Record profits, cash flow and production in third quarter mark Pan
American Silver's tenth anniversary (all amounts in US dollars
unless otherwise stated) VANCOUVER, Nov. 1 /PRNewswire-FirstCall/
-- THIRD QUARTER HIGHLIGHTS ------------------------ - Record net
earnings of $3.3 million for the quarter ($0.05/share) versus a net
loss of $1.2 million ($0.02) in the third quarter of 2003. Net
earnings year-to-date of $4.2 million. - Record consolidated
revenue of $27.4 million - 131% over the third quarter of 2003. -
Record cash flow from operations, before changes to non-cash
working capital, of $7.0 million, versus $0.3 million in 2003 - the
eighth consecutive quarter of improved operating profits. - Record
quarterly silver production of 3.2 million ounces, an increase of
45% over the same period of 2003. - Completion of acquisition of
84% of the Morococha silver mine in Peru. FINANCIAL RESULTS
----------------- Pan American Silver Corp. (NASDAQ: PAAS; TSX:
PAA) reported consolidated revenue for the second quarter of $27.4
million, 131% greater than revenue in the third quarter of 2003 due
to increased silver production, higher realized metal prices and
higher sales from concentrate inventory. Net earnings for the
quarter were $3.3 million compared to a net loss of $1.2 million in
2003. Cash flow from operating activities before changes to
non-cash working capital increased to $7.0 million for the quarter.
Consolidated silver production for the third quarter was 3,173,000
ounces, a 45% increase over the third quarter of 2003 and the
greatest quarterly production in the Company's history.
Steady-state production from Quiruvilca, Huaron and the pyrite
stockpiles was complemented by the addition of production from the
newly acquired Morococha mine as of July 1, 2004. Zinc production
of 10,367 tonnes was 37% higher than in the third quarter of 2003
while lead production of 4,876 tonnes was 12.5% higher also due to
the addition of Morococha production. Consolidated cash costs in
the third quarter rose from $3.87/oz to $4.07/oz and total costs
rose from $4.39/oz to $5.09/oz due to an expected temporary
increase in production costs at the La Colorada mine. Positive
results from the new mine plan and more selective mining methods
that have been implemented will begin to be realized in the fourth
quarter. Capital spending in the third quarter declined slightly to
$3.1 million, excluding $36.2 million spent to acquire the
Morococha mine. Exploration spending doubled to $1.2 million in the
third quarter, primarily reflecting increased activity at the
Manantial Espejo and San Vicente development projects. For the nine
months ended September 30, 2004, consolidated revenue totaled $63.5
million versus $32.3 million in the year-earlier period due to
higher production and higher realized metal prices. Net earnings
were $4.2 million versus a net loss of $4.0 million in the first
nine months of 2003. Consolidated silver production in the first
nine months of 2004 was 8,058,443 ounces, a 24% increase over the
same period in 2003 - on track for 11.5 million ounces in 2004.
Zinc production of 24,890 tonnes and copper production of 2,376
tonnes were unchanged from 2003 levels. Lead production of 12,973
tonnes was 12.5% lower than in 2003 due to lower lead production at
Huaron. Cash production costs for the first nine months of 2004
declined 3% to $4.01/oz, while total production costs rose 8% to
$5.00 due to higher depreciation charges. Working capital at
September 30, 2004, including cash and short-term investments of
$80.8 million, improved to $97.1 million, an increase of $15.2
million from December 31, 2003. The change in working capital stems
from the receipt of $54.8 million in net proceeds from a share
issuance in February, offset by the purchase of the Morococha mine
completed during the quarter. Capital spending in the first nine
months of 2004 was $9.7 million excluding the purchase of
Morococha, down from $12.5 million a year earlier. Exploration
spending increased from $1.6 million in the first three quarters of
2003 to $2.9 million in 2004, reflecting increased project
development activity and drill programs to expand reserves at
Huaron, San Vicente and now Morococha. Ross Beaty, Chairman of Pan
American said, "This is the eighth consecutive quarter that Pan
American has improved its operating profit - and we set new records
for earnings, cash flow and production. Our operations are strong,
our development projects are progressing well and we have one of
the best balance sheets in the industry with virtually no debt. We
completed the acquisition of the low-cost Morococha silver mine
last quarter and we are fully funded to start building another new
mine within the next 12 months. Pan American Silver is in great
shape today and we look forward to an even better future."
OPERATIONS AND DEVELOPMENT HIGHLIGHTS
------------------------------------- PERU The Quiruvilca mine
continued its turn-around in the third quarter with production of
654,182 ounces of silver, up 2% over 2003 levels. Cash and total
production costs dropped markedly, from $4.69/oz and $4.85/oz
respectively to $3.34/oz in the current quarter. For the first nine
months of the year the mine produced 1,892,383 ounces of silver at
a cash cost of $3.27/oz, versus similar production at a cash cost
of $5.31/oz in 2003. A new life-of-mine plan is now being developed
at Quiruvilca based on the discovery of a major new vein structure
announced in the second quarter. Silver production at the Huaron
mine remained steady in the third quarter at 1,064,476 ounces at a
cash cost of $3.87/oz. Total production costs increased 16% over
the prior-year period to $5.21/oz reflecting higher depreciation
costs. Year-to-date the mine has produced 3,129,071 ounces at a
cash cost of $3.93/oz, in line with 2003. The Company concluded the
acquisition of 84% of the Morococha Mine during the quarter.
Morococha produced 694,564 ounces of silver to Pan American's
account in the third quarter at a cash cost of $3.52/oz and a total
cost of $4.85/oz. Over the long term the mine is expected to
produce an average of 3.5 million ounces of silver annually (100%)
at cash costs of less than $3.00/oz. The Silver Stockpile Operation
continued to generate excellent cash flow, producing 231,115 ounces
of silver at a cash cost of $2.87/oz during the most recent
quarter. Year to date the Company has produced 779,426 ounces from
the silver stockpiles at a cash cost of $2.83/oz. The increased
cash costs in 2004 reflect a sliding-scale refining charge, which
increases as the silver price rises. MEXICO The La Colorada mine in
Mexico increased its third quarter silver production to 441,959
ounces, up from 244,971 ounces in 2003. During the quarter a new
mine plan was implemented to reduce dilution, to increase silver
grades and to blend ore from clay-rich areas that has been
difficult to process. This required more non-production underground
development, resulting in high cash costs for the quarter, as
planned. Ore grades are now 19% higher and new mining areas have
been opened up with lower clay-content ore, increasing recoveries.
Cash costs are now expected to decline and silver production to
increase steadily. Silver production and cash costs are expected to
improve further in 2005 once the sulphide zone returns to
production post dewatering. Staffing has begun on the Alamo Dorado
project in anticipation of a positive feasibility study, now due in
February 2005. A power supply has been secured and the design
process for the power line's right-of-way has been initiated.
Grindability tests have been completed and a pilot plant is now
operating. Construction is expected to begin in 2005. ARGENTINA The
50% owned Manantial Espejo silver-gold joint venture also
progressed significantly in the third quarter. The feasibility
study currently underway now envisions a combined open-pit,
underground operation to exploit the Maria and Karina Union
deposits. Ramped pit designs along with annual production schedules
and waste dump designs have been completed. As drilling continues
to intersect new vein structures and to expand the two main systems
on the property, another 5,000 m of infill and extension drilling
has been initiated. Drilling has also begun to secure water for the
mine and a number of baseline studies have been completed. Given
the ongoing drilling programs, the joint venture will provide a
proven and probable reserve with a mine plan upon completion of the
feasibility study early in 2005. BOLIVIA At the San Vicente
property, small-scale mining produced 86,704 ounces of silver in
the third quarter of the year to Pan American's account, while the
Company continues to move forward with a feasibility study testing
the viability of increasing production in 2005. EMUSA, a Bolivian
mining company, continues to carry out small-scale contract mining
under a site services agreement. SILVER MARKETS -------------- The
silver price opened the quarter at $5.91/oz, breaking through the
$6 level almost immediately and closing at $6.66/oz on September
30, 2004 for an average price of $6.47/oz, approximately the same
as the average for the year. The silver price remains very
volatile, but has continued to rebound from its second-quarter lows
and was up 23% over year-end 2003 as of late October. According to
Ross Beaty: "Primary factors influencing the silver price today
continue to be the US dollar, global industrial production -
particularly in the electronics/electrical sector - and investment
demand. The underlying demand/supply fundamentals for silver are
sound. It is a great time to be one of the world's major silver
producers." Pan American will host a conference call to discuss the
results on Monday, November 1, 2004 at 11:00 a.m. Pacific time
(2:00 p.m. Eastern time). North American participants please call
toll-free 1-877-825-5811. International participants please dial
1-973-582-2767. The conference may also be accessed live from the
investor relations section of the Pan American website at
http://www.panamericansilver.com/. To listen to a playback for one
week after the call, dial 1-877-519-4471 and enter the pass code
5270686. 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, 2004 2003 2004 2003 Consolidated
Financial Highlights (in thousands of US dollars) Net income (loss)
for the period $ 3,289 $ (1,225) $ 4,210 $ (3,972) Earnings (loss)
per share 0.05 (0.02) (0.11) (0.08) Cash flow from operations
before working capital adjustments 6,989 302 12,287 344 Capital
spending(xx) 39,327 3,501 45,889 12,513 Exploration expense 1,213
600 2,878 1,588 Cash and short-term investments 80,839 92,852
80,839 92,852 Working capital $ 97,076 $ 87,054 $ 97,076 $ 87,054
(xx) Includes the acquisition of the Morococha mine for $36,214
Consolidated Metal Production Tonnes milled 420,912 282,650
1,023,475 871,689 Silver metal - ounces 3,173,000 2,187,508
8,058,443 6,518,167 Zinc metal - tonnes 10,367 7,578 24,890 24,759
Lead metal - tonnes 4,876 4,332 12,973 14,836 Copper metal - tonnes
1,106 841 2,376 2,625 Consolidated Cost per Ounce of Silver (net of
by-product credits) Total cash cost per ounce $ 4.07 $ 3.87 $ 4.01
$ 4.12 Total production cost per ounce $ 5.09 $ 4.39 $ 5.00 $ 4.63
(In thousands of US dollars) Direct operating costs plus value of
metals lost in smelting and refining $ 20,885 $ 11,467 $ 51,988 $
35,612 By-product credits (8,312) (3,950) (20,502) (11,508)
-------------------------------------------------------------------------
Cash operating costs 12,573 7,517 31,486 24,104 Depreciation,
amortization & reclamation 3,127 1,013 7,782 2,987
-------------------------------------------------------------------------
Production costs $ 15,700 $ 8,530 $ 39,268 $ 27,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces used in cost per ounce calculations 3,086,296 1,942,537
7,847,992 5,846,927 Average Metal Prices Silver - London Fixing $
6.46 $ 4.99 $ 6.47 $ 4.75 Zinc - LME Cash Settlement per pound $
0.44 $ 0.37 $ 0.47 $ 0.36 Lead - LME Cash Settlement per pound $
0.42 $ 0.23 $ 0.39 $ 0.22 Copper - LME Cash Settlement per pound $
1.29 $ 0.79 $ 1.27 $ 0.77 Mine Operations Highlights Three months
ended Nine months ended September 30, September 30, Huaron Mine
2004 2003 2004 2003 Tonnes milled 166,965 148,630 481,445 461,570
Average silver grade - grams per tonne 228 246 230 256 Average zinc
grade - percent 3.13% 3.75% 3.22% 3.83% Silver - ounces 1,064,476
1,047,616 3,129,071 3,398,329 Zinc - tonnes 3,856 4,598 11,877
14,881 Lead - tonnes 2,825 3,247 8,677 11,277 Copper - tonnes 491
362 1,250 1,050 Net smelter return per tonne $ 57.32 $ 46.45 $
59.14 $ 44.96 Cost per tonne 41.95 41.70 43.92 41.09
-------------------------------------------------------------------------
Margin (loss) per tonne $ 15.37 $ 4.75 $ 15.22 $ 3.87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per ounce $ 3.87 $ 3.78 $ 3.93 $ 3.81 Total
production cost per ounce $ 5.21 $ 4.49 $ 5.25 $ 4.49 (In thousands
of US dollars) Direct operating costs & value of metals lost in
smelting and refining $ 7,666 $ 6,516 $ 22,990 $ 20,059 By-product
credits (3,543) (2,560) (10,694) (7,118)
-------------------------------------------------------------------------
Cash operating costs 4,123 3,956 12,295 12,941 Depreciation,
amortization and reclamation 1,423 748 4,138 2,322
-------------------------------------------------------------------------
Production costs $ 5,546 $ 4,704 $ 16,433 $ 15,263
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per ounce calculations 1,064,476 1,047,616
3,129,071 3,398,329 Quiruvilca Mine Tonnes milled 98,625 106,930
284,590 352,199 Average silver grade - grams per tonne 235 212 236
191 Average zinc grade - percent 3.48% 3.17% 3.66% 3.17% Silver -
ounces 654,182 641,747 1,892,383 1,875,775 Zinc - tonnes 2,920
2,845 8,994 9,525 Lead - tonnes 890 980 2,998 3,266 Copper - tonnes
310 479 800 1,575 Net smelter return per tonne $ 61.65 $ 38.44 $
62.84 $ 34.02 Cost per tonne 42.45 38.89 42.97 38.92
-------------------------------------------------------------------------
Margin (loss) per tonne $ 19.20 $ (0.45) $ 19.87 $ (4.90)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per ounce $ 3.34 $ 4.69 $ 3.27 $ 5.31 Total
production cost per ounce $ 3.34 $ 4.85 $ 3.25 $ 5.46 (In thousands
of US dollars) Direct operating costs & value of metals lost in
smelting and refining $ 4,566 $ 4,402 $ 13,305 $ 14,350 By-product
credits (2,383) (1,390) (7,111) (4,391)
-------------------------------------------------------------------------
Cash operating costs 2,182 3,012 6,194 9,960 Capital spending
expensed and carrying value adjustment - 104 (48) 288
-------------------------------------------------------------------------
Production costs $ 2,182 $ 3,115 $ 6,146 $ 10,247
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per ounce calculations 654,182 641,747 1,892,383
1,875,775 Three months ended Nine months ended September 30,
September 30, Morococha Mine(x) 2004 2003 2004 2003 Tonnes milled
112,580 - 112,580 - Average silver grade - grams per tonne 227 -
227 - Average zinc grade - percent 3.69% - 3.69% - Silver - ounces
694,564 - 694,564 - Zinc - tonnes 3,079 - 3,079 - Lead - tonnes
1,162 - 1,162 - Copper - tonnes 290 - 290 - Net smelter return per
tonne $ 54.53 $ - $ 54.53 $ - Cost per tonne 38.38 - 38.38 -
-------------------------------------------------------------------------
Margin (loss) per tonne $ 16.14 $ - $ 16.14 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per ounce $ 3.52 $ - $ 3.52 $ - Total production
cost per ounce $ 4.85 $ - $ 4.85 $ - In thousands of US dollars
Direct operating costs & value of metals lost in smelting and
refining $ 4,690 $ - $ 4,690 $ - By-product credits (2,246) -
(2,246) -
-------------------------------------------------------------------------
Cash operating costs 2,444 - 2,444 - Capital spending expensed and
carrying value adjustment 927 - 927 -
-------------------------------------------------------------------------
Production costs $ 3,371 $ - $ 3,371 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per ounce calculations 694,564 - 694,564 - (x)
Production and cost figures are for Pan American's share only. Pan
American's ownership increased from 81% to 84% during the quarter.
La Colorada Mine Tonnes milled 34,822 27,090 126,211 57,920 Average
silver grade - grams per tonne 510 430 457 467 Silver - ounces
441,959 244,971 1,352,549 671,240 Zinc - tonnes - 135 122 353 Lead
- tonnes - 105 136 293 Total cash cost per ounce $ 7.15 $ - $ 6.17
$ - Total production cost per ounce $ 8.57 $ - $ 7.86 $ - In
thousands of US dollars Direct operating costs & value of
metals lost in smelting and refining $ 3,299 $ - $ 8,801 $ -
By-product credits (140) (450)
-------------------------------------------------------------------------
Cash operating costs 3,159 - 8,351 - Depreciation, amortization and
reclamation 629 - 2,274 -
-------------------------------------------------------------------------
Production costs $ 3,789 $ - $ 10,625 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per ounce calculations 441,959 - 1,352,549 - Three
months ended Nine months ended September 30, September 30, Pyrite
Stockpile Sales 2004 2003 2004 2003 Tonnes sold 19,214 20,197
64,050 47,041 Average silver grade - grams per tonne 374 391 378
379 Silver ounces 231,115 253,174 779,426 572,823 Net smelter
return per tonne $ 44.23 $ 35.55 $ 44.76 $ 33.08 Cost per tonne
1.03 0.56 0.64 0.60
-------------------------------------------------------------------------
Margin (loss) per tonne $ 43.20 $ 34.99 $ 44.12 $ 32.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per ounce $ 2.87 $ 2.17 $ 2.83 $ 2.10 Total
production cost per ounce $ 3.51 $ 2.81 $ 3.46 $ 2.76 In thousands
of US dollars Value of metals lost in smelting and refining $ 664 $
549 $ 2,202 $ 1,203 By-product credits - - - -
-------------------------------------------------------------------------
Cash operating costs 664 549 2,202 1,203 Depreciation, amortization
and reclamation 147 162 491 377
-------------------------------------------------------------------------
Production costs $ 811 $ 711 $ 2,693 $ 1,580
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per ounce calculations 231,115 253,174 779,426
572,823 San Vicente 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 Vicente's production in its cost per ounce
calculations. The production statistics represent Pan American's 50
% interest in the mine's silver production. PAN AMERICAN SILVER
CORP. Consolidated Balance Sheets (in thousands of US dollars)
September 30 December 31 2004 2003
-------------------------------------------------------------------------
(Unaudited) ASSETS Current Cash and cash equivalents $ 17,862 $
14,191 Short-term investments 62,977 74,938 Accounts receivable
16,948 7,545 Inventories 8,809 6,612 Prepaid expenses 3,599 1,289
-------------------------------------------------------------------------
Total Current Assets 110,195 104,575 Mineral property, plant and
equipment - notes 3 and 4 102,315 83,574 Investment and
non-producing properties - note 5 121,323 83,873 Direct smelting
ore 3,289 3,901 Other assets 4,826 3,960
-------------------------------------------------------------------------
Total Assets $ 341,948 $ 279,883
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES Current Accounts payable and accrued liabilities $
11,435 $ 10,525 Advances for metal shipments 1,244 4,536 Current
portion of bank loans and capital lease 14 2,639 Current portion of
other non-current liabilities 426 4,948
-------------------------------------------------------------------------
Total Current Liabilities 13,119 22,648 Deferred revenue 754 865
Bank loans and capital lease 332 10,803 Liability component of
convertible debentures 167 19,116 Provision for asset retirement
obligation and reclamation 29,796 21,192 Provision for future
income tax 30,073 19,035 Non-controlling interest 1,734 - Severance
indemnities and commitments 2,640 2,126
-------------------------------------------------------------------------
Total Liabilities 78,615 95,785
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY Share capital Authorized: 100,000,000 common
shares with no par value Issued: December 31, 2003 - 53,009,851
common shares September 30, 2004 - 66,752,572 common shares 380,404
225,154 Equity component of convertible debentures 701 66,735
Additional paid in capital 9,874 12,752 Deficit (127,646) (120,543)
-------------------------------------------------------------------------
Total Shareholders' Equity 263,333 184,098
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 341,948 $ 279,883
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements PAN
AMERICAN SILVER CORP. Consolidated Statements of Operations
(Unaudited - in thousands of US dollars, except per share amounts)
Three months ended Nine months ended September 30, September 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
(Note 2) (Note 2) Revenue $ 27,409 $ 11,890 $ 63,510 $ 32,265
Expenses Operating 18,526 10,200 46,225 28,962 General and
administration 934 565 2,939 1,548 Depreciation and amortization
3,033 432 7,186 1,365 Stock-based compensation 518 835 1,642 2,036
Reclamation 302 75 905 231 Exploration and development 1,213 600
2,878 1,588 Interest 66 678 823 1,015
-------------------------------------------------------------------------
24,592 13,385 62,598 36,745
-------------------------------------------------------------------------
Income (loss) from operations 2,817 (1,495) 912 (4,480) Gain on
sale of concessions - - 3,583 - Debt settlement expenses (53) -
(1,364) - Non-controlling interest (320) - (320) - Interest and
other income (note 7) 845 270 1,399 508
-------------------------------------------------------------------------
Net income (loss) for the period $ 3,289 $ (1,225) $ 4,210 $
(3,972) Adjustments: Charges relating to conversion of convertible
debentures - - (8,464) - Convertible debentures issue costs -
(3,000) - (3,000) Accretion of convertible debentures - (975)
(2,838) (975)
-------------------------------------------------------------------------
Adjusted net income (loss) attributable to common shareholders $
3,289 $ (5,200) $ (7,092) $ (7,947)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share - Basic and Fully Diluted $ 0.05 $ (0.10)
$ (0.11) $ (0.16) Weighted average number of shares outstanding -
Basic 66,660 52,307 61,947 51,030 Weighted average number of shares
outstanding - Fully Diluted 72,213 67,990 67,499 66,714 See
accompanying notes to consolidated financial statements PAN
AMERICAN SILVER CORP. Consolidated Statements of Cash Flows
(Unaudited - in thousands of US dollars) Three months ended Nine
months ended September 30, September 30, 2004 2003 2004 2003
-------------------------------------------------------------------------
(Note 2) (Note 2) Operating activities Net income (loss) for the
period $ 3,289 $ (1,225) $ 4,210 $ (3,972) Reclamation expenditures
(327) - (919) - Gain on sale of assets - (165) (3,583) (165) Items
not involving cash Depreciation and amortization 3,033 432 7,186
1,365 Minority interest 320 - 320 - Interest accretion on
convertible debentures - - 366 - Stock-based compensation 518 835
1,642 2,036 Debt settlement expenses - - 1,208 - Compensation
expense - - 245 - Asset retirement and reclamation accretion 302 75
905 231 Operating cost provisions (146) 350 707 849 Changes in
non-cash working capital items (note 8) (6,576) (804) (11,772)
(3,069)
-------------------------------------------------------------------------
413 (502) 515 (2,725)
-------------------------------------------------------------------------
Financing activities Shares issued for cash 812 2,940 61,817 5,638
Shares issue costs - - (180) - Convertible debentures - 86,250 -
86,250 Convertible debentures issue costs - (2,993) - (3,000)
Convertible debentures payments (22) - (13,542) - Capital lease
repayment - (75) (75) (150) Proceeds from bank loans - - - 8,000
Repayment of bank loans - (406) (13,021) (1,344)
-------------------------------------------------------------------------
790 85,716 34,999 95,394
-------------------------------------------------------------------------
Investing activities Mineral property, plant and equipment
expenditures (2,679) (3,006) (8,687) (11,644) Investment and
non-producing property expenditures (434) (492) (988) (869)
Acquisition of net assets of subsidiary (note 3) (36,214) -
(36,214) - Acquisition of cash of subsidiary - - - 2,393 Proceeds
from sale of assets - 165 3,583 165 Proceeds from sale of
marketable securities 2,007 - 12,463 - Other - (180) (2,000) (60)
-------------------------------------------------------------------------
(37,320) (3,513) (31,843) (10,015)
-------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents during the period
(36,117) 81,701 3,671 82,654 Cash and cash equivalents, beginning
of period 53,979 11,138 14,191 10,185
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 17,862 $ 92,839 $ 17,862
$ 92,839
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of non-cash financing and investing
activities Shares issued for compensation $ - $ - $ 245 $ - Shares
issued for acquisition of subsidiary - - - 64,228 Shares issued for
conversion of convertible debentures - - 88,848 - See accompanying
notes to consolidated financial statements PAN AMERICAN SILVER
CORP. Consolidated Statements of Shareholders' Equity For the nine
months ended September 30, 2004 (Unaudited - in thousands of US
dollars, except for shares) Common shares ---------------------
Convertible Shares Amount Debentures
-------------------------------------------------------------------------
Balance, December 31, 2002 43,883,454 $ 161,108 $ - Stock-based
compensation - - - Exercise of stock options 1,385,502 9,312 -
Exercise of share purchase warrants 100,943 509 - Issued on
acquisition of Corner Bay Silver Inc. 7,636,659 54,203 - Fair value
of stock options granted - - - Fair value of share purchase
warrants - - - Issue of convertible debentures - - 63,201 Accretion
of convertible debentures - - 3,534 Convertible debentures issue
costs - - - Issued as compensation 3,293 22 - Net loss for the year
- - -
-------------------------------------------------------------------------
Balance, December 31, 2003 53,009,851 225,154 66,735 Stock-based
compensation - - - Exercise of stock options 717,695 9,313 -
Exercise of share purchase warrants 540,026 2,024 - Shares issued
for cash 3,333,333 55,000 - Shares issue costs - (180) - Shares
issued on conversion of convertible debentures 9,135,043 88,848
(68,883) Issued as compensation 16,624 245 - Accretion of
convertible debentures - - 2,849 Net income for the period - - -
-------------------------------------------------------------------------
Balance, September 30, 2004 66,752,572 $ 380,404 $ 701
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional Paid in Capital Deficit Total
-------------------------------------------------------------------------
Balance, December 31, 2002 $ 1,327 $(106,943) $ 55,492 Stock-based
compensation 2,871 - 2,871 Exercise of stock options (1,471) -
7,841 Exercise of share purchase warrants - - 509 Issued on
acquisition of Corner Bay Silver Inc. - - 54,203 Fair value of
stock options granted 1,136 - 1,136 Fair value of share purchase
warrants 8,889 - 8,889 Issue of convertible debentures - - 63,201
Accretion of convertible debentures - (3,534) - Convertible
debentures issue costs - (3,272) (3,272) Issued as compensation - -
22 Net loss for the year - (6,794) (6,794)
-------------------------------------------------------------------------
Balance, December 31, 2003 12,752 (120,543) 184,098 Stock-based
compensation 1,642 - 1,642 Exercise of stock options (4,415) -
4,898 Exercise of share purchase warrants (105) - 1,919 Shares
issued for cash - - 55,000 Shares issue costs - - (180) Shares
issued on conversion of convertible debentures - (8,464) 11,501
Issued as compensation - - 245 Accretion of convertible debentures
- (2,849) - Net income for the period - 4,210 4,210
-------------------------------------------------------------------------
Balance, September 30, 2004 $ 9,874 $(127,646) $ 263,333
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements Pan
American Silver Corp. Notes to consolidated financial statements As
at September 30, 2004 and 2003 and for the three and nine month
periods then ended (Tabular amounts are in thousands of US dollars,
except for shares, price per share and per share amounts
(Unaudited)
-------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND 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. The
Company completed the acquisition of the Morococha mining assets in
central Peru (Note 3) with the effective date July 1, 2004. 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These unaudited interim
consolidated financial statements are expressed in United States
dollars and are prepared in accordance with accounting principles
generally accepted in Canada ("Canadian GAAP"), which are more
fully described in the annual audited consolidated financial
statements for the year ended December 31, 2003 which is included
in the Company's 2003 Annual Report. These statements do not
include all of the disclosures required by Canadian GAAP for annual
financial statements. Certain comparative figures have been
reclassified to conform to the current presentation. In
management's opinion, all adjustments necessary for fair
presentation have been included in these financial statements. a)
Stock-based compensation During the fourth quarter 2003 the Company
changed its accounting policy, retroactive to January 1, 2002, in
accordance with recommendation of CICA 3870, "Stock-based
Compensation and Other Stock-based Payments". Under the amended
standards of this Section, the fair value of all stock-based awards
granted are estimated using the Black-Scholes model and are
recorded in operations over their vesting periods. Previously, the
Company used the intrinsic value method for valuing stock-based
compensation awards granted to employees, directors and officers
where compensation expense was recognized for the excess, if any,
of the quoted market price of the Company's common shares over the
common share exercise price on the day that options were granted.
In addition, the Company provided note disclosure of pro forma net
loss and pro forma loss per share as if the fair value based method
had been used to account for share purchase options granted to
employees, directors and officers after January 1, 2002. Using the
fair value method for stock-based compensation, the Company
recorded an additional charge to earnings of $1,642,000 for the
nine months ended September 30, 2004 (nine months ended September
30, 2003 - $2,036,000) for stock options granted to employees,
directors and officers. The fair value of the stock options granted
during the nine months ended September 30, 2004 was determined
using an option pricing model assuming no dividends were paid, a
weighted average volatility of the Company's share price of 58 per
cent, weighted average expected life of 3.5 years and weighted
average annual risk free rate of 4.03 per cent. b) Asset retirement
obligation During the fourth quarter of 2003, the Company changed
its accounting policy on a retroactive basis with respect to
accounting and reporting for obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and the normal operation of long-lived
assets. The Company adopted CICA 3110 "Asset Retirement
Obligations" whereby the fair value of the liability is initially
recorded and the carrying value of the related asset is increased
by the corresponding amount. The liability is accreted to its
present value and the capitalized cost is amortized over the useful
life of the related asset. The change in accounting policy did not
have a significant impact on reported results of operations in any
period presented. 3. ACQUISITION OF MOROCOCHA MINING ASSETS In July
2004, the Company acquired 92.0 per cent of the voting shares (80.8
per cent equity interest) of Compania Minera Argentum S.A.
("Argentum") and 100 per cent of the voting shares of Compania
Minera Natividad ("Natividad") for cash of $35,276,000. Argentum
and Natividad assets comprise of the Morococha mining assets, its
working capital and surrounding mineral concessions located in
central Peru. The Company subsequently acquired an additional 3.0
per cent equity interest in Argentum by acquiring 25 per cent its
outstanding non- voting investment shares for a cash payment of
$844,000. The acquisition was accounted for by the purchase method
of accounting and the accounts of Argentum and Natividad have been
consolidated from July 1, 2004, which was the date the Company
acquired effective control and ownership of the assets and
liabilities of the Morococha mine. The fair value of assets and
liabilities acquired and the consideration paid are summarized as
follows: Current assets, including cash of $657 $ 7,945 Plant and
equipment 7,053 Mineral properties 46,158
---------------------------------------------------------------------
61,156 Less: Accounts payable and accrued liabilities (3,215)
Non-controlling interest (1,414) Provision for asset retirement
obligation and reclamation (8,618) Future income tax liability
(11,038)
---------------------------------------------------------------------
Total purchase price $ 36,871
---------------------------------------------------------------------
---------------------------------------------------------------------
Consideration paid is as follows: Cash $ 36,120 Acquisition costs
751
---------------------------------------------------------------------
$ 36,871
---------------------------------------------------------------------
---------------------------------------------------------------------
The final allocation of the consideration among the assets and
liabilities of the Morococha Mine may vary from those shown above.
The purchase consideration for the mining assets of Argentum and
Natividad exceeded the carrying value of the underlying assets for
tax purposes by $28,176,000. In addition, the Company recorded a
provision for future reclamation and restoration costs in amount of
$8,618,000. These amounts have been applied to increase the
carrying value of the mineral properties for accounting purposes.
However, this did not increase the carrying value of the underlying
assets for tax purposes and resulted in a temporary difference
between accounting and tax value. The resulting estimated future
income tax liability associated with this temporary difference of
$11,038,000 was also applied to increase the carrying value of the
mineral properties. 4. MINERAL PROPERTY, PLANT AND EQUIPMENT
Mineral property, plant and equipment consist of: September 30,
2004 December 31, 2003
-------------------------------------------------------------------------
Accumulated Accumulated Cost Amortization Net Cost Amortization Net
-------------------------------------------------------------------------
Mineral properties Morococha mine, Peru $ 9,693 $ (636) $ 9,057 $ -
$ - $ - La Colorada mine, Mexico 4,153 (303) 3,850 4,153 - 4,153
Huaron mine, Peru 1 - 1 1 - 1
-------------------------------------------------------------------------
13,847 (939) 12,908 4,154 - 4,154
-------------------------------------------------------------------------
Plant and equipment Morococha mine, Peru 7,053 (463) 6,590 - - - La
Colorada mine, Mexico 10,850 (792) 10,058 10,332 (360) 9,972 Huaron
mine, Peru 14,417 (4,423) 9,994 14,417 (3,426) 10,991 Quiruvilca
mine, Peru 15,410 (15,410) - 15,410 (15,410) - Other 3,257 (559)
2,698 3,161 (503) 2,658
-------------------------------------------------------------------------
50,987 (21,647) 29,340 43,320 (19,699) 23,621
-------------------------------------------------------------------------
Mine development and others Morococha mine, Peru 502 (33) 469 - - -
La Colorada mine, Mexico 35,846 (2,615) 33,231 31,892 (1,113)
30,779 Huaron mine, Peru 36,333 (10,071) 26,262 32,820 (7,800)
25,020 Quiruvilca mine, Peru 10,151 (10,046) 105 10,046 (10,046) -
-------------------------------------------------------------------------
82,832 (22,765) 60,067 74,758 (18,959) 55,799
-------------------------------------------------------------------------
$147,666 $(45,351) $102,315 $122,232 $(38,658) $ 83,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company completed the purchase of 83.78 per cent equity
interest in Compania Minera Argentum S.A. and 100 per cent equity
interest in Compania Minera Natividad for $36,871,000 (Note 3). 5.
INVESTMENT AND OTHER NON-PRODUCING PROPERTIES Acquisition costs of
mineral development properties together with costs directly related
to mine development expenditures are deferred. Exploration
expenditures on investment properties are charged to operations in
the period they are incurred. Investment and non-producing
properties consist of: September December 30 31 2004 2003
Non-producing properties Morococha, Peru $ 36,465 $ - Alamo Dorado,
Mexico 81,061 80,076 Manantial Espejo, Argentina 2,012 2,012
---------------------------------------------------------------------
119,538 82,088
---------------------------------------------------------------------
Investment properties Waterloo, USA 1,000 1,000 Tres Cruces, Hog
Heaven and others 785 785
---------------------------------------------------------------------
1,785 1,785
---------------------------------------------------------------------
$ 121,323 $ 83,873
---------------------------------------------------------------------
---------------------------------------------------------------------
6. SHARE CAPITAL During the nine-month period ended September 30,
2004, the Company: i) issued 9,135,043 common shares at a value of
$88,848,000 to the holders of $85,431,000 principal amount, senior
subordinated convertible debentures on conversion; ii) issued
3,333,333 common shares at $16.50 per share, for net proceeds of
$54,820,000; iii) issued 717,695 common shares for proceeds of
$4,898,000 in connection with the exercise of employees and
directors stock options; iv) issued 540,026 common shares for
proceeds of $1,919,000 in connection with the exercise of share
purchase warrants; and v) issued 16,624 common shares at a value of
$245,000 as compensation expense. The following table summarizes
information concerning stock options outstanding as at September
30, 2004: Options Outstanding Options Exercisable
------------------------------------------- Weighted Number Number
Average Exercis- Outstanding Remaining able Weighted as at
Contractual as at Average Range of Year of September Life September
Exercise Exercise Prices Expiry 30, 2004 (months) 30, 2004 Price
---------------------------------------------------------------------
$3.61 2004 36 .07 36 $3.61 $9.51 2005 48,077 5.03 48,077 $9.51
$3.96 - $7.73 2006 124,666 19.42 88,000 $5.07 $7.93 - $8.01 2007
385,000 37.83 351,000 $7.95 $7.05 - $11.44 2008 494,231 45.44
169,231 $7.93 $13.08 - $17.84 2009 382,000 53.31 142,000 $15.58
$3.96 2010 217,000 74.53 217,000 $3.96
---------------------------------------------------------------------
1,651,010 49.01 1,015,344 $9.01
---------------------------------------------------------------------
---------------------------------------------------------------------
During the nine months ended September 30, 2004, the Company
recognized $1,642,000 of stock compensation expense consisting of
$831,000 for options issued in 2004 and $811,000 for options issued
in 2003. As at September 30, 2004 there were warrants outstanding
to allow the holders to purchase 3,814,470 common shares of the
Company at Cdn$12.00 per share, which expire on February 20, 2008.
Subsequent to September 30, 2004, the Company issued 7,000 common
shares for proceeds of $63,600 pursuant to exercise of employee
stock options. 7. INTEREST AND OTHER INCOME Interest and other
income consist of: Three months Nine months ended ended September
30, September 30, --------------------- --------------------- 2004
2003 2004 2003
---------------------------------------------------------------------
Revenue from third party $ 554 $ 239 $ 780 $ 546 Power credits 25
14 111 42 Gain on sale of marketable securities 226 - 475 - Other
revenue and expenses 40 17 33 (80)
---------------------------------------------------------------------
$ 845 $ 270 $ 1,399 $ 508
---------------------------------------------------------------------
---------------------------------------------------------------------
8. SUPPLEMENTAL CASH FLOW INFORMATION Three months ended Nine
months ended September 30, September 30, 2004 2003 2004 2003
---------------------------------------------------------------------
Changes in non-cash working capital Short-term investments $ (475)
$ - $ (475) $ - Accounts receivable (2,270) 1,032 (5,047) (695)
Inventories (212) 229 803 (1,807) Prepaids expenses (1,260) 44
(1,241) 909 Accounts payable and accrued liabilities (2,359)
(2,109) (5,812) (1,476)
---------------------------------------------------------------------
$ (6,576) $ (804) $ (11,772) $ (3,069)
---------------------------------------------------------------------
---------------------------------------------------------------------
9. 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 financial,
human resources and technical support to its mining and exploration
activities. Segmented disclosures and enterprise-wide information
are as follows: For the three months ended September 30, 2004
--------------------------------------------- Corporate Exploration
Mining Office & Development Total
---------------------------------------------------------------------
Revenue from external customers $ 27,409 $ - $ - $ 27,409 Net
income (loss) for the period 5,004 (1,109) (606) 3,289 For the
three months ended September 30, 2003 (Note 2)
--------------------------------------------- Corporate Exploration
Mining Office & Development Total
---------------------------------------------------------------------
Revenue from external customers $ 11,838 $ 52 $ - $ 11,890 Net
income (loss) for the period 655 (1,641) (239) (1,225) For the nine
months ended September 30, 2004
--------------------------------------------- Corporate Exploration
Mining Office & Development Total
---------------------------------------------------------------------
Revenue from external customers $ 63,510 $ - $ - $ 63,510 Net
income (loss) for the period 12,022 (5,758) (2,054) 4,210 Segmented
assets $ 178,991 $ 72,382 $ 90,575 $ 341,948 For the nine months
ended September 30, 2003 (Note 2)
--------------------------------------------- Corporate Exploration
Mining Office & Development Total
---------------------------------------------------------------------
Revenue from external customers $ 31,905 $ 360 $ - $ 32,265 Net
income (loss) for the period 333 (3,457) (848) (3,972) Segmented
assets $ 92,611 $ 91,696 $ 86,403 $ 270,710 Third Quarter 2004
Management's Discussion and Analysis 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 and nine months ended September 30, 2004 and the related
notes contained herein. Tabular amounts are in thousands of US
dollars, except for per share amounts. The significant accounting
policies are outlined within Note 2 to the Consolidated Financial
Statements of the Company for the year ended December 31, 2003.
These accounting policies have been applied consistently for the
nine months ended September 30, 2004. Significant Events and
Transactions of the Third Quarter The Company completed its
acquisition of 92 per cent (81% interest) of the voting shares of
Compania Minera Argentum ("Argentum"), a public company listed on
the Peru Stock Exchange, which holds the Morococha mining assets
previously owned by Sociedad Minera Corona. The Argentum shares
were purchased for $33.78 million by way of a public offering
through the Lima Stock Exchange. Subsequent to this offer, the
Company purchased an additional 3 per cent interest in Argentum by
acquiring 25 per cent of the investment shares for $0.84 million.
In addition, Pan American acquired 100 per cent of Compania Minera
Natividad ("Natividad") for $1.5 million, which holds numerous
adjacent mineral concessions and the Amistad processing facility.
The Company intends to combine Natividad and Argentum in the near
future. The statements of operations and balance sheets of Argentum
and Natividad have been incorporated into Pan American's
consolidated financial statements from July 1, 2004. Argentum and
Natividad (collectively "Morococha") contributed 694,564 ounces of
silver to Pan American's production in the third quarter of 2004 at
a cash cost of $3.52 per ounce. Over the longer term Morococha is
expected to produce 3.5 million ounces of silver annually at a cash
cost of less than $3.00 per ounce. The fair value of assets and
liabilities acquired through the acquisition of Morococha are
summarized as follows: (US$000) Cash $ 657 Accounts receivable
4,364 Inventory 2,878 Prepaid expenses 46 Plant and equipment 7,053
Mineral properties 46,158
------------------------------------------------------------- Total
assets 61,156 Less: Accounts payable and accrued liabilities
(3,215) Non-controlling interest (1,414) Provision for asset
retirement obligation and reclamation (8,618) Future income tax
liability (11,038)
------------------------------------------------------------- Total
purchase price $ 36,871
-------------------------------------------------------------
------------------------------------------------------------- The
future income tax liability arises due to the fact that the
purchase consideration exceeded the carrying value of the mining
assets for tax purposes, resulting in a temporary difference
between the accounting and tax value. The estimated future income
tax liability associated with this temporary difference is $11.04
million and has been recognized as a future income tax liability
and also applied to increase the carrying value of the mineral
properties. The provision for asset retirement obligation and
reclamation of $8.62 million arises pursuant to CICA Handbook
Section 3110 - "Accounting for Asset Retirement Obligations", which
required the Company to recognize the expected fair value of future
site restoration costs at Morococha as a liability and to increase
the carrying value of mineral properties by the same amount. The
liability is accreted over time to its anticipated future value
with a corresponding charge to the statement of operations while
the increase in the carrying value of mineral properties is
amortized on a unit of production basis. The La Colorada mine in
Mexico reached commercial production on January 1, 2004 after a $20
million expansion, which began in late 2002. As such, all revenue
and expense items were recognized in the statement of operations in
the first nine months of 2004, having been capitalized throughout
2003. This change in accounting treatment gives rise to several
significant differences when comparing the consolidated statement
of operations for the third quarter of 2004 with the corresponding
period in 2003. Results of Operations For the three months ended
September 30, 2004 the Company's net income was $3.29 million
(earnings per share of $0.05) compared to a net loss of $1.23
million (loss per share of $0.02) for the corresponding period in
2003. The Company generated net income of $4.21 million for the
nine-month period ended September 30, 2004 compared to a loss of
$3.97 million for the corresponding period in 2003. The loss per
share of ($0.11) for the nine months ended September 30, 2004
includes charges associated with the conversion and accretion of
the Company's 5.25 per cent convertible unsecured senior
subordinated debentures (the "Debentures"), which occurred in the
second quarter of 2004 and were charged directly to deficit.
Revenue from metal sales was 131 per cent higher in the third
quarter of 2004 and 97 per cent higher in the first nine months of
2004 compared to the corresponding periods in 2003. The acquisition
of the Morococha mine and the La Colorada mine reaching commercial
production on January 1, 2004, accounted for most of the revenue
increase from a year ago. The Company's other mining operations
recorded a 37 per cent increase in revenue in the third quarter of
2004 compared to the comparable period in 2003 as a result of
higher metal prices and in spite of the fact that less tonnes of
concentrate were sold in the third quarter of 2004. The Company
continued the trend of improving operating profits in the third
quarter of 2004. Operating profit is the difference between revenue
and cash operating costs. In the third quarter of 2004 operating
profits were $8.9 million, up from $4.4 million in the second
quarter of 2004 and from $1.7 million in the comparable quarter of
2003. As reflected in the following table, the third quarter of
2004 represents the eighth consecutive quarter that the Company has
improved its operating profit. Steadily improving operating profit
has helped the Company record its second consecutive quarter of
positive net earnings. Partially offsetting the improved operating
profits were increases in depreciation and amortization,
exploration and general and administrative charges, reflecting the
increased activity levels of a growing enterprise. The table below
sets out select quarterly results for the past eleven quarters.
-------------------------------------------------------------------------
Net income Quarter Operating (loss) for Net loss Year (unaudited)
Revenue Profit(1) the period per share
-------------------------------------------------------------------------
2004 Sept. 30 $27,409 $8,883 $3,289 $0.05 June 30 $20,950 $4,419
$1,287 ($0.12)(2) March 31 $15,151 $3,983 ($366) ($0.05)(2) 2003
Dec. 31 $12,857 $2,041 ($4,858) ($0.15) Sept. 30 $11,890 $1,690
($390) ($0.01) June 30 $12,553 $1,220 ($1,156) ($0.02) March 31
$7,822 $393 ($1,573) ($0.03) 2002 Dec. 31 $12,084 $379 ($14,040)
($0.35) Sept. 30 $11,195 ($252) ($17,387) ($0.40) June 30 $11,615
$808 ($1,247) ($0.03) March 31 $10,199 $997 ($1,303) ($0.03) (1)
Operating Profit/(Loss) is equal to total revenues less direct mine
operating expenses (2) Includes charges associated with the early
conversion and accretion of the Debentures Depreciation and
amortization charges for the third quarter increased significantly
to $3.03 million from $0.43 million a year before. The purchase of
Morococha and the achievement of commercial production at La
Colorada are the principal reasons for this increase. Depreciation
and amortization have also increased as a direct result of the
Company's adoption of CICA Handbook Section 3110 - "Accounting for
Asset Retirement Obligations", which required the Company to
increase its asset carrying values by $7.9 million as at December
31, 2003. The amortization of these higher asset values on a unit
of production basis has resulted in increased depreciation charges.
General and administration ("G & A") costs for the three-month
period ended September 30, 2004 were $0.93 million, up from $0.57
million for the comparable quarter in 2003. G & A costs have
increased significantly in 2004 from previous years, which is a
reflection of the expansion of the Company's management team
necessary to execute the Company's growth plans, and to a lesser
extent a stronger Canadian dollar. The Company recognized a $0.52
million stock-based compensation expense in the third quarter of
2004, as a result of adopting CICA Handbook Section 3870 -
"Stock-Based Compensation" in the fourth quarter of 2003. On a
restated basis, the comparable expense recorded in the quarter
ended September 30, 2003 was $0.84 million. Reclamation expense of
$0.30 million in the third quarter of 2004 related to the accretion
of the liability that the Company recognized by adopting CICA
Handbook Section 3110 - "Accounting for Asset Retirement
Obligations" as at December 31, 2003. Aside from those restoration
costs associated with the Morococha mine, there has been no change
to the Company's expectations of future site restoration costs
during the quarter at any of its other mines. Higher exploration
and development expenses were recorded for the three-month and
nine-month periods of 2004 relative to 2003 primarily as a result
of the Company's active development program at Manantial Espejo.
Interest and other income represented net income received from the
San Vicente operation and interest received from the cash balances
the Company maintained during the quarter, which were substantially
higher than a year ago primarily due to the proceeds of the
Debentures, together with the equity financing completed in March
2004. Production Pan American produced 3,173,000 ounces of silver
in the third quarter of 2004, a 45 per cent increase from the
corresponding period in 2003. The acquisition of the Morococha mine
accounts for 32 per cent of the increase, with significant
increases at La Colorada and the San Vicente operation responsible
for the balance. The Quiruvilca mine maintained its strong
performance by producing more ounces than a year ago at much lower
cash costs per ounce. The Huaron mine continued to improve on a
challenging first quarter by recording higher silver production
than in the third quarter of 2003 at a cash cost of $3.87 per
ounce. The Company's Pyrite Stockpile operation was again
profitable, producing 231,115 ounces of silver during the quarter
at cash costs of $2.87 per ounce. While production rates at the La
Colorada mine are steadily increasing, as expected the mine was not
able to cover its cash operating costs in the third quarter. A
revised mining and processing plan has been developed and
implemented to address the major issues that have hampered the mine
since the start of commercial production at the beginning of 2004.
The primary component of the plan was a switch to a more selective
narrow vein mining method, which has decreased tonnes mined but
substantially increased ore grades reported to the mill. In
addition, the Company plans to further expand the reserve and
resource base at the mine and to provide greater development
flexibility in the future. The Company still expects La Colorada to
achieve an annualized production rate of 3.5 million ounces at cash
costs of less than $3.50 per ounce; however, the Company now
believes these levels will be reached in the first quarter of 2005.
Consolidated cash costs for the nine-month period ended September
30, 2004 were $4.01 per ounce compared to $4.12 per ounce for the
corresponding period of 2003. During this period, cash costs
improved significantly at Quiruvilca, were stable at Huaron but
were offset by higher than expected costs at La Colorada. With the
addition of the low-cost Morococha mine and improvements at La
Colorada, the Company expects consolidated cash costs to decrease
and is estimating consolidated silver production of approximately
11.5 million ounces at a cash cost below $4.00 per ounce for 2004.
Liquidity and Capital Resources At September 30, 2004, cash and
cash equivalents plus short-term investments were $80.84 million, a
$37.90 million decrease from June 30, 2004. Investing activities
consumed $37.32 million in cash and consisted primarily of the
acquisition of the Morococha mine for $36.21 million, expenditures
on mineral property, plant and equipment of $2.68 million and
proceeds from the liquidation of short-term investments of $2.01
million. Cash flow from operating activities was $6.91 million for
the quarter ended September 30, 2004 before the net increase of
$6.58 million in non-cash working capital. Increased non-cash
working capital was primarily the result of increased accounts
receivable and concentrate inventories associated with the
concentrate producing Morococha mine. Financing activities in the
third quarter yielded $0.79 million mainly from the exercise of
stock options. Working capital at September 30, 2004 was $97.08
million, a reduction of $27.87 million from June 30, 2004. The
reduction is reflected largely in a $37.90 million decrease in cash
and cash equivalents plus short-term investments, offset by
increases of $6.66 million in accounts receivable, $3.03 million in
inventories and $1.28 million in prepaid expenses. Capital
resources at September 30, 2004 amounted to shareholders' equity of
$263.33 million, capital leases of $0.33 million and deferred
revenue of $0.75 million. At September 30, 2004, the Company had
66,752,572 common shares issued and outstanding. Based on the
Company's financial position at September 30, 2004 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. The Company's only contractual obligation at the date of
this MD&A was $0.4 million relating to a capital lease payable
over the next two years. The Company does not have any off-balance
sheet arrangements. 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. The Company
incurred base metal hedging losses in the third quarter of 2004
totaling $0.65 million (2003 - gain of $0.05 million), which have
been included in the revenue figure on the consolidated statements
of operations. At September 30, 2004, the Company had sold forward
25,140 tonnes of zinc at a weighted average price of $1,062 per
tonne ($0.482 per pound) and 6,170 tonnes of lead at a weighted
average price of $722 per tonne ($0.328 per pound). The forward
sales commitments for zinc represent approximately 45 per cent of
the Company's forecast zinc production until December 2005. The
lead forward sales commitments represent approximately 35 per cent
of the Company's forecast lead production until June 2005. At
September 30, 2004, the cash offered prices for zinc and lead were
$1,102 and $976 per tonne, respectively. The mark to market value
at September 30, 2004 was ($2.57) million. However, due to
significant declines in the price of zinc and lead since September
30, 2004, at the date of this MD&A the mark to market valuation
had improved to ($0.71) million. At the end of the third quarter of
2004, the Company had fixed the price of 800,000 ounces of the
third quarter's silver production contained in concentrates, which
is due to be priced in October and November under the Company's
concentrate contracts. The price fixed for these ounces averaged
$6.58 per ounce while the spot price of silver was $6.67 on
September 30, 2004. Exploration and Development Activities At
Huaron, progress towards expanding production rates continued
during the quarter. The mine was able to maintain the monthly
mining rates achieved in the second quarter, and is currently
processing approximately 12 per cent more ore per month than a year
ago. As part of the plan to increase production by up to 30 per
cent at the Huaron mine, the Company initiated a second phase drill
program focused on resource conversion. This is a continuation of
the $1.0 million first phase drilling program completed in the
first half of the year. Rehabilitation of the mine's 500 level is
ongoing and is a key component of the plan to establish a second
mining area, thereby allowing for an overall increase in monthly
ore extraction. The cost of this program is being capitalized.
During the third quarter of 2004, the Company continued to move
forward with the feasibility study for the 50 per cent owned
Manantial Espejo project in Argentina. Hatch Engineers developed
the plant and infrastructure capital and operating cost estimates
for the purposes of this scoping study. Snowden Engineers completed
the scoping level open pit mining operating and capital cost
estimates, which incorporated an updated mineral resource estimate.
Vector Engineers have completed the archeological field program
with no significant findings within the proposed disturbed area and
the environmental baseline field programs are well underway. An
additional 5,000 meters of infill and extension drilling has been
initiated, together with drilling to secure a water supply for the
mine. The feasibility study for the project is expected to be
completed by early 2005. Pan American's share of the feasibility
costs for the first nine months of 2004 was $1.63 million, which
was expensed as incurred. At Alamo Dorado in Mexico, a full time
project manager has been hired as the Company started the process
of staffing up for construction. Progress has been made toward
securing a power supply and the mine concessions have been
successfully upgraded to exploitation concessions and the
explosives license received. Site hydrological investigations
including development of a ground water monitoring program for any
tailings facility designs are underway. Grindability tests were
performed during the quarter and as a follow on from these tests, a
pilot plant has been activated. The updated feasibility study is
scheduled for completion in February 2005 incorporating the revised
environmental permitting, pilot plant evaluation and tailings
disposal facility design associated with the milling facility. At
the San Vicente property, production continued under the 50,000
tonne agreement with EMUSA, a Bolivian mining company acting as
operator. The small-scale test mining program has produced 210,451
ounces of silver in the first nine months of the year to Pan
American's account. The Company continued to move forward with a
feasibility study, including completing 11,364 meters of diamond
drilling by the end of the third quarter and undertaking
assessments of nearby processing facilities. DATASOURCE: Pan
American Silver Corp. CONTACT: Brenda Radies, Vice-President
Corporate Relations, (604) 806-3158,
http://www.panamericansilver.com/
Copyright