UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005.

OR

FOR THE TRANSITION PERIOD FROM                        TO                        .

COMMISSION FILE NUMBER 1-13627

APEX SILVER MINES LIMITED

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(345) 949-0050

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:    YES ý     NO o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):  YES ý     NO o

AT AUGUST 4, 2005, 48,476,978 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

PART I. FINANCIAL INFORMATION

Item 1.           Financial Statements

APEX SILVER MINES LIMITED

An Exploration and Development Stage Company

CONSOLIDATED BALANCE SHEET

(Expressed in United States dollars)

(Unaudited)

The accompanying notes form an integral part of these consolidated financial statements.

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APEX SILVER MINES LIMITED

An Exploration and Development Stage Company

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in United States dollars)

(Unaudited)

(1)             Interest expense and other borrowing costs are net of $1.4 million and $2.5 million capitalized for the three and six month periods ended June 30, 2005 and $0.7 million and $0.8 million for the three and six month periods ended June 30, 2004 and $5.0 million capitalized for the inception to date period ended June 30, 2005.

(2)             Diluted earnings per share were antidilutive for all periods presented.

The accompanying notes form an integral part of these consolidated financial statements.

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APEX SILVER MINES LIMITED

An Exploration and Development Stage Company

CONSOLIDATED STATEMENT OF CASH FLOWS

(Expressed in United States dollars)

(Unaudited)

(1)          During 2004, the Company reclassified auction rate securities having a stated or contractual maturity date for the underlying securities in excess of 90 days from cash equivalents to net cash used in investing activities. As a result of the purchase and sale of these securities the beginning cash balance decreased by $22.6 million from what was originally reported at June 30, 2004.  In addition the purchase of investments increased by $47.8 million from what was originally reported at June 30, 2004.  These two adjustments, related to auction rate securities reclassification, result in a decrease of $70.4 million to ending cash and cash equivalents from what was originally reported at June 30, 2004.

See Note 10 for supplemental cash flow information.

The accompanying notes form an integral part of these consolidated financial statements.

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APEX SILVER MINES LIMITED

An Exploration and Development Stage Company

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States dollars)

1.              Basis of Preparation of Financial Statements

These unaudited interim consolidated financial statements of Apex Silver Mines Limited (the “Company”) and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America, so long as such omissions do not render the financial statements misleading.  Certain prior period amounts have been reclassified to conform to the current period presentation.

In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair statement of the results for the periods presented.  All adjustments were of a normal recurring nature.  These interim financial statements should be read in conjunction with the annual financial statements of the Company included in its 2004 Annual Report on Form 10-K.

2.              Significant Accounting Policies

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“FAS No. 123R”), which revised Statement of Financial Accounting Standards No. 123  “Accounting for Stock-Based Compensation” (“FAS No. 123”), and superseded APB Opinion 25, “Accounting for Stock Issued to Employees” and its related implementation guidance.  FAS No. 123R requires measurement and recording to the financial statements of the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide services in exchange for such award. The SEC has approved a new rule that for public companies delays the effective date of FAS 123(R).  Under the SEC’s rule, FAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. Effective January 1, 2004 the Company adopted FAS No. 123, as amended by FAS No. 148, “Accounting for Stock-Based Compensation - Transition and disclosure” (“FAS No. 148”). As provided for under FAS No. 148, the Company used the “modified prospective method” of transition. Under that method of transition the costs recognized in the financial statements for the periods ended June 30, 2005 and 2004 are the same as if they had been based on their fair values at the grant date. The Company recognized stock-based compensation cost of $0.7 million and $1.3million for the quarter and six month periods ended June 30, 2005 respectively and $0.6 million and $1.1million and for the quarter and six month periods ended June 30, 2004 respectively.

In December 2003, the FASB issued Interpretation No. 46R (“FIN 46R”), which provides guidance on the identification and reporting for entities over which control is achieved through means other than voting rights. FIN 46R defines such entities as variable interest entities (“VIEs”). Application of this revised interpretation was required in financial statements for companies that have interests in VIEs or potential VIEs for periods ending after December 31, 2003.   In April 2005 the Company entered into a long-term contract with San Cristobal Transportadora de Electricidad, S.A. (“SC TESA”), a subsidiary of Ingelec, S.A., (“Ingelec”) a company in the power line construction and transmission services industry, to construct a power line and transport power to the San Cristobal Project from the Bolivian power grid. The Company has determined that the contractual arrangements result in the classification of SC TESA as a VIE. In addition, because of the restrictive requirements of the contract, effectively giving the Company control of SC TESA, the Company is deemed to be the primary beneficiary of SC TESA resulting in the full consolidation of SC TESA for the 2005 periods presented (see Note 10). The consolidation of SC TESA results in the elimination of the $5.6 million note receivable from TESA and the recognition of $2.9 million of additional Property, Plant & Equipment, $2.3 million of additional cash and $0.2 million of additional liabilities.  The Company recorded a small minority interest benefit related to the consolidation.

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3.              Investments

The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents.  Short-term investments include investments with maturities greater than three months, but not exceeding twelve months.  Long-term investments include investments with maturities greater than twelve months.

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the intent and ability to hold the securities to maturity. Debt securities are stated at amortized cost, which approximates market, and include government agency and corporate obligations.  Short term securities investments available for sale are marked-to-market at each reporting period.  Changes in the value of the securities are recorded, net of tax, as a component of other comprehensive income. If declines in value are deemed other than temporary, a charge is made to net loss for the period.

The Company invests only in government and corporate securities rated “investment grade” or better. The following tables summarize the Company’s investments at June 30, 2005 and December 31, 2004:

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During the second quarter 2005 the Company took delivery of certain leased mining equipment, to be used in stripping and future mine production, and recorded a capital lease resulting in the recognition of a $7.3 million liability at June 30, 2005. The capital lease obligations will require payments of $0.6 million during 2005, $1.1 million during both 2006 and 2007, $1.2 million during 2008 and $3.2 million in 2009 and thereafter.

At June 30, 2005 the Company is carrying $13.6 million of investments that have been restricted and at maturity will provide the amounts necessary to pay interest payments through September 2007 on the 4.0% Convertible Senior Subordinated Notes due 2024.

The Company has entered into a financing arrangement whereby Barclays Capital and BNP Paribas have agreed to underwrite and syndicate a $225 million secured credit facility to complete development of the Company’s San Cristobal Project.  During the second quarter 2005 the Company made certain payments related to the credit facility to Barclays Capital and BNP Paribas totaling $3.4 million and recorded the payments to Deferred financing costs.

8.              Commitments and Contingencies

Letters of Credit – At June 30, 2005, the Company had outstanding irrevocable standby letters of credit in the aggregate amount of $20.7 million. The letters of credit include $18.0 associated with the rail contract to transport metal concentrates to the port facilities, $2.0 million associated with the construction management contract and $0.7 million related to the planned port facilities.  The Company has deposited $23.0 million to collateralize the current and certain possible future letters of credit and has recorded that amount to restricted investments.

Bank Financing – The terms and conditions of the financing arrangement with Barclays Capital and BNP Paribas required the Company to deposit $100 million cash to collateralize certain pre-closing covenants and requirements. The cash will be released back to the Company upon the closing of the loan facility and the meeting of all “conditions precedent” to the loan.  At June 30, 2005 the $100 million collateral was recorded to restricted cash.

Commitments related to the San Cristobal Project – The Company has entered into agreements with certain service providers and placed orders for certain long lead equipment and construction materials for its San Cristobal Project resulting in commitments totaling approximately $180 million at June 30, 2005.  Should the Company cancel any of these agreements or orders, it would incur varying cancellation fees that would total approximately $17 million at June 30, 2005.

9.              Foreign Currency

Losses on foreign currency derivatives and exchange consist of the following:

The loss on the Euro derivatives is all related to the marking to market of open Euro derivative positions held by the Company.  During 2004 the Company had placed long lead advance orders for certain capital equipment in which the purchase price was denominated in Euros. At that time the Company purchased calls and wrote puts to partially offset a potential deterioration in the value of the U.S. dollar relative to the Euro.  The Company closed the Euro positions during the second quarter 2005. Over the life of the derivative positions the Company realized a $0.6 million gain.

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Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis summarizes the results of operations of Apex Silver Mines Limited (“Apex Silver” or “we”) for the three and six month periods ended June 30, 2005 and changes in our financial condition from December 31, 2004.  This discussion should be read in conjunction with the Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the period ended December 31, 2004.

Apex Limited is a mining exploration and development company that holds a portfolio of exploration and development properties primarily in South America and Central America. We currently focus our resources primarily on the development and financing of our San Cristobal Project in Bolivia. At present, none of our properties are in production and, consequently, we have no current operating income.

Overview

During the first six months of 2005 we began ramping up the construction of our San Cristobal Project, spending approximately $56 million during the period on development of the project.  We have entered into agreements with service providers including the construction management company, the mining contractor, the rail transport company, the power provider and the port facilities among others. We have placed orders for equipment and construction materials resulting in total contractual commitments of approximately $180 million at June 30, 2005. Should the Company cancel any of these agreements or orders, it would incur varying cancellation fees that would total approximately $17 million at June 30, 2005. We have began to take delivery of certain mining equipment during the period and we plan to begin pre-stripping activities in the third quarter 2005.

During June 2005 we announced that Barclays Capital and BNP Paribas agreed to underwrite and syndicate a $225 million secured credit facility for development of our San Cristobal Project.  The total financing package may incorporate support from export credit agencies, multilateral agencies and other public lenders.  We will continue to consider additional incremental financing arrangements.

For the remainder of the year we expect to spend in excess of $150 million on the above orders and agreements as well as on other San Cristobal Project construction and development. In addition, for the remainder of the year we expect to spend approximately $8 million on general corporate costs and exploration efforts.

Results of Operations –Three Months Ended June 30, 2005

Interest and other income. Interest and other income was $3.6 million for the second quarter of 2005 compared to $1.0 million recorded during the second quarter of 2004.  The 2005 increase is the result of greater interest earned because of higher average cash, cash equivalents and investment balances held during 2005 as compared to the same period of 2004 and higher available interest rates during 2005. The higher average cash, cash equivalents and investment balances are the result of the issuance of equity and convertible notes during 2004.

Gains (losses) on commodity derivatives. During the second quarter of 2005, we recorded a mark to market gain related to our metals trading program of $2.4 million compared to a $0.9 million mark to market gain for the same period in 2004.  The increased gain during the second quarter 2005 is the result of increased activity in the metals trading program as compared to the same period of 2004. The increased metals trading activities will likely result in increased volatility in our future earnings. We measure the fair value of open positions at the end of each reporting period, recording the difference in the carrying value to the current net loss, in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS No. 133”).  Under FAS No. 133, fair value measurements may vary substantially from period to period based on spot prices, forward prices and quoted option volatilities.

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Gains (losses) on foreign currency derivatives and exchange. During the second quarter of 2005 we recorded a $0.4 million foreign exchange loss related to the re-measurement of monetary assets and liabilities associated with the construction activities in at our San Cristobal project in Bolivia.

Also, during the second quarter of 2005 we incurred a mark-to-market loss of $0.3 million related to certain derivative positions we held related to the value of the Euro. During 2004 we had placed long lead advance orders for certain capital equipment in which the purchase price was denominated in Euros. At that time we purchased calls and wrote puts to partially offset a potential deterioration in the value of the U.S. dollar relative to the Euro.  The Company closed the Euro positions during the second quarter 2005. Over the life of the derivative positions we realized a $0.6 million gain. The Company marks its open foreign currency derivative positions to market at the end of each reporting period per the requirements of FAS 133.

Exploration.  Exploration expense was comparable at $1.4 million for the second quarters of both 2005 and 2004.

Administrative.  Administrative expense was $4.9 million for the second quarter of 2005, compared to $2.8 million for the second quarter of 2004.  The increase in administrative expense during the second quarter of 2005 is primarily the result of additional personnel and related support costs associated with the advancement of our San Cristobal Project, financing efforts and Sarbanes-Oxley compliance.

Interest Expense.  Interest expense was $1.9 and $0.9 million, net of approximately $1.4 and $0.7 million capitalized, for the second quarters of 2005 and 2004 respectively. The interest expense is primarily related to the Convertible Senior Subordinated Notes issued during 2004.

Results of Operations – Six Months Ended June 30, 2005

Interest and other income.Interest and other income was $7.0 million for the first six months of 2005 compared to $1.5 million recorded during the first six months of 2004.  The 2005 increase is the result of greater interest earned because of higher average cash, cash equivalents and investment balances held during 2005 as compared to the same period of 2004 and higher available interest rates during 2005. The higher average cash, cash equivalents and investment balances are the result of the issuance of equity and convertible notes during 2004.

Gains (losses) on commodity derivatives. During the first six months of 2005, we recorded a mark to market gain related to our metals trading program of $2.1 million compared to a $0.3 million mark to market gain for the same period in 2004.  The increased gain during the first six months 2005 is the result of increased activity in the metals trading program as compared to the same period of 2004. The increased metals trading activities will likely result in increased volatility in our future earnings. We measure the fair value of open positions at the end of each reporting period, recording the difference in the carrying value to the current net loss, in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS No. 133”).  Under FAS No. 133, fair value measurements may vary substantially from period to period based on spot prices, forward prices and quoted option volatilities.

Gains (losses) on foreign currency derivatives and exchange. During the first six months of 2005 we recorded a $0.4 million foreign exchange loss related to the re-measurement of monetary assets and liabilities associated with the construction activities in at our San Cristobal project in Bolivia.

Also, during the first six months of 2005 we incurred a mark-to-market loss of $0.9 million related to certain derivative positions we held related to the value of the Euro. During 2004 we had placed long lead advance orders for certain capital equipment in which the purchase price was denominated in Euros. At that time we purchased calls and wrote puts to partially offset a potential deterioration in the value of the U.S. dollar relative to the Euro.  We closed the Euro positions during the second quarter 2005. We had a realized gain of $0.6 million over the life of the derivative positions of which $0.5 million was recorded in 2005. The Company marks its open foreign currency derivative positions to market at the end of each reporting period per the requirements of FAS 133.

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Exploration.  Exploration expense was $2.8 million for the first six months of 2005 compared to $2.6 million for the same period of 2004.  The 2005 expense includes an approximate $0.4 million reserve charge to value added taxes recoverable for amounts on which the recoverability is not certain.

Administrative.  Administrative expense was $8.8 million for the first six months of 2005, compared to $6.0 million for the six months of 2004.  The increase in administrative expense during the first six months of 2005 is primarily the result of additional personnel and related support costs associated with the advancement of the San Cristobal Project, financing efforts and Sarbanes-Oxley compliance.

Interest Expense.  Interest expense was $3.9 and $1.0 million, net of approximately $2.5 and $0.8 million capitalized, for the first six months of 2005 and 2004 respectively. The interest expense is primarily related to the Convertible Senior Subordinated Notes issued during 2004.

Liquidity and Capital Resources

At June 30, 2005 our aggregate cash, restricted cash, short and long term investments and restricted investments amounted to $478.7 million compared to an aggregate of $543.8 in cash, restricted cash, short and long term investments and restricted investments at December 31, 2004.  The amounts held at June 30, 2005 include $18.0 million in cash and cash equivalents, $301.0 million in short term investments and $23.1 million in long term investments.  In addition to these amounts, at June 30, 2005, we had $100.0 million of cash that has been restricted to collateralize certain pre-closing covenants and requirements related to the bank financing and $13.6 million of investments that have been restricted and at maturity will provide the amounts necessary to pay interest payments through September 2007 on the 4.0% Convertible Senior Subordinated Notes due 2024 and $23.0 million of investments that have been restricted to provide collateral for outstanding letters of credit.

As of June 30, 2005, we had cash and cash equivalents of $18.0 million, compared to $27.7 million at December 31, 2004.  The decrease in our cash balance at June 30, 2005 is the result of $55.7 million invested in property, plant and equipment related to the development of the San Cristobal Project, $9.9 million used to fund operations, property holding costs and administrative costs, net of interest and other income, $3.4 million paid to the banks related to the credit facility, the net increase in restricted cash of $96.9 million and advances made to suppliers of $1.3 million, all partially offset by the net sales of $152.0 million of investments, $5.4 million of net proceeds from the sale of Ordinary Shares and $0.1 million of proceeds from employee stock options exercised.

For the remainder of the year we expect to spend about $150 million on the San Cristobal Project including the purchase of equipment, construction materials, payments to contractors and other development.  In addition, for the remainder of the year we expect to spend approximately $8 million on general corporate costs and exploration efforts.  We plan to fund these project and operating cash expenditures from our existing cash and investment balances and from interest and other income.

During 2004 we completed updating the San Cristobal development plan, resulting in estimated capital costs of approximately $560 million and anticipate commencement of operations in 2007. The capital cost estimate includes pre-stripping, engineering, procurement, construction, and freight necessary to commence production, as well as appropriate taxes, duties and levies under Bolivian law.  The estimate excludes approximately $27 million of working capital, $22 million expected to be advanced to the company constructing the power line, $6 million expected to be advanced to the company constructing the port facilities, and $20 million for escalation from the original constant dollar estimate.  Advances for the power line and port facility providers are expected to be recouped through credits applied against payments for the contracted services.  The estimate also excludes approximately $12 million in capital costs related to production enhancements.  Total project funding from January 1, 2004 going forward, including the additional amounts described above, is approximately $650 million.  Of this amount, approximately $82 million in capital costs were spent at the San Cristobal Project through June 30, 2005. At June 30, 2005 approximately $5.6 million of the costs associated with the power line have been paid using Ordinary Shares rather than cash and an additional $5.6 million of Ordinary Shares were issued to fund the power line construction during July 2005. We anticipate the use of an additional $11 million of Ordinary Shares related to the power line construction and $5 million of Ordinary Shares to pay certain construction bonuses. Barclays Capital and BNP Paribas have agreed to underwrite and syndicate a $225 million

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During 2004, a committee of the Emerging Issues Task Force (“EITF”) began discussing the accounting treatment for stripping costs incurred during the production phase of a mine.  During March 2005, the EITF reached a consensus that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of inventory produced during the period that the stripping costs are incurred. The Financial Accounting Standards Board ratified the EITF consensus.  The EITF consensus is effective for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted.  The Company is currently in the development phase and is currently evaluating the impact, if any, on the Company’s financial position and results from operations once production commences.

Commitments

The Company has entered into agreements with certain service providers and placed orders for certain long lead equipment and construction materials for its San Cristobal Project resulting in commitments totaling approximately $180 million at June 30, 2005.  Should the Company cancel any of these agreements or orders, it would incur varying cancellation fees that would have totaled approximately $17 million at June 30, 2005.

Forward-Looking Statements

Some information contained in or incorporated by reference into this report may contain forward-looking statements.  These statements include comments regarding San Cristobal development and construction plans, costs, infrastructure arrangements, financing needs, the availability of financing on acceptable terms, the timing of construction at San Cristobal, hedging arrangements and the markets for silver, zinc and lead.  The use of any of the words “anticipate,” “continues,” “estimate,” “expect,” “may,” “will,” “project,” “should,” “believe” and similar expressions are intended to identify uncertainties.  We believe the expectations reflected in those forward-looking statements are reasonable.  However, we cannot assure that these expectations will prove to be correct.  Actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors set forth below and other factors set forth in, or incorporated by reference into this report:

•                  worldwide economic and political events affecting the supply of and demand for silver, zinc and lead;

•                  political and economic instability in Bolivia and other countries in which we conduct business;

•                  volatility in market prices for silver, zinc and lead;

•                  financial market conditions, and the availability of financing on terms acceptable to Apex Silver;

•                  uncertainties associated with developing a new mine, including potential cost overruns and the unreliability of production and cost estimates in early stages of mine development;

•                  variations in ore grade and other characteristics affecting mining, crushing, milling and smelting operations and mineral recoveries;

•                  geological, technical, permitting, mining and processing problems;

•                  the availability, terms, conditions and timing of required government permits and approvals;

•                  uncertainties regarding future changes in applicable law or implementation of existing law, including Bolivian laws related to tax, mining, environmental matters and exploration;

•                  the availability, terms and timing and variations in smelting operations and capacity;

•                  the availability of experienced employees; and

•                  the factors discussed under “Risk Factors” in our Form 10-K for the period ended December 31, 2004.

Many of those factors are beyond our ability to control or predict.  You should not unduly rely on these forward-looking statements. These statements speak only as of the date of this report on Form 10-Q.  Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments.

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Item 3.           Quantitative and Qualitative Disclosures About Market Risk and Hedging Activities

Currently our major principal cash balances are held in U.S. dollars.  We maintain minimum cash balances in foreign currencies and therefore have a relatively low exposure to currency fluctuations.  Because we conduct our activities mainly in Bolivia, as well as in several other foreign countries, we may in the future engage in hedging activities to minimize the risk of exposure to currency and interest rate fluctuations.

We manage the timing of the cash required to construct the San Cristobal Project, to fund general corporate costs, exploration and other funding requirements and invest funds not immediately required in investments with varying maturities.   Our policy is to invest only in government and corporate securities rated “investment grade” or better.

To complete the project financing for San Cristobal, we are required to hedge a portion of the planned production.  In addition, when San Cristobal enters production, we may sell forward a portion of our production and use price hedging techniques to mitigate some of the risks associated with fluctuating metals prices.  We are currently engaged in metals trading activities, utilizing puts and calls and other market instruments.  During the first six months of 2005, we recorded a mark to market gain related to the metals trading program of $2.1 million. The increased metals trading activities will likely result in increased volatility in our future earnings.  See “Item 2, Results of Operations.”  Also, during the first six months of 2005 we incurred a mark-to-market loss of $0.9 million related to certain derivative positions we held related to the value of the Euro. During 2004 we had placed long lead advance orders for certain capital equipment in which the purchase price was denominated in Euros. At that time we purchased calls and wrote puts to partially offset a potential deterioration in the value of the U.S. dollar relative to the Euro.  We closed the Euro positions during the second quarter 2005. We had a realized gain of $0.6 million over the life of the derivative positions of which $0.5 million was recorded in 2005.

Item 4. Controls and Procedures

(a)          Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Apex Silver’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness and design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) under the Securities and Exchange Act of 1934.  Based upon, and as of the date of, this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

(b)         Change in Internal Control over Financial Reporting

Apex Silver’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

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Management issued a report on the effectiveness of our internal control over financial reporting as of December 31, 2004.  In making its assessment, management used criteria described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Management’s assessment concluded that, as of December 31, 2004, we did not maintain effective controls over the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise that was commensurate with our financial reporting requirements.  As disclosed in management’s report, this control deficiency constituted a material weakness as of December 31, 2004 and resulted in the following adjustments to our financial statements:

•                  Restatement of our consolidated financial statements for the first, second, and third quarters of 2004 to capitalize additional interest and to reduce interest expense due to a misinterpretation of GAAP related to the capitalization of interest incurred on debt borrowed for the construction of the San Cristobal project.

•                  Reclassification, prior to filing our second quarter financial statements for 2004, of cash and cash equivalents to short and long-term investments.

•                  Adjustment, prior to filing our third quarter financial statements for 2004, of stock compensation expense and related disclosures associated with our adoption of FAS 123, “Accounting for Stock-Based Compensation” and adjustment, prior to filing our financial statements for the year ended December 31, 2004, to increase costs capitalized at our San Cristobal project and to reduce administration expense.

During the six months ended June 30, 2005 management has undertaken remedial action to address the above described material weakness by:

•                  Expanding its accounting staff to include, beginning in February 2005, an experienced corporate controller and an experienced site controller and project accounting manager for our San Cristobal project in Bolivia, to provide additional technical accounting expertise in applying GAAP.  In addition, Management has created a corporate treasury position, also beginning in February 2005, to manage cash and investments and assist in the proper presentation and disclosure of these items.  These additional employees have been fully integrated into the Company’s internal control system, enhancing the review process related to early identification of accounting issues associated with our financial reporting requirements.

•                  Engaging an outside accounting firm to assist in preparing and reviewing our financial statements and providing expertise in the proper application of GAAP.  The outside accounting firm provided valuable support in the preparation of financial statements for the year ended December 31, 2004 and quarter ended March 31, 2005, and in assisting with Management’s review of the financial results of the quarter and six months ended June 30, 2005.  Management will continue to use the outside firm, as needed, to provide additional expertise in applying GAAP to new transactions as part of its ongoing system of internal controls over financial reporting.

Management has tested the key internal controls over financial reporting that were related to or had an impact on the Company’s disclosure of the material weakness noted above. This testing has provided management with sufficient evidence that such controls are operating effectively.  Therefore, management has concluded that remediation of the material weakness is complete.

During the six months ended June 30, 2005, there were material changes to accounting processes related to our San Cristobal Project due to a significant ramp-up of activity.  These changes primarily relate to the interface of financial information between our information systems and the information systems managed by our engineering, procurement and construction management contractor (“EPCM”).  In addition, processes relating to the approval of purchase orders, contracts and invoice payments for the project now involve significant interaction between our own project management and the EPCM.  A control framework for project accounting and reporting has been established and our key internal controls

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PART II: OTHER INFORMATION

Item 1.           Legal Proceedings

None.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.           Defaults Upon Senior Securities

None.

Item 4.           Submission of Matters to a Vote of Security Holders

The following matters were voted upon at the annual meeting of shareholders held on June 24, 2005:

(a)          Election of the three directors whose terms expired at the 2005 annual meeting,

(b)         Increase Authorized Share Capital for Ordinary Shares,

(c)          Approve Authorized Share Capital for Preference Shares,

(d)         Amend Article 18 of the Articles of Association.

(e)          Approve Amended and Restated  Memorandum of Association, and

(f)            Ratification of the selection of PricewaterhouseCoopers LLP as independent accountants for the current fiscal year.

All matters voted on at the annual meeting were approved.  The voting results were as follows:

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Item 5.           Other Information

None.

Item 6.           Exhibits

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