Global X Silver Miners ETF
Q1 2008 Earnings Call Transcript

Published: 13 May 2008

[Operator:]

Ladies and gentlemen, welcome to the Apex Silver Mines Corporation 2008 first quarter conference call. (Operator instructions) I would now like to turn the meeting over to Mr. Jerry Danni, Apex Senior Vice President of Corporate Affairs. Please go ahead Mr. Danni.

[Jerry Danni:]

Thank you operator, good morning ladies and gentlemen and thank you for joining us in today’s call to discuss Apex’s 2008 first quarter results. This call is being broadcast live on the internet and can be accessed through the company website, www.ApexSilver.com. A telephonic replay of the call will also be available for one week afterward on the website. Today’s call will be led by Jeffrey Clevenger, President and CEO. Joining Jeff in addition to me will be Gerald Malys, CFO and Bob Vogels, Vice President of Finance and Controller. First for the Safe Harbor statement

[Jeffrey Clevenger:]

Thank you Jerry and welcome everyone to Apex’s inaugural quarterly earnings call. We’re very pleased that you could join us as we share with you this morning our quarterly results, our successes, our opportunities and a bit of planning for the coming quarter. I’ll begin the call today with a quick summary of our financial and operating results and then go into a bit more detail about the specifics of the mines ramp up to full production. We continually are asked about politics in Bolivia, so I will make a few observations in that area as well. As Jerry mentioned, Bob Vogels, our Controller is with us on the phone from London today and he will provide you with commentary on our balance sheet and cash flow statement. I will follow Bob’s discussion with a few comments on exploration and then we will open the forum up to questions. Our first quarter press release went out this morning and knowing that many of you have read it, I’ll be brief in the summary of our results. We milled almost 2.5 million tons in the quarter, producing 75,000 tons of zinc and lead silver bearing concentrates, all of which were well within our agreed quality specifications with our customers. Concentrator output continues to show month to month improvement, will milling rates up 20% and concentrate production up 65% over the fourth quarter of 07. We produced nearly 3 million ounces of silver, 29,000 pounds of zinc and 10,000 tons of lead at a cost of silver of negative $0.79 per ounce and zinc cash costs of $1.02 per pound. These costs were high and that’s primarily as a result of lower than full production during the ramp up and additional costs associated with the ramp up and estimated increase costs associated with smelting our two concentrate products. Our loss from operations was $25 million, keeping in mind that included a $76 million loss on commodity derivatives. Net loss for our company was a bit over $9 million or $0.16 per share. Our income figures include the deferred payment for silver and zinc production that we received from Sumitomo and which is paid directly to Apex of approximately $6 million for the quarter. Factoring in our first quarter results and forecasted revised smelter charges, we are updating our guidance for the year to include production of 15 million ounces of salable silver, 215,000 tons of zinc and 75,000 tons of lead at cash costs of negative $1.75 to negative $2.25 per ounce of silver and $0.70 to $0.80 per pound of zinc. In the operations we continue to improve on our delivery of water to the mill, with water delivery now increased by 50% over that which we were delivering to the mill in December. We have replaced failed wells, we’ve improved upon the delivery system from the wells and increased our water recovery from tailings by about 10%. We are on track to produce at capacity from mid-year forward. We have improved on our blending capabilities by going from a zero blend of a finer Tesorera ore in the fourth quarter to as high as 70% in the first quarter of 08. We are now comfortable with a 40% blend of the higher grade Tesorera ore and are making progress at increasing the ratio even further. Importantly, plant maintenance has improved from just about 80% of the work being unplanned at work’s end to 60% planned maintenance currently. We’ve made important changes to the recovery circuit in the mill by modifying the froth collection system to allow us to full the flotation circuit harder. And we have approximately 12 experts from around the industry with more than 20 years of experience each focusing on grinding, material handling, flotation and instrumentation. We are extremely pleased and delighted that we were able to attract Mike Bunch as our Vice President and General Manager for San Cristobal. Mike comes to us with extensive experience dealing with complex plants, not only in South America as he is a fluent Spanish speaker, but also in other parts of the world as well. Looking ahead a bit, for the second quarter we intend to complete the 14 day test at an average of 40,000 tons per day. This test is a mechanical completion test specified in our contract with our builder, Aker Kvaerner. Satisfactory completion of this test will provide a tremendous morale boost to the team and will define the plant’s capability as we move forward. We intend to complete the water delivery and recovery projects such that we are assured sufficient water to go beyond 40,000 tons per day. We intend to continue our training activities for our largely indigenous workforce. And we intend to advance our most promising exploration properties, including San Cristobal which we believe has the potential for significant expansion. All of this for added value to our stakeholders. We will report to you the status of these activities at our next quarterly call. Our report to you today would really be incomplete without a few comments on the political situation in Bolivia. On May 4, residents of the department of Santa Cruz passed a resolution on autonomy with 85% of those voting in favor of the autonomy proposal. The referendum was not about succession, but it was about greater decentralization of government powers and whether the relatively prosperous Santa Cruz department of 2.5 million people should acquire greater control over their governance. Today, governors of the departments have a direct reporting relationship to the president. Autonomy would allow for an elected governor and legislature of the departments, independent of the central government. It would give them the ability to tax and it would give them the management of their own natural resources, land and police forces within the department. Autonomy referendums have also been scheduled for vote in three other provinces, Tarija, Beni and Pando for late May and early June. On May 8 a bill passed the senate calling for a referendum on the mandates of president Morales and the country’s nine department governors. This referendum is now scheduled for August 10. President Morales has signed the bill, in fact I think he signed that either this morning or last night. If more votes or a greater percentage of votes are cast against the president or any of the governors compared to the votes obtained by the incumbent office holders in December 2000 and 05, an early election would be scheduled. No additional changes to mining taxation have been implemented or proposed since the legislation passed in December which modified the income tax above specific metals prices and made changes to the complementary mining tax. Legislation also passed in December which reaffirmed that exporters can recover value added tax in the form of tax certificates or what is known in the country as [sadimes] which can be used to offset national taxes and import duties. Legislation is currently pending in the Bolivian congress to eliminate a 25% surtax that is triggered when annual profits exceed $50 million with allowed deductions for capital. On May 1, president Morales announced the nationalization of the country’s main telecommunications company and several foreign owned companies in the hydrocarbon sector. In each company, the Bolivian government already owned greater than a 40% stake in the companies and negotiations for cash payments to bring the government’s stake to at least 51% are underway. As recently as May 7, the Bolivian mining ministry reaffirmed that they had no intention of nationalizing mining companies and specifically San Cristobal. The ministry stated that the Bolivian mining sector should consist of the strong state owned mining company, Comibol, the private sector and the cooperative miners. I’d now ask Bob Vogels in London to give us a brief summary of our balance sheet and cash flow.

[Bob Vogels:]

Thank you Jeff and good morning to everybody on the call today. I want to take just a few minutes to highlight our liquidity situation as of March 31. As we just reported, our restricted and unrestricted cash and investments totaled $199 million. This compares to a total of $221 million at December 31, 2007. The amounts held at March 31 include

[Jeffrey Clevenger:]

Thanks Bob. In exploration we continue to look to exploration for our future long term growth and I’m going to highlight a few of the more promising projects that we’re working on. At the El Quevar project in Northern Argentina, the second phase of drilling is in progress and this phase of drilling is designed to provide more closely space drill intercepts that can be used to support a preliminary economic assessment, hopefully around the end of the year. Assay results are pending, they’re slow to come back, however visually the core looks quite encouraging and in fact it looks like the system may in fact be widening at depth. The 2007 drilling program established the presence of high grade silver, lead mineralization and parallel structures more than a mile in length and as much as 80-100 feet in width. We’ve mentioned in the past that we’ve identified a potentially significant silver zinc prospect at the Chinchilla property in Northern Argentina. The Chinchilla project has several cross cutting breccia pipes in contains disseminated mineralization over an area of just about a mile by 1,500 to 2,000 feet in width. Test bits that we’ve dug and trenching that we’ve performed have returns values ranging from 1-7% zinc and up to 400 grams per ton of silver. A geophysical survey of the area has been completed and this survey has indicated several areas of high priority for us and we are planning a drill program that will begin just about midyear this year. Drilling is also underway at our Chita gold, silver, copper project locating in Northwestern Argentina. Geologic mapping and outcrop sampling has defined a vein swarm more than 1.7 kilometers in length by about 500 meters in width. Sampling has returned consistently encouraging values in silver and gold. A phase one drill test consisting of approximately 15 holes is underway and is designed to confirm the continuation of the encouraging values that we see at the surface and hopefully will find those at depth. First phase drilling was completed during the quarter at the company’s Muleros project north of Zacatecas, Mexico. 30 shallow drill holes have been completed and mineralized veins have been intercepted in each and every hole. We’re planning to conduct deeper drilling in selected areas to further test the silver, gold and base metal mineralization identified to date and it is really conducive in the district. In addition, we do have several drill programs in progress at the mine in San Cristobal and these programs are designed to further define areas of potentially high grade zinc, silver, lead mineralization in areas within and adjacent to the existing mines. 17 core holes have been completed at the [Animus] prospect located about a kilometer to the southwest of the current open pit foundry. This drilling has been successful in defining a zone of zinc, silver, lead mineralization approximately 450 meters long, 175 meters wide and to a depth of about 200 meters and it contains average values equal to or greater than the average value in the main San Cristobal ore [but]. This drilling is expected to be completed within about the next six to eight weeks after which engineering studies will be performed and the material phased into the mine plant if that is warranted. In conclusion, our number one priority remains completing the ramp up at San Cristobal and achieving steady state design throughput by midyear. And we will continue to advance our more promising exploration projects to provide future growth for the company. And with that I think we’d like to ask the operator if she could open the forum up to questions.

[Operator:]

(Operator instructions) Your first question comes from John Bridges – J.P. Morgan.

[John Bridges:]

The revenue number you’ve given us, just if you, income statement numbers, the revenue number you’ve given us, is that before or after the hedges, the $136 million?

[Jeffrey Clevenger:]

The revenue number is before the hedges, the hedges come out down below.

[John Bridges:]

Where do they come out? The $76, that presumably is the mark to market of the main book.

[Bob Vogels:]

On the income statement we only have the mark to market. During the period we settled $52 million worth of hedges. That shows up as a cash flow item on the cash flow statement. So on the P&L itself, the mark to market was $76 million, shows up as a reduction of earnings.

[John Bridges:]

So is that related, so where is the impact of the hedge, the hedge sales for this current period?

[Bob Vogels:]

Well as you know we mark to market every period our hedge liabilities. So to a certain extent, we’ve already recognized losses on the hedges to date with only small adjustments period to period now as the price moves up and down. So we report our revenue at market prices and any further adjustments to the hedge book up or down based on market prices comes out in a line item called gain on commodity derivatives, gain-loss.

[John Bridges:]

In the cash flow?

[Bob Vogels:]

On the face of the income statement, the mark to market non-cash piece, and then in the cash flow statement you see the cash impact of settlement.

[John Bridges:]

Yes, I don’t have a cash flow statement. You didn’t issue the cash flow statement.

[Bob Vogels:]

We filed our 10-Q today and have the full financial statements in there.

[John Bridges:]

The income taxes you report, what’s in there?

[Bob Vogels:]

For the period, as we’ve described in our financial reports, the hedge liability, the hedges are held in a Cayman entity that is not subject to tax. So if we look at simply the Bolivian income, we had positive income and positive taxable income, so we paid a small amount of tax, provisions, a small amount of tax based on that, roughly $9 million and another $1 million of withholding taxes we’ve got on some intercompany interest income.

[John Bridges:]

So the royalties aren’t in there?

[Bob Vogels:]

The royalty tax shows up as an expenditure of operations, so it’s included actually in cost of sales.

[John Bridges:]

The return of water from the tailings dam that you spoke of, when will that be done?

[Jeffrey Clevenger:]

We think that we’ve got that line ordered, it’s scheduled for delivery and that should be going just right at midyear, probably about the middle of July.

[John Bridges:]

Do you think without returning that water from the tailings you’re going to be able to get anywhere close to your 40,000 tons per day?

[Jeffrey Clevenger:]

Absolutely, we ran, this is one day, but we ran 50,000 tons yesterday.

[John Bridges:]

Even with this inefficiency in the thickener?

[Jeffrey Clevenger:]

Well the thickener has actually improved. We had the provider of the thickener come in and make some adjustments and try to make the thing do what it was supposed to do and that did give us about 10% more return water from that. We’ve done some work on the delivery system, the pumps from the well field and we’ve also put in an additional line from the collection area down at the well field. So we feel pretty good that we can get real darn close to 40,000 tons a day, even before midyear but we’re officially saying midyear.

[John Bridges:]

And you spoke then in percentages in terms of the improvements but what have you actually been achieving on a regular basis in terms of throughput and in terms of water supply to the plant?

[Jeffrey Clevenger:]

I think right now we’re up at about in terms of water supply, just pretty close to 40,000 cubic meters a day. And then in terms of throughput, that’s, pick a timeframe. I mean obviously we talked about what we did in the first quarter and I think we’d probably best defer it until the end of the second quarter before we talk too much about the second quarter, but I will tell you it continues to ramp up. Every month is better than the previous month.

[John Bridges:]

This 40,000 water pull, that’s above your previous expectation, is that bringing down the water level in the aquifer?

[Jeffrey Clevenger:]

Not that we’ve seen.

[Operator:]

Your next question comes from Rodney Stevens – Salman Partners.

[Rodney Stevens:]

Could you just break down what the grades recovery is and strip ratio in the quarter was and hopefully cost per ton if you have it.

[Jeffrey Clevenger:]

On the recovery thing I’m not too sure that that’s all that meaningful right now. We’re under smelter negotiations at the moment and of course the ultimate recovery depends on the terms that we get from our smelters. During the ramp up I don’t think it’s all that meaningful as we focus on throughput and then turn our focus to recoveries. So it’s primarily because of that ongoing negotiation with the smelters, we want to keep that close to the vest until those negotiations are concluded. The strip ratio, we’re going to have to get back to you with that Rodney, I just don’t happen to have that right in front of me, but Jerry will do that.

[Rodney Stevens:]

And grades as well?

[Jeffrey Clevenger:]

Sure.

[Rodney Stevens:]

And any cost per ton estimates?

[Jeffrey Clevenger:]

Actually I think attached to our quarterly release there’s a sheet that shows those things.

[Rodney Stevens:]

I haven’t seen it in the summary. Okay, cash costs that you reported, is that before the impact of the hedging?

[Jeffrey Clevenger:]

Yes.

[Rodney Stevens:]

And does it include the royalty tax?

[Jeffrey Clevenger:]

Yes. And it includes our best estimate of what these increased smelting charges will be.

[Rodney Stevens:]

Can you give me an estimate where you think the smelting charges will be in refining?

[Jeffrey Clevenger:]

Well we said in the press release that it’s looking like lead has approximately doubled and zinc is up about 30%.

[Rodney Stevens:]

Your production forecast for 2008, it’s based on higher throughput but is that also based on higher recoveries and maybe higher grades?

[Jeffrey Clevenger:]

It is indeed a true re-forecast, so we’ve taken the first quarter results, where we are now and we’ve forecasted the rest of the year based on what we think we can do. So it includes all of the cost numbers, it includes grades, it includes recoveries.

[Rodney Stevens:]

Does it assume higher grades?

[Jeffrey Clevenger:]

We think that we’re going to be able to blend more finds, we’ve been increasing that trend and the finds tend to contain higher grades. So it is slightly higher grades than what we experienced certainly in the first quarter.

[Rodney Stevens:]

How does it compare to the original mine plan at this point?

[Jeffrey Clevenger:]

Well that I don’t have in front of me either, Jerry will have to get back to you.

[Rodney Stevens:]

How confident are you on this revised production number? I mean if you had to put a percentage to it?

[Jeffrey Clevenger:]

Well I think we feel pretty good about it I mean, obviously it’s a range, I mean we gave the cost and range. The production we didn’t give a range. We’ve had to define something to get the cost [inaudible].

[Rodney Stevens:]

Could you breakdown what your debt service coverage ratios are explicitly?

[Gerald Malys:]

The way we run ratios in the bank desk, we use different prices, we use bank mandated prices. So it doesn’t reflect the actual operation. But in our 08 plan we met all the required ratios in the test and we have some ratios that are forward looking and some that are [inaudible].

[Rodney Stevens:]

And do you have those reported somewhere?

[Gerald Malys:]

No we don’t report those, I mean the actual ratios we’re looking at. Again, they’re in this model which uses much lower prices than the actual prices today.

[Rodney Stevens:]

Based on those prices would you say that you’re likely to default on some of the covenants this year?

[Gerald Malys:]

No at this point looking forward we believe we’re fine. The 08 plan we put in we met everything.

[Rodney Stevens:]

Okay, even for 2009, do you think you’ll meet all your restrictive covenants? Or do you think you’ll have to go back to the bank and revise the terms again?

[Gerald Malys:]

No, the plan we have submitted approved meets all the covenants. Now we redo the plan every November. So it will redo the 09 plan in November. But the model which we’re currently looking at would meet all of the tests.

[Rodney Stevens:]

Okay are you looking into any financing alternatives at this point or what sort of financing alternatives would you be looking into just in case of the worst case scenario where if you might have to come back to the markets.

[Gerald Malys:]

We’re thinking of a number of different things. We’ve been having some conversations and discussions but that’s not anything we would want to talk publicly about at this point in time.

[Operator:]

Your next question comes from John O’Brien – Ragen Mackenzie.

[John O’Brien:]

My question primarily has to do with the cash flow issue kind of going back to the last questions. I understand you’ve got about $40 million unrestricted cash, you’ve got $45 million in expenses above the San Cristobal level of your G&A and then exploration expenses. So you’re going to get about $40 million in payments from interest and maybe the Sumitomo deferred payments. But in the 10-Q you mentioned a possible tax payment January 1 to Bolivia of almost $60 million. Are you telling us that per your current plan, the mine will be able to spin off enough cash to Apex to cover that?

[Gerald Malys:]

Yes it doesn’t spin off cash to Apex, it actually makes the payments. But based on our current outlook, it should provide sufficient cash to cover its cash needs throughout the rest of this year to make the tax payment in January.

[John O’Brien:]

So the $80 some million that you and Sumitomo contributed essentially sets up the reserve that you’re required to have at the end of the year of $72 million or so. So essentially I would assume that the only reason you’re contributing that much is because you don’t expect the mine to spin off a lot of cash this year because of derivatives. Is that true or false?

[Gerald Malys:]

The $82, a lot of that was spent to cover the derivative costs in the first quarter. From this point forward, our forecasts are that the mine generates enough cash to cover all its needs plus to continue to cover all the derivative costs. If the mine performs as we currently see it, we’ll build up enough to have the reserve we need to have in December over the next several months.

[John O’Brien:]

So essentially the mine going forward will cover the derivative payments as well as generating enough cash to cover any possible tax payments next year?

[Gerald Malys:]

Yes, our current forecasts indicate that, so our current forecasts indicate that Apex shouldn’t have to fund anymore cash into the mine this year and of course we have the $40 million that we’ve talked about as free cash. And then as you mentioned, we’ve got the deferred revenue payments, the interest and we also get the release of that margin account of $30 million a year for each of the next three years. They’re still probably looking at some financing later in the year.

[John O’Brien:]

That’s kind of what I was getting at and what I think my colleague previous to me was trying to get at because as I understand it, the metals prices required by your financing facility and those banks is ridiculously low and makes it almost impossible for you to meet coverage ratios if even at current prices you’re just making your cash flow.

[Gerald Malys:]

It’s difficult and we’ve struggled with some of the loan provisions but as I’ve said, based on our latest forecast and latest run of the model with the banks, we do meet all of the ratios. The ratios, one of the problems you have is the ratios are six months ratios, to see if you meet tests. And what you look at, like if you’re looking at 2010, you’re looking at a six month period where in that period you’ve got to generate enough to calculate the ratio. And even though you might be sitting on $200 million of cash, you can’t use that in the ratio. So the model is burdensome but I don’t see us having a significant problem with it as long as the mine keeps producing and generating cash as we expect it to.

[John O’Brien:]

At what point of cost increases would that become a huge problem? I know that you had the cost problems in the first quarter.

[Gerald Malys:]

We had the problems last year and we discussed with the banks and got an adjustment in the prices we’re allowed to use in the model. And you know if we had cost trending up again, undoubtedly would come to another point where we’d have to discuss with the banks more realistic prices in the model. You’ve got to remember, the prices in the model had silver at $5.00 and we got that kicked up a little bit. But the model prices make it very difficult. But we have had them amended once before and if we have to try again we will.

[John O’Brien:]

Finally the provision on the transferability of San Cristobal in case of default, what are your lenders telling you? I mean we’re in May 2008, the new Bolivian supreme court decision takes effect at the end of the month as long as the senate doesn’t pass any legislation. What are your lenders telling you?

[Jeffrey Clevenger:]

I don’t think that our lenders have told us anything about it and I don’t think it’s clear either. While the supreme court made that decision some time ago, I don’t think that the implementation of that mandate has been defined. In other words, so are things that already exist are they grandfathered or are they not? So I don’t know that we’ve heard much if anything from the banks, have you Gerald?

[Gerald Malys:]

No, we have a good relationship with the banks. We’re constantly updating them on things, they’re having discussions with us. Right now they’re fairly comfortable.

[Operator:]

Your next question comes from Joel Locker – FBN Securities.

[Joel Locker:]

Just back to the throughput rate, I know it was mentioned it was 66% or so in the first quarter and I know it’s still early in the second quarter but I just kind of wanted to see if you could give me a ballpark figure of what that averaged in the first 40 days of the second quarter.

[Jeffrey Clevenger:]

What we’ll do is we’ll wait until the end of the second quarter. As I mentioned one day doesn’t tell the whole story but we did get 50,000 yesterday and we’ve been running at a pretty good 40,000 ton per day rate for a week or so. So let’s wait until the end of the quarter and see how we fall out.

[Joel Locker:]

So it would be tough to get a rough estimate on total production of zinc silver versus the first quarter also?

[Jeffrey Clevenger:]

Yes and all I can tell you is that the trend is in the right direction which is up.

[Joel Locker:]

And just on the exploration issue. If cash, if production doesn’t meet certain limits and things like that, would you cut back on the exploration to free up the cash flow just to make sure you’re covenants aren’t broken?

[Jeffrey Clevenger:]

Well certainly that’s an option that we have. It’s one that we’re not implementing at this time because our forecasts do show that we’re in okay shape for the rest of the year and quite frankly we want to build this company. So it’s an option, it’s one that we’re aware of but at the present time we’re not planning to do that.

[Joel Locker:]

But if push came to shove you’d more likely do that than actually just.

[Jeffrey Clevenger:]

Yes, sure.

[Operator:]

Your next question comes from Daniel McConvey – Rossport Investments.

[Daniel McConvey:]

Can you remind me first, that supreme court decision that was mentioned by the other gentlemen, just remind me what that is for?

[Jerry Danni:]

What that decision primarily involved was the transfer or mortgage of concessions and basically said that any concessions could not be transferred or mortgaged and it actually required the Bolivian congress within a two year period to pass legislation to address that issue. There is a bill in congress right now to address that. Our legal analysis of that, however, suggests that that could not be applied retroactively so it would not apply to the San Cristobal concessions but would apply to any new concessions.

[Daniel McConvey:]

I’d just like to go through the income statement because John’s questions here, it’s tougher to follow than usual, the income statement as a result of the hedge book. Looking at it, you have $39 million of income before taxes and then you have the income taxes of $10 million. Now are you accounting for or making a provision for income taxes based on the derivative not being allowed at this point or for a deduction.

[Bob Vogels:]

That’s correct, so if you added back derivative mark to market that shows up in our income statement, you’d basically have taxable income and that’s what we’re provisioning tax on, the actual estimate of tax to date for San Cristobal.

[Daniel McConvey:]

It’s a big issue, is this something you’re in negotiations with the government with, correct?

[Bob Vogels:]

I wouldn’t call it negotiations, I would say that we’re trying to clarify what the law in Bolivia is with respect to the deduction and it’s not entirely clear and we’re working to clarify that.

[Daniel McConvey:]

Has there been any more communication within the last month or so with the authorities or a determination on this issue?

[Bob Vogels:]

I can assure you that we continued discussions there, they’ve been ongoing for some time and continued to. So I probably can’t comment beyond what the specific conversations are at this point.

[Daniel McConvey:]

Now the $40.8 million that comes in as minority interest to lost consolidated subsidiaries, is this the offshore that’s holding the derivatives?

[Bob Vogels:]

No, the minority interest we reflect there is made up of a couple of things actually. First of all, the booked loss from San Cristobal if you include the hedge liability is negative and so part of that add back is the minority interest offset to that. You’ll also recall and in our footnotes we highlight that in previous periods we have not been able to allocate the full amount of the loss due to the derivatives to the minority interest because their balance was taken down to zero on the balance sheet. So we had sort of a reserve account there off the balance sheet and now that Sumitomo has contributed more money, they in essence, we are in essence able to take some of those previous unallocated losses and now show the minority offset.

[Daniel McConvey:]

So this $40 million relates to more than just this period or not?

[Bob Vogels:]

It relates to a recapture, a slight recapture of previous losses that were not allowed to be allocated to the minority interest. And we’ve explained that pretty well I believe in the footnote on minority interests in our 10-Q.

[Daniel McConvey:]

Okay, your 10-Q, you have to go to Edgar to get it, it’s not on your website is it?

[Jerry Danni:]

If not it will be shortly, it should be on there.

[Daniel McConvey:]

Finally on the exploration adjacent to the San Cristobal area, you mentioned trying to drill this out and it could potentially be better grade, if you get this drilled out and if it looks attractive, what would be the earliest you could get into it?

[Jeffrey Clevenger:]

That’s the motivation for us doing that now. Now obviously we have 16 years of reserves ahead of us, so the motivation is to try to find some higher grade so that we can fit that into the mine plan as soon as possible and give a kick start to the upfront economics. So I would tell you that I think while we probably wouldn’t go to that area exclusively. We won’t know the answer to that until we’ve finished the engineering studies. But the notion is that defining some higher grade, we would use that as a kicker to the grade from San Cristobal and increase the grade in the next couple of years from this drilling.

[Daniel McConvey:]

Okay so if the engineering is done etc, etc, it would probably be 09 before you get into that.

[Operator:]

Your next question comes from Andy Schopick – Nutmeg Securities.

[Andy Schopick:]

I think a lot of us are still having some problems with understanding the hedge book, the accounting. I want to review this minority interest position. Is it my understanding that Sumitomo still basically has a 35% equity interest in San Cristobal?

[Jeffrey Clevenger:]

That’s correct.

[Andy Schopick:]

So that hasn’t changed. And part of that minority interest line reflects that Sumitomo interest in the San Cristobal mine, right?

[Jeffrey Clevenger:]

Correct.

[Andy Schopick:]

Can you give us any estimate on the time that will be required now to completely eliminate these hedges? I mean basically, when will this derivatives position be eliminated?

[Jeffrey Clevenger:]

Sure and it’s heavily front end loaded, so this year and next year it’s heavily loaded with zinc and lead, although it’s not all of our production, we certainly have quite a bit of it available to the blue sky if you will, market conditions. That’s pretty well specified in great detail in the 10-K and the 10-Q. So lead is pretty well gone at the end of 09, zinc carries on into 010 and then beyond that it really falls of and there’s not much of anything. Silver has deliberately been kept at a minimum. Silver’s not significant when it’s compared to the lead and zinc. But again you can see that entire schedule in our filings.

[Andy Schopick:]

So basically the company is going to be subjected to continuing mark to market types of actions here through probably 2010 on the lead and the zinc components of this?

[Jeffrey Clevenger:]

Significantly through 2009 but less significantly as we go because these things falls off on a monthly basis.

[Andy Schopick:]

Can you tell us what the cumulative losses on the hedge book has been to date?

[Bob Vogels:]

Well to date we have settled hedges through the end of March for about $100 million. And at the end of March we still have an open position liability of about $766 million.

[Andy Schopick:]

I think one of the things that certainly concerns those of us who are just kind of looking at the balance sheet is the deficit shareholder position and clearly with the long term debt and the current proportion of the long term debt, this company really is going to need to raise additional equity capital at some point. I guess I wonder to what extent you’re concerned about that capital structure right now, what types of pressures, media pressures that may be putting on you in terms of your future financing options at this time.

[Gerald Malys:]

I think clearly as we look forward, we need to strengthen our finances. That’s not necessarily with equity, there is a number of different ways and different options to do that. And as I mentioned we are looking at a number of things. We have a few unique opportunities that we’re looking at but we really can’t go into a lot of detail. But when we bring the mine pretty much in line in the third quarter, it gives us a lot more ability and flexibility to look toward different types of financing. So somewhere late third quarter, fourth quarter we’ll be considering strengthening the structure of the balance sheet.

[Operator:]

Our next question comes from John O’Brien – Ragen Mackenzie.

[John O’Brien:]

Question on walking through the cash flow. In the first quarter net cash provided by operating activities was only $1.5 million. You had a large increase in working capital. That goes to kind of the delays between actual shipping the ore and actually getting the cash from it. How much more increase in the working capital can we kind of expect in the second quarter, third quarter before you get kind of a more steady state where changes in working capital won’t be all that great? Essentially your cash flow will catch up to your net income.

[Bob Vogels:]

We’re reaching a pretty stable state now. If you examine we have a footnote, a supplemental cash flow footnote in our 10-Q shows all the various components of working capital. And as you can see we’re still building up a little bit of inventory, concentrate inventory as our production kind of planes out as we approach, as we get through the ramp up and approach design capacity. So the inventories are building a little bit with respect to that and our accounts receivable are building a little bit with respect to that as our sales volumes increase. But as we get ramped up here, all that is going to level out.

[John O’Brien:]

About how much more do you envision over the next two quarters?

[Bob Vogels:]

That’s going to depend on the production rate, it’s going to depend on prices and so forth. But I guess I would say that we’ve absorbed most of it at this point.

[John O’Brien:]

When you gave the update on the first quarter you indicated that I think in March you were operating at about a 75% rate versus the full quarter rate revealed here of about 66%. And you said that continues to increase. Do we take that as a linear increase assuming we were at 50% in December, 75% in March and supposedly at 100% in the end of June. So is that a reasonable assumption?

[Jeffrey Clevenger:]

I don’t know if it’s exactly linear. I mean we’ve had two four to five day shutdowns now where we’ve gone in and we’ve identified areas that needed resolved, some that were just regularly scheduled maintenance activities such as changing liners in the mill etc. And of course we have a whole suite of activities that we do when we do that, including the modifications that we did to the flotation circuit so that we could pull the cells harder and increase the recovery. So it’s not exactly linear, but the trend is certainly while there’s some blips in it, the trend is up and again I mean it makes us confident that we’re going to achieve the full production rate midyear.

[Operator:]

Your last question comes from Terrance Ortslan – TSO Associates.

[Terrance Ortslan:]

What was the work index in the quarter going into April or May and how did it affect the tonnages?

[Jeffrey Clevenger:]

Jerry will have to get back to you on that, we don’t have that right in front of us.

[Terrance Ortslan:]

Just remind me what ore volume are you anticipating for the year and the grades to come with the stable metal numbers that you have please.

[Jeffrey Clevenger:]

Again, Jerry will follow up with you on that.

[Terrance Ortslan:]

The value added tax, you have recuperated some from the government in the first quarter I assume as you shift some concentrate and book some revenues?

[Jeffrey Clevenger:]

Well the [sadimes] certificates actually take a bit of time. You file for them, we filed for some of them and then they go through the Bolivian system and then they’re issued to you in the form of certificates which is the time that you can then use them as a credit. We have not received any back yet but we have some going through the system.

[Terrance Ortslan:]

The $107 odd million, how should we model that again to get back to the cash position for you?

[Jeffrey Clevenger:]

I think on the modeling questions, both Jerry and his team can walk you through some of those things and that’s probably the best way to do that.

[Terrance Ortslan:]

Just remind me please that you said your con terms were revised for the year?

[Jeffrey Clevenger:]

Yes, our outlook, yes.

[Terrance Ortslan:]

I’m talking about the smelter contracts.

[Jeffrey Clevenger:]

Yes.

[Terrance Ortslan:]

Could you tell me what they are please?

[Jeffrey Clevenger:]

Well no we’re in negotiations, we have not finalized the TCRCs for this year and as such we’re keeping that fairly close to the vest as we’ve having, as many people are, some difficult negotiations with the smelters and we don’t want to really tip our hand on what we’ve achieved so far.

[Terrance Ortslan:]

How many smelters are you talking about for 2008 getting new cons?

[Jeffrey Clevenger:]

We’ve got about 12.

[Operator:]

At this time we have reached the allotted time for questions, gentlemen do you have any closing remarks?

[Jeffrey Clevenger:]

No just thank you very much everybody for joining our call, this is our first call and we’ll be doing this on a quarterly basis and [inaudible] at the end of next quarter we will follow up with you on where we said we were going, how we did and I’m sure that at the end of the next quarter that certainly the numbers will look a lot better and thank you again for joining us.