Pan American Silver reports improved results in second quarter (all
amounts in US Dollars unless otherwise stated) VANCOUVER, July 28
/PRNewswire-FirstCall/ -- SECOND QUARTER HIGHLIGHTS
------------------------- - Silver production increased 24% over
second quarter 2004 to 3.1 million ounces. - Cash production cost
of $4.48/oz in second quarter increased over 2004 ($4.09/oz), but
decreased over first quarter. - Cash flow from operations before
changes in non-cash working capital increased 73% to $3.5 million
versus $2.0 million in 2004. - Mine operating earnings grew 27% to
$3.1 million versus $2.4 million in 2004. - Consolidated revenue of
$23.9 million increased 14% over second quarter 2004. - Net
earnings for the quarter were $24,000 versus $1.3 million in 2004.
- Significantly increased reserves and resources at Morococha. -
Plan approved to resume sulphide production at La Colorada. - San
Vicente agreement signed; mining restarts; mill production deferred
until 2006. - Alamo Dorado construction on schedule and on budget.
FINANCIAL RESULTS ----------------- Pan American Silver Corp.'s
(NASDAQ: PAAS; TSX: PAA) consolidated revenue for the second
quarter of 2005 was $23.9 million, a 14% increase over 2004 due to
the addition of production from the Morococha mine in Peru acquired
in the third quarter of 2004. Cash flow from operations before
changes in working capital totaled $3.5 million versus $2.0 million
in 2004 due to increased silver and base metal production and
higher realized silver prices. Mine operating earnings in the
quarter increased to $3.1 million from $2.4 million in the
year-earlier period, due to the contribution of earnings from
Morococha and improved production at La Colorada. While
consolidated cash production costs increased 10% over the second
quarter of 2004, they declined slightly from the first quarter of
2005. All operations continue to be affected by higher energy and
labour costs. However, expected increases in silver production at
Quiruvilca and Huaron should help reduce unit costs over the
remainder of the year. Pan American recorded net earnings of
$24,000 in the second quarter versus net earnings of $1.3 million
in the corresponding period of 2004. The addition of good earnings
from the Morococha mine was more than offset by three factors not
present in the corresponding period of 2004: first, charges for
Peruvian income taxes, workers' participation costs and the 1% net
smelter royalty tax totaling $1.5 million; second, higher energy
and labour costs which increased unit production costs; and third,
a decreased contribution from the low-cost silver stockpile
operation. Consolidated silver production in the second quarter
totaled 3,088,667 ounces, a 24% increase over the second quarter of
2004, due primarily to the addition of production from the
Morococha mine and increased production at the La Colorada mine in
Mexico, offset by lower production at the Silver Stockpiles and
Huaron. Zinc production in the quarter increased 26% over 2004
levels to 9,246 tonnes due to the addition of production from
Morococha, while lead production dropped 12% to 3,703 tonnes due to
lower grades at Huaron and Quiruvilca. Copper production rose 60%
to 1,051 tonnes due to the addition of production from Morococha
and higher copper grades at Huaron. For the six months ended June
30, 2005, consolidated revenue totaled $51.0 million, a 41%
increase over the first six months of 2004, due primarily to
increased production and increased realized silver prices. In the
first six months, the Company's net loss totaled $2.9 million,
versus net earnings of $0.9 million in the year-earlier period.
Consolidated silver production in the first half of 2005 totaled
6,084,369 ounces, a 25% increase over the first half of 2004. Zinc
production in the half also climbed 25% to 18,117 tonnes, while
lead production decreased 9% to 7,378 tonnes and copper production
rose 56% to 1,978 tonnes. At June 30, 2005 working capital was
$96.6 million, including cash and short-term investments of $78.9
million. Working capital is $9.7 million less than at March 31,
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 that "This was a solid quarter. We
increased silver production 24%, we generated tremendous
exploration success and we made excellent progress on the building
of our next mine, Alamo Dorado, which is gearing up exactly
according to plan. I am pleased with the exceptional performances
at Morococha and La Colorada, but we still have work to do at
Huaron." OPERATIONS AND DEVELOPMENT HIGHLIGHTS
------------------------------------- PERU The Morococha mine (87%
owned) recorded an excellent quarter and produced 691,612 net
ounces of silver at a cash cost of $2.78/oz. Increased throughput,
higher ore grades and better metal recoveries all contributed to
the outstanding performance. Much of the Company's exploration
drilling in the second quarter was focused on Morococha in order to
exploit the mine's significant long-term potential. To date this
year, 14,000 meters of drilling have added 1.23 million tonnes
grading 170 g/tonne silver in new proven and probable mineral
reserves, containing an additional 6.4 million ounces of silver.
Total proven and probable mineral reserves at Morococha now stand
at 3.3 million tonnes grading 207 g/tonne silver, for 21.9 million
contained ounces of silver (19.0 million ounces Pan American's
share). The mine also contains an additional 11 million ounces of
silver in measured and indicated resources, and 71.9 million ounces
in inferred resources, as announced on July 21, 2005. Further
drilling in 2005 is expected to convert previously delineated
resources into additional proven and probable reserves. The
Quiruvilca mine produced 580,999 ounces of silver in the second
quarter, a 3% increase over the first quarter of 2005. Cash costs
were $4.46/oz, but are expected to decrease over the remainder of
the year as production rises to the forecast 2.3 million ounces. A
new conveyor system has been installed on the key 340 level of the
mine which is expected to increase production levels and lower unit
costs. The Huaron mine produced 922,643 ounces of silver in the
second quarter, a 4% improvement over first-quarter levels. Cash
costs rose over 2004 levels due primarily to lower zinc production
caused by lower zinc grades and recovery rates in the ore currently
being mined. Metallurgical testing is underway to determine how to
increase zinc recoveries to historical levels. A number of
production initiatives implemented in the last six months are
expected to improve Huaron's performance over the remainder of the
year. In the second quarter the Silver Stockpile operation sold
150,016 ounces of silver, versus 261,746 ounces in the second
quarter of 2004 due to decreased demand for the ore from the Doe
Run smelter in Peru. Production costs rose as a reflection of the
royalty now being paid to the Peruvian company Volcan under the
operation's purchase agreement. MEXICO The performance of the La
Colorada mine continued to improve in the second quarter with
record production of 743,397 ounces of silver, bringing its total
for the year to 1,432,016 ounces. Cash costs declined to $5.39/oz
from $6.82/oz in the corresponding period of 2004. Due to more
selective mining methods the operation has increased production by
57% over the first half of 2004 while mining only 9% more tonnes of
ore. In the second quarter the operation also completed a plan for
the resumption of mining of sulphide ore, which had ceased due to
excess water. Mining and stockpiling of sulphide ore will commence
immediately with the restart of the sulphide processing plant
scheduled for February, 2006. Mining 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. All critical equipment
has been secured and key members of the operations team have been
hired. Design work on the operation is approximately 40% complete.
Construction activities are well underway, including site clearing,
roadwork, the installation of temporary power and the erection of
the truck maintenance and warehouse facility. During the quarter,
the Company spent $5.6 million, with an additional $33.5 million
expected to be spent over the remainder of 2005. ARGENTINA The
feasibility study on the 50% owned Manantial Espejo joint venture
in Argentina continues to progress and remains on target for
completion in the fourth quarter. Exploration and infill drilling
programs completed in the first half of the year have allowed for
the refinement of mining methods and have significantly increased
the joint venture's confidence in the overall resource estimate,
but have not materially increased the project resources as stated
at December 31, 2004. The project is expected to produce in excess
of 3.7 million ounces of silver and 56,000 ounces of gold annually.
As part of the completion of the feasibility study, capital and
operating cost estimates are being reviewed to identify
opportunities to optimize project economics, including the
negotiation of power and infrastructure programs with the Argentine
government. An Environmental Impact Study is also underway to
secure the necessary mine development permits. BOLIVIA During the
second quarter, Pan American finalized agreements outstanding with
state mining company Comibol and as a result is now planning to
refurbish the existing Vetillas mill at San Vicente rather than
toll milling at another facility. The refurbishment of the Vetillas
mill will allow production at San Vicente to increase to
approximately 2.6 million ounces of silver annually, reducing
operating costs and improving profitability. Pan American began
stockpiling ore in July in anticipation of commencing operations in
the first quarter of 2006. Consequently, the 735,000 ounces
originally forecast to be produced this year have been deferred
until 2006. Pan American now estimates production for 2005 to be
12.5 million ounces of silver versus the 13.6 million ounces
forecast in January, but much of this shortfall will be made up
with higher production in 2006. SILVER MARKETS -------------- The
silver price remained volatile in the second quarter, ranging from
a low of $6.85/oz to a high of $7.53/oz, although it opened and
closed at $7.10/oz, near its average for the quarter of $7.16/oz.
The 2005 World Silver Survey, released in May by Gold Fields
Mineral Services, continued to support a bullish case for higher
silver prices, citing strong physical off take for industrial
applications and jewelry against declining scrap supply and
government sales. However, the dominant driver for the price
increases sustained since 2003 has been investment demand for
silver. According to GFMS, investors are once again viewing silver
as a viable asset class and the trend toward buying silver as a
commodity is expected to remain strong, likely bolstered by the
announcement that an Exchange Traded Fund in silver is being
launched by Barclays. A summary of the Survey is available on the
homepage of Pan American's website at
http://www.panamericansilver.com/. Pan American will host a
conference call to discuss the results today at 8:30 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 6258416. 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 Six months
ended June 30 June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Consolidated Financial Highlights (in thousands of US dollars)
(Unaudited) Net income (loss) for the period $ 24 $ 1,287 $ (2,864)
$ 921 Income/(Loss) per share $ 0.00 $ (0.12) $ (0.04) $ (0.17)
Cash flow from (used by) operations $ 1,348 $ 495 $ 4,080 $ 102
Capital spending $ 14,090 $ 2,983 $ 24,093 $ 6,562 Exploration
expenses $ 885 $ 1,137 $ 2,309 $ 1,665 Cash and short-term
investments $ 78,941 $ 98,136 $ 78,941 $ 98,136 Working capital $
96,648 $ 114,655 $ 96,648 $ 114,655 Consolidated Ore Milled &
Metals Recovered to Concentrate Tonnes milled 418,422 307,096
815,015 602,563 Silver metal - ounces 3,088,667 2,495,798 6,084,369
4,884,636 Zinc metal - tonnes 9,246 7,349 18,117 14,522 Lead metal
- tonnes 3,703 4,198 7,378 8,089 Copper metal - tonnes 1,051 656
1,978 1,270 Consolidated Cost per Ounce of Silver (net of
by-product credits) Total cash cost per ounce $ 4.48 $ 4.09 $ 4.50
$ 3.94 Total production cost per ounce $ 5.83 $ 5.14 $ 5.83 $ 5.05
In thousands of US dollars Direct operating costs, royalties,
treatment and refining charges $ 29,954 $ 20,032 $ 58,786 $ 39,382
By-product credits (17,273) (11,277) (33,856) (22,678)
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Cash operating costs 12,681 8,755 24,951 16,704 Depreciation,
amortization & reclamation 3,823 2,256 7,393 4,708
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Production costs $ 16,504 $ 11,010 $ 32,344 $ 21,412
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Payable ounces of silver (used in cost per ounce calculations)
2,831,511 2,142,515 5,549,584 4,243,810 Average Metal Prices Silver
- London Fixing $ 7.16 $ 6.25 $ 7.06 $ 6.47 Zinc - LME Cash
Settlement per pound $ 0.58 $ 0.47 $ 0.59 $ 0.48 Lead - LME Cash
Settlement per pound $ 0.45 $ 0.37 $ 0.45 $ 0.38 Copper - LME Cash
Settlement per pound $ 1.54 $ 1.26 $ 1.51 $ 1.25 Mine Operations
Highlights Three months ended Six months ended June 30 June 30 2005
2004 2005 2004
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Huaron Mine Tonnes milled 159,219 166,675 305,229 314,480 Average
silver grade - grams per tonne 212 233 215 231 Average zinc grade
2.88% 3.29% 2.95% 3.28% Silver - ounces 922,643 1,100,072 1,806,790
2,063,788 Zinc - tonnes 3,065 4,225 6,244 8,020 Lead - tonnes 1,621
3,175 3,525 5,845 Copper - tonnes 496 372 877 759 Total cash cost
per ounce $ 5.24 $ 3.77 $ 4.99 $ 3.92 Total production cost per
ounce $ 6.45 $ 4.99 $ 6.19 $ 5.15 In thousands of US dollars Direct
operating costs, royalties, treatments and refining charges $
10,754 $ 10,823 $ 21,000 $ 20,970 By-product credits (6,366)
(7,030) (12,806) (13,563)
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Cash operating costs 4,388 3,793 8,194 7,407 Depreciation,
amortization and reclamation 1,018 1,232 1,962 2,337
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Production costs $ 5,406 $ 5,025 $ 10,156 $ 9,744
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Payable ounces of silver (used in cost per ounce calculation)
837,864 1,066,816 1,640,658 1,890,662 Quiruvilca Mine Tonnes milled
90,328 93,745 180,253 185,965 Average silver grade - grams per
tonne 229 237 226 236 Average zinc grade 3.06% 3.53% 3.13% 3.76%
Silver - ounces 580,999 621,311 1,144,386 1,238,201 Zinc - tonnes
2,323 2,850 4,774 6,075 Lead - tonnes 668 977 1,349 2,108 Copper -
tonnes 321 267 643 490 Total cash cost per ounce $ 4.46 $ 3.74 $
4.34 $ 3.35 Total production cost per ounce $ 5.00 $ 4.02 $ 4.88 $
3.63 In thousands of US dollars Direct operating costs, royalties,
treatments and refining charges $ 6,670 $ 6,173 $ 13,338 $ 12,384
By-product credits (4,252) (4,015) (8,717) (8,531)
-------------------------------------------------------------------------
Cash operating costs 2,418 2,158 4,621 3,853 Depreciation,
amortization and reclamation 292 162 583 325
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Production costs $ 2,710 $ 2,320 $ 5,204 $ 4,178
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Payable ounces of silver (used in cost per ounce calculation)
541,793 577,264 1,065,874 1,149,619 Three months ended Six months
ended June 30 June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Morococha Mine(x) Tonnes milled 116,542 N/A 227,070 N/A Average
silver grade - grams per tonne 218 N/A 220 N/A Average zinc grade
4.27% N/A 4.17% N/A Silver - ounces 691,612 N/A 1,345,147 N/A Zinc
- tonnes 3,857 N/A 7,099 N/A Lead - tonnes 1,414 N/A 2,504 N/A
Copper - tonnes 234 N/A 458 N/A Total cash cost per ounce $ 2.78 $
N/A $ 3.25 $ N/A Total production cost per ounce $ 4.49 $ N/A $
4.98 $ N/A In thousands of US dollars Direct operating costs,
royalties, treatments and refining charges $ 8,074 $ N/A $ 15,626 $
N/A By-product credits (6,334) N/A (11,679) N/A
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Cash operating costs 1,740 N/A 3,947 N/A Depreciation,
amortization, reclamation 1,071 N/A 2,102 N/A
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Production costs $ 2,811 $ N/A $ 6,049 $ N/A
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Payable ounces of silver (used in cost per ounce calculations)
626,139 N/A 1,213,823 N/A (x) The company acquired the Morococha
Mine on July 1, 2004. Production costs and other amounts are for
Pan American's share only. Pan American's share increased from 86%
to 87% during the quarter La Colorada Mine Tonnes milled 52,333
38,347 99,463 91,389 Average silver grade - grams per tonne 556 480
553 437 Silver - ounces 743,397 415,828 1,432,016 910,590 Zinc -
tonnes 34 122 Lead - tonnes 46 136 Total cash cost per ounce $ 5.39
$ 6.82 $ 5.48 $ 6.09 Total production cost per ounce $ 7.34 $ 8.92
$ 7.40 $ 8.38 In thousands of US dollars Direct operating costs,
royalties, treatments and refining charges $ 4,319 $ 3,027 $ 8,466
$ 6,007 By-product credits (321) (232) (636) (585)
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Cash operating costs 3,998 2,795 7,830 5,422 Depreciation,
amortization, reclamation 1,443 861 2,747 2,047
-------------------------------------------------------------------------
Production costs $ 5,441 $ 3,656 $ 10,577 $ 7,469
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Payable ounces of silver (used in cost per ounce calculations)
741,538 409,742 1,428,436 890,842 Three months ended Six months
ended June 30 June 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Silver Stock Piles Tonnes sold 13,675 21,991 31,412 44,836 Average
silver grade - grams per tonne 341 370 353 380 Silver - ounces
150,016 261,746 356,030 548,311 Total cash cost per ounce $ 1.63 $
0.06 $ 1.78 $ 0.07 Total production cost per ounce $ 1.63 $ 0.06 $
1.78 $ 0.07 In thousands of US dollars Direct operating costs,
royalties, treatments and refining charges $ 137 $ 9 $ 358 $ 21
By-product credits - - - -
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Cash operating costs 137 9 358 21 Depreciation, amortization,
reclamation - - - -
-------------------------------------------------------------------------
Production costs $ 137 $ 9 $ 358 $ 21
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Payable ounces of silver (used in cost per ounce calculations)
84,177 148,693 200,793 312,687 San Vicente Mine(xx) Tonnes milled -
8,329 - 10,729 Average silver grade - grams per tonne - 424 - 422
Average zinc grade - percent - 3.63% - 3.65% Silver - ounces -
96,841 - 123,747 Zinc - tonnes - 240 - 306 Copper - tonnes - 17 -
21 (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 US
dollars) June 30 Dec. 31 2005 2004 (Unaudited) (Audited)
-------------------------------------------------------------------------
Assets Current Cash and cash equivalents $ 23,448 $ 28,345
Short-term investments 55,493 69,791 Accounts receivable, net of
$Nil provision for doubtful accounts 20,070 25,757 Inventories
12,818 10,674 Prepaid expenses 2,584 1,684
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Total Current Assets 114,413 136,251 Mineral property, plant and
equipment, net (note 3) 116,231 104,647 Investment and
non-producing properties (note 4) 133,390 125,863 Direct smelting
ore 2,449 2,671 Other assets 532 647
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Total Assets $ 367,015 $ 370,079
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-------------------------------------------------------------------------
Liabilities Current Accounts payable and accrued liabilities $
17,024 $ 20,331 Advances for metal shipments 367 652 Current
portion of bank loans and capital lease - 134 Current portion of
non-current liabilities 374 479
-------------------------------------------------------------------------
Total Current Liabilities 17,765 21,596 Liability component of
convertible debentures 105 134 Provision for asset retirement
obligation and reclamation (note 3) 32,455 32,012 Provision for
future income taxes 32,907 33,212 Other liabilities and provisions
1,648 1,144 Severance indemnities and commitments 1,153 398
Non-controlling interest 1,612 1,379
-------------------------------------------------------------------------
Total Liabilities 87,645 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 June 30, 2005 - 66,987,124 common shares
382,199 380,571 Equity component of convertible debentures 636 633
Additional paid in capital 11,378 10,976 Deficit (114,843)
(111,976)
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Total Shareholders' Equity 279,370 280,204
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 367,015 $ 370,079
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See accompanying notes to consolidated financial statements Pan
American Silver Corp. Consolidated Statements of Operations
(Unaudited - in thousands of US Dollars, except for shares and per
share amounts) Three months ended Six months ended June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 23,905 $ 20,950 $ 50,986 $ 36,101 Operating costs
(18,417) (16,531) (40,797) (27,699) Depreciation and amortization
(2,415) (2,008) (5,633) (4,153)
-------------------------------------------------------------------------
Mine operating earnings 3,073 2,411 4,556 4,249
-------------------------------------------------------------------------
General and adminis- trative, including stock-based compensation
1,751 1,886 3,313 3,129 Exploration 885 1,137 2,309 1,665 Asset
retirement and reclamation 412 301 939 603 Interest and financing
expenses 93 289 186 757
-------------------------------------------------------------------------
Operating (loss) (68) (1,202) (2,191) (1,905) Investment and other
income 990 2,489 1,248 2,826
-------------------------------------------------------------------------
Income (loss) before taxes and non- controlling interest 922 1,287
(943) 921 Income tax provision (746) - (1,688) - Non-controlling
interest (152) - (233) -
-------------------------------------------------------------------------
Net income (loss) for the period $ 24 $ 1,287 $ (2,864) $ 921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to common shareholders: Net income (loss) for the
period $ 24 $ 1,287 $ (2,864) $ 921 Charges relating to conversion
of convertible debentures (8,464) (8,464) Accretion of convertible
debentures 0 (718) (3) (2,838)
-------------------------------------------------------------------------
Adjusted net income (loss) for the period attributable to common
shareholders $ 24 $ (7,895) $ (2,867) $ (10,381)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and fully diluted income/ (loss) per share $ 0.00 $ (0.12) $
(0.04) $ (0.17) Weighted average shares outstanding 66,926,686
65,073,833 66,905,637 59,564,028 See accompanying notes to
consolidated financial statements Pan American Silver Corp.
Consolidated Statement of Cash Flows (Unaudited - in thousands of
US dollars) Three months ended Six months ended June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities Net (loss) income for the period $ 24 $ 1,287
$ (2,864) $ 921 Reclamation expenditures (225) (230) (500) (592)
Items not involving cash Depreciation and amortization 2,418 2,008
5,633 4,153 Gain on sale of marketable securities Non-controlling
interest 152 233 Interest accretion on the convertible debentures
97 366 Debt settlement expense 1,208 1,208 Gain on sale of
concessions (3,583) (3,583) Compensation expense 421 245 421 245
Stock-based compensation 284 684 581 1,124 Asset retirement and
reclamation 412 301 939 603 Changes in non-cash operating working
capital items (note 6) (2,138) (1,522) (363) (4,343)
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Cash generated by operations 1,348 495 4,080 102
-------------------------------------------------------------------------
Financing activities Shares issued for cash 282 943 1,201 61,005
Share issue costs - (96) (180) Convertible debentures payments -
(11,213) (13,520) Repayment of short-term loans and capital lease
(285) (12,689) (285) (13,096)
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Cash (used in) generated by financing activities (3) (23,055) 916
34,209
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Investing activities Mineral property, plant and equipment
expenditures (8,631) (2,665) (15,387) (6,008) Investment and
non-producing property expenditures (5,459) (318) (8,706) (554)
Maturity of short- term investments 18,466 10,434 13,798 10,456
Proceeds from sale of assets - 3,583 500 3,583 Other (174) (2,000)
(98) (2,000)
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Cash generated by (used in) investing activities 4,202 9,034
(9,893) 5,477
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Increase/(decrease) in cash and cash equivalents during the period
5,547 (13,526) (4,897) 39,788 Cash and cash equivalents, beginning
of period 17,901 67,505 28,345 14,191
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 23,448 $ 53,979 $ 23,448
$ 53,979
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Supplementary Disclosures Interest paid $ - $ - $ 18 $ 391
----------------------------------------------------
---------------------------------------------------- Taxes paid $
2,906 $ - $ 3,111 $ -
----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements PAN
AMERICAN SILVER CORP. Consolidated Statements of Shareholders'
Equity (in thousands of US dollars, except for amounts of shares)
Common Shares Additional --------------- Convertible Paid in Shares
Amount Debentures Capital Deficit Total
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Balance, December 31, 2003 53,009,851 $225,154 $ 66,735 $12,752
$(120,543) $184,098 Issued on the exercise of stock options 785,095
9,437 - (3,965) - 5,472 Issued on the exercise of share purchase
warrants 544,775 1,965 - - - 1,965 Stock-based compensation - - -
2,189 - 2,189 Issued for cash, net of issue costs 3,333,333 54,820
- - - 54,820 Accretion of convertible debentures - - 2,871 -
(2,871) - Issued on the conversion of convertible debentures
9,145,700 88,950 (68,973) - (8,464) 11,513 Issued as compensation
16,624 245 - - - 245 Net income for the year - - - - 19,902 19,902
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Balance, December 31, 2004 66,835,378 380,571 633 10,976 (111,976)
280,204 Issued on the exercise of stock options 120,325 1,190 - - -
1,190 Issued on the exercise of share purchase warrants 1,181 11 -
- - 11 Stock-based compensation - - - 581 - 581 Accretion of
convertible debentures - - 3 - (3) - Assigned value of exercised
options - 7 - (7) - - Issued as compensation 30,240 420 - - - 420
Other - - - (172) - (172) Net loss for the period - - - - (2,864)
(2,864)
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Balance, June 30, 2005 66,987,124 $382,199 $ 636 $11,378 $(114,843)
$279,370
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Pan American Silver Corp. Notes to Unaudited Interim Consolidated
Financial Statements As at June 30, 2005 and 2004 and for the three
month and six month periods then ended (Tabular amounts are in
thousands of US 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 Peru, Bolivia,
Argentina, Mexico and the United States of 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 six-
month periods ended June 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 87.4% Consolidated Morococha
Mine Plata Panamericana S.A. de C.V. Mexico 100% Consolidated La
Colorada Mine Minera Corner Bay Mexico 100% Consolidated Alamo
Dorado Project 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 includes
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 on
these investments are lower of cost and marked to market 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 ore 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 is 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 is 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 US dollar. The accounts of
subsidiaries, not reporting in US dollars, and which are integrated
operations, are translated into US 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 share 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, where appropriate. 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
5,609,333 for the six months ended June 30, 2005 (1,544,916 and
4,064,417 shares arising from outstanding stock options and share
purchase warrants, respectively) and 5,666252 shares for the six
months ended June 30, 2004 have been excluded from the calculation,
as their effect would have been 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:
June 30, 2005 December 31, 2004 -----------------------------
----------------------------- Accumulated Net Book Accumulated Net
Book Cost Amortization Value Cost Amortization Value
-------------------------------------------------------------------------
Mineral Properties Plant & equipment ----------- Morococha
mine, Peru $ 27,947 $ (4,279) $ 23,668 $ 18,217 $ (2,099) $ 16,118
La Colorada mine, Mexico 58,926 (7,919) 51,007 54,848 (5,261)
49,587 Huaron mine, Peru 56,752 (17,830) 38,922 53,628 (16,039)
37,589 Quiruvilca mine, Peru 16,675 (14,511) 2,164 25,601 (24,616)
985 Other 954 (483) 470 904 (536) 368
----------------------------------------------------------- TOTAL
$161,253 $(45,022) $116,231 $153,198 $(48,551) $104,647
-----------------------------------------------------------
----------------------------------------------------------- On July
1, 2004, the Company acquired control and ownership of the assets
and liabilities of the Morococha mine. A summary of the terms and
the fair values of the assets and liabilities acquired and
consideration paid was included in the December 31, 2004 annual
consolidated financial statements of the Company. 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: June 30, 2005 December 31, 2004
----------------------------- -----------------------------
Accumulated Net Book Accumulated Net Book Cost Amortization Value
Cost Amortization Value
-------------------------------------------------------------------------
Exploration and Development ------------ Morococha exploration,
Peru $ 34,704 $ - $ 34,704 $ 40,472 $ - $ 40,472 Manantial Espejo,
Argentina 3,176 - 3,176 2,012 - 2,012 Alamo Dorado, Mexico 93,689
(45) 93,644 81,692 - 81,692 Other 1,866 - 1,866 1,687 - 1,687
----------------------------------------------------------- TOTAL
$133,435 $ (45) $133,390 $125,863 $ - $125,863
-----------------------------------------------------------
----------------------------------------------------------- 5.
Share Capital a) Authorized and issued share capital The details of
the common shares issued and outstanding are as follows: Shares
Issued Amount ------------ ------------ Balance at December 31,
2004 66,835,378 $ 380,751 Shares issued on exercise of stock
options 120,325 1,190 Shares issued on exercise of warrants 1,181
11 Issued as compensation 30,240 420 Assigned value of exercised
options - 7 ------------------------- Balance at June 30, 2005
66,987,124 $ 382,199 -------------------------
------------------------- b) 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 June 30, 2005: Options Outstanding Options
Exercisable --------------------------------------------------
Weighted Number Average Number Outstanding Remaining Exercisable
Weighted Range of as at Contractual as at Average Exercise Year of
June 30, Life June 30, Exercise Prices Expiry 2005 (months) 2005
Price
-------------------------------------------------------------------------
$4.08 2006 88,000 10.63 88,000 $4.08 $7.88 - 8.24 2007 328,500
28.36 276,500 $8.17 $7.26 - 11.77 2008 457,308 35.88 67,308 $8.18
$7.51 - 15.65 2009 472,441 45.59 221,108 $15.24 $4.08 2010 217,000
65.43 217,000 $4.08
-------------------------------------------------------------------------
1,563,249 37.18 869,916 $7.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the six month period ended June 30, 2005, the Company
recognized $581 of stock compensation expense. c) Share purchase
warrants As of June 30, 2005 the Company had agreed to issue
255,781 warrants to the International Finance Corporation to
terminate future royalty payments at La Colorada. The Company has
recorded the liability for these warrants in current payables until
the warrants are issued. The warrants have a fair value of $2.1
million and allow the holder to purchase 255,781 common shares of
the company at $16.91 for a period of 5 years after the issue date.
As at June 30, 2005 there were warrants outstanding that allow the
holders to purchase 3,808,636 common shares of the Company at
Cdn$12.00 per share, which expire on February 20, 2008. In the
period, 1,181 common shares were issued for proceeds of $11,000 in
connection with the exercise of outstanding warrants. 6. Changes in
Non-Cash Working Capital Items The following table summarizes the
changes in non-cash working capital items: Three Months Ended Six
Months Ended June 30 June 30
---------------------------------------- 2005 2004 2005 2004
-------------------------------------------------------------------------
Accounts receivable $ 3,711 $ 193 $ 5,821 $ (1,727) Inventories
(3,126) 2,850 (731) 1,015 Prepaids (1,017) (929) (900) (1,031)
Accounts Payable and accrued liabilities (2,784) (5,376) (4,746)
(5,204) Advances for metal shipments - 1,244 - 1,906 Severance,
indemnities and commitments 1,333 496 498 698 Provision for future
income taxes (255) - (305) -
-------------------------------------------------------------------------
$ (2,138) $ (1,522) $ (363) $ (4,343)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 independently. 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 June 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and Mexico
Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external customers $ 4,405 $ 21,726 $ - $ (2,227) $
23,905 Investment and other income $ - $ (264) $ 19 $ 543 $ 298
Interest and financing expenses $ - $ - $ - $ - $ - Exploration $ -
$ - $ (677) $ (2,083) $ (2,760) Depreciation and amortization $
(691) $ (1,719) $ - $ (7) $ (2,415) Net income (loss) for the
period $ 808 $ 2,824 $ (704) $ (2,904) $ 24 Property, plant and
equipment Capital expenditures $ 878 $ 5,711 $ 7,441 $ - $ 14,090
Segment assets $ 57,773 $135,760 $102,015 $ 71,467 $367,015 For the
three months ended June 30, 2004
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and Mexico
Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external customers $ 2,404 $ 19,353 $ - $ (807) $
20,950 Investment and other income $ 2 $ 3,566 $ 210 $ 22 $ 3,800
Interest and financing expenses $ (117) $ (76) $ - $ (96) $ (289)
Exploration $ (7) $ - $ (1,130) $ - $ (1,137) Depreciation and
amortization $ (680) $ (1,317) $ - $ (11) $ (2,008) Net income
(loss) for the period $ (1,317) $ 7,861 $ 546 $ (5,803) $ 1,287
Property, plant and equipment Capital expenditures $ 1,017 $ 1,330
$ - $ 636 $ 2,983 Segment assets $ 50,516 $ 64,172 $ 89,484
$111,444 $315,616 For the six months ended June 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and Mexico
Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external customers $ 9,383 $ 45,834 $ - $ (3,458) $
51,759 Investment and other income $ 4 $ (214) $ (21) $ 785 $ 554
Interest and financing expenses $ - $ - $ - $ - $ - Exploration $
(2) $ - $ (2,130) $ (272) $ (2,402) Depreciation and amortization $
(1,950) $ (3,670) $ - $ (13) $ (5,633) Net income (loss) for the
period $ (149) $ 5,636 $ (2,147) $ (6,204) $ (2,864) Property,
plant and equipment Capital expenditures $ 2,564 $ 8,116 $ 13,386 $
27 $ 24,093 Segment assets $ 57,773 $135,760 $102,015 $ 71,467
$367,015 For the six months ended June 30, 2004
-------------------------------------------------------------------------
Mining & Development Investment -------------------- and Mexico
Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external customers $ 6,010 $ 30,091 $ - $ - $ 36,101
Investment and other income $ 1,814 $ 1,630 $ 226 $ 466 $ 4,136
Interest and financing expenses $ (229) $ (345) $ - $ (1,494) $
(2,068) Exploration $ (13) $ - $ (1,652) $ - $ (1,665) Depreciation
and amortization $ (1,620) $ (2,512) $ - $ (21) $ (4,153) Net
income (loss) for the period $ (1,393) $ 5,625 $ (1,448) $ (1,863)
$ 921 Property, plant and equipment Capital expenditures $ 2,279 $
3,620 $ 475 $ 188 $ 6,562 Segment assets $ 50,516 $ 64,172 $ 89,484
$111,444 $315,616 Second Quarter 2005 Management's Discussion and
Analysis July 27th, 2005 Management's discussion and analysis
("MD&A") focuses on significant factors that affected Pan
American Silver Corp.'s and its subsidiaries' ("Pan American" or
the "Company") performance and such factors that may affect its
future performance. The MD&A should be read in conjunction with
the unaudited consolidated financial statements for the three
months ended June 30, 2005 and 2004 and the related notes contained
herein. The significant accounting policies are outlined within
Note 2 to the Consolidated Financial Statements of the Company for
the year ended December 31, 2004. These accounting policies have
been applied consistently for the six months ended June 30, 2005.
Results of Operations For the three months ended June 30, 2005 the
Company's net income was $0.02 million (earnings per share of
$0.004) compared to net income of $1.3 million (loss of $0.12 per
share, after adjusting for the accretion to the 5.25 per cent
convertible unsecured senior subordinated debentures (the
"Debentures")) for the corresponding period in 2004. The Company
had a net loss of $ 2.9 million for the six-month period ended June
30, 2005 compared to net income of $0.9 million for the
corresponding period in 2004. During the second quarter of 2004,
the Company recorded a $3.58 million gain on the sale of surplus
land at the Quiruvilca mine, offset by a charge of $1.31 million
relating to the early conversion of the Debentures. Revenue from
metal sales for the second quarter of 2005 was $23.9 million, a 14
per cent increase from the corresponding period in 2004. The
Morococha mine, which was acquired with effect from July 1, 2004
generated revenue of $8.8 million in the second quarter of 2005 and
was the main reason for the increase in revenue from a year ago.
Revenue in the second quarter also benefited from higher realized
metal prices than the previous year, offset partially by lower
concentrate shipments from the Huaron and Quiruvilca operations as
compared to the year-earlier period. The growth in revenue was
further reduced by base metal hedging settlements in the second
quarter of 2005 totaling $1.4 million (2004 - loss of $0.8
million), and by the recently introduced Peruvian mining royalties
of $0.3 million (2004 - $nil). Operating costs for the three months
ended June 30, 2005 were $18.4 million, a $1.9 million increase
from the operating costs recorded in the same period of 2004. For
the six-month period ended June 30, 2005, operating costs increased
by $13.1 million over the operating costs for the comparable period
of 2004. The Morococha mine incurred operating costs of $5.1
million and $10.9 million in the three-months and six-months ended
June 30, 2005 respectively and was the main reason for the increase
in operating costs from a year ago. Peruvian workers participation
and a third party's one- third participation in the Pyrite
Stockpile operation, which totaled $0.4 million during the second
quarter (2004 - $nil) and $0.9 million in the first half of 2005
(2004 - $nil) also increased operating costs from last year. In
addition, the Company has experienced the industry-wide escalations
in major cost items, such as energy, freight and labour costs over
the last year. The Company generated mine operating earnings of
$3.1 million in the second quarter of 2005 (2004 - $2.4 million).
Mine operating earnings are equal to revenue less operating costs
and depreciation and amortization expenses. As reflected in the
following table, the second quarter of 2005 represents the ninth
consecutive quarter that the Company has generated mine operating
earnings. The table below sets out select quarterly results for the
past ten quarters, which are stated in thousands of US dollars,
except per share amounts. Mine operating Net income/ Net income
Quarter earnings/ (loss) for (loss) Year (unaudited) Revenue
(loss)(1) the period per share
-------------------------------------------------------------------------
2005 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 second quarter of 2005 increased to
$2.4 million from $2.0 million the year before. The principal
reason for this increase was the depreciation charges related to
the Morococha mine. General and administration ("G & A") costs
for the three-month period ended June 30, 2005, including
stock-based compensation, were $1.8 million, down from $1.9 million
recorded in the comparable quarter in 2004. Exploration expenses
for the quarter were $0.9 million, mostly expended on feasibility
activity at the Company's 50 per cent owned Manantial Espejo
property in Argentina. Exploration expenses for the comparable
quarter of 2004 were $1.1 million, which included due diligence
costs of $0.5 million spent on a business development opportunity.
Reclamation expense of $0.9 million in the second quarter of 2005
(2004 - $0.6 million) related to the accretion of the liability
that the Company previously 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 expenses have been reduced for
the three and six-month periods ended on June 30, 2005 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. Interest expenses of $0.1 million were incurred in
the second quarter of 2005 compared to $0.3 million during the same
period in 2004. Interest and other income for the second quarter of
$0.9 million primarily represented net income received from cash
balances the Company maintained during the quarter. In the second
quarter of 2004, the Company recorded $0.5 million of interest and
other income. The Company incurred an income tax expense of $0.7
million and increased operating costs relating to government
mandated worker's participation in annual mining profits of $0.3
million during the second quarter of 2005 (2004 - $nil). These
expenses were a result of the Company generating taxable earnings
at its Huaron and Morococha mines in Peru. Metal Production Pan
American produced 3,088,667 ounces of silver in the second quarter
of 2005, a 24 per cent increase from the corresponding period in
2004. In the first half of 2005, silver production has increased by
25 per cent as compared to 2004 production. This increase was
achieved through the acquisition of Morococha , which produced
691,612 ounces at a cash cost of $2.78 per payable ounce in the
second quarter, while production from the Company's other
operations in total remained similar to production levels achieved
a year ago. As shown in the following table, zinc and copper
production were also significantly higher than last year's
production due to the addition of Morococha. Lead production is
trailing last year's production levels by 9 per cent over the first
half of the year due to lower lead grades at both Huaron and
Quiruvilca. Three months ended Six months ended June 30 % June 30 %
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Silver metal - ounces 3,088,667 2,495,798 24 6,084,369 4,884,636 25
Zinc metal - tonnes 9,246 7,349 26 18,117 14,522 25 Lead metal -
tonnes 3,703 4,198 -12 7,378 8,089 -9 Copper metal - tonnes 1,051
656 60 1,978 1,270 56 The La Colorada mine production continued its
improving trend during the second quarter with record silver
production of 743,397 ounces at cash costs of $5.39 per payable
ounce. For the first half of 2005, La Colorada has achieved a
production increase of 57 per cent compared to the first half of
2004 by processing only 9 per cent more tonnes of ore, but at much
higher grades and recoveries. In the second quarter of 2005 the
Quiruvilca mine encountered lower grades than a year ago, resulting
in silver production of 580,999 ounces, which was 6 per cent lower
than the comparable period in 2004. However, silver production did
increase 3 per cent over production in the first quarter of 2005.
Cash costs per ounce of payable silver for the first half of 2005
at Quiruvilca were $4.34. Management expects that production levels
at Quiruvilca will steadily improve during the second half of the
year, with the installation in July of a conveyor system to
transport both ore and waste from the key 340 level of the mine.
The Huaron mine experienced grades and recoveries which did not
meet expectations during the second quarter of 2005. For the
three-months ended June 30, 2005, Huaron produced 922,643 ounces of
silver, which was 16 per cent behind silver production achieved in
the second quarter of 2004; however it was a 4 per cent improvement
over production in the first quarter of 2005. Cash costs per
payable ounce for the first half of 2005 were $4.99, a 27 per cent
increase over last year's costs per payable ounce. Contributing
approximately $0.79 to the increase in costs per ounce for the
second quarter of 2005 compared to the second quarter of 2004 was
lower base metal production, which resulted in a reduction in the
by-product credit. Zinc recoveries have declined due to a change in
the ore type in the areas currently being mined. An intensive
metallurgical test program has been initiated in an effort to
return zinc recoveries to historical levels. In addition,
management is confident that a combination of operating and capital
initiatives implemented in the first half of the year will allow
Huaron to steadily increase mining and processing rates over the
remainder of 2005. The Company's Pyrite Stockpile operation
produced 150,016 ounces of silver during the quarter at a cash cost
of $1.63 per payable ounce. Production from the Stockpiles for the
first six months of 2005 was 35 per cent lower than the production
in the comparable period of 2004. 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. became entitled
to a one-third participation in the Stockpile operation in December
2004, which is treated as a cost to the operation. At the San
Vicente property in Bolivia, mining of ore recommenced in early
July 2005 following six months of negotiations between the Company
and Comibol, the Bolivian state owned mining company. As a
consequence of these negotiations, the Company plans to stockpile
ore while refurbishing the milling facility at the San Vicente mine
over the course of the next six months, instead of processing ore
on a toll basis at a nearby facility. The Company had expected to
produce approximately 735,000 ounces from San Vicente in 2005 at a
total cost of under $2.50 per ounce; however the protracted
negotiations and decision to change milling arrangements will make
it impossible for the Company to meet this production target.
Instead, the Company now expects to be producing from its own mill
at a rate of approximately 400 tonnes per day early in 2006,
producing approximately 750,000 ounces per year. With no production
expected from San Vicente in 2005 and reduced production rates from
the Stockpile operation, the Company now expects consolidated
production for 2005 to be approximately 12.5 million ounces, down
from 13.5 million ounces originally forecasted. The Company expects
consolidated cash costs per payable ounce to decrease slightly in
the second half of 2005 and is estimating consolidated cash cost
per payable ounce of below $4.50 for 2005. The lack of production
from the low-cost San Vicente mine and reduced production from the
low-cost Pyrite Stockpiles are the main reasons for the increase in
the estimated consolidated costs for 2005 from the $4.16 per
payable ounce that was forecast by management at the start of the
year. Cash and Total Production Costs per Ounce for Payable Silver
Consolidated cash costs per ounce for the three-month period ended
June 30, 2005 were $4.48 per payable ounce of silver compared to
$4.09 per payable ounce for the corresponding period of 2004. For
the first half of 2005, consolidated cash costs per ounce were
$4.50 per payable ounce compared to $3.94 per payable ounce in the
first half of 2004. Industry-wide cost escalations in energy and
consumables, Peruvian workers participation and a third party's
one-third participation in the Pyrite Stockpile operation, which
totaled $0.4 million during the second quarter (2004 - $nil) and
$0.9 million in the first half of 2005 (2004 - $nil) were the
primary reasons for the increase in cash costs from last year. In
addition, the Company has experienced increases in labour costs as
a direct effect of stronger Peruvian and Mexican local currencies
relative to the US dollar over the last year. The Company changed
its method for calculating cash and total costs per ounce of
silver, with effect from the first quarter of 2005. 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 based on the silver ounces for which the Company is
paid, therefore eliminating the need to account for the cost of
metals lost in smelting and refining. The second quarter and the
first six 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 six-month periods ended June 30,
2005. Three months ended Six months ended June 30 June 30 2005 2004
2005 2004 -------------------------------------------- Operating
Costs $ 18,417 $ 16,531 $ 40,797 $ 27,699 Add/(Subtract) Smelting,
refining, and transportation charges 9,061 5,603 17,734 11,159
By-product credits (18,219) (11,277) (35,616) (22,678) Mining
royalties 62 32 255 32 Change in inventories 3,352 (2,035) 1,731
294 Other 271 (100) 657 198 Minority interest adjustment (262) -
(604) -
-------------------------------------------------------------------------
Cash Operating Costs A $ 12,682 $ 8,754 $ 24,954 $ 16,704
Add/(Subtract) Depreciation and amortization 2,415 2,008 5,633
4,153 Asset retirement and reclamation 412 302 939 603 Change in
inventories 1,061 - 1,061 - Other 95 (53) 80 (48) Minority interest
adjustment (159) - (321) -
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Production Costs B $ 16,504 $ 11,010 $ 32,344 $ 21,412 Payable
Ounces of Silver C 2,831,511 2,142,515 5,549,584 4,243,810
-------------------------------------------- Total Cash Cost per
Ounce (A(x)1000)/B $ 4.48 $ 4.09 $ 4.50 $ 3.94
-------------------------------------------- Total Production Costs
per Ounce (B(x)1000)/C $ 5.83 $ 5.14 $ 5.83 $ 5.05
-------------------------------------------- Liquidity and Capital
Resources At June 30, 2005, cash and cash equivalents plus
short-term investments were $78.9 million, a $12.9 million decrease
from March 31, 2005. Investing activities for the three months
ended June 30, 2004 generated $4.2 million and consisted primarily
of the maturity of short-term investments of $18.5 million, which
was partially used to fund expenditures on mineral property, plant
and equipment of $14.1 million, mostly at Alamo Dorado. Cash flow
provided by operating activities was $1.3 million for the quarter
ended June 30, 2005, after changes in non-cash operating working
capital items utilized $2.1 million. Financing activities in the
second quarter offset each other with the exercise of stock options
yielding $0.3 million and the repayment of short-term loans
utilizing $0.3 million. Working capital at June 30, 2005 was $96.6
million, a reduction of $9.8 million from March 31, 2005. The
reduction is reflected largely in a $12.9 million decrease in cash
and cash equivalents plus short-term investments, a $3.6 million
decrease in accounts receivable partially offset by a $1.6 million
decrease in current liabilities and increases in inventories and
prepaid expenses of $4.2 million and $1.0 million respectively.
Capital resources at June 30, 2005 amounted to shareholders' equity
of $279.4 million. At June 30, 2005, the Company had 66,987,124
common shares issued and outstanding. During the second quarter,
the Company agreed to issue 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. Pan American was required to make payments to IFC by May 15th
of each year if the average price of silver for the preceding
calendar year exceeded $4.75 per ounce. Such payment was based on
the positive difference between the average price per ounce of
silver for a year and $4.75. The Company negotiated the settlement
of this obligation at a fair value of $2.1 million, to be settled
by the issue of warrants after the quarter end. At 30 June, 2005
the fair value was recorded as a current liability. Each warrant
issued entitles the IFC to purchase one common share of Pan
American at a price of US$ 16.91 over a five-year period. Based on
the Company's financial position at June 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
sustaining 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 June
30, 2005 and 2004 and the related notes, 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 under forward sales
contracts, all of which are designated hedges for accounting
purposes. At June 30, 2005, the Company had sold forward 16,850
tonnes of zinc at a weighted average price of $1,144 per tonne
($0.519 per pound). These forward sales commitments represent
approximately 45 per cent of the Company's forecast zinc production
until March 2006. At June 30, 2005, the cash offered prices for
zinc was $1,223 per tonne. The negative mark to market value at
June 30, 2005 was $1.4 million. At the end of the second quarter of
2005, the Company had fixed the price of 650,000 ounces of silver
produced during the second quarter and contained in concentrates,
which are due to be priced in July and August of 2005 under the
Company's concentrate contracts. The price fixed for these ounces
averaged $7.19 per ounce while the spot price of silver was $7.10
per ounce on June 30, 2005. In anticipation of capital expenditures
in Mexican pesos ("MXN") relating to the construction of Alamo
Dorado, the Company has purchased MXN 237 million settling between
September 2005 and May 2006 to match anticipated spending at an
average MXN/US$ exchange rate of 11.28. These forward contracts
have been designated as hedges for accounting purposes. At June 30,
2005, the spot exchange rate for MXN/US$ was 10.73 and the positive
mark to market value of the Company's position was $0.5 million.
Exploration and Development Activities Following the positive
construction decision in late February 2005, the Company has begun
development at its Alamo Dorado project in Mexico and is confident
that production will commence on schedule in late 2006. All
critical lead time equipment has been secured and key members of
the operations management team have been hired. The final water
permit has been received for the project and an engineering,
procurement and construction management ("EPCM") agreement was
signed with engineering firm M3. M3's engineering and design work,
which began in March was approximately 40% complete at June 30,
2005. Construction activities have commenced at the site, including
clearing work, the erection of a truck maintenance and warehouse
facility, the pioneering of the main mine haulage road and the
installation of temporary power lines. The Company spent $5.6
million on equipment and construction related activities for the
quarter ended June 30, 2005. Over the remainder of the year, the
Company anticipates spending an additional $33.5 million on the
construction of Alamo Dorado, which will be funded out of the
Company's treasury. The total capital costs for the project are
still expected to be approximately $77 million, including working
capital and a contingency allowance. The Company progressed the
feasibility study for the 50 per cent owned Manantial Espejo
project in Argentina during the quarter. Pan American's share of
the feasibility costs in the first and second quarters of 2005 were
$1.2 million and $0.8 million respectively, which was expensed as
incurred. Over the course of the next few months, the Company will
develop and submit an environmental impact study to the Argentinean
authorities along with proposals for the development of local
infrastructure, supply of energy and tax incentive programs. The
results of this work, together with ongoing metallurgical and
geological interpretation will culminate in a completed feasibility
study for the project by late 2005 at which time a construction
decision will be taken. Pan American's share of costs to complete
the feasibility study is expected to be approximately an additional
$0.4 million. DATASOURCE: Pan American Silver Corp. CONTACT: Brenda
Radies, Vice-President Corporate Relations, (604) 806-3158,
http://www.panamericansilver.com/
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