Description

Apex Silver Mines is developing what will be a tremendously profitable silver and zinc mine in Bolivia.

Why invest in a mining company when commodity prices are so low right now? The primary reason is that the mine being developed has a grade of ore so high that this mine will be one of the world’s lowest cost producers of both zinc and silver. The mine will have an expected life of 15 years, and will produce annually 27 million ounces of silver and 540 million pounds of zinc concentrates. Cash operating costs will be $1.23/oz of silver and $0.23/pound of zinc. Mining will begin in 2003

If silver prices are at $4.50/oz and zinc concentrates at $0.50/pound when Apex begins producing, we have expected cash operating profits of $234 million/year. At today’s share price of $7.58, the market cap is only $261 million. So once mining operations begin, this company will have a price/cash flow ratio of close to 1. Obviously, the stock price won’t stay so low once this happens.

Because Apex’s cost of production will be one of the lowest in the world, there is practically a zero chance that commodity prices could go so low as to make the company unprofitable.

Apex has a super strong balance sheet. ALL liabilities total only $6.2 million, and the company has $61 million in cash and cash equivalents. Money will have to be borrowed between now and the beginning of production as part of the development costs, but with the huge cash flow this company will generate, the debt will be paid off easily. And after that, everything is pure profit for shareholders.

An interesting fact about this company is that George Soros owns a significant interest and his brother sits on the board of directors.

There was an article about this company, and all the big investors who own stakes in it, and how profitable it will be, in Forbes magazine last August. You can read the article at the following url: http://www.forbes.com/forbes/2000/0807/6604064a.html It’s an interesting article and I recommend reading it even if you have no desire to invest in a mining company.

Finally, I’d like to add that I’m bullish on silver prices. Silver is an industrial metal; about one third is used for electronics, one third for photographic film, and one third for ornamental silver items and jewelry. According to the Silver Institute, for the last ten years, the amount of silver demanded has exceeded the amount supplied by mines and from scrap and central bank sales. Where is the rest of the silver coming from? “Implied disinvestment.” Someone selling from stockpiles of silver. During the last decade, yearly implied disinvestment has averaged nearly 100 million oz. Once these stockpiles run out, the price of silver will soar. Just like Palladium soared. Palladium used to be $150/oz when Russia was selling its stockpiles, but now it’s at $700, down from highs in the quadruple digits. Between now and 2003, there could be just as big run-up in the price of silver. But remember, even with low silver prices this company is an undervalued bargain. With the stock trading near it’s all-time low, there has never been a better time to buy.

Catalyst

(1) Production begins in 2003 and this company starts making lots of money
(2) Spike in silver prices before then.
(3) The company has announced plans to spinoff its global exploration assets into a new company for the purpose of increasing shareholder value.
(4) Stock doesn’t need a catalyst when it’s so cheap.