Apex Silver falls on Bolivia concerns; Quicksilver gains on earnings anticipation; Sirius up on guidance

By Kenneth Lim

Boston, May 2 - The convertible bond market continued to be subdued on Tuesday on uncertainty about the equity market, and Apex Silver Mines Ltd. fell on fears that its business in Bolivia could become the target of nationalization efforts by the country's government.

Quicksilver Resources Inc. gained in line with its stock as convertible investors bought into the sector's recent volatility and took positions ahead of the company's earnings announcement.

Sirius Satellite Radio Inc. rose with the stock after it reported a first-quarter loss but guided for profitability by the fourth quarter.

In general, interest in the convertible bond market was narrow, with investors taking positions in specific names without any major themes, market sources said.

"It seems as though there's some buyers in certain names out there," said a sell-side convertible bond trader. "The doom and gloomers are thinking that there's no volatility in the market, and it's only going to get worse in the summertime. The market is struggling to figure out where things are going."

A month-end wrap of the convertible market published by Lehman Brothers on Tuesday also said that volatility in the broad equity market was "subdued" in April, with investment-grade convertibles quieting the most.

The difference between the implied and realized volatility of investment-grade convertible bonds narrowed to 2.3 percentage points from more than 4 percentage points over the month due to "investor selling in conjunction with the recent supply of aggressively priced investment-grade paper," said the team of Venu Krishna, Brendan Lynch and Manoj Shivdasani.

Also seen trading on Tuesday were the new convertibles from Gilead Sciences Inc., which fell about two points outright in line with a slide in the stock amid a general pullback in biotech names. Gilead's 0.5% convertible due 2011 was marked at 91.67 bid, 91.92 offered versus the closing stock price of $54.80. Its 0.625% convertible due 2013 was marked at 90.6 bid, 90.85 offered against the same stock price. Gilead stock (Nasdaq: GILD) fell 5.34%, or $3.09.

It was not clear why the stock fell, but a convertible trader said the slide drew the interest of investors. "They're looking for volatility," the trader said.

Gilead is a Foster City, Calif.-based biopharmaceutical company.

Also in the biotech sector, Cephalon Inc. dropped about half a point outright in line with its stock ahead of its earnings announcement Tuesday evening. The company's A tranche zero-coupon convertible due 2033 was marked at 117.5 bid, 118 offered against the closing stock price of $64.54, while its B tranche zero-coupon convertible, also due 2033, was marked at 121.5 bid, 122 offered at the same stock level. Cephalon stock (Nasdaq: CEPH) ended lower by 1.74% or $1.14.

Frazer, Pa.-based Cephalon said after the market closed that its first-quarter net profit fell 86% to $3.6 million, or 5 cents per share, from $26.7 million, or 44 cents per share, in the year-ago period. Excluding amortization expenses and other items, adjusted income would have been 86 cents per share, up 37% from the adjusted 63 cents per share in the first quarter of 2005.

The biotech company also raised its 2006 sales guidance by $25 million, to between $1.475 billion and $1.525 billion. It expects adjusted net income of $240 million to $250 million for the year.

Apex Silver hit by Bolivia worries

Apex Silver's convertibles took a hit on Tuesday as the stock caved in on fears that the silver mining company's main properties in Bolivia would be the next target of the country's nationalization thrust.

Apex Silver's 2.875% convertible due 2024 was marked about nine points lower on an outright basis at 82.85 bid, 83.85 offered versus the closing stock price of $17.70. Its 4% convertible due 2024, which was above par on Monday, was quoted at 93.3 bid, 94.3 offered at the same stock level. Apex Silver stock (Amex: SIL) lost 15.71% or $3.30 over the session.

"The stock got hit pretty big because of the news that the Bolivian government was nationalizing its oil and gas resources," said a buy-side trader.

Bolivian President Evo Morales on Monday signed an act to nationalize the country's oil and gas sector, seizing ownership of its natural gas fields. The market sold down the stock of companies like Apex Silver on worries that the Bolivian government's nationalizing efforts would next reach the metal miners.

Indeed, Bolivian vice president Alvaro Garcia on Tuesday said foreign mining companies in Bolivia must pay higher taxes. He said there would not be "expropriations" like in the oil and gas sector, but that the government would seek greater control.

Apex Silver is developing the San Cristobal silver and zinc mine in Bolivia, and production is only expected in 2007.

A buy-side convertible analyst said speculation about the nationalization efforts has been making rounds for some time after Morales won the presidency on a platform of nationalizing natural resources. Apex Silver, which is headquartered in George Town in the Cayman Islands, counts the San Cristobal mine as its main asset.

Apex Silver management has assured investors that the Bolivian government is unlikely to be as aggressive in nationalizing the mining sector as it is in seizing oil and gas assets, the analyst said.

"They say that in oil and gas, a lot of the companies are foreign companies and they don't use local labor. But silver or gold or copper, you've got to come in and it's very labor intensive, you need to use local people, build schools...and be part of the community," the analyst said.

But the buysider was not convinced, pointing out Apex Silver, which has not made money from the mine yet, does not have much power to negotiate if the Bolivian government decides it wants more out of the company.

"They took a huge debt to develop the mine, and they need the mines to pay back the loans," the buysider said. "They have no leverage."

The Bolivian government also has a number of ways to get more out of miners like Apex Silver.

"The bigger concern is that the government can just tax the hell out of them," the buysider said.

With the stock crashing, Apex Silver's convertibles may still not provide hedge opportunities, the buysider said.

"The company has no product, that's the problem" the analyst said. "It has no revenue. So the bond would be in play if it had a floor, but now it's not that clear."

Quicksilver gains on expectations

Quicksilver Resources was up slightly in line with the stock on Tuesday as investors took positions in anticipation of good earnings and after a separate acquisition suggested Quicksilver was drilling in solid acreage.

Quicksilver's 1.875% convertible due 2024 was seen at 154 bid, 155 offered against a stock price of $42.06 during the day, and Quicksilver stock (NYSE: KWK) closed at $43.15, up 2.66% or $1.12.

"I still like this oil space," a sell-side convertible trader said. "The numbers are improving, and if the stocks continue to whip around on geopolitical events...it's going to continue to provide opportunities. It's just like the perfect storm in converts."

Fort Worth, Texas-based Quicksilver said after Tuesday's close that it had net income of $27.5 million in the first quarter, more than double the $10.8 million earned in the year-ago period.

Analysts said the oil and gas exploration company also benefited from buzz over Devon Energy Corp.'s purchase of natural gas properties in the Barnett Shale area near Fort Worth for $2.2 billion from privately held Chief Holdings.

"I think the bulls on the Street are going to say that, hey, Quicksilver is worth a lot more than the current stock price [because of the pricing of the Devon deal]," said a New York-based buy side convertible analyst.

But the analyst said it is difficult to draw a clear comparison between the quality of Devon's newly acquired acreage with Quicksilver's. The analyst said the Quicksilver convertibles are so much in the money that they will trade with the stock, and he was "pretty neutral" on the convertibles.

Sirius gains on results

Sirius Satellite Radio also improved in line with the stock on Tuesday after the company reported a larger first-quarter loss but guided for profitability by the fourth quarter of the year.

The Sirius 2.5% convertible due 2009 was marked about five points higher on an outright basis at 124.35 bid, 125.35 offered against a stock price of $4.88 on Tuesday, while the 3.25% convertible due 2011 was 113.12 bid, 113.62 offered at the same stock price. Sirius stock closed higher by 5.63% or 26 cents.

"A lot of Sirius traded today on the results," said a buy-side convertible bond trader.

Sirius said Tuesday that it incurred a net loss of $458.5 million, or 33 cents per share, in the first quarter, from a loss of $193.6 million, or 15 cents per share, in the year-ago period. The latest loss included $225 million in stock-based compensation to radio star Howard Stern, who recently moved to Sirius's satellite radio service.

Sirius also said it had enough cash on hand for now, and expects to start making a profit as soon as the fourth quarter of the year.

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