The preparation of financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The most significant estimates are
related to the physical and economic lives of mineral assets, their
recoverability, and site restoration and related obligations. Some
of the statements in this MD&A are forward-looking statements,
such as estimates of future production levels, expectations
regarding mine production costs, expected trends in mineral prices
and statements that describe Pan American's future plans,
objectives or goals. Actual results and developments may differ
materially from those contemplated by these statements depending on
such factors as changes in general economic conditions and
financial markets, changes in prices for silver and other metals,
technological and operational hazards in Pan American's mining and
mine development activities, uncertainties inherent in the
calculation of mineral reserves, mineral resources and metal
recoveries, the timing and availability of financing, governmental
and other approvals, political unrest or instability in countries
where Pan American is active, labor relations and other risk
factors listed from time to time in Pan American's Annual
Information Form and Form 40F. Significant Events during the Second
Quarter On April 5, 2006, Pan American filed a preliminary
prospectus supplement to its existing $150 million base shelf
prospectus with the securities regulatory authorities in the
provinces of Canada and with the SEC in connection with a public
offering of common shares (the "Offering"). The Company completed
the base Offering on April 18, 2006 and completed the
over-allotment option of the Offering on April 21, 2006. The
Offering consisted of 6.28 million common shares priced at $23.88
for gross proceeds of $150 million and net proceeds after deducting
underwriting fees and other share issue costs, of $142.2 million.
Pan American expects to use the proceeds of the Offering for the
construction and development of its Manantial Espejo silver project
in Argentina. On April 12, 2006, Pan American announced that it had
closed the acquisition of a 50 per cent interest in the Manantial
Espejo project from Silver Standard Resources Inc. The transaction
gave Pan American a 100 per cent interest in Manantial Espejo. The
purchase price of $47.5 million was paid with 1.95 million common
shares of Pan American. Prior to June 30, 2006, the Company bought
6,000 tonnes of zinc settling between July and December 2006. These
forward purchases were entered into to exactly offset all of the
Company's zinc forward sales positions, leaving the Company with no
open zinc positions as at June 30, 2006. The effect of these
transactions was to crystallize a loss of $8.3 million, which has
been recorded in the consolidated statement of operations. These
transactions will have no further impact on the Company's earnings
and the Company's future zinc production is now fully exposed to
zinc cash prices. Results of Operations For the three months ended
June 30, 2006, the Company generated record net income of $15
million (basic income per share of $0.21) compared to net income of
$5.0 million (basic income per share of $0.07) for the
corresponding period in 2005. The improved financial results for
the quarter are primarily due to significantly higher silver
prices, increased silver production and record low costs per ounce
of silver (net of higher base metal by-product credits). The
Company's record earnings for the second quarter included a $4.8
million loss from forward sale contracts. Specifically, the Company
realized only $1,603 per tonne on approximately 53% of its payable
zinc production, which had been previously sold forward. This was
significantly below the average zinc price of $3,059 per tonne for
the period. For the six-month period ended June 30, 2006 the
Company had net income of $ 12.2 million, compared to net income of
$0.7 million for the corresponding period in 2005. Increased silver
and zinc production combined with higher realized prices were the
primary reasons for the dramatic increase in net income for the
six-month period ended June 30, 2006 versus the comparable 2005
period. The net income for the six-month period ended June 30, 2006
includes a loss of $16.6 million relating to commodity and currency
contracts, (compared to a gain of $0.2 million for the same period
in 2005) and an income tax provision of $11.6 million, (compared to
an expense of $1.7 million for the same period in 2005). Sales for
the second quarter of 2006 were $62.8 million, a 148 per cent
increase from sales in the corresponding period in 2005. Sales in
the second quarter of 2006 benefited from significantly higher
realized metal prices, increased production from the La Colorada
mine and a 22 per cent increase in the quantity of concentrate
shipped from the Company's Peruvian operations versus the
year-earlier period (shipments of concentrate are an essential
criterion for revenue recognition). The Company shipped
approximately the same quantity of concentrate as it produced
during the second quarter of 2006. At the end of the second quarter
the Company had approximately 13,200 tonnes of concentrate
inventory on hand and expects to ship this inventory and recognize
the related revenues in the third and fourth quarters of 2006.
Sales for the six-month period ended June 30, 2006 were almost
double the sales for the comparable period in 2005, due primarily
to higher realized metal prices, increased production from the La
Colorada and San Vicente mines and slightly higher concentrate
shipments from the Peruvian operations. Cost of sales for the three
months ended June 30, 2006 was $27.6 million, a 50 per cent
increase from the $18.4 million recorded in the same period of
2005. Similar to sales for the second quarter of 2006, cost of
sales increased due to the fact that the Company shipped
approximately 6,160 more tonnes of concentrates from the three
mines in Peru relative to the comparable period in 2005. Cost of
sales was also negatively impacted by significantly increased
worker's participation costs in Peru, which are based on higher
taxable income generated. Further increases in cost of sales were
seen at the La Colorada mine, where mining and milling rates
increased by approximately 9 per cent relative to a year ago. Cost
of sales for the six-month period ended June 30, 2006, increased by
27 per cent over the comparable period of 2005. The factors
described above plus the cost of sales of the San Vicente mine in
Bolivia, which was operating in the first quarter of 2006, were the
primary reasons for the increase from the comparable period in
2005. Depreciation and amortization charges for the second quarter
of 2006 increased to $4.2 million from $2.4 million recorded for
the corresponding period in 2005. For the six-month period ended
June 30, 2006, these charges increased to $7.6 million from $5.6
million a year ago. The higher level of concentrate shipments and
milling rates at La Colorada were the main reasons for the increase
in both the three-month and six-month periods ended June 30, 2006
compared to the depreciation and amortization charges recorded in
the respective periods of 2005. Mine operating earnings in the
second quarter of 2006 were a record $31.1 million, which is
approximately seven times the mine operating earnings generated in
the second quarter 2005 of $4.5 million, and almost double the mine
operating earnings generated in the first quarter of 2006. During
the six-month period ended June 30, 2006, the Company generated
mine operating earnings of $49 million compared to mine operating
earnings of $8 million in the same period of 2005. Higher metal
prices, increasing silver production profile and declining costs,
net of by-product credits, resulted in the improving trend in mine
operating earnings over the last three years. The table below sets
out selected quarterly results for the past fourteen quarters,
which are stated in thousands of US dollars, except for the per
share amounts. Mine operating Net income/ Diluted Quarter earnings/
(loss) for income (loss) Year (unaudited) Sales (loss)(1) the
period per share
-------------------------------------------------------------------------
2006 June 30 $ 62,848 $ 31,060 $ 14,964 $ 0.20 March 31 $ 45,744 $
17,976 $ (2,761) $ (0.04)
-------------------------------------------------------------------------
2005 Dec.31 $ 37,871 $ 8,683 $ (29,514) $ (0.44) Sept. 30 $ 30,086
$ 4,961 $ 172 $ 0.00 June 30 $ 25,358 $ 4,526 $ 4,971 $ 0.07 March
31 $ 29,086 $ 3,488 $ (4,223) $ (0.06)
-------------------------------------------------------------------------
2004 Dec. 31 $ 30,022 $ 3,402 $ 13,527 $ 0.21 Sept. 30 $ 27,916 $
6,357 $ 358 $ 0.01 June 30 $ 21,179 $ 2,640 $ 3,352 $ (0.09)(2)
March 31 $ 15,708 $ 2,395 $ (2,023) $ (0.08)(2)
-------------------------------------------------------------------------
2003 Dec.31 $ 12,857 $ 81 $ (2,840) $ (0.05)(2) Sept. 30 $ 11,890 $
1,258 $ (1,225) $ (0.10)(2) June 30 $ 12,553 $ 758 $ (1,156) $
(0.02) March 31 $ 7,822 $ (78) $ (1,573) $ (0.03)
-------------------------------------------------------------------------
(1) Mine operating earnings/(loss) are equal to revenues less
operating costs and depreciation and amortization (2) Includes
charges associated with early conversion and accretion of the
Debentures General and administration costs for the three-month
period ended June 30, 2006, including stock-based compensation,
were $2.4 million. These costs, which were $1.8 million for the
comparable quarter in 2005, were negatively impacted by the
continued strength in the Canadian dollar as compared to the US
dollar and additional costs associated with the Company's Sarbanes
Oxley compliance project. General and administration costs of $4.3
million for the six-month period ended June 30, 2006 (compared to
$3.3 million in the same period in 2005), increased primarily for
the same reasons. Exploration expenses for the second quarter of
2006 were $0.6 million (second quarter 2005, $0.9 million) and
mostly reflect exploration activities at Morococha and La Colorada.
Based on positive exploration results, the Company expects to
continue a similar level of exploration activity for the remainder
of the year. Exploration expenses for the first six-months of 2006
were $1.9 million (2005, $2.3 million). Exploration costs in the
three-month and six-month comparable periods of 2005 were incurred
primarily to complete the feasibility study for the Manantial
Espejo project, which is now under construction. Asset retirement
and reclamation expense of $0.6 million in the second quarter of
2006 (second quarter 2005, $0.4 million) related to the accretion
of the Company's mines closure liabilities. The accretion for the
six-month period ended June 30, 2006 was $1.2 million compared to
$0.9 million for the same period of 2005. The increase in the
accretion charge relative to last year is directly due to the
Company increasing its estimate for the future consolidated mine
closure liability at the end of 2005. Interest and financing
expense in the second quarter of 2006 of $0.2 million increased
from the $0.1 million of interest expenses incurred during the same
period in 2005 due to increases in transactional bank fees.
Investment and other income of $1.1 million (second quarter 2005,
$1.0 million) represented interest income received from cash
balances the Company maintained during the quarter. Investment and
other income for the six-month period ended June 30, 2006 was of
$1.3 million (2005, $1.2 million). The higher interest rate
environment prevailing in 2006, combined with higher average cash
balances resulted in the increase over the comparable periods.
Income tax provision of $7.6 million for the second quarter was a
significant increase from the $0.7 million in the comparable period
of 2005 due to sharply higher taxable income generated by the
Company's Peruvian entities and the fact that these entities
utilized their remaining tax loss carry forwards in 2005. Income
tax provision for the six-month period ended June 30, 2006
increased to $11.6 million from $1.7 million recorded in the same
period of 2005 due to the same reasons. Metal Production Pan
American produced 3,317,369 ounces of silver in the second quarter
of 2006, a 7 per cent increase from the corresponding period in
2005. Silver production increased at all of the Company's
operations, other than at Huaron, due primarily to increased
milling rates. The most significant increases in silver production
were at La Colorada and Morococha, which achieved 23 per cent and
12 per cent increases, respectively. Consolidated base metal
production also increased over production levels from a year ago,
with higher mill tonnage outweighing the impact of slightly lower
ore grades. Please refer to the "Financial & Operating
Highlights" section of this second quarter report for a detailed
breakdown of each mine's production data. Cash and Total Production
Costs per Ounce for Payable Silver Consolidated cash costs for the
three-month period ended June 30, 2006 were a record low of $1.17
per ounce compared to $4.48 per ounce for the corresponding period
of 2005. This $3.31 per ounce decrease in cash costs was primarily
a result of the increase in by-product credits generated from
increased base metal production at higher metal prices. At both
Morococha and Quiruvilca, the by-product credits were greater than
the operating costs, resulting in cash costs per ounce of negative
$3.81 and negative $1.07 respectively. The cash costs per ounce as
compared to the same period in 2005 dropped by $6.59 at Morococha,
by $5.53 at Quiruvilca and by $3.53 at Huaron. At La Colorada,
which is a nearly pure silver mine and thus realizes only minor
by-product credits, cash costs per ounce of $5.56 were similar to
those recorded a year ago. Only the Company's Pyrite Stockpile
operation recorded higher costs than it had a year ago due to the
fact that the cost structure of that operation is linked to silver
prices, resulting in higher costs when silver prices are higher.
The Company reports the non-GAAP cash cost per ounce of payable
silver in order to manage and evaluate operating performance at
each of the Company's mines. The measure is widely used in the
silver mining industry as a benchmark for performance, but does not
have standardized meaning. To facilitate a better understanding of
this measure as calculated by the Company, we have provided a
detailed reconciliation of this measure to our cost of sales, as
shown in our unaudited Consolidated Statement of Operations for the
period. Three months ended Six months ended June 30 June 30 2006
2005 2006 2005 ----------------------- ----------------------- Cost
of sales $ 27,613 $ 18,417 $ 51,910 $ 40,797 Add/(Subtract)
Smelting, refining, and transportation charges 16,594 9,061 30,679
17,734 By-product credits (41,265) (18,219) (73,593) (35,616)
Mining royalties 838 337 1,685 782 Workers participation (2,478)
(275) (3,818) (528) Change in inventories 1,332 3,352 2,413 1,731
Other 539 272 1,375 658 Minority interest adjustment 389 (262) 343
(604) ------------------------- -----------------------
----------------------- Cash Operating Costs A $ 3,562 $ 12,682 $
10,994 $ 24,954 Add/(Subtract) Depreciation and amortization 4,175
2,415 7,646 5,633 Asset retirement and reclamation 614 412 1,228
939 Change in inventories (29) 1,061 337 1,061 Other (173) 95 (65)
80 Minority interest adjustment (145) (159) (302) (321)
------------------------- -----------------------
----------------------- Production Costs B $ 8,004 $ 16,506 $
19,838 $ 32,346 Payable Ounces of Silver C 3,048,131 2,831,511
6,079,589 5,549,584 ----------------------- -----------------------
Total Cash Cost per Ounce (A(x)1000)/C $ 1.17 $ 4.48 $ 1.81 $ 4.50
----------------------- ----------------------- Total Production
Costs per Ounce (B(x)1000)/C $ 2.63 $ 5.83 $ 3.26 $ 5.83
----------------------- ----------------------- Liquidity and
Capital Resources At June 30, 2006, cash and cash equivalents plus
short-term investments were $185.3 million, a $136.7 million
increase from March 31, 2006. The increase is primarily due to the
net proceeds of $142.2 million from the offering of common shares
completed during the quarter. In addition to these funds, the
Company also generated cash flow from operating activities of $29.2
million during the quarter and drew a further $2.2 million as an
advance on concentrate shipments. Of the $173.8 million that was
raised and generated, $37 million was invested in mining equipment
and development, primarily at the Company's two construction
projects, Alamo Dorado and Manantial Espejo, where $18.2 million
and $10.1 million was expended respectively. Significant
investments also occurred at Morococha, where $3.2 million was
invested in mine development and at La Colorada, where $1.7 million
was invested in rehabilitating the sulphide plant in preparation
for its restart. The balance of the funds raised and generated
during the quarter were invested in the Company's high-quality bond
portfolio ($116.3 million) and held in cash ($20.4 million).
Working capital at June 30, 2006 was $188.9 million, an increase of
$125.8 million from March 31, 2006. The increase in working capital
resulted from a $136.7 million increase in cash and short-term
investments plus a $5.6 million increase in accounts receivable,
and an increase of $3.9 million in other current assets, partially
offset by a $20.4 million increase in current liabilities. The
increase in current liabilities was primarily a consequence of
increases in payables related to Peruvian income taxes,
construction activities at Alamo Dorado and advances on concentrate
shipments. Shareholders' equity at June 30, 2006 amounted to $463
million, an increase of $205.6 million from shareholders' equity at
March 31, 2006. This increase resulted primarily from the public
offering of common shares, from the acquisition of the remaining 50
per cent interest of Manantial Espejo, valued at $47.4 million, and
from the net income generated during the second quarter of $15
million. At June 30, 2006, the Company had 76 million common shares
issued and outstanding. Based on the Company's financial position
at June 30, 2006 and the operating cash flows that are expected
over the next twelve months, management believes that the Company's
liquid assets are more than sufficient to fund the development of
Alamo Dorado and Manantial Espejo, and planned sustaining capital
expenditures, and to discharge liabilities as they come due. At the
date of this MD&A, the Company did not have any material
contractual obligation, or any off-balance sheet arrangements,
except for $9.8 million of commitments relating to the construction
of Alamo Dorado and Manantial Espejo. In anticipation of capital
expenditures in Mexican pesos ("MXN") relating to the construction
of Alamo Dorado, and to match anticipated spending, the Company has
purchased MXN 43 million settling between July 2006 and September
2006 at an average MXN/US$ exchange rate of 10.86. At June 30,
2006, the mark to market value of the Company's position was loss
of $0.2 million. As at June 30, 2006, the Company had sold forward
6,000 tonnes of zinc at an average price of $1,603 per tonne and
had bought forward 6,000 tonnes of zinc at an average of $2,986 per
tonne. All of the Company's zinc positions settle between July and
December of 2006. At June 30, 2006, the cash offered price of zinc
was $3,218 per tonne, which resulted in a net unrealized
mark-to-market loss of the Company's zinc forward positions of $8.3
million ($9.5 million of unrealized losses and $1.2 million of
unrealized gains). At the end of the second quarter of 2006, the
Company had fixed the price of 900,000 ounces of silver produced
during the second quarter and contained in concentrates, which are
due to be priced in July and August of 2006 under the Company's
concentrate contracts. The price fixed for these ounces averaged
$12.14 per ounce while the spot price of silver was $10.70 on June
30, 2006, resulting in a mark to market gain of $1.3 million.
Exploration and Development Activities The development of the
Company's Alamo Dorado project in Mexico is progressing on budget
and on schedule with production still planned for the start of the
fourth quarter of 2006. Over 82 per cent of the construction work
was completed by quarter end. The expected total capital costs for
the project are approximately $77 million, including start-up
working capital and a contingency allowance. Construction of the
Manantial Espejo project in Argentina, which commenced in April
2006, is progressing well. Expenditures at the project during the
second quarter were $10.1 million, primarily on purchasing the
necessary underground and surface mining equipment. The Company
continued to fill key staffing positions during the quarter and has
awarded the critical EPCM contract to Ausenco International,
through its Argentinean subsidiary. Over the remainder of the year,
the Company anticipates spending an additional $36 million on the
construction of Manantial Espejo, which will be funded out of the
proceeds from the common share offering completed in the second
quarter. Capital costs for the project are expected to be $112.3
million including working capital and normal construction
contingencies, plus $18.1 million in Argentine Value Added Tax
which will be refundable once the mine is in production. At the San
Vicente property, Pan American is hoping to continue to mine on a
limited scale while evaluating expansion plans. The Company signed
an extension to an a previous agreement with Comibol, a Bolivian
state run mining company, on July 25, 2006, which allows the
Company to continuing with mining activities. The Company plans to
resume processing ore at a nearby processing facility in early
August, 2006 and expects to produce approximately 0.2 million
ounces from San Vicente in 2006 at a total cost of under $3.50 per
ounce. CONTACT: Alexis Stewart, Director Corporate & Investor
Relations, (604) 684-1175, DATASOURCE: Pan American Silver Corp.
CONTACT: PRNewswire - - 08/02/2006
Copyright