/FIRST AND FINAL ADD - TO316 - Pan American Silver Corp./

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates are related to the physical and economic lives of mineral assets, their recoverability, and site restoration and related obligations.

Some of the statements in this MD&A are forward-looking statements, such as estimates of future production levels, expectations regarding mine production costs, expected trends in mineral prices and statements that describe Pan American's future plans, objectives or goals. Actual results and developments may differ materially from those contemplated by these statements depending on such factors as changes in general economic conditions and financial markets, changes in prices for silver and other metals, technological and operational hazards in Pan American's mining and mine development activities, uncertainties inherent in the calculation of mineral reserves, mineral resources and metal recoveries, the timing and availability of financing, governmental and other approvals, political unrest or instability in countries where Pan American is active, labor relations and other risk factors listed from time to time in Pan American's Annual Information Form and Form 40F.

Significant Events during the Second Quarter

On April 5, 2006, Pan American filed a preliminary prospectus supplement to its existing $150 million base shelf prospectus with the securities regulatory authorities in the provinces of Canada and with the SEC in connection with a public offering of common shares (the "Offering"). The Company completed the base Offering on April 18, 2006 and completed the over-allotment option of the Offering on April 21, 2006. The Offering consisted of 6.28 million common shares priced at $23.88 for gross proceeds of $150 million and net proceeds after deducting underwriting fees and other share issue costs, of $142.2 million. Pan American expects to use the proceeds of the Offering for the construction and development of its Manantial Espejo silver project in Argentina.

On April 12, 2006, Pan American announced that it had closed the acquisition of a 50 per cent interest in the Manantial Espejo project from Silver Standard Resources Inc. The transaction gave Pan American a 100 per cent interest in Manantial Espejo. The purchase price of $47.5 million was paid with 1.95 million common shares of Pan American.

Prior to June 30, 2006, the Company bought 6,000 tonnes of zinc settling between July and December 2006. These forward purchases were entered into to exactly offset all of the Company's zinc forward sales positions, leaving the Company with no open zinc positions as at June 30, 2006. The effect of these transactions was to crystallize a loss of $8.3 million, which has been recorded in the consolidated statement of operations. These transactions will have no further impact on the Company's earnings and the Company's future zinc production is now fully exposed to zinc cash prices.

Results of Operations

For the three months ended June 30, 2006, the Company generated record net income of $15 million (basic income per share of $0.21) compared to net income of $5.0 million (basic income per share of $0.07) for the corresponding period in 2005. The improved financial results for the quarter are primarily due to significantly higher silver prices, increased silver production and record low costs per ounce of silver (net of higher base metal by-product credits). The Company's record earnings for the second quarter included a $4.8 million loss from forward sale contracts. Specifically, the Company realized only $1,603 per tonne on approximately 53% of its payable zinc production, which had been previously sold forward. This was significantly below the average zinc price of $3,059 per tonne for the period.

For the six-month period ended June 30, 2006 the Company had net income of $ 12.2 million, compared to net income of $0.7 million for the corresponding period in 2005. Increased silver and zinc production combined with higher realized prices were the primary reasons for the dramatic increase in net income for the six-month period ended June 30, 2006 versus the comparable 2005 period. The net income for the six-month period ended June 30, 2006 includes a loss of $16.6 million relating to commodity and currency contracts, (compared to a gain of $0.2 million for the same period in 2005) and an income tax provision of $11.6 million, (compared to an expense of $1.7 million for the same period in 2005).

Sales for the second quarter of 2006 were $62.8 million, a 148 per cent increase from sales in the corresponding period in 2005. Sales in the second quarter of 2006 benefited from significantly higher realized metal prices, increased production from the La Colorada mine and a 22 per cent increase in the quantity of concentrate shipped from the Company's Peruvian operations versus the year-earlier period (shipments of concentrate are an essential criterion for revenue recognition). The Company shipped approximately the same quantity of concentrate as it produced during the second quarter of 2006. At the end of the second quarter the Company had approximately 13,200 tonnes of concentrate inventory on hand and expects to ship this inventory and recognize the related revenues in the third and fourth quarters of 2006.

Sales for the six-month period ended June 30, 2006 were almost double the sales for the comparable period in 2005, due primarily to higher realized metal prices, increased production from the La Colorada and San Vicente mines and slightly higher concentrate shipments from the Peruvian operations.

Cost of sales for the three months ended June 30, 2006 was $27.6 million, a 50 per cent increase from the $18.4 million recorded in the same period of 2005. Similar to sales for the second quarter of 2006, cost of sales increased due to the fact that the Company shipped approximately 6,160 more tonnes of concentrates from the three mines in Peru relative to the comparable period in 2005. Cost of sales was also negatively impacted by significantly increased worker's participation costs in Peru, which are based on higher taxable income generated. Further increases in cost of sales were seen at the La Colorada mine, where mining and milling rates increased by approximately 9 per cent relative to a year ago.

Cost of sales for the six-month period ended June 30, 2006, increased by 27 per cent over the comparable period of 2005. The factors described above plus the cost of sales of the San Vicente mine in Bolivia, which was operating in the first quarter of 2006, were the primary reasons for the increase from the comparable period in 2005.

Depreciation and amortization charges for the second quarter of 2006 increased to $4.2 million from $2.4 million recorded for the corresponding period in 2005. For the six-month period ended June 30, 2006, these charges increased to $7.6 million from $5.6 million a year ago. The higher level of concentrate shipments and milling rates at La Colorada were the main reasons for the increase in both the three-month and six-month periods ended June 30, 2006 compared to the depreciation and amortization charges recorded in the respective periods of 2005.

Mine operating earnings in the second quarter of 2006 were a record $31.1 million, which is approximately seven times the mine operating earnings generated in the second quarter 2005 of $4.5 million, and almost double the mine operating earnings generated in the first quarter of 2006. During the six-month period ended June 30, 2006, the Company generated mine operating earnings of $49 million compared to mine operating earnings of $8 million in the same period of 2005. Higher metal prices, increasing silver production profile and declining costs, net of by-product credits, resulted in the improving trend in mine operating earnings over the last three years. The table below sets out selected quarterly results for the past fourteen quarters, which are stated in thousands of US dollars, except for the per share amounts.

                                     Mine
                                   operating    Net income/      Diluted
          Quarter                  earnings/    (loss) for    income (loss)
  Year  (unaudited)     Sales      (loss)(1)    the period      per share
  -------------------------------------------------------------------------
  2006     June 30    $  62,848    $  31,060     $  14,964     $   0.20
          March 31    $  45,744    $  17,976     $  (2,761)    $  (0.04)
  -------------------------------------------------------------------------
  2005      Dec.31    $  37,871    $   8,683     $ (29,514)    $  (0.44)
          Sept. 30    $  30,086    $   4,961     $     172     $   0.00
           June 30    $  25,358    $   4,526     $   4,971     $   0.07
          March 31    $  29,086    $   3,488     $  (4,223)    $  (0.06)
  -------------------------------------------------------------------------
  2004     Dec. 31    $  30,022    $   3,402     $  13,527     $   0.21
          Sept. 30    $  27,916    $   6,357     $     358     $   0.01
           June 30    $  21,179    $   2,640     $   3,352     $  (0.09)(2)
          March 31    $  15,708    $   2,395     $  (2,023)    $  (0.08)(2)
  -------------------------------------------------------------------------
  2003      Dec.31    $  12,857    $      81     $  (2,840)    $  (0.05)(2)
          Sept. 30    $  11,890    $   1,258     $  (1,225)    $  (0.10)(2)
           June 30    $  12,553    $     758     $  (1,156)    $  (0.02)
          March 31    $   7,822    $     (78)    $  (1,573)    $  (0.03)
  -------------------------------------------------------------------------

  (1) Mine operating earnings/(loss) are equal to revenues less operating
      costs and depreciation and amortization
  (2) Includes charges associated with early conversion and accretion of
      the Debentures



General and administration costs for the three-month period ended June 30, 2006, including stock-based compensation, were $2.4 million. These costs, which were $1.8 million for the comparable quarter in 2005, were negatively impacted by the continued strength in the Canadian dollar as compared to the US dollar and additional costs associated with the Company's Sarbanes Oxley compliance project. General and administration costs of $4.3 million for the six-month period ended June 30, 2006 (compared to $3.3 million in the same period in 2005), increased primarily for the same reasons.

Exploration expenses for the second quarter of 2006 were $0.6 million (second quarter 2005, $0.9 million) and mostly reflect exploration activities at Morococha and La Colorada. Based on positive exploration results, the Company expects to continue a similar level of exploration activity for the remainder of the year. Exploration expenses for the first six-months of 2006 were $1.9 million (2005, $2.3 million). Exploration costs in the three-month and six-month comparable periods of 2005 were incurred primarily to complete the feasibility study for the Manantial Espejo project, which is now under construction.

Asset retirement and reclamation expense of $0.6 million in the second quarter of 2006 (second quarter 2005, $0.4 million) related to the accretion of the Company's mines closure liabilities. The accretion for the six-month period ended June 30, 2006 was $1.2 million compared to $0.9 million for the same period of 2005. The increase in the accretion charge relative to last year is directly due to the Company increasing its estimate for the future consolidated mine closure liability at the end of 2005.

Interest and financing expense in the second quarter of 2006 of $0.2 million increased from the $0.1 million of interest expenses incurred during the same period in 2005 due to increases in transactional bank fees.

Investment and other income of $1.1 million (second quarter 2005, $1.0 million) represented interest income received from cash balances the Company maintained during the quarter. Investment and other income for the six-month period ended June 30, 2006 was of $1.3 million (2005, $1.2 million). The higher interest rate environment prevailing in 2006, combined with higher average cash balances resulted in the increase over the comparable periods.

Income tax provision of $7.6 million for the second quarter was a significant increase from the $0.7 million in the comparable period of 2005 due to sharply higher taxable income generated by the Company's Peruvian entities and the fact that these entities utilized their remaining tax loss carry forwards in 2005. Income tax provision for the six-month period ended June 30, 2006 increased to $11.6 million from $1.7 million recorded in the same period of 2005 due to the same reasons.

Metal Production

Pan American produced 3,317,369 ounces of silver in the second quarter of 2006, a 7 per cent increase from the corresponding period in 2005. Silver production increased at all of the Company's operations, other than at Huaron, due primarily to increased milling rates. The most significant increases in silver production were at La Colorada and Morococha, which achieved 23 per cent and 12 per cent increases, respectively.

Consolidated base metal production also increased over production levels from a year ago, with higher mill tonnage outweighing the impact of slightly lower ore grades. Please refer to the "Financial & Operating Highlights" section of this second quarter report for a detailed breakdown of each mine's production data.

Cash and Total Production Costs per Ounce for Payable Silver

Consolidated cash costs for the three-month period ended June 30, 2006 were a record low of $1.17 per ounce compared to $4.48 per ounce for the corresponding period of 2005. This $3.31 per ounce decrease in cash costs was primarily a result of the increase in by-product credits generated from increased base metal production at higher metal prices. At both Morococha and Quiruvilca, the by-product credits were greater than the operating costs, resulting in cash costs per ounce of negative $3.81 and negative $1.07 respectively. The cash costs per ounce as compared to the same period in 2005 dropped by $6.59 at Morococha, by $5.53 at Quiruvilca and by $3.53 at Huaron. At La Colorada, which is a nearly pure silver mine and thus realizes only minor by-product credits, cash costs per ounce of $5.56 were similar to those recorded a year ago. Only the Company's Pyrite Stockpile operation recorded higher costs than it had a year ago due to the fact that the cost structure of that operation is linked to silver prices, resulting in higher costs when silver prices are higher.

The Company reports the non-GAAP cash cost per ounce of payable silver in order to manage and evaluate operating performance at each of the Company's mines. The measure is widely used in the silver mining industry as a benchmark for performance, but does 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 shown in our unaudited Consolidated Statement of Operations for the period.

                              Three months ended       Six months ended
                                    June 30                 June 30
                                2006        2005        2006        2005
                            ----------------------- -----------------------
  Cost of sales              $  27,613   $  18,417   $  51,910   $  40,797

  Add/(Subtract)

  Smelting,
   refining, and
   transportation
   charges                      16,594       9,061      30,679      17,734
  By-product
   credits                     (41,265)    (18,219)    (73,593)    (35,616)
  Mining royalties                 838         337       1,685         782
  Workers
   participation                (2,478)       (275)     (3,818)       (528)
  Change in
   inventories                   1,332       3,352       2,413       1,731
  Other                            539         272       1,375         658
  Minority
   interest
   adjustment                      389        (262)        343        (604)
  ------------------------- ----------------------- -----------------------
  Cash
   Operating
   Costs        A            $   3,562   $  12,682   $  10,994   $  24,954

  Add/(Subtract)
  Depreciation
   and
   amortization                  4,175       2,415       7,646       5,633
  Asset
   retirement
   and
   reclamation                     614         412       1,228         939
  Change in
   inventories                     (29)      1,061         337       1,061
  Other                           (173)         95         (65)         80
  Minority
   interest
   adjustment                     (145)       (159)       (302)       (321)
  ------------------------- ----------------------- -----------------------
  Production
   Costs        B            $   8,004   $  16,506   $  19,838   $  32,346

  Payable Ounces
   of Silver    C            3,048,131   2,831,511   6,079,589   5,549,584

                            ----------------------- -----------------------
  Total Cash
   Cost per
   Ounce       (A(x)1000)/C  $    1.17   $    4.48   $    1.81   $    4.50
                            ----------------------- -----------------------
  Total
   Production
   Costs per
   Ounce       (B(x)1000)/C  $    2.63   $    5.83   $    3.26   $    5.83
                            ----------------------- -----------------------

  Liquidity and Capital Resources



At June 30, 2006, cash and cash equivalents plus short-term investments were $185.3 million, a $136.7 million increase from March 31, 2006. The increase is primarily due to the net proceeds of $142.2 million from the offering of common shares completed during the quarter. In addition to these funds, the Company also generated cash flow from operating activities of $29.2 million during the quarter and drew a further $2.2 million as an advance on concentrate shipments. Of the $173.8 million that was raised and generated, $37 million was invested in mining equipment and development, primarily at the Company's two construction projects, Alamo Dorado and Manantial Espejo, where $18.2 million and $10.1 million was expended respectively. Significant investments also occurred at Morococha, where $3.2 million was invested in mine development and at La Colorada, where $1.7 million was invested in rehabilitating the sulphide plant in preparation for its restart. The balance of the funds raised and generated during the quarter were invested in the Company's high-quality bond portfolio ($116.3 million) and held in cash ($20.4 million).

Working capital at June 30, 2006 was $188.9 million, an increase of $125.8 million from March 31, 2006. The increase in working capital resulted from a $136.7 million increase in cash and short-term investments plus a $5.6 million increase in accounts receivable, and an increase of $3.9 million in other current assets, partially offset by a $20.4 million increase in current liabilities. The increase in current liabilities was primarily a consequence of increases in payables related to Peruvian income taxes, construction activities at Alamo Dorado and advances on concentrate shipments.

Shareholders' equity at June 30, 2006 amounted to $463 million, an increase of $205.6 million from shareholders' equity at March 31, 2006. This increase resulted primarily from the public offering of common shares, from the acquisition of the remaining 50 per cent interest of Manantial Espejo, valued at $47.4 million, and from the net income generated during the second quarter of $15 million. At June 30, 2006, the Company had 76 million common shares issued and outstanding.

Based on the Company's financial position at June 30, 2006 and the operating cash flows that are expected over the next twelve months, management believes that the Company's liquid assets are more than sufficient to fund the development of Alamo Dorado and Manantial Espejo, and planned sustaining capital expenditures, and to discharge liabilities as they come due. At the date of this MD&A, the Company did not have any material contractual obligation, or any off-balance sheet arrangements, except for $9.8 million of commitments relating to the construction of Alamo Dorado and Manantial Espejo.

In anticipation of capital expenditures in Mexican pesos ("MXN") relating to the construction of Alamo Dorado, and to match anticipated spending, the Company has purchased MXN 43 million settling between July 2006 and September 2006 at an average MXN/US$ exchange rate of 10.86. At June 30, 2006, the mark to market value of the Company's position was loss of $0.2 million.

As at June 30, 2006, the Company had sold forward 6,000 tonnes of zinc at an average price of $1,603 per tonne and had bought forward 6,000 tonnes of zinc at an average of $2,986 per tonne. All of the Company's zinc positions settle between July and December of 2006. At June 30, 2006, the cash offered price of zinc was $3,218 per tonne, which resulted in a net unrealized mark-to-market loss of the Company's zinc forward positions of $8.3 million ($9.5 million of unrealized losses and $1.2 million of unrealized gains).

At the end of the second quarter of 2006, the Company had fixed the price of 900,000 ounces of silver produced during the second quarter and contained in concentrates, which are due to be priced in July and August of 2006 under the Company's concentrate contracts. The price fixed for these ounces averaged $12.14 per ounce while the spot price of silver was $10.70 on June 30, 2006, resulting in a mark to market gain of $1.3 million.

Exploration and Development Activities

The development of the Company's Alamo Dorado project in Mexico is progressing on budget and on schedule with production still planned for the start of the fourth quarter of 2006. Over 82 per cent of the construction work was completed by quarter end. The expected total capital costs for the project are approximately $77 million, including start-up working capital and a contingency allowance.

Construction of the Manantial Espejo project in Argentina, which commenced in April 2006, is progressing well. Expenditures at the project during the second quarter were $10.1 million, primarily on purchasing the necessary underground and surface mining equipment. The Company continued to fill key staffing positions during the quarter and has awarded the critical EPCM contract to Ausenco International, through its Argentinean subsidiary. Over the remainder of the year, the Company anticipates spending an additional $36 million on the construction of Manantial Espejo, which will be funded out of the proceeds from the common share offering completed in the second quarter. Capital costs for the project are expected to be $112.3 million including working capital and normal construction contingencies, plus $18.1 million in Argentine Value Added Tax which will be refundable once the mine is in production.

At the San Vicente property, Pan American is hoping to continue to mine on a limited scale while evaluating expansion plans. The Company signed an extension to an a previous agreement with Comibol, a Bolivian state run mining company, on July 25, 2006, which allows the Company to continuing with mining activities. The Company plans to resume processing ore at a nearby processing facility in early August, 2006 and expects to produce approximately 0.2 million ounces from San Vicente in 2006 at a total cost of under $3.50 per ounce.

CONTACT: Alexis Stewart, Director Corporate & Investor Relations, [phone],  

DATASOURCE: Pan American Silver Corp.



CONTACT: PRNewswire - - 08/02/2006

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