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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A - 16 OR 15D - 16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For July 3, 2003
PAN AMERICAN SILVER CORP.
1500 - 625 HOWE STREET
VANCOUVER, B.C.
V6C 2T6
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F Form 40-F X
----- -------
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ___
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):___
Indicate by check mark whether the registrant by furnishing 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.
Yes No X
----- ------
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___
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Audited Consolidated Financial Statements of
PAN AMERICAN SILVER CORP.
Including a reconciliation to United States
generally accepted accounting principles
in accordance with Item 18 of Form 20-F.
Deloitte & Touche LLP
P.O. Box 49279
Four Bentall Centre
2800 - 1055 Dunsmuir Street
Vancouver, British Columbia
V7X 1P4
Tel: (604) 669 4466
Fax: (604) 685 0395
www.deloitte.ca [Deloitte & Touch Logo]
AUDITORS' REPORT
To the Directors 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 on 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
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinions.
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.
On February 20, 2003, except for Note 9, which is at March 7, 2003, we reported
to the shareholders of Pan American Silver Corp. on financial statements for the
same period prepared in accordance with accounting principles generally accepted
in Canada. This report is rendered in accordance with Canadian and United States
generally accepted auditing standards.
(SIGNED) DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, British Columbia
February 20, 2003, except for Note 9, which is as at March 7, 2003
-2-
PAN AMERICAN SILVER CORP.
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
(signed) Ross J. Beaty, Director
(signed) Paul B. Sweeney, Director
See accompanying notes to consolidated financial statements
-3-
PAN AMERICAN SILVER CORP.
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
-4-
PAN AMERICAN SILVER CORP.
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 on compensation shares (Note 10b (v)) 69,000 253 - - 253
Issued on purchase of 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
-5-
PAN AMERICAN SILVER CORP.
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
-6-
PAN AMERICAN SILVER CORP.
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. The Company operates in one industry, with three reporting
segments, mining and development, exploration, and corporate.
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 other income or
expenses. 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.
-7-
PAN AMERICAN SILVER CORP.
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) Page 2
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 agreements 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.
-8-
PAN AMERICAN SILVER CORP.
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) Page 3
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 stock 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 stock 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
============
-9-
PAN AMERICAN SILVER CORP.
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) Page 4
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 $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 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.
-10-
PAN AMERICAN SILVER CORP.
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) Page 5
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 writedowns (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 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,
$1,261,000 in capitalized pre-operating costs and incurred $1,680,000
in additional commitments. Mine development costs will be transferred
to plant and equipment once commercial production begins.
-11-
PAN AMERICAN SILVER CORP.
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) Page 6
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. The carrying value is net of an
impairment provision made in the year ended December 31, 2000.
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 cash of $662,433, 231,511 in 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 while 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.
-12-
PAN AMERICAN SILVER CORP.
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) Page 7
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% - 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. (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 IGV taxes of which $3,000,000 is
non-current and 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
these long-term receivables of $580,000 (2001 - $643,000) is reflected
in current assets as at December 31, 2002.
-13-
PAN AMERICAN SILVER CORP.
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) Page 8
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 pre-production loan facility $ 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 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
-14-
PAN AMERICAN SILVER CORP.
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) Page 9
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.
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 drawdown 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
-15-
PAN AMERICAN SILVER CORP.
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) Page 10
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
Year as at Contractual Average as at Average
Range of 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 5.98
$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.
-16-
PAN AMERICAN SILVER CORP.
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) Page 11
2002 2001 2000
------------ ------------ ------------
Net loss for the year under Canadian GAAP $ (33,658) $ (8,101) $ (47,847)
Stock-based compensation costs (319) (1,369) (1,605)
------------ ------------ ------------
Pro forma net loss under Canadian GAAP $ (33,977) $ (9,470) $ (49,452)
============ ============ ============
Pro forma basic loss per share ($0.81) ($0.26) ($1.45)
============ ============ ============
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 on 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 on 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 Compania Minera.
v) Issued 69,000 common shares at a value of $253,000
for compensation expense.
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 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.
-17-
PAN AMERICAN SILVER CORP.
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) Page 12
Concentration of Credit Risk
In 2002, the Company's five customers (2001 - five customers and 2000 -
two customers) accounted for 100 percent of concentrate sales revenue.
The loss of any of these customers or curtailment of purchases by such
customers could have a material adverse affect on the Company's results
of operations and financial condition.
Derivatives
The Company sells metal under long-term contracts. Generally, the price
received for such sales is the average metal price for a month that is
one month before shipment or two months after the month in which the
metal arrives at its destination. In order to establish the price
received for portions of its production, the Company occasionally sells
metal forward at a fixed price.
During 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 (1,592) (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
============ ============ ==========
-18-
PAN AMERICAN SILVER CORP.
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) Page 13
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 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
-19-
PAN AMERICAN SILVER CORP.
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) Page 14
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 17,879 18,948
Segment assets $ 33,299 $ 690 $ 49,098 $ 83,087
----------- ---------- ----------- ----------
-20-
PAN AMERICAN SILVER CORP.
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) Page 15
Revenue Net Capital Assets
----------------------- ------------------------------------
2002 2001 2000 2002 2001
---------- --------- --------- ---------- ----------
Peru $ 42,588 $ 35,108 $ 29,901 $ 27,875 $ 45,527
Canada 961 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 indemnities $ 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 indemnities 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 non-current liabilities
totaling $347,000 (2001 - $621,000).
-21-
PAN AMERICAN SILVER CORP.
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) Page 16
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 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 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
---------- ---------
Depreciation and amortization $ 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
Future income tax liability - -
Less: valuation allowance (23,327) (16,330)
---------- ---------
Net future income tax asset 8,751 11,444
Excess of book value of capital assets over tax value (8,751) (11,444)
---------- ---------
Net future income tax asset $ - $ -
========== =========
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.
-22-
PAN AMERICAN SILVER CORP.
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) Page 17
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 $1,993,000 at December and 31, 2002 and 2001, 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.
-23-
PAN AMERICAN SILVER CORP.
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) Page 18
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 and diluted 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) SHORT-TERM INVESTMENTS
Short-term investments 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.
-24-
PAN AMERICAN SILVER CORP.
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) Page 19
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 the gain on sale of
land 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 significantly 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 Company has determined that the effect of this
difference on all periods disclosed is immaterial.
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 fiscal 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.
-25-
PAN AMERICAN SILVER CORP.
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) Page 20
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 have a material impact on the Company's results of operations
or financial position.
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.
-26-
PAN AMERICAN SILVER CORP.
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) Page 21
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 is currently evaluating the effects
of FIN 45; however, it does not expect that the adoption will have
a material impact on the Company's results of operations or
financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an Interpretation
of ARB No. 51. FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The
Company has evaluated FIN 46 and determined that it has no effect
on the results of its operations or financial condition.
-27-
PAN AMERICAN SILVER CORP.
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) Page 22
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2002, 2001 and 2000
(in thousands of US dollars, except for shares)
Share Purchase
Common Shares Warrants
------------------------- -----------------------
Shares Amount Warrants Amount
---------- --------- --------- ----------
BALANCE, DECEMBER 31, 1999 32,460,845 $ 106,459 2,487,110 $ 7,321
Issued on acquisition of Huaron (Note 3) 1,780,389 7,015 -- --
Issued for purchase of royalty 140,000 507 -- --
Fair value of stock options granted -- -- -- --
Fair value of warrants granted -- -- 100,000 69
Foreign exchange translation adjustment -- -- -- --
Net loss for the year -- -- -- --
---------- ------- --------- -----
BALANCE, DECEMBER 31, 2000 34,381,234 113,981 2,587,110 7,390
---------- ------- --------- -----
Exercise of stock options 247,000 789 -- --
Shares issued for cash, net of share
issue
costs (Note 10c) 3,000,000 8,632 -- --
Fair value of warrants granted (Note -- -- 32,250 27
10c)
Expired Warrants -- -- (1,950,000) --
Foreign exchange translation adjustment -- -- -- --
Net loss for the year -- -- -- --
---------- ------- ------- -----
AT DECEMBER 31, 2001 37,628,234 123,402 669,360 7,417
---------- ------- ------- -----
Exercise of stock options 1,445,400 6,102 -- --
Shares issued for cash, net of share
issue
costs (Note 10b(i)) 3,450,000 15,599 -- --
Issued on acquisition of Manantial
Espejo
(Notes 6 and 10bii) 231,511 1,250 -- --
Issued on acquisition of royalty (Notes
5 and
10biii) 390,117 3,000 -- --
Issued on compensation payable (Note
10b(v)) 69,000 253 -- --
Issued to purchase silver stockpiles
(Notes 4
and 10biv) 636,942 4,000 -- --
Exercise of share purchase warrants 32,250 97 (32,250) --
Foreign exchange translation adjustment -- -- -- --
Net loss for the year -- -- -- --
---------- ----------- ------- ------------
AT DECEMBER 31, 2002 43,883,454 $ 153,703 637,110 $ 7,417
---------- ----------- ------- ------------
Share
Purchase Other
Options Contributed Comprehensive
Amount Surplus Income Deficit Total
------- ------- ------ --------- ---------
BALANCE, DECEMBER 31, 1999 $ -- $ 115 $ -- $ (19,011) $ 94,884
Issued on acquisition of Huaron (Note 3) -- -- -- -- 7,015
Issued for purchase of royalty -- -- -- -- 507
Fair value of stock options granted 985 -- -- -- 985
Fair value of warrants granted -- -- -- -- 69
Foreign exchange translation adjustment -- -- (38) -- (38)
Net loss for the year -- -- -- (45,878) (45,878)
--- --- --- ------- ------
BALANCE, DECEMBER 31, 2000 985 115 (38) (64,889) 57,544
--- --- --- ------- ------
Exercise of stock options -- -- -- -- 789
Shares issued for cash, net of share
issue
costs (Note 10c) -- -- -- -- 8,632
Fair value of warrants granted (Note -- -- -- -- 27
10c)
Expired Warrants -- -- -- -- --
Foreign exchange translation adjustment -- -- (38) -- (38)
Net loss for the year -- -- -- (8,077) (8,077)
--- --- --- ------- ------
AT DECEMBER 31, 2001 985 115 (76) (72,966) 58,877
--- --- --- ------- ------
Exercise of stock options -- -- -- -- 6,102
Shares issued for cash, net of share
issue
costs (Note 10b(i)) -- -- -- -- 15,599
Issued on acquisition of Manantial
Espejo
(Notes 6 and 10bii) -- -- -- -- 1,250
Issued on acquisition of royalty (Notes
5 and
10biii) -- -- -- -- 3,000
Issued on compensation payable (Note
10b(v)) -- -- -- -- 253
Issued to purchase silver stockpiles
(Notes 4
and 10biv) -- -- -- -- 4,000
Exercise of share purchase warrants -- -- -- -- 97
Foreign exchange translation adjustment -- -- (28) -- (28)
Net loss for the year -- -- -- (33,658) (33,658)
------ ----- --------- --------- ---------
AT DECEMBER 31, 2002 $ 985 $ 115 $ (104) $(106,624) $ 55,492
------ ----- --------- --------- ---------
-28-
PAN AMERICAN SILVER CORP.
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) Page 23
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 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 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% 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 intrinsic 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.
-29-
PAN AMERICAN SILVER CORP.
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) Page 24
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
------------
83,639
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 $64,728,000 for 100% 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.
-30-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAN AMERICAN SILVER CORP.
Date: July 3, 2003 By: /s/ Ross J. Beaty
----------------------------------
Ross J. Beaty
Chairman
-31-