SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 40-F
[ ] 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, 2002 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 (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification No.)
of Incorporation
or Organization)
1500 - 625 HOWE STREET
VANCOUVER, BRITISH COLUMBIA
CANADA, V6C 2T6
(604) 684-1175
(Address and telephone number of Registrants' principal executive offices)
CT CORPORATION SYSTEM,
111 8TH AVENUE, 13TH FLOOR,
NEW YORK, NEW YORK 10011
(212) 894-8700
(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:
Title of each class: Name of each exchange on which registered:
-------------------- ------------------------------------------
Common Shares The Toronto Stock Exchange
without par value The Nasdaq National Market
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 43,883,454 shares
outstanding as at December 31, 2002.
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]
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 [ ]
DOCUMENTS INCLUDED IN THIS FORM
No. Document
--- --------
1. Pan American Silver Corp. Annual Information Form for the year ended December 31, 2002.
2. Pan American Silver Corp. Consolidated Financial Statements for the year ended December 31, 2002, including a
reconciliation to United States generally accepted accounting principles.
3. Pan American Silver Corp. Management's Discussion and Analysis of Financial Condition and Results of Operations for
the year ended December 31, 2002.
DOCUMENT NO. 1
[PAN AMERICAN SILVER CORP. LOGO]
ANNUAL
INFORMATION
FORM
FOR THE YEAR
ENDED DECEMBER 31, 2002
Dated: May 20, 2003
1500-625 Howe Street
Vancouver, British Columbia
V6C 2T6
Web Site: www.panamericansilver.com
TABLE OF CONTENTS
INTRODUCTION......................................................................................................1
REPORTING CURRENCY.............................................................................................1
ACCOUNTING POLICIES............................................................................................1
CONVERSION TABLE...............................................................................................1
GLOSSARY OF TERMS..............................................................................................1
CLASSIFICATION OF MINERAL RESERVES AND RESOURCES...............................................................1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS...................................................................2
CORPORATE STRUCTURE...............................................................................................3
INCORPORATION..................................................................................................3
SUBSIDIARIES...................................................................................................3
GENERAL DEVELOPMENT OF THE BUSINESS...............................................................................4
BUSINESS OF PAN AMERICAN.......................................................................................4
DEVELOPMENTS OVER THE LAST THREE FINANCIAL YEARS...............................................................4
CORPORATE STRATEGY.............................................................................................7
OUTLOOK FOR 2003...............................................................................................7
NARRATIVE DESCRIPTION OF THE BUSINESS.............................................................................8
OPERATIONS.....................................................................................................8
OPERATING MINES................................................................................................8
QUIRUVILCA MINE................................................................................................8
HUARON MINE...................................................................................................16
LA COLORADA MINE..............................................................................................24
STOCKPILES....................................................................................................31
METALS TRADING................................................................................................31
DEVELOPMENT PROJECTS..........................................................................................32
INVESTMENT AND EXPLORATION PROPERTIES AND EXPENDITURES........................................................37
PROPERTIES....................................................................................................37
MINERAL PROPERTY EXPENDITURES.................................................................................39
EMPLOYEES.....................................................................................................39
RESEARCH AND DEVELOPMENT......................................................................................40
COMPETITIVE CONDITIONS........................................................................................40
WORKING CAPITAL...............................................................................................40
ENVIRONMENT...................................................................................................40
TRENDS AND UNCERTAINTIES......................................................................................41
SELECTED CONSOLIDATED FINANCIAL INFORMATION......................................................................46
ANNUAL INFORMATION............................................................................................46
DIVIDENDS.....................................................................................................47
MANAGEMENT'S DISCUSSION AND ANALYSIS.............................................................................47
MARKET FOR SECURITIES............................................................................................47
DIRECTORS AND OFFICERS...........................................................................................48
ADDITIONAL INFORMATION...........................................................................................50
GLOSSARY OF TERMS................................................................................................51
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INTRODUCTION
--------------------------------------------------------------------------------
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
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 16 to the Consolidated
Financial Statements of the Company. These financial statements set out on pages
40 through 55, inclusive, of the Company's 2002 Annual Report are incorporated
by reference herein.
CONVERSION TABLE
In this Annual Information Form, imperial measures are used with respect to
mineral properties located in the United States of America and metric units are
used with respect to mineral properties located in Peru, Mexico, Bolivia 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 grams/tonne 1 ounce (troy)/ton
GLOSSARY OF TERMS
The glossary of terms set forth on page 51 to 55 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 certain 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 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
--------------------------------------------------------------------------------
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", "budget",
"may", "schedule" and similar expressions, identify forward-looking statements.
Forward-looking statements are necessarily based upon a number of assumptions
and estimates that, while considered reasonable by Pan American, are inherently
subject to significant uncertainties and contingencies. This Annual Information
Form contains forward-looking statements relating to, among other things, the
sufficiency of current working capital and anticipated operating cash flow, the
sufficiency of mineral reserves and resources at Quiruvilca, Huaron, La
Colorada, and Alamo Dorado as well as other properties, the estimated cost of
and availability of funding for ongoing capital improvement programs, the
estimated cost of the proposed development of the La Colorada and Alamo Dorado
projects, estimated exploration expenditures to be incurred on Pan American's
various silver exploration properties and compliance with environmental
standards. Management's Discussion and Analysis of Financial Conditions and
Results of Operations ("MD&A"), which is set out on pages 33 to 38 in the
Company's 2002 Annual Report is incorporated by reference within this Annual
Information Form. The MD&A also contains forward-looking statements relating to,
among other things, forecast capital and non-operating spending, levels of
silver and other metals production, production costs and metal prices. Such
statements reflect the current views of Pan American with respect to future
events and are subject to known and unknown risks, uncertainties and
assumptions. Many factors, both known and unknown, could cause the actual
results, performance or achievements of Pan American 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 in this Annual Information Form under the headings "Trends
and Uncertainties" and "Competitive Conditions". Other such factors include,
whether or not referenced in this Annual Information Form, changes in general
economic and business conditions and changes in business strategy. Should one or
more of these factors or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements may
vary materially from those described herein as anticipated, believed, estimated
or expected. Pan American 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.
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CORPORATE STRUCTURE
--------------------------------------------------------------------------------
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.
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.
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
SUBSIDIARIES
A significant portion of the Company's business is carried on through its
various subsidiaries. The following table shows, as at December 31, 2002, 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 (%)
---- ------------ -------------
Aurifera Tres Cruces S.A. ("Tres Cruces S.A.") Peru 50
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)
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 100
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
Serebro Magadana ("Dukat") Russia 20
--------------
1 The Company indirectly owns 99.7% of the total outstanding equity of Mina
Quiruvilca.
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GENERAL DEVELOPMENT OF THE BUSINESS
--------------------------------------------------------------------------------
BUSINESS OF PAN AMERICAN
Pan American is principally engaged in the exploration for, and the
acquisition, development and operation of silver properties.
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 property, a silver
mine and development project located on the site of a formerly producing silver
mine in Mexico (Pan American is operating La Colorada under a limited production
plan pending completion of construction of an oxide mill anticipated at the end
of June, 2003); and (4) mines and sells silver-rich pyrite stockpiles at a
small-scale operation in central Peru. Pan American also either holds an
interest in or may earn an interest in non-producing silver resource and silver
exploration properties in Peru, Argentina, the United States, Russia and Mexico,
including the significant Alamo Dorado deposit in Mexico.
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 significant exploration
potential.
DEVELOPMENTS OVER THE LAST THREE FINANCIAL YEARS
During the last three financial years the Company has focused on the
acquisition and development of a number of projects ranging from silver
exploration activities to the development and operation of silver producing
properties.
o On March 6, 2000, the Company purchased a 71.8% interest in Minera
Huaron, a Peruvian company (at that time, a company at arm's length to
Pan American) that owns the Huaron silver mine in Peru from Cementos
Pacasmayo S.A.A., Mauricio Hochschild & Cia. Ltda. S.A.C.
("Hochschild") and Cia. Minera Arcata S.A., three foreign corporations
at arm's length to the Company (the "Huaron Vendors") for, inter alia,
1,780,389 shares of the Company, a 2.16% net smelter return royalty
(the "Huaron Royalty") and 700,000 ten-year stock options to purchase
common shares of the Company exercisable at $4.00 per common share.
The Huaron Royalty is payable after 4,300,000 tonnes of ore have been
extracted from the Huaron mining claims. The royalty increased to 3%
when Pan American increased its ownership interest in Minera Huaron to
99.85% in August 2001.
o Between March 6, 2000 and December 31, 2000, the Company increased its
ownership of Minera Huaron from 71.8% to 72.6% through the purchase of
additional common shares of Minera Huaron from minority shareholders
at arm's length to Pan American for cash consideration in the amount
of $65,000.
o In April 2000, Pan American granted Minera Barrick Misquichilca S.A.
("Barrick"), a subsidiary of Barrick Gold Corporation, a Peruvian
company at arm's length to Pan American, the right to conduct
exploration activities on certain mineral claims located near the
Quiruvilca mine in Peru (known as Los Angeles) for up to a ten year
period in consideration of, among other things, Barrick incurring
certain minimum annual exploration expenditures on the property and
paying $100,000 per year to Pan American (which amount increases to
$200,000 per year after year five of such agreement). Pan
- 4 -
American also granted Barrick an option to acquire such mining claims
which option only becomes effective upon Barrick having incurred $10
million in exploration expenditures on the property. If Barrick
exercises such option, it must make certain payments to Pan American
based on the estimated proven and probable reserves of gold and a five
percent net smelter return on any proven and probable gold in excess
of such estimate. In April 2003, Barrick made its annual $100,000
payment to maintain such agreement for a further one-year period.
o In June 2000, Pan American completed a positive bankable feasibility
study designed to determine the economic viability of constructing a
new underground mine and processing facilities at its La Colorada
project in central Mexico.
o In July 2000, the Company acquired the annual 20% royalty on net
income from the Company's Quiruvilca mine from NPMC, Inc. ("NPMC")
(formerly Northern Peru Mining Corporation), a wholly owned subsidiary
of Coeur d'Alene Mines Corp., a mining company at arm's length to Pan
American, in consideration of the issue to Coeur d'Alene Mines Corp.
of 140,000 common shares of the Company, 100,000 common share purchase
warrants exercisable for three years at $5.00 per warrant and a cash
payment in the amount of $50,000. To-date, none of the common share
purchase warrants have been exercised.
o In September 2000, Pan American reached an agreement with the Kaskol
Group (OAO MNPO Polimetall) resolving the outstanding legal actions
between the parties involving the Dukat silver project in Magadan,
Russia and providing for the future ownership of the project. Under
the settlement agreement, Pan American and the Kaskol Group agreed to
form a new Russian mining company, Serebro Magadana, to hold the
mining license (previously held by Pan American) and certain other
assets at the Dukat project (previously held by the Kaskol Group). On
March 11, 2001, Pan American and Kaskol Group entered into a
shareholder's agreement governing Serebro Magadana. Under the
shareholders agreement, Pan American holds a 20% interest in Serebro
Magadana and has no future management or financial obligations. The
Kaskol Group holds an 80% interest in Serebro Magadana and is
responsible for all financial obligations and operating the project.
Due to Pan American's lack of significant influence with respect to
operating and financing decisions for the Dukat project and the
uncertainty as to the receipt of cash flow from that project, Pan
American wrote-off its $37,208,000 carrying value of the Dukat project
in the third quarter of 2000. As at the date hereof, the consolidated
balance sheet of Pan American ascribes no value to the Dukat project.
o In September 2000, Minera Huaron reached an agreement with Espresa
Administradora Chungar S.A.C. settling a number of legal proceedings
between them related to the Huaron mine that existed prior to Pan
American's acquisition of its interest in Minera Huaron. The
proceedings related to a 1998 flood of the adjoining Chungar zinc
mine, which also flooded the Huaron mine and caused it to cease
operations. The settlement resulted in a payment of $1,350,000 by
Chungar to Minera Huaron.
o In April 2001, Pan American commenced milling operations at the
rehabilitated Huaron mine. The Huaron mine reached commercial
production levels on May 1, 2001.
o In July 2001, Pan American optioned a portion of the Huaron property
to Anglo American Mining Corporation ("Anglo"). The optioned property
consists of approximately 29,008 hectares located on the northern
portion of the Huaron property holdings. The option allows Anglo to
earn a 51% interest in the optioned property by making annual cash
payments of $30,000 to Minera Huaron and by spending $3,000,000 on the
optioned property over a four-year period.
- 5 -
o In August 2001, Pan American sold 9,321 hectares of the Huaron
property for consideration having a value equal to $3,700,000 to
Volcan Compania Minera S.A.A. ("Volcan"). Such consideration consisted
of $200,000 in cash, $500,000 in shares of Volcan, the remaining 27.2%
interest in Minera Huaron that Pan American did not already own and
other consideration. The acquisition of these shares brought Pan
American's direct and indirect ownership in Minera Huaron to 99.85%.
o In October 2001, Pan American retired the outstanding balance of the
$12,000,000 Standard Bank loan facility taken out to re-start the
Huaron mine. The $6,300,000 remaining balance was re-paid by a
four-year, $6,500,000 loan provided by Banco de Credito del Peru
("Banco de Credito"). The majority of the assets of Minera Huaron are
pledged as security for this loan.
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 minimum 10-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 April 23, 2002 Anglo decided not to continue work on the
approximately 29,008 hectares located on the northern portion of the
Huaron property holdings.
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, the funds from which
are to be used to expand the La Colorada mine. The Company took its
first draw from the facility in March of 2003.
o On November 8, 2002 Pan American acquired silver bearing stockpiles
(the "Stockpiles") located in central Peru from Volcan for 636,942
common shares of the Company, $500,000 in marketable securities owned
by Pan American, and $317,000 in cash.
o In December 2002 Polymetall advised Pan American that they had
commenced mine production at Dukat.
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 3,818,330 warrants to former Corner Bay shareholders and granted
options to purchase up to 553,846 common shares of the Company to
former employees of Corner Bay.
- 6 -
CORPORATE STRATEGY
Pan American's corporate strategy is to become one of the world's leading
primary silver mining companies. The key elements of Pan American's strategy are
to:
o INCREASE SILVER PRODUCTION - Until 2001, Pan American's only source of
silver production was its Quiruvilca mine. During 2001, Pan American
commenced production at its Huaron and La Colorada mines and
maintained production at the Quiruvilca mine. For the year ended
December 31, 2001, silver production was approximately 6.9 million
ounces compared to approximately 3.6 million ounces of silver in 2000.
For the year ended December 31, 2002 Pan American increased its silver
production to 7.8 million ounces, an increase of 12% compared to 2001.
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, its
Hog Heaven and Waterloo properties in the United States and through
its interest in the Dukat property in the Russian Federation. Pan
American actively seeks opportunities to increase its silver resource
base by acquiring formerly producing silver mines with silver
resources that could be re-opened should silver prices increase
sufficiently to justify such a re-opening.
o ACQUIRE ADDITIONAL SILVER EXPLORATION PROPERTIES - One of Pan
American's objectives is to acquire a portfolio of silver exploration
properties. As at December 31, 2002, Pan American holds 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, Huaron holds approximately 41,280 hectares of
exploration property. Pan American is actively seeking to acquire
additional silver exploration properties with bulk mineable targets
that have the possibility of possessing over 50,000,000 ounces of
silver mineralization to supplement its 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 2003
In 2003, Pan American will continue to take steps towards its stated
corporate strategy of becoming one of the world's leading primary silver mining
companies. In 2003, Pan American expects to maintain close to the current level
of production at the Quiruvilca and Huaron mines, commence full production at
the La Colorada mine and produce silver from its pyrite Stockpiles in Peru. The
combined operations of these mines are expected to increase Pan American's
silver production to approximately 10.3 million ounces in 2003.
Pan American will continue to investigate, evaluate and where appropriate,
acquire additional silver production or silver exploration and development
properties.
- 7 -
NARRATIVE DESCRIPTION OF THE BUSINESS
--------------------------------------------------------------------------------
OPERATIONS
Pan American's principal products and sources of revenue are silver rich
zinc, lead and copper concentrates. In 2002, the Quiruvilca, Huaron, and La
Colorada mines and the Stockpiles accounted for all of Pan American's production
of concentrates. Information related to Pan American's segment revenues is set
forth in Note 13 to the Consolidated Financial Statements and is referred to
in the Company's MD&A.
Consolidated production for the year ended December 31, 2002 was as
follows:
QUIRUVILCA HUARON LA COLORADA CONSOLIDATED(1)
---------- ------ ----------- --------------
Tonnes milled 508,352 606,300 50,662 1,165,314
Grade
Grams/tonne silver 176 261 442 232
% Zinc 3.95 4.08 1.14 3.90
% Lead 1.44 2.64 0.97 2.04
% Copper 0.37 0.49 - 0.42
Production
Ounces silver 2,509,689 4,527,971 626,035 7,765,153
Tonnes zinc 17,852 20,896 333 39,081
Tonnes lead 6,468 14,006 316 20,790
Tonnes copper 1,107 1,740 - 2,847
-----------
1 includes 101,458 ounces of silver produced from the Stockpiles.
OPERATING MINES
QUIRUVILCA MINE
OWNERSHIP AND PROPERTY DESCRIPTION
The Company's wholly-owned indirect subsidiaries, Pan American Peru owns
and Mina Quiruvilca operates, the Quiruvilca mine. Pan American acquired the
Quiruvilca mine in 1995.
The Quiruvilca mine is an underground mine. The Quiruvilca mineral property
consists of 158 mining concessions covering 8,581 hectares. Mina Quiruvilca owns
six mining concessions covering 3,472 hectares that are being explored by
Barrick. Mina Quiruvilca holds surface and water rights in the area covering the
mill and related workings.
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
Quiruvilca mine is 76 kilometres east of the coastal city of Trujillo. The
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mine is centred at approximately 8 degrees 00' 57" South Latitude and 78 degrees
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 33 kilometres of the road are paved and the
remaining 104 kilometres consist of a dirt road. The last major upgrade to the
road was in 1996. 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, forming 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.
Quiruvilca has undetermined environmental liabilities and in connection
therewith the Company has taken a charge against operations of approximately
$12.5 million.
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. The
overall tax burden in Peru is less than the Canadian tax burden.
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.
- 9 -
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.
GEOLOGY
The Quiruvilca mine is situated within the eastern edge of a major sequence
of volcanic rocks, interpreted as part of the Calipuy Volcanic complex of the
Mid-Miocene. 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 0.65 metres. The
average dip of the veins is 70 degrees, but range from vertical to 40 degrees.
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, SECURITY OF SAMPLES
Exploration at the Quiruvilca property is conducted using a combination of
diamond drilling and underground drifting. Four diamond drills are in continuous
operation at the property, drilling BQ (36.4 mm diameter) sized holes between 50
and 200 meters in length. This is generally followed by underground
cross-cutting at a 70 meter spacing. During 2002, 15,264 meters of drilling was
done, along with 7,608 meters 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. 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, 2002 are 2,109,100 tonnes
with an average grade of 186 grams/tonne silver, details of which are set out in
the following table:
- 10 -
QUIRUVILCA MINERAL RESERVES (1),(2),(3)
RESERVE GRAMS OF SILVER
CATEGORY TONNES PER TONNE % ZINC % LEAD % COPPER
-------- --------- --------------- ------ ------ --------
Proven 1,976,500 191 4.28 1.58 0.49
Probable 732,600 178 4.60 1.62 0.42
--------- --- ---- ---- ----
Total 2,109,100 186 4.39 1.59 0.47
-----------
1 Calculated using a price of $4.75 per ounce of silver and $900 per tonne of
zinc.
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 ($28/tonne). Proven and probable
mineral reserves are extrapolated between 15 and 30 metres down dip
depending on vein continuity.
3 Mineral reserves were estimated by the engineering and geology staff of the
Company's wholly-owned subsidiary, Mina Quiruvilca, under the supervision
of the Company's "qualified person", Norm Pitcher, P.Geo, who is an
employee of the Company. Mr. Pitcher has reviewed and tested the
information developed by the Company's operating subsidiary and, based upon
those tests and reviews, Pan American is satisfied with the accuracy of the
reserve calculations.
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, 2002:
RECONCILIATION OF MINERAL RESERVES AT QUIRUVILCA
TONNES
------
Opening balance, December 31, 2001 2,749,400(1)
---------
Additions 331,486(2)
Losses 847,543(3)
Tonnes mined from reserves 323,638
Low grade added to reserves 199,395
---------
Closing balance, December 31, 2002 2,109,100
=========
----------
1 December 31, 2001 reserves were calculated using a price of $5.00 per ounce
of silver and $1,000 per tonne of zinc.
2 Additions are from tonnes added through exploration and reinterpretation.
3 Losses during 2002 consisted of 301,388 tonnes of material that was moved
to the resource category due to declining metal prices, 122,897 tonnes of
material that was moved to the resource category due to reinterpretation,
and 427,258 tonnes of material that was moved to the resource category
mainly due to the accessibility of the ore.
Management of the Company believes that reserves at the Quiruvilca mine are
sufficient for at least four years at current production rates.
MINERAL RESOURCES
Pan American's management estimates that mineral resources at the
Quiruvilca mine as at December 31, 2002 are as follows:
- 11 -
QUIRUVILCA MINERAL RESOURCES(1),(2)
RESOURCE GRAMS OF SILVER
CATEGORY TONNES PER TONNE % ZINC % LEAD % COPPER
--------- ------ --------------- ------ ------ --------
Measured 1,123,800 177 3.41 1.30 1.74
Indicated 356,200 186 4.56 1.61 1.19
Total 1,482,000 179 3.69 1.37 1.61
--------- --- ---- ---- ----
Inferred 2,044,100 170 4.45 1.64 0.43
--------- --- ---- ---- ----
----------
1 These resources are in addition to Quiruvilca mineral reserves.
2 Mineral resources were estimated by the engineering and geology staff of
the Company's wholly-owned subsidiary, Mina Quiruvilca, under the
supervision of the Company's "qualified person" Norm Pitcher, P.Geo, who is
an employee of the Company. Mr. Pitcher has reviewed and tested the
information developed by the Company's operating subsidiary and based upon
those reviews and tests, Pan American is satisfied with the accuracy of the
resource calculations.
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 metre level (elevation 3,537 metres). Access to
the mine has been from seven adits driven into the side of the mountain at
elevations ranging from 3,925 metres to 3,650 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 level main haulage
level. Diesel locomotives with mine cars are used to transport ore from the ore
passes on the 220 level to coarse ore bins.
Of the 65 veins presently being mined, 11 contributed approximately 50% of
the production during calendar 2002. The bulk of recent production has come from
veins, which average less than 0.60 metres in width in the Zinc-Lead and
Transition Zones.
There are presently 110 active stopes in the mine, with approximately
one-third in the drilling and blasting phase, one-third in the mucking phase and
one-third in the filling phase at any given time. Two stoping methods are
presently in use at the Quiruvilca mine. In stopes where the vein's mineable
width is less than 1.0 metre, and where hydraulic backfill is not available,
resuing is employed. Resuing was utilized in at least half of the stopes over
the past few years. Cut-and-fill stopes are used where hydraulic backfill is
available with tailings used as fill. In stopes where the ground conditions
permit, up to two cuts are taken prior to filling. There are variations to these
stoping methods to suit local conditions.
A hydraulic backfill plant was first installed in 1977, overhauled in 1991
and expanded in 1998. Tailings from the mill are directed to the sand-fill plant
located near the Santa Catalina tailings pond. The fines are removed with
cyclones, and the coarse is directed to the distribution plants or storage
tanks. 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 170 cubic metre
storage tanks. When backfill is required underground, the fill is re-slurried
and pumped underground. Expansion of the backfill system capacity commenced in
late 1998 and was completed in 1999 to increase backfill for a mining rate of
600,000 tonnes per year.
- 12 -
The average monthly production from the Quiruvilca mine for 2002 was 42,302
tonnes, a decrease from 47,371 tonnes in 2001. Production was decreased in 2002
to lower overall operating costs and reduce production from low-grade stopes and
more distant areas of mine.
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. During 1999 the daily
capacity of the mill was increased to over 2,000 tonnes per day. Daily
throughput is currently 2,050 tonnes per day, with the mill operating an average
5.0 days per week.
Although the mill equipment (with the exception of the primary and
secondary crusher, the primary grinding circuit, the primary lead rougher
flotation cells and the zinc and lead cleaning circuits) dates from the 1950s
and 1960s, it has been adequately maintained and operates well. The mill
operated an average 70.0% of the time in 2002 compared to an average of 73% of
the time in 2001. Down-time was primarily due to planned maintenance (7%),
scheduled Saturday and Sunday shutdowns (20%), and other non-planned shutdowns
due to electrical outages and breakdowns (3.0%).
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
Peru's 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 impoundment, tailings reclamation, mine acid 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. Water flowing from the Quiruvilca mine is acidic and
contains copper, lead, zinc and iron. Under the terms of its PAMA, Mina
Quiruvilca agreed to construct a water treatment facility at the mine.
Construction of a mine water treatment facility was completed in 1998 at a cost
of $3,800,000. Commissioning of the facility occurred in June of 1999. During
2002, water quality at the compliance point has generally met pH standards and a
majority of metal compliance standards since start-up. Hydrological studies now
underway will evaluate surface water inflows into the mine, and allow
identification of options to improve management of underground flows. Ongoing
work is focused on evaluating water treatment options to reduce metal levels
from water inflows downstream from the mine and water treatment plant.
Quiruvilca's PAMA projects and expenditures for the years 1997 to 2002 were
audited by independent consultants and reviewed by Peruvian environmental
regulators in 2002. Investments completed exceeded the total required under the
PAMA. Based on discussions with auditors, some projects had been re-classified
as part of a closure plan. Expenditures for several lesser PAMA projects had
considerably exceeded the original budget, but had not been completed at PAMA
expiry due to wet conditions. The company is currently in discussions with
regulators, 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, no mechanism had been provided within the
PAMA process to review and revise projects based on results achieved to assess
whether budgeted programs would still be effective in achieving the results
desired.
- 13 -
Pan American's operations at the Quiruvilca mine currently comply in all
material respects with the 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.
During the past five years Pan American has taken steps to stabilize and
remediate the three tailings areas identified by Pan American as having a
potential for stability problems.
In 1963, and again in 1967, earthquakes liquefied the Almirvilca tailings
area causing a run-out of tailings into the nearby Rio Moche. The tailings
flowed up to ten kilometres downstream and formed terrace deposits over an area
of some four hectares along the stream. Approximately 30% of the total volume of
these tailings have been cleaned out and used as borrowed material to build the
San Felipe stabilizing berm. Ongoing cleanup of the riverbed continued during
the dry season from 1999 through 2001 and will be substantially completed in
2003.
During late 1998 and through early 2002 Pan American implemented a third
party safety and training program for employees and contractors. All employees
were required to undergo safety training and all new underground employees were
required to undergo training prior to being assigned to their first position.
The safety department was required to provide one inspector per mine area. All
mine supervisors completed the first two phases of a multi-phase third party
safety program.
From 1998 through 2002, on a cumulative basis, the year-end accident
frequency was reduced by 57%, accident severity by 14% and lost time accidents
by 68%. During 2001, the Peruvian definition of lost-time accidents was changed
-- the previous definition was that a lost-time accident occurred when a worker
was unable to return to normal duties for more than three days; the current
definition changed the three-day duration to more than one-day.
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 2002, capital expenditures were approximately $626,000 and consisted
of:
o mine and related structures on the mine's 340 level of $519,000; and
o tailings dam expansion at a cost of $98,000.
Of these expenditures, $400,000 were capitalized for accounting purposes
and the remainder was changed to operations.
During 2001, capital expenditures at Quiruvilca were approximately $470,000
and consisted of:
o a new hospital building at a cost of approximately $130,000;
o civil and mechanical work on the mine's 340 level at a cost of
approximately $125,000;
o mine ventilation system improvements at a cost of approximately
$50,000;
o computer system software and implementation costing approximately
$40,000; and
- 14 -
o various other projects and equipment purchases at a cost of
approximately $125,000.
In 2000, Pan American's capital expenditures at the Quiruvilca mine were
approximately $1.1 million and consisted of:
o tailings dam expansion at a cost of approximately $450,000;
o mine equipment and mine services upgrades at a cost of approximately
$180,000;
o environmental projects at a cost of approximately $150,000;
o new computer systems and upgrades to computer equipment at a cost of
approximately $40,000;
o other minor expenditures totalling $280,000.
Pan American has budgeted $0.4 million for 2003 capital expenditures at the
Quiruvilca mine consisting of sustaining capital and mine deepening.
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 2002, zinc concentrate was sold under the last year of a
two-year contract. For 2003, that contract has been replaced with a contract
which runs until 2006, which contract has a minimum one-year extension clause at
the option of either party. Lead concentrates have been sold under a four-year
contract expiring in 2004. Copper concentrate has been sold under a contract
that also expires at the end of 2004. All contracts are at arms length. Mina
Quiruvilca receives payment for an agreed percentage of the silver and lead,
zinc, or copper contained in the concentrate, after deduction of smelting and
refining costs. As well, a contract has been signed to sell lead concentrate
from Quiruvilca for 2005 and 2006 with a minimum one-year extension beyond the
contract period at the option of either party.
During 2002, the revenue per type of concentrate produced by the Quiruvilca
mine was as follows:
AVERAGE PRICE
REVENUE(1) TONNES PER TONNE
------------ ------ -------------
Zinc Concentrate $6,018,898 27,408 $ 220
Lead Concentrate $4,450,154 9,851 $ 452
Copper Concentrate $4,975,952 4,710 $1,056
-------------
1 Consists of sales to arm's length customers.
- 15 -
During 2001, the revenue per type of concentrate produced by the Quiruvilca
mine was as follows:
AVERAGE PRICE
REVENUE(1) TONNES PER TONNE
----------- ------ -------------
Zinc Concentrate $8,991,980 39,475 $ 228
Lead Concentrate $6,285,649 12,975 $ 484
Copper Concentrate $6,135,727 5,602 $1,095
-------------
1 Consists of sales to arm's length customers.
The zinc and lead concentrates produced by the Quiruvilca mine are highly
marketable as they contain low levels of impurities. 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, 70,000 hectares of
exploration claims and 473 hectares of surface rights and a lease over 178
hectares of surface rights covering the main workings. During 2001, Minera
Huaron sold 9,321 hectares of claims, of which 49 hectares were exploitation
claims and 9,272 hectares were exploration claims.
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 kilometre
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.
The climate at the mine site is semi-humid 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.
- 16 -
ROYALTIES AND ENCUMBRANCES
The Huaron property is subject to the Huaron Royalty, a 3% net smelter
return royalty, which is payable after 4,300,000 tonnes of ore from the Huaron
property have been recovered. Pan American estimates that this will not occur
until 2007 or 2008 based on currently planned levels of mining activities.
Substantially all of Huaron's plant and equipment is subject to a mortgage
and charge in favour of Banco de Credito del Peru as security for the
liabilities and obligations of Minera Huaron under a $6,500,000 loan facility
made available to Minera Huaron for working capital purposes. 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.
Huaron has undetermined environmental liabilities, however, to date the
Company has taken a charge against operations of approximately $500,000.
PAN AMERICAN'S ACQUISITION OF HUARON
On March 6, 2000, the Company entered into a Stock Purchase Agreement
pursuant to which the Company acquired 71.8% of the common shares of Minera
Huaron (which owns 100% of the Huaron property) in consideration for: (i) the
issuance of 1,780,389 common shares of the Company; (ii) the issuance of stock
options to purchase up to 700,000 common shares of the Company exercisable at
$4.00 per common share (expiring March 6, 2010); and (iii) the grant of the
Huaron Royalty to the Huaron Vendors. The 700,000 stock options were issued to a
representative of the Huaron Vendors, Hannibal International, Inc., a Panamanian
corporation arm's length to the Company. All of these options to purchase common
shares of the Company have been exercised.
Included in the liabilities of Minera Huaron at the date of acquisition was
$3,174,000 payable to former majority shareholders of Minera Huaron. This
liability was discharged from the sale proceeds of certain assets of Minera
Huaron ($1,980,000) and corporate funds ($1,194,000).
Between March 6, 2000 and December 31, 2000, the Company increased its
ownership of Minera Huaron from 71.8% to 72.6% through the purchase of
additional common shares of Minera Huaron from minority shareholders at arm's
length to the Company for $65,000.
In August 2001, Pan American received an additional 27.2% of the common
shares of Minera Huaron, $200,000 in cash, $500,000 in shares of Volcan Compania
Minera S.A., ("Volcan") and additional consideration in exchange for
transferring 9,321 hectares of exploration and exploitation claims to Volcan.
When Pan American acquired its 71.8% interest in the Huaron mine, the mine
was not operating. In April 1998, a portion of the floor of nearby Lake
Naticocha collapsed and allowed water to flood through the adjacent Chungar
Animon mine and through interconnected tunnels into the Huaron mine. The flood
caused Minera Huaron's operations at the Huaron mine to be shut down.
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 Hochschild. To date, approximately 22 million
tonnes of silver-rich base metals sulphides ore have been mined from the Huaron
property. Silver is the main constituent, contributing about 49% of the historic
sales value, the rest being zinc 33%, lead 15% and copper 3%.
- 17 -
Ore from the mine was processed on-site by crushing, grinding, and
differential flotation to produce copper, lead and zinc concentrates. Before the
1998 closure, between 800 and 1,500 tonnes per day were processed, and 700 to
1,200 tonnes per day of tailings were produced. About 60% of the tailings were
used as underground backfill. The rest were gravity fed for disposal into
tailings containment ponds.
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. Currently the lake, which provided the source of
floodwater, is dry and will not be refilled. There is no threat of further
flooding. Chungar, in accordance with the 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.
REHABILITATION OF HUARON MINE
After Pan American's acquisition of the Huaron mine, a $12 million bank
financing was concluded with Standard Bank London Limited in early September
2000 to provide the funding necessary to place the mine back into production.
Pan American commenced construction in September 2000, which was substantially
completed by April 2001.
The steps taken to place the mine back in operation included:
(a) rehabilitation of underground ramps and access ways;
(b) rehabilitation of existing or construction of new underground services
in particular ventilation, hydraulic backfill and electrical
distribution;
(c) stope preparation work for initial mining as well as the commencement
of longer term development (access and raises);
(d) 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
(e) infrastructure upgrades with the major component being earthwork to
increase the stability of the tailings dam to acceptable levels.
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.
- 18 -
The $12 million credit facility was repaid in 2002.
GEOLOGY
The main lithology in the Huaron area is a sequence of continental
lacustrine "redbeds" consisting of interbedded sandstones, limestones, marls,
conglomerates, breccias and limey 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
calcareous marls. The bottom of this sequence consists of the Barnabe quartzite
conglomerate. In the western side of the mine rocks consist of a series of
interbedded conglomerates (San Pedro) and sandstones. The conglomerate contains
poorly sorted limestone and quartz clasts in a sandy matrix. Throughout the mine
area a series of quartz porphyry monzonite dykes cut the sediments.
The Huaron mine is within an anticline formed by east-west compressional
forces. The axis of the anticline is approximately north-south and it plunges
gently to the north. There are two series of faults, the principal one formed by
a series of compressional faults generally parallel to the axis of the anticline
and the secondary tensional faults, which are oriented in an east-west
direction. On the western side of the anticline the north-south faults are
considered to be reverse faults. The intrusives strike in two principal
directions N70 degrees E and S10 degrees E. Later erosion has left most of the
area 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 as veins in the
north-south and east-west striking fault systems, beds and lenses associated
with the calcareous sections of the conglomerates and breccias where they are
intersected by veins, irregular bodies that occur at favourable stratigraphic
horizons, and disseminated bodies in the monzonite intrusives surrounding
favorable 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 sulfosalts 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
- 19 -
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 yellow sphalerite and sulfosalts in
structures of rhodochrosite.
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, SECURITY OF SAMPLES
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 2002, 5092 meters were drilled using four drill rigs.
In addition, there was 4525 meters 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 checks
run 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.
MINERAL RESERVES
Pan American's management has estimated proven and probable mineral
reserves at the Huaron mine, as at December 31, 2002, to be as follows:
HUARON RESERVES(1),(2)
RESERVE GRAMS OF SILVER
CATEGORY TONNES PER TONNE % ZINC % LEAD % COPPER
----------- --------- --------------- ------ ------ --------
Proven 4,220,300 250 4.64 2.54 0.47
Probable 1,694,400 244 4.60 2.54 0.42
--------- --- ---- ---- ----
Total 5,914,700 249 4.63 2.54 0.46
-----------
1 Calculated using a price of $4.75 per ounce of silver and $900 per tonne of
zinc.
2 Mineral reserves have been calculated by the mine staff of the Company's
subsidiary, Minera Huaron, under the supervision of the Company's
"qualified person", Norm Pitcher, P.Geo, who is an employee of the Company.
Mr. Pitcher has reviewed and tested the information developed by the
Company's operating subsidiary and, based upon those reviews and tests, Pan
American is satisfied with the accuracy of the reserve calculations.
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,
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, 2002:
- 20 -
RECONCILIATION OF MINERAL RESERVES AT HUARON
TONNES
---------
Opening balance, December 31, 2001 6,684,850
Additions(1) 420,150
Losses(2) 776,360
Tonnes mined from reserves 413,700
---------
Closing balance, December 31, 2002 5,914,700
=========
-----------
1 Additions are from tonnes added through exploration or reinterpretation.
2 Losses are from 118,940 tonnes lost through re-interpretation and 657,420
tonnes lost due to declining metal prices.
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, 2001, are as follows:
HUARON RESOURCES(1),(2),(3),
RESOURCE GRAMS OF SILVER
CATEGORY TONNES PER TONNE % ZINC % LEAD % COPPER
------------------- --------- --------------- ------ ------ --------
Measured 1,507,600 187 3.12 1.67 0.36
Indicated 679,165 185 3.17 1.60 0.35
--------- --- ---- ---- ----
Total 2,186,765 186 3.13 1.64 0.35
--------- --- ---- ---- ----
Inferred 4,818,000 244 3.79 2.42 0.42
--------- --- ---- ---- ----
-----------
1 Calculated using a price of $4.75 per ounce of silver and $900 per tonne
zinc.
2 These resources are in addition to Huaron's mineral reserves.
3 Mineral resources have been calculated by the mine staff of the Company's
subsidiary, Minera Huaron, under the supervision of the Company's
"qualified person", Norm Pitcher, P.Geo, who is an employee of the Company.
Mr. Pitcher has reviewed and tested the information developed by the
Company's operating subsidiary and, based upon those reviews and tests, Pan
American is satisfied with the accuracy of the resource calculations.
MINING
The Huaron mine is located under a mountain range with development from
elevation 4,250 metres above sea level to 4,650 metres above sea level.
Initially, Pan American's mining activities will extend over an area of two
kilometers by two kilometers.
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.
- 21 -
In 2003 it is expected that stopes from 15 different veins will be mined
with approximately 25 stopes active at any time. The mining method is over 80%
mechanized cut-and-fill using mill tailings as the backfill material. The other
mining method employed will be unmechanized shrink stoping for the narrower
veins with development waste as backfill.
Contractors under the supervision of Pan American carry out all mining
activities. Pan American also carries out geological, mine planning and mine
engineering functions for the mine.
In the last quarter of 2002, the Company began developing an additional
area of the mine to increase the number of stopes to between 30 and 32 and
increase mill throughput by 10%.
MILLING
The mill flowsheet consists of three stages of crushing, ball mill grinding
and selective flotation of the ore to produce copper, lead and zinc
concentrates. The mill capacity was designed to be approximately 2,000 tonnes
per day.
The equipment in the mill is predominantly refurbished equipment, although
several items are new (zinc filter, vacuum pump, etc). The majority of the
equipment is post-1980 in age. Prior to the rehabilitation process, the mill
operated at 42,500 tonnes per month. The addition of a large ball mill in the
rehabilitation program increased grinding throughput as well as allowing
material to be ground finer to increase recovery.
The mill started operations on April 17, 2001, and reached commercial
production in May 2001. During 2002, the mill processed 606,300 tonnes, an
average of 50,525 tonnes per month. Pan American expects the mill to produce at
a rate in excess of 50,000 tonnes per month.
MARKETING
The products of value to be produced from the Huaron mine are silver rich
zinc, lead and copper concentrates. In 2002, zinc concentrate was sold under the
last year of a two-year contract. For 2003 the contract has been replaced with a
contract which runs until 2006, which contract has a minimum one-year extension
clause at the option of either party. In 2001 lead concentrate was sold under a
four-year contract that expires in 2004. Copper concentrate was sold under a
contract that expires at the end of 2005. All contracts are at arms length.
Minera Huaron will receive payment for an agreed percentage of the silver, lead,
zinc or copper contained in the concentrate after deduction of smelting and
refining costs. In 2001, 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. In 2002, a
contract for the sale of Huaron's excess lead concentrate production was signed
with an arm's length metals trading company. This contract is for the years 2002
and 2003 and covers lead concentrate production in excess of that previously
contracted.
During 2002, 100% of Huaron's zinc concentrate was sold to a metals trading
company; 100% of Huaron's lead concentrate was sold to an integrated metals
smelter or a metals trading company; and 100% of Huaron's copper concentrate was
sold to a Peruvian integrated metals smelter.
In 2001 and 2002, the revenues per type of concentrate produced by the
Huaron mine were as follows:
- 22 -
AVERAGE PRICE
2002 REVENUE TONNES PER TONNE
---- --------- ------ -------------
Zinc Concentrate $8,803,506 43,827 $ 201
Lead Concentrate $9,285,097 26,088 $ 356
Copper Concentrate $8,596,221 6,022 $1,427
AVERAGE PRICE
2001 REVENUE TONNES PER TONNE
---- --------- ------ -------------
Zinc Concentrate $2,587,119 14,237 $ 182
Lead Concentrate $5,041,925 14,723 $ 342
Copper Concentrate $5,384,260 3,915 $1,375
Under the terms of its concentrate sales agreements Minera Huaron is
entitled to receive partial payments for the value of concentrate that it has
produced but not yet delivered ("Advance Payments"). Minera Huaron is obliged to
make deliveries of concentrate in order to discharge these Advance Payments. The
Company has guaranteed Minera Huaron's performance, up to $2 million under
Huaron's lead concentrate agreement with one purchaser, to discharge this
obligation.
ENVIRONMENT
Before Pan American acquired its interest in Minera Huaron, Minera Huaron
filed a program of environmental remediation and management (PAMA) with Peruvian
regulators. This filing was made on July 26, 1996. 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. 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 the PAMA. 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 Huaron mine, Minera Huaron has not
been able to satisfy all of its obligations under the PAMA in accordance with
the established implementation time line. Given the magnitude of the accident 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 continues to take steps toward the implementation of the
original PAMA. In March of 1998 Minera Huaron obtained a report regarding the
stability of certain tailings deposits. This report was approved by the
Direccion General de Mineria on October 19, 1998. Remedial work to increase the
stability of the current tailings dam was undertaken as part of Pan American's
rehabilitation of the Huaron mine and was completed at the end of January 2001.
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 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.
- 23 -
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 maximum permissible levels.
Numerous historic spilled tailings are present along the Rio San Jose from
the concentrator plant to below the San Jose campsite and beyond the property
boundary. A program to survey and document existing tailings in the river was
completed and investigation of best management practices to remediate these
areas is underway.
CAPITAL EXPENDITURES
During 2002, capital expenditures at the Huaron mine were approximately
$887,000 and consisted of:
o Ongoing rehabilitation of the mine's 250 level drainage tunnel of
$390,000.
o Purchase of an exploration diamond drill machine and secondary cone
crusher for $286,000.
o Infrastructure and site improvement work of $114,000.
Pan American has budgeted $1.5 million for 2003 capital expenditures at the
Huaron mine consisting of $500,000 for mine development, $350,000 for drainage
level rehabilitation and $400,000 for rehabilitation and closure of the Huayllay
containment pond.
LA COLORADA MINE
OWNERSHIP AND PROPERTY DESCRIPTION
The Company's wholly-owned subsidiary, Pan American Mexico, owns and
operates the La Colorada property. Pan American acquired La Colorada in March
1998.
The La Colorada property consists of exploration claims covering an area of
approximately 1,551 hectares, 542 hectares of exploitation claims and 534
hectares of surface rights covering 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.
LOCATION, ACCESS, CLIMATE AND INFRASTRUCTURE
The La Colorada property is located in the Chalchihuites district in
Zacatecas State, Mexico, approximately 156 kilometres northwest of the city of
Zacatecas and 99 kilometres southeast of the city of Durango. The main
municipality in the district is the city of Chalchihuites with a population of
approximately 1,000. The district's general coordinates are 23 degrees, 23'
North Latitude and 103 degrees, 46' West Longitude. The property is situated at
elevations between 2,100 and 2,550 metres above sea level.
The La Colorada property 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.
- 24 -
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 but
precipitation in the area is quite low. Average winter temperatures are around 0
degrees Celsius.
La Colorada receives its power through the Mexican national power grid
which was upgraded in 2001.
The existing water system at the La Colorada site 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.
ROYALTIES AND ENCUMBRANCES
On June 17, 2002 Pan American entered into a $10,000,000 project debt
facility with International Finance Corporation pursuant to which Pan American
granted security over its shares of Pan American Mexico and all of the assets of
Pan American Mexico.
To the best of Pan American's knowledge, there are no other royalties or
encumbrances that affect the La Colorada property.
La Colorada has undetermined environmental liabilities, however, to date
the Company has taken a charge against operations of approximately $18,000.
TAXATION
The principal taxes of Mexico 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. The
overall tax burden in Mexico is less than the Canadian tax burden.
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.
At the beginning of the twentieth century the Eagle Pitcher Company mined
the La Colorada property. In 1925 the Dorado family operated mines at two other
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 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.
- 25 -
GEOLOGY
The La Colorada property is located along the southeast flank of the Sierra
Madre Occidental at the contact between the lower volcanic complex and the upper
volcanic supergroup.
The sedimentary rocks were subjected to folding and intense deformation
during the Laramide Orogeny which gave rise to the formation of the Sierra Madre
Occidental and the extrusion of large volumes of trachytic volcanics. During the
final stages of the orogeny, granodioritic intrusives were emplaced resulting in
even greater deformation and generating the mineralizing fluids that formed the
deposits. East-west block faulting affected the entire stratigraphic column and
resulted in structural preparation of the host rocks for the mineralization.
Tuffs and pyroclastic flows of rhyolitic composition post-date the
mineralization.
Four types of mineralization occur at the La Colorada property: (i) veins;
(ii) mantos; (iii) breccia pipes; and (iv) replacement skarn. Veins display
typical epithermal textures and occur both in the trachytes and limestone. Most
veins strike east-northeast and dip steeply to the south. Vein widths generally
average 1.5 to 2.0 metres. Vein fillings are mainly quartz and calcite, and
where oxidation is not present pyrite, galena, sphalerite, silver sulfosalts and
native silver are found. Mantos mineralization is found in close proximity to
the veins and represents a wider replacement zone of the limestone host rock.
Breccia pipes are circular to ovoid in plan and the larger pipes are continuous
to depths of over 400 metres. The mineralization occurs in the matrix of the
breccia, primarily as galena and sphalerite. Thirteen breccia pipes have been
mapped on the surface or in the underground workings.
The replacement skarn mineralization has been explored by nine deep holes
drilled from underground. This zone probably represents a transition between
upper level epithermal veins and deeper seated skarn mineralization and has
significant bulk tonnage potential.
During 2000 a new zone was discovered which represents a corridor of
sheared, mineralised limestone with a high-grade quartz vein core. Exploration
efforts in 2000 were focused on this zone, with a total of 5,312 metres of
drilling and 730 metres of drifting completed during the year.
No exploration drilling was done during 2002, however a surface exploration
program of 1,000 metres was conducted. Exploration activities consisted of
underground drifting to define ore zones prior to mining.
Total exploration by Pan American at La Colorada consists of 31,448 metres
of surface and underground drilling and 6,521 metres of underground drifting and
development.
DRILLING, SAMPLING AND ANALYSIS, SECURITY OF SAMPLES
Drilling at La Colorada consisted of BQ (36.4 mm), NQ (47.6 mm) and HQ
(63.5 mm) core in holes ranging from 100 to 350 meters. An independent
laboratory conducted assaying for the diamond drill programs and development
prior to 2001. A quality assurance/quality control program consisting of check
assays and blank samples were used throughout the drilling program. Since 2001
assaying was carried out by the La Colorada laboratory. The quality
assurance/quality control program consisted of check assays at an independent
laboratory.
All of the drilling, sampling and quality assurance/quality control
programs were conducted under the direct supervision of Pan American's geology
staff.
- 26 -
MINERAL RESERVES
Pan American's management estimates that mineral reserves at La Colorada,
as at December 31, 2002, are as follows:
LA COLORADA MINERAL RESERVES 1, 2
OXIDE
-----
RESERVE GRAMS OF SILVER GRAMS OF GOLD
CATEGORY TONNES PER TONNE PER TONNE
-------- --------- --------------- -------------
Proven 415,400 506 0.45
Probable 1,878,000 426 0.56
SULFIDE
-------
RESERVE GRAMS OF SILVER GRAMS OF GOLD
CATEGORY TONNES PER TONNE PER TONNE % LEAD % ZINC
-------- -------- --------------- ------------- ------- ------
Proven 150,480 618 0.50 0.90 1.72
Probable 196,400 512 0.42 1.11 2.23
TOTAL
-----
RESERVE GRAMS OF GOLD GRAMS OF GOLD
CATEGORY TONNES PER TONNE PER TONNE
-------- ---------- ------------- -------------
Proven 565,880 536 0.46
Probable 2,074,500 433 0.55
--------- --- ----
Total 2,640,380 455 0.53
--------------
1 Calculated using a price of $4.75 per ounce of silver.
2 Mineral reserves have been prepared by the Company's wholly owned
subsidiary, Pan American Mexico, under the supervision of the Company's
"qualified person" Norm Pitcher, P.Geo, who is an employee of the Company.
Mr. Pitcher reviewed and tested the information prepared by the Company's
operating subsidiary and, based upon those reviews and tests, Pan American
is satisfied with the accuracy of the reserve calculations.
Management of the Company believes that reserves at the La Colorada Mine
are sufficient for at least nine years at planned production rates.
MINERAL RESOURCES
Pan American's management estimates that mineral resources at La Colorada
as at December 31, 2002 are as follows:
VEIN AND MANTOS MINERAL RESOURCES(1),(2),(3)
RESOURCE GRAMS OF SILVER GRAMS OF GOLD
CATEGORY TONNES PER TONNE PER TONNE % LEAD % ZINC
---------- --------- --------------- ------------- ------ ------
Measured 387,800 275 0.16 0.68 0.98
Indicated 1,321,900 254 0.20 1.05 1.56
--------- --- ---- ---- ----
Total 1,709,700 259 0.19 0.89 1.43
--------- --- ---- ---- ----
Inferred 2,360,900 363 0.26 1.40 2.33
--------- --- ---- ---- ----
-----------
1 Calculated using a price of $4.75 per ounce of silver.
2 These resources are in addition to La Colorada mineral reserves.
3 Mineral resources were prepared jointly by Pan American and Pan American's
independent third party consultant, MRDI Canada Ltd., under the supervision
of the Company's "qualified person" Norm Pitcher, P.Geo with the exception
of the breccia resources which were calculated solely by Pan American. Mr.
Pitcher is an employee of the Company. Mr. Pitcher reviewed and tested the
information prepared by the Company's subsidiary and reviewed the
information developed by MRDI Canada Ltd. and, based upon those reviews and
tests, Pan American is satisfied with the accuracy of the resource
calculations.
- 27 -
BRECCIA MINERAL RESOURCES(1),(2),(3)
RESOURCE GRAMS OF SILVER GRAMS OF GOLD
CATEGORY TONNES PER TONNE PER TONNE % LEAD % ZINC
--------- ------ --------------- ------------- ------ ------
Inferred 5,000,000 108 0.24 1.65 0.57
-----------
1 Calculated using a price of $4.75 per ounce of silver.
2 These resources are in addition to La Colorada mineral reserves.
3 Mineral resources were prepared jointly by Pan American and Pan American's
independent third party consultant, MRDI Canada Ltd., under the supervision
of the Company's "qualified person" Norm Pitcher, P.Geo with the exception
of the breccia resources which were calculated solely by Pan American. Mr.
Pitcher is an employee of the Company. Mr. Pitcher reviewed and tested the
information prepared by the Company's subsidiary and reviewed the
information developed by MRDI Canada Ltd. and, based upon those reviews and
tests, Pan American is satisfied with the accuracy of the resource
calculations.
DEVELOPMENT OF PROJECT
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 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.
Also in 2000, a credit facility mandate letter was signed with IFC. The
feasibility study was reviewed by IFC's independent engineers and the EIS was
posted on the World Bank's web site for review and comments. Pan American
received conditional IFC board approval in February 2001 for a loan facility of
up to $28.6 million for the construction and development of the La Colorada
project. It was a condition precedent to loan drawdown that Pan American hedge
enough silver to cover several years of operating costs at a price greater than
$5.00 per ounce of silver. Due to declining silver prices in 2001 the definitive
loan documentation was not signed and Pan American and the IFC allowed the
financing arrangements to lapse.
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. Following the addition of another small ball mill
and additional lead flotation capacity, the mill commenced operating at 200
tonnes per day in January, 2002.
The feed for the mill is underground sulphide ore from the La Colorada
property. The mining method utilized is cut and fill, with backfill material
largely coming from waste development. Mining and mine development are carried
out by third party contractors 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.
- 28 -
In January of 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.
Under the Updated Feasibility Study, the mining method utilized for the
oxide ore will be mechanized cut and fill from the property's NCP, 4235
footwall, NC(2)W and San Fermin veins. Fill material will be sourced from
internal mine waste, existing waste dumps and a surface borrow pit. Fill
material including cement will be delivered to backfill mined-out areas via
boreholes. During years ten and 11 of proposed production, historic tailings
will be fed to the mill.
Milling will consist 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 is estimated that 80% of
the silver will be produced in dore form and 20% of the silver will be contained
in base metal concentrates. Independent test work has shown recovery for NCP and
San Fermin vein oxide material will be greater than 85% for silver and 80% for
gold, for NC(2)W and the 4235 footwall vein, recoveries of 90% silver and 88%
gold, and for the tailings material 76% silver and 80% gold. Treatment of
sulphide material will produce lead and zinc concentrates with the majority of
silver reporting to the lead concentrate. Silver recoveries to concentrate will
total 91% and is based on both test work and actual mill recoveries during 2001.
Oxide test work has consisted of bottle roll tests, locked cycle tests and pilot
plant testing. Sample materials include drift samples, drill hole samples and
bulk samples obtained from three crosscuts in the NCP zone. Sulphide test work
utilized drift back samples and drill hole samples, together with historic and
current mill results.
The total cost of the mine, mill, plant site and services (including debt
financing) is estimated at US$20 million. Existing stock piles and
pre-development ore will allow the new oxide mill to be operated at full
capacity while the mine ramps up production. During construction the existing
small-scale sulphide mill will continue to operate other than during periods of
mine infrastructure development, such as mine hoist upgrade.
Concentrates will be shipped by truck and sold to the Penoles smelter at
Torreon, Mexico pursuant to the terms of an annual sales contract. Dore will be
shipped to a refinery and sold internationally.
The economics of the project have been calculated using constant prices and
costs as at January 2002. The Peso exchange rate used was 9.25 Pesos to one U.S.
dollar. Operating costs for the eleven year life of the mine are estimated at
US$35 per tonne milled. The average cash cost per ounce of silver recovered will
be US$2.56 per ounce net of gold, zinc and lead byproduct credits, with a total
average cost per recovered ounce (assuming 100% equity funding), being US$3.66.
The project has a present value (net of capital) of US$23.8 million using
US$4.50 per ounce silver prices and an internal rate of return of 22.4%. The
project is expected to return the capital investment in 3.4 years, including
funding sustaining capital.
Pan American purchased from NJB Mining Inc. an existing 600 tonne per day
Congress mill, located in southern Arizona, for use at La Colorada for
US$600,000.
Construction of the new oxide mill commenced in July, 2002. By the end of
2002 the majority of the new mills foundation had been completed and equipment
erection had commenced. Construction is expected to be completed early in the
third quarter of 2003, and production is schedule to ramp up thereafter.
During 2002 the existing sulphide mill treated 50,662 tonnes for a monthly
average of 4,222 tonnes. Mill operations were adversely affected by the
construction project. Milling operations were suspended for approximately eight
consecutive weeks to allow underground infrastructure for the oxide ore body to
be constructed and for a shorter duration during the fall of 2002 for other
construction related tie ins.
- 29 -
On June 14, 2002, the Company's wholly-owned subsidiary Plata Panamericana
S.A. de C.V. ("Plata") entered into a $10,000,000 project loan facility to
partially finance the mine expansion. This loan bears interest at six month
LIBOR plus 3.50% per annum until the mine achieves certain operating and
financial performance measures after which the interest will be six month LIBOR
plus 3.25%. The loan is repayable in semi-annual instalments of $1,000,000
commencing November 14, 2004. The Company's interest in Plata and substantially
all of Plata's assets have been pledged as security for the loan. The Company
has guaranteed Plata's performance under the loan agreement until certain
completion tests are satisfied. In addition to the interest payments, on the
outstanding balance of the loan, Plata would be required in certain
circumstances to make additional payments to the lender. Such payments would be
required if the average price of silver for a year exceeded $4.75 per ounce and
would be equal to 20% of the positive difference between the average price per
ounce of silver for a year and $4.75 multiplied by the number of ounces produced
by the La Colorada mine in that year divided by $10,000,000 and multiplied by
the greater of the loan balance outstanding at the end of that year or the
originally scheduled loan balance at the end of that year.
Plata pays the lender a commitment fee equal to one-half of one percent per
annum of the amount of the loan not borrowed and cancelled. At December 31, 2002
there were no borrowings under the loan and no part of the loan had been
cancelled. In March 2003, Plata borrowed $4,000,000 under the loan agreement and
anticipates borrowing the full amount agreed to under the loan agreement over
the course of 2003.
MARKETING
All of La Colorada's concentrate production is sold under a one-year
contract expiring in 2003 to an arm's length integrated smelter located in
Mexico. A sales agreement for dore production from the new oxide mill has not
yet been completed.
During 2002 the revenue per type of concentrate produced by the La Colorada
mine was as follows:
AVERAGE PRICE
2002 REVENUE TONNES PER TONNE
---- ----------- ------ -------------
Zinc Concentrate $ 211,529 641 $ 330
Lead Concentrate $ 2,144,344 939 $2,284
AVERAGE PRICE
2001 REVENUE TONNES PER TONNE
---- ----------- ------ -------------
Zinc Concentrate $ 180,223 580 $ 311
Lead Concentrate $ 2,677,582 1,142 $2,245
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.
The permits issued to Pan American Mexico allow for the commencement of
construction and set out the conditions required for compliance prior to and
during construction and operation. Approved design allows for an underground
mine of up to 1,500 tonnes per day capacity and processing by either cyanide
leaching, flotation or a combination of both. These permits are valid until
November 2004.
- 30 -
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.
Inactive tailings impoundments containing oxide and sulphide materials are
located on the La Colorada property, neither of which have been regraded,
covered or vegetated. The slopes of these impoundments have undergone extensive
erosion and require remediation. Pan American estimates the costs of this
remediation work to be less than $400,000. Pan American expects to profitably
re-treat oxide tailings.
Activities necessary to ensure long-term compliance with Mexican waste
water discharge parameters will be 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 slopes to
reduce the angle of repose, and covering. Culverts may be required to prevent
blockage of the arroyo drainage.
STOCKPILES
Pan American mines 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 2002 totalled 9,018
tonnes of ore containing 101,000 ounces of silver. For 2003 and beyond,
Stockpile sales are expected to average approximately 45,000 tonnes per year
resulting in annual silver production of approximately 500,000 ounces of silver.
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 a three-year period, 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.
Pan American's management has estimated mineral reserves and resources
at the Stockpiles, as at December 31, 2002, to be as follows:
STOCKPILE MINERAL RESERVES AND RESOURCES(1)(2)
RESERVE OR
RESOURCE
CATEGORY TONNES GRAMS OF SILVER PER TONNE
---------- -------- -------------------------
Probable
Reserve 591,000 313
Inferred
Resource 20,342,400 157
1 Calculated using a price of $4.75 per ounce of silver.
2 Mineral reserves and resources have been calculated by staff of
Pan American Peru, under the supervision of the Company's
"qualified person" Norm Pitcher, P. Geo, who is an employee of
the Company. Mr. Pitcher 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.
Management of the Company believes that reserves at the Stockpiles are
sufficient for at least 10 years of production at planned rates.
METALS TRADING
Pan American has engaged in hedging base metal prices for production from
its mines.
On January 7, 2002 Pan American sold forward 4,500 tonnes of zinc at an
average price of $851 per tonne. These sales were a hedge of the future price
for a portion of the February through July 2002 zinc production. On March 21,
2002 Pan American sold forward 1,500 tonnes of zinc at $879 per tonne. These
sales were a hedge of the future price for a portion of the zinc production from
August 2002 to January 2003.
On January 8, 2002 Pan American sold 1,500,000 ounces of silver at $4.50
per ounce. On January 22, 2002 these ounces were re-purchased for a trading gain
of $210,000.
At December 31, 2002 the Company had sold 10,150 tonnes of zinc forward at
an average price of $830 per tonne. During 2003, 8,950 tonnes (of the 10,150
tonnes sold forward) are to be delivered against these contracts.
DEVELOPMENT PROJECTS
ALAMO DORADO PROJECT
LOCATION, ACCESS AND OWNERSHIP
The Alamo Dorado Project is located 67 kilometres southeast of the town of
Alamos, Sonora, near the border with the State of Sinaloa in northwest Mexico at
26 degrees, 44', 44.2" North Latitude and 108 degrees, 40', 00.7" West
Longitude.
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 Alamos
on a well-maintained gravel road. 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 Alamo Dorado Project consists of two concessions, the Alamo Ocho
Concession and the Alamo Dorado Concession, covering a total area of 5,369
hectares. The Alamo Ocho Concession was purchased by
- 31 -
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. An exploration concession for the Alamo
Ocho Concession was granted on December 13, 1993 and Pan American has made an
application for an exploitation concession to be granted in respect of this
property. An exploration concession for the Alamo Dorado Concession was granted
on May 27, 1998 and expires on May 26, 2004.
Corner Bay has executed local land agreements with several individuals and
ejidos (agricultural cooperatives in Mexico) in the mine site area. Corner Bay
has received approval from thirteen existing water users for a transfer of
sufficient water for the project. Pan American has officially applied to the
Mexican Federal Agency ("CNA") for approval of the transfer. On approval from
CNA a final contract is required to be signed by the existing users. Pan
American does not anticipate any problems receiving the signed agreements.
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.
GEOLOGY AND MINERALIZATION
The Alamo Dorado Project, as presently known, occurs within a package of
metamorphosed rocks ranging from Cretaceous to Paleozoic in age. These
metamorphosed rocks occur as roof pendants resting on an extensive, relatively
younger igneous rock (approximately 62 million years old) known as the Sonoran
batholith. The composition of the rocks making up this batholith ranges from
granodiorite to quartz monzonite, and is devoid of precious and base metals
mineralization.
Preliminary conclusions of a recent geologic mapping program suggest that
the original rocks may have had a volcanic origin. The host rocks are dominantly
tuffs and porphyritic rocks which underwent a metamorphic event. Intrusion of
the Sonoran batholith has further fractured, dislocated and faulted these
metamorphosed rocks; however, their original metamorphic (quasi-sedimentary)
fabrics, which in the deposit area have a generalized strike to the north and a
moderate dip (35-37 degrees) to the west, are still evident.
The principal zone of silver and gold mineralization is observed at surface
occurring as a 30-50 metre wide zone of oxidized, rusty and fractured rocks best
described as gneisses and schists, both metamorphic grade rocks (altered from
their original state). The surface occurrence on the ridge crest is subject to
talus cover on the eastern flank of the ridge where it outcrops. Progressive
drill programs have now shown the mineralized zone extends up to several hundred
metres in width. The average length of drill hole has been approximately 250
metres. The mineralized body is currently defined to be approximately 500 metres
in length, with an average width of approximately 150 metres. The mineralization
has been drilled to a depth of approximately 250 metres. Drilling has traced the
zone of mineralization for 600 metres from drill section 400 South to 200 North
along the north-south drill grid. Several drill sections in the latest 2000
drill campaign were oriented northeast-southwest at the mineralized zone's
northern extent to better intersect the mineralization in this area where the
zone trends to the northwest.
A number of major faults have been observed in the area; however, in the
central mineralized area, no major faults appear to have affected the
distribution of mineralization. Furthermore, it has been observed that, in
general, the areal limits of mineralization may not be structurally controlled.
The eastern edge of the deposit, however, is limited by a steep feature, which
could be either a high-angle fault trending to the north-northwest, or the
results of strong silicification of the rocks making up the cliffs in this
sector of the deposit.
- 32 -
The dominant hydrothermal alteration in the metamorphic rocks, which has
been enhanced by supergene effects and weathering, is argillic with an intense
association of hematite. Hematite is abundant, giving the metamorphic rocks a
reddish coloring; the Cerro Colorado (Red Hill) ridge is a result of this
phenomenon. Classic hydrothermal alteration is evident by the presence of
quartz-sericite and silicification.
Silicification is pervasive on the eastern cliffs of the Cerro Colorado
ridge. The batholithic rocks are essentially unaltered and barren.
ENVIRONMENT
Pan American holds all necessary permits for its current activities, but
must obtain, on a timely basis, permits for work planned for the future
development of, and production from, the Alamo Dorado Project. There is no
guarantee that such permits will be issued.
The environmental permitting work for the Alamo Dorado Feasibility Study
was provided by Corner Bay in conjunction with Agauyo Consultoria Ambiental,
Corner Bay's environmental consultant and coordinator. AMEC has reviewed the
Environmental Impact Statement (MIA), 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 culminating from the development of the mine are
greatly outweighed by the overall benefits. A finding of no significant impact
was recommended in the impact statement/permitting document.
ALAMO DORADO FEASIBILITY STUDY
AMEC E&C Services, Inc. ("AMEC") was contracted in 2001 to provide a
feasibility study for Alamo Dorado.
Alamo Dorado is a greenfield project with no existing infrastructure or
equipment. The basis for the Alamo Dorado Feasibility Study is utilizing a
combination of new and used equipment, a mining contractor, and owner operated
crushing, leaching, and processing facilities. The reserves planned for mining
are currently estimated at 35.5 million tonnes averaging 68 gpt silver and 0.26
gpt gold, for a contained metal total of 77 million ounces of silver and 297,000
ounces of gold. This is based on $4.60 silver per ounce and $300 gold per ounce.
The project design crushing rate is 4.5 million tonnes per year or approximately
12,500 tonnes per day. At this design rate the project is expected to produce an
average of 6.0 million ounces of silver and 29,000 ounces of gold per year over
the eight-year mine life and 11-year project life.
Direct total cash costs are estimated at $3.25 per ounce silver equivalent
and total costs including taxes and 10% employee profit sharing amount to $4.13
per ounce silver equivalent. The life of mine waste to ore stripping ratio is
currently anticipated at 1.08:1. Capital costs for the project are estimated at
$45.1 million. Silver production is higher in the first three years of
production with peak production in year three. The product will be silver - gold
dore, which will be shipped to a precious metal refiner for final processing and
sale.
MINEABLE RESERVES AND RESOURCES
Mintec provided the mineable reserves for Alamo Dorado. AMEC reviewed the
assay data, geology model, resources model and the resulting reserve statement
and found the work to be acceptable for use in the Alamo Dorado Feasibility
Study. A detailed audit of mineable reserves has not been conducted by AMEC.
AMEC wrote a Quality Assurance/Quality Control Report for the Alamo Dorado
Feasibility Study.
- 33 -
For the purposes of the Alamo Dorado Feasibility Study, the assumptions
used to calculate the reserve and resource were a silver price of US$4.60 per
ounce and a gold price of US$300 per ounce. Reserve and resource calculations
are exclusive of each other and are as follows:
ALAMO DORADO RESERVES AND RESOURCES(1),(2)
GRAMS OF SILVER GRAMS OF GOLD
CLASS TONNES PER TONNE PER TONNE
----- ---------- --------------- -------------
RESERVE CATEGORY
Proven 23,360,000 71 0.27
Probable 12,144,000 60 0.24
---------- -- ----
Total 35,504,000 67 0.26
RESOURCE CATEGORY
Measured & Indicated 7,296,000 42 0.17
---------- -- ----
Total 7,296,000 42 0.17
--------------
1 Assumes $4.60 silver per ounce and US$300 gold per ounce.
2 John Thorton, Mintec Inc., qualified person.
MINING
The mine plan used in the Alamo Dorado Feasibility Study was prepared by
Mintec and Corner Bay, prior to its acquisition by Pan American. The plan is
based on a May 2002 technical report, pit designs and mining schedule prepared
by Mintec. The mine plan is based on moving approximately 12,500 ore tonnes per
day over a planning period of 350 operating days per year. It is proposed that
mining operations will be conducted through a mining contractor with management
by Pan American. Pan American would be responsible for all technical aspects of
the mining operation, including, pit surveying, ore control, short and long term
planning and other technical support.
METALLURGY
The primary metallurgical testing program for the Alamo Dorado Project was
developed under the direction of Corner Bay in consultation with METCON. AMEC
reviewed the methods and results obtained and as a result directed additional
supplemental roll testing during the course of the Alamo Dorado Feasibility
Study.
Two metallurgically significant areas or zones have been defined through a
combination of variability bottle roll testing and applied geological
interpretation. These zones have been related to the metallurgical testing
information to produce recovery and consumable estimates for the commercial heap
leaching operations anticipated. Gold recoveries are estimated to be 71% in both
zones.
The more intensely oxidized and silicified supergene material in the
epithermal core zone of the deposit was determined to be one geo-metallurgical
zone (Zone 1) of significance. The core of the system is pipe-like at depth at
the contact with the granodiorite, and widens laterally, or "mushrooms" upwards.
This zone comprises 51% of the total leachable tonnes (75% of the first three
years of production) and 56% of the projected heap leach contained silver. Based
on column testing of core sample composites for this material, the average
silver recovery from heap leaching is expected to be 71% distributed over three
years. This accounts for 65% of the recoverable silver in the mine plan leach
tonnes.
The lesser oxidized/silicified supergene material, in the areas north and
south of and below the epithermal core of the deposit, was determined to be a
second geometallurgical zone (Zone 2) of significance. This zone 2
- 34 -
comprises 49 percent of the total leachable tonnes (25 percent of the first
three years of production) and 44 percent of the projected heap leach contained
silver. Based on column testing of core sample composites for this material, the
average silver recovery from heap leaching is expected to be 51 percent
distributed over three years. This accounts for 35 percent of the recoverable
silver in the mine plan leach tonnes.
HEAP LEACH FACILITY
AMEC carried out a geotechnical evaluation and basic level design for the
heap leach facility. AMEC also carried out a site selection study, a preliminary
geotechnical evaluation of the preferred leach pad site that included site
reconnaissance, geotechnical investigation, laboratory testing and evaluation of
the results for the purpose of design of the heap leach facilities for use in
mine planning and project permitting.
The design consists of an integrated facility consisting of two phases with
nine internal cells with a width of 85 metres spaced uniformly across the pad.
The initial construction will consist of Phase 1 with a design storage capacity
of 13.5 million tonnes. Phase 1 will achieve the required storage capacity
stacked to approximately six lifts (36 metres in height). Phase 1 covers an area
of approximately 374,150 square metres and Phase 2 covers an area of 227,900
square metres. The ultimate design capacity of the heap leach facility is for
storage of 36 million tonnes.
Three ponds will be constructed adjacent to the southwest corner of the
Phase 1 facility that will serve both phases of the facility. The pond system
consists of two process solution ponds (a pregnant solution pond and an
intermediate solution pond), and an emergency storm pond. The two process
solution ponds will be double lined with a geomembrane and will have leak
detection, collection and monitoring systems. Pregnant solution will be pumped
to the adjacent process facility while intermediate solution will be returned to
the heap for enrichment (secondary leaching). The emergency storm pond will be
single-lined with provision made to pump solution back to the process.
CRUSHING, CONVEYING AND STACKING
The proposed crushing, conveying and stacking system for Alamo Dorado
consists of all equipment required to receive ore from the mine and place it on
the heap leach pad. The system is designed to produce a crushed product size of
P80 minus 6.4 mm (1/4 inch) and convey and stack the material on the heap leach
pad in 6-metre lifts. The feed for the crushing system was based on standard
Run-of-Mine tables since no Run-of-Mine material was available for gradation
analysis. This complete system is designed to process approximately 12,500
tonnes per day including regularly scheduled maintenance.
During the course of the Alamo Dorado Feasibility Study, two used equipment
opportunities were identified which were evaluated by AMEC. The Briggs Mine
Crushing Plant, located in California and owned by Canyon Resources Corporation,
was found to provide significant synergy and opportunity for the Alamo Dorado
Project. The plant was inspected, the flow sheet modified for increased rates,
and capital and operating costs were developed, all of which supported the
incorporation of the Briggs Mine Crushing Plant. Based on this work and a
recommendation by AMEC, on June 14, 2002, Corner Bay purchased the Briggs Mine
Crushing Plant.
PROCESS PLANT
The proposed process plant will recover silver and gold from leach solution
to produce dore. The precious metals will be recovered from the pregnant
solution in a typical Merrill-Crowe zinc precipitation circuit. The precipitate
will be mixed with fluxes and will be added to a 150 kilowatt, 500 kilogram
steel-capacity electric furnace. At the end of the melt in the furnace, 1000
ounce dore bars will be poured. Dore will be cleaned, weighed, sampled and
stored in a vault awaiting shipment to an independent outside refinery.
- 35 -
The major unit processes include:
o Solution application to the heap;
o Merrill-Crowe circuit to recover silver and gold;
o Acid treatment of zinc precipitated to remove leached metals including
copper, zinc, selenium and cadmium;
o Neutralization of leach solution; and
o Refining of leach residue to produce silver-gold dore.
The process plant is designed based on a 4,500,000 tonnes per year heap
leach facility and will process 908 cubic metres per hour of pregnant leach
solution. At the planned throughput rate, the plant will produce 1,940 kilograms
per day of zinc precipitate.
OPERATING COSTS
The Alamo Dorado Feasibility Study estimates average operating expenditures
to be $24.4 million dollars per year. Direct cash costs are estimated to be
$3.25 per ounce silver equivalent. The total estimated site operating cost
(operating, capital, taxes and 10% employee profit sharing) is $4.13 per ounce
silver equivalent produced.
PROJECT CAPITAL COSTS
Excluding the cost of the Briggs Mine Crushing Plan, which is considered a
sunk cost, the AMEC estimated cost to construct, install and commission the
facilities described in the Alamo Dorado Feasibility Study is $45.1 million.
This amount covers the direct field costs of executing the project, plus owner's
costs and indirect costs associated with design, construction and commissioning.
The estimate is based on utilizing the Briggs Mine Crushing Plant, which was
purchased on June 14, 2002 from Canyon Resources Corporation.
Working Capital is calculated as a percentage of operating supplies in the
financial model. The initial working capital required is $3,800,000 in the
pre-production period and the balance peaks in the third year at $5,000,000.
FINANCIAL OVERVIEW
Alamo Dorado was analyzed assuming 100 percent equity financing using a
discounted cash-flow approach starting in the second quarter of 2002. In
addition, a 70:30 debt to equity ratio was also reviewed as an alternative for
project financing. Mintec's reserve was calculated using metal prices of $4.60
silver per ounce and $300 gold per ounce to produce a conservative mine plan for
project financing. The base case metal prices used for the Alamo Dorado
Feasibility Study financial overview were $5 per ounce of silver and $325 per
ounce of gold. Projections for annual revenues and costs are based on data
developed for the mine plan, leach and process plant production, capital
expenditures and operating costs. The estimated project cashflows were used to
determine the pre-tax and after-tax internal rate of return (IRR).
The results of the 100% equity base case analysis yield a pre-tax IRR of
30% and an after-tax IRR of 17.3%. The results of the analysis with a
70:30 debt equity ratio at 5.5% interest with debt being repaid in
- 36 -
four years indicates a pre-tax IRR of 57% and an after-tax IRR of 33%. The 100%
equity base case scenario has a projected payback period of approximately 2.8
years.
2003 PROGRAM
For 2003 Pan American has budgeted approximately $1,000,000 for diamond
drilling to undertake metallurgy testing and to update the feasibility study.
The review will examine the economic merits of processing the ore in a
conventional oxide leaching mill circuit versus heap leach processing. Capital
and operating costs will be detailed, as well as a financial model prepared.
The study will also examine a combination mill for high grade ore and heap
leach for low grade ore.
Expected mill recoveries are estimated at over 90% based on preliminary
metallurgical testing versus in excess of 60% for the heap leach process.
INVESTMENT AND EXPLORATION PROPERTIES AND EXPENDITURES
PROPERTIES
Pan American owns interest in a variety of exploration and resource
properties in Mexico, Argentina, Peru, Russia, Bolivia and the United States,
none of which are material to the Company. A brief description of the most
advanced of these properties follows:
RESERVE OR
RESOURCE OZ/T G/T
PROPERTY LOCATION TYPE CATEGORY(1) TONS TONNES AG AG BY-PRODUCTS
-------- -------- ---- ----------- ---- ------ --- --- -----------
Manantial Espejo(2)(3) Argentina vein Meas. resource 1,398,000 235 5.23 g/t Au
vein Ind. Resource 2,993,000 277 4.17 g/t Au
vein Inf. resource 1,590,000 258 3.65 g/t Au
Dukat(2)(4) Russia vein P&P reserve 10,550,000 755 1.5 g/t Au
vein M&I resource 3,750,000 489 1.0 g/t Au
vein Inf. resource 17,060,000 295 0.66 g/t Au
San Vicente(5) Bolivia vein Ind. resource 2,053,000 393 4.5% Zn
vein Inf. resource 1,754,000 398 4.4% Zn
Hog Heaven(6) Montana stockwork Meas. resource 2,095,000 4.04 0.016 oz/t Au
stockwork Ind. resources 928,000 7.06 0.021 oz/t Au
stockwork Inf. resource 8,205,000 4.11 0.004 oz/t Au
Waterloo(6) California stockwork Ind. resource 37,235,000 2.71 13.4% barite
-------------
1 P&P = proven and probable reserves
M&I = measured and indicated resources
Meas. resource = measured resources
Ind resource = indicated resources
Inf resource = inferred resources
2 Totals include only 50% of Manantial Espejo and 20% of Dukat.
3 Resource estimate by Pincock Allen & Holt, Stewart Wallis, P. Geo.,
"qualified person".
4 Reserve and resource calculations were prepared by Kilborn Engineering
Pacific Ltd. in a supplemental feasibility study completed in January 1999
and were reviewed and tested by the Company's "qualified person", Norm
Pitcher, P. Geo., who is an employee of the Company. Mr. Pitcher reviewed
and tested the information prepared by Kilborn Engineering Pacific Ltd. and,
based upon those reviews and tests, Pan American is satisfied with the
accuracy of the reserve and resource calculations.
5 Mineral resources have been prepared by the Company's wholly owned
subsidiary, Pan American Bolivia, under the supervision of the Company's
"qualified person", Norm Pitcher, P. Geo., who is an employee of the Company.
Mr. Pitcher 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 resource calculations.
- 37 -
6 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.
In November 2002, OAO MNPO Polimetall ("Polimetall"), the 80% owner of the
Dukat deposit, announced that it had started production at Dukat by mining ore
from both open pit and underground sources, and processing the ore at a
refurbished mill to produce a silver concentrate. Polimetall reported that the
concentrate is being stockpiled in Magadan, Russia for future export to refining
facilities pending receipt of Russian governmental approvals, including a
Presidential export decree. Since no revenues can be generated until the
concentrates can be sold, Dukat, is not yet a commercial operation. As of the
date hereof, the consolidated balance sheet of Pan American ascribes no value to
Dukat.
In late 2001, Pan American and COMIBOL, the Bolivian state mining company
that has 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 does not take credit for silver ounces produced by
EMUSA's toll mining operation but books proceeds derived from a gross revenue
royalty. Pan American earned $202,000 in revenues from San Vicente in 2002,
which more than offsets the project's holding costs.
MINERAL PROPERTY EXPENDITURES
The following table sets out Pan American's acquisition, exploration and
development expenditures for the periods indicated:
YEARS ENDED DECEMBER 31
(in thousands of U.S. dollars)
------------------------------ TOTAL
2002 2001 EXPENDITURES
------- --------- ------------
Acquisition
$ 2,012 $ - $ 8,065
------- --------- ---------
2,012 - 8,065
------- --------- ---------
Development
Huaron 957 4,899 17,427
Quiruvilca 349
La Colorada 8,300 358 6,100
Other - 299 2,298
------- --------- ---------
9,606 5,556 25,825
------- --------- ---------
Exploration
Manantial Espejo 461 - 461
San Vicente 180 179 650
La Colorada 11 - 492
Ocotlan 139 175 175
Other (field office costs) 96 - 786
------- --------- ---------
887 354 2,103
------- --------- ---------
Investment
Waterloo 55 56 109
Hog Heaven 23 24 50
------- --------- ---------
78 80 159
------- --------- ---------
TOTAL $12,583 $ 5,990 $ 36,152
======= ========= =========
1 Pan American's option on the Ocotlan property was allowed to lapse in early
2003, after drilling programs did not return positive results.
EMPLOYEES
The Company employs ten full-time employees at its head office in
Vancouver, including three geologists, one metallurgical engineer, and one
environmental specialist.
As at December 31, 2002, Mina Quiruvilca employed 495 persons in connection
with the operation of the Quiruvilca mine and indirectly employed an additional
763 persons through private agreements with a number of Peruvian contractors.
Approximately 309 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 2003 are proceeding at the
present time.
Minera Huaron employs 119 full time employees and indirectly 853 persons
through agreements with Peruvian mining contractors.
Pan American Peru employs 22 full-time employees and three contractors,
including one mining engineer.
Pan American Mexico employs 32 employees, 127 mining contractors, including
four geologists, one civil engineer and three mining engineers, and 355
construction contractors.
Pan American Bolivia has 16 employees and one part-time contractor,
including one geologist.
- 38 -
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 2001 or 2002 and has not
budgeted for any significant costs during 2003.
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 silver reserves or resources or 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 $2.4
million (as at December 31, 2002) together with the working capital of $2.3
million acquired in connection with the Company's acquisition of Corner Bay and
monies available in connection with the IFC Loan is sufficient to ensure
liquidity throughout 2003.
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
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 under the headings "Quiruvilca Mine - Environment", "La
Colorada - Environment" and "Huaron - Environment", 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, 2002 Pan American's
environmental operating costs were $748,856 and environmental project costs were
$591,942. 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.
- 39 -
Other than the Quiruvilca and Huaron mines and the La Colorada property,
none of Pan American's properties has any outstanding material reclamation or
environmental concerns. As at December 31, 2002, an accounting provision for
reclamation in the amount of $12,971,000 had been made in respect of the
Quiruvilca, 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.
GOVERNMENTAL REGULATION
Pan American's operations and exploration and development activities are
subject to extensive Canadian, U.S., Peruvian, Mexican, Bolivian and other
foreign federal, state, provincial, territorial and local laws and regulations
governing exploration, development, production, exports, taxation, labour
standards, land use, water use, waste disposal, health, safety, restrictions on
production, price controls, currency remittance, maintenance of mineral rights,
mineral tenure, and expropriation of property, remediation of environment,
reclamation and historic and cultural preservation. Future changes in such laws
and regulations in the various jurisdictions in which Pan American operates
could adversely affect Pan American's operations and profitability.
METAL PRICE AND EXCHANGE RATE FLUCTUATIONS
Fluctuating metal prices, particularly the price of silver, zinc, lead,
copper and gold, represent one of the most significant factors affecting Pan
American's operations and profitability. The following table illustrates the
volatility of the price of silver and sets forth the annual high, low, average
and end of period London Fix prices in U.S. dollars for an ounce of silver for
the periods indicated.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
High $ 5.10 $ 4.80 $ 5.45 $ 5.75 $ 7.31
Low 4.24 4.10 4.58 4.88 4.77
Average 4.60 4.40 4.95 5.22 5.53
End of Period 4.66 4.52 4.58 5.33 5.05
On pages 33 through 38 of the Company's 2002 Annual Report under the
heading "Management's Discussion & Analysis of Financial Conditions and Results
of Operations" there are tables that illustrate the impact of higher and lower
metal prices (silver, zinc, lead and copper) on Pan American's expected revenue.
- 40 -
In addition, fluctuations in currency exchange rates between the United
States dollar (being the currency in which Pan American's revenues are currently
earned) and 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 currently incurred) could also
have a significant impact on Pan American's operations and profitability.
The following table sets forth the exchange rates between the Canadian
dollar and the U.S. dollar for the periods indicated including the high, low and
average exchange rates for such periods (such rates, which are expressed in
Canadian dollars, are the noon buying rates for U.S. dollars reported by the
Bank of Canada).
YEAR ENDED DECEMBER 31 (CDN.)
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
High 1.6155 1.6021 1.5590 1.5475 1.5845
Low 1.5123 1.4936 1.4341 1.4200 1.4037
Average 1.5704 1.5484 1.4850 1.4858 1.4831
End of Period 1.5776 1.5926 1.5002 1.4433 1.5333
The price of silver and other metals or currency exchange rates are
affected by numerous factors beyond Pan American's control including, but not
limited to, international economic and political conditions, inflation, interest
rates, global or regional consumptive patterns, speculative activities, levels
of supply and demand, increased production due to new mine developments and
improved mining and production methods, availability and costs of metal
substitutes, metal stock levels maintained by producers and others and inventory
carrying costs. The effect of these factors on the price of base and precious
metals, and therefore the profitability of Pan American's operations, cannot
accurately be predicted. Changes in the market price of these metals and changes
in such currency exchange rates could adversely affect Pan American's operations
and profitability.
OPERATING HAZARDS AND RISKS
The operation and development of a mine or a mineral property involves many
risks, which even a combination of experience, knowledge and careful evaluation
may not be able to overcome. These risks include, without limitation: ground
fall; explosions and other accidents; flooding; environmental hazards; the
discharge of toxic chemicals; and other hazards and risks. Such occurrences may
result in work stoppages, delayed production, increased production costs, damage
to or destruction of mines and other producing facilities, damage to life and
property, environmental damage and possible legal liability for any or all
damage. Although Pan American maintains insurance in an amount, which it
considers adequate for its operations, the nature of these risks is such that
liabilities could exceed policy limits or may not be insurable. The occurrence
of any of these events could incur significant costs, which could have a
materially adverse effect upon the Company's 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 involve 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. For example, the Manantial Espejo, Lucita and Tres Cruces properties
are in the exploration stages only and are without a known body of commercial
mineralization. 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
- 41 -
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.
PERMITTING
Operations at the Quiruvilca, Huaron, La Colorada, and San Vicente
properties and the Stockpiles are subject to receiving and maintaining permits
from appropriate governmental authorities in Peru, Mexico and Bolivia,
respectively. Although Pan American currently has all required permits for its
operations as currently conducted, there is no assurance that delays will not
occur in connection with obtaining all necessary renewals of such permits for
the existing operations or additional permits for any possible future changes to
operations at these properties including any proposed capital improvement
programs. Prior to any development on any of its other properties Pan American
must receive permits from appropriate governmental authorities. Although the
permitting processes with such authorities have progressed well to date and Pan
American expects that all necessary permits will be forthcoming, there is no
guarantee that Pan American will obtain all permits necessary to develop or
continue operating at any particular property.
UNCERTAINTY IN THE CALCULATION OF MINERAL RESERVES, RESOURCES AND SILVER
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
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.
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 counter parties 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 FACTORS
See "Environment".
- 42 -
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 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.
FOREIGN OPERATIONS
As at December 31, 2002, the majority of the Company's current operations
were conducted by its subsidiaries outside of Canada in Peru and Mexico. All of
Pan American'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 various levels of political, economic and other risks
and uncertainties. These risks and uncertainties include, but are not limited
to, terrorism, hostage taking, military repression, expropriation, changing tax
laws, extreme fluctuations in currency exchange rates, high rates of inflation
and labour unrest.
Local opposition to mine development projects has arisen in Peru in the
past, and such opposition has at times been violent. In particular, in February
of 2001, the exploration premises of a Canadian mineral exploration company,
Manhattan Minerals Inc., at Tambo Grande in Northern Peru, were stormed by
approximately 5,000 people, who burned machinery and injured approximately 30
people. Although Pan American's operations in Peru are located in communities
that have been traditionally supportive of mining for decades and no discernable
local opposition has arisen to Pan American's projects, there can be no
assurance that such local opposition will not arise in the future.
Changes, if any, in mining or investment policies or shifts in political
attitude in Peru, Mexico or Bolivia may adversely affect Pan American's
operations or profitability. Operations may be affected in varying degrees by
government regulations with respect to, but not limited to, restrictions on
production, price controls, export controls, currency remittance, income taxes,
expropriation of property, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use and
mine safety.
In certain countries where Pan American has properties or interests 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.
The occurrence of these various factors and uncertainties cannot be
accurately predicted and could have an adverse effect on Pan American's
operations or profitability.
UNITED STATES 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
- 43 -
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
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.
- 44 -
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:
2002 2001 2000 1999 1998
--------- --------- ---------- --------- ---------
(thousands of U.S. dollars, except per share amounts)
Revenue $ 45,093 $ 37,296 $ 29,931 $ 26,851 $ 30,219
Operating loss (34,910) (8,540) (46,650) (5,837) (6,016)
Operating loss per share ($1.37) ($0.20)
($0.93) ($0.24) ($0.24)
Net loss (33,658) (8,077) (45,878) (5,837) (5,987)
Net loss per share ($1.35) ($0.20)
($0.80) ($0.22) ($0.24)
Cash and short-term investments 10,198 3,844 7,590 15,873 10,139
Total assets 94,966 97,517 83,087 107,829 70,719
Total long-term financial liabilities 3,942 5,010 4,987 -- --
Total shareholder's equity 55,492 58,877 57,544 94,884 61,656
Selected unaudited consolidated financial information of the Company for
each of the last eight quarterly periods is as follows:
2002 2001
--------------------------------------------- -----------------------------------------------
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
-------- -------- -------- -------- -------- ------- -------- --------
(thousands of U.S. dollars, except per share amounts)
Total Revenue $10,199 $11,615 $ 11,195 $ 12,084 $ 4,541 $ 8,051 $13,790 $10,914
Expenses:
Operating costs 9,202 10,807 11,447 11,705 4,894 9,083 14,471 12,143
Depreciation 1,429 1,435 1,316 692 708 1,034 1,278 1,292
General & admin. 359 498 379 462 505 476 471 686
Reclamation 198 221 226 215 115 108 107 290
General exploration 83 260 234 629 152 171 115 454
Investment income, net 231 (119) (149) 13 292 (28) (147) (437)
Write-off resource ppty 15,129 12,089
Operating loss (1,303) (1,487) (17,387) (13,721) (1,541) (2,849) (2,799) (4,388)
Gain on sale of land -- -- -- -- -- -- 3,500 --
Net income (loss) for
the period $(1,303) $(1,247) $(17,387) $(13,721) $(1,541) $(2,849) $ 701 $(4,388)
Earnings (loss) per
share ($0.03) ($0.03) $ (0.40) ($0.40) ($0.04) ($0.08) $ 0.02 ($0.12)
Quarterly per share amounts have been adjusted to reflect the weighted
average common shares of the Company outstanding for the full year.
- 45 -
Further discussion of the Company's financial results is contained in the
"Management's Discussion and Analysis" incorporated by reference into this
Annual Information Form.
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, 2002 and 2001, set
out on pages 33 through 38 and 41 through 55, respectively, of the Company's
2002 Annual Report, which are incorporated by reference herein.
MARKET FOR SECURITIES
--------------------------------------------------------------------------------
The Company's common shares are listed and posted for trading on the
Toronto Stock Exchange under the symbol "PAA". The common shares of the Company
are also quoted on the Nasdaq National Market and trade under the symbol "PAAS".
Warrants to purchase common shares of the Company are also listed and posted for
trading on the Toronto Stock Exchange and trade under the symbol "PAA.WT".
- 46 -
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 THE
OF RESIDENCE POSITION WITH THE COMPANY PAST FIVE YEARS
--------------------- ------------------------- ---------------------------------
ROSS J. BEATY(2),(3),(4) Director, Chairman and Chief Chairman and Chief Executive Officer
Vancouver, B.C. Executive Officer (director of of the Company
the Company since September
30, 1988)
WILLIAM A. FLECKENSTEIN(3),(4) Director of the Company since President of Fleckenstein Capital,
Seattle, Washington, U.S.A. May 9, 1997 Inc. (an investment counselling
firm) from 1996 to present; prior
thereto Partner of Olympic Capital
Management Inc. (an investment
counselling firm)
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 since Vice President and Chief Financial
Surrey, B.C. 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.
MICHAEL LARSON(4) Director of the Company since Investment Advisor and Manager of
Seattle, Washington November 29, 1999 Cascade Investment LLC (a private
investment company)
JOHN H. WRIGHT(4) Director, President and Chief President of the Company
Vancouver, B.C. Operating Officer (director
of the Company since
September 30, 1988)
JOHN WILLSON(1),(2),(4) Director since April 4, 2002 Retired since April 2000; formerly
CEO of Placer Dome Inc.
- 47 -
NAME AND MUNICIPALITY PRINCIPAL OCCUPATION DURING THE
OF RESIDENCE POSITION WITH THE COMPANY PAST FIVE YEARS
--------------------- ------------------------- ---------------------------------
ANTHONY HAWKSHAW Chief Financial Officer Chief Financial Officer of the
Vancouver, B.C. Company
NORM PITCHER Chief Geologist Chief Geologist of the Company since
North Vancouver, B.C. February, 1998 and prior thereto
consulting geologist with H.A.
Simons Engineering
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.
ROSALIE MOORE Vice President, Vice President, Corporate Relations
West Vancouver, B.C. Corporate Relations of the Company.
GORDON JANG 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 Environmental Committee
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 seven directors five of
whom, John Willson, Paul B. Sweeney, Michael Larson, William A. Fleckenstein and
Michael J.J. Maloney, qualify as unrelated directors who are independent of
management. On January 1, 2003, Mr. Robert Pirooz rejoined Pan American as its
Vice President, Legal Affairs. Mr. John Wright has advised that, for family
reasons, at the end of May, 2003 he is stepping down as President and Chief
Operating Officer of Pan American. Mr. Wright will remain an active director of
the Company. Mr. Geoff Burns has joined Pan American effective May 1, 2003 and
will fulfill Mr. Wright's functions. As well, on March 1, 2003 Mr. Bill Faust
joined Pan American as Vice President, Alamo Dorado. Lastly, Ms. Rosalie Moore
has resigned from the Company effective May 1, 2003. Replacing Ms. Moore is Ms.
Brenda Radies. The board has established four committees: the Audit Committee,
the Compensation Committee, the Environmental Committee and the Nominating and
Governance Committee. The board does not have an Executive Committee. The
composition of the various committees as at December 31, 2002 is set forth in
the preceding table. As of May 12, 2003, Mr. Beaty no longer serves on the
Compensation Committee or the Nominating and Governance Committee.
- 48 -
As at March 28, 2003, the directors and officers of the Company as a group
beneficially owned, directly or indirectly, 5,105,000 common shares of the
Company representing 17.12% of the issued and outstanding common shares of the
Company.
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.
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 to be
held on May 12, 2002. Additional financial information is also provided in the
Company's Audited Consolidated Financial Statements for the years ended December
31, 2002 and 2001 which are contained in the Company's 2002 Annual Report.
The Company shall provide to any person, upon request to the 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
(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.
- 49 -
- 50 -
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.
"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.
"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 degrees 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.
- 51 -
"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.
"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.
- 52 -
"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 Ag(16)As(2)S(11), 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)(16)Sb(2)S(11) 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, Ag(3)AsS(3), with rhombohedral cleavage that
is soft, ruby red and occurs in low temperature or secondary enrichment veins. A
minor source of silver.
"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.
- 53 -
"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.
"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.
- 54 -
DOCUMENT NO. 2
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL INFORMATION
The consolidated financial statements and all information in the Annual Report
are the responsibility of the Board of Directors and management. The
consolidated financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada from information
available to March 7, 2003. Financial information presented throughout the
Annual Report is consistent with the information presented in the consolidated
financial statements.
The Audit Committee of the Board of Directors meets with management to ensure
that management maintains systems of internal and administrative controls to
provide reasonable assurance that financial information is presented fairly. The
audit committee also meets with the Company's external auditors to review the
scope and results of their audit and auditors' report prior to submitting the
consolidated financial statements to the Board of Directors for approval.
The consolidated financial statements have been audited by Deloitte & Touche
LLP, Chartered Accountants, who were appointed by the shareholders. The
Auditors' Report sets out the scope of their examination and their opinion on
the consolidated financial statements.
/s/ Anthony Hawkshaw
-----------------------
Anthony Hawkshaw
Chief Financial Officer
Vancouver, Canada
March 7, 2003
AUDITORS' REPORT
TO THE SHAREHOLDERS OF PAN AMERICAN SILVER CORP.
We have audited the consolidated balance sheets of Pan American Silver Corp. as
at December 31, 2002 and 2001 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
from 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, 2002
and 2001, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
---------------------------
Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
February 20, 2003,
except for Note 9,
which is at March 7, 2003
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(IN THOUSANDS OF US DOLLARS)
2002 2001
---------- ------------
ASSETS
Current
Cash and cash equivalents $ 10,185 $ 3,331
Short-term investments 13 513
Accounts receivable 4,598 6,037
Inventories (Note 4) 4,637 4,655
Prepaid expenses 3,197 6,534
---------- ------------
Total Current Assets 22,630 21,070
Mineral property, plant and equipment, net (Note 5) 59,447 66,659
Investment and other properties (Note 6) 4,193 1,785
Direct smelting ore (Note 4) 4,303 -
Other assets (Note 7) 4,393 2,003
---------- ------------
Total Assets $ 94,966 $ 91,517
========== ============
LIABILITIES
Current
Operating line of credit $ 125 $ 1,390
Accounts payable and accrued liabilities (Note 8) 15,227 12,283
Advances for metal shipments 2,158 4,071
Current portion of bank loans and capital lease (Note 9) 1,638 2,209
Current portion of severance indemnity and commitments (Note 14) 953 547
Current portion of deferred revenue (Note 7) 130 643
---------- ------------
Total Current Liabilities 20,231 21,143
Deferred revenue (Note 7) 923 1,850
Bank loans and capital lease (Note 9) 3,942 5,010
Provision for reclamation (Note 5) 12,971 2,112
Severance indemnity and commitments (Notes 5, 6 and 14) 1,407 2,525
---------- ------------
Total Liabilities 39,474 32,640
========== ============
SHAREHOLDERS' EQUITY
Share capital (Note 10)
Authorized:
100,000,000 common shares of no par value
Issued:
December 31, 2001 - 37,628,234 shares
December 31, 2002 - 43,883,454 shares 161,024 130,723
Additional paid in capital 1,092 1,120
Deficit (106,624) (72,966)
---------- ------------
Total Shareholders' Equity 55,492 58,877
---------- ------------
Total Liabilities and Shareholders' Equity $ 94,966 $ 91,517
========== ============
APPROVED BY THE BOARD
/s/ Ross J. Beaty /s/ John H. Wright
--------------------- ---------------------
Ross J. Beaty, John H. Wright,
Director Director
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS OF US DOLLARS, EXCEPT FOR SHARES AND PER SHARE AMOUNTS)
2002 2001 2000
------------ ------------ ------------
Revenue $ 45,093 $ 37,296 $ 29,931
------------ ------------ ------------
Expenses
Operating 43,161 40,591 27,561
General and administration 1,698 2,138 2,177
Depreciation and amortization 4,872 4,312 2,509
Reclamation 860 620 461
Exploration 1,206 892 800
Interest expense 988 783 326
Write down of mineral properties
and reclamation (Notes 5 and 6) 27,218 - 42,747
Gain on sale of land (Note 3) - (3,500) -
------------ ------------ ------------
80,003 45,836 76,581
------------ ------------ ------------
Loss from operations (34,910) (8,540) (46,650)
Interest income 269 236 641
Other income (Note 13) 983 227 131
------------ ------------ ------------
Net loss for the year $ (33,658) $ (8,077) $ (45,878)
------------ ------------ ------------
Basic and fully diluted loss per share (Note 2) ($0.80) ($0.22) ($1.35)
------------ ------------ ------------
Weighted average shares outstanding 41,849,413 36,162,815 33,987,958
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF US DOLLARS, EXCEPT FOR SHARES)
COMMON SHARES ADDITIONAL
-------------------------- PAID IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------------ ---------- ------------ ------------
Balance, December 31, 1999 32,460,845 $ 113,780 $ 115 $ (19,011) $ 94,884
Issued on acquisition of
Huaron (Note 3) 1,780,389 7,015 - - 7,015
Issued for purchase of royalty 140,000 507 - - 507
Fair value of stock options granted - - 985 - 985
Fair value of warrants granted - - 69 - 69
Foreign exchange translation adjustment - - (38) - (38)
Net loss for the year - - - (45,878) (45,878)
---------- ------------ ------- ----------- -----------
Balance, December 31, 2000 34,381,234 121,302 1,131 (64,889) 57,544
Exercise of stock options 247,000 789 - - 789
Shares issued for cash, net of share
issue costs (Note 10c) 3,000,000 8,632 - - 8,632
Fair value of warrants granted (Note 10c) - - 27 - 27
Foreign exchange translation adjustment - - (38) - (38)
Net loss for the year - - - (8,077) (8,077)
---------- ------------ ------- ----------- -----------
Balance, December 31, 2001 37,628,234 130,723 1,120 (72,966) 58,877
Exercise of stock options 1,445,400 6,102 - - 6,102
Shares issued for cash, net of share
issue costs (Note 10b(i)) 3,450,000 15,599 - - 15,599
Issued on acquisition of Manantial
Espejo (Notes 6 and 10bii) 231,511 1,250 - - 1,250
Issued on acquisition of royalty
(Notes 5 and 10biii) 390,117 3,000 - - 3,000
Issued as compensation payable
(Note 10b (v)) 69,000 253 - - 253
Issued to purchase silver stockpiles
(Notes 4 and 10biv) 636,942 4,000 - - 4,000
Exercise of share purchase warrants 32,250 97 - - 97
Foreign exchange translation adjustment - - (28) - (28)
Net loss for the year - - - (33,658) (33,658)
---------- ------------ ------- ----------- -----------
Balance, December 31, 2002 43,883,454 $ 161,024 $ 1,092 $ (106,624) $ 55,492
========== ============ ======= =========== ===========
The cumulative translation adjustment account at December 31, 2002 was $11
(2001 - $39).
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS OF US DOLLARS)
2002 2001 2000
------------ ---------- ---------
Operating activities
Sales proceeds $ 44,015 $ 38,176 $ 30,085
Hedging activities 960 40 181
Interest paid (988) (783) (326)
Other income and expenses 926 96 762
Products and services purchased (42,533) (36,759) (26,898)
Exploration (1,102) (892) (811)
Taxes paid - - (111)
General and administration (2,020) (1,964) (2,267)
------------ ---------- ---------
(742) (2,086) 615
------------ ---------- ---------
Financing activities
Repayments of bank loans (3,325) (5,044) 10,043
Shares issued for cash 22,821 9,789 -
Share issue costs (962) (340) -
------------ ---------- ---------
18,534 4,405 10,043
------------ ---------- ---------
Investing activities
Mineral property, plant and equipment expenditures (9,780) (6,683) (1,077)
Investment and other property expenditures (1,158) (24) (17,815)
Short-term investment sales (purchases) - 256 (13)
Other - (81) (59)
------------ ---------- ---------
(10,938) (6,532) (18,964)
------------ ---------- ---------
Increase (decrease) in cash and
cash equivalents for the year 6,854 (4,213) (8,306)
Cash and cash equivalents at beginning of year 3,331 7,544 15,850
------------ ---------- ---------
Cash and cash equivalents at end of year $ 10,185 $ 3,331 $ 7,544
============ ========== =========
Supplemental Cashflow Information (Note 12c)
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS OF US DOLLARS, EXCEPT FOR SHARES, PRICE PER
SHARE AND PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS
The Company is a silver mining company operating in
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 as set out below. 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
differences from United States accounting principles are disclosed in Note 16.
A) BASIS OF PRESENTATION
These consolidated financial statements are expressed in United States dollars
and include the accounts of the Company and its subsidiaries. All intercompany
transactions and balances have been eliminated.
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 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. Adjustments to revenue are recorded in the period leading up to and
during the period of final settlement of prices, weights and assays.
C) INVENTORIES
Metals inventories are stated at the lower of cost and net realizable value
determined by using the first-in, first-out method. Materials and supplies
inventories are carried at the lower of average cost and replacement cost. Costs
of direct smelting ore are charged to operations on a per tonne of ore sold
basis over 600,000 tonnes (Note 4).
D) MINERAL PROPERTY, PLANT AND EQUIPMENT
i) Mineral properties
Acquisition costs of mineral development properties together with costs
directly related to mine development expenditures and any interest thereon
are deferred. Once in production such costs are amortized on a
units-of-production basis over a property's expected economic life.
Exploration costs are charged to operations.
ii) Mineral property, plant and equipment are stated at the lower of cost or
estimated net recoverable value on the basis of undiscounted estimates of
future cash flows. 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. Depreciation 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 undiscounted
estimates of future cash flows. Any resulting write downs to net recoverable
value are charged to operations. Deferred costs relating to abandoned
properties are written off.
E) RECLAMATION COSTS
Ongoing reclamation costs are charged to operations in the period in which they
are incurred. Estimated closure costs are accrued on a units-of-production
basis. At operations where the carrying value of the related property, plant and
equipment is deemed to be impaired because of uncertainty about the expected
mine life, an estimate of the expected future reclamation and closure costs is
made. The difference between the estimated future reclamation and closure costs
and the amount of such costs accrued at the time of impairment is charged to
operations. Should subsequent revisions of the estimated future costs be made,
the effect of the revision on the amount accrued would be reflected as a charge
or credit to operations.
F) FOREIGN CURRENCY TRANSLATION
The Company's functional currency is the US dollar. The accounts of
self-sustaining foreign operations are accounted for by the current rate method.
Under this method, assets and liabilities are translated into US dollars at
prevailing rates of exchange at each balance sheet date and revenue and expense
items are translated at exchange rates prevailing when such items are recognized
in the statement of operations. Foreign currency gains and losses are deferred
as a component of additional paid in capital.
Foreign currency transactions and balances and the accounts of integrated
foreign operations are accounted for by the temporal method. Under this method,
monetary items are translated at the exchange rate in effect at the balance
sheet date, non-monetary items are translated at historical rates, and revenue
and expense items are translated at exchange rates prevailing when such items
are recognized in the statement of operations. Foreign currency gains and losses
are expensed.
G) DERIVATIVE FINANCIAL INSTRUMENTS
The Company, from time to time, uses forward sales instruments for the purpose
of managing the price of anticipated metal sales. These instruments are
accounted for as a hedge of anticipated transactions and are not recorded on the
balance sheet of the Company. Gains and losses from these contracts are recorded
as an adjustment of revenue in the period that related production is delivered.
Occasionally, non-hedging derivative contracts are entered into. These contracts
are recorded on the balance sheet and marked-to-market at each reporting date.
Any mark-to-market gains or losses are included in the statement of operations.
H) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash or highly liquid, fixed income securities
or term deposits with an average yield of 1.25% (2001 -1.65%) and an average
term to maturity, at the date of purchase, of one month.
I) SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and market value.
J) STOCK OPTION PLAN
The Company provides options to buy common shares of the Company to directors,
officers and service providers. The board of directors grants such options for
periods of up to ten years at prices equal to or greater than the weighted
average market price of the five trading days prior to the date the options are
granted.
The Company adopted the intrinsic value method of accounting for stock-based
compensation. Under this method compensation expense is recognized for the
excess, if any, of the quoted market price of the Company's common shares over
the common share option exercise price on the day that options are granted.
K) LOSS PER SHARE
The diluted net 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 call 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 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.
3. BUSINESS ACQUISITION
On March 6, 2000, the Company acquired a 71.83 percent interest in Compania
Minera Huaron S.A. ("Huaron"). The acquisition agreement provided for the
issuance of 1,780,389 common shares of the Company valued at $7,015,000 and
700,000 common share purchase options with a value of $985,000. The share
purchase options were exercisable over a ten-year period at $4.00 per share and
would have expired on March 6, 2010. During 2002, all the share purchase options
were exercised for proceeds of $2,800,000. The Company also granted the vendors
a 2.16 percent net smelter return royalty payable after the Company has
extracted 4,300,000 tonnes of ore from the property. As at December 31, 2002,
the Company had extracted 974,000 tonnes of ore from the property. This royalty
increases to a maximum of 3 percent if the Company acquires a 90 percent or more
interest in Huaron. Included in liabilities of Huaron at the date of acquisition
was a liability of $3,174,000 payable to the former majority shareholders of
Huaron. This liability was discharged from the proceeds of sale of certain
Huaron assets for $1,980,000 and corporate funds of $1,194,000. Between March 6
and October 20, 2000, the Company increased its ownership in Huaron to 72.64
percent by purchasing shares from minority shareholders for $65,000.
The acquisition was accounted for by the purchase method and the accounts of
Huaron have been consolidated from March 6, 2000. The fair value of assets and
liabilities acquired and the consideration paid are summarized as follows:
Current assets $ 1,297
Property, plant and equipment 12,968
---------
14,265
Less:
Current liabilities (3,649)
Long-term liabilities (1,551)
Severance indemnity (1,000)
---------
Consideration, including cash of $65,000 $ 8,065
=========
On August 2, 2001, the Company increased its ownership of Huaron to 99.85
percent when the Company sold certain parcels of Huaron land to Volcan Compania
Minera S.A. ("Volcan") in exchange for Volcan's 27.21 percent interest in
Huaron, which was valued at $2,968,000. The Company also received $200,000 in
cash, 1,800,000 Volcan "B" shares valued at $500,000 and other benefits as
consideration for the sale of Huaron land and recorded a $3,500,000 gain (Note
13) as a result of this transaction.
4. INVENTORIES
Inventories consist of:
2002 2001
------- -------
Concentrate inventory $ 3,128 $ 2,115
Direct smelting ore 4,753 -
Materials and supplies 1,059 2,540
------- -------
8,940 4,655
Long-term portion of
direct smelting ore (4,303) -
------- -------
$ 4,637 $ 4,655
======= =======
Under an agreement entered into on November 8, 2002 with Volcan, the Company
acquired the right to mine and sell 600,000 tonnes of silver-bearing ore
stockpiles to a nearby smelter. The consideration paid was 636,942 common shares
of the Company with a value of $4,000,000, the return to Volcan of 1,800,000
Volcan "B" shares, carried on the Company's books at $500,000 and a one-third
production bonus after the Company recovers $4,500,000, operating costs, deemed
taxes and interest on the acquisition cost. In addition, the Company guaranteed
that Volcan would receive a minimum $4,000,000 from the sale of the Company's
common shares. Pursuant to this guarantee the Company made a $317,000 cash
payment to Volcan.
Under a second agreement with Volcan, the Company has the option to acquire a 60
percent 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 percent by
paying Volcan $3,000,000 and granting Volcan a 7 percent royalty on commercial
production from the stockpiles.
The Company wrote-down the $1,807,000 carrying value of Quiruvilca's materials
and supplies inventory in 2002.
Notes to Consolidated Financial Statements, continued
5. MINERAL PROPERTY, PLANT AND EQUIPMENT
Mineral property, plant and equipment consist of:
LA COLORADA QUIRUVILCA HUARON OTHER 2002 2001
----------- ---------- -------- ------ -------- ---------
Mineral Property $ 4,153 $ - $ 1 $ - $ 4,154 $ 1,250
Plant and equipment 2,257 13,356 20,799 - 36,412 35,694
Mine development 26,757 9,817 14,500 - 51,074 43,001
Other - - - 527 527 1,108
------- -------- -------- ------ -------- ---------
$33,167 $23,173 $ 35,300 $527 $ 92,167 $ 81,053
------- -------- -------- ------ -------- ---------
Accumulated
amortization and
write downs (645) (23,173) (8,481) (421) (32,720) (14,394)
------- -------- -------- ------ -------- ---------
$32,522 $ - $ 26,819 $ 106 $ 59,447 $ 66,659
======= ======== ======== ====== ======== =========
Mineral property, plant and equipment is amortized using the straight-line
method over the lesser of estimated useful life ranging from five to twenty
years or estimated ore reserves. Mine development is amortized over estimated
ore reserves.
Until May 2001, mine development costs at the Huaron mine were
capitalized as part of mineral properties. These costs were transferred to
property, plant and equipment when commercial production began in May 2001.
On May 23, 2002, the Company acquired a 5 percent net smelter return royalty
over the La Colorada mine. The purchase price was 390,117 common shares of the
Company valued at $3,000,000.
In September 2002, the Company wrote down its investment in the Quiruvilca mine
by $15,129,000. 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. The amount of the write down as at
December 31, 2002 was $27,218,000, which includes a $10,000,000 provision for
future reclamation, a $1,807,000 write down of the mine's materials and supplies
inventory and $282,000 of capital asset expenditures that were expensed
subsequent to September 30, 2002. As at December 31, 2002, the balance of
Quiruvilca's future reclamation costs account was $12,467,000. The Company will
continue to operate the mine and all spending at the Quiruvilca mine will be
expensed as incurred.
During the third quarter of 2002, the Company commenced a $20,000,000 expansion
program at the La Colorada mine in Mexico. As at December 31, 2002, the Company
had spent $7,143,000 on the project expansion, incurred $1,261,000 in deferred
pre-operating costs and incurred $1,680,000 in additional commitments. Mine
development costs will be transferred to mineral property, plant and equipment
once commercial production begins.
6. INVESTMENT AND OTHER PROPERTIES
Investment properties and other consist of:
2002 2001
------- -------
Investment properties
Waterloo, USA. $ 1,000 $ 1,000
Tres Cruces and others 785 785
------- -------
1,785 1,785
------- -------
Other properties
Manantial Espejo, Argentina 2,012 -
Other 396 -
------- -------
2,408 -
------- -------
$ 4,193 $ 1,785
======= =======
WATERLOO, USA
In 1994, the Company acquired a 100 percent interest in the Waterloo
silver-barite property located in the Calico Mining District of San Bernardino
County, California.
MANANTIAL ESPEJO, ARGENTINA
On March 4, 2002, the Company acquired a 50 percent interest in the Manantial
Espejo property, located in Argentina, from Silver Standard Resources Ltd.,
which holds the other 50 percent. This interest is held through a 50 percent
interest in two Argentina corporations, Minera Triton Argentina S.A. and
Compania Minera Altovalle S.A. The purchase price was $662,433 in cash, 231,511
common shares of the Company valued at $1,250,000 and a further cash payment of
$100,000 to eliminate a 1.2 percent NSR royalty on the property. All acquisition
costs have been capitalized. Exploration costs have been charged to operations.
On November 8, 2002, the Company acquired from Barrick Exploraciones Argentine
S.A. a 3 percent NSR royalty over the Manantial Espejo property in exchange for
certain of Quiruvilca's mineral concessions. These mineral concessions had no
carrying value and no value was assigned to the royalty during the exchange. In
December 2002, the Company sold 50 percent of this royalty to Silver Standard
Resources Ltd. for $300,000 and recorded a gain of $300,000.
TRES CRUCES, PERU
On May 22, 2002, the Company entered into an agreement granting New Oroperu
Resources Inc. ("Oroperu") an option to acquire a 100 percent interest in the
Tres Cruces gold property in northern Peru, which is currently held 50 percent
by the Company and 50 percent by Oroperu. In consideration for this option,
Oroperu issued 500,000 of its common shares to the Company, which were valued at
$1,000. In addition, Oroperu is required to issue to the Company an additional
1,000,000 common shares and spend $1,750,000 in exploration expenditures within
42 months.
If the option is exercised, Oroperu will issue additional common shares to the
Company to give the Company a 20 percent equity interest in Oroperu and the
Company will retain a 2 percent net smelter return royalty on production.
Oroperu has an option to reduce this royalty to 1.5 percent by paying the
Company $500,000 prior to production. Upon exercise of the option, Oroperu is
obligated to make annual advance royalty payments of $100,000.
Upon a decision to place Tres Cruces into production, Oroperu will pay the
Company $1,000,000 and assign to the Company a 30 percent interest in Tres
Cruces.
SAN VICENTE, BOLIVIA
In June 1999, the Company entered into a joint venture agreement, that was
amended on January 15, 2001, with COMIBOL, Bolivia's state mining company, to
earn a 100% interest in the San Vicente mine and related infrastructure by
spending $1,100,000 in exploration expenditures in the first two years of the
agreement, which have been spent, and spending, at the Company's option,
$1,150,000 in year three, $6,750,000 in years four and five and $11,000,000 in
years six and seven of this agreement on exploration and development.
Due to market conditions and the uncertainty about whether future exploration
and development work would justify continuing the joint venture agreement, the
Company wrote-off its $1,142,000 carrying value for San Vicente in December
2000.
In October 2001, COMIBOL approved the Company's request for a state of force
majeure, which extends the deadline for its annual spending commitments by a
maximum of two years or until silver and zinc prices reach $5.00 per ounce and
$0.50 per pound, respectively.
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 during the life of the contract. The Company will receive the
greater of $13,000 per month, a 4% net smelter return royalty or depending on
metal prices, 20% to 30% of net cash flow. During 2002, EMUSA continued with
small scale operations, contributing a total of $170,000 in cash to the Company.
OTHER
During 2000, the Company wrote-off its $37,208,000 carrying value in Dukat
silver project and various other mineral properties totaling $1,138,000.
During 2002, the Company capitalized $396,000 in merger related costs with
Corner Bay Silver Inc. which will be added to the carrying value of the Alamo
Dorado property (Note 17d).
7. OTHER ASSETS AND DEFERRED REVENUE
Other assets consist of:
2002 2001
------- ------------
Prepaid taxes $ 3,000 $ -
Long-term receivable 1,319 1,929
Reclamation bond 74 74
------- ------------
$ 4,393 $ 2,003
======= ============
The Company has $3,970,000 of prepaid value added taxes of which $3,000,000 is
non-current. These taxes will be collectible as a portion of future metal sales.
Long-term receivable consists of $581,000 remaining on future power credits
received as partial consideration from the 1998 sale of an interest in a
Peruvian power line, $1,052,000 remaining from the sale of Huaron land in 2001
and $266,000 in various tax and interest payments collectible over a ten-year
period. The current portion of this long-term receivable of $580,000 (2001 -
$643,000) is reflected in current assets.
As at December 31, 2002, the deferred revenue portion of the 1998 transaction is
fully amortized. The deferred revenue portion of the 2001 transaction (2002 -
$1,053,000; 2001 - $1,183,000), which is subject to increase at the rate of
Peruvian inflation, is payable as future power credits over a five-year period
at the Huaron mine of which $130,000 (2001 - $223,000) is current and is
reflected in current liabilities.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
2002 2001
-------- ----------
Trade accounts payable $ 13,528 $ 9,408
Payroll and related benefits 1,242 2,034
Sales taxes 237 320
Royalty 111 101
Other 109 420
-------- ----------
$ 15,227 $ 12,283
======== ==========
9. BANK LOANS AND CAPITAL LEASE
Bank loans consist of:
2002 2001
--------- ---------
Huaron loan $ 5,146 $ 6,500
Operating loan - 719
--------- ---------
5,146 7,219
Current portion (1,625) (2,209)
--------- ---------
3,521 5,010
--------- ---------
Capital lease consists of:
Capital lease 434 -
Current portion (13) -
--------- ---------
421 -
--------- ---------
$ 3,942 $ 5,010
========= =========
The Huaron loan bears interest at 6 month LIBOR plus 3.00% and is repayable in
monthly installments of $135,000 until February 2006. Certain of Huaron's assets
have been pledged as security for this loan.
Details of principal repayments due are as follows:
YEAR AMOUNT DUE
---- -----------
2003 $ 1,625,000
2004 1,625,000
2005 1,625,000
2006 271,000
The Company assumed an operating loan amounting to $719,100 as part of the
acquisition of Compania Minera Huaron S.A. (Note 3). In September 2002, the
operating loan was repaid.
Notes to Consolidated Financial Statements, continued
On June 14, 2002, the Company entered into a $10,000,000 project loan facility
(the "Loan") with the International Finance Corporation ("IFC"), the private
lending arm of the World Bank, to partially finance a $20,000,000 expansion
program at the La Colorada mine in Mexico. The Loan bears interest at 6-month
LIBOR plus 3.50% until certain technical and financial tests are achieved and
6-month LIBOR plus 3.25% thereafter and is repayable in semi-annual installments
of $1,000,000, commencing November 15, 2004 until May 15, 2009. On March 7,
2003, the Company received the first Loan draw down of $4,000,000. The Company's
interest in its wholly-owned subsidiary, Plata Panamericana S.A. de C.V.
("Plata") and substantially all of the assets of Plata have been pledged as
security for the Loan. The Company has guaranteed the Loan repayments on behalf
of Plata until the expanded La Colorada mine achieves certain production and
financial performance targets.
In addition to the interest payments on the outstanding balance of the Loan,
Plata would be required, in certain circumstances, to make additional payments
to IFC. Such payments would be required if the average price of silver for a
year exceeded $4.75 per ounce and would be equal to 20 percent of the positive
difference between the average price per ounce of silver for a year and $4.75
multiplied by the number of ounces of silver produced by the La Colorada mine
divided by $10,000,000 and multiplied by the greater of the Loan balance at the
end of the year or the originally scheduled Loan balance at the end of a year.
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 percent per
annum, payable in semi-annual payments over 5 years with the following repayment
terms:
YEAR AMOUNT DUE
---- ----------
2003 $ 13,500
2004 14,300
2005 127,500
2006 135,200
2007 143,500
10. 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, 1999 2,375,300 2,487,110 4,862,410
Year ended December 31, 2000
Granted 1,552,500 $3.33-$4.00 100,000 $5.00 1,652,500
Expired (855,500) $6.17 - - (855,500)
Cancelled (440,000) $6.17-$10.07 - - (440,000)
---------- ----------- --------- ----- ----------
Outstanding, December 31, 2000 2,632,300 $4.72 2,587,110 $5.37 5,219,410
Year ended December 31, 2001
Granted 790,000 $3.14 32,250 $3.00 822,250
Exercised (247,000) $3.14 - - (247,000)
Expired - (1,950,000) $5.65 (1,950,000)
Cancelled (130,000) $3.14-$5.81 - - (130,000)
---------- ----------- ---------- ----- ----------
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
========== =========== ========== ===== ==========
The Company has reserved 3,060,878 common shares available for the future grant
of stock options.
The following table summarizes information concerning stock options outstanding
as at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AS AT CONTRACTUAL AVERAGE AS AT AVERAGE
RANGE OF YEAR OF DECEMBER LIFE EXERCISE DECEMBER EXERCISE
EXERCISE PRICES EXPIRY 31, 2002 (MONTHS) PRICE 31, 2002 PRICE
--------------- ------- ----------- ----------- --------- ----------- --------
$5.86 2004 100,000 18.66 5.86 100,000 5.86
$3.17-$5.86 2005 114,800 32.94 5.62 114,800 5.62
$3.17 2006 350,300 40.53 3.14 350,300 3.14
$5.39-$6.34 2007 103,360 58.53 5.98 103,360 6.34
$3.17 2010 496,900 94.45 3.17 496,900 3.17
--------- ----- ----- --------- -----
1,165,360 60.92 $4.68 1,165,360 $4.68
========= ===== ===== ========= =====
During the twelve month period ended December 31, 2002 the Company granted
103,360 (2001 - 790,000; 2000 - 1,552,500) options to purchase the Company's
common shares at exercise prices equal to the quoted market value of the common
shares on the dates that the options were granted. Consequently, under the
intrinsic value method no compensation expense for the grant of such options has
been recognized.
The following pro forma financial information presents the net loss for the year
and the basic loss per common share had the Company adopted the fair value
method of accounting for stock options as set out in CICA Handbook Section 3870,
Stock-Based Compensation and Other Stock-Based Payments.
2002 2001 2000
-------- ------- --------
Net loss for the year $(33,658) $(8,077) $(45,878)
Stock-based
compensation costs (319) (1,369) (1,605)
-------- ------- --------
Pro forma net loss $(33,977) $(9,446) $(47,483)
-------- ------- --------
Pro forma basic
loss per share ($0.81) ($0.26) ($1.40)
-------- ------- --------
Using the fair value based method for stock-based compensation, additional costs
of approximately $319,000, $1,369,000 and $1,605,000 would have been recorded
for the years ended December 31, 2002, 2001 and 2000, respectively. 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 67.5% (2001
- 45.98% and 2000 - 46.26%), weighted average annual risk free rate of 4.16%
(2001 - 4.93% and 2000 - 5.71%) and resulted in a weighted average option price
of $4.75 per share (2001 - $1.36 and 2000 - $1.63).
B) During the year ended December 31, 2002, the Company:
i) issued 3,450,000 common shares at $4.80 per share in a public offering,
for net proceeds of $15,599,000 after fees.
ii) issued 231,511 common shares at a value of $1,250,000 and made a cash
payment of $762,443 to purchase a 50 percent interest in and to eliminate a
1.2 percent NSR royalty over the Manantial Espejo project, in Argentina.
iii) issued 390,117 common shares at a value of $3,000,000 to purchase the
existing 5 percent net smelter return royalty over the La Colorada silver
mine in Mexico.
iv) issued 636,942 common shares at a value of $4,000,000 for the purchase of
the right to mine and sell 600,000 tonnes of silver-bearing ore stockpile
from Volcan.
v) Issued 69,000 common shares at a value of $253,000 for compensation.
C) During the year ended December 31, 2001, the Company issued 3,000,000 common
shares at $3.00 per share for net proceeds of $8,632,000 after fees. In
addition, the Company granted 32,250 share purchase warrants, exercisable at
$3.00 per share that had a fair value of $27,000 which forms a part of
shareholders' equity. All of the share purchase warrants were exercised in 2002.
11. FINANCIAL INSTRUMENTS
FAIR VALUE
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, an operating line of credit,
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.
Financial instruments also include a bank loan with a remaining maturity of 37
months and an interest rate of 6-month LIBOR plus 3%. Management considers that
no events have occurred subsequent to the arrangement of this loan that would
indicate that its fair value differs substantially from its carrying value.
CONCENTRATION OF CREDIT RISK
In 2002, the Company's five customers (2001 - five customers and 2000 - two
customers) accounted for 100 percent of metal 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
Notes to Consolidated Financial Statements, continued
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 2002, the Company sold 500 tonnes of copper at an average price of $1,525
per tonne, sold 1,500,000 ounces of silver at $4.50 per ounce and sold 11,000
tonnes of zinc at an average price of $843.25 per tonne. The copper sales
settled between January and February 2002 for realized incremental revenue of
$18,000. The silver sales settled in January 2002 and incremental revenue of
$210,000 was recognized between February and July 2002. The zinc sales settled
between February and December of 2002 for realized incremental revenue of
$732,000.
12. A) CHANGES IN OPERATING CASH FLOWS USING THE INDIRECT METHOD
The consolidated statements of cash flows reports the flow of cash provided by
or consumed by the Company's operating, financing and investing activities. The
following presents a reconciliation between cash provided by or consumed by
operating activities and net loss for the year in order to identify differences
between them.
2002 2001 2000
--------- -------- ---------
Net loss for the year $ (33,658) $ (8,077) $ (45,878)
Items not involving cash:
Depreciation and
amortization 4,872 4,312 2,509
Write down of mineral
properties and
reclamation (Note 5) 27,218 - 42,747
Gain on sale of land - (3,500) -
Compensation expense - 253 -
Operating cost provisions (366) 559 256
------- -------- ---------
Reclamation 860 620 461
(1,074) (5,833) 95
Changes in non-cash
operating working capital
Accounts receivable 2,041 (2,601) 218
Inventories (1,590) (242) 457
Prepaid expenses 1,038 (3,359) (99)
Accounts payable and
accrued liabilities 1,352 5,665 215
Advance payment for
metals shipments (1,913) 4,071 -
Current portion of
deferred revenue (513) - -
Severance indemnity (83) 213 (271)
------- -------- ---------
332 3,747 520
------- -------- ---------
Cash provided by (used in)
operations $ (742) $(2,086) $ 615
------- -------- ---------
B) RECONCILIATION OF CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
SOURCES (USES) OF CASH
------------------------------
2002 2001 2000
------ -------- --------
Increases (decreases) in
non-cash current assets $ 487 $(6,188) $ (901)
Increases (decreases) in
current liabilities (913) 3,324 7,200
------ -------- --------
Changes in non-cash
working capital (426) (2,864) 6,299
Less non-operating
working capital items:
Short-term investments
reflected in investing
activities - 467 30
Short-term investments
reflected in other assets (500) - -
Mineral property
expenditures reflected
in accounts receivable - 191 (879)
Development
expenditures reflected in
accounts receivable 602 223 18
Development expenditures
reflected in inventories 197 - 561
Mineral property
expenditures reflected
in prepaid expenses - - (27)
Development
expenditures reflected in
prepaid expenses 701 291 1,774
Development
expenditures reflected in
accounts payable (1,590) (163) 768
Bank loans (repayments)
reflected in financing
activities 1,835 5,067 (7,276)
Operating costs reflected
in non-current liabilities (487) 535 (748)
------ -------- --------
Changes in non-cash
operating working capital $ 332 $ 3,747 $ 520
====== ======== ========
C) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
2002 2001 2000
------- ------ ------
Shares issued for purchase
of direct smelting ore
stockpile (Note 4) $ 4,000 $ - $ -
Shares issued for purchase
of royalty (Note 10b(iii)) 3,000 - 507
Shares issued for acquisition
of subsidiary (Note 3) - - 7,015
Shares issued for resource
property (Notes 6 and
10b(ii)) 1,250 - -
Shares issued for
compensation payable 253 - -
Warrants granted for
purchase of royalty - - 69
Exchange of marketable
securities for ore stockpiles
(Note 4) 500 - -
Shares received in exchange
for Tres Cruces option
agreement (Note 6) 1 - -
Warrants granted pursuant
to equity financing - 27 -
Equity interest in subsidiary
acquired through sale
of land - 2,800 -
Shares acquired through
sale of land - 500 -
Stock options granted on
acquisition of subsidiary
(Note 3) - - 985
-------- ------- -------
13. SEGMENTED INFORMATION
The Company operates in one industry, has three reporting segments and has
activities in six countries. Segmented disclosures and enterprise-wide
information are as follows:
MINING & 2002
DEVELOPMENT CORPORATE EXPLORATION TOTAL
------------ --------- ----------- --------
Revenue from
external customers $ 44,132 $ 961 $ - $ 45,093
Write off of mineral
properties and
reclamation (27,218) - - (27,218)
Interest income 25 240 4 269
Interest expense (988) - - (988)
Other income 789 24 170 983
Exploration (163) - (1,043) (1,206)
Depreciation and
amortization (4,852) (20) - (4,872)
Net income (loss) (30,331) (2,569) (758) (33,658)
-------- -------- ------- --------
Capital asset
expenditures 9,759 21 1,158 10,938
Segment assets $ 78,661 $ 11,757 $ 4,548 $ 94,966
======== ======== ======= ========
MINING & 2001
DEVELOPMENT CORPORATE EXPLORATION TOTAL
------------ --------- ----------- --------
Revenue from
external customers $ 37,256 $ 40 $ - $ 37,296
Gain on sale of land 3,500 - - 3,500
Interest income 104 126 6 236
Interest expense (783) - - (783)
Other income 204 23 - 227
Exploration (15) - (877) (892)
Depreciation and
amortization (4,257) (47) (8) (4,312)
Net income (loss) (5,952) (1,796) (329) (8,077)
-------- ------ ------- ---------
Capital asset
expenditures 6,704 3 - 6,707
Segment assets $ 86,424 3,784 $ 1,309 $ 91,517
======== ====== ======= =========
MINING & 2000
DEVELOPMENT CORPORATE EXPLORATION TOTAL
------------ --------- ----------- --------
Revenue from external
customers $ 29,901 $ 30 $ - $ 29,931
Write off of mineral
properties - - (42,747) (42,747)
Interest income 148 350 143 641
Interest expense (326) - - (326)
Other income 116 15 - 131
Exploration - - (800) (800)
Depreciation and
amortization (2,400) (66) (43) (2,509)
Net income (loss) (43) (1,918) (43,917) (45,878)
-------- -------- ------- ---------
Capital asset expenditures 1,065 4 17,823 18,892
Segment assets $ 33,299 $ 690 $49,098 $ 83,087
======== ======== ======= =========
Notes to Consolidated Financial Statements, continued
REVENUE NET CAPITAL ASSETS
---------------------------- ------------------
2002 2001 2000 2002 2001
------- ------- ------- ------- -------
Peru $42,588 $35,108 $29,901 $27,875 $45,527
Canada 960 40 30 20 19
Mexico 1,545 2,148 - 32,524 21,682
United States - - - 1,194 1,194
Argentina - - - 2,012 -
Bolivia - - - 15 22
------- ------- ------- ------- -------
$45,093 $37,296 $29,931 $63,640 $68,444
======= ======= ======= ======= =======
Other income consists of:
2002 2001 2000
----- ------ -----
Sale of royalty (Note 6) $ 300 $ - $ -
Revenue from third party 170 - -
Power credits (Note 7) 326 505 483
Other revenue and
expenses, net 187 (278) (352)
----- ------ -----
$ 983 $ 227 $ 131
===== ====== =====
14. SEVERANCE INDEMNITIES AND COMMITMENTS
Severance indemnities and commitments consist of:
2002 2001
------- -------
Severance indemnity $ 1,435 $ 1,626
Employee benefits liability 578 825
Other provisions and
non-current liabilities 347 621
------- -------
2,360 3,072
Less: current portion of severance
indemnity and commitments (953) (547)
------- -------
$ 1,407 $ 2,525
======= =======
The Company has an obligation to its Peruvian employees for severance
indemnities. At December 31, 2002 the current portion of the obligation amounted
to $753,000 (2001 - $786,000).
On March 6, 2000 the Company acquired a 71.83% interest in Compania Minera
Huaron S.A. (Note 3) and assumed a $1,000,000 severance indemnity relating to
former employees of Huaron, which will be discharged over an estimated ten-year
period. At December 31, 2002, the unpaid obligation amounted to $682,000 (2001
-$840,000) and a portion of this liability amounting to $157,000 is reflected in
current liabilities.
As at December 31, 2002, the Company had accrued a $578,000 (2001 - $825,000)
liability for unpaid 1997 to 2000 hospital taxes. The amount outstanding accrues
interest at 6% per annum and is to be repaid over a ten-year period ending in
2012. A portion of this liability amounting to $58,000 is reflected in current
liabilities. As at December 31, 2002, the Company has provisions and other
noncurrent liabilities totaling $347,000 (2001 - $621,000).
15. INCOME TAXES
The recovery of income taxes reported differs from the amounts computed by
applying the aggregate Canadian federal and provincial income tax rates to the
loss before tax provision due to the following:
2002 2001 2000
-------- ------- --------
Statutory tax rate 39.6% 43.5% 45%
Recovery of income
taxes computed at
statutory rates $ 13,328 $ 3,403 $ 20,645
Effect of write down of
mineral property not
recognized in the
period (2,957) - -
Effect of lower tax rates
in foreign jurisdictions (4,818) (801) (14,652)
Tax benefit of losses not
recognized in the period
that the loss arose (5,553) (2,602) (5,993)
-------- ------- --------
$ - $ - $ -
======== ======= ========
The tax effect of each type of temporary difference that gives rise to the
Company's future net tax assets have been determined and are set out in the
following table. Until the Company can predict the timing of the realization of
such potential tax assets they are not reflected in the accounts.
Net Future Income Tax Assets
2002 2001
--------- ---------
Excess of tax value of capital assets
over book value $ 7,460 $ 4,105
Canadian resource pools 2,830 3,109
Excess tax value of mineral
property over book value 1,614 1,614
Operating loss carry-forwards 20,174 18,946
--------- ---------
32,078 27,774
Less: valuation allowance (23,327) (16,330)
--------- ---------
Net future income tax assets 8,751 11,444
Future income tax liability - -
Excess of book value of
capital assets over tax value (8,751) (11,444)
--------- ---------
Net future income tax $ - $ -
========= =========
At December 31, 2002 the Company had the following loss carry forwards available
for tax purposes:
AMOUNT EXPIRY
----------- ----------
Canada $ 6,401,000 2005-2009
Peru 18,330,000 2004-2005
Peru 13,236,000 Indefinite
Mexico 21,409,000 2007-2012
Bolivia 2,253,000 Indefinite
----------- ----------
Peruvian tax losses incurred after 2001 can be carried forward indefinitely and
expire four years after the first utilization of such losses.
The Company has tax loss carry-forwards in Russia and Cyprus that are unlikely
to be utilized.
16. 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"). The differences
between Canadian GAAP and accounting principles generally accepted in the United
States ("US GAAP") as they relate to these financial statements are summarized
below.
A) EXPLORATION EXPENDITURES
Under US GAAP, exploration costs are expensed until a commercial body of ore has
been established. Under Canadian GAAP, these costs may be deferred until there
is evidence of impairment. In addition to the effect on operations, reported
total assets under US GAAP would be lower by $1,993,000 at December 31, 2002 and
2001, respectively, and the reported deficit would increase by a corresponding
amount. Under US GAAP, exploration expenditures would be classified as an
operating activity rather than an investing activity within the statement of
cash flows.
2002 2001 2000
--------- -------- ---------
Consolidated Statements
of Operations
Net loss for the year under
Canadian GAAP $ (33,658) $ (8,077) $ (45,878)
Deferred exploration,
previously written-off - - 378
Deferred exploration - (24) (2,347)
--------- -------- ---------
Net loss under
US GAAP $ (33,658) $ (8,101) (47,847)
--------- -------- ---------
Basic loss per share
under US GAAP ($0.81) ($0.22) ($1.41)
--------- -------- ---------
B) STOCK BASED COMPENSATION
For US GAAP purposes the Company accounts for stock-based compensation to
employees and directors, under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), using the intrinsic value
based method whereby compensation cost is recorded for the excess, if any, of
the quoted market price over the exercise price, at the date the stock options
are granted. As at December 31, 2002, no compensation cost would have been
recorded for any period under this method.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), issued in October 1995, requires the use of the fair
value based method of accounting for stock options. Under this method,
compensation cost is measured at the grant date based on the fair value of the
options granted and is recognized over the exercise period. SFAS 123, however,
allows the Company to continue to measure the compensation cost of employees and
directors in accordance with APB 25. The Company has adopted the disclosure-only
provision of SFAS 123.
The following pro forma financial information presents the net loss for the year
and the basic loss per common share had the Company adopted SFAS 123 for all
stock options issued to employees and directors.
2002 2001 2000
--------- -------- ---------
Net loss for the year
under US GAAP $ (33,658) $ (8,101) $ (47,847)
Stock-based
compensation costs (319) (1,369) (1,605)
--------- -------- ---------
Pro forma net loss for the
year under US GAAP $ (33,977) $ (9,470) $ (49,452)
--------- -------- ---------
Pro forma basic loss
per share ($0.81) ($0.26) ($1.45)
========= ======== =========
C) COMPREHENSIVE INCOME
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. The impact of adopting SFAS 130 on the
Company's financial statements is as follows:
2002 2001 2000
--------- -------- ---------
Net loss under US GAAP $ (33,658) $ (8,101) $ (47,847)
Other comprehensive income:
Foreign exchange
adjustment (28) (38) (38)
--------- -------- ---------
Comprehensive net
loss under US GAAP $ (33,686) $ (8,139) $ (47,885)
========= ======== =========
D) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which standardizes the accounting for derivative instruments. This
standard was adopted during the year ended December 31, 1999. The Company has
assessed its business activities and has determined that application of the
requirements of SFAS 133 had no significant impact on the Company's consolidated
financial position or results of operations.
E) MARKETABLE SECURITIES
Marketable securities are carried at the lower of cost and market value under
Canadian GAAP. Under SFAS No. 115, portfolio investments classified as
available-for-sale securities are recorded at market value. The resulting gains
or losses are included in the determination of comprehensive income. This GAAP
difference has no impact on these financial statements
F) INCOME TAXES
Under Canadian GAAP, future income taxes are calculated based on enacted or
substantially 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 did not result in a difference in the financial position, results of
operations or cash flows of the Company for the years ended December 31, 2002
and 2001.
Notes to Consolidated Financial Statements, continued
G) SHARE PURCHASE WARRANTS
The Company, from time to time, issues special warrants which are normally
comprised of a common share and either a whole or portion of a share purchase
warrant. The special warrant is issued at the current market value of the common
share and the share purchase warrant is normally exercised at or higher than
market value. Under Canadian GAAP, the proceeds of the special warrant are
allocated to the common share with no value being assigned to the share purchase
warrant. Under US GAAP, the gross proceeds would be allocated between the shares
and warrants based on the relative fair value of the special warrant components
at the date the Company has a contractual liability to issue the special
warrants.
H) FINANCIAL STATEMENT PRESENTATION
For US GAAP purposes, certain items such as other income and expenses and
interest income would be excluded from the calculation of "Loss from
Operations".
I) CONTROLLED ENTITIES
The Company owns a 50 percent interest in two Argentinean corporations (Note 6).
Under US GAAP such ventures are accounted for under the equity method as it is
considered that the Company cannot exercise sufficient control to warrant
consolidation. Under Canadian GAAP, it is considered that the rights of the
minority do not impair the Company's right to control and direct the operations
and therefore the Company has consolidated, on a proportionate basis, the
results of operations and financial position. The effect of this difference
would be to reduce Investment and Other Properties and to increase Other Assets
by $2,012,000.
J) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS Nos. 141 and 142 ("SFAS 141" and "SFAS 142"),
"Business Combinations" and "Goodwill and Other Intangible Assets." SFAS 141
replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It
also provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 142, goodwill will be tested annually and whenever events
or circumstances occur indicating that goodwill might be impaired. SFAS 141 and
SFAS 142 are effective for all business combinations completed after June 30,
2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS 141 will be reclassified to goodwill. Companies are required to adopt
SFAS 142 for financial years beginning after December 15, 2001, but early
adoption is permitted. The Company is required to adopt SFAS 141 and 142 on a
prospective basis as of January 1, 2002. The Company has not recorded any
goodwill and, therefore, the application of SFAS 141 and 142 did not have a
material affect on its consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which addresses financial accounting and reporting
for obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation of
long-lived assets, except for certain obligations of leases. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded an entity capitalizes the cost by increasing the carrying
amount of the related long-lived assets. Over time the liability is accreted to
its present value each period, and the capitalized cost is amortized over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for financial statements issued for
financial years beginning after June 15, 2002 with earlier application
encouraged. The Company is currently evaluating the effects of SFAS 143;
however, it does expect that the adoption will not have a material impact on the
Company's results of operations or shareholders' equity.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 replaces SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The FASB issued SFAS 144 to establish a single accounting model, based on the
framework established in SFAS 121, as SFAS 121 did not address the accounting
for a segment of a business accounted for as a discontinued operation under APB
30, "Reporting The Results of Operations - Reporting The Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 also resolves significant implementation
issues related to SFAS 121. Companies are required to adopt SFAS 144 for fiscal
years beginning after December 15, 2001, but early adoption is permitted. The
Company has adopted SFAS 144 as of January 1, 2002. The Company has determined
that the application of SFAS 144 did not have a material affect on its
consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and the amendment to SFAS No. 4, SFAS No.
64, "Extinguishment of Debt Made to Satisfy Sinking Fund Requirements". Through
this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and
SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. Generally, SFAS No. 145 is effective for transactions occurring
after May 15, 2002. The application of SFAS No. 145 did not have a material
effect on the Company's results of operations or its financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal of Activities". SFAS No. 146 requires that the liability
for a cost associated with an exit or disposal activity be recognized at its
fair value when the liability is incurred. Under previous guidance, a liability
for certain exit costs was recognized at the date that management committed to
an exit plan, which was generally before the actual liability had been occurred.
As SFAS No. 146 is effective only for exit or disposal activities initiated
after December 31, 2002, the Company does not expect the adoption of this
statement to have a material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation" Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also amends the disclosure provisions of that statement. The
disclosure provisions of this statement are effective for financial statements
issued for fiscal periods beginning after December 15, 2002. The Company does
not currently have plans to change to the fair value method of accounting for
its stock-based compensation.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantee, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The Company does not expect that the
adoption will have a material impact on the Company's results of operations or
financial position.
17. SUBSEQUENT EVENTS
A) On January 22, 2003, the Company sold 3,600 tonnes of zinc at an average
price of $829 per tonne. These sales were designated as a hedge and represent
sales of 300 tonnes per month for each of the months of March 2003 through and
including February 2004. The difference between the average monthly London zinc
cash settlement price and the forward sales price will be credited or charged to
revenue during the March 2003 through February 2004 period.
B) Issued 30,000 common shares for proceeds of $97,250 pursuant to the exercise
of employee stock options.
C) The Company sold forward 1,750 tonnes of copper at $1,751 per tonne and
designated the sale as a hedge of a portion of the Company's copper production
for the period March 2003 through December 2003. On February 7, 2003, the
Company closed out the copper forward sales and realized incremental revenue of
$98,000. This revenue will be recognized evenly over the March through December
2003 period.
D) On February 20, 2003, the Company acquired a 100 percent 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 (a "Pan American share"),
representing 0.3846 of a share of the Company for each share of Corner Bay and
3,818,329 warrants (the "Pan American warrant") to purchase common shares of the
Company, representing 0.1923 of a warrant for each share of Corner Bay. The
common shares issued were valued at $54,203,000, which was derived from an issue
price of Cdn$11.30 translated at $0.6595 for each U.S. dollar, less a deemed 5%
issue expense of $2,707,000. The share purchase warrants were assigned a value
of $8,889,000, which was derived from a warrant valued at $2.328 per warrant.
The warrants were valued using an option pricing model assuming a weighted
average volatility of the Company's share price of 35 percent and a weighted
average annual risk free rate of 4.16 percent.
The value of the common shares issued by the Company was estimated based on the
average closing price of the Company's common shares for the period before and
after the date that the terms of the transaction was agreed and announced.
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 553,846 stock options to purchase Pan
American shares. These options replace 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 options granted have a weighted
average exercise price of Cdn$8.46 and a weighted average remaining life of 26
months.
The purchase method of accounting will be applied to account for this
acquisition, which results in the allocation of the consideration paid to the
fair value of the assets acquired and the liabilities assumed, as follows:
AS AT
DECEMBER 31
2002
------------
Fair value of net assets acquired
Current assets $ 3,168
Mineral properties 81,455
Other assets 19
------------
84,642
Less:
Current liabilities (859)
Provision for future income tax liability (19,035)
------------
$ 64,748
============
Consideration paid:
Issue of 7,636,659 common shares $ 54,203
Issue of 3,818,329 share
purchase warrants 8,889
Issue of 553,846 replacement stock options 1,136
------------
64,228
Add: Estimated costs of acquisition 520
------------
$ 64,748
============
The purchase consideration of $64,748,000 for 100 percent of Corner Bay exceeds
the carrying value of the net assets acquired by $54,385,000, which has been
applied to increase the carrying value of mineral properties. The resulting
estimated future income tax liability of $19,035,000 has also been applied to
increase the carrying value of mineral properties. The most recent financial
statements available for Corner Bay are as at December 31, 2002. Consequently
this purchase price allocation is provisional and may be changed.
DOCUMENT NO. 3
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION
Pan American Silver Corp. together with its subsidiaries ("Pan American" or the
"Company") is a silver mining company that operates three mines - the Huaron
mine in central Peru, the Quiruvilca mine in northern Peru and the La Colorada
mine in central Mexico. The Company also mines and sells silver-bearing ore from
surface stockpiles in central Peru. An unrelated Bolivian mining company
operates the Company's San Vicente mine, in Bolivia. Pan American receives a
royalty based on minerals extracted at San Vicente. The Company holds a carried
20 per cent interest in a Russian company that owns the Dukat silver project, a
50 percent interest in the Manantial Espejo exploration project in Argentina and
various interests in inactive silver investment properties in the Americas.
This discussion and analysis focuses on significant factors that affected the
Company's performance and such factors that may affect its future performance.
It should be read in conjunction with the rest of this Annual Report and
especially in conjunction with the audited consolidated financial statements
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. Pan
American's significant accounting policies are set out in Note 2 of the audited
consolidated financial statements included in pages 44 and 45 of this Annual
Report. Differences between Canadian and United States generally accepted
accounting principles ("US GAAP") that would affect the Company's reported
financial results under US GAAP are set out in Note 16 on pages 53 to 55 of this
Annual Report.
RISKS, UNCERTAINTIES AND CAUTION REGARDING FORWARD-LOOKING STATEMENTS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS DISCUSSION AND ANALYSIS, 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 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
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 OR OTHER APPROVALS, POLITICAL
UNREST OR INSTABILITY IN COUNTRIES WHERE PAN AMERICAN IS ACTIVE, LABOUR
RELATIONS AND OTHER RISK FACTORS LISTED FROM TIME-TO-TIME IN THE COMPANY'S
ANNUAL INFORMATION FORM OR FORM 40-F.
2002 SIGNIFICANT EVENTS AND TRANSACTIONS
CORNER BAY SILVER INC. ACQUISITION
In September 2002, the Company's shareholders and shareholders of Corner Bay
Silver Inc. ("Corner Bay") approved a plan of arrangement whereby Pan American
would acquire 100 percent of Corner Bay. The acquisition was completed on
February 20, 2003. Corner Bay is a silver exploration company with one
significant mineral property (the Alamo Dorado property) and working capital
amounting to $2.3 million at December 31, 2002.
The Alamo Dorado property is located in the State of Sonora, Mexico. It consists
of two concessions covering an area of 5,369 hectares (13,266 acres) that, under
Mexican law, are renewable for a fifty-year term. In 2001, AMEC E&C Services,
Inc., an independent engineering consulting firm was contracted by Corner Bay to
prepare a feasibility study on the Alamo Dorado property. Corner Bay and the
Company believe that the feasibility study confirmed that the Alamo Dorado
property could support project financing and result in an acceptable rate of
return.
Pan American paid 7,636,659 common shares of the Company, 3,818,329 warrants
(the "Pan American warrants") to purchase common shares of the Company and
granted 553,846 options (the "Options") to purchase common shares of the Company
in order to acquire 100 percent of Corner Bay. The common shares of the Company
were valued at $54.2 million, the Pan American warrants were valued at $8.9
million and the options granted had a value of $1.1 million resulting in a
purchase price of $64.2 million. One Pan American warrant allows the holder to
purchase one share of the Company for Cdn $12 per share (approximately $7.80 per
share) for a five-year period ending February 20, 2008. The Options granted have
a weighted average remaining life of 26 months and have a weighted average
exercise price of Cdn $8.46 per share (approximately $5.50 per share).
LA COLORADA EXPANSION
On June 14, 2002, the Company's wholly-owned subsidiary Plata Panamericana S.A.
de C.V. ("Plata") entered into a $10 million loan agreement to partially fund an
expansion of Plata's La Colorada mine in Mexico. The total cost of the expansion
was estimated to be $20 million of which $10 million is to be provided by the
loan and $10 million from the Company's treasury.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
The expanded La Colorada mine is expected to produce about 2.3 million ounces of
silver in 2003 increasing, in subsequent years, to nearly 4 million ounces per
year.
Equal $1 million semi-annual repayments of the loan commence on November 15,
2004, with the last scheduled repayment to be made on May 15, 2009. Interest on
the loan will be payable at the rate of six-month LIBOR plus 3.5 percent per
annum until financial completion and six-month LIBOR plus 3.25 percent
subsequent to financial completion. The Company has guaranteed Plata's
performance under the loan agreement until financial completion is achieved,
which is expected to occur before the first scheduled loan repayment. Pan
American's interest in and virtually all of the assets of Plata are pledged as
security for the loan. After financial completion the Company's ownership
interest in Plata is released from the pledge.
In order to avoid hedging a significant portion of La Colorada's future silver
production as a condition for obtaining the loan, Plata agreed to provide to the
lender a portion of future increases in the price of silver. This portion is
calculated as 20 percent of the positive difference between the average price
per ounce of silver for a year less $4.75 multiplied by the number of ounces
produced by La Colorada in the corresponding year all multiplied by the fraction
obtained by dividing the greater of the amount of the loan outstanding at the
end of a year or the regularly scheduled amount of the loan outstanding divided
by $10 million. In effect, this allows Plata to obtain 80 percent of the benefit
when average silver prices exceed $4.75 per ounce. This benefit to Plata
increases proportionately as the loan is repaid.
SILVER-BEARING STOCKPILES
In November 2002 the Company entered into two agreements to acquire certain
silver-bearing stockpiles located in central Peru from Volcan Minera S.A. de
C.V. ("Volcan"). Under the terms of one agreement the Company paid $4.8 million
consisting of 636,942 common shares of the Company, marketable securities valued
at $500,000 and cash of $317,000 for the right to mine and sell up to 600,000
tonnes of direct smelter ore. Once the Company has received proceeds from the
sale of this ore equal to $4.5 million, associated operating costs, deemed
interest on the acquisition cost and deemed taxes arising from the sale of this
ore, the Company will grant Volcan a one-third share in any future net cash flow
from the sale of such ore. Under the terms of the second agreement, the Company
has the option to acquire a 60 percent interest in certain other silver-bearing
mineral stockpiles by spending $2 million over a three-year period on testing
the feasibility of profitably treating and selling this material. In the
subsequent one-year period the Company has the further option of increasing its
ownership in these mineralized stockpiles to 100 percent by paying $3 million to
Volcan and granting Volcan a 7 percent royalty over commercial production from
the stockpiles.
QUIRUVILCA MINE WRITE DOWN
In the third quarter of 2002, the Company determined that due to the mine's
recent past performance and its likely future performance in depressed markets
for its principal products, the carrying value of the property, plant and
equipment of the Quiruvilca mine was impaired. As a result the carrying value of
such assets was written down by $15.1 million. During the fourth quarter of 2002
certain planned mine development activities and equipment purchases amounting to
$0.3 million were made at the Quiruvilca mine. These expenditures were expensed.
Also in the fourth quarter the $1.8 million carrying value of Quiruvilca's spare
parts and supplies inventory was written off, which increased the write down to
$17.2 million. In addition, Management prepared an estimate of the expected
future reclamation costs to be incurred at the Quiruvilca mine and in the fourth
quarter charged operations with a $10 million provision for future reclamation
resulting in a total charge to operations of $27.2 million.
MANANTIAL ESPEJO
In March 2002 Pan American acquired a 50 percent interest in the Manantial
Espejo property. The purchase price consisted of $0.7 million in cash, 231,511
common shares of the Company and a $0.1 million cash payment to eliminate a 1.2
percent net smelter return royalty over the property. In November Pan American
exchanged certain mineral concessions at its Quiruvilca mine for a 3 percent net
smelter return royalty over the Manantial Espejo property and subsequently sold
one-half of this royalty to the owner of the other 50 percent interest of
Manantial Espejo realizing a gain on sale of $0.3 million.
During the year Pan American expended $0.5 million, representing the Company's
50 percent share, on exploration at this project. Results of this exploration
were encouraging and plans call for Pan American's share of the spending to be
about $0.7 million at the project in 2003 on underground development and
exploration.
COST PER OUNCE OF SILVER CALCULATIONS
Elsewhere in this Annual Report, Pan American reports two performance measures -
total cash cost per ounce and total production cost per ounce of silver
recovered. These measures are widely reported in the mining industry as
benchmarks for performance measurement. There is a general understanding within
the industry of how these measures are calculated; however, there are no legal
or regulatory definitions for them. For purposes of clarification, the following
sets out how the Company calculates its cost per ounce performance measures.
For total cash cost per ounce recovered -
Costs included in the numerator are the sum of:
o Costs to explore for, develop access to and mine ore,
o Costs to transport, crush and process ore to concentrate,
o Costs to support production activities, such as engineering, geology,
health and safety, environmental and maintenance,
o Costs to truck, store, weigh, assay and ship metals to the buyer,
o Costs of administration, insurance and sales activities,
o All other cash expenses and production related taxes or royalties,
o Smelter treatment charges and price participation payments,
o The value of metals lost in the smelting process, and
o Any recurring incidental expenses or income.
By-product credits netted against costs include:
o The sales value of zinc, lead, copper and gold by-products.
Total production cost per ounce of silver recovered includes all of the items in
the total cash cost per ounce recovered and the following:
o All other taxes
o Depreciation and amortization
o Reclamation
Ounces included in the denominator are ounces of silver recovered.
The resulting quotients are the Total Cash Cost per Ounce and the Total
Production Cost per Ounce of Silver Recovered. Excluded from these performance
measure calculations are unusual, non-recurring items such as the gain
recognized on the sale of land in 2001 or the Quiruvilca property write down in
2002.
METAL PRICES
Pan American derives its revenue from the sale of silver, zinc, lead, copper and
gold. Metal prices during 2002 were extremely low. Factors contributing to the
low metal prices during 2002 include the general economic slowdown in the OECD
countries, geo-political uncertainty, the strong U.S. dollar and a lack of
investor interest in base and precious metals investments. The Company
anticipates that economic growth will resume during 2003 and that metal prices
will improve.
The following table sets out the average London cash settlement prices for the
metals and the periods indicated as well as the Company's forecast prices for
2003.
METAL 2003 EST. 2002 2001 2000
----- --------- ----- ----- -----
Silver - Oz $4.60 $4.60 $4.40 $4.94
Zinc - lb $0.37 $0.35 $0.40 $0.51
Lead - lb $0.20 $0.21 $0.22 $0.21
Copper - lb $0.72 $0.71 $0.72 $0.82
Metals prices for 2002 and 2001 were volatile. The following table sets out the
daily high, low and average London Metal Exchange cash settlement prices for
base metals and the London Bullion Dealers' price for silver and the annualized
historic volatility of those metal prices.
SILVER ZINC LEAD COPPER
OZ LB LB LB
------ ----- ----- ------
2002 - High $5.10 $0.38 $0.24 $0.77
2002 - Avg $4.60 $0.35 $0.21 $0.71
2002 - Low $4.24 $0.33 $0.18 $0.64
2002 - Range $0.86 $0.05 $0.06 $0.13
Volatility 19.5% 17.3% 20.6% 17.2%
------ ----- ----- ------
2001 - High $4.80 $0.48 $0.22 $0.83
2001 - Avg $4.40 $0.40 $0.22 $0.72
2001 - Low $4.10 $0.33 $0.20 $0.60
2001 - Range $0.70 $0.15 $0.02 $0.23
Volatility 14.3% 15.3% 23.7% 18.3%
------ ----- ----- ------
METAL PRICE HEDGING AND TRADING
Pan American's policy is to not hedge the price of silver. The Company has no
hedge position in silver.
Occasionally Pan American sells base metals forward. At December 31, 2002, the
Company had sold forward 10,150 tonnes of zinc at a weighted average price of
$830 per tonne ($0.38 per pound). These sales are a hedge of a portion of the
Company's 2003 production and a portion of the production for January and
February 2004. In February 2003, the Company sold 1,750 tonnes of copper at
$1,751 per tonne ($0.79 per pound) and re-purchased the same tonnage at $1,695
per tonne ($0.77 per pound) for a gain of $98,000. This gain will be recognized
evenly over the March through December 2003 period.
METALS MARKETING
The Company has contracts to sell the zinc, lead and associated silver produced
by the Quiruvilca and Huaron mines through to the end of 2006 with an option to
extend through 2007. Except for treatment charges, the terms of the contracts
are fixed. Treatment charges are adjusted during the contract life to within
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
a $5 band of prevailing worldwide treatment charges. Copper and associated
silver from Huaron and Quiruvilca are sold under frame contracts extending
through 2004 for Quiruvilca and 2005 for Huaron. Under these contracts a portion
of each year's and each succeeding years' treatment charges are re-negotiated.
La Colorada's lead and zinc concentrates are sold under annual contracts. The
Company has never had any delivery or payment disputes with its sales
counter-parties and management believes that there are no appreciable delivery
or credit risks resulting from its sales contracts.
MINING OPERATIONS
HUARON MINE
Huaron is an underground mine with wide veins and lends itself to mechanized
mining methods. Contract miners receive a fee for tonnes mined and for the
amount of development work completed under Pan American's supervision. Company
employees are responsible for processing, engineering, geology, health and
safety, environmental and administrative functions. At December 31, 2002, the
Huaron mine employed 119 people and contract workers amounted to 853 people.
Third party services (principally mining, equipment maintenance, transportation
and power) represent 79 per cent of Huaron's costs. Materials represent 12 per
cent and labour accounts for about 9 per cent of costs.
Following is a table showing Huaron's 2001's production from May, the 2002
production and the expected 2003 production.
2003 EST. 2002 2001
--------- --------- ---------
Tonnes milled 637,932 606,300 367,274
Cost per tonne $37.96 $38.71 $39.73
Silver ounces 4,877,947 4,527,971 2,897,946
Zinc tonnes 20,195 20,896 9,574
Lead tonnes 12,040 14,006 8,445
Copper tonnes 2,701 1,740 959
Tonnes Shipped
Zinc concentrate 39,990 43,988 14,237
Lead concentrate 24,252 26,219 14,723
Copper concentrate 10,220 6,249 3,915
The table below sets out how Huaron's net smelter return ("NSR") per tonne of
ore varies as ore grades or metal prices change.
MINUS 10% 2003 PLAN PLUS 10%
--------- --------- --------
Silver value/tonne $ 28.92 $ 32.13 $ 35.34
Zinc $ 6.25 $ 8.44 $ 10.63
Lead $ 2.31 $ 3.11 $ 3.92
Copper $ 1.63 $ 2.23 $ 2.84
------- ------- -------
NSR per Tonne $ 39.10 $ 45.91 $ 52.73
Pan American forecasts Huaron's 2003 average NSR per tonne at approximately
$45.91 and its budgeted average cost per tonne is $37.96, which should generate
approximately $5.1 million in operating cash flow. Sustaining capital will be
about $1.0 million resulting in a net cash inflow of $4.1 million for the year.
In 2002, Management had projected that Huaron's NSR per tonne would be about
$43.09 and its cost per tonne milled would be about $38.50 per tonne. For 2002,
the mine's NSR per tonne was better than expected at $44.61 while its cost per
tonne was slightly higher than expected at $38.71. More underground development
work than planned for was carried out in 2002. This additional development work
accounted for the marginally higher than planned cost per tonne. The higher than
expected NSR is attributable to greater than expected metals production more
than offsetting the negative effect of generally lower than anticipated metal
prices.
DIRECT SMELTING ORE SALES
In November 2002 Pan American acquired the right from a Peruvian mining company
to mine and sell ore from certain stockpiles. During November and December 2002,
the Company sold 9,018 tonnes containing 101,459 ounces of silver that generated
nearly $0.2 million in cash. For 2003, the Company expects to sell 45,000 tonnes
of this ore containing 535,000 ounces of silver to generate a net cash flow of
about $1.4 million.
QUIRUVILCA MINE
The Quiruvilca mine is an underground narrow vein mine that does not lend itself
to modern mechanized mining. Consequently, it is very labour intensive and, at
December 31, 2002, employed 495 people and 763 people as contract workers. Third
party services (principally transportation, power and contract miners) account
for about 52 per cent of Quiruvilca's costs. Labour accounts for 28 per cent and
materials (explosives, drill bits and steel, grinding media and reagents)
represent about 20 per cent of costs.
Following is a table showing Quiruvilca's historic and expected 2003 production.
2003 EST. 2002 2001 2000 1999
----------- ---------- ----------- ---------- ----------
Tonnes milled 523,374 508,352 568,451 615,382 562,584
Cost per tonne $40.66 $40.01 $43.23 $44.14 $45.34
Silver ounces 2,650,076 2,509,689 3,259,372 3,611,589 3,236,774
Zinc tonnes 18,969 17,852 21,009 24,462 23,340
Lead tonnes 8,251 6,468 8,358 8,740 7,319
Copper tonnes 715 1,107 1,204 1,215 1,098
Tonnes Shipped
Zinc concentrate 32,655 27,511 39,475 42,039 41,224
Lead concentrate 14,397 9,901 12,975 14,899 11,265
Copper concentrate 3,361 4,706 5,602 5,970 5,372
Quiruvilca's revenue depends on ore grade, recovery rates and metal prices.
Recovery rates are reasonably consistent from year-to-year; however, variations
in ore grades and metals prices occur. The table below sets out how Quiruvilca's
NSR per tonne of ore milled changes as ore grades or metal prices change.
MINUS 10% 2003 PLAN PLUS 10%
--------- --------- --------
Silver value/tonne $ 18.28 $ 20.49 $ 22.70
Zinc $ 8.96 $ 11.46 $ 13.97
Lead $ 2.42 $ 3.09 $ 3.77
Copper $ 0.65 $ 0.84 $ 1.04
-------- --------- --------
NSR per Tonne $ 30.30 $ 35.88 $ 41.47
For 2003, Management expects Quiruvilca's average NSR per tonne to be $35.88 and
its expected average cost per tonne to be $40.66, which would result in an
operating loss of approximately $2.5 million. Sustaining capital will be about
$0.4 million resulting in a net cash outflow of about $2.9 million for 2003.
In 2002, Management expected that Quiruvilca would realize an average NSR per
tonne of $40.27 and that its operating costs would be about $41.67 per tonne
milled. The average NSR per tonne realized for the year was $34.39 or nearly
$6.00 per tonne less than anticipated. The principal reason for this difference
was that metal prices, with the exception of silver, were lower than planned for
- zinc was $0.05 per pound lower, copper was $0.04 per pound lower and lead was
$0.02 per pound lower. Also contributing to the lower NSR per tonne was the
amount of metal produced. The 2002 Quiruvilca mine plan called for an average
silver grade of 200 grams per tonne, 4.10% zinc per tonne and 1.65% lead per
tonne. The actual tonnes mined averaged 176 grams of silver, 3.95% zinc and
1.44% lead. These differences were primarily responsible for lower than planned
silver production of about 645,000 ounces, lower zinc production of
approximately 2,700 tonnes and lower lead production of nearly 1,700 tonnes.
Quiruvilca's operating cost per tonne was slightly better than planned for, but
this better than expected performance was overwhelmed by the lower than expected
value of metals produced.
LA COLORADA MINE
Following is a summary of La Colorada's historic production and its expected
2003 production.
2003 EST 2002 2001
--------- ------- -------
Tonnes milled 163,155 50,662 47,317
Silver ounces 2,267,348 626,035 782,853
Zinc tonnes 518 333 311
Lead tonnes 595 316 384
During 2002 the Company started a $20 million expansion of the La Colorada mine.
The expansion is scheduled to be complete early in the third quarter of 2003.
Commencing in the third quarter the daily production rate of the mine will be
incrementally increased from 200 tonnes per day to 800 tonnes per day. At full
production, 600 tonnes of mill throughput will consist of oxide ore that will
produce silver dore and 200 tonnes will be sulphide material that will produce
lead-silver and zinc concentrates. Management expects that for 2003 La Colorada
will generate a NSR per tonne of about $60.52 and have an operating cost per
tonne milled of $43.16 resulting in operating cash flow of about $2.8 million.
Sustaining capital will be about $0.9 million resulting in net cash flow of $1.9
million.
The expansion program is being financed by $10 million from the Company's
treasury and from a $10 million project loan entered into by the Company's
wholly-owned Mexican subsidiary Plata Panamericana S.A. de C.V. ("Plata"). At
this time the expansion program is both on schedule and budget. At December 31,
2002, the Company had expended $8.3 million and had made commitments to spend
$1.7 million on the expansion. On March 7, the Company drew down $4 million of
the project loan facility.
Once the expansion program started and until it is complete the net costs or
revenues at La Colorada are being capitalized as part of the cost of the mine
expansion. For 2002, $1.2 million in net costs were capitalized as part of the
mine expansion and $0.6 million of net costs incurred prior to the expansion
start up were charged to operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, cash and cash equivalents were $10.2 million - a $6.9
million increase from December 31, 2001. This increase was due to cash generated
from financing activities of $18.5 million and partially consumed by investing
activities of $10.9 million and operating activities of $0.7 million. Financing
activities included the issuance of shares for net cash receipts of $21.9
million and debt repayments of $3.3 million. Investing
Management's Discussion and Analysis of Financial Condition and Results of
Operations, continued
activities consisted of expenditures on property, plant and equipment of $9.8
million including $8.3 million at La Colorada, $0.7 million at Huaron and $0.6
million at Quiruvilca and $1.2 million on mineral properties including $0.8
million on Manantial Espejo, in Argentina and $0.4 million on the Corner Bay
acquisition.
Working capital at December 31, 2002 amounted to $2.4 million an improvement of
$2.5 million from the prior year end. The improvement is due to the $6.9 million
increase in cash partially offset by the reclassification of $3.0 million of
prepaid taxes to long-term assets, the $1.8 million write down of Quiruvilca's
spare parts and supplies inventory and net changes in other non-cash working
capital accounts.
During 2003, Pan American expects that Quiruvilca will consume cash or working
capital of about $2.9 million, Huaron will generate about $4.1 million, ore
stockpile sales will generate $1.4 million and La Colorada will generate about
$1.9 million. Exploration, general and administration expenses will require
approximately $3.3 million and debt repayments will use $1.7 million resulting
in a net decrease in cash or working capital of $0.5 million.
Capital resources at December 31, 2002 amounted to shareholders' equity of $55.5
million, long-term bank loans and capital leases of $3.9 million and deferred
revenue of $0.9 million. The Plata project loan of $10 million is available to
complete the expenditures required for La Colorada mine expansion.
Management believes that the Company's liquid assets and access to the La
Colorada loan is more than sufficient to fund planned operating and capital
expenditures and discharge liabilities as they come due.
Cash at December 31, 2001 amounted to $3.3 million, which was a decrease of $4.2
million from December 31, 2000. During 2001, operating activities consumed $2.1
million, investing activities used $6.5 million and net loan repayments required
$5.0 million. Cash was generated by the issue of common shares for net proceeds
of $9.4 million. Low metals prices caused operations to use cash. Huaron
construction activities required expenditures of $5.4 million, $0.6 million was
spent at Quiruvilca and $0.7 million at La Colorada.
The working capital deficiency at December 31, 2001 was $0.1 million. Working
capital was $1.8 million at December 31, 2000. The $1.9 million decrease was due
to a loss from operations of $6.6 million, net of depreciation and amortization
and reclamation provisions. This loss was funded by a $1.4 million operating
line of credit, increases in accounts payable and accrued liabilities of $3.3
million and concentrate advances of $4.1 million, offset by $2.2 million used by
other non-cash working capital items.
RESULTS OF OPERATIONS
The net loss for 2002 was $33.7 million including the write down and increased
future reclamation provision at Quiruvilca of $27.2 million. Excluding the
unusual Quiruvilca write down and the unusual gain on the sale of land recorded
in 2001, the 2002 loss of $6.4 million represents a $5.1 million improvement
from 2001. This improvement is due to better results from the Huaron mine and
the capitalization of $1.2 million in net costs at La Colorada.
In 2002, revenue was $7.8 million greater than in 2001. This increase was due to
higher production and sales of metals. Increased production was due to a full
year's operation of the Huaron mine, which more than offset lower production
from the Quiruvilca mine. Operating costs were $2.6 million more in 2002 than
last year. Cost increases of $8.6 million occurred at Huaron because it operated
for the full year compared to a partial year in 2001. Cost reduction efforts at
Quiruvilca and a lower production level in 2002 resulted in a $4.3 million
reduction in costs relative to 2001. At La Colorada, pre-operating costs of $1.2
million associated with the capital expansion project were deferred, which had
the effect of lowering this mine's costs, relative to the prior year by $0.7
million and a build up in metals inventory reduced operating costs by $1.0
million.
Other costs were as expected. General and administrative costs were $0.5 million
lower than last year due to the effect of staff reductions and ongoing cost
saving efforts. Depreciation and amortization expense was $0.6 million more due
to a full year's amortization at Huaron. Similarly, the reclamation provision,
excluding the unusual $10 million provision at Quiruvilca, was $0.2 million more
in 2002 than in 2001. Exploration expense increased because of activities at the
Manantial Espejo project. Other income, in 2002, was $0.8 million more than in
the prior year principally because of a $0.3 million gain on the exchange of
land for a royalty interest over Manantial Espejo and the eventual sale of a
one-half interest in this royalty and revenue of $0.2 million from the company
operating Pan American's San Vicente mine in Peru.
For 2003, general and administration costs are likely to increase slightly
because of expected increases in staff and insurance premiums. These increases
will be partially offset by a reduction in the corporate office rent due to the
downsizing of office space. Depreciation and amortization and reclamation
expenses will increase once the La Colorada expansion is complete. Interest
expense will increase due to the La Colorada loan.
In 2001 the net loss improved relative to 2000 by $37.8 million. A $3.5 million
gain on the sale of land occurred in 2001 and in 2000 the carrying value of
various mineral properties, most notably the Dukat project in Russia, was
written down by $42.7 million. After excluding unusual items the loss in 2001 of
$11.6 million compared to a loss of $3.1 million in 2000. The operating results
for 2001 relative to 2000 were adversely affected by the impact of lower metal
prices and operating cost increases that exceeded the benefits resulting from
increased metal production. Revenue in 2001 was $7.4 million more than in 2000,
principally because of the start up of the Huaron mine. Relative to 2000, lower
metal prices had a negative impact on revenue of about $13.8 million and
increased production had a positive impact of $21.8 million. Operating costs in
2001 were $13.0 million higher when compared to 2000. The increase was caused by
the start up of the Huaron mine.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed by the Registrant in reports filed or
submitted by it under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Registrant's Chief
Executive Officer and Chief Financial Officer have evaluated the Registrant's
disclosure controls and procedures within 90 days prior to filing of this Annual
Report on Form 40-F and have determined that such disclosure controls and
procedures are effective.
INTERNAL CONTROLS
Since the most recent evaluation of the Registrant's internal controls, there
have not been any significant changes in the Registrant's internal controls or
in other factors that could significantly affect internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
The design of the Registrant's system of controls and procedures is based, in
part, upon assumptions about the likelihood of future events. There can be no
assurance that the design of such system of controls and procedures will succeed
in achieving its goals under all potential future conditions, regardless of how
remote.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by the Registrant's principal accountant for the
fiscal year 2002 for professional services rendered by the principal accountant
for the audit of the Registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for such year was $107,730.
Audit-Related Fees
No fees were billed by the Registrant's principal accountant for the fiscal year
2002 for assurance and related services by the principal accountant that are
reasonably related to the performance of the audit or review of the Registrant's
financial statements and are not reported above as audit fees.
Tax Fees
The aggregate fees billed by the Registrant's principal accountant for the
fiscal year 2002 for professional services rendered by the principal accountant
for tax compliance, tax advice and tax planning were $7,360.
All Other Fees
The aggregate fees billed by the Registrant's principal accountant for the
fiscal year 2002 for all other products and services provided by the principal
accountant not described above were $77,810. Professional services provided
included: quarterly reviews of consolidated financial statements; the review and
preparation of documents and financial statements in connection with the public
offering of common shares by the Registrant; the review and preparation of
documents and financial statements in connection with the Registrant's
acquisition of Corner Bay Silver Inc.; certifications required by lenders in
connection with the Registrant's expansion of the La Colorada mine; and a
payroll audit.
Since the enactment of the Sarbanes-Oxley Act of 2002 on July 30, 2002, all
audit and non-audit services performed by the Registrant's auditor for the
fiscal year ended December 31, 2002 were pre-approved by the audit committee of
the Registrant.
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 this
Annual Report on Form 40-F arises, or transactions in such securities.
B. CONSENT TO SERVICE OF PROCESS
The Registrant filed with the Commission a Form F-X on June 11, 1996,
which Form F-X remains current.
EXHIBIT INDEX
PAGE
NUMBER DOCUMENT NUMBER
------ -------- ------
1. Pan American Silver Corp. Notice of Meeting and Information Circular
(the "Circular") for the 2003 Annual Meeting of Members, dated April 9, 2003
2. Consent of Deloitte & Touche LLP.............................................
3. Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002..................................................................
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 annual report to be signed on its behalf by the undersigned,
thereto duly authorized.
PAN AMERICAN SILVER CORP.
Dated: May 20, 2003 By: /s/ Robert Pirooz
--------------------------------
Robert Pirooz
Vice President, Legal Affairs
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ross J. Beaty, certify that:
1. I have reviewed this annual report on Form 40-F of Pan American Silver
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Ross J. Beaty
------------------------------
By: Ross J. Beaty
Title: Chief Executive Officer
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony Hawkshaw, certify that:
1. I have reviewed this annual report on Form 40-F of Pan American Silver
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Anthony Hawkshaw
------------------------------
By: Anthony Hawkshaw
Title: Chief Financial Officer
EXHIBIT INDEX
PAGE
NUMBER DOCUMENT NUMBER
------ -------- ------
1. Pan American Silver Corp. Notice of Meeting and Information Circular
(the "Circular") for the 2003 Annual Meeting of Members, dated April 9, 2003.
2. Consent of Deloitte & Touche LLP.............................................
3. Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002..................................................................