(all amounts in US Dollars unless otherwise stated) VANCOUVER, Nov.
2 /PRNewswire-FirstCall/ -- THIRD QUARTER HIGHLIGHTS
------------------------ - Silver production of 3.2 million ounces,
a new quarterly record. - Cash production costs in the third
quarter decreased 8% over the first six months of 2005 to $4.15/oz.
- Consolidated revenue of $30.0 million, a new quarterly record. -
Cash flow from operations (before changes in non-cash working
capital) of $7.0 million. - Mine operating earnings of $4.9
million. - Net earnings of $2.3 million or $0.03/share. -
Production at San Vicente resumed. - Alamo Dorado construction on
schedule and on budget. - 2005 Silver production on target for 12.5
million ounces. Production set to double by 2008. FINANCIAL RESULTS
----------------- Pan American Silver Corp. (NASDAQ: PAAS; TSX:
PAA) recorded net earnings of $2.3 million in the third quarter.
Earnings in the year-earlier period of $3.3 million included a
one-time gain on the sale of land of $3.6 million offset by a
charge of $1.3 million for the early conversion of debentures.
Consolidated revenue for the third quarter of 2005 was $30.0
million, a 10% increase over 2004 due to higher metal prices and
increased silver production. Cash flow from operations before
changes in working capital held steady at $7.0 million versus $7.1
million in 2004. Mine operating earnings in the quarter decreased
to $4.9 million from $5.9 million in the year-earlier period, due
primarily to increased depreciation and amortization expenses.
Consolidated cash production costs declined 8% from the first half
of 2005. Higher energy and labour costs at all operations were
offset by increased productivity and the very strong performance at
Morococha. Costs are expected to hold at current levels for the
remainder of the year. Consolidated silver production in the third
quarter totaled 3,202,289 ounces, a 1% increase over the third
quarter of 2004 and a new quarterly record. Zinc production in the
quarter decreased 4% over 2004 levels to 9,977 tonnes while lead
production dropped 15% to 4,113 tonnes due to lower grades at
Huaron and Quiruvilca offset by higher grades at Morococha. Copper
production decreased 5% to 1,042 tonnes due to lower production
from Huaron and Morococha partially offset by higher production at
Quiruvilca. For the nine months ended September 30, 2005,
consolidated revenue was $81.0 million, a 28% increase over the
first nine months of 2004, due to increased silver production and
higher realized base metal prices. In the first nine months, the
Company's net loss totaled $0.5 million. In the year-earlier
period, net earnings were $4.2 million, including a one-time gain
of $3.6 million on the sale of land. Consolidated silver production
in the first three quarters of 2005 totaled 9,286,658 ounces, a 15%
increase over the first three quarters of 2004 due to the first
full year of production from Morococha. Zinc production in the
first three quarters increased 13% to 28,094 tonnes, while lead
production decreased 11% to 11,492 tonnes and copper production
rose 27% to 3,020 tonnes. At September 30, 2005 working capital was
$89.2 million, including cash and short-term investments of $68.4
million. Working capital is $7.4 million less than at June 30, 2005
due primarily to expenditures on the construction of the Alamo
Dorado silver project in Mexico. Geoff Burns, President and CEO of
Pan American Silver stated: "We set a new record for silver
production this quarter, we decreased our unit costs over the first
two quarters of this year and we were profitable. We've resumed
production at San Vicente ahead of schedule and the construction of
Alamo Dorado remains on time and on budget. The star performer this
quarter, though, has been Morococha, which just keeps getting
better and better." OPERATIONS AND DEVELOPMENT HIGHLIGHTS
------------------------------------- PERU The 87%-owned Morococha
mine turned in a record quarter, producing 705,981 ounces of silver
at a cash cost of $1.99/oz. Increased throughput and better metal
recoveries more than offset slightly lower grades than in the
corresponding period of 2004. Exploration drilling continues in
order to add to the 23 million new ounces of silver reserves and
resources delineated in the first half of the year. A ramp is being
developed to access a portion of the newly discovered reserves and
as of September 30 was approximately 30% complete. A series of mill
upgrades are underway and are scheduled for completion in December,
which will allow for an estimated 10% increase in production in
2006. The Quiruvilca mine produced 579,586 ounces of silver in the
third quarter, on par with second quarter production levels. Cash
costs declined to $3.55/oz thanks to the installation of a new
conveyor system on the 340 level of the mine to transport ore and
waste, which has helped lower unit costs. The Huaron mine produced
940,400 ounces of silver in the third quarter, an 11% decrease over
the third quarter of 2004 but an improvement over first and
second-quarter levels. Cash costs remain above those of 2004 as the
mine continues to be hampered by lower zinc grades and recovery
rates in the ore currently being mined. Several initiatives have
been undertaken to improve zinc recoveries and metallurgical
testing continues. In the third quarter the Silver Stockpile
operation sold 158,578 ounces of silver, versus 231,115 ounces in
the third quarter of 2004 due to decreased demand for the ore from
the Doe Run smelter in Peru. Production costs have increased as a
reflection of the royalty now being paid to the Peruvian company
Volcan under the operation's purchase agreement. MEXICO The La
Colorada mine also turned in a record performance in the third
quarter, producing 817,744 ounces of silver, bringing its total for
the year to 2,249,760 ounces. Cash costs declined to $5.48/oz from
$7.05/oz in the corresponding period of 2004. Mining and
stockpiling of sulphide ore is underway and the resumption of
sulphide processing remains on track for April 2006. Processing the
sulphides will add approximately 0.9 million ounces of silver
annually to production at a cash cost of $2.20/oz, substantially
decreasing the mine's overall unit costs. Construction of the Alamo
Dorado mine, which commenced in the first quarter of 2005, is on
schedule and on budget. Commercial production of 5 million ounces
of silver annually is expected to begin in late 2006. More than 60%
of the engineering design work and 20% of construction has been
completed. The truck maintenance and warehouse facility are fully
operational, the lab and offices are being erected and prestripping
of the open pit has begun. During the quarter, the Company spent
$10.5 million on equipment and construction, bringing the total
spent year-to-date to $16.1 million including feasibility work. An
additional $13 million is expected to be spent over the remainder
of 2005. ARGENTINA The Company is in the final stages of the
feasibility study on the 50% owned Manantial Espejo joint venture
in Argentina, which remains on target for completion at year-end.
An environmental impact study has been completed, which will be
submitted to Argentine authorities in November, along with
proposals for the development of local infrastructure. Upon mine
development, the project is expected to produce in excess of 4
million ounces of silver and 60,000 ounces of gold annually (100%
basis). BOLIVIA In October, Pan American resumed production at the
San Vicente mine under a toll milling agreement with a nearby mill.
Pan American also renegotiated its agreement with the Bolivian
mining company, EMUSA, to increase Pan American's interest in San
Vicente from 50% to 55%. The joint venture is now processing
approximately 300 tonnes of ore per day, which is expected to add
in excess of 100,000 ounces of silver to Pan American's production
total over the remainder of 2005. The Company plans to continue
mining and toll milling at a rate of 200-300 tonnes per day until
the refurbishment of the mill onsite at San Vicente is completed in
mid-2006. Upon completion, the operation will ramp up to a nominal
rate of 600 tonnes per day for annual production to Pan American's
account of 1.5 million ounces of silver at a cash cost of less than
$3/oz. SILVER MARKETS -------------- The silver price opened the
third quarter at $7.10/oz and closed at $7.53/oz, although it
dipped as low as $6.74 before rebounding to average $7.07/oz for
the quarter, on par with its $7.06/oz average price for the year to
date. A study on the Chinese silver market commissioned by the
Silver Institute was released by Gold Fields Mineral Services in
the third quarter. GFMS has identified China as the most important
emerging market for silver. It also reports that Chinese stockpiles
of silver, which were sold into the market through the late '90s,
are now believed to be much reduced or gone and are expected to
have little impact on the silver price going forward. A free copy
of the report may be downloaded from the Silver Institute's website
at http://www.silverinstitute.org/. Pan American will host a
conference call to discuss the results on Wednesday, November 2,
2005 at 10:00 am Pacific time. North American residents dial
toll-free to 1-877-825-5811. International participants please dial
1-973-582-2767. The call may also be accessed from the home page of
the Company's website at http://www.panamericansilver.com/. It will
be available for replay for one week after the call by dialing
1-877-519-4471 and using replay pin number 6620484. For More
Information, please contact: Brenda Radies, Vice-President
Corporate Relations, (604) 806-3158
http://www.panamericansilver.com/ CAUTIONARY NOTE SOME OF THE
STATEMENTS IN THIS NEWS RELEASE ARE FORWARD-LOOKING STATEMENTS,
SUCH AS ESTIMATES OF FUTURE PRODUCTION LEVELS, EXPECTATIONS
REGARDING MINE PRODUCTION COSTS, EXPECTED TRENDS IN MINERAL PRICES
AND STATEMENTS THAT DESCRIBE PAN AMERICAN'S FUTURE PLANS,
OBJECTIVES OR GOALS. ACTUAL RESULTS AND DEVELOPMENTS MAY DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY THESE STATEMENTS DEPENDING ON
SUCH FACTORS AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND
FINANCIAL MARKETS, CHANGES IN PRICES FOR SILVER AND OTHER METALS,
TECHNOLOGICAL AND OPERATIONAL HAZARDS IN PAN AMERICAN'S MINING AND
MINE DEVELOPMENT ACTIVITIES, UNCERTAINTIES INHERENT IN THE
CALCULATION OF MINERAL RESERVES, MINERAL RESOURCES AND METAL
RECOVERIES, THE TIMING AND AVAILABILITY OF FINANCING, GOVERNMENTAL
AND OTHER APPROVALS, POLITICAL UNREST OR INSTABILITY IN COUNTRIES
WHERE PAN AMERICAN IS ACTIVE, LABOR RELATIONS AND OTHER RISK
FACTORS LISTED FROM TIME TO TIME IN PAN AMERICAN'S FORM 40-F.
Financial & Operating Highlights Three months ended Nine months
ended September 30 September 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Consolidated Financial Highlights (in thousands of US dollars) Net
income (loss) for the period $ 2,328 $ 3,289 $ (536) $ 4,210
Earnings (loss) per share $ 0.03 $ 0.05 $ (0.01) $ (0.11) Cash flow
from operations before working capital adjustments $ 6,959 $ 7,135
$ 11,402 $ 11,580 Capital spending $ 16,482 $39,327(xx) $ 40,575
$45,799(xx) Exploration expenses $ 545 $ 1,213 $ 2,703 $ 2,878 Cash
and short-term investments $ 68,364 $ 80,839 $ 68,364 $ 80,839
Working capital $ 89,225 $ 97,076 $ 89,225 $ 97,076 (xx)Includes
the acquisition of the Morococha mine for $36,214 Consolidated
Metals Recovered to Concentrate Silver metal - ounces 3,202,289
3,162,847 9,286,658 8,047,483 Zinc metal - tonnes 9,977 10,377
28,094 24,899 Lead metal - tonnes 4,113 4,865 11,492 12,955 Copper
metal - tonnes 1,042 1,100 3,020 2,370 Consolidated Cost per Ounce
of Silver (net of by-product credits) Total cash cost per ounce $
4.15 $ 4.05 $ 4.38 $ 3.98 Total production cost per ounce $ 5.52 $
5.21 $ 5.72 $ 5.11 In thousands of US dollars Direct operating
costs, royalties, treatment and refining charges $ 30,935 $ 26,808
$ 89,724 $ 66,190 By-product credits (18,769) (15,585) (52,605)
(38,263)
-------------------------------------------------------------------------
Cash operating costs 12,165 11,224 37,119 27,927 Depreciation,
amortization & reclamation 3,998 3,195 11,391 7,903
-------------------------------------------------------------------------
Production costs $ 16,163 $ 14,418 $ 48,511 $ 35,830
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
2,930,179 2,768,841 8,479,763 7,012,651 Average Metal Prices Silver
- London Fixing $ 7.07 $ 6.46 $ 7.06 $ 6.47 Zinc - LME Cash
Settlement per pound $ 0.59 $ 0.44 $ 0.59 $ 0.47 Lead - LME Cash
Settlement per pound $ 0.40 $ 0.42 $ 0.43 $ 0.39 Copper - LME Cash
Settlement per pound $ 1.70 $ 1.29 $ 1.58 $ 1.27 Mine Operations
Highlights Three months ended Nine months ended September 30
September 30 Morococha Mine(x) 2005 2004 2005 2004
-------------------------------------------------------------------------
Tonnes milled 119,953 112,580 347,023 112,580 Average silver grade
- grams per tonne 216 227 218 227 Average zinc grade - percent
4.58% 3.69% 4.30% 3.69% Silver - ounces 705,981 685,937 2,051,128
685,937 Zinc - tonnes 4,455 3,089 11,554 3,089 Lead - tonnes 1,724
1,161 4,228 1,161 Copper - tonnes 227 284 685 284 Total cash cost
per ounce $ 1.99 $ 3.57 $ 2.82 $ 3.57 Total production cost per
ounce $ 3.68 $ 5.21 $ 4.54 $ 5.21 In thousands of US dollars Direct
operating costs, royalties, treatments and refining charges $ 8,582
$ 6,540 $ 24,207 $ 6,540 By-product credits (7,322) (4,326)
(19,000) (4,326)
-------------------------------------------------------------------------
Cash operating costs 1,260 2,215 5,207 2,215 Depreciation,
amortization, reclamation 1,077 1,015 3,178 1,015
-------------------------------------------------------------------------
Production costs $ 2,337 $ 3,230 $ 8,385 $ 3,230
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
634,104 619,862 1,847,927 619,862 (x) Production and cost figures
are for Pan American's share only. Pan American's ownership was
approximately 87% during the quarter. Huaron Mine 2005 2004 2005
2004
-------------------------------------------------------------------------
Tonnes milled 167,585 166,965 427,814 481,445 Average silver grade
- grams per tonne 212 228 214 230 Average zinc grade - percent
2.70% 3.13% 2.86% 3.22% Silver - ounces 940,400 1,062,949 2,747,189
3,126,738 Zinc - tonnes 2,823 3,856 9,067 11,877 Lead - tonnes
1,635 2,815 5,161 8,660 Copper - tonnes 449 491 1,326 1,250 Total
cash cost per ounce $ 5.13 $ 3.85 $ 5.04 $ 3.89 Total production
cost per ounce $ 6.37 $ 5.12 $ 6.25 $ 5.14 In thousands of US
dollars Direct operating costs, royalties, treatments, and refining
charges $ 10,456 $ 10,635 $ 31,456 $ 31,604 By-product credits
(6,067) (6,909) (18,872) (20,471)
-------------------------------------------------------------------------
Cash operating costs 4,389 3,726 12,583 11,133 Depreciation,
amortization, and reclamation 1,064 1,234 3,026 3,571
-------------------------------------------------------------------------
Production costs $ 5,453 $ 4,960 $ 15,610 $ 14,704
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
856,228 968,624 2,496,885 2,859,286 Mine Operations Highlights
Three months ended Nine months ended September 30 September 30
Quiruvilca Mine 2005 2004 2005 2004
-------------------------------------------------------------------------
Tonnes milled 95,539 98,625 275,792 284,590 Average silver grade -
grams per tonne 217 235 223 236 Average zinc grade - percent 3.34%
3.48% 3.21% 3.66% Silver - ounces 579,586 654,182 1,723,973
1,892,383 Zinc - tonnes 2,698 2,920 7,472 8,994 Lead - tonnes 754
890 2,103 2,998 Copper - tonnes 366 310 1,009 800 Total cash cost
per ounce $ 3.55 $ 3.55 $ 4.07 $ 3.42 Total production cost per
ounce $ 4.10 $ 3.82 $ 4.62 $ 3.70 In thousands of US dollars Direct
operating costs, royalties, treatments and refining charges $ 6,914
$ 6,304 $ 20,251 $ 18,688 By-product credits (5,007) (4,142)
(13,723) (12,673)
-------------------------------------------------------------------------
Cash operating costs 1,907 2,161 6,528 6,014 Depreciation,
amortization and reclamation 296 162 879 487
-------------------------------------------------------------------------
Production costs $ 2,203 $ 2,324 $ 7,407 $ 6,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
537,719 608,010 1,603,593 1,757,629 La Colorada Mine
-------------------------------------------------------------------------
Tonnes milled 56,746 34,822 156,209 126,211 Average silver grade -
grams per tonne 510 510 537 457 Silver - ounces 817,744 441,959
2,249,760 1,352,549 Zinc - tonnes - - - 122 Lead - tonnes - - - 136
Total cash cost per ounce $ 5.48 $ 7.05 $ 5.48 $ 6.41 Total
production cost per ounce $ 7.40 $ 8.83 $ 7.40 $ 8.53 In thousands
of US dollars Direct operating costs, royalties, treatments and
refining charges $ 4,832 $ 3,316 $ 13,300 $ 9,324 By-product
credits (374) (208) (1,009) (793)
-------------------------------------------------------------------------
Cash operating costs 4,458 3,109 12,291 8,531 Depreciation,
amortization, reclamation 1,561 783 4,308 2,829
-------------------------------------------------------------------------
Production costs $ 6,019 $ 3,982 $ 16,599 $ 11,360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
813,752 440,854 2,242,188 1,331,696 Three months ended Nine months
ended September 30 September 30 Pyrite Stockpile Sales 2005 2004
2005 2004
-------------------------------------------------------------------------
Tonnes sold 15,076 19,214 46,488 64,050 Average silver grade -
grams per tonne 327 374 327 378 Silver - ounces 158,578 231,115
514,608 779,426 Total cash cost per ounce $ 1.72 $ 0.10 $ 1.76 $
0.08 Total production cost per ounce $ 1.72 $ 0.10 $ 1.76 $ 0.08 In
thousands of US dollars Direct operating costs, royalties,
treatments and refining charges $ 152 $ 13 $ 510 $ 34 By-product
credits - -
-------------------------------------------------------------------------
Cash operating costs 152 13 510 34 Depreciation, amortization,
reclamation - -
-------------------------------------------------------------------------
Production costs $ 152 $ 13 $ 510 $ 34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per ounce calculations)
88,376 131,491 289,169 444,178 San Vincente Mine(xx)
-------------------------------------------------------------------------
Tonnes milled - 7,920 - 18,649 Average silver grade - grams per
tonne - 389 - 408 Average zinc grade - percent - 7.48% - 5.28%
Silver - ounces - 86,704 - 210,451 Zinc - tonnes - 512 - 817 Copper
- tonnes - 15 - 36 (xx) Pan American does not include San Vincente
production in its cost per ounce calculations. The production
statistics represent Pan American's 50% interest in the mine. Pan
American Silver Corp. Consolidated Balance Sheets (In thousands of
U.S. dollars) Sep. 30 Dec. 31 2005 2004 (Unaudited) (Audited)
-------------------------------------------------------------------------
Assets Current Cash and cash equivalents $ 22,501 $ 28,345
Short-term investments 45,863 69,791 Accounts receivable, net of
$Nil provision for doubtful accounts 20,091 25,757 Inventories
14,233 10,674 Prepaid expenses 4,034 1,684
-------------------------------------------------------------------------
Total Current Assets 106,722 136,251 Mineral property, plant and
equipment, net (note 3) 119,957 104,647 Investment and
non-producing properties (note 4) 142,202 125,863 Direct smelting
ore 2,343 2,671 Other assets 518 647
-------------------------------------------------------------------------
Total Assets $ 371,742 $ 370,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current Accounts payable and accrued liabilities $
17,135 $ 20,331 Advances for metal shipments - 652 Current portion
of bank loans and capital lease - 134 Current portion of
non-current liabilities 362 479
-------------------------------------------------------------------------
Total Current Liabilities 17,497 21,596 Liability component of
convertible debentures 99 134 Provision for asset retirement
obligation and reclamation 32,858 32,012 Provision for future
income taxes 31,594 33,212 Other liabilities and provisions 1,500
1,144 Severance indemnities and commitments 143 398 Non-controlling
interest 2,368 1,379
-------------------------------------------------------------------------
Total Liabilities 86,059 89,875
-------------------------------------------------------------------------
Shareholders' Equity Share capital (note 5) Authorized: 100,000,000
common shares of no par value Issued: December 31, 2004 -
66,835,378 common shares September 30, 2005 - 67,166,373 common
shares 383,772 380,571 Equity component of convertible debentures
636 633 Additional paid in capital 13,790 10,976 Deficit (112,515)
(111,976)
-------------------------------------------------------------------------
Total Shareholders' Equity 285,683 280,204
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 371,742 $ 370,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements Pan
American Silver Corp. Consolidated Statements of Operations
(Unaudited - in thousands of U.S. dollars, except for shares and
per share amounts) Three months ended Nine months ended September
30 September 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 30,044 $ 27,409 $ 81,030 $ 63,510 Operating costs
(21,337) (18,526) (62,134) (46,225) Depreciation and amortization
(3,788) (3,033) (9,421) (7,186)
-------------------------------------------------------------------------
Mine operating earnings 4,919 5,850 9,475 10,099
-------------------------------------------------------------------------
General and administrative, including stock-based compensation
2,065 1,452 5,378 4,581 Exploration 545 1,213 2,703 2,878 Asset
retirement and reclamation 735 302 1,674 905 Interest and financing
expenses 126 66 312 823
-------------------------------------------------------------------------
Operating income (loss) 1,448 2,817 (592) 912 Investment and other
income 1,341 792 2,438 3,618
-------------------------------------------------------------------------
Income before taxes and non-controlling interest 2,789 3,609 1,846
4,530 Income tax benefit (provision) 79 - (1,609) - Non-controlling
interest (540) (320) (773) (320)
-------------------------------------------------------------------------
Net income (loss) for the period $ 2,328 $ 3,289 $ (536) $ 4,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to common shareholders: Net income (loss) for the
period $ 2,328 $ 3,289 $ (536) $ 4,210 Accretion of convertible
debentures - - (3) (11,302)
-------------------------------------------------------------------------
Adjusted net income (loss) for the period attributable to common
shareholders $ 2,328 $ 3,289 $ (539) $ (7,092)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted income (loss) per share $ 0.03 $ 0.05 $ (0.01) $
(0.11) Weighted average shares outstanding - Basic 66,943 66,660
66,943 61,947 Weighted average shares outstanding - Diluted 71,926
72,213 71,532 67,499 See accompanying notes to consolidated
financial statements Pan American Silver Corp. Consolidated
Statements of Cash Flows (Unaudited - in thousands of U.S. dollars)
Three months ended Nine months ended September 30 September 30 2005
2004 2005 2004
-------------------------------------------------------------------------
Operating activities Net income (loss) for the period $ 2,328 $
3,289 $ (536) $ 4,210 Reclamation expenditures (324) (327) (824)
(919) Items not involving cash Gain on sale of assets (453) - (453)
(3,583) Depreciation and amortization 3,788 3,033 9,421 7,186
Non-controlling interest 540 320 773 320 Accretion on convertible
debentures - - - 366 Stock-based compensation 345 518 1,347 1,887
Debt settlement expense - - - 1,208 Asset retirement and
reclamation 735 302 1,674 905 Future income tax (1,313) - (1,618) -
Changes in operating working capital items (note 6) (1,419) (6,722)
(1,477) (11,065)
-------------------------------------------------------------------------
Cash generated by operations 4,227 413 8,307 515
-------------------------------------------------------------------------
Financing activities Shares issued for cash 1,539 812 2,740 61,817
Share issue costs (180) Interest payment on convertible debentures
- (22) - (13,542) Repayment of bank loans and capital lease (408)
(693) (13,096)
-------------------------------------------------------------------------
Cash generated by financing activities 1,131 790 2,047 34,999
-------------------------------------------------------------------------
Investing activities Mineral property, plant and equipment
expenditures (1,856) (2,679) (13,543) (8,687) Investment and non-
producing property expenditures (14,626) (434) (27,032) (988)
Acquisition of net assets of subsidiary - (36,214) - (36,214)
Maturity of short-term investments 9,630 2,007 23,428 12,463
Proceeds from sale of assets 383 - 883 3,583 Other 164 - 66 (2,000)
-------------------------------------------------------------------------
Cash used in investing activities (6,305) (37,320) (16,198)
(31,843)
-------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents during the period
(947) (36,117) (5,844) 3,671 Cash and cash equivalents, beginning
of period 23,448 53,979 28,345 14,191
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 22,501 $ 17,862 $ 22,501
$ 17,862
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Disclosures ------------------------- Shares Issued
for Compensation $ - $ 0 $ 410 $ 245 Share purchase warrants issued
$ 2,100 $ - $ 3,100 $ - Shares issued for conversion of convertible
debentures $ - $ - $ 88,848 $ - Cash Payments Interest paid $ 18 $
18 $ 36 $ 409 -----------------------------------------------
----------------------------------------------- Taxes paid $ 1,001
$ 311 $ 4,112 $ 509 -----------------------------------------------
----------------------------------------------- See accompanying
notes to consolidated financial statements Pan American Silver
Corp. Consolidated Statements of Shareholders' Equity For the nine
months ended September 30, 2005 (in thousands of U.S. dollars,
except for amounts of shares) Common Shares
------------------------ Convertible Shares Amount Debentures
-------------------------------------------------------------------------
Balance, December 31, 2003 53,009,851 $ 225,154 $ 66,735 Issued on
the exercise of stock options 785,095 9,437 - Issued on the
exercise of share purchase warrants 544,775 1,965 - Stock-based
compensation - - - Issued for cash, net of issue costs 3,333,333
54,820 - Accretion of convertible debentures - - 2,871 Issued on
the conversion of convertible debentures 9,145,700 88,950 (68,973)
Issued as compensation 16,624 245 - Net income for the year - - -
-------------------------------------------------------------------------
Balance, December 31, 2004 66,835,378 380,571 633 Issued on the
exercise of stock options 300,325 2,780 - Issued on the exercise of
share purchase warrants 1,186 11 - Issued warrants on settlement of
debt - - - Stock-based compensation on granting of stock options -
- - Issued as compensation 29,484 410 - Accretion of convertible
debentures - - 3 Other - - - Net loss for the period - - -
-------------------------------------------------------------------------
Balance, September 30, 2005 67,166,373 $ 383,772 $ 636
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional Paid in Capital Deficit Total
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 12,752 $(120,543) $ 184,098 Issued on
the exercise of stock options (3,965) - 5,472 Issued on the
exercise of share purchase warrants - - 1,965 Stock-based
compensation 2,189 - 2,189 Issued for cash, net of issue costs - -
54,820 Accretion of convertible debentures - (2,871) - Issued on
the conversion of convertible debentures - (8,464) 11,513 Issued as
compensation - - 245 Net income for the year - 19,902 19,902
-------------------------------------------------------------------------
Balance, December 31, 2004 10,976 (111,976) 280,204 Issued on the
exercise of stock options (51) - 2,729 Issued on the exercise of
share purchase warrants - - 11 Issued warrants on settlement of
debt 2,100 - 2,100 Stock-based compensation on granting of stock
options 937 - 937 Issued as compensation - - 410 Accretion of
convertible debentures - (3) - Other (172) - (172) Net loss for the
period - (536) (536)
-------------------------------------------------------------------------
Balance, September 30, 2005 $ 13,790 $(112,515) $ 285,683
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pan American Silver Corp. Notes to Unaudited Interim Consolidated
Financial Statements as at September 30, 2005 and 2004 and for the
three month and nine month periods then ended. (Tabular amounts are
in thousands of U.S. dollars, except for numbers of shares, price
per share and per share amounts) 1. Nature of Operations Pan
American Silver Corp (the "Company") is engaged in silver mining
and related activities, including exploration, extraction,
processing, refining and reclamation. The Company has mining
operations in Peru, Mexico and Bolivia, project development
activities in Argentina, Mexico and Bolivia, and exploration
activities in South America. 2. Summary of Significant Accounting
Policies a) Basis of Presentation: The accompanying unaudited
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada for interim
financial information and follow the same accounting policies and
methods as our most recent annual financial statements.
Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in Canada for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating
results for the three-month and nine month periods ended September
30, 2005 and 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. The
consolidated balance sheet at December 31, 2004 has been derived
from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in Canada for complete financial
statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Pan
American Silver Corp. (the "Company") Annual Report for the year
ended December 31, 2004. b) Principles of Consolidation: The
consolidated financial statements include the wholly-owned and
partially-owned subsidiaries of the Company, the most significant
of which are presented in the following table: Operations and
Ownership Development Subsidiary Location interest Status Projects
-------------------------------------------------------------------------
Pan American Silver S.A.C. Peru 100% Consolidated Quiruvilca Mine
Compania Minera Huaron S.A. Peru 100% Consolidated Huaron Mine
Compania Minera Argentum S.A. Peru 87.5% Consolidated Morococha
Mine Minera Corner Bay S.A. Mexico 100% Consolidated Alamo Dorado
Project Plata Panamericana S.A. de C.V. Mexico 100% Consolidated La
Colorada Mine Inter-company balances and transactions have been
eliminated in consolidation. Investments in corporate joint
ventures where the Company has ownership of 50% or less and funds
its proportionate share of expenditures are accounted for under the
equity method. The Company has no investments in entities in which
it has greater than 20% ownership interest accounted for using the
cost method. c) Revenue Recognition: Revenue is recognized when
title and risk of ownership of metals or metal bearing concentrate
passes to the buyer and when collection is reasonably assured. The
passing of title to the customer is based on the terms of the sales
contract. Product pricing is determined at the point revenue is
recognized by reference to active and freely traded commodity
markets. Under our concentrate sales contracts with third-party
smelters, final commodity prices are set on a specified future
quotational period, typically one to three months, after the
shipment arrives at the smelter based on market metal prices.
Revenues are recorded under these contracts at the time title
passes to the buyer based on the expected settlement period. The
contracts, in general, provide for a provisional payment based upon
provisional assays and quoted metal prices. Final settlement is
based on the average applicable price for a specified future
period, and generally occurs from three to six months after
shipment. Final sales are settled using smelter weights, settlement
assays (average of assays exchanged and/or umpire assay results)
and are priced as specified in the smelter contract. Third party
smelting and refining costs are recorded as a reduction of revenue.
d) Cash and Cash Equivalents: Cash and cash equivalents include
cash, bank deposits, and all highly-liquid investments with a
maturity of three months or less at the date of purchase. The
Company minimizes its credit risk by investing its cash and cash
equivalents with major international banks and financial
institutions located principally in Canada and Peru with a minimum
credit rating of A1 as defined by Standard & Poor's. The
Company's management believes that no concentration of credit risk
exists with respect to investment of its cash and cash equivalents.
Due to the short maturity of cash equivalents, their carrying
amounts approximate their fair value. e) Short-term Investments:
Short-term investments principally consist of highly-liquid debt
securities with original maturities in excess of three months and
less than one year. These debt securities include corporate bonds
with S & P rating of A- to AAA with an overall average of
single A high. The Company classifies all short-term investments as
available-for-sale securities. Unrealized gains and losses are
recognized on these investments at the end of each period and are
included in determining net income/(loss). f) Inventories:
Inventories include concentrate ore, dore, ore in stockpiles and
operating materials and supplies. The classification of inventory
is determined by the stage at which the ore is in the production
process. Inventories of ore are sampled for metal content and are
valued based on the lower of actual production costs incurred or
estimated net realizable value based upon the period ending prices
of contained metal. Material that does not contain a minimum
quantity of metal to cover estimated processing expense to recover
the contained metal is not classified as inventory and is assigned
no value. All metal inventories are stated at the lower of cost or
market, with cost being determined using the first-in, first-out
method. Supplies inventories are valued at the lower of average
cost and replacement cost, net of obsolescence. Concentrate and
dore inventory includes product at the mine site, the port
warehouse and product held by refineries, and are also valued at
lower of cost or market. g) Property, Plant, and Equipment:
Expenditures for new facilities, new assets or expenditures that
extend the useful lives of existing facilities are capitalized and
depreciated using the straight-line method at rates sufficient to
depreciate such costs over the shorter of estimated productive
lives of such facilities or the useful life of the individual
assets ranging from five to twenty years. Certain mining equipment
is depreciated using the units-of-production method based upon
estimated total proven and probable reserves. Maintenance and
repairs are expensed as incurred. h) Operational Mining Properties
and Mine Development: Mineral exploration costs are expensed as
incurred. When it has been determined that a mineral property can
be economically developed as a result of establishing proven and
probable reserves, the costs incurred to develop such property
including costs to further delineate the ore body and remove over
burden to initially expose the ore body, are capitalized. Such
costs are amortized using the units-of-production method over the
estimated life of the ore body based on proven and probable
reserves. Significant payments related to the acquisition of the
land and mineral rights are capitalized as incurred. Prior to
acquiring such land or mineral rights the Company generally makes a
preliminary evaluation to determine that the property has
significant potential to develop an economic ore body. The time
between initial acquisition and full evaluation of a property's
potential is variable and is dependant on many factors including:
location relative to existing infrastructure, the property's stage
of development, geological controls and metal prices. If a mineable
ore body is discovered, such costs are amortized when production
begins. If no mineable ore body is discovered, such costs are
expensed in the period in which it is determined the property has
no future economic value. Interest expense allocable to the cost of
developing mining properties and to construct new facilities is
capitalized until the assets are ready for their intended use.
Gains or losses from sales or retirements of assets are included in
other income or expense. Ongoing mining expenditures on producing
properties are charged against earnings as incurred. Major
development expenditures incurred to increase production or extend
the life of the mine are capitalized. i) Asset Impairment:
Management reviews and evaluates its long-lived assets for
impairment when events or changes in circumstances indicate that
the related carrying amounts may not be recoverable. An impairment
is considered to exist if total estimated future cash flows or
probability-weighted cash flows on an undiscounted basis are less
than the carrying amount of the assets, including mineral property,
plant and equipment, non-producing property, and any deferred costs
such as deferred stripping. An impairment loss is measured and
recorded based on discounted estimated future cash flows or the
application of an expected present value technique to estimate fair
value in the absence of a market price. Future cash flows include
estimates of proven, probable, and a portion of resource
recoverable ounces, gold and silver prices (considering current and
historical prices, price trends and related factors), production
levels, capital and reclamation costs, all based on detailed
engineering life-of-mine plans. Assumptions underlying future cash
flow estimates are subject to risks and uncertainties. Any
differences between significant assumptions and market conditions
and/or the Company's performance could have a material effect on
any impairment provision, and on the Company's financial position
and results of operations. In estimating future cash flows, assets
are grouped at the lowest levels for which there are identifiable
cash flows that are largely independent of cash flows from other
groups. Generally, in estimating future cash flows, all assets are
grouped at a particular mine for which there is identifiable cash
flow. j) Reclamation and Remediation Costs: Estimated future
reclamation and remediation costs are based principally on legal
and regulatory requirements. The asset retirement obligation is
measured using assumptions for cash outflows such as expected labor
costs, allocated overhead and equipment charges, contractor markup,
and inflation adjustments to determine the total obligation. The
sum of all these costs are discounted, using the credit adjusted
risk-free interest rate from the time the Company expects to pay
the retirement obligation to the time the Company incurs the
obligation. The measurement objective is to determine the amount a
third party would demand to assume the asset retirement obligation.
Upon initial recognition of a liability for an asset retirement
obligation, the Company capitalizes the asset retirement cost to
the related long-lived asset. The Company amortizes this amount to
operating expense using the units-of-production method. The Company
evaluates the cash flow estimates at the end of each reporting
period to determine whether the estimates continue to be
appropriate. Upward revisions in the amount of undiscounted cash
flows will be discounted using the current credit-adjusted
risk-free rate. Downward revisions will be discounted using the
credit-adjusted risk-free rate that existed when the original
liability was recorded. k) Foreign Currency Translation: The
Company's functional currency is the U.S. dollar. The accounts of
subsidiaries, not reporting in U.S. dollars, and which are
integrated operations, are translated into U.S. dollars using the
temporal method. Under this method, substantially all assets and
liabilities of foreign subsidiaries are translated at exchange
rates in effect at the date of the transaction or at end of each
period. Revenues and expenses are translated at the average
exchange rate for the period. Foreign currency transaction gains
and losses are included in the determination of net income/(loss).
l) Stock-based Compensation Plans: The Company provides stock
grants or options to buy common shares of the Company to directors,
officers, employees and service providers. The board of directors
grants such options for periods of up to ten years, vesting period
of up to four years and at prices equal to or greater than the
weighted average market price of the five trading days prior to the
date the options were granted. The Company applies the fair-value
method of accounting in accordance with recommendation of CICA
Handbook Section ("CICA 3870"), "Stock-based Compensation and Other
Stock-based Payments". Stock-based compensation expense is
calculated using the Black-Scholes option pricing model or stock at
market price. m) Income Taxes: The Company computes income taxes in
accordance with CICA Handbook Section ("CICA 3465"), "Income
Taxes", that requires an asset and liability approach which results
in the recognition of future tax assets and liabilities for the
expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities,
as well as operating loss and tax credit carry-forwards, using
enacted or substantially enacted, as applicable, tax rates in
effect in the years in which the differences are expected to
reverse. n) Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in Canada requires the Company's management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. o)
Earnings (Loss) Per Share: Basic earnings (loss) per share
calculations are based on the net income (loss) attributable to
common shareholders for the period divided by the weighted average
number of common shares issued and outstanding during the period.
The diluted earnings/(loss) per share calculations are based on the
weighted average number of common shares outstanding during the
period, plus the effects of dilutive common share equivalents. This
method requires that the dilutive effect of outstanding options and
warrants issued should be calculated using the treasury stock
method. This method assumes that all common share equivalents have
been exercised at the beginning of the period (or at the time of
issuance, if later), and that the funds obtained thereby were used
to purchase common shares of the Company at the average trading
price of common shares during the period. For convertible
securities that may be settled in cash or shares at the holder's
option the more dilutive of cash settlement and share settlement is
used in computing diluted earnings/(loss) per share. For
settlements in common shares, the if-converted method is used,
which requires that returns on senior convertible equity
instruments and income charges applicable to convertible financial
liabilities be added back to net earnings/(loss), and the net
earnings/(loss) is also adjusted for any non-discretionary changes
that would arise from the beginning of the period (or at the time
of issuance, if later). Potentially dilutive securities totaling
5,013,642 for the nine months ended September 30, 2005 (74,922,
874,308 and 4,064,412 shares arising from convertible debentures,
outstanding and exercisable stock options and share purchase
warrants, respectively) and 4,904,736 shares for the nine months
ended September 30, 2004 (74,922, 1,015,344 and 3,814,470 shares
arising from convertible debentures, outstanding stock options and
share purchase warrants, respectively) were not included as they
were anti-dilutive. Reclassifications: Certain reclassifications of
prior year balances have been made to conform to current year
presentation. 3. Mineral property, plant and equipment Mineral
property, plant and equipment consist of: September 30, 2005
December 31, 2004 -----------------------------
----------------------------- Cost Accumulated Net Book Cost
Accumulated Net Book Amortization Value Amortization Value
----------------------------- -----------------------------
Morococha mine, Peru $ 32,347 $ (5,352) $ 26,995 $ 18,217 $ (2,099)
$ 16,118 La Colorada mine, Mexico 60,571 (9,435) 51,136 54,848
(5,261) 49,587 Huaron mine, Peru 57,656 (18,733) 38,923 53,628
(16,039) 37,589 Quiruvilca mine, Peru 17,007 (14,643) 2,364 25,601
(24,616) 985 Other 1,121 (582) 539 904 (536) 368
----------------------------------------------------------- TOTAL
$168,702 $(48,745) $119,957 $153,198 $(48,551) $104,647
-----------------------------------------------------------
----------------------------------------------------------- 4.
Investment and non-producing properties Acquisition costs of
investment and non-producing properties together with costs
directly related to mine development expenditures are deferred.
Exploration expenditures on investment and non-producing properties
are charged to operations in the period they are incurred. The
carrying values of these properties are as follows: September 30,
2005 December 31, 2004 -----------------------------
----------------------------- Cost Accumulated Net Book Cost
Accumulated Net Book Amortization Value Amortization Value
----------------------------- -----------------------------
Morococha mine, Peru $ 31,052 $ - $ 31,052 $ 40,472 $ - $ 40,472
Manantial Espejo, Argentina 3,446 - 3,446 2,012 - 2,012 Alamo
Dorado, Mexico 104,361 - 104,361 81,692 - 81,692 San Vicente,
Bolivia 1,814 - 1,814 - - - Other 1,529 - 1,529 1,687 - 1,687
----------------------------------------------------------- TOTAL
$142,202 $ - $142,202 $125,863 $ - $125,863
-----------------------------------------------------------
----------------------------------------------------------- 5.
Share Capital a) Share Option Plan The Company has a comprehensive
stock option plan for its employees, directors and officers. The
plan provides for the issuance of incentive stock options to
acquire up to a total of 10% of the issued and outstanding common
shares of the Company on a non-diluted basis. The exercise price of
each option shall be the weighted average trading price of the
Company's stock on the five days prior to the award date. The
options can be granted for a maximum term of 10 years with vesting
provides determined by the Company. The following table summarizes
information concerning stock options outstanding as at September
30, 2005: Options Outstanding Options Exercisable
----------------------------------------------- Number Weighted
Number Outstanding Average Exercisable Weighted as at Remaining as
at Average Range of Year of September Contractual September
Exercise Exercise Prices Expiry 30, 2005 Life (months) 30, 2005
Price
-------------------------------------------------------------------------
$4.31 - $7.93 2006 86,333 8.51 86,333 $5.08 $8.32 - $8.70 2007
308,500 25.41 266,500 $8.62 $7.67 - $12.43 2008 357,308 32.99
37,308 $8.74 $14.21 - $19.72 2009 424,108 42.45 214,108 $16.63
$4.31 - $16.19 2010 294,000 61.32 74,000 $10.55
-------------------------------------------------------------------------
1,470,249 34.14 678,249 $9.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the nine month period ended September 30, 2005, 300,325
common shares were issued for proceeds of $2.7 million in
connection with the exercise of options. Also in the period the
Company recognized $0.9 million of stock-based compensation expense
for options issued in 2005, 2004 and 2003. The Company used as its
assumptions for calculating expense a discount rate of 3.4%,
volatility of 55.6, 42.0, and 41.0 for expected lives of 3.0, 2.3,
and 1.5, respectively and an exercise price of Cdn $18.80 per
share. b) Share purchase warrants On September 15, 2005 the Company
issued 255,781 share purchase warrants to the International Finance
Corporation ("IFC") as settlement for the cancellation of the
obligation related to payments on the La Colorada Mine. The
warrants have a fair value of $2.1 million and allow the holder to
purchase 255,781 common shares of the Company for $16.91 per share
for a period of 5 years after the date of issue. As at September
30, 2005 there were warrants outstanding that allow the holders to
purchase 3,808,626 common shares of the Company at Cdn$12.00 per
share, which expire on February 20, 2008. In the period, 1,186
common shares were issued for proceeds of $11 in connection with
the exercise of outstanding warrants. 6. Changes in operating
working capital items The following table summarizes the changes in
operating working capital items: Three Months Ended Nine Months
Ended September 30 September 30
----------------------------------------------- 2005 2004 2005 2004
-------------------------------------------------------------------------
Short - term investments $ - (475) $ - $ (475) Accounts receivable
(155) (3,320) 5,666 (5,047) Inventories (1,416) (212) (2,147) 803
Prepaid expenses (1,450) (210) (2,350) (1,241) Accounts payable and
accrued liabilities 2,722 (1,635) (1,739) (3,029) Advances for
metal shipments (367) (1,388) (652) (3,292) Severance, indemnities
and commitments (753) 518 (255) 1,216
-------------------------------------------------------------------------
$ (1,419) $ (6,722) $ (1,477) $ (11,065)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Segmented information Substantially all of the Company's
operations are within the mining sector, conducted through
operations in six countries. Due to differences between mining and
exploration activities, the Company has a separate budgeting
process and measures the results of operations and exploration
activities separately. The Corporate office provides support to the
mining and exploration activities with respect to financial, human
resources and technical support. Segmented disclosures and
enterprise-wide information are as follows: For the three months
ended September 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and
Corporate Total Mexico Peru exploration
-------------------------------------------------------------------------
Revenue from external customers $ 5,355 $ 24,731 $ - $ (42) $
30,044 Investment and other income $ (5) $ 13 $ 420 $ 913 $ 1,341
Interest and financing expenses $ - $ (154) $ - $ 28 $ (126)
Exploration $ - $ (511) $ (193) $ 159 $ (545) Depreciation and
amortization $ (1,489) $ (2,274) $ (8) $ (17) $ (3,788) Net income
(loss) for the period $ (1,803) $ 3,358 $ (271) $ 1,044 $ 2,328
Property, plant and equipment capital expenditures $ 12,186 $ 4,033
$ 1,970 $ (1,707) $ 16,482 Segment assets $ 82,362 $ 136,518 $
89,761 $ 63,101 $ 371,742 For the three months ended September 30,
2004
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and
Corporate Total Mexico Peru exploration
-------------------------------------------------------------------------
Revenue from external customers $ 2,901 $ 25,155 $ - $ (647) $
27,409 Investment and other income $ 3 $ 5 $ 559 $ 225 $ 792
Interest and financing expenses $ - $ (66) $ - $ - $ (66)
Exploration $ (1) $ (48) $ (387) $ (777) $ (1,213) Depreciation and
amortization $ (618) $ (2,404) $ - $ (11) $ (3,033) Net income
(loss) for the period $ (993) $ 6,360 $ 169 $ (2,247) $ 3,289
Property, plant and equipment capital expenditures $ 1,493 $ 36,537
$ 422 $ 875 $ 39,327 Segment assets $ 51,530 $ 127,461 $ 90,575 $
72,382 $ 341,948 For the nine months ended September 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and
Corporate Total Mexico Peru exploration
-------------------------------------------------------------------------
Revenue from external customers $ 14,738 $ 69,792 $ - $ (3,500) $
81,030 Investment and other income $ (5) $ 439 $ 399 $ 1,605 $
2,438 Interest and financing expenses $ - $ (267) $ - $ (45) $
(312) Exploration $ (2) $ (511) $ (2,077) $ (113) $ (2,703)
Depreciation and amortization $ (3,439) $ (5,944) $ (8) $ (30) $
(9,421) Net income (loss) for the period $ (1,952) $ 8,994 $
(2,418) $ (5,160) $ (536) Property, plant and equipment capital
expenditures $ 26,702 $ 12,149 $ 3,404 $ (1,680) $ 40,575 Segment
assets $ 82,362 $ 136,518 $ 89,761 $ 63,101 $ 371,742 For the nine
months ended September 30, 2004
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and
Corporate Total Mexico Peru exploration
-------------------------------------------------------------------------
Revenue from external customers $ 8,912 $ 57,295 $ - $ (2,697) $
63,510 Investment and other income $ 14 $ 3,438 $ 785 $ (619) $
3,618 Interest and financing expenses $ (229) $ (229) $ - $ (365) $
(823) Exploration $ (15) $ (48) $ (556) $ (2,259) $ (2,878)
Depreciation and amortization $ (2,238) $ (4,915) $ - $ (33) $
(7,186) Net income (loss) for the period $ (2,386) $ 16,822 $ 203 $
(10,429) $ 4,210 Property, plant and equipment Capital expenditures
$ 4,472 $ 39,456 $ 897 $ 1,064 $ 45,889 Segment assets $ 51,530 $
127,461 $ 90,575 $ 72,382 $ 341,948 Management's Discussion and
Analysis of Financial Condition and Results of Operations For the
Three Months Ended September 30, 2005 October 24, 2005 This
Management's Discussion and Analysis ("MD&A") of Pan American
Silver Corp. (the "Company") focuses on significant factors that
affected the performance, and those that may affect the future
performance, of the Company and its subsidiaries'. The MD&A
should be read in conjunction with the unaudited consolidated
financial statements of the Company, and the notes thereto, for the
three months ended September 30, 2005 and 2004. In addition, the
following should be read in conjunction with the audited
Consolidated Financial Statements of the Company, and the notes
thereto, for the year ended December 31, 2004. Note 2 to such
financial statements outlines the significant accounting policies
that have been applied consistently for the nine months ended
September 30, 2005. All figures are in United States dollars unless
otherwise noted. RESULTS OF OPERATIONS Net income for the three
months ended September 30, 2005 was $2.3 million (an earnings per
share of $0.03) compared to net income of $3.3 million (an earnings
per share of $0.05) for the corresponding period in 2004. The
Company had a net loss of $0.5 million for the nine-month period
ended September 30, 2005 compared to net income of $4.2 million for
the corresponding period in 2004. Included in 2004 net income was a
$3.6 million gain on the sale of surplus land at the Quiruvilca
mine, offset by a charge of $1.3 million relating to the early
conversion of 5.25 per cent convertible unsecured senior
subordinated debentures previously issued by the Company (the
"Debentures"). Revenue from metal sales for the third quarter of
2005 was $30 million, a 10 per cent increase from the corresponding
period in 2004. Revenue in the third quarter of 2005 benefited from
higher realized silver, zinc and copper prices than the previous
year's third quarter. The effects of higher realized prices and
increased silver production were offset partially by: (i) lower
zinc concentrate shipments from the Quiruvilca and Huaron
operations as compared to during the third quarter of 2004; (ii)
base metal hedging settlements totaling ($0.4 million) (as compared
to a loss of $0.6 million in 2004); and (iii) by the recently
introduced Peruvian mining royalties, which amounted to $0.2
million (as compared to $nil royalty payments in 2004). For the
nine-month period ended September 30, 2005, revenue increased by
$17.5 million over the revenue for the comparable period of 2004.
The Morococha mine, which was acquired with effect from July 1,
2004, is the main reason for this increase. Morococha recorded
revenue of $27.1 million in the first nine months of 2005 compared
to $8.3 million in 2004. Operating costs for the three months ended
September 30, 2005 were $21.3 million, a $2.8 million increase from
the operating costs recorded in the same period of 2004. A 63 per
cent increase in the number of tonnes mined and milled during the
quarter at the La Colorada mine compared to the third quarter of
2004 is the main reason for the increase in operating costs.
Peruvian workers' participation and a third party's one-third
participation in the Pyrite Stockpile operation, which together
totaled $0.4 million during the third quarter (as compared to $nil
in such costs in 2004), were also significant factors behind the
increase in operating costs over last year. In addition, the
Company has experienced the effects of industry-wide escalations in
major cost items, such as energy, freight and labor over the last
year. For the nine-month period ended September 30, 2005, operating
costs increased over the comparable period in 2004 primarily due to
the acquisition of the Morococha mine. Morococha recorded operating
costs of $17.3 million in the first nine months of 2005 compared to
$5.1 million in 2004. Mine operating earnings in the third quarter
of 2005 were $4.9 million (2004 - $5.9 million), a 60 per cent
increase over the mine operating earnings generated in the second
quarter of 2005. As reflected in the following table, the third
quarter of 2005 represents the tenth consecutive quarter that the
Company has generated mine operating earnings. The table below sets
out select quarterly results for the past eleven quarters, which
are stated in thousands of US dollars, except for the per share
amounts. Mine operating Net income/ Net income/ Year Quarter
earnings/ (loss) for (loss) per (unaudited) Revenue (loss)(1) the
period share
-------------------------------------------------------------------------
2005 Sept. 30 $ 30,044 $ 4,919 $ 2,328 $ 0.03 June 30 $ 23,905 $
3,073 $ 24 $ 0.00 March 31 $ 27,081 $ 1,483 $ (2,891) $ (0.05)
-------------------------------------------------------------------------
2004 Dec. 31 $ 29,386 $ 2,766 $ 15,692 $ 0.23 Sept. 30 $ 27,409 $
5,850 $ 3,289 $ 0.05 June 30 $ 20,950 $ 2,411 $ 1,287 $ (0.12)(2)
March 31 $ 15,151 $ 1,838 $ (366) $ (0.05)(2)
-------------------------------------------------------------------------
2003 Dec. 31 $ 12,857 $ 81 $ (4,858) $ (0.15)(2) Sept. 30 $ 11,890
$ 1,258 $ (390) $ (0.01)(2) June 30 $ 12,553 $ 758 $ (442) $ (0.01)
March 31 $ 7,822 $ (78) $ (1,104) $ (0.02) (1) Mine operating
earnings/(loss) are equal to revenues less operating costs and
depreciation and amortization (2) Includes charges associated with
early conversion and accretion of the Debentures Depreciation and
amortization charges for the third quarter of 2005 increased to $
3.8 million from $3.0 million recorded for the corresponding period
in 2004. This increase is primarily due to the increased production
at La Colorada, as increased production generally has a direct
bearing on the depreciation and amortization recorded in a given
period. General and administration costs for the three-month period
ended September 30, 2005, including stock-based compensation,
increased to $2.1 million from $1.5 million recorded in the
comparable quarter in 2004. This increase is due mainly to higher
travel costs, a stronger Canadian dollar relative to the US dollar
and higher salary expense. Exploration expenses recorded for the
third quarter of 2005 were $0.5 million, as compared to $1.2
million recorded for the comparable quarter in 2004. The
exploration expenses for the third quarter of 2005 are attributed
to exploration work at the Morococha mine and feasibility activity
conducted at the Company's 50 per cent owned Manantial Espejo
property in Argentina. At Morococha, the Company was active with
seven drill rigs during the third quarter, developing both known
resource areas and discovering previously unknown mineralized
areas. A total of $1.4 million was spent on exploration activities
at Morococha during the quarter, of which $0.9 million was
determined to be for the development and extension of known
resource areas, and therefore capitalized, while the balance was
expensed. Exploration expenses for the comparable quarter of 2004
reflected higher activity levels relating to the feasibility study
at Manantial Espejo. Reclamation expenses for the third quarter of
2005 increased to $0.7 million from $0.3 million incurred in the
corresponding period in 2004. These costs are related to the
accretion of the liability that the Company recognized on all its
mining operations by adopting CICA Handbook Section 3110 -
"Accounting for Asset Retirement Obligations" as at December 31,
2003. The Company's expectations for future site restoration costs
at its mines did not change during the quarter. Interest and
financing expenses incurred in the third quarter of 2005 were $0.1
million, which is similar to the amount incurred during the same
period in 2004. Year to date interest expenses have been reduced as
a result of the Company successfully inducing the early conversion
of 99 per cent of the Debentures and prepaying all bank debt in the
second quarter of 2004. Investment and other income for the third
quarter of 2005 increased to $1.2 million from $0.8 million in the
corresponding period of 2004. This is primarily represented by
interest income received from cash balances the Company maintained
during the quarter. In addition to interest income, the Company
also recognized a $0.3 million gain on the sale of a crusher owned
by a Mexican subsidiary. Income tax benefit of $0.1 million was
recorded in the third quarter of 2005 (2004 - $nil) as a result of
the Company reducing its future income tax liability by $1.3
million, which was partially offset by current income tax expenses.
The Company expects to utilize tax assets to reduce income taxes
payable in Peru to a greater extent than originally assumed,
resulting in a reduction in the valuation allowance applied to
future income tax assets and a corresponding credit to the income
tax provision for the third quarter. For the nine-month period
ended September 30, 2005, the Company recorded a provision for
income tax of $1.6 million (2004 - $nil). These expenses were a
result of the Company generating taxable earnings at its Huaron and
Morococha mines in Peru. During the comparable period in 2004
income taxes were not payable due to utilization of tax loss carry
forwards. METAL PRODUCTION Pan American produced 3,202,289 ounces
of silver in the third quarter of 2005, the highest quarterly
silver production achieved by the Company in its eleven year
history. Record silver production was achieved at both La Colorada
and Morococha during the quarter. For the first nine months of
2005, silver production has increased by 1.2 million ounces or 15
per cent as compared to year-to-date production in 2004. This
increase in the silver production was achieved primarily through
the acquisition of Morococha, which was effective as of July 1,
2004. Morococha produced over 2 million ounces at a cash cost of
$2.82 per ounce for the Company in the first nine months of 2005
compared to 685,937 ounces produced at a cash cost of $3.57 per
ounce in 2004. Silver production from the La Colorada operation in
the first nine months of 2005 increased by 66 per cent and cash
costs per ounce decreased 14 per cent compared to the production in
the comparable period in 2004. This increase in silver production
at La Colorada more than made up for the decrease in silver
production at each of the Company's Huaron, Quiruvilca and Pyrite
operations in Peru when compared to production levels achieved in
the same period of 2004. As shown in the following table, zinc and
copper production for the first nine months of the year were also
significantly higher than production in the corresponding period of
2004, even without production from the San Vicente mine in Bolivia.
The increase was due to the addition of Morococha. Lead production
is trailing last year's production levels by 11 per cent over the
first nine months of the year due to lower lead grades at both
Huaron and Quiruvilca. Three months ended Nine months ended
September 30 September 30 % % 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Silver metal - ounces 3,202,289 3,162,847 1 9,286,658 8,047,483 15
Zinc metal - tonnes 9,977 10,377 (4) 28,094 24,899 13 Lead metal -
tonnes 4,113 4,865 (15) 11,492 12,955 (11) Copper metal - tonnes
1,042 1,100 (5) 3,020 2,370 27 The Morococha mine maintained its
trend of increasing silver production and lowering its cash cost
per ounce over the first three quarters of 2005. For the
three-month period ended September 30, 2005, Morococha produced
705,981 ounces of silver at a cash cost of $1.99 per payable ounce.
The results of the Company's exploration activities at Morococha,
which were contained in a news release dated July 21, 2005 have
lead to a reallocation of $9.4 million of Morococha's carrying
value from "Investment in non-producing properties" to "Mineral
property, plant and equipment" on the Company's balance sheet. The
reallocation is based on the upgrading of resources to reserves
achieved from these exploration activities. The La Colorada mine
production continued its improving trend during the third quarter
with record silver production of 817,744 ounces at cash costs of
$5.48 per payable ounce. For the first nine months of 2005, La
Colorada has achieved a production increase of 66 per cent compared
to the corresponding period in 2004 by processing 24 per cent more
tonnes of ore at 18 per cent higher grades. During the third
quarter of 2005, the Quiruvilca mine managed to reduce its cash
costs per payable ounce from those recorded in each of the first
two quarters of 2005. While the mine continued to encounter
slightly lower silver grades than in the previous year, cost
control measures and higher by-product credits from base metal
production enabled the Quiruvilca mine to produce 579,586 ounces at
the same cash cost of $3.55 per payable ounce recorded in the
comparable quarter of 2004. At the Huaron mine, mining and
processing rates in the third quarter of 2005 continued to increase
over those achieved in the first two quarters of the year, however
grades and recoveries remained significantly lower than those
historically experienced. Lower grades and recoveries had a
negative impact on silver production, which resulted in
approximately 12 per cent lower production than that recorded in
the third quarter of 2004; however silver production was higher
than that achieved in the first two quarters of 2005. Base metal
grades and recoveries have also declined due to a change in the ore
type in the areas currently being mined. The significance of lower
grades and recoveries from Huaron's base metal production can be
seen in the 33 per cent increase over last year's cash costs per
payable ounce. Cash costs per payable ounce for the third quarter
of 2005 were $5.13 per ounce, a $1.28 per ounce increase from costs
recorded a year ago. Lower base metal production, which resulted in
a reduction in the by-product credit, contributed approximately
$0.90 to the increase in costs per ounce. An intensive
metallurgical test program continues at the mine in an effort to
return base metal recoveries to historical levels. The Company's
Pyrite Stockpile operation produced 158,578 ounces of silver during
the quarter at a cash cost of $1.72 per payable ounce. Production
from the Stockpiles for the third quarter of 2005 was 31 per cent
lower than the production in the comparable period of 2004 due to
lower tonnage demand and lower silver grades. The production rates
from the Stockpile operation are entirely dependent on the demand
for this ore from the purchaser, Doe Run Peru, and as a consequence
are not controlled by management. Costs per payable ounce are
higher than last year due to the fact that Volcan Minera S.A.
("Volcan") became entitled to a one-third participation in the net
operating cash flow of the Stockpile operation in December 2004,
which is treated as a cost to the operation. In Bolivia, the
Company's subsidiary, Pan American Silver (Bolivia) S.A. ("PAS
Bolivia") began to mine and stockpile ore at the San Vicente mine
in the third quarter of 2005. As of mid-October PAS Bolivia
recommenced processing ore on a toll basis at a nearby facility.
PAS Bolivia now expects to produce approximately 0.2 million ounces
of silver in 2005 from San Vicente at a cash cost of under $3.00
per ounce; while continuing to work towards producing from its own
mill by mid-2006. During the third quarter of 2005, the Company
concluded negotiations with EMUSA, a Bolivian mining company and a
third-party concentrates trader with respect to the ownership of
PAS Bolivia. Pursuant to the agreement, Pan American will increase
its interest to 55 per cent and will operate the San Vicente mine.
The Company expects consolidated silver production for 2005 to be
approximately 12.5 million ounces, in-line with the revised
forecast provided at the end of the second quarter of 2005. The
Company expects consolidated cash costs per payable ounce over the
remainder of the year to be similar to the third quarter's costs
and estimates total consolidated cash cost for 2005 to be below
$4.30 per payable ounce. CASH AND TOTAL PRODUCTION COSTS PER OUNCE
FOR PAYABLE SILVER Consolidated cash costs per ounce for the
three-month period ended September 30, 2005 were $4.15 per payable
ounce of silver, which is slightly higher than the $4.05 per
payable ounce for the corresponding period of 2004 but
significantly lower than the $4.50 per payable ounce for the first
half of 2005. Industry-wide cost escalations in energy and
consumables, new Peruvian workers' participation and Volcan's
participation in the Pyrite Stockpile operation, which totaled $0.4
million during the third quarter (2004 - $nil) and $1.3 million in
the first nine months of 2005 (2004 - $nil), were the primary
reasons for the increase in cash costs from last year. Taking
effect from the first quarter of 2005, the Company changed its
method for calculating cash and total costs per ounce of silver. In
the past, these calculations were based on produced ounces, as set
out on page 11 of the Consolidated Financial Statements for the
year ended December 31, 2004. The Company now calculates its cash
and total costs per ounce on the more widely- used methodology
based on the silver ounces for which the Company is paid. Costs per
ounce for the third quarter and the first nine months of 2004 costs
per ounce have been recalculated on the same basis to ensure that
the comparables are consistent with this new method. The non-GAAP
measures of cash and total cost per ounce of payable silver are
used by the Company to manage and evaluate operating performance at
each of the Company's mines and are widely reported in the silver
mining industry as benchmarks for performance, but do not have
standardized meaning. To facilitate a better understanding of this
measure as calculated by the Company, we have provided a detailed
reconciliation of this measure to our operating costs, as shown in
our unaudited Consolidated Statement of Operations for the three-
and nine-month periods ended September 30, 2005. Three months ended
Nine months ended September 30 September 30 2005 2004 2005 2004
-------------------------------------------- Operating Costs $
21,337 $ 18,526 $ 62,134 $ 46,226 Add/(Subtract) Smelting,
refining, and transportation charges 9,469 8,267 27,204 19,426
By-product credits (19,815) (16,530) (55,431) (39,209) Mining
royalties and worker's participation 125 219 379 251 Change in
inventories 733 747 2,464 1,041 Other 492 476 1,157 674 Minority
interest adjustment (175) (484) (779) (484)
-------------------------------------------------------------------------
Cash Operating Costs A $ 12,165 $ 11,222 $ 37,126 $ 27,925
Add/(Subtract) Depreciation and amortization 3,788 3,033 9,421
7,186 Asset retirement and reclamation 736 302 1,674 905 Change in
inventories (45) 0 1,016 0 Other (327) 82 (245) 34 Minority
interest adjustment (154) (222) (475) (222)
-------------------------------------------------------------------------
Production Costs B $ 16,163 $ 14,416 $ 48,518 $ 35,828 Payable
Ounces of Silver C 2,930,179 2,768,841 8,479,763 7,012,651
-------------------------------------------- Total Cash Cost per
Ounce (A(x)1000)/B $ 4.15 $ 4.05 $ 4.38 $ 3.98
-------------------------------------------- Total Produc- tion
Costs per Ounce (B(x)1000)/C $ 5.52 $ 5.21 $ 5.72 $ 5.11
-------------------------------------------- LIQUIDITY AND CAPITAL
RESOURCES At September 30, 2005, cash and cash equivalents plus
short-term investments were $68.4 million, a $10.6 million decrease
from June 30, 2005. Investing activities for the three months ended
September 30, 2005 used a net $6.3 million and consisted primarily
of expenditures on mineral property, plant and equipment of $16.5
million, mostly at Alamo Dorado and Morococha, which were partially
funded by the maturity of short-term investments of $9.6 million.
Cash flow provided from operating activities was $4.2 million for
the third quarter of 2005, after accounting for changes in non-cash
operating working capital items which utilized $2.7 million.
Financing activities in the third quarter consisted of the exercise
of stock options yielding $1.5 million and the repayment of
advances utilizing $0.4 million. Working capital at September 30,
2005 was $89.2 million, a reduction of $7.4 million from June 30,
2005. This reduction is largely the result of a $10.6 million
decrease in cash and cash equivalents plus short-term investments,
and was partially offset by a $1.5 million increase in and prepaid
expenses, a $1.4 million increase in inventories and a $0.3 million
decrease in current liabilities. Capital resources at September 30,
2005 amounted to shareholders' equity of $285.7 million. At
September 30, 2005, the Company had 67,166,373 common shares issued
and outstanding. During the third quarter, the Company issued
255,781 warrants to the International Finance Corporation ("IFC")
in exchange for the termination of past and future obligations
relating to production from the La Colorada mine. Each warrant
issued entitles the IFC to purchase one common share of Pan
American at a price of US$ 16.91 over a five-year period. These
warrants were negotiated with the IFC during the second quarter of
2005 and issued as settlement of the Company's obligation to the
IFC with a fair value of $2.1 million. Based on the Company's
financial position at September 30, 2005 and the operating cash
flows that are expected over the next twelve months, management
believes that the Company's liquid assets are more than sufficient
to fund planned operating and project development and to sustain
capital expenditures and discharge liabilities as they come due.
Other than as disclosed elsewhere in the unaudited consolidated
financial statements for the three months ended September 30, 2005
and 2004, and the related notes thereto, the Company did not have
any known material contractual obligation or any off-balance sheet
arrangements at the date of this MD&A. Pan American mitigates
the price risk associated with its base metal production by selling
some of its forecasted base metal production pursuant to forward
sales contracts, all of which are designated hedges for accounting
purposes. At September 30, 2005, the Company had sold forward
10,000 tonnes of zinc at a weighted average price of $1,074 per
tonne ($0.487 per pound). These forward sales commitments represent
approximately 45 per cent of the Company's forecast zinc production
until March 2006. At September 30, 2005, the cash offered prices
for zinc was $1,402 per tonne. The negative mark to market value at
September 30, 2005 was $3.2 million. At the end of the third
quarter of 2005, the Company had fixed the price of 1,000,000
ounces of silver produced during the third quarter and contained in
concentrates, which are due to be priced in October and November of
2005 under the Company's concentrate sales contracts. The price
fixed for these ounces averaged $7.24 per ounce while the spot
price of silver on September 30, 2005 was $7.42 per ounce. In
anticipation of capital expenditures in Mexican pesos ("MXN")
relating to the construction of Alamo Dorado, the Company has
purchased MXN 301 million settling between October 2005 and June
2006 to match anticipated spending at an average MXN/US$ exchange
rate of 11.25. These forward contracts have been designated as
hedges for accounting purposes. At September 30, 2005, the spot
exchange rate for MXN/US$ was 10.78 and the positive mark to market
value of the Company's position was $0.4 million. EXPLORATION AND
DEVELOPMENT ACTIVITIES The development of the Company's Alamo
Dorado project in Mexico is progressing on budget and on schedule
with production still planned for late 2006. Over 60 per cent of
the engineering design work and about 20 per cent of the
construction work is now complete. A total of 120,000 tonnes of
waste rock was mined from the pit area during the month of
September and the stockpiling of ore-grade material has commenced.
Plant site civil work continues ahead of schedule with completion
by the end of the third quarter 2005 of: (i) the rough grading for
the crusher, stockpile, and grinding circuit areas; (ii) the truck
maintenance and warehouse facility; and (iii) the erection of the
laboratory and offices. The Company spent $10.5 million on
equipment and construction-related activities at Alamo Dorado for
the quarter ended September 30, 2005. Over the remainder of the
year, the Company anticipates spending an additional $13 million on
the construction of Alamo Dorado, which will be funded out of the
Company's treasury. The expected total capital costs for the
project are approximately $77 million, including start-up working
capital and a contingency allowance. The Company is in the final
stages of feasibility study for its 50 per cent owned Manantial
Espejo project in Argentina. During the quarter, the Company
continued to develop an environmental impact study, which will be
submitted to the Argentine authorities in November 2005. In
addition, the Company continued detailed capital and operating cost
estimations which will culminate in a completed feasibility study
for the project by late 2005. Pan American's share of additional
costs to complete the feasibility study is expected to be
approximately $0.3 million. DATASOURCE: Pan American Silver Corp.
CONTACT: Brenda Radies, Vice-President Corporate Relations, (604)
806-3158, http://www.panamericansilver.com/
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