VANCOUVER OFFICE
CORPORATE HEADQUARTERS
Pan American Silver Corp.
1500 – 625 Howe Street
Vancouver, British Columbia
Canada, V6C 2T6
T. 604-684-1175
F. 604-684-0147
info@panamericansilver.com
www.panamericansilver.com
ARGENTINA OFFICE
Pan American Silver Argentina
T. 54 -11-4816-3220
F. 54 -11-4816-3227
Country Manager – Bret Boster
MEXICO OFFICE
Plata Panamericana S.A. de C.V.
T. 52-618-128-0709 x 101
F. 52-618-128-0692 x 102
Country Manager – Chris Warwick
BOLIVIA OFFICE
PERU OFFICE
Pan American Silver (Bolivia) S.A.
T. 59 -1-2-279-6690
F. 59 -1221-54216
Country Manager – Gary Hannan
Pan American Silver Peru S.A.C.
T. 51-1-618-9700
F. 51-1-618-9729
Country Manager – Jorge Ugarte
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PLANTING THE SEEDS FOR
GROWTH
ANNUAL REPORT 2011
TABLE OF CONTENTS
Operations/Projects Map
Financial Highlights
Chairman’s Message to the Shareholders
President’s Message to the Shareholders
The Silver Market 2011
Growth Through Exploration
Growth Through Sustainability
Cautionary Note to US Investors
Properties at a Glance
Financial Statements
Corporate Information
02
03
04
06
08
09
10
12
13
14
IBC
SUSTAINABILITY REPORT 2010
Our 2010 Sustainability Report describes our
pioneering work in environmental performance,
health and safety and community relations.
Download a copy at:
www.panamericansilver.com/sustainability/
sustainability-report/
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE STATEMENTS AND INFORMATION IN THIS ANNUAL REPORT CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND “FORWARD-LOOKING INFORMATION” WITHIN THE MEANING OF APPLICABLE CANADIAN PROVINCIAL SECURITIES LAWS RELATING TO
THE COMPANY AND ITS OPERATIONS. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT
THE WORDS, “BELIEVES”, “EXPECTS”, “INTENDS”, “PLANS”, “FORECAST”, “OBJECTIVE”, “OUTLOOK”, “POTENTIAL”, “ANTICIPATED”, AND OTHER SIMILAR WORDS AND EXPRESSIONS, IDENTIFY
FORWARD-LOOKING STATEMENTS OR INFORMATION. THESE FORWARD-LOOKING STATEMENTS OR INFORMATION RELATE TO, AMONG OTHER THINGS: FUTURE PRODUCTION OF SILVER,
GOLD AND OTHER METALS; FUTURE CASH COSTS PER OUNCE OF SILVER; THE PRICE OF SILVER AND OTHER METALS; THE EFFECTS OF LAWS, REGULATIONS AND GOVERNMENT POLICIES
AFFECTING PAN AMERICAN’S OPERATIONS OR POTENTIAL FUTURE OPERATIONS, INCLUDING BUT NOT LIMITED TO, LAWS IN THE PROVINCE OF CHUBUT, ARGENTINA, WHICH, CURRENTLY
HAVE SIGNIFICANT RESTRICTIONS ON MINING; FUTURE SUCCESSFUL DEVELOPMENT OF THE NAVIDAD PROJECT, THE LA PRECIOSA PROJECT, AND OTHER DEVELOPMENT PROJECTS OF
THE COMPANY; THE SUFFICIENCY OF THE COMPANY’S CURRENT WORKING CAPITAL, ANTICIPATED OPERATING CASH FLOW OR ITS ABILITY TO RAISE NECESSARY FUNDS; THE EFFECTS OF
FUTURE ACQUISITIONS AND THE ABILITY OF THE COMPANY TO SUCCESSFULLY INTEGRATE ANY SUCH ACQUISITIONS; THE ACCURACY OF MINERAL RESERVE AND RESOURCE ESTIMATES;
ESTIMATED PRODUCTION RATES FOR SILVER AND OTHER PAYABLE METALS PRODUCED BY THE COMPANY; TIMING OF PRODUCTION AND THE CASH AND TOTAL COSTS OF PRODUCTION
AT EACH OF THE COMPANY’S PROPERTIES; THE ESTIMATED COST OF AND AVAILABILITY OF FUNDING NECESSARY FOR SUSTAINING CAPITAL; ONGOING OR FUTURE DEVELOPMENT
PLANS AND CAPITAL REPLACEMENT, IMPROVEMENT OR REMEDIATION PROGRAMS; THE ABILITY OF THE COMPANY TO REDUCE ENVIRONMENTAL IMPACTS, INCLUDING A REDUCTION
IN GREENHOUSE GAS EMISSIONS, AND TO IMPROVE SUSTAINABILITY IN ITS OPERATIONS AND PROJECTS; THE ESTIMATES OF EXPECTED OR ANTICIPATED ECONOMIC RETURNS FROM
THE COMPANY’S MINING PROJECTS, AS REFLECTED IN TECHNICAL REPORTS OR OTHER ANALYSES PREPARED IN RELATION TO DEVELOPMENT OF PROJECTS; ESTIMATED EXPLORATION
EXPENDITURES TO BE INCURRED ON THE COMPANY’S VARIOUS PROPERTIES; FORECAST CAPITAL AND NON-OPERATING SPENDING; FUTURE SALES OF THE METALS, CONCENTRATES OR
OTHER PRODUCTS PRODUCED BY THE COMPANY; AND THE COMPANY’S PLANS AND EXPECTATIONS FOR ITS PROPERTIES AND OPERATIONS.
THESE STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE NECESSARILY BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES
THAT, WHILE CONSIDERED REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, POLITICAL AND SOCIAL UNCERTAINTIES
AND CONTINGENCIES. MANY FACTORS, BOTH KNOWN AND UNKNOWN, COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM
THE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT ARE OR MAY BE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT
AND THE COMPANY HAS MADE ASSUMPTIONS AND ESTIMATES BASED ON OR RELATED TO MANY OF THESE FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION: FLUCTUATIONS
IN SPOT AND FORWARD MARKETS FOR SILVER, GOLD, BASE METALS AND CERTAIN OTHER COMMODITIES (SUCH AS NATURAL GAS, FUEL OIL AND ELECTRICITY); FLUCTUATIONS IN
CURRENCY MARKETS (SUCH AS THE PERUVIAN SOL, MEXICAN PESO, ARGENTINE PESO, BOLIVIAN BOLIVIANO AND CANADIAN DOLLAR VERSUS THE U.S. DOLLAR); RISKS RELATED
TO THE TECHNOLOGICAL AND OPERATIONAL NATURE OF THE COMPANY’S BUSINESS; CHANGES IN NATIONAL AND LOCAL GOVERNMENT, LEGISLATION, TAXATION, CONTROLS OR
REGULATIONS AND POLITICAL OR ECONOMIC DEVELOPMENTS IN CANADA, THE UNITED STATES, MEXICO, PERU, ARGENTINA, BOLIVIA OR OTHER COUNTRIES WHERE THE COMPANY MAY
CARRY ON BUSINESS IN THE FUTURE; RISKS AND HAZARDS ASSOCIATED WITH THE BUSINESS OF MINERAL EXPLORATION, DEVELOPMENT AND MINING (INCLUDING ENVIRONMENTAL
HAZARDS, INDUSTRIAL ACCIDENTS, UNUSUAL OR UNEXPECTED GEOLOGICAL OR STRUCTURAL FORMATIONS, PRESSURES, CAVE-INS AND FLOODING); RISKS RELATING TO THE CREDIT
WORTHINESS OR FINANCIAL CONDITION OF SUPPLIERS, REFINERS AND OTHER PARTIES WITH WHOM THE COMPANY DOES BUSINESS; INADEQUATE INSURANCE, OR INABILITY TO OBTAIN
INSURANCE, TO COVER THESE RISKS AND HAZARDS; EMPLOYEE RELATIONS; RELATIONSHIPS WITH AND CLAIMS BY LOCAL COMMUNITIES AND INDIGENOUS POPULATIONS; AVAILABILITY
AND INCREASING COSTS ASSOCIATED WITH MINING INPUTS AND LABOUR; THE SPECULATIVE NATURE OF MINERAL EXPLORATION AND DEVELOPMENT, INCLUDING THE RISKS OF
OBTAINING NECESSARY LICENSES AND PERMITS AND THE PRESENCE OF LAWS AND REGULATIONS THAT MAY IMPOSE RESTRICTIONS ON MINING, INCLUDING THOSE CURRENTLY IN
THE PROVINCE OF CHUBUT, ARGENTINA; DIMINISHING QUANTITIES OR GRADES OF MINERAL RESERVES AS PROPERTIES ARE MINED; GLOBAL FINANCIAL CONDITIONS; THE COMPANY’S
ABILITY TO COMPLETE AND SUCCESSFULLY INTEGRATE ACQUISITIONS AND TO MITIGATE OTHER BUSINESS COMBINATION RISKS; CHALLENGES TO, OR DIFFICULTY IN MAINTAINING, THE
COMPANY’S TITLE TO PROPERTIES AND CONTINUED OWNERSHIP THEREOF; THE ACTUAL RESULTS OF CURRENT EXPLORATION ACTIVITIES, CONCLUSIONS OF ECONOMIC EVALUATIONS,
AND CHANGES IN PROJECT PARAMETERS TO DEAL WITH UNANTICIPATED ECONOMIC OR OTHER FACTORS; INCREASED COMPETITION IN THE MINING INDUSTRY FOR PROPERTIES,
EQUIPMENT, QUALIFIED PERSONNEL, AND THEIR COSTS; AND THOSE FACTORS IDENTIFIED UNDER THE CAPTION “RISKS RELATED TO PAN AMERICAN’S BUSINESS” IN THE COMPANY’S
MOST RECENT FORM 40-F AND ANNUAL INFORMATION FORM FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CANADIAN PROVINCIAL SECURITIES
REGULATORY AUTHORITIES. INVESTORS ARE CAUTIONED AGAINST ATTRIBUTING UNDUE CERTAINTY OR RELIANCE ON FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
HAS ATTEMPTED TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, THERE MAY BE OTHER FACTORS THAT CAUSE RESULTS NOT TO BE AS
ANTICIPATED, ESTIMATED, DESCRIBED OR INTENDED. THE COMPANY DOES NOT INTEND, AND DOES NOT ASSUME ANY OBLIGATION, TO UPDATE THESE FORWARD-LOOKING STATEMENTS
OR INFORMATION TO REFLECT CHANGES IN ASSUMPTIONS OR CHANGES IN CIRCUMSTANCES OR ANY OTHER EVENTS AFFECTING SUCH STATEMENTS OR INFORMATION, OTHER THAN AS
REQUIRED BY APPLICABLE LAW.
DIRECTORS
Ross J. Beaty – Chairman
Geoff A. Burns – President & Chief Executive Officer
Michael Carroll (Independent)
Noel Dunn (Independent)
Michael J.J. Maloney (Independent)
Robert Pirooz – General Counsel
David Press (Independent)
Walter Segsworth (Independent)
EXECUTIVE MANAGEMENT – VANCOUVER
Geoff Burns – President & Chief Executive Officer
Steven Busby – Chief Operating Officer
Ignacio Couturier – Treasurer
Andres Dasso – Sr. VP, Mining Operations
Rob Doyle – Chief Financial Officer
Delaney Fisher – Corporate Secretary & Legal Counsel
George Greer – VP, Project Development
Sean McAleer – VP, Human Resources & Security
Robert Pirooz – General Counsel
Michael Steinmann – Executive VP, Geology & Exploration
Wayne Vincent – VP, Accounting & Financial Reporting
Martin Wafforn – VP, Technical Services
ANNUAL GENERAL MEETING
Wednesday, May 16, 2012
Four Seasons Hotel, Arbutus Room
791 West Georgia St. Vancouver, BC
MANANTIAL ESPEJO | ARGENTINA
AUDITORS
Deloitte & Touche LLP, Chartered Accountants
2800 – 1055 Dunsmuir Street
Vancouver, British Columbia
Canada, V7X 1P4
LEGAL COUNSEL
Borden Ladner Gervais
1200 – 200 Burrard Street
Vancouver, British Columbia,
Canada, V7X 1T2
AUTHORIZED CAPITAL
200,000,000 common shares without par value
ISSUED CAPITAL
December 31, 2011: 104,492,743 common shares
TRADING INFORMATION
NASDAQ: PAAS
TSX: PAA
REGISTRAR & TRANSFER AGENT
Computershare Investor Services Inc.
510 Burrard Street, 3rd Floor
Vancouver, British Columbia
Canada, V6C 3B9
1-800-564-6253
PLANTING THE SEEDS FOR
GROWTH
While 2011 was a record financial year and we generated record
earnings and cash flows, we continued to focus on the future.
We advanced our development projects and prepared to take
advantage of strategic opportunities. In March 2012, we completed
the acquisition of Minefinders with its long-life Dolores mine. The
seeds we have planted will bear fruit as we strive to reach our goal
of becoming the world’s largest silver mining company by 2016.
MANANTIAL ESPEJO | ARGENTINA
OPERATIONS & PROJECTS MAP
NORTH AMERICA
SOUTH AMERICA
CANADA
HEAD OFFICE, VANCOUVER
MEXICO
1 ALAMO DORADO
2 LA COLORADA
PERU
3 QUIRUVILCA
4 HUARON
5 MOROCOCHA
6 PICO MACHAY
BOLIVIA
7 SAN VICENTE
LEGEND
MINING OPERATIONS
DEVELOPMENT PROJECTS
ARGENTINA
8 CALCATREU
9 NAVIDAD
10 MANANTIAL ESPEJO
1
2
3
4
5
6
7
8
9
10
MANANTIAL ESPEJO | ARGENTINA
A SENIOR SILVER PRODUCER
WITH AN OUTSTANDING GROWTH PROFILE
During 2011 Pan American Silver produced 21.9 million ounces of silver at its seven mines in Latin America.
With the acquisition of Minefinders Corporation Ltd. (“Minefinders”), Pan American has added the Dolores mine to its portfolio of long-life
operating assets. Pan American also owns the world-class Navidad silver deposit. The Company offers outstanding exposure to silver and a
growth profile that is second to none in its industry.
In 2012, Pan American expects to produce 21.5 to 22.5 million ounces of silver and 75,000 to 80,000 ounces of gold (excluding production
from Dolores).
HIGHLIGHTS OF 2011
PRODUCTION
Silver ounces
Gold ounces
Zinc tonnes
Lead tonnes
Copper tonnes
Cash costs per silver ounce1
Total cost per silver ounce1
Average silver price (London fix)
FINANCIAL (millions except per share amount)
Revenue
Net income
Earnings per share attributable to common shareholders
Adjusted earnings 2
Adjusted earnings per share
Mine operating earnings 3
Cash flow from operations 4
Cash and short-term investments at December 31
Working capital at December 31 5
STAKEHOLDERS
Common shares outstanding at December 31 (millions)
Employees and Contractors
2011
21,855,000
2010
24,286,000
$
$
$
$
$
$
$
$
$
$
$
$
78,426
37,234
12,701
4,544
9.44
13.51
35.11
855.3
354.1
3.31
252.3
2.37
409.1
359.5
491.2
566.4
104.5
7,622
$
$
$
$
$
$
$
$
$
$
$
$
89,555
43,103
13,629
5,221
5.69
9.51
20.14
646.6
15.7
0.13
106.4
0.99
241.1
242.3
360.5
429.9
107.8
7,068
1 Cash and total cost per silver ounce are non-GAAP measures. Refer to the cash costs and total production costs per ounce of payable silver reconciliation on
page 40 of the Company’s MD&A for a breakdown of the calculation.
2 Adjusted earnings is a non-GAAP measure calculated as net earnings for the period excluding the gain or loss recorded on fair market value adjustments of the
Company’s outstanding warrants.
3 Mine operating earnings is a non-GAAP measure used by the Company to assess the performance of its silver mining operations. Mine operating earnings is
calculated as revenue less production costs, depreciation and amortization and royalties. The Company and certain investors use this information to evaluate
the Company’s performance.
4 Cash flow from operations before changes in working capital is a non-GAAP measure. This non-GAAP measure is used by the Company to manage and
evaluate operating performance and the Company considers this measure to better reflect the normalized cash flow generated by operations. Cash flow from
operations before changes in working capital is a non-GAAP measure that is calculated by taking cash flow from operations before interest and income taxes
less the working capital adjustments and current income tax expense.
5 Working capital is a non-GAAP measure calculated as current assets less current liabilities. The Company and certain investors use this information to
evaluate whether the Company is able to meet its current obligations using its current assets.
FINANCIAL HIGHLIGHTS
3
PLANTING THE SEEDS FOR
GROWTH
Planting the seeds for growth! That’s what we did in 2011 while
simultaneously delivering the best financial performance in our 17
year history! What a great year – we generated record earnings,
record cash flow and record cash reserves. A lot of this was
made possible by record high silver prices, but also because we
produced a near-record amount of silver. But our 15-year silver
production growth streak ended in 2011; in fact, we produced
21.9 million ounces, less than what we produced in 2010. Simply
put, we focused on mine building over the past eight years, and
very successfully with five mines built on time and on budget. We
advanced from being a small silver producer in 2002 to being the
world’s second largest primary silver miner in 2011.
We are now positioned for our next extraordinary leg of silver
production growth to begin in 2012, which should propel Pan
American closer to becoming the world’s largest silver mining
company by 2016. The seeds for this growth have been planted;
we now have to execute and our first objective is to increase our
silver and gold production through the acquisition of Minefinders,
something we completed in late March 2012. Our second
objective is to start developing our massive Navidad silver project
in Argentina into production. This requires a legal reform from the
Province of Chubut and we hope it will be forthcoming soon to
enable us to start construction of this world-class deposit. As these
seeds mature, we expect our silver production to increase from
current levels of about 22 million ounces per year to more than 40
million ounces by 2016. That will be something to watch as
it grows!
Pan American is in great shape today. We have all the ingredients
necessary for our second great phase of growth. We have
exceptional financial horsepower, with cash and near-cash
holdings at year-end 2011 of almost $500 million, no debt, $150
million in unutilized bank credit, and substantial free cash flow
generation from our soon to be eight operating mines. Our
cash generation should increase in 2012, with the Minefinders
transaction completed and the Dolores Mine becoming our lowest-
cost mine with the highest cash flow. In addition, we have a great
stable of assets, including several like Waterloo, Calcatreu, Pico
Machay and La Bolsa, which contribute nearly zero to our public
valuation, but which are major potential development assets in their
own right. And finally, we have an extraordinary management
team fully capable of building and operating our existing assets and
our great growth projects such as Navidad.
4
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
One of Pan American’s greatest assets is more difficult to
measure: our reputation. I am so proud of our reputation for fair
dealings with our employees, suppliers, contractors, communities
and other stakeholders; our reputation for having a healthy and
safe workplace at our mines and projects; our reputation for open,
honest and ethical business practices; and our reputation for good
governance and transparency in our reporting. This is so hard to
gain and so easy to destroy. I commend all of our employees and
Directors for building this fine reputation over so many years and
for their steadfast attention to preserving it in years to come.
Silver continues to do well as a precious and an industrial metal.
Its fundamentals remain strong. Not only is it the metal with the
most diverse applications, it is essentially a beautiful metal too in
so many ways – literally as a beauty adornment for thousands of
years, and figuratively in being the best at reflecting beauty since
it is the most reflective metal. In 2011 its greatest use was as
currency and a store of value, with many investors buying silver as
an alternative to paper money – something I think will continue to
happen for many years as governments all over the world succumb,
in the face of ever-worsening deficits, to the eternal temptation to
debase paper money. And so I expect continuing strength in the
silver price, though with plenty of volatility!
Pan American has built itself into a leading silver mining
company and has delivered excellent financial results to our
shareholders in the process – I was especially pleased that we
recently increased our dividend by 50%. With our next leg of
growth, for which we have already planted the seeds, I expect this
financial return will increase further and I look forward to reporting
on our progress during 2012. Thank you for your support of our
enterprise and enjoy watching with me the second great leg of
growth of our company as we execute on Navidad, optimize the
Dolores mine and all our other growth assets that will add value
to us as they develop into mature assets.
Ross J. Beaty Chairman
LA COLORADA | MEXICO
GROWTH THROUGH
PERSEVERANCE
DEDICATED TO EXPLORATION, EFFICIENT OPERATION AND STRATEGIC ACQUISITION
Without a doubt, 2011 marked the best annual financial
performance in the Company’s history. While our consolidated
silver production declined modestly from 2010, at just shy of 22
million ounces, we generated record revenue of $855.3 million,
record mine operating earnings of $409.1 million, record adjusted
earnings of $252.3 million, or $2.37 per share, and record cash
flow from operations of $359.5 million, a healthy $3.25 per share.
We also finished the year with cash and short term investments
of close to $0.5 billion and record working capital in excess of that.
Recognizing our good fortune, we also returned nearly $105 million
to our shareholders by way of quarterly dividends and a share
repurchase program.
optimum production rates by the end of this year. Production from
San Vicente in Bolivia was basically as we forecasted, as was
production from our Manantial Espejo mine in Argentina; however,
both suffered cost pressures throughout 2011 that were above
our expectations.
Across our entire portfolio of operating mines, we have faced and
will continue to face significant cost escalation driven by increasing
labour, energy and consumable costs. Happily, we have seen our
margins expand at the same time, thanks to strong and rising silver
prices. Many of the same factors that are pushing our costs higher
are also behind silver’s surge in price. Having said this, we will do
all we can in 2012 to manage the cost elements that are within
our influence.
However, 2011 was also an extremely volatile year in both the
precious metal and equities markets. Silver experienced some
remarkable price swings, reaching a high of $48.70 per ounce in
April of 2011 and a low of $28.16 in September of the same year,
registering an annual volatility of close to 50%. In spite of the
volatility, silver enjoyed a record year in terms of price, finishing
2011 with an all time record average annual price of $35.11 per
ounce. Not surprisingly, with these large swings in the price of
our primary product, we also experienced a very volatile year in
terms of our share price. We entered 2011 at $41.92 per share and
ended the year down 52% at 21.81 per share. As a shareholder, I
am keenly aware that our share price performance did not match
the trajectory of our financial performance or that of silver. While I
am at somewhat of a loss to explain this dichotomy, I continue to
believe that our best course of action is to continue to do what we
do best, and that is to maximize the value of our assets by focusing
on and achieving our earnings, cash flow and production objectives,
while taking prudent and calculated steps to grow our business.
I have no doubt that eventually our share price will reflect the
consistently superior results that we have produced.
From an operating perspective, we enjoyed great success at our
Mexican operations in 2011. Both La Colorada and Alamo Dorado
had excellent years, delivering at or above forecasted silver
production at cash costs well within our estimates. However,
our success in Mexico was tempered by challenges in Peru. Our
three Peruvian mines produced less silver than we expected at
significantly higher costs. We fell behind on our development at
both Huaron and Morococha and as a consequence were well
behind our anticipated throughput rates and forecasted silver
production. We will be focusing on and investing in increased
underground development as we move into 2012 and with proper
execution should have both these assets operating closer to their
6
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Looking to our longer term future, we worked diligently at our
Navidad silver project in Chubut, Argentina towards the completion
of a Feasibility Report and an Environmental Impact Study. Chubut
continues to impose a ban on open cut mining and the expected
change to this legislation did not occur in 2011 as we had hoped.
However, the newly elected Governor of the Province, Martin
Buzzi, has publicly acknowledged his support for the national
government’s pro-mining policies and we are confident that this
support will translate into a change in the legislation in Chubut
this year, which will allow us to develop Navidad. Navidad is truly
a world class silver deposit and a game changer for Pan American,
having the potential to produce almost 20 million ounces of silver
annually at a cash cost of between $6 and $7 per ounce, as we
described in the Preliminary Economic Assessment we completed
for the project in late 2010.
But we are not just sitting and waiting for law changes in Argentina
to expand our business and improve our portfolio of assets. We
have just completed the friendly acquisition of Minefinders Ltd.,
which we announced on January 23, 2012. Minefinders brings to
us the Dolores mine, an open pit heap leach silver and gold mine,
as well as an interesting portfolio of development and exploration
properties, all located in the mining preferred jurisdiction of Mexico.
Dolores is an outstanding, long-life asset that fits perfectly into
our portfolio. It will immediately add low-cost silver production,
while bringing with it the potential for further growth through
optimization, exploration and the likely addition of a milling circuit
to enhance silver and gold recoveries. Strategically, this acquisition
is about production growth, cash flow growth, upgrading our asset
portfolio, while clearly lowering our geo-political risk profile.
I look forward to 2012 with great enthusiasm and optimism.
I believe that there are ample reasons to expect silver to continue
to do well in 2012 and beyond. Pan American is extremely well
positioned to reap the rewards of the current silver price, with the
addition of Dolores, and in the longer term with the expectation
that 2012 will be the year that we are able to start Navidad’s
construction. Together or separately, I would hope that these
investments will once again attract the attention of the silver
investment community to our strengths and help restore Pan
American’s premium valuation.
MANANTIAL ESPEJO | ARGENTINA
I would like to finish by thanking our global workforce of employees
and contractors for their dedication to our Company, our investors
for their continued support and commitment to our business
model and the communities where we operate for hosting us and
being part of our sustainable operations. I hope that you all remain
on board as the seeds we have planted grow and develop
into maturity.
Geoff Burns President & Chief Executive Officer
PRESIDENT’S MESSAGE TO SHAREHOLDERS
7
GROWTH THROUGH
SILVER EXPOSURE
SILVER’S RECORD YEAR
Since its inception in 1994, Pan American has strived to become a
premier vehicle for investors looking for real exposure to silver. In
2011, Pan American derived 74% of its total revenue from silver
contained in concentrates or doré bars produced at our seven
operations. This makes Pan American Silver a true silver play and
an excellent vehicle for individuals who regard silver as a long-term
investment and a store of value, especially in today’s tumultuous
world economic environment. In addition to producing 21.9 million
ounces of silver, in 2011 Pan American also sold over 75,900
ounces of gold, which contributed 12% to our consolidated
annual revenue.
2011 was another record year for silver; however, much like the
world economic recovery, it was also a year characterized by
high volatility. The price per ounce on the London Bullion Market
fluctuated widely between US$30.60 on January’s first day of
trading and US$28.18 at the close of trading on December 30th.
During the first months of the year, silver found strong support
from the continued recovery in industrial demand and steady
investor interest, largely motivated by the gloomy prospects for the
Eurozone in the face of Greece’s fiscal woes and fears of contagion
to other members of the block.
Silver quickly rose to close to $50 per ounce in April, but by late
May profit taking and stock liquidation, including a decline in silver
ETFs holdings, brought the price down to the low $30s, when
SILVER – LONDON FIX PRICE (US$/oz Ag)
45
40
35
30
25
20
15
10
5
0
investors saw a buying opportunity and provided renewed support.
Throughout the summer and until late September, silver climbed
steadily back up to the $40s, until the Eurozone crisis seemed to
worsen. This, coupled with loose monetary policies in the world’s
industrial economies and a weak US dollar, prompted another
steep decline and from September 21 until October 5th, silver
dropped from approximately $40 per ounce to approximately
$28 per ounce.
The final weeks of 2011 saw the silver price make brief incursions
into the high $20s, but investor support has kept the price firmly
over $30 per ounce since. Despite the extreme price moves of
2011, last year silver averaged a record $35.12 per ounce, which
was 74% higher than 2010’s average and far outpaced gold’s
increase of 28% compared to the previous year.
According to GFMS-Thomson Reuters, industrial demand growth
and investor interest will sustain silver’s bull run in 2012. Although
the slow world economic recovery, the US presidential election and
the continued European credit crisis could cause further volatility,
the expected annual average price could set a new record at
approximately $45 per ounce. During the first three months of 2012,
silver averaged $32.63 per ounce and investor interest remained
strong, as evidenced by UBS’ research, which estimates that at
March 6th, the combined holdings of the 10 major silver ETFs were
approximately 490 million ounces.
J a n-07
M ar-07
M ay-07
J ul-07
S e p-07
N ov-07
J a n-08
M ar-08
M ay-08
J ul-08
S e p-08
N ov-08
J a n-09
M ar-09
M ay-09
J ul-09
S e p-09
N ov-09
J a n-10
M ar-10
M ay-10
J ul-10
S e p-10
N ov-10
J a n-11
M ar-11
M ay-11
J ul-11
S e p-11
N ov-11
J a n-12
M ar-12
8
GROWTH THROUGH
EXPLORATION
EXPLORATION & GEOLOGY
Exploration programs are vital to our successful business, because
they are an investment in our future that generates growth by
extending our Company’s production profile and securing long-term
cash flow and earnings.
enough to replace the 24.7 million contained ounces of silver that
we mined during the year and in fact allowed us to grow our Proven
and Probable silver Mineral Reserves to 235.3 million ounces at
December 31, 2011; 2% more than at the end of 2010.”
Although mining activities deplete ore bodies, our Mineral Reserves
and Resources can grow through green field discoveries that add
new projects to our development pipeline, or through brown field
exploration that expands the mineralization and the mine life of our
current producing assets.
In addition to green field exploration, Pan American also invested in
exploration and technical studies to further define the outstanding
Navidad silver deposit in Argentina. The results of the work
performed at this project will be included in a Feasibility Study,
which will be ready for publication in 2012.
Michael Steinmann, EVP Geology and Exploration, commented on
this year’s exploration success, “Since 2004, Pan American has
discovered in excess of 198 million ounces of Proven and Probable
silver Mineral Reserves through brown field exploration activities at
our seven mines and 2011 was another exceptional year in terms
of Mineral Reserve addition. An investment of $25.1 million in
direct exploration allowed us to complete over 190,000 meters of
diamond drilling and discover 29.3 million ounces of Proven and
Probable silver Mineral Reserves at our mines. This was more than
In 2012, we plan to invest $15.5 million to carry out an estimated
116,000 meters of diamond drilling at our seven operating mines.
We also plan to invest approximately $7.8 million in green field
exploration at a handful of prospective properties in Mexico,
Peru and Argentina.
The table below illustrates the changes in Proven and Probable
silver Mineral Reserves at our current seven operating mines.
PROVEN AND PROBABLE MINERAL RESERVES1 (MILLIONS OF OUNCES OF CONTAINED SILVER)
RESERVES Dec 31, 2010
MINED 2011
GAINED/LOST
RESERVES Dec 31, 20112
Morococha (92.2%)
Huaron
Quiruvilca
La Colorada
Alamo Dorado
San Vicente (95%)
Manantial Espejo
TOTAL3
37.6
59.3
3.9
38.3
27.2
28.0
36.3
230.7
(2.0)
(3.5)
(1.1)
(4.8)
(5.7)
(3.5)
(4.2)
(24.8)
1.5
5.1
1.3
10.6
4.3
9.5
(3.0)
29.3
1 For the complete breakdown of Mineral Reserves and Resources by property and category, please refer to pages 51 and 52 of this annual report
2 Proven and Probable Mineral Reserves were estimated using appropriate cut-off grades based on assumed metal prices of Ag: $25.00/oz, Au: $1,350/oz,
Pb: $1,850/tonne, Cu: $6,500/tonne, Zn: $1,750/tonne
3 Totals may not add up due to rounding
37.1
60.9
4.2
44.1
25.8
34.1
29.1
235.3
9
GROWTH THROUGH
SUSTAINABILITY
Sustainability is one of our guiding principles. We strive to operate
our business, our mines and our development projects with
the objective of creating lasting social progress and economic
growth for all stakeholders. To achieve this, we seek continuous,
sustainable growth and improvement in all areas of our business –
from our efforts to protect the environment and enhance socio-
economic development in the communities where we operate, to
developing the skills and careers of our employees.
Social sustainability - which is inextricably linked to economic
well-being -considers the communities surrounding our mines,
and the changes that our activities can have on the social fabric
of, for example, an isolated mountain village. We cooperate with
respected local and international organizations such as Caritas
to establish social support programs in communities in Peru,
Argentina and Bolivia. We deliver educational programs, workshops,
nutritional and economic planning assistance among other things.
An economically sustainable company takes a long-term view by
building and maintaining enduring working relationships with the
local communities, everywhere it operates. Long-term success is
also achieved by ensuring that its activities benefit all stakeholders,
from shareholders to employees and contractors, to their
communities, regions and countries. The salaries, taxes, and other
payments that Pan American makes can represent a major portion
of regional economies. But our social and economic influence goes
deeper, and reaches closer to home.
In a continued and conscientious approach to corporate citizenship
and responsibility, we seek to create sustainable local economies
with greater economic depth and transcendence than they had
before we arrived. In addition to training our workers, we support
alternative activities like ranching and herding, we research and
teach organic gardening; we run workshops on traditional and high-
fashion handicrafts and support a growing number of successful
artisans, from silversmiths to weavers.
One of our most successful programs is just taking flight. We
are the driving force behind a new designer brand called “Andes
Wear” which will launch its “Alpaca de los Andes” products in
2012. These hand-woven goods have been professionally designed
and market-tested and should see tremendous success in the
international quality fashion marketplace. The goods are woven by
members of our communities using alpaca and vicuña wool from
their herds whose development we supported. We ensure that
weavers receive fair payment for their work and we aim to achieve
international Fair Trade certification for these products. In this way
we are contributing to building a sustainable local economy, which
is diversified and complementary to our activities.
In addition to working with our communities, we protect our
workers by making safety our priority and implementing rigorous
safety standards. In 2011, we embarked on a new, comprehensive
safety training program that involves all staff from senior
management to new workers at our mines. But we are also very
active on environmental stewardship and we are always focused on
environmental sustainability. Not only do we work under stringent
environmental guidelines and legislation, but our decisions and
policies are guided by a continued awareness of our footprint at
every stage of a mine’s life cycle.
We minimize and mitigate our environmental impact in all phases,
from exploration through project design and development, to
mining operations and finally to mine closure and reclamation.
We ensure optimum environmental performance by monitoring
and reporting to the government authorities and communities
associated with our mines, and to all our stakeholders via our
Annual Sustainability Report. In particular, we focus on efficient
water use, waste management and recycling, protecting surface
and ground water quality, minimizing greenhouse and air emissions,
and the implementation of environmental contingency planning at
all of our mines and projects.
Being a responsible member of the communities in which we
operate is a critical element of Pan American’s mandate. We strive
to treat our communities as partners in an exciting enterprise in
which we all benefit economically, environmentally, socially and
culturally. We take pride in our sustainability policies and practices
and we are confident that they comply or exceed our industry’s
best practices.
10
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
SANTA CRUZ | ARGENTINA
TECHNICAL INFORMATION
MICHAEL STEINMANN, P.GEO., EXECUTIVE VP GEOLOGY & EXPLORATION, AND MARTIN
WAFFORN, P.ENG., VP TECHNICAL SERVICES, EACH OF WHOM ARE QUALIFIED PERSONS,
AS THE TERM IS DEFINED IN NATIONAL INSTRUMENT 43-101 “NI 43-101”, HAVE REVIEWED
AND APPROVED THE CONTENTS OF THIS ANNUAL REPORT. TECHNICAL INFORMATION
WITH RESPECT TO NAVIDAD IS DERIVED FROM THE NI 43-101 TECHNICAL REPORT ON THE
PROPERTY PREPARED BY SNOWDEN, UNDER THE SUPERVISION OF PAMELA DE MARK,
P.GEO., SR. CONSULTANT OF SNOWDEN MINING INDUSTRY CONSULTANTS. MINERAL
RESOURCE ESTIMATES FOR HOG HEAVEN AND WATERLOO ARE BASED ON HISTORICAL
THIRD PARTY ESTIMATES.
CAUTIONARY NOTE TO US INVESTORS CONCERNING ESTIMATES OF
RESERVES AND RESOURCES
THIS ANNUAL REPORT HAS BEEN PREPARED IN ACCORDANCE WITH THE REQUIREMENTS
OF CANADIAN PROVINCIAL SECURITIES LAWS, WHICH DIFFER FROM THE REQUIREMENTS
OF U.S. SECURITIES LAWS. UNLESS OTHERWISE INDICATED, ALL MINERAL RESERVE
AND RESOURCE ESTIMATES INCLUDED IN THIS ANNUAL REPORT HAVE BEEN PREPARED
IN ACCORDANCE WITH CANADIAN NATIONAL INSTRUMENT 43-101 – STANDARDS OF
DISCLOSURE FOR MINERAL PROJECTS (‘‘NI 43-101’’) AND THE CANADIAN INSTITUTE
OF MINING, METALLURGY AND PETROLEUM CLASSIFICATION SYSTEM. NI 43-101 IS A
RULE DEVELOPED BY THE CANADIAN SECURITIES ADMINISTRATORS THAT ESTABLISHES
STANDARDS FOR ALL PUBLIC DISCLOSURE AN ISSUER MAKES OF SCIENTIFIC AND
TECHNICAL INFORMATION CONCERNING MINERAL PROJECTS.
CANADIAN STANDARDS, INCLUDING NI 43-101, DIFFER SIGNIFICANTLY FROM THE
REQUIREMENTS OF THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(THE “SEC”), AND INFORMATION CONCERNING MINERALIZATION, DEPOSITS, MINERAL
RESERVE AND RESOURCE INFORMATION CONTAINED OR REFERRED TO HEREIN MAY
NOT BE COMPARABLE TO SIMILAR INFORMATION DISCLOSED BY U.S. COMPANIES.
IN PARTICULAR, AND WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THIS
ANNUAL REPORT USES THE TERMS ‘‘MEASURED RESOURCES’’, ‘‘INDICATED RESOURCES’’
AND ‘‘INFERRED RESOURCES’’. U.S. INVESTORS ARE ADVISED THAT, WHILE SUCH
TERMS ARE RECOGNIZED AND REQUIRED BY CANADIAN SECURITIES LAWS, THE
SEC DOES NOT RECOGNIZE THEM. UNDER U.S. STANDARDS, MINERALIZATION MAY
NOT BE CLASSIFIED AS A ‘‘RESERVE’’ UNLESS THE DETERMINATION HAS BEEN MADE
THAT THE MINERALIZATION COULD BE ECONOMICALLY AND LEGALLY PRODUCED OR
EXTRACTED AT THE TIME THE RESERVE DETERMINATION IS MADE. U.S. INVESTORS
ARE CAUTIONED NOT TO ASSUME THAT ANY PART OF A “MEASURED RESOURCE”
OR “INDICATED RESOURCE” WILL EVER BE CONVERTED INTO A “RESERVE”. U.S.
INVESTORS SHOULD ALSO UNDERSTAND THAT “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 “INFERRED RESOURCES” EXIST, ARE ECONOMICALLY OR LEGALLY
MINEABLE OR WILL EVER BE UPGRADED TO A HIGHER CATEGORY. UNDER CANADIAN
SECURITIES LAWS, ESTIMATED “INFERRED RESOURCES” MAY NOT FORM THE BASIS
OF FEASIBILITY OR PRE-FEASIBILITY STUDIES EXCEPT IN RARE CASES. DISCLOSURE
OF “CONTAINED OUNCES” IN A MINERAL RESOURCE IS PERMITTED DISCLOSURE
UNDER CANADIAN SECURITIES LAWS. HOWEVER, THE SEC NORMALLY ONLY PERMITS
ISSUERS TO REPORT MINERALIZATION THAT DOES NOT CONSTITUTE “RESERVES” BY
SEC STANDARDS AS IN PLACE TONNAGE AND GRADE, WITHOUT REFERENCE TO UNIT
MEASURES. THE REQUIREMENTS OF NI 43-101 FOR IDENTIFICATION OF “RESERVES”
ARE ALSO NOT THE SAME AS THOSE OF THE SEC, AND RESERVES REPORTED BY THE
COMPANY IN COMPLIANCE WITH NI 43-101 MAY NOT QUALIFY AS “RESERVES” UNDER
SEC STANDARDS. ACCORDINGLY, INFORMATION CONCERNING MINERAL DEPOSITS
SET FORTH HEREIN MAY NOT BE COMPARABLE WITH INFORMATION MADE PUBLIC BY
COMPANIES THAT REPORT IN ACCORDANCE WITH U.S. STANDARDS.
SAN VICENTE | BOLIVIA
PROPERTIES AT A GLANCE
OPERATING MINES
PROPERTY
TYPE
LOCATION
PROVEN & PROBABLE
RESERVES 1
Huaron
Underground
Pasco, Peru
60.9 Moz Ag
Morococha
(92.2%)
Underground
Junin, Peru
37.1 Moz Ag
Quiruvilca 4
Underground
La Libertad, Peru
Alamo Dorado
Open Pit
Sonora, Mexico
La Colorada
Underground
Zacatecas, Mexico
4.2 Moz Ag;
24.2 Koz Au
25.8 Moz Ag;
98.8 Koz Au
44.1 Moz Ag;
48.0 Koz Au
San Vicente (95%) Underground
Potosi, Bolivia
34.1 Moz Ag
2011 PRODUCTION 2
2012 PRODUCTION FORECAST 3
2.8 Moz Ag at cash cost of
$14.03/oz
2.7 to 2.8 Moz Ag at cash cost of
$20.90 to $22.70 per oz Ag
1.7 Moz Ag at cash cost of
$16.11/oz
1.7 to 1.8 Moz Ag at cash costs of
$24.60 to $26.50 per oz Ag
0.9 Moz Ag at cash cost of
$17.47/oz
Approximately 0.2 Moz Ag at
cash cost of $31.30 per oz Ag
5.3 Moz Ag at cash cost of
$4.80/oz
5.1 to 5.4 Moz Ag at cash cost of
$6.40 to $6.80 per oz Ag
4.3 Moz Ag at cash cost of
$7.74/oz
4.1 to 4.3 Moz Ag at cash cost of
$9.50 to $9.90 per oz Ag
3.1 Moz Ag at cash cost of
$13.48/oz
3.4 to 3.5 Moz Ag at cash cost of
$18.40 to $18.70 per oz Ag
Manantial Espejo
Combination Open
Pit & Underground
Santa Cruz, Argentina
29.1 Moz Ag;
446.6 Koz Au
3.8 Moz Ag at cash cost of
$7.36/oz
4.3 to 4.5 Moz Ag at cash cost of
$8.60 to $10.40 per oz Ag
1 At December 31, 2011
2 Cash costs per payable ounce of silver produced, net of by-product credits
3 Cash costs per ounce of Ag, net of by-product credits. Price assumptions: Au $1,600/oz, Zn $1,900/tonne, Pb $2,000/tonne, Cu $7,300/tonne
4 The forecast for Quiruvilca only includes estimates for the first quarter of 2012. The Company is currently assessing strategic alternatives for the mine, including continued operations, divestiture, or placing the mine on care and maintenance.
DEVELOPMENT PROJECTS
RESOURCES
PROPERTY
OWNERSHIP
LOCATION
MEASURED & INDICATED
INFERRED
2012 OBJECTIVES
Navidad
100%
Chubut, Argentina
532.4 Moz Ag;
2,914 M pounds Pb
119.4 Moz Ag;
580 M pounds Pb
Invest $22.8 million to complete an
Environmental Impact Assessment
and a full Feasibility Study to be filed
when provincial legislation allows
open pit mining
Calcatreu
Pico Machay
100%
100%
Rio Negro, Argentina
6.6 Moz Ag; 676 Koz Au
1.8 Moz Ag;
226 Koz Au
Invest $4 million to complete a
Scoping Study
Huancavelica, Peru
265 Koz Au
446 Koz Au
Evaluate strategic options for the deposit
13
TABLE Of CONTENTS
Management's Discussion and Analysis
Introduction
Core Business and Strategy
Highlights of 2011
Minefinders Transaction
2012 Operating Outlook
2012 Project Development Outlook
2011 Operating Performance
2011 Project Development Update
Overview of 2011 Financial Results
Liquidity Position
Investments and Investment Income
Capital Resources
Financial Instruments
Closure and Decommissioning Cost Provision
Contractual Commitments and Contingencies
General and Administrative
Exploration and Project Development
Alternative Performance Measures
Governance, Corporate Social Responsibility
and Environment
Risks and Uncertainties
Critical Judgement in the Application
of Accounting Policies
Future Accounting Changes
Subsequent Events
Disclosure Controls and Procedures
Mineral Reserves and Resources
Management’s Report on Internal Controls
over Financial Reporting
Auditors' Reports
Consolidated Statements of Financial Position
Consolidated Income Statements
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
14
15
16
17
17
18
22
23
31
32
36
37
37
37
38
38
39
39
40
41
42
46
46
49
49
51
55
56
58
59
60
61
62
The Company’s 2012 forecast contained in this MD&A include
estimates of future production rates for silver and other metals
and future cash and total costs of production at each of the
Company’s properties, which are forward-looking estimates.
These forecasts are based on the following key assumptions:
(i) silver: $30.00 per ounce, gold: $1,600 per ounce, zinc:
$1,900 per tonne ($0.86 per lb), lead: $2,000 per tonne ($0.91
per lb), and copper: $7,300 per tonne ($3.31 per lb); (ii) that the
Company is able to ship and sell all of 2012 production in the
2012 financial year; (iii) the Company’s forecast production for
each individual mine is achieved; (iv) there is no disruption in
production, unexpected increase in costs or disruption due
to, among other things: natural phenomena and hazards;
technological, mechanical or operational disruptions; changes
in local governments, legislation, taxation or the political or
economic environment; fluctuations in the price of silver, gold
or base metals; fluctuations in the local currencies of those
countries in which the Company carries on business; unexpected
work stoppages or labour disputes; fluctuations in the price
for electricity, natural gas, fuel oil, and other key supplies; or
transportation disruptions.
No assurance can be given that the forecasted quantities of
silver and other metals will be produced, or that projected cash
costs or forecast capital costs will be achieved. Expected future
production, cash costs and capital costs are inherently uncertain
and could materially change over time. If actual results differ
from the assumptions set out above, the Company’s mineral
production and cash costs may differ materially from the
forecasts in this MD&A. Readers should review those matters
discussed herein under the heading “Risks and Uncertainties”
and are advised to read the “Cautionary Note Regarding Forward
Looking statements” contained herein.
March 21, 2012
INTRODUCTION
Management’s discussion and analysis (“MD&A”) is intended
to help the reader understand the significant factors that have
affected Pan American Silver Corp.’s and its subsidiaries’ (“Pan
American” or the “Company”) performance and such factors
that may affect its future performance. The MD&A should be
read in conjunction with the Company’s Audited Consolidated
Financial Statements for the year ended December 31, 2011
and the related notes contained therein. All amounts in this
MD&A and
in the consolidated financial statements are
expressed in United States dollars (“USD”), unless identified
otherwise. The Company reports its financial position, results
of operations and cash flows in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board
(“IASB”). Pan
American’s significant accounting policies are set out in Note 3
of the Audited Consolidated Financial Statements. This MD&A
refers to various non-Generally Accepted Accounting Principles
(“GAAP”) measures, such as “cash and total cost per ounce of
silver”, which are used by the Company to manage and evaluate
operating performance at each of the Company’s mines and are
widely reported in the silver mining industry as benchmarks for
performance, but do not have standardized meaning. To facilitate
a better understanding of these measures as calculated by the
Company, detailed descriptions and reconciliations have been
provided where applicable.
Except for historical information contained in this MD&A, the
following disclosures are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 or are future oriented financial information and as such are
based on an assumed set of economic conditions and courses
of action. Please refer to the cautionary note regarding the risks
associated with forward looking statements at the back of this
MD&A and the “Risks Related to Pan American’s Business”
contained in the Company’s most recent Form 40-F and Annual
Information Form on file with the U.S. Securities and Exchange
Commission and the Canadian provincial securities regulatory
authorities. Additional information about Pan American and its
business activities, including its Annual Information Form, is
available on SEDAR at www.sedar.com
The scientific or technical information in this MD&A, which
includes mineral reserve and resource estimates for the Huaron,
Morococha, Quiruvilca, Alamo Dorado, La Colorada, Manantial
Espejo, San Vicente, Pico Machay, and Calcatreu properties were
based upon information prepared by or under the supervision
of Michael Steinmann, P.Geo., Executive Vice President Geology
& Exploration and Martin G. Wafforn, P.Eng., Vice President
Technical Services, who are “Qualified Persons” for purposes
of National Instrument 43-101. Navidad resource estimates were
prepared by Pamela De Mark, P. Geo., Director, Resources who is
also a Qualified Person for purposes of National Instrument 43-
101. Mineral resource estimates for Hog Heaven and Waterloo
are based on historical third party estimates.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
15
CORE BUSINESS AND STRATEGY
Pan American engages in silver mining and related activities,
including
extraction,
exploration, mine development,
processing, refining and reclamation. The Company owns and
operates silver mines located in Peru, Mexico, Argentina, and
Bolivia. In addition, the Company is exploring for new silver
deposits throughout South America and Mexico. The Company
is listed on the Toronto Stock Exchange (Symbol: PAA) and on
the NASDAQ Exchange in New York (Symbol: PAAS).
Pan American was founded in 1994 with the specific intention
of providing investors with the best investment opportunity to
gain real exposure to silver prices. The Company's mission is to
be the largest and lowest cost primary silver mining company
globally. To realize this mission, Pan American’s strategy is to
focus on growing its base of low cost silver production and
silver mineral reserves by constantly optimizing its production
methods, and developing new silver deposits
through
acquisition and exploration.
To execute this strategy, Pan American has assembled a
sector leading team of mining professionals with a depth of
exploration, construction, operating, and financing knowledge
that allows the Company to confidently advance early stage
projects through construction and into operation.
Pan American is determined to conduct its business in a
responsible and sustainable manner.
Being responsible for the environment in which we operate,
long-term development of our host
contributing to the
communities and ensuring that our employees can work in
a safe and secure manner are core values at Pan American.
We are committed to maintaining positive relations with
our employees, the local communities and the government
agencies, all of whom we view as partners in our enterprise.
Pan American’s priority at every operation is the safety of our
employees. We believe that comprehensive and continuous
training is fundamental to the safety of our employees. With
our comprehensive safety training and strictly enforced safety
procedures, our goal is to continually improve our safety
performance and remain industry leaders in the health and
safety of our workers.
In addition, the Company is committed to operating our mines
and developing new projects in an environmentally responsible
manner. We have developed a comprehensive environmental
policy, which all operations adhere to and apply to their short
and long-term plans. This policy addresses topics that include
water use and recycling, waste disposition, the research and
use of alternative energies, compliance with required laws,
closure requirements and education initiatives. Each operation
runs unique environmental programs according to its location,
needs, resources and processes. We have a proactive approach
to minimizing and mitigating environmental impacts during
all phases of the mining cycle from exploration through
project development and into full mining operations. This
is accomplished by applying prudent design and operating
practices, continuous monitoring and by providing training
and education for the employees and contractors who work at
our facilities.
The Company recognizes that the skills and dedication of
our employees and contractors are important drivers of our
success. We also recognize the vital contribution they make
to the economic prosperity of the communities in which
we operate. As such, we offer leading career development
opportunities, competitive remuneration, an engaging working
environment and a supportive culture where fairness, respect,
safety and diversity are valued and practiced.
track
Pan American’s operational
record and strong
financial standing has positioned the Company to take full
advantage of strategic opportunities in the silver market,
as they arise. As such, on January 23, 2012 the Company
and Minefinders Corporation Ltd. (TSX: MFL; NYSE/AMEX:
MFN) (“Minefinders”) announced that they had entered into
a definitive agreement pursuant to which Pan American will
acquire all of the issued and outstanding common shares of
Minefinders by way of a plan of arrangement. This transaction,
upon successful completion, creates the leading, growth-
oriented, geographically-diversified silver producer with a
combined market capitalization of approximately $4 billion as
measured at the announcement date, an exceptional growth
profile, and enhanced portfolio diversification. Assuming
the Company receives shareholder approval at the meetings
to be held on March 26, 2012, the Company expects to close
this transaction by the end of March. Please refer to the
“Minefinders Transaction” section for more details.
Pan American has seven operating mines and also owns the
world class Navidad silver development project in Argentina,
and is the operator of the La Preciosa project in Mexico - a
considerable portfolio of quality silver assets providing
diversification of political and operational risk. Pan American
also produces significant quantities of gold and base metals as
by-products to its silver mining activities. The following charts
reflect the geographic diversity of our silver production and
the breakdown of our revenue, by metal type, for 2011. Mexico
accounted for 44% of the Company’s silver production, while
silver and gold combined to make up 86% of the Companies
consolidated revenue for 2011.
2011 SILVER PRODUCTION
BY COUNTRY
Mexico
Peru
Argentina
Bolivia
44%
25%
17%
14%
2011 REVENUE BY METAL
Silver
Gold
Zinc
Copper
Lead
73%
13%
7%
4%
3%
14%
17%
44%
25%
13%
3%
4%
7%
73%
16
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
HIGHLIGHTS Of 2011
OPERATIONS & PROJECT DEVELOPMENT
Silver Production
Silver production was 21.9 million ounces in 2011, a decrease of
10% over the record production of 24.3 million ounces in 2010.
This decrease was mainly attributable to operational challenges
at our Peruvian operations, where silver production declined by
a combined 1.5 million ounces, in addition to lower silver grades
at Alamo Dorado, where 5.3 million ounces was produced
compared to 6.7 million ounces in 2010.
Navidad Project Update
The Company significantly advanced the technical studies and
continued its corporate social responsibility efforts during 2011,
spending approximately $51 million. The Company conducted
resource modeling and mine planning,
inclusive of 37
kilometers of infill and step-out drilling, and advanced the basic
engineering in support of a feasibility study and environmental
impact assessment, both of which are ready for finalization upon
the positive announcement of a change in the laws in Chubut,
Argentina to allow for open pit mining. The 2011 expenditures
also included certain long lead time equipment purchases as
well as an investment in securing additional surface land rights.
The Company continued to make investments in the local
communities that will enable integration of the project and has
purchased long-lead time crushing and grinding equipment.
La Preciosa Update
On August 11, 2011, the Company released a positive Preliminary
Economic Analysis (“PEA”) for the La Preciosa project. The PEA
estimates average annual production of 6.8 million ounces of
silver and 11,800 ounces of gold at a cash cost of $11.84 per
ounce of silver, net of by-product credits for a twelve year life.
The 100% basis after-tax net present value at a 5% discount
rate is expected to be $315 million with a project IRR of 24.3%
(assuming prices of $25 per ounce for silver and $1,250 per
ounce for gold).
Robust Proven and Probable Silver Mineral Reserves
A successful exploration and resource conversion program
in 2011 more than replaced mineral reserves that were mined
during the year. As at December 31, 2011, Proven and Probable
mineral reserves totaled 235.3 million ounces. For the complete
breakdown of mineral reserves and resources by property and
category, refer to section “Mineral Reserves and Resources”
contained herein.
fINANCIAL
Record Revenue
Annual revenue in 2011 was a record $855.3 million, an increase
of 32% over 2010 revenue, driven primarily by higher realized
prices for all metals, partially offset by decreased quantities of
all metals sold.
Record Mine Operating Earnings
Mine operating earnings in 2011 increased to a record $409.1
million, an increase of 70% over the prior year, as growth in
revenue noted above significantly outweighed increases in cost
of sales.
Record Operating Cash Flow
Cash flow from operations was at a record $359.5 million, a
48% increase from 2010. The additional operating cash flow was
mainly attributable to increased cash flow from both operations
in Mexico, Alamo Dorado and La Colorada, as well as Manantial
Espejo, which combined to generate $250.5 million.
Record Liquidity and Working Capital Position
The Company had a record cash and short term investment
balance of $491.2 million and a working capital position at a
record $566.4 million at December 31, 2011, an increase of $130.7
million and $136.5 million, respectively, from a year ago.
Record Net Earnings and Adjusted Net Earnings
The Company had record net earnings of $354.1 million and after
adjusting for the derivative mark to market gain on its warrants,
the adjusted earnings were also a record at $252.3 million
compared to 2010 figures of $15.7 million and $106.4 million,
respectively. Please refer to the section, “Alternative Performance
Measures”, of this MD&A for a description of this measure.
Returning Value to Shareholders
Driven by the record operating cash flows described above,
the Company announced its intention to purchase up to
approximately 5.4 million of its common shares under a normal
course issuer bid, representing up to 5% of Pan American’s
issued and outstanding shares on August 26, 2011. The Company
commenced this share buy-back program during Q3 2011 and as
at the date of this MD&A has purchased approximately 3.6 million
shares at an average price of $26.20 for a total consideration of
about $94.0 million. In addition, the Company continued to pay
quarterly dividends of $0.025 per share during the year ($0.10/
share in aggregate for the year), thereby paying $10.7 million in
dividends to our shareholders.
MINEfINDERS TRANSACTION
On January 23, 2012, Pan American and Minefinders announced
that they had entered
into a definitive agreement (the
“Arrangement Agreement”) pursuant to which Pan American
will acquire all of the issued and outstanding common shares of
Minefinders by way of a plan of arrangement. Under the terms of
the Arrangement Agreement, Minefinders’ shareholders will be
entitled to elect to receive, in exchange for each Minefinders share
held, either: (i) 0.55 shares of Pan American and CDN$1.84 in cash;
or (ii) 0.6235 shares of Pan American; or (iii) CDN$15.60 in cash,
subject to pro-ration under total aggregate cash and share pools.
The consideration represents a total offer value of CDN$15.60
per Minefinders share and implies a total transaction value of
CDN$1.38 billion. Following completion of the transaction, former
Minefinders’ securityholders will own up to approximately 32%
of Pan American, on a fully-diluted basis. The Arrangement
Agreement, as amended can be obtained under Pan American’s
profile on SEDAR at www.sedar.com.
The proposed acquisition is subject to approval by Pan American’s
shareholders and Mindfinders’ securityholders, and the terms and
conditions for the proposed transaction are summarized in the
management information circulars provided to Pan American’s
shareholders and Minefinders’ securityholders. The Company
expects that a special meeting of the Company’s shareholders
will take place on March 26, 2012 to approve the issuance of
Pan American shares pursuant to the proposed acquistion. If
approved by Pan American’s shareholders and Minefinders’
securityholders, the Company expects to complete the proposed
transaction on or about March 30, 2012.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
Management and the Company’s Board of Directors fully support the proposed acquisition and, assuming all necessary approvals are
obtained and the transaction completes, believe that significant strategic benefits to Pan American’s shareholders resulting from the
acquisition will include: (i) enhanced operating and development portfolio diversification towards producing assets, (ii) additional near-
term cash flow, (iii) creation of the leading growth profile in the silver sector, (iv) a meaningful reduction of our average silver cash costs
across our production portfolio, (v) addition of significant silver and gold mineral reserves and resources with excellent potential to
increase even further through exploration (vi) a number of attractive near-term opportunities to drive production growth, (vii) a strong
balance sheet and access to capital; and (viii) increases in the Company’s exposure to the prices of silver and gold.
Assuming the necessary approvals are obtained and the transaction completes, the addition of the Dolores mine’s production to Pan
American’s current portfolio of producing assets should have a significant positive impact on the Company’s 2012 production forecast.
2012 OPERATING OUTLOOK
This section of the MD&A provides management’s production and costs forecasts for 2012. Major capital projects planned for each of
the operations in 2012 are also discussed. The Company has not included any production forecasts from Minefinders’ Dolores mine.
Pending the successful completion of the Minefinders acquisition at the end of March 2012, the Company expects to update its forecast to
incorporate production from the Dolores mine. These are forward-looking estimates and subject to the cautionary note regarding the risks
associated with forward looking statements at the end of this MD&A.
The following table sets out management forecast for silver production and cash and total costs per ounce at each operation in 2012.
Silver Production ounces (000's)
Cash Costs per ounce1
Total Costs per ounce1
SILVER PRODUCTION FORECAST
Huaron
Morococha
Quiruvilca
Alamo Dorado
La Colorada
San Vicente
Manantial Espejo
2,730 - 2,820
1,740 - 1,820
210
5,070 - 5,370
4,100 - 4,260
3,400 - 3,520
4,250 - 4,500
CONSOLIDATED TOTAL
21,500 - 22,500
$20.90 - $22.70
$24.60 - $26.50
$31.30
$6.40 - $6.80
$9.50 - $9.90
$18.40 - $18.70
$8.60 - $10.40
$12.50 - $13.50
$22.60 - $24.46
$29.85 - $31.75
$36.4
$10.25 - $10.65
$10.81 - $11.21
$22.57 - $22.87
$17.03 - $18.83
$16.74 - $17.74
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales. The cash cost forecasts assume by-product credit prices of $1,900/tonne ($0.86/lb) for Zinc, $2,000/tonne ($0.91/lb) for Lead,
$7,300/tonne ($3.31/lb) for Copper, and $1,600/oz for gold.
Silver production is expected to increase slightly from 2011’s production to between 21.5 and 22.5 million ounces. The expected increase is
primarily due to higher production at Manantial Espejo and San Vicente as well as modest increases at Huaron and Morococha. Offsetting
these increases is the decrease on account of an ongoing strategic analysis of the Quiruvilca operation, which may lead to eliminating its
contribution to Pan American’s consolidated production during the second quarter 2012.
18
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
CASH AND TOTAL COSTS fORECASTS
Cash costs are expected to increase to approximately $12.50 to $13.50 per ounce of payable silver in 2012 compared to the 2011
cash costs of $9.44 per ounce. Cash costs are expected to increase primarily due to increases in direct operating costs (mostly
labour related), royalties, treatment charges, and reduced by-product credits due to lower base metal production and prices assumed.
Royalties are expected to increase sharply as a result of the COMIBOL royalty at San Vicente increasing to 37.5% from 9.4% following
the recovery of our investment as defined in the joint venture contract.
The non-cash component of our total cost per ounce is expected to increase to $4.24 per ounce relative to the 2011 comparable of
$4.07 per ounce, as higher depreciation charges arise from the start of amortization of the new Morococha facilities and other capital
expansions incurred in 2011.
BY-PRODUCT PRODUCTION FORECAST
Huaron
Morococha
Quiruvilca
Alamo Dorado
La Colorada
San Vicente
Gold
ounces
1,400 - 1,500
1,250 - 1,300
300
14,700 - 15,300
3,150 - 3,200
-
Manantial Espejo
54,200 - 58,400
Zinc
tonnes
9,400 - 9,600
11,800 - 12,400
1,700
-
4,800 - 4,900
5,300 - 5,400
-
Lead
tonnes
4,300 - 4,400
3,100 - 3,450
600
-
2,620 - 2,660
380 - 390
-
Copper
tonnes
1,000 - 1,450
1,200 - 1,250
300
-
-
-
-
CONSOLIDATED TOTAL
75,000 - 80,000
33,000 - 34,000
11,000 - 11,500
2,500 - 3,000
Gold production in 2012 is expected to be in line with 2011 production levels as increases in throughput rates and gold grades at
Manantial Espejo are expected to offset the loss of gold production from Quiruvilca and small decreases in gold production at all other
operations.
Production of zinc, lead, and copper is expected to decrease marginally in 2012 as compared to 2011’s production primarily due to the
loss of Quiruvilca’s contribution to production, as well as other fluctuations primarily driven by changes in grades.
Precious metals are expected to contribute some 89% of our revenue in 2012, up from 86% of revenue in 2011. The geographic diversity
of the revenue base will continue to enhance in 2012 with the Mexican operations contributing 39% of revenue, 27% from Argentina,
the Peruvian operations 21%, and 13% from Bolivia.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
CAPITAL ExPENDITURE fORECASTS
The Company is planning to invest $87.5 million in sustaining
capital and $35.1 on project development in 2012, as set out in
the table below:
CAPITAL BUDGET (in millions)
Huaron
Morococha
Alamo Dorado
La Colorada
San Vicente
Manantial Espejo
Mine Capital
Navidad (Pre-law reform)1
Morococha Project
Other
Project Development Capital
TOTAL CAPITAL
$
$
$
$
$
$
$
$
$
$
$
$
19.2
19.3
10.3
16.1
5.4
17.2
87.5
22.8
7.5
4.7
35.1
122.5
1 Please see section “2012 Project Development Outlook” for discussion of
the Navidad Project capital expenditure plans post the pending law reform.
MINING OPERATIONS fORECASTS
A brief description of each mine and management’s forecast for
each operation’s production, cash cost performance and capital
requirements in 2012 follows.
Huaron Mine
The Huaron silver-zinc underground polymetallic mine is located
320 highway kilometres northeast of Lima in the heart of the
Cerro de Pasco district. This is one of Peru's most important
mining districts, accounting for more than half of the country's
silver production. Since operations began in 1912, Huaron has
produced more than 230 million ounces of silver.
Pan American acquired a majority interest in Huaron in March
2000 and re-opened the mine in April 2001 after completing
a feasibility study, arranging financing and completing site
rehabilitations.
In 2012, Huaron plans to increase mining and milling rates by
5% from its 2011 throughput rates by accessing additional ore
zones deeper in the mine. The increased throughput along with
a slight recovery improvement, partially offset by a 3% decrease
in silver grade, is expected to result in a modest increase in
silver production. The expected increase in throughput rates
is also expected to yield higher production of zinc and copper,
while lead production is expected to decline slightly.
Costs per dry metric tonne (“DMT”) milled are budgeted to
increase by 13% as compared to 2011 primarily as a result of
increased underground development and drilling rates to access
the additional ore, higher labour costs and social benefits, and
higher raw materials and supply costs. Cash costs per ounce are
expected to increase significantly over the 2011 cash costs due to
a decrease in by-product credits due to lower base metal prices,
combined with the increases in direct operating costs, smelting
and refining costs, and royalties.
Capital spending of $19.2 million at Huaron in 2012 will allow
for mine development, exploration to replace mineral reserves
mined, installation of ventilation raise bores, additional mine
equipment as well as a significant tailings facility expansion.
The capital expenditures planned at Huaron in 2012 also reflects
a commitment to improve camp and working conditions, with
new accommodations and recreational facilities, a change house
and the modernization of the main workshop.
Morococha Mine
Pan American acquired the Morococha mine in Peru in August
2004. Morococha is a silver-zinc rich underground polymetallic
vein mine located approximately 180 highway kilometres
southeast of the Company's Huaron mine or 140 highway
kilometres east of Lima.
The Morococha district has been mined continuously for more
than 100 years and lies within one of the world's most prolific
mineral belts for polymetallic vein systems. Morococha hosts a
very large and productive network of veins, mantos, skarns, and
other replacement ore bodies within a mineral rights package
covering 110 square kilometres of concessions.
Tonnes milled, silver and zinc grades, and recoveries at
Morococha in 2012 are all expected to improve slightly compared
to 2011 levels due to increased underground development rates,
resulting in an improved production profile, with the exception
of copper production which is expected to decline due to lower
grades and recoveries.
Operating costs are expected to increase by 10% over 2011 costs
primarily as a result of increased underground development
and drilling rates, higher smelting and refining costs, labour,
raw material and supplies, mine development costs, camp
administration costs and geology expenses. The Company
anticipates cash cost per ounce in 2012 to increase due to lower
base metal by-product credits, combined with the increase in
direct operating costs mentioned above.
The primary objective of Morococha’s 2012 capital budget, which
totals $19.3 million, is to integrate production from various
ore sources, which requires significant investments in mine
development. Capital expenditures are planned for primary
ramp developments in the Yacumina, Codiciada and Alapampa
mining areas. In addition, capital has been allocated for new
mine equipment, installation of a backfill plant, workshop
upgrades, ventilation raises and mine exploration activities. In
addition, investments are planned for camp improvements and
communication upgrades.
Quiruvilca Mine
The Quiruvilca mine is located in Peru approximately 130
kilometres to the east of the coastal city of Trujillo. Mineralization
was first reported in the area in 1789, and the mine has been
in continuous operation since 1926. The underground workings
cover an area four kilometres long by three kilometres wide
and extend more than 400 meters in depth. Pan American has
operated Quiruvilca since acquiring the property from ASARCO
in late 1995.
Our intention at Quiruvilca in 2012 is to assess strategic
alternatives for the mine which may include continuing to
operate the mine, divestiture or placing the operation on care
and maintenance. Accordingly, only production for the first
quarter of the year has been included in our 2012 guidance,
pending a decision based on our assessment.
20
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Alamo Dorado Mine
Alamo Dorado is an open-pit mine located in the Mexican state
of Sonora, approximately 320 kilometres from the state capital
of Hermosillo. Pan American acquired the Alamo Dorado project
in February 2003. The mine began commercial production on
April 1, 2007 after the construction of the mine, plant and related
infrastructure was completed substantially on schedule and on
budget at the end of 2006.
In 2012, Alamo Dorado will aim to process an average of
between 4,850 and 5,050 ore tonnes per day at similar silver
grades to 2011, with silver recoveries expected to increase to
88% as a result of additional leaching capacity. Based on these
assumptions, the mine is expected to maintain steady silver
production while gold production is expected to decline by 9%
due to lower grades.
Cash costs per ounce are expected to increase from $4.80 to a
range of $6.40 to $6.80, as direct operating costs are expected to
increase and by-product credits from gold revenues to decline.
The expected increase in operating costs is being driven by
escalation in consumables, energy, labour and security costs
which includes an increased frequency of silver doré shipments.
Capital expenditures are expected to be $10.3 million, comprised
primarily of waste pre-stripping of the Phase III open pit
extension to increase the mine life, the addition of a further two
leach tanks to maximize silver recovery, and the introduction of a
grinding automation control program to maximize throughputs.
La Colorada Mine
Pan American acquired the La Colorada mine in 1998 and
began to refurbish the mine and construct a 650 tonne per
day silver and gold oxide ore processing plant with associated
infrastructure. Following the commissioning of the oxide plant in
2003, the Company made additional investments to expand the
mine and the pre-existing sulphide processing plant to produce
silver, gold, lead, and zinc from an expanded 750 tonne per day
sulphide plant, which was first commissioned in 2006. The mine
consists of six continuous blocks of exploration permits and
exploitation claims totalling 2,230 hectares.
The project lies within one of Mexico’s geologic belts known as
the "Faja de Plata" (silver belt) that extends for 800 kilometres
along the Sierra Madre Mountains and is defined by prolific
silver deposits. The continued exploration success achieved
at La Colorada reported over the last five years illustrates the
excellent potential for extending mineral reserves through
discovery and additional development.
In 2012 La Colorada will continue shifting production from the
oxide zone and expand production from the sulphide zone. This
transition will be facilitated by the introduction of a new sulphide
tailings facility. Stable throughput, grades and recovery rates are
expected to result in similar silver production to 2011. The shift
towards more sulphide ore feed, combined with slightly higher
lead and zinc grades is expected to result in higher base metal
by-product production, but lower gold production as compared
to 2011.
Operating costs in 2012 are expected to increase by approximately
9% compared to costs in 2011 due to escalation in the cost of
consumables, energy, labour and security. Cash costs per ounce
are expected to increase from 2011’s cash cost level due to the
effect of an increase in the direct operating costs, together with
a net reduction in by-product credits.
Capital expenditures at La Colorada in 2012 are expected to be
$16.1 million, and are comprised mostly of expenditures related
to mine development and underground mine equipment,
continuation of the deep exploration drilling program, and a
new lower level pump station. Work to complete the sulphides
tailings dam is expected to require $3.0 million while $1.1 million
is planned for an expansion of the sulphide plant.
San Vicente Mine
The San Vicente silver-zinc mine is located in the Bolivian
Andes. More than 20 bonanza type silver-zinc veins are known
to occur over an area of 15 square kilometres and extend to
at least 200 meters in depth. The project consists of 15 mining
concessions totalling 8,159 hectares.
San Vicente was operated from 1972 to 1993 by COMIBOL,
the Bolivian state mining company. In 1999 Pan American
optioned the project from COMIBOL under a joint venture
agreement. Following acquisition, Pan American investigated
several development alternatives for San Vicente with local
partnerships and by May 2007 secured 95.0% interest in the
operating company of the Joint Venture Project with COMIBOL.
Under the Joint Venture agreement, COMIBOL retains the
rights to collect 9.4% of the operating cash flow while the
Company recovers its capital investment increasing to 37.5%
thereafter. Between 2000 and 2007 the Company invested in
exploration drilling, underground development drifting, and
performing various feasibility and development studies while
conducting limited mining and toll milling production at a
nearby neighbouring processing facility. During this period,
Pan American discovered the rich Litoral Ramo II vein which
served to significantly increase the Proven and Probable
reserves at the mine. Pan American decided in mid-2007 to
invest in expanding the mine by developing a modern trackless
long-hole mining operation for the Litoral Ramo II vein and
constructing its own 750 tonne-per-day processing facility.
Commissioning activities proceeded smoothly since the April
2009 start-up leading the Company to declare commercial
production in the first month of operation.
In 2012, the Company expects to operate San Vicente at 8% to
10% higher throughput rates from the continued development
of the high-grade Litoral vein, which is expected to deliver
ore grades similar to 2011. As a consequence, San Vicente is
expected to increase its contribution of silver and zinc to Pan
American (95% interest) from 2011 levels.
Operating costs are expected to increase in 2012 with higher
throughput rates and
the Company anticipates paying
significantly higher royalties to COMIBOL pursuant to the
joint venture agreement. As defined in this agreement, the
royalty paid to COMIBOL increases to 37.5% of operating cash
flow from the 2011 9.4% levels upon recovery of our initial
construction capital at San Vicente. The recovery of our initial
construction capital pursuant to the COMIBOL agreement is
expected to occur during the early part of 2012. Accordingly,
the Company expects to pay an additional $15.7 million in
royalties in 2012 compared to the 2011 expense. Cash costs per
ounce are expected to increase substantially due primarily to
the increase in COMIBOL royalties, together with an expected
decrease in by-product credits on the assumption of lower zinc
prices in 2012.
The main components of the capital investments planned for
2012 at San Vicente, which total $5.4 million, include $1.6 million
for mine development and a mobile equipment maintenance
shop, and $1.0 million for resource development.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
21
Calcatreu, focus on community engagement, including assisting
those areas affected by volcanic ash problems and update
the EIA. The Company expects to spend $3.7 million on these
activities in 2012, all of which will be expensed.
At La Preciosa, our objective is to complete a feasibility study
by mid 2012, assuming an agreement is reached with Orko for
an extension of the delivery date, originally scheduled for April
2012. Work to be completed in 2012 includes a geotechnical
assessment, plant and surface engineering and the completion
of metallurgical testing. The Company anticipates spending
approximately $5.0 million on these activities at La Preciosa
in 2012 assuming the extension of the study delivery date is
achieved and these expenditures will be expensed.
In 2010, the Company’s wholly owned subsidiary Compañia
Minera Argentum S.A. (“Argentum”) which operates the
Morococha mine, entered into an agreement with Minera
Chinalco Perú
the Aluminum
(“MCP”), a subsidiary of
Corporation of China, which clearly defines each party’s long
term surface rights in the area of the mine. The primary focus
of the agreement is on the lands and concessions around the
Morococha mine and MCP’s Toromocho copper project. MCP
requires certain lands and concessions in order to proceed with
the development of Toromocho, including the surface lands
within the planned open pit mining area of the Toromocho
project. While Argentum does not own this land, much of the
Morococha mine infrastructure and facilities are located on this
ground.
Under the terms of the agreement, Argentum will relocate the
core Morococha facilities over a 5 year period and transfer certain
mineral concessions and access rights to MCP. In exchange,
Argentum will receive a package of surface rights, easements
and other rights that are sufficient to relocate the facilities and
to continue uninterrupted operations, as well as periodic cash
payments from MCP totaling $40 million, of which, to December
31, 2011, the Company received $13.8 million. These payments
have been utilized towards capital expenditures incurred for the
project as well as direct project related expenses and recorded as
other income and offset against direct project related expenses.
The main objectives at the Morococha relocation project in 2012
are to complete construction of new facilities, to connect into
permanent power at MCP supplied substation, to secure water
permits and to successfully relocate 53 families, as per our
agreement with MCP. In total $7.5, million is expected to be spent
on the Morococha relocation project in 2012. Additionally, the
Company is expecting to receive from MCP progress payments
of $5.0 million in 2012 of the $40 million discussed above.
Manantial Espejo Mine
Reconnaissance exploration on the Manantial Espejo property
was first carried out in the 1970s by the Argentinean government.
In 2002, the Company acquired a 50% interest in the project
and in March 2006, the Company negotiated and entered into
a purchase agreement for the remaining 50% interest, thus
becoming a 100% owner of the Manantial Espejo project.
In March 2006, Pan American completed a feasibility study and
began construction of the Manantial Espejo project, based upon
a combination open pit and underground mine plan, and a
conventional milling and leaching circuit with a design capacity
of 2,000 tonnes per day. The mine construction was completed
in December 2008 and in 2009, its first full year of commercial
production, the mine produced 3.8 million ounces of silver and
over 70,000 ounces of gold at cash costs of negative $0.84 per
ounce of silver.
The key objectives in 2012 at Manantial Espejo are to increase
plant throughput by 7% to 9% with slightly higher grade ore
and to maintain recoveries, thereby increasing silver and gold
production over 2011 levels. The 2012 mine plan calls for a total
of 10.8 million tonnes to be mined from open pits, including 0.75
million tonnes of ore and an additional 0.15 million ore tonnes
to be mined from underground.
Operating costs are expected to increase by 10% on a per tonne
basis primarily due to the expectation of continued cost inflation
in Argentina, which affects costs of labor and consumables.
These increases, partially offset by higher throughputs and gold
production and the resultant increase in by-product credit are
the principal factors behind the higher expected cash costs.
The capital investments planned at Manantial Espejo total $17.2
million for 2012, with the majority of the capital planned to be
spent on open pit and underground mine development and
equipment acquisitions, expanding the housing project in the
nearby town of Gobernador Gregores, upgrades to the cyanide
neutralization circuit, as well as continued mineral reserve
definition drilling.
2012 PROJECT DEVELOPMENT OUTLOOK
Pan American continues to work in an open and informed
manner with the provincial government and local communities
regarding open pit mining in the Central Meseta of Chubut and
remains confident that this approach will result in a change
in the mining law in 2012. Accordingly, the Company plans
to commence detailed engineering early in 2012 and be in a
position to issue a feasibility study and submit the Navidad
project environmental impact assessment once the mining law
reform has occurred. The forecasted capital cost for Navidad
in 2012 is $22.8 million prior to the anticipated positive law
reform which would allow development of the Navidad Project.
Assuming a positive construction decision can be made around
mid-year 2012, the capital expenditure could grow to $88.6
million for the full year.
In conjunction with the feasibility work on the Navidad project
and the recent positive law reforms in the Rio Negro Province of
Argentina, a conceptual study on the Calcatreu Property located
approximately 120 km north of Navidad will be performed to
assess the viability of a combined project approach, given
the relatively close proximity of Calcatreu to Navidad. The
Company’s objectives in 2012 are to finish a scoping study at
22
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
2011 OPERATING PERfORMANCE
The following table reflects silver production and cash costs at each of Pan American’s operations for 2011, as compared to 2010
and 2009.
SILVER PRODUCTION (ounces '000s)
CASH COSTS1 ($ per ounce)
Huaron
Morococha2
Quiruvilca
Pyrites Stockpiles
Alamo Dorado
La Colorada
San Vicente3
Manantial Espejo
2011
2010
2,769
1,712
881
-
5,300
4,296
3,130
3,767
2,987
2,633
1,245
-
6,721
3,702
3,033
3,965
2009
3,563
2,762
1,422
98
5,321
3,468
2,627
3,783
CONSOLIDATED TOTAL
21,855
24,286
23,044
2011
14.03
16.11
17.47
-
4.80
7.74
13.48
7.36
9.44
$
$
$
$
$
$
$
$
$
2010
12.35
4.43
5.87
-
3.16
8.59
8.21
1.61
5.69
$
$
$
$
$
$
$
$
$
2009
9.95
5.86
8.64
3.78
4.51
7.55
7.07
(0.84)
5.53
$
$
$
$
$
$
$
$
$
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
2 Morococha data represents Pan American's 92.2% interest in the mine's production.
3 San Vicente data represents Pan American's 95.0% interest in the mine's production.
The graph below pictorially presents silver production by mine
in 2011 and highlights the diverse nature of Pan American’s
silver production.
2011 SILVER PRODUCTION
BY MINE
Alamo Dorado
La Colorada
Manantial Espejo
San Vicente
Huaron
Morococha
Quiruvilca
24%
20%
17%
14%
13%
8%
4%
13%
14%
4%
8%
24%
20%
17%
In 2011, Pan American’s silver production decreased to 21.9
million ounces from the record production in 2010 of 24.3 million
ounces. This decrease was primarily a result of significantly
lower production at Alamo Dorado due to reduced grades and at
Morococha, where lower grades and throughput rates negatively
impacted production. At our other operations, decreased
production in Peru and at Manantial Espejo were largely offset
by increased silver production at La Colorada and San Vicente,
which both successfully increased throughput rates.
Silver production in 2011 was 0.6 million ounces lower than
management’s forecast of 22.5 million ounces as described in
the Q3 2011 MD & A, with the largest variances occurring at
Alamo Dorado and at Manantial Espejo, where an unexpected
mechanical breakdown was encountered in December, 2011.
Consolidated cash costs per ounce of silver were $9.44 in 2011,
a 66% increase from 2010’s cash costs per ounce of $5.69. The
increase in cash costs were primarily due to a 19% increase in
unit operating costs per tonne, which were primarily driven
by higher labour costs, combined with the negative impact of
spreading fixed costs over lower production, increases in mining
royalties and treatment costs, exacerbated by an 8% decrease in
by-product credits as a result of lower gold and base metal by-
product production in 2011, as shown in the table below.
The following tables set out the Company’s by-product
production over the past three years and the metal prices
realized for each metal produced:
BY-PRODUCT PRODUCTION
2011
78,426
37,234
12,701
4,544
2010
89,555
43,103
13,629
5,221
REALIZED PRICES
2011
35.03
1,568
2,208
2,402
8,625
$
$
$
$
$
2010
19.87
1,216
2,160
2,147
7,457
2009
100,704
44,246
14,328
6,446
2009
14.90
989
1,554
1,723
5,431
Gold ounces
Zinc tonnes
Lead tonnes
Copper tonnes
Silver/ounce
Gold/ounce
Zinc/tonne
Lead/tonne
Copper/tonne
In 2011, production of all by-product metals decreased in
comparison to 2010 production. Gold, zinc, lead and copper
production declined by 13%, 14%, 7% and 13% respectively,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23
relative to 2010. Gold production declined primarily as a result of expected lower grades at Manantial Espejo while base metal
production was negatively impacted by lower throughput at our Peruvian operations in 2011.
Actual base metal production in 2011 exceeded management’s revised expectation contained in the Q3 MD&A for zinc, lead and copper
by 6%, 6% and 1%, respectively. Gold production in 2011 was 2% below management’s revised forecast of 80,000 to 85,000 ounces.
The positive variance in base metal production relative to management’s guidance was due primarily to higher than anticipated grades
and throughput rates at our Peruvian mines during the fourth quarter, while gold production was hindered by a mechanical stoppage
at Manantial Espejo.
An analysis of each operation’s 2011 operating performance measured against 2010 operating performance, and management’s
forecasts for 2011 follows. Management’s revised forecasts, as contained in section 6 “2011 Operating Outlook” of the Q3 MD&A have
been used for purposes of assessing the 2011 performance against management’s 2011 forecast.
HUARON MINE
Tonnes milled
Average silver grade - grams per tonne
Average zinc grade - %
Average silver recovery - %
Silver - ounces
Gold - ounces
Zinc - tonnes
Lead - tonnes
Copper - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
TWELVE MONTHS ENDED DECEMBER 31,
2011
614,437
177
2.46%
79.1%
2010
704,094
171
2.43%
77.3%
2,768,768
2,987,280
1,339
9,555
4,865
1,278
14.03
16.89
$
$
1,525
10,216
4,346
1,654
$
$
12.35
13.98
2,491,190
2,753,906
Capital Expenditures - thousands
$
13,021
$
6,606
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
In 2011, mill tonnage at Huaron declined by 13% relative to
2010, however this decrease was partially offset by slightly
higher grades and recoveries, resulting in silver production that
declined by 7% year-on-year. Zinc, copper and gold production
was also hampered by the lower throughput rates, while lead
production increased over 2010 levels on account of higher
grades. The decline in throughput rates at Huaron were primarily
a result of less than expected ore tonnes obtained from the 180
level mine deepening area.
Cash costs at Huaron increased by 14% in 2011 to $14.03 per
ounce mainly due to the negative effect of fixed costs on lower
production of silver ounces and increased costs associated
with additional underground mine development and ground
support measures, general operating cost escalations and
the strengthening local currency. In addition, the Company
made a decision during Q3 of 2011 to demobilize a significant
number of contract miners in favor of hiring and developing
a trained workforce in order to enhance safe and productive
mine efficiencies for the long life available. In support of this
effort, the Company has established a miner training center at
Huaron to enhance efforts at training inexperienced people from
the surrounding communities as well as to provide a center for
improving our experienced miners skills and productivity. By-
product credits at Huaron remained similar to 2010 as lower
production of zinc, copper and gold were offset by higher lead
production and by stronger metal prices in 2011.
Silver production in 2011 was in line with management’s
revised forecast of 2.8 million ounces. Improving throughput
rates positively affected the production of by-product metals,
resulting in zinc and lead production that was above revised
levels forecast by management for 2011.
The actual cash costs in 2011 were within 1% of our revised
forecast of $13.89 per ounce due primarily to actual by-product
credits being lower than expected due to shortfalls against
expected copper metal production and lower base metal prices.
Capital expenditures at Huaron during 2011 totalled $13.0
million compared to our forecast of $9.9 million due primarily to
unexpected additional mine development and mine equipment
replacements.
24
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
MOROCOCHA MINE*
Tonnes milled
Average silver grade - grams per tonne
Average zinc grade - %
Average silver recovery - %
Silver - ounces
Gold - ounces
Zinc - tonnes
Lead - tonnes
Copper - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
Capital Expenditures - thousands2
* Production and cost figures are for Pan American’s 92.2% share only.
TWELVE MONTHS ENDED DECEMBER 31,
2011
483,104
128
2.74%
86.1%
2010
619,819
152
2.88%
87.0%
1,711,668
2,632,790
1,691
10,676
3,050
1,522
2,329
15,228
4,927
1,532
$
$
16.11
22.19
$
$
4.43
7.13
1,520,702
2,338,121
$
17,289
$
11,325
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
2 Sustaining capital expenditures not including capital incurred at the Morococha project as disclosed in the section Project Development Update.
Actual silver production performance at Morococha in 2011 met
management’s revised forecasts, while higher than expected
zinc and copper production was offset by below anticipated lead
production as a result of variations in ore grades.
The actual cash costs in 2011 were 8% higher than our revised
forecast of $14.87 per ounce due primarily to actual by-product
credits being significantly lower than expected due to shortfalls
against expected by-product metal prices.
Capital expenditures at Morococha during 2011 totalled $17.3
million, compared to management’s guidance of $12.2 million.
The capital spending was primarily on increased long term mine
development advances, exploration drilling, mine and plant
equipment replacements. In addition, the Company invested in
capital for the Morococha project as described in the “Project
Development Update” below.
Morococha’s 2011 silver production decreased by 35% as
compared to 2010 mainly due to a 22% decrease in throughput
rates combined with 16% lower silver grades. Zinc, lead and
gold production also suffered due to the lower throughput rates,
while higher copper grades resulted in similar production to
2010. Throughput rates and silver grades at Morococha were
challenged by decisions to temporarily stop mining a few of the
higher grade areas in the Yacumina and Morro Solar areas that
were experiencing erratic grades to allow for additional reserve
definition studies and enable optimization of the mine design
to maximize the resource extraction and profitability from these
areas. In addition, after attempts to enhance safe productive
mining at our Peruvian operations with limited success, a
decision was made during the third quarter to demobilize three
of four contract miner groups in order to allow hiring and
appropriate training of Company employees. The Company
is confident these decisions will result in overall enhanced
performance once the mineralization in these areas are better
understood and brought back into production in 2012 and 2013.
Cash costs at Morococha increased by 264% in 2011 to $16.11
per ounce due to the negative impact of carrying fixed costs
by substantially reduced silver production, lower by-product
credits resulting from reduced by-product metal production
combined with general cost escalation in operating costs for
2011 compared to 2010.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
25
QUIRUVILCA MINE
Tonnes milled
Average silver grade - grams per tonne
Average zinc grade - %
Average silver recovery -%
Silver - ounces
Gold - ounces
Zinc - tonnes
Lead - tonnes
Copper - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
Capital Expenditures - thousands
TWELVE MONTHS ENDED DECEMBER 31,
2011
295,378
114
3.06%
81.2%
2010
323,427
141
3.58%
84.7%
880,873
1,245,030
1,687
7,745
2,399
1,030
17.47
20.32
$
$
760,191
$
1,515
1,801
10,058
2,989
1,434
5.87
6.56
1,128,557
-
$
$
$
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconcili-
ation of these measures to our cost of sales.
Cash costs of $17.47 per ounce were 2% above management’s
revised forecast of $17.20 per ounce primarily due to slightly
higher than expected mine development costs. By-product
credits were similar to management’s expectations as higher
gold production offset lower than expected base metal prices.
Capital expenditures at Quiruvilca during 2011 totalled $1.5
million, compared to management’s guidance of $2.9 million.
The capital spending was primarily on mine development
advances and equipment replacements.
In 2011, Quiruvilca’s silver production decreased by 29% in
comparison to 2010. This decrease in silver production was due
to a combination of lower tonnage and reduced silver grades
and recoveries. Similarly, reduced throughput rates and lower
zinc, lead, copper and gold grades resulted in lower production
of those metals in 2011.
Cash costs for 2011 were $17.47, a 198% increase from $5.87 per
ounce a year ago, primarily due to the combined effect of lower
throughput and grades, higher operating costs from general cost
escalations and the strengthened local currency and decreased
by-product credits resulting from lower by-product production
in 2011.
Silver production during 2011 attained management’s revised
forecast of 0.9 million ounces. Base metal production also was
in line with management’s revised forecasts, while higher than
expected gold grades resulted production that was slightly
higher than management’s forecast.
26
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
ALAMO DORADO MINE
Tonnes milled
Average silver grade - grams per tonne
Average gold grade - grams per tonne
Average silver recovery - %
Silver - ounces
Gold - ounces
Copper - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
TWELVE MONTHS ENDED DECEMBER 31,
2011
1,848,230
105
0.33
83.6%
5,299,841
16,607
66
2010
1,675,952
147
0.38
88.4%
6,721,258
16,746
89
$
$
4.80
8.29
$
$
3.16
7.41
5,278,892
6,683,134
Capital Expenditures - thousands
$
8,287
$
2,132
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
Cash costs were 2% higher than our revised forecast of $4.68 per
ounce as a result of lower silver production partially offset by
higher realized gold by-product credits resulting from increased
gold production and gold metal prices.
Capital expenditures at Alamo Dorado during 2011 totalled $8.3
million, compared to management’s guidance of $2.0 million.
Capital expenditures in 2011 exceeded management’s guidance
due to an unplanned decision to construct two additional leach
tanks in order to increase residence times, which is expected to
increase future recovery rates. The additional leaching capacity
is expected to be commissioned in the first half of 2012.
Alamo Dorado was the Company’s largest silver producer in
2011, with silver production of 5.3 million ounces, which was
a 21% reduction from the record silver production achieved in
2010. Silver production decreased as expected from the 2010
levels primarily due to significantly lower silver grades and
recoveries. The decreased silver grades were a result of the
mining sequence in the Phase II pit during 2011 compared to the
higher grade portions of the Phase I pit encountered in 2010. Gold
production of approximately 17,000 ounces in 2011 remained
similar to the production levels in the comparable period of 2010
as lower gold grades were offset by higher throughput rates.
Alamo Dorado’s cash costs per ounce were $4.80 in 2011, a 52%
increase from the 2010 cash costs of $3.16, due mainly to the
negative effect of lower production of silver ounces on fixed
costs and cost escalation, partially offset by higher gold by-
product credits due to higher realized gold prices in 2011.
Alamo Dorado’s silver production in 2011 was 6% below
management’s revised forecast of 5.6 million ounces mainly due
to a decision to complete the in-pit phase 3 exploration drilling
program, which disrupted mining activities. Gold production
was 3% ahead of the revised forecast of 16,071 ounce as gold
grades realized exceeded expectations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27
LA COLORADA MINE
Tonnes milled
Average silver grade - grams per tonne
Average silver recovery - %
Silver - ounces
Gold - ounces
Zinc - tonnes
Lead - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
TWELVE MONTHS ENDED DECEMBER 31,
2011
404,533
369
89.5%
2010
345,697
378
88.0%
4,295,783
3,701,568
4,104
4,466
2,388
7.74
8.99
$
$
4,312
2,940
1,366
8.59
9.73
$
$
4,093,851
3,537,905
Capital Expenditures - thousands
$
13,301
$
9,118
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconcili-
ation of these measures to our cost of sales.
Silver production at the La Colorada mine in 2011 was 4.3 million
ounces, a 16% increase compared to the previous year. This
increase was due to higher throughput rates and improved silver
recoveries as a result of benefits from previous investments in
mine development, mine equipment purchases, ventilation
and dewatering which are enabling higher productivities and
efficiencies. Production of lead and zinc benefited from higher
throughput, while lower gold grades led to a modest decrease
in gold production.
Actual cash costs of $7.74 were 3% higher than management’s
revised forecast of $7.51 per ounce as higher operating costs
were partially off-set by better than expected by-product
metal production.
Capital expenditures at La Colorada during 2011 totalled $13.3
million, which exceeded our forecast of $10.8 million. The capital
was spent mainly on a tailings dam expansion, a mine back-fill
plant, sulphide plant equipment upgrades, and exploration works.
Cash costs decreased by 10% in 2011 compared to 2010 to $7.74
per ounce as a result of significantly increased by-product
credits, partially offset by higher operating costs.
Actual silver production at La Colorada in 2011 achieved
management’s revised forecast of 4.3 million ounces, as higher
throughput rates offset slightly lower realized silver grades
than expected. Actual by-product grades realized varied from
management’s expectations resulting in gold production that
was slightly below expectations, while both zinc and lead
production exceeded our revised guidance by 5%.
28
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
SAN VICENTE MINE*
Tonnes milled
Average silver grade - grams per tonne
Average zinc grade - %
Average silver recovery - %
Silver - ounces
Zinc - tonnes
Copper - tonnes
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
TWELVE MONTHS ENDED DECEMBER 31,
2011
282,960
382
2.26%
90.1%
2010
271,483
389
2.29%
89.1%
3,130,145
3,033,046
4,792
649
13.48
17.14
$
$
4,661
512
8.21
12.07
$
$
2,849,243
2,823,869
Capital Expenditures - thousands
$
4,975
$
6,007
* Production and interest figures are for Pan American’s 95.0% share only.
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
Actual cash costs of $13.48 were 5% above management’s
revised forecast due to higher than expected mining royalties,
treatment and refining charges and operating costs. Mining
royalties that the Company pays in Bolivia are directly linked
to metal prices and operating cash flow generated, which
exceeded management’s forecasts, partially offset by higher
than expected by-product credits on higher zinc and copper
production.
Capital expenditures at San Vicente during 2011 totalled
$5.0 million, which was close to management’s forecasts
of $4.6 million. Expenditures consisted mainly of spending
on community infrastructure and water treatment facility
upgrades, the construction of a new fuel station, additional
underground mine equipment and exploration drilling.
In 2011, San Vicente’s silver production increased by 3%
compared to its 2010 production, mainly due to higher
throughput rates and recoveries, partially offset by lower
silver grades. Zinc and copper production levels also increased
compared to the same period last year, primarily due to the
increased throughput rates.
Cash costs at San Vicente increased by 64% to $13.48 in 2011
as compared to the previous year. The higher cash costs in
2011 resulted from the combined effect of (i) a 36% increase
in royalties, which are calculated on operating cash flow,
(ii) a 110% increase in smelting costs, primarily due to the
deterioration in terms for high silver grade concentrates and
(iii) an 11% increase in operating costs, primarily driven by
increases in labor costs. These factors were partially offset by
higher zinc and copper by-product credits due to increased
production and prices of those metals.
Actual silver production attributable to Pan American in 2011 of
3.1 million ounces was slightly below management’s revised
forecast of 3.2 million ounces, as the higher than expected
throughput rates were offset by the lower than anticipated
silver grades. Zinc and copper production benefited from higher
throughput rates and exceeded the revised forecast by 6%.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
MANANTIAL ESPEJO MINE
Tonnes milled
Average silver grade - grams per tonne
Average gold grade - grams per tonne
Average silver recovery - %
Average gold recovery - %
Silver - ounces
Gold - ounces
Cash costs per ounce1
Total costs per ounce1
Payable ounces of silver
TWELVE MONTHS ENDED DECEMBER 31,
2011
697,205
185
2.48
90.2%
95.1%
3,766,504
52,998
2010
717,463
191
2.81
90.5%
94.7%
3,964,822
62,843
$
$
7.36
15.89
$
$
1.61
10.16
3,758,971
3,958,874
Capital Expenditures - thousands
$
16,916
$
7,021
1 Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance Measures for a detailed reconciliation
of these measures to our cost of sales.
The actual cash costs in 2011 of $7.36 per ounce were 20% higher
than the revised forecast of $5.90 per ounce. The main drivers
for the higher than expected cash costs was the impacts of the
plant shutdown in addition to higher than anticipated operating
cost inflation in Argentina, compounded by lower by-product
gold credits. Major components of the operating cost increases
were higher diesel fuel prices, spare parts and materials logistic
costs, and employee costs.
Capital expenditures at Manantial Espejo during 2011 totalled
$16.9 million, compared to management’s forecast capital
expenditures of $11.6 million. Higher capital costs were
incurred as the Company adapted its operations to deal with
the more difficult Argentine customs clearances now required
and supplementing its fleet with locally available contractor
equipment. The capital expenditures consisted mainly of camp
upgrades, development drilling, work on a tailings dam raise,
and mine exploration works.
Silver production at the Manantial Espejo mine in 2011 was
3.8 million ounces, a 5% decrease from the production level in
2010. This decrease was a result of the slightly lower throughput
rates, silver grades and recoveries. Gold production decreased
by 16% in 2011 due to lower throughput rates and gold grades
that were expected as the operation normalized towards the
average reserve gold grades of the deposit, which is expected to
be approximately 2.2 grams per tonne. Lower gold grades were
partially offset by an increase in gold recoveries.
In 2011, cash costs at Manantial Espejo increased to $7.36,
significantly higher than 2010’s cash costs of $1.61 per ounce.
The main drivers of the increase in cash costs were higher
operating costs mainly due to an increase in labour costs and
the effects from the high sustained inflation rates in Argentina.
These were partially offset by higher by-product gold prices.
In 2011, Manantial Espejo’s actual throughput rates and silver
grades were below management’s forecast, resulting in 9%
lower silver production than our revised forecast. Silver
production was challenged due to a two week unplanned
plant shutdown to facilitate the repair of the primary ball mill,
together with equipment availability issues as a consequence of
importation restrictions that severely limited our flow of spare
parts and materials necessary to sustain operations. Actual gold
production suffered for the same reasons, resulting in a 10%
negative variance compared to our revised forecasts.
30
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
2011 PROJECT DEVELOPMENT UPDATE
The following table reflects the amounts spent at each of Pan American’s project developments in 2011, as compared to 2010 and 2009.
Our accounting policies determine what portion of the amounts spent at our projects is capitalized and what portion is expensed during
the period.
Navidad
Morococha Project
La Preciosa
Calcatreu
TOTAL PROJECT SPENDING
2011
33,200
26,218
2,400
1,656
2010
37,177
10,259
9,989
323
$
$
$
$
2009
631
1,710
4,000
-
$
$
$
$
At the Navidad project, the Company spent a total of $33.2 million in 2011, of which $22.1 million was capitalized. In addition, certain
long lead time equipment was purchased, including plant SAG and ball mills, primary crusher, pebble crusher, rockbreaker and liner
handlers which totalled $17.0 million. Major activities in 2011 related to Navidad included:
• Advancing the feasibility study significantly by the end of the year.
• Continuing to optimize the project design and production plan.
• Preparing the project environmental impact assessment document for submission once Chubut mining law is amended.
• Assisting affected nearby communities in both Rio Negro and Chubut during the volcanic ash fallout event due to the eruption
of the Puyehue volcano in Chile.
• Assisting nearby communities with improving integrity of water supply, provision of firewood, school and education support,
sporting events for youth, and assistance with the development of local businesses.
• Completion of exploration drilling program, which focused on infilling of known deposits.
• Continued with metallurgical test work to better understand the recovery characteristics of the various ore types found at the project.
At the Morococha plant relocation project, the Company invested $26.2 million in 2011 (partially funded by $6.0 million progress
payment by Chinalco). The main focus of the work in 2011 included:
• Completed construction of all new surface buildings, which include an administration building, maintenance shop, warehouse,
change house, kitchen, 300 person camp, laboratory, and compressor building. Connecting these new facilities to a power supply
is scheduled to be completed in early 2012.
• Completed new main water supply lines and new compressed air line to the mine operations.
At the La Preciosa joint venture project, the Company spent $2.4 million in 2011, all of which was expensed. Work at La Preciosa during
the year included:
• Completion and announcement of the preliminary economic assessment.
• Commenced a scoping study (in advance of performing a full feasibility study) in order to optimize and improve the project
economics.
• Commenced a site geotechnical investigation as the basis for the design of the tailings storage facility and the site.
• Continued with infrastructure improvements in local communities in the vicinity of the project.
At the Calcatreu project, the Company spent $1.7 million in 2011, all of which was expensed. Work during the year included:
• Completion of nearly 3,000 meters of diamond drilling, mostly as confirmation holes and collection of fresh metallurgical sample
materials. Results on testing performed on these materials are still pending and the Company has not yet had an opportunity to
confirm and update the resource estimates, which were prepared in April 2008 by Micon for Aquiline Resources Inc., the previous
owners of the project.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31
OVERVIEW Of 2011 fINANCIAL RESULTS
For the year ended December 31, 2011, the Company’s net income and cash flow from operations increased significantly from the
comparable period in 2010. The improved results were primarily due to significantly higher realized metal prices, partially offset by lower
quantities of all metals sold. Significant volatility to attributable net income continued on account of income tax expense as well as the
mark to market valuation of the Company’s warrant position, both discussed in more detail in the section that follows.
The following table sets out selected quarterly (unaudited) results for the past twelve quarters, which are stated in thousands of USD,
except for the per share amounts.
2011
Revenue
Mine operating earnings1
Attributable earnings for the period
Adjusted attributable earnings for the period3
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash flow from (used in) operating activities
Cash dividends paid
Other financial information:
Total assets
Total long-term financial liabilities
Total shareholders’ equity
2010
Revenue
Mine operating earnings1
Attributable earnings for the period
Adjusted attributable earnings for the period3
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash flow from (used in) operating activities
Cash dividends paid
Other financial information:
Total assets
Total long-term financial liabilities
Total shareholders’ equity
QUARTERS ENDED (Unaudited)
YEARS ENDED
MARCH 31
JUNE 30
SEPT. 30
DEC. 31
DEC. 31
$
$
$
$
$
$
$
$
190,481
96,018
92,161
$
$
$
231,866
118,629
112,623
64,638
$ 76,093
0.86
0.604
59,465
0.025
$
$
$
$
1.04
1.04
104,127
0.025
$
$
$
$
$
$
$
$
220,567
106,208
52,354
45,573
0.49
0.48
90,896
0.025
MARCH 31
JUNE 30
SEPT. 30
$
$
$
$
$
$
$
$
135,819
37,776
26,276
17,128
0.25
0.24
48,646
0.025
$
$
$
$
$
$
$
$
150,558
52,269
(6,262)
4,504
(0.06)
(0.04)
45,338
-
$
$
$
$
$
$
$
$
164,530
61,293
21
27,372
0.00
0.00
65,066
0.025
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
212,361
88,270
95,356
$
$
$
885,275
409,125
352,494
64,362
$ 250,666
0.89
0.89
104,967
0.025
DEC. 31
195,646
89,777
(6,324)
55,368
(0.06)
(0.07)
83,206
0.025
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3.31
3.31
359,455
0.10
1,951,796
118,984
1,593,839
DEC. 31
646,553
241,115
13,711
104,372
0.13
0.13
242,256
0.075
1,738,796
228,054
1,341,358
1 Mine operating earnings are equal to revenue less cost of sales and depreciation and amortization, which is considered to be substantially the same as gross margin.
3 Adjusted earnings for the period is an alternative performance measure. Please refer to the section, Alternative Performance Measures, of this MD&A for a calculation
of adjusted earnings for the period.
4 The diluted earnings per share for the three months ended March 31, 2011 has been revised to $0.60 per share from the amount previously presented of $0.86 per share,
to properly reflect the effect under IFRS of the dilutive share purchase warrants which are classified as a liability.
32
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
20092
Revenue
Mine operating earnings1
Attributable earnings for the period
Adjusted attributable earnings for the period3
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash flow from (used in) operating activities
Cash dividends paid
Other financial information:
Total assets
Total long-term financial liabilities
Total shareholders’ equity
QUARTERS ENDED (Unaudited)
YEARS ENDED
MARCH 31
JUNE 30
SEPT. 30
$
$
$
$
$
$
$
70,406
10,474
6,610
N/A
0.08
0.08
(5,375)
-
$
$
$
$
$
$
$
111,392
23,490
10,208
N/A
0.12
0.12
32,034
-
$
$
$
$
$
$
$
118,608
34,708
17,375
N/A
0.20
0.20
37,099
-
DEC. 31
154,406
57,334
27,805
N/A
0.31
0.31
52,118
-
$
$
$
$
$
$
$
DEC. 31
454,812
126,006
61,998
N/A
0.71
0.71
115,876
-
1,848,609
83,563
1,343,790
$
$
$
$
$
$
$
$
$
$
1 Mine operating earnings are equal to revenue less cost of sales and depreciation and amortization, which is considered to be substantially the same as gross margin.
2 Information for 2009 is presented in accordance with Canadian GAAP and was not required to be restated to IFRS. As such, adjusted earnings are not applicable to
these figures.
3 Adjusted earnings for the period is an alternative performance measure. Please refer to the section, Alternative Performance Measures, of this MD&A for a calcula-
tion of adjusted earnings for the period.
The following table reflects the metal prices that the Company realized and the quantities of metal sold during each respective period.
As seen below, there was an increase in the realized metal prices but a decrease in quantities of all metals sold in 2011 compared to
2010.
REALIZED METAL PRICES
Year ended December 31,
QUANTITIES OF METAL SOLD
Year ended December 31,
2011
35.031
1,5681
2,2082
2,4022
8,6252
$
$
$
$
$
2010
19.871
1,2161
2,1602
2,1472
7,4572
$
$
$
$
$
2011
19,516,483
75,904
30,157
11,885
3,991
$
$
$
$
$
2010
22,914,073
88,604
37,831
13,466
4,973
$
$
$
$
$
Silver - in ounces
Gold - in ounces
Zinc - in tonnes
Lead - in tonnes
Copper - in tonnes
1 Metal price per ounce.
2 Metal price stated as cash settlement per tonne.
INCOME STATEMENT
Earnings for 2011 were $354.1 million, compared to earnings of $15.7 million in 2010. Basic earnings per share for 2011 were $3.31
compared to $0.13 in 2010. Adjusting for the benefit of a $101.8 million gain on derivatives in 2011 and a loss on derivatives of $90.7
in 2010, adjusted earnings were $252.3 million for 2011 compared to $106.4 million in 2010 (please refer to the section, “Alternative
Performance Measures”, of this MD&A for description of adjusted earnings). Adjusted basic earnings per share for 2011 were $2.37
compared to $0.99 for the corresponding period in 2010. Adjusted earnings benefited from significant increases in the realized metal
prices received, partially offset by declines in overall quantities of most metal sold, as reflected in the tables above. When compared
to 2010, the quantities of silver, gold, zinc, lead ,and copper sold declined by 15%, 14%, 20%, 12% and 20%, respectively, due to lower
production levels and timing of doré shipments. Cost of sales, which includes production costs, depreciation and amortization, and
royalty expense, in 2011 were higher than in 2010 due to operating costs escalation discussed in the section “Operating Performance”.
Adjusted earnings in 2011 were reduced by $27.7 million in exploration expenses primarily incurred on drilling and prefeasibility work
at the Navidad and La Preciosa projects and the Company’s greenfield exploration program, but positively impacted by other income
of $15.7 million comprised primarily of insurance recoveries related to the theft of doré, receipt of payments from MCP towards the
Morococha relocation project, receipt of a non-refundable deposit upon the initiation of the sale of the Pico Machay project and the
reversal of certain severance provisions based on changes to mine plans. This was offset by a foreign exchange loss of $8.1 million
primarily on cash and short term investments held in Canadian dollars and Mexican pesos (“CAD” and “MXN”, respectively).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
Revenue for 2011 was $855.3 million, a $208.7 million or 32% increase from revenue for 2010. This increase was driven by higher metal
prices realized, offset by lower quantities of all metals sold, as described above.
Mine operating earnings increased to $409.1 million in 2011, a significant increase of 70% from the $241.1 million generated in 2010.
This increase resulted from an increase in revenue outweighing the higher cost of sales. Mine operating earnings are equal to revenue
less cost of sales, which is considered to be substantially the same as gross margin.
Income taxes for 2011 were $117.1 million, a $26.9 million increase from the $90.2 million income tax provision recorded in 2010 and are
comprised of current and deferred income taxes as follows:
Current taxes
Current tax expense in respect of the current year
Adjustments recognized in the current year with respect to prior years
Deferred taxes
Deferred tax expense recognized in the current year
Adjustments recognized in the current year with respect to prior years
2011
110,620
(1,273)
109,347
4,133
3,638
7,771
2010
73,786
(28)
73,758
16,457
-
16,457
Provision for income taxes
$
117,118
$
90,215
This increase was primarily a consequence of increased taxable earnings generated at our operations as well as the effects of various
temporary and permanent differences as shown in the table below, which result in effective tax rates that vary considerably from the
comparable period and from the amount that would result from applying the Canadian statutory income tax rates to earnings before
income taxes. The main factors which have affected the effective tax rates for the year ended December 31, 2011 and the comparable
period of 2010 were the unrealized gains and losses on the Company’s warrants position, foreign income tax rate differentials, additional
mining taxes paid and withholding taxes paid on income and payments from subsidiaries to parent companies, exploration expenses
on properties for which the deductibility of the expenses is not assured, and foreign exchange gains and losses. The Company expects
that these and other factors will continue to cause volatility in effective tax rates in the future.
Income before taxes
Statutory tax rate
YEAR ENDED DECEMBER 31,
2011
471,264
26.50%
2010
105,922
28.50%
Income tax expense based on above rates
$
124,885
$
30,188
Increase (decrease) due to:
Non-deductible expenses
(Increase) decrease to estimated deductible expenses
Change in net deferred assets not recognized
Non-taxable unrealized (gain) loss on derivatives - warrants
Foreign tax rate differences1
Effect of other taxes paid (mining and withholding)
Change in net deferred assets not recognized for exploration expenses
Foreign exchange (gain) loss
Other
Effective tax rate
2,028
(12,986)
286
(26,984)
14,642
9,914
6,207
2,277
(3,151)
1,731
5,099
1,543
25,416
3,179
10,008
6,214
3,866
2,971
$
117,118
$
90,215
24.85%
85.17%
1 The 2011 statutory income tax rates in the countries that the Company has operations in are as follows: Argentina – 35%, Bolivia – 25%, Mexico – 30%, Peru – 30%.
34
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
STATEMENT Of CASH fLOWS
Cash flow from operations, generated a record $359.5 million
in 2011, a 48% increase from the $217.2 million generated a year
ago. The increase in cash flow from operations resulted from
improved operating earnings as discussed previously. Changes
in non-cash working capital consumed $39.4 million compared
with a non-cash working capital use of $12.6 million in 2010.
The net non-cash working capital consumed in 2011 consisted
primarily of a $28.4 million increase in inventories which was
primarily attributable to the timing of doré and concentrate
shipments, an increase of $2.8 million in prepaid expenses and
an increase of accounts receivable of $8.6 million. In 2010, non-
cash working capital was primarily affected by similar increases
in doré inventory, accounts receivable and prepaid expenses,
partially offset by decreases in accounts payable due to cash
payments received for the Morococha relocation project.
Investing activities used $177.3 million in 2011, inclusive of
$51.1 million invested in short-term investments. The balance of
investing activities consisted primarily of spending $39.1 million
on the Navidad project including $17.0 million of processing
equipment intended for the Navidad project and sustaining
investments in property, plant and equipment at Manantial
Espejo, Morococha, La Colorada, Huaron, Alamo Dorado and
San Vicente of $16.9 million, $17.3 million, $13.3 million, $13.0
million, $8.3 million and $5.0 million, respectively. In addition,
$26.2 million was spent on the Morococha relocation project
net of $21.9 million received as equipment and construction
advances and lease proceeds. The $6.0 million received from
MCP as part of the relocation project was recognized as
Other Income as per the required IFRS accounting for these
contributions (as described in the Notes to the Consolidated
Financial Statements). Finally, $3.9 million of refundable VAT
tax was paid in Argentina and Bolivia.
Investing activities used $160.8 million in 2010, inclusive of
$80.2 million invested in short- term investments. The balance
of investing activities consisted primarily of spending $28.0
million on the Navidad project and sustaining investments
in property, plant and equipment primarily at Morococha, La
Colorada, Manantial Espejo, Huaron, San Vicente and Alamo
Dorado of $11.3 million, $9.1 million, $7.0 million, $6.6 million,
$6.0 million and $2.1 million, respectively. In addition, $5.4
million was spent on the Morococha relocation project and
$5.0 million was paid as refundable VAT tax in Argentina and
Bolivia.
Financing activities in 2011 used $99.4 million, whereas
financing activities in 2010 used $2.8 million. Cash used in
financing activities in 2011 was a result of $94.0 million used
for the share buy-back program and $10.7 million in dividend
payments to our shareholders which was offset by $4.5 million
in proceeds from the exercising of warrants and options and
$1.5 million of net contributions received from non-controlling
interests.
In 2010, the $2.8 million in cash used in financing activities
consisted primarily of $11.9 million proceeds from the
exercising of warrants and options which was offset by $8.0
million in dividend payments to our shareholders and $5.6
million of repayments on concentrate advances.
INCOME STATEMENT Q4 2011
The following table reflects the metal prices that the Company
realized and the quantities of metal sold during each respective
period. As seen below, there was an increase in the realized
metal prices but a decrease in quantities of all metals sold in
2011 compared to 2010, other than gold.
REALIZED METAL PRICES
Year ended December 31,
QUANTITIES OF METAL SOLD
Year ended December 31,
2011
32.491
1,6831
1,9642
1,9802
7,1002
$
$
$
$
$
2010
25.611
1,3761
2,3262
2,5202
8,7582
$
$
$
$
$
2011
5,369,259
19,296
8,410
2,877
1,038
$
$
$
$
$
2010
5,608,042
20,771
10,184
3,186
1,202
$
$
$
$
$
Silver - in ounces
Gold - in ounces
Zinc - in tonnes
Lead - in tonnes
Copper - in tonnes
1 Metal price per ounce.
2 Metal price stated as cash settlement per tonne.
Earnings in the fourth quarter of 2011 (Q4 2011) were $95.5 million or $0.89 per share compared to a loss of $5.8 million or $0.06
per share for the comparable period in 2010. Adjusting for the benefit of a $31.0 million gain on derivatives, adjusted earnings were
$64.5 million for Q4 2011 compared to $55.9 million in Q4 2010 (please refer to the section, “Alternative Performance Measures”, of
this MD&A for description of adjusted earnings). Adjusted basic earnings per share for Q4 2011 were $0.61 compared to $0.52 for
the corresponding period in 2010. Adjusted earnings benefited from increases in the realized metal prices received, partially offset
by declines in overall quantities of metal sold. When compared to Q4 2010, the quantities of silver, zinc, copper, lead, and gold sold
declined by 4%, 17%, 14%, 10% and 7%, respectively, due to lower production levels and timing of doré shipments. Cost of sales in
Q4 2011 were higher than the comparable period of 2010 due to operating costs escalation in line with cost pressures described for
the year 2001 in the section “ Operating Performance”. Adjusted earnings in Q4 2011 were positively impacted by foreign exchange
gains of $2.4 million primarily on cash and short term investments held in CAD and other income of $10.1 million comprised of the
receipt of payments from Chinalco and reversal of certain provisions as described above.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
35
2010, financing activities generated $4.8 million and consisted
primarily of $8.7 million from the exercising of warrants and
options partially offset by $2.7 million in dividend payments to
our shareholders.
LIQUIDITY POSITION
The Company’s cash balance at December 31, 2011 was $262.9
million, which was an increase of $83.0 million from the balance
at December 31, 2010. The balance of the Company’s short-term
investments at December 31, 2011 was $228.3 million, an increase
of $47.7 million from a year ago. This increase in liquidity in 2011
resulted primarily from cash generated by operating activities
partially offset by capital expenditures on property, plant and
equipment, the cash utilized for the share buy-back program and
the payment of dividends to our shareholders. The Company
does not own any asset-backed commercial paper or other
similar, known, at-risk investments in its investment portfolio.
Working capital at December 31, 2011 was $566.4 million, an
increase of $136.5 million from the prior year-end’s working
capital of $429.9 million. The increase in working capital was
mainly due to the $130.7 million increase in cash and short-term
investments described above plus an increase in refundable
taxes of $32.0 million, accounts receivable of $36.5 million and
inventory of $28.8 million. These were partially offset by an
increase in the current income tax liability of $44.7 million and
an increase in finance leases of $20.7 million. The increase in
short term refundable tax is reflective of the Company’s success
in collecting value added taxes in the countries it operates in
allowing balances that were carried as long term refundable
tax to be reclassified to short term. The increase in inventory is
mainly attributable to an increase in both silver doré inventory
and concentrates inventory due to the timing of shipments
which also impacts the accounts receivable while the increase
in income tax liability is primarily a result of the higher current
taxable income generated in 2011.
The Company’s financial position at December 31, 2011, the
undrawn $150 million credit facility, and the operating cash
flows that are expected over the next twelve months, lead
management to believe that the Company’s liquid assets
are sufficient to fund currently planned capital expenditures
for existing operations, to complete the proposed merger
with Minefinders including funding of the cash portion of the
acquisition as well as all operating and capital expenditures
that will arise, and to discharge liabilities as they come due. The
Company remains well positioned to take advantage of further
strategic opportunities as they become available. Please refer
to the “2012 Operating Outlook” section of this MD&A for a
more detailed description of the sustaining capital expenditures
planned for each mine in 2012.
The impact of inflation on the Company’s financial position,
operational performance, or cash flows over the next twelve
months cannot be determined with any degree of certainty.
Earnings for Q4 2010 were impacted by higher general and
administration costs due to the timing of the Company’s annual
incentive plan and severance payments and a non-cash $1.5
million write-down of pyrite stockpile inventories that were
being sold to the La Oroya smelter which had closed, offset by
$3.2 million in foreign exchange gains and an insurance claim
related to theft of doré at La Colorada for $1.7 million reported
in Other Income.
Revenue for Q4 2011 was $212.4 million, a $16.7 million or 9%
increase from revenue in the comparable period in 2010. This
increase was driven by higher metal prices realized, offset by
lower quantities of all metals sold, as described above.
Mine operating earnings decreased slightly to $88.3 million
in Q4 2011 from $89.8 million in the same quarter last year.
Despite increased revenue, this decrease was attributable
primarily to the increase in cost of sales for reasons described
above as well as an increase in depreciation and amortization
of $3.0 million from $20.5 million to $23.5 million which is
included as part of the cost of sales. Cost of sales for Q4 2011
of $124.1 million was an increase of 17% from $105.9 million in
the comparable period last year.
Income tax provision during Q4 2011 amounted to $21.3 million
compared to $30.6 million in Q4 2010. As described above for
the full year 2011, the main factors which impacted the effective
tax rates for Q4 2011 and the comparable period of 2010 were
the unrealized gains and losses on the Company’s warrants
position, foreign income tax rate differentials and foreign
exchange gains and losses.
STATEMENT Of CASH fLOWS: Q4 2011
Cash flow from operations, generated $105.0 million in Q4
2011, up from the $83.2 million generated a year ago. Although
earnings from operations were similar in Q4 2011 to those of Q4
2010 at $86.7 million and $87.6 million, respectively, changes
in non-cash working capital generated $8.4 million compared
with non-cash working capital consuming $15.6 million in Q4
2010. The net non-cash working capital generated in Q4 2011
consisted primarily of a decrease in accounts receivable of
$19.9 million, which were offset by a decrease in accounts
payable and accrued liabilities of $9.4 million. In Q4 2010, the
net consumption of $15.6 million was an aggregate of various
timing differences in the normal course operations.
Cash flow from investing activities used $74.5 million in Q4
2011. This consisted primarily of $36.6 million in purchases of
short term investments, $5.3 million spending on the Navidad
project and an aggregate $36.6 million primarily in sustaining
capital investments at the operating mines.
Investing activities in Q4 of 2010 used $63.6 million, which
consisted primarily of $41.6 million in the purchase of short
term investments, $5.7 million spending on the Navidad
project and an aggregate $18.6 million in primarily sustaining
capital investments at Morococha, La Colorada, San Vicente
and Manantial Espejo.
Financing activities in Q4 2011 used $68.0 million and consisted
primarily of $66.1 million used in the share buy-back program,
$3.2 million in dividend payments to our shareholders but
offset by $1.0 million from the exercise of warrants. In Q4 of
36
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
INVESTMENTS AND
INVESTMENT INCOME
At the end of 2011, cash plus short-term investments were $491.2
million, a $130.7 million increase from December 31, 2010, as
described in the “Liquidity and Capital Resources” section
above.
Pan American’s investment objectives for its cash balances are
to preserve capital, to provide liquidity and to maximize return.
The Company’s strategy to achieve these objectives is to invest
excess cash balances in a portfolio of primarily fixed income
instruments with specified credit rating targets established by
the Board of Directors, and by diversifying the currencies in
which it maintains its cash balances.
Investment income for the year ended December 31, 2011
totalled $3.1 million (2010 - $1.0 million) and consisted mainly
of interest income and net gains from the sales of the securities
within the Company’s short-term investment portfolio.
CAPITAL RESOURCES
Shareholders’ equity at December 31, 2011 was $1,593.8
million, an increase of $252.5 million from $1,341.4 million
at December 31, 2010, primarily as a result of the attributable
earnings generated during the year and warrants and options
exercised in the year offset by the share buy-back program and
dividends paid as described above. As at December 31, 2011,
the Company had approximately 104.5 million common shares
outstanding for a share capital of $1,243.2 million. The basic
weighted average number of common shares outstanding was
106.4 million shares for the year and 106.6 million shares for the
quarter ended December 31, 2011.
On August 26, 2011 the Company announced that the Toronto
Stock Exchange (the “TSX”) accepted the Company’s notice of
its intention to make a normal course issuer bid to purchase up
to 5,395,540 of its common shares, representing up to 5% of Pan
American’s issued and outstanding shares as of August 24, 2011.
Purchases pursuant to the share buy-back program are required
to be made on the open market through the facilities of the
TSX and the Nasdaq Global Select Market (“NASDAQ”) at the
market price at the time of acquisition of any common shares in
accordance with the rules and policies of the TSX and NASDAQ
and applicable securities laws. The period of the share buy-back
program began on September 1, 2011 and will continue until
August 31, 2012 or an earlier date should the Company complete
its purchases. Pan American had not acquired any of its own
common shares within the 12 month period prior to initiating
the share buy-back program and is not obligated to make any
purchases. All common shares acquired by the Company under
the share buy-back program will be cancelled and purchases will
be funded out of Pan American’s working capital.
As of the date of this MD&A, the Company had purchased
3,582,200 shares since the start of the share buy-back program
and had 104,497,168 common shares outstanding.
Pan American initiated the share buy-back program because,
in the opinion of its board of directors, the market price of
its common shares, from time to time, may not fully reflect
the underlying value of its mining operations, properties and
future growth prospects. The Company believes that in such
circumstances, the outstanding common shares represent an
appealing investment for Pan American since a portion of the
Company’s excess cash generated on an annual basis can be
invested for an attractive risk adjusted return on capital through
the share buy-back program.
A copy of the Company’s notice of its intention to make a normal
course issuer bid filed with the TSX can be obtained from the
Corporate Secretary of Pan American without charge.
The following table sets out the common shares, warrants and
options outstanding as at December 31, 2011:
OUTSTANDING AS AT DECEMBER 31, 2011 (in thousands)
Common shares
Warrants
Options
TOTAL
104,492,743
7,814,984
1,243,312
113,551,039
The warrants, all of which were issued as part of the Aquiline
acquisition in December of 2009, expire in December 2014, and
have an exercise price of CAD $35.00.
As at December 31, 2011, the Company had approximately 1.2
million stock options outstanding, with exercise prices in the
range of CAD $17.73 and $40.22 and a weighted average life of
35 months. Approximately 0.5 million of the stock options were
vested and exercisable at the 2011 year end with an average
weighted exercise price of $27.38 per share.
fINANCIAL INSTRUMENTS
From time to time, Pan American mitigates the price risk
associated with its base metal production by committing
some of its forecasted production under forward sales or
option contracts. At December 31, 2011, the Company had
no outstanding base metal positions. As of the date of this
MD&A, the Company entered into lead option contracts
for 4,000 tonnes, which have the effect of ensuring a price
between $2,000 and $2,620 per tonne on that quantity of lead,
settling monthly during 2012. At the date of this MD&A, these
positions had an insignificant mark-to-market valuation effect
due to the market price of this commodity having remained
relatively stable since the time at which the Company entered
into the contracts.
The Company recorded a gain on settled commodity contracts
of $0.7 million in 2011, compared to a loss of $0.2 million in
2010.
Approximately 50% of the Company’s operating and capital
expenditures are denominated in local currencies other than
the USD. These expenditures are exposed to fluctuations in
USD exchange rates relative to the local currencies. From time
to time, the Company mitigates part of this currency exposure
by accumulating local currencies or by entering into contracts
designed to fix or limit the Company’s exposure to changes
in the value of local currencies relative to USD. At December
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37
is $55.8 million (2010 - $71.6 million). Decommissioning
obligations at the Quiruvilca mine of $18.1 million are
expected to be incurred starting in two to five years while the
remainder of the obligations are expected to be paid through
2028. Revisions made to the reclamation obligations in 2011
were primarily a result of increased site disturbance from the
ordinary course of operations at the mines as well as revisions
to the estimates based on periodic reviews of closure plans,
actual expenditures incurred and concurrent closure activities
completed. These obligations will be funded from operating
cash flows, reclamation deposits and cash on hand.
The unwinding of the discount charged to 2011 earnings as
finance expense was $3.3 million compared to $3.7 million in
2010. Reclamation expenditures during the current year were
up slightly from the previous year at $2.0 million (2010 - $1.0
million).
CONTRACTUAL COMMITMENTS AND
CONTINGENCIES
The Company does not have any off-balance sheet arrangements
or commitments that have a current or future effect on its
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources, that are material, other than those disclosed in
this MD&A and the Audited Consolidated Financial Statements
and the related notes.
31, 2011 and at the date of this MD&A, the Company had no
outstanding foreign currency contracts but did hold cash and
short term investments of $205.5 million in CAD and $38.3
million in Mexican pesos.
The carrying value of share purchase warrants is at fair
value, while cash, accounts receivable, accounts payable
and accrued liabilities approximate their fair value due to
the relatively short periods to maturity of these financial
instruments. Under IFRS, our share purchase warrants are
classified and accounted for as financial liabilities and,
as such, are measured at their fair values with changes in
fair values reported in the income statement as gain/loss
on derivatives. The Company used as its assumptions for
calculating fair value of the 7,814,984 warrants outstanding at
December 31, 2011 a risk free interest rate of 1%, expected
stock price volatility of 41%, expected life of 2.9 years (expiry
in December 2014), expected dividend yield of 0.5%, a quoted
market price of the Company’s shares on the Toronto Stock
Exchange of $22.28, an exchange rate of 1 CAD to USD of
0.9771 and an exercise price of CAD $35.00 per share. The
changes in the valuation of these share purchase warrants
create a permanent difference for tax purposes and may result
in significant volatility of our effective tax rate. The Company
recorded a gain on the revaluation of the warrants of $101.8
million in 2011, compared to a loss of $90.7 million in 2010.
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The Company does not have any off-balance sheet
arrangements or commitments that are expected to have a
current or future effect on its financial condition or results of
operations, other than those disclosed in this MD&A and the
consolidated financial statements and the related notes.
CLOSURE AND DECOMMISSIONING
COST PROVISION
The estimated future closure and decommissioning costs are
based principally on the requirements of relevant authorities
and the Company’s environmental policies. The provision is
measured using management’s assumptions and estimates
for cash outflows. The Company accrues these costs initially
at their fair value, which are determined by discounting
costs using rates specific to the underlying obligation. Upon
recognition of a liability for the closure and decommissioning
costs, the Company capitalizes these costs to the related
mine and amortizes it over the life of each mine on a unit-of-
production basis except in the case of exploration projects for
which the offset to the liability is expensed. The unwinding of
the discount due to the passage of time is recognized as an
increase in the liability and a finance expense.
The total undiscounted amount of estimated cash flows
required to settle the Company’s asset retirement obligations is
$65.9 million (2010 - $73.2 million) which has been discounted
using discount rates between 4% and 10%. The provision on
the statement of financial position as at December 31, 2011
38
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
The Company had the following contractual obligations at the end of 2011:
PAYMENTS DUE BY PERIOD (in thousands of USD)
Finance lease obligations1
Current liabilities2
Long term income taxes payable
Severance accrual
Contribution plan3
TOTAL
$
31,983
149,785
2,274
5,427
3,478
LESS THAN
A YEAR
21,068
149,785
-
3,032
3,478
1 – 3
YEARS
10,915
-
-
-
-
Total contractual obligations4
$
192,947
177,363
10,915
4 – 5
YEARS
AFTER
5 YEARS
-
-
2,274
2,395
-
4,669
-
-
-
-
-
-
1 Includes lease obligations in the amount of $10.1 million (2010 - $0.12 million) with a net present value of $9.8 million (2010 - $0.12 million) and equipment and construc-
tion advances in the amount of $21.9 million (2010 - $5.4 million); both discussed further in the notes to the consolidated financial statements.
2 Includes all current liabilities as per the statement of financial position less items presented separately in this table which also include amounts expected to be paid
but not accrued in the books of the Company.
3 In June 2008 the Company initiated a 4 year contractual retention plan for key officers and management. Contract commitments for the plan, payable in CAD, represent
minimum payments expected to be paid out, which are presented above in USD at the period-end rate.
4 Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation, the liability arising from Aquiline acquisition,
and deferred tax liabilities.
GENERAL AND ADMINISTRATIVE
General and administrative costs, including stock based compensation, increased by 7% in 2011 to $18.3 million (2010: $17.1 million).
This increase was primarily as a result of the addition of several new positions in 2011; various expenses related to increased business
development activity, including increased use of consultants and travel; but partially offset by a weaker CAD exchange rate against the
USD (CAD to USD exchange of 1.01 average in 2011 versus 1.03 average in 2010).
Our 2012 general and administrative costs, including stock based compensation, are expected to remain similar to our 2011 level at
approximately $18.0 million. This figure is subject to fluctuations in the CAD to USD exchange rate as well as the Company’s ability to
allocate certain head office costs that are directly attributable to the operations to the operating subsidiaries.
The following table compares our general and administrative forecast for 2012 against the general and administrative costs incurred
over the previous two years, on a per ounce of silver produced basis.
General and administrative costs2 (in ‘000 of USD)
Silver production (in ‘000s of ounces)
General and administrative costs per silver ounce produced
ACTUAL
FORECAST1
2010
17,109
24,286
0.70
$
$
2011
18,291
21,854
0.84
$
$
2012
$
18,000
22,000
$
0.82
1 Forecast silver production at the mid-point of the guidance given in this MD&A on page 18 from the Company’s existing operations.
2 Related party transactions: During the year ended December 31, 2011, a private company controlled by a director of the Company was paid approximately $0.4 mil-
lion (2010 - $0.4 million) for consulting services, charged to general and administrative costs. Similarly, at December 31, 2011 an accrual was recorded for consulting
services for the same company in the amount of $0.01 million (2010 - $0.01 million). These transactions are in the normal course of operations and are measured at the
exchange amount, which is the amount of consideration established and agreed to by the parties.
ExPLORATION AND PROJECT DEVELOPMENT
Exploration and project development expenses in 2011 were $27.7 million compared to $24.5 million incurred in 2010. Similar to 2010,
the expenses recorded in 2011 primarily represented the exploration and project development expenses incurred for the advancement
of the Navidad project, and to a lesser degree the La Preciosa and Calcatreu projects in addition to exploration done in the vicinity of
our existing mines.
Please refer to “2011 Project Development Update” for more details of work performed during 2011 on these projects.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
39
The 2011 brownfields program was successful at replacing 118% of the 2011 silver ounces mined by adding 29.3 million ounces to the
mineral reserve. A total of 150,247 meters of diamond drilling was completed at the operating mines, and an additional 37,095 meters
were drilled at the Navidad project.
The Company’s brownfields exploration program will continue to be very active in 2012 with approximately 116,000 meters of drilling
planned. The cost of these programs is included as part of each mine’s capital budget or included in its operating costs. The total
amount expected to be spent on brownfield drilling in 2012 is approximately $15.5 million. The main objective of this program is to
replace mineral reserves and resources mined at our sites. The main targets for these mineral resource and reserve replacements are
the Candelaria sulphide zone and testing the sulphide deep extension at La Colorada, Litoral, Guernica and Union veins at San Vicente,
the Maria, Gaby, Karina and Melissa veins at Manantial Espejo and multiple vein structures at Morococha and Huaron.
ALTERNATIVE PERfORMANCE MEASURES
CASH AND TOTAL COSTS PER OUNCE Of SILVER
The alternative performance measures of cash and total cost per ounce of silver are used by the Company to manage and evaluate
operating performance at each of the Company’s mines and are widely reported in the silver mining industry as benchmarks for
performance, but do not have standardized meaning. To facilitate a better understanding of these measures as calculated by the
Company, provided in the following table is the detailed reconciliation of these measures to the cost of sales, as reported in the audited
Consolidated Income Statements for 2011, 2010 and 2009.
CASH AND TOTAL COST PER OUNCE RECONCILIATION
(in thousands of USD)
Cost of Revenue1
Add / (Subtract)
Depreciation and amortization
Smelting, refining, & transportation charges
By-product credits
Mining royalties
Worker’s participation and voluntary payments
Change in inventories
Other
Non-controlling interest adjustment
Cash Operating Costs
Add / (Subtract)
Depreciation & amortization
Accretion of asset retirement obligation
Change in inventories
Other
Non-controlling interest adjustment
Total Costs
Payable Silver Production (000’s ounces)
Cash Costs per ounce
Total Costs per ounce
2011
2010
2009
$
446,150
$
405,438
$
245,637
(82,756)
64,132
(83,084)
66,441
-
64,118
(255,820)
(253,925)
(215,657)
-
(5,632)
30,103
3,765
(4,099)
-
(6,230)
10,620
(5,092)
(2,114)
11,867
(1,151)
15,068
3,368
(2,144)
A
195,843
132,054
121,106
82,756
3,268
659
(817)
(1,334)
280,375
20,753
9.44
13.51
$
$
$
83,084
2,929
4,611
(755)
(1,108)
220,815
23,224
5.69
9.51
$
$
$
83,169
2,998
3,388
(271)
(867)
209,523
21,888
5.53
9.57
B
C
A/C
B/C
$
$
$
1 The years 2011 and 2010 are presented under IFRS while 2009 is presented under Canadian GAAP. As such, Cost of Revenue includes production costs, depreciation
and amortization, and royalty expense for these two years.
40
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
MINE OPERATING EARNINGS
The alternative performance measure of mine operating
earnings is a non-GAAP measure used by the Company to assess
the performance of its silver mining operations. Mine operating
earnings is calculated as revenue less production costs,
depreciation and amortization and royalties. The Company and
certain investors use this information to evaluate the Company’s
performance.
ADJUSTED EARNINGS
Adjusted earnings is a non-GAAP measure calculated as net
earnings for the period adjusting for the gain or loss recorded
on fair market value adjustments on the Company’s outstanding
warrants. The Company considers this measure to better reflect
normalized earnings as it does not include unrealized gains or
losses from outstanding warrants, which may be volatile from
period to period.
GOVERNANCE AND CORPORATE SOCIAL
RESPONSIBILITY AND ENVIRONMENT
Pan American adheres to the highest standards of corporate
governance and closely follows the requirements established
by both the Canadian Securities Administrators and the SEC
(Securities and Exchange Commission) in the United States. We
believe that our current corporate governance systems not only
meet but exceed these requirements.
Our Board of Directors oversees the direction and strategy of the
business and the affairs of the Company. The Board is comprised
of a non-executive chairman and seven other directors, five of
whom are independent and are represented by a lead director.
The Board’s wealth of experience allows it to effectively oversee
the development of corporate strategies, provide management
with long-term direction, consider and approve major decisions,
oversee
the business generally and evaluate corporate
performance. The Health, Safety and Environment Committee,
which is a committee appointed by the Board of Directors,
provides oversight for the corporate social initiatives of the
Company and reports directly to the Board.
We believe that good corporate governance is important to the
effective performance of the Company and plays a significant
role in protecting the interests of all stakeholders while helping
to maximize value.
OUR COMMUNITIES
We are committed to creating sustainable value in the communities
where our people work and live. Guided by research and
conducted by our local offices, we participate in, and contribute
to numerous community programs. They typically center on
education and health, the environment, local infrastructure and
alternative economic activities. In every community we place
a priority on assisting with livestock breeding. Most of the
communities depend on livestock for their essentials, as the basic
food supply and for raw materials used in textiles and clothing.
Some of our core activities are:
• Strengthening the production chain of livestock breeding,
world class alpaca textiles and contemporary designed
silver jewelry.
Improving nutrition, focusing on children and pregnant
women.
•
• Promoting community health with emphasis on
immunizations and focusing on oral health.
• Promoting tourism and local areas of interest such as the
Stone Forest in Huayllay in Peru.
• Encouraging education for children and adults by
contributing to teacher’s salaries, and providing continuous
support through different scholarships at a local and
national level.
NON-MINED WASTE
Typical site non-mined waste products at Pan American’s mines
include oils, scrap, steel, tires and construction waste, in addition
to office, cafeteria and camp waste. In all, our operations generate
approximately 5,000 metric tons of this waste every year. We are
striving for significant reductions through the implementation of
waste-reduction initiatives, alternate practices, innovative waste-
reduction technologies, and we have engaged local companies
to help with recycling, re-use and reclamation projects, in order
to further reduce our waste load and improve the revenue and
awareness for the local communities.
At Manantial Espejo, Alamo Dorado and La Colorada, cyanide
is used for leaching silver from the mined ore. To ensure safe
handling and disposal, mine employees receive rigorous training.
WATER
Water is a finite resource and essential to life. At Pan American,
we are committed to ensuring that our operations do not
negatively affect sources of water by ensuring that we use it in
the most efficient way possible. For that reason, our discharges
comply with or exceed regulated requirements where necessary.
At the Quiruvilca mine, we have been working with the local
communities on a re-vegetation project that began with seeding
the river with species of algae which changed and increased micro
life in the area. A similar river improvement is underway at the San
Vicente mine, where we are removing historic acid-generating
mine spoils (unrelated to our operations) and rehabilitating the
riverbed.
ENERGY
At Pan American we recognize the challenges and risks associated
with climate change. Improving our energy efficiency is key
to reducing our greenhouse gas (GHG) emission, and while
conservation efforts to date have been limited, we promote
innovation opportunities for improvement among our staff.
Many of our mines maintain relatively low GHG emission rates
because their mining and processing are powered from their
national electrical grids (classified as energy consumption from
an indirect source, which is categorized at a lower GHG emission
than Direct, or fossil-fuel consumption).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
41
tax rate that also varies depending on operating margins. The
Company’s calculations of the change in the royalty and the new
tax indicate that no material impact is expected on the results of
the Company’s Peruvian operations.
On October 26, 2011, the Federal Government of Argentina
promulgated an “economic emergency” decree requiring all oil,
gas and mining exporters to repatriate 100% of revenue receipts,
in an attempt to stem ongoing capital flight. Pan American is
currently assessing the implications the new regulation will have
on its Manantial Espejo mine and its development projects in
Chubut and Rio Negro. Currently, management believes that the
likely impact would come in the form of additional transaction fees
associated with the repatriation of funds; however, the precise
methods of application of the decree are still being formulated
by the Government and are being analyzed by the Company as
further details are determined.
Management and the Board of Directors continuously assess
risks that the Company is exposed to, and attempt to mitigate
these risks where practical through a range of risk management
including employing qualified and experienced
strategies,
personnel.
METAL PRICE RISK
Pan American derives its revenue from the sale of silver, zinc, lead,
copper, and gold. The Company’s sales are directly dependent on
metal prices that have shown extreme volatility and are beyond
the Company’s control. The table below illustrates the effect of
changes in silver and gold prices on anticipated revenues for 2012.
This analysis assumes that quantities of silver and gold produced
and sold remain constant under all price scenarios presented.
Educational campaigns among workers and locals are being
evaluated to teach the importance of conserving energy and the
most efficient way to manage consumption. Also, our ongoing
reforestation and restoration projects contribute to mitigating
GHG emissions. At the Alamo Dorado mine, four hectares of land
have been reclaimed and 120,000m3 of topsoil recovered and
stored for use when the property is restored after closure. At the
Quiruvilca mine, a similar program has been put in place.
RISKS AND UNCERTAINTIES
The Company is exposed to many risks in conducting its
business, including but not limited to: metal price risk as the
Company derives its revenue from the sale of silver, zinc, lead,
copper, and gold; credit risk in the normal course of dealing
with other companies; foreign exchange risk as the Company
reports its financial statements in USD whereas the Company
operates in jurisdictions that utilize other currencies; the inherent
risk of uncertainties in estimating mineral reserves and mineral
resources; political risks; and environmental risks and risks
related to its relations with employees. These and other risks are
described in Pan American’s Annual Information Form (available
on SEDAR at www.sedar.com); Form 40-F filed with the SEC; and
the Audited Annual Consolidated Financial Statements for the
year ended December 31, 2011. Readers are encouraged to refer
to these documents for a more detailed description of some of
the risks and uncertainties inherent to Pan American’s business.
In a press release on April 19, 2011, management provided
comments on media reports from Bolivia, that the Bolivian
government was considering unilaterally terminating contracts
and taking control of several privately-operated mines (formerly
operated by the government). In a follow up release on May 3,
2011, the Company provided an update on this situation. On May
1, 2011 Bolivian President Evo Morales announced the formation
of a multi-disciplinary committee to re-evaluate several pieces of
legislation, including the mining law. However, Mr. Morales made
no reference to reviewing or terminating agreements with private
mining companies. Operations at San Vicente have continued
to run normally under Pan American’s administration and the
Company expects normal operations to continue status quo. The
Company will take every measure available to enforce its rights
under its agreement with COMIBOL and is confident that it will
ultimately be successful in protecting its investment.
The Company’s Mexican operations have both suffered from
armed robberies of doré within the past two years. The Company
has instituted a number of additional security measures and a
more frequent shipping schedule in response to these incidents.
The Company has subsequently renewed its insurance policy to
mitigate some of the financial loss that would result from such
criminal activities in the future, however a substantial deductible
amount would apply to any such losses in Mexico.
In September Peru’s Parliament approved new laws to change
the scheme for royalty payments and to introduce a new special
mining tax, which are effective from October 1, 2011. Under
the previous tax scheme, royalties were based on net revenue.
Under the current law, royalties are based on operating profit
and royalty rates that vary depending on operating margins. In
the case that the calculated royalty payments are less than 1%
of net revenue, then the Company will pay a minimum royalty
of 1% of net revenue. Additionally, a new special mining tax has
been introduced which is also based on operating profits and a
42
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
ExPECTED 2012 REVENUE (000’s USD)
GOLD PRICE
$
$
$
$
$
$
$
$
$
1,700
702,226
742,331
782,409
822,459
862,469
902,445
942,402
982,319
$
$
$
$
$
$
$
$
$
1,800
709,804
749,909
789,986
830,036
870,045
910,020
949,977
989,893
$
$
$
$
$
$
$
$
$
1,600
694,648
734,754
774,832
814,882
854,893
894,869
934,827
974,744
$
$
$
$
$
$
$
$
$
1,900
717,381
757,486
797,563
837,612
877,621
917,596
957,553
997,468
$
$
$
$
$
$
$
$
$
2,000
724,959
765,064
805,141
845,189
885,197
925,171
965,128
1,005,043
I
E
C
R
P
R
E
V
L
I
S
$ 26.00
$ 28.00
$ 30.00
$ 32.00
$ 34.00
$ 36.00
$ 38.00
$ 40.00
Consistent with the Company’s mission to provide equity investors with exposure to changes in silver prices, our policy is not to hedge
the price of silver.
From time to time, Pan American mitigates the price risk associated with its base metal production by committing some of its forecasted
base metal production under forward sales and option contracts, as described under the “Financial Instruments” section of this MD&A.
The Board of Directors continually assesses the Company’s strategy towards its base metal exposure, depending on market conditions.
Since base metal and gold revenue are treated as a by-product credit for purposes of calculating cash costs per ounce of silver, this
non-GAAP measure is highly sensitive to base metal and gold prices. The table below illustrates this point by plotting the expected
cash cost per ounce according to the 2012 forecast against various price assumptions for the Company’s two main by-product credits,
zinc and gold.
CASH COST PER OUNCE OF SILVER PRODUCED (USD/OZ)
GOLD PRICE
$
$
$
$
$
$
$
1,600
12.43
12.27
12.11
11.97
11.83
11.65
$
$
$
$
$
$
$
1,700
12.08
11.92
11.76
11.62
11.48
11.30
$
$
$
$
$
$
$
1,800
11.73
11.57
11.41
11.27
11.13
10.95
$
$
$
$
$
$
$
1,900
11.38
11.22
11.06
10.92
10.78
10.59
$
$
$
$
$
$
$
2,000
11.03
10.87
10.70
10.57
10.43
10.24
$ 1,700
$ 1,850
$ 2,000
$ 2,150
$ 2,300
$ 2,500
I
E
C
R
P
C
N
Z
I
The Company has long-term contracts to sell the zinc, lead and copper concentrates produced by the Quiruvilca, Huaron, Morococha,
San Vicente and La Colorada mines. These contracts include provisions for pricing the contained metals, including silver, based on
average spot prices over defined 30-day periods that may differ from the month in which the concentrate was produced. Under these
circumstances, the Company may, from time to time, fix the price for a portion of the payable metal content during the month that the
concentrates are produced.
CREDIT RISK
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. The terms of the concentrate contracts may require the Company to deliver concentrate
that has a value greater than the payment received at the time of delivery, thereby introducing the Company to credit risk of the buyers
of our concentrates. Should any of these counterparties not honour supply arrangements, or should any of them become insolvent, Pan
American may incur losses for products already shipped and be forced to sell its concentrates on the spot market or it may not have a
market for its concentrates and therefore its future operating results may be materially adversely impacted.
For example, the Doe Run Peru (“DRP”) smelter, a past significant buyer of Pan American’s production in Peru, experienced financial
difficulties in the first quarter of 2009 and closed. Pan American continued to sell copper concentrates to other buyers but on inferior
terms. At the end of 2010 and at the date of this MD&A, the DRP smelter remains closed and Pan American is owed approximately $8.8
million under the terms of its contract with DRP for deliveries of concentrates that occurred in early 2009. The Company has established
a doubtful accounts receivable provision for the full amount receivable from DRP. The Company continues to pursue all legal and
commercial avenues to collect the amount outstanding.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
43
At December 31, 2011 the Company had receivable balances
associated with buyers of our concentrates of $40.5 million (2010
- $51.0 million). All of this receivable balance is owed by eight
well known concentrate buyers and the vast majority of our
concentrate is sold to those same counterparts.
Silver doré production is refined under long term agreements
with fixed refining terms at three refineries worldwide. The
Company generally retains the risk and title to the precious metals
throughout the process of refining and therefore is exposed to the
risk that the refineries will not be able to perform in accordance
with the refining contract and that the Company may not be
able to fully recover our precious metals in such circumstances.
At December 31, 2011 the Company had approximately $35.9
million (2010 - $20.8 million) of value contained in precious
metal inventory at refineries. The Company maintains insurance
coverage against the loss of precious metal doré and base metal
concentrates at our mine sites, in-transit to refineries and while at
the refineries and smelters.
Refined silver and gold is sold on the spot market to various
bullion traders and banks. Credit risk may arise from these
activities if the Company is not paid for metal at the time it is
delivered, as required by spot sale contracts.
The Company maintains trading facilities with several banks and
bullion dealers for the purposes of transacting the Company’s
trading activities. None of these facilities are subject to margin
arrangements. The Company’s trading activities can expose us to
the credit risk of our counterparties to the extent that our trading
positions have a positive mark-to-market value.
Management constantly monitors and assesses the credit risk
resulting from its concentrate sales, refining arrangements and
commodity contracts. Furthermore, management carefully
considers credit risk when allocating prospective sales and
refining business to counterparties. In making allocation decisions,
management attempts to avoid unacceptable concentration of
credit risk to any single counterparty.
ExCHANGE RATE RISK
its financial statements
Pan American reports
in USD;
however the Company operates in jurisdictions that utilize
other currencies. As a consequence, the financial results of
the Company’s operations, as reported in USD, are subject to
changes in the value of the USD relative to local currencies.
Since the Company’s revenues are denominated in USD and a
portion of the Company’s operating costs and capital spending
are in local currencies, the Company is negatively impacted by
strengthening local currencies relative to the USD and positively
impacted by the inverse. The local currencies that the Company
has the most exposure to are the Peruvian soles (PEN), Mexican
pesos (MXN) and Argentine pesos (ARS). The following table
illustrates the effect of changes in the exchange rate of PEN
and MXN against the USD on anticipated cost of sales for 2012,
expressed in percentage terms:
D
S
U
/
N
E
P
2.30
2.50
2.70
2.90
3.10
11.00
12.00
13.00
14.00
MxN/USD
106%
105%
103%
102%
101%
105%
103%
102%
100%
99%
103%
101%
100%
99%
98%
102%
100%
99%
97%
96%
15.00
100%
99%
98%
96%
95%
Under this analysis, our cost of sales is reflected at 100% of our forecasted foreign exchange assumptions for the PEN and MXN of 2.70
and 13.00 per one USD, respectively. Devaluation of the USD relative to the PEN and MXN has the effect of increasing our anticipated
cost of sales above 100%, and vice versa.
In order to mitigate this exposure, the Company maintains a portion of its cash balances in PEN, MXN and CAD and, from time to
time, enters into forward currency positions to match anticipated spending. At December 31, 2011, the Company did not have any open
currency forward positions, but was holding approximately 51% of its cash balances in currencies other than USD.
The Company’s balance sheet contains various monetary assets and liabilities, some of which are denominated in foreign currencies.
Accounting convention dictates that these balances are translated at the end of each period, with resulting adjustments being reflected
as foreign exchange gains or losses on the Company’s income statement.
44
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
LIQUIDITY RISK
EMPLOYEE RELATIONS
Pan American’s business depends on good relations with
its employees. At December 31, 2011 the Company had
approximately 7,622 employees and employees of mining
contractors, of which approximately 2,208 were represented by
unions in Peru, 416 by a union in Argentina and a further 286
by a union in Bolivia. The Mexican mines do not have a union.
The Company has experienced short-duration labour strikes and
work stoppages in the past and may experience future labour
related events.
The number of persons skilled in acquisition, exploration and
development of mining properties is limited and competition
for such persons is intense. As Pan American’s business
activity grows, Pan American will require additional key mining
personnel as well as additional financial and administrative staff.
There can be no assurance that Pan American will be successful
in attracting, training and retaining qualified personnel as
competition for persons with these skill sets increases. If Pan
American is not successful in this regard, the efficiency of its
operations could be impaired, which could have an adverse
impact on Pan American’s future cash flows, earnings, results of
operations and financial condition.
CLAIMS AND LEGAL PROCEEDINGS
Pan American is subject to various claims and legal proceedings
covering a wide range of matters that arise in the ordinary course
of business activities, including claims relating to ex-employees.
Each of these matters is subject to various uncertainties and it is
possible that some of these matters may be resolved unfavourably
to Pan American. The Company carries liability insurance
coverage and establishes provisions for matters that are probable
and can be reasonably estimated. In addition, Pan American may
be involved in disputes with other parties in the future which may
result in a material adverse impact on our financial condition,
cash flow and results of operations. Please refer to the Note
“Commitments and Contingencies” of the Audited Consolidated
Financial Statements for further information.
CORPORATE DEVELOPMENT ACTIVITIES
An element of the Company’s business strategy is to make
selected acquisitions. The Company expects to continue to
evaluate acquisition opportunities on a regular basis and intends
to pursue those opportunities that it believes are in its long-term
best interests. The success of the Company’s acquisitions will
depend upon the Company’s ability to effectively manage the
operations of entities it acquires and to realize other anticipated
benefits. The process of managing acquired businesses may
involve unforeseen difficulties and may require a disproportionate
amount of management resources. There can be no assurance that
the Company will be able to successfully manage the operations
of businesses it acquires or that the anticipated benefits of its
acquisitions will be realized.
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they come due. The volatility of the
metals markets can impact the Company’s ability to forecast cash
flow from operations.
The Company must maintain sufficient liquidity to meet its short-
term business requirements, taking into account its anticipated
cash flows from operations, its holdings of cash and cash
equivalents and committed loan facilities.
its
The Company manages
liquidity risk by continuously
monitoring forecasted and actual cash flows. The Company has
in place a rigorous reporting, planning and budgeting process to
help determine the funds required to support its normal operating
requirements on an ongoing basis and its expansion plans.
The Company continually evaluates and reviews capital and
operating expenditures in order to identify, decrease and limit all
non-essential expenditures. Pan American expects to generate
positive free cash flow from operations in 2012 and to further
strengthen its liquidity position.
POLITICAL AND COUNTRY RISK
Pan American currently conducts operations in Peru, Mexico,
Argentina and Bolivia. All of these jurisdictions are potentially
subject to a number of political and economic risks, including
those described above. The Company is unable to determine the
impact of these risks on its future financial position or results of
operations and the Company’s exploration, development and
production activities may be substantially affected by factors
outside of Pan American’s control. These potential factors include,
but are not limited to: royalty and tax increases or claims by
governmental bodies, expropriation or nationalization, foreign
exchange controls, import and export regulations, cancellation
or renegotiation of contracts and environmental and permitting
regulations. The Company currently has no political risk insurance
coverage against these risks.
ENVIRONMENTAL AND HEALTH
AND SAfETY RISKS
Pan American’s activities are subject to extensive laws and
regulations governing environmental protection and employee
health and safety. Environmental laws and regulations are
complex and have tended to become more stringent over time.
Pan American is required to obtain governmental permits and
in some instances provide bonding requirements under federal,
state, or provincial air, water quality, and mine reclamation
rules and permits. Although Pan American makes provisions for
reclamation costs, it cannot be assured that these provisions will
be adequate to discharge its future obligations for these costs.
Failure to comply with applicable environmental and health and
safety laws may result in injunctions, damages, suspension or
revocation of permits and imposition of penalties. While the
health and safety of our people and responsible environmental
stewardship are our top priorities, there can be no assurance
that Pan American has been or will be at all times in complete
compliance with such laws, regulations and permits, or that
the costs of complying with current and future environmental
and health and safety laws and permits will not materially and
adversely affect Pan American’s business, results of operations
or financial condition.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
45
CRITICAL JUDGEMENTS IN THE
APPLICATION Of ACCOUNTING
POLICIES
In preparing financial statements in accordance with International
Financial Reporting Standards, management is required to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements. These critical accounting
estimates represent management estimates and judgments that
are uncertain and any changes in these could materially impact
the Company’s financial statements. Management continuously
reviews its estimates, judgments, and assumptions using the
most current information available.
As this is the first year that financial statements have been
prepared using IFRS, readers should refer to Note 2 of the
consolidated financial statements for the year ended December
31, 2011, for the Company’s summary of significant accounting
policies including discussion of “Significant Judgements in
Applying Accounting Policies and Key Sources of Estimation
Uncertainty”.
fUTURE ACCOUNTING CHANGES
ACCOUNTING STANDARDS ISSUED AND EffECTIVE
JANUARY 1, 2012
IFRS 7 Financial Instruments: Disclosures amendment issued by
the IASB in October 2010 enhances the disclosure requirements
in relation to transferred financial assets. The amendments are
effective for annual periods beginning on or after July 1, 2011, with
earlier application permitted. The Company does not anticipate
this amendment to have a significant impact on the consolidated
financial statements.
IAS 12 Income Taxes amendment issued by the IASB in December
2010 provides a solution to determining the recovery of investment
properties as it relates to the accounting for deferred income taxes.
This amendment is effective for annual periods beginning on or
after July 1, 2011, with earlier adoption permitted. The Company
does not anticipate this amendment to have a significant impact
on the consolidated financial statements.
ACCOUNTING STANDARDS ISSUED AND EffECTIVE
JANUARY 1, 2013
IFRS 10 Consolidated Financial Statements establishes principles
for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities. This
standard (i) requires a parent entity (an entity that controls one or
more other entities) to present consolidated financial statements;
(ii) defines the principle of control, and establishes control as the
basis for consolidation; (iii) sets out how to apply the principle
of control to identify whether an investor controls an investee
and therefore must consolidate the investee; and (iv) sets out
the accounting requirements for the preparation of consolidated
financial statements. IFRS 10 supersedes IAS 27 Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special
Purpose Entities and is effective for annual periods beginning on
or after January 1, 2013, with early application permitted.
IFRS 11 Joint Arrangements establishes the core principle that
a party to a joint arrangement determines the type of joint
arrangement in which it is involved by assessing its rights and
obligations and accounts for those rights and obligations in
accordance with that type of joint arrangement. This standard is
effective for annual periods beginning on or after January 1, 2013,
with early application permitted.
IFRS 12 Disclosure of Interest in Other Entities requires the
disclosure of
information that enables users of financial
statements to evaluate the nature of, and risks associated with,
its interests in other entities and the effects of those interests on
its financial position, financial performance and cash flows. This
standard is effective for annual periods beginning on or after
January 1, 2013, with early application permitted.
IFRS 13 Fair Value Measurement defines fair value, sets out in a
single IFRS a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13 applies when
another IFRS requires or permits fair value measurements or
disclosures about fair value measurements (and measurements,
such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except for: share-based
payment transactions within the scope of IFRS 2 Share-based
Payment; leasing transactions within the scope of IAS 17 Leases;
measurements that have some similarities to fair value but that
are not fair value, such as net realizable value in IAS 2 Inventories
or value in use in IAS 36 Impairment of Assets. This standard is
effective for annual periods beginning on or after January 1, 2013,
with early application permitted.
IAS 1 Presentation of Financial Statements amendment, issued
by the IASB in June 2011, requires an entity to group items
presented in the Statement of Comprehensive Income on the
basis of whether they may be reclassified to earnings subsequent
to initial recognition. For those items presented before taxes, the
amendments to IAS 1 also require that the taxes related to the
two separate groups be presented separately. The amendments
are effective for annual periods beginning on or after July 1,
2012, with earlier adoption permitted. The Company does not
anticipate the application of IAS 1 to have a material impact on its
consolidated financial statements.
IAS 19 Employee Benefits amendment, issued by the IASB on
June 2011 introduced changes to the accounting for defined
benefit plans and other employee benefits. The amendments
include elimination of the options to defer, or recognize in full in
earnings, actuarial gains and losses and instead mandates the
immediate recognition of all actuarial gains and losses in other
comprehensive income and requires use of the same discount
rate for both the defined benefit obligation and expected asset
return when calculating interest cost. Other changes include
modification of the accounting for termination benefits and
classification of other employee benefits.
The Company does not anticipate the application of the amended
IAS 19 to have a material impact on its consolidated financial
statements.
IAS 27 Consolidated and Separate Financial Statements has the
objective of setting standards to be applied in accounting for
investments in subsidiaries, jointly ventures, and associates when
an entity elects, or is required by local regulations, to present
separate (non-consolidated) financial statements. This standard is
46
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
effective for annual periods beginning on or after January 1, 2013,
with early application permitted. This standard will not have an
impact on the consolidated financial statements.
IAS 28 Investments in Associates and Joint Ventures prescribes
the accounting for investments in associates and sets out the
requirements for the application of the equity method when
accounting for investments in associates and joint ventures. IAS
28 applies to all entities that are investors with joint control of, or
significant influence over, an investee (associate or joint venture).
This standard is effective for annual periods beginning on or after
January 1, 2013, with early application permitted.
IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine clarifies the requirements for accounting for the costs of
stripping activity in the production phase when two benefits
accrue: (i) useable ore that can be used to produce inventory and
(ii) improved access to further quantities of material that will be
mined in future periods. IFRIC 20 is effective for annual periods
beginning on or after January 1, 2013 with earlier application
permitted and includes guidance on transition for pre-existing
stripping assets.
The Company has not early adopted any of these standards and is
currently evaluating the impact, if any, that these standards might
have on its consolidated financial statements.
ACCOUNTING STANDARDS EffECTIVE JANUARY 1, 2015
IFRS 9 Financial Instruments cis intended to replace IAS 39
Financial Instruments: Recognition and Measurement in its
entirety by the IASB in three main phases. IFRS 9 will be the new
standard for the financial reporting of financial instruments that
is principles-based and less complex than IAS 39. In November
2009 and October 2010, phase 1 of IFRS was issued and amended,
respectively, which addressed the classification and measurement
of financial assets and financial liabilities. IFRS 9 requires that
all financial assets be classified as subsequently measured at
amortized cost or at fair value based on the Company’s business
model for managing financial assets and the contractual cash
flow characteristics of the financial assets. Financial liabilities are
classified as subsequently measured at amortized cost except for
financial liabilities classified as a FVTPL, financial guarantees and
certain other exceptions. In response to delays to the completion
of the remaining phases of the project, on December 16, 2011,
the IASB issued amendments to IFRS 9 which deferred the
mandatory effective date of IFRS 9 from January 1, 2013 to annual
periods beginning on or after January 1, 2015. The amendments
also provided relief from the requirements to restate comparative
financial statements for the effects of applying IFRS 9.
INTERNATIONAL fINANCIAL REPORTING STANDARDS
(IfRS)
The Accounting Standards Board (AcSB) adopted IFRS as
Canadian GAAP for publicly accountable enterprises for fiscal
years beginning on or after January 1, 2011. As such, the Company
is reporting its first audited consolidated financial statements in
accordance with IFRS for the year ended December 31, 2011, with
comparative figures for the year ended December 31, 2010. Due
to the requirement to present comparative financial information,
the effective transition date is January 1, 2010.
Our IFRS conversion team identified three phases to our
conversion: scoping and diagnostics, analysis and development,
implementation and review. All three phases have now been
completed.
Note 23 of the consolidated financial statements for the year
ending December 31, 2011, provides further details on our
key Canadian GAAP to IFRS differences, reconciliations of our
previously reported financial information under Canadian GAAP
and IFRS, and our IFRS 1 First-Time Adoption of International
Financial Reporting Standards optional exemption choices while
Note 2 discloses our significant accounting policies.
TRANSITIONAL fINANCIAL IMPACT
The below summarized financial statements provide an overview
of the impact on our statement of financial position and income
statement upon transition from Canadian GAAP to IFRS.
SUMMARIZED STATEMENT OF FINANCIAL POSITION RECONCILIATION
DECEMBER 31, 2010
AS AT JANUARY 1, 2010
(Date of transition)
Canadian
GAAP
Effect of
Transition
to IFRS
IFRS
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
Opening
Total assets
Total liabilities
$ 2,072,608
$
(333,812)
$
1,738,796
$
1,848,609
$ (278,290)
1,570,319
544,546
(155,759)
388,787
489,563
(233,531)
256,032
Non-controlling interest
7,774
(7,774)
-
15,256
(15,256)
-
Total equity
1,520,288
(170,279)
1,350,009
1,343,790
(29,503)
1,314,287
Total liabilities and equity
$ 2,072,608
(333,812)
$
1,738,796
$
1,848,609
$ (278,290)
$ 1,570,319
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
47
SUMMARIZED INCOME STATEMENT RECONCILIATION
Net Earnings for the period
Attributable to:
Equity holders of the Company
Non-controlling interest
YEAR ENDED DECEMBER 31, 2010
(The latest presented year
under previous GAAP)
Previous
GAAP
Effects of
Transition
to IFRS
$
112,573
$
(96,866)
-
-
-
$
13,711
1,996
$
15,707
$
15,707
IFRS
15,707
13,711
1,996
KEY EFFECTS OF TRANSITION TO IFRS
Deferred taxes
The adjustments to deferred income tax assets and liabilities
reflect the tax effects under IAS 12 Income Taxes:
(a) IAS 12 requires recognition of deferred income taxes for
differences that arise on translation of non-monetary assets
denominated
in currencies other than the Company’s
functional currency. The tax bases of these non-monetary
assets are re-measured from historical rates to functional
currency using current exchange rates. The difference as a
result of change in exchange rates creates a deferred income
tax adjustment. Under Canadian GAAP (“CGAAP”), the
historical exchange rates were used and any differences
that arose from re-measurement were recorded as foreign
exchange gain or loss. The Company has mining properties
in Argentina, Peru, Mexico and Bolivia with significant
tax basis denominated in local currencies, the movement
between the US dollar and these local currencies gives rise
to changes in deferred income tax.
(b) Unlike CGAAP, IAS 12 prohibits the recognition of deferred
taxes on initial recognition of an asset or liability where
the acquisition is not a business combination and neither
accounting profit nor taxable profit were affected at the time
of the transaction. Accordingly, in its opening statement of
financial position, the Company has reversed the deferred
income tax liabilities recognized on acquisition of the assets
of Aquiline, Manantial Espejo and Alamo Dorado.
(c) The deferred income tax expense booked on the deferred
component of the employee profit-sharing arrangement at
some of the Company’s sites is different under IFRS. Unlike
CGAAP, the deferred component of this employee benefit
liability is not recognized under IAS 19 Employee benefits.
(d) IAS 12 specifies the conditions under which an entity can
offset both current and deferred tax assets and liabilities, and
requires deferred taxes to be presented as non-current.
(e) The tax effects of other IFRS adjustments.
Closure and decommissioning
(a) Under
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets, the closure provision is measured
based on the best estimate of expenditure required to
settle the obligation at the statement of financial position
date using current discount rate and inflation assumptions;
thus simplifying the calculation by removing the ‘layering’
concept used for CGAAP. In addition, IFRS requires that the
liability be re-measured at each reporting date versus the
requirement in CGAAP to re-measure in the event of changes
in the amount or timing of cash flows required to settle the
obligation.
(b) A reclassification of the accretion on the closure and
decommissioning liability from operating expense to finance
expense to comply with the presentation requirements of
IAS 37.
Share purchase warrants
Reclassification of share purchase warrants that were presented
as equity instruments under CGAAP to derivative financial
liability under IAS 39 Financial Instruments: Recognition and
Measurement. Under IFRS, share purchase warrants with
an exercise price denominated in a currency other than the
Company's functional currency are classified and accounted for
as financial liabilities and, as such, are measured at their fair
values with changes in fair values included in net earnings.
Accordingly, a loss of $90.7 million was recorded under IFRS for
the year ended December 31, 2010.
Adjustments for non-controlling interest
An adjustment to record the changes in non-controlling interests
resulting from all the IFRS adjustments and reclassification of
non-controlling interests to be included in the equity section
under IFRS.
Depreciation
The adjustment to depreciation is a result of a change in the
mineral property, plant and equipment basis as a consequence
of the changes to the closure and decommissioning liability at
all the mine sites and changes related to IAS 12 Income Taxes
as discussed above. In addition, a presentation adjustment to
include depreciation and amortization expenses as part of cost
of sales.
48
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Foreign exchange gains or losses on available-for-sale
monetary securities
A reclassification of the unrealized gains or losses on available
for sale monetary securities from other comprehensive income
(under CGAAP) to earnings for the period (to retained earnings
on transition date) to comply with IAS 39 Financial Instruments:
Recognition and Measurement.
Provisions
A reclassification of the current portion of litigation provision
from trade and other payables to provisions.
Royalty
A reclassification of royalty expenses from revenue to cost of sales
to comply with the definition of Revenue under IAS 18 Revenue.
Changes in ownership interests
During the first quarter of 2010, the Company increased a
controlling ownership interest in a business (Aquiline) by 7%.
Under IFRS, changes in ownership interest that do not result in
a loss of control are accounted for as equity transactions and
the carrying amounts of the controlling and non-controlling
interests are adjusted to reflect the changes in their relative
interests in the subsidiary. Under the CGAAP policy of the entity,
such changes were treated as step acquisitions requiring an
increase in the carrying value of the consolidated business. An
adjustment was required in the first quarter in order to adjust
the IFRS financial statements for the impact of this GAAP
difference and appropriately account for this change as an equity
transaction under IFRS. Accordingly, a $39.8 million adjustment
was charged to equity (within retained earnings) under IFRS for
this period.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION
The adoption of IFRS has not had any impact on the net cash
flows of the Company, with the exception of the treatment of
advances received for construction and equipment leases which
under CGAAP are applied to capital for net investing whereas
under IFRS they are included in income. Additionally, the
changes made to the statements of financial position and income
statements have resulted in reclassifications of various amounts
on the statements of cash flows, however as there have been no
significant change to the net cash flows, no reconciliations have
been presented.
OUTLOOK ON FUTURE EARNINGS
Under IFRS, future net earnings will be impacted by changes in
fair values to the Company’s share purchase warrants, with an
exercise price denominated in CAD. Changes in the fair value
of the share purchase warrants is primarily influenced by the
Company’s share price, the volatility of the Company’s share
price and the Canadian to USD exchange rate. Generally, if
either the share price or the volatility increase or the Canadian
dollar strengthens against the USD, with other factors remaining
constant, the fair value of the warrant liability will increase and
the Company will record an expense in its future earnings. In
addition, these changes in the valuation of the share purchase
warrants create a permanent difference for tax purposes and
may result in significant volatility of our effective tax rate.
Secondly, due to the change in the accounting methodology of
recognizing deferred taxes that arise on foreign non-monetary
assets, the Company expects its foreign exchange gains or losses
related to deferred income taxes to be less volatile under IFRS.
INFORMATION TECHNOLOGY AND SYSTEMS
The adoption of IFRS did not have a significant impact on our
information systems for the convergence periods.
INTERNAL CONTROL OVER FINANCIAL REPORTING AND
DISCLOSURE CONTROLS AND PROCEDURES
The Company assessed the changes necessitated to maintain
the integrity of internal control over financial reporting and
disclosure controls and procedures. The extent of the impact
on these controls was immaterial. The Company applied its
existing control framework to the IFRS changeover process. All
accounting policy changes and financial statement impacts were
reviewed by senior management and the Audit Committee of
the Board of Directors.
KEY PERFORMANCE MEASURES
The Company has assessed the impact of the adoption of IFRS
on its key performance indicators. The transition to IFRS did not
have a significant impact on its key performance indicators,
which include gross profit margin, adjusted earnings per share,
cash flow from operations and cash costs.
All analysis and conclusions are based on the IFRSs effective at
December 31, 2011. As the IASB currently has various projects
on its work plan that might affect our decisions for the financial
year 2012, the Company continues to monitor and assess the
impact of these changes.
SUBSEQUENT EVENTS
Please refer to the section “Minefinders Transaction”, previously
described, for details of the pending transaction announcement
that occurred subsequent to December 31, 2011.
DISCLOSURE CONTROLS
AND PROCEDURES
Pan American’s management considers the meaning of internal
control to be the processes established by management to
provide reasonable assurance about the achievement of the
Company’s objectives regarding operations, reporting and
compliance. Internal control is designed to address identified
risks that threaten any of these objectives.
As of December 31, 2011, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2011,
the Company’s disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER fINANCIAL
REPORTING
There was no change in the Company’s internal control over
financial reporting that occurred during the period that has
materially affected or is reasonably likely to materially affect, its
internal control over financial reporting.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
49
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
fINANCIAL REPORTING
Management of Pan American is responsible for establishing and
maintaining an adequate system of internal control, including
internal controls over financial reporting. Internal control over
financial reporting is a process designed by, or under the
supervision of, the President and Chief Executive Officer and the
Chief Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with International Financial Reporting Standards. It
includes those policies and procedures that:
a) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of Pan American,
b) are designed
to provide reasonable assurance
that
transactions are recorded as necessary to permit preparation
of financial statements in accordance with International
Financial Reporting Standards, and that receipts and
expenditures of Pan American are being made only in
accordance with authorizations of management and Pan
American’s directors, and
c)
are designed to provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition,
use or disposition of Pan American’s assets that could have a
material effect on the annual financial statements or interim
financial reports.
The Company’s management, including its President and Chief
Executive Officer and Chief Financial Officer, believe that due to
its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis. Also,
projections of any evaluation of the effectiveness of internal
control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of Pan American’s
internal control over financial reporting as at December
31, 2011, based on the criteria set forth in Internal Control –
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on
this assessment, management believes that, as of December 31,
2011, Pan American’s internal control over financial reporting is
effective.
Management reviewed the results of management’s assessment
with the Audit Committee of the Company’s Board of Directors.
Deloitte & Touche LLP,
independent registered chartered
accountants, were engaged, as approved by a vote of the
Company’s shareholders, to audit and provide independent
opinions on the Company’s consolidated financial statements
and the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2011. Deloitte & Touche
LLP has provided such opinions.
50
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
MINERAL RESERVES AND RESOURCES
MINERAL RESERVES—PROVEN AND PROBABLE
LOCATION
TYPE
CLASSIFICATION
TONNES (Mt)
Ag (g/t)
Ag Cont (Moz)
Au (g/t) Au Cont (000’s oz)
Huaron
Peru
Morococha (92.2%)
Peru
La Colorada
Mexico
Quiruvilca
Peru
Alamo Dorado
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Vein
Vein
Vein/Mantos
Vein/Mantos
Vein
Vein
Vein
Vein
Disseminated
Disseminated
Vein
Vein
Vein
Vein
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
6.1
4.2
4.0
3.1
1.8
1.8
0.6
0.4
7.0
2.1
4.2
2.2
1.7
0.8
Totals(i)
Proven + Probable
39.9
MINERAL RESOURCES—MEASURED AND INDICATED
188
177
153
177
399
383
138
136
88
89
144
135
449
380
184
36.8
24.1
19.8
17.4
22.5
21.6
2.5
1.7
19.7
6.01
19.6
9.6
24.1
10.0
235.3
N/A
N/A
N/A
N/A
0.44
0.41
0.82
0.77
0.28
0.52
2.17
2.13
N/A
N/A
0.96
N/A
N/A
N/A
N/A
24.6
23.4
14.6
9.5
63.8
35.0
295.4
151.2
N/A
N/A
617.6
LOCATION
TYPE
CLASSIFICATION
TONNES (Mt)
Ag (g/t)
Ag Cont (Moz)
Au (g/t) Au Cont (000’s oz)
Huaron
Peru
Morococha (92.2%)
Peru
La Colorada
Mexico
Quiruvilca
Peru
Silver Stockpiles
Alamo Dorado
Peru
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Navidad
Argentina
Pico Machay
Peru
Calcatreu
Totals(i)
Argentina
Vein
Vein
Vein/Mantos
Vein /Mantos
Vein
Vein
Vein
Vein
Flux Material
Disseminated
Disseminated
Vein
Vein
Vein
Vein
Mantos, Diss.
Mantos, Diss.
Disseminated
Disseminated
Vein
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Indicated
Measured +
Indicated
MINERAL RESOURCES—INFERRED
1.0
0.7
1.4
2.1
0.2
1.0
0.3
0.3
0.2
1.0
2.1
2.2
3.7
0.4
0.2
15.4
139.8
4.7
5.9
8.0
190.6
157
157
142
173
194
370
121
120
318
49
82
98
85
120
112
137
126
N/A
N/A
26
122
4.8
3.6
5.6
11.6
1.0
12.3
1.0
1.1
1.9
1.7
5.5
7.0
10.1
1.7
0.8
67.8
564.5
N/A
N/A
6.6
708.8
N/A
N/A
N/A
N/A
0.18
0.39
0.44
0.37
N/A
0.22
0.35
1.16
1.01
N/A
N/A
N/A
N/A
0.91
0.67
2.63
1.26
N/A
N/A
N/A
N/A
1.0
12.9
3.5
3.5
N/A
7.4
23.5
83.6
119.8
N/A
N/A
N/A
N/A
137.5
127.1
676.0
1,195.8
LOCATION
TYPE
CLASSIFICATION
TONNES (Mt)
Ag (g/t)
Ag Cont (Moz)
Au (g/t) Au Cont (000’s oz)
Huaron
Morococha (92.2%)
La Colorada
Quiruvilca
Alamo Dorado
Manantial Espejo
San Vicente (95%)
Navidad
Pico Machay
Calcatreu
Totals(i)
Peru
Peru
Mexico
Peru
Mexico
Argentina
Bolivia
Argentina
Peru
Argentina
Vein
Vein/Mantos
Vein
Vein
Disseminated
Vein
Vein
Mantos, Diss.
Disseminated
Vein
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
HISTORICAL ESTIMATES
7.1
7.5
3.4
1.4
0.4
1.6
2.8
45.9
23.9
3.4
97.3
176
159
275
109
57
89
353
81
N/A
17
115
40.0
38.2
30.1
4.7
0.7
4.6
32.2
119.4
NA
1.8
271.7
N/A
N/A
0.28
0.59
0.91
1.07
N/A
N/A
0.58
2.06
0.73
N/A
N/A
31.1
25.7
11.1
54.7
N/A
N/A
445.7
226.0
794.4
LOCATION
UNCLASSIFIED
TONNES (Mt)
Ag (g/t)
Ag Cont (Moz)
Au (g/t)
Au Cont (000’s oz)
Hog Heaven(ii)
Hog Heaven(ii)
Waterloo(iii)
Totals(i)
USA
USA
USA
Historical
Historical
Historical
Historical
2.7
7.6
33.8
44.1
167
133
93
104
14.6
32.7
100.9
148.2
0.62
0.70
N/A
0.68
53.9
171.9
N/A
225.8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
51
information prepared by or under the supervision of a QP.
These historical estimates should not be relied upon.
The Company believes that the historical estimate category of
"Proven Reserves" for Hog Heaven most closely corresponds
to 2,705,000 tonnes in the CIM definition category of
"Indicated Mineral Resources".
The Company believes that the historical estimate categories
of "Proven & Possible Reserves", "heap leach ore stockpile",
"Possible Resources" and "Inferred Resources" most closely
correspond to 7,639,000 tonnes in the CIM definition category
of "Inferred Mineral Resources".
(iii) The historical estimate for Waterloo was initially prepared
by Asarco Inc. in 1968. In September 1994 Robert J. Rodger,
P.Eng., reviewed the Asarco reports and prepared a Technical
Evaluation Report on the Waterloo property, prior to the
implementation of NI 43-101. The Technical Evaluation
Report confirmed that the historical estimate was based on
reverse circulation drilling and underground sampling, and
concluded the estimate was based on sound methodology.
The historical estimate at Waterloo was prepared using a
silver price of $5.00 per ounce (the relevant price at the time
of the estimate). Michael Steinmann, P. Geo., has reviewed
the Technical Evaluation Report and believes the historic
estimate was conducted in a professional and competent
manner and is relevant for purposes of the Company's
decision to maintain its interest in the property. The Company
believes that the historical estimate category of 37,235,000
tons (at 2.71 ounces per ton silver) of "Measured and
Indicated Reserves" most closely corresponds to 33,758,000
tonnes in the CIM definition category of "Indicated Mineral
Resource." However, the Company has not completed the
work necessary to verify the historical estimate. Accordingly,
the Company is not treating the historical estimate as NI
43-101 compliant categories of Mineral Resources based on
information prepared by or under the supervision of a QP.
These historical estimates should not be relied upon.
TECHNICAL INfORMATION
Michael Steinmann, P.GEO., Executive VP Geology & Exploration,
and Martin Wafforn, P.ENG., VP Technical Services, each of
whom are qualified persons, as the term is defined in National
Instrument 43-101 “NI 43-101”, have reviewed and approved the
contents of this Management Discussion & Analysis.
NOTES:
Mineral Reserves and Resources are as defined by Canadian
Institute of Mining Guidelines.
Mineral Resources do not have demonstrated economic viability.
This table illustrates Pan American Silver Corp’s share of Mineral
Reserves and Resources. Properties in which Pan American
Silver has less than 100% interest are noted next to the property
name.
Mineral Resource and Reserve estimates for Huaron, Quiruvilca,
San Vicente, La Colorada, Manantial Espejo, Alamo Dorado
and Morococha were prepared under the supervision of
Michael Steinmann, P. Geo., Executive Vice-President Geology
& Exploration and Martin G. Wafforn, P. Eng., Vice-President
Technical Services as Qualified Persons as that term is defined
in NI 43-101. Navidad Resource estimates were prepared by
Pamela De Mark, P. Geo. Director of Resources.
Metal prices used for all Mines: Ag: $25/oz, Au: $1,350/oz, Pb:
$1,850/tonne, Cu: $6,500/tonne, Zn $1,750/tonne.
Metal prices used for Navidad were Ag: $12.52/oz and Pb: $1,100/
tonne.
Metal prices used for Calcatreu were Ag: $12.50/oz and Au: $650/
oz.
(i) Totals may not add-up due to rounding.
(ii) The historical estimate for Hog Heaven was prepared by
Gregory Hahn, Chief Geological Engineer for CoCa Mines
Inc., a previous owner of the property, in a report titled “Hog
Heaven Project Optimization Study” dated May 1989, prior
to implementation of NI 43-101. The historical estimate was
based on extensive diamond drilling, and was estimated
using a silver price of $6.50 per ounce and a gold price of
$400 per ounce (these were relevant prices at the time of
the estimate). Michael Steinmann, P.Geo, has reviewed the
available data, including drill sections, surface maps, and
additional supporting information sources, and believes that
the historic estimate was conducted in a professional and
competent manner and is relevant for the purposes of the
Company's decision to maintain its interest in this property.
In the study, the historic estimate was sub-categorized as
follows:
CATEGORY
TONS
Proven Reserves
2,981,690
Probable & Possible Reserves
904,200
Heap leach ore
Possible resources
Inferred resources
316,100
4,500,000
2,700,000
oz/ton
Ag
oz/ton
Au
4.88
10.40
1.56
2.41
4.44
0.018
0.020
0.014
0.020
0.022
However, the Company has not completed the work
necessary to verify the historical estimate. Accordingly,
the Company is not treating the historical estimate as NI
43-101-compliant categories of Mineral Resources based on
52
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
CAUTIONARY NOTE REGARDING fORWARD-LOOKING STATEMENTS
CERTAIN OF THE STATEMENTS AND
INFORMATION
IN THIS MD&A
COMPANY HAS MADE ASSUMPTIONS AND ESTIMATES BASED ON OR RELATED
CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING
TO MANY OF THESE FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION:
OF THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT
FLUCTUATIONS IN SPOT AND FORWARD MARKETS FOR SILVER, GOLD, BASE
OF 1995 AND “FORWARD-LOOKING INFORMATION” WITHIN THE MEANING
METALS AND CERTAIN OTHER COMMODITIES (SUCH AS NATURAL GAS, FUEL
OF APPLICABLE CANADIAN PROVINCIAL SECURITIES LAWS RELATING TO
OIL AND ELECTRICITY); FLUCTUATIONS IN CURRENCY MARKETS (SUCH AS
THE COMPANY AND ITS OPERATIONS. ALL STATEMENTS, OTHER THAN
THE PERUVIAN SOL, MEXICAN PESO, ARGENTINE PESO, BOLIVIAN BOLIVIANO
STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS.
AND CANADIAN DOLLAR VERSUS THE U.S. DOLLAR); RISKS RELATED TO THE
WHEN USED IN THIS MD&A THE WORDS, “BELIEVES”, “EXPECTS”, “INTENDS”,
TECHNOLOGICAL AND OPERATIONAL NATURE OF THE COMPANY’S BUSINESS;
“PLANS”, “FORECAST”, “OBJECTIVE”, “OUTLOOK”, “POSITIONING”, “POTENTIAL”,
CHANGES IN NATIONAL AND LOCAL GOVERNMENT, LEGISLATION, TAXATION,
“ANTICIPATED”, “BUDGET”, AND OTHER SIMILAR WORDS AND EXPRESSIONS,
CONTROLS OR REGULATIONS AND POLITICAL OR ECONOMIC DEVELOPMENTS
IDENTIFY FORWARD-LOOKING STATEMENTS OR
INFORMATION.
THESE
IN CANADA, THE UNITED STATES, MEXICO, PERU, ARGENTINA, BOLIVIA OR
FORWARD-LOOKING STATEMENTS OR INFORMATION RELATE TO, AMONG
OTHER COUNTRIES WHERE THE COMPANY MAY CARRY ON BUSINESS IN THE
OTHER THINGS: FUTURE PRODUCTION OF SILVER, GOLD AND OTHER METALS;
FUTURE; RISKS AND HAZARDS ASSOCIATED WITH THE BUSINESS OF MINERAL
FUTURE CASH COSTS PER OUNCE OF SILVER; THE PRICE OF SILVER AND
EXPLORATION, DEVELOPMENT AND MINING (INCLUDING ENVIRONMENTAL
OTHER METALS; THE EFFECTS OF LAWS, REGULATIONS AND GOVERNMENT
HAZARDS, INDUSTRIAL ACCIDENTS, UNUSUAL OR UNEXPECTED GEOLOGICAL
POLICIES AFFECTING PAN AMERICAN’S OPERATIONS OR POTENTIAL FUTURE
OR STRUCTURAL FORMATIONS, PRESSURES, CAVE-INS AND FLOODING);
OPERATIONS, INCLUDING BUT NOT LIMITED TO, LAWS IN THE PROVINCE OF
RISKS RELATING TO THE CREDIT WORTHINESS OR FINANCIAL CONDITION OF
CHUBUT, ARGENTINA, WHICH, CURRENTLY HAVE SIGNIFICANT RESTRICTIONS
SUPPLIERS, REFINERS AND OTHER PARTIES WITH WHOM THE COMPANY DOES
ON MINING; FUTURE SUCCESSFUL DEVELOPMENT OF THE NAVIDAD PROJECT,
BUSINESS; INADEQUATE INSURANCE, OR INABILITY TO OBTAIN INSURANCE, TO
THE LA PRECIOSA PROJECT, AND OTHER DEVELOPMENT PROJECTS OF
COVER THESE RISKS AND HAZARDS; EMPLOYEE RELATIONS; RELATIONSHIPS
THE COMPANY; THE SUFFICIENCY OF THE COMPANY’S CURRENT WORKING
WITH AND CLAIMS BY LOCAL COMMUNITIES AND INDIGENOUS POPULATIONS;
CAPITAL, ANTICIPATED OPERATING CASH FLOW OR ITS ABILITY TO RAISE
AVAILABILITY AND INCREASING COSTS ASSOCIATED WITH MINING INPUTS
NECESSARY FUNDS; THE ACCURACY OF MINERAL RESERVE AND RESOURCE
AND LABOUR; THE SPECULATIVE NATURE OF MINERAL EXPLORATION AND
ESTIMATES; ESTIMATED PRODUCTION RATES FOR SILVER AND OTHER
DEVELOPMENT, INCLUDING THE RISKS OF OBTAINING NECESSARY LICENSES
PAYABLE METALS PRODUCED BY THE COMPANY; TIMING OF PRODUCTION AND
AND PERMITS AND THE PRESENCE OF LAWS AND REGULATIONS THAT MAY
THE CASH AND TOTAL COSTS OF PRODUCTION AT EACH OF THE COMPANY’S
IMPOSE RESTRICTIONS ON MINING, INCLUDING THOSE CURRENTLY IN THE
PROPERTIES; THE ESTIMATED COST OF AND AVAILABILITY OF FUNDING
PROVINCE OF CHUBUT, ARGENTINA; DIMINISHING QUANTITIES OR GRADES
NECESSARY FOR SUSTAINING CAPITAL; ONGOING OR FUTURE DEVELOPMENT
OF MINERAL RESERVES AS PROPERTIES ARE MINED; GLOBAL FINANCIAL
PLANS AND CAPITAL REPLACEMENT,
IMPROVEMENT OR REMEDIATION
CONDITIONS; THE COMPANY’S ABILITY TO COMPLETE AND SUCCESSFULLY
PROGRAMS; THE ABILITY OF THE COMPANY TO REDUCE ENVIRONMENTAL
INTEGRATE ACQUISITIONS AND TO MITIGATE OTHER BUSINESS COMBINATION
IMPACTS, INCLUDING A REDUCTION IN GREENHOUSE GAS EMISSIONS,
RISKS; CHALLENGES TO, OR DIFFICULTY IN MAINTAINING, THE COMPANY’S
AND TO IMPROVE SUSTAINABILITY IN ITS OPERATIONS AND PROJECTS; THE
TITLE TO PROPERTIES AND CONTINUED OWNERSHIP THEREOF; THE ACTUAL
ESTIMATES OF EXPECTED OR ANTICIPATED ECONOMIC RETURNS FROM THE
RESULTS OF CURRENT EXPLORATION ACTIVITIES, CONCLUSIONS OF
COMPANY’S MINING PROJECTS, AS REFLECTED IN TECHNICAL REPORTS OR
ECONOMIC EVALUATIONS, AND CHANGES IN PROJECT PARAMETERS TO
OTHER ANALYSES PREPARED IN RELATION TO DEVELOPMENT OF PROJECTS;
DEAL WITH UNANTICIPATED ECONOMIC OR OTHER FACTORS; INCREASED
ESTIMATED EXPLORATION EXPENDITURES TO BE
INCURRED ON THE
COMPETITION IN THE MINING INDUSTRY FOR PROPERTIES, EQUIPMENT,
COMPANY’S VARIOUS PROPERTIES; FORECAST CAPITAL AND NON-OPERATING
QUALIFIED PERSONNEL, AND THEIR COSTS; AND THOSE FACTORS IDENTIFIED
SPENDING; FUTURE SALES OF THE METALS, CONCENTRATES OR OTHER
UNDER THE CAPTION “RISKS RELATED TO PAN AMERICAN’S BUSINESS” IN THE
PRODUCTS PRODUCED BY THE COMPANY; AND THE COMPANY’S PLANS AND
COMPANY’S MOST RECENT FORM 40-F AND ANNUAL INFORMATION FORM
EXPECTATIONS FOR ITS PROPERTIES AND OPERATIONS.
FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
AND CANADIAN PROVINCIAL SECURITIES REGULATORY AUTHORITIES.
THESE STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH
INVESTORS ARE CAUTIONED AGAINST ATTRIBUTING UNDUE CERTAINTY OR
RESPECT TO FUTURE EVENTS AND ARE NECESSARILY BASED UPON A
RELIANCE ON FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
NUMBER OF ASSUMPTIONS AND ESTIMATES THAT, WHILE CONSIDERED
HAS ATTEMPTED TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE
REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT
ACTUAL RESULTS TO DIFFER MATERIALLY, THERE MAY BE OTHER FACTORS
BUSINESS, ECONOMIC, COMPETITIVE, POLITICAL AND SOCIAL UNCERTAINTIES
THAT CAUSE RESULTS NOT TO BE AS ANTICIPATED, ESTIMATED, DESCRIBED
AND CONTINGENCIES. MANY FACTORS, BOTH KNOWN AND UNKNOWN,
OR INTENDED. THE COMPANY DOES NOT INTEND, AND DOES NOT ASSUME
COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
ANY OBLIGATION, TO UPDATE THESE FORWARD-LOOKING STATEMENTS OR
TO BE MATERIALLY DIFFERENT FROM THE RESULTS, PERFORMANCE OR
INFORMATION TO REFLECT CHANGES IN ASSUMPTIONS OR CHANGES IN
ACHIEVEMENTS THAT ARE OR MAY BE EXPRESSED OR IMPLIED BY SUCH
CIRCUMSTANCES OR ANY OTHER EVENTS AFFECTING SUCH STATEMENTS OR
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS MD&A AND THE
INFORMATION, OTHER THAN AS REQUIRED BY APPLICABLE LAW.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
53
CAUTIONARY NOTE TO US INVESTORS CONCERNING ESTIMATES Of RESERVES
AND RESOURCES
THIS MD&A HAS BEEN PREPARED
IN ACCORDANCE WITH THE
MINERALIZATION COULD BE ECONOMICALLY AND LEGALLY PRODUCED
REQUIREMENTS OF CANADIAN PROVINCIAL SECURITIES LAWS, WHICH
OR EXTRACTED AT THE TIME THE RESERVE DETERMINATION IS MADE.
DIFFER FROM THE REQUIREMENTS OF U.S. SECURITIES LAWS. UNLESS
U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY PART OF
OTHERWISE INDICATED, ALL MINERAL RESERVE AND RESOURCE ESTIMATES
A “MEASURED RESOURCE” OR “INDICATED RESOURCE” WILL EVER
INCLUDED IN THIS MD&A HAVE BEEN PREPARED IN ACCORDANCE WITH
BE CONVERTED INTO A “RESERVE”. U.S. INVESTORS SHOULD ALSO
CANADIAN NATIONAL INSTRUMENT 43-101 – STANDARDS OF DISCLOSURE
UNDERSTAND THAT “INFERRED RESOURCES” HAVE A GREAT AMOUNT
FOR MINERAL PROJECTS (‘‘NI 43-101’’) AND THE CANADIAN INSTITUTE OF
OF UNCERTAINTY AS TO THEIR EXISTENCE AND GREAT UNCERTAINTY AS
MINING, METALLURGY AND PETROLEUM CLASSIFICATION SYSTEM. NI 43-
TO THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE ASSUMED
101 IS A RULE DEVELOPED BY THE CANADIAN SECURITIES ADMINISTRATORS
THAT ALL OR ANY PART OF “INFERRED RESOURCES” EXIST, ARE
THAT ESTABLISHES STANDARDS FOR ALL PUBLIC DISCLOSURE AN ISSUER
ECONOMICALLY OR LEGALLY MINEABLE OR WILL EVER BE UPGRADED TO
MAKES OF SCIENTIFIC AND TECHNICAL INFORMATION CONCERNING
A HIGHER CATEGORY. UNDER CANADIAN SECURITIES LAWS, ESTIMATED
MINERAL PROJECTS.
“INFERRED RESOURCES” MAY NOT FORM THE BASIS OF FEASIBILITY
OR PRE-FEASIBILITY STUDIES EXCEPT IN RARE CASES. DISCLOSURE
CANADIAN STANDARDS, INCLUDING NI 43-101, DIFFER SIGNIFICANTLY
OF “CONTAINED OUNCES” IN A MINERAL RESOURCE IS PERMITTED
FROM THE REQUIREMENTS OF THE UNITED STATES SECURITIES AND
DISCLOSURE UNDER CANADIAN SECURITIES LAWS. HOWEVER, THE SEC
EXCHANGE COMMISSION (THE “SEC”), AND INFORMATION CONCERNING
NORMALLY ONLY PERMITS ISSUERS TO REPORT MINERALIZATION THAT
MINERALIZATION, DEPOSITS, MINERAL RESERVE AND RESOURCE
DOES NOT CONSTITUTE “RESERVES” BY SEC STANDARDS AS IN PLACE
INFORMATION CONTAINED OR REFERRED TO HEREIN MAY NOT BE
TONNAGE AND GRADE, WITHOUT REFERENCE TO UNIT MEASURES. THE
COMPARABLE TO SIMILAR INFORMATION DISCLOSED BY U.S. COMPANIES.
REQUIREMENTS OF NI 43-101 FOR IDENTIFICATION OF “RESERVES” ARE
IN PARTICULAR, AND WITHOUT LIMITING THE GENERALITY OF THE
ALSO NOT THE SAME AS THOSE OF THE SEC, AND RESERVES REPORTED
FOREGOING, THIS MD&A USES THE TERMS ‘‘MEASURED RESOURCES’’,
BY THE COMPANY IN COMPLIANCE WITH NI 43-101 MAY NOT QUALIFY AS
‘‘INDICATED RESOURCES’’ AND ‘‘INFERRED RESOURCES’’. U.S. INVESTORS
“RESERVES” UNDER SEC STANDARDS. ACCORDINGLY, INFORMATION
ARE ADVISED THAT, WHILE SUCH TERMS ARE RECOGNIZED AND REQUIRED
CONCERNING MINERAL DEPOSITS SET FORTH HEREIN MAY NOT BE
BY CANADIAN SECURITIES LAWS, THE SEC DOES NOT RECOGNIZE THEM.
COMPARABLE WITH INFORMATION MADE PUBLIC BY COMPANIES THAT
UNDER U.S. STANDARDS, MINERALIZATION MAY NOT BE CLASSIFIED AS
REPORT IN ACCORDANCE WITH U.S. STANDARDS.
A ‘‘RESERVE’’ UNLESS THE DETERMINATION HAS BEEN MADE THAT THE
54
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER fINANCIAL REPORTING
The accompanying Consolidated Financial Statements of Pan American Silver Corp. were prepared by management, which is
responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be
based on estimates and judgments. These Consolidated Financial Statements were prepared in accordance with with International
Financial Reporting Standards (“IFRS”). Financial information appearing throughout our management’s discussion and analysis is
consistent with these Consolidated Financial Statements.
In discharging our responsibility for the integrity and fairness of the consolidated financial statements and for the accounting
systems from which they are derived, we maintain the necessary system of internal controls designed to ensure that transactions
are authorized, assets are safeguarded and proper records are maintained. These controls include quality standards in hiring
employees, policies and procedure manuals, a corporate code of conduct and accountability for performance within appropriate
and well-defined areas of responsibility.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is
composed entirely of directors who are neither officers nor employees of Pan American Silver Corp. This Committee reviews
our consolidated financial statements and recommends them to the Board for approval. Other key responsibilities of the Audit
Committee include reviewing our existing internal control procedures and planned revisions to those procedures, and advising the
directors on auditing matters and financial reporting issues.
Deloitte & Touche LLP, Independent Registered Chartered Accountants appointed by the shareholders of Pan American Silver Corp.
upon the recommendation of the Audit Committee and Board, have performed an independent audit of the Consolidated Financial
Statements and their report follows. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and
related findings.
"Signed"
Geoff A. Burns
President and Chief Executive Officer
March 21, 2012
"Signed"
A. Robert Doyle
Chief Financial Officer
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
55
Deloitte & Touche LLP
2800—1055 Dunsmuir St.
4 Bentall Centre
P.O. Box 49279
Vancouver, British Columbia
Canada V7X 1P4
T. 604 699 4466
www.deloitte.ca
REPORT Of INDEPENDENT REGISTERED
CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Pan American Silver Corp.
We have audited the internal control over financial reporting of Pan American Silver Corp. and subsidiaries (the “Company”) as of December
31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive
and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,
based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements as at and for the year ended December 31, 2011 of the
Company and our report dated March 21, 2012 expressed an unqualified opinion on those consolidated financial statements.
Independent Registered Chartered Accountants
March 21, 2012
Vancouver, Canada
56
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Deloitte & Touche LLP
2800—1055 Dunsmuir St.
4 Bentall Centre
P.O. Box 49279
Vancouver, British Columbia
Canada V7X 1P4
T. 604 699 4466
www.deloitte.ca
REPORT Of INDEPENDENT REGISTERED
CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Pan American Silver Corp.
We have audited the accompanying consolidated financial statements of Pan American Silver Corp. and subsidiaries (the “Company”),
which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, and the
consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for the years ended December 31,
2011 and December 31, 2010, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Pan American
Silver Corp. and subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010 and their financial performance and cash
flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
21, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Independent Registered Chartered Accountants
March 21, 2012
Vancouver, Canada
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
57
CONSOLIDATED STATEMENTS Of fINANCIAL POSITION
As at December 31, 2011, December 31, 2010 and January 1, 2010 (in thousands of U.S. dollars)
ASSETS
Current assets
Cash
Short-term investments (Note 5)
Trade and other receivables (Note 4)
Income taxes receivable
Inventories (Note 6)
Derivative financial instruments
Prepaids and other current assets
Non-current assets
December 31, 2011
December 31, 2010
January 1, 2010
$
262,901
$
179,921
$
228,321
103,433
2,542
135,696
-
9,343
742,236
180,583
66,893
87
106,854
-
6,520
540,858
100,474
92,623
66,059
12,132
93,446
160
2,568
367,462
Mineral property, plant and equipment, net (Note 7)
1,189,708
1,161,323
1,177,076
Long-term refundable tax
Deferred tax assets (Note 20)
Other assets (Note 8)
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 9)
Provisions (Note 10)
Current portion of finance lease (Note 11)
Current income tax liabilities
Non-current liabilities
Provisions (Note 10)
Deferred tax liabilities (Note 20)
Share purchase warrants (Note 13)
Long-term portion of finance lease (Note 11)
Other long-term liabilities (Note 12)
Total liabilities
EQUITY
Capital and reserves (Note 13)
Issued capital
Share option reserve
Investment revaluation reserve
Retained earnings
Total equity attributable to equity holders of the Company
Non-controlling interests
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
$
$
10,253
4,170
5,429
28,171
6,826
1,618
11,909
7,351
6,521
1,951,796
$
1,738,796
$
1,570,319
78,258
$
77,662
$
2,341
20,841
74,366
175,806
59,052
54,919
23,651
10,824
25,457
349,709
3,450
118
29,699
110,929
74,016
49,804
127,890
5,360
20,788
388,787
90,591
4,948
620
4,021
100,180
57,273
33,872
43,919
-
20,788
256,032
1,243,241
1,276,887
1,206,647
8,631
2,146
339,821
1,593,839
8,248
1,602,087
7,022
7,698
49,751
1,341,358
8,651
1,350,009
$
1,951,796
$
1,738,796
$
6,349
1,452
83,875
1,298,323
15,964
1,314,287
1,570,319
APPROVED BY THE BOARD ON MARCH 21, 2012
Signed
Signed
58
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Ross J. Beaty, Director
Geoff A. Burns, Director
CONSOLIDATED INCOME STATEMENTS
For the years ended December 31, 2011 and December 31, 2010 (in thousands of U.S. dollars)
Revenue (Note 18)
Production Costs (Note 14)
Depreciation and amortization
Royalties
Mine operating earnings
General and administrative
Exploration and project development
Doubtful accounts provision
Foreign exchange (losses) gains
Gain (loss) on commodity and foreign currency contracts
Gain on sale of assets
Other income (Note 19)
Earnings from operations
Gain (loss) on derivatives (Note 13)
Investment income
Interest and finance expense
Earnings before income taxes
Income taxes (Note 20)
Net earnings for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share attributable to common shareholders (Note 16)
Basic income per share
Diluted income per share
Weighted average shares outstanding (in 000’s) Basic
Weighted average shares outstanding (in 000’s) Diluted
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2011 and December 31, 2010 (in thousands of U.S. dollars)
Net earnings for the year
Unrealized net (losses) gains on available for sale securities (net of zero dollars tax)
Reclassification adjustment for net gains included in earnings
2011
$
855,275
2010
$ 646,553
(341,363)
(82,756)
(22,031)
409,125
(18,291)
(27,727)
-
(8,126)
681
1,190
15,728
372,580
101,828
3,055
(6,199)
471,264
(117,118)
(307,787)
(83,084)
(14,567)
241,115
(17,109)
(24,527)
(4,754)
1,686
(237)
651
4,527
201,352
(90,661)
961
(5,730)
105,922
(90,215)
$
354,146
$
15,707
$
$
$
$
352,494
1,652
354,146
3.31
3.31
106,434
106,598
2011
$
354,146
(3,979)
(1,573)
13,711
1,996
$
15,707
$
$
0.13
0.13
106,969
107,277
2010
$
15,707
6,544
(298)
Total comprehensive income for the year
$
348,594
$
21,953
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
See accompanying notes to the consolidated financial statements.
$
346,942
$
19,957
1,652
1,996
$
348,594
$
21,953
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
59
CONSOLIDATED STATEMENTS Of CASH fLOWS
For the years ended December 31, 2011 and December 31, 2010 (in thousands of U.S. dollars)
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings for the year
Current income tax expense (Note 20)
Deferred income tax provision (Note 20)
Depreciation and amortization
Accretion on closure and decommissioning provision
Unrealized gain on foreign exchange
Doubtful account provision
Stock-based compensation expense
Unrealized (gain) loss on commodity contracts
(Gain) /loss on derivatives
Gain on sale of assets
Changes in non-cash operating working capital (Note 17)
Operating cash flows before interest and income taxes
Interest paid
Interest received
Income taxes paid
Net cash generated from operating activities
CASH FLOW FROM INVESTING ACTIVITIES
Payments for mineral property, plant and equipment
Net purchases of short term investments
Proceeds from sale of mineral property, plant and equipment
Net refundable tax and other asset expenditures
Net cash used in investing activities
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issue of equity shares
Shares repurchased and cancelled (Note 13)
Advances on working capital
Dividends paid
Net contributions/(distributions) from non-controlling interests
Net cash used in financing activities
Effects of exchange rate changes on cash
Net increase in cash
Cash at the beginning of the year
Cash at the end of the year
See accompanying notes to the consolidated financial statements.
60
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
2011
2010
$
354,146
$
15,707
109,347
7,771
82,756
3,268
(1,071)
-
3,502
-
(101,828)
(1,190)
(39,435)
417,266
(557)
1,482
(58,736)
359,455
(123,579)
(51,071)
1,297
(3,915)
73,758
16,457
83,084
3,668
(624)
4,754
4,028
160
90,661
(651)
(12,622)
278,380
(137)
664
(36,651)
242,256
(78,010)
(80,162)
1,337
(3,922)
(177,268)
(160,757)
4,453
(94,034)
(10,732)
904
(99,409)
202
82,980
179,921
11,887
-
(5,630)
(8,026)
(992)
(2,761)
709
79,447
100,474
$
262,901
$
179,921
CONSOLIDATED STATEMENTS Of CHANGES IN EQUITY
For the years ended December 31, 2011 and 2010 (in thousands of U.S. dollars, except for numbers of shares)
ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
ISSUED
SHARES
ISSUED
CAPITAL
SHARE
OPTION
RESERVE
INVESTMENT
REVALUATION
RESERVE
RETAINED
EARNINGS
TOTAL
NON-
CONTROLLING
INTERESTS
TOTAL
EQUITY
Balance, January 1, 2010
105,117,120
$ 1,206,647
$
6,349
$
1,452
$
83,875
$ 1,298,323
$
15,964
$
1,314,287
Total comprehensive income
Net earnings for the year
Other comprehensive income
Issued on the exercise
of stock options
Issued as compensation
-
-
-
-
-
-
450,587
76,918
9,003
2,490
Issued on the exercise of warrants
399,005
15,215
Issued to acquire non-controlling
interest of Aquiline Resources Inc.
1,747,738
43,532
Other decreases in non-controlling
interests
Distributions by subsidiaries to
non-controlling interests
Stock-based compensation on
option grants
Dividends declared
-
-
-
-
-
-
-
-
-
-
-
(1,655)
-
-
-
-
-
2,328
-
Total comprehensive income
Net earnings for the year
Other comprehensive loss
Issued on the exercise of stock
options
Issued as compensation
-
-
-
90,093
53,721
Issued on the exercise of warrants
139,761
-
-
-
2,692
1,329
4,675
Shares repurchased and cancelled
(3,582,200)
(42,342)
Distributions by subsidiaries to
non-controlling interests
Stock-based compensation on
option grants
Dividends declared
-
-
-
-
-
-
-
-
-
(503)
-
-
-
-
2,112
-
-
13,711
6,246
6,246
-
13,711
13,711
6,246
19,957
7,348
2,490
15,215
1,996
-
1,996
-
-
-
15,707
6,246
21,953
7,348
2,490
15,215
(39,809)
3,723
(7,709)
(3,986)
-
-
-
(8,026)
-
-
2,328
(8,026)
(608)
(608)
(992)
(992)
-
-
2,328
(8,026)
-
352,494
352,494
1,652
354,146
(5,552)
-
(5,552)
-
(5,552)
(5,552)
352,494
346,942
1,652
348,594
-
-
-
2,189
1,329
4,675
(51,692)
(94,034)
-
-
-
-
2,189
1,329
4,675
(94,034)
-
(2,055)
(2,055)
2,112
(10,732)
(10,732)
-
-
2,112
(10,732)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2010
107,791,368
$ 1,276,887
$
7,022
$
7,698
$
49,751
$ 1,341,358
$
8,651
$
1,350,009
Balance, December 31, 2011
104,492,743
$ 1,243,241
$
8,631
$
2,146
$
339,821
$ 1,593,839
$
8,248
$
1,602,087
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
61
NOTES TO CONSOLIDATED fINANCIAL STATEMENTS
As at December 31, 2011, December 31, 2010, January 1, 2010 and for the years ended December 31, 2011 and 2010
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
1. NATURE Of OPERATIONS
Pan American Silver Corp. is the ultimate parent company of its subsidiary group (collectively, the “Company”, or “Pan American”).
The Company is incorporated and domiciled in Canada, and its registered office is at Suite 1500 – 625 Howe Street, Vancouver, British
Columbia, V6C 2T6.
The Company is engaged in the production and sale of silver, gold and other base metals including copper, lead and zinc as well as
other related activities, including exploration, extraction, processing, refining and reclamation. The Company’s primary product (silver)
is produced in Peru, Mexico, Argentina and Bolivia. Additionally, the Company has project development activities in Peru, Mexico and
Argentina, and exploration activities throughout South America and Mexico.
2. SUMMARY Of SIGNIfICANT ACCOUNTING POLICIES
a. Statement of Compliance
These annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”), International Accounting Standards (“IAS”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”) issued by
the International Accounting Standards Board (“IASB”). The Company adopted IFRS in accordance with IFRS 1 – First-time adoption
of International Financial Reporting Standards (“IFRS 1”) with a transition date of January 1, 2010. These consolidated financial
statements have been prepared in accordance with IFRS standards and interpretations effective as of December 31, 2011.
b. Basis of Preparation
The Company’s accounting policies have been applied consistently in preparing these consolidated annual financial statements
for the year ended December 31, 2011, the comparative information as at December 31, 2010 and the opening statement of
financial position at the date of transition. The effects of the transition to IFRS on the statements of financial position, equity, total
comprehensive income and income statements are presented in Note 23.
c. Significant Accounting Policies
Principles of Consolidation: The financial statements consolidate the financial statements of Pan American and its subsidiaries. All
intercompany balances and transactions, including unrealized profits and losses arising from intra-company transactions, have
been eliminated in full. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which
control passes. Control is achieved where the Company has the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities. This occurs when the Company has more than 50% voting power through ownership
or agreements, except where minority rights are such that a minority shareholder is able to prevent the Company from exercising
control. Where there is a loss of control of a subsidiary, the financial statements include the results for the part of the reporting
period during which the Company has control. Subsidiaries use the same reporting period and same accounting policies as the
Company.
For partly owned subsidiaries, the net assets and net earnings attributable to non-controlling shareholders are presented as “net earnings
attributable to non-controlling interests” in the consolidated statement of financial position and consolidated income statement.
The consolidated financial statements include the wholly-owned and partially-owned subsidiaries of the Company, the most
significant of which are presented in the following table:
SUBSIDIARY
Pan American Silver S.A. Mina Quiruvilca
Compañía Minera Argentum S.A.
Minera Corner Bay S.A.
Plata Panamericana S.A. de C.V.
Compañía Minera Tritón S.A.
Pan American Silver (Bolivia) S.A.
Minera Argenta S.A.
LOCATION
OWNERSHIP
INTEREST
STATUS
OPERATIONS AND DEVELOPMENT
PROJECTS OWNED
Peru
Peru
Mexico
Mexico
Argentina
Bolivia
Argentina
100%
92%
100%
100%
100%
95%
100%
Consolidated
Huaron Mine/Quiruvilca Mine
Consolidated
Morococha Mine
Consolidated
Alamo Dorado Mine
Consolidated
La Colorada Mine
Consolidated
Manantial Espejo Mine
Consolidated
San Vicente Mine
Consolidated
Navidad Project
62
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Associates: An associate is an entity over which the investor
has significant influence but not control and that is neither a
subsidiary nor an interest in a joint venture. Significant influence
is presumed to exist where the Company has between 20% and
50% of the voting rights, but can also arise where the Company
has less than 20%, if the Company has the power to be actively
involved and influential in policy decisions affecting the entity.
The Company’s share of the net assets and net earnings or loss is
accounted for in the consolidated financial statements using the
equity method of accounting.
Basis of measurement: These consolidated financial statements
have been prepared on a historical cost basis except for derivative
financial instruments, share purchase warrants and assets
classified as at fair value through profit or loss or available-for-sale
which are measured at fair value. Additionally, these consolidated
financial statements have been prepared using the accrual basis
of accounting, except for cash flow information.
Currency of presentation: The consolidated financial statements
are presented in United States dollars (“USD”), which is the
Company’s functional and presentation currency, and all values
are rounded to the nearest thousand except where otherwise
indicated.
Business combinations: Upon the acquisition of a business, the
acquisition method of accounting is used, whereby the purchase
consideration is allocated to the identifiable assets, liabilities
and contingent liabilities (identifiable net assets) acquired on
the basis of fair value at the date of acquisition. When the cost
of acquisition exceeds the fair values attributable to the Group’s
share of the identifiable net assets, the difference is treated as
purchased goodwill, which is not amortised but is reviewed
for impairment annually or more frequently when there is an
indication of impairment. If the fair value attributable to the
Company’s share of the identifiable net assets exceeds the cost
of acquisition, the difference is immediately recognized in the
income statement. Acquisition related costs, other than costs
to issue debt or equity securities, of the acquirer, including
investment banking fees, legal fees, accounting fees, valuation
fees, and other professional or consulting fees are expensed as
incurred. The costs to issue equity securities of the Company as
consideration for the acquisition are reduced from share capital
as share issuance costs. The costs to issue debt securities are
capitalized and amortized using the effective interest method.
Control of a business may be achieved in stages. Upon the
acquisition of control, any previously held interest is re-measured
to fair value at the date control is obtained resulting in a gain
or loss upon the acquisition of control. In addition, any change
relating to interest previously recognized in other comprehensive
income is reclassified to the income statement upon the
acquisition of control.
Significant Judgements in Applying Accounting Policies and
Key Sources of Estimation Uncertainty: Many of the amounts
included in the financial statements involve the use of judgement
and or estimates in the process of applying the Company’s
accounting policies. These
judgements and estimates are
based on management’s knowledge of the relevant facts and
circumstances, having regard to previous experience, but actual
results may differ from the amounts included in the financial
statements.
a. Critical Judgements in the Application of Accounting
Policies
Judgements that have the most significant effect on
the amounts recognized in the Company’s consolidated
financial statements are as follows:
• Capitalization of exploration and evaluation costs:
The Company has determined that exploration and
evaluation costs incurred during the year for the
respective operating mines, Navidad and other
exploration interests have potential future economic
benefits and are potentially economically recoverable.
In making this judgement, the Company has assessed
various sources of
including but not
information
limited to the geologic and metallurgic information,
history of conversion of mineral deposits to proven
and probable mineral reserves, scoping and feasibility
studies, proximity to existing ore bodies, operating
management expertise and required environmental,
operating and other permits. During the year, the
Company capitalized a total of $22.3 million (2010 - $29.1
million) of exploration expenditures.
• Commencement of commercial/operating
level of
production: During the determination of whether a mine
has reached an operating level that is consistent with
the use intended by management, costs incurred are
capitalized as mineral property, plant and equipment
and any consideration from commissioning sales
are offset against costs capitalized. The Company
defines commencement of commercial production as
the date that a mine has achieved a sustainable level
of production that provides a basis for a reasonable
expectation of profitability along with various qualitative
factors including but not limited to the achievement of
mechanical completion, whether production levels are
sufficient to be at least capable of generating sustainable
positive cash flow, the working effectiveness of the site
refinery, whether a refining contract for the product is
in place and whether the product is of sufficient quality
to be sold, whether there is a sustainable level of
production input available including power, water and
diesel; whether the necessary permits are in place to
allow continuous operations.
• Assets’ carrying values and impairment charges: In
determining carrying values and impairment charges the
Company looks at recoverable amounts, defined as the
higher of value in use or fair value less cost to sell in the
case of assets, and at objective evidence that identifies
significant or prolonged decline of fair value on financial
assets indicating impairment. These determinations and
their individual assumptions require that management
make a decision based on the best available information
at each reporting period. For instance, the Company
continues to work in an open and informed manner
with the provincial government and local communities
regarding open pit mining in the Central Meseta of
Chubut, which is where the Company’s Navidad project
is located, and remains confident that this approach will
result in a change in the mining law, to allow for open
pit mining. Accordingly, this was used as a factor in
the Company’s assessment of the carrying value of the
Navidad project.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
63
• Functional currency: The
functional currency
for
the Company, its subsidiaries and associates is the
currency of the primary economic environment in
which each operates. The Company has determined that
its functional currency and that of its subsidiaries and
associates is the USD. The determination of functional
currency may require certain judgements to determine
the primary economic environment. The Company
reconsiders the functional currency used when there is
a change in events and conditions which determined the
primary economic environment.
• Business combinations: Determination of whether
a set of assets acquired and
liabilities assumed
constitute a business may require the Company to make
certain judgements, taking into account all facts and
circumstances. If an acquired set of assets and liabilities
includes goodwill, the set is presumed to be a business.
• Deferral of stripping costs: In determining whether
stripping costs incurred during the production phase of
a mining property relate to mineral reserves and mineral
resources that will be mined in a future period and
therefore should be capitalized, the Company treats the
costs of removal of the waste material during a mine’s
production phase as deferred, where it gives rise to
future benefits. These capitalized costs are subsequently
amortized in a systematic and rational manner over the
reserves that directly benefit from the specific stripping
activity. As at December 31, 2011, the carrying amount of
stripping costs capitalized was $1.6 million (2010 - $nil).
• Determination of significant influence: The Company
determines its ability to exercise significant influence
over an investment in shares of other companies by
looking at its percentage interest and other qualitative
factors including but not limited to its voting rights and,
operating involvement.
• Share purchase warrants: The carrying value of share
purchase warrants is at fair value. The share purchase
warrants are classified and accounted for as financial
liabilities and, as such, are measured at their fair value
with changes in fair value reported in the income
statement as a gain or loss on derivatives. The Company
utilizes the Black-Scholes pricing model to determine
the fair value of the share purchase warrants as the best
approximation of fair value given the warrants are not
listed or publically traded. The Company uses significant
judgement in the evaluation of the input variables in
the Black-Scholes calculation which include: risk free
interest rate, expected stock price volatility, expected
life, expected dividend yield and a quoted market
price of the Company’s shares on the Toronto Stock
Exchange. At December 31, 2011, the fair value of the
share purchase warrants was $23.7 million (2010 - $127.9
million). Additionally, during the year ended December
31, 2011, there was a derivative gain of $101.8 million
(2010 – derivative loss of $90.7 million).
• Replacement convertible debenture: As part of the 2009
Aquiline transaction the Company issued a replacement
convertible debenture that allowed the holder to convert
the debenture into either 363,854 Pan American shares
or a Silver Stream contract. The convertible debenture
is classified and accounted for as a deferred credit.
64
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
In determining the appropriate classification of the
convertible debenture as a deferred credit, the Company
evaluated the economics underlying the contract as
of the date the Company assumed the obligation.
As at December 31, 2011, the carrying amount of
the convertible debenture arising from the Aquiline
acquisition was $20.8 million (2010 - $20.8 million).
b. Key Sources of Estimation Uncertainty in the Application
of Accounting Policies
Key sources of estimation uncertainty that have a significant
risk of causing a material adjustment to the carrying
amounts of assets and liabilities are:
• Revenue recognition: Revenue
from
the sale of
concentrate to independent smelters is recorded at the
time the risks and rewards of ownership pass to the
buyer using forward market prices on the expected date
that final sales prices will be fixed. Variations between the
prices set under the smelting contracts may be caused
by changes in market prices and result in an embedded
derivative in the accounts receivable. The embedded
derivative is recorded at fair value each period until
final settlement occurs, with changes in the fair value
classified in revenue. In a period of high price volatility,
as experienced under current economic conditions, the
effect of mark-to-market price adjustments related to
the quantity of metal which remains to be settled with
independent smelters could be significant. For changes
in metal quantities upon receipt of new information and
assay, the provisional sales quantities are adjusted.
• Estimated recoverable ounces: The carrying amounts
of the Company’s mining properties are depleted
based on recoverable ounces. Changes to estimates
of recoverable ounces and depletable costs including
changes resulting from revisions to the Company’s mine
plans and changes in metal price forecasts can result in
a change to future depletion rates.
• Mineral reserve estimates: The figures for mineral
reserves and mineral
resources are determined
Instrument 43-101,
in accordance with National
“Standards of Disclosure for Mineral Projects”, issued
by the Canadian Securities Administrators. There are
numerous uncertainties inherent in estimating mineral
reserves and mineral resources, including many factors
beyond the Company’s control. Such estimation is a
subjective process, and the accuracy of any mineral
reserve or mineral resource estimate is a function of
the quantity and quality of available data and of the
assumptions made and judgements used in engineering
interpretation. Differences between
and geological
management’s
economic
assumptions
assumptions such as metal prices and market conditions
could have a material effect in the future on the
Company’s financial position and results of operation.
including
• Mine operating costs: In determining mine operating
costs recognized in the Consolidated Income Statement,
the Company makes estimates of quantities of ore
stacked in stockpiles and in process and the recoverable
silver in this material to determine the average costs of
finished goods sold during the period. Changes in these
estimates can result in a change in mine operating costs
of future periods and carrying amounts of inventories.
At December 31, 2011, the carrying amount of current
inventories excluding supplies was $99.8 million (2010 -
$72.0 million).
• Depreciation and amortization rates for mineral property,
plant and equipment and mineral interests: Depreciation
and amortization expenses are allocated based on
assumed asset lives and depreciation and amortization
rates. Should the asset life or depreciation rate differ
from the initial estimate, an adjustment would be made
in the Consolidated Income Statement. A change in
the mineral reserve estimate for assets depreciated
using the units of production method would impact
depreciation expense.
•
information.
Impairment of mining interests: While assessing whether
any indications of impairment exist for mining interests,
consideration is given to both external and internal
sources of
Information the Company
considers include changes in the market, economic
and legal environment in which the Company operates
that are not within its control and affect the recoverable
Internal sources of
interests.
amount of mining
information include the manner in which mineral
property and plant and equipment are being used or
are expected to be used and indications of economic
performance of the assets. Estimates include but are not
limited to estimates of the discounted future after-tax
cash flows expected to be derived from the Company’s
mining properties, costs to sell the mining properties
and the appropriate discount rate. Reductions in metal
price forecasts, increases in estimated future costs
of production, increases in estimated future capital
costs, reductions in the amount of recoverable mineral
reserves and mineral resources and/or adverse current
economics can result in a write-down of the carrying
amounts of the Company’s mining interests.
• Estimation of decommissioning and restoration costs
and the timing of expenditures: The cost estimates are
updated annually during the life of a mine to reflect
known developments, (e.g. revisions to cost estimates
and to the estimated lives of operations), and are
subject to review at regular intervals. Decommissioning,
restoration and similar liabilities are estimated based
on the Company’s interpretation of current regulatory
requirements,
constructive obligations and are
measured at the best estimate of expenditure required
to settle the present obligation of decommissioning,
restoration or similar liabilities that may occur upon
decommissioning of the mine at the end of the reporting
period. The carrying amount is determined based on the
net present value of estimated future cash expenditures
for the settlement of decommissioning, restoration or
similar liabilities that may occur upon decommissioning
of the mine. Such estimates are subject to change based
on changes in laws and regulations and negotiations
with regulatory authorities. At December 31, 2011, the
carrying amount of the Company’s provision for the
closure and decommissioning cost obligation was $55.8
million (2010 - $71.6 million).
•
Income taxes and recoverability of deferred tax assets:
In assessing the probability of realizing income tax
assets recognized, the Company makes estimates
income,
related to expectations of future taxable
applicable tax planning opportunities, expected timing
of reversals of existing temporary differences and the
likelihood that tax positions taken will be sustained upon
examination by applicable tax authorities. In making its
assessments, the Company gives additional weight to
positive and negative evidence that can be objectively
verified. Estimates of future taxable income are based
on forecasted cash flows from operations and the
application of existing tax laws in each jurisdiction. The
Company considers relevant tax planning opportunities
that are within the Company’s control, are feasible and
within management’s ability to implement. Examination
by applicable tax authorities is supported based on
individual facts and circumstances of the relevant tax
position examined in light of all available evidence.
Where applicable tax laws and regulations are either
unclear or subject to ongoing varying interpretations, it
is reasonably possible that changes in these estimates
can occur that materially affect the amounts of income
tax assets recognized. Also, future changes in tax laws
could limit the Company from realizing the tax benefits
from the deferred tax assets. The Company reassesses
unrecognized income tax assets at each reporting period.
• Accounting for acquisitions: The fair value of assets
acquired and liabilities assumed and the resulting
goodwill, if any, requires that management make
estimates based on the information provided by the
acquiree. Changes to the provisional values of assets
acquired and liabilities assumed, deferred income taxes
and resulting goodwill, if any, will be retrospectively
adjusted when the final measurements are determined
(within one year of acquisition date).
• Contingencies: Due to the size, complexity and nature of
the Company’s operations, various legal and tax matters
are outstanding from time to time. In the event the
Company’s estimates of the future resolution of these
matters changes, the Company will recognize the effects
of the changes in its consolidated financial statements
on the date such changes occur.
Revenue Recognition: Revenue associated with the sale of
commodities is recognized when all significant risks and rewards
of ownership of the asset sold are transferred to the customer,
usually when insurance risk and title has passed to the customer
and the commodity has been delivered to the shipping agent. At
this point the Company retains neither continuing managerial
involvement to the degree usually associated with ownership nor
effective control over the commodities and the costs incurred, or
to be incurred, in respect of the sale can be reliably measured.
Revenue is recognized, at the fair value of the consideration
receivable, to the extent that it is probable that economic benefits
will flow to the Company and the revenue can be reliably
measured. Sales revenue is recognized at the fair value of
consideration received, which in most cases is based on invoiced
amounts.
The Company’s concentrate sales contracts with third-party
smelters, in general, provide for a provisional payment
based upon provisional assays and quoted metal prices.
Final settlement is based on applicable commodity prices set
on specified quotational periods, typically ranging from one
month prior to shipment, and can extend to three months after
the shipment arrives at the smelter and is based on average
market metal prices. For this purpose, the selling price can be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
65
measured reliably for those products, such as silver, gold, zinc,
lead and copper, for which there exists an active and freely
traded commodity market such as the London Metals Exchange
and the value of product sold by the Company is directly linked
to the form in which it is traded on that market.
Sales revenue is commonly subject to adjustment based on
an inspection of the product by the customer. In such cases,
sales revenue is initially recognized on a provisional basis
using the Company’s best estimate of contained metal, and
adjusted subsequently. Revenues are recorded under these
contracts at the time title passes to the buyer based on the
expected settlement period. Revenue on provisionally priced
sales is recognized based on estimates of the fair value of the
consideration receivable based on forward market prices. At
each reporting date provisionally priced metal is marked-to-
market based on the forward selling price for the quotational
period stipulated in the contract. Variations between the price
recorded at the shipment date and the actual final price set
under the smelting contracts are caused by changes in metal
prices and result in an embedded derivative in the accounts
receivable. The embedded derivative is recorded at fair value
each period until final settlement occurs, with the fair value
adjustments recognized in revenue.
Refining and treatment charges are netted against revenue for
sales of metal concentrate. Sales of concentrate are stated at their
invoiced amount which is net of treatment and refining charges.
Financial instruments: A financial instrument is any contract that
gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity.
i) fINANCIAL ASSETS
The Company classifies its financial assets in the following
loans
categories: at fair value through profit or
and
receivables, available-for-sale and held-to-maturity
investments. The classification depends on the purpose
for which the financial assets were acquired. Management
determines the classification of financial assets at initial
recognition.
loss,
a. Financial assets at fair value through profit or loss
Derivatives are included in this category and are classified
as current assets or non-current assets based on their
maturity date. The Company does not acquire financial
assets for the purpose of selling in the short term. Financial
assets carried at fair value through profit or loss, are initially
recognized at fair value. The directly attributable transaction
costs are expensed in the income statement in the period in
which they are incurred. Subsequent changes in fair value
are recognized in net earnings.
b. Loans and receivables
Loans and receivables are non-derivative financial assets
with fixed or determinable payments that are not quoted
in an active market. Loans and receivables comprise ‘trade
and other receivables’, ‘other assets’ and ‘cash’ in the
statement of financial position. Loans and receivables are
carried at amortized cost less any impairment.
c. Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that
are either specifically designated as available-for- sale or not
classified in any of the other categories. They are included in
non-current assets unless the Company intends to dispose
of the investment within 12 months of the statement
of financial position date. Changes in the fair value of
available-for-sale financial assets denominated in a currency
other than the functional currency of the holder, other
than equity investments, are analyzed between translation
differences and other changes in the carrying amount of
the security. The translation differences are recognized in
the income statement. Any impairment charges are also
recognized in the income statement, while other changes in
fair value are recognized in other comprehensive income.
When financial assets classified as available-for-sale are
sold, the accumulated fair value adjustments previously
recognized in accumulated other comprehensive income
are reclassified to the income statement. Dividends on
available-for-sale equity instruments are also recognized in
the income statement within investment income when the
Company’s right to receive payments is established.
d. Held-to-maturity investments
Non-derivative financial assets with fixed or determinable
payments and fixed maturity are classified as held-to-
maturity when the Company has the positive intention and
ability to hold to maturity. Investments intended to be held
for an undefined period are not included in this classification.
Other long-term investments that are intended to be held-
to-maturity, such as bonds, are measured at amortized cost.
This cost is computed as the amount initially recognized
minus principal repayments, plus or minus the cumulative
amortization using the effective interest method of any
difference between the initially recognized amount and the
maturity amount. This calculation includes all fees paid or
received between parties to the contract that are an integral
part of the effective interest rate, transaction costs and all
other premiums and discounts. For investments carried at
amortized cost, gains and losses are recognized in income
when the investments are derecognized or impaired, as
well as through the amortization process.
Financial assets are derecognized when the investments
mature or are sold, and substantially all the risks and
rewards of ownership have been transferred.
ii) fINANCIAL LIABILITIES
Borrowings and other financial liabilities are classified
as other financial liabilities and are recognized initially
at fair value, net of transaction costs incurred and are
subsequently stated at amortized cost. Any difference
between the amounts originally received (net of transaction
costs) and the redemption value is recognized in the income
statement over the period to maturity using the effective
interest method.
Borrowings and other financial liabilities are classified as
current liabilities unless the Company has an unconditional
right to defer settlement of the liability for at least 12
months after the statement of financial position date.
iii) DERIVATIVE fINANCIAL INSTRUMENTS
When the Company enters into derivative contracts these
transactions are designed to reduce exposures related to
assets and liabilities, firm commitments or anticipated
transactions. All derivatives are initially recognized at their
fair value on the date the derivative contract is entered into
and are subsequently re-measured at their fair value at
each statement of financial position date.
66
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Embedded derivatives: Derivatives embedded in other
financial instruments or other host contracts are treated
as separate derivatives when their risks and characteristics
are not closely related to their host contracts. For example,
variations between the commodity price recorded at the
shipment date and the actual final price set under the
smelting contracts are caused by changes in metal prices
and result in an embedded derivative in the accounts
receivable. This is described in the policy for revenue
recognition.
and losses on derecognition are recognized within finance
income and finance costs, respectively.
Where an existing financial liability is replaced by another
from the same lender on substantially different terms, or
the terms of an existing liability are substantially modified,
such an exchange or modification is treated as a de-
recognition of the original liability and the recognition of a
new liability, and any difference in the respective carrying
amounts is recognized in the income statement.
iv) fAIR VALUE
vii) TRADE RECEIVABLES
Fair value is the amount at which an item could be exchanged
in an arm’s length transaction between informed and willing
parties. Where relevant market prices are available, these
are used to determine fair values. In other cases, fair values
are calculated using quotations from independent financial
institutions, or by using valuation techniques consistent
with general market practice applicable to the instrument.
• The
fair values of cash, short
term borrowings
approximate their carrying values, as a result of their
short maturity or because they carry floating rates of
interest
• Derivative financial assets and liabilities are measured
at fair value based on published price quotations for the
period for which a liquid active market exists
v)
IMPAIRMENT Of fINANCIAL ASSETS
Available-for-sale financial assets
The Company assesses at each statement of financial
position date whether there is objective evidence that a
financial asset or a group of financial assets is impaired.
In the case of equity securities classified as available for
sale, an evaluation is made as to whether a decline in fair
value is ‘significant’ or ‘prolonged’ based on an analysis
of indicators such as significant adverse changes in the
technological, market, economic or legal environment in
which the Company invested in operates.
If an available-for-sale financial asset is impaired, an
amount comprising the difference between its cost (net of
any principal payment and amortization) and its current fair
value, less any impairment loss previously recognized in the
income statement is transferred from equity to the income
statement. Reversals in respect of equity instruments
classified as available for- sale are not recognized in the
income statement. Reversals of impairment losses on debt
instruments are reversed through the income statement; if
the increase in fair value of the instrument can be objectively
related to an event occurring after the impairment loss was
recognized.
vi) DE-RECOGNITION Of fINANCIAL ASSETS AND LIABILITIES
Trade receivables are recognized initially at fair value and
are subsequently measured at amortized cost reduced by
any provision for impairment. A provision for impairment
of trade receivables is established when there is objective
evidence that the Company will not be able to collect all
amounts due. Indicators of impairment would include
financial difficulties of the debtor, likelihood of the debtor’s
insolvency, default in payment or a significant deterioration
in credit worthiness. Any impairment is recognized in the
income statement within ‘doubtful accounts provision’.
When a trade receivable is uncollectable, it is written
off against the provision for impairment. Subsequent
recoveries of amounts previously written off are credited
income
against
statement.
‘doubtful accounts provision’
in the
viii) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are recognized
initially at fair value and subsequently measured at
amortized cost using the effective interest method.
Derivative Financial Instruments: The Company employs metals
and currency contracts, including forward contracts to manage
exposure to fluctuations in metal prices and foreign currency
exchange rates. For metals production, these contracts are
intended to reduce the risk of falling prices on the Company’s
future sales. Foreign currency derivative financial instruments,
such as forward contracts are used to manage the effects of
exchange rate changes on foreign currency cost exposures. Such
derivative financial instruments are initially recognized at fair
value on the date on which a derivative contract is entered into
and are subsequently re-measured at fair value. Derivatives are
carried as assets when the fair value is positive and as liabilities
when the fair value is negative and any gains or losses arising from
changes in fair value on derivatives are taken directly to earnings
for the year. The fair value of forward currency and commodity
contracts is calculated by reference to current forward exchange
rates and prices for contracts with similar maturity profiles.
Cash: Cash includes cash on hand and cash in banks, held
primarily in U.S. and Canadian dollars (“USD” and “CAD”,
respectively) and considered loans and receivables and therefore
is stated at amortized cost, less any impairment.
Financial assets
A financial asset is derecognized when its contractual rights
to the cash flows that comprise the financial asset expire
or substantially all the risks and rewards of the asset are
transferred.
Financial liabilities
A financial liability is derecognized when the obligation
under the liability is discharged, cancelled or expired. Gains
Short-term investments: Short-term investments are classified
as “available-for-sale”, and consist of highly-liquid debt securities
with original maturities in excess of three months and equity
securities. These debt and equity securities are initially recorded
at fair value, which upon their initial measurement is equal to
their cost. Subsequent measurements and changes in the market
value of these debt and equity securities are recorded as changes
to other comprehensive income. Investments are assessed
quarterly for potential impairment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
67
Inventories: Inventories include work in progress, concentrate
ore, doré, processed silver and gold, and operating materials
and supplies. Work in progress inventory includes ore stockpiles
and other partly processed material. Stockpiles represent ore that
has been extracted and is available for further processing. The
classification of inventory is determined by the stage at which the
ore is in the production process. Inventories of ore are sampled
for metal content and are valued based on the lower of cost or
estimated net realizable value based upon the period ending
prices of contained metal. Cost is determined on a weighted
average basis or using a first-in-first-out basis and includes all
costs incurred in the normal course of business including direct
material and direct labour costs and an allocation of production
overheads, depreciation and amortization, and other costs,
based on normal production capacity, incurred in bringing each
product to its present location and condition. Material that does
not contain a minimum quantity of metal to cover estimated
processing expense to recover the contained metal is not
classified as inventory and is assigned no value. If the ore will not
be processed within the 12 months after the statement of financial
position date it is included within non-current assets. Quantities
are assessed primarily through surveys and assays.
Supplies inventories are valued at the lower of average cost and
net realizable value using replacement cost plus cost to dispose,
net of obsolescence. Concentrate and doré inventory includes
product at the mine site, the port warehouse and product held
by refineries. At times, the Company has a limited amount of
finished silver at a minting operation where coins depicting Pan
American’s emblem are stamped.
Mineral Property, Plant, and Equipment: On initial acquisition,
mineral property, plant and equipment are valued at cost, being
the purchase price and the directly attributable costs of acquisition
or construction required to bring the asset to the location and
condition necessary for the asset to be capable of operating in the
manner intended by management. When provisions for closure
and decommissioning are recognized, the corresponding cost is
capitalized as an asset, representing part of the cost of acquiring
the future economic benefits of the operation. The capitalized cost
of closure and decommissioning activities is recognized in mineral
property, plant and equipment and depreciated accordingly.
In subsequent periods, buildings, plant and equipment are stated
at cost less accumulated depreciation and any impairment in
value, whilst land is stated at cost less any impairment in value
and is not depreciated.
Depreciation is provided so as to write off the cost, less estimated
residual values of buildings, plant and equipment (based on
prices prevailing at the statement of financial position date) on the
following bases: Mine production assets are depreciated using
a unit of production method based on estimated economically
recoverable reserves, which results in a depreciation charge
proportional to the depletion of reserves. Buildings, plant and
equipment unrelated to production are depreciated using the
straight-line method based on estimated useful lives. Where parts
of an asset have different useful lives, depreciation is calculated
on each separate part.
Each asset or part’s estimated useful life has due regard to both
its own physical life limitations and the present assessment of
economically recoverable reserves of the mine property at which
the item is located, and to possible future variations in those
assessments. Estimates of remaining useful lives and residual
values are reviewed annually. Changes in estimates are accounted
for prospectively.
The expected useful lives are included below in the accounting
policy for depreciation of property, plant, and equipment. The
net carrying amounts of mineral property, land, buildings, plant
and equipment are reviewed for impairment either individually
or at the cash-generating unit level when events and changes
in circumstances indicate that the carrying amounts may not
be recoverable. To the extent that these values exceed their
recoverable amounts, that excess is fully provided against in the
financial year in which this is determined.
In countries where the Company paid Value Added Tax (“VAT”) and
where there is uncertainty of its recoverability, the VAT payments
have either been deferred with mineral property costs relating to
the property or expensed if it relates to mineral exploration. If the
Company ultimately recovers previously deferred amounts, the
amount received will be applied to reduce mineral property costs
or taken as a credit against current expenses depending on the
prior treatment.
Expenditure on major maintenance or repairs includes the cost of
the replacement of parts of assets and overhaul costs. Where an
asset or part of an asset is replaced and it is probable that future
economic benefits associated with the item will be available to
the Company, the expenditure is capitalized and the carrying
amount of the item replaced derecognized. Similarly, overhaul
costs associated with major maintenance are capitalized and
depreciated over their useful lives where it is probable that future
economic benefits will be available and any remaining carrying
amounts of the cost of previous overhauls are derecognized. All
other costs are expensed as incurred.
Where an item of mineral property, plant and equipment is
disposed of, it is derecognized and the difference between its
carrying value and net sales proceeds is disclosed as earnings or
loss on disposal in the income statement. Any items of mineral
property, plant or equipment that cease to have future economic
benefits are derecognized with any gain or loss included in the
financial year in which the item is derecognized.
Operational Mining Properties and Mine Development: When it
has been determined that a mineral property can be economically
developed as a result of establishing proven and probable reserves
(which occurs upon completion of a positive economic analysis of
the mineral deposit), the costs incurred to develop such property
including costs to further delineate the ore body and remove
overburden to initially expose the ore body prior to the start of
mining operations, are also capitalized. Such costs are amortized
using the units-of-production method over the estimated life of
the ore body based on proven and probable reserves.
Costs associated with commissioning activities on constructed
plants are deferred from the date of mechanical completion of
the facilities until the date the Company is ready to commence
commercial service. Any revenues earned during this period
are recorded as a reduction in deferred commissioning costs.
These costs are amortized using the units-of-production method
(described below) over the life of the mine, commencing on the
date of commercial service.
68
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Acquisition costs related to the acquisition of land and mineral
rights are capitalized as incurred. Prior to acquiring such land or
mineral rights the Company makes a preliminary evaluation to
determine that the property has significant potential to develop
an economic ore body. The time between initial acquisition and
full evaluation of a property’s potential is dependent on many
factors including: location relative to existing infrastructure,
the property’s stage of development, geological controls and
metal prices. If a mineable ore body is discovered, such costs
are amortized when production begins. If no mineable ore body
is discovered, such costs are expensed in the period in which
it is determined the property has no future economic value.
In countries where the Company has paid Value Added Tax
(“VAT”) and where there is uncertainty of its recoverability, the
VAT payments have either been deferred with mineral property
costs relating to the property or expensed if it relates to mineral
exploration. If the Company ultimately makes recoveries of
the VAT, the amount received will be applied to reduce mineral
property costs or taken as a credit against current expenses
depending on the prior treatment.
Major development expenditures on producing properties
incurred to increase production or extend the life of the mine
are capitalized while ongoing mining expenditures on producing
properties are charged against earnings as incurred. Gains or
losses from sales or retirements of assets are included in gain or
loss on sale of assets.
Depreciation of Mineral Property, Plant and Equipment: The
carrying amounts of mineral property, plant and equipment
(including initial and any subsequent capital expenditure) are
depreciated to their estimated residual value over the estimated
useful lives of the specific assets concerned, or the estimated life
of the associated mine or mineral lease, if shorter. Estimates of
residual values and useful lives are reviewed annually and any
change in estimate is taken into account in the determination
of remaining depreciation charges, and adjusted if appropriate,
at each statement of financial position date. Changes to the
estimated residual values or useful lives are accounted for
prospectively. Depreciation commences on the date when the
asset is available for use as intended by management.
Units of production basis
For mining properties and leases and certain mining equipment,
the economic benefits from the asset are consumed in a pattern
which is linked to the production level. Except as noted below,
such assets are depreciated on a unit of production basis.
In applying the units of production method, depreciation is
normally calculated using the quantity of material extracted
from the mine in the period as a percentage of the total quantity
of material to be extracted in current and future periods based
on proven and probable reserves and, for some mines, other
mineral resources. Such non reserve material may be included
in depreciation calculations in limited circumstances and where
there is a high degree of confidence in its economic extraction.
Straight line basis
Assets within operations for which production is not expected to
fluctuate significantly from one year to another or which have a
physical life shorter than the related mine are depreciated on a
straight line basis.
Mineral property, plant and equipment are depreciated over its
useful life, or over the remaining life of the mine if shorter. The
major categories of property, plant and equipment are depreciated
on a unit of production and/or straight-line basis as follows:
• Land – not depreciated
• Mobile equipment – 3 to 7 years
• Buildings and plant facilities – 25 to 50 years
• Mining properties and leases – based on reserves on a unit of
production basis. Capitalized evaluation and development
expenditure – based on applicable reserves on a unit of
production basis
• Exploration and Evaluation – not depreciated until mine goes
into production
• Assets under construction – not depreciated until assets are
ready for their intended use
Exploration and Evaluation Expenditure: relates to costs incurred
on the exploration and evaluation of potential mineral reserves
and resources and includes costs such as exploratory drilling
and sample testing and the costs of pre-feasibility studies.
Exploration expenditure relates to the initial search for deposits
with economic potential. Evaluation expenditure arises from a
detailed assessment of deposits or other projects that have been
identified as having economic potential.
Expenditure on exploration activity is not capitalized.
Capitalization of evaluation expenditure commences when there
is a high degree of confidence in the project’s viability and hence
it is potentially probable that future economic benefits will flow
to the Company.
Evaluation expenditure, other than that acquired from the
purchase of another mining company, is carried forward as an
asset provided that such costs are expected to be recovered in full
through successful development and exploration of the area of
interest or alternatively, by its sale.
Purchased exploration and evaluation assets are recognized as
assets at their cost of acquisition or at fair value if purchased as
part of a business combination.
In the case of undeveloped projects there may be only inferred
resources to form a basis for the impairment review. The review
is based on a status report regarding the Company’s intentions
for development of the undeveloped project. In some cases,
the undeveloped projects are regarded as successors to ore
bodies, smelters or refineries currently in production. Where
this is the case, it is intended that these will be developed and
go into production when the current source of ore is exhausted
or to replace the reduced output, which results where existing
smelters and/or refineries are closed. It is often the case that
technological and other improvements will allow successor
smelters and/or refineries to more than replace the capacity
of their predecessors. Subsequent recovery of the resulting
carrying value depends on successful development or sale of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
69
the undeveloped project. If a project does not prove viable, all
irrecoverable costs associated with the project net of any related
impairment provisions are written off.
An impairment review is performed, either individually or at
the cash generating unit level, when there are indicators that
the carrying amount of the assets may exceed their recoverable
amounts. To the extent that this occurs, the excess is expensed
in the financial year in which this is determined. Capitalized
exploration and evaluation assets are reassessed on a regular
basis and these costs are carried forward provided that the
conditions discussed above for expenditure on exploration
activity and evaluation expenditure are met.
Expenditure is transferred to mining properties and leases or
assets under construction once the work completed to date
supports the future development of the property and such
development receives appropriate approvals.
Deferred Stripping Costs: In open pit mining operations, it is
necessary to remove overburden and other waste in order to
access the ore body. During the preproduction phase, these
costs are capitalized as part of the cost of the mine property and
subsequently amortized over the life of the mine (or pit) on a units
of production basis.
The costs of removal of the waste material during a mine’s
production phase are deferred, where they give rise to future
benefits. These capitalized costs are subsequently amortized in
a rational and systematic manner over the reserves that directly
benefit from the specific stripping activity.
Asset Impairment: Management reviews and evaluates its assets
for impairment when events or changes in circumstances indicate
that the related carrying amounts may not be recoverable.
Impairment is normally assessed at the level of cash-generating
units which are identified as the smallest identifiable group of
assets that generates cash inflows and largely independent of the
cash inflows from other assets. In addition, an impairment loss is
recognized for any excess of carrying amount over the fair value
less costs to sell of a non-current asset or disposal group held
for sale. When an impairment review is undertaken, recoverable
amount is assessed by reference to the higher of value in use
(being the net present value of expected future cash flows of the
relevant cash generating unit) and fair value less costs to sell
(“FVLCTS”). The best evidence of FVLCTS is the value obtained
from an active market or binding sale agreement. Where neither
exists, FVLCTS is based on the best information available to reflect
the amount the Company could receive for the cash generating
unit in an arm’s length transaction. This is often estimated using
discounted cash flow techniques.
Where recoverable amount is assessed using discounted cash
flow techniques, the resulting estimates are based on detailed
mine and/or production plans. For value in use, recent cost levels
are considered, together with expected changes in costs that are
compatible with the current condition of the business and which
meet the requirements of IAS 36. The cash flow forecasts are
based on best estimates of expected future revenues and costs,
including the future cash costs of production, capital expenditure,
close down, restoration and environmental clean-up. These may
include net cash flows expected to be realized from extraction,
processing and sale of mineral resources that do not currently
qualify for inclusion in proven or probable ore reserves. Such
non reserve material is included where there is a high degree
of confidence in its economic extraction. This expectation is
usually based on preliminary drilling and sampling of areas
of mineralization that are contiguous with existing reserves.
Typically, the additional evaluation to achieve reserve status for
such material has not yet been done because this would involve
incurring costs earlier than is required for the efficient planning
and operation of the mine.
Where the recoverable amount of a cash generating unit is
dependent on the life of its associated ore body, expected future
cash flows reflect long term mine plans, which are based on
detailed research, analysis and iterative modeling to optimize the
level of return from investment, output and sequence of extraction.
The mine plan takes account of all relevant characteristics of the
ore body, including waste to ore ratios, ore grades, haul distances,
chemical and metallurgical properties of the ore impacting on
process recoveries and capacities of processing equipment that
can be used. The mine plan is therefore the basis for forecasting
production output in each future year and for forecasting
production costs.
The Company’s cash flow forecasts are based on estimates of
future commodity prices, which assume market prices will revert
to the Company’s assessment of the long term average price,
generally over a period of three to five years. These assessments
often differ from current price levels and are updated periodically.
The discount rates applied to the future cash flow forecasts
represent an estimate of the rate the market would apply having
regard to the time value of money and the risks specific to the
asset for which the future cash flow estimates have not been
adjusted, including appropriate adjustments for the risk profile
of the countries in which the individual cash generating units
operate. The great majority of the Company’s sales are based
on prices denominated in USD. To the extent that the currencies
of countries in which the Company produces commodities
strengthen against the USD without commodity price offset,
cash flows and, therefore, net present values are reduced. When
calculating value in use, IAS 36 requires that calculations should
be based on exchange rates current at the time of the assessment.
Non-financial assets other than goodwill that have suffered an
impairment are tested for possible reversal of the impairment
whenever events or changes in circumstances indicate that the
impairment may have reversed.
Closure and Decommissioning Costs: The mining, extraction
and processing activities of the Company normally give rise
to obligations for site closure or rehabilitation. Closure and
decommissioning works can include facility decommissioning
and dismantling; removal or treatment of waste materials;
site and land rehabilitation. The extent of work required and
the associated costs are dependent on the requirements of
relevant authorities and the Company’s environmental policies.
Provisions for the cost of each closure and rehabilitation
program are recognized at the time that environmental
disturbance occurs. When the extent of disturbance increases
over the life of an operation, the provision is increased
accordingly. Costs included in the provision encompass all
closure and decommissioning activity expected to occur
progressively over the life of the operation and at the time of
closure in connection with disturbances at the reporting date.
Routine operating costs that may impact the ultimate closure
and decommissioning activities, such as waste material
handling conducted as an integral part of a mining or production
process, are not included in the provision. Costs arising from
70
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
unforeseen circumstances, such as the contamination caused
by unplanned discharges, are recognized as an expense and
liability when the event gives rise to an obligation which is
probable and capable of reliable estimation. The timing of the
actual closure and decommissioning expenditure is dependent
upon a number of factors such as the life and nature of the
asset, the operating license conditions, and the environment
in which the mine operates. Expenditure may occur before and
after closure and can continue for an extended period of time
dependent on closure and decommissioning requirements.
Closure and decommissioning provisions are measured at the
expected value of future cash flows, discounted to their present
value and determined according to the probability of alternative
estimates of cash flows occurring for each operation. Discount
rates used are specific to the underlying obligation. Significant
judgements and estimates are involved in forming expectations
of future activities and the amount and timing of the associated
cash flows. Those expectations are formed based on existing
environmental and regulatory requirements which give rise to a
constructive or legal obligation.
When provisions for closure and decommissioning are initially
recognized, the corresponding cost is capitalized as an asset,
representing part of the cost of acquiring the future economic
benefits of the operation. The capitalized cost of closure and
decommissioning activities is recognized in Property, plant and
equipment and depreciated accordingly. The value of the provision
is progressively increased over time as the effect of discounting
unwinds, creating an expense recognized in finance expenses.
Closure and decommissioning provisions are also adjusted for
changes in estimates. Those adjustments are accounted for as
a change in the corresponding capitalized cost, except where
a reduction in the provision is greater than the un-depreciated
capitalized cost of the related assets, in which case the capitalized
cost is reduced to nil and the remaining adjustment is recognized
in the income statement. In the case of closed sites, changes
to estimated costs are recognized immediately in the income
statement. Changes to the capitalized cost result in an adjustment
to
future depreciation and finance charges. Adjustments
to the estimated amount and timing of future closure and
decommissioning cash flows are a normal occurrence in light of
the significant judgements and estimates involved.
The provision is reviewed at the end of each reporting period for
changes to obligations, legislation or discount rates that impact
estimated costs or lives of operations and adjusted to reflect
current best estimate. The cost of the related asset is adjusted for
changes in the provision resulting from changes in the estimated
cash flows or discount rate and the adjusted cost of the asset is
depreciated prospectively.
Foreign Currency Translation: The Company’s functional currency
and that of its subsidiaries is the USD as this is the principal
currency of the economic environments in which they operate.
Transaction amounts denominated
foreign currencies
(currencies other than USD) are translated into USD at exchange
rates prevailing at the transaction dates. Carrying values of foreign
currency monetary assets and liabilities are re-translated at each
statement of financial position date to reflect the U.S. exchange
rate prevailing at that date.
in
Gains and losses arising from translation of foreign currency
monetary assets and liabilities at each period end are included
in earnings except for differences arising on decommissioning
provisions which are capitalized for operating mines.
Share-based Payments: The Company makes share-based
awards, including free shares and options, to certain employees.
For equity-settled awards, the fair value is charged to the income
statement and credited to equity, on a straight-line basis over
the vesting period, after adjusting for the estimated number of
awards that are expected to vest. The fair value of the equity-
settled awards is determined at the date of grant. Non-vesting
conditions and market conditions, such as target share price upon
which vesting is conditioned, are factored into the determination
of fair value at the date of grant. All other vesting conditions
are excluded from the determination of fair value and included
in management’s estimate of the number of awards ultimately
expected to vest.
The fair value is determined by using option pricing models.
At each statement of financial position date prior to vesting,
the cumulative expense representing the extent to which the
vesting period has expired and management’s best estimate
of the awards that are ultimately expected to vest is computed
(after adjusting for non-market performance conditions). The
movement in cumulative expense is recognized in the income
statement with a corresponding entry within equity. No expense
is recognized for awards that do not ultimately vest, except for
awards where vesting is conditional upon a market condition,
which are treated as vesting irrespective of whether or not the
market condition is satisfied, provided that all other performance
conditions are satisfied.
Where the terms of an equity-settled award are modified, as a
minimum an expense is recognized as if the terms had not
been modified over the original vesting period. In addition, an
expense is recognized for any modification, which increases the
total fair value of the share-based payment arrangement, or is
otherwise beneficial to the employee as measured at the date of
modification, over the remainder of the new vesting period.
Where an equity-settled award is cancelled, it is treated as if it
had vested on the date of cancellation, and any expense not
yet recognized for the award is recognized immediately. Any
compensation paid up to the fair value of the awards at the
cancellation or settlement date is deducted from equity, with
any excess over fair value being treated as an expense in the
income statement. However, if a new award is substituted for
the cancelled award, and designated as a replacement award
on the date that it is granted, the new awards are treated as if
they are a modification of the original award, as described in the
previous paragraph.
Leases: The determination of whether an arrangement is, or
contains a lease is based in the substance of the arrangement
at inception date, including whether the fulfillment of the
arrangement is dependent on the use of a specific asset or
assets or whether the arrangement conveys a right to use the
asset. A reassessment after inception is only made in specific
circumstances.
Assets held under finance leases, where substantially all the
risks and rewards of ownership of the asset have passed to the
Company, are capitalized in the statement of financial position at
the lower of the fair value of the leased property or the present
value of the minimum lease payments during the lease term
calculated using the interest rate implicit in the lease agreement.
These amounts are determined at the inception of the lease and
are depreciated over the shorter of their estimated useful lives
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
71
enacted or substantively enacted at the statement of financial
position date.
Current and deferred taxes relating to items recognized in other
comprehensive income or directly in equity are recognized in
other comprehensive income or equity and not in the income
statement. Mining taxes and royalties are treated and disclosed
as current and deferred taxes if they have the characteristics of
an income tax. Judgements are required about the application
of income tax legislation. These judgements and assumptions
are subject to risk and uncertainty, hence there is a possibility
that changes in circumstances will alter expectations, which
may impact the amount of deferred tax assets and deferred tax
liabilities recognized on the statement of financial position and
the amount of other tax losses and temporary differences not yet
recognized. In such circumstances, some or the entire carrying
amount of recognized deferred tax assets and liabilities may
require adjustment, resulting in a corresponding credit or charge
to the income statement.
Deferred tax assets, including those arising from tax losses, capital
losses and temporary differences, are recognized only where it
is probable that taxable earnings will be available against which
the losses or deductible temporary differences can be utilized.
Assumptions about the generation of future taxable earnings
and repatriation of retained earnings depend on management’s
estimates of future cash flows. These depend on estimates
of future production and sales volumes, commodity prices,
reserves, operating costs, closure and decommissioning costs,
capital expenditure, dividends and other capital management
transactions.
Earnings (loss) Per Share: Basic earnings (loss) per share is
calculated by dividing earnings attributable to ordinary equity
holders of the parent entity by the weighted average number of
ordinary shares outstanding during the period.
The diluted earnings per share calculation is based on the earnings
attributable to ordinary equity holders and the weighted average
number of shares outstanding after adjusting for the effects
of all potential ordinary shares. This method requires that the
number of shares used in the calculation be the weighted average
number of shares that would be issued on the conversion of all
the dilutive potential ordinary shares into ordinary shares. This
method assumes that the potential ordinary shares converted
into ordinary shares at the beginning of the period (or at the
time of issuance, if not in existence at beginning of the period).
The number of dilutive potential ordinary shares is determined
independently for each period presented.
For convertible securities that may be settled in cash or shares
at the holder’s option, returns to preference shareholders and
income charges are added back to net earnings used for basic
EPS and the maximum number of ordinary shares that could be
issued on conversion are used in the computing diluted earnings
per share.
or lease term. The capital elements of future obligations under
leases and hire purchase contracts are included as liabilities in
the statement of financial position. The interest elements of the
lease or hire purchase obligations are charged to the income
statement over the periods of the leases and hire purchase
contracts and represent a constant proportion of the balance of
capital repayments outstanding.
Leases where substantially all the risks and rewards of ownership
have not passed to the Company are classified as operating
leases. Rentals payable under operating leases are charged to the
income statement on a straight-line basis over the lease term.
Income Taxes: Taxation on the earnings or loss for the year
comprises current and deferred tax. Taxation is recognized in
the income statement except to the extent that it relates to items
recognized in other comprehensive income or directly in equity,
in which case the tax is recognized in other comprehensive
income or equity.
Current tax is the expected tax payable on the taxable income
for the year using rates enacted or substantively enacted at the
year end, and includes any adjustment to tax payable in respect
of previous years.
Deferred tax is provided using the statement of financial position
liability method, providing for the tax effect of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for tax
assessment or deduction purposes. Where an asset has no
deductible or depreciable amount for income tax purposes, but
has a deductible amount on sale or abandonment for capital
gains tax purposes, that amount is included in the determination
of temporary differences.
in subsidiaries,
The tax effect of certain temporary differences is not recognized,
principally with respect to goodwill; temporary differences
arising on the initial recognition of assets or liabilities (other
than those arising in a business combination or in a manner that
initially impacted accounting or taxable earnings); and temporary
differences relating to
jointly
investments
controlled entities and associates to the extent that the Company
is able to control the reversal of the temporary difference and the
temporary difference is not expected to reverse in the foreseeable
future. The amount of deferred tax recognized is based on the
expected manner and timing of realization or settlement of the
carrying amount of assets and liabilities, with the exception of
items that have a tax base solely derived under capital gains tax
legislation, using tax rates enacted or substantively enacted at
period end. To the extent that an item’s tax base is solely derived
from the amount deductible under capital gains tax legislation,
deferred tax is determined as if such amounts are deductible in
determining future assessable income.
The carrying amount of deferred income tax assets is reviewed
at each statement of financial position date and reduced to the
extent that it is no longer probable that sufficient taxable earnings
will be available to allow all or part of the deferred income tax
asset to be utilized. To the extent that an asset not previously
recognized fulfils the criteria for recognition, a deferred income
tax asset is recorded.
Deferred tax is measured on an undiscounted basis at the tax
rates that are expected to apply in the periods in which the asset
is realized or the liability is settled, based on tax rates and tax laws
72
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
CHANGES IN ACCOUNTING STANDARDS
ACCOUNTING STANDARDS ISSUED AND EffECTIVE
JANUARY 1, 2012
are not fair value, such as net realizable value in IAS 2 Inventories
or value in use in IAS 36 Impairment of Assets. This standard is
effective for annual periods beginning on or after January 1, 2013,
with early application permitted.
IFRS 7 Financial Instruments: Disclosures amendment issued by
the IASB in October 2010 enhances the disclosure requirements
in relation to transferred financial assets. The amendments are
effective for annual periods beginning on or after July 1, 2011, with
earlier application permitted. The Company does not anticipate
this amendment to have a significant impact on the consolidated
financial statements.
IAS 12 Income Taxes amendment issued by the IASB in December
2010 provides a solution to determining the recovery of investment
properties as it relates to the accounting for deferred income taxes.
This amendment is effective for annual periods beginning on or
after July 1, 2011, with earlier adoption permitted. The Company
does not anticipate this amendment to have a significant impact
on the consolidated financial statements.
ACCOUNTING STANDARDS ISSUED AND EffECTIVE
JANUARY 1, 2013
IFRS 10 Consolidated Financial Statements establishes principles
for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities. This
standard (i) requires a parent entity (an entity that controls one or
more other entities) to present consolidated financial statements;
(ii) defines the principle of control, and establishes control as the
basis for consolidation; (iii) sets out how to apply the principle
of control to identify whether an investor controls an investee
and therefore must consolidate the investee; and (iv) sets out
the accounting requirements for the preparation of consolidated
financial statements. IFRS 10 supersedes IAS 27 Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special
Purpose Entities and is effective for annual periods beginning on
or after January 1, 2013, with early application permitted.
IFRS 11 Joint Arrangements establishes the core principle that
a party to a joint arrangement determines the type of joint
arrangement in which it is involved by assessing its rights and
obligations and accounts for those rights and obligations in
accordance with that type of joint arrangement. This standard is
effective for annual periods beginning on or after January 1, 2013,
with early application permitted.
IFRS 12 Disclosure of Interests in Other Entities requires
the disclosure of information that enables users of financial
statements to evaluate the nature of, and risks associated with,
its interests in other entities and the effects of those interests on
its financial position, financial performance and cash flows. This
standard is effective for annual periods beginning on or after
January 1, 2013, with early application permitted.
IFRS 13 Fair Value Measurement defines fair value, sets out in a
single IFRS a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13 applies when
another IFRS requires or permits fair value measurements or
disclosures about fair value measurements (and measurements,
such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except for: share-based
payment transactions within the scope of IFRS 2 Share-based
Payment; leasing transactions within the scope of IAS 17 Leases;
measurements that have some similarities to fair value but that
IAS 1 Presentation of Financial Statements (“IAS 1”) amendment,
issued by the IASB in June 2011, requires an entity to group items
presented in the Statement of Comprehensive Income on the
basis of whether they may be reclassified to earnings subsequent
to initial recognition. For those items presented before taxes, the
amendments to IAS 1 also require that the taxes related to the
two separate groups be presented separately. The amendments
are effective for annual periods beginning on or after July 1,
2012, with earlier adoption permitted. The Company does not
anticipate the application of IAS 1 to have a material impact on its
consolidated financial statements.
IAS 19 Employee Benefits amendment, issued by the IASB on
June 2011 introduced changes to the accounting for defined
benefit plans and other employee benefits. The amendments
include elimination of the options to defer, or recognize in full in
earnings, actuarial gains and losses and instead mandates the
immediate recognition of all actuarial gains and losses in other
comprehensive income and requires use of the same discount
rate for both the defined benefit obligation and expected asset
return when calculating interest cost. Other changes include
modification of the accounting for termination benefits and
classification of other employee benefits. The Company does
not anticipate the application of the amended IAS 19 to have a
material impact on its consolidated financial statements.
IAS 27 Consolidated and Separate Financial Statements has the
objective of setting standards to be applied in accounting for
investments in subsidiaries, jointly ventures, and associates when
an entity elects, or is required by local regulations, to present
separate (non-consolidated) financial statements. This standard is
effective for annual periods beginning on or after January 1, 2013,
with early application permitted. This standard will not have an
impact on the consolidated financial statements.
IAS 28 Investments in Associates and Joint Ventures prescribes
the accounting for investments in associates and sets out the
requirements for the application of the equity method when
accounting for investments in associates and joint ventures. IAS
28 applies to all entities that are investors with joint control of, or
significant influence over, an investee (associate or joint venture).
This standard is effective for annual periods beginning on or after
January 1, 2013, with early application permitted.
IFRIC 20 Stripping Costs in the Production Phase of a Surface
Mine clarifies the requirements for accounting for the costs of
stripping activity in the production phase when two benefits
accrue: (i) useable ore that can be used to produce inventory and
(ii) improved access to further quantities of material that will be
mined in future periods. IFRIC 20 is effective for annual periods
beginning on or after January 1, 2013 with earlier application
permitted and includes guidance on transition for pre-existing
stripping assets.
The Company has not early adopted any of these standards and is
currently evaluating the impact, if any, that these standards might
have on its consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
73
ACCOUNTING STANDARDS EffECTIVE JANUARY 1, 2015
b. Metal Price Risk
IFRS 9 Financial Instruments is intended to replace IAS 39
Financial Instruments: Recognition and Measurement in its
entirety by the IASB in three main phases. IFRS 9 will be the new
standard for the financial reporting of financial instruments that
is principles-based and less complex than IAS 39. In November
2009 and October 2010, phase 1 of IFRS was issued and
amended, respectively, which addressed the classification and
measurement of financial assets and financial liabilities. IFRS 9
requires that all financial assets be classified as subsequently
measured at amortized cost or at fair value based on the
Company’s business model for managing financial assets and
the contractual cash flow characteristics of the financial assets.
Financial liabilities are classified as subsequently measured
at amortized cost except for financial liabilities classified as
a FVTPL, financial guarantees and certain other exceptions.
In response to delays to the completion of the remaining
phases of the project, on December 16, 2011, the IASB issued
amendments to IFRS 9 which deferred the mandatory effective
date of IFRS 9 from January 1, 2013 to annual periods beginning
on or after January 1, 2015. The amendments also provided
relief from the requirements to restate comparative financial
statements for the effects of applying IFRS 9.
3. MANAGEMENT Of CAPITAL
The Company’s objective when managing its capital is to
maintain its ability to continue as a going concern while at the
same time maximizing growth of its business and providing
returns to its shareholders. The Company’s capital structure
consists of shareholders’ equity, comprising issued capital plus
share option reserve plus retained earnings, plus investment
revaluation reserve with a balance of $1.6 billion as at
December 31, 2011 (2010 - $1.3 billion). The Company manages
its capital structure and makes adjustments based on changes
to its economic environment and the risk characteristics of the
Company’s assets. The Company’s capital requirements are
effectively managed based on the Company having a thorough
reporting, planning and forecasting process to help identify
the funds required to ensure the Company is able to meet its
operating and growth objectives. The Company has a $150
million credit facility with a syndicate of international banks
which has not been drawn.
The Company is not subject to externally imposed capital
requirements and the Company’s overall strategy with respect
to capital risk management remains unchanged from the year
ended December 31, 2010.
4. fINANCIAL INSTRUMENTS
a. Overview
The Company has exposure to risks of varying degrees
of significance which could affect its ability to achieve its
strategic objectives for growth and shareholder returns.
The principal financial risks to which the Company is
exposed are metal price risk, credit risk, interest rate
risk, foreign exchange rate risk, and liquidity risk. The
Company’s Board of Directors has overall responsibility
for the establishment and oversight of the Company’s
risk management framework and reviews the Company’s
policies on an ongoing basis.
Metal price risk is the risk that changes in metal prices will
affect the Company’s income or the value of its related
financial instruments. The Company derives its revenue from
the sale of silver, gold, lead, copper, and zinc. The Company’s
sales are directly dependent on metal prices that have
shown extreme volatility and are beyond the Company’s
control. Consistent with the Company’s mission to provide
equity investors with exposure to changes in silver prices,
the Company’s policy is to not hedge the price of silver. A
10% increase in metal prices for the year ended December
31, 2011, would result in an increase of approximately $89.5
million (2010 – $67.7 million) in the Company’s revenues.
A 10% decrease in metal prices for the same period would
result in a decrease of approximately $88.0 million (2010 -
$66.5 million) in the Company’s revenues. The Company also
enters into provisional concentrate contracts to sell the zinc,
lead and copper concentrates produced by the Quiruvilca,
Huaron, Morococha, San Vicente and La Colorada mines.
A 10% increase in metal prices on open positions for the
year ended December 31, 2011 would result in an increase
of approximately $9.1 million (2010 - $8.6 million) in the
Company’s before tax earnings which would be reflected in
2012 results. A 10% decrease in metal prices for the same
period would result in a decrease of approximately $8.9
million (2010 - $8.3 million) in the Company’s before tax
earnings which would be reflected in 2012 results.
The Company mitigates the price risk associated with
its base metal production by committing some of its
forecasted base metal production from time to time under
forward sales and option contracts. The Board of Directors
continually assess the Company’s strategy towards its
base metal exposure, depending on market conditions. At
December 31, 2011, the Company had no contracts in place
for the sale of future production.
c. Credit Risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations and arises principally from
the Company’s trade receivables. The carrying value of
financial assets represents the maximum credit exposure.
The Company has long-term concentrate contracts to
sell the zinc, lead and copper concentrates produced
by the Quiruvilca, Huaron, Morococha, San Vicente and
La Colorada mines. Concentrate contracts are common
business practice in the mining industry. The terms of the
concentrate contracts may require the Company to deliver
concentrate that has a value greater than the payment
received at the time of delivery, thereby introducing the
Company to credit risk of the buyers of our concentrates.
Should any of these counterparties not honour supply
arrangements, or should any of them become insolvent,
the Company may incur losses for products already
shipped and be forced to sell its concentrates on the spot
market or it may not have a market for its concentrates and
therefore its future operating results may be materially
adversely impacted. At December 31, 2011 the Company
had receivable balances associated with buyers of its
concentrates of $40.5 million (2010 - $51.0 million). The vast
majority of the Company’s concentrate is sold to seven well
known concentrate buyers.
74
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Silver doré production from La Colorada, Alamo Dorado and Manantial Espejo is refined under long term agreements with fixed
refining terms at three separate refineries worldwide. The Company generally retains the risk and title to the precious metals
throughout the process of refining and therefore is exposed to the risk that the refineries will not be able to perform in accordance
with the refining contract and that the Company may not be able to fully recover precious metals in such circumstances. At
December 31, 2011 the Company had approximately $35.9 million (2010 - $20.8 million) of value contained in precious metal
inventory at refineries. The Company maintains insurance coverage against the loss of precious metals at the Company’s mine
sites, in-transit to refineries and whilst at the refineries.
The Company maintains trading facilities with several banks and bullion dealers for the purposes of transacting the Company’s
trading activities. None of these facilities are subject to margin arrangements. The Company’s trading activities can expose
the Company to the credit risk of its counterparties to the extent that our trading positions have a positive mark-to-market
value. However, the Company minimizes this risk by ensuring there is no excessive concentration of credit risk with any single
counterparty, by active credit management and monitoring.
Refined silver and gold is sold in the spot market to various bullion traders and banks. Credit risk may arise from these activities
if the Company is not paid for metal at the time it is delivered, as required by spot sale contracts.
Management constantly monitors and assesses the credit risk resulting from its refining arrangements, concentrate sales and
commodity contracts with its refiners, trading counterparties and customers. Furthermore, management carefully considers
credit risk when allocating prospective sales and refining business to counterparties. In making allocation decisions, Management
attempts to avoid unacceptable concentration of credit risk to any single counterparty.
At December 31, 2011, there is an allowance for doubtful accounts provision recorded in the amount of $7.6 million (2010 – $7.6
million) that relates to amounts owing from Doe Run Peru (“DRP”), one of the buyers of concentrates from the Company’s
Peruvian operations, for deliveries of concentrates that occurred in early 2009. The Company will continue to pursue every
possible avenue to recover the amounts owed by DRP. At December 31, 2011 and December 31, 2010, no additional provision for
doubtful account was recorded as there are no material past due trade receivables or other receivables present.
Trade accounts receivable and other receivables that represent the maximum credit risk to the Company consist of the following:
Trade accounts receivable
Advances to suppliers and contractors
Insurance receivable
Current portion of refundable tax
Export tax receivable
Other
Presented as accounts receivable on the Statement of Financial Position
Long-term refundable tax receivable and other receivables
Total
DECEMBER 31,
2011
2010
January 1, 2010
$
$
$
40,477
$
51,026
$
7,599
3,500
37,082
6,613
8,162
4,704
1,592
4,342
4,290
939
103,433
$
66,893
$
10,253
28,171
113,686
$
95,064
$
53,963
3,536
-
3,282
218
5,060
66,059
11,909
77,968
The Company invests its cash which also has credit risk, with
the objective of maintaining safety of principal and providing
adequate liquidity to meet all current payment obligations.
short term investments was 0.35%. A 10% increase or decrease
in the interest earned from financial institutions on cash and
short term investments would result in a nominal increase or
decrease in the Company’s before tax earnings (2010 – nominal).
d. Interest Rate Risk
Interest rate risk is the risk that the fair values and future cash
flows of the Company will fluctuate because of changes in
market interest rates. At December 31, 2011, the Company
has $9.8 million in lease obligations (2010 - $0.12 million),
equipment and construction advances of $21.9 million (2010
- $5.4 million) that are subject to an annualized interest rate
of 2.2% and no outstanding debt. The interest paid by the
Company for the year ended December 31, 2011 on its lease
obligations and equipment and construction advances was
nominal. The average interest rate earned by the Company
during the year ended December 31, 2011 on its cash and
e. Foreign Exchange Rate Risk
The Company reports its financial statements in USD;
however, the Company operates in jurisdictions that utilize
other currencies. As a consequence, the financial results of
the Company’s operations as reported in USD are subject to
changes in the value of the USD relative to local currencies.
Since the Company’s sales are denominated in USD and
a portion of the Company’s operating costs and capital
spending are in local currencies, the Company is negatively
impacted by strengthening local currencies relative to the
USD and positively impacted by the inverse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
75
In order to mitigate this exposure, from time to time the Company has purchased Peruvian New soles (“PEN”), Mexican pesos
(“MXN”) and CAD to match anticipated spending. At December 31, 2011, the Company had no forward contracts to purchase
foreign currencies. The Company’s net earnings are affected by the revaluation of its monetary assets and monetary liabilities at
each balance sheet date. The Company has reviewed its monetary assets and monetary liabilities and estimates that a 10% change
in the exchange rate of the foreign currencies in which its December 31, 2011 non-USD net monetary liabilities were denominated
would result in a net income change of about $9.6 million (2010 - $1.8 million). At December 31, 2011 the Company’s cash and short
term investments includes $205.5 million in CAD and $38.3 million in MXN.
f. Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages
its liquidity risk by continuously monitoring forecasted and actual cash flows. The Company has in place a rigorous planning and
budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing
basis and its expansion plans. The Company strives to maintain sufficient liquidity to meet its short-term business requirements,
taking into account its anticipated cash flows from operations, its holdings of cash and short-term investments, and its committed
loan facilities.
The Company’s commitments have contractual maturities which are summarized below:
PAYMENTS DUE BY PERIOD – 2011
TOTAL
LESS THAN A YEAR
1–3 YEARS
4–5 YEARS
AFTER 5 YEARS
Finance lease obligations1
Current liabilities2
Long term income taxes payable
Severance accrual
Contribution plan3
$
31,983
$
21,068
$
10,915
$
149,785
149,785
2,274
5,427
3,478
-
3,032
3,478
-
-
-
-
-
-
2,274
2,395
-
Total contractual obligations4
$ 192,947
$
177,363
$
10,915
$
4,669
$
$
-
-
-
-
-
-
PAYMENTS DUE BY PERIOD – 2010
TOTAL
LESS THAN A YEAR
1–3 YEARS
4–5 YEARS
AFTER 5 YEARS
Finance lease obligations1
$
5,482
$
122
$
5,360
$
Current liabilities2
Severance accrual
Contribution plan3
102,444
6,464
4,902
102,444
6,464
2,451
-
-
2,451
-
-
-
-
$
-
-
-
-
Total contractual obligations4
-
1 Includes lease obligations in the amount of $10.1 million (2010 - $0.12 million) with a net present value of $9.8 million (2010 - $0.12 million) and equipment and con-
struction advances in the amount of $21.9 million (2010 - $5.4 million); both discussed further in Note 11.
119,292
111,481
7,811
$
$
$
$
$
-
2 Includes all current liabilities as per the statement of financial position less items presented separately in this table which also include amounts expected to be paid
but not accrued in the books of the Company.
3 In June 2008 the Company initiated a 4 year contractual retention plan for key officers and management, further discussed in Note 13. Contract commitments for the
plan, payable in CAD, represent minimum payments expected to be paid out, which are presented above in USD at the period-end rate.
4 Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation, the liability arising from Aquiline acquisi-
tion discussed in Note 12, and deferred tax liabilities.
g. Fair Value of Financial Instruments
The carrying value of is at fair value and the carrying value of cash, trade and other receivables, accounts payable and accrued
liabilities approximate their fair value due to the relatively short periods to maturity of these financial instruments. Under IFRS,
share purchase warrants with an exercise price denominated in a currency other than the Company's functional currency are
classified and accounted for as financial liabilities and, as such, are measured at their fair values with changes in fair values included
in net earnings.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following table sets forth the Company’s financial assets and liabilities measured at fair value, grouped into Levels 1 to 3
based on the degree to which the fair value is observable. The hierarchy gives the highest priority to unadjusted quoted prices
76
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are described as follows:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the
full term of the asset or liability; and
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no observable market data).
At December 31, 2011, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities are measured
and recognized on the Consolidated Statements of Financial Position at fair value are categorized as follows:
FAIR VALUE AT DECEMBER 31, 2011
ASSETS AND LIABILITIES (in thousands of USD)
Short-term investments
Trade receivable from provisional concentrate sales
Non-current share purchase warrants
ASSETS AND LIABILITIES (in thousands of USD)
Short-term investments
Investments
Trade receivable from provisional concentrate sales
Non-current share purchase warrants
TOTAL
228,321
40,477
(23,651)
245,147
TOTAL
180,583
1,483
51,026
$
$
$
$
$
$
$
$ (127,890)
$
105,202
LEVEL 2
LEVEL 3
LEVEL 1
228,321
-
-
228,321
$
$
$
$
$
$
$
$
-
40,477
(23,651)
16,826
FAIR VALUE AT DECEMBER 31, 2010
LEVEL 1
LEVEL 2
$
$
$
$
$
180,583
1,483
-
-
182,066
$
$
$
$
$
-
-
51,026
(127,890)
(76,864)
FAIR VALUE AT JANUARY 1, 2010
ASSETS AND LIABILITIES (in thousands of USD)
TOTAL
LEVEL 1
LEVEL 2
Short-term investments
Investments
Derivative financial instruments
Trade receivable from provisional concentrate sales
Non-current share purchase warrants
$
$
$
$
$
$
92,623
1,553
160
53,963
(43,919)
104,380
$
$
$
$
$
$
92,623
1,553
-
-
-
94,176
$
$
$
$
$
$
-
-
160
53,963
(43,919)
10,204
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
-
LEVEL 3
-
-
-
-
-
LEVEL 3
-
-
-
-
-
-
At December 31, 2011, there were no financial assets or liabilities measured and recognized on the Consolidated Statement of
Financial Position at fair value that would be recognized as level 3 in the fair value hierarchy above (December 31, 2010-$nil; January
1, 2010-$nil)
There were no transfers between level 1 and level 2 during the years ended December 31, 2011 and 2010.
Valuation Techniques
Short-term investments and other investments
The Company’s short-term investments and other investments are valued using quoted market prices in active markets and as such
are classified within Level 1 of the fair value hierarchy and are primarily money market securities and U.S. Treasury securities. The
fair value of the investment securities is calculated as the quoted market price of the investment and in the case of equity securities,
the quoted market price multiplied by the quantity of shares held by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
77
Derivative Financial Instruments
The Company’s unrealized gains and losses on commodity and foreign currency contracts are valued using observable market
prices and as such are classified as Level 2 of the fair market value hierarchy. As of December 31, 2011, the unrealized gains and
losses on commodity and foreign currency contracts was $nil (2010 - $nil).
Share purchase warrants
The Company’s unrealized gains and losses on share purchase warrants are valued using observable inputs and as such are
classified as Level 2 of the fair market value hierarchy. As of December 31, 2011, the unrealized gain on share purchase warrants was
$101.8 million (2010 – unrealized loss of $90.7 million).
Receivables from Provisional Concentrate Sales
The Company’s trade receivables arose from provisional concentrate sales and are valued using quoted market prices based on the
forward London Metal Exchange (“LME”) for copper, zinc and lead and the London Bullion Market Association P.M. fix (“London
P.M. fix”) for gold and silver.
5. SHORT TERM INVESTMENTS AND OTHER ASSETS
AVAILABLE
FOR SALE
Short term
investments
Investments1
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
FAIR VALUE
COST
ACCUMULATED
UNREALIZED
HOLDING GAINS
FAIR VALUE
COST
ACCUMULATED
UNREALIZED
HOLDING GAINS
FAIR VALUE
COST
ACCUMULATED
UNREALIZED
HOLDING GAINS
$ 228,321
$ 226,997
$
1,324
$ 180,583
$ 172,315
$
8,268
$
92,623
$
92,153
$
470
-
-
-
1,483
405
1,078
1,553
405
$ 228,321
$ 226,997
$
1,324
$ 182,066
$ 172,720
$
9,346
$
94,176
$
92,558
$
1,148
1,618
1 Investments in certain equity securities are presented in other assets on the balance sheet (Note 8).
6.
INVENTORIES
Inventories consist of:
Concentrate inventory
Stockpile ore
Direct smelting ore
Doré and finished inventory
Materials and supplies
Less: non-current direct smelting ore (Note 8)
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
21,473
31,704
-
46,558
35,961
135,696
-
$
$
14,026
24,182
-
33,755
34,891
106,854
-
$
135,696
$
106,854
$
15,379
21,892
1,462
27,577
28,147
94,457
(1,011)
93,446
Production costs, including depreciation and amortization and royalties for the year ended December 31, 2011 was $446.2 million
(2010 - $405.4 million). Production costs represent cost of inventories sold during the year.
7. MINERAL PROPERTY, PLANT AND EQUIPMENT
Acquisition costs of investment and non-producing properties together with costs directly related to mine development
expenditures are capitalized. Exploration expenditures on investment and non-producing properties are charged to operations in
the period they are incurred.
Capitalization of evaluation expenditures commences when there is a high degree of confidence in the project’s viability and hence it is
potential that future economic benefits will flow to the Company. Evaluation expenditures, other than that acquired from the purchase
of another mining company, are carried forward as an asset provided that such costs are expected to be recovered in full through
successful development and exploration of the area of interest or alternatively, by its sale. Evaluation expenditures include delineation
drilling, metallurgical evaluations, and geotechnical evaluations amongst others.
78
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Mineral property, plant and equipment consist of:
MINING PROPERTIES
COST
DEPLETABLE
NON-DEPLETABLE
RESERVES AND
RESOURCES
RESERVES AND
RESOURCES
ExPLORATIONa AND
EVALUATION
PLANT AND
EQUIPMENT
TOTAL
As at January 1, 2011
$
466,172
$
24,404
$
573,746
$
393,944
$
1,458,266
Additions
Disposals
Transfers
VAT collected
Closure and decommissioning – changes in estimate
Other
As at December 31, 2011
ACCUMULATED DEPRECIATION
As at January 1, 2011
Depreciation charge
Disposals
Transfers
Other
As at December 31, 2011
Carrying value – December 31, 2011
$
$
$
$
33,554
-
3,859
(13,314)
(14,694)
(143)
475,434
(154,746)
(38,732)
-
(1,040)
(333)
(194,851)
280,583
2,361
-
(1,791)
-
-
-
24,974
-
-
-
-
-
-
24,974
$
$
$
$
19,932
(2,914)
45
-
-
(14)
89,916
(4,504)
(2,113)
-
-
(647)
145,763
(7,418)
-
(13,314)
(14,694)
(804)
590,795
$
476,596
$
1,567,799
-
-
-
-
-
-
590,795
(142,197)
$
(296,943)
(44,024)
(82,756)
1,938
1,040
3
1,938
-
(330)
(183,240)
293,356
$
$
(378,091)
1,189,708
$
$
$
$
MINING PROPERTIES
COST
DEPLETABLE
NON-DEPLETABLE
RESERVES AND
RESOURCES
RESERVES AND
RESOURCES
ExPLORATIONa AND
EVALUATION
PLANT AND
EQUIPMENT
TOTAL
As at January 1, 2010
$
452,430
$
25,513
$
549,199
$
363,023
$
1,390,165
Additions
Disposals
Transfers
VAT capitalized (collected)
Closure and decommissioning – change in estimate
Other
As at December 31, 2010
ACCUMULATED DEPRECIATION
As at January 1, 2010
Depreciation charge
Disposals
Transfers
Other
As at December 31, 2010
Carrying value – December 31, 2010
$
$
$
$
17,071
(69)
(613)
(11,883)
7,075
2,161
466,172
(112,411)
(43,712)
10
-
1,367
(154,746)
311,426
77
(158)
(1,246)
-
-
218
24,404
-
-
-
-
-
-
24,404
$
$
$
$
20,459
-
(6)
2,528
1,566
-
31,348
(1,498)
1,865
-
-
(794)
68,955
(1,725)
-
(9,355)
8,641
1,585
573,746
$
393,944
$
1,458,266
-
-
-
-
-
-
573,746
(100,678)
$
(213,089)
(42,768)
(86,480)
998
-
251
1,008
-
1,618
(142,197)
251,747
$
$
(296,943)
1,161,323
$
$
$
$
a During the year ended December 31, 2011, the Company incurred $33.3 million (2010 - $35.3 million) in exploration and evaluation expenditures, of which
$22.3 million (2010 - $29.1) were capitalized to exploration and evaluation ($19.9 million) and land ($2.4 million). The remaining $11.0 million of expenditures
(2010 - $6.2 million) were expensed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
79
DECEMBER 31, 2011
DECEMBER 31, 2010
JAN. 1, 2010
COST
ACCUMULATED
AMORIZATION
CARRYING
VALUE
COST
ACCUMULATED
AMORIZATION
CARRYING
VALUE
CARRYING
VALUE
Huaron mine, Peru
$
113,362
$
(44,935)
$
68,427
$
100,801
$
(37,861)
$
62,940
$
Morococha mine, Peru
Alamo Dorado mine, Mexico
La Colorada mine, Mexico
155,524
174,067
71,602
(41,048)
(110,882)
(40,793)
114,476
115,410
63,185
30,809
170,699
60,751
Manantial Espejo mine, Argentina
296,431
(102,126)
194,305
296,023
San Vicente mine, Bolivia
Other
Total
115,848
25,196
(35,200)
(3,107)
80,648
22,089
111,617
4,815
(31,578)
(93,263)
(36,596)
(70,863)
(24,349)
(2,433)
83,832
77,436
24,155
57,847
67,755
99,919
19,273
225,160
262,032
87,268
2,382
93,417
2,122
$
952,030
$
(378,091)
$
573,939
$
860,116
$
(296,943)
$
563,173
$
602,365
LAND AND ExPLORATION AND EVALUATION:
Land
Morococha, Peru
Navidad project, Argentina
Other
Total Non-producing properties
Total Mineral Property, Plant and Equipment
$
8,999
15,975
552,265
38,530
615,769
1,189,708
$
$
$
6,638
$
17,766
544,438
29,308
598,150
1,161,323
$
$
$
$
6,501
19,012
523,980
25,218
574,711
1,177,076
Navidad Project, Argentina
During the year ended December 31, 2011 the Company
capitalized $22.3 million of evaluation costs at the Navidad
Project in Argentina (2010 - $29.1 million) including land addition
of $2.4 million. Additionally, the Company purchased $17.0
million of long lead time processing equipment intended for
the Navidad project which is classified as part of “Other” in the
producing properties section above.
La Preciosa Project, Durango, Mexico
In April 2009, Pan American and Orko Silver Corp. (‘‘Orko’’)
entered into an agreement, pursuant to which Pan American
and Orko agreed to develop the La Preciosa silver project
located in the State of Durango, Mexico. Under the terms of the
agreement, in order for the Company to retain its 55% interest
in the project: (a) the Company must, in addition to contributing
its mine development expertise, spend a minimum of $5 million
in the first 12 months from the date of the Letter of Agreement
(the condition was achieved as of the first quarter of 2010) and
conduct resource definition drilling, acquire necessary surface
rights, obtain permits, and prepare a feasibility study; and (b)
following a positive construction decision, the Company must
contribute 100% of the funds necessary for practical completion
of an operating mine. In exchange for its 45% interest in the
venture, Orko agreed to contribute its exploration expertise and
the La Preciosa Project and related concessions. The Company
anticipates completing a feasibility study by mid 2012, assuming
an agreement is reached with Orko for an extension of the
delivery date, originally scheduled for April 2012.
The Company has assessed the operating company of the La
Preciosa project to be under the scope of IAS 27 Consolidated
and Separate Financial Statements and as such it is consolidated
in the financial statements of the Company. Until such time as
an economic analysis is completed and proven and probable
reserves are established, costs incurred through the company
will be expensed and no value has been attributed to the
property contributed by the Company’s partners to the project.
For the year ended December 31, 2011, the exploration expense
recognized arising from the La Preciosa project is $2.4 million
(2010 - $10.0 million).
Morococha Mine, Peru
During the second quarter of 2010, the Company’s wholly owned
subsidiary Compañia Minera Argentum S.A. (“Argentum”),
reached an agreement with Minera Chinalco Perú (“MCP” or
“Chinalco”), a subsidiary of the Aluminum Corporation of China
which clearly defines each party’s long term surface rights in the
area of the Morococha mine. The primary focus of the agreement
is on the lands and concessions around the Morococha mine and
MCP’s Toromocho copper project. MCP requires certain lands
and concessions in order to proceed with the development of
Toromocho, including the surface lands within the planned open
pit mining area of the Toromocho project. While Argentum does
not own this land, much of the Morococha mine infrastructure
and facilities are located on this ground.
Under the terms of the agreement, Argentum will relocate the
core Morococha facilities over a 5 year period and transfer certain
mineral concessions and access rights to MCP. In exchange,
Argentum will receive a package of surface rights, easements
and other rights that are sufficient to relocate the facilities and
to continue uninterrupted operations. Lastly, Argentum will
receive periodic cash payments from MCP totaling $40 million,
of which, to December 31, 2011, the Company received $13.8
million which has been utilized and offset against direct project
related expenses or recognized as other income to the extent
it represents a reimbursement of capital expenditures. The
Company has also entered into a funding arrangement whereby
it has received advances towards some of the project capital
expenditures in the amount of $21.9 million to date. These
advances are subject to an annualized interest rate of 2.2%,
which is paid monthly until the completion of the construction.
At the conclusion of the construction these advance payments
will be converted into a leasing arrangement in the first quarter
of 2012.
80
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
8. OTHER ASSETS
Other assets consist of:
Long-term receivable, net
Long-term prepaid expense1
Reclamation bonds
Investments (Note 5)
Non-current direct smelting ore (Note 6)
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
$
-
$
5,205
224
-
-
$
-
-
135
1,483
-
5,429
$
1,618
$
3,825
-
132
1,553
1,011
6,521
1 Represents a prepaid deposit related to the Virtual Gas Line Project at the Manantial mine.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Account payable and accrued liabilities consist of:
Accounts payable1
Accrued liabilities
Aquiline acquisition costs payable
Payroll and related benefits
Severance accruals
Payment due for mineral property acquired
Advances on concentrate
Other taxes payable
Other
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
30,879
$
23,786
$
13,199
-
24,174
3,032
-
-
152
6,822
17,230
-
18,386
6,464
-
38
3,842
7,916
$
78,258
$
77,662
$
29,906
18,108
7,582
12,848
4,768
5,799
5,668
1,862
4,050
90,591
1 No interest is charged on the trades payables ranging from 30 to 60 days from the invoice date. The Company has policies in place to ensure that all payables are
paid within the credit terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
81
10. PROVISIONS
As at January 1, 2010
Revisions in estimates and obligations incurred
Charged (credited) to earnings:
new provisions
unused amounts reversed
exchange gains on provisions
Utilized in year
Accretion expense
As at December 31, 2010
Revisions in estimates and obligations incurred
Charged (credited) to earnings:
new provisions
unused amounts reversed
exchange gains on provisions
Utilized in year
Accretion expense
As at December 31, 2011
CLOSURE AND
DECOMMISSIONING
57,273
$
11,654
-
-
-
(1,045)
3,668
71,550
$
(17,086)
-
-
-
(1,959)
3,268
LITIGATION
4,948
$
-
1,836
(216)
145
(797)
-
5,916
$
-
1,607
(147)
169
(1,925)
-
55,773
$
5,620
$
$
$
$
TOTAL
62,221
11,654
1,836
(216)
145
(1,842)
3,668
77,466
(17,086)
1,607
(147)
169
(3,884)
3,268
61,393
MATURITY ANALYSIS OF TOTAL PROVISIONS:
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
Current
Non-Current
$
$
2,341
$
59,052
61,393
$
3,450
$
74,016
77,466
$
4,948
57,273
62,221
CLOSURE AND DECOMMISSIONING COST PROVISION
LITIGATION PROVISION
The litigation provision consists of amounts accrued for labour
claims at several of the Company’s mine operations. The balance
of $5.6 million at December 31, 2011 (2010 - $5.9 million) represents
the Company’s best estimate for all known and anticipated future
obligations related to the above claims. The amount and timing
of any expected payments are uncertain as their determination is
outside the control of the Company.
The total undiscounted amount of estimated cash flows required
to settle the Company’s closure and decommissioning provision
is $65.9 million (2010 - $73.2 million) which has been discounted
using discount rates between 4% and 10%. Reclamation
obligations at the Quiruvilca mine of $18.1 million are expected
to be paid starting in two to five years while the remainder of
the obligations is expected to be paid through 2028. Revisions
made to the reclamation obligations in 2011 were primarily a
result of increased site disturbance from the ordinary course of
operations at the mines as well as revisions to the estimate based
on periodic reviews of closure plans, actual expenditures incurred
and concurrent closure activities completed. These obligations
will be funded from operating cash flows, reclamation deposits
and cash on hand.
The accretion expense charged to 2011 earnings as finance
expense was $3.3 million compared to $3.7 million in 2010.
Reclamation expenditures during the current year was $2.0
million compared to $1.0 million in 2010.
82
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
11. fINANCE LEASE OBLIGATIONS
Lease obligations1
Equipment and construction advances2
Maturity analysis of finance leases:
Current
Non-Current
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
$
9,764
$
21,901
31,665
$
118
$
5,360
5,478
$
620
-
620
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
$
20,841
$
10,824
31,665
$
118
$
5,360
5,478
$
620
-
620
1 Represents equipment lease obligations at several of the Company’s subsidiaries. A reconciliation of the total future minimum lease payments at the end of
December 31, 2011 to their present value is presented in the following table:
Less than a year
2 years
3 years
Less future finance charges
Present value of minimum lease payments
YEAR ENDED DECEMBER 31,
$
$
2011
5,737
3,787
558
10,082
(318)
9,764
$
$
2010
122
-
-
122
(4)
118
2 Represents a funding arrangement the Company entered into whereby it receives advances toward some of the project capital expenditures at the Morococha mine.
These advances are subject to an annualized interest rate of 2.2% and are paid monthly until the completion of the construction, which is anticipated to take place in
the first quarter of 2012, at which point these advance payments will be converted into a leasing arrangement.
12. OTHER LONG TERM LIABILITIES
Other long term liabilities consist of:
Deferred credit1
Long term income tax payable (Note 21)
Severance accruals
DECEMBER 31, 2011
DECEMBER 31, 2010
JANUARY 1, 2010
$
$
20,788
$
20,788
$
20,788
2,274
2,395
-
-
-
-
25,457
$
20,788
$
20,788
1 As part of the 2009 Aquiline transaction the Company issued a replacement convertible debenture that allowed the holder to convert the debenture into either
363,854 Pan American Shares or a Silver Stream contract related to certain production from the Navidad project. Regarding the replacement convertible
debenture, it was concluded that the deferred credit presentation was the most appropriate and best representation of the economics underlying the contract as
of the date the Company assumed the obligation as part of the Aquiline acquisition. Subsequent to the acquisition, the counterparty to the replacement debenture
has indicated its intention to elect the silver stream alternative. The final contract for the alternative is being discussed and pending the final resolution to this
alternative, the Company continues to classify the fair value calculated at the acquisition of this alternative, as a deferred credit.
13. SHARE CAPITAL AND EMPLOYEE COMPENSATION PLANS
The Company has a comprehensive stock compensation plan for its employees, directors and officers. The plan provides for the issuance
of common shares and stock options, as incentives. The maximum number of Shares which may be issued pursuant to options granted
or bonus Shares issued under the 2008 Plan may be equal to, but will not exceed 6,461,470 Shares. The exercise price of each option
shall be the weighted average trading price of the Company’s stock for the five days prior to the award date. The options can be granted
for a maximum term of 10 years with vesting provisions determined by the Company’s Board of Directors. Any modifications to the stock
Compensation Plan require shareholders’ approval.
The Board has developed long term incentive plan (“LTIP”) guidelines, which provides annual compensation to the senior managers of
the Company based on the long term performance of both the Company and the individuals that participate in the plan. The LTIP consists
of an annual grant of options to senior management to buy shares of the Company and a grant of the Company’s common shares with a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
83
two year no trading legend. The options are combination of five year options which vest evenly in three annual instalments and seven
year options which vest evenly in two annual instalments. Options and common shares granted under the LTIP plan are based on
employee salary levels, individual performance and their future potential. The Compensation Committee oversees the LTIP on behalf
of the Board of Directors. The LTIP plan guidelines can be modified or suspended, at the discretion of the Compensation Committee
and the Board of Directors.
Transactions concerning stock options and share purchase warrants are summarized as follows in CAD:
INCENTIVE STOCK OPTION PLAN
SHARE PURCHASE WARRANTS
SHARES
WEIGHTED
AVERAGE
ExERCISE PRICE
CAD$
WARRANTS
WEIGHTED
AVERAGE
ExERCISE PRICE
CAD$
1,469,126
558,249
-
(450,587)
-
(128,392)
1,448,396
373,853
(90,093)
(449,097)
(39,747)
1,243,312
$
$
$
$
$
$
$
$
$
$
$
29.66
27.43
-
16.72
-
23.92
32.95
24.90
23.61
48.10
27.15
25.92
7,702,698
-
702,540
(399,005)
(51,488)
-
7,954,745
-
(139,761)
-
-
7,814,984
$
$
$
$
$
$
$
$
$
$
$
$
33.56
-
35.00
11.57
52.10
-
34.67
-
16.05
-
-
35.00
TOTAL
SHARES
9,171,824
558,249
702,540
(849,592)
(51,488)
(128,392)
9,403,141
373,853
(229,854)
(449,097)
(39,747)
9,058,296
As at January 1, 2010
Granted
Issued on acquisition
Exercised
Expired
Forfeited
As at December 31, 2010
Granted
Exercised
Expired
Forfeited
As at December 31, 2011
a. Long Term Incentive Plan
In December 2011 the Company awarded 50,745 shares of common stock with a two year holding period and granted 373,853
options under this plan. The Company used as its assumptions for calculating the fair value a risk free interest rate of 0.85% to 0.93%,
weighted average volatility of 36.7% to 40.67%, expected lives ranging from 1.8 to 3.0 years based on a historical expected dividend
yield of 0.5%, and an exercise price of CAD$24.90 per share. The weighted average fair value of each option was determined to be
CAD$5.99.
During the year ended December 31, 2011, 90,093 common shares were exercised for proceeds of $2.2 million in connection with
the options under the plan (December 31, 2010 – 450,587 and $7.3 million). The weighted average share price at the date of exercise
at December 31, 2011 was $38.13 (2010 - $38.34).
b. Share Option Plan
The following table summarizes information concerning stock options outstanding and options exercisable as at December 31,
2011. The underlying options agreements are specified in Canadian dollar amounts.
OPTIONS OUTSTANDING
OPTIONS ExERCISABLE
RANGE OF
ExERCISE PRICES
CAD$
NUMBER OUTSTANDING
AS AT
DECEMBER 31, 2011
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
LIFE (MONTHS)
WEIGHTED AVERAGE
ExERCISE PRICE CAD$
NUMBER ExERCISABLE
AS AT
DECEMBER 31, 2011
WEIGHTED AVERAGE
ExERCISE PRICE CAD$
$
$
$
$
17.73 - 22.23
22.24 - 25.19
25.20 - 36.66
36.67 - 40.22
349,169
588,113
201,994
104,036
1,243,312
30.72
66.71
8.30
71.33
47.50
$
$
$
$
$
19.45
25.00
32.41
40.22
25.92
110,890
69,674
201,994
52,028
434,586
$
$
$
$
$
17.73
25.15
32.41
40.22
28.44
For the year ended December 31, 2011, the total employee stock-based compensation expense recognized in the income statement was
$3.5 million (2010 - $4.0 million).
84
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
c. Share Purchase Warrants
As part of the acquisition of Aquiline Resources Inc. the Company issued share purchase warrants (Consideration and Replacement
Warrants). The following table summarizes information concerning the warrants outstanding and warrants exercisable as at
December 31, 2011. The underlying options agreements are specified in Canadian dollar amounts.
WARRANTS OUTSTANDING
WARRANTS ExERCISABLE
RANGE OF
ExERCISE PRICES
CAD$
NUMBER OUTSTANDING
AS AT
DECEMBER 31, 2011
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
LIFE (MONTHS)
WEIGHTED AVERAGE
ExERCISE PRICE CAD$
NUMBER ExERCISABLE
AS AT
DECEMBER 31, 2011
WEIGHTED AVERAGE
ExERCISE PRICE CAD$
$
35.00
7,814,984
35.36
$
35.00
7,814,984
$
35.00
As discussed in Note 2, the Company’s share purchase warrants are classified and accounted for as a financial liability at fair value
with changes in fair value included in net earnings. At December 31, 2011, the fair value of the share purchase warrants is $23.7 million
(2010 - $127.9 million) and at January 1, 2010 is $43.9 million. The weighted average share price at the date of exercise was $30.70 (2010
- $38.78). Additionally, during the year ended December 31, 2011, there was a derivative gain of $101.8 million (2010 – derivative loss
of $90.7 million). The following table provides detail on the movement of the share purchase warrant liability between January 1, 2010
and December 31, 2011:
SHARE PURCHASE WARRANT LIABILITY
January 1, 2010
Warrants issued during the year
Warrants exercised during the year
Mark-to-market loss on the revaluation of warrants
As at December 31, 2010
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
As at December 31, 2011
$
43,919
3,987
(10,677)
90,661
127,890
(2,411)
(101,828)
$
23,651
The Company uses the Black Scholes pricing model to determine the fair value of the Canadian dollar denominated warrants.
Assumptions used are as follows:
Warrant strike price
Exchange rate (1CDN$ = US$)
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected warrant life in years
Quoted market price at period end
DECEMBER 31, 2011
DECEMBER 31, 2010
$
$
35.00
$
0.9771
1.0%
0.5%
41%
2.9
35.00
0.9998
2.2%
0.3%
40%
4.0
22.28
$
40.93
d. Key Employee Long Term Contribution Plan
An additional element of the Company’s compensation structure is a retention program known as the Key Employee Long Term
Contribution Plan (the “Contribution Plan”). The Contribution Plan was approved by the directors of the Company on June 2, 2008 in
response to a heated labour market situation in the mining sector, and is intended to reward certain key employees of the Company
over a fixed time period for remaining with the Company.
The Contribution Plan is a four year plan with a percentage of the retention bonus payable at the end of each year of the program.
The Contribution Plan design consists of three bonus levels that are commensurate with various levels of responsibility, and
provides for a specified annual payment for four years starting in June 2009. Each year, the annual contribution award will be paid
in the form of either cash or shares of the Company. As of December 31, 2011 CAD $3.5 million remains to be paid as described in
Note 4. No shares will be issued from the treasury pursuant to the Contribution Plan without the prior approval of the plan by the
shareholders of the Company and any applicable securities regulatory authorities.
e.
Issued share capital
The Company is authorized to issue 200,000,000 common shares of no par value and does not reserve shares for issuances in
connection of the exercise of stock options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
85
f. Normal Course Issuer Bid
On August 26, 2011, the Company received regulatory approval for a normal course issuer bid to purchase up to 5,395,540 of its
common shares, during the one year period from September 1, 2011 to August 31, 2012.
During the year ended December 31, 2011 the Company purchased and cancelled 3,582,200 shares (2010 – nil) for a total consideration
of $94.0 million (2010 – nil), allocated between retained earnings ($51.7 million) and issued capital ($42.3 million).
g. Dividends
During the year ended December 31, 2011, the Company declared and paid to its shareholders dividends of $0.025 per common
share for total dividends of $10.7 million (2010 - $0.025 for total dividends of $8.0 million). The total dividend per share for the year
ended December 31, 2011 was $0.10 (2010 - $0.08).
On February 22, 2012, the Company declared dividends payable of $0.0375 per common share for total dividends of $3.9 million,
payable to holders of record of its common shares as of the close of business day on March 5, 2012. These dividends were not
recognized in the year ended December 31, 2011.
14. PRODUCTION COSTS
Production costs are comprised of the following:
Consumption of raw materials and consumables
Employee compensation and benefits expense
Contractors and outside services
Utilities
Changes in inventories
Other expenses
15. EMPLOYEE COMPENSATION AND BENEfIT ExPENSES
Wages, salaries and bonuses
Share-based payments
Total employee compensation and benefit expenses
Less: Expensed within General and Administrative expenses
Less: Expensed Exploration expenses
Less: Capitalized in inventory
Employee compensation and benefits expenses included in production costs
FOR THE YEARS ENDED
DECEMBER 31,
2011
121,366 $
119,430
69,740
39,446
(27,374)
18,755
2010
89,664
101,362
60,091
33,560
(4,903)
28,013
341,363 $
307,787
FOR THE YEARS ENDED
DECEMBER 31,
2011
148,951 $
3,502
152,453
(15,953)
(8,205)
(8,865)
119,430 $
2010
119,879
4,028
123,907
(16,754)
(4,202)
(1,589)
101,362
$
$
$
$
86
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
16. EARNINGS PER SHARE (BASIC AND DILUTED)
2011
2010
For the years ended December 31,
EARNINGS
(NUMERATOR)
SHARES
(DENOMINATOR)
PER-SHARE AMOUNT
EARNINGS
(NUMERATOR)
SHARES
(DENOMINATOR)
PER-SHARE
AMOUNT
Net Earnings1
Basic EPS
Effect of Dilutive Securities:
Stock Options
Diluted EPS
$
352,494
352,494
106,434
3.31
$
13,711
13,711
106,969
0.13
-
164
-
308
352,494
106,598
3.31
13,711
107,277
0.13
1 Net earnings attributable to equity holders of the Company.
Potentially dilutive securities excluded in the diluted earnings per share calculation for the year ended December 31, 2011 were 8,018,637
out-of-money options and warrants (2010 – 8,631,999).
17. SUPPLEMENTAL CASH fLOW INfORMATION
The following tables summarize the changes in operating working capital items and significant non-cash items:
Changes in non-cash operating working capital items:
Trade and other receivables
Inventories
Prepaid expenditures
Accounts payable and accrued liabilities
Provisions
Significant Non-Cash Items:
Equity issued to acquire non-controlling interest of Aquiline Resources Inc.
Warrants issued to acquire non-controlling interest of Aquiline Resources Inc.
Fair value adjustment of warrants exercised
Advances received for construction and equipment leases
Stock compensation issued to employees and directors
18. SEGMENTED INfORMATION
$
$
$
2011
(8,595) $
(28,416)
(2,799)
2,631
(2,256)
2010
(3,569)
(12,097)
(3,908)
7,029
(77)
(39,435) $
(12,622)
2011
- $
-
2,411
22,111
1,329
2010
43,532
3,987
10,677
5,360
2,490
All of the Company’s operations are within the mining sector, conducted through operations in six countries. Due to geographic and
political diversity, the Company’s mining operations are decentralized whereby Mine General Managers are responsible for achieving
specified business results within a framework of global policies and standards. Country corporate offices provide support infrastructure
to the mines in addressing local and country issues including financial, human resources, and exploration support. The Company has a
separate budgeting process and measures the results of operations and exploration activities independently. The Corporate office provides
support to the mining and exploration activities with respect to financial, human resources and technical support. Major products are
silver, gold, zinc, lead and copper produced from mines located in Mexico, Peru, Argentina and Bolivia. Segments have been aggregated
where operations in specific regions have similar products, production processes, type of customers and economic environment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
87
PERU
MExICO
ARGEN-
TINA
BOLIVIA
YEAR ENDED DECEMBER 31, 2011
HUARON
MOROCOCHA
QUIRUVILCA
ALAMO
DORADO
LA
COLORADA
MANANTIAL
ESPEJO
SAN
VICENTE
PAS CORP.
OTHER
AQUILINE
GROUP
TOTAL
Revenue from external customers
$ 99,236
Depreciation and amortization
Exploration and project development
Interest and financing expenses
Gain (loss) on disposition of assets
Gain on derivatives
Foreign exchange gain (loss)
Gain on commodity and
foreign currency contracts
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss) for the year
Capital expenditures
Total assets
Total liabilities
$
$
$
$
$
$
$
(6,515)
(303)
(358)
(65)
-
(456)
-
$ 33,194
$
(9,260)
$ 23,934
$ 13,021
$ 69,014
$ 22,397
$
$
$
$
$
$
$
$
$
$
$
$
$
$
83,467
(9,679)
(3,619)
(514)
1,097
-
(300)
-
17,477
(4,683)
12,794
41,669
160,773
65,256
$
$
$
$
$
$
$
$
$
$
$
$
$
$
45,927
$
174,387
(1,515)
$ (16,637)
-
(648)
-
-
(180)
$
$
$
$
$
(2,098)
(363)
8
-
331
-
$
-
13,143
$ 115,293
(5,045)
$ (36,261)
8,098
1,515
$
$
79,032
8,287
79,613
$ 128,875
54,586
$
12,258
$
$
$
$
$
$
$
$
$
$
$
$
$
$
147,654
(4,077)
(845)
(313)
124
-
775
-
104,254
(30,418)
73,836
13,301
95,274
22,652
$
$
$
$
$
$
$
$
$
$
$
$
$
$
213,796
(33,675)
(2,189)
(1,468)
-
-
(2,490)
-
68,066
(14,737)
53,329
16,916
$
$
$
$
$
$
$
$
$
$
$
$
85,446
(9,985)
-
(317)
26
-
(38)
-
38,398
(15,045)
23,353
4,975
340,659
$ 118,147
248,016
$
67,242
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,362
(222)
(937)
(2,074)
-
101,828
(5,409)
681
97,989
(1,562)
96,427
20,723
272,609
(235,545)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(169)
(3,460)
(28)
-
-
(294)
-
(1,372)
(1,158)
(2,530)
3,023
89,138
5,921
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(282)
(14,276)
(116)
-
-
(65)
-
(15,178)
1,051
(14,127)
22,333
$
$
$
$
$
$
$
$
$
$
$
$
855,275
(82,756)
(27,727)
(6,199)
1,190
101,828
(8,126)
681
471,264
(117,118)
354,146
145,763
597,694
$ 1,951,796
86,926
$
349,709
PERU
MExICO
ARGEN-
TINA
BOLIVIA
YEAR ENDED DECEMBER 31, 2010
HUARON
MOROCOCHA
QUIRUVILCA
ALAMO
DORADO
LA
COLORADA
MANANTIAL
ESPEJO
SAN
VICENTE
PAS CORP.
OTHER
AQUILINE
GROUP
Revenue from external customers
$ 75,759
Depreciation and amortization
Exploration and project development
Interest and financing expenses
Gain (loss) on disposition of assets
Loss on derivatives
Foreign exchange gain (loss)
Loss on commodity and
foreign currency contracts
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss) for the year
Capital expenditures
Total assets
Total liabilities
$
$
$
$
$
$
$
(4,143)
-
(611)
13
-
2,046
(7)
$ 16,438
$
(5,432)
$ 11,006
$
6,606
$ 54,731
$ 18,741
$
$
$
$
$
$
$
$
$
$
$
$
$
$
89,879
(6,882)
-
(674)
640
-
(80)
(41)
27,943
(5,674)
22,269
16,685
139,952
51,067
$
$
$
$
$
$
$
$
$
$
$
$
$
$
52,745
$ 147,454
-
-
(1,202)
-
-
(2,616)
(34)
9,180
$ (24,184)
$
$
$
$
$
$
$
(25)
(328)
(17)
-
(522)
-
80,798
(3,932)
$ (29,874)
5,248
-
$
$
50,924
2,132
80,592
$ 137,265
57,161
$
30,934
$
$
$
$
$
$
$
$
$
$
$
$
$
$
73,428
(4,596)
(598)
(270)
(6)
-
(353)
-
33,349
(14,093)
19,256
9,118
49,758
12,798
$
$
$
$
$
$
$
$
$
$
$
$
$
$
140,198
(30,221)
(1,263)
(1,015)
-
-
(1,547)
-
32,357
(8,370)
23,987
7,021
$
$
$
$
$
$
$
$
$
$
$
$
67,090
(12,508)
-
(549)
21
-
44
-
20,207
(15,141)
5,066
6,007
319,004
$ 121,287
263,149
$
92,378
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(126)
(2,720)
(1,070)
-
(90,661)
4,709
(155)
(94,592)
(5,903)
(100,495)
193
250,884
(154,110)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(145)
(11,371)
-
-
-
-
-
(10,590)
215
(10,375)
154
$
$
$
$
$
$
$
$
$
$
$
$
-
(279)
(8,550)
(11)
-
-
5
-
(9,168)
(2,011)
(11,179)
21,039
TOTAL
646,553
(83,084)
(24,527)
(5,730)
651
(90,661)
1,686
(237)
105,922
(90,215)
15,707
68,955
$
$
$
$
$
$
$
$
$
$
$
$
10,416
$ 574,907
$ 1,738,796
(11,382)
$
28,051
$
388,787
PERU
MExICO
AS AT JANUARY 1, 2010
ARGEN-
TINA
BOLIVIA
HUARON MOROCOCHA
QUIRUVILCA
ALAMO
DORADO
LA
COLORADA
MANANTIAL
ESPEJO
SAN
VICENTE
PAS CORP.
OTHER
AQUILINE
GROUP
TOTAL
Total assets
Total liabilities
$
$
56,274
8,349
$
$
111,434
44,931
$
$
55,360
$ 148,003
60,053
$
55,588
$
$
47,712
16,964
$
$
326,872
295,003
$
$
128,890
104,630
$
$
126,236
(321,064)
$
$
8,168
(28,707)
$
$
561,370
$ 1,570,319
20,285
$
256,032
Product Revenue
Refined silver and gold
Zinc concentrate
Lead concentrate
Copper concentrate
Total
$
$
2011
432,634 $
67,037
156,960
198,644
855,275 $
2010
313,286
75,345
97,538
160,384
646,553
The Company has 10 customers that account for 100% of the concentrate and silver and gold sales revenue. The Company has 4
customers that accounted for 34%, 21%, 15% and 14% of total sales in 2011, and 4 customers that accounted for 24%, 22%, 18% and
11% of total sales in 2010. The loss of certain of these customers or curtailment of purchases by such customers could have a material
adverse affect on the Company’s results of operations, financial condition, and cash flows.
88
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
19. OTHER INCOME
Insurance proceeds, net1
Royalties income
Transaction break fee
Reversal of present value long term receivable
Chinalco grants (Note 7)
Other
Total
1 Represents insurance recoveries related to the theft of doré at one of the Company’s mines.
20. INCOME TAxES
Current taxes
Current tax expense in respect of the current year
Adjustments recognized in the current year with respect to prior years
Deferred taxes
Deferred tax expense recognized in the current year
Adjustments recognized in the current year with respect to prior years
$
$
2011
3,849 $
1,039
1,400
2,174
4,546
2,720
15,728 $
2010
3,727
430
-
-
-
370
4,527
2011
2010
110,620
(1,273)
109,347
4,133
3,638
7,771
73,786
(28)
73,758
16,457
-
16,457
90,215
Provision for income taxes
$
117,118 $
As of January 1, 2011, the applicable income tax rate in Canada was reduced from 28.5% to 26.5%. The change in tax rate has no income
tax impact.
Income tax expense differs from the amounts that would result from applying the Canadian federal and provincial income tax rates to
earnings before income taxes. These differences result from the items shown on the following table, which result in effective tax rates
that vary considerably from the comparable periods. The main factors which have affected the effective tax rates for the year ended
December 31, 2011 and the comparable period of 2010 were the unrealized gains and losses on the Company’s warrants position,
foreign income tax rate differentials and foreign exchange gains and losses. The Company expects that these and other factors will
continue to cause volatility in effective tax rates in the future.
Income before taxes
Statutory tax rate
Income tax expense based on above rates
Increase (decrease) due to:
Non-deductible expenses
(Increase) decrease to estimated deductible expenses
Change in net deferred tax assets not recognized
Non-taxable unrealized (gain) loss on derivative financial instruments - warrants
Foreign tax rate differences
Effect of other taxes paid (mining and withholding)
Change in net deferred tax assets not recognized for exploration expenses
Foreign exchange (gain) loss
Other
Effective tax rate
YEAR ENDED DECEMBER 31,
2011
$
471,264 $
26.50%
124,885
2,028
(12,986)
286
(26,984)
14,642
9,914
6,207
2,277
(3,151)
117,118 $
24.85%
$
2010
105,922
28.50%
30,188
1,731
5,099
1,543
25,416
3,179
10,008
6,214
3,866
2,971
90,215
85.17%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
89
DEfERRED TAx ASSETS AND LIABILITIES
The following is the analysis of the deferred tax assets (liabilities) presented in the consolidated financial statements:
Net deferred assets (liabilities) beginning of year
Recognized in net earnings or loss in current year
Net deferred assets (liabilities) end of year
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
$
$
YEAR ENDED DECEMBER 31,
2011
(42,978) $
(7,771)
(50,749) $
4,170
(54,919)
(50,749)
2010
(26,521)
(16,457)
(42,978)
6,826
(49,804)
(42,978)
COMPONENTS Of DEfERRED TAx ASSETS AND LIABILITIES
The deferred tax assets (liabilities) are comprised of the various temporary differences as detailed below:
YEAR ENDED DECEMBER 31,
2011
2010
Jan 1, 2010
Deferred tax assets (liabilities) arising from:
Closure and decommissioning costs
$
11,604 $
13,624
$
Tax Losses
Provision for doubtful debts and inventory adjustments
Provision for employee (vacation, severance, retirement)
Accounts payable and accrued liabilities
Trade and other receivables
Mineral properties, plant, and equipment
Estimated sales provisions
Prepaids and other current assets
Other temporary differences and provisions
-
345
92
6,657
15,103
(71,300)
(14,616)
(1,000)
2,366
-
1,334
801
3,831
-
(60,824)
(4,912)
-
3,168
11,574
4,701
508
712
488
-
(46,727)
(524)
-
2,747
Net deferred tax asset (liability)
$
(50,749) $
(42,978)
$
(26,521)
90
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
UNRECOGNIzED DEDUCTIBLE TEMPORARY DIffERENCES, UNUSED TAx LOSSES AND UNUSED TAx CREDITS
Deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax assets have been recognized are
attributable to the following:
Tax loss (revenue in nature)
Tax loss (capital in nature)
Resource pools
Financing fees
Donations
Property plant and equipment
Closure and decommissioning costs
Exploration expenses
Vacation accruals
Other temporary differences
$
YEARS ENDED DECEMBER 31,
2011
86,015 $
10,022
12,773
9,650
-
5,524
17,567
11,971
1,048
98
2010
132,668
10,034
12,773
6,207
1,832
3,805
23,750
3,738
-
-
$
154,668 $
194,807
Included in the tax losses above are Canadian losses of $78.2 million which if not utilized, will expire as follows: 2013 - $0.4 million, 2014
- $16.3 million, 2015 - $21.0 million, 2016 - $0.8 million and from 2027 to 2031 - $39.7 million. Mexican losses of $7.8 million which if not
utilized, will expire as follows: 2021 – $6.1 million, 2022 – $1.7 million.
TEMPORARY DIffERENCES ASSOCIATED WITH INVESTMENT IN SUBSIDIARIES
As at December 31, 2011, temporary differences of $138.7 million (2010 – $204.5 million) associated with the investments in subsidiaries
have not been recognized as the Company is able to control the timing of the reversal of these differences which are not expected to
reverse in the foreseeable future.
21. COMMITMENTS AND CONTINGENCIES
a. General
The Company is subject to various investigations, claims and legal and tax proceedings covering matters that arise in the ordinary
course of business activities. Each of these matters is subject to various uncertainties and it is possible that some of these matters
may be resolved unfavorably to the Company. Certain conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company. In the opinion of management none of these matters are expected to have a material effect
on the results of operations or financial conditions of the Company.
b. Purchase Commitments
The Company had no purchase commitments other than those commitments described in Note 4.
c. Credit Facility
On October 10, 2008, Pan American entered into a $70 million revolving credit facility (“the Facility”) with Scotia Capital and
Standard Bank Plc (“the Lenders”). The purpose of the Facility is for general corporate purposes, including acquisitions. The Facility,
which is principally secured by a pledge of Pan American’s equity interests in its material subsidiaries, had a term of four years.
On December 20, 2010 the Company amended the Facility by, among other things, extending the term to December 20, 2014 and
increased the amount of the Facility to $150 million by expanding the number of Lenders to include West LB, CIBC and BMO. The
interest margin on the renewed Facility ranges from 3.00% to 4.00% over LIBOR, based on the Company’s net debt to EBITDA ratio.
Pan American has agreed to pay a commitment fee of between 0.90% and 1.20% on undrawn amounts under the Facility, depending
on the Company’s net debt to EBITDA ratio. As at December 31, 2011, the Company has made no drawings under this Facility.
d. Environmental Matters
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the
environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company
conducts its operations so as to protect the public health and environment and believes its operations are in compliance with
applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures
to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
91
Estimated future reclamation costs are based on the extent
of work required and the associated costs are dependent on
the requirements of relevant authorities and the Company’s
environmental policies. As of December 31, 2011, December
31, 2010 and January 1, 2010, $55.8 million, $71.6 million
and $57.3 million, respectively, were accrued for reclamation
costs relating to mineral properties. See also Note 10.
e.
Income Taxes
The Company operates in numerous countries around the
world and accordingly it is subject to, and pays annual income
taxes under the various income tax regimes in the countries
in which it operates. Some of these tax regimes are defined
by contractual agreements with the local government, and
others are defined by the general corporate income tax
laws of the country. The Company has historically filed, and
continues to file, all required income tax returns and to pay
the taxes reasonably determined to be due. The tax rules
and regulations in many countries are highly complex and
subject to interpretation. From time to time the Company is
subject to a review of its historic income tax filings and in
connection with such reviews, disputes can arise with the
taxing authorities over the interpretation or application of
certain rules to the Company’s business conducted within
the country involved. The long term portion of the Company’s
current income taxes payable is classified as long term in
Note 12.
i. Other Legal Matters
The Company is subject to various claims and legal
proceedings covering a wide range of matters that arise in
the ordinary course of business activities, many of them
relating to ex-employees. Each of these matters is subject
to various uncertainties and it is possible that some of these
matters may be resolved unfavorably to the Company.
The Company establishes provisions for matters that are
probable and can be reasonably estimated, included within
current liabilities, and amounts are not considered material.
In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims
that may result in such proceedings, the Company and its
legal counsel evaluate the perceived merits of any legal
proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be
sought. In the opinion of management there are no claims
expected to have a material effect on the results of operations
or financial condition of the Company.
j. Title Risk
Although the Company has taken steps to verify title to
properties in which it has an interest, these procedures do not
guarantee the Company’s title. Property title may be subject
to, among other things, unregistered prior agreements or
transfers and may be affected by undetected defects.
f. Finance Leases
k. Royalty Agreements and Participation Agreements
The present value of future minimum lease payments
classified as finance leases at December 31, 2011 is $9.8
million (2010: $0.12 million) and the schedule of timing of
payments for this obligation is found in Note 4.
g. Law changes in Argentina
On October 26, 2011 the Federal Government of Argentina
promulgated an “economic emergency” decree requiring all
oil, gas and mining exporters to repatriate 100% of revenue
receipts, in an attempt to stem ongoing capital flight. Pan
American is currently assessing the implications the new
regulation will have on its Manantial Espejo mine and its
development projects in Chubut and Rio Negro. Currently,
management believes that the likely impact would come
in the form of additional transaction fees associated with
the repatriation of funds; however, the precise methods of
application of the decree are still being formulated by the
Government and are being analyzed by the Company as
further details are determined.
h. Political changes in Bolivia
In late 2005, a national election in Bolivia resulted in the
emergence of a left-wing government. This has caused
some concerns amongst foreign companies doing business
in Bolivia due to the government’s policy objective of
nationalizing the oil and gas industries. There is no certainty
the government of Bolivia will not take steps to implement
such measures targeting the mining industry, and in early
2009, a new constitution was enacted that further entrenches
the government’s ability to amend or enact such laws,
including those that may affect mining. Risks of doing
business in Bolivia include being subject to new higher taxes
and mining royalties (some of which have already been
proposed or threatened), revision of contracts and threatened
expropriation of assets, all of which could have a material
adverse impact on the Company’s operations or profitability.
92
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
The Company has various royalty agreements on certain
mineral properties entitling the counterparties to the
agreements to receive payments per terms as summarized
below. Royalty
incurred on acquisitions of
properties are netted against mineral property while royalties
that become payable upon production are expensed at the
time of sale of the production.
liabilities
On September 22, 2011, Peru’s Parliament approved new laws
that increase mining taxes to fund anti-poverty infrastructure
projects in the country, effective October 1, 2011. The new law
changes the scheme for royalty payments, so that mining
companies that have not signed legal stability agreements
with the government will have to pay royalties of 1% to 12%
on operating profit; royalties under the previous rules were
1% to 3% on net sales. In addition to these royalties, such
companies will be subject to a “special tax” at a rate ranging
from 2% to 8.4% of operating profit. Companies that have
concluded legal stability agreements (under the General
Mining Law) will be required to pay a “special contribution”
of between 4% and 13.12% of operating profits. The
Company’s calculations of the change in the royalty and the
new tax indicate that no material impact is expected on the
results of the Company’s Peruvian operations.
In the Province of Chubut, Argentina which is the location
of the Company’s Navidad property, there is a provincial
royalty of 3% of the “Operating Income”. Operating income
is defined as revenue minus production costs (not including
mining costs), treatment and transportation charges. The
Navidad property is not subject to any other royalties, back-
in rights, payments, encumbrances or similar agreements.
Huaron, Quiruvilca and Morococha mines
In June 2004, Peru’s Congress approved a bill that allows
royalties to be charged on mining projects. These royalties
are payable on Peruvian mine production at the following
progressive rates: (i) 1.0% for companies with sales up to $60
million; (ii) 2.0% for companies with sales between $60 million
and $120 million; and (iii) 3.0% for companies with sales greater
than $120 million. This royalty is a net smelter returns royalty,
the cost of which is deductible for income tax purposes. Because
the Huaron and Quiruvilca mines are one legal entity, this royalty
is calculated on the cumulative production of both mines while
the calculation of the royalty on Morococha’s production is done
on this mine alone.
Manantial Espejo mine
Production from the Manantial Espejo property is subject to
royalties to be paid to Barrick according to the following: (i) $0.60
per metric tonne of ore mined from the property and fed to process
at a mill or leaching facility to a maximum of 1 million tonnes; and
(ii) one-half of one percent (0.5%) of net smelter returns derived
from the production of minerals from the property. In addition,
the Company has negotiated a royalty equal to 3.0% of operating
cash flow payable to the Province of Santa Cruz.
San Vicente mine
Pursuant to an option agreement entered into with COMIBOL, a
Bolivian state mining company, with respect to the development
of the San Vicente property, the Company is obligated to pay
COMIBOL a participation fee of 37.5% (the “Participation Fee”)
of the operations cash flow. Once full commercial production of
San Vicente began, the Participation was reduced by 75% until
the Company recovers its investment in the property. Thereafter,
the Participation Fee will revert back to its original percentage. In
2011, the royalties to COMIBAL amounted to approximately $12.6
million.
A royalty is also payable to EMUSA, a former partner of the
Company on the project. The royalty is a 2% net smelter royalty
payable only after the Company has recovered its capital
investment in the project and only when the average price of silver
in a given financial quarter is $9.00 per ounce or greater. Recovery
of capital investment was not achieved as of December 31, 2011.
In December 2007, the Bolivian government introduced a new
mining royalty that affects the San Vicente project. The royalty is
applied to gross metal value of sales (before smelting and refining
deductions) and the royalty percentage is a sliding scale depending
on metal prices. At current metal prices, the royalty is 6% for silver
metal value and 5% for zinc and copper metal value of sales. The
royalty is income tax deductible.
22. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2011, a private company controlled by a director of the Company was paid approximately $0.4 million
(2010 - $0.4 million) for consulting services. These transactions are in the normal course of operations and are measured at the exchange
amount, which is the amount of consideration established and agreed to by the parties.
COMPENSATION Of KEY MANAGEMENT PERSONNEL
The remuneration of directors and other members of key management personnel during the year was as follows:
Short-term benefits
Share-based payments
$
$
2011
7,451 $
2,245
9,696 $
2010
7,116
2,912
10,028
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
93
23. fIRST TIME ADOPTION Of IfRS
The significant IFRS policies set out in Note 2 have been applied in preparing these consolidated financial statements and selected comparative
information presented below. The following tables reconcile the Company’s consolidated statements of financial position, statements of
income, comprehensive income and equity prepared in accordance with Canadian GAAP and as previously reported to those prepared and
reported in these consolidated financial statements in accordance with IFRS:
Consolidated Statements of
Financial Position Reconciliation
DECEMBER 31, 2010
AS AT JANUARY 1, 2010
(Date of transition)
Notes
Canadian
GAAP
Effect of
Transition
to IFRS
IFRS
Canadian
GAAP
Effects of
Transition
to IFRS
IFRS
Opening
ASSETS
Current assets
Cash
Short-term investments
Trade and other receivables
Income taxes receivable
Inventories
Derivative financial instruments
Future income taxes
i(d)
Prepaids and other current assets
Total current assets
Non-current assets
$
179,921
$
180,583
66,893
87
106,854
-
8,172
6,520
-
-
-
-
-
-
(8,172)
-
$
179,921
$
100,474
$
180,583
66,893
87
106,854
-
-
6,520
92,623
66,059
12,132
93,446
160
4,993
2,568
-
-
-
-
-
-
(4,993)
-
$
100,474
92,623
66,059
12,132
93,446
160
-
2,568
549,030
(8,172)
540,858
372,455
(4,993)
367,462
Property, plant and equipment, net
i(b),ii(a)
1,492,538
(331,215)
1,161,323
1,457,724
(280,648)
1,177,076
i(c),i(d)
1,251
1,618
28,171
5,575
-
-
6,826
1,618
28,171
-
7,351
6,521
11,909
-
-
7,351
6,521
11,909
$ 2,072,608
$
(333,812)
$ 1,738,796
$ 1,848,609
$
(278,290)
$ 1,570,319
Deferred tax assets
Other assets
Long-term refundable tax
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Provisions
Current income tax liabilities
Future income taxes
Non-current liabilities
Provisions
Deferred tax liabilities
Share purchase warrants
Other long-term liabilities
Total liabilities
Non-controlling interests
EQUITY
Capital and reserves
Issued capital
Share option reserve
Investment revaluation reserve
vii
vii
i(d)
ii
i
iii
vii
iv
iii
iii
vi
91,211
4,948
4,021
-
100,180
57,273
33,872
43,919
20,788
81,230
-
29,699
4,312
115,241
(3,450)
3,450
-
(4,312)
(4,312)
77,780
3,450
29,699
-
96,159
-
4,021
-
110,929
100,180
(4,948)
4,948
-
-
-
69,463
4,553
331,228
(281,424)
-
28,614
127,890
(2,466)
544,546
(155,759)
74,016
49,804
127,890
26,148
388,787
62,775
(5,502)
305,820
(271,948)
-
43,919
20,788
-
489,563
(233,531)
256,032
7,774
(7,774)
-
15,256
(15,256)
-
1,272,860
4,027
1,276,887
1,206,647
-
1,206,647
45,303
9,346
(38,281)
(1,648)
7,022
7,698
47,293
1,618
88,232
(40,944)
(166)
(4,357)
6,349
1,452
83,875
Retained earnings
i-vi,ix
192,779
(143,028)
49,751
Non-controlling interests
iv
-
8,651
8,651
-
15,964
15,964
Total equity
1,520,288
(170,279)
1,350,009
1,343,790
(29,503)
1,314,287
94
Total liabilities and equity
$ 2,072,608
$
(333,812)
$ 1,738,796
$ 1,848,609
$
(278,290)
$ 1,570,319
1,520,288
(178,930)
1,341,358
1,343,790
(45,467)
1,298,323
(Note 23 continued)
Consolidated Income Statement Reconciliation
Revenue
Production Costs
Depreciation and amortization
Royalties
Mine operating earnings
General and administrative
Exploration and project development
Doubtful accounts and inventory provision
Foreign exchange gain
Loss on commodity and foreign currency contracts
Gain on sale of assets
Other income
Asset retirement and reclamation
Earnings from operations
Loss on derivatives
Investment income
Interest and financing expense
Earnings before taxes
Non-controlling interests
Income taxes
Net earnings for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
YEAR ENDED DECEMBER 31, 2010
Notes
Previous
GAAP
Effect of
Transition
to IFRS
IFRS
viii
$
631,986
$
14,567
$
646,553
(283,665)
(24,122)
(307,787)
v
viii
i(a)
ii(b)
iii
(86,483)
(22,031)
239,807
(17,109)
(24,527)
(4,754)
11,058
(237)
651
4,527
(2,929)
206,487
-
961
ii(b)
(2,061)
205,387
(1,827)
(90,987)
iv
i(a-e)
3,399
7,464
1,308
-
-
-
(9,372)
-
-
-
2,929
(5,135)
(83,084)
(14,567)
241,115
(17,109)
(24,527)
(4,754)
1,686
(237)
651
4,527
-
201,352
(90,661)
(90,661)
-
(3,669)
(99,465)
1,827
772
961
(5,730)
105,922
-
(90,215)
$
112,573
$
(96,866)
$
15,707
iv
$
$
-
-
-
$
$
13,711
1,996
15,707
$
$
13,711
1,996
15,707
Consolidated Statement of Comprehensive Income Reconciliation
Net earnings for the period
$
112,573
$
(96,866)
$
15,707
Unrealized net gains on available for sale non-monetary securities (net of zero tax)
Reclassification adjustments of net (gains) included in earnings
8,025
(298)
(1,481)
-
6,544
(298)
Total comprehensive income for the period
$
120,300
$
(98,347)
$
21,953
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
See accompanying notes to these statements.
$
$
-
-
-
$
$
19,957
1,996
21,953
$
$
19,957
1,996
21,953
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
95
DECEMBER 31, 2010
Notes
Canadian
GAAP
Effect of
Transition
to IFRS
IFRS
$
1,272,860
$
4,027
$
1,276,887
iii
vi
45,303
9,346
(38,281)
(1,648)
7,022
7,698
i-vi, ix
192,779
(143,028)
49,751
1,520,288
(178,930)
1,341,358
iv
-
8,651
8,651
$
1,520,288
$
(170,279)
$ 1,350,009
Notes
DECEMBER 31, 2010
ix
i(a-e),vi
v
ii(a)
iii
vi
iv
iv
192,779
(4,357)
(39,809)
(10,084)
3,400
(2,831)
(90,661)
1,483
1,996
(2,165)
(143,028)
49,751
JANUARY 1, 2010
Notes
Canadian
GAAP
Effect of
Transition
to IFRS
IFRS
$
1,206,647
$
-
$ 1,206,647
vi
i-vi, ix
47,293
1,618
88,232
(40,944)
(166)
(4,357)
6,349
1,452
83,875
1,343,790
(45,467)
1,298,323
iv
-
15,964
15,964
$
1,343,790
$
(29,503)
$
1,314,287
(Note 23 continued)
Reconciliation of Total Equity as at December 31, 2010
Capital and reserves
Issued capital
Share option reserve
Investment revaluation reserve
Retained earnings
Equity attributable to equity holders
Non-controlling interests
Total Equity
Retained Earnings Reconciliation:
Canadian GAAP
Effects of Transition to IFRS:
January 1, 2010 adjustments
Aquiline adjustment for changes in ownership interest
Deferred tax and reclassification from foreign exchange gain/loss
Depreciation (mineral property, plant and equipment, net)
Accretion (provision for asset retirement obligation and reclamation)
Fair value of share purchase warrants related to Aquiline
Foreign exchange on available for sale monetary assets
Non-controlling interest
Other
IFRS
Reconciliation of Total Equity as at January 1, 2010
Capital and reserves
Issued capital
Share option reserve
Investment revaluation reserve
Retained earnings
Equity attributable to equity holders
Non-controlling interests
Total Equity
96
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
Retained Earnings Reconciliation:
Canadian GAAP
Effects of Transition to IFRS:
Deferred tax and reclassification from foreign exchange gain/loss
Depreciation (mineral property, plant and equipment, net)
Accretion (provision for asset retirement obligation and reclamation)
Fair value of share purchase warrants related to Aquiline
Foreign exchange on available for sale monetary assets (AOCI)
Non-controlling interests
IFRS
i) DEfERRED TAxES
Notes
JANUARY 1, 2010
i(a-e),vi
v
ii(a)
iii
vi
iv
88,232
(5,506)
(836)
5,502
(2,975)
166
(708)
(4,357)
83,875
The adjustments to deferred income tax assets and
liabilities reflect the tax effects under IAS 12 Income
Taxes:
a.
IAS 12 requires recognition of deferred income taxes for
differences that arise on translation of non-monetary assets
denominated
in currencies other than the Company’s
functional currency. The tax bases of these non-monetary
assets are re-measured from historical rates to functional
currency using current exchange rates. The difference as a
result of change in exchange rates creates a deferred income
tax adjustment. Under Canadian GAAP (“CGAAP”), the
historical exchange rates were used and any differences
that arose from re-measurement were recorded as foreign
exchange gain or loss. The Company has mining properties
in Argentina, Peru, Mexico and Bolivia with significant
tax basis denominated in local currencies, the movement
between the US dollar and these local currencies gives rise
to changes in deferred income tax.
b. Unlike CGAAP, IAS 12 prohibits the recognition of deferred
taxes on initial recognition of an asset or liability where
the acquisition is not a business combination and neither
accounting profit nor taxable profit were affected at the time
of the transaction. Accordingly, in its opening statement of
financial position, the Company has reversed the deferred
income tax liabilities recognized on acquisition of the assets
of Aquiline, Manantial Espejo and Alamo Dorado.
c. The deferred income tax expense booked on the deferred
component of the employee profit-sharing arrangement at
some of the Company’s sites is different under IFRS. Unlike
CGAAP, the deferred component of this employee benefit
liability is not recognized under IAS 19 Employee benefits.
d. IAS 12 specifies the conditions under which an entity can
offset both current and deferred tax assets and liabilities, and
requires deferred taxes to be presented as non-current.
e. The tax effects of other IFRS adjustments.
ii) CLOSURE AND DECOMMISSIONING
a. Under
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets, the closure provision is measured
based on the best estimate of expenditure required to
settle the obligation at the statement of financial position
date using current discount rate and inflation assumptions;
thus simplifying the calculation by removing the ‘layering’
concept used for CGAAP. In addition, IFRS requires that the
liability be re-measured at each reporting date versus the
requirement in CGAAP to re-measure in the event of changes
in the amount or timing of cash flows required to settle the
obligation.
b. A reclassification of the accretion on the closure and
decommissioning liability from operating expense to finance
expense to comply with the presentation requirements of
IAS 37.
iii) SHARE PURCHASE WARRANTS
Reclassification of share purchase warrants that were
presented as equity instruments under CGAAP to derivative
financial liability under IAS 39 Financial Instruments:
Recognition and Measurement. Under IFRS, share purchase
warrants with an exercise price denominated in a currency
other than the Company's functional currency are classified
and accounted for as financial liabilities and, as such, are
measured at their fair values with changes in fair values
included in net earnings.
iv) ADJUSTMENTS fOR NON-CONTROLLING INTEREST
An adjustment to record the changes in non-controlling
interests resulting from all the IFRS adjustments and
reclassification of non-controlling interests to be included
in the equity section under IFRS.
v) DEPRECIATION
The adjustment to depreciation is a result of a change
in the mineral property, plant and equipment basis
as a consequence of the changes to the closure and
decommissioning liability at all the mine sites and changes
related to IAS 12 Income Taxes as discussed above. In
addition, a presentation adjustment to include depreciation
and amortization expenses as part of cost of sales.
vi) fOREIGN ExCHANGE GAINS OR LOSSES ON AVAILABLE-fOR-SALE
MONETARY SECURITIES
A reclassification of the unrealized foreign exchange gains
or losses on available for sale monetary securities from
other comprehensive income (under CGAAP) to earnings
for the period (to retained earnings on transition date) to
comply with IAS 39 Financial Instruments: Recognition and
Measurement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
97
vii) PROVISIONS
b. Decommissioning Liability Exemption
IFRS 1 indicates that a first-time adopter may elect not
to apply IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities retrospectively. The
Company applied this election and accordingly measured
the decommissioning liability as at the date of transition
to IFRS in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets and estimated the
amounts that would have been included in the cost of
the related mineral property, plant and equipment and
recalculated the accumulated depreciation for those assets
at January 1, 2010.
c. Business Combination Exemption
IFRS 1 allows a first-time adopter to avoid application of
IFRS 3R Business Combinations retrospectively to business
combinations that occurred before either the date of
transition to IFRS or an alternative pre-transition date. The
Company applied this exemption to business combinations
that occurred prior to January 1, 2010.
d. Share-Based Payment Exemption
IFRS 1 gives a first-time adopter the option to not apply IFRS
2 Share-Based Payment to (i) equity instruments that were
granted for the periods on or before November 7, 2002 or
after November 7, 2002 but that vested before the date of
transition to IFRS and (ii) liabilities arising from cash-settled
share-based payment transactions if those liabilities were
settled before January 1, 2005 or before the date of transition
to IFRS. The Company elected to apply this exemption on its
January 1, 2010 date of transition to IFRS.
e. Leases Exemption
IFRS 1 provides a first-time adopter with an option to
not apply certain requirements under
IAS 17 Leases
retrospectively. The Company applied two exemptions and
accordingly assessed whether an arrangement contains
a lease on the basis of facts and circumstances existing at
the date of transition to IFRS. Secondly, the Company did
not reassess the determination of whether an arrangement
contains a lease under IFRS if the determination made under
CGAAP gave the same outcome as that from the application
of IAS 17 Leases and IFRIC 4 Determining Whether an
Arrangement Contains a Lease.
f. Borrowing Costs Exemption
This exemption in IFRS 1 allows a first-time adopter
to apply the transitional provisions set out in IAS 23
Borrowing Costs at January 1, 2009 or the date of transition
to IFRS, whichever is later. IAS 23 requires the capitalization
of borrowing costs related to all qualifying assets. The
Company elected to apply IAS 23 Borrowing Costs to
qualifying assets for which the commencement date for
capitalization is on or after January 1, 2010.
A reclassification of the current portion of
provision from trade and other payables to provisions.
litigation
viii) ROYALTY
A reclassification of royalty expenses from revenue to cost
of sales to comply with the definition of Revenue under IAS
18 Revenue.
ix) CHANGES IN OWNERSHIP INTERESTS
During the first quarter of 2010, the Company increased a
controlling ownership interest in a business (Aquiline) by
7%. Under IFRS, changes in ownership interest that do
not result in a loss of control are accounted for as equity
transactions and the carrying amounts of the controlling
and non-controlling interests are adjusted to reflect the
changes in their relative interests in the subsidiary. Under
the CGAAP policy of the entity, such changes were treated
as step acquisitions requiring an increase in the carrying
value of the consolidated business. An adjustment was
required in the first quarter of 2010 in order to adjust the
IFRS financial statements for the impact of this GAAP
difference and appropriately account for this change as
an equity transaction under IFRS. Accordingly, a $39.8
million adjustment was charged to equity (within retained
earnings) under IFRS for this period. This is disclosed in the
statement of equity prepared under IFRS for the year ended
December 31, 2010.
CONSOLIDATED STATEMENT Of CASH fLOWS
RECONCILIATION
The adoption of IFRS has not had any impact on the net cash
flows of the Company, with the exception of the treatment of
advances received for construction and equipment leases which
under CGAAP are applied to capital for net investing whereas
under IFRS they are included in income. Additionally, the
changes made to the statements of financial position and income
statements have resulted in reclassifications of various amounts
on the statements of cash flows, however as there have been no
significant change to the net cash flows, no reconciliations have
been presented.
fIRST TIME ADOPTION ExEPTIONS APPLIED
IFRS 1 First-time Adoption of International Financial Reporting
Standards, which governs the first-time adoption of IFRS, in
general requires accounting policies to be applied retrospectively
to determine the opening statement of financial position at the
Company’s transition date of January 1, 2010, unless certain
exemptions are applied. The exemptions that the Company has
elected to apply are:
a. Deemed Cost Exemption
IFRS 1 provides an option that allows a first-time adopter
to elect to use a previous GAAP revaluation of an item
of property, plant and equipment at or before the date
of transition to IFRS as deemed cost at the date of the
revaluation, if the revaluation was, at the date of the
revaluation, broadly comparable to fair value. The Company
had previously revalued the property, plant and equipment
assets at Quiruvilca and La Colorada as a result of a CGAAP
impairment, and has elected these revalued amounts less
subsequent depreciation as the deemed cost at the date of
transition to IFRS.
98
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
24. SUBSEQUENT EVENTS
On January 23, 2012, Pan American and Minefinders Corporation
Ltd. (“Minefinders”) announced that they have entered into a
definitive agreement (the “Arrangement Agreement”) pursuant to
which Pan American will acquire all of the issued and outstanding
common shares of Minefinders by way of a plan of arrangement.
Under the terms of the Arrangement Agreement, Minefinders’
shareholders will be entitled to receive, in exchange for each
Minefinders’ share held, either: (i) 0.55 shares of Pan American
and CAD$1.84 in cash; or (ii) 0.6235 shares of Pan American; or
(iii) CAD$15.60 in cash, subject to pro-ration under total aggregate
cash and share pools. The consideration represents a total offer
value of CAD$15.60 per Minefinders’ share and implies a total
transaction value of CAD$1.38 billion. The agreement also provides
for reciprocal termination payments of approximately CAD$42
million and reciprocal expense reimbursement of payments of
approximately CAD$5 million in certain specified circumstances.
Following completion of the transaction, former Minefinders
security holders will own up to approximately 32% of Pan
American, on a fully-diluted basis. The proposed acquisition
is subject to approval by Pan American’s shareholders and
Minefinders’ security holders, and the terms and conditions for
the proposed transaction will be summarized in the management
information circulars
to Pan American’s
to be provided
shareholders and Minefinders’ security holders. The Company’s
management information circular relating to the acquisition was
mailed out to its shareholders in February 2012. A special meeting
of the Company’s shareholders will take place on March 26, 2012.
If approved by Pan American’s shareholders and Minefinders’
security holders, the Company expects to complete the proposed
transaction by the end of March 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
99
NOTES:
100
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2011
TABLE OF CONTENTS
Operations/Projects Map
Financial Highlights
Chairman’s Message to the Shareholders
President’s Message to the Shareholders
The Silver Market 2011
Growth Through Exploration
Growth Through Sustainability
Cautionary Note to US Investors
Properties at a Glance
Financial Statements
Corporate Information
02
03
04
06
08
09
10
12
13
14
IBC
SUSTAINABILITY REPORT 2010
Our 2010 Sustainability Report describes our
pioneering work in environmental performance,
health and safety and community relations.
Download a copy at:
www.panamericansilver.com/sustainability/
sustainability-report/
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE STATEMENTS AND INFORMATION IN THIS ANNUAL REPORT CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND “FORWARD-LOOKING INFORMATION” WITHIN THE MEANING OF APPLICABLE CANADIAN PROVINCIAL SECURITIES LAWS RELATING TO
THE COMPANY AND ITS OPERATIONS. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT
THE WORDS, “BELIEVES”, “EXPECTS”, “INTENDS”, “PLANS”, “FORECAST”, “OBJECTIVE”, “OUTLOOK”, “POTENTIAL”, “ANTICIPATED”, AND OTHER SIMILAR WORDS AND EXPRESSIONS, IDENTIFY
FORWARD-LOOKING STATEMENTS OR INFORMATION. THESE FORWARD-LOOKING STATEMENTS OR INFORMATION RELATE TO, AMONG OTHER THINGS: FUTURE PRODUCTION OF SILVER,
GOLD AND OTHER METALS; FUTURE CASH COSTS PER OUNCE OF SILVER; THE PRICE OF SILVER AND OTHER METALS; THE EFFECTS OF LAWS, REGULATIONS AND GOVERNMENT POLICIES
AFFECTING PAN AMERICAN’S OPERATIONS OR POTENTIAL FUTURE OPERATIONS, INCLUDING BUT NOT LIMITED TO, LAWS IN THE PROVINCE OF CHUBUT, ARGENTINA, WHICH, CURRENTLY
HAVE SIGNIFICANT RESTRICTIONS ON MINING; FUTURE SUCCESSFUL DEVELOPMENT OF THE NAVIDAD PROJECT, THE LA PRECIOSA PROJECT, AND OTHER DEVELOPMENT PROJECTS OF
THE COMPANY; THE SUFFICIENCY OF THE COMPANY’S CURRENT WORKING CAPITAL, ANTICIPATED OPERATING CASH FLOW OR ITS ABILITY TO RAISE NECESSARY FUNDS; THE EFFECTS OF
FUTURE ACQUISITIONS AND THE ABILITY OF THE COMPANY TO SUCCESSFULLY INTEGRATE ANY SUCH ACQUISITIONS; THE ACCURACY OF MINERAL RESERVE AND RESOURCE ESTIMATES;
ESTIMATED PRODUCTION RATES FOR SILVER AND OTHER PAYABLE METALS PRODUCED BY THE COMPANY; TIMING OF PRODUCTION AND THE CASH AND TOTAL COSTS OF PRODUCTION
AT EACH OF THE COMPANY’S PROPERTIES; THE ESTIMATED COST OF AND AVAILABILITY OF FUNDING NECESSARY FOR SUSTAINING CAPITAL; ONGOING OR FUTURE DEVELOPMENT
PLANS AND CAPITAL REPLACEMENT, IMPROVEMENT OR REMEDIATION PROGRAMS; THE ABILITY OF THE COMPANY TO REDUCE ENVIRONMENTAL IMPACTS, INCLUDING A REDUCTION
IN GREENHOUSE GAS EMISSIONS, AND TO IMPROVE SUSTAINABILITY IN ITS OPERATIONS AND PROJECTS; THE ESTIMATES OF EXPECTED OR ANTICIPATED ECONOMIC RETURNS FROM
THE COMPANY’S MINING PROJECTS, AS REFLECTED IN TECHNICAL REPORTS OR OTHER ANALYSES PREPARED IN RELATION TO DEVELOPMENT OF PROJECTS; ESTIMATED EXPLORATION
EXPENDITURES TO BE INCURRED ON THE COMPANY’S VARIOUS PROPERTIES; FORECAST CAPITAL AND NON-OPERATING SPENDING; FUTURE SALES OF THE METALS, CONCENTRATES OR
OTHER PRODUCTS PRODUCED BY THE COMPANY; AND THE COMPANY’S PLANS AND EXPECTATIONS FOR ITS PROPERTIES AND OPERATIONS.
THESE STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE NECESSARILY BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES
THAT, WHILE CONSIDERED REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, POLITICAL AND SOCIAL UNCERTAINTIES
AND CONTINGENCIES. MANY FACTORS, BOTH KNOWN AND UNKNOWN, COULD CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM
THE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT ARE OR MAY BE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT
AND THE COMPANY HAS MADE ASSUMPTIONS AND ESTIMATES BASED ON OR RELATED TO MANY OF THESE FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION: FLUCTUATIONS
IN SPOT AND FORWARD MARKETS FOR SILVER, GOLD, BASE METALS AND CERTAIN OTHER COMMODITIES (SUCH AS NATURAL GAS, FUEL OIL AND ELECTRICITY); FLUCTUATIONS IN
CURRENCY MARKETS (SUCH AS THE PERUVIAN SOL, MEXICAN PESO, ARGENTINE PESO, BOLIVIAN BOLIVIANO AND CANADIAN DOLLAR VERSUS THE U.S. DOLLAR); RISKS RELATED
TO THE TECHNOLOGICAL AND OPERATIONAL NATURE OF THE COMPANY’S BUSINESS; CHANGES IN NATIONAL AND LOCAL GOVERNMENT, LEGISLATION, TAXATION, CONTROLS OR
REGULATIONS AND POLITICAL OR ECONOMIC DEVELOPMENTS IN CANADA, THE UNITED STATES, MEXICO, PERU, ARGENTINA, BOLIVIA OR OTHER COUNTRIES WHERE THE COMPANY MAY
CARRY ON BUSINESS IN THE FUTURE; RISKS AND HAZARDS ASSOCIATED WITH THE BUSINESS OF MINERAL EXPLORATION, DEVELOPMENT AND MINING (INCLUDING ENVIRONMENTAL
HAZARDS, INDUSTRIAL ACCIDENTS, UNUSUAL OR UNEXPECTED GEOLOGICAL OR STRUCTURAL FORMATIONS, PRESSURES, CAVE-INS AND FLOODING); RISKS RELATING TO THE CREDIT
WORTHINESS OR FINANCIAL CONDITION OF SUPPLIERS, REFINERS AND OTHER PARTIES WITH WHOM THE COMPANY DOES BUSINESS; INADEQUATE INSURANCE, OR INABILITY TO OBTAIN
INSURANCE, TO COVER THESE RISKS AND HAZARDS; EMPLOYEE RELATIONS; RELATIONSHIPS WITH AND CLAIMS BY LOCAL COMMUNITIES AND INDIGENOUS POPULATIONS; AVAILABILITY
AND INCREASING COSTS ASSOCIATED WITH MINING INPUTS AND LABOUR; THE SPECULATIVE NATURE OF MINERAL EXPLORATION AND DEVELOPMENT, INCLUDING THE RISKS OF
OBTAINING NECESSARY LICENSES AND PERMITS AND THE PRESENCE OF LAWS AND REGULATIONS THAT MAY IMPOSE RESTRICTIONS ON MINING, INCLUDING THOSE CURRENTLY IN
THE PROVINCE OF CHUBUT, ARGENTINA; DIMINISHING QUANTITIES OR GRADES OF MINERAL RESERVES AS PROPERTIES ARE MINED; GLOBAL FINANCIAL CONDITIONS; THE COMPANY’S
ABILITY TO COMPLETE AND SUCCESSFULLY INTEGRATE ACQUISITIONS AND TO MITIGATE OTHER BUSINESS COMBINATION RISKS; CHALLENGES TO, OR DIFFICULTY IN MAINTAINING, THE
COMPANY’S TITLE TO PROPERTIES AND CONTINUED OWNERSHIP THEREOF; THE ACTUAL RESULTS OF CURRENT EXPLORATION ACTIVITIES, CONCLUSIONS OF ECONOMIC EVALUATIONS,
AND CHANGES IN PROJECT PARAMETERS TO DEAL WITH UNANTICIPATED ECONOMIC OR OTHER FACTORS; INCREASED COMPETITION IN THE MINING INDUSTRY FOR PROPERTIES,
EQUIPMENT, QUALIFIED PERSONNEL, AND THEIR COSTS; AND THOSE FACTORS IDENTIFIED UNDER THE CAPTION “RISKS RELATED TO PAN AMERICAN’S BUSINESS” IN THE COMPANY’S
MOST RECENT FORM 40-F AND ANNUAL INFORMATION FORM FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CANADIAN PROVINCIAL SECURITIES
REGULATORY AUTHORITIES. INVESTORS ARE CAUTIONED AGAINST ATTRIBUTING UNDUE CERTAINTY OR RELIANCE ON FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
HAS ATTEMPTED TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, THERE MAY BE OTHER FACTORS THAT CAUSE RESULTS NOT TO BE AS
ANTICIPATED, ESTIMATED, DESCRIBED OR INTENDED. THE COMPANY DOES NOT INTEND, AND DOES NOT ASSUME ANY OBLIGATION, TO UPDATE THESE FORWARD-LOOKING STATEMENTS
OR INFORMATION TO REFLECT CHANGES IN ASSUMPTIONS OR CHANGES IN CIRCUMSTANCES OR ANY OTHER EVENTS AFFECTING SUCH STATEMENTS OR INFORMATION, OTHER THAN AS
REQUIRED BY APPLICABLE LAW.
DIRECTORS
Ross J. Beaty – Chairman
Geoff A. Burns – President & Chief Executive Officer
Michael Carroll (Independent)
Noel Dunn (Independent)
Michael J.J. Maloney (Independent)
Robert Pirooz – General Counsel
David Press (Independent)
Walter Segsworth (Independent)
EXECUTIVE MANAGEMENT – VANCOUVER
Geoff Burns – President & Chief Executive Officer
Steven Busby – Chief Operating Officer
Ignacio Couturier – Treasurer
Andres Dasso – Sr. VP, Mining Operations
Rob Doyle – Chief Financial Officer
Delaney Fisher – Corporate Secretary & Legal Counsel
George Greer – VP, Project Development
Sean McAleer – VP, Human Resources & Security
Robert Pirooz – General Counsel
Michael Steinmann – Executive VP, Geology & Exploration
Wayne Vincent – VP, Accounting & Financial Reporting
Martin Wafforn – VP, Technical Services
ANNUAL GENERAL MEETING
Wednesday, May 16, 2012
Four Seasons Hotel, Arbutus Room
791 West Georgia St. Vancouver, BC
MANANTIAL ESPEJO | ARGENTINA
AUDITORS
Deloitte & Touche LLP, Chartered Accountants
2800 – 1055 Dunsmuir Street
Vancouver, British Columbia
Canada, V7X 1P4
LEGAL COUNSEL
Borden Ladner Gervais
1200 – 200 Burrard Street
Vancouver, British Columbia,
Canada, V7X 1T2
AUTHORIZED CAPITAL
200,000,000 common shares without par value
ISSUED CAPITAL
December 31, 2011: 104,492,743 common shares
TRADING INFORMATION
NASDAQ: PAAS
TSX: PAA
REGISTRAR & TRANSFER AGENT
Computershare Investor Services Inc.
510 Burrard Street, 3rd Floor
Vancouver, British Columbia
Canada, V6C 3B9
1-800-564-6253
VANCOUVER OFFICE
CORPORATE HEADQUARTERS
Pan American Silver Corp.
1500 – 625 Howe Street
Vancouver, British Columbia
Canada, V6C 2T6
T. 604-684-1175
F. 604-684-0147
info@panamericansilver.com
www.panamericansilver.com
ARGENTINA OFFICE
Pan American Silver Argentina
T. 54 -11-4816-3220
F. 54 -11-4816-3227
Country Manager – Bret Boster
MEXICO OFFICE
Plata Panamericana S.A. de C.V.
T. 52-618-128-0709 x 101
F. 52-618-128-0692 x 102
Country Manager – Chris Warwick
BOLIVIA OFFICE
PERU OFFICE
Pan American Silver (Bolivia) S.A.
T. 59 -1-2-279-6690
F. 59 -1221-54216
Country Manager – Gary Hannan
Pan American Silver Peru S.A.C.
T. 51-1-618-9700
F. 51-1-618-9729
Country Manager – Jorge Ugarte
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PLANTING THE SEEDS FOR
GROWTH
ANNUAL REPORT 2011