Pan American Silver (NASDAQ:PAAS)
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Pan American Silver reports first quarter results: Production and
costs increase
(all amounts in US Dollars unless otherwise stated)
VANCOUVER, April 28 /PRNewswire-FirstCall/ --
FIRST QUARTER HIGHLIGHTS
------------------------
- Silver production increased 27% over first quarter 2004 to
3.0 million ounces.
- Cash flow from operations was $2.7 million vs. $(0.3) million in
2004.
- Cash production costs increased to $4.50/oz.
- Consolidated revenue of $27.1 million increased 79% over the first
quarter of 2004. The net loss for the quarter was $2.9 million
($0.4 million in 2004) due primarily to increased spending on the
Manantial Espejo project, reduced realized revenues due to base metal
hedges and higher production costs.
- Commenced development of the Alamo Dorado silver mine in Mexico.
- Became the only silver producer on the XAU, the Gold and Silver
Index.
- Launched a line of bullion products to provide investors with easier
access to physical silver.
FINANCIAL RESULTS
-----------------
Pan American Silver Corp.'s (NASDAQ: PAAS; TSX: PAA) consolidated revenue for
the first quarter of 2005 was $27.1 million or 79% greater than in 2004 due to
the addition of production from the Morococha mine acquired in the third
quarter of 2004. Cash flow from operations totaled $2.7 million versus $(0.3)
million in 2004 due to increased silver and base metal production and higher
realized silver prices. Mine operating earnings in the quarter decreased to
$1.5 million from $1.8 million in the year-earlier period, due to increased
depreciation charges and increasing production costs at the operations.
Cash production costs at all operations have been negatively affected by
increasing power, fuel and concentrate shipping costs as well as the
strengthening of local currencies against the US dollar. Peruvian operations
have also been affected by increased timber costs due to local shortages, plus
the imposition of a 1% net smelter royalty on all production. These factors
contributed to a 19% increase in consolidated cash costs, from $3.78/oz to
$4.50/oz. Although this higher cost structure is likely to continue to affect
operations in the short term, work is underway to increase efficiency and
productivity in the second quarter resulting in decreased unit costs.
The net loss for the first quarter increased from $0.4 million in 2004 to $2.9
million in 2005 after taking into account the $2.0 million cost from zinc and
lead hedges and $1.0 million in increased exploration expense, primarily for
the feasibility-stage Manantial Espejo project in Argentina. Without these
items, Pan American would have realized a profit in the quarter. In addition,
Pan American became subject to income taxes in Peru as of late 2004, resulting
in an expense of $1.2 million for income taxes and workers' profit
participation during the first quarter of this year. Exploration drilling will
be focused on Morococha, where the Company expects to expand reserves and
resources significantly.
Consolidated silver production for the first quarter totaled 2,995,702 ounces,
a 27% increase over the first quarter of 2004. The increase was due primarily
to the addition of the Morococha silver mine in Peru, acquired effective July 1
of 2004, and increased production at the La Colorada mine in Mexico, offset by
lower production at Huaron and Quiruvilca. Zinc and copper production also
increased due to the contribution from Morococha, while lead production
decreased slightly over the year-earlier period due to lower lead grades and
recoveries at Huaron and Quiruvilca.
Working capital at March 31, 2005, including cash and short-term investments of
$91.9 million, declined $8.3 million from December 31, 2004 to $106.4 million,
due primarily to capital investments in the development of Alamo Dorado and
capital expenses at Huaron and La Colorada.
Geoff Burns, President and CEO of Pan American commented, "We have definitely
seen higher costs this quarter due to increased energy costs, new taxes and
local currency appreciation. Our focus is on efficiency and productivity
improvements to offset the rise. We expect to see increased silver production
and lower unit costs in the second quarter, but the financial benefits of those
improvements will not be realized until the third quarter, given the lag time
for our concentrate sales. We still expect to produce approximately 13.5
million ounces of silver this year at a cost of $4.25/oz".
OPERATIONS AND DEVELOPMENT HIGHLIGHTS
-------------------------------------
PERU
The Morococha mine produced 653,534 ounces of silver at a cash cost of
$3.72/oz. In 2005 the Company expects to invest approximately $9.0 million in
mill refurbishment, underground development and mining equipment as part of a
gradual expansion to 3.9 million ounces of silver production annually. In
addition, 24,000 meters of drilling is being conducted this year to exploit the
property's immense mineral potential. Initial results of the drilling completed
to the end of the first quarter are extremely encouraging.
The Quiruvilca mine produced 563,388 ounces of silver, a decrease of 9% due
primarily to lower silver grades. Cash costs increased to $4.20/oz reflecting
lower silver, zinc and lead production. Production in the quarter was slowed by
the required maintenance of main haulage equipment for four weeks. The
equipment has since been returned to service and production and costs are
expected to return to forecast levels in the second quarter.
Silver production at the Huaron mine in the first quarter of 2004 decreased 8%
to 884,146 ounces due to lower grades and recoveries. As a result, cash costs
increased 16% to $4.74/oz. The mine has accelerated development of new stopes
to reach better grade ore. Production is expected to increase starting in the
second quarter and the mine is still expected to produce 4.0 million ounces of
silver this year.
The Silver Stockpile Operation sold 206,015 ounces of silver in the first
quarter, down 28% from 2004. Costs rose as a reflection of the royalty now
being paid to the Peruvian company Volcan under the operation's purchase
agreement.
MEXICO
Construction of the Alamo Dorado mine has commenced, with commercial production
of 5 million ounces of silver annually expected to begin in late 2006. Capital
costs for the project will be $76.6 million, including working capital and a
contingency allowance. Pan American will fund the project from its cash
reserves. All necessary permits are in place, primary equipment has been
secured or identified and earth works will begin in May. Alamo Dorado is
expected to produce silver at a cash cost of $3.25/oz or less for the next 8
years.
The La Colorada mine increased production to a record 688,619 ounces of silver
in the first quarter, an increase of 39% over the year-earlier period, due
primarily to better silver grades arising from the successful implementation of
more selective mining methods. Cash costs remained stable at $5.58/oz. With the
oxide mine now performing at capacity, the operation's ability to increase
production and reduce costs further is dependent on the reactivation of
sulphide production, which was stopped due to excess water underground.
Hydrological studies are underway to assess the viability of resuming sulphide
mining, but no decision is expected until late in 2005.
ARGENTINA
Feasibility work continues on the 50% owned Manantial Espejo silver-gold joint
venture. An additional 7,900 meters of infill and extension drilling were
completed during the quarter and incorporated into the block models required
for open pit and underground mine design. Water sources have been identified
and pump testing on the water wells is under way. The feasibility study is
expected to be completed later in 2005.
BOLIVIA
The resumption of mining at San Vicente has been delayed pending conclusion of
necessary agreements with state mining authority Comibol, but production is
expected to commence in May. San Vicente is forecast to produce 700,000 ounces
of silver to Pan American's account at a cash cost of $2.23/oz.
SILVER MARKETS
--------------
The silver price opened the quarter at $6.77/oz and closed at $7.19/oz with
significant volatility. This volatility is expected to continue in reaction to
moves in the US dollar and speculative interest. The annual world silver survey
of supply and demand statistics for 2004 will be published by the Silver
Institute on May 26 and a summary will be provided on Pan American's website.
In April Pan American launched a new line of silver bullion products for its
shareholders and other silver investors in order to provide easier access to
physical silver and to help stimulate demand. The products comprise .999 pure
silver coins and bars in one, five and ten ounce weights, featuring Pan
American's trademark "silver hammer" and using silver supplied from Pan
American's La Colorada mine in Mexico, one of the world's purest silver mines.
The Pan American silver products will be minted at and exclusively available
through Washington State-based Northwest Territorial Mint, one of the largest
private mints in the United States. They will sell for $0.50 to $0.70 per ounce
above the spot price of silver on the date of order, depending on volume. The
coins and bars can be ordered by calling the Northwest Territorial Mint at
1-800-344-6468 or at http://www.silverpa.com/.
Pan American will host a conference call to discuss the results on Friday,
April 29, 2005 at 8:30 am Pacific time. North American residents dial toll-free
to 1-877-825-5811. International participants please dial 1-973-582-2767. The
call may also be accessed from the home page of the Company's website at
http://www.panamericansilver.com/. It will be available for replay for one week
after the call by dialing 1-877-519-4471 and using replay pin number 5978629.
For More Information, please contact:
Brenda Radies, Vice-President Corporate Relations (604) 806-3158
http://www.panamericansilver.com/
CAUTIONARY NOTE
Some of the statements in this news release are forward-looking statements,
such as estimates of future production levels, expectations regarding mine
production costs, expected trends in mineral prices and statements that
describe Pan American's future plans, objectives or goals. Actual results and
developments may differ materially from those contemplated by these statements
depending on such factors as changes in general economic conditions and
financial markets, changes in prices for silver and other metals, technological
and operational hazards in Pan American's mining and mine development
activities, uncertainties inherent in the calculation of mineral reserves,
mineral resources and metal recoveries, the timing and availability of
financing, governmental and other approvals, political unrest or instability in
countries where Pan American is active, labor relations and other risk factors
listed from time to time in Pan American's Form 40-F.
Financial & Operating Highlights
Three months ended
March 31,
2005 2004
-------------------------------------------------------------------------
Consolidated Financial Highlights
(in thousands of US dollars)
(Unaudited)
Net loss for the period $ (2,891) $ (366)
Loss per share $ (0.04) $ (0.05)
Cash flow from (used by) operations $ 2,732 $ (334)
Capital spending $ 10,003 $ 3,579
Exploration expenses $ 1,424 $ 528
Cash and short-term investments $ 91,860 $ 142,799
Working capital $ 106,371 $ 128,630
Consolidated Ore Milled & Metals Recovered
to Concentrate
Tonnes milled 393,594 293,067
Silver metal - ounces 2,995,702 2,361,933
Zinc metal - tonnes 8,871 7,108
Lead metal - tonnes 3,675 3,891
Copper metal - tonnes 927 610
Consolidated Cost per Ounce of Silver
(net of by-product credits)
Total cash cost per ounce $ 4.50 $ 3.78
Total production cost per ounce $ 5.82 $ 4.95
In thousands of US dollars
Direct operating costs, royalties, treatment
and refining charges $ 28,805 $ 19,350
By-product credits (16,563) (11,401)
-------------------------------------------------------------------------
Cash operating costs 12,242 7,949
Depreciation, amortization & reclamation 3,570 2,453
-------------------------------------------------------------------------
Production costs $ 15,812 $ 10,402
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost
per ounce calculations) 2,718,073 2,101,295
Average Metal Prices
Silver - London Fixing $ 6.97 $ 6.68
Zinc - LME Cash Settlement per pound $ 0.60 $ 0.46
Lead - LME Cash Settlement per pound $ 0.44 $ 0.38
Copper - LME Cash Settlement per pound $ 1.48 $ 1.24
Mine Operations Highlights Three Months ended
March 31
2005 2004
-------------------------------------------------------------------------
Huaron Mine
Tonnes milled 146,010 147,805
Average silver grade - grams per tonne 218 229
Average zinc grade 3.02% 3.26%
Silver - ounces 884,146 963,716
Zinc - tonnes 3,179 3,796
Lead - tonnes 1,904 2,671
Copper - tonnes 381 387
Total cash cost per ounce $ 4.74 $ 4.09
Total production cost per ounce $ 5.91 $ 5.34
In thousands of US dollars
Direct operating costs, royalties, treatments
and refining charges $ 10,241 $ 10,147
By-product credits (6,439) (6,532)
-------------------------------------------------------------------------
Cash operating costs 3,802 3,615
Depreciation, amortization and reclamation 944 1,104
-------------------------------------------------------------------------
Production costs $ 4,746 $ 4,719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of silver (used in cost
per ounce calculation) 802,794 883,846
Quiruvilca Mine
Tonnes milled 89,925 92,220
Average silver grade - grams per tonne 223 236
Average zinc grade 3.21% 3.99%
Silver - ounces 563,388 616,890
Zinc - tonnes 2,451 3,225
Lead - tonnes 681 1,131
Copper - tonnes 321 223
Total cash cost per ounce $ 4.20 $ 2.96
Total production cost per ounce $ 4.76 $ 3.25
In thousands of US dollars
Direct operating costs, royalties, treatments
and refining charges $ 6,668 $ 6,212
By-product credits (4,465) (4,516)
-------------------------------------------------------------------------
Cash operating costs 2,203 1,696
Depreciation, amortization and reclamation 291 162
-------------------------------------------------------------------------
Production costs $ 2,494 $ 1,858
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per
ounce calculation) 524,081 572,356
Three months ended
March 31
2005 2004
-------------------------------------------------------------------------
Morococha Mine(x)
Tonnes milled 110,528 N/A
Average silver grade - grams per tonne 222 N/A
Average zinc grade 4.06% N/A
Silver - ounces 653,534 N/A
Zinc - tonnes 3,242 N/A
Lead - tonnes 1,091 N/A
Copper - tonnes 224 N/A
Total cash cost per ounce $ 3.72 N/A
Total production cost per ounce $ 5.47 N/A
In thousands of US dollars
Direct operating costs, royalties, treatments
and refining charges $ 7,529 N/A
By-product credits (5,345) N/A
-------------------------------------------------------------------------
Cash operating costs 2,184 N/A
Depreciation, amortization, reclamation 1,031 N/A
-------------------------------------------------------------------------
Production costs $ 3,215 N/A
-------------------------------------------------------------------------
Payable ounces of silver (used in cost
per ounce calculations) 587,685 N/A
(x) The company acquired the Morococha Mine on July 1, 2004. Production
costs and other amounts are for Pan American's share only. Pan
American's share increased from 86% to 87% during the quarter
La Colorada Mine
Tonnes milled 47,130 53,402
Average silver grade - grams per tonne 547 406
Silver - ounces 688,619 494,761
Zinc - tonnes - 88
Lead - tonnes - 90
Total cash cost per ounce $ 5.58 $ 5.46
Total production cost per ounce $ 7.48 $ 7.92
In thousands of US dollars
Direct operating costs, royalties, treatments
and refining charges $ 4,146 $ 2,980
By-product credits (314) (354)
-------------------------------------------------------------------------
Cash operating costs 3,832 2,626
Depreciation, amortization, reclamation 1,304 1,186
-------------------------------------------------------------------------
Production costs $ 5,136 $ 3,812
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per
ounce calculations) 686,897 481,100
Three Months ended
March 31
2005 2004
-------------------------------------------------------------------------
Silver Stockpile Sales
Tonnes sold 17,737 22,845
Average silver grade - grams per tonne 361 390
Silver - ounces 206,015 286,565
Total cash cost per ounce $ 1.89 $ 0.07
Total production cost per ounce $ 1.89 $ 0.07
In thousands of US dollars
Direct operating costs, royalties, treatments
and refining charges $ 221 $ 12
By-product credits - -
-------------------------------------------------------------------------
Cash operating costs 221 12
Depreciation, amortization, reclamation - -
-------------------------------------------------------------------------
Production costs $ 221 $ 12
-------------------------------------------------------------------------
Payable ounces of silver (used in cost per
ounce calculations) 116,616 163,994
Cash cost per ounce is a non-GAAP measurement and investors are cautioned
not to place undue reliance on it and are urged to read all GAAP
accounting disclosures presented in the unaudited consolidated financial
statements and accompanying footnotes. In addition, see the
reconciliation of operating costs to "Cash Cost per Ounce of Payable
Silver" set forth in the Management Discussion and Analysis.
PAN AMERICAN SILVER CORP.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
March 31 Dec. 31
2005 2004
(Unaudited) (Audited)
-------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 17,901 $ 28,345
Short-term investments 73,959 69,791
Accounts receivable, net of $Nil provision
for doubtful accounts 23,647 25,757
Inventories 8,279 10,674
Prepaid expenses 1,567 1,684
-------------------------------------------------------------------------
Total Current Assets 125,353 136,251
Mineral property, plant and equipment,
net (note 3) 110,417 104,647
Investment and non-producing properties
(note 4) 126,877 125,863
Direct smelting ore 2,546 2,671
Other assets 697 647
-------------------------------------------------------------------------
Total Assets $ 365,890 $ 370,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities $ 18,369 $ 20,331
Advances for metal shipments - 652
Current portion of bank loans and
capital lease 134 134
Current portion of non-current liabilities 479 479
-------------------------------------------------------------------------
Total Current Liabilities 18,982 21,596
Liability component of convertible
debentures 134 134
Provision for asset retirement obligation
and reclamation (note 3) 32,264 32,012
Provision for future income taxes 33,162 33,212
Severance indemnities and commitments 1,359 1,542
Non-controlling interest 1,460 1,379
-------------------------------------------------------------------------
Total Liabilities 87,361 89,875
-------------------------------------------------------------------------
Shareholders' Equity
Share capital (note 5)
Authorized:
100,000,000 common shares of no par value
Issued:
December 31, 2004 - 66,835,378
common shares
March 31, 2005 - 66,926,051 common shares 381,490 380,571
Equity component of convertible debentures 636 633
Additional paid in capital 11,273 10,976
Deficit (114,870) (111,976)
-------------------------------------------------------------------------
Total Shareholders' Equity 278,529 280,204
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 365,890 $ 370,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statements of Operations
(Unaudited - in thousands of US Dollars,
except for shares and per share amounts)
Three months ended
March 31,
2005 2004
-------------------------------------------------------------------------
Revenue $ 27,081 $ 15,151
Operating costs 22,380 11,168
Depreciation and amortization 3,218 2,145
-------------------------------------------------------------------------
Mine operating earnings 1,483 1,838
General and administrative, including
stock-based compensation 1,563 1,243
Exploration 1,424 528
Asset retirement and reclamation 527 302
Interest and financing expenses 93 468
-------------------------------------------------------------------------
Operating loss (2,124) (703)
Investment and other income 256 337
-------------------------------------------------------------------------
Loss before taxes and non-controlling interest (1,868) (366)
Income tax provision (942) -
Non-controlling interest (81) -
-------------------------------------------------------------------------
Net loss for the period $ (2,891) $ (366)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to common shareholders:
Net loss for the period $ (2,891) $ (366)
Accretion of convertible debentures (3) (2,120)
-------------------------------------------------------------------------
Adjusted net loss for the period attributable
to common shareholders $ (2,894) $ (2,486)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and fully diluted loss per share $ (0.04) $ (0.05)
Weighted average shares outstanding 66,878,766 54,054,224
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statement of Cash Flows
(Unaudited - in thousands of U.S. dollars)
Three months ended
March 31,
2005 2004
-------------------------------------------------------------------------
Operating activities
Net loss for the period $ (2,891) $ (366)
Reclamation expenditures (275) (362)
Items not involving cash
Depreciation and amortization 3,218 2,145
Gain on sale of marketable securities - (22)
Non-controlling interest 81 -
Interest accretion on the convertible debentures - 269
Stock-based compensation 297 440
Asset retirement and reclamation 527 302
Changes in non-cash operating working
capital items (note 6) 1,775 (2,740)
-------------------------------------------------------------------------
Cash generated by (used in) operations 2,732 (334)
-------------------------------------------------------------------------
Financing activities
Shares issued for cash 919 60,062
Share issue costs - (84)
Interest payment on convertible debentures - (2,307)
Repayment of bank loans and capital lease - (407)
-------------------------------------------------------------------------
Cash generated by financing activities 919 57,264
-------------------------------------------------------------------------
Investing activities
Mineral property, plant and equipment
expenditures (8,988) (3,234)
Investment and non-producing property
expenditures (1,015) (345)
(Purchase)/maturity of short-term investments (4,668) (334)
Proceeds from sale of assets 500 -
Other 76 297
-------------------------------------------------------------------------
Cash used in investing activities (14,095) (3,616)
-------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents
during the period (10,444) 53,314
Cash and cash equivalents, beginning of period 28,345 14,191
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 17,901 $ 67,505
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Disclosures
Interest paid $ - $ 2,307
---------------------------
---------------------------
Taxes paid $ 92 $ -
---------------------------
---------------------------
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statements of Shareholders' Equity
For the three months ended March 31, 2005
(in thousands of US dollars, except for amounts of shares)
Conver-
Common Shares tible Additional
------------------ Deben- Paid in
Shares Amount tures Capital Deficit Total
-------------------------------------------------------------------------
Balance, December
31, 2003 53,009,851 $225,154 $66,735 $12,752 $(120,543) $184,098
Issued on the
exercise of
stock options 785,095 9,437 - (3,965) - 5,472
Issued on the
exercise of
share purchase
warrants 544,775 1,965 - - - 1,965
Stock-based
compensation - - - 2,189 - 2,189
Issued for cash,
net of issue
costs 3,333,333 54,820 - - - 54,820
Accretion of
convertible
debentures - - 2,871 - (2,871) -
Issued on the
conversion of
convertible
debentures 9,145,700 88,950 (68,973) - (8,464) 11,513
Issued as
compensation 16,624 245 - - - 245
Net income for
the year - - - - 19,902 19,902
-------------------------------------------------------------------------
Balance, December
31, 2004 66,835,378 380,571 633 10,976 (111,976) 280,204
Issued on the
exercise of
stock options 89,492 908 - - - 907
Issued on the
exercise of
share purchase
warrants 1,181 11 - - - 11
Stock-based
compensation - - - 295 - 295
Accretion of
convertible
debentures - - 3 - (3) -
Net loss for
the period - - - - (2,891) (2,891)
-------------------------------------------------------------------------
Balance, March
31, 2005 66,926,051 $381,490 $ 636 $11,273 $(114,870) $278,529
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Notes to Unaudited Interim Consolidated Financial Statements
As at March 31, 2005 and 2004 and for the three month periods then ended
(Tabular amounts are in thousands of US dollars, except for numbers of
shares, price per share and per share amounts)
1. Nature of Operations
Pan American Silver Corp (the "Company") is engaged in silver mining
and related activities, including exploration, extraction,
processing, refining and reclamation. The Company has mining
operations in Peru, Mexico and Bolivia, project development
activities in Argentina, Mexico and Bolivia, and exploration
activities in South America.
2. Summary of Significant Accounting Policies
a) Basis of Presentation: The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in Canada for interim financial
information and follow the same accounting policies and methods as
our most recent annual financial statements. Accordingly, they do not
include all the information and footnotes required by accounting
principles generally accepted in Canada for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the
three-month periods ended March 31, 2005 and 2004 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2005.
The consolidated balance sheet at December 31, 2004 has been derived
from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in Canada for complete financial
statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Pan
American Silver Corp. (the "Company") Annual Report for the year
ended December 31, 2004.
b) Principles of Consolidation: The consolidated financial statements
include the wholly-owned and partially-owned subsidiaries of the
Company, the most significant of which are presented in the following
table:
Ownership Operations and
Subsidiary Location interest Status Development Projects
---------------------------------------------------------------------
Pan American
Silver S.A.C. Peru 100% Consolidated Quiruvilca Mine
Compania Minera
Huaron S.A. Peru 100% Consolidated Huaron Mine
Compania Minera
Argentum S.A. Peru 86.7% Consolidated 70% Morococha Mine
Compania Minera
Natividad S.A. Peru 100% Consolidated 30% Morococha Mine
Plata Panamericana
S.A. de C.V. Mexico 100% Consolidated La Colorada Mine
Inter-company balances and transactions have been eliminated in
consolidation. Investments in corporate joint ventures where the
Company has ownership of 50% or less and funds its proportionate
share of expenditures are accounted for under the equity method. The
Company has no investments in entities in which it has greater than
20% ownership interest accounted for using the cost method.
c) Revenue Recognition: Revenue is recognized when title and risk of
ownership of metals or metal bearing concentrate passes to the buyer
and when collection is reasonably assured. The passing of title to
the customer is based on the terms of the sales contract. Product
pricing is determined at the point revenue is recognized by reference
to active and freely traded commodity markets.
Under our concentrate sales contracts with third-party smelters,
final commodity prices are set on a specified future quotational
period, typically one to three months, after the shipment arrives at
the smelter based on market metal prices. Revenues are recorded under
these contracts at the time title passes to the buyer based on the
expected settlement period. The contracts, in general, provide for a
provisional payment based upon provisional assays and quoted metal
prices. Final settlement is based on the average applicable price for
a specified future period, and generally occurs from three to six
months after shipment. Final sales are settled using smelter weights,
settlement assays (average of assays exchanged and/or umpire assay
results) and are priced as specified in the smelter contract.
Third party smelting and refining costs are recorded as a reduction
of revenue.
d) Cash and Cash Equivalents: Cash and cash equivalents includes
cash, bank deposits, and all highly-liquid investments with a
maturity of three months or less at the date of purchase. The Company
minimizes its credit risk by investing its cash and cash equivalents
with major international banks and financial institutions located
principally in Canada and Peru with a minimum credit rating of A1 as
defined by Standard & Poor's. The Company's management believes that
no concentration of credit risk exists with respect to investment of
its cash and cash equivalents. Due to the short maturity of cash
equivalents, their carrying amounts approximate their fair value.
e) Short-term Investments: Short-term investments principally consist
of highly-liquid debt securities with original maturities in excess
of three months and less than one year. These debt securities
include corporate bonds with S & P rating of A- to AAA with an
overall average of single A high. The Company classifies all
short-term investments as available-for-sale securities. Unrealized
gains and losses on these investments are lower of cost and marked to
market at the end of each period and are included in determining net
income/(loss).
f) Inventories: Inventories include concentrate ore, dore, ore in
stockpiles and operating materials and supplies. The classification
of inventory is determined by the stage at which the ore is in the
production process. Inventories of ore are sampled for metal content
and are valued based on the lower of actual production costs incurred
or estimated net realizable value based upon the period ending prices
of contained metal. Material that does not contain a minimum quantity
of metal to cover estimated processing expense to recover the
contained metal is not classified as inventory and is assigned no
value. All metal inventories are stated at the lower of cost or
market, with cost being determined using the first-in, first-out
method. Supplies inventories are valued at the lower of average cost
and replacement cost, net of obsolescence. Concentrate and dore
inventory includes product at the mine site, the port warehouse and
product held by refineries, and are also valued at lower of cost or
market.
g) Property, Plant, and Equipment: Expenditures for new facilities,
new assets or expenditures that extend the useful lives of existing
facilities are capitalized and depreciated using the straight-line
method at rates sufficient to depreciate such costs over the shorter
of estimated productive lives of such facilities or the useful life
of the individual assets ranging from five to twenty years. Certain
mining equipment is depreciated using the units-of-production method
based upon estimated total proven and probable reserves. Maintenance
and repairs are expensed as incurred.
h) Operational Mining Properties and Mine Development: Mineral
exploration costs are expensed as incurred. When it has been
determined that a mineral property can be economically developed as a
result of establishing proven and probable reserves, the costs
incurred to develop such property including costs to further
delineate the ore body and remove over burden to initially expose the
ore body, are capitalized. Such costs are amortized using the
units-of-production method over the estimated life of the ore body
based on proven and probable reserves. Significant payments related
to the acquisition of the land and mineral rights are capitalized as
incurred. Prior to acquiring such land or mineral rights the Company
generally makes a preliminary evaluation to determine that the
property has significant potential to develop an economic ore body.
The time between initial acquisition and full evaluation of a
property's potential is variable and is dependant on many factors
including: location relative to existing infrastructure, the
property's stage of development, geological controls and metal
prices. If a mineable ore body is discovered, such costs are
amortized when production begins. If no mineable ore body is
discovered, such costs are expensed in the period in which it is
determined the property has no future economic value. Interest
expense allocable to the cost of developing mining properties and to
construct new facilities is capitalized until the assets are ready
for their intended use. Gains or losses from sales or retirements of
assets are included in other income or expense. Ongoing mining
expenditures on producing properties are charged against earnings as
incurred. Major development expenditures incurred to increase
production or extend the life of the mine are capitalized.
i) Asset Impairment: Management reviews and evaluates its long-lived
assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An
impairment is considered to exist if total estimated future cash
flows or probability-weighted cash flows on an undiscounted basis are
less than the carrying amount of the assets, including mineral
property, plant and equipment, non-producing property, and any
deferred costs such as deferred stripping. An impairment loss is
measured and recorded based on discounted estimated future cash flows
or the application of an expected present value technique to estimate
fair value in the absence of a market price. Future cash flows
include estimates of proven, probable, and a portion of resource
recoverable ounces, gold and silver prices (considering current and
historical prices, price trends and related factors), production
levels, capital and reclamation costs, all based on detailed
engineering life-of-mine plans. Assumptions underlying future cash
flow estimates are subject to risks and uncertainties. Any
differences between significant assumptions and market conditions
and/or the Company's performance could have a material effect on any
impairment provision, and on the Company's financial position and
results of operations. In estimating future cash flows, assets are
grouped at the lowest levels for which there are identifiable cash
flows that are largely independent of cash flows from other groups.
Generally, in estimating future cash flows, all assets are grouped at
a particular mine for which there is identifiable cash flow.
j) Reclamation and Remediation Costs: Estimated future reclamation
and remediation costs are based principally on legal and regulatory
requirements.
The asset retirement obligation is measured using assumptions for
cash outflows such as expected labor costs, allocated overhead and
equipment charges, contractor markup, and inflation adjustments to
determine the total obligation. The sum of all these costs are
discounted, using the credit adjusted risk-free interest rate from
the time the Company expects to pay the retirement obligation to the
time the Company incurs the obligation. The measurement objective is
to determine the amount a third party would demand to assume the
asset retirement obligation.
Upon initial recognition of a liability for an asset retirement
obligation, the Company capitalizes the asset retirement cost to the
related long-lived asset. The Company amortizes this amount to
operating expense using the units-of-production method. The Company
evaluates the cash flow estimates at the end of each reporting period
to determine whether the estimates continue to be appropriate. Upward
revisions in the amount of undiscounted cash flows will be discounted
using the current credit-adjusted risk-free rate. Downward revisions
will be discounted using the credit-adjusted risk-free rate that
existed when the original liability was recorded.
k) Foreign Currency Translation: The Company's functional currency is
the US dollar. The accounts of subsidiaries, not reporting in U.S.
dollars, and which are integrated operations, are translated into
U.S. dollars using the temporal method. Under this method,
substantially all assets and liabilities of foreign subsidiaries are
translated at exchange rates in effect at the date of the transaction
or at end of each period. Revenues and expenses are translated at the
average exchange rate for the period. Foreign currency transaction
gains and losses are included in the determination of net
income/(loss).
l) Stock-based Compensation Plans: The Company provides options to
buy common shares of the Company to directors, officers, employees
and service providers. The board of directors grants such options for
periods of up to ten years, vesting period of up to four years and at
prices equal to or greater than the weighted average market price of
the five trading days prior to the date the options were granted.
The Company applies the fair-value method of accounting in accordance
with recommendation of CICA Handbook Section ("CICA 3870"),
"Stock-based Compensation and Other Stock-based Payments".
Stock-based compensation expense is calculated using the
Black-Scholes option pricing model.
m) Income Taxes: The Company computes income taxes in accordance with
CICA Handbook Section ("CICA 3465"), "Income Taxes", that requires an
asset and liability approach which results in the recognition of
future tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities, as well as operating
loss and tax credit carry-forwards, using enacted or substantially
enacted, as applicable, tax rates in effect in the years in which the
differences are expected to reverse.
n) Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in Canada
requires the Company's management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
o) Earnings (loss) per share: Basic earnings (loss) per share
calculations are based on the net income (loss) attributable to
common shareholders for the period divided by the weighted average
number of common shares issued and outstanding during the period.
The diluted earnings/(loss) per share calculations are based on the
weighted average number of common shares outstanding during the
period, plus the effects of dilutive common share equivalents. This
method requires that the dilutive effect of outstanding options and
warrants issued should be calculated using the treasury stock method.
This method assumes that all common share equivalents have been
exercised at the beginning of the period (or at the time of issuance,
if later), and that the funds obtained thereby were used to purchase
common shares of the Company at the average trading price of common
shares during the period.
For convertible securities that may be settled in cash or shares at
the holder's option the more dilutive of cash settlement and share
settlement is used in computing diluted earnings/(loss) per share.
For settlements in common shares, the if-converted method is used,
which requires that returns on senior convertible equity instruments
and income charges applicable to convertible financial liabilities be
added back to net earnings/(loss), and the net earnings/(loss) is
also adjusted for any non-discretionary changes that would arise from
the beginning of the period (or at the time of issuance, if later).
Potentially dilutive securities totaling 4,666,778 for the three
months ended March 31, 2005 (1,578,142 and 3,088,636 shares arising
from outstanding stock options and share purchase warrants,
respectively) and 5,751,044 shares for the three months ended
March 31, 2004 (1,936,344 and 3,814700 shares arising from
outstanding stock options and share purchase warrants, respectively)
were not included as they were anti-dilutive.
p) Reclassifications: Certain reclassifications of prior year
balances have been made to conform to current year presentation.
3. Mineral property, plant and equipment
Mineral property, plant and equipment consist of:
March 31, 2005 December 31, 2004
--------------------------- ---------------------------
Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
--------------------------- ---------------------------
Mineral properties
Morococha mine,
Peru $ 9,914 $ (729) $ 9,185 $ 9,693 $ (169) $ 9,524
La Colorada mine,
Mexico 4,153 (516) 3,637 4,153 (421) 3,732
Huaron mine, Peru 1 - 1 1 - 1
-------------------------------------------------------
$ 14,068 $ (1,245) $ 12,823 $ 13,847 $ (590) $ 13,257
-------------------------------------------------------
Plant & equipment
Morococha mine,
Peru $ 9,227 $ (2,422) $ 6,805 $ 8,515 $ (1,930) $ 6,585
La Colorada mine,
Mexico 25,147 (2,960) 22,187 23,514 (2,420) 21,094
Huaron mine, Peru 19,690 (7,952) 11,738 19,389 (7,659) 11,730
Quiruvilca mine,
Peru 6,618 (6,544) 74 6,523 (6,523) -
Other 5,310 (503) 4,807 706 (503) 203
-------------------------------------------------------
$ 65,992 $(20,381) $ 45,611 $ 58,647 $(19,035) $ 39,612
-------------------------------------------------------
Mine development
& other
Morococha mine,
Peru $ 9 $ - $ 9 $ 9 $ - $ 9
La Colorada mine,
Mexico 27,234 (3,044) 24,190 27,181 (2,420) 24,761
Huaron mine, Peru 35,198 (8,897) 26,301 34,238 (8,380) 25,858
Quiruvilca mine,
Peru 19,078 (18,155) 923 19,078 (18,093) 985
Other 607 (47) 560 198 (33) 165
-------------------------------------------------------
$ 82,126 $(30,143) $ 51,983 $ 80,704 $(28,926) $ 51,778
-------------------------------------------------------
TOTAL $162,186 $(51,769) $110,417 $153,198 $(48,551) $104,647
-------------------------------------------------------
-------------------------------------------------------
On July 1, 2004, the Company acquired control and ownership of the
assets and liabilities of the Morococha mine. A summary of the terms
and the fair values of the assets and liabilities acquired and
consideration paid was included in the December 31, 2004 annual
consolidated financial statements of the Company.
4. Investment and non-producing properties
Acquisition costs of investment and non-producing properties together
with costs directly related to mine development expenditures are
deferred. Exploration expenditures on investment and non-producing
properties are charged to operations in the period they are incurred.
The carrying values of these properties are as follows:
March 31, December 31,
2005 2004
------------- -------------
Morococha, Peru $ 40,472 $ 40,472
Alamo Dorado, Mexico 82,706 81,692
Manantial Espejo, Argentina 2,012 2,012
Other 1,687 1,687
---------------------------
$ 126,877 $ 125,863
---------------------------
---------------------------
5. Share Capital
a) Authorized and issued share capital
The details of the common shares issued and outstanding are as
follows:
2005 Shares Issued Amount
---- --------------- -------------
Balance at December 31, 2004 66,835,378 $ 380,571
Shares issued on exercise of stock
options 89,492 908
Shares issued on exercise of warrants 1,181 11
-----------------------------
Balance at March 31, 2005 66,926,051 $ 381,490
-----------------------------
-----------------------------
b) Share Option Plan
The Company has a comprehensive stock option plan for its
employees, directors and officers. The plan provides for the
issuance of incentive stock options to acquire up to a total of
10% of the issued and outstanding common shares of the Company on
a non-diluted basis. The exercise price of each option shall be
the weighted average trading price of the Company's stock on the
five days prior to the award date. The options can be granted for
a maximum term of 10 years with vesting provides determined by
the Company.
The following table summarizes information concerning stock
options outstanding as at March 31, 2005:
Options Outstanding Options Exercisable
-------------------------------------------------
Weighted
Number Average Number
Outstanding Remaining Exercisable Weighted
Range of as at Contractual as at Average
Exercise Year of March 31, Life March 31, Exercise
Prices Expiry 2005 (months) 2005 Price
-------------------------------------------------------------------------
$12.21 2005 26,500 3.00 7,500 $12.21
$6.05 2006 88,000 13.67 88,000 $6.05
$11.68 - $12.22 2007 306,000 31.53 246,000 $12.12
$7.36 - $17.45 2008 457,308 38.92 67,308 $12.13
$11.79 - $27.23 2009 499,274 48.95 227,941 $22.82
$6.05 2010 217,000 68.47 217,000 $6.05
-------------------------------------------------------------------------
1,594,082 49.01 853,749 $9.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended March 31, 2005, the Company
recognized $295 of stock compensation expense consisting of $112
for options issued in 2004 and $183 for options issued in 2003.
c) Share purchase warrants
As at March 31, 2005 there were warrants outstanding that allow
the holders to purchase 3,808,636 common shares of the Company at
Cdn$12.00 per share, which expire on February 20, 2008.
In the period, 1,181 common shares were issued for proceeds of
$11 in connection with the exercise of outstanding warrants.
6. Changes in Non-Cash Working Capital Items
The following table summarizes the changes in non-cash working
capital items:
March 31,
2005 2004
---------------------------------------------------------------------
Accounts receivable and prepaid expenses $ 2,110 $ (1,920)
Inventories 2,395 (1,835)
Prepaids 117 (102)
Accounts Payable and accrued liabilities (1,962) 172
Advances for metal shipments (652) 662
Severance, indemnities and commitments (183) 283
Provision for future income taxes (50) -
---------------------------------------------------------------------
$ 1,775 $ (2,740)
---------------------------------------------------------------------
---------------------------------------------------------------------
7. Segmented information
Substantially all of the Company's operations are within the mining
sector, conducted through operations in six countries. Due to
differences between mining and exploration activities, the Company
has a separate budgeting process and measures the results of
operations and exploration activities independently. The Corporate
office provides support to the mining and exploration activities with
respect to financial, human resources and technical support.
Segmented disclosures and enterprise-wide information are as follows:
For the three months ended March 31, 2005
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 4,978 $ 24,108 $ - $ (2,005) $ 27,081
Investment and other
income 4 50 (40) 242 256
Interest and
financing expenses - (93) - - (93)
Exploration (2) (17) (1,405) - (1,424)
Depreciation and
amortization (1,259) (1,953) - (6) (3,218)
Net income (loss)
for the period (957) 2,812 (1,443) (3,302) (2,891)
Property, plant
and equipment
Capital expenditures 1,686 2,345 5,945 27 10,003
Segment assets $ 55,548 $ 134,660 $ 95,645 $ 80,037 $ 365,890
For the three months ended March 31, 2004
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 3,606 $ 12,788 $ - $ (1,243) $ 15,151
Investment and other
income 9 (134) (18) 445 302
Interest and
financing expenses (112) (86) - (270) (468)
Exploration (7) - (521) - (528)
Depreciation and
amortization (940) (1,194) - (11) (2,145)
Net income (loss)
for the period (76) 2,601 (515) (2,376) (366)
Property, plant
and equipment
Capital expenditures 1,803 1,419 346 11 3,579
Segment assets $ 50,516 $ 59,208 $ 87,494 $ 141,049 $ 370,079
First Quarter 2005 Management's Discussion and Analysis
Management's discussion and analysis ("MD&A") focuses on significant factors
that affected Pan American Silver Corp.'s and its subsidiaries' ("Pan American"
or the "Company") performance and such factors that may affect its future
performance. This MD&A has been prepared effective April 28, 2005. The MD&A for
the first quarter ending March 31, 2005, and 2004, should be read in
conjunction with the unaudited consolidated financial statements for the three
months ended March 31, 2005 and 2004 and the related notes contained therein.
The significant accounting policies are outlined within Note 2 to the
Consolidated Financial Statements of the Company for the year ended December
31, 2004. These accounting policies have been applied consistently for the
three months ended March 31, 2005.
The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates are related to the physical and economic lives of mineral assets,
their recoverability, site restoration and related obligations.
Some of the statements in this management discussion and analysis are
forward-looking statements, such as estimates of future production levels,
expectations regarding mine production costs, expected trends in mineral prices
and statements that describe Pan American's future plans, objectives or goals.
Actual results and developments may differ materially from those contemplated
by these statements depending on such factors as changes in general economic
conditions and financial markets, changes in prices for silver and other
metals, technological and operational hazards in Pan American's mining and mine
development activities, uncertainties inherent in the calculation of mineral
reserves, mineral resources and metal recoveries, the timing and availability
of financing, governmental and other approvals, political unrest or instability
in countries where Pan American is active, labor relations and other risk
factors listed from time to time in Pan American's Annual Report.
Results of Operations
For the three months ended March 31, 2005, the Company's net loss was $2.9
million (loss per share of $0.04) compared to a net loss of $0.4 million ($0.05
per share loss) for the corresponding period in 2004.
Revenue from metal sales for the first quarter of 2005 was $27.1 million, a 79
per cent increase from the corresponding period in 2004. The acquisition of the
Morococha mine in the third quarter of 2004 was the main reason for the
increase in revenue from a year ago, accounting for $8.6 million of revenue in
the first quarter of 2005. Revenue in the first quarter also benefited from
higher realized metal prices and increased concentrate shipments from the
Company's Peruvian operations versus the year-earlier period. The growth in
revenue was partially offset by reductions on account of base metal hedges in
the first quarter of 2005 totaling $2.0 million (2004 - loss of $1.2 million),
and by the recently introduced Peruvian mining royalties of $0.6 million (2004
- $nil).
The Company generated mine operating earnings of $1.5 million in the first
quarter of 2005 (2004 - $1.8 million). Mine operating earnings are the
difference between revenue and operating costs plus depreciation and
amortization. As reflected in the following table, the first quarter of 2005
represents the eighth consecutive quarter that the Company has generated mine
operating earnings. The table below sets out select quarterly results for the
past nine quarters, which are stated in thousands of US dollars, except per
share amounts.
Mine Net income/
operating (loss) Net income
Quarter earnings/ for the (loss)
Year (unaudited) Revenue (loss)(1) period per share
-------------------------------------------------------------------------
2005 March 31 $ 27,081 $ 1,483 $ (2,891) $ (0.05)
-------------------------------------------------------------------------
2004 Dec. 31 $ 29,386 $ 2,766 $ 15,692 $ 0.23
Sept. 30 $ 27,409 $ 5,850 $ 3,289 $ 0.05
June 30 $ 20,950 $ 2,411 $ 1,287 $ (0.12)(2)
March 31 $ 15,151 $ 1,838 $ (366) $ (0.05)(2)
-------------------------------------------------------------------------
2003 Dec. 31 $ 12,857 $ 81 $ (4,858) $ (0.15)(2)
Sept. 30 $ 11,890 $ 1,258 $ (390) $ (0.01)(2)
June 30 $ 12,553 $ 758 $ (442) $ (0.01)
March 31 $ 7,822 $ (78) $ (1,104) $ (0.02)
(1) Mine operating earnings/(loss) is equal to revenues less
operating expenses less depreciation and amortization
(2) Includes charges associated with early conversion and accretion
of the Debentures
Depreciation and amortization charges for the first quarter increased to $3.2
million from $2.1 million in the first quarter of 2004. The principle reason
for this increase was the depreciation charges related to Morococha, which was
acquired with effect from July 1, 2004.
General and administration costs for the three-month period ended March 31,
2005, including stock-based compensation, were $1.6 million. These costs, which
were $1.2 million for the comparable quarter in 2004, were negatively impacted
by a stronger Canadian dollar as compared to the US dollar.
Exploration expenses for the first quarter of 2005 were $1.4 million, which is
almost a three fold increase from the corresponding period a year ago,
reflecting the increased feasibility activity at the Company's 50 per cent
owned Manantial Espejo property in Argentina.
Asset retirement and reclamation expense of $0.5 million in the first quarter
of 2005 (2004 - $0.3 million) related to the accretion of the liability that
the Company recognized by adopting CICA Handbook Section 3110 - "Accounting for
Asset Retirement Obligations" as at December 31, 2003. There has been no change
during the quarter to the Company's expectations of future site restoration
costs at any of its mines.
Interest expenses have been reduced to $0.1 million in the first quarter of
2005 compared to $0.5 million during the same period in 2004 as a result of the
Company successfully inducing the early conversion of 99 per cent of the 5.25
per cent convertible unsecured senior subordinated debentures (the
"Debentures") and prepaying all bank debt in the second quarter of 2004.
Investment and other income of $0.3 million represented interest income
received from cash balances the Company maintained during the quarter.
During the later part of 2004, the Company became taxable in Peru. As such, the
Company incurred an income tax expense of $0.9 million and increased operating
costs relating to worker's participation of $0.3 million during the first
quarter of 2005 (2004 - $nil).
Production
Pan American produced 2,995,702 ounces of silver in the first quarter of 2005,
a 27 per cent increase from the corresponding period in 2004. The acquisition
of Morococha, which produced 653,534 ounces at a cash cost of $3.72 per payable
ounce, accounts for all of the increase, while production from the Company's
other operations in total remained steady from production levels achieved a
year ago. The La Colorada mine continued to improve during the first quarter
with record silver production of 688,619 ounces at cash costs of $5.58 per
payable ounce. The Company's Pyrite Stockpile operation produced 206,015 ounces
of silver during the quarter at cash costs of $1.89 per payable ounce. The
Quiruvilca and Huaron mines endured difficult quarters during which grades and
recoveries did not meet expectations. Management is confident that these
operations will be able to make up for the shortfall compared to expected
production over the remainder of the year and still expects to reach the
consolidated production target of 13.5 million ounces of silver in 2005.
Consolidated cash costs for the three-month period ended March 31, 2005 were
$4.50 per payable ounce compared to $3.78 per payable ounce for the
corresponding period of 2004. Peruvian mining royalties and Volcan Minera
S.A.'s one-third participation in the Pyrite Stockpile operation, which totaled
$0.6 million during the quarter (2004 - $nil) are the primary reason for this
increase. Higher energy costs at all operations and lower grades and recoveries
at Quiruvilca and Huaron also negatively impacted cash costs per payable ounce.
With the addition of the low-cost San Vicente mine, towards the end of May
2005, the Company expects consolidated cash costs per payable ounce to decrease
and is estimating consolidated cash cost per payable ounce of below $4.25 for
2005.
In April Pan American launched a new line of silver bullion products for its
shareholders and other silver investors in order to provide easier access to
physical silver and to help stimulate demand. The products comprise .999 pure
silver coins and bars in one, five and ten ounce weights, featuring Pan
American's trademark "silver hammer" and using silver supplied from Pan
American's La Colorada mine in Mexico, one of the world's purest silver mines.
Cash and Total Production Costs per Ounce for Payable Silver
The Company has changed its method for calculating cash and total costs per
ounce of silver, with effect from the first quarter of 2005. In the past, these
calculations were based on produced ounces, as set out on page 11 of the MD&A
for the year ended December 31, 2004. Under the new method, the Company will
calculate its cash and total costs per ounce based on the silver ounces for
which the Company is paid, therefore negating the need to account for the cost
of metals lost in smelting and refining. The 2004 first quarter's costs per
ounce have been recalculated on a payable metal basis to ensure that the
comparables are consistent with the method used for the 2005 first quarter's
costs per ounce.
The Company reports the cash cost per ounce of payable silver. This non- GAAP
measure is used by the Company to manage and evaluate operating performance at
each of the Company's mines and is widely reported in the silver mining
industry as benchmarks for performance measurement, but do not have
standardized meaning. To facilitate a better understanding of this measure as
calculated by the Company, we have provided a detailed reconciliation of this
measure to our operating costs, as shown in our unaudited Consolidated
Statement of Operations for the period.
March 31,
2005 2004
--------------------------
Operating Costs $ 22,380 $ 11,168
Add/(Subtract)
Smelting, refining, and transportation
charges 9,189 6,218
By-product credits (17,398) (11,401)
Mining royalties 445 -
Change in inventories (2,136) 1,667
Other 104 298
Minority interest adjustment (342) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Operating Costs A $ 12,242 $ 7,949
Add/(Subtract)
Depreciation and amortization 3,218 2,145
Asset retirement and reclamation 527 302
Other (175) 6
-------------------------------------------------------------------------
Production Costs B 15,812 10,402
Payable Ounces of Silver C 2,718,073 2,101,295
--------------------------
Total Cash Cost per Ounce (A(x)1000)/B $ 4.50 $ 3.78
--------------------------
Total Production Costs per Ounce (B(x)1000)/C $ 5.82 $ 4.95
--------------------------
Liquidity and Capital Resources
At March 31, 2005, cash and cash equivalents plus short-term investments were
$91.9 million, a $6.3 million decrease from December 31, 2004. Cash flows used
in investing activities totaled $14.1 million and consisted primarily of
capital expenditures of $10.0 million, mostly at Alamo Dorado and the purchase
of short-term investments of $4.7 million. Cash flow provided by operating
activities was $2.7 million for the quarter ended March 31, 2005. Financing
activities in the first quarter yielded $0.9 million from the exercise of stock
options.
Working capital at March 31, 2005 was $106.4 million, a reduction of $8.3
million from December 31, 2004. The reduction is reflected largely in a $6.3
million decrease in cash and cash equivalents plus short-term investments, a
$2.4 million decrease in inventories and a decrease of $2.1 million in accounts
receivable partially offset by a $2.6 million decrease in current liabilities.
Capital resources at March 31, 2005 amounted to shareholders' equity of $278.5
million. At March 31, 2005, the Company had 66,926,051 common shares issued and
outstanding. During the quarter, the Company filed a preliminary short form
shelf prospectus with the securities commissions in Canada and a corresponding
registration statement with the SEC. These filings allow the Company to make
offerings of common shares, warrants, debt securities subscription receipts or
any combination thereof up to $150 million during the next two years.
Based on the Company's financial position at March 31, 2005 and the operating
cash flows that are expected over the next twelve months, management believes
that the Company's liquid assets are more than sufficient to fund planned
operating and project development and sustaining capital expenditures and to
discharge liabilities as they come due. The Company's did not have any material
contractual obligation, or any off-balance sheet arrangements, except as
discussed below, at the date of this MD&A.
Pan American mitigates the price risk associated with its base metal production
by selling some of its forecasted base metal production under forward sales
contracts, all of which are designated hedges for accounting purposes. At March
31, 2005, the Company had sold forward 22,000 tonnes of zinc at a weighted
average price of $1,121 per tonne ($0.509 per pound) and 1,425 tonnes of lead
at a weighted average price of $633 per tonne ($0.287 per pound). The forward
sales commitments for zinc represent approximately 45 per cent of the Company's
forecast zinc production until March 2006. The lead forward sales commitments
represent approximately 45 per cent of the Company's forecast lead production
until May 2005. At March 31, 2005, the cash offered prices for zinc and lead
were $1,354 and $1,027 per tonne, respectively. The mark to market value at
March 31, 2005 was an unrealized loss of $6.1 million.
At the end of the first quarter of 2005, the Company had fixed the price of
600,000 ounces of silver produced during the first quarter and contained in
concentrates, which are due to be priced in April and May of 2005 under the
Company's concentrate contracts. The price fixed for these ounces averaged
$7.08 per ounce while the spot price of silver was $7.15 on March 31, 2005.
Exploration and Development Activities
Following the positive construction decision for Alamo Dorado in late February
2005, the Company has made good progress towards reaching production at Alamo
Dorado by late 2006. Several key personnel were hired during the quarter,
including mine maintenance, planning and process managers, a chief metallurgist
and senior accounting and finance managers. Critical equipment items, including
a fleet of mining trucks, a ball mill, a crusher and laboratory have been
secured. The Company spent $4.7 million on equipment and construction related
activities for the quarter ended March 31, 2005. Over the remainder of the
year, the Company has budgeted to spend an additional $40 million on the
construction of Alamo Dorado, which can be funded out of the Company's
treasury. The total capital costs for the project are expected to be $76.6
million, including working capital and a contingency allowance.
The Company continued work on the feasibility study for the 50 per cent owned
Manantial Espejo project in Argentina during the quarter. An additional 11,700
meters of infill and extension drilling was completed during the quarter and
incorporated into the block models required for open pit and underground mine
design. The contract for the feasibility level tailings facility design has
been awarded and pump testing on proposed water wells has been initiated. The
Company has opened a local office and begun hiring key personnel, including a
Community Relations director. Pan American's share of the feasibility costs in
the first three months of 2005 was $1.2 million, which was expensed as
incurred. The completed feasibility study for the project is expected by late
2005 at which time a construction decision will be taken. Pan American's share
of costs to complete the feasibility study is expected to be approximately an
additional $1.8 million.
At the San Vicente property, production plans have been delayed several months
while the Company negotiates agreements with its joint venture partners, EMUSA
and Comibol. Production, which was due to commence in March, 2005, is now
expected towards the end of May, 2005. The Company still expects to produce
approximately 700,000 ounces from San Vicente in 2005 at a total cost of under
$2.50 per ounce; however, an extended delay may impede the Company's ability to
meet this production target.
DATASOURCE: Pan American Silver Corp.
CONTACT: Brenda Radies, Vice-President Corporate Relations,
(604) 806-3158, http://www.panamericansilver.com/