GOLD NEWS

Bolivian silver/lead/zinc pioneer San Cristobal quietly mines, yields 1st concentrate without incident

While protests and political tensions may be part of life in Bolivia, Apex Silver’s fledgling San Cristobal mine is mining and yielding its first concentrates with little strife or interference.

RENO, NV - 

Despite a Bolivian political atmosphere filled with uncertainty over policy issues--such as mining taxation, nationalization of natural resources, and power shortages--Apex Silver's San Cristobal mine has been quietly and ramping up toward full production without incident or even a typical Bolivian political protest.

The San Cristobal zinc, lead and silver mine is a modern pioneer of sorts for foreign-owned and operated precious mining in Bolivi

Denver-based Apex Silver (AMEX: SIL) Monday reported its first shipment of zinc concentrates from the $650 million-plus Bolivian mine, which began its first production in August. The company expects to reach full production during the current quarter. Apex owns 65% of the mine while Japan's Sumitomo Corp. (SSUMY) holds 35%. Silver reserves are estimated at 450 million ounces, zinc reserves at 8 billion pounds and lead reserves at 3 billion pounds.

In a recent presentation to the Rocky Mountain Mineral Law Foundation, Apex Senior Vice President Jerry Danni explained that as the company spent $22 million to extend a power line to the San Cristobal project, it also provided electricity for the first time to the community of San Cristobal. The $29 million spent by Apex to extend the railroad into the region in order to ship concentrates to port also provides transportation for local communities.

Local communities are now connected by a new 240 km road and bridges that are part of a $10 million Apex investment to also serve the mine.

Apex has also trained many of former subsistence farmers who are now operating heavy equipment and employed in other good paying jobs at the mine. During the construction phase, San Cristobal provided 5,000 jobs. The mine has also generated an additional 2,000 jobs in the service sector.

Danni told Mineweb that more than $2 million has been contributed by Apex to the San Cristobal Foundation to foster economic development. A new medical center and school have been built in the community. Irrigation and drinking water supply systems have been construction. The foundation even generated a voter registration drive to help the isolated communities participate in Bolivia's electoral process.

Despite the fact 400 people had to be relocated to make room for San Cristobal mine, the relocation has not generated long-time controversy or hostility in local communities. Danni said a 400-year-old church was relocated and murals cleaned and restored due to a joint effort by archeologists, local leaders and Apex Silver.

Six new communities-San Cristobal, Culpina K, Villa Villa, Ramaditas, Rio Grande and Villa Alota-were developed, which are now home to 2,500 residents. A new school and athletic facility for area youth also offers an Internet café for local residents. Independent tourism enterprises have emerged, including mountain biking trips and tours to the Uyuni Salt Lake.

In his presentation to the Rocky Mountain Mineral Law Foundation, Danni said San Cristobal still faces challenges of political uncertainty, nationalization, changes to the mining code, the outcome of the Bolivian Constitutional Assembly, and keeping community relations programs viable on a day-to-day basis.

Bolivian President Evo Morales has renegotiated hydrocarbon contracts, after basically taking them over. A May 1 Mining Supreme Decree created concerns for the security of existing mining concessions in the country, the impact of the decree on future mining investment, and constitutionality of the edict. The potential for further nationalization actions by the Bolivian Government has placed "continued pressure" on the Apex share price, according to Danni.

Political uncertainty also exists surrounding the nation's taxation regimes. In January, the Executive Branch said it would seek changes in the minerals' exports tax to generate more than $300 million in tax revenue. In May, the Bolivian government proposed a 12.5% net income mining company profits tax (IUM), but decided against a proposed increase of the Mining Complementary Tax (ICM).

In an August press release, Apex said, "The Bolivian Government continues to consider various changes to applicable mining taxes, including possible increases in income tax rates, modification of credibility of the complementary mining tax against income tax, and elimination of the refund to exporters of a percentage of import duties and value-added taxes. The company, together with Sumitomo, is engaged in ongoing discussions with government representatives regarding the various proposals and their potential effects on San Cristobal."

Danni said the current mining tax regime in Bolivia is the highest of the neighboring South American countries, adding that "any tax increase would likely jeopardize Bolivia's competitiveness in the region."

As the months have progressed, Danni said Apex Silver learned that the protest marches that occur routinely in Bolivia are a primary method of political expression for many Bolivians. In response, the company has sought a community relations program which goes beyond the compliance required by the Equator Principles, which are a benchmark for the financial sector to manage social and environmental issues for project financing.

Basically, Apex has sought to leverage strong grassroots support for the San Cristobal mine to help establish a good working relationship with Bolivian governmental leaders. The company's goal is to "create a mutually beneficial partnership for the Bolivian people and Apex Silver," and to also "establish a proven ability to successfully operate in difficult social and political settings."

Despite Apex Silver's considerable accomplishments, the company still reported a net loss of $143.8 million or $2.45 per share for the second-quarter 2007, compared to a net loss of $80.5 million or $1.40/sh for the same period of 2006.

The company warned that its "third quarter financial results may also reflect a negative mark-to-market adjustment" which will reflect "a non-cash loss of approximately $137 million for the quarter ended September 30, 2007, related to its metals derivative positions due to metals price increases in the third quarter."

Last month, Sumitomo estimated that that San Cristobal would yield a net profit of $60 million to $70 million in the next business year. However, Japan's third-biggest trading company sustained an unanticipated $120 million quarterly hedging loss from the mine.

However, Danni told Mineweb that current zinc and lead prices have resulted in negative cash cost per ounce of silver produced.

BOLIVIA'S ECONOMIC PROSPECTS

Danni told Mineweb that he considered Bolivia is a "very prospective country" which will attract more foreign investment to mining.

Meanwhile, Bolivia's main economic indicators have continued to show improvement with rapid advances in some areas, such as manufacturing and construction.

A study by the Center for Economic and Policy Research (CEPR) released in August found that "Bolivia's situation regarding fiscal balances, balance of payments, and international reserves has been improving drastically. Total revenues for the combined public section increased from 27.5% of GDP in 2004 to 40.2% in 2006."

CEPR attributed the revenue increase to the changes in the Bolivian Government's policies in the hydrocarbons sector including royalty increases and re-nationalization of the natural gas sector last year. "Increases in natural gas prices have made these changes even more important," suggested Mark Weisbot, Co-Director of the center, and Luis Sandoval, Research Assistant.

The study also noted that Bolivia "has been piling up international reserves, which now total $3.9 billion, or about 32% of GDP. This is much more than the country needs."

The nation's public debt has been reduced from 70 to 35% of GDP over the past year and a half, much of this due to debt cancellation. "Bolivia's total foreign public debt now stands at $2.1 billion or about 16% of GDP. This is a relatively low level of foreign indebtedness," CEPR noted.

Nevertheless, CEPR also determined that "the progress in reducing poverty has been slow, with the official poverty rate falling from 63.1% in 2003 to an estimated 59.9% in 2006." Since the department and municipal authorities now control the increased revenue generated from the hydrocarbons sector, the Constituent Assembly is hoping to address the problem by giving the federal government more authority over these revenues under the country's new constitution.

However, the government has been taking steps to improve of the lives of the poor, including instituting a national literacy program, providing surgeries to restore or improve the vision of 100,000 persons, building six new national hospitals this year, and implementing a "zero malnutrition" program to reduce or eliminate child malnutrition and related diseases.

CEPR noted that other structural changes including land reform in a country that has more than 40% of its labor force in agriculture; "faster growth; the reduction of regional economic disparities; and an accelerated diversification of the economy away from hydrocarbons and minerals are the medium-to-long term development challenges facing the economy."