SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 40-F/A
(Amendment No. 2)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission File Number 0-13727
______________________
Pan American Silver Corp.
(Exact name of Registrant as specified in its charter)
British Columbia 1044 Not Applicable
(Province or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No..)
1500 - 625 Howe Street
Vancouver, British Columbia
V6C 2T6
(604) 684-1175
(Address and telephone number of Registrants' principal executive offices)
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, NY 10011
(212) 894-8940
(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United States)
______________________
Securities registered or to be registered pursuant to Section 12(b) of the
Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
Common Shares, No Par Value
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
None
For annual reports, indicate by check mark the information filed with this
Form:
[X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by this annual
report.
The Registrant had 66,835,378 Common Shares
outstanding as at December 31, 2004
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned
to the registrant in connection with such Rule.
Yes 82- No X
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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EXPLANATORY NOTE
This Form 40-F/A is being filed to amend the Annual Report on Form 40-F for the
fiscal year ended December 31, 2004, originally filed with the Commission on
March 31, 2005. The Registrant is filing this Amendment because it has restated
its consolidated financial statements for the fiscal year ended December 31,
2004 for the reasons discussed herein. Please refer to Note 3 of the notes to
the consolidated financial statements included herein, which discloses the
adjustments to the Registrant's consolidated financial statements for the year
ended December 31, 2004 resulting from this restatement.
In addition, the Registrant has restated and reflected corresponding
corrections to both its Annual Information Form in Document No. 1 and to
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Document No. 3. The Registrant has also revised Item A.
Disclosure Controls and Procedures and Item B. Changes in Internal Control Over
Financial Reporting, as set forth below. This Form 40-F/A does not reflect
events occurring after the original filing date of the Form 40-F.
DOCUMENTS FILED UNDER COVER OF THIS FORM
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Document No. 1: Revised Annual Information Form for the fiscal year ended
December 31, 2004, dated April 4, 2006.
Document No. 2: Restated Audited Consolidated Financial Statements for the
fiscal year ended December 31, 2004, prepared in accordance
with Canadian generally accepted accounting principles, and
reconciled to United States generally accepted accounting
principles in accordance with Item 18 of Form 20-F.
Document No. 3: Restated Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year
ended December 31, 2004.
Document No. 1
[PAN AMERICAN SILVER CORP. GRAPHIC OMITTED]
Restated
Annual Information
Form
For the Year
Ended December 31, 2004
Dated: April 4, 2006
1500-625 Howe Street
Vancouver, British Columbia
V6C 2T6
Web Site: www.panamericansilver.com
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TABLE OF CONTENTS
INTRODUCTION..................................................................1
Reporting Currency.........................................................1
Accounting Policies........................................................1
Conversion Table...........................................................2
Glossary of Terms..........................................................2
Classification of Mineral Reserves and Resources...........................2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS...............................3
CORPORATE STRUCTURE...........................................................3
Incorporation..............................................................3
Capital Structure..........................................................4
Subsidiaries...............................................................4
GENERAL DEVELOPMENT OF THE BUSINESS...........................................5
Business of Pan American...................................................5
Developments over the Last Three Financial Years...........................5
Corporate Strategy.........................................................7
Outlook for 2005...........................................................8
NARRATIVE DESCRIPTION OF THE BUSINESS.........................................9
Operations.................................................................9
Operating Mines............................................................9
Metals Trading............................................................47
Development Projects......................................................47
Working Capital...........................................................54
Investment, Exploration and Resource Properties and Expenditures..........54
Mineral Property Expenditures.............................................58
Employees.................................................................59
Research and Development..................................................60
Competitive Conditions....................................................60
Working Capital...........................................................60
Environment...............................................................60
Trends and Uncertainties..................................................61
Risks Relating to Pan American's Business.................................61
SELECTED CONSOLIDATED FINANCIAL INFORMATION..................................69
Annual Information........................................................69
Dividends.................................................................70
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................70
DIRECTORS AND OFFICERS.......................................................70
EXCEPTIONS FROM NASDAQ CORPORATE GOVERNANCE REQUIREMENTS.....................73
MARKET FOR SECURITIES........................................................73
TRANSFER AGENTS AND REGISTRAR................................................74
MATERIAL CONTRACTS...........................................................74
ADDITIONAL INFORMATION.......................................................74
GLOSSARY OF TERMS............................................................76
APPENDIX "A" - Duties and Responsibilities of the Audit Committee...........A-1
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DISCLOSURE REGARDING RESTATED ANNUAL INFORMATION FORM
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In 2004, Pan American implemented a hedge accounting policy for the
accounting treatment of its base-metal forward contracts program. In the fourth
quarter of 2005 it was concluded that the Company's accounting for its forward
contracts for the sale of base metals (lead and zinc), its forward contracts
for purchasing Mexican pesos with US dollars and its silver fixing contracts do
not qualify for hedge accounting under AcG-13, Hedging Relationships. As a
result, Pan American has restated its unaudited consolidated financial
statements for each quarter from March 31, 2004 to September 30, 2005 and its
audited consolidated financial statements for the year ended December 31, 2004.
Pan American is now required to recognize mark-to-market valuations of its open
forward contract positions through its income at the end of each period. In the
past, Pan American had recognized gains, losses, revenues and expenses from its
forward contracts in its income only in the period in which they settled. The
effects of the change in accounting treatment are summarized in the table
below:
As previously reported As restated
for the year ended for the year ended
December 31, 2004 December 31, 2004
---------------------------------------------------------------------------------------
Revenue $ 92,896 $ 94,825
Mine operating earnings $ 12,865 $ 14,794
Loss on commodity contracts $ - $ (6,617)
Net income for the period $ 19,902 $ 15,214
Adjusted net income for the period
attributable to common shareholders $ 8,567 $ 3,879
Basic earnings per share $ 0.14 $ 0.06
Diluted earnings per share $ 0.13 $ 0.06
As a result of this change in accounting treatment, revisions have
been made to this Annual Information Form under the following headings: (i)
"Introduction - Accounting Policies"; (ii) "Narrative Description of the
Business - Hedging Activities" and (iii) "Selected Consolidated Financial
Information - Annual Information".
INTRODUCTION
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In this Annual Information Form, the term "Company" refers to Pan
American Silver Corp. and the term "Pan American" refers to the Company and its
direct and indirect subsidiaries.
Reporting Currency
Pan American's reporting currency is the United States dollar. Unless
otherwise indicated, all currency amounts in this Annual Information Form are
stated in United States dollars.
Accounting Policies
Financial information is presented in accordance with accounting
principles generally accepted in Canada. Differences between accounting
principles generally accepted in Canada and those generally accepted in the
United States, as applicable to Pan American, are explained in Note 18 to the
Consolidated Financial Statements of the Company. These financial statements,
set out on pages 17 through 44, inclusive, of the Company's 2004 Annual Report,
are incorporated by reference herein. This Annual Information Form should also
be read in conjunction with the Company's Restated Consolidated Financial
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Statements for the first three quarters of 2005 and 2004, respectively, its
restated audited consolidated financial statements for the fiscal year ended
December 31, 2004, as well as the restated "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the year ended
December 31, 2004, each of which is made publicly available under the Company's
profile on SEDAR website at www.sedar.com.
Conversion Table
In this Annual Information Form, metric units are used with respect to
mineral properties located in Peru, Mexico, Bolivia, Argentina and elsewhere,
unless otherwise indicated. Conversion rates from imperial measures to metric
units and from metric units to imperial measures are provided in the table set
out below.
Imperial Measure = Metric Unit Metric Unit = Imperial Measure
---------------- ----------- ----------- ----------------
2.47 acres 1 hectare 0.4047 hectares 1 acre
3.28 feet 1 metre 0.3048 metres 1 foot
0.62 miles 1 kilometre 1.609 kilometres 1 mile
0.032 ounces (troy) 1 gram 31.1 grams 1 ounce (troy)
1.102 tons (short) 1 tonne 0.907 tonnes 1 ton
0.029 ounces (troy)/ton 1 gram/tonne 34.28 1 ounce (troy)/ton
grams/tonne
Glossary of Terms
The glossary of terms set forth on pages 74 to 78 of this Annual
Information Form contains definitions of certain terms used herein.
Classification of Mineral Reserves and Resources
In this Annual Information Form, the definitions of proven and
probable mineral reserves and measured, indicated and inferred resources are
those used by Canadian provincial securities regulatory authorities and conform
to the definitions utilized by the Canadian Institute of Mining, Metallurgy and
Petroleum ("CIM") in the CIM Standards on Mineral Resources and Reserves
Definitions and Guidelines adopted on August 20, 2000.
Cautionary Note to U.S. Investors Concerning Estimates of Measured, Indicated
and Inferred Resources
In this Annual Information Form, the terms "measured" and "indicated
resources" are used. The Company advises U.S. investors that while such terms
are recognized and permitted under Canadian securities rules, the U.S.
Securities and Exchange Commission does not recognize them. U.S. investors are
cautioned not to assume that any part or all of the mineral deposits in these
categories will ever be converted into proven or probable reserves.
This Annual Information Form also uses the term "inferred resources".
The Company advises U.S. investors that while such term is recognized and
permitted under provincial Canadian securities rules, the U.S. Securities and
Exchange Commission does not recognize it. "Inferred resources" have a great
amount of uncertainty as to their existence, and great uncertainty as to their
economic and legal feasibility. It cannot be assumed that all or any part of an
inferred mineral resource will ever be upgraded to a higher category. Under
Canadian securities rules, estimates of inferred mineral resources may not form
the basis of feasibility or other economic studies. U.S. investors are
cautioned not to assume that any part or all of an inferred resource exists, or
is economically or legally mineable.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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This Annual Information Form and the documents incorporated by
reference herein contain certain forward-looking statements relating to Pan
American and its operations. All statements, other than statements of
historical fact, are forward-looking statements. When used in this Annual
Information Form, the words "anticipate", "believe", "estimate", "expect",
"target", "plan", "forecast", "budget", "may", "schedule" and similar
expressions, identify forward-looking statements. These forward-looking
statements relate to, among other things:
o the sufficiency of Pan American's current working capital and
anticipated operating cash flow;
o the sufficiency of the mineral reserves and resources at
Quiruvilca, Huaron, Morococha, La Colorada, San Vincente, Alamo
Dorado, Manantial Espejo or other properties;
o estimated production from the Quiruvilca, Huaron, Morococha, La
Colorada, Alamo Dorado, Manantial Espejo, San Vincente or other
properties;
o the estimated operating costs of Pan American's producing mines;
o the estimated cost of and availability of funding for ongoing
capital improvement programs;
o the estimated cost of development of Alamo Dorado, Manantial
Espejo or other projects;
o the estimated cost and effectiveness of changes to the mine plan
at the La Colorada mine;
o estimated exploration expenditures to be incurred on the
Company's various silver exploration properties;
o compliance with environmental standards; and
o forecast capital and non-operating spending; and
o levels of silver and other metals production, production costs
and metal prices.
These statements reflect the Company's current views with respect to
future events and are necessarily based upon a number of assumptions and
estimates that are inherently subject to significant uncertainties and
contingencies. Many factors, both known and unknown, could cause actual
results, performance or achievements to be materially different from the
results, performance or achievements that are or may be expressed or implied by
such forward-looking statements including, without limitation, the factors
identified under the captions "Trends and Uncertainties" and "Competitive
Conditions" in this Annual Information Form. Investors are cautioned against
attributing undue certainty to forward-looking statements. Although the Company
has attempted to identify important factors that could cause actual results to
differ materially, there may be other factors that cause results not to be
anticipated, estimated or intended. The Company does not intend, and does not
assume any obligation, to update these forward-looking statements to reflect
changes in assumptions or changes in circumstances or any other events
affecting such statements, other than as required by applicable law.
CORPORATE STRUCTURE
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Incorporation
The Company was incorporated under the Company Act (British Columbia)
on March 7, 1979 under the name Pan American Energy Corporation. On September
10, 1984 the Company's memorandum was amended to change the Company's name to
Pan American Minerals Corp. and on April 11, 1995 the Company's memorandum was
again amended to change the Company's name to Pan American Silver Corp.
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Since 1979 the memorandum and articles of the Company have been
amended on several occasions to increase the share capital of the Company and
to update the form of articles. In May 2005 the Company will amend its articles
to transition under the Business Corporations Act (British Columbia).
The Company's head office is situated at 1500 - 625 Howe Street,
Vancouver, British Columbia, Canada, V6C 2T6 and its registered and records
offices are situated at 1200 Waterfront Centre, 200 Burrard Street, Vancouver,
British Columbia, Canada, V7X 1T2. The Company's web site can be found at
www.panamericansilver.com. The information on that website is not incorporated
by reference into this annual information form.
Capital Structure
The Company is authorized to issue 100,000,000 common shares, each
without par value. Holders of common shares are entitled to one vote per common
share at all meetings of shareholders, to receive dividends as and when
declared by the directors of the Company and to receive a pro rata share of the
assets of the Company available for distribution to the shareholders in the
event of the liquidation, dissolution or winding-up of the Company. There are
no pre-emptive, conversion or redemption rights attached to the common shares.
Subsidiaries
A significant portion of the Company's business is carried on through
its various subsidiaries. The following table shows, as at December 31, 2004,
the principal subsidiaries of the Company including their respective
jurisdictions of incorporation and the Company's percentage ownership in each
such subsidiary:
Name Jurisdiction Ownership (%)
---- ------------ -------------
Pan American Silver S.A.C. Mina Quiruvilca ("Mina Quiruvilca") Peru 100 (voting)/
99.7 (non-voting)(1)
Cia. Minera Huaron S.A. ("Minera Huaron") Peru 99.85 (voting)
Compania Minera Argentum ("Agentum")(2) Peru 86
Corner Bay Silver Inc. ("Corner Bay") Canada 100
Compania Minera Natividad ("Natividad")(2) Peru 100
Minera Corner Bay S.A. de C.V. ("Minera Corner Bay") Mexico 100
Pan American Minerals, Inc. ("Pan American U.S.") Nevada 100
Pan American Silver (Barbados) Corp. ("Pan American Barbados") Barbados 100
Pan American Silver (Bolivia) S.A. ("Pan American Bolivia") Bolivia 62(3)
Pan American Silver (Cyprus) Corp. Limited. ("Pan American Cyprus") Cyprus 100
Pan American Silver Peru S.A.C. ("Pan American Peru") Peru 100
Plata Panamericana S.A. de C.V. ("Pan American Mexico") Mexico 100
Compania Minera Altivale S.A. ("Altivale") Argentina 50
Minera Triton Argentine S.A. ("Triton") Argentina 50
--------------
(1) The Company indirectly owns 99.7% of the total outstanding equity of Mina Quiruvilca.
(2) Argentum and Natividad collectively own the property and assets that comprise the
Morococha mine.
(3) Pan American has granted EMUSA, a Bolivian mining company which currently holds a 38%
interest in Pan American Bolivia, the right to increase its interest to 49% by
financing $2.5 million in project expenses on the San Vicente property in Bolivia,
including a feasibility study. As at December 31, 2004, EMUSA had incurred $2.1
million in project expenses on San Vincente, which expenditures apply toward EMUSA's
financing commitment.
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GENERAL DEVELOPMENT OF THE BUSINESS
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Business of Pan American
Pan American is principally engaged in the exploration for, and the
acquisition, development and operation of silver mines.
Pan American: (1) owns and operates the producing Quiruvilca silver
mine in Peru; (2) owns a 99.85% interest in, and operates, the producing Huaron
silver mine in Peru; (3) owns and operates the producing La Colorada silver
mine located in Mexico; (4) owns an 86% interest in, and operates, the
Morococha silver mine in Peru; (5) mines and sells silver-rich pyrite
stockpiles at a small-scale operation in central Peru; and (6) owns, is
constructing and will operate the Alamo Dorado silver project in Mexico. Pan
American also either holds an interest in or may earn an interest in
non-producing silver resource and silver exploration properties in Argentina,
Peru, the United States and Mexico, including 50% of the significant Manantial
Espejo deposit in Argentina.
Pan American employs a multifaceted strategy to ensure growth in
reserves and production. The first part of Pan American's strategy is to
increase its silver production profile through the acquisition of silver mines,
silver development projects or silver producing companies. The second part of
its growth strategy is to focus on exploration in and around existing
properties. Finally, Pan American is also seeking to acquire additional silver
properties having significant silver reserves or resources or known exploration
potential.
Developments over the Last Three Financial Years
During the last three financial years the Company has undertaken the
following:
o On January 29, 2002, Pan American updated the feasibility study
for production from the La Colorada mine. The updated study
indicated that capital costs of $20.0 million would expand the
current operations to 800 tonnes of ore per day to yield
approximately 3.8 million ounces of silver per year for a ten
year mine life.
o On March 4, 2002, Pan American acquired a 50% interest in the
Manantial Espejo silver and gold exploration property in
Argentina. Pan American's acquisition cost was $1,912,000 which
consisted of cash in the amount of $662,000 and 231,511 common
shares of the Company valued at $1,250,000. In addition, Pan
American paid 50% of the $200,000 cost to eliminate a 1.2% net
smelter return royalty over the property.
o On March 11, 2002, Pan American completed a sale of 3.45 million
shares to a syndicate of underwriters for net proceeds of
$15,599,000.
o On May 21, 2002, Pan American entered into an agreement to
acquire all of the issued and outstanding shares of Corner Bay
Silver Inc. ("Corner Bay") which owned the Alamo Dorado deposit
in Sonora, Mexico.
o On June 14, 2002, Pan American entered into a $10,000,000
project debt facility with International Finance Corporation
("IFC"), the funds from which were used to expand the La
Colorada mine. The Company took its first draw from the facility
in March of 2003.
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o On November 8, 2002, Pan American acquired silver bearing
stockpiles (the "Stockpiles") located in central Peru from
Volcan Compania Minera S.A.A. ("Volcan") for 636,942 common
shares of the Company, $500,000 in marketable securities owned
by Pan American, and $317,000 in cash.
o On February 20, 2003, the Company completed its acquisition of
Corner Bay and in connection therewith the Company issued
7,636,659 shares and 3,818,329 warrants exercisable over five
years at a price of Cdn$12.00 per share to former Corner Bay
shareholders and granted options to purchase up to 553,847
common shares of the Company to former employees of Corner Bay.
o In July and August 2003, the Company issued $86.25 million of
5.25% convertible, unsecured senior subordinated debentures (the
"Debentures") due July 31, 2009. Each US$1,000 principal amount
of Debentures is convertible into 104.4932 common shares of the
Company (subject to adjustment in certain events) at the option
of the holder at any time prior to the earlier of the close of
business on July 31, 2009 and the last business day immediately
preceding any date fixed for redemption, representing a
conversion price of $9.57 per share. On or after July 31, 2006,
the Debentures may be redeemed in whole or in part by the
Company, at its option on not more than 60 and not less than 30
days prior notice, at a price equal to par, plus accrued and
unpaid interest, provided that the weighted average trading
price of the common shares of the Company equals at least 125%
of the conversion price. On redemption or upon maturity, the
Company may, at its option, elect to satisfy its obligation to
repay the principal amount of the Debentures by issuing and
delivering freely tradable common shares of the Company. In
addition, the interest payable on the Debentures may, at the
Company's election, be payable by the application of the
proceeds of the sale of the Company's common shares.
o On January 1, 2004, commercial production commenced at La
Colorada.
o On January 1, 2004, Pan American assumed the operator role in
respect of the Manantial Espejo development project in
Argentina.
o On January 20, 2004, Pan American reached an agreement to
purchase for approximately $33.8 million an 81% interest in
Argentum. Argentum acquired, through a corporate restructuring
undertaken pursuant to Peruvian company law, the Anticona and
Manuelita mining units and related infrastructure and processing
assets of Sociedad Minera Corona S.A. ("SMC") located in Central
Peru. On February 24, 2004, Pan American entered into a further
agreement to purchase all of the issued and outstanding shares
of Natividad, a corporation organized under Peruvian company law
which holds mining concessions and operations that are
complimentary to the Anticona and Manuelita mining units
(collectively these concessions and mining operations and the
Anticona and Manuelita mining units are referred to as the
"Morococha mine"), for $1.5 million in cash. These acquisitions
were subject to regulatory approval and a number of conditions
and closed in August 2004. Subsequently, Pan American acquired
an additional 5% interest in Argentum for $1.5 million.
o On February 27, 2004, the Company issued 3,333,333 common shares
at a price of $16.50 per share for proceeds of $55 million.
o On March 25, 2004, Pan American sold 6,839 hectares of mining
concessions and surface rights in the vicinity of the Quiruvilca
mine to Barrick Gold Corporation ("Barrick") for $3,582,575 and
for the assumption of $67,425 of payments owing in respect of
these mining concessions.
o On March 30, 2004, the Company made a formal offer (the
"Conversion Offer") to encourage conversion by holders of the
Company's $86.25 million outstanding principal amount of
Debentures. Pursuant to the Conversion Offer, which is open from
April 7, 2004 to May 21, 2004 (the "Conversion Period"), each
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holder who converts all or a portion of his or her Debentures
during the Conversion Period will receive $131.25 in cash plus
106.9290 common shares of the Company per $1,000 principal
amount of Debentures converted. As at December 31, holders of
approximately $84 million principal amount of Debentures have
converted their Debentures pursuant to the terms of the
Conversion Offer and the Company has issued 9,145,700 million
common shares in respect of such conversions.
o On April 28, 2004, Pan American repaid a $3.5 million remaining
balance on its loan from Banco de Credito relating to the
initial development of the Huaron mine.
o On May 15, 2004, Pan American prepaid to the IFC $9.5 million
outstanding balance under its project debt facility used to
expand the La Colorada mine.
o On November 22, 2004, Pan American sold its 20% interest in the
Dukat silver mine in Magaden State, Russia to OAO MNPO
Polimetall, the mine's owner and operator, for $20.5 million in
cash and right to receive up to $22.5 million in contingent
future payments. The future payments are to be made annually
based on the yearly average silver price, and range from no
payment at a silver price of less than $5.50 per ounce, to $8
million if the average silver price for the year exceeds $10 per
ounce. The agreement also includes provisions for prepayment of
remaining future contingent payments on the occurrence of
certain events, such as a public share offering by OAO MNPO
Polimetall. In 2000, Pan American wrote off its entire $37
million investment in the Dukat mine.
o On February 25, 2005, Pan American announced its decision to
commence construction of an open pit silver mine at its Alamo
Dorado silver project in Mexico. Capital costs for the project
are estimated to be $76.6 million, including working capital and
a contingency allowance. Pan American expects to fund the
project from its cash reserves. Construction, which is expected
to take 15 to 18 months, is scheduled to begin in the second
quarter of 2005.
Corporate Strategy
Pan American's corporate strategy is to become one of the world's
largest and lowest cost primary silver mining companies. The key elements of
Pan American's strategy are to:
o Increase silver production - During 2002, Pan American's sources
of silver production were its Quiruvilca, Huaron and La Colorada
mines and the Stockpiles. In 2003, Pan American completed an
expansion of its La Colorada mine and in 2004 Pan American
acquired the producing Morococha mine. In 2005, Pan American
made a decision to initiate mine construction at the Alamo,
Dorado project. Production from this mine is expected to begin
in late 2006. For the year ended December 31, 2002, silver
production was approximately 7.8 million ounces. Silver
production increased during the year ended December 31, 2003 to
approximately 8.6 million ounces, an increase of 11% compared to
2002. For the year ended December 31, 2004, Pan American further
increased its silver production to approximately 11.2 million
ounces, a 30% increase over 2003.
o Acquire additional non-producing silver resources - One of Pan
American's objectives is to hold one of North America's largest
inventories of non-producing silver resources as leverage to
higher silver prices. Pan American holds or has control over
non-producing silver resources at its Manantial Espejo property
in Argentina and its Hog Heaven and Waterloo properties in the
United States.
o Acquire additional silver exploration properties - Pan American
is actively seeking to acquire a portfolio of promising silver
exploration properties. As at December 31, 2004, Pan American
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retains an option to acquire the San Vicente property in
Bolivia. Pan American also owns a 50% interest in the Manantial
Espejo exploration property in Argentina. In addition, Minera
Huaron holds approximately 41,280 hectares of prospective
exploration property in Peru. Finally, in 2004, Pan American
purchased the Morococha property, which has significant
exploration potential. Pan American's exploration acquisition
focus is silver properties with bulk mineable targets that have
the possibility of possessing over 50,000,000 ounces of silver
mineralization to supplement Pan American's existing base of
silver exploration properties.
Pan American's current activities are primarily focussed on Peru,
Mexico, Bolivia and Argentina, with a secondary focus on the United States and
the Americas generally.
Outlook for 2005
In 2005, Pan American expects to maintain close to the current level
of production at the Quiruvilca and Huaron mines, increase production at the La
Colorada mine as its new oxide plant reaches designed capacity, add a full
year's production from the Morococha mine, continue to produce silver from its
pyrite Stockpiles in Peru and ramp up production at its 50% joint venture on
the San Vincente mine. These combined operations are expected to increase Pan
American's silver production to approximately 13 million ounces in 2005. Pan
American will also commence construction of the Alamo Dorado open pit silver
mine with commercial production expected in late 2006 and will continue to
advance feasibility studies at the 50% owned Manantial Espejo project in
Argentina.
Pan American will continue to investigate, evaluate and where
appropriate, acquire additional silver production, exploration and development
properties.
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NARRATIVE DESCRIPTION OF THE BUSINESS
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Operations
Pan American's principal products and sources of revenue are silver
rich zinc, lead and copper concentrates in addition to silver gold dore from
the La Colorada mine. In 2005, the Quiruvilca, Huaron, Morococha, San Vincente
and La Colorada mines and the Stockpiles accounted for all of Pan American's
production of concentrates and dore. Information related to Pan American's
segment revenues is set forth in Note 15 to the Consolidated Financial
Statements and is referred to in the Management's Discussion and Analysis of
Financial Conditions and Results of Operations (the "MD&A") of the Company for
the year ended December 31, 2004.
Consolidated production for the year ended December 31, 2004 was as
follows:
San
Quiruvilca Huaron(1) La Colorada(2) Morococha(3) Vincente(4) Consolidated
Tonnes milled 381,237 635,845 171,155 212,172 27,017 1,427,426
Grade
Grams/tonne silver 235 228 489 221 417 N/A
% Zinc 3.57 3.14 1.41 3.76 5.79 N/A
% Lead 1.19 1.99 1.11 1.47 - N/A
% Copper 0.43 0.42 - 0.45 - N/A
Production
Ounces silver 2,530,869 5,042,606 2,036,075 1,259,451 313,029 11,182,030
Tonnes zinc 11,709 15,041 122 5,902 1,312 34,086
Tonnes lead 3,803 10,569 136 2,186 - 16,694
Tonnes copper 1,081 1,754 - 538 53 3,426
---------------
(1) Includes 961,869 ounces of silver produced from the Stockpiles in Peru.
(2) La Colorada zinc and lead grades are for sulphide ore only.
(3) Morococha data is from July 1, 2004 onwards only.
(4) San Vincente data represents Pan American Silver Corp. 50% interest in the mine's production.
Operating Mines
Quiruvilca Mine
Ownership and Property Description
The Quiruvilca mine is owned by Pan American Peru and operated by Mina
Quiruvilca, each a wholly-owned indirect subsidiary of the Company.
The Quiruvilca mine is an underground mine. The Quiruvilca mineral
property consists of 152 mining concessions covering 2,850 hectares. Mina
Quiruvilca also owns six mining concessions covering 3,472 hectares and holds
surface and water rights in the area covering the mill and related workings. On
March 25, 2004, Pan American sold 6,839 hectares of mining concessions and
surface rights in the vicinity of Quiruvilca mine to Barrick Gold Corporation
("Barrick") for $3,582,575 and for the assumption of $67,425 of payments owing
in respect of these mining concessions.
Location, Access, Climate and Infrastructure
The Quiruvilca mine is located in the District of Quiruvilca, Province
of Santiago de Chuco, Department of La Libertad in northwestern Peru. The
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Quiruvilca mine is 76 kilometres east of the coastal city of Trujillo. The mine
is centred at approximately 8(degree) 00' 57" South Latitude and 78(degree) 20'
33" West Longitude. The Quiruvilca mine lies in the Andean mountain range above
the tree line. Elevations in the immediate area of the mine range from 3,450
metres to 4,075 metres above sea level.
Access to the Quiruvilca mine is by a 137 kilometre all weather road
east from the city of Trujillo. The first 65 kilometres of the road are paved
and the remaining 72 kilometres consist of a gravel road. The last major
upgrade to the road was in 2004 done by Barrick. Trujillo is connected to Lima
by a paved all-weather highway.
The relief at the mine site is hilly and uneven with local slopes of
more than sixty degrees, typical of the Peruvian Andes. Natural vegetation is
mainly grasses which form meadows. These meadows have permitted development of
varied livestock operations.
The climate at the mine site is classified as "cold climate" or
"boreal". Average minimum and maximum temperatures in the region range from 5.7
to 14.8 degrees Celsius. One of the characteristics of this climate is wet
summers (highest rainfall occurs from January to April) and dry winters. The
Quiruvilca mine operates throughout the entire year.
The primary source of power for the Quiruvilca mine is the Peruvian
national power grid via a 65 kilometre 138kV line from the city of Trujillo to
the Motil substation. A 20 kilometre 33kV line connects the mine site to the
Motil substation. Pan American owns and operates a diesel generating system,
which provides a back up source of power for the Quiruvilca mine.
Pan American is permitted to pump water from the Los Angeles Lake, to
the east of the Andean divide to two dams east of the town of Quiruvilca as
well as to other local rivers and streams in the area. Process water is drawn
from these dams.
Peru's economy is dependent on mining and there is a sufficient local
source of mining personnel and related infrastructure.
Royalties and Encumbrances
The Quiruvilca property is not subject to any royalties or
encumbrances, other than the mining royalty tax described below under "-
Taxation".
Quiruvilca's largest environmental liability relates to its future
closure and remediation. In connection therewith, the Company has charged
operations with an approximately $15.3 million provision for future reclamation
and asset retirement at the Quiruvilca mine.
Taxation
The principal taxes of Peru affecting Pan American include income tax,
employee profit sharing taxes, annual fees for holding mineral properties,
various payroll and social security taxes and a refundable value added tax.
In June 2004, Peru's congress approved a new bill that will allow
royalties to be charged on mining projects. These royalties are payable on
Peruvian mine production at the following rates: (i) 1.0% for companies with
sales up to US$60 million; 2.0% for companies with sales between US$60 million
and US$120 million; and 3.0% for companies with sales greater than US$120
million. In the case of silver, zinc and copper, the percentage royalty is a
net smelter returns royalty, which cost will be deductible for income tax
purposes.
The 1% royalty on Quiruvilca's production amounted to approximately
$135,000 in 2004.
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History
Mineralization was first reported in the area of the Quiruvilca mine
in 1789. Small-scale silver mining in the area was carried on from the 1870's
until 1924. Between 1924 and 1925, Northern Peru Mining and Smelting Co.
("NPMS"), the predecessor to Mina Quiruvilca, which was formed by ASARCO,
acquired certain mining concessions in the area and began mining operations.
The operation was shut down in 1931. The Quiruvilca mine was re-opened in 1940
and has been in operation since that time. Since 1940 NPMS claimed additional
mineral concessions in the area and purchased several adjacent mining
concessions as well as surface and water rights in the area.
Initially, mining by NPMS focused on the copper bearing veins in the
Enargite Zone (as defined below) but gradually focus was shifted to veins in
the Zinc-Lead Zone (as defined below). In March 1967, the mill started to treat
complex ores producing copper, lead and zinc concentrates.
In August 1995, the Company acquired 80% of the outstanding voting
shares (representing a 53.3% total equity interest) in Mina Quiruvilca from
NPMS. Between September 1995 and March 1996, the Company increased its interest
in Mina Quiruvilca to 100% of the outstanding voting shares and 99.7% of the
total outstanding equity.
Geology and Mineralization
The Quiruvilca mine is situated at the west side of the Western
Cordillera within the eastern edge of a major sequence of volcanic rocks,
interpreted as part of the Calipuy Volcanic Formation of the Mid-Miocene age.
This volcanic formation, with a thickness of about 2,000 metres, consists of
andesite flows and flow breccias inter-layered with thin basalt flows and
occasional tuffaceous lacustrine sediments.
The mineralization at Quiruvilca is contained in a series of narrow
veins filling the fractures and faults. Over 130 veins have been identified in
the mine area. At least three-quarters have been mined at some point in time.
Although narrow, the veins at Quiruvilca tend to have an extensive lateral and
vertical continuity with abundant splits, cymoid loops, pinch and swell
structures. In some places, the veins show some thick ore shoots connected to
thinner diagonal sub-economic to non-economic zones. The width varies up to two
metres in the central zone to stringers in the Zinc-Lead Zone (as defined
below). The average width of veins currently being mined is 0.56 metres. The
average dip of the veins is 70(0), but range from vertical to 40(0).
The mineralization exhibits strong metal zoning. The central copper
zone, some 700 metres by 2,800 metres in area, consists of predominately
enargite-pyrite, with lesser chalcopyrite, tennantite, tetrahedrite, sphalerite
and galena (the "Enargite Zone"). The Enargite Zone is surrounded by a
relatively narrow transition zone of tennantite, tetrahedrite, sphalerite and
galena (the "Transition Zone"). The Transition Zone is in turn surrounded by a
zinc-lead zone of predominately sphalerite and galena, which extends some 500
metres beyond the Transition Zone (the "Zinc-Lead Zone"). In recent years some
70% of the Quiruvilca mine's production has come from the Zinc-Lead Zone. An
outer zone consists of stibnite, arsenopyrite and pyrite.
Drilling, Sampling and Analysis
Exploration at the Quiruvilca property is conducted using a
combination of diamond drilling and underground drifting. Three diamond drills
are in continuous operation at the property, drilling BQ (36.4 mm diameter)
sized holes between 50 and 350 metres in length. This is generally followed by
underground drifting and cross-cutting at a 70 metre spacing. During 2004,
5,775 metres of drilling was done, along with 5,141 metres of drifting for
reserve delineation and access for mining.
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Diamond drill core is split in half, with one half sent for assaying
and one half retained in a secure on-site facility. The veins in the cross-cuts
are channel sampled, and a two to three kilogram sample is sent for analysis.
Assaying is done at Quiruvilca's laboratory. The laboratory conducts a
routine internal quality assurance/quality control program that includes
external check samples and the routine submission of standards.
All sampling, whether diamond drilling or cross-cutting, is done under
the direct supervision of the Quiruvilca mine geology department.
Mineral Reserves
Pan American's management estimates that proven and probable mineral
reserves at the Quiruvilca mine as at December 31, 2004 are 1,064,805 tonnes
with an average grade of 200 grams/tonne silver and 4.53% Zn, details of which
are set out in the following table:
Quiruvilca Mineral Reserves 1, 2, (3)
Reserve Grams of Silver
Category Tonnes per Tonne % Zinc % Lead % Copper
-------- ------ --------- ------ ------ --------
Proven 676,510 202 4.61 1.41 0.47
Probable 388,295 197 4.38 1.51 0.46
--------------------------------------------------------------------------------------
TOTAL 1,064,805 200 4.53 1.45 0.47
-----------
(1) Calculated using a price of $5.50 per ounce of silver, $1,020 per tonne of zinc,
$600 per tonne of lead and $2,200 per tonne of copper.
(2) Estimates of mineral reserves are calculated on the basis of blocks exposed by
underground workings on one or more sides and having an in-place diluted value
equal to or above the cutoff grade ($25/tonne). Proven and probable mineral
reserves are extrapolated between 15 and 30 metres down dip depending on vein
continuity.
(3) Mineral resource and reserve estimates for Quiruvilca were prepared under the
supervision of or were reviewed by Michael Steinmann, P.Geo., Vice President
Geology - Operations and Martin G. Wafforn, P. Eng., Director of Mine Engineering
as Qualified Persons as that term is defined in National Instrument 43-101-Standards
of Disclosure for Mineral Projects ("NI 43-101").
Reconciliation of Mineral Reserves
Mineral reserves are adjusted annually by the amount mined, by
additions and deletions resulting from new geological information and
interpretation and in connection with changes in operating parameters and metal
prices. However, proven and probable mineral reserves are not usually revised
in response to short-term cyclical price variations of metal markets. The
following is a reconciliation of the proven and probable mineral reserves at
Quiruvilca to December 31, 2004:
Reconciliation of Mineral Reserves at Quiruvilca
------------------------------------------------
Tonnes
------
Opening balance, December 31, 2003 631,115(1)
Additions 814,927(2)
Tonnes mined 381,237
-----------
Closing balance, December 31, 2004 1,064,805
===========
-----------
(1) December 31, 2003 reserves were calculated using a price of $5.00
per ounce of silver and $900 per tonne of zinc.
(2) Additions are from tonnes added through exploration (303,786
tonnes) and reinterpretation due to higher metal prices
(511,141 tonnes).
- 12 -
Mineral Resources
Pan American's management estimates that mineral resources at the
Quiruvilca mine as at December 31, 2004 are as follows:
Quiruvilca Mineral Resources (1), (2)
-------------------------------------
Resource Grams of Silver
Category Tonnes per Tonne % Zinc % Lead % Copper
-------- ------ --------- ------ ------ --------
Measured 2,198,005 178 3.66 1.37 0.78
Indicated 760,775 181 4.33 1.52 0.79
Inferred 2,180,955 174 4.23 1.51 0.47
-------------
(1) These resources are in addition to Quiruvilca mineral reserves.
(2) Mineral resource and reserve estimates for Quiruvilca were prepared under the
supervision of or were reviewed by Michael Steinmann, P. Geo., Vice President
Geology - Operations and Martin G. Wafforn, P. Eng., Director of Mine
Engineering as Qualified Persons as that term is defined in NI 43-101.
Mining
The Quiruvilca mine extends over an area that is four kilometres
east/west by three kilometres north/south and from an elevation of 4,050 metres
at the top of the mountain down to the 340 level (elevation 3,528 metres).
Access to the mine is from four adits driven into the side of the mountain at
elevations ranging from 3,648 metres to 3,870 metres.
Battery locomotives are used to haul ore and waste from the stopes and
development headings to ore and waste passes. Ore from the upper levels of the
mine is delivered to ore passes, which transfer it to the 220 main haulage
level. Trolley locomotives with mine cars are used to transport ore from the
ore passes on the 220 level to coarse ore bins at the crushing plant.
A 590 metre long, 76mm wide conveyor is used to transport ore and
waste from below the 220 level to a surface bin at the 220 level. The conveyor
belt has a capacity of 150 tonnes per hour. The mine plans to extend this
conveyor belt down to the 340 level during 2005.
Of the 28 veins presently being mined, seven contributed approximately
70% of the production during calendar 2004. These seven veins average 0.68
metres in width.
There are on average 69 active stopes at any given time, all using the
cut and fill mining method. Approximately one-third of the stopes are typically
in the drilling and blasting phase, one-third in the mucking phase and
one-third in the filling phase at any given time. In stopes where the vein's
mineable width is less than 1.0 metre, and where hydraulic backfill is not
available, resueing is employed with the waste rock remaining in the stope as
backfill. In all other stopes, tailings are poured into the stope hydraulically
to serve as backfill.
Tailings from the mill are directed to the hydraulic fill plant
located near the Santa Catalina tailings pond. The fine fraction is removed
with cyclones, and the coarse fraction is directed to the storage tanks in the
hydraulic fill plant. The sand-fill is pumped 2,700 metres to the Luz Angelica
distribution plant, or a further 1,600 metres to the Central distribution plant
through a 76 millimetre HDPE line. The distribution plants are equipped with
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170 cubic metre storage tanks. When backfill is required underground, the fill
is re-slurried and pumped underground. The monthly hydraulic backfill volume
employed at the mine is 5,200 cubic metres.
Milling
The mill flowsheet consists of three-stage-crushing, ball mill
grinding and selective flotation of the ore to produce copper, lead and zinc
concentrates, followed by thickening and filtering of the concentrates.
Present daily treatment capacity is 1,350 tonnes, with an operative
mill working six days a week. This capacity level has been in place since
September 2003 when the north zone of the mine was closed. Previously, the
daily treatment tonnage was 2,000 tonnes.
Although the mill equipment (with the exception of the upgraded
primary and secondary crusher, the primary grinding circuit, the primary lead
rougher flotation cells and the zinc and lead circuits) dates from the 1950s,
it has been adequately maintained and operates well.
Strategic Restructuring
In 2002, the Company wrote down its investment in the Quiruvilca mine
by $25,129,000. This decision was reached after an evaluation of the likelihood
of recovering the carrying value of Quiruvilca in light of the mine's recent
and expected operating and financial performance. As a result of Quiruvilca's
high production costs and low metal prices, a significant turnaround at
Quiruvilca was required to avoid the necessity of a shutdown of the mine in
2004.
Accordingly, a strategy to reduce high cost ore production and
increase mine grades was implemented during 2003 in order to drastically lower
the mine costs and adapt the mine operation to lower metal prices. This plan to
reduce high cost tonnage was carried out by closing the north zone of the mine,
a zone with higher operating costs and lower geological expectations. All the
Quiruvilca permanent workers were relocated to the lower cost south zone of the
mine and all mine contractors terminated at the end of August 2003. This action
reduced the total mine work force from 1,079 (permanent workers and
contractors) to 462 permanent workers without any labour conflict. Average
production was lowered by 20% to approximately 32,000 tonnes per month. As a
result of these actions, cash costs in 2004 at Quiruvilca were reduced to $3.63
per ounce of silver from $5.01 per ounce of silver in 2003 and Quiruvilca
generated significantly positive net cash flow in 2004.
These positive operating and financial results have caused Pan
American to modify its plans, which contemplated a shut down of the Quiruvilca
mine in June 2004. As of today's date, Pan American intends to continue to
operate Quiruvilca as long as there are reserves available.
In addition to the 2004 mine life extension, reoriented exploration
and development has provided positive results, such as the confirmation of the
high silver grade Union Vein on the 340 level, and new reinterpretation
demonstrates continuity up to the surface which should enable the Quiruvilca
mine to continue operations beyond the life of the current proven and probable
reserves.
Environment, Health and Safety
Environmental regulations are evolving in Peru and it is expected that
these requirements will eventually reach North American standards. As part of
the developing regulatory framework, mining companies were required to submit
environmental evaluation reports summarizing general environmental conditions
at their mines and environmental remediation plans. Mina Quiruvilca filed an
evaluation report with the Peruvian Ministry of Energy and Mines in 1995 and
filed a Program for Environmental Remediation and Management ("PAMA") in 1996
in compliance with Peruvian regulations. The PAMA addressed, among other
things, stabilization of tailings impoundments, tailings reclamation, mine acid
- 14 -
water neutralization and other effluent treatment, revegetation and a
contingency plan. For each of these issues, Pan American provided an
implementation schedule and estimates of capital expenditures. The PAMA was
approved by the Peruvian Ministry of Energy and Mines in 1997 and the terms of
the PAMA were to have been completed by March 2002. However, based on
discussions with the auditors, some projects were re-classified as more
appropriate for inclusion in a final closure and remediation plan.
Quiruvilca's PAMA projects and expenditures for the years 1997 to 2004
were audited by independent consultants and reviewed by Peruvian environmental
regulators. Overall expenditures were greater than budgeted and considerably
more than the 1% of gross sales required under the law. While the PAMA process
defined remediation projects, expenditures and time frames to achieve
compliance primarily with respect to water quality, it explicitly excluded
closure projects, and in many cases did not fully consider remediation of
historic liabilities, whether caused by third parties or predecessor companies.
In addition, the PAMA process provided no mechanism to review and revise
projects based on results achieved to assess whether budgeted programs would
still be effective in achieving the results desired. Discussions are ongoing
with regulators to better define Pan American's remaining obligations under the
PAMA program. In conjunction with this, Pan American sought independent
consulting expertise to review closure strategies and options; this work is
still underway.
In October 2003, the Peruvian government passed legislation requiring
active mining operations to file closure plans within six months of the date of
passage of the legislation. To date, accompanying administrative rules that lay
out detailed closure requirements, including bonding and tax deductibility of
reclamation and rehabilitation expenses are not yet promulgated. Quiruvilca's
Closure Plan was filed in early March 2004. Pan American has budgeted $1.2
million for concurrent reclamation and closure related costs at Quiruvilca in
calendar 2005 (including rehabilitation of tailings ponds and rehabilitation of
waste dumps). In the fourth quarter of 2002, Pan American prepared an estimate
of the expected future reclamation costs to be incurred at Quiruvilca and
charged operations with a $15.3 million provision for future reclamation.
Pan American's operations at the Quiruvilca mine currently comply in
all material respects with applicable Peruvian laws. In 1999, Mina Quiruvilca
received the National Society of Mining, Petroleum and Energy's highest
environmental award and in 2000 the Latin American Organization of Mining's
environmental award for polymetallic deposits.
The most significant environmental issues currently associated with
the Quiruvilca mine are metal-laden acid water discharge from the mine, acid
rock drainage from the mine's tailings deposit areas and the containment and
stability of mine tailings ponds. All acid water discharge from the Quiruvilca
mine is either treated at the mine's High Density Sludge plant or by passive
systems. During 2004, water quality at the compliance point has generally met
pH standards and a majority of metal compliance standards. The review now
underway by independent consultants will define closure and mitigation options
for reducing acid water flows and improving the quality of waters exiting the
site.
During late 1998 and through early 2002 Pan American implemented a
third party safety and training program for employees and contractors; this
program was re-started in mid-2003. All mine supervisors completed the first
two phases of a multi-phase third party safety program. The safety department
was reorganized to provide one dedicated inspector per mine area. All employees
are required to undergo safety training and all new underground employees are
required to undergo training prior to being assigned to their first position.
In addition, supervisors and workers are attending the Centromin
"Basic Mining Concepts and Safety" training in Lima. This training focuses on
proper mining methods with an emphasis on safety. This training will continue
through 2005.
- 15 -
Capital Expenditures
Since 1995, Pan American has undertaken a program of capital and
non-operating expenditures at the Quiruvilca mine to improve its operations,
ensure compliance with its PAMA and reduce operating costs.
During 2004, capital expenditures were approximately $1,860,000 and
consisted of:
o Mine equipment, tailings dam raise and other related
infrastructure of $563,000; and
o reclamation expenditures of $1.3 million.
During 2003, capital expenditures were approximately $664,000 and
consisted of:
o Reclamation expenses of $240,000;
o Constancia tailings treatment of $185,000;
o Civil, electromechanic and mine works at level 340 of $181,000;
and
o Other minor works totalling $58,000.
Pan American has budgeted $1.9 million for 2005 capital expenditures
at the Quiruvilca mine consisting primarily of $0.5 million for a conveyor
system on the 340 level and $1 million for earth moving equipment for related
reclamation projects.
Pan American expects to fund future capital expenditures from cash
flow from the Quiruvilca mine. In the event that cash flow from the Quiruvilca
mine is insufficient to fund the capital expenditure program, Pan American will
fund the remainder of the capital expenditure program from working capital.
Marketing
The principal products from the Quiruvilca mine are silver rich zinc,
lead and copper concentrates. All of these concentrates are sold under
contracts to arm's length metals trading companies or arm's length integrated
mining and smelting companies. In 2004, zinc concentrate was sold to Glencore
under a contract which runs until 2006, which contract has a minimum one-year
extension clause at the option of either party. Lead concentrates had been sold
under a four-year contract to Noranda which expired in 2004. Currently, the
Quiruvilca mine sells its lead concentrate to Glencore pursuant to a contract
that lasts until 2007, with fixed terms for 2005. Terms for 2006 leave 50% of
the anticipated lead concentrate production to be sold against a pre-determined
market benchmark and terms for 2007 leave 100% to be negotiated. Copper
concentrate was sold under a contract that also expired at the end of 2004.
This contract has been extended until 2006. All contracts are at arms length.
Under the terms of all of its sales contracts, Mina Quiruvilca receives payment
for an agreed percentage of the silver and lead, zinc, or copper contained in
the concentrate, after deductions for smelting and refining costs.
- 16 -
During 2004, the revenue per type of concentrate produced by the
Quiruvilca mine was as follows:
Average Sales Price
Revenue(1) Tonnes per Tonne
---------- ------ ---------
Zinc Concentrate $5,280,689 19,657 $269
Lead Concentrate $10,832,574 11,052 $980
Copper Concentrate $11,027,666 6,268 $1,759
----------------
(1) Consists of sales to arm's length customers.
During 2003, the revenue per type of concentrate produced by the
Quiruvilca mine was as follows:
Average Sales Price
Revenue(1) Tonnes per Tonne
---------- ------ ---------
Zinc Concentrate $5,088,269 25,339 $201
Lead Concentrate $2,891,538 6,014 $481
Copper Concentrate $7,389,166 7,188 $1,028
-------------
(1) Consists of sales to arm's length customers.
The zinc concentrates produced by the Quiruvilca mine are highly
marketable as they contain low levels of impurities and low silver content. The
lead concentrates have arsenic and antimony as impurities but are attractive to
lead smelters due to their high lead, silver and gold content. Although the
silver-rich copper concentrate produced by the Quiruvilca mine contains arsenic
and antimony impurities, its marketability is not affected because of the high
amount of silver contained in the concentrate. To date, Pan American has not
experienced difficulty in securing contracts for the sale of the Quiruvilca
mine's zinc, lead or copper concentrates.
Huaron Mine
Ownership and Property Description
The Company owns 99.85% of a private Peruvian company, Minera Huaron,
which owns and operates the Huaron mine.
The Huaron mine is an underground silver mine and the property
consists of exploitation claims covering approximately 17,075 hectares,
approximately 40,000 hectares of exploration claims and 473 hectares of surface
rights and a lease over 178 hectares of surface rights covering the main
workings.
Location, Access, Climate and Infrastructure
The Huaron mine is located in the Department of Pasco, Province of
Pasco, District of Huayllay in central Peru, 320 km northeast of Lima. The
property lies on the eastern flank of the western branch of the Andean mountain
range from an elevation of 4,250 metres to 4,800 metres above sea level.
Access to the Huaron property is by a continuously maintained 285
kilometres paved highway between Lima and Unish and a well maintained
35-kilometre gravel road between Unish and the Huaron property.
The relief at the mine site is hilly and uneven with local slopes of
more than sixty degrees. Natural vegetation is mainly grasses, forming meadows.
These meadows have permitted development of varied livestock operations.
- 17 -
The climate at the mine site is classified as "cold climate" or
"boreal" with average annual temperatures ranging from three to ten degrees
Celsius. The Huaron mine operates throughout the entire year.
The primary source of power for the Huaron mine is the Peruvian
national power grid.
Historically, the supply of water has been abundant and is provided by
local lakes and rivers.
Peru's economy is dependent on mining and there is a large local
source of mining personnel.
Royalties and Encumbrances
The Huaron property was subject to a 3% net smelter return royalty,
which was payable after 4,300,000 tonnes of ore from the Huaron property has
been recovered. In October 2003, Pan American bought back this 3% net smelter
royalty on the Huaron mine from a group of Peruvian companies for a total of
$2.5 million in cash. The buyout of the royalty should reduce the mine's cash
costs by approximately $850,000 per year, starting 2006.
At December 31, 2003, substantially all of Huaron's plant, equipment
and mining rights were subject to a mortgage and charge in favour of Glencore
that was acting as guarantor against Banco de Credito del Peru for the
liabilities and obligations of Pan American Silver Peru under a $6,500,000 loan
facility made available to Minera Huaron for working capital purposes. In April
2004, Pan American repaid its outstanding debt balance under the Banco de
Credito facility and all encumbrances have been released.
To the best of Pan American's knowledge, the Huaron property is not
subject to any royalties or encumbrances other than those set out above and the
mining royalty tax described under "- Taxation" below.
Huaron has future environmental liabilities that which have been
estimated by the Company to amount to $8 million to remediate. As a result, the
Company has established an asset retirement obligation of $8 million with
respect to Huaron.
Taxation
The principal taxes of Peru affecting Minera Huaron include income
tax, employee profit sharing taxes, annual fees for holding mineral properties,
various payroll and social security taxes and refundable value added tax.
The 1% royalty on Huaron's production amounted to approximately
$229,000 in 2004. See "Quiruvilca Mine - Taxation" for a discussion of the new
Peruvian mining royalty tax.
History
The Huaron mine is an underground mine with narrow veins of
silver-rich base metal sulphides. The mine, mill and supporting villages were
originally built and operated by a subsidiary of the French Penarroya company
from 1912 to 1987. In 1987 the mine was sold to Mauricio Hochschild and Cia
Ltda. Prior to its acquisition by Pan American, approximately 22 million tonnes
of silver-rich base metals sulphide ore were mined from the Huaron property.
Silver was the main constituent, contributing about 49% of the historic sales
value, the rest being zinc 33%, lead 15% and copper 3%. Ore from the mine was
processed on-site by crushing, grinding, and differential flotation to produce
copper, lead and zinc concentrates.
In April, 1998, a portion of the lakebed of nearby Lake Naticocha
collapsed and water from the lake flowed into the adjacent Animon mine,
operated by an unrelated company, and through interconnected tunnels the water
entered and flooded the Huaron mine, causing its closure.
- 18 -
The production rates for the last periods of operation, before the
flooding, at the Huaron Mine are set forth in the following table.
Production Rate
Year Tonnes / year Tonnes / month
---- ------------- --------------
1998 (4 months) 158,000 43,500
1997 442,000 37,000
1996 305,000 25,000
1995 303,000 25,000
After the April 1998 flooding, the Huaron mine operations were shut
down, the labour force was terminated, the village closed, and work was
undertaken to clean up the flood damage, drain the workings and prepare for an
eventual restart of production. The water level in the lake which provided the
source of floodwater is maintained well below the level where it flooded into
the old workings. There is no threat of further flooding. The Animon mine, in
accordance with a settlement agreement reached with Minera Huaron in September
2000, constructed a channel to route water around the lake to provide water for
the Huaron's mine operation and to reduce the water in upstream lakes to
prevent agricultural flooding which had created local social pressures.
On March 6, 2000, Pan American acquired 71.8% of the common shares of
Minera Huaron (which owns 100% of the Huaron mine). Between March 2000 and
August 2001, Pan American increased its ownership of Minera Huaron from 71.8%
to 99.85%.
Rehabilitation of Huaron Mine
After Pan American's acquisition of the Huaron mine, a $12 million
credit facility with Standard Bank London Limited was obtained in early
September 2000 to provide the funding necessary to place the mine back into
production. Pan American commenced construction and rehabilitation in September
2000, which was substantially completed by April 2001.
The steps taken to place the mine back in operation included:
o rehabilitation of underground ramps and access ways;
o rehabilitation of existing, or construction of new, underground
services in particular ventilation, hydraulic backfill and
electrical distribution;
o stope preparation work for initial mining as well as the
commencement of longer term development (access and raises);
o rehabilitation of the mill, with the major areas being the
installation of a larger ball mill to allow for finer grinding,
electrical upgrades and mechanical overhauls; and
o infrastructure upgrades with the major component being earthwork
on the tailings dam.
Milling operations at the rehabilitated Huaron mine were started in
April 2001. The mine and mill achieved commercial production in May 2001.
Capital costs of the rehabilitation, including preproduction mining
and operations were approximately $11.1 million.
The $12 million credit facility with Standard Bank was repaid in 2002,
and replaced with the $6,500,000 loan facility from Banco de Credito. This loan
was repaid in full in 2004.
- 19 -
Geology and Mineralization
The main lithology in the Huaron area is a sequence of continental
"redbeds" consisting of interbedded sandstones, limestones, marls,
conglomerates, breccias and cherts of the Abigarrada and Casapalca Formations
of Upper Cretaceous to Lower Tertiary age. These rocks unconformably overlay
massive marine limestones of the Upper Cretaceous Jumasha Formation. To the
west of the mine a series of andesites and dacites of the mid to lower Tertiary
Calipuy Formation outcrop. A series of sub-vertical porphyritic quartz
monzonite dykes, thought to be contemporaneous with the volcanics, strike
generally north-south and cut across the mine stratigraphy.
The rocks in the central part of the mine and at lower elevations are
principally thinly bedded marls and sandstones known as the lower redbeds. In
the eastern side of the mine the upper redbeds occur. The upper section of
these rocks consists of calcareous Sevilla chert that overlies sandstones and
marls. The bottom of this sequence consists of the Barnabe quartzite
conglomerate. In the western side of the mine the stratigraphy consist of a
series of interbedded conglomerates (San Pedro) and sandstones. The
conglomerate contains poorly sorted limestone and quartz clasts in a sandy
matrix.
The Huaron mine is within an anticline formed by east-west
compressional forces. The axis of the anticline is approximately north-south,
gently plunging to the north. There are two main fault systems; north-south
striking thrust faults, parallel to the axis of the anticline and east-west
striking tensional faults. The intrusives strike in two principal directions
N70(degree)E and S10(degree)E. Most of the area is covered with recent soils
except where the more resistant cherts and conglomerates form ridges parallel
to the flanks of the anticline. These outcrops are discontinuous and frequently
offset by the crosscutting east-west faults.
Huaron is a polymetallic deposit (hosting silver, lead, zinc and
copper, with silver being the most important) consisting of mineralized
structures probably related to Miocene monzonite dykes principally within but
not confined to the Huaron anticline. Mineralization is encountered in veins
parallel to the main fault systems, in replacement bodies associated with the
calcareaous sections of the conglomerates and other favourable stratigraphic
horizons, and as dissemination in the monzonitic ingrusions at vein
intersections.
The first pulse of mineralization was associated with the emplacement
of intrusive bodies and subsequent opening of the structures, during which
zinc, iron, tin, and tungsten minerals were deposited. This was followed by a
copper, lead and silver rich stage, and finally by an antimony/silver phase
associated with quartz.
More than 95 minerals have been identified at Huaron with the most
important economic minerals being tennantite-tetrahydrite containing most of
the silver, sphalerite and galena. The principal gangue minerals are pyrite,
quartz, calcite and rhodochrosite. Enargite and pyrrhotite are common in the
central copper core of the mine and zinc oxides and silicates are encountered
in structures with deep weathering. Silver is also found in pyrargyrite,
proustite, polybasite and pearceite.
There is a definite mineral zoning at Huaron and the mine has been
divided into seven separate zones. There is a central copper core (Zone 5)
where the principal economic mineral was enargite. The structures contain
copper with pyrite and quartz. This area was extensively mined by previous
operators but because of the high arsenic and antimony content and poor metal
recoveries mining in this area could be problematic. To the east and west of
the central core are Zones 2, 3 and 4 where silver, lead and zinc are found in
carbonates principally calcite and rhodochrosite. Zone 1 to the north of the
central core contains silver, lead and zinc associated with pyrite. Zone 6 is
along the west side of the axis of the anticline and south of Zone 2 is
principally lead and zinc with lower silver values within carbonates. Zone 7 is
a narrow band running north-south along the general axis of the anticline and
to the south of Zone 3 and contains principally sphalerite and sulfosalts with
rhodochrosite.
- 20 -
The central core of the district has adularia-sericite alteration
overprinted with strong silicification and epidote-pyrite. This core is
surrounded by a zone containing epidote-pyrite-quartz that grades outwardly to
a zone containing chlorite and magnetite. The mineralized structures are
concentrated in the central core of the district but important structures
continue into the outer zones.
Drilling, Sampling and Analysis
Exploration at Huaron is conducted using a combination of underground
drilling and drifting. Generally, underground drillholes that intersect
promising ore grade mineralization are followed up by drifting for resource and
reserve definition. During 2004, 11,179 metres were drilled using four drill
rigs. In addition, there was 4,685 metres of underground drifting for resource
and reserve definition.
Drill core is split with half remaining on-site for further reference.
Assaying, for both drill samples and underground channel samples, is done at
the mine laboratory. The quality assurance/quality control program includes
sample checks performed at an outside lab and the submission of standards to
the mine lab.
All of the geologic activities, including sampling, are conducted
under the direct supervision of the Huaron Chief Geologist.
In October 2003, a $1 million exploration drill program was initiated
to upgrade the mine's resources to proven and probably reserves and to identify
additional resources. A follow-up second phase $1 million exploration program
was initiated in late 2004, and is still underway.
Mine Re-engineering & Expansion
In the fall of 2003, Pan American initiated a technical and economic
evaluation to determine the benefits of re-engineering the main haulage system
at the Huraon mine. As a result of that evaluation, the haulage system is being
changed from diesel trucks to electric locomotives. In addition, an evaluation
is underway to determine whether to use the existing mine shafts (not
operative) to reduce mine haulage costs.
Mineral Reserves
Pan American's management has estimated proven and probable mineral
reserves at the Huaron mine, as at December 31, 2004, to be as follows:
Huaron Reserves (1), (2)
------------------------
Reserve Grams of Silver
Category Tonnes per tonne % Zinc % Lead % Copper
-------- ------ --------- ------ ------ --------
Proven 4,854,005 219 4.16 1.51 0.44
Probable 1,902,330 225 4.01 2.15 0.41
-----------------------------------------------------------------------------------
Total 6,756,335 221 4.12 1.69 0.43
-------------
(1) Calculated using a price of $5.50 per ounce of silver, $1,020 per tonne of zinc,
$600 per tonne of lead and $2,200 per tonne of copper.
(2) Mineral resource and reserve estimates for Huaron were prepared under the
supervision of, or were reviewed by, Michael Steinmann, P. Geo., Vice President
Geology - Operations and Martin G. Wafforn, P. Eng., Director of Mine
Engineering as Qualified Persons as that term is defined in NI 43-101.
Reconciliation of Mineral Reserves
Mineral reserves are adjusted by the amount mined, by additions and
deletions resulting from new geological information and interpretation and in
connection with changes in operating parameters and metal prices. However,
- 21 -
proven and probable mineral reserves are not usually revised in response to
short-term cyclical price variations of metal markets. The following is a
reconciliation of the proven and probable mineral reserves at Huaron to
December 31, 2004:
Reconciliation of Mineral Reserves at Huaron
--------------------------------------------
Tonnes
------
Opening balance, December 31, 2003 6,547,700
Additions (1) 844,310(1)
Tonnes mined from reserves 635,845
----------------------------------------------------------------------
Closing balance, December 31, 2004 6,756,335
=================
-----------
(1) Additions are from tonnes added through exploration (495,960) or
reinterpretation due to higher metal prices (348,350).
Management of the company believes that reserves at the Huaron Mine
are sufficient for at least ten years at current production rates.
Mineral Resources
Pan American's management estimates that mineral resources at the
Huaron mine, as of December 31, 2004, are as follows:
Huaron Resources(1)
-------------------
Resource Grams of Silver
Category Tonnes per tonne % Zinc % Lead % Copper
-------- ------ --------- ------ ------ --------
Measured 738,310 210 3.43 2.66 0.15
Indicated 523,665 205 3.53 2.58 0.16
Inferred 1,841,890 233 4.06 2.63 0.32
-----------
(1) Mineral resource and reserve estimates for Huaron were prepared under
the supervision of, or were reviewed by, Michael Steinmann, P. Geo.,
Vice President Geology - Operations and Martin G. Wafforn, P. Eng.,
Director of Mine Engineering as Qualified Persons as that term is defined
in NI 43-101.
Mining
The Huaron mine is located under a mountain range with development
from an elevation of 4,250 metres above sea level to 4,650 metres above sea
level. Pan American's mining activities will extend over an area of two
kilometres by two kilometres.
The main mine access is by a four metre by four metre ramp which is
used for truck haulage of ore out of the mine. There are two existing shafts on
the property but these have not been used since the late 1980's.
In 2004 stopes from 15 different veins were mined with approximately
38 stopes active at any time. The mining method is 100% mechanized cut-and-fill
using mill tailings as the backfill material.
Rehabilitation of the 500 level has almost been completed at a total
estimated cost of approximately $1.5 million in order to change the ore haulage
system from commercial 12 cubic metre-capacity trucks to electric locomotives
for the ore transport. This will mean savings in operating costs, and provide
- 22 -
access to new zones with ore reserves. Evaluation is currently underway to
rehabilitate and use existing mine shafts to replace part of the existing truck
haulage system.
Milling
During the year 2004, the concentrator plant processed 635,845 tonnes
of ore. The plant has operated basically the same circuits of crushing, ball
mill grinding, selective flotation and filtering since it started in 2001.
For the year 2005 it is expected that 683,200 tonnes of ore will be
processed.
Environment, Health and Safety
Before Pan American acquired its interest in the Huaron Mine, Minera
Huaron had filed a program of environmental remediation and management ("PAMA")
with the government on July 26, 1996 in compliance with Peruvian regulations.
The PAMA addressed, among other things, stability of tailings impoundments,
water quality and the fact that liquid effluents from the mine exceeded certain
permissible levels of metals, as well as the required revegetation of a
historic tailings area near the adjacent town. The PAMA set forth an
implementation time line of nine months for Minera Huaron to make certain
expenditures to address the environmental issues raised. In January of 1997 and
March of 1998, the Minister of Energy and Environment consented to the
modification of certain expenditures under the PAMA and an extension of the
implementation time line.
As a result of the 1998 flood of the adjacent Animon mine, waters
inundated portions of the Huaron Mine, causing the closure of the mine. For
this reason, Minera Huaron was not able to satisfy all of its obligations under
the PAMA in accordance with the established implementation time line. Given the
magnitude of the incident at the Huaron mine, in December 2001 the Minister of
Energy and Environment granted further modification of the PAMA and an
extension of the time for implementation. At the same time, the Minister of
Energy and Environment approved a special program of environmental management
("PEMA") to continue until the end of 2005.
Minera Huaron completed requirements under the PAMA program, and
compliance and expenditures have been audited by third party consultants. Under
the PEMA program, work continues on two projects: remediation of water quality
exiting the old workings; and closure of the historic Huayllay tailings
impoundment. Remedial work started on the Huayllay tailings impoundment in 2004
and will be complete in early 2005. To date, Huaron has spent approximately
$790,000 on those PEMA projects.
In October 2003, the Peruvian government passed legislation requiring
active mining operations to file closure plans within six months of the date of
passage of the legislation. To date, accompanying administrative rules which
lay out detailed closure requirements, including bonding and tax deductibility
of reclamation and rehabilitation expenses are not yet promulgated. Huaron's
Closure Plan was filed by mid-year 2004. Pan American has accrued approximately
$7.9 million for future reclamation of the Huaron mine.
Pan American's operations at the Huaron mine currently comply in all
material respects with applicable Peruvian laws. The most significant
environmental issues currently associated with the mine are metal-laden waters
discharged from the mine, localized areas of acid rock drainage from the mine's
tailings deposit areas and the containment and stability of the active tailings
ponds. During 2004, water quality at the compliance point has met pH standards
and a majority of metal compliance standards. The closure planning process, now
underway with the support of independent consultants, will define closure and
mitigation options for improving water quality exiting the site.
Water quality will likely remain as the most important environmental
issue at the Huaron mine due to both suspended solids and dissolved metals.
More precise information on flows and water quality is required before
- 23 -
effective and integrated solutions can be developed to define a site water
balance model. Dissolved metals in mine waters and other drainages can be
managed using various types of water treatment, such as addition of lime or
other reagents to precipitate metals. A program of regular water sampling is
ongoing to provide base line data. This data will be used to assist the
decision-making process for the development of the appropriate mitigation
measures to bring site water quality into compliance with permissible levels.
Following its purchase of the mine, Pan American implemented a
modified version of the third party safety and training program for employees
and contractors used successfully at its Quiruvilca Mine. All employees are
required to undergo safety and environmental training and all new underground
employees are required to undergo task specific training prior to being
assigned to their first position.
In addition, supervisors and workers are attending the Centromin
"Basic Mining Concepts and Safety" training in Lima. This training focuses on
proper mining methods with an emphasis on safety. This training will continue
through 2005.
Capital Expenditures
During 2004 capital expenditures at the Huaron mine were approximately
$6 million and consisted primarily of:
o Closure and revegetation of the Huayllay tailings of $495,000;
o Ongoing rehabilitation of the mine's 250 level drainage tunnel of
$570,000;
o Rehabilitation of the mines 500 level of $1.2 million;
o Development of the south zone of $1.1 million;
o Infrastructure and site improvement work of $540,000; and
o Exploration program of $1.2 million.
In 2003, capital expenditures at the Huaron mine were approximately
$1,862,000 and consisted of:
o Ongoing rehabilitation of the mine's 250 level drainage tunnel of
$658,000;
o Exploration drilling of $266,000;
o Tailings dam No. 5 works and preparation for raising of $218,000;
o Purchase of diesel scoop of $150,000; and
o Other mine expenditures totalling $570,000.
Pan American has budgeted $3.7 million for capital expenditures at the
Huaron mine in 2005 consisting primarily of $1.5 million for installation of a
track haulage system and filter presses, $1.5 million for mine equipment and
development and $0.3 million for concurrent reclamation projects.
- 24 -
Marketing
The products of value produced from the Huaron mine are silver rich
zinc, lead and copper concentrates. In 2002, long-term contracts for the sale
of Huaron's zinc and lead concentrate were signed with an arm's length metals
trading company. These contracts extend through 2006 with an option to extend
through 2007. Copper concentrate was sold under a contract that expires at the
end of 2005. All contracts are at arms length. Minera Huaron receives payment
for an agreed percentage of the silver, lead, zinc or copper contained in the
concentrates it sells after deduction of smelting and refining costs.
During 2004 the existing zinc concentrate contract was modified. Under
this new contract, total production is committed for sale until 2008, and after
this period 60% of total zinc concentrate production has been committed for
sale based on market benchmark terms until 2011.
In 2003 and 2004, the revenues per type of concentrate produced by the
Huaron mine were as follows:
Average
Sales Price
2004 Revenue Tonnes per Tonne
---- ------- ------ ---------
Zinc Concentrate $7,077,634 34,317 $206
Lead Concentrate $13,025,388 20,253 $643
Copper Concentrate $16,179,935 7,030 $2,302
Average
Sales Price
2003 Revenue Tonnes per Tonne
---- ------- ------ ---------
Zinc Concentrate $5,361,873 31,662 $169
Lead Concentrate $11,122,849 25,239 $441
Copper Concentrate $9,817,419 5,064 $1,939
La Colorada Mine
Ownership and Property Description
Pan American Silver's wholly-owned subsidiary, Pan American Mexico,
owns and operates the La Colorada mine.
The La Colorada property consists of six non-contiguous blocks of
exploration permits and exploitation claims totalling approximately 1,947
hectares. Approximately 1,405 hectares of exploration permits, 542 hectares of
exploitation claims and 464 hectares of surface rights cover the main mine
workings and the mine's ore zones. Additional exploration permits covering an
area of approximately 110 hectares and 98 hectares of exploitation claims are
located to the north of the main workings. There was a minor boundary dispute
between Pan American Mexico and a local landowner regarding less than 1% of the
surface rights in the area held by Pan American Mexico. The complaint against
Pan American Mexico was dismissed by a Mexican court.
On June 17, 2002 Pan American entered into a $10 million project debt
facility with IFC pursuant to which Pan American granted security over its
shares of Pan American Mexico and all of the assets of Pan American Mexico. Pan
American drew down $9.5 million from this facility to complete the project
expansion. In May 25, 2004 Pan American Mexico, prepaid in full all amounts
owing to IFC in respect of the debt facility.
To the best of Pan American's knowledge, there are no other royalties
or encumbrances that affect the La Colorada property.
- 25 -
A technical report on the La Colorada mine (the "La Colorada Report")
dated August 29, 2003 was prepared for Pan American in accordance with NI
43-101 by Norm Pitcher, P.Geo., John Wright, P.Eng. and Robert Barnes, P.Eng.,
all of whom were "qualified persons" then employed by the Company. The
following summary of the La Colorada Mine is primarily based on and, in some
cases, is extracted directly from the La Colorada Report.
The projected capital expenditures, production estimates, cash flow
projections and other projections in respect of the La Colorada mine included
in this Annual Information Form have been extracted in part from the La
Colorada Report and updated with current projections which are based on the La
Colorada mine's recent operating and production history. These projected
capital expenditures, production estimates, cash flow projections and other
projections have been included in this Annual Information Form based on the
requirements of applicable Canadian securities regulations and were not
prepared with a view towards compliance with the published guidelines of the
United States Securities Exchange Commission, or the guidelines published by
the Canadian Institute of Chartered Accountants or the American Institute of
Certified Public Accountants for preparation and presentation of prospective
financial information. Pan American's auditors have neither examined nor
compiled the accompanying prospective financial information and, accordingly,
do not express opinions or any other form of assurance with respect thereto.
Location, Access, Climate and Infrastructure
The La Colorada Mine is located in the Chalchihuites district in
Zacatecas State, Mexico, approximately 156 kilometres northwest of the city of
Zacatecas and 99 kilometres south of the city of Durango. The main municipality
in the district is the city of Chalchihuites, 16 kilometres northwest of the La
Colorada Mine, with a population of approximately 1,000. The district's general
coordinates are 23(0), 23' North Latitude and 103(0), 46' West Longitude. The
property is situated at elevations between 2,100 and 2,550 metres above sea
level.
The La Colorada Mine is accessed primarily from the city of Durango by
a continuously maintained 120 kilometre all-weather, paved, two lane highway
(Highway 45) and a 23 kilometre public, all weather, gravel road.
The physiography of the region around the mine site resembles a basin
and range area with wide flat valleys and narrow relatively low mountains and
ranges.
The climate at the project site is arid to semi-arid. Vegetation
typically includes mesquite and cactus. The rainy season is from July to
September when precipitation can be extreme and cause regional flooding and
wash-outs. However, in general precipitation in the area is quite low.
La Colorada receives its power through the Mexican national power grid
which was upgraded in 2001.
The existing water system at the La Colorada Mine is currently
supplied from an underground source. As permitted by Mexican law, underground
water is pumped to surface head tanks for use in the mill process and for
domestic services. Underground water is also pumped to a water treatment plant,
which was constructed in 2002, to provide potable water. Pan American estimates
that the current volume of water supply meets the existing and planned future
requirements of the project.
There is a long history of silver mining in Zacatecas State and as a
result there is adequate infrastructure and an experienced workforce in the
area.
All permits and licences required for the conduct of mining operations
at La Colorada are currently in good standing.
- 26 -
Pan American is required to make royalty payments to IFC by May 15th
of each year if the average price of silver for the preceding calendar year
exceeds $4.75 per ounce. This obligation lasts until 2009 and is capped at a
maximum accumulated total of approximately $2.8 million. During 2004, $0.7
million was accrued with respect to this obligation, and the Company expects a
similar amount will be payable on 2005 production, based on current silver
prices.
Taxation
The principal taxes of Mexico affecting Pan American include income
tax, assets tax, annual fees for holding mineral properties, various payroll
and social security taxes and a refundable value added tax.
History
The production history of the Chalchihuites district began during
pre-colonial times when natives produced silver and malachite in primitive
ways. During the sixteenth century, the Spaniards founded the village of
Chalchihuites and began intermittent exploitation of the mineral deposits in
the area. By the nineteenth century, the Spanish operations achieved continuous
silver production, which was interrupted by the Mexican War of Independence.
In 1925 the Dorado family operated mines at two locations on the La
Colorada property. From 1929 to 1955 Candelaria y Canoas S.A., a subsidiary of
Fresnillo S.A., installed a 100 ton per day flotation plant and worked the old
dumps of two previous mines on the La Colorada property. From 1933 to the end
of World War II La Compania de Industrias Penoles also conducted mining
operations on a single breccia pipe on the property. From 1949 to 1993 Compania
de Minas Victoria Eugenia S.A. de C.V. operated a number of mines on the La
Colorada property.
In 1994 Minas La Colorada S.A. de C.V. ("MLC") acquired the
exploration and exploitation claims and surface rights of Compania de Minas
Victoria Eugenia S.A. de C.V. Until 1997 MLC conducted mining operations on
three of the old mines on the La Colorada property, producing approximately
6,000 tons per month.
Pan American acquired La Colorada in March 1998.
Geology and Mineralization
The La Colorada property is located on the eastern flanks of the
Sierra Madre Occidental at the contact between the lower volcanic complex and
the upper volcanic supergroup.
The oldest rocks exposed in the mine area are Cretaceous carbonates
and calcareous clastic rocks. Overlying the calcareous rocks is a conglomerate
unit containing clasts derived mostly from the subadjacent sedimentary rocks.
Most of the outcrop in the mine area is represented by intermediate to felsic
volcanic rocks of the regional lower volcanic complex.
The stratigraphically highest rocks in the mine area are felsic tuffs
correlated with the upper volcanic sequence. These tuffs unconformably overlie
the trachyte along the southern property boundary, and are distinctly maroon
coloured and show varying degrees of welding.
Thirteen breccia pipes have been mapped on the surface or in
underground workings. All of the pipes are located along or to the south of the
No Conocida (NCP/NC2) vein complex. The pipes are round to ovoid in shape, up
to 100 metres in diameter, and can extend vertically more than 400 metres below
the surface. The breccias contain clasts of limestone and trachyte (often
mineralized) in an altered trachyte matrix. The ratio of limestone to trachyte
clasts varies from pipe to pipe.
- 27 -
East to northeast striking faults form the dominant structures in the
project area and play a strong role in localizing mineralization. Most of these
faults dip moderately to steeply to the south and juxtapose younger hanging
wall strata against older footwall rocks. Evidence suggests down-dip motion on
these faults, however most of the faults have been reactivated at some point so
the movement direction during the initial formation is uncertain. Stratigraphic
contacts are displaced from tens to over a hundred metres lower on down dropped
blocks.
The trachyte unit displays an eastward tilting that may reflect
displacement on regional, orogenparallel structures outside the project area.
This tilting probably reflects the final episode of deformation.
La Colorada represents a typical epithermal silver gold deposit, with
a transition in the lower reaches of the deposit to a more base metal
predominant system. There are indications of what might be skarn style
mineralization in the deepest drill holes on the property.
There are four dominant styles of mineralization at La Colorada: (i)
breccia pipes; (ii) vein-hosted mineralization; (iii) replacement mantos within
limestone; and (iv) deeper seated transitional mineralization (transition
zone).
Mineralization in the breccia pipes generally has lower silver values
and elevated base metal values. Mineralization is associated with intense
silicification and occurs as disseminated galena and sphalerite with minor
chalcopyright and bornite. Sulphides are found in the clasts and the matrix.
Most mineralized veins on the property strike east to northeast and
dip moderately to steeply to the south. Veins occur in the trachyte and
limestone units and cut across the bedding and contacts with little change in
the width or grades of the vein. Mineralized widths in the veins are generally
less than two metres but may be wider if there is a halo of replacement or
brecciated material. The No Conocida Poniente (NCP) Corridor strikes east west
and dips moderately to the south, with average widths of approximately 12
metres.
Vein fillings consist of quartz, calcite, and locally barite and
rhodochorosite. Where the veins are unoxidized, galena, sphalerite, pyrite,
native silver and silver sulfosalts are present. The major mineralised veins,
including the Corridor, are strongly brecciated and locally oxidized, obscuring
original textural features. Less deformed veins show mineralogical layering,
crystal-lined open vugs, and hydrofracture vein breccias, indicating typical
multi-stage growth.
The depth to the surface and the permeability of the mineralized zone
control the level of oxidation in the veins. These factors result in an uneven
but generally well-defined redox boundary.
Manto style mineralization is found near vein contacts where the
primary host rock is limestone. At Recompensa, the mantos appear to be
controlled by thrust faulting adjacent to the veins, and can form bodies up to
six metres wide. Most commonly they occur in the footwall north of the steeply
dipping vein, but depending on the orientation of the fault they can occur in
the footwall, the hanging wall, or both. The mineralogy of the mantos is
characterized by galena and sphalerite with minor pyrite and chalcopyrite.
Gangue minerals are quartz, rhodochorosite, pyrolusite and other manganese
oxides.
The deep seated transition mineralization consists of both vein type
mineralization and more diffuse stockwork and breccia zones.
The ore zones at La Colorada as well as their orientation (strike/dip)
and style of mineralization are as follows.
- 28 -
NCP and NCP Corridor - Average orientation 75/60S. The Corridor consists of the
NCP structure west of the Candelaria Breccia. This zone is characterized by a
broad mineralised shear within limestone containing one or more quartz veins
parallel to the orientation of the shear. The majority of the silver
mineralization is found in the quartz veins, however the limestone is
mineralised throughout with grades up to 1,000 grams of silver per tonne. The
Corridor is generally oxidized, although there is a poorly defined mixed zone
and there are also unoxidized areas, particularly in the extreme western
portion. The Corridor is exposed on the 295 level and is unmined below that
level. Above 295 some sporadic mining has taken place. The NCP vein is east of
the Candelaria Breccia, and is a typical narrow vein structure.
NC2E - Average orientation 45/70S. NC2E is a narrow (one-to-two metre) sulphide
vein that contains the bulk of the current sulphide resources. It has a strike
length of over 700 metres and is open to the east where there is a wedge of
inferred material below the east mine fault. NC2E is exposed on the 295 level
and has been drilled to below the 495 level.
NC2W - Average orientation 35/65S. NC2W is probably the faulted, western
extension of NC2E. The western portion of NC2W is oxide and averages 2.1 metres
wide. The eastern portion is sulphide and averages 1.1 metres wide. NC2W is
unmined, and has been exposed on the recently developed 100 and 150 levels. It
has a strike length of over 300 metres and extends from the surface to slightly
above the 295 level. Below the 295 level the structure becomes more complicated
and further work is needed in this area to define additional resources.
4235 - Average orientation 90/75N. 4235 is a narrow (approximately one metre)
vein which occurs in the hanging wall of the NCP and NC2 vein systems. It has a
strike length of approximately 140 metres, and has been exposed by recent
development on the 295 level and by drilling above and below that level. The
western half of 4235 is sulphide, the eastern half is oxide.
Recompensa - Average orientation is 90/80N. Recompensa is a combination of vein
and manto mineralization located more than a kilometre north and west of the
NC2 and NCP vein complex. The vein mineralization is narrow (less than one
metre) but irregular shaped mantos can be up to ten metres thick. Recompensa
contains both oxide and sulphide material.
Amolillo - Average orientation 45/70S. Amolillo is a small oxide vein located
500 metres north of the NC2 and NCP vein complex.
Footwall and Hanging Wall Veins - Orientation generally parallel to NC2E. These
veins (all sulphide) occur in the footwall and hanging wall of the NC2E
structure, and are generally narrow (less than one metre) with limited strike
and dip extents.
NC2E Deep - Average orientation variable. This mineralization occurs as the
down dip extension of the NC2E structure on the east end. This zone has
received limited drilling due to restricted access. The current interpretation
of this area, based on work by Pan American geologists and a structural
consultant, is that the mineralization represents a transition from typical
epithermal veins to a deeper seated, intrusion related system. As a result,
this zone shows characteristics of vein-style mineralization as well as
thicker, more diffuse, stockwork, breccia, and replacement-type mineralization.
The zone tends to have lower silver values and higher lead-zinc values.
Exploration and Drilling
The bulk of Pan American's exploration of the La Colorada property has
been surface and underground diamond drilling and underground drifting on the
veins and mineralized zones.
- 29 -
From 1997 to 2002 Pan American drilled 49 surface holes and 127
underground holes, for 32,327 total metres of drilling. Surface drilling was
done with NQ sized core and underground drilling used BQ, except for certain
Corridor drilling in 2000, which was done with HQ core in an attempt to improve
recovery.
Prior to Pan American's involvement in the La Colorada project,
previous operators had drilled 131 holes for a total of 8,665 metres. These
holes were not used in Pan American's reserve or resource calculation, with the
exception of four holes where the original core was found and assayed by Pan
American.
Drill holes generally ranged in length from 100 to 300 metres with
dips of plus 45(0) to minus 90(0). Standard logging and sampling processes were
used to record information from the holes drilled by Pan American. Interval
samples were cut with a diamond saw and the entire remaining core is stored
on-site. Hole collars were surveyed by a total station survey equipment.
Recovery in the drill holes was generally high (plus 80%), with the
exception of holes drilled into the Corridor ore zone. In the Corridor zone,
the recovery averaged 67%. There was no bias in the poorer recovery drill
holes.
The drilling programs were successful in projecting ore below the
lowest level of the mine (the 295 level) in NC2E and the Corridor zone, and
below the 150 level in NC2W. Drilling was also used as a recognizance tool
outside of the main mine area.
Underground drifting along the mineralized structures was the other
principal method of exploration. Approximately 3,000 metres of horizontal and
ramp development was done in NC2W, NC2E, 5235 and the San Fermin areas during
2004. The drifting allowed detailed mapping and structural interpretation of
the ore zones, as well as key grade information.
No exploration drilling was conducted during 2004. However, a detailed
exploration drilling program is being developed and will commence in the second
quarter of 2005.
Sampling and Analysis
The La Colorada database consists of two types of samples -
underground channel samples and diamond drill core samples.
Underground development was channel sampled every four metres. Samples
were broken out geologically, and vein and wall rock is sampled separately.
Sample size is approximately three kilos. To provide an accurate representation
of vein grades, samples are taken regardless of whether the vein appears to be
above cut-off or not. Any waste lenses within the vein are included in the vein
sample. In almost all cases the vein is usually distinguishable from the wall
rock, due to the high quartz and sulphide content of the vein material.
In addition to the samples taken from development, the database now
includes stope samples taken from mining during 2001 and 2002. Stope sampling
methodology is the same as the development sampling.
Drill holes are sampled and logged accordingly to industry-accepted
standards. Holes are logged for lithology, alteration, mineralogy and recovery.
As with the underground sampling, the samples are broken out by geology, and
vein and wall rock are sampled separately.
Pan American has used three commercial labs for the exploration
assaying at La Colorada: Bondar Clegg (Vancouver, B.C.), Chemex (Vancouver,
B.C.) and Luismin (Durango, Mexico). During 2001 and 2002, production samples
were also assayed at the La Colorada lab under Pan American's direction. All
assaying by the commercial labs for gold and silver has been done using fire
- 30 -
assay with either an AA or gravimetric finish on a one-assay tonne charge. Base
metals were assayed using acid solution and AA determination. The La Colorada
lab uses fire assay for gold and silver on a ten gram charge with a gravimetric
finish. Base metals are assayed using acid digestion and titration.
A quality assurance/quality control program consisting of check assays
and blank samples at an independent laboratory were used throughout the
drilling program conducted prior to 2004. The results of the re-assaying shows
variation between the La Colorada lab and the independent laboratory. However,
the mean of the assays for both silver and gold are lower from the on-site lab,
which would introduce an element of conservatism into the sulphide resource and
reserve calculations.
All of the drilling, sampling and quality assurance/quality control
programs were conducted under the direct supervision of Pan American's geology
staff.
Mineral Reserves
Pan American's management estimates that mineral reserves at La
Colorada, as at December 31, 2004, are as follows:
La Colorada Mineral Reserves(1), (2)
Oxide
-----
Reserve Grams of Silver Grams of Gold
Category Tonnes per tonne per tonne
-------- ------ --------- ---------
Proven 403,805 467 0.5
Probable 1,183,411 493 0.4
Sulfide
-------
Reserve Grams of Silver Grams of Gold
Category Tonnes per tonne per tonne % Lead % Zinc
-------- ------ --------- --------- ------ ------
Proven 163,303 591 0.5 1.0 2.0
Probable 105,706 571 0.5 1.0 2.0
Total
-----
Reserve Grams of Silver Grams of Gold
Category Tonnes per tonne per tonne
-------- ------ --------- ---------
Proven 567,108 502 0.5
Probable 1,289,117 499 0.4
------------------------------------------------------------------------
Total 1,856,225 501 0.4
--------------
(1) Calculated using a price of $5.50 per ounce of silver, $375 per ounce of gold,
$600 per tonne of lead and $1,020 per tonne of zinc.
(2) Mineral reserves have been prepared by the Company's wholly owned subsidiary,
Pan American Mexico, and were reviewed by an independent "qualified person",
Donald F. Earnest, P. Geo. Reserve/resource estimates for La Colorada were
prepared in previous years, and are adjusted for 2004 production where applicable.
Mineral Resources
Pan American's management estimates that mineral resources at La
Colorada as at December 31, 2004 are as follows:
- 31 -
Vein and Mantos Mineral Resources (1), (2)
------------------------------------------
Resource Grams of Silver Grams of Gold
Category Tonnes per tonne per tonne % Lead % Zinc
-------- ------ --------- ---------- ------ ------
Measured 562,000 438 0.53 1.0 1.4
Indicated 2,189,000 418 0.53 1.0 2.0
--------------------------------------------------------------------------------------------
Total 2,751,000 422 0.53 1.0 1.6
--------------------------------------------------------------------------------------------
Inferred 452,000 597 0.53 - 2.5
-----------
(1) These resources are in addition to La Colorada mineral reserves.
(2) Mineral resources were prepared by Pan American and were reviewed by an independent
"qualified person", Donald F. Earnest, P. Geo. Reserve/resource estimates for La
Colorada were prepared in previous years, and are adjusted for 2004 production where
applicable.
Breccia Mineral Resources (1), (2)
----------------------------------
Resource Grams of Silver Grams of Gold
Category Tonnes per tonne per tonne % Lead % Zinc
-------- ------ --------- --------- ------ ------
Inferred 6,715,000 112 0.24 - 0.6
-----------
(1) These resources are in addition to La Colorada mineral reserves.
(2) Mineral resources were prepared by Pan American and were reviewed by an independent
"qualified person", Donald F. Earnest, P. Geo. Reserve/resource estimates for La
Colorada were prepared in previous years, and are adjusted for 2004 production where
applicable
Development of Mining Operations
Initial development work
During 2000, development work at La Colorada included diamond drilling
and underground drilling for reserve definition, the preparation of a bankable
feasibility study, negotiation with banks for project financing, independent
engineering review, repairs to the existing shaft and rehabilitation of the
existing mill to restart operation in 2001. During the fall of 2000 repairs
involving shotcrete and steel were made to the existing shaft to ready the mine
for full development.
Following successful drilling, which substantially increased the oxide
reserves at the property, a bankable feasibility study was completed in June
2000 using H.A. Simons Ltd. for mill design, Agra Earth and Environmental Ltd.
for tailing design, and Beacon Hill Consultants and R. Barnes Consultant for
mine design. An Environmental Impact Study ("EIS") was prepared to World Bank
standards by Dew Point International, LLC and reviewed by Clifton Associates
Ltd.
Rehabilitation of Existing Mill and Limited Production
Pan American decided to rehabilitate the existing mill at La Colorada
to allow for limited production in 2001. Limited production commenced in
January 2001 at approximately 90 tonnes per day, which increased to
approximately 120 tonnes per day as of March 2001 and reached a consistent
production rate of 150 tonnes per day in June 2001. In January 2002, the mill's
operating capacity was increased to 200 tonnes per day following the addition
of another small ball mill and additional lead floatation capacity. The feed
for the mill is underground sulphide ore from the La Colorada property.
- 32 -
The mining method utilized is cut and fill, with backfill material
largely coming from waste development. Third party contractors carry out mining
and mine development with Pan American providing supervision.
Pan American expended approximately US$250,000 to restart the mill in
2001 and payback of this capital expenditure was received within 12 months.
Approximately US$100,000 was spent to upgrade the mill's capacity to 200 tonnes
of sulphide ore per day in late 2001.
Expanded Production
In January 2002, Pan American prepared an internal update to the June
2000 Feasibility Study (qualified persons: John H. Wright, P.Eng. and Norman
Pitcher, P.Geo) (the "Updated Feasibility Study"). This Updated Feasibility
Study recommended proceeding with a 210,000 tonnes per year underground mining
operation for oxide ore in conjunction with and continued mining of 70,000
tonnes per year of sulphide ore.
Construction of the new oxide mill commenced in July 2002 and produced
the first dore bars in August 2003. The rest of the facilities, including the
surface areas and sulphides plant rehabilitation, road upgrades and the first
phase of the tailings dam construction were 95% complete by December 31, 2003.
Total project construction work, including the second phase of the tailings
dam, was completed during 2004.
Pan American Mexico's 2004 capital expenditures, including the final
construction works at La Colorada, were $5.97 million.
Mining
The mining method utilized for the oxide ore is mechanized cut and
fill from the property's NCP, 4235 footwall, NC2W and San Fermin veins. Fill
material is sourced from development muck, waste slashed from walls in the
stopes and a surface open pit. No tailing backfill is planned. Based on the
results that La Colorada operations had in the narrower sulphide stopes, no
conventional slusher cut and fill stopes for narrow veins are planned.
Mechanized cut and fill will be used for narrow veins with 1.5 yard scoop trams
for mucking. In narrow stopes the ore will typically be blasted by taking down
the back. If the ore outline is too narrow for the scoop tram, the access for
mucking the next cut will be provided by slashing the walls after the ore is
mucked. The slashing will also provide backfill. Rock bolts will be used for
ground control, with 1.2 metre by 1.2 metre pattern bolting used about 50% of
the time.
Mechanized equipment includes three yard, two yard and 1.5 yard scoop
trams, low profile nine tonne trucks for haulage in NC2W and NC2E ramps, jack
legs for drilling and battery locomotives/Granby cars for sill haulage.
During 2004, Pan American initiated rehabilitation work on the "El
Aguila" shaft in the candelaria mine. This project is to be completed in April
2005.
In 2006, hoisting capacity from the 395 level and below will be
upgraded by installing a larger 350 HP - 900 rpm motor gear reducer. Additional
upgrades to clutches, braking system and other electrical controls will also be
performed.
The mine plan was developed for mining all areas concurrently. The NCP
oxide area is expected to produce 400 tonnes per day; NC2E sulphide is expected
to produce 150 tonnes per day and the San Fermin/NC2W was expected to produce
200 tonnes per day oxide and 50 tonnes per day sulphide.
- 33 -
In June 2004, La Colorada stopped producing sulphides when the
sulphide resource was exhausted above the de-watered level of the mine. Golder
and Associates visited La Colorada and developed a de-watering model to gain
access to the sulphide resource below the water level. A study is currently
being carried on to determine the mechanical/electrical/development
requirements to handle the water. The project is expecting to be finished by
mid 2005.
As the San Fermin and NC2W reserves are mined out to the dewatered
level of the mine, the rate of mining in NCP and NC2E will be increased to
compensate.
Milling
Milling consists of a 600 tonne per day conventional cyanide recovery
plant for oxide ore as well as the existing 200 tonne per day flotation circuit
for sulphide ore processing. During the mine's life, it was estimated in the La
Colorada Report that 80% of the silver would be produced in dore form and 20%
of the silver would be contained in base metal concentrates. Treatment of
sulphide material will produce lead and zinc concentrates with the majority of
silver reporting to the lead concentrate.
Metallurgy
Predicted metal recoveries in La Colorada's oxide ore, based on all
available test work at the time of the La Colorada Report, were as follows:
Structure Silver Recovery % Gold Recovery %
--------- ----------------- ---------------
NC2W 90.00 87.5
4235 90.00 87.5
NCP 84.45 75.0
Tailings 73.00 80.0
Oxide plant operations have been ramping up and Pan American believes
that this plant will achieve these recovery projections during 2005.
Economic Analysis and Payback
The current mine life extends to 2013, which mines out the proven and
probable oxide and sulphide reserves.
The total cost of the expansion of the mine, mill, plant site and
services was $25.5 million and was completed in 2004. The La Colorada Report
estimated mine operating costs are to be $19.57 per tonne of NCP oxide ore,
$19.70 per tonne of NC2W/San Fermin ore and $21.19 per tonne of sulphide ore.
The La Colorada Report also estimated process operating costs to be $10.86 per
tonne of NCP oxide ore, $8.96 per tonne of NC2W/San Fermin ore and $10.11 per
tonne of sulphide ore. Assuming production of 800 tonnes per day and a silver
price of $4.50 per ounce, the La Colorada mine was estimated in the La Colorada
Report to produce cumulative net cash flow of approximately $26 million through
2011. Based on this production rate and these cash flows, the La Colorada mine
was expected to return the capital investment in 3.4 years, including funding
sustaining capital. A new mine plan, which will likely result in a different
economic analysis from that set out in the La Colorada Report, is being
prepared by Pan American and will be based upon definition drilling to be
conducted in 2005 and an improved mine design to address ground conditions
encountered at La Colorada. This new plan is expected to be completed in the
first quarter of 2006.
- 34 -
The project economics are most sensitive to the price of silver,
operating costs and capital costs. Project economics are barely affected by
changes in the prices of gold, lead and zinc.
Environment
An environmental impact study and risk assessment by Clifton
Associates Ltd. on the La Colorada property was submitted to Mexican
environmental authorities in early March 1999. The EIS described the impacts of
proposed development and mining activities and provides conceptual plans for
closure and remediation. The EIS was approved by the Mexican authorities in
November 1999.
Pan American's operations at the La Colorada mine currently comply in
all material respects with applicable Mexican laws.
The three most significant environmental issues currently associated
with the La Colorada property are the erosional stability of existing tailings
facilities on the property, domestic waste water discharge from on-site
buildings, and an uncovered solid waste landfill on the western portion of the
La Colorada property.
In late 2004, Pan American began resloping these impoundments and
placing a layer of thin rock to minimize erosion. This work will continue into
2005. To date, approximately $120,000 has been spent conducting this
remediation.
Actions to ensure long-term compliance with Mexican waste water
discharge parameters were completed during mine construction. As part of this
construction an Imhoff tank was constructed to process domestic waste waters,
with clarified waters discharged to the new tailings pond.
A solid waste landfill is located on the western portion of the La
Colorada property. The historic landfill wastes on the arroyo slope are not
covered but new fill is deposited into open trenches atop the landfill and
covered on a weekly basis. Reclamation of the landfill will require re-grading
the slopes to reduce the angle of repose, and covering. Culverts may be
required to prevent blockage of the arroyo drainage.
To maintain compliance with all the environmental regulations, a
Voluntary Environmental Audit program was authorized by the corresponding
authorities in 2004 and is expected to be complete in 2005.
Marketing
All of La Colorada's concentrate production is sold under a one-year
contract (renewable) expiring in 2005 to an arm's length integrated smelter
located in Torreon, Mexico. All silver dore produced from the oxide mill is
sent for smelting and subsequent sale to Johnson Matthey in Salt Lake City,
Utah, U.S.A.
During 2004 the revenue produced by the La Colorada mine was as
follows:
Average Sales
Revenue Quantity Price per Tonne
------- -------- ---------------
Silver and Gold in Dore $11,113,282 1,810,380 ounces silver -
and 2,235 ounces gold
Zinc Concentrate $110,203 223 tonnes $494
Lead Concentrate $1,407,612 484 tonnes $2,908
- 35 -
During 2003 the revenue produced by the La Colorada mine was as
follows:
Average Sales
Revenue Quantity Price per Tonne
------- -------- ---------------
Silver and Gold in Dore $1,055,552 224,481 ounces of -
silver and 296 ounces
of gold
Zinc Concentrate $259,000 848 tonnes $305
Lead Concentrate $3,240,000 1,250 tonnes $2,592
Morococha Mine
Ownership and Property Description
The Morococha mine is located in the Morococha District, Yauli
Province, Junin Department, Peru, on the east side of the continental divide
just below Ticlo summit, approximately 38 kilometres west of the city of La
Oroya and 137 kilometres east of Lima. The Morococha mine's general coordinates
are latitude 11(Degree) 36' S and longitude 76(Degree) 10' W.
The Morococha property is comprised of three economic administrative
units ("UEA") and various concessions held outside of these UEAs. The three
UEAs contain 435 mining concessions owned outright by Argentum, 15 mining
concessions held jointly with Peru's national mining company, Centromin Peru
("Centromin"), nine concessions held jointly with other third parties, one
leased concession (El Proletario), 11 concessions leased from Silver Lead
Mining Company and 35 concessions leased from Corporacion Minera Sacracancha
S.A., which together total 9,166.73 hectares. In addition, there are 19 mining
concessions outside of the three UEAs that comprise part of the Morococha
property, eight of which have been assigned to Volcan, four of which are owned
jointly with Volcan and five of which are leased from third parties, which
together total 2,129.57 hectares. The majority of the mining concessions
comprising the Morococha property are contiguous. All known mineralized zones
in which mining operations are currently conducted and in which known mineral
reserves exist are set out within these concessions.
Argentum does not own any of the surface lands that overlie the mining
concessions which comprise the Morococha property. These surface lands are
owned by Centromin, the Peruvian national mining company. The Morococha
property's process plants, shafts and access roads are all located on
Centromin's surface lands. Argentum's and its predecessors' use of these
surface lands has been exercised for decades with Centromin's acknowledgement.
Accordingly, the Company anticipates no action by Centromin to interfere with
the future use of these surface lands.
Centromin has granted Argentum a right to use certain of Centromin's
surface lands throughout the useful life of its mining operations, provided
such use does not interfere with the development of a mine in respect of the
Toromocha disseminated copper system, which overlies certain of Argentum's
mining concessions and underground mining operations. Argentum is obligated to
pay Centromin $60,000 (which amount will be adjusted annually to account for
inflation) quarterly commencing May 28, 2003 as consideration for this right.
All permits necessary for mining operations at the Morococha mine are
held by Argentum or Natividad.
A report entitled "Morococha Operations, Yauli Province, Peru -
Technical Report", dated February 2004 (the "REI Report"), was been prepared
for the Company in accordance with NI 43-101 by an independent "qualified
person", Donald F. Earnest, P. Geol., President of Resource Evaluation Inc.
("REI"). The following summary of the Morococha property is based on and, in
some cases, is extracted directly from the REI Report.
- 36 -
The projected capital expenditures, production estimates, cash flow
projections and other projections in respect of the Morochocha mine included in
this Annual Information Form have been extracted in part from the REI Report
and updated with current projections which are based on the Morococha mine's
recent operating and production history. These projected capital expenditures,
production estimates, cash flow projections and other projections have been
included in this Annual Information Form based on the requirements of
applicable Canadian securities regulations and were not prepared with a view
toward compliance with the published guidelines of the United States Securities
Exchange Commission, or the guidelines established by the Canadian Institute of
Chartered Accountants or the American Institute of Certified Public Accountants
for preparation and presentation of prospective financial information. Pan
American's auditors have neither examined nor compiled the accompanying
prospective financial information and, accordingly do not express opinions or
any other form of assurance with respect thereto.
Location, Access, Climate and Infrastructure
The Morococha mine is accessible via Peru's paved central highway, by
travelling approximately 137 kilometres east of Peru's capital city of Lima,
then five kilometres south via a public, all-weather gravel road. Rail service
from Lima is also available via a national rail line that passes adjacent to
the Morococha operations.
The topography of the Morococha property is characterized by steep,
rugged ridges and peaks ranging in elevation from 4,400 metres to 4,900 metres
above sea level. Vegetation is sparse, and wildlife is limited to mostly birds
and small mammals, amphibians and reptiles.
The climate of the Morococha district is typical of the Andean
Cordillera in Peru, with two distinct seasons - wetter summer months (November
through March) and dryer, colder winter months (April through October). Because
all mining currently takes place underground, climate has minimal effect on ore
production at the Morococha property.
Mining has taken place on the Morococha property and nearby areas
(Casapalca, Cerro de Pasco) for more than 100 years, resulting in a well
developed regional transportation and power infrastructure and a large local
labour pool. Water for processing is plentiful, and tailings disposal areas are
adequate. Several mine development waste disposal sites exist on the Morococha
property and are sufficient to meet the needs of mining operations. Two
existing processing plant sites are sufficient for all proposed operations.
Royalties and Encumbrances
The Morococha property is not subject to any royalties or
encumbrances, other than the mining royalty tax described under "- Taxation"
below.
Although there are some uncertainties associated with certain recently
enacted Peruvian environmental regulations, Pan American has estimated final
site reclamation costs for the Morococha property to be approximately $10.8
million. A more detailed closure plan for the Morococha mine is under
development.
Taxation
The principal taxes of Peru affecting Argentum and Natividad include
income tax, employee profit sharing taxes, annual fees for holding mineral
properties, various payroll and social security taxes and a refundable value
added tax.
The 1% royalty on Morococha's production amounted to approximately
$202,000 in 2004. See "Quiruvilca Mine - Taxation" for a description of the new
Peruvian mining royalty tax.
- 37 -
History
Mining began in the region around the Morococha property during the
Inca Period before 1500, and production has been continuous in the district
since the late 1800s.
Between 1915 and 1918, much of the district was reorganized and
incorporated into the Cerro de Pasco Mining Company ("Cerro de Pasco"). By
1924, Cerro de Pasco was producing at a rate of 1,500 tonnes per day from
primarily copper ores containing 6% copper. Between 1929 and 1934, Cerro de
Pasco excavated the 11.5 kilometre Kingsmill Tunnel, successfully dewatering
all of the Morococha district mine workings above the 4,020 metre tunnel
elevation. The Kingsmill tunnel is still in use and is a vital feature of the
Morococha mining district, providing production access for deeper underground
mining operations that otherwise would have been too challenging and expensive
to develop.
In the 1940s, the Gubbins family began operating mines in the
Morococha district through Minera Santa Rita S.A. and Minera Yauli S.A., which
were subsequently consolidated in the late 1990s into SMC. Cerro de Pasco
continued to operate in the Morococha district until 1974, when its mines were
nationalized by the Peruvian government. Production from the Cerro de Pasco
mines in the district continued under the Peruvian national mining company,
Centromin, until 2003, when SMC acquired these operations from Centromin
through privatization.
Historical production from the Morococha property over the past 15
years is set out in the following table.
Morococha Property
Historical Production
Grams of Silver Tonnes per
Year Tonnes per Tonne % Lead % Copper % Zinc Month
---- ------ ------------------ ------ -------- ------ ---------
1989 466,543 189 1.3 0.4 3.2 38,879
1990 461,342 166 1.3 0.5 3.6 38,445
1991 454,960 184 1.6 0.4 4.5 37,913
1992 458,257 202 2.0 0.4 5.8 38,188
1993 494,033 194 1.9 0.6 5.5 41,169
1994 503,160 227 1.5 0.5 4.9 41,930
1995 531,542 232 1.5 0.6 4.0 44,295
1996 534,148 237 1.5 0.5 3.8 44,512
1997 511,584 250 1.7 0.5 4.1 42,632
1998 539,008 251 2.1 0.4 4.9 44,834
1999 590,570 250 2.2 0.4 5.7 49,214
2000 656,318 215 2.1 0.4 5.2 54,693
2001 606,980 236 1.8 0.4 5.0 50,582
2002 550,075 274 1.7 0.5 4.4 45,840
2003 529,651 272 1.5 0.4 3.9 44,138
On January 20, 2004, the Company entered into an agreement with 14
arm's-length individuals, estates and companies, all of whom are members of the
Gubbins family or entities in which members of the Gubbins family hold
beneficial interests (the "Morococha Vendors"), to purchase 92.014% of the
voting shares of Argentum, a sociedad anonima organized under Peruvian company
law, for $35,425,390 in cash. Argentum acquired, through a corporate
restructuring undertaken under Peruvian company law, the Anticona and Manuelita
mining units and related infrastructure and processing assets from SMC. At the
time of acquisition, Argentum held in its treasury as cash, all profits earned
by SMC's Anticona and Manuelita mining operations since November 1, 2003. The
transaction was subject to regulatory approval and a number of conditions,
including: (i) the completion of the corporate restructuring; (ii) the listing
on the Lima Stock Exchange of 100% of the shares of Argentum, including those
issued in connection with the corporate restructuring; and (iii) Pan American
successfully undertaking a public bid for not less than 92.014% of the voting
shares of Argentum through the Lima Stock Exchange.
- 38 -
On February 24, 2004, the Company entered into a further agreement
with the Morococha Vendors to purchase all of the issued and outstanding shares
of Natividad, a corporation organized under Peruvian company law, which holds
mining concessions and operations that are complementary to the Anticona and
Manuelita mining units for $1.5 million in cash. Closing of the acquisitions of
Argentum and Natividad occurred contemporaneously in August 2004, with effect
as of July 1, 2004.
Geology and Mineralization
A 2,000 metre thick Paleozoic-Mesozoic sequence of schists, volcanic
rocks and predominantly carbonate sediments cut by a series of Upper Tertiary
intrusions provide the host rocks for the mineralization in the Morococha
district. The structures that account for the majority of the vein
mineralization in the Morococha district trend predominantly northeast to
east-northeast. Mineralization includes epi-mesothermal silver-lead-copper-zinc
veins and bedded silver-base metal replacements or mantos (which together
account for the majority of the past and present economic mineralization at the
Morococha property), intrusive-sediment contact skarns, and the quartz
porphyry-hosted Toromocha disseminated copper system. The size and geometry of
individual ore shoots in the veins can range up to 400 metres in length and
more than 800 metres down plunge. Undiluted district vein width averages are on
the order of 1.2 metres. Replacement manto mineralization is generally
restricted to receptive stratigraphic horizons where favorable lithologies are
intersected by mineralized veins or are proximal to pre-mineral intrusives.
Mantos can have a significant strike extent where the veins are closely spaced,
and can range from less that one metre in width up to seven metres. Intrusive
contact related skarn bodies, while common locally, are generally small and
irregular, with disseminated rather than massive sulfide mineralization.
Ore and gangue mineralogy is similar in veins and mantos but it varies
considerably across the property. Sphalerite, galena, and chalcopyrite are the
most important primary minerals for zinc, lead and copper and silver is
generally present as freibergite (Ag-tetrahedrite) or argentiferous galena.
Gangue generally consists of quartz, calcite, barite and rhodochrosite, the
latter having a strong correlation with higher silver grades.
As with most of the large Peruvian polymetallic deposits, Morococha
exhibits a distinct lateral and vertical metal zonation. A central copper zone
centered on the Toromocha copper deposit grades outward through a
lead-zinc-minor silver zone and then into an outermost zone that is richer in
silver but still containing significant lead-zinc contents. There is also a
distinct trend for higher silver grades at higher elevations on the west side
of the Morococha property. Individual silver assays of greater than 2,200 grams
per tonne ("g/mt") are not uncommon above 4,800 metres in certain areas, and
greater than 300 g/mt silver ore grades also are common in the outer
silver-lead-zinc zone above the 4,400 metre elevation in certain areas. In
veins that have been mined over significant vertical extents (such as those in
Manuelita), silver grades tend to decrease as zinc grades increase with depth.
However, several of the major veins currently being mined on the 4,020 metre
Kingsmill Tunnel level still contain silver grades in the 200 g/mt to 250 g/mt
range. The hydrothermal alteration present at Morococha is typical for central
Peruvian zoned polymetallic deposits.
Exploration
SMC conducted only minimal exploration in the Morococha district since
the late 1990s. However, exploration potential is considered to be excellent
throughout the district due to the significant vertical extent (over 800
metres) of economic veins and the prevalence of multiple carbonate units
favorable for replacement mineralization. Additionally, of the very few drill
holes (less than ten) that tested depth extensions of known veins or mantos
below developed ore, all intersected potentially economic material.
- 39 -
Drilling
SMC utilized surface and underground diamond drilling only to test for
potential ore-grade mineralization in the various veins, replacement mantos,
and skarn bodies. Once the results of drilling determined the presence of ore
grade mineralization, the vein or manto was accessed by underground
crosscutting and drifting for further exploration and delineation of ore
reserves. Thus, assay data generated by SMC's drilling was seldom used in block
grade estimations for mineral reserves. From September 2004 on exploration at
the Morococha property has been conducted using a combination of diamond
drilling and underground drifting. Six to seven diamond drills are in
continuous operation at the property, drilling AQ, BQ, NQ and HQ sized holes
between 50 and 350 metres in length. This is generally followed by underground
development. During 2004, 7,191 metres of drilling was done, along with 10,147
metres of drifting for reserve delineation and access.
Diamond drill core is split in half, with one half sent for assaying
and one half retained in a secure on-site facility. The veins in the cross-cuts
are channel sampled, and a two to three kilogram sample is sent for analysis.
The mine laboratory conducts a routine internal quality
assurance/quality control program that includes external check samples and the
routine submission of standards.
All sampling, whether diamond drilling or cross-cutting, is done under
the direct supervision of the Morococha mine geology department.
Sampling and Analysis
The data used for the estimation of mineral reserves and resources at
the Morococha property consist almost entirely of underground chip channel
samples from the backs of drifts, the ribs of crosscuts, the backs of stopes
and the ribs of raises. The samples are taken every 1.0 metre across the veins
or mantos. Stopes are sampled at least once a month on 2.0-metre centers along
strike.
All samples from both the Morococha mine and mill are first run for
silver, lead, copper, and zinc using an atomic absorption ("AA") unit. Samples
with initial AA analyses for silver greater than 25 ounces per ton are rerun by
fire assay, using assay charges that vary in size from 10 to 15 grams depending
on the grade of the initial AA assay (the larger the AA assay value, the larger
the fire assay charge). Wet chemical analysis for lead and zinc is reserved for
concentrate samples.
- 40 -
Mineral Reserves
Pan American's management estimates that its 86% ownership interest in
the proven and probable mineral reserves for the Morococha property as of
December 31, 2004 are as set out in the following table:
Morococha Mineral Reserves(1), (2)
----------------------------------
Grams of Silver
Reserve Category Tonnes per Tonne % Copper % Lead % Zinc
---------------- ------ --------- -------- ------ ------
Proven 1,455,418 223 0.44% 1.51% 4.16%
Probable 542,799 242 0.91% 1.18% 4.27%
---------------------------------------------------------------------------------------------
TOTAL 1,998,217 228 0.57% 1.42% 4.19%
-------------
(1) Calculated using prices of $5.50 per ounce of silver, $375 per ounce of gold, $600 per
tonne of lead, $2,200 per tonne of copper and $1,020 per tonne of zinc.
(2) Mineral reserve estimates for Morococha were prepared under the supervision of, or were
reviewed by, Michael Steinmann, P. Geo., Vice President Geology - Operations and
Martin G. Wafforn, P. Eng., Director of Mine Engineering as Qualified Persons as that
term is defined in NI 43-101.
Mineral Resources
Pan American's management estimates that the mineral resources at the
Morococha mine as at December 31, 2004 are as follows:
Morococha
Mineral Resource Estimate (1), (2)
----------------------------------
Grams of Silver
Resource Category Tonnes per Tonne % Lead % Copper % Zinc
----------------- ------ --------- ------ -------- ------
Measured 701,252 144 1.30% 0.32% 3.20%
Indicated 189,007 163 1.09% 0.36% 2.93%
Inferred 6,566,100 250 2.0% 0.4% 4.4%
-----------
(1) These resources are in addition to the Morococha mine's mineral reserves.
(2) Mineral resource estimates for the Morococha mine were prepared under the supervision of, or were
reviewed by, Michael Steinmann, P.Geo., Vice President, Geology - Operations and Martin G. Wafforn,
P. Eng., Director of Mine Engineering as Qualified Persons as that term is defined in NI 43-101.
Mining
Underground mining operations at the Morococha property consist
primarily of typical overhand cut and fill, shrinkage, and mechanized room and
pillar methods using waste rock and tailings for backfill where needed. Holes
are drilled in the mining face using jacklegs which are loaded with explosives
and blasted twice per day between shifts. Slushers are used in the cut and fill
and shrink stopes to transport the broken rock to chutes that report to levels
with track haulage. Locomotives transport the ore from the chutes to one of
three shafts for hoisting. Highway dump trucks then haul the ore from shaft
coarse ore bins to mill stockpiles. In addition to the three main shafts, some
ore is also transported from certain sectors of the mine to stockpiles using
scoop trams. The mine operates two eight hour shifts per day, seven days a
week.
- 41 -
The Yauli, Maria and Central production shafts provide access down to
the Kingsmill drainage tunnel level at an elevation of 4,020 metres. The
Central shaft is located approximately 1,500 metres west of the Maria Shaft and
2,500 metres west of the Yauli shaft. The Maria and Central shafts are equipped
with above ground head frames, hoists and ore bins. The Maria Shaft has a
single split drum hoist with two 2.0-tonne skips. The Central Shaft is larger
with two split drum hoists. One hoist is fitted with two 3.5-tonne skips and
the other is used for men and materials. The Yauli shaft is equipped with two
2.6-tonne skips and its collar is located beneath the surface. Ore from the
Yauli shaft feeds into chutes from where it is then transported by a small
locomotive to an adjacent subsurface truck loading facility. The three shafts
have a combined capacity to support production schedules in excess of 600,000
tonnes per year.
The Morococha property includes the Sacracancha and Amistad process
plant facilities that are separated by approximately five kilometres. Both
process plants are conventional selective flotation facilities capable of
producing individual copper, lead, and zinc concentrates. These flotation
concentrates are shipped to third party smelters for final refining. In
December 2003, the Amistad plant became the primary milling facility for all
Morococha mine ores. Although much of the Amistad plant is at least 80 years
old and many repairs and upgrades are needed, Pan American has been able to
obtain satisfactory production and reasonable metallurgical performance with
the plant in its current condition.
Metallurgy
The metallurgy of the Morococha ore is highly variable according to
the mineral assemblage. There are numerous vein and manto deposits that form
the mineral reserves and resources of the Morococha property, each with unique
mineral assemblages. The former SMC staff developed individual metallurgical
projections according to the expected deposit mineral assemblages. These
projections have been established with consideration and experience of the many
years of operating results and testing of the various Morococha deposits. These
metallurgical performance projections are summarized in the following table:
Morococha Property
Metallurgical Projections (By Mine Area)
San San
units Manuelita Codiciada Sulfuruso Antonio Alapampa Yacumina Florencia
----- --------- --------- --------- ------- -------- -------- ---------
Ag Head Grade gpt 265 240 299 225 229 415 258
Pb Head Grade % 1.92 1.92 1.34 2.73 1.16 1.38 3.28
Cu Head Grade % 0.53 0.36 1.02 0.38 1.16 0.15 0.18
Zn Head Grade % 4.72 5.81 3.11 5.76 7.07 2.48 5.96
Cu Conc Grade % 24.2% 24.2% 28.5% 28.5% 28.5% 22.7% 21.4%
Pb Conc Grade % 53.9% 53.9% 54.0% 54.0% 54.0% 52.6% 52.2%
Zn Conc Grade % 50.2% 50.2% 50.4% 50.4% 50.4% 50.8% 53.9%
Ag in Cu Recovery % 55.9% 55.9% 59.1% 59.1% 59.1% 58.1% 56.5%
Ag in Pb Recovery % 22.7% 22.7% 18.1% 18.1% 18.1% 20.3% 28.2%
Ag in Zn Recovery % 6.9% 6.9% 9.6% 9.6% 9.6% 11.9% 5.0%
Overall Ag Recovery % 85.5% 85.5% 86.8% 86.8% 86.8% 90.3% 89.6%
Cu Recovery % 65.7% 65.7% 67.0% 67.0% 67.0% 52.5% 50.3%
Pb Recovery % 76.0% 76.0% 68.1% 68.1% 68.1% 82.7% 85.3%
Zn Recovery % 82.7% 82.7% 84.1% 84.1% 84.1% 77.0% 81.1%
- 42 -
Pan American carefully evaluated the metallurgical performance of the
Sacracancha process plant during the month of October 2003. The SMC
metallurgical projections from the table above were applied to the ore ton and
grade distributions by mine area to determine a weighted average metallurgical
performance projection for the ores treated at the Sacracancha plant during
October 2003. This projection was compared to the actual performance as
determined from the reported month-end metallurgical balance. Overall, using
common metal sales prices and marketing terms, the unit net smelter return on
an ore ton processed basis during October 2003 at the Sacracancha plant was
2.9% less than that predicted by the metallurgical projection targets used for
the Morococha reserve estimation.
Mine Plan and Development Program
Pan American has developed a long range mine plan and development
program for the Morococha property, based on an average production of 1,600
tonnes of ore per day through 2007 (40,000 tonnes per month, 480,000 tonnes
annually) and an average of 1,840 tonnes of ore per day from 2008 to 2018
(46,000 tonnes per month, 552,000 tonnes annually), assuming an average of 25
production days per month. Production is scheduled to come from all areas of
the Morococha operation at different levels through 2018. Following the
completion of this plan, Pan American has been able to identify some additional
production opportunities and now expect to process 522,000 tonnes in 2005.
The long range mine plan was completed based on the following prices:
silver - $5.00 per troy ounce; copper - $1,900 per tonne; lead - $600 per
tonne; and zinc - $900 per tonne.
The mine plan was sequenced using, in order or preference, proven and
probable reserves, measured and indicated resources, and finally, inferred
resources. Thus, the earliest years of the mine plan can be considered as a
short-term plan having a high degree of certainty. Total material processed in
the 15 year mine plan is approximately eight million tonnes. Of the total
material processed in the plan, 1.5 million tonnes (18%) are mineral reserves
and measured and indicated resources. The remaining 82% of the material
scheduled is inferred resources. A combination of diamond drilling in the first
two years and underground drifting for the entire mine life is included in the
plan to convert inferred resources to reserves prior to mining. SMC had not
historically recorded a running success rate regarding the conversion of
inferred resources to proven reserves, as SMC had not historically estimated
inferred resource data for the Morococha mine. Instead, SMC recorded the number
of tonnes of new reserves estimated for every metre of development advance. Pan
American's drifting program applies those historical conversion rates to the
inferred resources Pan American has identified. Pan American has assumed that
both diamond drilling and drifting would be accelerated in the first years of
the mine plan to extend the mine life beyond its present three year proven and
probable reserve life.
The mine plan and development program includes several capital
improvements designed to increase productivity. These include:
o Extending the length of the stopes to 70 metres which will result
in a 30% reduction of raise preparation.
o Implementation of development drilling to improve the development
performance ratio (tonnes of ore converted per metre of
development) to 55 tonnes per metre from the current 20 tonnes
per metre;
o Better control of external dilution in the Codiciada Alta,
Sulfurosa, and Alapampa areas (which averaged 8% in 2003),
bringing them in line with the Codiciada Baja, Manuelita, and
Yacumina areas, where the average excess external dilution in
2003 was minimal (0.06%).
o The development of additional ore passes and waste passes in 2004
and 2005 in Codiciada and Alapampa and in 2007 in areas of
Yacumina in order to reduce ore handling;
- 43 -
o Repairs to the Central shaft, including realignment of 150 metres
of timber and guides, electrical improvements to the hoist, new
cables, and installation of equipment that will provide for the
simultaneous hoisting of ore and waste, avoiding the current
necessity to campaign the separate materials;
o The development of main haulage levels in the lower areas of the
mine that will allow the use of 10-tonne trolley locomotives;
o The centralization of the ore flow to the Central shaft and the
Manuelita shaft, which will reduce ore handling; and
o Improvements to compressed air and drilling water supply
services, and ventilation.
Economic Analysis and Payback
Capital cost estimates for the mine, plant, infrastructure,
environmental and sustaining capital over three years total approximately $16
million. These capital expenditures are necessary in order to achieve the
overall long term planned production rate of 48,000 metric tons per month,
prepare the operation for sustained production beyond the three year proven and
probable reserve life and to achieve forecast cash flow.
Operating costs of the Morococha property over the three year period
during which the current proven and probable reserves would be mined are
estimated to be approximately $18.13 million, $18.77 million and $17.79 million
in each of the three years of the mine plan, respectively. This represents unit
operating costs per tonne of $38.62, $39.37 and $36.51 in each of the three
years of the mine plan, for an average unit operating cost per tonne of $38.15.
The operating cost assumptions were developed using source data provided by
SMC. Historic production basis and accounting costs records for SMC were
analysed and reconciled in order to obtain the most accurate present costs
incurred in the operations. Adjustments were made where it was estimated that
the costs under Pan American's stewardship will differ from SMC's costs. The
primary data source for the operating cost estimate was taken from actual costs
incurred from January to October in 2003. An increase of five percent was added
to the contractor's worker salaries, which results in an increase of 3.3% to
the unit costs. Cost estimates included provisions for administrative office
expenses, annual mining concession payments and insurance. The power supply
costs were based on a review of the expected power consumption using a
commercially available rate of $0.05326 per kilowatt hour. The operating costs
estimate also included costs for exploration drilling.
A cash flow forecast for the Morococha property was generated from the
June 30, 2003 proven and probable reserves estimate and a projection of the
December 31, 2003 proven and probable reserve base. The cash flow forecast
estimated net after tax cash flows of the future production profile
incorporating estimates for production rates, metallurgical performance, mined
ore grades, direct mine operating costs, development costs, exploration
drilling costs, general and administration costs, marketing costs, capital
expenditures, employee profit sharing and corporate income taxes. The three
year cash flow forecast totals approximately $9.3 million ($444,000 in year
one, $4,604,000 in year two and $4,258,000 in year three). This forecast cash
flow does not provide payback for Pan American's costs of acquiring Argentum
and Natividad based solely on the proven and probable reserves, as these only
provide for a three year mine life. However, the Company believes that
sustained mining will continue well beyond the life of the current proven and
probable reserves and has included development and sustaining cost provisions
based on this assumption.
The economics of the Company's long range, 15 year mine plan and
development program for the Morococha property is based upon the assumption
that future drilling and underground drifting will convert inferred resources
to reserves prior to mining at a rate similar to SMC's historic rate of
generating new reserves for every metre of development advance. The plan was
completed based on the following prices: silver - $5.00 per troy ounce; copper
- $1,900 per tonne; lead - $600 per tonne; and zinc - $900 per tonne. This mine
- 44 -
plan and development program is necessarily preliminary in nature, because it
includes inferred mineral resources that are considered too speculative
geologically to have the economic considerations applied to them that would
enable them to be categorized as mineral reserves. There is no certainty that
inferred resources will be converted to mineable reserves in sufficient
quantities to support Pan American's long range mine plan and development
program.
Mine Life
The estimated proven and probable reserves on the Morococha property
provide for a three-year mine life at Pan American's short-term planned
production rate of 40,000 tonnes per month. However, Pan American expects the
mine will continue to produce for at least 15 years as reserve definition
programs are carried out. Historically, most underground mines in mature mining
districts in countries such as Canada, the United States and Peru, have carried
no more than three to five years of proven and probable reserves ahead of
production. This is because of the very significant capital costs required to
maintain sufficient mine development to provide access for the drilling and
sampling required to support the conversion of indicated and inferred resources
to proven and probable reserves. As a result, at any given point in a typical
underground mine's life, a valuation of the mine based only on proven and
probable reserves would not be likely to justify purchase of the mine by a
third party. At Morococha, SMC has been successful at generating new reserves
to replace those mined each year. In Pan American's opinion, given the
demonstrated geologic potential of the district, this trend can reasonably be
expected to continue for the 15-year period in Pan American's long range plan.
Environment
The single largest environmental liability identified at the Morococha
mine is the mine's share of the cost of a proposed Kingsmill tunnel water
treatment plant which is estimated to cost $12 - $15 million to build. The
Kingsmill drainage tunnel discharges between 1.5 to 1.8 cubic metres per second
of water into the Rio Yauli and has been determined to be a significant
polluter according to studies performed in the late 1990s. Morococha's share
was defined by a study completed in 1997 by Water Management Consultants
("WMC"), which apportioned responsibility for the costs of the treatment plant
as follows:
o Centromin 72.2%
o Morococha operations 12.3%
o Soc. Minera Puquiococha 8.5%
o Soc. Minera Austria Duvaz 4.9%
o Minera Centrominas 2.1%
The capital and operating costs for the water treatment facility are
directly proportional to both constituent load and flow determined in the 1997
WMC study. Centromin has updated the 1997 WMC study, and the results are under
discussion. As part of its due diligence efforts, Pan American conducted its
own sampling of the Kingsmill tunnel discharge. Based on the results of this
sampling, which indicated an improvement to water quality since 1997, it
appears unlikely that the update will materially change the responsibility
calculations determined in the 1997 WMC study.
The Huascacocha Lake, which is adjacent to the Morococha mining
operations, has been used for tailings disposal since 1960. The facility has
additional capacity for 15 years of tailings once a dike raise is completed.
Initial deposition created a beach of tailings that eventually raised
environmental concerns related to dust and acid generation. WMC completed a
study in 2001 to determine what may be required to mitigate the historical
tailings. The WMC plan includes raising the dike to submerge a larger portion
of tailings and covering the remaining beach tailings with topsoil. The
estimated cost of the dike raise is $1.5 million. The share of responsibility
for this tailings mitigation has been allocated in the WMC plan as follows:
- 45 -
o Centromin 67.15%
o Morococha Operations 21.01%
o Soc. Minera Austria Duvaz 11.84%
Markets
Historically, part of SMC's production from the Morococha mine was
sold locally to the Doe Run smelter in Peru and Cajamarquilla refineries and
the balance was exported. Some of these marketing contracts were assumed by
Argentum from SMC. In the case of zinc concentrates, Argentum inherited
contracts until 2007 with such traders and refineries as BHL, Trafigura
(Cormin), Transamine, Mintrade and Umicore. In the case of lead concentrates,
Argentum has a Doe Run contract for part of the production that lasts through
2005. In the case of copper concentrate, Argentum inherited a contract with Doe
Run that lasts until 2006.
In addition to the Doe Run`s existing lead contract, Argentum has
recently signed another lead contract with Doe Run for 2004 through to 2007.
From July 1, 2004 to December 31, 2004, the revenue per type of
concentrate produced by the Morococha mine was as follows:
Average
Sales Price
Revenue Tonnes per Tonne
------- ------ ---------
Zinc Concentrate $4,552,135 16,323 $279
Lead Concentrate $4,622,962 5,295 $873
Copper Concentrate $7,236,354 2,877 $2,515
Stockpiles
Pan American transports and sells silver-rich pyrite Stockpiles at a
small-scale operation in central Peru. These operations are not material to the
Company.
The Stockpiles were accumulated over several years by Volcan, a
Peruvian mining company which is one of the largest silver producers in the
Cerro de Pasco mining district in central Peru. Until recently silver could not
be extracted from the Stockpiles by standard metallurgical processes.
On November 8, 2002, Pan American entered into two agreements to
acquire the Stockpiles. The first agreement grants Pan American the right to
mine and sell 600,000 tonnes of the highest grade silver Stockpiles to a
smelter, where ore is used as process flux and Pan American is paid for the
silver contained. A ten-year contract to process the Stockpile material was
negotiated with Doe Run's La Oroya smelter. Production from the Stockpiles in
2003 totalled 68,388 tonnes of ore containing 810,829 ounces of silver. For
2004, Stockpile sales were 79,451 tonnes resulting in silver production of
961,869 ounces of silver. Pursuant to the agreement, Pan American is required
to pay Volcan 33.3% of the net cash from Stockpile sales after taxes and costs,
once Pan American generates $4.5 million net cash after taxes and costs from
Stockpile sales. In December 2004, these payments to Volcan began.
The second agreement gives Pan American the option to acquire a 60%
ownership in a number of other Stockpiles by spending $2 million on exploration
over three years, with a further option to increase its interest to 100% by
paying $3 million plus a production royalty within the following 12 months. Pan
American has begun detailed definition drilling to confirm estimated resources
and will perform metallurgical studies and an economic evaluation as to whether
silver can be commercially extracted from these additional Stockpiles.
- 46 -
Pan American's management has estimated mineral reserves and resources
at the Stockpiles, as at December 31, 2004, to be as follows:
Stockpile Mineral Reserves and Resources(1), (2)
------------------------------------------------
Grams of Silver
Reserve or Resource Category Tonnes per Tonne
---------------------------- ------ ---------
Probable Reserve 442,549 302
Inferred Resource 21,337,000 162
---------------------
(1) Calculated using a price of $5.50 per ounce of silver.
(2) Mineral reserves and resources have been calculated by staff
of Pan American Peru, under the supervision of an independent
"qualified person", Donald F. Earnest, P. Geo. Mr. Earnest
reviewed and tested the information prepared by the Company's
subsidiary and, based upon those reviews and tests, Pan American
is satisfied with the accuracy of the reserve calculations.
Reserve/resource estimates for the silver Stockpiles were
prepared in previous years, and are adjusted for 2004 production
where applicable
Metals Trading
Pan American engages in hedging base metal prices for production from
its mines.
During 2004, the Company settled 16,260 tonnes of zinc hedges at an
average price of $943 per tonne and 10,290 tonnes of lead hedges at an average
of $728 per tonne.
At December 31, 2004, the Company had sold 22,200 tonnes of zinc
forward at an average price of $1,092 per tonne and 4,000 tonnes of lead
forward at an average price of $726 per tonne.
Pan American does not engage in any hedging of its silver production.
Development Projects
Alamo Dorado Project
Ownership and Property Description
The Alamo Dorado Project is located 60 kilometres south-southeast of
the town of Alamos in the southeast corner of the State of Sonora, near the
border with the State of Sinaloa in northwest Mexico at 26(0), 44', 44.2" North
Latitude and 108(0), 40', 00.7" West Longitude.
The Alamo Dorado Project consists of two contiguous exploitation
concessions, the 509 hectare Alamo Ocho Concession and the 4,865 hectare Alamo
Dorado Concession, five non-contiguous exploration concessions covering 6,014
hectares, and surface rights covering 763.64 hectares. All of the mineral
reserves and resources for the Alamo Dorado Project lie within the boundaries
of the Alamo Ocho and Alamo Dorado concessions and these surface rights. The
Alamo Ocho Concession expires in 2050, the Alamo Dorado Concession expires in
2054 and the five exploration concessions expire between July 2007 and June
2009. The Alamo Ocho Concession was purchased by Corner Bay from Alfredo Duran
Viramontes and Roberto Duran Viramontes for $425,000 in semi-annual payments
from 1997 to 2002 and a balance payment of $300,000, all of which have been
paid.
To the best of Pan American's knowledge, there are no royalties or
encumbrances that affect the Alamo Dorado Project.
- 47 -
Pan American is well advanced on the acquisition of all permits
necessary for the operation of Alamo Dorado. A conversion of Corner Bay's
existing temporary land use permit from SEMARNAT, the Mexican national
environmental agency for the proposed mine, to "construction status" was issued
in December 2004. Corner Bay also submitted, and SEMARNAT approved, a land use
permit modification for the milling scenario with dry stack disposal of
non-hazardous tailings in an unlined facility in January 2005. Corner Bay has
also secured a permit from INAH, the Mexican national archeological and
historical institute, for the Alamo Dorado mine site area and a blasting permit
from SEDENA, the Mexican national secretary of defence. An Environmental Impact
Assessment for a power line right of way has been completed and an application
for the land use permits for water line construction are progressing. Other
necessary construction permits are pending completion of basic design details.
Corner Bay has an existing agreement with SEMARNAT for compensation
activities in mitigation for the environmental impact of the Alamo Dorado
project. This agreement will be renegotiated in light of the revised land use
permit, which involves the impact of significantly less area.
Location, Access, Climate and Infrastructure
The Alamo Dorado Project can be accessed from the United States via
toll highway 15 which is a well-maintained, four-lane, paved road that starts
at the border town of Nogales, Sonora. The project is 67 kilometres southeast
of the town of Alamos on maintained dirt roads. Certain access routes have low
water crossings that will be impassable during short periods of the monsoon
season. During these periods, personnel will access the site solely via a route
which includes a bridge suitable for passenger vehicles, but which would not be
used for bulk consumable shipments. Major airports in the state of Sonora are
located in Hermosillo in the central sector of the state, and Ciudad Obregon to
the south. The airport at Ciudad Obregon is approximately 75 kilometres north
of Navojoa.
The climate of the Alamo Dorado Project area is transitional between
the tropical climates further south and the subtropical desert lands typical of
the Pacific Coast of Baja, California. The area is generally dry with the
warmest period occurring between March to July. Precipitation occurs during a
short but intense rainy season that extends from July through September.
The terrain in the vicinity of the Alamo Dorado Project site consists
of moderate to steep foothills that characterizes the area located between the
coastal plain of the Sea of Cortez to the west and the Sierra Madre Occidental
mountain range to the east. Local relief ranges from 300 metres above sea level
to approximately 550 metres above sea level at the top of Cerro Colorado Ridge
in which the Alamo Dorado deposit occurs. The tops of the hills consist
primarily of unmineralized bedrock exposures with flanks that are covered by
coarse colluvium. Drainages in the nearby valleys are typically incised about
two-to-four metres in depth, indicative of shallow bedrock and relatively high
rainfall runoff.
The site currently contains no existing infrastructure other than
unimproved access roads and an explosives magazine which was constructed during
2004 as a part of the process of obtaining approval of the SEDENA explosives
storage and use permit. The project will require a 115 kva power transmission
line to be constructed, which will start near the Miguel Hidalgo hydroelectric
station 35 kilometres away. The most feasible water supply option for the
project appears to be drilling ground water wells in an aquifer west of the
project site. In addition, an existing smaller supply potable water well is
located near the plant. In the short term, this water will be used for
construction. The water rights for the groundwater wells are being secured from
the Mexican national water commission and owners as required.
- 48 -
History
Prior to 1997, there is no record of any modern exploration conducted
on the Alamo Dorado Project nor are there any records of production, although
there is evidence of a few old adits in the general area. All recorded drilling
at the property has been undertaken since 1997.
Geologists from Corner Bay visited the property in 1997 and collected
some grab samples from various locations along the north trending ridge.
Encouraged by the positive assay results from those samples, Corner Bay began a
systematic surface sampling program and eventually obtained an agreement to
purchase the Alamo Ocho concession from the owners. The surface sampling
program outlined a 300-meter-long north-south trending silver-gold anomaly
situated along the east side of the Cerro Colorado Ridge.
Exploration on the Alamo Dorado Project has been comprised primarily
of reverse circulation drill campaigns conducted annually from 1998 to 2001. A
structural geology examination of the property was undertaken in 2000 through
mapping of surface exposures along drill access roads. A more comprehensive
1:2500 scale geologic mapping program was conducted in 2001 over an area of
about four square kilometres in the project area. Results established surface
extents of the volcanic lithologic units, cross cutting dykes and alteration
patterns and provided a linkage for the interpretation of the drilling
geological data. Exploration that was completed through 2002 formed the basis
for Mintec to create a resource model for the property. Corner Bay also
contracted with AMEC Engineers to conduct and complete a feasibility study for
a heap leach operation with 35,504 million tonnes of 68 g/t silver ore reserve.
Mintec's resource model supported the AMEC study. The study was completed in
June 2002.
On February 20, 2003, the Company acquired Corner Bay pursuant to a
plan of arrangement under the Canada Business Corporations Act, and in
connection therewith the Company issued 7,636,659 common shares and 3,818,329
common share purchase warrants exercisable for a period of up to five years at
a price of $12.00 per common share. The Company also granted options to
purchase up to 553,847 common shares of the Company to former employees of
Corner Bay.
In 2003 Pan American contracted with SRK Engineers to perform a
structural evaluation of Alamo deposit. The SRK study concluded that reserves
were structurally controlled rather than disseminated as previously
interpreted. Mineralization was found to be generally higher grade along
structurally controlled zones and not a lower grade disseminated deposit as
previously interpreted. This raised the prospect that the mineralization might
be better suited to a milling type operation rather than a heap leach
operation, as previously interpreted.
Resource Modelling Inc. ("RMI") was contracted by Pan American in 2003
to construct a new resource model using the revised structural interpretation
of the mineralization. RMI's new resource model reduced the overall silver
resource on Alamo Dorado by approximately 40%, primarily due to the loss of
approximately half of the previously interpreted gold mineralization.
An infill drilling program was conducted on the Alamo Dorado
concession in the first half of 2004 in order to confirm the revised
interpretation of the reserves, and to provide core samples for the
metallurgical testing needed for design of a mill and recovery plant.
In 2004, AMEC Engineers was contracted by Pan American to conduct a
study to confirm whether a milling operation was the optimum type of recovery
operation for the Alamo Dorado mining project. This study indicated that
project economics could be improved by using grind-leach circuits in a mill
instead of the previously evaluated heap leach concept. In August, 2004, AMEC
completed a throughput tradeoff study for the milling option which indicated
that a 4,000 ton per day throughput was the optimum production rate for a
milling circuit.
- 49 -
In September 2004, Pan American commenced an update of the Alamo
Dorado Feasibility Study for a new project based upon the revised resource
model, and a conventional milling and leaching circuit. A number of consulting
firms were engaged to collaborate on the study, including:
o AMEC Engineers for mine design, mine planning, process design
and initially for feasibility study coordination;
o RMI for final resource model;
o M3 Engineers for project capital cost estimate, preliminary
design and estimates for power supply and water supply;
o AMEC Earth and Environmental for geotechnical evaluation,
groundwater evaluation, tradeoff studies for tailings disposal,
and final design of the tailings disposal facility;
o Pan American conducted permitting for the revised project,
mining equipment selection and completed the overall financial
evaluation and analysis of the project;
o PRA Laboratories for conduct of pilot plant testing of leaching
and AVR;
o Elbow Creek Engineering for pilot plant and preliminary
engineering of the AVR circuit;
o Summit Valley Engineering for preliminary design of the direct
electrowinning circuit;
o Lakefield Research for grinding circuit design; and
o Hubbard Consulting for pilot plant coordination and process
design.
In late December, 2004, Pan American completed a scoping study of the
4,000 ton per day milling operation which indicated encouraging project
economics. Pan American management concluded that the project feasibility study
should be accelerated in order to bring the project design to a satisfactory
level for investment decision in the first quarter of 2005.
Geology and Mineralization
Regionally, the Alamo Dorado Project is located in the Sierra Madre
Occidental Range, a late Cretaceous to Tertiary age volcanic province that
extends for hundreds of kilometres through northwestern Mexico. The volcanics
overlie a basement of Paleozoic and Mesozoic metamorphic rocks that have been
locally intruded by various Cretaceous intrusions. The volcanic sequence has
been grouped into lower and upper units based on the different styles of
volcanism that are present.
Mining districts in the Sierra Madre Occidental province are typically
located along sheared and faulted structural zones formed in the Lower Volcanic
Sequence, and to a lesser extent, within the granitic intrusives.
Alamo Dorado deposit lies within Jurassic metavolcanic rocks, the
youngest member of a Precambrian thru to Mesozoic aged metamorphic and
sedimentary sequence of gneisses, metasedimentary and metavolcanic rocks. This
sequence is underlain by an extensive Late Cretaceous or Tertiary age granite -
granodiorite, likely part of the Sonoran Batholith. The property geology
consists of a complex of ductilely deformed and metamorphosed felsic
metavolcanic and high-level intrusive rocks which have been intruded by, and
essentially engulfed by, a younger, relatively undeformed granitic pluton
(Sonoran Batholith unit). The felsic metavolcanic units comprise rhyolitic to
- 50 -
rhyodacitic high level intrusive rocks to sill-like bodies, and lesser dacite,
rhyolite, rhyodacite tuffs. Cross-cutting rhyolite and andesite dykes also
occur.
The silver-gold mineralization at Alamo Dorado is predominantly
fracture-controlled and associated with moderate to intense pervasive
silification. About 50 percent of the silver mineralization is in strongly
fractured rhyodacites and about 30 and 10 percent in the rhyolites and dacites,
respectively. The main silver mineral at Alamo Dorado appears to be
chlorargyrite which is a silver mineral derived from a silver chloride complex
occurring along with the quartz-pyrite minerals filling the fractures. The gold
mineralization occurs as free, micron-size particles and/or in the crystal
lattices of micro-crystalline pyrite.
Drilling, Sampling and Analysis
The Alamo Dorado Project has been evaluated in five separate drilling
campaigns using reverse circulation (RC) drilling techniques and diamond drill
coring methods. A total of 79 drill holes were drilled on the property in 1997:
75 RC holes and four core holes. The 19 discovery drill holes were drilled in
1998 and 11 of the 19 holes were deepened in 1999. An additional 23 new RC
drill holes were drilled in 1999, along with four large diameter core holes.
The core drilling was specifically for metallurgical testing. In 2000, 14
previously drilled holes were deepened and 25 new RC holes were drilled. Eight
more RC holes were drilled in 2001. In 2004 infill core holes were drilled for
confirmation of the new resource model, and for physical samples needed for
milling, leaching and pilot plant testing.
Drilling totals 31,604 metres in 130 drill holes. The holes generally
range in length from 90 to 390 metres, averaging 243 metres. Drill holes were
drilled at a declination of between 38(degree) and 70(degree), with a single
vertical hole. The major bearing was easterly with a subordinate number of
holes drilled from the west. Drill hole collars were located respective to a
property grid.
Standard logging and sampling conventions were used to capture
information from the cuttings and drill core. Inspection of the model and drill
hole data in plans and sections, together with the spatial statistical work
showed reasonable geologic and grade continuity in the main area of
mineralization.
A reasonable program was conducted to assure the quality of its sample
preparation and assaying. The routine assaying was done at Bondar Clegg, a
recognized assay laboratory. This laboratory performed duplicate assays on
course reject material, and the precision of these duplicate assays
(approximate 15% relative standard deviation of pair differences) is typical of
that achieved for similar deposits within the mining industry. Check assays
were done on pulps at a number of laboratories. The vast majority of these
checks confirm the original assays which will be used to perform resource
estimation. A small percentage of potentially contaminated assay intervals were
identified in RC holes, all within zones drilled under wet conditions. These
data were set to zero for the purpose of reserve and resource estimation.
Resulting reserve and resource estimates could be considered to be slightly
conservative. It is management of Pan America's opinion that the Alamo Dorado
project's quality assurance program meets industry standards.
Data verification and quality assurance/quality control (QA/QC) checks
were performed on various occasions by AMEC Engineers on different vintages of
the Alamo Dorado database. The bulk of the assays in the database were examined
in 2002 by AMEC Engineers as a part of a feasibility study that was undertaken
by Corner Bay. In addition, RMI selected 21 drill holes so that AMEC Engineers
could perform an assay verification check. These holes were selected from all
of the major drill campaigns and were spatially located throughout the deposit.
These QA/QC checks meet industrial standards.
Based on these various data verifications that have been conducted by
AMEC and to a limited extent by RMI, the Alamo Dorado assay database has been
shown to be accurate and suitable for use in estimating resources. Very few
- 51 -
errors have been found with respect to the assay values that are stored in the
electronic database versus certified assays.
Mineral Reserves
Pan American's management estimates that proven and probable mineral
reserves at the Alamo Dorado project as at December 31, 2004 are as follows:
Alamo Dorado Mineral Reserves (1), (2)
--------------------------------------
Grams of Silver Grams of Gold
Class Reserve Category Tonnes per tonne per tonne
----------------------- ------ --------- ---------
Proven 1,019,000 136 0.43
Probable 10,591,000 116 0.32
-------------------------------------------------------------------------------------
TOTAL 11,610,000 118 0.33
-----------------
(1) Calculated using a price of $5.50 per ounce of silver and $375 per ounce of gold.
(2) Mineral reserve estimates for Alamo Dorado were prepared under the supervision
of, or were reviewed by, Michael Steinmann, P. Geo., Vice President Geology -
Operations and Martin G. Wafforn, P. Eng., Director of Mine Engineering as
Qualified Persons as that term is defined in NI 43-101.
Mineral Resources
Pan American's management estimates that mineral resources at the
Alamo Dorado project as at December 31, 2004 are as follows:
Alamo Dorado Mineral Resources (1), (2)
---------------------------------------
Grams of Silver Grams of Gold
Class Reserve Category Tonnes per tonne per tonne
----------------------- ------ --------- ---------
Measured 263,000 84 0.31
Indicated 3,610,000 71 0.23
Inferred 518,000 79 0.30
-------------
(1) Calculated using a price of $5.50 per ounce of silver and $375 per ounce of gold.
(2) Mineral reserve estimates for Alamo Dorado were prepared under the supervision of,
or were reviewed by, Michael Steinmann, P. Geo., Vice President Geology - Operations
and Martin G. Wafforn, P. Eng., Director of Mine Engineering as Qualified Persons
as that term is defined in NI 43-101.
Mining
Alamo Dorado will be a conventional surface mine, using a 7.5 cubic
metre hydraulic shovel, front end loader and 60 ton mechanical rock trucks for
the principal earthmoving. The plant is designed to mill 4,000 tonnes per day,
and the average strip ratio in the current mine plan of 1.65 to 1 waste to ore
ratio requires an average earthmoving capacity requirement of 10,000 to 12,600
tonnes per day. The equipment fleet selected for Alamo Dorado can comfortably
produce at these levels.
The mine will be developed in two phases, with an initial pit designed
to develop downward into the deeper, higher grade reserves as rapidly as is
practically possible, and a second phase of development, balancing the material
movements with the first phase which will expand the pit to its final highwall
and depth. The configuration of the ore deposit is such that the mining
operation must startup approximately one year ahead of the milling operation in
order to expose sufficient reserves to be able to maintain consistent ore
production from the outset of milling operations. Since commitments have been
made for key mining equipment, the critical path toward commissioning and metal
- 52 -
production is actually in the design and construction of the plant. Currently
Pan American forecasts plant startup in the fourth quarter of 2006. Adhering to
that schedule requires mine startup in October 2005 in order to pre-strip
approximately two million tons of waste and 250,000 tons of ore prior to plant
startup. On that basis, the mine will comfortably stay ahead of plant
requirements for the life of the project.
The estimated eight year life of Alamo Dorado's reserves at the
current design levels will allow the project to operate over the life cycle of
the mine (including 18 months of development and mine pre-stripping) with
essentially the same fleet, and not require significant capital for equipment
replacement. In order to have the necessary equipment on schedule to commence
mining operations by the fourth quarter of 2005, the following critical
components of the mining fleet and plant equipment were secured for the Alamo
Dorado Project: a fleet of six CAT 773 haul trucks; a CAT 990 front end loader;
a Euclid R35 water truck; a Grove 55 ton crane; an EX1200 Hitachi 7.5 metre
hydraulic mining shovel; an Ingersoll Rand DM 45 blast hole drill; a CAT D9H
bulldozer; a used 42x68 Gyratory Crusher; a completely equipped site laboratory
and building; and a truck shop/warehouse facility.
Milling
Ore from the Alamo Dorado deposit will be treated by conventional
crushing and SAG/Ball mill grinding to -74 um, followed by thickening, agitated
cyanide leaching leach residue filtration, direct electrowinning to produce a
cathode sludge, AVR cyanide recovery and recirculation, leach residue washing
with AVR product solutions, dry stack tailings and conventional silver and gold
dore bar production from melting of the cathode sludge. The nominal treatment
rate will be 4,000 tonnes per day of ore on a 24-hour per day schedule. The
mine's tailings treatment process is expected to recover at least 97.5% of the
sodium cyanide used and also neutralize mill tailings, thus reducing the mine's
environmental impact and reclamation costs.
The design of a dry stackable tailings facility consists of downstream
constructed embankment that will buttress the moist tailings cake placement.
The impoundment area for tailings placement will not be lined given the
expectation that the moist cake will meet non-toxic classification as confirmed
with samples from the pilot plant. A series of lined collection channels will
be used to collect and channel seepage beneath the facility into a lined
collection pond below the embankment. This collection pond will be equipped
with a pump to transfer solutions back to the mill and reduce overall mill
make-up water requirements.
Metallurgy
As a part of the new feasibility work, Pan American conducted a pilot
scale demonstration of the leaching, filtering and AVR process technology which
was selected for the project. In addition, the solutions produced in the pilot
plant were used for laboratory scale testing of the electrowinning technologies
under consideration, and tailings samples were taken for physical, chemical and
environmental characterization. Results of the pilot plant tests were
satisfactory and substantiated the estimates and forecasts in the feasibility
study.
Economic Analysis and Payback
The capital cost estimate for construction of the Alamo Dorado mine
totals $76.6 million, broken down as follows:
- 53 -
Capital Cost
Items (in Millions)
----- -------------
Mine $ 10.2
Pre-Stripping $ 2.1
Plant & Tailings $ 42.3
Infrastructure $ 9.5
EPCM $ 5.3
Owner's Cost $ 3.8
Spares & First Fills $ 2.7
Working Capital $ 0.7
-------------------- ------
Total Capital $ 76.6
Accuracy of the foregoing capital costs is estimated to be -15% to +10%.
Accuracy will be largely determined by bidding climate, method of contracting,
compliance with project schedule and completeness of engineering construction
documents. These costs are in first quarter 2005 US dollars and no allowance
has been made for escalation. Pan American will fund the project from its cash
reserves.
Construction is expected to take 15 to 18 months. Production is
expected to commence in late 2006 and it is estimated that Alamo Dorado will
produce 11.6 million tonnes of ore over a 9.1 year period (including
pre-stripping) with an average grade of 118 grams of silver and 0.33 grams of
gold per tonne. Average annual operating costs over the life-of-mine are
estimated to be approximately $18 million, comprised of annual mining costs of
approximately $4.1 million ($2.86 per tonne of ore milled), processing costs of
approximately $12.2 million ($8.45 per tonne milled) and general and
administrative costs of approximately $1.7 million. Alamo Dorado is estimated
to contribute approximately five million ounces of silver production annually
to Pan American at a cash cost of less than $3.25 per ounce of silver, net of
gold by-by-product credits, over the mine life of eight years (not including 18
months of development and mine pre-stripping). In today's silver price
environment of $7.00 per ounce, the Alamo Dorado project generates a 16% return
on investment and undiscounted net cash of $68.5 million over the project life.
At the Company's current long term price assumption of $5.50 per ounce of
silver, the project generates $22.6 million of undiscounted cash flow for a
return of 5.7%. The expected payback for the project is four years at current
metal prices.
Environment
The original environmental permitting work considered options
developed for the 2002 Feasibility Study, and was provided by Corner Bay in
conjunction with Agauyo Consultoria Ambiental, Corner Bay's environmental
consultant and coordinator. AMEC reviewed the environmental impact statement
and risk assessment study, as well as ancillary documents submitted by Corner
Bay to the Mexican Secretary for Environmental and Natural Resources
("SEMARNAT") to identify potential major deficiencies and for appropriateness
for permitting Alamo Dorado. Environmental impacts arising from the development
of the mine are greatly outweighed by the overall benefits. SEMARNAT
recommended a finding of no significant impact in the original impact
statement/permitting document. Following completion of the updated feasibility
study, the original environmental impact statement and risk assessment study
documents were revised, resubmitted and approved by SEMARNAT.
Investment, Exploration and Resource Properties and Expenditures
Pan American owns interests in a variety of exploration, investment
and resource properties in Argentina, Bolivia, Mexico, Peru and the United
States. A brief description of the most advanced of these properties follows:
- 54 -
Manantial Espejo Project
Our 50% owned Manantial Espejo property is located in southern
Argentina in the province of Santa Cruz, entered at longitude 69(0) 30' west
and latitude 48(0) 46' north. The nearest major city is Puerto San Julian,
located on the Atlantic coast, 160 kilometres east of the property.
The Manantial Espejo property consists of 17 mineral concessions
covering a total of 25,533 hectares, extending 36 kilometres east-west and 19
kilometres north-south. The mineral concessions forming Manantial Espejo are,
by law, subject to minimum expenditure requirements with respect to which Pan
American has entered an alternate agreement with the government of Argentina.
Pan American is in compliance with such agreement.
Exploration was first carried out on the property in the 1970s by the
Argentine government. Subsequent mineral exploration on the Manantial Espejo
property was carried out by St. Joe Minerals Corp., Lac Minerals Ltd., Barrick
Gold Corporation, Triton Mining and our 50% joint venture partner, Silver
Standard Resources Inc. To date, a total of 685 drill holes totalling
approximately 75,000 metres have been completed on the Manantial Espejo
Project, excluding the wagon drill holes completed by St. Joe Minerals Corp.
Mineralization at Manantial Espejo is hosted in four main veins: the
Maria Vein, Karina/Union Vein, Melissa Vein and Concepcion Vein. The majority
of the mineralization outlined to date is in the Maria Vein. The vein is a
thick multiphase silica vein exposed on surface for more than 1.0 kilometre and
has been intersected at a depth of up to 275 metres. This vein averages 7.8
metres in true thickness width ranging from 0.63 metres to 20 metres. The vein
is open to the east and at depth.
The Maria Vein exhibits two quartz textures, older quartz which may
also contain grey silica, amethyst and vuggy quartz, and younger sulphide-rich
vein quarts breccia that often crosscuts the earlier vein and carries fragments
of it. Sulphide content is low and is primarily three to five percent pyrite.
Minor amounts of galena, sphalerite, chalcopyrite, bornite, chalcocite and
covellite have been observed.
Silver occurs as electrum along with minor amounts of argentite,
acanthite, sulfosalts, and prousite-pyrargerite. Gold occurs as electrum
inclusions contained in pyrite. Very minor visible gold in the 200-micron size
has been observed in drill core along goethite-coated fractures.
The Karina/Union Vein is exposed on surface for a distance of 850
metres and has been drilled to a depth of 150 metres. The host rocks,
alteration and mineralogy of the vein is similar to the Maria Vein. Several
interconnected high grade silver-gold epithermal veins produce drill
intersections in excess of 20 metre true widths.
The Melissa Vein has a faint surface expression that rarely outcrops.
The trend of the 1.5 to 2.5 metre-wide high-grade silver-gold epithermal
Melissa system has an 80 degree strike with a steep northerly dip. The
mineralization and host geology is very similar to that encountered at the
Maria Vein. Structurally, Melissa is thought to be the extensional component to
the Maria shear system. The Melissa Vein has been defined by drill holes along
a 300 metre strike length and 200 metre down dip.
The Concepcion Vein is a single quartz vein. Mineralization occurs
over a strike length of 600 metres and is open at depth and at both ends. The
host rocks, mineralogy and alteration are similar to the other veins on the
property.
In late 2003, Pan American Silver and Silver Standard Resources Inc.
made a decision to initiate a feasibility study on the Manantial Espejo
property. Feasibility activities in 2004 included the following:
- 55 -
o Completion of 19,600 metres of infill, extension and exploration
drilling. This drilling resulted in a 25% increase in measured
and indicated resources. The measured and indicated resource
growth was attributable to a combination of infill drilling and
the inclusion of the Melissa deposit.
o All environmental baseline studies were essentially completed to
allow for timely submittal of Project permit documents.
o Feasibility level flowsheet development metallurgical testing
was completed. This testing confirmed previous gold recovery
estimates and indicates potentially improved silver recoveries
at a coarser primary grind.
o Completed geologically constrained and diluted resource
estimates for the Maria, Karina Union, Melissa and Conception
deposits.
o Completed feasibility level pit slope stability work.
o Developed methodology for optimization of open pit versus
underground mine development. Results indicate project economics
will likely be improved by utilizing a combination of
underground and open pit mining.
o Completed 1,100 metres of water exploration drilling. Drilling
indicates likely success in pursuing structurally controlled
groundwater associated with the mineral deposits.
o Finalized the purchase of the 6,750 hectare land package
directly overlying all reported resources.
o Community relations activities have been initiated to insure
community support should a positive production decision be made.
o Completed a comprehensive project scoping study in September of
2004. This study was utilized to focus ongoing exploration and
engineering optimization studies. The study also highlighted
potential tax and infrastructure issues for possible Argentine
Government participation. Based on scoping work, formal
presentations and were made to various Provincial and National
Government representatives to petition support.
o Formal searches have been initiated to fill key project
development staff positions. Positions include the
Administration, Environmental, Human Resources and Community
Relations Managers.
Pan American's management estimates that mineral resources at
Manantial Espejo as at December 31, 2004 are as follows:
Manantial Espejo Mineral Resources (1), (2)
-------------------------------------------
Resource Grams of Silver Grams of Gold
Category Tonnes per Tonne per Tonne
-------- ------ --------- ---------
Measured 2,360,000 174 2.46
Indicated 1,969,000 160 2.20
Inferred 821,000 158 1.88
---------------
(1) Calculated using a price of $5.50 per ounce of silver and $375
per ounce of gold.
(2) Mineral resource estimates for San Vincente were prepared under
the supervision of, or were reviewed by, Michael Steinmann,
P. Geo., Vice President Geology - Operations who is a Qualified
Persons as that term is defined in NI 43-101.
- 56 -
Pan American plans to spend approximately $3.0 million at Manantial
Espejo in 2005 (representing Pan American's 50% share of joint venture costs)
to continue exploration drilling, initiate underground development activities
and to complete the project feasibility study. Completion of the feasibility
study is currently scheduled for the third quarter of 2005.
San Vincente Project
In late 2001, Pan American and COMIBOL, the Bolivian state mining
company that optioned the San Vincente property to Pan American, entered into a
two-year toll mining agreement with EMUSA, a well-established Bolivian mining
company, to process up to 250 tonnes of San Vincente's ore per day at EMUSA's
nearby mill. Pan American did not take credit for silver ounces produced by
EMUSA's toll mining operation, but booked proceeds derived from a gross revenue
royalty. Pan American earned $422,000 in cash from San Vincente toll mining in
2003, which more than offset the project's holding costs. On October 30, 2003,
mining activities related to the two-year toll mining agreement were completed.
During 2003, a total of 108,809 tonnes of ore was processed under the agreement
at an average mill feed grade of 400 gpt silver and 3.45% zinc.
On November 1, 2003 Pan American entered into a share purchase
agreement with EMUSA, whereby EMUSA could acquire up to 49% of the outstanding
shares of Pan American Bolivia. This agreement required EMUSA to fund
feasibility and development related expenses to an aggregate of $2,500,000 by
May 1, 2005.
In late 2003, Pan American, EMUSA and underlying property holder
COMIBOL agreed to a program of limited scale mining at San Vicente with a toll
milling operation at the nearby EMUSA flotation plant. The project ran from
March through December of 2004 during which time it produced 54,033 tonnes of
ore at 417 g/t silver and 5.79% zinc. Pan Americans share of the cash flow from
the project was an estimated $ 766,000 which more than offset project holding
costs.
Feasibility study activities continued in 2004 with 13,919 metres of
surface and underground diamond drilling, 2983 metres of underground
development and resampling of historical reserve blocks for purposes of
resource definition and exploration. Metallurgical studies were conducted at
the TECSUP laboratories in Peru and results of flotation tests indicated that
the +82% zinc and silver recoveries seen at the EMUSA plant during the year are
reasonable feasibility level assumptions.
As part of its earn-in agreement, EMUSA funded all Feasibility Study
activities in 2004 and they vested as a 38% owner of Pan Americans Bolivian
subsidiary in October. As of years end, EMUSA had invested $2.34 million of the
$2.5 million required to vest as a 49% owner of Pan American Silver Bolivia,
and EMUSA indicated that they intended to proceed with the remaining investment
to acquire a 49% interest.
A scoping study completed in 2000 anticipated that five million tonnes
of ore could be processed through a newly constructed 1,300 tonne per day
plant. The results of the exploration and development activities concluded an
indicated a resource of approximately half of the amount anticipated in the
scoping study. This result led to a proposal to COMIBOL in November of 2004 for
a renegotiation of Pan American's investment commitment to the Joint Venture
that would be more appropriate to the size and character of the ore body. At
year-end 2004, COMIBOL was still considering the proposal.
- 57 -
Pan American's management estimates that mineral resources at San
Vincente as at December 31, 2004 are as follows:
San Vincente Mineral Resources (1)
----------------------------------
Resource Grams of Silver
Category Tonnes per Tonne
-------- ------ ---------
Measured 607,000 363
Indicated 677,000 519
Inferred 236,000 563
---------------
(1) Mineral resource estimates for San Vincente were prepared under
the supervision of, or were reviewed by, Michael Steinmann,
P. Geo., Vice President Geology - Operations who is a Qualified
Persons as that term is defined in NI 43-101.
United States Investment Properties
Pan American owns interests in two investment properties in the United
States, neither of which are material to the Company. A brief description of
the resources of these properties follows:
Reserve or
Resource
Property Location Type Category (1) Tonnes g/t Ag By-Products
-------- -------- ---- --------- ------ ------ -----------
Hog Heaven(6) Montana stockwork M&I resource 2,741,000 170 0.69 g/t Au
stockwork Inf. resource 7,439,000 141 -
Waterloo(6) California stockwork Ind. resource 33,758,000 93 -
----------------
(1) Resources for Hog Heaven and Waterloo are based on historic estimates prepared by CoCa Mines
and American Mine Services in 1988 as part of a feasibility study in the case of Hog Heaven
and exploration records of ASARCO Incorporated in the case of Waterloo. Pan American believes
these historical estimates to be relevant and reliable.
Mineral Property Expenditures
The following table sets out Pan American's acquisition, exploration
and development expenditures for the periods indicated:
- 58 -
Years Ended December 31
-----------------------
(in thousands of U.S. dollars)
2004 2003
---- ----
Acquisition:
Morococha $36,871 $ -
Corner Bay - 64,910
---------------------------------------------------------
36,871 64,910
---------------------------------------------------------
Development:
Huaron 5,543 4,907
Quiruvilca 984 2,283
La Colorada 8,474 12,263
Alamo Dorado 1,676 738
---------------------------------------------------------
17,043 20,191
---------------------------------------------------------
Exploration:
San Vicente 482 906
La Colorada - 172
Manantial Espejo 2,663 956
Ocotlan - -
Turkey 540 131
Morococha - 240
Other 72 56
---------------------------------------------------------
3,757 2,461
---------------------------------------------------------
Investment:
Waterloo 57 58
Hog Heaven 24 24
---------------------------------------------------------
81 82
---------------------------------------------------------
TOTAL $57,752 $ 87,644
---------------------------------------------------------
Employees
The Company has 14 full-time employees and three part-time employees
at its head office in Vancouver, including two geologists, a metallurgical
engineer, two mining engineers, one health, safety and environmental
specialist, two chartered accountants, a lawyer and one human resource
specialist and several support staff.
As at December 31, 2004, Mina Quiruvilca employed 1,049 persons (818
permanent and 231 temporary) in connection with the operation of the Quiruvilca
mine. Approximately 280 of the workers employed by Mina Quiruvilca are members
of either the Sindicato de Trabajadores de Pan American Silver S.A.C. - Mina
Quiruvilca (the "Quiruvilca Union") or the Sindicato de Trabajadores de Shorey
y Anexos (the "Shorey Union"). Mina Quiruvilca considers its relations with its
employees to be satisfactory. Negotiations for Mina Quiruvilca's 2005
collective agreements are proceeding at the present time.
Minera Huaron directly employs 172 full time employees and indirectly
employs 650 persons through agreements with Peruvian mining contractors.
Argentum and Natividad directly employ 140 full time employees and
indirectly employs 1,088 persons through agreements with Peruvian mining
contractors.
Pan American Silver Peru employs 28 full-time employees and 5
contractors.
Pan American Mexico employs 68 employees and 510 mining contractors,
including four geologists, one civil engineer and 20 mining engineers.
- 59 -
Pan American Bolivia has 17 employees and one part-time contractor,
including two geologists.
Research and Development
Pan American conducts research and development activities in order to
develop improved production processes and exploration techniques. Costs
associated with this work are expensed as incurred. Pan American did not incur
any significant research and development costs during 2002, 2003 or 2004 and
has not budgeted any significant amounts for any significant costs during 2005.
Competitive Conditions
The mining industry is intensely competitive particularly in the
acquisition of additional reserves and resources in all of its phases and Pan
American competes with many companies possessing greater financial and
technical resources. Competition in the mining business for limited sources of
capital could adversely affect Pan American's ability to acquire and develop
suitable silver mines, silver developmental projects, silver producing
companies or properties having significant exploration potential. As a result,
there can be no assurance that Pan American's acquisition and exploration
programs will yield new mineral reserves to replace or expand current mineral
reserves.
Pan American's competitive position is largely determined by its costs
compared to other producers throughout the world and its ability to maintain
its financial integrity through metal price cycles. Costs are governed to a
large extent by the location, grade and nature of Pan American's mineral
reserves as well as by operating and management skills. As one of few mining
companies focusing on silver production, development and exploration, Pan
American is subject to unique competitive advantages and disadvantages related
to the price of silver. If silver prices substantially increase Pan American
will be in a relatively stronger competitive position than diversified mining
companies that produce, develop and explore for other minerals in addition to
silver. Conversely, if silver prices substantially decrease, Pan American would
be at a competitive disadvantage to diversified mining companies.
Working Capital
Management of Pan American believes that its working capital of $110
million as at December 31, 2004 and its expected operating cash flows in the
future are more than sufficient to fund planned project development and
sustaining capital expenditures and discharge liabilities as they come due for
the foreseeable future.
Environment
All phases of Pan American's operations are subject to environmental
regulation in the various jurisdictions in which it operates. To the best of
management's knowledge, Pan American is currently in compliance in all material
respects with such environmental regulations applicable to its mining
operations, development and exploration activities. The costs associated with
environmental compliance are considered to be normal operating costs necessary
to maintain operations on an ongoing basis. Other than specific environmental
concerns discussed in this Annual Information Form, the Company is not aware of
any material environmental matters requiring significant capital outlays in the
immediate future.
In the financial year-end dated December 31, 2004, Pan American's
environmental operating costs were $1.3 million. Operating costs were incurred
principally for the acid water treatment plant at Quiruvilca and project costs
were principally for tailings dam stabilization and rehabilitation of a
drainage tunnel at Huaron.
- 60 -
The Quiruvilca, Morococha, Huaron and La Colorada mines have
outstanding material reclamation or environmental concerns. As at December 31,
2004, accounting provisions for reclamation in the amount of $32,011,670 had
been made in respect of the Quiruvilca, Morococha, Huaron and La Colorada
mines.
Environmental legislation in all of the jurisdictions in which Pan
American operates is evolving in a manner which will require stricter standards
and will be subject to increased enforcement, fines and penalties for
non-compliance, more stringent environmental assessments of proposed projects
and a heightened degree of responsibility for companies and their officers,
directors and employees. Changes in environmental regulation, if any, may
adversely affect Pan American's operations and profitability. In addition,
environmental hazards may exist on Pan American's properties which are unknown
to Pan American at present, which have been caused by previous or existing
owners or operators of the property, or by the past or present owners of
adjacent properties or by natural conditions. The occurrence of any of these
hazards or conditions could have a material adverse effect on Pan American's
operations or profitability.
Trends and Uncertainties
The following is a discussion of trends, commitments, events and
uncertainties that are both presently known to management of Pan American and
are expected reasonably to have a material effect on Pan American's business,
financial condition or results of operations.
Risks Relating to Pan American's Business
Metal Price Fluctuations
The majority of the Company's revenue is derived from the sale of
silver, zinc, and, to a lesser degree, copper and lead, and therefore
fluctuations in the price of these commodities represents one of the most
significant factors affecting the Company's operations and profitability. The
price of silver and other metals are affected by numerous factors beyond the
Company's control, including:
o levels of supply and demand;
o global or regional consumptive patterns;
o sales by government holders;
o metal stock levels maintained by producers and others;
o increased production due to new mine developments and improved
mining and production methods;
o speculative activities;
o inventory carrying costs;
o availability and costs of metal substitutes;
o international economic and political conditions.
o interest rates;
o currency values; and
o inflation.
Declining market prices for these metals could materially adversely
affect the Company's operations and profitability.
- 61 -
Foreign Operations
The majority of the Company's current operations are conducted by its
subsidiaries in Peru, Mexico, Bolivia and Argentina, and all of the Company's
current production and revenue is derived from its operations in Peru and
Mexico. As Pan American's business is carried on in a number of foreign
countries it is exposed to a number of risks and uncertainties, including:
o terrorism and hostage taking;
o military repression;
o expropriation or nationalization without adequate compensation;
o difficulties enforcing judgments obtained in Canadian or United
States courts against assets located outside of those
jurisdictions;
o labour unrest;
o high rates of inflation;
o changes to royalty and tax regimes;
o extreme fluctuations in currency exchange rates; and
o volatile local political and economic developments.
Local opposition to mine development projects has arisen in Peru in
the past, and such opposition has at times been violent. In particular, in
November 2004, approximately 200 farmers attacked and damaged the La Zanja
exploration camp located in Santa Cruz province, Peru, which was owned by
Compania de Minas Buenaventura and Newmont Mining Corporation. One person was
killed and three injured during the protest. There can be no assurance that
such local opposition will not arise in the future with respect to the
Company's foreign operations. If the Company were to experience resistance or
unrest in connection with its foreign operations, it could have a material
adverse effect on the Company's operations or profitability.
Governmental Regulation
Pan American's operations and exploration and development activities
are subject to extensive Canadian, United States, Peruvian, Mexican, Bolivian,
Argentinian and other foreign federal, state, provincial, territorial and local
laws and regulations governing various matters, including:
o environmental protection;
o management and use of toxic substances and explosives;
o management of natural resources;
o exploration, development of mines, production, and post-closure
reclamation;
o exports;
o price controls;
o taxation;
o mining royalties;
o labour standards and occupational health and safety, including
mine safety; and
o historic and cultural preservation.
- 62 -
The costs associated with compliance with these laws and regulations
are substantial and possible future laws and regulations, changes to existing
laws and regulations (including the imposition of higher taxes and mining
royalties which have been implemented or threatened in Peru) or more stringent
enforcement of current laws and regulations by governmental authorities, could
cause additional expense, capital expenditures, restrictions on or suspensions
of Pan American's operations and delays in the development of its properties.
Moreover, these laws and regulations may allow governmental authorities and
private parties to bring lawsuits based upon damages to property and injury to
persons resulting from the environmental, health and safety impacts of our past
and current operations, and could lead to the imposition of substantial fines,
penalties or other civil or criminal sanctions.
Obtaining and Renewing of Government Permits
In the ordinary course of business, Pan American is required to obtain
and renew governmental permits for the operation and expansion of existing
operations or for the development, construction and commencement of new
operations. Obtaining or renewing the necessary governmental permits is a
complex and time-consuming process involving numerous jurisdictions and often
involving public hearings and costly undertakings on Pan American's part. The
duration and success of Pan American's efforts to obtain and renew permits are
contingent upon many variables not within its control including the
interpretation of applicable requirements implemented by the permitting
authority. Pan American may not be able to obtain or renew permits that are
necessary to its operations, or the cost to obtain or renew permits may exceed
what the Company believes it can recover from the property once in production.
Any unexpected delays or costs associated with the permitting process could
delay the development or impede the operation of a mine, which could adversely
affect Pan American's operations and profitability.
Compliance With Local Laws and Standards
In some of the countries in which Pan American operates, failure to
comply strictly with applicable laws, regulations and local practices relating
to mineral right applications and tenure could result in loss, reduction or
expropriation of entitlements, or the imposition of additional local or foreign
parties as joint venture partners with carried or other interests. Any such
loss, reduction or imposition of partners could have a material adverse effect
on Pan American's operations or business.
Operating Hazards and Risks
The operation and development of a mine or mineral property involves
many risks which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. These risks include:
o environmental hazards;
o industrial accidents and explosions;
o the encountering of unusual or unexpected geological formations;
o ground fall and cave-ins;
o flooding;
o earthquakes; and
o periodic interruptions due to inclement or hazardous weather
conditions.
These occurrences could result in:
o environmental damage and liabilities;
o work stoppages and delayed production;
- 63 -
o increased production costs;
o damage to, or destruction of, mineral properties or production
facilities;
o personal injury or death;
o asset write downs;
o monetary losses; and
o other liabilities.
Liabilities that Pan American incur may exceed the policy limits of
its insurance coverage or may not be insurable, in which event Pan American
could incur significant costs that could adversely affect its business,
operations or profitability.
Exploration and Development Risks
The long-term operation of Pan American's business and its
profitability is dependent, in part, on the cost and success of its exploration
and development programs. Mineral exploration and development involves a high
degree of risk and few properties that are explored are ultimately developed
into producing mines. There is no assurance that Pan American's mineral
exploration and development programs will result in any discoveries of bodies
of commercial mineralization. There is also no assurance that even if
commercial quantities of mineralization are discovered that a mineral property
will be brought into commercial production. Development of Pan American's
mineral properties will follow only upon obtaining satisfactory exploration
results. Discovery of mineral deposits is dependent upon a number of factors,
not the least of which is the technical skill of the exploration personnel
involved. The commercial viability of a mineral deposit once discovered is also
dependent upon a number of factors, some of which are the particular attributes
of the deposit (such as size, grade and proximity to infrastructure), metal
prices and government regulations, including regulations relating to royalties,
allowable production, importing and exporting of minerals and environmental
protection. Most of the above factors are beyond the control of Pan American.
As a result, there can be no assurance that Pan American's acquisition,
exploration and development programs will yield new reserves to replace or
expand current reserves. Unsuccessful exploration or development programs could
have a material adverse impact on Pan American's operations and profitability.
The current proven and probable reserves on the Morococha property
only provide for a two year mine life. The estimated cash flow over this two
year mine life does not provide a payback for the Company's costs to acquire
Argentum. For Pan American to recover these costs, inferred resources on the
Morococha property must be converted to mineable reserves. There is no
certainty that inferred resources will be converted to mineable reserves or
that the Company's investment costs for the Morococha property will ever be
paid back.
The Morococha mine is currently dependent on the Manuelita zone for
50% of its monthly production. Barring new discoveries, this zone will be
exhausted in two to three years and in order to maintain the mine's operating
cost profile and silver production, a replacement for the Manuelita's zone must
be found. There can be no assurance that such a replacement zone will be found
or that Pan American's production estimates will be met after the third year of
the mine plan.
Uncertainty in the Calculation of Mineral Reserves, Resources and Silver and
Base Metal Recovery
There is a degree of uncertainty attributable to the calculation of
mineral reserves and mineral resources and corresponding grades being mined or
dedicated to future production. Until mineral reserves or mineral resources are
actually mined and processed the quantity of mineral and reserve grades must be
considered as estimates only. In addition, the quantity of mineral reserves and
mineral resources may vary depending on, among other things, metal prices. Any
material change in quantity of mineral reserves, mineral resources, grade or
- 64 -
stripping ratio may affect the economic viability of Pan American's properties.
In addition, there can be no assurance that silver recoveries or other metal
recoveries in small scale laboratory tests will be duplicated in larger scale
tests under on-site conditions or during production.
Infrastructure
Mining, processing, development and exploration activities depend, to
one degree or another, on adequate infrastructure. Reliable roads, bridges,
power sources and water supply are important determinants, which affect capital
and operating costs. Unusual or infrequent weather phenomena, sabotage,
government or other interference in the maintenance or provision of such
infrastructure could adversely affect Pan American's operations and
profitability.
The equipment on site at the Morococha property, particularly the
Amistad plant, is old and may require higher capital investment than Pan
American has estimated.
Smelter Supply Arrangements
The zinc, lead and copper concentrates produced by Pan American are
sold through long-term supply arrangements to metal traders or integrated
mining and smelting companies. Should any of these counterparties not honour
supply arrangements, or should any of them become insolvent, Pan American may
be forced to sell its concentrates in the spot market or it may not have a
market for its concentrates and therefore its future operating results may be
materially adversely affected.
Environmental Hazards
All phases of Pan American's operations are subject to environmental
regulation in the various jurisdictions in which it operates. Environmental
legislation in all of the jurisdictions in which Pan American operates is
evolving in a manner which will require stricter standards and will be subject
to increased enforcement, fines and penalties for non-compliance, more
stringent environmental assessments of proposed projects and a heightened
degree of responsibility for companies and their officers, directors and
employees. Changes in environmental regulation, if any, may adversely affect
Pan American's operations and profitability. In addition, environmental hazards
may exist on Pan American's properties which are currently unknown to Pan
American. Pan American may be liable for losses associated with such hazards,
or may be forced to undertake extensive remedial cleanup action or to pay for
governmental remedial cleanup actions, even in cases where such hazards have
been caused by previous or existing owners or operators of the property, or by
the past or present owners of adjacent properties or natural conditions. The
costs of such cleanup actions may have a material adverse effect on Pan
American's operations and profitability.
Responsibility for construction of a water treatment plant for the
Kingsmill Tunnel and tailings mitigation program at Huascacocha Lake, near the
Morococha mine, has been apportioned by Water Management Consultants Inc. in
environmental studies among the Morococha mine and mining companies operating
neighbouring projects, including Centromin, Soc. Minera Austria Duvaz, Soc.
Minera Buquiococha and Minera Centrominas. In the event that one or more of
these companies defaults on its funding obligation for the Kingsmill water
treatment plant or the Huascacocha Lake tailings mitigation program, Pan
American's proportionate share of the costs of such environmental projects
could increase and reduce cash flow from Morococha operations.
Reclamation Obligations
Reclamation requirements vary depending on the location of the
property and the managing governmental agency, but they are similar in that
they aim to minimize long-term effects of exploration and mining disturbance by
requiring the operating company to control possible deleterious effluents and
to re-establish to some degree pre-disturbance land forms and vegetation. Pan
- 65 -
American is actively providing for or has carried out any requested reclamation
activities on its properties. Any significant environmental issues that may
arise, however, could lead to increased reclamation expenditures and have a
materially adverse impact on Pan American's financial resources.
Peruvian Mine Closure Law
On October 14, 2003, the Peruvian government published Law 28090 "Mine
Closure Law" which establishes provisions relating to mine closure plans. For
existing mining operations the law provides that a mine closure plan must be
submitted for certification to the Peruvian Ministry of Energy and Mines within
six months of the law entering into force. No enabling regulations were
published with the law. Therefore, the effect of the law on Pan American's
Peruvian mining and exploration activities cannot yet be determined.
The law provides that a mine operator must grant an environmental
warranty for the estimated costs associated with its mine closure plan. The law
does not establish when such warranties must be in place and does not specify
the form of the required warranty. However, the law indicates that a warranty
may take the form of insurance, cash collateral, a trust agreement or other
forms, as permitted by the Civil Code of Peru. Pan American's Huaron,
Quiruvilca and Morococha mines will submit closure plans as required by the
law, but until these plans have been certified and the nature and form of
whatever environmental warranty is required have been determined, the impact of
this law on Pan American's Peruvian mining and exploration activities cannot be
determined.
Hedging Activities
From time to time, the Company engages in hedging activities in
connection with base metal production and foreign currency requirements, such
as forward purchases or sales contracts, to minimize the effect of declines in
metal prices or strengthening of foreign currencies on the Company's operating
results. These hedging activities will either generate a gain or loss,
depending on the market price of a metal or exchange rate at settlement
relative to the stated forward contract price/rate. As at December 31, 2004,
the Company's zinc forward contract position had a negative mark-to-market
value of approximately $3.59 million and its lead forward contract position as
at December 31, 2004 had a negative value of approximately $1.11 million.
Including these negative mark-to-market valuations, the Company recognized a
loss on commodity contracts in restated 2004 earnings of $6.6 million. Please
refer to note 3 of the 2005 consolidated annual financial statements, which can
be found on SEDAR at www.sedar.com, for further discussion of this matter.
In addition, the Company may experience losses if a counterparty fails
to purchase under a contract when the contract price exceeds the spot price of
a commodity. The Company's current policy is to not hedge the price of silver
and therefore it is fully exposed to declines in the price of silver.
Employee Relations
Certain of Pan American's employees and the employees of Peruvian
mining contractors indirectly employed by Pan American are represented by
unions. Pan American has experienced labour strikes and work stoppages in the
past. There can be no assurance that Pan American will not experience future
labour strikes or work stoppages.
Title to Assets
The validity of mining or exploration titles or claims, which
constitute most of Pan American's property holdings, can be uncertain and may
be contested. Pan American has used its best efforts to investigate its title
or claims to its various properties and, to the best of its knowledge, those
titles or claims are in good standing. However no assurance can be given that
applicable governments will not revoke or significantly alter the conditions of
the applicable exploration and mining titles or claims and that such
exploration and mining titles or claims will not be challenged or impugned by
- 66 -
third parties. Pan American operates in countries with developing mining laws
and changes in such laws could materially affect Pan American's rights to its
various properties or interests therein.
Although Pan American has received title opinions for those properties
in which it has a material interest there is no guarantee that title to such
properties will not be challenged or impugned. Pan American has not conducted
surveys of all the claims in which it holds direct or indirect interests and
therefore, the precise area and location of such claims may be in doubt. Pan
American's properties may be subject to prior unregistered liens, agreements or
transfers, native land claims or undetected title defects.
Pan American does not own any surface lands in the areas that overlie
its mining concessions at the Morococha property. These surface lands belong to
Centromin. Centromin also holds rights to certain sub-surface areas which may
allow easier and less costly underground access to some areas of the Morococha
concessions. Although the use by Argentum's previous owner, Sociedad Minera
Corona S.A. ("SMC") and its predecessors of Centromin's surface lands and
sub-surface rights for mining and processing operations has been exercised for
decades with Centromin's acknowledgement, there is no assurance that Centromin
will continue to allow unimpeded use of these surface lands and sub-surface
rights by the Morococha operations. In particular, the development of the
adjacent Toromocha disseminated copper system into a mine may interfere with
operations on the Morococha property. In such an event, Pan American could be
required to incur potentially significant costs and expense to acquire surface
and sub-surface rights for its Morococha operations and could be required to
cease certain Morococha operations altogether if such surface and sub-surface
rights cannot be obtained for reasonable consideration.
Acquisitions
An element of the Company's business strategy is to make selected
acquisitions. For example, the Company completed the acquisition of Corner Bay
Silver Inc. in February 2003 and the acquisition of Argentum and the Morococha
mine in August 2004. The Company expects to continue to evaluate acquisition
opportunities on a regular basis and intends to pursue those opportunities that
it believes are in its long-term best interests. The success of the Company's
acquisitions will depend upon its ability to effectively manage the operations
of entities it acquires and to realize other anticipated benefits. The process
of managing acquired businesses may involve unforeseen difficulties and may
require a disproportionate amount of management resources. There can be no
assurance that the Company will be able to successfully manage the operations
of businesses it acquires or that the anticipated benefits of its acquisitions
will be realized.
Competition for New Properties
Mines have limited lives and as a result, Pan American continually
seeks to replace and expand its reserves through the acquisition of new
properties. In addition, there is a limited supply of desirable mineral lands
available in areas where Pan American would consider conducting exploration
and/or production activities. Because Pan American faces strong competition for
new properties from other mining companies, some of which have greater
financial resources than it does, Pan American may be unable to acquire
attractive new mining properties on terms that it considers acceptable.
United States Mining Legislation
There is a movement in the United States Congress to reform the
current mining laws. While it is not expected that any reform legislation will
pass the United States Congress in the current session, it is not unlikely that
some changes to U.S. mining laws will occur in the future. These changes may
include the payment of royalties to the government, increased holding fees and
restrictions or prohibitions on patenting mining claims. In addition,
prospective legislation could be expected to include various environmental and
- 67 -
land use requirements, which may restrict, or in some cases, prevent mining
operations. Although none of the mineralization on the properties on which Pan
American holds direct or indirect interests are within unpatented claims, Pan
American's interest in unpatented claims on federal land could have an overall
impact on the value of its properties in the United States.
Foreign Exchange Rate Fluctuations
Fluctuations in currency exchange rates, particularly the weakening or
strengthening of the U.S. dollar (being the currency in which Pan American's
products are sold) against the Canadian dollar (used to pay corporate head
office costs), the Peruvian sole and the Mexican peso (being the currencies in
which a significant portion of Pan American's operating costs are incurred),
could have a significant effect on Pan American's results of operations. Pan
American does not engage in currency hedging transactions.
- 68 -
SELECTED CONSOLIDATED FINANCIAL INFORMATION
------------------------------------------------------------------------------
Annual Information
Selected consolidated financial information of the Company for each of
the last five completed financial years is as follows:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Restated)
(thousands of U.S. dollars, except per share amounts)
Revenue $ 94,825 $ 45,122 $ 45,093 $ 37,296 $ 29,931
Operating earnings/(loss) 940 (7,608) (35,229) (8,540) (45,878)
Net income/(loss) 15,214 (6,794) (33,977) (8,077) (45,878)
Net earnings/(loss) per share
- basic $ 0.06 $ (0.20) $ (0.81) $ (0.22) $ (1.35)
- diluted 0.06 (0.20) (0.81) (0.22) (1.35)
Cash and short-term investments 98,136 89,129 10,198 3,844 7,590
Total assets 370,086 279,883 102,945 91,517 83,087
Total long-term financial
liabilities 68,279 73,137 27,222 11,497 8,219
Total shareholder's equity 275,516 184,098 55,492 58,877 57,544
Selected unaudited consolidated financial information of the Company
for each of the last eight quarterly periods is as follows:
2004 2003
---- ----
(Restated)
----------
Three Three Three Three Three Three Three Three
months months months months months months months months
ended ended ended ended ended ended ended ended
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
(in thousands of U.S. Dollars, except per share amounts)
Total Revenue $ 15,708 $ 21,179 $ 27,916 $ 30,022 $ 7,822 $ 12,553 $ 11,890 $ 12,857
Expenses:
Operating costs 11,168 16,531 18,526 22,937 7,429 11,333 10,200 10,816
Depreciation 2,145 2,008 3,033 3,683 471 462 432 1,960
General & Admin. 803 1,202 934 1,113 401 582 565 1,184
Stock-based 440 684 518 547 487 714 835 857
compensation
Reclamation 302 301 302 410 61 77 75 90
General exploration 528 1,137 1,213 960 496 492 600 955
Investment income, net 131 (3,511) (779) (864) 50 49 408 (165)
Debt settlement costs - 1,311 53 - - - - -
(Gain)/loss on
commodity contracts 2,214 (1,836) 3,438 2,801 - - - -
Non-controlling
interest - - 320 (141) - - - -
Write down on Non-
producing property - - - 2,460 - - - -
Gain on sale of assets - - (20,164) - - - -
----------------------------------------------------------------------------------------------
Income (loss) before tax (2,023) 3,352 358 16,280 (1,573) (1,156) (1,225) (2,840)
Income Tax Provision - - - (2,753) - - - -
----------------------------------------------------------------------------------------------
Net income (loss) for
the period $ (2,023) $ 3,352 $ 358 $ 13,527 $ (1,573) $ (1,156) $ (1,225) $ (2,840)
=========== =========== =========== ========== =========== =========== =========== ===========
Earnings (loss) per
share - basic $ (0.08) $ 0.09 $ 0.01 $ 0.21 $ (0.03) (0.02) $ (0.10) $ (0.05)
- 69 -
Quarterly per share amounts have been adjusted to reflect the weighted
average common shares of the Company outstanding for the full year.
Further discussion of the Company's financial results is contained in
the MD&A incorporated by reference into this Annual Information Form, as well
as in the Restated Consolidated Financial Statements of the Company for the
first three quarters of 2004, respectively, its audited consolidated financial
statements for the year ended December 31, 2004, and the restated "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
the year ended December 31, 2004, each of which is publicly available on SEDAR
at www.sedar.com.
Dividends
The Company has not, since the date of its incorporation, declared or
paid any dividends on its common shares and does not currently intend to pay
dividends. Earnings will be retained to finance further exploration and
development. Currently there are no restrictions with respect to the Company's
present or future ability to declare or pay dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" ("MD&A") and the Consolidated
Financial Statements of the Company for the years ended December 31, 2004 and
2003, set out on pages 1 through 16 and 17 through 44, respectively, of the
Company's 2004 Annual Report, which are incorporated by reference herein.
DIRECTORS AND OFFICERS
-------------------------------------------------------------------------------
The names and municipalities of residences of the directors and
officers of the Company, the positions held by them with the Company and their
principal occupations for the past five years are set forth below:
Name and Municipality Principal Occupation During
of Residence Position with the Company the Past Five Years
--------------------- ------------------------- ---------------------------
ROSS J. BEATY (4) Director and Chairman Chairman of the Company
Vancouver, B.C. (director of the Company
since September 30, 1988)
GEOFF A. BURNS (4) Director, President and Chief President and Chief Executive
North Vancouver, B.C. Executive Officer (director of Officer of the Company since July
the Company since July 1, 2003 2003; and prior thereto Sr. Vice
President and Chief Financial
Officer of Coeur D'Alene Mines
Corporation
WILLIAM A. FLECKENSTEIN 3, (4) Director of the Company President of Fleckenstein Capital,
Seattle, Washington, U.S.A. since May 9, 1997 Inc. (an investment counselling
firm) from 1996 to present; prior
thereto Partner of Olympic Capital
Management Inc. (an investment
counselling firm)
- 70 -
Name and Municipality Principal Occupation During
of Residence Position with the Company the Past Five Years
--------------------- ------------------------- ---------------------------
MICHAEL LARSON (4) Director of the Company Investment Advisor and Manager of
Seattle, Washington, U.S.A. since November 29, 1999 Cascade Investment LLC (a private
investment company)
MICHAEL J.J. MALONEY 1, 2, 3, (4) Director of the Company from Private Investor
Seattle, Washington, U.S.A. Sept. 11, 1995 to Nov. 29,
1999 and then re-elected
on May 15, 2000
PAUL B. SWEENEY 1, (4) Director of the Company Vice President and Chief Financial
Surrey, B.C. since August 6, 1999 Officer of Canico Resource Corp. (a
mining company) since February 2002;
prior thereto Chief Financial
Officer of Manhattan Minerals Inc.
(a mining company) from December
1999 to May 2001; Chief Financial
Officer of Sutton Resources Inc. (a
mining company) from February 1998
to April 1999; and prior thereto
Senior Vice President and Chief
Financial Officer at Princeton
Mining Corp.
JOHN H. WRIGHT (4) Director of the Company President and Chief Operating Officer
Vancouver, B.C. since September 30, 1988 of the Company from 1998 to 2003
JOHN WILLSON 1, 2, (4) Director since April 4, 2002 Retired since April 2000; formerly
Vancouver, B.C. President and Chief Executive Officer
of Placer Dome Inc.
A. ROBERT DOYLE Chief Financial Officer Chief Financial Officer of the
Vancouver, B.C. Company since January 2004; and
prior thereto Senior Vice
President-Mining Finance and Metals
Marketing with Standard Bank
ROBERT P. PIROOZ General Counsel and Secretary General Counsel of the Company since
Vancouver, B.C. January 2003; and prior thereto
Group Vice President with the BCR
Group of Companies
STEVEN BUSBY Senior Vice President, Project Senior Vice President, Project
Vancouver, B.C. Development & Technical Development & Technical Services of
Services the Company since August 2003;
Principal of S.L. Busby Consulting
from September 2001 to August 2003
and Vice President Engineering and
Director of Technical Services for
Coeur D'Alene Mines Corporation from
August 1998 to September 2001
- 71 -
Name and Municipality Principal Occupation During
of Residence Position with the Company the Past Five Years
--------------------- ------------------------- ---------------------------
ANDREW POOLER Senior Vice President, Mining Senior Vice President, Mining
Vancouver, B.C. Operations Operations of the Company since
September 2003; Chief Operating
Officer for Colville Tribal
Enterprise Corp. from 2000 to 2003;
Vice President Operations for
Greenstone Resources Ltd. from 1998
to 2000; and prior thereto Vice
President Operations for Amex Gold
1992 to 1998.
STUART A. MOLLER Vice President, Vice President, Exploration of the
La Paz, Bolivia Exploration Company since July 1997; and prior
thereto Exploration Manager in
Bolivia with Barrick Gold Corporation
BRENDA RADIES Vice President, Vice President, Corporate Relations
West Vancouver, B.C. Corporate Relations of the Company since May 2003; and
prior thereto Director, Corporate
Communications for Placer Dome Inc.
from 2000 - 2003; and Manager,
Corporate Relations for Placer Dome
North America from 1993 - 2000.
GORDON JANG(5) Controller and Secretary Controller of the Company
Vancouver, B.C.
-----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Governance Committee
(4) Member of the Health, Safety and Environmental Committee
(5) Effective March 31, 2005, Mr. Jang resigned from the Company.
The directors of the Company are elected at each annual general
meeting to hold office until the next annual general meeting or until their
successors are elected or appointed. The board currently consists of eight
directors five of whom, William A. Fleckenstein , Michael Larson, Michael J.J.
Maloney, Paul B. Sweeney and John Willson qualify as unrelated directors who
are independent of management. The board has established four committees: the
Audit Committee, the Compensation Committee, the Health, Safety and
Environmental Committee and the Nominating and Governance Committee. Detailed
information regarding the duties and obligations of the Audit Committee is
annexed as Appendix "A" to this Annual Information Form. The board does not
have an Executive Committee. The composition of the various committees as at
December 31, 2004 is set forth in the preceding table.
As at March 7, 2005, the directors and officers of the Company as a
group beneficially owned, directly or indirectly, 7,959,757 common shares of
the Company representing 11.9% of the issued and outstanding common shares of
the Company.
Effective March 31, 2005, Mr. Gordon Jang resigned from the Company.
On April 1, 2005 Mr. Wayne Vincent joined Pan American as Controller.
- 72 -
Conflicts of Interest
Certain officers and directors of the Company are officers and/or
directors of, or are associated with, other natural resource companies that
acquire interests in mineral properties. Such associations may give rise to
conflicts of interest from time to time. However, the directors are required by
law to act honestly and in good faith with a view to the best interests of the
Company and its shareholders and to disclose any personal interest which they
may have in any material transaction which is proposed to be entered into with
the Company and to abstain from voting as a director for the approval of any
such transaction.
EXCEPTIONS FROM NASDAQ CORPORATE GOVERNANCE REQUIREMENTS
-------------------------------------------------------------------------------
Under Rule 4350(a) of the Nasdaq Stock Market Rules (the "Nasdaq
Rules"), a foreign private issuer (as defined in Rule 12b-2 under the U.S.
Securities Exchange Act of 1934, as amended) may follow its home country
practice in lieu of certain of the corporate governance requirements of the
Nasdaq Rules. Pursuant to Rule 4350(a), the Company follows British Columbia
practice with respect to quorum requirements in lieu of Nasdaq Rule 4350(f).
Nasdaq Rule 4350(f) requires that the minimum quorum for a shareholder
meeting is 33-1/3% of the outstanding common shares, whereas the Company's
articles provide that the minimum quorum for a meeting of the holders of its
common shares is two individuals who are shareholders, proxyholders or duly
authorized representatives of corporate shareholders personally present and
representing shares aggregating not less than one-twentieth (5%) of the issued
shares of the Company carrying the right to vote. The Company's quorum
requirement complies with the Business Corporations Act (British Columbia),
which requires that unless the memorandum or articles otherwise provide, two
shareholders entitled to vote at a meeting of shareholders, whether in person
or represented by proxy, constitute a quorum. Furthermore, the rules of the
Toronto Stock Exchange, upon which the Company's common shares are also listed,
do not contain specific quorum requirements.
MARKET FOR SECURITIES
-------------------------------------------------------------------------------
The Company's common shares are listed for trading on the Toronto
Stock Exchange under the symbol PAA. During the most recently completed
financial year, our shares traded in a range with a low of $15.62 and a high of
$25.95. The monthly trading volume and value is presented in the table below.
Month Open High Low Close Volume
----- ---- ---- --- ----- ------
Jan 04 $18.10 $21.57 $17.95 $19.11 4,240,716
Feb 04 $18.75 $24.48 $18.41 $23.64 3,606,896
Mar 04 $24.25 $24.47 $22.02 $23.40 4,794,099
Apr 04 $24.00 $25.95 $16.80 $18.04 12,668,036
May 04 $17.90 $19.19 $15.62 $18.82 3,923,766
Jun 04 $18.89 $18.89 $16.28 $17.64 2,384,412
Jul 04 $17.54 $20.30 $16.49 $18.25 2,568,238
Aug 04 $18.25 $19.99 $16.92 $19.41 1,788,718
Sep 04 $19.20 $21.82 $17.76 $21.56 1,749,717
Oct 04 $21.70 $22.58 $19.84 $20.50 2,127,429
Nov 04 $20.79 $22.55 $19.94 $21.47 1,482,493
Dec 04 $21.50 $21.79 $18.50 $19.23 1,804,201
----------
Source for tabulation of 2004 Monthly Aggregate Data - Stockwatch.com
- 73 -
TRANSFER AGENTS AND REGISTRAR
-------------------------------------------------------------------------------
The transfer agent and registrar for the common shares of the Company
is Computershare Trust Company of Canada at its principal office in Vancouver,
British Columbia.
MATERIAL CONTRACTS
-------------------------------------------------------------------------------
The only contracts, other than material contracts entered into in the
ordinary course of business that are material to the Company and that were
entered into during the most recently completed financial year, or before the
most recently completed financial year, but is still in effect, are:
o the Acquisition Agreement for Argentum dated January 20, 2004;
and
o the agreement with OAO MNPO Polimetall dated November 22, 2004
for the sale of Pan American's interest in the Dukat mine.
ADDITIONAL INFORMATION
-------------------------------------------------------------------------------
Additional information, including directors' and officers'
remuneration and indebtedness, principal holders of the Company's securities,
options to purchase securities and interests of insiders in material
transactions, is contained in the Information Circular for the Annual General
Meeting of the Company held on May 11, 2004. Additional financial information
is also provided in the Company's Audited Consolidated Financial Statements for
the years ended December 31, 2004 and 2003 that are contained in the Company's
2004 Annual Report.
The Company shall provide to any person, upon request to the General
Counsel and Secretary of the Company:
(a) when the securities of the Company are in the course of a
distribution pursuant to a shelf or short form prospectus or a
preliminary short form prospectus has been filed in respect of a
distribution of its securities:
(i) one copy of the Annual Information Form of the Company,
together with a copy of any document or the pertinent
pages of any document, incorporated by reference in the
Annual Information Form;
(ii) one copy of the comparative financial statements of the
Company for its most recently completed financial year
together with the accompanying report of the auditor and
one copy of any interim financial statements of the
Company subsequent to the financial statements for the
Company's most recently completed financial year;
(iii) one copy of the information circular of the Company in
respect to its most recent annual meeting of shareholders
that involved the election of directors; and
(iv) one copy of any other documents that are incorporated by
reference into a preliminary short form prospectus or
shelf or short form prospectus and are not required to be
provided under (i) to (iii) above; or
- 74 -
(b) at any other time, one copy of any of the documents referred to
in (a) (i), (ii) and (iii) above, provided that the Company may
require the payment of a reasonable charge if the request is
made by a person who is not a security holder of the Company.
Requests for copies pursuant to the foregoing should be made to the
Secretary of the Company at 1500 - 625 Howe Street, Vancouver, British
Columbia, Canada, V6C 2T6.
The documents listed above are also available on the SEDAR website at
www.sedar.com.
- 75 -
GLOSSARY OF TERMS
------------------------------------------------------------------------------
"adit" - a horizontal or nearly horizontal passage driven from the surface for
the working of a mine.
"adularia" - a very low-temperature monoclinic potassium feldspar.
"andesite" - a dark-coloured, fine-grained extrusive rock that, when
porphyritic, contains phenocrysts composed primarily of zoned sodic plagioclase
(esp. andesine) and one or more of the mafic minerals (e.g. biotite,
horneblend, pyroxene), with a ground-mass composed generally of the same
minerals as the phenocrysts; the extrusive equivalent of diorite.
"argillic" - pertaining to clay or clay minerals, e.g. in "argillic
alternation" in which certain minerals are converted to minerals of the clay
group.
"arroyo" - a term applied in the arid and semi-arid southwestern U.S. to a
small deep flat-floored channel or gully of an ephemeral or intermittent
stream. It is usually dry and has steep or vertical banks of unconsolidated
material.
"AVR" - acidification, volatilization and neutralization circuit, used to
recover cyanide from barren solution resulting from the electrowinning process.
"basalt" - a dark-coloured igneous rock, commonly extrusive, composed primarily
of calcic plagioclase and pyroxene.
"berm" - the space left between the upper edge of a cut and the toe of an
embankment.
"breccia", "brecciation" - rock broken up by geological forces.
"calcareous" - containing calcium carbonate. When applied to a rock name, it
implies that as much as 50% of the rock is calcium carbonate.
"chalcopyrite" - a bright brass-yellow tetragonal mineral; generally found
massive and constitutes the most important ore of copper.
"chert" - a hard, dense, dull to semivitreous, microcrystalline or
cryptocrystalline sedimentary rock, consisting dominantly of interlocking
crystals of quartz less than about 30mu m in diameter; it may contain amorphous
silica (opal). It sometimes contains impurities such as calcite, iron oxide,
and the remains of siliceous and other organisms. Chert occurs principally as
nodular or concretionary nodules in limestone and dolomites, and less commonly
as layered deposits (bedded chert).
"conglomerate" - a coarse-grained clastic sedimentary rock, composed of rounded
to sub-angular fragments larger than 2mm in diameter (granules, pebbles,
cobbles, boulders) set in fine-grained matrix of sand or silt and commonly
cemented by calcium carbonate, iron oxide, silica or hardened clay.
"cut-and-fill" - a method of stoping in which ore is removed in slices, or
lifts, following which the excavation is filled with rock or other waste
material known as back fill, before the subsequent slice is mined. The back
fill supports the walls of the stope.
"dacite" - a fine-grained extrusive rock with the same general composition as
andesite, but having less calcic plagioclase and more quartz.
- 76 -
"diamond drill" - a type of rotary drill in which the cutting is done by
abrasion rather than by percussion. The drill cuts a core of rock which is
recovered in long cylindrical sections.
"dore" - unrefined gold and silver in bullion form.
"drift" - a horizontal passage underground that follows along the length of a
vein or rock formation.
"enargite" - a grayish-black or iron-black orthorhombic mineral. It is an
important ore of copper.
"epidote" - a basic silicate of aluminium, calcium and iron .
"epithermal" - formed by low-temperature (100 - 200(degree) C.) hydrothermal
processes.
"fault" - a fracture in a rock where there has been displacement of the two
sides.
"feldspar" - a prominent group of rock-forming silicate minerals.
"fracture" - breaks in a rock, usually due to intensive folding or faulting.
"galena" - the most important ore of lead, found in hydro-thermal veins and as
a replacement mineral.
"gangue" - that part of an ore deposit from which a metal or metals is not
extracted.
"gneiss" - a foliated rock formed by regional metamorphism, in which bands or
lenticles of granular minerals alternate with bands or lenticles in which
minerals having flaky or elongate prismatic habits predominate.
"granodioritic" - similar to granitic, except that graphic texture does not
seem to occur, and a lower percentage of silicon, and a higher calcium and
magnesium content is present.
"indicated mineral resource" - mineral resources for which quantity, grade or
quality, densities, shape, physical characteristics are so well established
that they can be estimated with confidence sufficient to allow the appropriate
application of technical and economic parameters, to support mine planning and
evaluation of the economic viability of the deposit. The estimate is based on
detailed and reliable exploration and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes that are spaced closely enough for geological and
grade continuity to be reasonably assumed.
"inferred mineral resource" - mineral resources for which quantity and grade or
quality can be estimated on the basis of geological evidence and limited
sampling and reasonably assumed, but not verified, geological grade and
continuity. The estimate is based on limited information and sampling gathered
through appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes.
"lacustrine" - pertaining to, produced by, or inhabiting a lake or lakes.
"loop" - a pattern of field observations that begin and end at the same point
with a number of intervening observations.
"manto" - a blanket-like replacement of rock (commonly limestone) by ore. In
some districts, the term has been modified to designate a pipe-shaped deposit
confined within a single stratigraphic horizon.
"marls" - a variety of materials, most of which occur as loose, earthy deposits
consisting chiefly of an intimate mixture of clay and calcium carbonate.
- 77 -
"measured mineral resource" - the part of a mineral resource for which
quantity, grade or quality, densities, shape, physical characteristics are so
well established that they can be estimated with confidence sufficient to allow
the appropriate application of technical and economic parameters, to support
production planning and evaluation of the economic viability of the deposit.
The estimate is based on detailed and reliable exploration, sampling and
testing information gathered through appropriate techniques from locations such
as outcrops, trenches, pits, workings and drill holes that are spaced closely
enough to confirm both geological and grade continuity.
"mineral reserve" - the economically mineable part of a measured or indicated
mineral resource demonstrated by at least a preliminary feasibility study. This
study must include adequate information on mining, processing, metallurgical,
economic and other relevant factors that demonstrate, at the time of reporting,
that economic extraction can be justified. A mineral reserve includes diluting
materials and allowances for losses that may occur that when the material is
mined.
"mineralization" or "resources" or "mineral resources" - is a concentration or
occurrence of natural, solid, inorganic or fossilized organic material in or on
the Earth's crust in such form and quantity and of such a grade or quality that
it has reasonable prospects for economic extraction. The location, quantity,
grade, geological characteristics and continuity of a mineral resource are
known, estimated or interpreted from specific geological evidence and
knowledge.
"monzonite" - a granular plutonic rock containing approximately equal amounts
of orthoclase and plagioclase, and thus intermediate between syenite and
diorite. Quartz is minor or absent.
"muck" - ore or rock that has been broken by blasting.
"open pit" - a surface working open to daylight, such as a quarry.
"ore shoot" - a pipelike, ribbonlike or chimneylike mass of ore within a
deposit (usually a vein), representing the more valuable part of a deposit.
"orogeny" - a period of mountain building.
"pearceite" - a monoclinic mineral Ag16As2S11, having copper as an apparent
necessary minor component which is metallic black, brittle and occurs in low-to
moderate-temperature silver and base-metal ores.
"pinch" - a compression of the walls of a vein, or the roof and floor of a coal
bed, which more or less completely displaces the ore or coal.
"polybasite" - a monoclinic mineral (Ag,Cu)16Sb2S11 that is soft, metallic and
grey to black occurring in low-temperature veins. A source of silver.
"porphyry" - an igneous rock of any composition that contains conspicuous
phenocrysts in a fine-grained ground mass.
"probable mineral reserve" - is the economically mineable part of an indicated,
and in some circumstances, a measured mineral resource demonstrated by at least
a preliminary feasibility study. This study must include adequate information
on mining, processing, metallurgical, economic and other relevant factors that
demonstrate, at the time of reporting, that economic extraction can be
justified.
"proustite" - a triangle mineral, Ag3AsS3, with rhombohedral cleavage that is
soft, ruby red and occurs in low temperature or secondary enrichment veins. A
minor source of silver.
- 78 -
"proven mineral reserve" - is the economically mineable part of a measured
mineral resource demonstrated by at least a preliminary feasibility study. This
study must include adequate information on mining, processing, metallurgical,
economic, and other relevant factors that demonstrate, at the time of
reporting, that economic extraction is justified.
"pyrite" - a mineral containing iron sulphide.
"pyroclastic" - rock formed by the mechanical combination of volcanic
fragments.
"pyrrhotite" - a monoclinic and hexagonal mineral, FeS, invariably deficient in
iron, variably ferrimaganetic, which is metallic, bronze yellow with iridescent
tarnish and occurs in mafic igneous rocks, contact metamorphic deposits, high
temperature veins and granite pegmatites.
"qualified person" - is an individual who is an engineer or geoscientist with
at least five years experience in mineral exploration, mine development or
operation or mineral project assessment, or any combination of these; and has
experience relevant to the subject matter of the mineral project; and who is a
member in good standing of a recognized self-regulatory organization of
engineers or geoscientists.
"raise" - a vertical or inclined underground working that has been excavated
from the bottom upward.
"resuing" - a method of stoping wherein the wall rock on one side of the vein
has been blasted after the ore itself is broken, with the waste rock used as
fill. Resuing is employed on narrow veins and permits a recovery with a minimum
of dilution.
"rhodochrosite" - a hexagonal carbonate mineral, found in lead and silver-lead
ore veins and in metasomatic deposits.
"schist" - a strongly foliated crystalline rock formed by dynamic metamorphism,
that can be readily split into thin flakes or slabs due to the well developed
parallelism of more than 50% of the minerals present, particularly those of
lamellar or elongate prismatic habit (e.g., mica and hornblende).
"shrinkage stoping" - a method of stoping which utilizes part of the broken ore
as a working platform and as support for the walls.
"silicified" - a rock altered by a silica hydrothermal solution.
"skarn" - rocks composed nearly entirely of lime-bearing silicates and derived
from nearly pure limestones and dolomites in which large amounts of silicon,
aluminium, iron and magnesium has been introduced.
"sphalerite" - the main zinc ore, found in metasomatic deposits with galena, in
hydro-thermal vein deposits, and in replacement deposits.
"split" - a coal seam that is separated from the main seam by a thick parting
of other sedimentary rock.
"stope" - an excavation in a mine from which ore is being or has been
extracted.
"strike" - the course or bearing of a layer of rock.
"stripping ratio" - the ratio of waste material to ore experienced in mining an
ore body by open pit.
- 79 -
"supergene" - said of a mineral deposit or enrichment formed near the surface,
commonly by descending solutions; also, said of the solutions and of that
environment.
"swell" - an enlarged place in an orebody, as opposed to a pinch.
"tailings" - material rejected from a mill after recoverable valuable minerals
have been extracted.
"tennantite" - a blackish lead-gray isometric mineral. It is isomorphous with
tetrahedrite, and sometimes contains zinc, silver, or cobalt replacing part of
the copper. It is an important ore of copper.
"tetrahedrite" - a metallic isometric mineral. It is isomorphous with
tennantite, and often contains silver or other metals replacing part of the
copper. Tetrahedrite is an important ore of copper and sometimes an ore of
silver.
"trachytes" - fine-grained, alkali, intermediate igneous rocks.
"tuff" - a general term for all consolidated pyroclastic rocks. Adj:
tuffaceous.
"tuffs" - upon consolidation, the general name for the material derived from
solid volcanic material which has been blown into the atmosphere by explosive
activity.
"vein" - an epigenetic mineral filling of a fault or other fracture, in tabular
or sheetlike form, often with associated replacement of the host rock; a
mineral deposit of this form and origin.
- 80 -
APPENDIX "A"
DUTIES AND RESPONSIBILITIES OF THE AUDIT COMMITTEE
A. The audit committee shall consist of three members of the board of
directors, all of whom shall be unrelated directors.
B. All of the members of the audit committee shall be financially literate
and at least one member of the audit committee shall have accounting or
related financial expertise. For the purposes of this document, "financial
literacy" means the ability to read and understand a balance sheet, an
income statement and a cash flow statement and "accounting or related
financial expertise" means the ability to analyse and interpret a full set
of financial statements, including the notes attached thereto, in
accordance with Canadian Generally Accepted Accounting Principles.
C. Subject to any duties and responsibilities imposed by the board of
directors, the audit committee shall have the following duties and
responsibilities:
1. to assist the board of directors in fulfilling its fiduciary
responsibilities relating to the Company's accounting and reporting
practises and the integrity of the Company's internal accounting
controls and information systems;
2. to review with the auditors of the Company any audited financial
statements of the Company and report thereon to the board of directors
with a recommendation whether such statements should be approved by
the board of directors;
3. to review and approve unaudited interim financial statements of the
Company;
4. to review and approve the Company's MD&A and any press releases
related to MD&A and annual and interim financial statements before the
Company publicly discloses this information;
5. to recommend to the board of directors the firm of independent
auditors to be nominated for appointment by shareholders at each
annual general meeting of the Company and, where appropriate, the
removal of the Company's independent auditors;
6. to recommend to the board of directors the compensation to be paid to
the Company's independent auditors;
7. to review the scope and adequacy of audits to be conducted by the
Company's independent auditors;
8. adopt and annually reassess formal terms of reference for the
Company's independent auditors;
9. to oversee the work of the Company's independent auditors, including
the resolution of disagreements between management and the independent
auditors regarding financial reporting;
10. to monitor and evaluate the independence and performance of the
Company's independent auditors, including actively engaging in a
dialogue with the Company's independent auditors with respect to any
disclosed relationships or services that may impact the objectivity
and independence of the auditor and taking or recommending that the
board of directors take, appropriate action to oversee the
independence of the Company's independent auditors;
A-1
11. to pre-approve all non-audit services to be provided to the Company by
its independent auditors prior to the commencement of such services;
12. to review all post-audit management letters containing the
recommendations of the Company's independent auditors and management's
response or follow-up thereto, where appropriate;
13. to review, monitor and periodically assess the integrity, adequacy and
timeliness of the Company's financial reporting and disclosure
practices;
14. to monitor the Company's compliance with legal and regulatory
requirements related to financial reporting and disclosure;
15. to monitor and evaluate the adequacy of the Company's internal
accounting and audit procedures;
16. to review and ensure the acceptability of the Company's accounting
principles;
17. to review and approve the Company's hiring policies regarding
partners, employees and former partners and employees of the Company's
independent auditor;
18. to identify the principal financial risks of the Company and to report
thereon to the board of directors;
19. to oversee management's reporting on internal controls and to ensure
that management has designed and implemented an effective system of
internal controls;
20. to establish procedures for the receipt, retention, confidentiality
and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters;
21. to establish procedures for the confidential, anonymous submission by
employees of the Company and its subsidiary of concerns regarding
questionable accounting or auditing matters;
22. to annually review and reassess the adequacy of these duties and
responsibilities of the audit committee; and
23. any other matters that the audit committee feels are important to its
mandate or that the board of directors chooses to delegate to it.
D. The audit committee shall either meet (i) at least once following each of
the first, second and third quarters to review and recommend approval by
the board of directors of each interim report prepared for the
shareholders and regulatory authorities or (ii) review such interim
reports; and shall also meet at least once in each year to review and
recommend approval by the board of the annual financial statements for the
immediately preceding fiscal year.
E. The audit committee shall appoint a chairman from among its members who
shall be an unrelated director.
F. It is the responsibility of the audit committee to maintain an open avenue
of communication between itself, the independent auditors of the Company
and management of the Company. In performing its role, the audit committee
is empowered to investigate any matter brought to its attention, with full
access to all books, records, accounts, facilities and personnel of the
Company. The audit committee is also empowered to instruct and retain
A-2
outside counsel or other advisors as necessary, set the pay and
compensation for any such advisors and communicate directly with the
Company's independent auditors at the expense of the Company.
G. The independent auditors of the Company shall report directly to the Audit
Committee.
A-3
Document No. 2
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Report of Independent Registered Chartered Accountants
To the Shareholders of
Pan American Silver Corp.
We have audited the consolidated balance sheets of Pan American Silver Corp.
(the "Company") as at December 31, 2004 and 2003 and the consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2004 and 2003 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion.
As described in Note 3, the accompanying consolidated financial statements of
Pan American Silver Corp. as at December 31, 2004 and for the year then ended
have been restated. We therefore withdraw our previous report dated February
11, 2005 on those financial statements.
[GRAPHIC OMITTED]
Independent Registered Chartered Accountants
Vancouver, British Columbia
February 11, 2005 (March 8, 2006 as to the effects of the restatement
described in Note 3)
Comments by Independent Registered Chartered Accountants for U.S. Readers on
Canada-U.S. Reporting Conflict
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) where there are
changes in accounting principles that have a material effect on the
comparability of the Company's financial statements, such as the changes
described in Note 2 (j) to the consolidated financial statements. Our report
to the shareholders dated February 11, 2005 (March 8, 2006 as to the effects
of the restatement described in Note 3) is expressed in accordance with
Canadian reporting standards which do not require a reference to such change
in accounting principles in the report of the independent registered chartered
accountants when the change is properly accounted for and adequately disclosed
in the financial statements.
[GRAPHIC OMITTED]
Independent Registered Chartered Accountants
Vancouver, British Columbia
February 11, 2005 (March 8, 2006 as to the effects of the restatement
described in Note 3)
[GRAPHIC OMITTED]
RESTATED
Consolidated Financial Statements
for the Year Ended December 31, 2004
1
Pan American Silver Corp.
Consolidated Balance Sheets
As at December 31, 2004 and 2003
(in thousands of US dollars)
2004 2003
---------------------------------------------------------------------------------------------------------------------
Assets (Restated - Note 3)
Current
Cash $ 28,345 $ 14,191
Short-term investments 69,791 74,938
Accounts receivable, net of $nil provision for doubtful accounts 25,757 7,545
Inventories (Note 5) 10,674 6,612
Unrealized gain on commodity contracts 480
Prepaid expenses 1,211 1,289
---------------------------------------------------------------------------------------------------------------------
Total Current Assets 136,258 104,575
Mineral property, plant and equipment (Notes 4 and 6) 104,647 83,574
Non-producing properties (Notes 4 and 7) 125,863 83,873
Direct smelting ore (Note 5) 2,671 3,901
Other assets (Note 8) 647 3,960
----------------------------------------------------------------------------------------------------------------------
Total Assets $ 370,086 $ 279,883
======================================================================================================================
Liabilities
Current
Accounts payable and accrued liabilities (Note 9) $ 20,331 $ 10,525
Advances for metal shipments 652 4,536
Unrealized loss on commodity contracts 4,695
Current portion of bank loans and capital lease 134 2,639
Current portion of non-current liabilities 479 4,948
---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 26,291 22,648
Deferred revenue - 865
Bank loans and capital lease (Note 10) - 10,803
Liability component of convertible debentures (Note 11) 134 19,116
Provision for asset retirement obligation and reclamation (Notes 4 and 12) 32,012 21,192
Provision for future income taxes (Note 18) 33,212 19,035
Severance indemnities and commitments (Note 17) 1,542 2,126
Non-controlling interest 1,379 -
---------------------------------------------------------------------------------------------------------------------
Total Liabilities 94,570 95,785
---------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 11)
Authorized: 100,000,000 common shares of no par value
Issued:
December 31, 2003 - 53,009,851 common shares
December 31, 2004 - 66,835,378 common shares 380,571 225,154
Equity component of convertible debentures (Note 11) 633 66,735
Additional paid in capital 10,976 12,752
Deficit (116,664) (120,543)
---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 275,516 184,098
---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 370,086 $ 279,883
=====================================================================================================================
APPROVED BY THE BOARD
_________________ Ross J. Beaty, Director __________________ Geoff A. Burns, Director
See accompanying notes to consolidated financial statements.
2
Pan American Silver Corp.
Consolidated Statements of Operations
For the years ended December 31, 2004, 2003 and 2002
(in thousands of US dollars, except for shares and per share amounts)
2004 2003 2002
------------------------------------------------------------------------------------------------------------------
(Restated - Note 3)
Sales $ 94,825 $ 45,122 $ 45,093
Cost of sales 69,162 39,778 43,161
Depreciation and amortization 10,869 3,325 4,872
---------------------------------------------------------------------------------------------------------------
Mine operating earnings (loss) 14,794 2,019 (2,940)
---------------------------------------------------------------------------------------------------------------
General and administrative, including stock-based 6,241 5,625 2,017
compensation
Exploration 3,838 2,543 1,206
Reclamation 1,315 303 860
Interest and financing expenses 898 1,156 988
Write-down of non-producing property (Note 7) 2,460 - 27,218
---------------------------------------------------------------------------------------------------------------
Operating loss 42 (7,608) (35,229)
Interest and other income 2,338 496 1,252
Loss on commodity contracts (6,617) - -
Debt settlement expenses (1,364) - -
Gain on sale of assets (Note 7) 23,747 318 -
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and non-controlling 18,146 (6,794) (33,977)
interest
Provision for income taxes (Note 18) (2,753) - -
Non-controlling interest (179) - -
---------------------------------------------------------------------------------------------------------------
Net income (loss) for the year $ 15,214 $ (6,794) $ (33,977)
===============================================================================================================
Attributable to common shareholders:
Net income (loss) for the year $ 15,214 $ (6,794) $ (33,977)
Early conversion premium on convertible debentures (2,871) (3,534) -
Accretion of convertible debentures (8,464) - -
---------------------------------------------------------------------------------------------------------------
Net income (loss) for the year attributable to common $ 3,879 $ (10,328) $ (33,977)
shareholders
===============================================================================================================
Earnings (loss) per share
Basic $ 0.06 $ (0.20) $ (0.81)
Fully Diluted $ 0.06 $ (0.20) $ (0.81)
Weighted average number of common shares outstanding
Basic 63,168,995 51,058,212 41,849,413
Fully Diluted 65,268,137 51,058,212 41,849,413
3
Pan American Silver Corp.
Consolidated Statements of Shareholders' Equity For the years ended December
31, 2004, 2003 and 2002 (in thousands of US dollars, except for shares)
Common shares
---------------------------- Convertible Paid In
Shares Amount Debentures Capital Deficit Total
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 37,628,234 $ 130,723 $ - $ 1,120 $ (72,966) $ 58,877
Issued on exercise of stock options 1,445,400 6,186 - (84) - 6,102
Issued on exercise of share purchase
warrants 32,250 97 - - - 97
Stock-based compensation - - - 319 - 319
Issued for cash, net of issue costs 3,450,000 15,599 - - - 15,599
Issued for purchase of mining property 231,511 1,250 - - - 1,250
Issued for purchase of royalty 390,117 3,000 - - - 3,000
Issued as compensation 69,000 253 - - - 253
Issued for purchase of silver stockpiles 636,942 4,000 - - - 4,000
Other - - - (28) - (28)
Net loss for the year - - - - (33,977) (33,977)
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 43,883,454 161,108 - 1,327 (106,943) 55,492
Issued on exercise of stock options 1,385,502 9,312 - (1,471) - 7,841
Issued on exercise of share purchase
warrants 100,943 509 - - - 509
Stock-based compensation - - - 2,871 - 2,871
Issued for acquisition of subsidiary (Note 3) 7,636,659 54,203 - - - 54,203
Fair value of stock options granted (Note 3) - - - 1,136 - 1,136
Fair value of share purchase warrants (Note 3) - - - 8,889 - 8,889
Issue of convertible debentures (Note 10) - - 63,201 - - 63,201
Convertible debentures issue costs (Note 10) - - - - (3,272) (3,272)
Issued as compensation 3,293 22 - - - 22
Accretion of convertible debentures - - 3,534 - (3,534) -
Net loss for the year - - - - (6,794) (6,794)
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 53,009,851 225,154 66,735 12,752 (120,543) 184,098
Issued on exercise of stock options 785,095 9,437 - (3,965) - 5,472
Issued on 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 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 (Restated - Note 3) - - - - 15,214 15,214
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 66,835,378 $ 380,571 $ 633 $ 10,976 $(116,664) $ 275,516
================================================================================================================================
See accompanying notes to consolidated financial statements.
4
Pan American Silver Corp.
Consolidated Statements of Cash Flows For the years ended December 31, 2004, 2003 and 2002 (in thousands of US dollars)
2004 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
(Restated - Note 3)
Operating activities
Net income (loss) for the year $ 15,214 $ (6,794) $ (33,977)
Reclamation expenditures (1,347) (61) -
Items not involving cash
Gain on sale of assets (23,747) (318) -
Depreciation and amortization 10,869 3,325 4,872
Write-down of non-producing property and property, plant and
equipment 2,460 - 27,218
Non-controlling interest 179 - -
Debt settlement expenses 1,208 - -
Future income taxes 31 - -
Interest accretion on convertible debentures 366 595 -
Stock-based compensation 2,189 2,871 319
Unrealized loss on commodity contracts 4,215
Reclamation 1,315 303 860
Operating cost provisions (1,209) 941 (4,463)
Changes in non-cash working capital items (Note 14(a)) (8,610) (5,380) 4,361
--------------------------------------------------------------------------------------------------------------------------------
Cash generated by (used in) operating activities 3,133 (4,518) (810)
--------------------------------------------------------------------------------------------------------------------------------
Financing activities
Shares issued for cash 62,437 8,350 22,759
Share issue costs (180) - (961)
Convertible debentures - 86,250 -
Convertible debentures issue costs - (3,272) -
Convertible debentures payments (13,565) - -
Repayment of credit line - - (1,265)
Repayment of bank loans - - (2,060)
(Repayment) proceeds of bank loans and capital lease (13,308) 7,737 -
--------------------------------------------------------------------------------------------------------------------------------
Cash generated by financing activities 35,384 99,065 18,473
--------------------------------------------------------------------------------------------------------------------------------
Investing activities
Mineral property, plant and equipment expenditures (15,367) (16,944) (9,651)
Non-producing property expenditures (1,676) (1,383) (1,158)
Acquisition of net assets of subsidiary, net of cash acquired (36,214) 2,393 -
Proceeds from sale of assets 23,747 318 -
Sale (purchase) of short-term investments 5,147 (74,925) -
--------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (24,363) (90,541) (10,809)
--------------------------------------------------------------------------------------------------------------------------------
Increase in cash during the year 14,154 4,006 6,854
Cash, beginning of year 14,191 10,185 3,331
--------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 28,345 $ 14,191 $ 10,185
================================================================================================================================
Supplemental Cash Flow Information (Note 14(b))
See accompanying notes to consolidated financial statements.
5
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Pan American Silver Corp., its subsidiaries and joint ventures (the
"Company") are engaged in silver mining and related activities,
including exploration, extraction, processing and reclamation.
Silver, the primary product, is produced in Mexico and Peru, with
exploration and project development activities in Argentina, Peru,
Mexico and Bolivia.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada.
The preparation of financial statements in accordance with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures 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. Significant differences from
United States generally accepted accounting principles are disclosed
in Note 18.
a) Basis of presentation
These consolidated financial statements include the accounts of the
Company and its subsidiaries. Principal subsidiaries and investments
at December 31, 2004 are listed below. All intercompany transactions
and balances have been eliminated.
Ownership Operations & Development
Subsidiary Location interest Status Projects Owned
----------------------------------------------------------------------------------------------------
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 86.5% 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
Certain comparative figures have been reclassified to conform to the
current year's presentation.
b) Revenue recognition
Revenue is recognized when title and risk of ownership of metals or
metal bearing concentrate have passed and collection is reasonably
assured. Revenue from the sale of metals may be subject to adjustment
upon final settlement of estimated metal prices, weights and assays,
and are recorded as adjustments to revenue in the period of final
settlement of prices, weights and assays; such adjustments have not
historically been material in relation to the initial invoice
amounts.
c) Inventories
Dore and concentrate inventories are stated at the lower of cost and
net realizable value determined by using the first-in, first-out
method. Direct smelting ore inventories are carried at the lower of
average cost and net realizable value. Acquisition cost of direct
smelting ore is charged to operations on a per tonne of ore sold
basis (Note 4). Supplies inventory are valued at the lower of average
cost and replacement cost, net of obsolescence. Inventories at
December 31, 2004 included an obsolescence provision of $2,294,000
(2003 -
6
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
$1,996,000), of which $1,807,000 was written down as part of the
write-off of the Quiruvilca mine in 2002.
d) Mineral property, plant and equipment
i. Mineral property, plant and equipment
Costs associated with operating mineral properties, plant
and equipment are carried at cost less depreciation and
depletion. Maintenance, repairs and renewals are charged to
operations. Betterments are capitalized. Any gains or losses
on disposition of property, plant and equipment are
reflected in the statement of operations. Mineral property
costs are amortized on a units-of-production basis over a
property's ore reserves. Depreciation of plant and equipment
is calculated on a straight-line basis over the lesser of an
asset's estimated useful life ranging from five to twenty
years and the life of the mineral property to which it
relates.
The carrying value of mineral properties and any related
plant and equipment are reviewed periodically for impairment
in value, utilizing discounted estimates of future cash
flows. Any resulting write downs to fair value are charged
to operations. Deferred costs relating to abandoned
properties are written off.
ii. Non-producing properties
Acquisition costs of investment and mineral development
properties together with costs directly related to mine
development expenditures and any interest costs thereon are
deferred. Exploration and development costs are expensed
until the Company has a reasonable expectation that the
property is capable of commercial production, supported by a
positive economic analysis and approved by the Board of
Directors. Capitalized costs are written down to their
estimated recoverable amount if the property is subsequently
determined to be uneconomic.
The Company's policy is to commence commercial production
for accounting purposes at the earlier of the operation
achieving 60 per cent of design capacity or one year after
substantial completion of construction activities.
e) Reclamation costs
During the fourth quarter of 2003, the Company changed its accounting
policy on a retroactive basis with respect to accounting and
reporting for obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and the normal operation of long-lived assets. The
Company adopted CICA 3110 "Asset Retirement Obligations" whereby the
fair value of the liability is initially recorded and the carrying
value of the related asset is increased by the corresponding amount.
The liability is accreted to its present value and the capitalized
cost is amortized over the useful life of the related asset. The
effect of the change was to increase the provision for assets
retirement obligation and reclamation by $7,978,000 and increase the
carrying value of the related assets by the corresponding amount.
7
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
The present value of the reclamation liabilities may be subject to
change based on management's current estimates, changes in
remediation technology or changes to the applicable laws and
regulations by regulatory authorities, which affects the ultimate
cost of remediation and reclamation. Such changes will be reflected
in the accounts of the Company as they arise.
f) 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, monetary assets and liabilities are
translated at the year-end exchange rate. Non-monetary assets and
liabilities are translated using historical rates of exchange.
Revenue and expenses are translated at the rates of exchange
prevailing on the dates such items are recognized in earnings except
for depletion and amortization of mineral property, plant and
equipment which are translated at the same rates as the assets to
which they relate. Exchange gains and losses are included in
operating results.
g) Derivative financial instruments
Derivatives and trading Activities: The Company employs metals and
currency contracts, including forward contracts to manage exposure to
fluctuations in metal prices and foreign currency exchange rates. For
metals production, these contracts are intended to reduce the risk of
falling prices on the Company's future sales. Foreign currency
derivative financial instruments, such as forward contracts are used
to manage the effects of exchange rate changes on foreign currency
cost exposures. The Company recognizes mark-to-market valuations on
open derivative positions through income at the end of each period.
h) Cash
Cash includes cash and bank deposits with an average current yield of
1.35 per cent (2003 - 1.10 per cent).
i) Short-term investments
Short-term investments consist of debt securities with maturities of
less than two years. These debt securities include corporate bonds
with S&P rating of A- to AAA with an overall average of single A high
and are classified as available for sale, which are marked-to-market
at each period end.
j) Stock option plan
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.
During the fourth quarter 2003 the Company changed its accounting
policy, retroactive to January 1, 2002, in accordance with
recommendation of CICA Handbook Section ("CICA 3870"), "Stock-based
Compensation and Other Stock-based Payments". As permitted by
8
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
CICA 3870, the Company has applied this change retroactively for new
awards granted on or after January 1, 2002. Stock-based compensation
expense is calculated using the Black-Scholes option pricing model.
Previously, the Company used the intrinsic value method for valuing
stock-based compensation awards granted to employees and directors
where compensation expense was recognized for the excess, if any, of
the quoted market price of the Company's common shares over the
common share exercise price on the day that options were granted.
Using the fair value method for stock-based compensation, the Company
recorded an additional charge to earnings of $2,189,000, $2,871,000
and $319,000 for the years ended December 31, 2004, 2003 and 2002,
respectively, for stock options granted to employees and directors.
These amounts were determined using an option pricing model assuming
no dividends were paid, a weighted average volatility of the
Company's share price of 58.5 per cent (2003 - 58.0 per cent; 2002 -
67.5 per cent), weighted average expected life of 2.8 years (2003 and
2002 - 3.5 years), weighted average annual risk free rate of 3.80 per
cent (2003 - 4.03 per cent; 2002 - 4.16 per cent). The option
valuation determined by the model was $4.04 (2003 - $2.74; 2002 -
$4.75) per option.
k) 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 year.
The diluted loss per share is calculated based on the weighted
average number of common shares outstanding during the year, 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 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 per share. For settlements in
common shares, the if-converted method is used, which requires that
returns on convertible senior equity instruments and income charges
applicable to convertible financial liabilities be added back to net
loss, net loss be adjusted for any non-discretionary changes that
would arise from the assumed conversion, and that the convertible
securities are assumed to be converted at the beginning of the period
(or at the time of issuance, if later).
Potentially dilutive securities totaling 2,099,142 shares for 2004
(666,746 and 1,432,396 shares arising from outstanding stock options
and share purchase warrants, respectively) were included in the
diluted earnings per share calculation while dilutive securities
totaling 11,798,928 and 952,879 shares for 2003 and 2002,
respectively, have been excluded from the calculation, as their
effect would be anti-dilutive.
l) Convertible debt instruments
The equity and liability components of convertible debt instruments
are presented separately in accordance with their substance. The
liability component is accreted by way
9
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
of charge to earnings with a corresponding credit to the liability
and interest payments are applied against the accrued liability.
Accretion of the equity component is recorded as a direct charge to
the deficit. Financing costs related to the placement of the
convertible debt are charged to the deficit.
m) Income taxes
The provision for income taxes is based on the liability method.
Future taxes arise from the recognition of the tax consequences of
temporary differences by applying enacted or substantially enacted
tax rates applicable for future years to differences between the
financial statement carrying amounts and the tax bases of certain
assets and liabilities. The Company records a valuation allowance
against any portion of those future income tax assets that it
believes will, more likely than not, fail to be realized.
3. RESTATEMENT
Pan American implemented a hedge accounting policy for the accounting
treatment of its base-metal forward contracts program as of January 1, 2004.
In the fourth quarter of 2005 it was concluded that the Company's accounting
for its forward contracts for the sale of base metals (lead and zinc), its
forward contracts for purchasing Mexican pesos with US dollars and its silver
fixing contracts do not qualify for hedge accounting under AcG-13, Hedging
Relationships. As a result, Pan American has restated its unaudited
consolidated financial statements for each quarter from March 31, 2004 to
September 30, 2005 and its audited consolidated financial statements for the
year ended December 31, 2004.
Pan American is now required to recognize mark-to market valuations of its
open forward contract positions through its income at the end of each period.
In the past, Pan American had recognized gains, losses, revenues and expenses
from its forward contracts in its income only in the period in which they
settled. The effects of the change in accounting treatment are summarized in
the tables below:
As Previously Reported As Restated
December 31 December 31
Consolidated Balance Sheets 2004 2004
-------------------------------------------------------------------------------
Unrealized gain on commodity contracts $ - $ 480
Prepaid and other $ 1,684 $ 1,211
Unrealized loss on commodity contracts $ - $ 4,695
Deficit $ (111,976) $ (116,664)
As Previously Reported As Restated
For the year ended For the year ended
December 31 December 31
Consolidated Statement of Operations 2004 2004
--------------------------------------------------------------------------------
Revenue $ 92,896 $ 94,825
Mine operating earnings $ 12,865 $ 14,794
Loss on commodity contracts $ - $ (6,617)
Net income for the period $ 19,902 $ 15,214
Adjusted net income for the period $ 8,567 $ 3,879
attributable to common shareholders
Basic earnings per share $ 0.14 $ 0.06
Diluted earnings per share $ 0.13 0.06
10
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
4. BUSINESS ACQUISITIONS
Morococha mining assets
On August 26, 2004, the Company acquired an 80.7 per cent interest in
Compania Minera Argentum S.A. ("Argentum"), which owns 70.0 per cent
of the Morococha mine in central Peru, for $34,620,000 by way of a
public offering for Argentum's common shares through the Lima Stock
Exchange. The Company also acquired Compania Minera Natividad S.A.
("Natividad") for $1,500,000, which owns 30.0 per cent of the
Morococha mine and holds numerous adjacent mineral concessions and a
primary processing facility. Subsequent to the acquisition, the
Company purchased an additional 2.0 percent interest by acquiring
investment shares for $625,000.
The acquisition was accounted for by the purchase method of
accounting and the accounts of Argentum and Natividad have been
consolidated from July 1, 2004, which was the date the Company
acquired effective control and ownership of the assets and
liabilities of the Morococha mine.
The fair value of assets and liabilities acquired and the
consideration paid are summarized as follows:
As at June 30, 2004
-----------------------------------------------------------------------
Fair value of net assets acquired
Current assets (including cash of $657,000) $ 7,555
Mineral property, plant and equipment 16,745
Non-producing properties 40,472
64,772
Less:
Accounts payable and accrued liabilities (3,937)
Provision for asset retirement obligation and reclamation (8,618)
Future income tax liability (14,146)
Non-controlling interest (1,200)
----------------------------------------------------------------------
Total purchase price $ 36,871
======================================================================
Consideration paid is as follows:
Cash $ 36,120
Acquisition costs 751
$ 36,871
=======================================================================
The purchase consideration for the mining assets of Argentum and
Natividad exceeded the carrying value of the underlying assets for
tax purposes by $54,945,000. In addition, the Company recorded a
provision for future reclamation and restoration costs in amount of
$8,618,000. These amounts have been applied to increase the carrying
value of the mineral properties for accounting purposes. However,
this did not increase the carrying value of the underlying assets for
tax purposes and resulted in a temporary difference between
accounting and tax values. The resulting estimated future income tax
liability associated with this temporary difference of $14,146,000
was also applied to increase the carrying value of the non-producing
properties.
11
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
Corner Bay Silver Inc.
On February 20, 2003, the Company acquired a 100 per cent interest in
Corner Bay Silver Inc. ("Corner Bay"). The consideration paid to the
shareholders of Corner Bay was 7,636,659 common shares of the Company
( "Pan American shares"), representing 0.3846 of a share of the
Company for each share of Corner Bay and 3,818,329 warrants (the "Pan
American warrants") to purchase common shares of the Company,
representing 0.1923 of a warrant for each share of Corner Bay. The
Pan American shares issued were valued at $54,203,000, which was
derived from an issue price of Cdn$11.30. The Pan American warrants
were valued at $8,889,000, which was equal to $2.328 per warrant. The
Pan American warrants were valued using an option pricing model
assuming a weighted average volatility of the Company's share price
of 35.0 per cent and a weighted average annual risk free rate of 4.16
per cent.
Each whole Pan American warrant allows the holder to purchase a Pan
American share for a price of Cdn$12.00 for a five-year period ending
February 20, 2008.
In addition, the Company agreed to grant 553,847 stock options to
purchase common shares of the Company. These options replaced 960,000
fully vested stock options held by employees and shareholders of
Corner Bay. The value of the stock options granted was determined to
be $1,136,000.
The acquisition was accounted for using the purchase method, which
resulted in the allocation of the consideration paid to the fair
value of the assets acquired and the liabilities assumed, as follows:
As at February 20, 2003
-------------------------------------------------------------------
Fair value of net assets acquired
Current assets (including cash of $2,393,000) $ 2,512
Mineral property, plant and equipment 2,500
Non-producing properties 79,008
Other assets 29
84,049
Less:
Current liabilities (104)
Provision for future income tax liability (19,035)
--------------------------------------------------------------------
Total Purchase Price $ 64,910
===================================================================
Consideration paid is as follows:
Common shares $ 64,228
Acquisition costs 682
$ 64,910
===================================================================
The purchase consideration of $64,228,000 for 100 per cent of Corner
Bay exceeds the carrying value of the net assets acquired by
$54,108,000, which was applied to increase the carrying value of the
mineral properties. The excess amount did not increase the carrying
value of the underlying assets for tax purposes resulting in a
temporary difference between accounting and tax values. The resulting
estimated future income tax liability associated with this temporary
difference of $19,035,000 was also applied to increase the carrying
value of the non-producing properties.
12
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
5. INVENTORIES
Inventories consist of:
2004 2003
----------------------------------------------------------------------
Concentrate inventory $ 3,827 $ 4,474
Direct smelting ore 3,121 4,350
Dore inventory 2,168 217
Materials and supplies 4,229 1,472
----------------------------------------------------------------------
13,345 10,513
Less: non-current direct smelting ore (2,671) (3,901)
------------------------------------------------------------------
$ 10,674 $ 6,612
=================================================================
Under an agreement relating to direct smelting ore entered into in
2002 the Company acquired the right to mine and sell 600,000 tonnes
of silver-bearing ore stockpiles. The consideration paid was
$4,500,000 and a one-third operating cash flow interest after the
Company recovers $4,500,000 of operating costs, deemed taxes and
interest on the acquisition cost. In December 2004, the Company
recorded a charge against income of $61,000 relating to the operating
cash flow interest.
Under a second agreement with Volcan, the Company has an option to
acquire a 60 per cent interest in certain silver-bearing stockpiles
by spending $2,000,000 over a three-year period ending November 8,
2005. In the twelve-months following this three-year period, the
Company may increase its interest to 100 per cent by paying Volcan
$3,000,000 and granting Volcan a 7.0 per cent royalty on commercial
production from the stockpiles. In December 2004, the Company
extended this agreement to December 31, 2006 at a cost of $304,000.
As at December 31, 2004, the Company has not made any expenditures
pursuant to this agreement.
13
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
6. MINERAL PROPERTY, PLANT AND EQUIPMENT
Mineral property, plant and equipment consist of:
December 31, 2004 December 31, 2003
-----------------------------------------------------------------------------------
Accumulated Accumulated
Cost amortization Net Cost amortization Net
-------------------------------------------------------------------------------------------------------------------
Mineral properties
Morococha mine, Peru $ 9,693 $ (169) $ 9,524 $ - $ - $ -
La Colorada mine, Mexico 4,153 (421) 3,732 4,153 (44) 4,109
Huaron mine, Peru 1 - 1 1 - 1
-------------------------------------------------------------------------------------------------------------------
13,847 (590) 13,257 4,154 (44) 4,110
-------------------------------------------------------------------------------------------------------------------
Plant and equipment
Morococha mine, Peru 8,515 (1,930) 6,585 - - -
La Colorada mine, Mexico 23,514 (2,420) 21,094 21,743 (703) 21,040
Huaron mine, Peru 19,389 (7,659) 11,730 19,852 (6,355) 13,497
Quiruvilca mine, Peru 6,523 (6,523) - 6,212 (3,769) 2,443
Other 706 (503) 203 2,567 - 2,567
-------------------------------------------------------------------------------------------------------------------
58,647 (19,035) 39,612 50,374 (10,827) 39,547
-------------------------------------------------------------------------------------------------------------------
Mine development and other
Morococha mine, Peru 9 - 9 - - -
La Colorada mine, Mexico 27,181 (2,420) 24,761 20,482 (725) 19,757
Huaron mine, Peru 34,238 (8,380) 25,858 27,294 (4,871) 22,423
Quiruvilca mine, Peru 19,078 (18,093) 985 19,264 (21,707) (2,443)
Other 198 (33) 165 664 (484) 180
-------------------------------------------------------------------------------------------------------------------
80,704 (28,926) 51,778 67,704 (27,787) 39,917
-------------------------------------------------------------------------------------------------------------------
$ 153,198 $ (48,551) $ 104,647 $ 122,232 $ (38,658) $ 83,574
===================================================================================================================
Mineral property, plant and equipment is amortized using the
straight-line method over the lesser of estimated useful lives
ranging from five to twenty years or estimated ore reserves. Mine
development is amortized over the estimated ore reserves.
On October 23, 2003, the Company purchased an existing 3.0 per cent
net smelter royalty on its Huaron silver mine for cash consideration
of $2,500,000.
During 2004 the Company spent $6,306,000 to expand the oxide mine and
various other mine upgrades after completing a $20,693,000 in
expansion at the La Colorada mine in 2003. Commercial production for
accounting purposes commenced on January 1, 2004.
During the fourth quarter 2004, the Company wrote-off the $2,460,000
carrying value of certain assets acquired as part of the acquisition
of Corner Bay Silver Inc., which were considered unnecessary for the
development of the property.
14
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
7. NON-PRODUCING PROPERTIES
Non-producing properties consist of:
2004 2003
-----------------------------------------------------------------------
Non-producing properties
Morococha, Peru $ 40,472 $ -
Alamo Dorado, Mexico 81,692 80,076
Manantial Espejo, Argentina 2,012 2,012
Other 1,687 1,785
------------------------------------------------------------------------
$ 125,863 $ 83,873
========================================================================
Morococha, Peru
The Company holds a number of mining concessions as part of the
acquisition of the Morococha mine (Note 3).
Alamo Dorado, Mexico
On February 20, 2003, the Company acquired a 100 per cent interest in
the Alamo Dorado silver-gold deposit located in the State of Sonora,
Mexico.
Manantial Espejo, Argentina
On March 4, 2002, the Company acquired a 50.0 per cent interest in
the Manantial Espejo property, located in Argentina, from Silver
Standard Resources Ltd., which holds the other 50.0 per cent. The
purchase price was 231,511 common shares of the Company valued at
$1,250,000, cash of $662,433 and a further cash payment of $100,000
to eliminate a 1.2 per cent NSR royalty on the property. All
acquisition costs have been capitalized while exploration costs have
been charged to operations.
At December 31, 2004, the Company's share of the net liabilities of
the joint venture was $58,000 (2003 - $260,000). During the year the
joint venture expended approximately $5,274,000 on exploration
activities which was funded by the joint venture partners
(approximately $2,637,000 each).
Other properties consist of:
The Company holds a 100% interest in the Waterloo and Hog Heaven
properties located in the United Sates.
San Vicente, Bolivia
On December 1, 2001, the Company and Comibol entered into a two-year
contract to allow EMUSA, a Bolivian company, to extract from the
mine, at its cost, up to 200,000 tonnes of ore during the life of the
contract. The Company received the greater of $13,000 per month, a 4
per cent net smelter return royalty or depending on metal prices, 20
per cent - 30 per cent of net cash flow. The Company extended the
contract with EMUSA to continue with small scale operation for an
additional year, which concluded at the end of 2004
On November 10, 2003, the Company entered into a separate agreement
with EMUSA giving EMUSA the right to earn a 49 per cent interest in
the Company's Bolivian subsidiary,
15
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
Pan American Silver (Bolivia) S.A. EMUSA can earn its share by
financing the next $2,500,000 in project expenses, including a
feasibility study. As at year ended December 31, 2004 EMUSA has spent
$2,054,000 towards the earn-in interest, including $1,105,000 owing
to the Company.
Dukat, Russia
On November 21, 2004, the Company completed the sale of its 20 per
cent interest in the Dukat silver mine in Russia to a maximum amount
of $43,000,000. The Company received $20,500,000 in cash and may
receive up to $22,500,000 in contingent future payments. The future
payments are to be made annually based on the yearly average silver
price, and the range is from no payment, if the yearly silver price
for the preceding year is less than $5.50 per ounce to $8,000,000, if
the average silver price for the preceding year exceeds $10.00 per
ounce. The agreement also includes provisions for early payment of
remaining future payments on the occurrence of certain events. The
Company had previously written-off the property in 2000 and as a
result, recognized a $20,165,000 gain, net of $335,000 in transaction
related costs, from this sale. The contingent future payments will be
recognized into income as they are received.
Quiruvilca, Peru
On June 28, 2004, the Company completed the sale of a package of
surplus lands and mineral rights in the vicinity of the Quiruvilca
mine for $3,650,000 and has recognized a gain of $3,582,000 as a
result of this sale.
Collectively, the Company recognized a gain of $23,747,000 from the
sale of the Dukat property and the sale of surplus lands and mineral
rights.
8. OTHER ASSETS
Other assets consist of:
2004 2003
----------------------------------------------------------
Prepaid taxes $ - $ 2,441
Long-term receivable 138 1,414
Reclamation bonds 105 105
Other 404 -
----------------------------------------------------------
$ 647 $ 3,960
==========================================================
Prepaid taxes consisted of non-current IGV and various other taxes,
including tax on assets. During 2003 and 2004, the Company prepaid
$1,186,000 of tax on assets to the Peruvian tax authorities which can
be applied against future income taxes. The tax on assets was
repealed and the taxes paid in 2003 may be refunded. As at December
31, 2004, the prepaid taxes have been reclassified as current.
In December 2004, an agreement was reached whereby the balance of
future power credits included in long-term receivable of $539,000 was
forgiven in exchange for an extension to December 31, 2006 for the
right to earn a 60 per cent interest in certain silver-bearing
stockpiles (Note 4). The value for the extension was $304,000 and a
charge of $539,000 was recognized for power credits forgiven.
16
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
On March 15, 2004, the Company sold its interest in the Tres Cruces
property in Peru in exchange for 3,500,000 common shares (December
31, 2004 market value - $1,225,000) of New Oroperu Resources Inc.
valued at the same carrying value of the Tres Cruces property.
9. CURRENT LIABILTIES
Accounts payable and accrued liabilities consist of:
2004 2003
----------------------------------------------------- -----------------
Trades accounts payable $ 12,153 $ 8,781
Payroll and related benefits 4,196 1,203
Income taxes and other 2,377 422
Royalties 1,259 29
Provisions and other liabilities 346 90
----------------------------------------------------- -----------------
$ 20,331 $ 10,525
===================================================== =================
In June 2004, the Peruvian congress passed a new 1.0 per cent mining
royalty tax on all revenue from mining operations in Peru. During
2004 certain mining operations in Peru became taxable and are subject
to both workers participation tax and Peruvian income tax. For the
year ended December 31, 2004, the Company has accrued $997,000 for
mandatory workers participation tax.
The Company is obligated to make an annual payment (the "Royalty
Fee") until May 15, 2009. The Royalty Fee is equal to 20 per cent
multiplied by the average silver price for the previous calendar year
less $4.75, multiplied by the annual production from the La Colorada
mine and multiplied by the scheduled IFC loan balance at the end of
the year divided by $9,500,000. The Royalty Fee is capped such that
the maximum payable is $2,800,000. As at December 31, 2004 the
Company accrued $695,000 (2003 - $29,000) for the Royalty Fee.
10. BANK LOANS AND CAPITAL LEASE
Bank loans and capital lease consist of:
2004 2003
-----------------------------------------------------------------------
Huaron pre-production loan facility $ - $ 3,521
La Colorada IFC project loan - 9,500
-----------------------------------------------------------------------
- 13,021
Current portion - (2,625)
-----------------------------------------------------------------------
- 10,396
-----------------------------------------------------------------------
Capital lease 134 421
Current portion (134) (14)
-----------------------------------------------------------------------
- 407
-----------------------------------------------------------------------
$ - $ 10,803
=======================================================================
17
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
During 2004 the Company repaid the balance of the Huaron
pre-production loan. The loan bore interest at 6-month LIBOR plus 3.0
per cent and was repayable in monthly installments of $135,000 until
February 2006. In 2004, $114,000 of interest was paid on this loan.
During 2004 the Company repaid the $9,500,000 IFC project loan. The
loan bore interest at 6-month LIBOR plus 3.50 per cent until certain
technical and financial tests were achieved, and 6-month LIBOR plus
3.25 per cent thereafter and was repayable in semi-annual
installments of $1,000,000, commencing November 15, 2004 until May
15, 2009.
During 2004 the Company paid $229,000 (2003 - $334,500) to the IFC
for interest and financing costs of which $Nil (2003 - $89,500) was
reflected in accounts payable and accrued liabilities as at December
31, 2003. The costs incurred in 2003 were capitalized as part of
pre-operating costs.
The Company entered into a capital lease for the purchase of mining
equipment for the La Colorada project. The capital lease bears
interest at 6.0 per cent per annum, payable in semi-annual payments
over 5 years. The balance of the capital lease will be repaid in
2005.
11. CONVERTIBLE DEBENTURES
On July 30, 2003, the Company completed an offering of $86,250,000
convertible, unsecured senior subordinated debentures (the
"Debentures"), which mature on July 31, 2009. The Debentures bear
interest at a rate of 5.25 per cent per annum, payable semi-annually
on January 31 and July 31 of each year, beginning on January 31,
2004. The Company has the option to discharge interest payments from
the proceeds of the sale of common shares issued to a trustee for the
purpose of converting such shares into cash. The Company incurred
$3,272,000 of debt issue expenses, which were charged to the deficit.
The Debentures are convertible, at the option of the holder, at any
time prior to maturity or redemption into common shares of the
Company at a price of $9.57 per common share (the "Conversion
Price"). The Company may not redeem the Debentures prior to July 31,
2006. After July 31, 2006, the Company may redeem the Debentures
provided that the Company's common shares trade at 125 per cent or
more of the Conversion Price. The Debentures are classified as a
compound financial instrument for accounting purposes as they contain
a right to convert into equity of the Company.
The Debentures were being accounted for in accordance with their
substance and were presented in the financial statements in their
component parts, measured at their respective fair values at the time
of issue. The value of the Debentures was comprised of a $35,357,000
fair value of the Debentures, $23,049,000 fair value of the future
interest payments and $27,844,000 fair value ascribed to the holder's
option to convert the principal balance into common shares. These
components have been measured at their respective fair values on the
date the Debentures were issued. The $23,049,000 fair value of the
future interest payments was classified as a liability and the
$63,201,000 fair value of the Debentures and the conversion option
have been classified in shareholders' equity. Over the six-year term
of the Debentures, the fair value of the Debentures and the fair
value of the future interest payments are accreted to their future
value. The periodic accretion of the Debentures is charged to deficit
and the periodic accretion of the future interest payments is charged
to operations. For the year ended December 31, 2004, the Company
recorded accretion of $2,871,000 (2003 - $3,534,000) related to the
Debentures and $366,000 (2003
18
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
- $595,000) accretion expense was charged to operations with a credit
to the liability component of the Debentures.
During the period between April 7, 2004 and May 21, 2004 the Company
offered an inducement (the "Offer") to the holders of the Debentures
to convert their holdings into 106.929 common shares of the Company
plus cash of $131.25 for every $1,000 principal amount of the
Debentures. Pursuant to this Offer the Company issued 9,135,043
common shares and made cash payments totaling $11,213,000 to the
holders of $85,431,000 principal amount of the Debentures. The cost
of this Offer was allocated based on the respective fair values of
the debt and equity components at the date of redemption. The
redemption of the Debentures resulted in a loss on redemption of the
debt component of the Debentures of $1,364,000, while the redemption
of the equity component of the Debentures resulted in an $8,464,000
charge to the deficit.
As at December 31, 2004, the fair value of the outstanding Debentures
was $767,000 (principal balance -$717,000), which includes the fair
value ascribed to the holder's option to convert the principal
balance into common shares.
12. PROVISION FOR ASSET RETIREMENT OBLIGATION AND RECLAMATION
Although the ultimate amount of the asset retirement obligation and
reclamation is uncertain, the fair value of these obligations is
based on information currently available including closure plans and
applicable regulations.
The total undiscounted amount of estimated cash flows required to
settle the Company's asset retirement obligations is $40,960,000
(2003 - $27,531,000) which has been discounted using a discount rate
of 7.6 per cent. Reclamation obligations at the Quiruvilca mine of
$15,320,000 are expected to be paid over the next six years. The
remainder of the obligations is expected to be paid within the next
fifteen years. Reclamation obligations will be funded from operating
cash flows, reclamation deposits and cash on hand. Future changes to
these estimates due to changes in closure plans or applicable
regulation will be made prospectively, with a corresponding charge to
the asset's carrying value.
A summary of the Company's provision for asset retirement obligation
and reclamation is presented below:
Balance at December 31, 2002 $ 20,950
Reclamation expenditures (61)
Accretion 303
------------------------------------------------------------------
Balance at December 31, 2003 21,192
Reclamation expenditures (1,347)
Accretion 1,315
Changes in estimates 2,234
Amounts arising from business acquisition 8,618
------------------------------------------------------------------
Balance at December 31, 2004 $ 32,012
==================================================================
19
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
13. SHARE CAPITAL
a) Transactions concerning stock options and share purchase warrants
are summarized as follows:
Incentive Share Purchase
Stock Option Plan Warrants
------------------------------ ------------------------ Total
Shares Price Shares Price Shares
-------------- ------------- ---------- ----------- -------------
Outstanding, December 31, 2001 3,045,300 $ 4.27 669,360 $ 3.26 3,714,660
Year ended December 31, 2002
Granted 103,360 $ 5.39 - 6.12 103,360
Exercised (1,445,400) $ 3.17 - 7.70 (32,250) $ 3.00 (1,477,650)
Expired (522,900) $ 5.86 (522,900)
Cancelled (15,000) $ 3.17 (15,000)
------------- ---------------- ----------- -------------- --------------
Outstanding, December 31, 2002 1,165,360 $ 3.89 637,110 $ 3.26 1,802,470
Year ended December 31, 2003
Granted 2,214,847 $ 3.51 - 9.26 3,818,329 $ 9.26 6,033,176
Exercised (1,385,502) $ 3.51 - 9.26 (100,943 $ 5.00 - 9.26 (1,486,445)
Cancelled (15,000) $ 7.79 - - (15,000)
------------- ---------------- ----------- -------------- --------------
Outstanding, December 31, 2003 1,979,705 $ 6.69 4,354,496 $ 8.56 6,334,201
Year ended December 31, 2004
Granted $ 12.00 -18.73 - - 570,000
Exercised $ 4.16 - 13.73 (544,679) $ 3.89 - 9.98 (1,329,774)
Cancelled $ 7.70 - 9.98 - - (1,036)
$ 8.14 - - (80,000)
------------- -- ------------- ----------- ------------- ---------------
$ 9.90 3,809,817 $ 9.98 5,493,391
============= ================ =========== ============= ===============
The Company has reserved 3,920,260 common shares available for the
future grant of stock options.
The following table summarizes information concerning stock options
outstanding as at December 31, 2004:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted
Average Number
Number Remaining Weighted Exercisable Weighted
Range of Year Outstanding as Contractual Average as at Average
Exercise of at December 31, Life Exercise December Exercise
Prices Expiry 2004 (months) Price 31, 2004 Price
------------------ --------- --------------- ---------- -------------- ------------ ------------
$ 4.16 - 8.11 2006 124,666 16.36 $ 5.32 88,000 $ 4.16
$ 8.04 - 8.40 2007 370,000 34.71 $ 8.34 370,000 $ 8.34
$ 6.83 -12.00 2008 491,908 41.88 $ 8.48 101,908 $ 9.61
$ 13.73 -18.73 2009 480,000 51.69 $ 16.35 170,000 $ 16.56
$ 4.16 2010 217,000 71.47 $ 4.16 217,000 $ 4.16
------------- -------------- ------------ ------------
1,683,574 45.03 $ 9.90 946,908 $ 8.07
============= ============== ============ ============
b) During the year ended December 31, 2004, the Company:
i) issued 3,333,333 common shares for gross proceeds of
$55,000,000 less share issue expenses of $180,000;
ii) issued 9,145,700 common shares at a deemed value of
$88,950,000 on the induced conversion of $85,431,000
principal amount of the convertible debentures; and
20
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
iii)issued 16,624 common shares at a value of $245,000 for
compensation expense.
c) During the year ended December 31, 2003, the Company:
i) issued 7,636,659 common shares to acquire a 100 per cent
interest in Corner Bay Silver Inc. The common shares issued
were valued at $54,203,000; and
ii) issued 3,293 common shares at a value of $22,000 recorded as
compensation expense.
14. FINANCIAL INSTRUMENTS
Fair value
The Company's financial instruments, excluding the debentures
disclosed in Note 9, include cash, short-term investments, accounts
receivable, accounts payable and accrued liabilities, a capital lease
and advances for metal shipments. The carrying value of these
instruments approximates their fair value due to their immediate or
short-term maturity.
Concentration of Credit Risk
In 2004, the Company's six customers (2003 and 2002 - six and five
customers, respectively) accounted for 100per cent of concentrate and
Dore sales revenue. The loss of any of these customers or curtailment
of purchases by such customers could have a material adverse affect
on the Company's results of operations and financial condition.
Derivatives
The Company sells metal under long-term contracts. Generally, the
price received for such sales is the average metal price for a month
that is one month before shipment or two months after the month in
which the metal arrives at its destination. In order to establish the
price received for portions of its production, the Company
occasionally sells metal forward at a fixed price.
During 2004, the Company settled on 16,260 tonnes of zinc sold at an
average price of $943 per tonne and 10,290 tonnes of lead sold at an
average price of $728 per tonne. The Company realized a net loss of
$3,312,000 from the settlement of these forward sales.
As at December 31, 2004 the Company had sold forward 22,200 tonnes of
zinc at an average price of $1,092 per tonne and 4,000 tonnes of lead
at an average price of $726 per tonne. These forward sales represent
approximately 62 per cent and 22 per cent of anticipated 2005
production of zinc and lead, respectively, and will be realized
between January 2005 and December 2005. At December 31, 2004 these
contracts have a negative market value of a $4,707,000.
As at December 31, 2004, the Company had fixed the price of 800,000
ounces of silver from the fourth quarter's silver production which is
due to be priced in January and February 2005 under the Company's
concentrate contracts. The price fixed for these ounces averaged
$7.40 per ounce while the spot price of silver was $6.81 on December
31, 2004. As a result, the Company has recorded additional revenue on
these silver sales at the hedged price which was $473,000 higher than
the spot price.
21
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
15. SUPPLEMENTAL CASH FLOW INFORMATION
a) CHANGES IN NON-CASH WORKING CAPITAL ITEMS
2004 2003 2002
-------------------------------------------------------------------------------------------
Changes in non-cash working capital items
Accounts receivable $ (13,970) $ (2,348) $ 1,439
Inventories 2,652 (1,975) (1,592)
Prepaid expenses 124 1,908 3,337
Accounts payable and accrued liabilities 6,416 (4,702) 3,197
Advances for metal shipments (3,884) 2,378 (1,913)
Current portion of non-current liabilities 52 (641) (107)
-------------------------------------------------------------------------------------------
$ (8,610) $ (5,380) $ 4,361
===========================================================================================
b) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
2004 2003 2002
-----------------------------------------------------------------------------------------------------------------
Shares issued on conversion of convertible debentures (Note 10) $ 88,950 $ - $ -
Exchange of mineral property for marketable securities 404 - -
Shares issued for purchase of direct smelting ore stockpile - - 4,500
Shares issued for purchase of royalty - - 3,000
Shares issued for acquisition of subsidiary (Note 3) 54,203 -
Shares issued for purchase of mineral property - - 1,250
Shares received in exchange for Tres Cruces option agreement - - 1
Shares purchase warrants issued on acquisition of subsidiary (Note 3) - 8,889 -
Stock options granted on acquisition of subsidiary (Note 3) $ - $ 1,136 $ -
Operating activities included the following cash payments
Interest paid $ 2,663 $ 561 $ 988
Income taxes paid $ 1,249 $ 510 $ -
16. SEGMENTED INFORMATION
Substantially all of the Company's operations are within the mining
sector and the Company has activities 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 activities independently. The Corporate office
provides support infrastructure to the mining and exploration
activities with respect to financial, human resource and technical
support.
22
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
Segmented disclosures and enterprise-wide information are as follows:
Mining and development 2004
------------------------- Investment & (Restated - Note 3)
Mexico Peru exploration Corporate Total
--------------------------------------------------------------------------------------------------------------
Revenue from external customers $ 11,938 $ 84,401 $ - $ (1,514) $ 94,825
Gain on sale of assets - 3,583 20,164 - 23,747
Interest and other income 10 213 822 1,293 2,338
Loss on commodity contracts (6,617) (6,617)
Interest and financing expenses (229) (304) - (365) (898)
Exploration (84) (172) (3,582) - (3,838)
Depreciation and amortization (3,788) (7,055) - (26) (10,869)
Net income (loss) (5,245) 18,271 17,358 (15,170) 15,214
--------------------------------------------------------------------------------------------------------------
Property, plant and equipment 6,378 8,943 10 36 15,367
expenditures
Segment assets $ 55,702 $ 136,432 $ 87,611 $ 90,341 $ 370,086
Mining and development
------------------------- Investment & 2003
Mexico Peru exploration Corporate Total
--------------------------------------------------------------------------------------------------------------
Revenue from external customers $ - $ 45,122 $ $ - $ 45,122
-
Gain on sale of assets - - - 318 318
Interest and other income - (402) 581 318 497
Interest and financing expenses - (561) - (595) (1,156)
Exploration (172) (202) (2,063) (106) (2,543)
Depreciation and amortization - (3,306) - (19) (3,325)
Net income (loss) (172) 638 (1,483) (5,777) (6,794)
--------------------------------------------------------------------------------------------------------------
Property, plant and equipment 11,436 5,467 - 41 16,944
expenditures
Segment assets $ 47,501 $ 57,254 $ 86,656 $ 88,472 $ 279,883
Mining and development
------------------------- Investment & 2023
Mexico Peru exploration Corporate Total
--------------------------------------------------------------------------------------------------------------
Revenue from external customers 1,545 $ 42,588 $ - $ 960 $ 45,093
Interest and other income 1 813 174 264 1,252
Interest and financing expenses - (988) - - (988)
Exploration (152) (11) (1,043) - (1,206)
Depreciation and amortization (235) (4,617) - (20) (4,872)
Net loss (669) (29,662) (758) (2,888) (33,977)
--------------------------------------------------------------------------------------------------------------
Property, plant and equipment 7,654 1,976 - 21 9,651
expenditures
Segment assets 34,964 $ 51,676 $ 4,548 $ 11,757 $ 102,945
Mineral property, plant and
Revenue equipment
----------------------------------------------------- ---------------------------------
2004
(Restated - Note 3) 2003 2002 2004 2003
--------------------------------------------------------------------------------------------------------------
Peru $ 84,401 $ 45,122 $ 42,588 $ 93,659 $ 36,436
Canada (1,514) - 960 57 62
Mexico 11,938 - 1,545 133,581 127,734
United States - - - 1,194 1,194
Argentina - - - 2,012 2,012
Bolivia - - - 7 9
--------------------------------------------------------------------------------------------------------------
$ 94,825 $ 45,122 $ 45,093 $ 230,510 $ 167,447
==============================================================================================================
23
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------
Revenue from third parties $ 813 $ 563 $ 170
Investment income, net 1,334 403 269
Power credits 109 36 326
Other revenue and expenses 82 (506) 187
Sale of royalty - - 300
-----------------------------------------------------------------------
$ 2,338 $ 496 $ 1,252
=======================================================================
17. SEVERANCE INDEMNITIES AND COMMITMENTS
Severance indemnities and commitments
2004 2003
----------------------------------------------------------------------
Severance indemnities $ 569 $ 803
Employee benefits liability 927 562
Other provision and non-current liabilities 788 1,087
----------------------------------------------------------------------
2,284 2,452
Less: current portion (742) (326)
----------------------------------------------------------------------
$ 1,542 $2,126
======================================================================
The Company has an obligation to its Peruvian employees for severance
indemnities. At December 31, 2004 the obligation amounted to $569,000
(2003 - $803,000) and the current portion of this obligation amounted
to $171,000 (2003 - $242,000).
As at December 31, 2004, the Company had accrued a $927,000 (2003 -
$562,000) liability for unpaid 1997 to 2000 hospital and social
security taxes. The amount outstanding accrues interest at 6 per cent
per annum and is to be repaid over a ten-year period ending in 2012.
A portion of this liability amounting to $126,000 (2003 - $84,000) is
reflected in current liabilities.
As at December 31, 2004, the Company has provisions and other
non-current liabilities totaling $788,000 (2003 - $1,087,000) of
which $445,000 (2003 - $Nil) is current.
As at December 31, 2004, the Company has outstanding commitments of
$3,515,000 for capital expenditures at the Alamo Dorado and Manantial
Espejo development projects.
The Company is subject to various claims and legal proceedings
covering a wide range of matters that arise in the ordinary course of
business activities, many of them relating to ex-employees. Each of
these matters is subject to various uncertainties and it is possible
that some of these matters may be resolved unfavorably to the
Company. The Company has established provisions for matters that are
probable and can be reasonably estimated, which are included within
current liabilities. The total value of claims against the Company
does not exceed $5 million.
24
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
INCOME TAXES
The provision for income taxes reported differs from the amounts
computed by applying the aggregate Canadian federal and provincial
income tax rates to the income before tax provision due to the
following:
2004 2003 2002
(Restated - Note 3)
--------------------------------------------------------------------------------------------------
Statutory tax rate 35.6% 37.6% 39.6%
(Provision) recovery of income taxes computed at
statutory rates $ (6,460) $ 2,653 $ 13,454
Non-deductible expenses (779) (1,088) (126)
Effect of tax benefits not previously recognized 5,511 - -
Effect of write-down of non-producing property not
recognized in the period - - (2,957)
Effect of lower tax rates in foreign jurisdictions 6,244 (98) (4,818)
Tax benefit not recognized in the period that the
loss arose (7,269) (1,467) (5,553)
--------------------------------------------------------------------------------------------------
Provision for income taxes $ (2,753) $ - $ -
==================================================================================================
The tax effect of each type of temporary difference that gives rise
to the Company's future tax assets and liabilities have been
determined and are set out in the following table.
2004 2003
---------------------------------------------------------------------------------------------------
Excess of tax value of mineral property, plant and equipment over $ 7,626 $ 6,481
book value
Excess book value of liability over tax value 9,541 6,357
Capital losses and other 5,130 -
Canadian resource pools 2,689 2,689
Operating loss carryforwards 25,022 23,336
---------------------------------------------------------------------------------------------------
Total future income tax asset 50,008 38,863
Less: valuation allowance (34,005) (24,353)
---------------------------------------------------------------------------------------------------
Net future income tax asset 16,003 14,510
Excess book value of mineral property, plant and equipment over
tax value (49,215) (33,545)
---------------------------------------------------------------------------------------------------
Net future income tax liability $ (33,212) $ (19,035)
===================================================================================================
Changes in the valuation allowance relate primarily to net operating
losses which are not currently recognized. The Company has reviewed
its future income tax assets and has not recognized potential tax
benefits arising there from because at this time management believes
it is more likely than not that benefits will not be realized in
future years.
Income taxes consist of:
2004 2003 2002
---------------------------------------------------------------------
Income taxes - current $ (2,723) $ - $ -
Income taxes - future (30) - -
---------------------------------------------------------------------
Provision for income taxes $ (2,753) $ - $ -
=====================================================================
25
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
At December 31, 2004 the Company had the following operating loss
carry forwards available for tax purposes:
Amount Expiry
------------------------------------------------------------------
Canada $26,834,000 2006-2011
Peru $12,496,000 2005-2007
Cyprus $17,043,000 Indefinite
Mexico $32,803,000 2005-2014
Argentina $841,000 2005-2009
Bolivia $1,789,000 Indefinite
19. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These financial statements are prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP") which
differ in certain material respects from accounting principles
generally accepted in the United States ("US GAAP"). Material
differences between Canadian and US GAAP and their effect on the
Company's consolidated financial statements are summarized in the
tables below.
December 31, 2004 (Restated - Note 3)
------------------------------------------------
Total Total Shareholders'
Consolidated Balance Sheets assets Liabilities Equity
------------------------------------------------------------------------------------------------------------------
Reported under Canadian GAAP $ 370,086 $ 94,570 $ 275,516
Amortization of mineral property (a) (1,700) (595) (1,105)
Deferred exploration (a) (1,825) - (1,825)
Increase in depletion expense (d) (2,551) (765) (1,786)
Reclassify convertible debentures (b) - 633 (633)
Net effect of other convertible debentures adjustments (b) 15 2 13
-------------------------------------------------------------------------------------------------------------------
Reported under US GAAP $ 364,025 $ 93,845 $ 270,180
===================================================================================================================
December 31, 2003
-------------------------------------------
Total Total Shareholders'
Consolidated Balance Sheets assets Liabilities Equity
------------------------------------------------------------------------------------------------------------
Reported under Canadian GAAP $ 279,883 $ 95,785 $ 184,098
Deferred exploration (a) (1,993) - (1,993)
Amortization of mineral property (a) (1,700) (595) (1,105)
Reclassify convertible debentures (b) - 63,201 (63,201)
Other comprehensive income (g) 1,515 (1,515)
Deferred debt issue costs (b) 3,273 - 3,273
Amortization of debt issue costs (b) (454) - (454)
Net affect on convertible debentures adjustments (b) - 1,292 (1,292)
-------------------------------------------------------------------------------------------------------------
Reported under US GAAP $ 279,009 $ 161,198 $ 117,811
=============================================================================================================
26
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
December 31, 2004 (Restated - Note 3)
------------------------------------------------------------------
Additional
Common Convertible Paid in
Consolidated Statements of Shareholders' Equity Shares Debentures Capital Deficit Total
---------------------------------------------------------------------------------------------------------------------
Reported under Canadian GAAP $ 380,571 $ 633 $10,976 $(116,664) $275,516
Amortization of mineral property (a) - - - (1,105) (1,105)
Increase in depletion expense (d) - - - (1,786) (1,786)
Deferred exploration (a) - - - (1,825) (1,825)
Net effect on convertible debentures adjustments (b)
- - - 13 13
Reclassify convertible debentures (b) - (633) - - (633)
------------------------------------------------- -------------------------------------------------------------------
Reported under US GAAP $ 380,571 $ - $10,976 $(121,367) $270,180
=====================================================================================================================
December 31, 2003 (Restated - Note 18(d))
-----------------------------------------------------------------
Additional
Common Convertible Paid in
Consolidated Statements of Shareholders' Equity Shares Debentures Capital Deficit Total
--------------------------------------------------------------------------------------------------------------------
Reported under Canadian GAAP $225,154 $ 66,735 $ 12,752 $(120,543) $184,098
Amortization of mineral property (a) - - - (1,105) (1,105)
Deferred exploration - - - (1,993) (1,993)
Reclassify convertible debentures (b) - (66,735) - 3,534 (63,201)
Debt issue costs (b) - - - 3,272 3,272
Net effect on convertible debentures adjustments
(b) - - - (1,292) (1,292)
Unrealized loss on commodity contracts (g) - - - (1,515) (1,515)
Amortization of debt issue costs (b) - - - (453) (453)
--------------------------------------------------------------------------------------------------------------------
Reported under US GAAP $225,154 $ - $ 12,752 $(120,095) $117,811
====================================================================================================================
December 31, 2002
---------------------------------------------------------------
Additional
Common Convertible Paid in
Consolidated Statements of Shareholders' Equity Shares Debentures Capital Deficit Total
---------------------------------------------------------------------------------------------------------------
Reported under Canadian GAAP $ 161,108 $ - $ 1,327 $ 06,943) $ 55,492
Deferred exploration (a) - - - (1,993) (1,993)
Reported under US GAAP $ 161,108 $ - $ 1,327 $ (108,936) $ 53,499
===============================================================================================================
27
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
The following consolidated statements of operations are presented in
conformity with US GAAP:
Consolidated Statements of Operations 2004 2003 2002
----------------------------------------------------------------------------------------------------------------
(Restated - Note 3) (Restated - Note 18(d))
Revenue $ 94,825 $ 45,122 $ 44,361
Expenses
Operating 69,162 39,778 43,161
General and administrative 6,241 5,625 2,017
Depreciation, depletion and amortization (a)(d) 13,588 5,025 4,872
Reclamation 1,315 303 860
Exploration 3,838 2,543 1,206
Debt settlement expenses (b) 13,534 - -
Write-down of assets 2,460 - 27,218
----------------------------------------------------------------------------------------------------------------
110,138 53,274 79,334
----------------------------------------------------------------------------------------------------------------
Loss before the undernoted (15,313) (8,152) (34,973)
Interest and other income (g) 1,597 894 1,252
Interest expense (1,971) (2,448) (988)
Gain/(Loss) on commodity contracts (5,102) (1,515) 732
Amortization of debt issue costs (b) (2,804) (454) -
Gain on sale of assets 23,747 - -
----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and non-controlling 154 (11,675) (33,977)
interest
Income tax (provision) recovery (1,988) 595 -
Non-controlling interest (179) - -
----------------------------------------------------------------------------------------------------------------
Net (loss) for the year $ (2,013) $ (11,080) $ (33,977)
================================================================================================================
Basic and fully diluted (loss) per share $ (0.03) $ (0.22) $ (0.81)
Weighted average number of common shares outstanding
Basic 63,168,995 51,058,212 41,849,413
Fully Diluted 65,268,137 51,058,212 41,849,413
a) Mineral Property Expenditures
i) Canadian GAAP allows exploration costs and costs of acquiring
mineral rights to be capitalized during the search for a
commercially mineable body of ore. The Company has incurred
exploration expenses that were added to the carrying value of
mineral properties as it was anticipated that there was a
continuing benefit of such expenditures. The Company expenses
exploration costs unless such activities expand the reserve
base at one of the Company's operations or relates to a
property on which the Company has completed a positive economic
study. Under US GAAP, exploration expenditures can only be
deferred subsequent to the establishment of reserves. This GAAP
difference had no effect on any periods presented and has a
cumulative effect of $1,993,000 (prior to depletion). During
the year ended December 31, 2004 depletion under US GAAP would
have been $168,000 lower (2003 and 2002-$Nil).
28
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
ii) Under Canadian GAAP capitalized costs related to
non-producing mineral properties are only amortized after
the commencement of operations. Prior to 2004, under US
GAAP, the Company accounted for mineral rights as intangible
assets, and accordingly were amortized on a straight-line
basis over the life of the mineral rights. This resulted in
the Company recording amortization of $1,700,000 during 2003
(2002-$Nil) with respect to mining rights acquired in 2003.
The Emerging Issues Task Force (EITF) reached a consensus,
Issue No 04-02, "Whether Mineral Rights are Tangible or
Non-Tangible Assets". The conclusion is that mineral rights
are tangible assets and should be amortized over the
productive life of the asset. The Company has adopted this
new guidance with effect from 2004 on a prospective basis.
The change has the affect of reducing amortization expense
in the year ended December 31, 2004 by $1,700,000
($1,190,000 net of income taxes). This change conforms US
GAAP with Canadian GAAP.
b) Convertible debentures
In May 2003, FASB Statement No. 150 ("SFAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" was issued. This Statement requires that
three types of financial instruments be reported as liabilities
by their issuers. Those types of instruments include: mandatory
redeemable instruments, forward purchase contracts, written put
options and other financial instruments not in the form of
shares that either obligate the issuer to repurchase its equity
shares and settle its obligation for cash or by transferring
other assets; and certain financial instruments that include an
obligation that may be settled in a variable number of equity
shares, has a fixed or benchmark tied value at inception that
varies inversely with the fair value of the equity shares. SFAS
150 is effective for instruments entered into or modified after
May 31, 2003. Under Canadian GAAP the convertible debentures
have been accounted for in accordance with CICA Handbook Section
3860. Application of this section results in the accounting as
described in Note 9 in the Company's consolidated financial
statements for the year ended December 31, 2003, with the
principle component of the debenture being treated as equity.
Under US GAAP, liabilities at December 31, 2004 would increase
by $633,000 (December 31, 2003 - $66,735,000) and shareholders'
equity would decrease by a corresponding amount. Debt issue
expenses of $3,273,000 would be reclassified from shareholders'
equity to assets and would initially be amortized over a
three-year period based on the outstanding balance of the
debentures. During 2004, most of the debentures were converted
into equity, which gave rise to a higher amortization of debt
issue costs of $2,804,000.
FASB Statement No. 84 ("SFAS 84"), "Induced Conversion of
Convertible Debt", require the recognition of inducement expense
equal to the fair value of all securities and other
consideration transferred in the transaction in excess of the
fair value of securities issuable pursuant to the original
conversion terms. The Company recognized an additional expense
of $12,170,000 related to the inducement, which under Canadian
GAAP was charged directly to deficit.
29
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
c) Business combinations (Restated - Note 3)
FASB Statement No. 141 ("SFAS 141"), "Business Combinations"
require supplemental information on a pro forma basis to
disclose the results of operations for the years ended December
31, 2004 and 2003 as though the business combination had been
completed as of the beginning of the years being reported on.
The following table sets forth on a pro forma basis, the results
of Pan American Silver Corp., had the acquisition of the
Morococha mine occurred on January 1, 2003.
Pan American Morococha
Year ended December 31, 2004 Silver Corp. mine (a) Combined
----------------------------------------------------------------------------------------------------
Revenue 94,825 16,630 $ 111,455
Net (loss) for the year (2,013) (29) (2,042)
Proforma basic and diluted (loss) per share (0.02) n/a $ (0.02)
Pan American Morococha
Year ended December 31, 2003 Silver Corp. mine (b) Combined
-------------------------------------------------------------------------------------------------
Revenue 45,122 23,377 $ 68,499
Net loss for the year (9,565) (3,005) (12,570)
Proforma basic and diluted loss per share (0.19) n/a $ (0.25)
(a) Morococha's operating results for the six months ended June 30, 2004, net of taxes
(b) Includes $1,120,000 share of water treatment plant costs, net of taxes
d) Depreciation and depletion
Under Canadian GAAP, depletion expense is calculated in
reference to proven and probable reserves and a portion of
resources, whereas under US GAAP, depletion is calculated based
on proven and probable reserves only. This difference would
result in a $2,551,000 increase in depletion (2003 and
2002-$Nil), with a corresponding increase to accumulated
depletion. In addition, future income tax liability would
decrease by $765,000 (2003 and 2002-$Nil), with a corresponding
decrease to income tax expense.
e) Derivatives and hedging activities (Restated - Note 3)
Under Canadian GAAP, derivatives hedging transactions are
off-balance sheet until the hedge transaction is recorded. The
hedged transactions are recorded at the hedge amount.
Under US GAAP, derivative transactions are recorded at its fair
value regardless of the purpose or intent for holding them.
Changes in the fair value of derivatives are recorded each
period in current earnings (loss). Appropriate accounting for
changes in the fair value of derivatives held is dependent on
whether the derivative transaction qualifies as an accounting
hedge and on the classification of the hedge transaction. For
derivative instruments that are designated and qualify as cash
flow hedges, the effective portions of changes in fair value of
the derivative are recorded in OCI, and are recognized in the
Consolidated Statement of Operations when the hedged item
affects earnings.
30
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
Ineffective portions of changes in the fair value of cash flow
hedges are recognized currently in earnings.
This GAAP difference results in a decrease in accounts
receivable of $473,000 (2003- $Nil), a charge to earnings of
$3,192,000 (2003-$1,515,000; 2002-$Nil) and an increase in
unrealized fair value of derivatives (liability) of $4,234,000
(2003-$1,515,000).
f) Income taxes
Under Canadian GAAP, future income taxes are calculated based on
enacted or substantively enacted tax rates applicable to future
years. Under US GAAP, only enacted rates are used in the
calculation of future income taxes. This GAAP difference
resulted in a no difference in the financial position, results
of operations or cash flows of the Company for the years
presented.
g) Other comprehensive income (Restated - Note 3)
The Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income, which was required to
be adopted beginning on January 1, 1998. SFAS 130 establishes
standards for the reporting and display of comprehensive income
and its components. In addition to the effect on OCI described
in e) above, the impact to OCI relating to foreign exchange
translation is a charge of $Nil (2003 - $Nil; 2002 - $28,000).
Additionally, under SFAS 115, portfolio investments classified
as available-for-sale securities are recorded at market value.
The resulting gain and loss are included in determination of
OCI.
2004 2003 2002
--------------------------------------------------------------------------------------------
Net loss under US GAAP $ (2,013) $ (11,080) $ (33,977)
Unrealized gain (loss) on available for sale
securities 741 (80) -
Foreign exchange adjustment - - (28)
--------------------------------------------------------------------------------------------
Comprehensive net loss under US GAAP $ (1,272) $ (11,160) $ (34,005)
============================================================================================
h) Recent accounting pronouncements
In December 2003, the FASB issued Interpretation No. 46-Revised
("FIN 46-R"), Consolidation of Variable Interest Entities, an
interpretation of ARB 51 (revised December 2003), which replaces
FIN 46. FIN 46-R incorporates certain modifications of FIN 46
adopted by the FASB subsequent to the issuance of FIN 46,
including modifications to the scope of FIN 46. For all
non-special purpose entities ("SPE") created prior to February
1, 2003, public entities will be required to adopt FIN 46-R at
the end of the first interim or annual reporting period ending
after March 15, 2004. For all entities (regardless of whether
the entity is an SPE) that were created subsequent to January
31, 2003, public entities are already required to apply the
provisions of FIN 46, and should continue doing so unless they
elect to adopt the provisions of FIN 46-R early as of the first
interim or annual reporting period ending after December 15,
2003. If they do not elect to adopt FIN 46-R early, public
entities would be required to apply FIN 46-R to those
post-January 31, 2003 entities as of the end of the first
interim or annual reporting period ending after March 15, 2004.
The adoption of this standard had no effect on the financial
position or results of operations of the Company.
31
PAN AMERICAN SILVER CORP.
Notes to consolidated financial statements
December 31, 2004, 2003 and 2002
(Tabular amounts are in thousands of US dollars, except for shares, price per
share and per share amounts)
-------------------------------------------------------------------------------
In March 2004, the EITF reached a consensus, based upon the
Committee's deliberations and ratified by the FASB, that mineral
interests conveyed by leases should be considered tangible
assets. On April 30, 2004, the FASB issued a FASB Staff Position
("FSP") amending SFAS No. 141 and SFAS No. 142 to provide that
certain mineral use rights are considered tangible assets and
that mineral use rights should be accounted for based on their
substance. The FSP is effective for the first reporting period
beginning after April 29, 2004, with early adoption permitted.
The Company does not expect that the adoption of this statement
will have a material impact on the Company's financial position
or results of operation.
The EITF published Issue No. 04-03, "Mining Assets: Impairment
and Business Combinations". The consensus provided guidance with
respect to commodity prices and value attributable to mineral
resources other than proven and probable reserves to be used in
the conduct of impairment tests and in the allocation of
purchase price arising from a business combination. The Company
has applied EITF Issue No. 04-03 when accounting for the
Morococha business acquisition and in the impairment tests
conducted at December 31, 2004.
During 2004, deliberations began on EITF Issue No. 04-06,
Accounting for Stripping Costs Incurred during Production in the
Mining Industry. In the mining industry, companies may be
required to remove overburden and other mine waste materials to
access mineral deposits. The costs of removing overburden and
waste materials are often referred to as "stripping costs."
During the development of a mine (before production begins), it
is generally accepted in practice that stripping costs are
capitalized as part of the depreciable cost of building,
developing, and constructing the mine. Those capitalized costs
are typically amortized over the productive life of the mine
using the units-of-production method. A mining company may
continue to remove overburden and waste materials, and therefore
incur stripping costs, during the production phase of the mine.
Questions have been raised about the appropriate accounting for
stripping costs incurred during the production phase, and
diversity in practice exists. In response to these questions,
the EITF has undertaken a project to develop an Abstract to
address the questions and clarify the appropriate accounting
treatment for stripping costs under US GAAP. The EITF issued
EITF 04-06, "Accounting for Stripping Costs in the Mining
Industry", which recommends that stripping costs are considered
development costs that should be recognized as investments in
the mine. The Company is currently evaluating the impact, if
any, the adoption of EITF 04-06 will have on the Company's
financial position or results of operation.
During 2004, EITF Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, was issued and establishes guidance to be used in
determining when an investment is considered impaired, whether
that impairment is other than temporary, and the measurement of
an impairment loss. The Company does not expect that the
adoption of this statement will have a material impact on the
Company's financial position or results of operation.
32
Document No. 3
RESTATED
--------
Management's Discussion and Analysis of Financial Condition and Results of
Operations February 24, 2005
Introduction
This MD&A reflects the effects of the restatement on the consolidated financial
statements for the year ended December 31, 2004 related to the Company's
accounting of derivative instruments. Please see Note 3 of the audited
consolidated financial statements for discussion on this matter. Apart from
revisions described under Note 3 "Restatement", this MD&A has not been revised
for new events or developments.
Management's discussion and analysis ("MD&A") focuses on significant factors
that have affected Pan American Silver Corp.'s and its subsidiaries ("Pan
American" or the "Company") performance and such factors that may affect its
future performance. In order to better understand the MD&A, it should be read in
conjunction with the audited consolidated financial statements and the related
notes contained herein. Pan American's reporting currency is the United States
dollar and all amounts in this discussion and in the consolidated financial
statements are expressed in United States dollars, unless identified otherwise.
The Company reports its financial position, results of operations and cash flows
in accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). Pan American's significant accounting policies are set out in Note 2 of
the audited consolidated financial statements. Differences between Canadian and
United States generally accepted accounting principles that would have affected
the Company's reported financial results are set out in Note 19.
This MD&A is comprised of the following sections: The "Overview of 2004"
provides an analysis of Pan American's financial results and operating
performance, after discussing the significant events and transactions that had a
material bearing on the results and performance in 2004. A detailed analysis of
each mine's operating performance in 2004 and our forecasts for 2005 are
provided. Also provided in this section is a reconciliation of our consolidated
cash and total costs per ounce of silver produced to the operating expenses
reported in our consolidated statement of operations. The "Liquidity and Capital
Resources" section describes our current financial condition and discusses our
expected capital and liquidity requirements for 2005 and beyond. The "Critical
Accounting Policies and Estimates" section identifies those accounting estimates
that have the largest impact on the financial presentation. The "Risks and
Uncertainty" section discusses the risks associated with Pan American's business
and our risk management programs to mitigate such risks. Finally, in the
"Outlook" section we provide Pan American's expectations regarding the Company's
development projects and the metal markets.
Except for historical information contained in this MD&A, the following
disclosures are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 or are future oriented financial
information and as such are based on an assumed set of economic conditions and
courses of action. These include estimates of future production levels,
expectations regarding mine production and development programs and capital
costs, expected trends in mineral prices and statements that describe Pan
American's future plans, objectives or
goals. There is significant risk that actual results will vary, perhaps
materially, from results projected depending on such factors as discussed
under Risks and Uncertainties in this MD&A and other risk factors listed from
time-to-time in the Company's Annual Information Form or Form 40-F. Additional
information about Pan American and its business activities is available on
SEDAR at www.sedar.com.
Overview of 2004
To gain an appreciation for Pan American's financial results and operating
performance in 2004, it is important to understand the significant events and
transactions that occurred during the year.
Significant Events and Transactions
Morococha Acquisition
On February 9, 2004 Pan American announced the signing of a binding agreement
with a number of individuals to purchase a direct 81 per cent interest in
Compania Minera Argentum S.A. ("Argentum"), which owns the Morococha mine in
central Peru. The Company acquired this interest in Argentum for $33.8 million
by way of a public offering for Argentum common shares through the Lima Stock
Exchange. Subsequent to this offer, the Company purchased an additional 5 per
cent interest in Argentum by acquiring investment shares for $1.5 million. In
addition, Pan American acquired 100 per cent of Compania Minera Natividad
("Natividad") for $1.5 million, which holds numerous adjacent mineral
concessions and owns the primary processing facility. The Company intends to
combine Natividad and Argentum in the near future. The statements of operations
and balance sheets of Argentum and Natividad were incorporated into Pan
American's consolidated financial statements from July 1, 2004.
Argentum and Natividad (collectively "Morococha") contributed 1.26 million
ounces of silver to Pan American's production in the second half of 2004 at a
cash cost of $4.41 per ounce. Over the longer term Morococha is expected to
produce 3.0 to 3.5 million ounces of silver annually at a cash cost of
approximately $3.50 per ounce.
The fair value of assets and liabilities acquired through the acquisition of
Morococha are summarized as follows:
($'000)
Current assets (including cash of $657) $ 7,555
Mineral property, plant and equipment 16,745
Non-producing properties 40,472
------
64,772
Less:
Accounts payable and accrued liabilities (3,937)
Non-controlling interest (1,200)
Provision for asset retirement obligation and reclamation (8,618)
Future income tax liability (14,146)
----------
Total purchase price $ 36,871
----------
The future income tax liability arises due to the fact that the purchase
consideration exceeded the carrying value of the mining assets for tax purposes,
resulting in a temporary difference between
2
the accounting and tax value. The estimated future income tax liability
associated with this temporary difference was $14.1 million and had been
recognized as a future income tax liability and also applied to increase the
carrying value of the mineral properties. The provision for asset retirement
obligation and reclamation of $8.6 million arises pursuant to CICA Handbook
Section 3110 - "Accounting for Asset Retirement Obligations", which required
the Company to recognize the expected fair value of future site restoration
costs at Morococha as a liability and to increase the carrying value of
mineral properties by the same amount. The liability is accreted over time to
its anticipated future value with a corresponding charge to the statement of
operations while the increase in the carrying value of mineral properties is
amortized on a unit of production basis.
To finance the acquisition of the Morococha mine, Pan American closed a common
share financing with an institutional investor on March 12, 2004. A total of
3,333,333 Pan American common shares were issued at a price of $16.50 per share
for gross proceeds of $55 million.
Debenture Conversion
In July 2003 the Company issued $86.25 million of 5.25 per cent convertible
unsecured senior subordinated debentures (the "Debentures") due July 31, 2009.
The Company made an offer to induce conversion of the Debentures by the holders
between April 7, 2004 and May 21, 2004. Approximately $85.4 million or 99 per
cent of the Debenture holders elected to accept the Company's offer and received
$131.25 in cash plus 106.929 common shares of the Company per $1,000 principal
amount of the Debentures. The cash component of the offer represented the
interest that the Company would have paid on the Debentures up until July 31,
2006, when the Company would, under certain circumstances, have the right to
force conversion. In addition, the offer incorporated an additional 2.436 common
shares per $1,000 principal amount of Debentures converted, which was equal to a
4 per cent premium. The Company issued 9,135,043 common shares and paid cash of
$11.2 million pursuant to this offer. Pan American recorded debt settlement
expenses of $1.3 million associated with the induced conversion of the
Debentures.
Asset Sales
In November 2004, Pan American announced that it had sold its 20 per cent
interest in the Dukat mine in Magadan State, Russia for up to $43 million, of
which $20.5 million was received in cash and the remaining $22.5 million is to
be received in contingent future payments. No amount has been booked for this
additional receivable. The future payments are to be made annually based on the
yearly average silver price, and range from no payment if the average silver
price is below $5.50 per ounce, to $8 million if the average silver price
exceeds $10 per ounce. Under certain circumstances, the Company will be entitled
to early settlement of the remaining future payments, such as a public share
offering by the buyer, OAO MNPO Polimetall. The Company recorded a gain of $20.2
million on the sale, net of transaction costs. In an unrelated transaction, Pan
American also recorded a $3.6 million gain on the sale of surplus land at the
Quiruvilca mine during 2004.
3
Debt Prepayments
The Company prepaid the $9.5 million La Colorada construction loan from the
International Finance Corporation ("IFC") on May 17, 2004. Pan American also
prepaid the Huaron project loan by making a $3.1 million payment of principal
and accrued interest on April 16, 2004.
La Colorada
The La Colorada mine in Mexico reached commercial production on January 1, 2004
after a $20 million expansion, which started in late 2002. As such, all revenue
and expense items were recognized in the statement of operations in 2004, after
having been capitalized throughout 2003. This change in accounting treatment
gives rise to several significant differences when comparing the consolidated
statement of operations for 2004 with 2003. During 2004, La Colorada recorded
$12.1 million in revenue, $11.2 million in operating costs and $3.6 million in
depreciation.
Financial Results
The table below sets out the quarterly results, expressed in thousands of US
dollars, for the past 12 quarters, together with select balance sheet
information for the prior three years.
-----------------------------------------------------------------------------------------------------------------
Quarters ended (unaudited) Years Ended
-----------------------------------------------------------------------------------------------------------------
2004 March 31 June 30 Sept. 30 Dec.31 Dec. 31
-----------------------------------------------------------------------------------------------------------------
Revenue $ 15,708 $ 21,179 $ 27,916 $ 30,022 $ 94,825
Mine operating earnings* $ 2,395 $ 2,640 $ 6,357 $ 3,402 $ 14,794
General & Administrative $ (803) $ (1,202) $ (934) $ (3,302) $ (6,241)
Exploration $ (528) $ (1,137) $ 1,213 $ (960) $ (3,838)
Net income (loss) for the period $ (2,023) $ 3,352 $ 358 $ 13,527 $ 15,214
Net profit/(loss) per share $ (0.08) $ (0.09) $ 0.01 $ 0.21 $ 0.06
---------- ----------- ----------- ---------- -----------
Other financial information:
Total Assets $ 370,086
Total long-term financial liabilities $ 68,279
Total Shareholders Equity $ 275,516
-----------------------------------------------------------------------------------------------------------------
2003 March 31 June 30 Sept. 30 Dec.31 Dec. 31
-----------------------------------------------------------------------------------------------------------------
Revenue $ 7,822 $ 12,553 $ 11,890 $ 12,857 $ 45,122
Mine operating earnings* $ (78) $ 758 $ 1,258 $ 81 $ 2,019
General & Administrative $ (401) $ (582) $ (565) $ (4,077) $ (5,625)
Exploration $ (496) $ (492) $ (600) $ (955) $ (2,543)
Net income (loss) for the period $ (1,573) $ (1,156) $ (1,225) $ (2,840) $ (6,794)
Net profit/(loss) per share $ (0.03) $ (0.02) $ (0.10) $ (0.05) $ (0.20)
---------- ----------- ----------- ------------
Other financial information:
Total Assets $ 279,883
Total long-term financial liabilities $ 73,137
Total Shareholders Equity $ 184,098
-----------------------------------------------------------------------------------------------------------------
4
--------------------------------------------------------------------------------------------------------------
2002 March 31 June 30 Sept. 30 Dec.31 Dec. 31
--------------------------------------------------------------------------------------------------------------
Revenue $ 10,199 11,615 $ 11,195 $ 12,084 $ 45,093
Mine operating loss* $ (432) $ (627) $ (1,568) $ (313) $ (2,940)
General & Administrative $ (359) $ (498) $ (379) $ (781) $ (2,017)
Exploration $ (83) $ (260) $ (234) $ (629) $ (1,206)
Net loss before Write-down of Properties $ (1,303) (1,247) (2,258) (1,951) (6,759)
Write-down of Properties $ 0 0 (15,129) (12,089) (27,218)
Net income (loss) for the period $ (1,303) $ (1,247) $ (17,387) $ (14,040) (33,977)
(0.03)
Net profit/(loss) per share $ $ (0.03) $ (0.04) (0.35) (0.81)
----------- ---------- ----------- ---------- ----------
Other financial information:
Total Assets $ 102,945
Total long-term financial liabilities $ 27,222
Total Shareholders Equity $ 55,492
-----------------------------------------------------------------------------------------------------------------
Note: *Mine operating earnings/ (loss) is equal to revenue less operating
expenses less depreciation and amortization.
The Company did not declare or pay any dividends during the periods under
review.
The net income after tax for 2004 was $15.2 million, compared to the net loss
for 2003 of $6.8 million. Included in the net income for 2004 were several
unusual items including the gain on the sale of the Company's interest in Dukat
for $20.1 million, the gain on the sale of surplus land at Quiruvilca for $3.6
million, the write-off of $2.5 million of obsolete assets and debt settlement
expenses of $1.4 million. In addition to these unusual items that occurred
during the year, 2004 also marked the first year in which the Company became
taxable in Peru and was subject to the 1% royalty imposed by the Peruvian
congress in June 2004. Income tax expenses, together with the mandatory workers
participation expense totaled $3.3 million for the year, while an additional
$0.6 million was accrued with respect to the royalty in Peru.
Mine operating earnings, defined as revenue less operating expenses and
depreciation and amortization, increased by 633 per cent in 2004 from $2.0
million to $14.8 million as a result of the improving price environment for the
metals that the Company produces together with the addition of the Morococha
mine. This improvement in mine operating earnings can be seen in stronger gross
revenue margins (operating profit/revenue), which increased from 11.8 per cent
in 2003 to 27.1 per cent in 2004 and more than offset the impact of higher
depreciation and amortization charges in 2004.
Relative to 2003, revenue more than doubled in 2004. The average price for all
of the metals that the Company produces increased in 2004 compared to 2003. The
average silver price increased 36 per cent, average zinc price increased 26 per
cent, average lead price increased 74 per cent and average copper prices
increased 60 per cent. Magnifying this improved price environment, the Company
achieved a 29 per cent increase in silver production, together with 7 per cent
and 9 per cent increases in the production of zinc and coppers respectively,
partially offset by a 12 per cent decrease in lead production. The Company also
sold more concentrate than it produced in 2004 by reducing its 2003 year-end
inventories. At the end of 2004, the Company had slightly over ten thousand
tonnes of concentrate in inventory, which represents approximately one month's
production.
5
Revenue recognition from quarter to quarter can vary significantly, depending on
the timing of shipments of concentrates. Shipping delays were the main reason
behind the uneven revenue between the first and second quarters in both 2003 and
2004. The acquisition of Morococha, which took effect on July 1, 2004, is the
primary reason why revenue increased in the second half of 2004. The variation
in quarterly revenue that occurred in Q2 of 2002 was due to the Huaron mine
starting commercial production.
General and administrative costs increased by $0.6 million from 2003 reflecting
increased staffing costs, a stronger Canadian dollar against the US dollar,
increased legal expenses relating to the early conversion offer to the
Debentures holders and increased travel costs. The Company completed the
staffing of its senior management team during 2004 with the recruitment of
several key technical personnel in the areas of geology, health, environment and
safety and underground mining. Included in General and administrative expenses
was stock-based compensation of $2.2 million (2003 - $2.9 million), which until
the fourth quarter of 2004 had been reported as a separate item on the Company's
consolidated statement of operations.
Depreciation and amortization expense was $7.5 million higher in 2004 than 2003.
The acquisition of Morococha and La Colorada achieving commercial production
accounted for $5.7 million of this increase. Depreciation and amortization
expense also increased as a direct result of the Company's adoption of CICA
Handbook Section 3110 - "Accounting for Asset Retirement Obligations", which
required the Company to write up its asset values by $8.2 million as at December
31, 2003. The amortization of these higher asset values on a unit of production
basis has resulted in an increased depreciation charge.
Exploration expense increased by $1.5 million because of increased activity
levels associated with the preparation of a feasibility study at the Company's
Manantial Espejo joint venture project and due diligence expense related to the
Company's business development activities.
Total interest expense during 2004 amounted to $0.9 million, which was lower
than the $1.2 million incurred in 2003 as a result of the Debenture conversion
and debt prepayments described earlier in this MD&A.
The Company recorded a loss on commodity contracts of $6.6 million during 2004,
of which $4.2 million was unrealized. The unrealized losses comprised a negative
mark-to-market on zinc and lead contracts of $4.7 million partially offset by
$0.5 million positive mark-to-market on silver fixing contracts.
For the fourth quarter of 2004, the Company recorded net income after tax of
$13.5 million, primarily as a result of the $20.1 million gain on sale of Dukat,
partially offset by the $2.5 million non-cash write-off of obsolete assets. The
financial results for the fourth quarter of 2004 were influenced by the fact
that the Company became taxable in Peru. Also recorded in the fourth quarter's
costs were mandatory workers participation expenses and bonuses totaling $1.2
million to the employees and workers at Huaron, Morococha and Quiruvilca mines
in recognition for the record operating performance achieved at each mine during
2004.
6
The net loss for 2003 was $6.8 million, compared to the net loss for 2002 of
$34.0 million, which included the write down at Quiruvilca of $27.2 million.
Included in the net loss for 2003 was $2.9 million related to recognition of
stock option compensation expenses, of which $2.1 million was for stock options
granted in 2003, relating to 2002 performance. The operating results improved
greatly in 2003 as compared to 2002 as a result of the improving price
environment for metals that the Company produces and continued cost reductions,
particularly at the Quiruvilca mine. In addition, the Company's Pyrite
stockpiles, acquired in November 2002, generated approximately $1.7 million in
operating profit in 2003.
In 2003, revenue was almost identical to that in 2002. Lower production of zinc
and lead in 2003 due to the closure of the high-cost North Zone at the
Quiruvilca mine was offset by higher realized metal prices in 2003. General and
administrative costs were $ 1.0 million higher in 2003 compared to 2002 due to
the costs associated with recruitment of several new senior staff, increases in
insurance premiums and the strengthening of the Canadian dollar against the US
dollar. Depreciation and amortization expense was $1.5 million less in 2003 than
2002 primarily due to the write off in 2002 of the carrying value of Quiruvilca,
and all of La Colorada's 2003 expenses being capitalized.
Operating Performance
The following table sets out select historic and 2005 forecast consolidated
operating information. For purposes of budgeting for 2005 and the forecast
numbers contained in this MD&A, the Company has used the following price
assumptions: silver: $6.00 per oz, zinc: $1,000 per tonne ($0.45 per lb), lead:
$850 per tonne ($0.39 per lb), copper: $2,600 per tonne ($1.18 per lb). For our
concentrate producing mines, we refer to the net smelter return ("NSR"), which
is revenue received from buyers of our concentrate, net of smelting and refining
charges. The numbers below are based on the assumption that the Company will
commence mining activities at its San Vicente mine in Bolivia in March 2005.
------------------------------------------------------------------------------------------------------------
2005
Forecast 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------
Production
Silver ounces 13,637,990 11,182,030 8,641,914 7,765,154 6,940,171
Zinc tonnes 43,873 34,086 31,797 39,081 30,894
Lead tonnes 17,912 16,694 18,990 20,790 17,187
Copper tonnes 4,407 3,426 3,143 2,847 2,163
Costs
Cash cost per ounce $4.11 $4.25 $4.09 $4.03 $4.35
Non-cash cost per ounce $1.15 $1.08 $0.53 $0.76 $0.68
Total Cost per ounce $5.26 $5.33 $4.62 $4.79 $5.03
-------------------------------------------------------------------------------------------------------------
In 2004, the Company achieved a 29 per cent increase in silver production,
together with 7 per cent and 9 per cent increases in the production of zinc and
copper, respectively, offset by a 12 per cent decrease in lead production.
Increases in silver, zinc and copper production were primarily achieved through
the acquisition of the Morococha mine and the expansion at La Colorada. The
decrease in lead production was mainly due to the lower lead grades and
recoveries experienced at the Huaron mine. The silver production figures for
2003 above include 992,142 ounces of silver (2002 - 252,262 ounces) produced at
La Colorada while the mine was in pre-production for accounting purposes.
7
Consolidated cash costs per ounce exceeded Management's expectations in 2004 by
approximately $0.91 per ounce. The primary reason for this was the higher than
expected costs at La Colorada due to increased ground control and ventilation
expenditures, coupled with lower than expected production, particularly in the
first half of the year. Actual cash costs per ounce at Morococha in the fourth
quarter were also significantly above expectations due to lower silver grades
and recoveries. The silver grades and recoveries are expected to improve in
2005. There have also been significant costs associated with integrating the
Morococha mine into Pan American's operations including organizational changes
and the implementation of safety systems. The strengthening of both the Peruvian
sol and the Mexican peso, relative to the US dollar, also negatively impacted
operating costs.
Consolidated production in 2005 is forecast at 13.6 million ounces of silver, a
22 per cent increase as compared to 2004. Base metal production is also expected
to increase, particularly in the case of zinc production, which we forecast will
increase by 28 per cent. The increases in expected production are primarily due
to a full year of ownership of Morococha, improvements at La Colorada and
production from San Vicente. Consolidated cash costs per ounce of silver
produced, net of by-product credits, are forecast to decline by 3.3 per cent to
$4.11 per ounce as cost reductions at La Colorada and Morococha are likely to
outweigh increases in costs associated with Peruvian taxes and royalties and the
one-third participation by Volcan Minera S.A. de C.V. ("Volcan") in the
operating cash flow generated by the Pyrite stockpile operation.
An analysis of each mine's operating performance in 2004 measured against
historical performance follows, together with Management's forecasts for each
operation's performance in 2005.
Huaron mine
The Company's largest silver producing mine, Huaron produced 6 per cent less
ounces of silver in 2004 as compared to 2003 as a result of a reduction in ore
grades and lower recoveries, yet still generated mine operating earnings of $5.1
million. Aided by higher metal prices, this performance was achieved by
increasing tonnage milled by 5 per cent to take advantage of excess capacity in
the milling facility. As can be seen in the table that follows, the Company
plans to continue to increase the annual tonnes milled at Huaron in 2005:
8
-------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
Forecast
-------------------------------------------------------------------------------------------------------------
Tonnes Milled 683,200 635,845 605,790 606,300 367,274
Silver ounces 4,197,897 4,080,737 4,365,061 4,527,971 2,897,946
Zinc tonnes 17,033 15,041 18,855 20,896 9,574
Lead tonnes 9,392 10,569 14,246 14,006 8,445
Copper tonnes 2,051 1,754 1,332 1,740 959
Tonnes Shipped
Zinc concentrate 33,860 34,314 34,819 43,988 14,237
Lead concentrate 19,444 20,253 27,602 26,219 14,723
Copper concentrate 9,213 7,030 5,687 6,249 3,915
Cost per tonne $40.74 $40.32 $41.87 $38.71 $39.73
Cash cost per ounce $4.10 $3.90 $3.92 $3.66 $3.55
Non-cash cost per ounce $1.09 $1.16 $0.70 $0.46 $0.36
Total Cost per ounce $5.19 $5.06 $4.62 $4.12 $3.91
-------------------------------------------------------------------------------------------------------------
For 2004, the mine's NSR per tonne exceeded expectations by 14 per cent at
$58.98 compared to $51.60, and its cost per tonne was 6% lower than expected at
$40.32 compared to $42.67.
Huaron's average NSR per tonne for 2005 is expected to be approximately $51.25
and its average cost per tonne is forecast at $40.74, which should generate
approximately $2.1 million in mine operating earnings. The re-engineering
program at Huaron, together with sustaining capital is expected to require about
$3.7 million of spending in 2005.
Quiruvilca mine
2003 saw a significant transformation at Quiruvilca. Production levels at the
mine were reduced in August of 2003 from approximately 45,000 tonnes per month
to approximately 30,000 tonnes per month with the closure of the high-cost North
Zone. At this reduced rate, the mine has been able to process higher-grade ore
and decrease its operating costs to the point where it became Pan American's
most profitable mine in 2004, generating $9.5 million in mine operating
earnings. Quiruvilca produced more silver in 2004 compared to 2003, despite that
fact that it milled 14% less tonnage. Last year, Management expected that
Quiruvilca would possibly close in the third quarter of 2004; however,
exploration success during 2004 has enabled management to prepare a mine plan
that will see mining activities continuing at the Quiruvilca mine for at least
the next three years and likely beyond. The following table sets out
Management's forecasts for Quiruvilca in 2005 and historical production and cost
data going back to 2000.
9
-------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
Forecast
-------------------------------------------------------------------------------------------------------------------
Tonnes Milled 389,776 381,237 442,093 508,352 568,451 615,382
Silver ounces 2,327,631 2,530,869 2,493,908 2,509,689 3,259,372 3,611,589
Zinc tonnes 10,915 11,709 12,509 17,852 21,009 24,462
Lead tonnes 3,050 3,803 4,361 6,468 8,358 8,740
Copper tonnes 1,243 1,081 1,811 1,107 1,204 1,215
Tonnes Shipped
Zinc concentrate 19,139 19,657 27,481 27,511 39,475 42,039
Lead concentrate 5,641 11,048 6,425 9,901 12,975 14,899
Copper concentrate 7,202 6,268 7,938 4,706 5,602 5,970
Cost per tonne $41.86 $45.00 $39.20 $40.01 $43.23 $44.14
Cash cost per ounce $4.03 $3.63 $5.01 $5.15 $4.71 $3.20
Non-cash cost per ounce $0.40 $0.25 $0.17 $1.37 $0.95 $0.82
Total Cost per ounce $4.43 $3.88 $5.18 $6.52 $5.66 $4.02
-------------------------------------------------------------------------------------------------------------------
Last year, Management expected Quiruvilca's average NSR per tonne to be $45.07
and its budgeted average cost per tonne to be $36.41. However the mine realized
an average NSR per tonne of $64.02 and its operating costs were about $45.00 per
tonne milled. The average NSR per tonne realized for the year was 42 per cent
higher than expected due to higher prices and better actual grades and
recoveries while higher costs were associated with the decision to extend the
mine's life.
For 2005, Pan American expects Quiruvilca's average NSR per tonne to be $53.01
and its budgeted average cost per tonne to be $41.86, which should result in a
mine operating earnings of approximately $3.4 million. A total of $1.9 million
has been budgeted for capital expenditures at Quiruvilca in 2005, including $1.2
million on concurrent reclamation and $0.5 million to extend the conveyer belt
system.
Morococha mine
Pan American acquired an 81 per cent interest in the Morococha mine with effect
from July 1, 2004 and has subsequently purchased an additional 5 per cent
interest. Morococha was immediately accretive to production, cash flow and
earnings. Morococha generated $2.2 million of mine operating earnings and $5.2
million in operating cash flow before non-cash working capital items in the
second half of 2004. The following table sets out the production and cost data
for the second half of 2004 together with Management's expectations for 2005:
10
--------------------------------------------------------------
2005
Forecast 2H 2004
--------------------------------------------------------------
Tonnes Milled 439,371 212,172
Silver ounces 2,557,172 1,259,451
Zinc tonnes 12,924 5,902
Lead tonnes 5,470 2,186
Copper tonnes 975 538
Tonnes Shipped
Zinc concentrate 25,417 13,613
Lead concentrate 10,954 4,416
Copper concentrate 4,129 2,399
Cost per tonne $39.47 $42.03
Cash cost per ounce $3.42 $4.41
Non-cash cost per ounce $1.54 $1.53
Total Cost per ounce $4.97 $5.94
-------------------------------------------------------------
* Production and cost figures are for Pan American's share only.
Morococha's average NSR per tonne in 2005 is expected to be about $53.34 against
a forecast cost per tonne of $39.47, which should generate mine operating
earnings of $2.1 million.
The Company plans to invest heavily in Morococha in 2005 with the primary
objectives of establishing a long term, proven and probable reserve based mine
plan and reducing cash costs per ounce. Approximately $5.1 million is budgeted
to be spent on extensive mine development with a further $2.2 million on
upgrades to the milling facility and other equipment. An additional $1.0 million
is budgeted for exploration, including 20 kilometers of diamond drilling. Pan
American also plans on spending $0.7 million on health and safety matters,
primarily upgrading safety equipment.
Pyrite Stockpiles
Pan American acquired the right to mine and sell certain stockpiled ore from
Volcan in November 2002. In 2004, demand for the stockpiled ore from the only
buyer of this material, Doe Run Peru, increased by 22 per cent over the tonnage
requested in 2003. Cash costs per ounce were higher in 2004 due to the fact that
the major cost of this operation for accounting purposes is the contained silver
that is withheld as a processing fee under the terms of our smelting agreement.
Higher silver prices result in a higher expense being recorded on account of
these lost ounces. Following is a table showing production from November 2002
onwards and the expected 2005 production.
--------------------------------------------------------------------------------------------
2005
Forecast 2004 2003 2002
--------------------------------------------------------------------------------------------
Tonnes Sold 80,352 79,451 62,255 9,018
Silver ounces 961,192 961,869 790,803 101,459
Cost per tonne $0.48 $1.32 $0.47 $0.00
Cash cost per ounce $3.41 $2.95 $2.15 $1.50
Non-cash cost per ounce $0.68 $0.63 $0.66 $0.63
Total Cost per ounce $4.09 $3.58 $2.81 $2.13
--------------------------------------------------------------------------------------------
11
For 2004, Pan American expected to sell 57,600 tonnes of this ore containing
706,000 ounces of silver, but actual performance exceeded budget. The Company
was able to ship over 79,000 tonnes of ore containing 961,869 ounces of silver,
which generated mine operating earnings of approximately $3.0 million during the
year.
In 2005, our agreement with Volcan entitles them to a one-third interest in net
operating cash flow from the Pyrite operation. This is the reason for the
anticipated increase in the cash cost per ounce in 2005. Management expects that
80,300 tonnes of ore will generate mine operating profit for Pan American of
about $1.8 million.
San Vicente mine
Pan American has been developing the San Vicente mine in Bolivia under an
agreement with COMIBOL, Bolivia's state mining company and EMUSA, a Bolivian
mining company since December 2001. In terms of that agreement and based on the
expenditures made by EMUSA during the small scale mining operations and
feasibility work, EMUSA are entitled to a 50 per cent interest in the mine, with
Pan American retaining the other 50 per cent. As at December 31, 2004, EMUSA had
incurred $2.1 million in costs associated with the development of San Vicente as
part of their earn-in rights. San Vicente contributed 313,029 ounces of silver
to Pan American's account during 2004.
At the time of this MD&A the Company was in negotiations with both EMUSA and
COMIBOL regarding the further development of the San Vicente mine. Pan American
has proposed a 400-tonne per day operation, which will initially utilize a mill
owned by EMUSA while the Company completes an evaluation of the potential to
upgrade and restart the 600 tonne per day Vetillas plant located on the San
Vicente mine site. The following table shows Management's expectations of our 50
per cent interest in San Vicente for 2005, assuming that agreements are reached
with EMUSA and COMIBOL to allow the operation to commence in March 2005:
---------------------------------------------------------------
2005
Forecast 2004
---------------------------------------------------------------
Tonnes Milled 60,000 27,017
Silver ounces 735,441 313,029
Zinc tonnes 3,000 1,312
Copper tonnes 138 53
Tonnes Shipped
Zinc concentrate 5,357
Copper concentrate 861
Cost per tonne $37.86
Cash cost per ounce $2.23
Non-cash cost per ounce $0.18
Total Cost per ounce $2.41
---------------------------------------------------------------
Management expects the average NSR per tonne in 2005 to be about $82.98 against
a forecast cost per tonne of $37.86, which should generate mine operating
earnings for Pan American of $1.3 million. Our share of capital expenditures is
expected to be $0.8 million, including $0.4 million to evaluate the potential
upgrade to the Vetillas plant.
12
La Colorada mine
During 2002 the Company started a $20 million expansion of the La Colorada mine.
The expansion was completed in late 2003, and the mine commenced commercial
production for accounting purposes on January 1, 2004. Prior to that date, all
revenue and expense items were capitalized and added to the carrying value,
which is being amortized on a unit of production basis.
---------------------------------------------------------------
2005
Forecast 2004
---------------------------------------------------------------
Tonnes Milled 216,000 171,155
Silver ounces 2,858,657 2,036,075
Zinc tonnes 0 122
Lead tonnes 0 136
Cash cost per ounce $5.53 $ 6.23
Non-cash cost per ounce $1.92 $ 1.88
Total Cost per ounce $7.45 $ 8.12
---------------------------------------------------------------
La Colorada's performance in 2004 was below expectations due to a combination of
events: difficult ground conditions which have slowed both development and
mining, increased dewatering requirements and areas of high clay refractory ore
which have negatively impacted recoveries and mill throughput. A revised mining
and processing plan was developed and implemented to address all of these
issues. The primary component of the new plan, which was implemented in the
second half of the year, was to switch to a more selective narrow vein mining
method, which decreased tonnes of ore mined but substantially increased ore
grades. As a result, in the fourth quarter of 2004 silver grades reporting to
the mill averaged 579 grams per tonne compared to 409 grams per tonne for the
same period in 2003, and 439 grams per tonne for the first half of 2004. La
Colorada was expected to generate a small mine operating loss of $0.6 million in
2004, but due to the challenges described above, ended up with a mine operating
loss of $2.5 million.
La Colorada's average cash cost per ounce in 2005 is expected to decline to
approximately $5.53. However these costs are higher than is expected over the
longer term as a result of increased mine development costs associated with
completing the transition to a more selective mining method. At forecast silver
prices of $6 per ounce, the mine should generate a mine operating loss of $3.0
million but positive operating cash flow of $1.3 million. Capital investments at
La Colorada in 2005 are expected to be $2.2 million, comprised mostly of
capitalized mine development and equipment expenditures. A drill program to
further expand and upgrade the resource base at the mine will be initiated in
the first quarter of 2005.
Cash and Total Costs per Ounce of Silver Produced
Pan American reports two performance measures - cash cost per ounce and total
production cost per ounce of silver produced. These non-GAAP measures are used
by the Company to manage and evaluate operating performance at each of the
Company's mines and are widely reported in the silver mining industry as
benchmarks for performance measurement but do not have any standardized
meaning. To facilitate a better understanding of these measures as calculated
by Pan American, we have provided a
13
detailed reconciliation of these measures to our operating, depreciation and
amortization and reclamation expenses as shown in our audited Consolidated
Statement of Operations for 2004, 2003 and 2002.
($'000's) 2004 2003 2002
Operating Expenses $ 69,162 $ 39,778 $ 43,161
Add / (Subtract)
Cost of Metals Lost in Smelting & Refining 7,191 4,293 2,854
By Product Credits for zinc, lead, copper and gold (29,610) (15,281) (17,984)
Change in Inventory (379) 1,467 1,042
Mining Royalties & Worker's Participation (514)
Shipping and Selling Adjustment (174) 49 852
Financing Costs 487 563 924
Miscellaneous income / (costs) 1,117 456 (292)
La Colorada costs excluded from calculation (1,818)
Minority Interest Adjustment (1,091)
----------------------------------------------------------------------------------------------------------------
Cash Costs A 46,188 31,325 28,739
Add / (Subtract)
Depreciation and Amortization 10,869 3,325 4,872
Reclamation 1,315 303 806
Miscellaneous income / (costs) (57) 373 (234)
Minority Interest Adjustment (386)
----------------------------------------------------------------------------------------------------------------
Total Costs B 57,930 35,326 34,183
Silver Production (oz.) C 10,869,001 7,649,772 7,139,119
----------------------------------------------------------------------------------------------------------------
Cash Costs per ounce (A*$1000)/C $ 4.25 $ 4.09 $ 4.03
Total Costs per ounce (B*$1000)/C $ 5.33 $ 4.62 $ 4.79
Liquidity and Capital Resources
At December 31, 2004, cash and cash equivalents plus short-term investments were
$98.1 million, which is a $9.0 million increase from December 31, 2003. This
increase was achieved through cash generated from financing and operating
activities of $35.4 million and $3.1 million, respectively, plus the proceeds
from the sale of our interest in Dukat and surplus land at Quiruvilca of $23.7
million, less investments in mineral property, plant and equipment of $53.3
million. Financing activities included the issuance of 4.7 million shares during
the year for net proceeds of $62.4 million, the prepayment of bank loans of
$13.0 million, prepaid interest on the Debentures of $11.2 million pursuant to
the terms of the early conversion offer, and Debenture interest payments of $2.4
million. Investments in mineral property, plant and equipment consisted
primarily of the acquisition of the Morococha mine of $37.4 million, $6.6
million at Huaron as part of the re-engineering program at the mine, $6.2
million at La Colorada for work on the tailing dam, mill upgrades and mine
development and $1.5 million in project development expenditures at Alamo
Dorado. Cash provided by operations of $3.1 million was net of $9.1 million
consumed by changes in the Company's operating working capital items.
Working capital at December 31, 2004 was $110.0 million, an improvement of $28.0
million from the prior year-end. The improvement is due largely to the $18.2
million increase in accounts receivable, the $9.0 million increase in cash plus
short-term investments, a $4.1 million increase in inventories and a net $3.4
million increase in current liabilities.
14
Capital resources at December 31, 2004 amounted to shareholders' equity of
$275.5 million. At the date of this MD&A, the Company had issued 66,867,570
shares.
Cash and cash equivalents plus short-term investments at December 31, 2003
amounted to $89.1 million, which was an increase of $78.9 million from December
31, 2002. This increase, together with cash used in operating activities of $3.8
million and investments in mineral property, plant and equipment of $16.5
million were financed by the financing activities of $99.1 million. Financing
activities included the issuance of the Debentures for net proceeds of $83.0
million, shares issued for cash of $8.3 million and a net draw down of bank
loans of $7.7 million. Investing activities consisted of construction related
expenditures at La Colorada of $11.4 million, $4.2 million at Huaron and $1.3
million for feasibility study work at Alamo Dorado.
Working capital at December 31, 2003 was $81.9 million, an improvement of $79.5
million from the prior year-end. The improvement was due largely to the $78.9
million increase in cash and cash equivalents plus short-term investments, a
reduction in accounts payable of $4.2 million and increased concentrate
inventories of $1.3 million.
Pan American plans capital expenditures in 2005 of up to $71.6 million,
including initial development and construction expenditures at Alamo Dorado and
Manantial Espejo of $43.1 million and $10.2 million, respectively. Feasibility
work at Alamo Dorado required in order to make a production decision is
forecasted at approximately $1.2 million, with an additional $41.9 million
budgeted for construction in 2005, which includes a 15 per cent contingency. At
Manantial Espejo, Management plan to spend $2.1 million to complete a
feasibility study, which will be expensed, followed by anticipated construction
expenditures in 2005 of $10.2 million assuming a positive production decision in
the third quarter of 2005. The Company plans to spend $9.6 million on
development and upgrades to infrastructure at the Morococha mine while
rehabilitation work and sustaining capital at Huaron is expected to amount to
$3.7 million. Capital requirements at La Colorada, Quiruvilca and San Vicente
are anticipated to be approximately $2.2 million, $1.9 million and $0.8 million,
respectively. In addition to these capital expenditures, the Company anticipates
reducing reclamation liabilities through concurrent reclamation spending at
Quiruvilca of $1.2 million and at Huaron of $0.3 million. Working capital
balances are not expected to increase from the levels as of the end of 2004.
The Company does not expect the impact of inflation to have a material effect on
the Company's financial position, operational performance or cash flows over the
next twelve months.
Pan American is required to make royalty payments to the IFC by May 15th of each
year if the average price of silver for the preceding calendar year exceeds
$4.75 per ounce. This obligation lasts until the end of the scheduled loan life
in 2009 and is capped at a maximum accumulated total of approximately $2.8
million. During 2004, $0.7 million was accrued with respect to this obligation,
and the Company expects a similar amount will be payable on 2005 production,
based on our forecast silver price.
15
Based on the Company's financial position at December 31, 2004 and the $15.1
million of operating cash flows that are expected in 2005, Management believes
that the Company's liquid assets are more than sufficient to fund planned
project development and sustaining capital expenditures and discharge
liabilities as they come due. The Company's only contractual obligations at the
end of 2004 was $0.7 million remaining for the Debentures, which are due in 2009
and capital leases of $0.1 million due in the next twelve months. The Company
does not anticipate annual interest payments related to these contractual
obligations to be material over the next five years. The Company does not have
any off-balance sheet arrangements or commitments other than those disclosed in
this MD&A and the audited consolidated financial statements and the related
notes.
Critical Accounting Policies and Estimates
For its 2003 fiscal year, Pan American adopted CICA Handbook Section 3870 -
Stock-Based Compensation and Other Stock-Based Payments, which requires the fair
value method of accounting for stock options. Under this method, Pan American is
required to recognize a charge to the income statement based on an
option-pricing model for all stock options that were granted and vested in each
period, with a corresponding credit to Contributed Surplus under the
Shareholders' Equity section of the balance sheet. In 2004, the fair value of
the stock options granted was calculated using an option-pricing model based on
the following assumptions - no dividends were paid, a weighted average
volatility of the Company's share price of 58 per cent, a weighted average
annual risk free rate of 3.78 per cent and an expected life of 2.7 years. The
resulting weighted average option valuation was $4.27 per share for a total
expense related to stock options in 2004 of $2.2 million (2003 - $2.9 million,
2002 - $0.3 million). The charge to the Company's income statement is
incorporated as part of the general and administrative expenses.
The Company also adopted CICA Handbook Section 3110 in 2003, the equivalent of
FASB Statement No. 143, "Accounting for Asset Retirement Obligations", which
addresses financial accounting and reporting for obligations associated with the
retirement of long-lived assets. Accordingly, at December 31, 2004 the expected
fair value of future site restoration costs for the La Colorada, Huaron and
Quiruvilca mines was estimated using a discount rate of 5 per cent at $ 23.9
million (2003 - $21.2 million). This estimate was increased by $2.6 million in
2004 as a result of revisions to the expected site restoration costs at the La
Colorada and Quiruvilca mines. The fair value at December 31, 2004 of future
site restoration costs for the Morococha mine was estimated using a discount
rate of 5 per cent at $ 8.6 million. Thus, the Company's assets and liabilities
as stated on the balance sheet have been increased to reflect the fair value of
the anticipated future liability. The Company reviews these estimates on an
annual basis. In future periods, assuming no change in estimates, operations
will be charged with annual amortization of future site restoration costs of
about $2.0 million and the annual accretion of the liability for future site
restoration costs of about $1.4 million.
In 2004, Pan American implemented a hedge accounting policy for the accounting
treatment of its base-metal forward contracts program. In the fourth quarter of
2005 it was concluded that the Company's accounting for its forward contracts
for the sale of base metals (lead and zinc), its forward contracts for
purchasing Mexican pesos with US dollars and its silver fixing contracts do not
qualify for hedge accounting under AcG-13, Hedging Relations. As a result, Pan
American has restated its unaudited consolidated financial statements for each
16
quarter from march 31, 2004 to September 30, 2005 and its audited consolidated
financial statements for the year ended December 31, 2004.
Canadian GAAP requires that certain financial instruments with characteristics
of both liabilities and equity be recorded as part debt and part equity. The
Company's Debentures fall into this category of financial instruments. A reader
might expect the interest cost associated with the Debentures to be reflected
in the statement of operations. However, Canadian GAAP requires that the
interest payment be accounted for in a manner parallel to the initial
recognition of the Debentures as part debt, recognizing the accretion of the
liability component of the Debentures as a charge to earnings, with the
accretion of the Debenture equity component charged directly to the Deficit.
Similarly, a reader might expect that the Debentures issue costs would be
amortized over the minimum life of the Debentures and reflected as a charge in
the statement of operations. Since all of the issue costs were charged to
Shareholders' Equity when the Debentures were issued, no amortization of those
costs is recorded. Consistent with the Canadian GAAP treatment, the costs
incurred to induce the early conversion of the Debentures were split between a
liability component of $1.3 million, which was charged to earnings and an
equity component of $8.5 million, which was charged directly to the Deficit.
Annually, or more frequently as circumstances require, Pan American assesses
the recoverability of its mining properties and investments by performing
impairment evaluations. These evaluations consist of comparing each asset's
carrying value with the estimated undiscounted future net cash flows. Where
those cash flows are less than the carrying value, the Company records a
write-down of the asset to the estimated fair value. In 2002, the Company wrote
down the carrying value of the Quiruvilca mine by $27.2 million to $nil. In
2004, asset impairment analyses were performed using the closing silver price
on December 31, 2004 of $6.80 per ounce as the long-term silver price
assumption. Other estimates incorporated in the impairment evaluations include
processing and mining costs, mining tonnage, ore grades and recoveries, which
are all subject to uncertainty. If silver prices fall below $6.80 per ounce or
some of the other assumptions prove inaccurate, additional material asset
impairment charges may be required.
Risks and Uncertainties
Metal Price Risk
Pan American derives its revenue from the sale of silver, zinc, lead, copper and
gold. The Company's revenues are directly dependent on metal prices that may
fluctuate widely and are beyond the Company's control. Since the Company's
revenue is derived approximately 53 per cent from silver, 29 per cent from zinc,
10 per cent from lead and the balance from copper and gold, changes in silver
and zinc prices have the greatest impact on the Company's earnings potential.
The following graphs set out the London silver fixing price activity and the
London Metal Exchange Cash Settlement prices for zinc for the period January
2004 through December 2004, and show the volatile nature of the price for these
metals in 2004.
17
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
18
The following table illustrates the effect of changes in silver and zinc prices
on anticipated net revenue for 2005, taking into account the Company's forward
sales commitments for zinc:
Zinc prices
------------------------------------------------------------------------
US $'000's $ 900 $ 1,000 $ 1,100 $ 1,200
------------------------------------------------------------------------
$ 5.00 $ 92,172 $ 93,188 $ 93,984 $ 94,620
Silver $ 5.50 $ 98,314 $ 99,328 $ 100,084 $ 100,753
prices $ 6.00 $ 104,447 $ 105,457 $ 106,210 $ 106,876
$ 6.50 $ 110,570 $ 111,577 $ 112,326 $ 112,989
$ 7.00 $ 116,684 $ 117,697 $ 118,433 $ 119,093
------------------------------------------------------------------------
Consistent with the Company's mission to provide equity investors with exposure
to changes in silver prices, our policy is to not hedge the price of silver.
Pan American mitigates the price risk associated with its base metal production
by selling some of its forecasted base metal production under forward sales
contracts. At December 31, 2004, the Company had sold forward 22,200 tonnes of
zinc at a weighted average price of $1,092 per tonne ($0.495 per pound) and
4,000 tonnes of lead at a weighted average price of $726 per tonne ($0.329 per
pound). The forward sales commitments for zinc represent approximately 42 per
cent of the Company's forecast 2005 zinc production and 17 per cent of the
Company's forecast 2006 zinc production. The lead forward sales commitments
represent approximately 22 per cent of the expected 2005 lead production. At
December 31, 2004 the cash offered prices for zinc and lead were $1,270 and
$1,056 per tonne, respectively, and the mark to market value of the Company's
zinc and lead forward contracts at that date was a negative $4.7 million and at
the date of this MD&A was a negative $5.3 million.
The Company maintains trading facilities with several banks for the purposes of
transacting the Company's hedging activities. None of these facilities are
subject to margin arrangements.
The Company has long-term contracts to sell the zinc, lead and copper
concentrates produced by the Quiruvilca, Huaron and Morococha mines and plans to
enter into similar contracts for the San Vicente concentrate production. These
contracts include provisions for pricing the contained metals, including silver,
based on average spot prices over defined 30-day periods that may differ from
the month in which the concentrate was produced. Under these circumstances, the
Company locks in the spot price of silver during the month that the
silver-bearing concentrates are produced. At December 31, 2004 the Company had
fixed the price of 800,000 ounces of its fourth quarter's silver production
contained in concentrates, which is due to be priced in January and February of
2005 under the Company's concentrate contracts. The price fixed for these ounces
averaged $7.41 per ounce while the spot price of silver was $6.80 per ounce on
December 31, 2004.
Silver dore production from La Colorada is refined under a long term agreement
with fixed refining terms. The refined silver is sold in the spot market to
various bullion trading banks. The Company has never had any delivery or payment
disputes with its customers and management believes that there are no
appreciable delivery or credit risks resulting from its sales contracts.
19
Political and Country Risk
Pan American conducts operations in Peru, Mexico, Argentina and Bolivia, which
are potentially subject to a number of political and economic risks. The Company
is not able to determine the impact of these risks on its future financial
position or results of operations and the Company's exploration, development and
production activities may be substantially affected by factors outside of Pan
American's control. These potential factors include, but are not limited to:
royalty and tax increases or claims by governmental bodies, expropriation or
nationalization, foreign exchange controls, import and export regulations,
cancellation or renegotiation of contracts and environmental and permitting
regulations. The Company currently has no political risk insurance coverage
against these risks.
As an example of this risk, on June 23, 2004 the Peruvian congress approved a
royalty on mining companies of between 1 and 3 per cent based on the value of
annual concentrate sales. The Company's operations in Peru are now subject to
the royalty calculated at 1 per cent, which was a $0.6 million unexpected
increase to costs in 2004 and is expected to total between $0.5 million to $1.0
million per year for all our Peruvian mines combined.
Environmental Risks
Pan American's activities are subject to extensive laws and regulations
governing environmental protection and employee health and safety. Environmental
laws and regulations are complex and have tended to become more stringent over
time. Pan American is required to obtain governmental permits and in some
instances provide bonding requirements under federal, state or provincial air,
water quality and mine reclamation rules and permits. Although Pan American
makes provisions for reclamation costs, it cannot be assured that these
provisions will be adequate to discharge its future obligations for these costs.
Failure to comply with applicable environmental health and safety laws can
result in injunctions, damages, suspension or revocation of permits and
imposition of penalties. There can be no assurance that Pan American has been or
will be at all times in complete compliance with such laws, regulations and
permits, or that the costs of complying with current and future environmental
and health and safety laws and permits will not materially adversely affect Pan
American's business, results of operations or financial condition.
Specifically related to environmental risks, in mid-October 2003 a new mine
closure law was enacted in Peru. No enabling regulations have been published,
and therefore, determining how this law will affect the Company's Peruvian
operations is difficult; however, the law provides that each operating mine in
Peru must complete and submit for certification a mine closure plan setting out
the technical, economical, financial and social aspects of its closure plan.
Furthermore, the law provides that each operating mine must provide a guarantee
for payment of the eventual closure and post-closure phases of its operation.
The form of guarantee has not been specified, but it seems that a guarantee may
take the form of cash, a third-party guarantee or a company guarantee. Until the
enabling regulations are passed and the closure certification process is
complete the possible effects of this law on the Company's financial condition
and results of operation are unknown.
20
Employee relations
Pan American's business depends on good relations with its employees. Certain of
the Company's employees and the employees of Peruvian mining contractors
indirectly employed by the Company, are represented by unions. At December 31,
2004, there were 239 employees represented by the Sindicato de Trabajadores de
Pan American Silver S.A.C. - Mina Quiruvilca (the "Quiruvilca Union") and 65
employees represented by the Sindicato de Trabajadores de Shorey y Anexos (the
"Shorey Union"). There are also 15 employees at the Huaron mine who are members
of a union committee who have rights pursuant to an agreement dated January 1,
2003. The Company has experienced short-duration labour strikes and work
stoppages in the past and may experience future work stoppages.
Pan American is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business activities, many
of them relating to ex-employees. Each of these matters is subject to various
uncertainties and it is possible that some of these matters may be resolved
unfavorably to Pan American. The Company has established provisions for matters
that are probable and can be reasonably estimated. The liabilities that
ultimately may result from these matters do not exceed $5 million in aggregate.
Outlook
During 2005, the Company expects to be making construction decisions for Alamo
Dorado and Manantial Espejo, and expanding operations at San Vicente. In
addition to these properties, Management believes there is significant
exploration potential at our existing Peruvian operations, especially at the
recently acquired Morococha mine. In 2004, Pan American improved its financial
position through the early conversion of nearly all of its Debentures,
prepayment of all its debt and by generating operating cash flow before non-cash
working capital items of $12.2 million. With a full year of production at the
Morococha mine and considering the Company's forecasted metal prices, we
anticipate generating consolidated operating cash flow of approximately $15
million and with current cash balances are well funded to undertake the
ambitious capital growth programs planned for 2005.
Project Development
Work on the feasibility study for the Alamo Dorado silver project is reaching
its final stage. All the major permitting and metallurgical testing is
substantially complete. The Company plans on making a construction decision in
the first quarter of 2005.
Feasibility work is progressing steadily on the 50 per cent owned Manantial
Espejo silver-gold project in Argentina. Hatch Engineers is developing the plant
and infrastructure capital and operating cost estimates while Snowden Engineers
are completing the open pit mining operating and capital cost estimates. The
archeological field program has been completed by Vector Engineers with no
significant findings and the environmental baseline field programs are underway.
The Company expects to complete the feasibility in the third quarter of 2005 and
to make a construction decision shortly thereafter.
21
Metal markets
Prices for the metals that the Company produces were robust in 2004, after
several years of prolonged weakness. Factors contributing to the recovery in
metal prices during 2004 include demand resulting from the strong industrial
growth in China, weakness in the US dollar and supply concerns due to
under-investment in new production capacity. The Company anticipates that these
factors will continue to support prices during 2005 and that the long-term
fundamentals for metal prices are positive.
22
A. Disclosure Controls and Procedures
Disclosure controls and procedures are defined by the Commission as those
controls and other procedures that are designed to ensure that information
required to be disclosed by Pan American Silver Corp. (the "Registrant") in
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.
In connection with restating the Registrant's consolidated financial statements
as provided in this Form 40-F/A, the Registrant's Chief Executive Officer and
Chief Financial Officer, with the participation of other management,
re-evaluated the effectiveness of its disclosure controls and procedures as of
the end of the period covered by this report. Based on the re-evaluation by the
Chief Executive Officer and Chief Financial Officer, and for the reasons
described in Item B below, they concluded that the Registrant's disclosure
controls and procedures were not effective as of the end of the period covered
by this report. However, as a result of the steps taken by the Registrant since
the end of the period covered by this Form 40-F/A, and as disclosed in the
Registrant's Annual Report on Form 40-F for the fiscal year ended December 31,
2005, the Registrant's Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures were
effective as of December 31, 2005.
B. Changes in Internal Control Over Financial Reporting
As described in Document No. 2 to this Annual Report, the Registrant restated
its unaudited consolidated financial statements for the first three quarters of
2004 and its audited consolidated financial statements for the fiscal year
ended December 31, 2004. The Registrant implemented a hedge accounting policy
for the accounting treatment of its base-metal forward contracts program in
2004. Its external auditors, Deloitte and Touche LLP, reviewed the initial
implementation and concurred with the hedge accounting treatment as reported.
The restatement became necessary when the Registrant concluded in fiscal 2005
that its accounting treatment of its forward contracts (collectively, the
"commodity contracts") for the sale of base metals (lead and zinc) and silver,
and its forward contracts for purchasing Mexican pesos with U.S. dollars did
not technically qualify for hedge accounting under AcG-13, Hedging
Relationships. The Registrant has since modified its hedge accounting policy
for the accounting treatment of its commodity contracts accordingly. The
Registrant's restated audited consolidated financial statements for the fiscal
year ended December 31, 2004 reflect the change in the accounting treatment.
The effect of these changes is a non-cash earnings decrease of $4.7 million
after tax for the year ended December 31, 2004. The restatement represents a
change in accounting treatment and has no economic impact on the Registrant and
its cash flows. The details of the Registrant's base-metal forward contracts,
which have been previously disclosed, have not changed. The reconciliation of
results reported in accordance with generally accepted accounting principles
(GAAP) in Canada with United States GAAP has also been restated to reflect the
items above.
The Registrant was required to restate its consolidated financial statements,
as discussed above, in connection with the Registrant's incorrect
interpretation of a complex accounting issue. To address its systems of
internal controls over financial reporting, the Registrant is committed to
obtaining expert disclosure advice from another public accounting firm,
separate from Deloitte & Touche LLP, in conjunction with the interpretation of
complex accounting issues encountered in the future. The Registrant considers
this the most effective course of action to remediate the material weakness in
internal controls.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
The Registrant undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the Commission
staff, and to furnish promptly, when requested to do so by the Commission
staff, information relating to: the securities in relation to which the
obligation to file an annual report on Form 40-F arises; or transactions in
said securities.
B. Consent to Service of Process
The Registrant has previously filed with the Commission a Form F-X in
connection with its Common Shares.
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this amendment to its annual report to be signed on its behalf by
the undersigned, thereto duly authorized.
PAN AMERICAN SILVER CORP.
Dated: April 5, 2006 By: /s/ Robert Pirooz
------------------------------
By: Robert Pirooz
Title: General Counsel and Secretary
EXHIBIT INDEX
Number Document
------ --------
1. Consent of Deloitte & Touche LLP
31. Certification of CEO and CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
32. Certification of CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
33. Certification of CEO and CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 regarding Amendment No. 1
to the Annual Report on Form 40-F*
34. Certification of CEO and CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 regarding Amendment No. 2
to the Annual Report on Form 40-F
35. Certification of CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 regarding Amendment No. 2
to the Annual Report on Form 40-F
---------------
* Previously filed.