Accounting & Tax

Apex Silver Mines Digs Into Derivatives

May have understated its derivative liability by some $300 million.
Stephen TaubMarch 5, 2007

Apex Silver Mines will restate its financials for the quarter ended September 30, 2005, the year ended December 31, 2005, and the first three quarters of 2006 after determining that the method it had used to estimate the fair value of metals derivative positions was not appropriate.

Apex explained that during the third quarter of 2005, it entered into certain silver, zinc, and lead derivative contracts — primarily forward sales, but also puts and calls — regarding a portion of the planned production from its San Cristobal project. Under Financial Accounting Standard No. 133, it recorded the derivatives at their fair value on its balance sheet and records the change in fair value to current earnings at the end of each reporting period.

Apex estimated that the cumulative understatement of the derivative liability is roughly $300 million as of September 30, 2006. Correcting the valuation of the derivatives, Apex also noted, will affect the gain recognized on the sale of a 35 percent interest in the company’s mining subsidiary during the quarter ended September 30, 2006.

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Apex also disclosed that while it was still calculating the impact on prior financial statements, “the company expects that the adjustments to these financial statements will be material.”

In addition, the company continues to evaluate whether a material weakness existed in its internal controls over financial reporting as of December 31, 2006, and whether the company’s controls were ineffective as of that date.

In addition, Apex warned, the accounting changes will likely increase volatility in the company’s earnings during the next three years, when most of its derivatives mature or expire.