Pan American Silver (NASDAQ:PAAS)
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From Jul 2019 to Jul 2024
Pan American Silver reports improved results in second quarter
(all amounts in US Dollars unless otherwise stated)
VANCOUVER, July 28 /PRNewswire-FirstCall/ --
SECOND QUARTER HIGHLIGHTS
-------------------------
- Silver production increased 24% over second quarter 2004 to
3.1 million ounces.
- Cash production cost of $4.48/oz in second quarter increased over
2004 ($4.09/oz), but decreased over first quarter.
- Cash flow from operations before changes in non-cash working capital
increased 73% to $3.5 million versus $2.0 million in 2004.
- Mine operating earnings grew 27% to $3.1 million versus $2.4 million
in 2004.
- Consolidated revenue of $23.9 million increased 14% over second
quarter 2004.
- Net earnings for the quarter were $24,000 versus $1.3 million in
2004.
- Significantly increased reserves and resources at Morococha.
- Plan approved to resume sulphide production at La Colorada.
- San Vicente agreement signed; mining restarts; mill production
deferred until 2006.
- Alamo Dorado construction on schedule and on budget.
FINANCIAL RESULTS
-----------------
Pan American Silver Corp.'s (NASDAQ: PAAS; TSX: PAA) consolidated revenue for
the second quarter of 2005 was $23.9 million, a 14% increase over 2004 due to
the addition of production from the Morococha mine in Peru acquired in the
third quarter of 2004. Cash flow from operations before changes in working
capital totaled $3.5 million versus $2.0 million in 2004 due to increased
silver and base metal production and higher realized silver prices. Mine
operating earnings in the quarter increased to $3.1 million from $2.4 million
in the year-earlier period, due to the contribution of earnings from Morococha
and improved production at La Colorada.
While consolidated cash production costs increased 10% over the second quarter
of 2004, they declined slightly from the first quarter of 2005. All operations
continue to be affected by higher energy and labour costs. However, expected
increases in silver production at Quiruvilca and Huaron should help reduce unit
costs over the remainder of the year.
Pan American recorded net earnings of $24,000 in the second quarter versus net
earnings of $1.3 million in the corresponding period of 2004. The addition of
good earnings from the Morococha mine was more than offset by three factors not
present in the corresponding period of 2004: first, charges for Peruvian income
taxes, workers' participation costs and the 1% net smelter royalty tax totaling
$1.5 million; second, higher energy and labour costs which increased unit
production costs; and third, a decreased contribution from the low-cost silver
stockpile operation.
Consolidated silver production in the second quarter totaled 3,088,667 ounces,
a 24% increase over the second quarter of 2004, due primarily to the addition
of production from the Morococha mine and increased production at the La
Colorada mine in Mexico, offset by lower production at the Silver Stockpiles
and Huaron. Zinc production in the quarter increased 26% over 2004 levels to
9,246 tonnes due to the addition of production from Morococha, while lead
production dropped 12% to 3,703 tonnes due to lower grades at Huaron and
Quiruvilca. Copper production rose 60% to 1,051 tonnes due to the addition of
production from Morococha and higher copper grades at Huaron.
For the six months ended June 30, 2005, consolidated revenue totaled $51.0
million, a 41% increase over the first six months of 2004, due primarily to
increased production and increased realized silver prices. In the first six
months, the Company's net loss totaled $2.9 million, versus net earnings of
$0.9 million in the year-earlier period.
Consolidated silver production in the first half of 2005 totaled 6,084,369
ounces, a 25% increase over the first half of 2004. Zinc production in the half
also climbed 25% to 18,117 tonnes, while lead production decreased 9% to 7,378
tonnes and copper production rose 56% to 1,978 tonnes.
At June 30, 2005 working capital was $96.6 million, including cash and
short-term investments of $78.9 million. Working capital is $9.7 million less
than at March 31, 2005 due primarily to expenditures on the construction of the
Alamo Dorado silver project in Mexico.
Geoff Burns, President and CEO of Pan American Silver stated that "This was a
solid quarter. We increased silver production 24%, we generated tremendous
exploration success and we made excellent progress on the building of our next
mine, Alamo Dorado, which is gearing up exactly according to plan. I am pleased
with the exceptional performances at Morococha and La Colorada, but we still
have work to do at Huaron."
OPERATIONS AND DEVELOPMENT HIGHLIGHTS
-------------------------------------
PERU
The Morococha mine (87% owned) recorded an excellent quarter and produced
691,612 net ounces of silver at a cash cost of $2.78/oz. Increased throughput,
higher ore grades and better metal recoveries all contributed to the
outstanding performance. Much of the Company's exploration drilling in the
second quarter was focused on Morococha in order to exploit the mine's
significant long-term potential. To date this year, 14,000 meters of drilling
have added 1.23 million tonnes grading 170 g/tonne silver in new proven and
probable mineral reserves, containing an additional 6.4 million ounces of
silver. Total proven and probable mineral reserves at Morococha now stand at
3.3 million tonnes grading 207 g/tonne silver, for 21.9 million contained
ounces of silver (19.0 million ounces Pan American's share). The mine also
contains an additional 11 million ounces of silver in measured and indicated
resources, and 71.9 million ounces in inferred resources, as announced on July
21, 2005. Further drilling in 2005 is expected to convert previously delineated
resources into additional proven and probable reserves.
The Quiruvilca mine produced 580,999 ounces of silver in the second quarter, a
3% increase over the first quarter of 2005. Cash costs were $4.46/oz, but are
expected to decrease over the remainder of the year as production rises to the
forecast 2.3 million ounces. A new conveyor system has been installed on the
key 340 level of the mine which is expected to increase production levels and
lower unit costs.
The Huaron mine produced 922,643 ounces of silver in the second quarter, a 4%
improvement over first-quarter levels. Cash costs rose over 2004 levels due
primarily to lower zinc production caused by lower zinc grades and recovery
rates in the ore currently being mined. Metallurgical testing is underway to
determine how to increase zinc recoveries to historical levels. A number of
production initiatives implemented in the last six months are expected to
improve Huaron's performance over the remainder of the year.
In the second quarter the Silver Stockpile operation sold 150,016 ounces of
silver, versus 261,746 ounces in the second quarter of 2004 due to decreased
demand for the ore from the Doe Run smelter in Peru. Production costs rose as a
reflection of the royalty now being paid to the Peruvian company Volcan under
the operation's purchase agreement.
MEXICO
The performance of the La Colorada mine continued to improve in the second
quarter with record production of 743,397 ounces of silver, bringing its total
for the year to 1,432,016 ounces. Cash costs declined to $5.39/oz from $6.82/oz
in the corresponding period of 2004. Due to more selective mining methods the
operation has increased production by 57% over the first half of 2004 while
mining only 9% more tonnes of ore. In the second quarter the operation also
completed a plan for the resumption of mining of sulphide ore, which had ceased
due to excess water. Mining and stockpiling of sulphide ore will commence
immediately with the restart of the sulphide processing plant scheduled for
February, 2006. Mining the sulphides will add approximately 0.9 million ounces
of silver annually to production at a cash cost of $2.20/oz, substantially
decreasing the mine's overall unit costs.
Construction of the Alamo Dorado mine, which commenced in the first quarter of
2005, is on schedule and on budget. Commercial production of 5 million ounces
of silver annually is expected to begin in late 2006. All critical equipment
has been secured and key members of the operations team have been hired. Design
work on the operation is approximately 40% complete. Construction activities are
well underway, including site clearing, roadwork, the installation of temporary
power and the erection of the truck maintenance and warehouse facility. During
the quarter, the Company spent $5.6 million, with an additional $33.5 million
expected to be spent over the remainder of 2005.
ARGENTINA
The feasibility study on the 50% owned Manantial Espejo joint venture in
Argentina continues to progress and remains on target for completion in the
fourth quarter. Exploration and infill drilling programs completed in the first
half of the year have allowed for the refinement of mining methods and have
significantly increased the joint venture's confidence in the overall resource
estimate, but have not materially increased the project resources as stated at
December 31, 2004. The project is expected to produce in excess of 3.7 million
ounces of silver and 56,000 ounces of gold annually. As part of the completion
of the feasibility study, capital and operating cost estimates are being
reviewed to identify opportunities to optimize project economics, including the
negotiation of power and infrastructure programs with the Argentine government.
An Environmental Impact Study is also underway to secure the necessary mine
development permits.
BOLIVIA
During the second quarter, Pan American finalized agreements outstanding with
state mining company Comibol and as a result is now planning to refurbish the
existing Vetillas mill at San Vicente rather than toll milling at another
facility. The refurbishment of the Vetillas mill will allow production at San
Vicente to increase to approximately 2.6 million ounces of silver annually,
reducing operating costs and improving profitability. Pan American began
stockpiling ore in July in anticipation of commencing operations in the first
quarter of 2006. Consequently, the 735,000 ounces originally forecast to be
produced this year have been deferred until 2006. Pan American now estimates
production for 2005 to be 12.5 million ounces of silver versus the 13.6 million
ounces forecast in January, but much of this shortfall will be made up with
higher production in 2006.
SILVER MARKETS
--------------
The silver price remained volatile in the second quarter, ranging from a low of
$6.85/oz to a high of $7.53/oz, although it opened and closed at $7.10/oz, near
its average for the quarter of $7.16/oz. The 2005 World Silver Survey, released
in May by Gold Fields Mineral Services, continued to support a bullish case for
higher silver prices, citing strong physical off take for industrial
applications and jewelry against declining scrap supply and government sales.
However, the dominant driver for the price increases sustained since 2003 has
been investment demand for silver. According to GFMS, investors are once again
viewing silver as a viable asset class and the trend toward buying silver as a
commodity is expected to remain strong, likely bolstered by the announcement
that an Exchange Traded Fund in silver is being launched by Barclays. A summary
of the Survey is available on the homepage of Pan American's website at
http://www.panamericansilver.com/.
Pan American will host a conference call to discuss the results today 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 6258416.
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 Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Consolidated Financial
Highlights
(in thousands of
US dollars)
(Unaudited)
Net income (loss)
for the period $ 24 $ 1,287 $ (2,864) $ 921
Income/(Loss) per
share $ 0.00 $ (0.12) $ (0.04) $ (0.17)
Cash flow from
(used by) operations $ 1,348 $ 495 $ 4,080 $ 102
Capital spending $ 14,090 $ 2,983 $ 24,093 $ 6,562
Exploration expenses $ 885 $ 1,137 $ 2,309 $ 1,665
Cash and short-term
investments $ 78,941 $ 98,136 $ 78,941 $ 98,136
Working capital $ 96,648 $ 114,655 $ 96,648 $ 114,655
Consolidated Ore
Milled & Metals
Recovered to
Concentrate
Tonnes milled 418,422 307,096 815,015 602,563
Silver metal - ounces 3,088,667 2,495,798 6,084,369 4,884,636
Zinc metal - tonnes 9,246 7,349 18,117 14,522
Lead metal - tonnes 3,703 4,198 7,378 8,089
Copper metal - tonnes 1,051 656 1,978 1,270
Consolidated Cost per
Ounce of Silver
(net of by-product
credits)
Total cash cost
per ounce $ 4.48 $ 4.09 $ 4.50 $ 3.94
Total production cost
per ounce $ 5.83 $ 5.14 $ 5.83 $ 5.05
In thousands of
US dollars
Direct operating
costs, royalties,
treatment and
refining charges $ 29,954 $ 20,032 $ 58,786 $ 39,382
By-product credits (17,273) (11,277) (33,856) (22,678)
-------------------------------------------------------------------------
Cash operating costs 12,681 8,755 24,951 16,704
Depreciation,
amortization &
reclamation 3,823 2,256 7,393 4,708
-------------------------------------------------------------------------
Production costs $ 16,504 $ 11,010 $ 32,344 $ 21,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce
calculations) 2,831,511 2,142,515 5,549,584 4,243,810
Average Metal Prices
Silver - London
Fixing $ 7.16 $ 6.25 $ 7.06 $ 6.47
Zinc - LME Cash
Settlement per pound $ 0.58 $ 0.47 $ 0.59 $ 0.48
Lead - LME Cash
Settlement per pound $ 0.45 $ 0.37 $ 0.45 $ 0.38
Copper - LME Cash
Settlement per pound $ 1.54 $ 1.26 $ 1.51 $ 1.25
Mine Operations Highlights
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Huaron Mine
Tonnes milled 159,219 166,675 305,229 314,480
Average silver grade -
grams per tonne 212 233 215 231
Average zinc grade 2.88% 3.29% 2.95% 3.28%
Silver - ounces 922,643 1,100,072 1,806,790 2,063,788
Zinc - tonnes 3,065 4,225 6,244 8,020
Lead - tonnes 1,621 3,175 3,525 5,845
Copper - tonnes 496 372 877 759
Total cash cost
per ounce $ 5.24 $ 3.77 $ 4.99 $ 3.92
Total production cost
per ounce $ 6.45 $ 4.99 $ 6.19 $ 5.15
In thousands of
US dollars
Direct operating costs,
royalties, treatments
and refining
charges $ 10,754 $ 10,823 $ 21,000 $ 20,970
By-product credits (6,366) (7,030) (12,806) (13,563)
-------------------------------------------------------------------------
Cash operating costs 4,388 3,793 8,194 7,407
Depreciation,
amortization and
reclamation 1,018 1,232 1,962 2,337
-------------------------------------------------------------------------
Production costs $ 5,406 $ 5,025 $ 10,156 $ 9,744
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce calculation) 837,864 1,066,816 1,640,658 1,890,662
Quiruvilca Mine
Tonnes milled 90,328 93,745 180,253 185,965
Average silver grade -
grams per tonne 229 237 226 236
Average zinc grade 3.06% 3.53% 3.13% 3.76%
Silver - ounces 580,999 621,311 1,144,386 1,238,201
Zinc - tonnes 2,323 2,850 4,774 6,075
Lead - tonnes 668 977 1,349 2,108
Copper - tonnes 321 267 643 490
Total cash cost
per ounce $ 4.46 $ 3.74 $ 4.34 $ 3.35
Total production cost
per ounce $ 5.00 $ 4.02 $ 4.88 $ 3.63
In thousands of
US dollars
Direct operating costs,
royalties, treatments
and refining charges $ 6,670 $ 6,173 $ 13,338 $ 12,384
By-product credits (4,252) (4,015) (8,717) (8,531)
-------------------------------------------------------------------------
Cash operating costs 2,418 2,158 4,621 3,853
Depreciation,
amortization and
reclamation 292 162 583 325
-------------------------------------------------------------------------
Production costs $ 2,710 $ 2,320 $ 5,204 $ 4,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce
calculation) 541,793 577,264 1,065,874 1,149,619
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Morococha Mine(x)
Tonnes milled 116,542 N/A 227,070 N/A
Average silver grade -
grams per tonne 218 N/A 220 N/A
Average zinc grade 4.27% N/A 4.17% N/A
Silver - ounces 691,612 N/A 1,345,147 N/A
Zinc - tonnes 3,857 N/A 7,099 N/A
Lead - tonnes 1,414 N/A 2,504 N/A
Copper - tonnes 234 N/A 458 N/A
Total cash cost
per ounce $ 2.78 $ N/A $ 3.25 $ N/A
Total production cost
per ounce $ 4.49 $ N/A $ 4.98 $ N/A
In thousands of
US dollars
Direct operating
costs, royalties,
treatments and
refining charges $ 8,074 $ N/A $ 15,626 $ N/A
By-product credits (6,334) N/A (11,679) N/A
-------------------------------------------------------------------------
Cash operating costs 1,740 N/A 3,947 N/A
Depreciation,
amortization,
reclamation 1,071 N/A 2,102 N/A
-------------------------------------------------------------------------
Production costs $ 2,811 $ N/A $ 6,049 $ N/A
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce
calculations) 626,139 N/A 1,213,823 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 52,333 38,347 99,463 91,389
Average silver grade -
grams per tonne 556 480 553 437
Silver - ounces 743,397 415,828 1,432,016 910,590
Zinc - tonnes 34 122
Lead - tonnes 46 136
Total cash cost
per ounce $ 5.39 $ 6.82 $ 5.48 $ 6.09
Total production cost
per ounce $ 7.34 $ 8.92 $ 7.40 $ 8.38
In thousands of
US dollars
Direct operating costs,
royalties, treatments
and refining charges $ 4,319 $ 3,027 $ 8,466 $ 6,007
By-product credits (321) (232) (636) (585)
-------------------------------------------------------------------------
Cash operating costs 3,998 2,795 7,830 5,422
Depreciation,
amortization,
reclamation 1,443 861 2,747 2,047
-------------------------------------------------------------------------
Production costs $ 5,441 $ 3,656 $ 10,577 $ 7,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce
calculations) 741,538 409,742 1,428,436 890,842
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Silver Stock Piles
Tonnes sold 13,675 21,991 31,412 44,836
Average silver grade -
grams per tonne 341 370 353 380
Silver - ounces 150,016 261,746 356,030 548,311
Total cash cost
per ounce $ 1.63 $ 0.06 $ 1.78 $ 0.07
Total production cost
per ounce $ 1.63 $ 0.06 $ 1.78 $ 0.07
In thousands of
US dollars
Direct operating
costs, royalties,
treatments and
refining charges $ 137 $ 9 $ 358 $ 21
By-product credits - - - -
-------------------------------------------------------------------------
Cash operating costs 137 9 358 21
Depreciation,
amortization,
reclamation - - - -
-------------------------------------------------------------------------
Production costs $ 137 $ 9 $ 358 $ 21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payable ounces of
silver (used in cost
per ounce
calculations) 84,177 148,693 200,793 312,687
San Vicente Mine(xx)
Tonnes milled - 8,329 - 10,729
Average silver grade -
grams per tonne - 424 - 422
Average zinc grade -
percent - 3.63% - 3.65%
Silver - ounces - 96,841 - 123,747
Zinc - tonnes - 240 - 306
Copper - tonnes - 17 - 21
(xx) Pan American does not include San Vincente production in its cost
per ounce calculations. The production statistics represent Pan
American's 50% interest in the mine.
PAN AMERICAN SILVER CORP.
Consolidated Balance Sheets
(In thousands of US dollars)
June 30 Dec. 31
2005 2004
(Unaudited) (Audited)
-------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 23,448 $ 28,345
Short-term investments 55,493 69,791
Accounts receivable, net of $Nil provision
for doubtful accounts 20,070 25,757
Inventories 12,818 10,674
Prepaid expenses 2,584 1,684
-------------------------------------------------------------------------
Total Current Assets 114,413 136,251
Mineral property, plant and equipment,
net (note 3) 116,231 104,647
Investment and non-producing properties (note 4) 133,390 125,863
Direct smelting ore 2,449 2,671
Other assets 532 647
-------------------------------------------------------------------------
Total Assets $ 367,015 $ 370,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities $ 17,024 $ 20,331
Advances for metal shipments 367 652
Current portion of bank loans
and capital lease - 134
Current portion of non-current liabilities 374 479
-------------------------------------------------------------------------
Total Current Liabilities 17,765 21,596
Liability component of convertible debentures 105 134
Provision for asset retirement obligation
and reclamation (note 3) 32,455 32,012
Provision for future income taxes 32,907 33,212
Other liabilities and provisions 1,648 1,144
Severance indemnities and commitments 1,153 398
Non-controlling interest 1,612 1,379
-------------------------------------------------------------------------
Total Liabilities 87,645 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
June 30, 2005 - 66,987,124 common shares 382,199 380,571
Equity component of convertible debentures 636 633
Additional paid in capital 11,378 10,976
Deficit (114,843) (111,976)
-------------------------------------------------------------------------
Total Shareholders' Equity 279,370 280,204
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 367,015 $ 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 Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ 23,905 $ 20,950 $ 50,986 $ 36,101
Operating costs (18,417) (16,531) (40,797) (27,699)
Depreciation and
amortization (2,415) (2,008) (5,633) (4,153)
-------------------------------------------------------------------------
Mine operating earnings 3,073 2,411 4,556 4,249
-------------------------------------------------------------------------
General and adminis-
trative, including
stock-based compensation 1,751 1,886 3,313 3,129
Exploration 885 1,137 2,309 1,665
Asset retirement
and reclamation 412 301 939 603
Interest and financing
expenses 93 289 186 757
-------------------------------------------------------------------------
Operating (loss) (68) (1,202) (2,191) (1,905)
Investment and
other income 990 2,489 1,248 2,826
-------------------------------------------------------------------------
Income (loss) before
taxes and non-
controlling interest 922 1,287 (943) 921
Income tax provision (746) - (1,688) -
Non-controlling interest (152) - (233) -
-------------------------------------------------------------------------
Net income (loss)
for the period $ 24 $ 1,287 $ (2,864) $ 921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to
common shareholders:
Net income (loss) for
the period $ 24 $ 1,287 $ (2,864) $ 921
Charges relating to
conversion of
convertible
debentures (8,464) (8,464)
Accretion of
convertible
debentures 0 (718) (3) (2,838)
-------------------------------------------------------------------------
Adjusted net income
(loss) for the
period attributable
to common
shareholders $ 24 $ (7,895) $ (2,867) $ (10,381)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and fully
diluted income/
(loss) per share $ 0.00 $ (0.12) $ (0.04) $ (0.17)
Weighted average
shares outstanding 66,926,686 65,073,833 66,905,637 59,564,028
See accompanying notes to consolidated financial statements
Pan American Silver Corp.
Consolidated Statement of Cash Flows
(Unaudited - in thousands of US dollars)
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities
Net (loss) income for
the period $ 24 $ 1,287 $ (2,864) $ 921
Reclamation
expenditures (225) (230) (500) (592)
Items not involving cash
Depreciation and
amortization 2,418 2,008 5,633 4,153
Gain on sale of
marketable securities
Non-controlling interest 152 233
Interest accretion on
the convertible
debentures 97 366
Debt settlement expense 1,208 1,208
Gain on sale of
concessions (3,583) (3,583)
Compensation expense 421 245 421 245
Stock-based compensation 284 684 581 1,124
Asset retirement and
reclamation 412 301 939 603
Changes in non-cash
operating working
capital items (note 6) (2,138) (1,522) (363) (4,343)
-------------------------------------------------------------------------
Cash generated by
operations 1,348 495 4,080 102
-------------------------------------------------------------------------
Financing activities
Shares issued for cash 282 943 1,201 61,005
Share issue costs - (96) (180)
Convertible debentures
payments - (11,213) (13,520)
Repayment of short-term
loans and capital lease (285) (12,689) (285) (13,096)
-------------------------------------------------------------------------
Cash (used in) generated
by financing activities (3) (23,055) 916 34,209
-------------------------------------------------------------------------
Investing activities
Mineral property,
plant and equipment
expenditures (8,631) (2,665) (15,387) (6,008)
Investment and
non-producing
property expenditures (5,459) (318) (8,706) (554)
Maturity of short-
term investments 18,466 10,434 13,798 10,456
Proceeds from sale
of assets - 3,583 500 3,583
Other (174) (2,000) (98) (2,000)
-------------------------------------------------------------------------
Cash generated by (used
in) investing activities 4,202 9,034 (9,893) 5,477
-------------------------------------------------------------------------
Increase/(decrease) in
cash and cash
equivalents during
the period 5,547 (13,526) (4,897) 39,788
Cash and cash
equivalents, beginning
of period 17,901 67,505 28,345 14,191
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 23,448 $ 53,979 $ 23,448 $ 53,979
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
Disclosures
Interest paid $ - $ - $ 18 $ 391
----------------------------------------------------
----------------------------------------------------
Taxes paid $ 2,906 $ - $ 3,111 $ -
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statements of Shareholders' Equity
(in thousands of US dollars, except for amounts of shares)
Common Shares Additional
--------------- Convertible Paid in
Shares Amount Debentures 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 120,325 1,190 - - - 1,190
Issued on the
exercise of
share purchase
warrants 1,181 11 - - - 11
Stock-based
compensation - - - 581 - 581
Accretion of
convertible
debentures - - 3 - (3) -
Assigned value
of exercised
options - 7 - (7) - -
Issued as
compensation 30,240 420 - - - 420
Other - - - (172) - (172)
Net loss for
the period - - - - (2,864) (2,864)
-------------------------------------------------------------------------
Balance, June 30,
2005 66,987,124 $382,199 $ 636 $11,378 $(114,843) $279,370
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pan American Silver Corp.
Notes to Unaudited Interim Consolidated Financial Statements
As at June 30, 2005 and 2004 and for the three month and six 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 Peru, Bolivia, Argentina,
Mexico and the United States of 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 and six- month periods ended
June 30, 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:
Operations and
Ownership Development
Subsidiary Location interest Status 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 87.4% Consolidated Morococha Mine
Plata Panamericana
S.A. de C.V. Mexico 100% Consolidated La Colorada Mine
Minera Corner Bay Mexico 100% Consolidated Alamo Dorado
Project
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
ore 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 is 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 is 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 US dollars,
and which are integrated operations, are translated into US 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 share grants or
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, where
appropriate.
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 5,609,333 for the six months
ended June 30, 2005 (1,544,916 and 4,064,417 shares arising from
outstanding stock options and share purchase warrants, respectively) and
5,666252 shares for the six months ended June 30, 2004 have been excluded
from the calculation, as their effect would have been anti-dilutive.
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:
June 30, 2005 December 31, 2004
----------------------------- -----------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
-------------------------------------------------------------------------
Mineral
Properties
Plant &
equipment
-----------
Morococha
mine, Peru $ 27,947 $ (4,279) $ 23,668 $ 18,217 $ (2,099) $ 16,118
La Colorada
mine, Mexico 58,926 (7,919) 51,007 54,848 (5,261) 49,587
Huaron mine,
Peru 56,752 (17,830) 38,922 53,628 (16,039) 37,589
Quiruvilca
mine, Peru 16,675 (14,511) 2,164 25,601 (24,616) 985
Other 954 (483) 470 904 (536) 368
-----------------------------------------------------------
TOTAL $161,253 $(45,022) $116,231 $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:
June 30, 2005 December 31, 2004
----------------------------- -----------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
-------------------------------------------------------------------------
Exploration
and
Development
------------
Morococha
exploration,
Peru $ 34,704 $ - $ 34,704 $ 40,472 $ - $ 40,472
Manantial
Espejo,
Argentina 3,176 - 3,176 2,012 - 2,012
Alamo Dorado,
Mexico 93,689 (45) 93,644 81,692 - 81,692
Other 1,866 - 1,866 1,687 - 1,687
-----------------------------------------------------------
TOTAL $133,435 $ (45) $133,390 $125,863 $ - $125,863
-----------------------------------------------------------
-----------------------------------------------------------
5. Share Capital
a) Authorized and issued share capital
The details of the common shares issued and outstanding are as
follows:
Shares
Issued Amount
------------ ------------
Balance at December 31, 2004 66,835,378 $ 380,751
Shares issued on exercise of stock options 120,325 1,190
Shares issued on exercise of warrants 1,181 11
Issued as compensation 30,240 420
Assigned value of exercised options - 7
-------------------------
Balance at June 30, 2005 66,987,124 $ 382,199
-------------------------
-------------------------
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 June 30, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------
Weighted
Number Average Number
Outstanding Remaining Exercisable Weighted
Range of as at Contractual as at Average
Exercise Year of June 30, Life June 30, Exercise
Prices Expiry 2005 (months) 2005 Price
-------------------------------------------------------------------------
$4.08 2006 88,000 10.63 88,000 $4.08
$7.88 - 8.24 2007 328,500 28.36 276,500 $8.17
$7.26 - 11.77 2008 457,308 35.88 67,308 $8.18
$7.51 - 15.65 2009 472,441 45.59 221,108 $15.24
$4.08 2010 217,000 65.43 217,000 $4.08
-------------------------------------------------------------------------
1,563,249 37.18 869,916 $7.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the six month period ended June 30, 2005, the Company
recognized $581 of stock compensation expense.
c) Share purchase warrants
As of June 30, 2005 the Company had agreed to issue 255,781 warrants
to the International Finance Corporation to terminate future royalty
payments at La Colorada. The Company has recorded the liability for these
warrants in current payables until the warrants are issued. The warrants
have a fair value of $2.1 million and allow the holder to purchase
255,781 common shares of the company at $16.91 for a period of 5 years
after the issue date.
As at June 30, 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
$11,000 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:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Accounts receivable $ 3,711 $ 193 $ 5,821 $ (1,727)
Inventories (3,126) 2,850 (731) 1,015
Prepaids (1,017) (929) (900) (1,031)
Accounts Payable and accrued
liabilities (2,784) (5,376) (4,746) (5,204)
Advances for metal shipments - 1,244 - 1,906
Severance, indemnities and
commitments 1,333 496 498 698
Provision for future income taxes (255) - (305) -
-------------------------------------------------------------------------
$ (2,138) $ (1,522) $ (363) $ (4,343)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 June 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 4,405 $ 21,726 $ - $ (2,227) $ 23,905
Investment and other
income $ - $ (264) $ 19 $ 543 $ 298
Interest and financing
expenses $ - $ - $ - $ - $ -
Exploration $ - $ - $ (677) $ (2,083) $ (2,760)
Depreciation and
amortization $ (691) $ (1,719) $ - $ (7) $ (2,415)
Net income (loss)
for the period $ 808 $ 2,824 $ (704) $ (2,904) $ 24
Property, plant and
equipment
Capital expenditures $ 878 $ 5,711 $ 7,441 $ - $ 14,090
Segment assets $ 57,773 $135,760 $102,015 $ 71,467 $367,015
For the three months ended June 30, 2004
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 2,404 $ 19,353 $ - $ (807) $ 20,950
Investment and other
income $ 2 $ 3,566 $ 210 $ 22 $ 3,800
Interest and financing
expenses $ (117) $ (76) $ - $ (96) $ (289)
Exploration $ (7) $ - $ (1,130) $ - $ (1,137)
Depreciation and
amortization $ (680) $ (1,317) $ - $ (11) $ (2,008)
Net income (loss)
for the period $ (1,317) $ 7,861 $ 546 $ (5,803) $ 1,287
Property, plant and
equipment
Capital expenditures $ 1,017 $ 1,330 $ - $ 636 $ 2,983
Segment assets $ 50,516 $ 64,172 $ 89,484 $111,444 $315,616
For the six months ended June 30, 2005
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 9,383 $ 45,834 $ - $ (3,458) $ 51,759
Investment and other
income $ 4 $ (214) $ (21) $ 785 $ 554
Interest and financing
expenses $ - $ - $ - $ - $ -
Exploration $ (2) $ - $ (2,130) $ (272) $ (2,402)
Depreciation and
amortization $ (1,950) $ (3,670) $ - $ (13) $ (5,633)
Net income (loss)
for the period $ (149) $ 5,636 $ (2,147) $ (6,204) $ (2,864)
Property, plant and
equipment
Capital expenditures $ 2,564 $ 8,116 $ 13,386 $ 27 $ 24,093
Segment assets $ 57,773 $135,760 $102,015 $ 71,467 $367,015
For the six months ended June 30, 2004
-------------------------------------------------------------------------
Mining & Development Investment
-------------------- and
Mexico Peru exploration Corporate Total
-------------------------------------------------------------------------
Revenue from external
customers $ 6,010 $ 30,091 $ - $ - $ 36,101
Investment and other
income $ 1,814 $ 1,630 $ 226 $ 466 $ 4,136
Interest and financing
expenses $ (229) $ (345) $ - $ (1,494) $ (2,068)
Exploration $ (13) $ - $ (1,652) $ - $ (1,665)
Depreciation and
amortization $ (1,620) $ (2,512) $ - $ (21) $ (4,153)
Net income (loss)
for the period $ (1,393) $ 5,625 $ (1,448) $ (1,863) $ 921
Property, plant and
equipment
Capital expenditures $ 2,279 $ 3,620 $ 475 $ 188 $ 6,562
Segment assets $ 50,516 $ 64,172 $ 89,484 $111,444 $315,616
Second Quarter 2005 Management's Discussion and Analysis
July 27th, 2005
Management's discussion and analysis ("MD&A") focuses on significant factors
that affected Pan American Silver Corp.'s and its subsidiaries' ("Pan American"
or the "Company") performance and such factors that may affect its future
performance. The MD&A should be read in conjunction with the unaudited
consolidated financial statements for the three months ended June 30, 2005 and
2004 and the related notes contained herein.
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 six
months ended June 30, 2005.
Results of Operations
For the three months ended June 30, 2005 the Company's net income was $0.02
million (earnings per share of $0.004) compared to net income of $1.3 million
(loss of $0.12 per share, after adjusting for the accretion to the 5.25 per
cent convertible unsecured senior subordinated debentures (the "Debentures"))
for the corresponding period in 2004. The Company had a net loss of $ 2.9
million for the six-month period ended June 30, 2005 compared to net income of
$0.9 million for the corresponding period in 2004. During the second quarter of
2004, the Company recorded a $3.58 million gain on the sale of surplus land at
the Quiruvilca mine, offset by a charge of $1.31 million relating to the early
conversion of the Debentures.
Revenue from metal sales for the second quarter of 2005 was $23.9 million, a 14
per cent increase from the corresponding period in 2004. The Morococha mine,
which was acquired with effect from July 1, 2004 generated revenue of $8.8
million in the second quarter of 2005 and was the main reason for the increase
in revenue from a year ago. Revenue in the second quarter also benefited from
higher realized metal prices than the previous year, offset partially by lower
concentrate shipments from the Huaron and Quiruvilca operations as compared to
the year-earlier period. The growth in revenue was further reduced by base
metal hedging settlements in the second quarter of 2005 totaling $1.4 million
(2004 - loss of $0.8 million), and by the recently introduced Peruvian mining
royalties of $0.3 million (2004 - $nil).
Operating costs for the three months ended June 30, 2005 were $18.4 million, a
$1.9 million increase from the operating costs recorded in the same period of
2004. For the six-month period ended June 30, 2005, operating costs increased
by $13.1 million over the operating costs for the comparable period of 2004.
The Morococha mine incurred operating costs of $5.1 million and $10.9 million
in the three-months and six-months ended June 30, 2005 respectively and was the
main reason for the increase in operating costs from a year ago. Peruvian
workers participation and a third party's one- third participation in the
Pyrite Stockpile operation, which totaled $0.4 million during the second
quarter (2004 - $nil) and $0.9 million in the first half of 2005 (2004 - $nil)
also increased operating costs from last year. In addition, the Company has
experienced the industry-wide escalations in major cost items, such as energy,
freight and labour costs over the last year.
The Company generated mine operating earnings of $3.1 million in the second
quarter of 2005 (2004 - $2.4 million). Mine operating earnings are equal to
revenue less operating costs and depreciation and amortization expenses. As
reflected in the following table, the second quarter of 2005 represents the
ninth consecutive quarter that the Company has generated mine operating
earnings. The table below sets out select quarterly results for the past ten
quarters, which are stated in thousands of US dollars, except per share
amounts.
Mine
operating Net income/ Net income
Quarter earnings/ (loss) for (loss)
Year (unaudited) Revenue (loss)(1) the period per share
-------------------------------------------------------------------------
2005 June 30 $ 23,905 $ 3,073 $ 24 $ 0.00
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) are equal to revenues less operating
costs and depreciation and amortization
(2) Includes charges associated with early conversion and accretion of
the Debentures
Depreciation and amortization charges for the second quarter of 2005 increased
to $2.4 million from $2.0 million the year before. The principal reason for
this increase was the depreciation charges related to the Morococha mine.
General and administration ("G & A") costs for the three-month period ended
June 30, 2005, including stock-based compensation, were $1.8 million, down from
$1.9 million recorded in the comparable quarter in 2004.
Exploration expenses for the quarter were $0.9 million, mostly expended on
feasibility activity at the Company's 50 per cent owned Manantial Espejo
property in Argentina. Exploration expenses for the comparable quarter of 2004
were $1.1 million, which included due diligence costs of $0.5 million spent on
a business development opportunity.
Reclamation expense of $0.9 million in the second quarter of 2005 (2004 - $0.6
million) related to the accretion of the liability that the Company previously
recognized on all its mining operations by adopting CICA Handbook Section 3110
- "Accounting for Asset Retirement Obligations" as at December 31, 2003. The
Company's expectations for future site restoration costs at its mines did not
change during the quarter.
Interest expenses have been reduced for the three and six-month periods ended
on June 30, 2005 as a result of the Company successfully inducing the early
conversion of 99 per cent of the Debentures and prepaying all bank debt in the
second quarter of 2004. Interest expenses of $0.1 million were incurred in the
second quarter of 2005 compared to $0.3 million during the same period in 2004.
Interest and other income for the second quarter of $0.9 million primarily
represented net income received from cash balances the Company maintained
during the quarter. In the second quarter of 2004, the Company recorded $0.5
million of interest and other income.
The Company incurred an income tax expense of $0.7 million and increased
operating costs relating to government mandated worker's participation in
annual mining profits of $0.3 million during the second quarter of 2005 (2004 -
$nil). These expenses were a result of the Company generating taxable earnings
at its Huaron and Morococha mines in Peru.
Metal Production
Pan American produced 3,088,667 ounces of silver in the second quarter of 2005,
a 24 per cent increase from the corresponding period in 2004. In the first half
of 2005, silver production has increased by 25 per cent as compared to 2004
production. This increase was achieved through the acquisition of Morococha ,
which produced 691,612 ounces at a cash cost of $2.78 per payable ounce in the
second quarter, while production from the Company's other operations in total
remained similar to production levels achieved a year ago. As shown in the
following table, zinc and copper production were also significantly higher than
last year's production due to the addition of Morococha. Lead production is
trailing last year's production levels by 9 per cent over the first half of the
year due to lower lead grades at both Huaron and Quiruvilca.
Three months ended Six months ended
June 30 % June 30 %
2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Silver metal -
ounces 3,088,667 2,495,798 24 6,084,369 4,884,636 25
Zinc metal - tonnes 9,246 7,349 26 18,117 14,522 25
Lead metal - tonnes 3,703 4,198 -12 7,378 8,089 -9
Copper metal -
tonnes 1,051 656 60 1,978 1,270 56
The La Colorada mine production continued its improving trend during the second
quarter with record silver production of 743,397 ounces at cash costs of $5.39
per payable ounce. For the first half of 2005, La Colorada has achieved a
production increase of 57 per cent compared to the first half of 2004 by
processing only 9 per cent more tonnes of ore, but at much higher grades and
recoveries.
In the second quarter of 2005 the Quiruvilca mine encountered lower grades than
a year ago, resulting in silver production of 580,999 ounces, which was 6 per
cent lower than the comparable period in 2004. However, silver production did
increase 3 per cent over production in the first quarter of 2005. Cash costs
per ounce of payable silver for the first half of 2005 at Quiruvilca were
$4.34. Management expects that production levels at Quiruvilca will steadily
improve during the second half of the year, with the installation in July of a
conveyor system to transport both ore and waste from the key 340 level of the
mine.
The Huaron mine experienced grades and recoveries which did not meet
expectations during the second quarter of 2005. For the three-months ended June
30, 2005, Huaron produced 922,643 ounces of silver, which was 16 per cent behind
silver production achieved in the second quarter of 2004; however it was a 4 per
cent improvement over production in the first quarter of 2005. Cash costs per
payable ounce for the first half of 2005 were $4.99, a 27 per cent increase
over last year's costs per payable ounce. Contributing approximately $0.79 to
the increase in costs per ounce for the second quarter of 2005 compared to the
second quarter of 2004 was lower base metal production, which resulted in a
reduction in the by-product credit. Zinc recoveries have declined due to a
change in the ore type in the areas currently being mined. An intensive
metallurgical test program has been initiated in an effort to return zinc
recoveries to historical levels. In addition, management is confident that a
combination of operating and capital initiatives implemented in the first half
of the year will allow Huaron to steadily increase mining and processing rates
over the remainder of 2005.
The Company's Pyrite Stockpile operation produced 150,016 ounces of silver
during the quarter at a cash cost of $1.63 per payable ounce. Production from
the Stockpiles for the first six months of 2005 was 35 per cent lower than the
production in the comparable period of 2004. The production rates from the
Stockpile operation are entirely dependent on the demand for this ore from the
purchaser, Doe Run Peru, and as a consequence are not controlled by management.
Costs per payable ounce are higher than last year due to the fact that Volcan
Minera S.A. became entitled to a one-third participation in the Stockpile
operation in December 2004, which is treated as a cost to the operation.
At the San Vicente property in Bolivia, mining of ore recommenced in early July
2005 following six months of negotiations between the Company and Comibol, the
Bolivian state owned mining company. As a consequence of these negotiations,
the Company plans to stockpile ore while refurbishing the milling facility at
the San Vicente mine over the course of the next six months, instead of
processing ore on a toll basis at a nearby facility. 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 the protracted negotiations and decision
to change milling arrangements will make it impossible for the Company to meet
this production target. Instead, the Company now expects to be producing from
its own mill at a rate of approximately 400 tonnes per day early in 2006,
producing approximately 750,000 ounces per year.
With no production expected from San Vicente in 2005 and reduced production
rates from the Stockpile operation, the Company now expects consolidated
production for 2005 to be approximately 12.5 million ounces, down from 13.5
million ounces originally forecasted. The Company expects consolidated cash
costs per payable ounce to decrease slightly in the second half of 2005 and is
estimating consolidated cash cost per payable ounce of below $4.50 for 2005.
The lack of production from the low-cost San Vicente mine and reduced
production from the low-cost Pyrite Stockpiles are the main reasons for the
increase in the estimated consolidated costs for 2005 from the $4.16 per
payable ounce that was forecast by management at the start of the year.
Cash and Total Production Costs per Ounce for Payable Silver
Consolidated cash costs per ounce for the three-month period ended June 30,
2005 were $4.48 per payable ounce of silver compared to $4.09 per payable ounce
for the corresponding period of 2004. For the first half of 2005, consolidated
cash costs per ounce were $4.50 per payable ounce compared to $3.94 per payable
ounce in the first half of 2004. Industry-wide cost escalations in energy and
consumables, Peruvian workers participation and a third party's one-third
participation in the Pyrite Stockpile operation, which totaled $0.4 million
during the second quarter (2004 - $nil) and $0.9 million in the first half of
2005 (2004 - $nil) were the primary reasons for the increase in cash costs from
last year. In addition, the Company has experienced increases in labour costs as
a direct effect of stronger Peruvian and Mexican local currencies relative to
the US dollar over the last year.
The Company 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
Consolidated Financial Statements for the year ended December 31, 2004. The
Company now calculates its cash and total costs per ounce based on the silver
ounces for which the Company is paid, therefore eliminating the need to account
for the cost of metals lost in smelting and refining. The second quarter and the
first six months of 2004 costs per ounce 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 payable 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 operating costs, as
shown in our unaudited Consolidated Statement of Operations for the three and
six-month periods ended June 30, 2005.
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------------------------------------
Operating Costs $ 18,417 $ 16,531 $ 40,797 $ 27,699
Add/(Subtract)
Smelting, refining,
and transportation
charges 9,061 5,603 17,734 11,159
By-product credits (18,219) (11,277) (35,616) (22,678)
Mining royalties 62 32 255 32
Change in inventories 3,352 (2,035) 1,731 294
Other 271 (100) 657 198
Minority interest
adjustment (262) - (604) -
-------------------------------------------------------------------------
Cash Operating
Costs A $ 12,682 $ 8,754 $ 24,954 $ 16,704
Add/(Subtract)
Depreciation and
amortization 2,415 2,008 5,633 4,153
Asset retirement
and reclamation 412 302 939 603
Change in
inventories 1,061 - 1,061 -
Other 95 (53) 80 (48)
Minority interest
adjustment (159) - (321) -
-------------------------------------------------------------------------
Production Costs B $ 16,504 $ 11,010 $ 32,344 $ 21,412
Payable Ounces of
Silver C 2,831,511 2,142,515 5,549,584 4,243,810
--------------------------------------------
Total Cash Cost
per Ounce (A(x)1000)/B $ 4.48 $ 4.09 $ 4.50 $ 3.94
--------------------------------------------
Total Production
Costs per Ounce (B(x)1000)/C $ 5.83 $ 5.14 $ 5.83 $ 5.05
--------------------------------------------
Liquidity and Capital Resources
At June 30, 2005, cash and cash equivalents plus short-term investments were
$78.9 million, a $12.9 million decrease from March 31, 2005. Investing
activities for the three months ended June 30, 2004 generated $4.2 million and
consisted primarily of the maturity of short-term investments of $18.5 million,
which was partially used to fund expenditures on mineral property, plant and
equipment of $14.1 million, mostly at Alamo Dorado. Cash flow provided by
operating activities was $1.3 million for the quarter ended June 30, 2005,
after changes in non-cash operating working capital items utilized $2.1
million. Financing activities in the second quarter offset each other with the
exercise of stock options yielding $0.3 million and the repayment of short-term
loans utilizing $0.3 million.
Working capital at June 30, 2005 was $96.6 million, a reduction of $9.8 million
from March 31, 2005. The reduction is reflected largely in a $12.9 million
decrease in cash and cash equivalents plus short-term investments, a $3.6
million decrease in accounts receivable partially offset by a $1.6 million
decrease in current liabilities and increases in inventories and prepaid
expenses of $4.2 million and $1.0 million respectively.
Capital resources at June 30, 2005 amounted to shareholders' equity of $279.4
million. At June 30, 2005, the Company had 66,987,124 common shares issued and
outstanding.
During the second quarter, the Company agreed to issue 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.
Pan American was required to make payments to IFC by May 15th of each year if
the average price of silver for the preceding calendar year exceeded $4.75 per
ounce. Such payment was based on the positive difference between the average
price per ounce of silver for a year and $4.75. The Company negotiated the
settlement of this obligation at a fair value of $2.1 million, to be settled by
the issue of warrants after the quarter end. At 30 June, 2005 the fair value was
recorded as a current liability. Each warrant issued entitles the IFC to
purchase one common share of Pan American at a price of US$ 16.91 over a
five-year period.
Based on the Company's financial position at June 30, 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
discharge liabilities as they come due. Other than as disclosed elsewhere in
the unaudited consolidated financial statements for the three months ended June
30, 2005 and 2004 and the related notes, the Company did not have any known
material contractual obligation or any off-balance sheet arrangements 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 June
30, 2005, the Company had sold forward 16,850 tonnes of zinc at a weighted
average price of $1,144 per tonne ($0.519 per pound). These forward sales
commitments represent approximately 45 per cent of the Company's forecast zinc
production until March 2006. At June 30, 2005, the cash offered prices for zinc
was $1,223 per tonne. The negative mark to market value at June 30, 2005 was
$1.4 million.
At the end of the second quarter of 2005, the Company had fixed the price of
650,000 ounces of silver produced during the second quarter and contained in
concentrates, which are due to be priced in July and August of 2005 under the
Company's concentrate contracts. The price fixed for these ounces averaged
$7.19 per ounce while the spot price of silver was $7.10 per ounce on June 30,
2005.
In anticipation of capital expenditures in Mexican pesos ("MXN") relating to
the construction of Alamo Dorado, the Company has purchased MXN 237 million
settling between September 2005 and May 2006 to match anticipated spending at
an average MXN/US$ exchange rate of 11.28. These forward contracts have been
designated as hedges for accounting purposes. At June 30, 2005, the spot
exchange rate for MXN/US$ was 10.73 and the positive mark to market value of
the Company's position was $0.5 million.
Exploration and Development Activities
Following the positive construction decision in late February 2005, the Company
has begun development at its Alamo Dorado project in Mexico and is confident
that production will commence on schedule in late 2006. All critical lead time
equipment has been secured and key members of the operations management team
have been hired. The final water permit has been received for the project and
an engineering, procurement and construction management ("EPCM") agreement was
signed with engineering firm M3. M3's engineering and design work, which began
in March was approximately 40% complete at June 30, 2005. Construction
activities have commenced at the site, including clearing work, the erection of
a truck maintenance and warehouse facility, the pioneering of the main mine
haulage road and the installation of temporary power lines. The Company spent
$5.6 million on equipment and construction related activities for the quarter
ended June 30, 2005. Over the remainder of the year, the Company anticipates
spending an additional $33.5 million on the construction of Alamo Dorado, which
will be funded out of the Company's treasury. The total capital costs for the
project are still expected to be approximately $77 million, including working
capital and a contingency allowance.
The Company progressed the feasibility study for the 50 per cent owned
Manantial Espejo project in Argentina during the quarter. Pan American's share
of the feasibility costs in the first and second quarters of 2005 were $1.2
million and $0.8 million respectively, which was expensed as incurred. Over the
course of the next few months, the Company will develop and submit an
environmental impact study to the Argentinean authorities along with proposals
for the development of local infrastructure, supply of energy and tax incentive
programs. The results of this work, together with ongoing metallurgical and
geological interpretation will culminate in a completed feasibility study for
the project 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 $0.4 million.
DATASOURCE: Pan American Silver Corp.
CONTACT: Brenda Radies, Vice-President Corporate Relations,
(604) 806-3158, http://www.panamericansilver.com/