Pan American Silver continues record growth in 2005

(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 [phone]

  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)
  -------------------------------------------------------------------------
  Cash operating costs       13,246       12,816       50,082       40,743
  Depreciation,
   amortization &
   reclamation                3,966        2,222       15,376       11,132
  -------------------------------------------------------------------------
  Production costs      $    17,213  $    15,039  $    65,458  $    51,875
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)
  -------------------------------------------------------------------------
  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
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)
  -------------------------------------------------------------------------
  Cash operating costs        1,979        2,807        8,457        8,822
  Depreciation,
   amortization &
   reclamation                  288          162        1,167          650
  -------------------------------------------------------------------------
  Production costs      $     2,267  $     2,970  $     9,624  $     9,471
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)
  -------------------------------------------------------------------------
  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
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)
  -------------------------------------------------------------------------
  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
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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              -            -            -            -
  -------------------------------------------------------------------------
  Cash operating costs          202           71          711          105
  Depreciation,
   amortization and
   reclamation                    -            -            -            -
  -------------------------------------------------------------------------
  Production costs      $       202  $        71  $       711  $       105
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)           -
  -------------------------------------------------------------------------
  Cash operating costs           88            -           88            -
  Depreciation,
   amortization and
   reclamation                    -            -            -            -
  -------------------------------------------------------------------------
  Production costs      $        88  $         -  $        88  $         -
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------

  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)
  -------------------------------------------------------------------------
  Total Shareholders' Equity                          257,322      275,516
  -------------------------------------------------------------------------
  Total Liabilities and Shareholders' Equity      $   362,280  $   370,086
  -------------------------------------------------------------------------
  -------------------------------------------------------------------------



  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.

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                                   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,

[phone], http://www.panamericansilver.com/

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