SilverSilver demand has grown by an average of 4 percent a yearfor the past 20 years. Since silver is the best electricalconductor among the metals, it is an essential component inelectronic circuitry. Silver membrane switches are used in anever increasing list of applications including computerkeyboards, televisions, telephones, automobiles and handheldelectronic gear. As the breadth of electronic applicationsexpands, the use of silver has increased dramatically. Silver isalso used as an industrial catalyst in a variety of chemicalapplications including the manufacture of plastics andpetroleum refining. Silver’s natural bactericidal andalgaecidal properties have led to its replacing corrosivechlorine in water purification systems, as well as its use insalves and artificial skin for burn patients.

Silver’s sensitivity to light as silver halide is the basis for itsusage in photographic film, which has been one of thestrongest growth segments for silver over the past five years,averaging 4 percent a year. Recent concerns that digitalphotography would significantly reduce silver usage haveproved to be unfounded. Digital photography has actuallyled to more people taking pictures and printing them onsilver-based paper to achieve high quality images.

Silver’s near perfect reflectivity drives its demand in jewelry,silverware and glass coatings (mirrors). With the increasingneed for more efficient energy storage and transmission,silver’s high technology uses have the potential to increasedemand significantly. Lightweight, high performance silver-zinc batteries that are used as power sources in high-techapplications like satellites, missiles and launch vehicles couldeventually translate to broader based commercial uses.Sheathing for superconducting wire and cable is another hightechnology application that could substantially increase silverdemand as each mile of superconducting cable requiresapproximately one ton of silver.

ZincZinc demand has grown by more than 2 percent a year forthe last 20 years. Zinc’s dominant use as a coating for steel,or galvanizing, is due to the metal’s strength, formability andrelatively low cost. During galvanizing, steel is immersed ina molten zinc bath, developing a tough uniform coating aszinc actually forms a metallurgical bond with steel. If thecoating is cut to expose the steel, zinc provides sacrificialprotection by corroding first, thereby maintaining thestrength and integrity of the steel. Zinc actually “heals” thecut by flowing across the break, in much the same way thehuman body heals cut skin. Zinc’s natural corrosionresistance also provides long-term protection, particularly foroutdoor uses.

Zinc’s formability and light weight make it ideal for diecastparts used in automobiles, appliances and toys. A typical U.S.automobile has nearly 20 pounds of zinc in castings and 18pounds of zinc in coatings. When combined with copper, itforms brass that represents another 3 pounds in a typicalautomobile. Zinc is also rolled into sheets that provide thestock for U.S. pennies, which are 98 percent zinc with copperplating. Its formability and corrosion resistance also make itan ideal material for applications like countertops andbuilding downspouts. Zinc powder is an essential componentin dry-cell batteries.

Oxide and chemical uses cover a wide variety of applicationsincluding curing rubber, as corrosion protection in manypaints, as a healing ingredient in personal care products likediaper rash ointment and sunscreens, and as a fortifyingmineral in cereals and fertilizers. Most recently, zinc’s use inthe prevention and/or elimination of cold symptoms has beenthe subject of considerable attention and study.

Metals for LifeUnderstandable Business

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1981

Silver Demand(Million Ounces)

Source: CPM GroupTrend Growth 1981-20014.0% per year

Fundamental Value+ Focused Growth

= Competitive Advantage

Source: International Lead and Zinc Study Group(Western World)

0

1000

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Zinc Demand(Thousand Tonnes)

Trend Growth 1981-20012.1% per year

Metals mining is an understandable business that adds value to nearly allaspects of life. San Cristobal’s principal metals, silver and zinc, have a widerange of real and tangible uses.

Q What challenges does theCompany have to deal with?

A We face the normal challenges of a company developing a world class min-ing project. Thus, there have beennumerous milestones that have had tobe achieved: tenders, metallurgical opti-mizations, discussions with smelters,securing permits, and government nego-tiations over taxes and infrastructure, toname a few. One by one, these mile-stones are being met. Our approach hasalways been methodical and for the longterm. As a deposit like San Cristobal islikely to be mined for decades, it standsto reason that it is best to plan it — aswell as finance and build it — right. Inthe end, of course, as those with experi-ence in this or any other industry know,

that’s the only way to do anything, mostof all assemble a project that has thepotential to redefine the cost structure ofsilver and zinc production. This is not tosay that the process is easy. When anindependent company of our size devel-ops one of the largest projects of itskind, even in a seasoned mining countrylike Bolivia, there are bound to be challenges. Unlike a “major”, we don’thave the luxury of being able to ignorefinancial constraints. As an independentcompany deeply committed to its found-ing principle of making a lot of money forits shareholders, we have taken the viewthat if we “do not cut corners” and “do itright” the first time, we and our stake-holders will be repaid on the back-endmany times over.

Q What makes Bolivia an attractive mining country?

A As home to the Cerro Rico de Potosi,the most famous silver discovery in history, Bolivia has long been known topossess one of Latin America’s mostfavorable mining cultures. The countryis democratically governed and economically sound. Having undergoneone of the most far reaching privatiza-tion programs in Latin America, Bolivia’sfree market reforms enjoy bipartisanpolitical agreement at home and multi-lateral banking support abroad.The Mining Code of 1997, which offersbroad safeguards for the industry, guarantees that property title is secureand not subject to “use it or lose it” regulations. Foreigners are placed onthe same footing as locals, environ-mental regulations are enforcedstraightforwardly and Bolivia’s effectivetax rates are competitive with its neigh-bors, Chile and Peru.

the fastest growing hydrocarbonprovinces in South America. Indeed,Bolivia is rapidly becoming an energyhub, which we believe in turn has height-ened regional interest in key Bolivianprojects like San Cristobal and the desirefrom both domestic and internationalsuppliers to provide it with power andother infrastructure.

In addition to the power supply, progresswas recorded on other infrastructureitems as we worked closely with thegovernments of Bolivia and Chile onmatters related to the design and use oftransportation and port systems to andfrom the Project to the Chilean coast. Inlate July, San Cristobal received its keyenvironmental permit from the BolivianMinistry of Sustainable Development andPlanning for the road to Chile. Thisfollows the Company’s receipt in May ofthe key Bolivian environmental sitepermit that sets forth the comprehensiveenvironmental standards for the Project,as well as granting approval for miningand processing the silver, zinc and leadreserves at San Cristobal.

Q In what ways did you advanceSan Cristobal “on the ground” in 2001?

A Every mine development project hasthree very basic infrastructure require-ments: water, power and transportation.We have made progress on each. On-site drilling has indicated that SanCristobal has more than adequate waterresources to meet the mine’s needs forthe foreseeable future. Regarding ener-gy, after an open and competitive bid-ding process, in September 2001, theCompany signed a letter of intent withNor Oeste Pacifico Generacion deEnergia Limitada (“NOPEL”) to providepower for San Cristobal. NOPEL is apower generating and transmission jointventure combining two of the world’slargest energy companies, Endesa andCMS Energy. Now that a preferredpower provider has been selected, theCompany is conferring with the variousgovernment agencies responsible forexecuting power arrangements involvingthe import and export of energy, which isa rapidly growing part of the Bolivianeconomy. Since completion of the SanCristobal Feasibility Study, natural gasdiscoveries have rendered Bolivia one of

San Cristobal: Competitive Advantage

PERU

PACIFICOCEAN

CHILE

Salar deUyuni

Calama

Antofagasta

La Paz

BOLIVIA

Potosi

Kori Kollo

Lake Titicaca

Iquique

Punta Patache

Tocopilla

Collahuasi

El Abra

Escondida Mejillones

Uyuni

200 km

San Cristobal

Chuquicamata

ARGENTINA

San Cristobal Location Map

intent is not to simply sell silver produc-tion forward, but to use dynamic hedgesto minimize downside exposure whilemaximizing the opportunity to captureupside movements.

Q San Cristobal is a unique depositin that most primary silver isproduced from small, high costunderground mines that exploithigh-grade vein and limestonereplacement deposits. How did Apex find it?

A In January 1995, Larry Buchanan, nowthe Company’s Chief Geologist, was sentto Bolivia to evaluate silver explorationproperties. One of the prospects he visited was the San Cristobal Districtincluding the Toldos mine, an operationhe judged to be too small to be of con-tinuing interest on its own. Other majormining companies had evaluated SanCristobal for gold, but not for silver. Hisreconnaissance discovered significantalteration of the surface rocks within thevolcanic crater just north of the Toldosmine. Before leaving, the team hikedinto the crater to investigate and wassufficiently encouraged to collect severalhundred surface samples, all of which

the discovery of silver, gold and otherprecious metal deposits as well as polymetallic deposits containing preciousmetals. While the structure of the newcompany is being developed, options forSilEx may include at some future timetaking the company public on its ownwhen the environment improves forexploration valuations and/or spinning itoff directly to shareholders.

We certainly believe there is a great dealof value to be unlocked from ourexploration portfolio, which comprisesone of the largest holdings of silver-related properties ever assembled.Indeed, outside the San Cristobal Districtitself, during 2001 successful drill resultswere encountered at three of theCompany’s Latin American explorationproperties: the Pulacayo/Paca propertyin southern Bolivia; the Platosa/Saltillerajoint venture property in north centralMexico; and the Aldea Zapote jointventure property in northern El Salvador.All three drill programs have encounteredrelatively high-grade silver values inseveral drill holes, indicating the potentialpresence of bulk mineable silver depositsor high-grade underground targets. TheCompany’s geologists have also recentlylocated and acquired a number of new,highly prospective volcanogenic massivesulfide (VMS) prospects in Peru.

proved to contain anomalous to oregrade silver values. He immediately rec-ognized the potential for a bulk tonnagepolymetallic deposit along the lines ofReal de Angeles in Mexico, a highly prof-itable, smaller-scale, open-pit silver minethat ceased production in 1998 due todepletion of reserves. Drilling at SanCristobal commenced in 1996 once theentire target area had been acquired.

Q What are Apex’s plans for itsnon-San Cristobal properties?

A As we advance our flagship, we havenot forgotten that our prime goal is toadd value to all our assets. Over theyears, the Company has acquired,staked, or joint-ventured hundreds ofholdings outside the San CristobalDistrict deemed to be geologicallyattractive. Current holdings are nowcombined into 17 core property groupsspread over approximately 540,000acres in 5 countries. In that spirit, andto realize shareholder value from a port-folio of exploration assets that would beconsidered first-rate by the standards ofmost any mining company, in January2001 the Company announced its plansto create SilEx, which is intended to be apremier exploration vehicle focused on

Chilean Coast

San Cristobal’s silver-rich zincand lead concentrates will beshipped to smelters around the world from a port on theChilean coast.

Apex Silver’s Latin AmericanProperty Portfolio

El SalvadorZapote

MEXICO

EL SALVADOR

PERU

BOLIVIA

Platosa/Saltillera

Pulacayo/PacaSan Cristobal

Aldea Zapote

Ag-Zn-Pb-(Au)Ag-Au/AgPd-Pt-AuVMS Targets

Q How long will it take to put San Cristobal into production?

A Construction of San Cristobal is expect-ed to take two years once the projectfinancing has been completed. Givenrecent low metals prices, the Companyhas focused its efforts on advancing theinfrastructure arrangements that will bepart of the completion of the projectfinancing including power arrangements,permits, transportation and port facili-ties, as discussed earlier. While it takesa number of steps to put together thevarious pieces for a project financingpackage on the scale of San Cristobal’s,every milestone reached along the chainadds value to the Project and theCompany. Once we are comfortablewith metals markets, the Company andits project finance arrangers, workingclosely with key multilateral fundingagencies, expect to develop and implement a total financing package for San Cristobal.

Q What is your view of marketconditions?

A While very bullish on long-termprospects for the metals, we do not wishto be short-term market timers as, his-torically, that path has often become theshort route to hell for many of our fellowmining companies. What we do feelcomfortable reporting is that at currentprices, many silver and zinc mines areoperating at a loss. These mines are notgenerating the financial returns requiredto replace the ore reserves that are beingdepleted. While San Cristobal is project-ed to be one of the few mines able togenerate cash (after financing costs)even during hard times, the fact is thattime is on our side. We strongly believethat the next bull cycle will not likely becharacterized by a price spike, but rathera “long wave” uptrend. This is evi-denced by the fact that the contractionin supply that has been taking place isbeing accentuated by a bullish nexus ofcorporate failures and mine productioncutbacks. With a strong cash positionand a long-lived asset that is highlyleveraged to silver and zinc, we are wellpositioned to take advantage of the mar-ket rather than being held hostage by it.

We are unwilling to deplete Apex’sreserves simply for the sake of operatingand are keenly aware that our relativeposition in the industry continues toimprove. As ore reserves diminish (orget “burned”) along with the financialresources required to develop them, SanCristobal’s reserves represent a largerproportion of the world’s remainingsupply of silver and zinc. When themarkets acknowledge the depletion ofexisting reserves, market pricing shouldprovide us with the opportunity todevelop and sell San Cristobal’s metalat the superior returns that our investorsare anticipating.

Q To complete your project financ-ing, will you be required tohedge your metal production?

A A project financing of San Cristobal’ssize always requires protection for thelenders. Our goal in hedging silver pro-duction is to maintain as much upsideexposure to silver prices as possible. Tomeet that goal, we will optimize hedgingour zinc and lead production first, thenfill in any remaining required hedgingwith some of our silver. We are verybullish on silver’s fundamentals. For anysilver we are required to hedge, our

Salar de Uyuni

The Salar de Uyuni isthe world’s largest saltlake (9,000 square kilo-meters) and is home toa regional salt miningindustry.

San Cristobal is one of theworld’s largest open-pit silver and zinc reserves with 240 milliontonnes of ore grading 2.0 ouncesper tonne of silver, 1.67 percentzinc and 0.58 percent lead (containing approximately 470 million ounces of silver, 8.8 billion pounds of zinc and 3.1 billion pounds of lead).

San Cristobal

Altiplano

The Bolivian Altiplano is bordered on the east and westby the twin spines of the Andes.It consists of high plains withvalleys, small hills, salt flats,volcanoes, rivers and lakes.

AgWorld of EnergyBattery CapsMicrocircuitryMotor Control SwitchesWiringEnergy Efficient Window CoatingsStartersSilver Palladium PastesSilver Tungsten ContactsSilver Epoxy Microchip ResinPhototooling Wiring Films Satellite Solar PowerPhotovoltaic CellsEnergy Efficient LightingElectric WheelchairsSuperconducting Cable Sheathing

Q In view of continued large deficits, what kind of a move do you see in silver prices?

A Commodity prices commonly take a long time to reflectchanging market fundamentals, then move rapidly tobalance supply and demand. Consumption has grown byan average of 3.4 percent a year for the last 10 years, whilesilver stocks have decreased by 100 to 200 million ounces ayear for the last 10 years. Silver inventories are not justbelieved to be at their lowest point in absolute terms but, ascan be seen from the accompanying chart, stockpiles arealso at their lowest point historically relative to globalconsumption needs. As silver is unique in many of itsapplications, low inventories could lead to a very substantialrevaluation of the metal and its price. Market wisdom statesthat, “The longer the bottoming process, the more dramaticthe price reversal”. The more than four-fold rise in thepalladium price since 1997 is a recent example of such aphenomenon at work.

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Months of Demand, Year End

Source: CPM Group

Surplus/(Deficit)

Silver Surplus/(Deficit)(Million Ounces)

Silver Spot Price(Comex, US$/Ounce)

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Source: CPM GroupStrong Silver Fundamentals

Silver Spot Price(Comex, US$/Ounce)

World of MedicineSevere Burn TreatmentUlcer TreatmentAntibacterial ApplicationsHospital Water FiltrationX-Ray FilmAcne TreatmentDiaper Rash TreatmentSun Burn TreatmentPoison Ivy TreatmentFighting Gum DiseaseDiabetes TreatmentNewborn Eye ProtectionSilver ColloidsPrescription Eyeglass CoatingOxygen Pumps and SealsSpectroscopyCholera TreatmentPharmaceuticals

World of ScienceDNA ResearchPhotometry Chemical AnalysisCloud SeedingAnalytical InstrumentsMicroscopic Research Robotics Non-Invasive Archeological StudiesNuclear StudyHigh Power Radar Tubes

World of PowerSilver Oxide BatteriesSilver Zinc BatteriesPower StorageSilver Cadmium BatteriesConductorsConductive AdhesivesFusesAnodesElectrodesFuse CapsTransistorsCircuit BreakersTransformersBusbars Contacts RelaysConnectorsThermostatsComputer Chip CircuitryTimersMembrane SwitchesMulti-layer Ceramic CapacitorsSolar PanelsPower Tubes Zinc Air BatteriesAlkaline BatteriesZinc Carbon BatteriesLight Switches

Electronics and IndustrialPhotographyJewelry and SilverwareCoinage

34%

33%

2%

31%

Source: CPM Group

Silver FabricationDemand

98

World of IndustryJewelryBearingsSilverwareMirrorsCoated Paper SunglassesWeldingBrazingPlumbingFaucetsElectroplatingHome Water Filters Swimming Pool FiltersFormaldehyde ProductionPlastic ManufacturingBrass BronzeParticle BoardPlywoodPackaging MaterialsPolyesterToysDishwashersVCR TapeAntifreezeAir ConditionersRefrigeratorsAdhesives

Zn Q Does Warren Buffett still have his silver?

A We have no idea. Some claim he sold it all;some claim he still has every ounce he everbought. What we might speculate is asfollows: assuming all of us find out theanswer to this question after silver hasbegun its bull move, we are willing to guessthat the market’s reaction will be asfollows…if he has sold his silver, investorswill be heartened to know that theperceived “overhang” he might represent isgone…and this will fuel another leg higher;if, on the other hand, Mr. Buffett is found tostill be holding the metal, investors will beheartened to know that he remains theirpartner in this new upcycle. In otherwords, it won’t matter. In a bull market, themarket will always find reasons to justifyhigher prices. It always does.

Q How do you view the outlook for zinc?

A We are very pleased, in addition to oursilver, to have one of the largest open-pitzinc reserves in the world. We believethe future of galvanized steel in particularis very promising and is likely to improvesignificantly with a worldwide economicrecovery. Mine closures are likely toaccentuate zinc’s positive supply anddemand fundamentals in the comingyears. As with silver, good, large zincdeposits are hard to find.

No matter how you measure it, SanCristobal is projected to be one of thelowest cost producers of both silver andzinc worldwide. Whether you judge SanCristobal’s production costs on a co-product basis, where cash operatingcosts are attributed to silver and zincproportional to their relative values, or ona by-product basis, where silverproduction is credited back to zinc costs,San Cristobal falls on the lowest end ofthe cost curve. While as a company, wehave most clearly focused on our silverassets, we are grateful for any metal thatcan improve our margins in theproduction of silver. In this business,the lowest cost producer wins.

GalvanizingBrassZinc Alloys (Diecast)ChemicalsSemi-manufactured ZincOther

8%

12%

6%4%

18%

52%

Source: CHR Metals

ZincFabricationDemand

World of CommerceGalvanized SteelWindowsKeyboardsCircuit BoardsComputer ChipsWashersDryersMicrowavesBlendersPhotographyMotion PicturesCell PhonesElectric MotorsWindshield DefrostersPower SteeringEngine StartersAuto LocksPower BrakesAuto TiresRadiosDiecast Parts Jet Engines