(all amounts in US Dollars unless otherwise stated) VANCOUVER, Feb.
23 /PRNewswire-FirstCall/ -- 2005 IN REVIEW -------------- - Record
silver production - up 12% to 12.5 million ounces (11.2 million in
2004) - the eleventh consecutive year of silver production growth.
- Record mine operating earnings of $21.7 million ($14.8 million in
2004). - Record consolidated revenue of $122.4 million ($94.8
million in 2004). - Net earnings for the year of $1.1 million,
excluding a $29.7 million non-cash write-down of the carrying value
of the La Colorada mine in Mexico. - Morococha silver mine in Peru
delivered outstanding results. Proven and probable reserves
increased by 40%. - Construction commenced at Alamo Dorado in
Mexico with first production expected in fourth quarter of 2006. -
Feasibility study completed for Manantial Espejo in Argentina. -
Small-scale production resumed at San Vicente in Bolivia.
Feasibility study on expansion in progress. - Exploration success
in 2005 replaced all ounces mined and increased total proven and
probable reserves by 30.5 million ounces. - Working capital at
year-end $74.8 million. Company is debt-free. All silver production
is unhedged. FINANCIAL RESULTS (unaudited)
----------------------------- All financial results include the
effects of the restatement announced on February 16, 2006. Restated
2005 and 2004 quarterly statements will be filed prior to March 2,
2006. Pan American Silver Corp. (NASDAQ: PAAS; TSX: PAA) reported a
net loss of $29.5 million or ($0.44) per share for the fourth
quarter of 2005 versus fourth quarter earnings of $13.1 million in
2004. Both reporting periods include one-time impacts to earnings.
In 2005, the loss included a non-cash write-down of the carrying
value of the La Colorada silver mine in Mexico. Very high water
inflows and the resulting pumping costs appear likely to render the
deeper portion of La Colorada mineralization unrecoverable, thus
decreasing the mine's ore reserves and carrying value. Excluding
the write down, net earnings for the fourth quarter were $0.15
million or nil per share, including a $6.2 million charge to
earnings for commodity and foreign-currency contracts. In 2004,
earnings included a gain on the sale of the Company's 20% interest
in the Dukat mine in Russia for $20.1 million. Consolidated revenue
for the quarter was $37.9 million versus $30.0 million in 2004 due
to higher production levels and higher metal prices. Consolidated
silver production for the fourth quarter totaled 3.2 million
ounces, up from 3.1 million ounces in the fourth quarter of 2004.
By-product production of zinc and lead in the fourth quarter was
higher while copper production was lower than in the previous
period due to higher zinc and lead production at Morococha and
lower copper production at Huaron. Cash costs in the fourth quarter
declined 3% over 2004 levels to $4.48/oz and total costs rose
slightly due to higher depreciation charges. For the full year
ended December 31, 2005 Pan American recorded a consolidated net
loss of $28.6 million, or earnings of $1.1 million excluding the
non-cash write-down of the La Colorada mine and including an $8.2
million charge to earnings for commodity and foreign-currency
contracts. Earnings in 2004 were $15.2 million, due primarily to a
gain on the sale of the Company's 20% interest in the Dukat mine.
Consolidated revenue in 2005 was $122.4 million versus $94.8
million in 2004. Silver production in 2005 totaled 12.5 million
ounces, a 12% increase over 2004 due to a full year's contribution
from Morococha and increased production at La Colorada. Zinc
production of 37,421 tonnes was 10% higher than in 2004, lead
production was 8% lower and copper production was 15% higher. Cash
costs in 2005 rose to $4.38/oz due to increased costs for energy,
transportation and consumables and the appreciation of the Peruvian
and Mexican currencies against the US dollar. Total production
costs rose to $5.72/oz due primarily to increased depreciation
charges. Capital spending in 2005 increased to $59.6 million from
$17.0 million in 2004 reflecting the commencement of construction
at Alamo Dorado, improvements to Morococha and preparations for the
resumption of sulphide mining at La Colorada. Working capital at
December 31, 2005 totaled $74.8 million, down from $110.0 million
at December 31, 2004 due to the drawdown of cash for the
construction of Alamo Dorado. Geoff Burns, President and CEO of Pan
American commented that "We set new financial and operating records
in 2005 and achieved several critical goals, including the startup
of construction of Alamo Dorado, the successful integration of
Morococha and the completion of the Manantial Espejo feasibility
study. Our production grew for the 11th straight year and our
exploration and feasibility programs increased our proven and
probable reserves by 23% or 30.5 million ounces. Our focus in 2006
will be on increasing profitability, successfully commissioning
Alamo Dorado and initiating construction of Manantial Espejo. In
2006 we expect to increase annual silver production another 13% to
14.1 million ounces enroute to increasing our annual production to
25 million ounces by the end of 2008." OPERATIONS AND DEVELOPMENT
HIGHLIGHTS ------------------------------------- PERU The Morococha
mine (87.5% interest) in Peru marked its first full year of
operation under Pan American with a record performance as the
Company's most profitable operation in 2005. The mine generated
$10.4 million in operating earnings and $8.5 million in cash flow
from operations. In the fourth quarter the mine produced 685,265
ounces of silver, up 19% over the fourth quarter of 2004, as well
as 4,134 tonnes of zinc, 1,648 tonnes of lead and 241 tonnes of
copper. Cash costs in the fourth quarter totaled $2.10/oz with
total costs of $3.89/oz. For the year, Morococha produced 2,736,393
ounces to Pan American's account, at a cash cost of $2.61/oz and a
total cost of $4.36/oz. The mine also produced 15,689 tonnes of
zinc, 5,875 tonnes of lead and 925 tonnes of copper. The Company's
share of silver production in 2006 is expected to increase to 2.9
million ounces at a cash cost of $2.86/oz. Over the next three
years, Pan American will be working to double production at
Morococha by accessing and developing the lower-cost mantos
discovered during exploration. The Company added 29.1 million
ounces of new silver reserves and resources at Morococha in 2005 at
a cost of $0.08/oz, and expects further increases to occur in 2006
as it continues to drill the highly prospective land package
acquired as part of the purchase. The Quiruvilca mine produced
510,592 ounces of silver in the fourth quarter versus 638,486
ounces in the year-earlier period due primarily to lower silver
grades. Cash costs declined 10% over the year-earlier period to
$4.18/oz. For the year the mine produced 2,234,565 ounces of
silver, 9,697 tonnes of zinc, 2,761 tonnes of lead and 1,307 tonnes
of copper at a cash cost of $4.07/oz of silver. Total costs rose
from $4.03/oz of silver to $4.63/oz reflecting increased
depreciation and amortization costs. In 2006, Quiruvilca is
forecast to produce 2 million ounces of silver at a cash cost of
$4.30/oz. The Huaron mine continued to deal with lower metal grades
and lower metal recoveries in the fourth quarter of 2005 as silver
production declined slightly to 943,596 ounces versus 954,000
ounces in the year-earlier period. Cash production costs increased
from $3.44/oz in the 2004 period to $5.40/oz in 2005 due mostly to
lower by-product credits from reduced zinc recoveries. Zinc
production declined from 3,165 tonnes to 2,634 tonnes while lead
totaled 1,613 tonnes versus 1,909 tonnes in 2004 and copper totaled
363 tonnes versus 504 tonnes. For the year, Huaron produced
3,690,786 ounces of silver, 11,701 tonnes of zinc, 6,774 tonnes of
lead and 1,689 tonnes of copper at a cash cost of $5.08/oz of
silver and a total cost of $6.30/oz. For 2006, Huaron is forecast
to produce 3.7 million ounces of silver at a cash cost of $4.70/oz.
The Silver Stockpile Operation continued to generate excellent cash
flow, producing 177,773 ounces of silver in the fourth quarter at a
cash cost of $2.00/oz, up from $0.68/oz due to the inclusion of a
33% cash flow royalty to the Peruvian company from which Pan
American purchased the operation. In 2005 the mine produced a total
of 692,381 ounces of silver at cash and total costs of $1.82/oz.
This production rate is expected to continue in 2006. MEXICO Pan
American Silver commenced construction of the Alamo Dorado silver
project in Mexico in the second quarter of this year. Approximately
40% of construction has been completed and the remainder is already
fully funded. The assay lab is built and in operation; installation
of the leach tanks, primary crusher, stacking conveyor and water
line are underway; and the SAG and ball mills are on site. During
the quarter Pan American spent $12.9 million on equipment and
construction, bringing the total spent in 2005 to $35.5 million.
The project remains on budget ($76.6 million) and on time for
commissioning in the fourth quarter of 2006. Mining and stockpiling
of ore for startup is already underway. Starting in 2007, Alamo
Dorado is expected to produce approximately 5 million ounces of
silver and 14,000 ounces of gold annually at an average cash cost
of less than $3.25/oz of silver, net of gold by-product revenues.
In the fourth quarter, the La Colorada mine produced a record
844,553 ounces of silver, a 24% increase over the year-earlier
period as the oxide portion of the mine reached full production
capacity in the second quarter. Production for the year totaled
3,094,301 ounces at a cash cost of $5.63/oz and a total cost of
$7.52. However, very high inflows of hot water, high pumping costs
and difficult ground conditions appear likely to render the deeper
portion of the La Colorada mineralization unrecoverable, thus
decreasing the mine's proven and probable ore reserves from 29.9
million ounces to 16.2 million ounces. This has led the Company to
write down the carrying value of La Colorada by $29.7 million. Pan
American is currently conducting exploration drilling and is
optimistic that its exploration programs may increase mine life in
the future. In 2006 the mine is forecast to produce 4.0 million
ounces of silver at a cash cost of $5.44/oz. ARGENTINA A
feasibility study was completed on the 50% owned Manantial Espejo
silver/gold joint venture with Silver Standard Resources. Pan
American, as project operator, has received comments on its
Environmental Impact Study from the Argentine government and there
appear to be no significant impediments to receiving a mine
development permit. Pan American expects to be able to announce the
results of the feasibility study shortly after it submits its
response to government in March. On a 100% basis, Manantial Espejo
is expected to produce an average of 4.2 million ounces of silver
and more than 60,000 ounces of gold annually over an 8-year mine
life. BOLIVIA In 2005, Pan American increased its interest in the
San Vicente project to 55% and resumed small-scale production under
a toll-milling agreement with a nearby mill. Under the new
agreement with Bolivian partner EMUSA, the joint venture is now
processing approximately 300 tonnes of ore per day, yielding 80,991
ounces of silver for the fourth quarter and full-year 2005, at a
cash cost of $1.24/oz. Pan American is also completing a
feasibility study on the viability of building a new mill on-site
at San Vicente to expand its share of production to more than 2
million ounces annually. While a new mill is built, San Vicente is
expected to contribute approximately 300,000 ounces of silver to
Pan American's account for the year. RESERVES AND RESOURCES
---------------------- Pan American's exploration programs replaced
all of the tonnage mined at its operations in 2005 and added 30.5
million ounces of proven and probable reserves, at a cost of $3.7
million. The Company's silver reserve and resource base remains one
of the largest in the industry. Proven and probable reserves as of
December 31, 2005 totaled 178 million ounces. Measured and
indicated resources totaled 185.3 million ounces. Inferred
resources totaled 273.4 million ounces. For details, please see
press release of February 16, 2006. SILVER MARKETS --------------
Silver had a great year in 2005, rising 30% to close at $8.83/oz.
Silver enjoyed strong investment demand based on continuing US
dollar weakness, a sharp rise in the gold price and the possible
creation of a silver exchange traded fund (ETF). Silver's
fundamentals also improved. According to GFMS consultants, global
silver demand rose by 4%, led by industrial demand, which rose 6%
and jewelry demand, which rose 14%. Mine production remained flat
and government sales fell 3%. Photographic demand dropped 12% but
this decline was partly offset by lower scrap supply. We expect
continuing strength in silver prices as these positive conditions
should persist in 2006. Pan American's silver coin and bar sales
program also enjoyed marked success in 2005. From its inception in
May to January, 2006, more than 500,000 ounces of silver bullion
from the La Colorada mine were purchased by investors and
collectors. A new 100-ounce bar is being produced and may be seen
and ordered at http://www.silverpa.com/. Pan American Silver Corp.
will host a conference call on February 23, 2005 at 11:00 am
Pacific Time to discuss these results. 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 6961962. For
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 earnings, reserves and resources, 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
Twelve Months ended December 31 December 31 2005 2004 2005 2004
Consolidated Financial Highlights (in thousands of US dollars) Net
income (loss) for the period $ (29,514) $ 13,130 $ (28,594) $
15,214 Earnings (loss) per share $ (0.44) $ 0.21 $ (0.43) $ 0.06
Cash flow from operations before working capital adjustments $
4,974 $ 1,373 $ 14,134 $ 12,952 Capital spending $ (18,907) $
(7,368) $ 59,638 $ 17,043 Exploration expense $ 944 $ 960 $ 3,697 $
3,838 Cash and short-term investments $ 55,322 $ 98,136 $ 55,322 $
98,136 Working capital $ 74,763 $ 109,967 $ 74,763 $ 109,967
Consolidated Ore Milled & Metals Recovered to Concentrate
Tonnes milled 439,687 403,951 1,691,525 1,427,426 Silver metal -
ounces 3,242,771 3,134,547 12,529,417 11,182,030 Zinc metal -
tonnes 9,327 9,187 37,421 34,086 Lead metal - tonnes 3,918 3,740
15,410 16,694 Copper metal - tonnes 912 1,056 3,931 3,426
Consolidated Cost per Ounce of Silver (net of by-product credits)
Total cash cost per ounce $ 4.48 $ 4.63 $ 4.38 $ 4.17 Total
production cost per ounce $ 5.82 $ 5.43 $ 5.72 $ 5.30 In thousands
of US dollars Direct operating costs, royalties, treatment and
refining charges $ 34,250 $ 27,741 $ 123,691 $ 93,931 By-product
credits (21,004) (14,924) (73,609) (53,188)
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Cash operating costs 13,246 12,816 50,082 40,743 Depreciation,
amortization & reclamation 3,966 2,222 15,376 11,132
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Production costs $ 17,213 $ 15,039 $ 65,458 $ 51,875
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Payable ounces of silver (used in cost per ounce calculations)
2,955,842 2,768,024 11,435,604 9,780,675 Average Metal Prices
Silver - London Fixing $ 8.05 $ 7.24 $ 7.31 $ 6.66 Zinc - LME Cash
Settlement per pound $ 0.74 $ 0.51 $ 0.63 $ 0.48 Lead - LME Cash
Settlement per pound $ 0.48 $ 0.43 $ 0.44 $ 0.40 Copper - LME Cash
Settlement per pound $ 1.95 $ 1.40 $ 1.67 $ 1.30 Mine Operations
Highlights Three Months ended Twelve Months ended December 31
December 31 Huaron Mine 2005 2004 2005 2004 Tonnes milled 167,035
154,400 639,849 635,845 Average silver grade - grams per tonne 212
223 214 228 Average zinc grade - percent 2.59% 2.89% 2.79% 3.14%
Silver - ounces 943,596 954,000 3,690,786 4,080,737 Zinc - tonnes
2,634 3,165 11,701 15,041 Lead - tonnes 1,613 1,909 6,774 10,569
Copper - tonnes 363 504 1,689 1,754 Total cash cost per ounce $
5.40 $ 3.44 $ 5.08 $ 3.79 Total production cost per ounce $ 6.62 $
4.76 $ 6.30 $ 5.05 In thousands of US dollars Direct operating
costs, royalties, treatment and refining charges $ 11,314 $ 9,093 $
42,601 $ 40,697 By-product credits (6,682) (6,092) (25,554)
(26,563)
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Cash operating costs 4,632 3,001 17,047 14,134 Depreciation,
amortization and reclamation 1,048 1,149 4,074 4,720
-------------------------------------------------------------------------
Production costs $ 5,680 $ 4,150 $ 21,121 $ 18,855
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Payable ounces of silver (used in cost per ounce calculations)
857,619 872,590 3,354,504 3,731,876 Quiruvilca Mine Tonnes milled
86,400 96,647 362,192 381,237 Average silver grade - grams per
tonne 214 234 221 235 Average zinc grade - percent 3.09% 3.31%
3.18% 3.57% Silver - ounces 510,592 638,486 2,234,565 2,530,869
Zinc - tonnes 2,225 2,714 9,697 11,709 Lead - tonnes 658 805 2,761
3,803 Copper - tonnes 299 280 1,307 1,081 Total cash cost per ounce
$ 4.18 $ 4.73 $ 4.07 $ 3.75 Total production cost per ounce $ 4.79
$ 5.00 $ 4.63 $ 4.03 In thousands of US dollars Direct operating
costs, royalties, treatment and refining charges $ 7,009 $ 7,002 $
27,210 $ 25,690 By-product credits (5,030) (4,195) (18,753)
(16,868)
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Cash operating costs 1,979 2,807 8,457 8,822 Depreciation,
amortization & reclamation 288 162 1,167 650
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Production costs $ 2,267 $ 2,970 $ 9,624 $ 9,471
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Payable ounces of silver (used in cost per ounce calculations)
473,652 593,468 2,077,245 2,351,098 Three Months ended Twelve
Months ended December 31 December 31 Morococha Mine 2005 2004 2005
2004 Tonnes milled 120,498 99,591 467,521 212,172 Average silver
grade - grams per tonne 235 252 215 221 Average zinc grade -
percent 4.79% 4.54% 4.27% 3.76% Silver - ounces 685,265 573,514
2,736,393 1,259,451 Zinc - tonnes 4,134 2,812 15,689 5,902 Lead -
tonnes 1,648 1,025 5,875 2,186 Copper - tonnes 241 254 925 538
Total cash cost per ounce $ 2.10 $ 5.54 $ 2.61 $ 4.47 Total
production cost per ounce $ 3.89 $ 7.30 $ 4.36 $ 6.16 In thousands
of US dollars Direct operating costs, royalties, treatment and
refining charges $ 9,653 $ 7,157 $ 33,796 $ 13,697 By-product
credits (8,363) (4,297) (27,364) (8,622)
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Cash operating costs 1,290 2,860 6,432 5,075 Depreciation,
amortization & reclamation 1,099 911 4,296 1,926
-------------------------------------------------------------------------
Production costs $ 2,389 $ 3,771 $ 10,728 $ 7,001
-------------------------------------------------------------------------
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Payable ounces of silver (used in cost per ounce calculations)
613,821 516,576 2,461,749 1,136,438 (x) Production and cost figures
are for Pan American's share only. Pan American's ownership was
approximately 87.5% during the year. La Colorada Mine Tonnes milled
55,645 44,945 211,854 171,155 Average silver grade - grams per
tonne 509 579 530 489 Silver - ounces 844,553 683,526 3,094,301
2,036,075 Zinc - tonnes - - - 122 Lead - tonnes - - - 136 Total
cash cost per ounce $ 6.03 $ 5.98 $ 5.63 $ 6.26 Total production
cost per ounce $ 7.85 $ 5.98 $ 7.52 $ 8.17 In thousands of US
dollars Direct operating costs, royalties, treatment and refining
charges $ 5,468 $ 4,418 $ 18,768 $ 13,742 By-product credits (412)
(341) (1,421) (1,134)
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Cash operating costs 5,056 4,076 17,347 12,607 Depreciation,
amortization and reclamation 1,531 5,839 3,836
-------------------------------------------------------------------------
Production costs $ 6,587 $ 4,076 $ 23,186 $ 16,443
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Payable ounces of silver (used in cost per ounce calculations)
839,026 681,817 3,081,213 2,013,513 Three Months ended Twelve
Months ended December 31 December 31 Pyrite Stockpile Sales 2005
2004 2005 2004 Tonnes sold 15,011 15,401 61,499 79,451 Average
silver grade - grams per tonne 368 368 350 377 Silver ounces
177,773 182,443 692,381 961,869 Total cash cost per ounce $ 2.00 $
0.68 $ 1.82 $ 0.19 Total production cost per ounce $ 2.00 $ 0.68 $
1.82 $ 0.19 In thousands of US dollars Direct operating costs,
royalties, treatment and refining charges $ 202 $ 71 $ 711 $ 105
By-product credits - - - -
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Cash operating costs 202 71 711 105 Depreciation, amortization and
reclamation - - - -
-------------------------------------------------------------------------
Production costs $ 202 $ 71 $ 711 $ 105
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Payable ounces of silver (used in cost per ounce calculations)
100,917 103,572 390,086 547,750 San Vicente Mine(xx) Tonnes milled
10,109 8,368 10,109 27,017 Average silver grade - grams per tonne
296 436 296 417 Average zinc grade - percent 4.07% 6.93% 4.07%
5.79% Silver - ounces 80,991 102,578 80,991 313,029 Zinc - tonnes
334 495 334 1,312 Copper - tonnes 10 17 10 53 Total cash cost per
ounce $ 1.24 $ - $ 1.24 $ - Total production cost per ounce $ 1.24
$ - $ 1.24 $ - In thousands of US dollars Direct operating costs,
royalties, treatment and refining charges $ 604 $ - $ 604 $ -
By-product credits (516) - (516) -
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Cash operating costs 88 - 88 - Depreciation, amortization and
reclamation - - - -
-------------------------------------------------------------------------
Production costs $ 88 $ - $ 88 $ -
-------------------------------------------------------------------------
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Payable ounces of silver (used in cost per ounce calculations)
70,808 - 70,808 - (xx) Pan American did not include San Vicente
production in it cost per ounce calculations in 2004. The
production statistics represent Pan American's 50% interest in the
mine in 2004 and 55% interest on the mine in 2005. Pan American
Silver Corp. Consolidated Balance Sheets As at December 31 (In
thousands of U.S. dollars) 2005 2004
-------------------------------------------------------------------------
Assets (Restated) Current Cash and cash equivalents $ 29,291 $
28,345 Short-term investments 26,031 69,791 Accounts receivable,
net of $Nil provision for doubtful accounts 27,342 25,757
Inventories 16,667 10,674 Unrealized gain on commodity and foreign
currency contracts 863 480 Prepaid expenses 1,935 1,211
-------------------------------------------------------------------------
Total Current Assets 102,129 136,258 Mineral property, plant and
equipment, net 99,815 104,647 Construction in progress 34,306 -
Investment and non-producing properties 123,259 125,863 Direct
smelting ore 2,236 2,671 Other assets 535 647
-------------------------------------------------------------------------
Total Assets $ 362,280 $ 370,086
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities Current Accounts payable and accrued liabilities $
22,333 $ 20,331 Advances for metal shipments - 652 Unrealized loss
on commodity contracts 4,810 4,695 Current portion of non-current
liabilities 223 613
-------------------------------------------------------------------------
Total Current Liabilities 27,366 26,291 Liability component of
convertible debentures 126 134 Provision for asset retirement
obligation and reclamation 39,378 32,012 Provision for future
income taxes 32,396 33,212 Severance indemnities and other
commitments 1,894 1,542 Non-controlling interest 3,798 1,379
-------------------------------------------------------------------------
Total Liabilities 104,958 94,570
-------------------------------------------------------------------------
Shareholders' Equity Share capital Authorized: 100,000,000 common
shares of no par value Issued: December 31, 2005 - 67,564,903
common shares December 31, 2004 - 66,835,378 common shares 388,830
380,571 Equity component of convertible debentures 762 633
Additional paid in capital 13,117 10,976 Deficit (145,387)
(116,664)
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Total Shareholders' Equity 257,322 275,516
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 362,280 $ 370,086
-------------------------------------------------------------------------
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Pan American Silver Corp. Consolidated Statements of Operations For
the years ended December 31, 2005, 2004 and 2003 (in thousands of
US Dollars, except for shares and per share amounts) 2005 2004 2003
-------------------------------------------------------------------------
(Restated) Sales $ 122,401 $ 94,825 $ 45,122 Cost of sales 87,648
69,162 39,778 Depreciation and amortization 13,095 10,869 3,325
-------------------------------------------------------------------------
Mine operating earnings 21,658 14,794 2,019
-------------------------------------------------------------------------
General and administrative, including stock-based compensation
6,936 6,241 5,625 Exploration 3,697 3,838 2,543 Asset retirement
and reclamation 2,329 1,315 303 Write-down of mining assets 29,666
2,460 -
-------------------------------------------------------------------------
Operating (loss) earnings (20,970) 940 (6,452)
-------------------------------------------------------------------------
Investment and other income 2,649 2,338 496 Interest and financing
expenses (494) (898) (1,156) Premium on early retirement of
debentures - (1,364) - Loss on commodity and currency contracts
(net of gains) (8,196) (6,617) - Gain on sale of assets 2,556
23,747 318
-------------------------------------------------------------------------
Net (loss) earnings before taxes and other items (24,455) 18,146
(6,794) Non-controlling interest (854) (179) - Income tax provision
(3,285) (2,753) -
-------------------------------------------------------------------------
Net (loss) income for the year $ (28,594) $ 15,214 $ (6,794)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to common shareholders: Net (loss) income for the year
$ (28,594) $ 15,214 $ (6,794) Accretion of convertible debentures
(129) (2,871) (3,534) Early conversion premium on convertible
debentures - (8,464) -
-------------------------------------------------------------------------
Net (loss) income for the year attributable to common shareholders
$ (28,723) $ 3,879 $ (10,328)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Loss) earnings per share Basic (loss) income per share $ (0.43) $
0.06 $ (0.20) Diluted (loss) income per share $ (0.43) $ 0.06 $
(0.20) Weighted average shares outstanding: Basic 67,041,967
63,168,995 51,058,212 Diluted 67,041,967 65,268,137 51,058,212 See
accompanying notes to consolidated financial statements Pan
American Silver Corp. Consolidated Statement of Cash Flows (in
thousands of U.S. dollars) 2005 2004 2003
-------------------------------------------------------------------------
(Restated) Operating activities Net (loss) income for the year $
(28,594) $ 15,214 $ (6,794) Reclamation expenditures (1,528)
(1,347) (61) Items not affecting cash; Depreciation and
amortization 13,095 10,869 3,325 Future income taxes (816) 31 -
Asset retirement and reclamation accretion 2,329 1,315 303
Non-controlling interest 854 179 - Debt settlement expenses - 1,208
- Write-down of property, plant, and equipment 29,666 2,460 -
Interest accretion on the convertible debentures 2 366 595
Stock-based compensation 1,950 2,189 2,871 Unrealized (gain) loss
on commodity and currency contracts (268) 4,215 - Gain on sale of
assets (2,556) (23,747) (318) Changes in non-cash operating working
capital (3,371) (9,819) (4,439)
-------------------------------------------------------------------------
Cash generated by (used in) operations 10,763 3,133 (4,518)
-------------------------------------------------------------------------
Investing activities Mining property, plant and equipment
expenditures (59,638) (17,043) (18,327) Acquisition of net assets
of subsidiary, net of cash - (36,214) 2,393 Proceeds from sale of
assets 50 23,747 318 Proceeds from/(purchase of) short-term
investments 44,100 5,147 (74,925)
-------------------------------------------------------------------------
Cash used in investing activities (15,488) (24,363) (90,541)
-------------------------------------------------------------------------
Financing activities Proceeds from issuance of common shares 6,361
62,437 8,350 Share issue costs - (180) - Proceeds from convertible
debenture - - 86,250 Convertible debentures issue costs - - (3,272)
Convertible debentures payments (38) (13,565) - Proceeds
from/(repayment of) short-term loans (652) (13,308) 7,737
-------------------------------------------------------------------------
Cash generated by financing activities 5,671 35,384 99,065
-------------------------------------------------------------------------
Increase in cash and cash equivalents during the year 946 14,154
4,006 Cash and cash equivalents, beginning of year 28,345 14,191
10,185
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 29,291 $ 28,345 $ 14,191
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental Cash Flow Information Interest paid $ 38 $ 2,663 $ 561
---------------------------------------
--------------------------------------- Taxes paid $ 5,249 $ 1,249
$ 510 ---------------------------------------
--------------------------------------- See accompanying notes to
consolidated financial statements Pan American Silver Corp.
Consolidated Statements of Shareholders' Equity For the year ended
December 31, 2005, 2004, 2003 (in thousands of US dollars, except
for amounts of shares) Common Shares ---------------------
Convertible Shares Amount Debentures
-------------------------------------------------------------------------
Balance, December 31, 2002 43,883,454 $ 161,108 $ - Issued on the
exercise of stock options 1,385,502 9,312 - Issued on the exercise
of share purchase warrants 100,943 509 - Stock-based compensation -
- - Issued for acquisition of subsidiary 7,636,659 54,203 - Fair
value of stock options granted - - - Fair value of share purchase
warrants - - - Issue of convertible debentures - - 63,201
Convertible debentures issue costs - - - Issued as compensation
3,293 22 - Accretion of convertible debentures - - 3,534 Net loss
for the year - - -
-------------------------------------------------------------------------
Balance, December 31, 2003 53,009,851 225,154 66,735 Issued on the
exercise of stock options 785,095 9,437 - Issued on the exercise of
share purchase warrants 544,775 1,965 - Stock-based compensation on
granting of stock option - - - Issued for cash, net of issue costs
3,333,333 54,820 - Accretion of convertible debentures - - 2,871
Issued on the conversion of convertible debentures 9,145,700 88,950
(68,973) Issued as compensation 16,624 245 - Net income for the
year (Restated) - - -
-------------------------------------------------------------------------
Balance, December 31, 2004 (Restated) 66,835,378 380,571 633 Issued
on the exercise of stock options 693,933 7,751 - Issued on the
exercise of share purchase warrants 1,320 18 - Stock-based
compensation on granting of stock option - - - Issued for cash, net
of issue costs - - - Accretion of convertible debentures - - 129
Other - - - Issued as compensation 34,272 490 - Net loss for the
year - - -
-------------------------------------------------------------------------
Balance, December 31, 2005 67,564,903 $ 388,830 $ 762
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional Paid in Capital Deficit Total
-------------------------------------------------------------------------
Balance, December 31, 2002 $ 1,327 $(106,943) $ 55,492 Issued on
the exercise of stock options (1,471) - 7,841 Issued on the
exercise of share purchase warrants - - 509 Stock-based
compensation 2,871 - 2,871 Issued for acquisition of subsidiary - -
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 Convertible debentures issue costs - (3,272)
(3,272) Issued as compensation - - 22 Accretion of convertible
debentures - (3,534) - Net loss for the year - (6,794) (6,794)
-------------------------------------------------------------------------
Balance, December 31, 2003 12,752 (120,543) 184,098 Issued on the
exercise of stock options (3,965) - 5,472 Issued on the exercise of
share purchase warrants - - 1,965 Stock-based compensation on
granting of stock option 2,189 - 2,189 Issued for cash, net of
issue costs - - 54,820 Accretion of convertible debentures -
(2,871) - Issued on the conversion of convertible debentures -
(8,464) 11,513 Issued as compensation - - 245 Net income for the
year (Restated) - 15,214 15,214
-------------------------------------------------------------------------
Balance, December 31, 2004 (Restated) 10,976 (116,664) 275,516
Issued on the exercise of stock options (1,403) - 6,348 Issued on
the exercise of share purchase warrants (5) - 13 Stock-based
compensation on granting of stock option 1,460 - 1,460 Issued for
cash, net of issue costs 2,100 - 2,100 Accretion of convertible
debentures - (129) - Other (11) - (11) Issued as compensation - -
490 Net loss for the year - (28,594) (28,594)
-------------------------------------------------------------------------
Balance, December 31, 2005 $ 13,117 $(145,387) $ 257,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations February 23, 2006 Introduction Management's
discussion and analysis ("MD&A") focuses on significant factors
that have affected Pan American Silver Corp.'s and its subsidiaries
("Pan American" or the "Company") performance and such factors that
may affect its future performance. In order to better understand
the MD&A, it should be read in conjunction with the audited
consolidated financial statements and the related notes contained
herein. Pan American's reporting currency is the United States
dollar and all amounts in this discussion and in the consolidated
financial statements are expressed in United States dollars, unless
identified otherwise. The Company reports its financial position,
results of operations and cash flows in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP"). This
MD&A reflects the effects of the restatement on the
consolidated financial statements as at December 31, 2005,
announced on February 16, 2006. This MD&A is comprised of the
following sections: The "Overview of 2005" provides an analysis of
Pan American's financial results and operating performance. A
detailed analysis of each mine's operating performance in 2005 and
our forecasts for 2006 are also provided in this section, together
with a reconciliation of our consolidated cash and total costs per
ounce of silver to the cost of sales reported in our consolidated
statement of operations. The "Liquidity and Capital Resources"
section describes our current financial condition and discusses our
expected capital and liquidity requirements for 2006 and beyond.
The "Critical Accounting Policies and Estimates" section identifies
those accounting estimates that have the largest impact on the
financial presentation. The "Risks and Uncertainty" section
discusses the risks associated with Pan American's business and our
risk management programs to mitigate such risks. Finally, in the
"Outlook" section we discuss the status of Pan American's
development projects and the metal markets, into which we sell our
products. Except for historical information contained in this
MD&A, the following disclosures are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995 or are future oriented financial information and as such
are based on an assumed set of economic conditions and courses of
action. These include estimates of future production levels,
expectations regarding mine production and development programs and
capital costs, expected trends in mineral prices and statements
that describe Pan American's future plans, objectives or goals.
There is significant risk that actual results will vary, perhaps
materially, from results projected depending on such factors as
discussed under Risks and Uncertainties in this MD&A and other
risk factors listed from time-to-time in the Company's Annual
Information Form or Form 40-F. Additional information about Pan
American and its business activities is available on SEDAR at
http://www.sedar.com/. Overview of 2005 Financial Results Net loss
after tax for 2005 was $28.6 million, compared to net income after
tax for 2004 of $15.2 million. The net loss for 2005 includes a
non-cash impairment charge of $29.7 million, which resulted from
the Company's decision to write down the carrying value of the La
Colorada mine. Pan American's decision to write-down a portion of
the La Colorada mine was based on its impairment evaluations, which
consist of comparing each asset's carrying value with its estimated
undiscounted future net cash flows. Where those cash flows are less
than the carrying value, the Company records a write-down of the
asset to the estimated fair value. The persistent operating
challenges at La Colorada, primarily poor ground conditions,
increasing dewatering requirements and related costs and a decrease
in the reserve and resource as a result of a new geological
interpretation were the major reasons for estimated future
performance being below expectations established in the feasibility
study. Other significant items included in income in 2005 were a
loss on commodity and foreign currency contracts of $8.2 million
(of which $3.9 million was unrealized), and a gain on the sale of
the Company's interest in Dukat for $2 million. Included in the net
income for 2004 were several unusual items including the gain on
the sale of the Company's interest in Dukat for $20.1 million, the
gain on the sale of surplus land at Quiruvilca for $3.6 million,
loss on commodity and foreign currency contracts of $6.6 million
(including $4.2 million of unrealized losses), the write-off of
$2.5 million of obsolete assets and debt settlement expenses of
$1.4 million. Revenue in 2005 was $122 million, an increase of 29
per cent relative to 2004 revenue. The average price for all of the
metals that the Company produces increased in 2005 compared to
2004. The average silver and lead prices increased 10 per cent, the
average zinc price increased 31 per cent and the average copper
price increased 28 per cent. In addition to higher realized prices
for our products, the Company also significantly increased its
production of metals. The Company achieved a 12 per cent increase
in silver production, together with 10 per cent and 15 per cent
increases in the production of zinc and copper respectively,
partially offset by an 8 per cent decrease in lead production. The
production increases were primarily a result of a full year of
ownership of the Morococha mine, which was acquired with effect
from July 1, 2004. Cost of sales in 2005 were $87.6 million, an
$18.5 million increase from the operating costs recorded in 2004.
Accounting for approximately $12.9 million of the increase is the
fact that the Morococha mine was owned for the full year in 2005
compared to only 6-months of ownership in 2004. Peruvian workers'
participation and Volcan Minera S.A. de C.V's ("Volcan") interest
in the Pyrite Stockpile operation, which together totaled $1.9
million in 2005 (as compared to $1.0 million of such costs in
2004), were also significant factors contributing to the increase
in operating costs over last year. In addition, the Company has
experienced the effects of industry-wide escalations in major cost
items, such as energy, freight, local currencies and labor in 2005.
Depreciation and amortization expense of $13.1 million was $2.2
million higher in 2005 than 2004. A full year of ownership of
Morococha accounted for $2.0 million of this increase. Mine
operating earnings, defined as revenue less operating expenses and
depreciation and amortization increased by 46 per cent in 2005 from
$14.8 million in 2004 to $21.6 million primarily as a result of the
acquisition of the low-cost Morococha mine and the improved prices
the Company received for the metals we produced. General and
administrative costs, including stock based compensation increased
by $0.7 million from 2004 to $6.9 million, reflecting increased
staffing costs, a stronger Canadian dollar against the US dollar
and increased travel costs. Included in general and administrative
expenses was stock-based compensation of $2.0 million (2004 - $2.2
million), which until the fourth quarter of 2004 had been reported
as a separate item on the Company's consolidated statement of
operations. Exploration expenses in 2005 were $3.7 million, similar
to exploration expenses incurred in 2004. The exploration expenses
recorded in 2005 primarily represented the costs associated with
the preparation of a feasibility study at the Company's Manantial
Espejo joint venture project and exploration drilling at Morococha,
while 2004's expense related mostly to work at Manantial Espejo and
due diligence expense associated with the Company's business
development activities. Asset retirement and reclamation expenses
for 2005 increased to $2.3 million from $1.3 million incurred in
2004. These costs are related to the accretion of the liability
that the Company has recorded with respect to its mining operations
by adopting CICA Handbook Section 3110 - "Accounting for Asset
Retirement Obligations" as at December 31, 2003. The Company
increased its estimated closing liability at Quiruvilca and La
Colorada during the year, and recognized a closure liability at
Alamo Dorado triggered by construction activities. The resultant
increase in our asset retirement obligation provision gave rise to
a higher accretion charge associated with this liability.
Investment and other income for 2005 totaled $2.6 million and was
primarily made up of interest generated by the Company's short-term
investment portfolio. The Company also recognized a gain on sale of
assets of $2.6 million in 2005, consisting of $2 million owing
under the terms of sale of our interest in the Dukat mine in 2004,
which is payable in December 2006, and $0.6 million for the gain on
the sale of obsolete equipment. Interest expense in 2005 of $0.5
million, which was primarily made up of financing and transactional
charges, compared to $0.9 million incurred in 2004. The decrease
from the prior year was as a result of the conversion of 99 per
cent of the 5.25 per cent convertible unsecured senior subordinated
debentures (the "Debentures") and other debt prepayments in April
and May 2004. Income tax provision for 2005 amounted to $3.3
million compared to $2.8 million in 2004, which was the first year
that the Company was taxable in Peru. A higher current income tax
expense resulted from greater taxable income being generated by our
Peruvian operating subsidiaries in 2005 than in 2004, primarily due
to a stronger price environment. The current income tax expense for
2005 was partially reduced by a $0.8 million reversal of the
provision for future income taxes. The table below sets out the
quarterly results, expressed in thousands of US dollars, for the
past 12 quarters, together with select balance sheet information
for the prior three years.
-------------------------------------------------------------------------
Quarters Ended (unaudited) Years Ended
-------------------------------------------------------------------------
2005 March 31 June 30 Sept. 30 Dec.31 Dec. 31
-------------------------------------------------------------------------
Revenue $ 29,086 $ 25,358 $ 30,086 $ 37,871 $ 122,401 Mine
operating earnings(x) $ 3,488 $ 4,526 $ 4,961 $ 8,683 $ 21,658
General & Administrative $ (1,563) $ (1,751) $ (2,065) $
(1,557) $ (6,936) Exploration $ (1,424) $ (885) $ (545) $ (843) $
(3,697) Net income/(loss) before write-down of properties $ (4,223)
$ 4,971 $ 172 $ 152 $ 1,072 Write-down of properties $ 0 $ 0 $ 0 $
(29,666) $ (29,666) Net income/(loss) for the period $ (4,223) $
4,971 $ 172 $ (29,514) $ (28,594) Net income/(loss) per share $
(0.06) $ 0.07 $ 0.00 $ (0.44) $ (0.43)
------------------------------------------- Other financial
information: --------------- Total Assets $ 362,280 Total long-term
financial liabilities $ 77,592 Total Shareholders Equity $ 257,322
-------------------------------------------------------------------------
2004 March 31 June 30 Sept. 30 Dec.31 Dec. 31
-------------------------------------------------------------------------
Revenue $ 15,708 $ 21,179 $ 27,916 $ 30,022 $ 94,825 Mine operating
earnings(x) $ 2,395 $ 2,640 $ 6,357 $ 3,402 $ 14,794 General &
Administrative $ (803) $ (1,202) $ (934) $ (3,302) $ (6,241)
Exploration $ (528) $ (1,137) $ (1,213) $ (960) $ (3,838) Net
income (loss) for the period $ (498) $ 2,150 $ 432 $ 13,130 $
15,214 Net income/(loss) per share $ (0.05) $ (0.11) $ 0.01 $ 0.21
$ 0.06 ------------------------------------------- Other financial
information: --------------- Total Assets $ 370,087 Total long-term
financial liabilities $ 68,279 Total Shareholders Equity $ 275,516
-------------------------------------------------------------------------
2003 March 31 June 30 Sept. 30 Dec.31 Dec. 31
-------------------------------------------------------------------------
Revenue $ 7,822 $ 12,553 $ 11,890 $ 12,857 $ 45,122 Mine operating
earnings(x) $ (78) $ 758 $ 1,258 $ 81 $ 2,019 General &
Administrative $ (401) $ (582) $ (565) $ (4,077) $ (5,625)
Exploration $ (496) $ (492) $ (600) $ (955) $ (2,543) Net income
(loss) for the period $ (1,104) $ (442) $ (390) $ (4,858) $ (6,794)
Net income/(loss) per share $ (0.02) $ (0.01) $ (0.01) $ (0.15) $
(0.20) ------------------------------------------- Other financial
information: --------------- Total Assets $ 279,883 Total long-term
financial liabilities $ 73,137 Total Shareholders Equity $ 184,098
-------------------------------------------------------------------------
Notes (x)Mine operating earnings/(loss) is equal to revenue less
operating expenses less depreciation and amortization The Company
did not declare or pay any dividends during the periods under
review. Revenue recognition from quarter to quarter can vary
significantly, depending on the timing of shipments of our
concentrates, which is primarily produced at all our Peruvian
mines. Shipping delays were the main reason behind the uneven
revenue between the first and second quarters in both 2003 and
2004, and between the first and second half of 2005. The
acquisition of Morococha is the primary reason why revenue
increased in the second half of 2004. For the fourth quarter of
2005, the Company recorded a net loss after tax of $29.5 million,
primarily as a result of the $29.7 million non-cash write down of
the La Colorada mine, partially offset by the $2.0 million gain
recorded relating the amount receivable under the terms of the sale
of our interest in Dukat. The Company generated mine operating
earnings of $8.7 million in the fourth quarter of 2005, a 75 per
cent increase from the mine operating earnings generated in the
third quarter of 2005 and significantly higher than the $3.4
million of mine operating earnings generated in the fourth quarter
of 2004. Cash costs per ounce averaged $4.48 in the fourth quarter
of 2005, which was 3% lower than the costs per ounce recorded in
the comparable period of 2004. Pan American produced 3,242,771
ounces of silver in the fourth quarter of 2005, which was a new
quarterly record. The net income after tax for 2004 was $15.2
million, compared to the net loss for 2003 of $6.8 million.
Included in the net loss for 2003 was $2.9 million related to
recognition of stock option compensation expenses, of which $2.1
million was for stock options granted in 2003, relating to 2002
performance. The operating results improved considerably in 2004 as
compared to 2003 as a result of the improving price environment for
metals that the Company produces and continued cost reductions,
particularly at the Quiruvilca mine. In 2004, revenue was more than
double that in 2003 as a result of an increase in the average price
for all of the metals that the Company produces, coupled with a 29
per cent increase in silver production. Operating costs were $29.4
million more in 2004 than 2003 primarily due to the acquisition of
Morococha and La Colorada achieving commercial production on
January 1, 2004. Depreciation and amortization expense increased
for the same reasons and 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 write
up its asset values by $8.2 million as at December 31, 2003. The
amortization of these higher asset values on a unit of production
basis has resulted in an increased depreciation charges. General
and administrative costs were $ 0.6 million higher in 2004 compared
to 2003 due to the costs associated with recruitment of several new
senior staff, increases in legal expenses relating to the early
conversion offer to the Debenture holders and the strengthening of
the Canadian dollar against the US dollar. Operating Performance In
2005, the Company achieved a 12 per cent increase in silver
production, together with 10 per cent and 15 per cent increases in
the production of zinc and copper, respectively, while lead
production decreased by 8 per cent. Increased silver, zinc and
copper production were primarily achieved through the acquisition
of the Morococha mine and an improvement in the operating
performance at La Colorada. The following table sets out select
historic and 2006 forecast consolidated operating information. The
Company's 2006 budget and the resultant forecast numbers contained
in this MD&A were based on the following price assumptions:
silver: $7.25 per ounce, zinc: $1,500 per tonne ($0.68 per lb),
lead: $850 per tonne ($0.39 per lb), copper: $3,700 per tonne
($1.68 per lb) and gold: $475 per ounce.
-------------------------------------------------------------------------
2006 Forecast 2005 2004 2003
-------------------------------------------------------------------------
Production Silver ounces 14,137,743 12,529,417 11,182,030 8,641,914
Zinc tonnes 43,510 37,421 34,086 31,797 Lead tonnes 17,279 15,410
16,694 18,990 Copper tonnes 3,937 3,931 3,426 3,143 Costs Cash cost
per ounce $ 4.43 $ 4.38 $ 4.17 $ 4.21 Non-cash cost per ounce $
1.49 $ 1.34 $ 1.14 $ 0.52 Total Cost per ounce $ 5.92 $ 5.72 $ 5.30
$ 4.73
-------------------------------------------------------------------------
Silver and base metal production in 2005 fell short of Management's
expectations of 13.6 million ounces due primarily to the delay in
production from San Vicente, the operating performance of the
Huaron mine and the reduction in demand at the Pyrite Stockpiles.
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 due to the protracted negotiations with Comibol, the
Bolivian state owned mining company and EMUSA, a Bolivian mining
company, Pan American only recommenced processing ore on a toll
basis at a nearby facility in mid-October, producing only 81,000
ounces at San Vicente and making it impossible for the Company to
meet its production target in 2005. At Huaron, production of silver
and particularly base metals fell short of Management's
expectations due to historically low metal grades and recoveries,
which are expected to improve in 2006. Silver production at the
Pyrite Stockpile operation was negatively impacted by the reduced
demand from the purchaser, Doe Run Peru, during 2005. Since demand
for this material is not controlled by Management, production from
the Pyrite Stockpile is difficult to forecast. Consolidated cash
costs per ounce in 2005 of $4.38 were higher than Management's
forecast by approximately $0.25 per ounce. Stronger local
currencies, higher Peruvian workers' profit participation and the
effects of industry-wide escalations in energy, freight and labor
costs all contributed to higher cash and total cost per ounce over
the previous year. Huaron's higher than expected costs per ounce
together with less than expected production from the low-cost San
Vicente and Pyrite Stockpile operations contributed to the increase
in our average consolidated cash and total costs per ounce in 2005.
Partially off-setting these higher than expected operating costs
were higher than expected by-product credits from base metal
revenues due to a better than expected price environment in 2005.
Consolidated production in 2006 is forecast at 14.1 million ounces
of silver, a 13 per cent increase as compared to 2005. The planned
increase is primarily due to restarting sulphide production at La
Colorada and commencing production at Alamo Dorado. Base metal
production is also expected to increase in 2006 over 2005's
production. Zinc production is budgeted to increase by 16% in 2006
due to increased zinc grades and recoveries at Huaron and
Quiruvilca and increased production at San Vicente. Higher lead
production from both Huaron and Quiruvilca combined with the
restart of the sulphide mine at La Colorada are expected to result
in an 12% increase in overall lead production. Copper production is
expected to be similar to the copper production in 2005.
Consolidated cash costs per ounce of silver, net of by-product
credits, are forecast to remain similar to 2005's cash costs of
$4.43 per ounce as cost reductions at Huaron are likely to be
offset by increases in costs at Quiruvilca and Morococha. An
analysis of each mine's operating performance in 2005 measured
against historical performance follows, together with Management's
forecasts for each operation's performance in 2006. Morococha mine
Pan American acquired an 81 per cent interest in the Morococha mine
with effect from July 1, 2004 and has subsequently purchased an
additional 7 per cent interest. Morococha was immediately accretive
to production, cash flow and earnings and was Pan American's most
profitable mine in 2005. Morococha generated $2.2 million and $10.4
million of mine operating earnings in the second half of 2004 and
in 2005, respectively. Mining and milling rates increased by 10 per
cent in 2005, resulting in a corresponding increase in silver
production rates, relative to 2004. Zinc and lead production rates
increased by one-third due to the increased mining and milling
rates coupled with increases in base metal grades and recoveries.
The following table sets out the production and cost data for the
second half of 2004, full year of 2005, together with Management's
forecasts for 2006:
-------------------------------------------------------------------------
2006 Forecast 2005 2H 2004
-------------------------------------------------------------------------
Tonnes Milled 530,194 467,521 212,172 Silver ounces 2,853,365
2,736,393 1,259,451 Zinc tonnes 17,263 15,689 5,902 Lead tonnes
5,490 5,875 2,186 Copper tonnes 1,065 925 538 Tonnes Shipped Zinc
concentrate 34,248 34,404 13,613 Lead concentrate 11,118 11,369
4,416 Copper concentrate 4,615 3,994 2,399 Cash cost per ounce $
2.86 $ 2.61 $ 4.47 Non-cash cost per ounce $ 1.67 $ 1.74 $ 1.69
Total Cost per ounce $ 4.53 $ 4.36 $ 6.16
-------------------------------------------------------------------------
Morococha exceeded Management's forecasts of tonnage, grades and
recoveries in 2005, resulting in significantly higher than expected
production of silver, lead and especially zinc. The investments in
mine infrastructure and development generated better than expected
results and allowed milling rates to increase 6 per cent more than
expected. Morococha's cash cost per ounce in 2005 was expected to
be $3.46, however better than expected operating performance and
higher than expected by-product credits resulted in an actual cash
cost of $2.61 per ounce. Tonnes milled at Morococha in 2006 are
expected to increase by 14% over 2005 tonnage, enabling the mine to
reduce the production costs per tonne over 2005 costs by 4%. The
higher tonnage milled combined with better zinc and lead
recoveries, offset by lower expected head grades, is expected to
result in higher silver, zinc and copper production, but lower lead
production than 2005. We anticipate a 12% increase in cash costs
per ounce due to lower silver and zinc grades and increases in
operating costs for labor and electricity. The primary objectives
at Morococha in 2006 are to increase proven and probable reserves
by continuing the extensive exploration drilling program that was
commenced shortly after the mine was purchased in 2004. In
addition, the Company intends to continue its program of extensive
investment at Morococha in order to improve efficiencies, increase
mining and milling rates, improve safety systems and prepare for
long term expansion. Capital expenditures at Morococha in 2006 are
expected to total $16.7 million. Huaron mine The Company's largest
silver producing mine in 2005, Huaron produced 10 per cent fewer
ounces of silver and 26 per cent less base metals compared to 2004
as a result of lower ore grades and base metal recoveries. However,
the mine still generated mine operating earnings of $4.8 million in
2005. The following table sets out Management's forecasts for
Huaron in 2006 and historical production and cost data.
-------------------------------------------------------------------------
2006 Forecast 2005 2004 2003
-------------------------------------------------------------------------
Tonnes Milled 639,881 639,849 635,845 605,790 Silver ounces
3,692,510 3,690,786 4,080,737 4,365,061 Zinc tonnes 12,908 11,701
15,041 18,855 Lead tonnes 8,012 6,774 10,569 14,246 Copper tonnes
1,641 1,689 1,754 1,332 Tonnes Shipped Zinc concentrate 25,121
23,110 34,314 34,819 Lead concentrate 17,361 16,162 20,253 27,602
Copper concentrate 6,710 7,470 7,030 5,687 Cash cost per ounce $
4.70 $ 5.12 $ 3.79 $ 4.09 Non-cash cost per ounce $ 1.22 $ 1.21 $
1.26 $ 0.77 Total Cost per ounce $ 5.92 $ 6.34 $ 5.05 $ 4.85
-------------------------------------------------------------------------
Production of silver and particularly base metals in 2005 fell
short of Management's forecasts due to lower than expected metal
grades and recoveries and lower than planned tonnes milled. Huaron
had forecast production of 4.2 million ounces of silver, 17,033
tonnes of zinc, 9,392 tonnes of lead and 2,051 tonnes of copper in
2005. As a consequence of lower silver production and by-product
credits, actual cash costs in 2005 were higher than forecasted by
21 per cent at $5.12 per ounce. In 2006, Huaron plans to mine and
process at approximately the same rate as in 2005. Management
expects silver production to be similar to that achieved in 2005,
but expects higher zinc and lead production as a result of
improvements in grades and recoveries. Metallurgical control at
Huaron will continue to be the key challenge in 2006. Operating
costs are expected to increase by 3% in 2006 as compared to 2005,
however, cash costs per ounce are expected to decrease over the
2005 forecast due mainly to larger base metal by-product credits
resulting from higher base metal production and prices.
Approximately $7.6 million of capital spending is expected at
Huaron in 2006 as the mine starts the investment necessary to
access reserves below the 250 level, which will be the most
important mining area in years to come. Quiruvilca mine In August
of 2003, Quiruvilca closed the high-cost North Zone and reduced
monthly tonnage processed from approximately 45,000 tonnes to
approximately 30,000 tonnes. Since then, the mine has processed
higher-grade ore and decreased its operating costs to the point
where it generated $6.1 million and $9.5 million in mine operating
earnings in 2005 and 2004, respectively. Quiruvilca produced less
silver, zinc and lead in 2005 compared to 2004, due to the fact
that it milled 5 per cent less tonnage and ore grades were slightly
lower. The following table sets out Management's forecasts for
Quiruvilca in 2006 and historical production and cost data.
-------------------------------------------------------------------------
2006 Forecast 2005 2004 2003
-------------------------------------------------------------------------
Tonnes Milled 362,842 362,192 381,237 442,093 Silver ounces
2,030,942 2,234,565 2,530,869 2,493,908 Zinc tonnes 11,042 9,697
11,709 12,509 Lead tonnes 3,157 2,761 3,803 4,361 Copper tonnes
1,189 1,307 1,081 1,811 Tonnes Shipped Zinc concentrate 198,717
17,921 19,657 27,481 Lead concentrate 5,846 3,226 11,048 6,425
Copper concentrate 6,247 6,681 6,268 7,938 Cash cost per ounce $
4.30 $ 4.11 $ 3.75 $ 5.23 Non-cash cost per ounce $ 0.62 $ 0.56 $
0.28 $ 0.19 Total Cost per ounce $ 4.92 $ 4.67 $ 4.03 $ 5.42
-------------------------------------------------------------------------
Production of all metals at Quiruvilca fell slightly short of
Management's forecasts in 2005 primarily because tonnes milled were
lower than expected due to the delay in the installation of a
conveyor system to transport both ore and waste from the key 340
level of the mine. Silver production in 2005 was forecast to be 2.3
million, however actual production fell 4 per cent below the
forecast. Despite lower than forecast silver production in 2005,
actual cash cost per ounce were $4.11 per ounce compared to
forecast cash costs of $4.26 per ounce due to better than expected
by- product credits. Cash costs per ounce are projected to increase
by 8% at Quiruvilca due to lower silver production as a result of
lower grades and higher operating costs of labor and electricity.
Higher expected costs should be offset somewhat by the higher base
metal by-product credits expected from increased base metal
production and prices compared with 2005. A total of $1.5 million
capital is planned for 2006, primarily to develop the mine down to
the 400 level. An additional $1.4 million is also planned for
reclamation expenditures at Quiruvilca. Pyrite Stockpiles Pan
American acquired the right to mine and sell certain stockpiled ore
from Volcan in November 2002. Following is a table showing historic
and forecast production and cost information.
-------------------------------------------------------------------------
2006 Forecast 2005 2004 2003
-------------------------------------------------------------------------
Tonnes Sold 56,520 61,499 79,451 62,255 Silver ounces 648,737
692,381 961,869 790,803 Cash cost per ounce $ 1.78 $ 1.82 $ 0.19 $
0.07 Non-cash cost per ounce $ 0.00 $ 0.00 $ 0.00 $ 0.00 Total Cost
per ounce $ 1.78 $ 1.82 $ 0.19 $ 0.07
-------------------------------------------------------------------------
In 2005, demand for the stockpiled ore from the only buyer of this
material, Doe Run Peru, decreased by 23 per cent compared to the
tonnage purchased in 2004. Our agreement with Volcan entitles them
to a one-third interest in net operating cash flow from the Pyrite
operation, beginning in December 2004, which was the reason for the
increased cash cost per ounce in 2005. As a direct result of
Volcan's interest, the higher the price of silver, the higher the
cash cost per ounce at the Pyrite operation. Since the average
silver price in 2005 exceeded Management's expectations, the actual
cost per ounce of $1.82 exceeded Management's forecast of $1.44 per
ounce. In 2006, Management expects that 56,500 tonnes of ore will
be sold to Doe Run Peru, with costs remaining similar to those
incurred in 2005. San Vicente mine Pan American has been developing
the San Vicente mine in Bolivia under agreements with Comibol and
EMUSA since December 2001. Based on the expenditures made by EMUSA
during the small scale mining operations and feasibility work,
EMUSA has earned a 45 per cent interest in the mine, with Pan
American retaining the other 55 per cent. The following table sets
out Management's forecasts for San Vicente in 2006 assuming that
agreements are reached with EMUSA and COMIBOL to allow the
operation to continue small-scale mining beyond March 2006,
together with production and cost data for 2005. In 2004, the mine
was operated by EMUSA and the Company accounted for its interest in
San Vicente as an investment for that period.
-------------------------------------------------------------------------
2006 Forecast 2005 2004
-------------------------------------------------------------------------
Tonnes Milled 36,112 10,109 27,017 Silver ounces 278,698 80,991
313,029 Zinc tonnes 1,554 334 1,312 Copper tonnes 39 10 53 Cash
cost per ounce $ 3.50 $ 1.24 $ Non-cash cost per ounce $ 0.33 $
0.00 $ Total Cost per ounce $ 3.83 $ 1.24 $
-------------------------------------------------------------------------
San Vicente contributed 80,991 ounces of silver to Pan American's
account during 2005, well below the 313,029 ounces contributed in
2004, and below Management's expectation of 735,441 ounces for
2005. Mining activities at San Vicente only restarted in early July
as a result of delays in the negotiations with Comibol and EMUSA.
The Company stockpiled ore at San Vicente until toll milling began
in October at a nearby facility. Cash costs per ounce of $1.24 in
the fourth quarter were well below Management's forecast of $2.05
per ounce due to larger than expected by-product credits. In 2006,
Pan American expects to continue a small-scale operation, which
will utilize a mill owned by EMUSA while the Company completes an
evaluation of the potential to build a 600 tonne per day plant
located on the San Vicente mine site. La Colorada mine The La
Colorada mine commenced commercial production for accounting
purposes on January 1, 2004, after completing a $20 million
expansion. La Colorada's performance has been below feasibility
estimates due to a combination of events: difficult ground
conditions which have slowed both development and mining, increased
dewatering requirements and areas of high clay refractory ore which
have negatively impacted recoveries and mill throughput. A revised
mining and processing plan was developed and implemented in the
second half of 2004 to address these issues. The primary component
of the new plan was to switch to a more selective narrow vein
mining method, which decreased tonnes of ore mined but
substantially increased ore grades. While the revised mine plan has
improved the safety record and operating performance of La
Colorada, the mine continued to generate mine operating losses of
$2.5 million and $1.3 million in 2004 and 2005, respectively. The
following table sets out Management's forecasts for La Colorada in
2006 and historical production and cost data for 2005 and 2004.
Prior to 2004, all revenue and expense items were capitalized and
added to the carrying value
-------------------------------------------------------------------------
2006 Forecast 2005 2004 2003
-------------------------------------------------------------------------
Tonnes Milled 284,000 211,854 171,155 99,115 Silver ounces
4,050,544 3,094,301 2,036,075 992,142 Zinc tonnes 588 0 122 433
Copper tonnes 621 0 136 383 Cash cost per ounce $ 5.44 $ 5.63 $
6.26 Non-cash cost per ounce $ 1.95 $ 1.90 $ 1.91 Total Cost per
ounce $ 7.39 $ 7.52 $ 8.17
-------------------------------------------------------------------------
In 2005, although La Colorada processed slightly fewer tonnes than
Management had forecasted, silver grades exceeded expectations,
resulting in silver production of 3.1 million ounces, which was 8
per cent higher than forecast. Actual cash costs of $5.63 per ounce
were within 2 per cent of Management's forecast. In 2006,
Management anticipates restarting the sulphide mine and plant at La
Colorada, resulting in an expected increase in silver production of
nearly 1 million ounces. The sulphide plant is expected to process
250-tonnes per day after April 2006. Cash costs per ounce in 2006
are expected to decline slightly over 2005's costs as a result of
processing more tonnage with higher silver grades, however combined
oxide and sulphide plant silver recoveries are expected to decline
and the cost of mining in recently dewatered zones is expected to
increase. Capital expenditures at La Colorada in 2006 are expected
to be $3.2 million, comprised mostly of expenditures related to
restarting the sulphide mine and plant, which Management expects to
have an 18-month payback period. Cash and Total Costs per Ounce of
Silver Taking effect from the first quarter of 2005, the Company
changed its method for calculating cash and total costs per ounce
of silver. In the past, these calculations were based on produced
ounces, as set out on page 11 of the Consolidated Financial
Statements for the year ended December 31, 2004. The Company now
calculates its cash and total costs per ounce on the more widely-
used methodology based on the silver ounces for which the Company
is paid. Throughout this MD&A, costs per ounce for 2004 and
2003 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 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 cost of sales, as reported in
our audited Consolidated Statement of Operations for 2005, 2004 and
2003. Cash and Total Cost per Ounce Reconciliation (in thousands of
US dollars) 2005 2004 2003
-------------------------------------------------------------------------
Cost of Sales $ 87,648 $ 69,162 $ 39,778 Add / (Subtract) Smelting,
refining, & transportation charges 37,736 26,948 24,771
By-product credits (78,025) (54,911) (39,179) Mining royalties
& worker's participation 372 (514) 0 Change in inventories
1,975 (553) 1,516 Other 1,395 1,696 1,454 Minority interest
adjustment (1,018) (1,091) 0
-------------------------------------------------------------------------
Cash Operating Costs A 50,082 40,737 28,341 Add / (Subtract)
Depreciation & amortization 13,095 10,869 3,325 Asset
retirement & reclamation 2,329 1,315 303 Change in inventories
943 (56) 0 Other (360) (612) (150) Minority interest adjustment
(632) (386) 0
-------------------------------------------------------------------------
Total Costs B 65,458 51,867 31,819 Payable Silver Production (oz.)
C 11,435,604 9,780,675 6,732,244
-------------------------------------------------------------------------
Cash Costs per ounce (A(x)$1000)/C $ 4.38 $ 4.17 $ 4.21 Total Costs
per ounce (B(x)$1000)/C $ 5.72 $ 5.30 $ 4.73 Liquidity and Capital
Resources Cash and cash equivalents plus short-term investments
balance at December 31, 2005 was $55.3 million, which was a
decrease of $42.8 million from the balance at December 31, 2004.
The decrease in funds, together with cash generated by operating
activities of $10.8 million and financing activities of $5.7
million were used for resource property expenditures totaling $44.2
million and for investments in mineral property, plant and
equipment totaling $15.4 million. Cash flow provided by operations
in 2005 was $10.7 million, which was significantly higher than the
$ 3.1 million generated by operations in 2004 (changes in working
capital items absorbed $3.4 million in 2005 compared to $9.8
million in 2004). Financing activities in 2005 included the
issuance of shares for cash of $6.4 million and a net repayment of
short term concentrate advances of $0.7 million. Financing
activities in 2004 included the issuance of shares for net proceeds
of $62.4 million, the prepayment of bank loans of $13.0 million,
prepaid interest on the Debentures of $11.2 million pursuant to the
terms of the early conversion offer, and Debenture interest
payments of $2.4 million. Investing activities in 2005 consisted of
construction expenditures at Alamo Dorado of $35.5 million, and
property plant and equipment expenditures at Morococha, La
Colorada, Huaron and Quiruvilca of $8.4 million, $5.5 million, $4.5
million and $2.3 million, respectively. The Company also invested
$1.7 million into equipment at both Manantial Espejo and at San
Vicente. Included in investing activities in 2005 was the
liquidation of $44.1 million of the Company's short-term bond
portfolio and other investments. Investing activities in 2004
included investments in mineral property, plant and equipment,
including the purchase of Morococha of $53.3 million plus the
proceeds from the sale of our interest in Dukat and surplus land at
Quiruvilca of $23.7 million and the sale of short-term investments
of $5.1 million. Working capital at December 31, 2005 was $74.8
million, a reduction of $35.2 million from the prior year-end's
working capital of $110 million. The reduction in working capital
was due to the $42.8 million decrease in cash and cash equivalents
plus short-term investments and an increase in current liabilities
of $1.1 million, partially off-set by increases in accounts
receivables, inventories, prepaids and hedge assets totaling $8.7
million. Working capital at December 31, 2004 was $110 million, an
increase of $28 million from the end of 2003. The improvement was
due largely to the $18.2 million increase in accounts receivable,
the $9.0 million increase in cash plus short-term investments, a
$4.1 million increase in inventories and a net $1.1 million
reduction in current liabilities. During the third quarter of 2005,
the Company issued 255,781 warrants to the International Finance
Corporation ("IFC") in exchange for the termination of past and
future obligations relating to production from the La Colorada
mine. Each warrant issued entitles the IFC to purchase one common
share of Pan American at a price of US$ 16.91 over a five-year
period. These warrants were negotiated with the IFC during the
second quarter of 2005 and issued as settlement of the Company's
obligation to the IFC with a fair value of $2.1 million. Capital
resources at December 31, 2005 amounted to shareholders' equity of
$257.3 million. At the date of this MD&A, the Company had
issued 67,564,903 shares. Pan American plans capital expenditures
in 2006 of up to $120 million, including $43.2 million for the
completion of Alamo Dorado and $46.9 million of construction
expenditures at Manantial Espejo. In addition to these project
construction expenditures, the Company plans to spend $16.6 million
on development and upgrades to infrastructure at the Morococha mine
while rehabilitation work and capital to deepen the mine at Huaron
is expected to amount to $7.6 million. Assuming a positive decision
to build a mill at San Vicente in the first quarter of 2006,
capital requirements for that mine are anticipated to be $7 million
in 2006. Capital requirements at La Colorada and Quiruvilca are
expected to be approximately $3.1 million, and $1.5 million,
respectively. In addition to these capital expenditures, the
Company anticipates reducing reclamation liabilities through
concurrent reclamation spending at Quiruvilca of $1.4 million and
at Morococha of $0.9 million. Non- cash working capital balances
are expected to increase by $3 million from the levels as of the
end of 2005 due to the start-up of operations at Alamo Dorado.
Based on the Company's financial position at December 31, 2005 and
the $19.5 million of operating cash flows that are expected in
2006, the Company's liquid assets are sufficient to discharge
liabilities as they come due, however only partially sufficient to
fund planned project development and sustaining capital
expenditures in 2006. As of the date of this MD&A, the Company
is reviewing financing alternatives for the planned capital
expenditures described above. The Company does not expect the
impact of inflation to have a material effect on the Company's
financial position, operational performance or cash flows over the
next twelve months. Other than as disclosed elsewhere in the
audited consolidated financial statements for 2005 and 2004, and
the related notes thereto, the Company's only contractual
obligation at the end of 2005 was $0.7 million remaining for the
Debentures, which are due in 2009. The Company does not anticipate
annual interest payments related to the Debentures to be material
over the next four years. The Company does not have any off-balance
sheet arrangements or commitments other than those disclosed in
this MD&A and the audited consolidated financial statements and
the related notes. Critical Accounting Policies and Estimates The
preparation of financial statements in conformity with Canadian
GAAP requires Management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure
of contingent liabilities at the date of the financial statements,
and the reported amounts of revenues and expenditures during the
reporting period. Management has identified (i) property, plant and
equipment, (ii) provision for reclamation and closure, (iii) future
income tax provision and (iv) stock based compensation as the main
estimates for the following discussion. Please refer to Note 2 of
the Company's consolidated financial statements for a description
of all of the significant accounting policies. Property, plant and
equipment are the most significant assets of the Company,
representing $257.4 million at December 31, 2005. This amount
represents the capitalized expenditures related to the acquisition,
exploration and development of mineral deposits. Construction costs
on development projects are capitalized until the mine is
substantially complete and ready for production. The Company
estimates its reserves and resources and the economic life of its
mines and utilizes this information to calculate depletion and
amortization expense. Annually, or more frequently as circumstances
require, Pan American assesses the recoverability of the carrying
values of its mining properties and investments by performing
impairment evaluations. These evaluations consist of comparing each
asset's carrying value with the estimated undiscounted future net
cash flows. Where those cash flows are less than the carrying
value, the Company records a write- down of the asset to the
estimated fair value. In 2005, the Company wrote-down the asset
carrying value of the La Colorada mine by $29.7 million to $23.3
million. Each mine's impairment analyses were performed using the
average silver fixing price of 2005, which was $7.31 per ounce as
the long- term silver price assumption. Other estimates
incorporated in the impairment evaluations include processing and
mining costs, mining tonnage, ore grades and recoveries, which are
all subject to uncertainty. If silver prices fall below $7.31 per
ounce or some of the other assumptions prove inaccurate, additional
material asset impairment charges may be required in the future.
Reclamation and closure costs have been estimated based on the
Company's interpretation of current regulatory requirements,
however changes in regulatory requirements and new information may
result in revisions to estimates. The Company recognizes the fair
value of liabilities for reclamation and closure costs in the
period in which they are incurred. A corresponding increase to the
carrying amount of the related assets is generally recorded and
depreciated over the life of the asset. Accordingly, at December
31, 2005 the expected fair value of future site restoration costs
for the La Colorada, Morococha, Huaron and Quiruvilca mines was
estimated using a discount rate of 7.5 per cent at $ 39.4 million
(2004 - $32.0 million). This estimate was increased in 2005 as a
result of accretion of the liability of $2.3 million, the
recognition of a $0.7 million liability at Alamo Dorado and
revisions to the expected site restoration costs at the Quiruvilca
and La Colorada mines of $3.2 million and $1.1 million,
respectively. The reclamation provision was reduced in 2005 by $1.3
million of closure expenditures. In future periods, assuming no
change in estimates, operations will be charged with annual
amortization of future site restoration costs of about $2.5 million
and the annual accretion of the liability for future site
restoration costs of about $2.2 million. The future income tax
provision is based on the liability method. Future taxes arise from
the recognition of the tax consequences of temporary differences by
applying enacted or substantively enacted tax rates applicable to
future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and
liabilities. The Company records a valuation allowance against any
portion of those future income tax assets that it believes will,
more likely than not, fail to be realized. For its 2003 fiscal
year, Pan American adopted CICA Handbook Section 3870 - Stock-Based
Compensation and Other Stock-Based Payments, which requires the
fair value method of accounting for stock options. Under this
method, Pan American is required to recognize a charge to the
income statement based on an option-pricing model for all stock
options that were granted and vested in each period, with a
corresponding credit to Contributed Surplus under the Shareholders'
Equity section of the balance sheet. In 2005, the fair value of the
stock options granted was calculated using an option-pricing model
based on the following assumptions - no dividends were paid, a
weighted average volatility of the Company's share price of 46 per
cent, a weighted average annual risk free rate of 3.45 per cent and
an expected life of 2.7 years. The resulting weighted average
option valuation was $5.39 per share for a total expense related to
stock options in 2005 of $1.5 million (2004 - $2.2 million, 2003 -
$2.9 million). The charge to the Company's income statement is
incorporated as part of the general and administrative expenses.
Risks and Uncertainties Metal Price and Currency Risk Pan American
derives its revenue from the sale of silver, zinc, lead, copper and
gold. The following pie graph's reflect the respective contribution
to Pan American's consolidated revenue from the various metals it
produces and by operation, according to the 2006 budget. For charts
on revenue by metal and revenue by operation, please see the Pan
American Silver website at http://www.panamericanslver.com/ The
Company's revenues are directly dependent on metal prices that have
shown extreme volatility and are beyond the Company's control. The
following table illustrates the effect of changes in silver and
zinc prices on anticipated adjusted revenue for 2006, after taking
into account the Company's forward sales commitments for zinc: Zinc
prices -----------------------------------------------------------
$ 1,500 $ 1,750 $ 2,000 $ 2,250
----------------------------------------------------------- $ 7.00
$ 142,777 $ 145,226 $ 147,674 $ 150,123 Silver $ 7.50 $ 149,414 $
151,862 $ 154,310 $ 156,759 prices $ 8.00 $ 156,050 $ 158,498 $
160,946 $ 163,395 $ 8.50 $ 162,686 $ 165,134 $ 167,538 $ 170,031 $
9.00 $ 169,322 $ 171,770 $ 174,219 $ 176,667 $ 9.50 $ 175,958 $
178,406 $ 180,855 $ 183,303
-----------------------------------------------------------
Consistent with the Company's mission to provide equity investors
with exposure to changes in silver prices, our policy is not to
hedge the price of silver. 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. At
December 31, 2005, the Company had sold forward 13,400 tonnes of
zinc at a weighted average price of $1,551 per tonne ($0.704 per
pound). These forward sales commitments for zinc represent
approximately 37 per cent of the Company's forecast 2006 payable
zinc production. At December 31, 2005 the cash offered prices for
zinc was $1,907 per tonne and the mark-to-market value of the
Company's zinc forward contracts at that date was a negative $4.3
million and at the date of this MD&A was a negative $6.4
million. Pan American reports its financial statements in US
dollars ("USD"); however the Company operates in jurisdictions that
utilize other currencies. As a consequence, the financial results
of the Company's operations as reported in USD are subject to
changes in the value of the USD relative to local currencies. Since
the Company's revenues are denominated in USD and a portion of the
Company's operating costs and capital spending are in local
currencies, the Company is negatively impacted by strengthening
local currencies relative to the USD and positively impacted by the
inverse. In order to mitigate this exposure presented by the
construction expenditures at Alamo Dorado in Mexican pesos ("MXN"),
the Company has purchased MXN 203 million settling between January
2006 and June 2006 to match anticipated spending at an average
MXN/USD exchange rate of 11.26. At December 31, 2005, the spot
exchange rate for MXN/USD was 10.65 and the positive mark to market
value of the Company's position was $0.9 million. At the date of
this MD&A the mart to market was positive $1.2 million. The
Company maintains trading facilities with several banks for the
purposes of transacting the Company's hedging activities. None of
these facilities are subject to margin arrangements. The Company
has long-term contracts to sell the zinc, lead and copper
concentrates produced by the Quiruvilca, Huaron, Morococha and San
Vicente mines. These contracts include provisions for pricing the
contained metals, including silver, based on average spot prices
over defined 30-day periods that may differ from the month in which
the concentrate was produced. Under these circumstances, the
Company locks in the spot price of silver during the month that the
silver-bearing concentrates are produced. At December 31, 2005 the
Company had fixed the price of 900,000 ounces of its fourth
quarter's silver production contained in concentrates, which is due
to be priced in January and February of 2006 under the Company's
concentrate contracts. The price fixed for these ounces averaged
$8.31 per ounce while the spot price of silver was $8.83 per ounce
on December 31, 2005. Silver dore production from La Colorada is
refined under long term agreements with fixed refining terms. The
refined silver is sold in the spot market to various bullion
trading banks. The Company has never had any delivery or payment
disputes with its customers and management believes that there is
no appreciable delivery or credit risk resulting from its sales
contracts. Political and Country Risk As shown by the Revenue by
Operation pie graph above, Pan American conducts operations in
Peru, Mexico and Bolivia and also has a development property in
Argentina. All of these jurisdictions are potentially subject to a
number of political and economic risks. The Company is not able to
determine the impact of these risks on its future financial
position or results of operations and the Company's exploration,
development and production activities may be substantially affected
by factors outside of Pan American's control. These potential
factors include, but are not limited to: royalty and tax increases
or claims by governmental bodies, expropriation or nationalization,
foreign exchange controls, import and export regulations,
cancellation or renegotiation of contracts and environmental and
permitting regulations. The Company currently has no political risk
insurance coverage against these risks. Environmental Risks Pan
American's activities are subject to extensive laws and regulations
governing environmental protection and employee health and safety.
Environmental laws and regulations are complex and have tended to
become more stringent over time. Pan American is required to obtain
governmental permits and in some instances provide bonding
requirements under federal, state or provincial air, water quality
and mine reclamation rules and permits. Although Pan American makes
provisions for reclamation costs, it cannot be assured that these
provisions will be adequate to discharge its future obligations for
these costs. Failure to comply with applicable environmental health
and safety laws can result in injunctions, damages, suspension or
revocation of permits and imposition of penalties. There can be no
assurance that Pan American has been or will be at all times in
complete compliance with such laws, regulations and permits, or
that the costs of complying with current and future environmental
and health and safety laws and permits will not materially
adversely affect Pan American's business, results of operations or
financial condition. Employee relations Pan American's business
depends on good relations with its employees. Certain of the
Company's employees and the employees mining contractors indirectly
employed by the Company, are represented by unions. At December 31,
2005, there were 239 employees represented by the Sindicato de
Trabajadores de Pan American Silver S.A.C. - Mina Quiruvilca (the
"Quiruvilca Union") and 65 employees represented by the Sindicato
de Trabajadores de Shorey y Anexos (the "Shorey Union"). There are
also 15 employees at the Huaron mine who are members of a union
committee who have rights pursuant to an agreement dated January 1,
2003. The Company has experienced short-duration labour strikes and
work stoppages in the past and may experience future work
stoppages. Pan American is subject to various claims and legal
proceedings covering a wide range of matters that arise in the
ordinary course of business activities, many of them relating to
ex-employees. Each of these matters is subject to various
uncertainties and it is possible that some of these matters may be
resolved unfavorably to Pan American. The Company has established
provisions for matters that are probable and can be reasonably
estimated. The liabilities that ultimately may result from these
matters do not exceed $5 million in aggregate. Outlook During 2006,
the Company plans to continue on the growth trend it has
established by commissioning Alamo Dorado into production, by
commencing with the construction of Manantial Espejo and by
completing a feasibility study for the expansion of operations at
San Vicente. In addition to these properties, Management believes
there is significant exploration potential at its existing Peruvian
operations, especially at Morococha. Development Projects The Alamo
Dorado project remains on schedule and on budget through over 90
per cent of engineering and nearly 40 per cent completion of
construction. Up to the end of 2005 project expenditures totaled
$35.5 million. Total commitments made to date are $48.4 million.
Plant site civil work and concrete pouring is underway at Alamo
Dorado in the four main plant areas: primary crusher, coarse ore
stockpile, the mill bench, and the leach tank areas. The laboratory
has been completed and commissioned and construction of the office
proceeds satisfactory. A total of 750,000 tonnes of ore and waste
rock were mined from the pit area during 2005. The mine continues
to safely ramp-up to the 10,000 tonnes per day mining rate as
access improves. The mine is expected to move a total of 3.6
million tonnes during 2006, of which 0.6 million tonnes will be ore
grade. After startup and commissioning in September, the plant is
expected to steadily increase to 100 per cent of the design
capacity of 4,000-tonnes per day by the end of 2006. The plant is
expected to process relatively low grade ore from stockpiles,
contributing silver production of 555,000 ounces in 2006. The
feasibility study has been completed on the 50 per cent owned
Manantial Espejo silver/gold joint venture. Pan American, as
project operator, has received comments on its Environmental Impact
Study from the Argentine government and there appear to be no
significant impediments to receiving a mine development permit. Pan
American expects to be able to announce the results of the
feasibility study shortly after it submits its response to
government in March. On a 100% basis, Manantial Espejo is expected
to produce an average of 4.2 million ounces of silver and more than
60,000 ounces of gold annually over an 8-year mine life starting
January 1, 2008. Metal markets Prices for the metals that the
Company produces have been robust for the last two years, after
several years of prolonged weakness. Factors contributing to the
recovery in metal prices include demand resulting from the strong
industrial growth in China, weakness in the US dollar and supply
concerns due to under-investment in new production capacity. The
Company anticipates that these factors will continue to support
prices during 2006 and that the long-term fundamentals for metal
prices are positive. DATASOURCE: Pan American Silver Corp. CONTACT:
Brenda Radies, Vice-President Corporate Relations, (604) 806-3158,
http://www.panamericansilver.com/
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