ANNUAL REPORT 2012
Responsible Investments,
Growing Returns
SUSTAINABILITY REPORT 2012
(Right) Our sustainable development Llama
breeding project in the community of Pocani,
in the Potosi region of Bolivia.
Our 2012 Sustainability Report describes our
efforts in growing communities towards sustainable
development while protecting the environment and
adhering to the highest safety standards.
Download a copy at:
www.panamericansilver.com/sustainability/
sustainability-report/
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IBC
Table of Contents
Highlights of 2012
Operations and Projects Map
Chairman’s Letter, Ross Beaty
President’s Letter, Geoff Burns
Silver, A Smart Investment
Exploration Investment, Creating High Returns
The Dolores Mine, A Strategic Investment
Cautionary Notes
Management’s Discussion and Analysis
Consolidated Financial Statements
Corporate Information
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS INFORMATION
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. 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”, “POSITIONING”, “POTENTIAL”, “ANTICIPATED”, “BUDGET”, 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 AND THE TIMING OF SUCH PRODUCTION;
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, THE LAWS IN THE PROVINCE OF CHUBUT, ARGENTINA, WHICH CURRENTLY HAVE SIGNIFICANT RESTRICTIONS ON MINING,
AND RECENT AMENDMENTS TO THE LABOUR LAWS IN MEXICO; THE CONTINUING NATURE OF HIGH INFLATION, RISING CAPITAL AND OPERATING COSTS, CAPITAL RESTRICTIONS AND RISKS OF
EXPROPRIATION IN ARGENTINA AND, IN PARTICULAR, IN THE PROVINCE OF CHUBUT AND THEIR EFFECTS ON THE COMPANY AND ITS ASSETS; THE DEVELOPMENT OF THE NAVIDAD PROJECT AND
OTHER DEVELOPMENT PROJECTS OF THE COMPANY; THE TIMING OF PRODUCTION AND THE CASH AND TOTAL COSTS OF PRODUCTION AT EACH OF THE COMPANY’S PROPERTIES; THE SUFFICIENCY OF
THE COMPANY’S CURRENT WORKING CAPITAL, ANTICIPATED OPERATING CASH FLOW OR ITS ABILITY TO RAISE NECESSARY FUNDS; TIMING OF RELEASE OF TECHNICAL OR OTHER REPORTS, INCLUDING
ENVIRONMENTAL IMPACT ASSESSMENTS; THE ABILITY OF THE COMPANY TO ACHIEVE ANY PLANNED EXPANSIONS AND DEVELOPMENT, INCLUDING BUT NOT LIMITED TO, POTENTIAL OPPORTUNITIES
AND ADVANCEMENTS AT THE DOLORES MINE, AND THE POTENTIAL EXPANSION OF THE LA COLORADA MINE, AND THE TIMING FOR THE SAME; THE ESTIMATES OF EXPECTED OR ANTICIPATED
ECONOMIC RETURNS FROM THE COMPANY’S MINING PROJECTS; 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 CANADIAN DOLLAR, PERUVIAN SOL, MEXICAN PESO, ARGENTINE
PESO AND BOLIVIAN BOLIVIANO 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 INCLUDING AMONG OTHERS, CHANGES TO IMPORT AND EXPORT REGULATIONS, LAWS RELATING TO THE REPATRIATION OF
CAPITAL AND FOREIGN CURRENCY CONTROLS AND LABOUR LAWS; 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 AND THE EFFECTS OF LABOUR LAWS IN THOSE COUNTRIES IN WHICH THE COMPANY OPERATES; 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.
DOLORES, MEXICO
“We aim to be the world’s
pre-eminent silver producer,
with a reputation for
excellence in discovery,
engineering, innovation and
sustainable development.”
MANANTIAL ESPEJO, ARGENTINA
A Senior Silver Producer
Delivering Superior Returns
Operations and Projects
In 2012, our annual consolidated silver production rose 15% to a record 25.1 million ounces and our
gold production rose 43% to a record 112,300 ounces.
Highlights of 2012
PRODUCTION
Silver (million ounces)
Gold (ounces)
Zinc (tonnes)
Lead (tonnes)
Copper (tonnes)
Cash costs per silver ounce, net of by-product credits (US$)
(1)
Total costs per silver ounce (US$)
Average price per silver ounce (US$ London fix)
Average price per gold ounce (US$ London fix)
FINANCIAL (all amounts in million US$ except per share amounts)
Net earnings
Net earnings per share attributable to common shareholders (basic)
Adjusted earnings
(2)
Adjusted earnings per share attributable to common shareholders (basic)
Operating cash flows before changes in non-cash operating working capital
(3)
Operating cash flows before changes in non-cash operating working capital per share
(3)
Dividends paid
Shares repurchased
Cash and short term investments at December 31
(4)
Working capital at December 31
STAKEHOLDERS
Common shares outstanding at December 31 (million)
Employees and contractors at December 31
2012
25.1
112,300
36,800
12,300
4,200
$12.03
$16.88
$31.26
$1,672
$87.5
$0.62
$177.9
$1.26
$215.5
$1.53
$24.9
$41.7
$542.3
$778.7
151.8
7,768
2011
21.9
78,400
37,200
12,700
4,500
$9.44
$13.51
$35.03
$1,567
$354.1
$3.31
$251.2
$2.36
$398.9
$3.26
$10.7
$94.0
$491.2
$566.4
104.5
7,622
HEAD OFFICE
Vancouver, Canada
UNITED STATES
1 Waterloo
MEXICO
2 La Bolsa*
3 Dolores
4 La Virginia
5 Alamo Dorado
6 La Colorada
PERU
7 Huaron
8 Morococha
9 Pico Machay*
BOLIVIA
10 San Vicente
ARGENTINA
11 Calcatreu*
12 Navidad
13 Manantial Espejo
*On February 24, 2013 Pan American Silver Corp.
entered into an agreement with Esperanza Resources
to sell these non-core advanced stage gold projects.
NORTH AMERICA
SOUTH AMERICA
Mining Operations
Silver Development and Advanced
Stage Exploration Projects
Gold Development and Advanced
Stage Exploration Projects
(1) Consolidated cost per ounce of silver is a non-GAAP measure. The Company believes that in addition to production costs, depreciation and amortization, and royalties, cash cost per ounce is a useful and
complementary benchmark that investors use to evaluate the Company’s performance and ability to generate cash flows and is well understood and widely reported in the silver mining industry. However,
cash cost per ounce does not have a standardized meaning prescribed by IFRS as an indicator of performance. Investors are cautioned that cash costs per ounce should not be construed as an alternative to
production costs, depreciation and amortization, and royalties determined in accordance with IFRS as an indicator of performance. The Company’s method of calculating cash costs per ounce may differ from
the methods used by other entities. See the “Cash Costs and Total Operating Costs per Ounce of Payable Silver” table on page 41 of this report for a reconciliation of this measure to the Company’s production
costs, depreciation and amortization and royalties.
(2) Adjusted earnings and adjusted earnings per share attributable to common shareholders are non-GAAP measures. Adjusted earnings is calculated as net earnings for the period adjusting for the gains
or losses recorded on fair market value adjustments on the Company’s outstanding derivative instruments, unrealized foreign exchange gains or losses, unrealized gain or loss on commodity contracts, the
transaction costs arising from the Minefinders transaction, write-down of mining assets, and gains on the disposition of mineral interests. The Company considers this measure to better reflect normalized
earnings as it does not include items which may be volatile from period to period. Please refer to page XX of this report for a reconciliation of Adjusted Earnings.
(3) Operating cash flows before changes in non-cash operating working capital is a non-GAAP measure used by the Company to manage and evaluate operating performance. The Company considers this
measure to better reflect normalized cash flow generated by operations.
(4) 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.
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PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
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Responsible Investing,
Growing Returns
It is tempting to open this letter with
yet another triumphant tone about how
well Pan American did in 2012: how
we produced record amounts of silver
and gold, generated record revenue,
produced excellent operating earnings
and adjusted earnings, maintained one
of the mining industry’s best balance
sheets, more than replaced our mined
reserves and increased our dividend
twice, including a 150 percent increase after year-end results
were published early in 2013. But the fact is that our share
price declined in 2012 by 21 percent in spite of such great
corporate results and silver prices remaining practically
unchanged during the year (opening at $29 per ounce and
closing the year at $30 per ounce), so a modest tone is perhaps
more appropriate here. The decline in our share price may be
attributed to a macro trend of investors away from silver and
gold companies generally – something that is impossible to
fight over the short term, but which I believe will not prevail
over the long term. When investor sentiment returns to the
precious metals sector, patient and supportive shareholders of
Pan American should be very well rewarded.
“Pan American is today harvesting
the returns of our investments in the
past decade - and these returns will
flow to our shareholders for many
years to come.”
That being said, I cannot be modest about singing the praises
of our operating, exploration, finance and administration
teams who work day in and day out to build Pan American into
a bigger, stronger and better company. We have one of the
strongest operating teams in the industry, with an unrivaled
record of placing five mines into production over a seven year
period, all reasonably on time and budget. I know I speak for
all shareholders in thanking all of our almost eight thousand
employees and contractors for their hard work in delivering
such excellent results, once again. I also thank our communities
and governments where we operate for their support of our
enterprise – as we provide jobs, taxes, services and spin-off
benefits to our employees, their families and the communities
and countries they live in, we are provided with services and
spin-off benefits in return. That’s the win-win recipe for mutual
success – because it is done with a spirit of mutual respect and
support. We have now very successfully operated in Peru for
17 years, in Bolivia and Mexico for 16 years and in Argentina
for 12 years. We have an exceptional record in each of those
jurisdictions for cooperative and responsible investing and
development; in return we have been rewarded for the most
part with respect by local and national governments.
The highlight of the year 2012, other than our generation
of such stellar operating results, was the acquisition of the
Dolores mine in Mexico through our takeover of Minefinders.
We bought Minefinders to upgrade our operating portfolio
with a large, de-risked silver-gold operation that gives us our
longest-life, lowest- cash-cost asset in a great mining country
where we have had such a positive experience to date through
our operation of the La Colorada and Alamo Dorado mines. We
believe the Dolores mine is and will be a cornerstone of Pan
American Silver for many years to come.
In contrast, the disappointment of the year 2012 was our
inability to commence development of our Navidad silver
deposit in Argentina. This was a personal blow since I had
championed the acquisition of Aquiline Resources in 2010 – I
did so because I thought such a large and wonderful silver
ore body as Navidad, located in such a remote region of
Argentina with no known fatal flaws to its development,
and in an emerging silver mining nation full of potential like
Argentina, would be a relatively straightforward mine to permit
and develop once the citizens of Chubut learned the real
story about how it could improve their provincial economy
and once the project was approved for development by the
provincial legislature.
During 2012, however, Argentina moved towards a more
protectionist political agenda, the province of Chubut failed
to encourage mineral investment, and general investment
and operating conditions deteriorated to the point that we
were forced to slow our development plans. All I can wish for
presently is that our inability to advance the project will not last
much longer, but we will not proceed with the development
of Navidad until the investment climate in Argentina
improves significantly.
Pan American is today harvesting the returns of our
investments in the past decade – and these returns will flow to
our shareholders for many years to come. Our cash generation
is excellent, our dividend is well supported, our balance sheet
is exceptional and our earnings growth is strong – all assuming
silver and gold prices remain at or above current levels.
Between the cash we spent in 2011 and 2012 buying back our
shares and the cash we are spending on our dividend, we are
returning to shareholders significant capital. Our prospects
are good for this to continue for the foreseeable future, and,
if Navidad is returned to a development mode and we are
successful at our La Colorada and Dolores mines expansion,
we have the internal growth prospects to significantly
increase our production once again. Strong operations, great
financial condition, powerful in-house growth potential
and an outstanding management team – these are good
ingredients for continuing strong share price performance when
equity markets again return to large capitalization precious
metals companies.
The theme of this year’s Annual Report is: Responsible
Investments; Growing Returns. “Investment” is of course not
just financial, but also human. Pan American has, in its nineteen
years of existence, invested billions of dollars in acquiring and
developing our assets and hundreds of thousands of hours
in training of our workforce. The “Returns” are also not just
financial, but human as well. We provide economic returns
for more than 100,000 people who live around and from
our operations, large tax benefits to governments for the
infrastructure, health and education of their citizens and of
course dividends and capital gains for our stockholders. One
other return is worth mentioning here – our safety dividend. In
2012 we enjoyed our best safety record in our 19-year history
– this is really a wonderful return and it has come after years of
focused work on training and equipping our mines to operate in
safer ways. I am so pleased at this outstanding result, from such
devoted work by so many in our team, and I know I speak for all
shareholders in saying to each and every one of our staff: Thank
you and WELL DONE!
Ross Beaty, Chairman
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PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
DOLORES, MEXICO
ALAMO DORADO, MEXICO
LA COLORADA, MEXICO
Responsible, Profitable Growth as
a Long-Term Strategy
As I look back on 2012, I am certainly
proud of what we accomplished. We
realized new Company records for both
silver and gold production. We posted
record sales, which helped us generate
sector leading financial results, with
adjusted earnings in 2012 of $1.26 per
share and operating cash flows of $1.53
per share. We more than replaced all of
the proven and probable silver reserves
that we mined and we distributed (through dividends and
share repurchases) one of the best real cash returns to our
shareholders, not just in the silver sector, but in the entire
mining industry. Unfortunately, these accomplishments did
not translate into a higher share price or more interest in our
company, as many investors departed from the precious metal
sector. I am proud of what we accomplished and we will remain
focused on our core strengths; responsibly and profitably
mining silver, while exercising capital discipline, where we only
invest to grow our production when we can reasonably envision
acceptable financial returns.
Pan American also took significant strides in upgrading
our mining portfolio in 2012. In January we announced an
agreement to purchase Minefinders Corporation and its flagship
Dolores mine in a $1.2 billion share transaction, the largest
acquisition in our Company’s 17-year history. The long life
Dolores mine, located in Chihuahua, Mexico (a preferred mining
jurisdiction) has been a tremendous addition to our portfolio
and helped re-balance our political risk profile away from
South America, while adding new low cost production with
outstanding exploration upside.
Shortly after completing this acquisition, we announced the
sale of our Quiruvilca mine. Quiruvilca was Pan American’s
first operating asset when it was acquired back in 1995 and
provided us with a springboard into mine operation and
development. But after 17 years of operation and with the
ore reserves nearing exhaustion, Quiruvilca had become our
smallest and highest cost operation and it was time to say thank
you and good-bye to what had been a very important asset in
our history.
Together, these two transactions clearly upgraded our
mining portfolio and as we move into 2013 and beyond we
will continue to look for opportunities to strengthen our
asset base further, either from new acquisitions or further
timely divestitures.
On the project development front we were very disappointed
at the progress or more specifically the lack of progress in
modifying the legislation in the province of Chubut, where our
world class Navidad silver deposit is located. After three years
“The driver for our long term
strategy is a disciplined approach
to sound investment; investment
which has the capacity to generate
strong returns for the benefit of
our company, our shareholders
and all our stakeholders.”
of focused and integrated effort and numerous conversations
and discussions with local communities and authorities on
the enormous economic benefits of developing Navidad in a
safe and environmentally responsible manner, we were forced
to conclude that our only reasonable course of action was
to significantly scale back our level of investment until both
the legislative and economic environment in Chubut and in
Argentina improves. Navidad is an amazing silver deposit and
one day will be Pan American’s largest and most profitable
LA COLORADA, MEXICO
SAN VICENTE, BOLIVIA
MOROCOCHA, PERU
mine, so we are by no means walking away from it, but now
is just not the right time to push forward and we will patiently
await better circumstances.
permitted operations and both are significantly lower risk. Both
of these opportunities look to be very positive projects and well
worth pursuing aggressively.
In spite of this disappointment, we are by no means standing
still lamenting this misfortune. Diverting our attention away
from Navidad in the short term has allowed us to identify two
lower risk, lower capital-intense opportunities to grow our
production base.
The first is the potential to expand our La Colorada mine.
Over the past four years through exploration, we have added
64 million ounces of silver reserves at La Colorada and in all
likelihood will add even more as we continue exploring in 2013
and beyond. These reserve additions have inspired us to ask
ourselves the question as to “What is the optimal mining rate
for La Colorada?” It seems clear that our current mining and
processing rate of 1,100 tonnes per day is sub-optimal and we
are now doing the engineering work to assess the potential and
cost to expand La Colorada to take advantage of the wonderful
exploration success that we’ve generated.
At the same time we are evaluating the potential production
increase and economics of building a mill at our Dolores
mine. Harvesting the increased silver and gold recovery that
is available from milling the Dolores ore versus the current
process of heap leaching appears to be an appealing option
for this long-life property and one we will be investigating
thoroughly in the coming months.
While neither of these opportunities can supplant the
magnitude of growth that Navidad would have provided, both
of them could potentially generate meaningful incremental
production, both of them are in Mexico and are at established,
The driver for our long term strategy is a disciplined approach
to sound investment; investment which has the capacity to
generate strong returns for the benefit of our company, our
shareholders and all our stakeholders. This is nothing new at
Pan American, as we have followed this philosophy and strategy
while we have grown our Company from 7.5 million ounces of
silver production in 2004 to over 25 million ounces last year. In
following this strategy, we hope to reassert Pan American as
the silver investment of choice by continuing to deliver strong,
predictable, profitable returns from our mine portfolio and
sharing these returns directly with our shareholders.
Pan American’s vision is “To be the world’s pre-eminent
silver producer, with a reputation for excellence in discovery,
engineering, innovation and sustainable development.” I firmly
believe that we have all the ingredients to achieve this. We
have the assets, we have an exceptionally strong balance sheet,
and perhaps most importantly, we have the most talented,
experienced and dedicated workforce in the silver sector.
To finish, I would like to acknowledge every one of our
employees, contractors and the members of our communities
for their invaluable contributions to our company during 2012.
And I would also like to thank our current and prospective
shareholders for their continued support and ongoing interest
in Pan American Silver.
Geoff Burns, President & CEO
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PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
7
Silver, A Smart Investment
Exploration Investment,
Securing Superior Returns
With the addition of the Dolores mine in April 2012, Pan
American’s production climbed to a record 25.1 million ounces
of silver and 112,300 ounces of gold. On the back of these
increases, last year our consolidated annual revenues rose to a
record $928.6 million, of which 71% was attributable to silver
and 18% was derived from gold contained in doré bars and
concentrates. Our exposure to silver has never been higher
and our total exposure to precious metals is now almost 90%.
Our policy not to hedge any of our precious metals production
translates into true exposure to increasing silver and gold
prices and an excellent vehicle for investors looking to invest
in an established cash-generating, dividend-paying precious
metals producer.
After a very volatile 2011 in which the average silver price was a
record $35.12 per ounce, 2012 was relatively more stable price-
wise. One ounce of silver traded for $28.78 on January 2nd and
it was only slightly higher at $29.95 on December 31st. In that
12-month period, silver fluctuated between a high of $37.23
in February and a low of $26.67 in July and the 2012 annual
average price per ounce was $31.15, 12% lower than in 2011.
As in previous years, the main driver of silver prices continued
to be investment demand, which according to GFMS-Thomson
Reuters’ estimates accounts for some 30% of total investment
demand and is only exceeded by industrial demand, which
accounts for some 43% of total demand. As CPM group points
out, the three rallies in silver price during 2012 (January
– February, July-October, November), were all driven by
changes in investor sentiment, specifically concerns about the
consequences of political and economic developments in the
US and Europe and seasonal trends like the wedding season
in India, which have traditionally played into the hands of gold
and silver.
In the first quarter of 2013, silver has ranged between $28.01
and $32.23 per ounce, with an average price of $30.11 per
ounce. Although analysts estimate that the silver market will
continue to be in a surplus due to growing mine production,
investor sentiment is also expected to remain strong and should
be capable of absorbing the production surplus, especially given
investors’ ongoing concerns over sovereign debt in Europe, and
expectations that the US Federal Reserve’s soft fiscal policies
(low interest rates and QE) will continue for quite some time. In
this environment, silver and gold’s current price levels should
easily entice investors to take a position or increase their silver
holdings as a safe haven and as a hedge against inflation or
further currency devaluation. According to UBS’ research, at
March 22, 2013, holdings in the 10-largest silver ETFs were
555.89 million ounces, a significant increase from the 490
million ounces reported just a year earlier.
Silver - London Fix Price (US$/oz Ag)
45
40
35
30
25
20
15
10
5
0
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PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
Since 2004, the return on Pan American’s
investment in mine-site exploration has
been outstanding. Over the last 9 years,
we have added over 229.4 ounces of new
silver reserves, 20% more than we mined
during that same period. We spent a
total of $86.1 M for mine-site exploration
during that time, adding new reserves at
an average cost of approximately $0.38
cents per ounce of silver.
Michael Steinmann, Executive Vice-President of Corporate
Development & Geology says; “Proven and probable reserves
are the base for our mine plans, daily production, and ultimately
cash flows. Replacing and increasing reserves extends the
life of our operations and secures superior returns for our
shareholders. Once again, in 2012 our strong core assets have
proven their exploration potential by providing us with another
year of reserve replacement. We have one of the largest reserves
and resources in the silver sector with 317 million ounces of silver
and 2.4 million ounces of gold in proven and probable reserves as
well as 735 million ounces of silver and 1.9 million ounces of gold
in our measured and indicated resource categories.”
In 2012, Pan American invested $18.2 million and drilled almost
156,000 meters at our operating mines. In total, we discovered
31.2 million contained silver ounces in new mineral reserves,
more than replacing the 26 million contained ounces we mined
during the year. Once again, our largest reserve addition was at
La Colorada, with 20.7 million ounces of silver added to proven
and probable mineral reserves net of the 2012 production. La
Colorada now has the second-largest reserve in our portfolio,
after the recently acquired Dolores mine, and a technical
study to determine the viability of expanding production at La
Colorada is expected in the third quarter of 2013.
In 2013, we plan to invest $16.3 million to complete
approximately 124,000 meters of diamond drilling at our mine
sites. In addition, we plan to spend $14.7 million on greenfield
exploration activities.
The table below shows the changes in proven and probable
silver mineral reserves at our operating mines in 2012.
For our complete mineral reserves and resources, please refer
to page 52.
Michael Steinmann, Executive Vice-President
of Corporate Development & Geology
Proven and Probable Mineral Silver Reserves (1)
PROPERTY
La Colorada
Alamo Dorado
Huaron
Morococha (92.2%)
San Vicente (95%)
Manantial Espejo
Quiruvilca
(2)
SUBTOTAL
(3)
Dolores
La Bolsa
TOTAL
(3)
RESERVES 2012
(Ag Moz)
MINED 2012
(Ag Moz)
GAINED/(LOST)
(Ag Moz)
RESERVES 2013
(Ag Moz)
44.1
25.8
60.9
37.1
34.1
29.1
4.2
235.3
-
-
235.3
(5.0)
(6.7)
(3.6)
(2.5)
(4.2)
(4.0)
-
(26.0)
(5.8)
-
(31.8)
25.7
-
4.3
(0.5)
5.6
(3.9)
-
31.2
76.1
4.5
111.8
64.8
19.1
61.6
34.2
35.6
21.2
-
236.4
76.1
4.5
316.9
(1) Unless otherwise noted, the December 31, 2012 Proven and Probable Mineral Reserves were estimated using cut-off grades calculated on metal prices of Ag: $25/oz, Au: $1,350/oz,
Cu: $6,500/t, Pb: $1,850/t, Zn: $1,750/t
(2) The Quiruvilca mine was divested effective June 1, 2012
(3) May not add up due to rounding
The Dolores Mine,
A Strategic Investment
The mine uses conventional open pit mining methods utilizing
shovels, loaders and haul trucks to extract the ore and deliver
it to a crushing plant, where it is crushed, conveyed to the
leach pad and placed on the pads using a stacking conveying
system. Leach solutions are applied to the heaps to dissolve the
silver and gold, is collected in a pond, then processed through
a Merrill-Crowe circuit to precipitate gold and silver. The
precipitant is recovered, dried, and melted in a furnace to form
silver/gold doré bars. The average long-term ultimate recovery
varies by ore type, but overall is estimated at 55% for silver and
72% for gold.
We had been following the evolution of the Dolores property
ever since Minefinders’ issued their feasibility study in 2006
and were able to conduct our first due diligence on the mine
in 2008. However, due to a combination of market forces
and some initial operational issues, it took several rounds
of negotiations and due diligence work to finally reach an
agreement with Minefinders to launch a friendly acquisition
in early 2012. The acquisition of Minefinders and the Dolores
mine substantially enhanced Pan American’s geographical
diversification and added a long-life, low-cost silver and gold
mine with significant optimization and expansion potential to
our portfolio of assets.
With the acquisition completed in late March 2012, we
immediately focused our efforts towards quickly and smoothly
integrating Dolores into our existing and proficient Mexican
organization. We were fortunate that there was already a solid
Dolores is our newest, lowest-cost and
longest-life mine. It is located in Mexico,
the world’s largest silver producing
country and home to two of our best and
most profitable mines, Alamo Dorado and
La Colorada.
Dolores is an open-pit operation
situated in the Sierra Madre Occidental
Mountains, in the municipality of
Madera, state of Chihuahua, 250 kilometres west of the
city of Chihuahua. Pan American acquired the mine in April
2012, when we purchased Minefinders Corporation Ltd. and
Minefinders’ wholly owned Mexican subsidiary, Compañía
Minera Dolores, S.A. de C. V. (CMD). CMD controls the Dolores,
Silvia and Unificacion Real Cananea concessions that comprise a
property of 27,700 hectares. Dolores’ surface rights are owned
by the Huizopa Ejido and CMD has surface rights agreements
with the Ejido that grant us irrevocable access and rights to
explore and mine the property for 15 years since 2006, with the
option of a 15-year extension.
Mineral exploitation of the property started in the early
1860s initially in placer deposits and eventually with lode
mining. In the early 1900s, a conventional stamp mill was
built and operated on the property until 1931, but only
sporadic production occurred until 1993, when Minefinders
acquired a land position and began exploring the area in
1995. Subsequently, Minefinders completed a series of
technical studies that ultimately lead to a feasibility study in
2006, which was the basis for today’s Dolores mine. In April
2006, Minefinders received the necessary permits and began
construction of an open pit and 16,200 tonnes-per-day heap
leach operation. Mining activities and initial commissioning of
the heap leach began in 2008.
Dolores’ gold and silver mineralization is generally associated
with quartz contained in gold-silver bearing veins, stockworks,
breccias, and replacements. Dolores’ known mineralization
extends over an area 4,000 metres long and up to 1,000 metres
wide, at elevations of 1,100 metres to 1,700 metres above
sea level. The deposit remains open at depth and along strike
with the deeper mineralization tending to be located in high
grade veins.
team of talented local professionals employed at the mine who
were eager to accept the decentralized organizational structure
that we successfully use to manage global operations, where
decision-making and accountabilities are pushed down to the
site level. As such, the transitioning of the operations group at
Dolores into our Mexican structure went exceedingly well and
resulted in outstanding performance where we produced 2.7
million ounces of silver and 43,500 ounces of gold from April 1st
to December 31st, 2012.
In addition, the timing of the acquisition enabled us to
immediately assign our industry-leading Project development
team to step in and provide support towards stabilizing and
expanding the operationally critical leach pads, which had
been marred with design and construction deficiencies since
Minefinders first started operations in 2008. Our Projects team
has made great progress towards stabilizing the leach pad 2
operation, as well as redesigning and constructing the longer
term leach pad 3 that will provide the mine operations group
relief from many nagging issues they have faced.
Meanwhile, our first class Technical Services group developed
our first mineral resource estimate for Dolores at December
31, 2012, highlighting the robustness of the deposit that
contains 76.1 million ounces of silver and 1.6 million ounces
of gold in proven and probable mineral reserves, 26.4 million
ounces of silver and 0.6 million ounces gold in measured and
indicated mineral resources and 3.4 million ounces of silver and
0.1 million ounces of gold in inferred mineral resources. For
Dolores’ complete mineral reserves and resources, please refer
to page 52 of this report.
DOLORES - 2013 AND BEYOND
We estimate that Dolores will produce 3.25 to 3.45 million
ounces of silver and 63,500 to 68,000 ounces of gold in 2013,
at cash costs of $2.25 to $3.50 per ounce of silver, net of
by-product credits. It is expected to be by far our lowest-cost
and one of our most profitable mines. However, we believe
there is additional value to be harvested at Dolores by possibly
increasing production with higher silver and gold recoveries
obtained by a milling circuit for the higher grade ores, as well
as possibly adding an underground mine to reach open-ended,
high-grade ore chutes defined outside the perimeter of the
current life of mine pit design.
We are currently evaluating a matrix of high-grade ore milling
alternatives to improve recoveries. This includes an interesting
staged approach option, where a supplemental 3-stage crushing
plant feeding a grinding circuit could be initially installed for
grinding high grade ore, ahead of an agglomeration circuit
where the ground ore would be bound to the low-grade ore.
The ore would then be placed on the leach pads and this would
lift silver and gold recoveries on the high-grade ores by some
20% and 10%, respectively in addition to providing a boost to
overall throughputs. A second stage addition to bring the high
grade circuit to a full-scale milling circuit could further boost
silver and gold recoveries by as much as another 15% and 10%,
respectively on the high-grade ores. We expect to complete our
matrix analysis of the different alternatives in the third quarter
of 2013, which will determine the optimal option to further
increase and maximize the value obtained from this mine over
its long life.
Our planned investment at Dolores in 2013 is $68 million, which
will be destined to advance pre-stripping, continue the leach
pad stabilization and expansion work we began in 2012 and to
enhance the mining fleet performance. We are also evaluating
the possibility to team up with other mining companies in the
area to build a power line to connect the mine to the national
grid, which would substantially reduce our cost of energy in
addition to reducing our carbon emissions.
The reality of Argentina’s complicated political and operational
climate taught us the value of having the geographical
diversification weighted towards stable jurisdictions. Dolores
represents exactly that, an asset with a great present and an
even better future; one that will become another cornerstone
for our company’s long-term ability to do what we do best:
profitably mine and recover silver.
Steve Busby, Chief Operating Officer
10
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
11
2012 ANNUAL REPORT
PROPERTIES AT A GLANCE
OPERATING MINES
PROPERTY
TYPE
LOCATION
MINERAL RESERVES⁽�⁾
PROVEN & PROBABLE
2012 PRODUCTION
2013 PRODUCTION FORECAST
CASH COSTS⁽�⁾
CASH COSTS⁽�⁾
SILVER
GOLD
SILVER
GOLD
(US$ PER AG OZ)
SILVER
GOLD
(US$ PER AG OZ)
La Colorada
Underground
Zacatecas, Mexico
64.8 Moz
67.1 Koz
4.4 Moz
3.6 Koz
Open Pit
Open Pit
Sonora, Mexico
19.1 Moz
78.3 Koz
5.4 Moz
18 Koz
Chihuahua, Mexico
76.1 Moz
1,616.9 Koz
2.7 Moz
43.5 Koz
Alamo Dorado
Dolores⁽�⁾
Huaron
Underground
Pasco, Peru
Morococha (92.2%)
Underground
Junin, Peru
San Vicente (95%)
Underground
Potosi, Bolivia
Manantial Espejo
Open Pit /
Santa Cruz,
61.6 Moz
34.2 Moz
35.6 Moz
N/A
N/A
N/A
2.9 Moz
0.7 Koz
2.1 Moz
2.8 Koz
3.7 Moz
N/A
Underground
Argentina
21.2 Moz
341.0 Koz
3.6 Moz
43.3 Koz
Quiruvilca⁽�⁾
Underground
La Libertad, Peru
N/A
N/A
0.3 Moz
0.4 Koz
TOTAL
312.5
2,103.2
25.1
112.3 Koz
DEVELOPMENT PROJECTS
$8.64
$5.06
$4.05
$17.51
$23.48
$18.92
$14.65
$36.33
$12.03
4.60 - 4.70 Moz
4.3 - 4.5 Koz
$9.00- $9.75
4.80 - 5.00 Moz
16.0 - 16.5 Koz
$8.25- $8.50
3.25 - 3.45 Moz
63.5 - 68.0 Koz
$2.25-3.50
2.85 - 2.95 Moz
0.5 - 1.0 Koz
$20.00-$22.00
2.40 - 2.60 Moz
2.2 - 2.5 Koz
$20.50-$22.25
3.75 - 3.85 Moz
N/A
$17.26-$18.00
3.35 - 3.45 Moz
53.5 - 57.5 Koz
$13.00-$14.25
N/A
N/A
N/A
25.0 - 26.0 Moz
140.0 - 150.0 Koz
$11.80-$12.80
PROPERTY
OWNERSHIP
LOCATION
MINERAL RESERVES⁽�⁾
PROVEN & PROBABLE
MINERAL RESOURCES
MEASURED + INDICATED
INFERRED
La Bolsa⁽⁶⁾*
Pico Machay*
Calcatreu⁽⁶⁾*
La Virginia
Navidad⁽⁶⁾
100%
100%
100%
100%
100%
SILVER
GOLD
SILVER
GOLD
LEAD
Sonora, Mexico
4.5 Moz
316.1 Koz
1.4 Moz
91.2 Koz
N/A
Huancavelica, Peru
N/A
Rio Negro, Argentina
N/A
Sonora, Mexico
Chubut, Argentina
N/A
N/A
N/A
N/A
N/A
N/A
N/A
264.6 Koz
N/A
6.6 Moz
676.0 Koz
N/A
N/A
N/A
N/A
SILVER
3.3 Moz
N/A
1.8 Moz
N/A
GOLD
222.4 Koz
445.7 Koz
226.0 Koz
N/A
N/A
LEAD
N/A
N/A
N/A
N/A
0.6 Mlb
632.4 Moz
N/A
2.9 Mlb
119.4 Moz
TECHNICAL INFORMATION
MICHAEL STEINMANN , P.GEO., EVP CORPORATE DEVELOPMENT & GEOLOGY, 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. MINERAL RESOURCE ESTIMATES FOR 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 DEFINITION STANDARDS. 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. 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. 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. INVEST ORS 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. 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. 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.
For our complete mineral reserves and resources, including additional footnotes and cautionary notes, please refer to page 52.
Notes:
⁽�⁾ Contained Ounces at December 31, 2012. 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
⁽�⁾ Cash costs per payable ounce of Ag produced, net of by-product credits
⁽�⁾ Cash costs per ounce of Ag, net of by-product credits. Price assumptions: Au $1,600/oz, Zn $1,925/tonne, Pb $1,975/tonne, Cu $7,800/tonne
⁽�⁾ Dolores’ production for the period April 1 - December 31, 2012
⁽�⁾ The Quiruvilca mine was sold to a private company effective June 1, 2012
⁽⁶⁾ Metal prices used for Navidad: Ag $12.52/oz and Pb $1,100/tonne. Metal prices used for Calcatreu: Ag $12.50/oz, Au $650/oz. Metal prices used for La Bolsa: Ag
$14/00/oz and Au $825/oz
*On February 24, 2013, Pan American Silver entered into an agreement with Esperanza Resources Corp. to sell these non-core advance stage gold projects.
12
PAN AMERICAN SILVER CORP. | ANNUAL REPORT 2012
13
14 PAN AMERICAN SILVER CORP. TABLE OF CONTENTS
Management’s Discussion and Analysis
Introduction
Core Business and Strategy
Highlights of 2012
2013 Operating Outlook
2013 Project Development Outlook
2012 Operating Performance
2012 Project Development Update
Overview of 2012 Financial Results
Investments and Investment Income
General and Administrative Expense
Related Party Transactions
Exploration and Project Development
Liquidity Position
Capital Resources
Financial Instruments
Closure and Decommissioning Cost Provision
Contractual Commitments and Contingencies
Minefinders Transaction
Purchase Allocation
Risks and Uncertainties
Significant Judgements and Key Sources of Estimation Uncertainty in the Application of Accounting Policies
Changes in Accounting Standards
Governance Corporate Social Responsibility and Environmental Stewardship
Subsequent Events
Disclosure Controls and Procedures
Mineral Reserves and Resources
15
16
17
18
20
20
28
29
34
34
35
35
36
36
37
38
38
39
39
41
46
48
50
51
51
52
This MD&A includes estimates of future silver and other metal sale prices
as well as production rates for silver and other metals, future cash and
total costs of production at each of the Company’s properties, and capital
expenditure forecast at each of the Company’s properties which are all
forward-looking estimates. No assurance can be given that the forecasted
sale prices of silver and other metals, quantities of silver and other metals
will be produced, or that projected cash costs or forecast capital costs
will be achieved. Expected future metal prices, production, cash costs
and capital costs are inherently uncertain and could materially change
over time. The Company’s mineral production, cash costs, and capital
expenditures 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 22, 2013
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,
2012 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 as issued by
the International Accounting Standards Board (“IFRS”). Pan American’s
significant accounting policies are set out in Note 2 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 and forward-looking
information within the meaning of applicable Canadian provincial securities
laws 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,
Alamo Dorado, La Colorada, Dolores, 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.
14 PAN AMERICAN SILVER CORP.
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
exploration, mine development, extraction, 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 and opportunities throughout North and South
America. The Company is listed on the Toronto Stock Exchange (Symbol:
PAA) and on the NASDAQ Exchange in New York (Symbol: PAAS).
The Company recognizes that the skills, innovation 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.
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.
Pan American’s vision is to be the world’s pre-eminent silver producer,
with a reputation for excellence in discovery, engineering, innovation
and sustainable development. To achieve this vision, we base our
business on the following strategy:
• Generate sustainable profits and superior returns on investments
through the safe, efficient and environmentally sound development
and operation of silver assets
• Constantly replace and grow our mineable silver reserves and resources
through targeted near-mine exploration and global business development
• Foster positive long term relationships with our employees, our
shareholders, our communities and our local governments through open
and honest communication and ethical and sustainable business practices
• Continually search for opportunities to upgrade and improve the quality
of our silver assets both internally and through acquisition
• Encourage our employees to be innovative, responsive and entrepreneurial
throughout our entire organization.
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 and experience 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. Caring for the environment in which we operate,
contributing to the long-term development of our host 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 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.
HIGHLIGHTS OF 2012
OPERATIONS & PROJECT DEVELOPMENT
Record Silver and Gold Production
Silver production was a record 25.1 million ounces in 2012, an increase of
15% over the 21.9 million ounces produced in 2011, while gold production
also set a new Company record at 112,300 ounces, 43% higher than
2011 production. While these increases in precious metal production
were mainly attributable to additional production from the Dolores
mine in Mexico, which was acquired upon the closing of the Minefinders
transaction on March 30, 2012, increases in silver production over 2011
were recorded at all of Pan American’s mines, other than Manantial
Espejo in Argentina. These increases in silver production more than
offset the loss of production resulting from the sale of the Quiruvilca
mine in Peru on June 1, 2012.
regulate all oil and gas and mining activities in the province. The draft
legislation incorporated the long-awaited and expected zoning of the
province, which would allow for the development of Navidad as an open
pit mine. However, the same draft legislation proposed to introduce a
series of new regulations which would significantly increase provincial
royalties and impose the province’s direct participation in all mining
projects, including Navidad. In view of the uncertainty surrounding the
legislation, the Company has been forced to place the Navidad project
on care and maintenance in the fourth quarter. As a consequence of
these events, as well as rampant inflation in Argentina, Pan American
recognized an impairment charge of $100 million against the carrying
value of the project in the fourth quarter of 2012.
The Company remains committed to the eventual development of Navidad
and to contributing to the positive economic and social development of
the province of Chubut should a more favorable legislative framework
be adopted.
Robust Proven and Probable Silver Mineral Reserves
A successful exploration and resource conversion program in 2012 more
than replaced mineral reserves that were mined during the year. As at
December 31, 2012, Proven and Probable mineral reserves totalled 317
million ounces. For the complete breakdown of mineral reserves and
resources by property and category, refer to section “Mineral Reserves
and Resources” contained herein.
Minefinders Acquisition Completed
On March 30, 2012, the Company completed the previously announced
plan of arrangement under the Business Corporations Act (Ontario)
whereby Pan American acquired all of the issued and outstanding
common shares of Minefinders. Pan American’s management believes
that the strategic benefits to shareholders resulting from the acquisition
include: (i) enhanced portfolio diversification of producing assets into a
more stable mining jurisdiction, (ii) additional near-term cash flow, (iii)
improved organic growth opportunities, (iv) a meaningful reduction of
average silver cash costs across the Company’s production portfolio, (v)
addition of significant silver and gold mineral reserves and resources with
excellent potential to increase even further through exploration; and
(vi) increases in the Company’s exposure to the prices of silver and gold.
Exploration Success
On August 15, 2012, the Company reported excellent drill results from
this year’s ongoing exploration programs at the La Colorada mine and
one of its development projects, the Waterloo silver project in San
Bernardino County, California. At La Colorada, the drill program continued
to target both oxide and sulphide mineralization with impressive results
being returned in both areas of the mine, which have been incorporated
into the December 2012 Mineral Reserves and Resources update. At
Waterloo, Pan American decided to actively evaluate the potential of the
property and started a first phase drilling campaign in 2012. The initial
drill program consisted of 11 reverse circulation (“RC”) holes for a total
of 974 metres, with all holes returning consistent high grade and wide
intersects starting from the surface in most holes. Work to evaluate
Waterloo’s development potential is continuing with a second phase of
RC and diamond drilling in order to confirm the historic mineral resource,
metallurgical testing, geological mapping and topographic surveying.
Navidad Development Pending Provincial Legislation Reform
In July 2012, Pan American reported that the Governor of the province
of Chubut submitted a draft bill to the provincial legislature that would
16 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
FINANCIAL
Record Revenue
Revenue in 2012 was a record $929 million, an increase of 9% over
2011 revenue, driven primarily by increased quantities of silver and gold
sold, partially offset by lower realized prices for silver and base metals.
Strong Margins and Adjusted Earnings ⁽�⁾
Adjusted earnings in 2012 remained healthy at $178 million or $1.26 per
share although representing a decline from 2011 results of $251 million
of $2.36 per share primarily due to lower realized prices for all metals
sold, other than gold. Pan American was able to achieve a gross margin
(mine operating earnings/revenue) of 34% in 2012 despite operating
cost pressures and the lower realized metal prices sold, other than gold,
as compared to a gross margin of 48% achieved in 2011.
⁽�⁾ Please refer to the section Alternative Performance (Non-GAAP) Measures for a detailed
description of Adjusted Earnings.
Robust Operating Cash Flow and Record Liquidity and
Working Capital Position
Cash flow from operations was $193 million, which was sufficient to
fund all of the Company’s capital programs and add to our liquidity. The
Company had cash and a short term investment balance of $542 million
2013 OPERATING OUTLOOK
and a working capital position at a record $779 million at December 31,
2012, an increase of $51 million and $212 million, respectively, from a
year ago.
Return of Value to Shareholders
Strong operating cash flow and net cash acquired from Minefinders
facilitated the continued return of value to shareholders in 2012 by way
of approximately $25 million in dividend payments and $42 million of
common share repurchases under the Company’s normal course issuer
bid programs. The Company received approval and commenced a second
share repurchase program in 2012 after completing the first program,
which started in September, 2011 and finished in July, 2012. The Company
also announced in February 2013 an increase to its existing quarterly
dividends, bringing the quarterly dividend to an industry leading $0.125
per share or $0.50 on an annual basis.
These estimates are forward-looking statements and information and they are subject to the cautionary note regarding the risks associated with
forward looking statements and information at the end of this MD&A.
The following tables set out management’s 2013 forecast for each operation’s silver production, cash and total costs per ounce, by-product
production, and expected capital investments.
SILVER PRODUCTION, CASH AND TOTAL COSTS FORECASTS
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
CONSOLIDATED TOTAL
Silver Production ounces million
4.60 - 4.70
4.80 - 5.00
3.25 - 3.45
2.85 - 2.95
2.40 - 2.60
3.75 - 3.85
3.35 - 3.45
25.00 - 26.00
Cash Costs per ounce⁽�⁾
$9.00 - $9.75
$8.25 - $8.50
$2.25 - $3.50
$20.00 - $22.00
$20.50 - $22.25
$17.26 - $18.00
$13.00 - $14.25
$11.80 - $12.80
Total Costs per ounce⁽�⁾
$10.33 - $11.08
$11.21 - $11.46
$19.02 - $20.27
$23.82 - $25.82
$26.46 - $28.16
$20.57 - $21.31
$21.06 - $22.31
$17.57- $18.57
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
reconciliation of these measures to our cost of sales. The cash cost forecasts assume by-product credit prices of $1,925/tonne ($0.87lb) for zinc, $1,975/tonne
($0.90/lb) for lead, $7,800/tonne ($3.54/lb) for copper, and $1,600/oz for gold.
Copper
tonnes
-
70 - 80
-
1,750 - 2,100
1,680 - 1,820
-
-
3,500 - 4,000
(in millions)
15.0
7.5
37.0
20.0
15.0
11.5
20.0
126.0
31.0
157.0
$
$
$
$
$
$
$
$
$
$
BY-PRODUCT PRODUCTION FORECASTS
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
CONSOLIDATED TOTAL
Gold
ounces
4,300 - 4,500
16,000 -16,500
63,500 - 68,000
500 - 1,000
2,200 - 2,500
-
53,500 - 57,500
140,000 - 150,000
Zinc
tonnes
5,000 - 5,800
-
-
11,000 - 11,700
13,500 - 15,000
6,000 - 6,500
-
36,000 - 39,000
Lead
tonnes
2,800 - 2,900
-
-
4,200 - 4,500
3,950 - 4,500
550 - 600
-
11,500 - 12,500
CAPITAL EXPENDITURE FORECASTS
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
Mine Capital
Project Development Capital (Dolores)
TOTAL CAPITAL
2013 MINE OPERATION FORECASTS
La Colorada Mine
Increased overall throughput rates, combined with stable grades and
recovery rates are expected to result in higher silver, gold and base
metal production in 2013.
Cash costs per ounce are expected to increase by between 4% and 13%
from 2012’s actual costs due to an expected increase to direct operating
costs and treatment charges with a higher component of sulfide ore
processing leading to an increase in base metal rich flotation concentrate
production, partially offset by the benefits of higher silver production
and by an increase in by-product credits.
Capital expenditures at La Colorada in 2013 are expected to decline
substantially from 2012 levels, down to $15 million. Our capital plans
at La Colorada are comprised mostly of expenditures related to mine
development and equipment purchases for the Estrella and Candelaria
mines, an Estrella mine expansion, a continuation of the near-mine
exploration drilling program, and an expansion of the crusher/plant dam.
Alamo Dorado Mine
The silver grades at Alamo Dorado are expected to decline from the 2012
levels as the reserve depletes, which is expected to result in a modest
decline in silver production in 2013 compared with 2012. Similarly,
gold grades are also expected to decline, resulting in a decrease in gold
production.
Cash costs are expected to increase sharply by 64% to 68% per ounce
over 2012 costs, as a result of expected increases in direct operating
costs coupled with lower by-product gold production. Cost increases are
expected for materials (most notably cyanide and explosives), labour,
power, security and community relations.
Capital expenditures are expected to be $7.5 million, predominantly
for pre-stripping of the phase II pit expansion, which is expected to
cost $5.6 million.
Dolores Mine
Silver grades at Dolores are expected to remain at 2012 levels in 2013;
whereas, the gold grades are expected to increase according to the areas
planned to be mined. Based on the expected grades and benefiting from
a full year of production, the mine will maintain annual silver production
rates steady with 2012 rates, resulting in 23% to 30% increased expected
silver production and 46% and 56% increased expected gold production.
Cash costs per ounce are expected to decrease in the range of 14% to 44%,
primarily due to the significantly higher gold by-product gold production
credits on a per ounce basis. Unit operating costs are expected to remain
similar to 2012’s actual costs, with increases expected in materials and
labour costs largely being offset by reductions in mine site general and
administrative costs.
Capital expenditures, excluding the leach pad expansions projects and
mine optimization projects, are expected to be $37 million, predominantly
related to mine operations, comprised of pre-stripping of approximately
$18 million, truck rehabilitation and other mobile equipment purchases
of approximately $8 million, near-mine exploration of approximately $4
million and other sustaining infrastructure of approximately $7 million. In
addition to the Dolores mine capital budget, capital expenditures relating
to the construction and expansion of the mine’s leach pads and mine
18 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
optimization projects are presented and discussed separately under the
next section, 2013 Project Development Outlook.
Huaron Mine
In 2013, we plan to modestly increase mining and milling rates at Huaron
by approximately 6% from the 2012 rates by increasing the amount of
efficient long-hole stoping mining methods in well-defined areas of the
mine. The increased throughput is expected to be offset by modestly
lower silver grades and recoveries, resulting in similar silver production
to 2012. Base metal production is also expected to remain similar to
2012 levels.
Cash costs per ounce are expected to increase by 14% to 26% over the
2012 cash costs due to higher expected operating costs combined with
a reduction in by-product credits resulting from the assumption of lower
by-product metal prices. Operating costs are expected to rise primarily
as a result of higher materials costs, wage increases, increased mine
development advances and a stronger local currency.
Capital spending plans at Huaron in 2013 are expected to reach $20
million, allowing for the continuation of long term mine developments
advances. A large portion of the budget is also allocated to complete the
significant tailings dam expansion project initiated in 2012, the purchase
and overhaul of mobile mine equipment, as well as near-mine exploration.
Morococha Mine
Tonnes milled, silver and zinc grades and recoveries at Morococha in
2013 are all expected to improve slightly compared to 2012 actuals,
resulting in an expected 15% to 25% increase in produced silver and
similar increases in by-product base metal production.
We anticipate that the improved production rates at Morococha will
result in cash costs per ounce being 5% to 13% lower than 2012 cash
costs. Base metal by-product credits are expected to remain steady as
higher levels of base metal production is expected to be offset by lower
metal prices, relative to 2012. Operating costs per tonne milled are
expected to decline over 2012 actual costs primarily as a result of the
benefit of an improvement in throughput rates and implementation of
more mechanized mining methods in certain areas, despite increased
materials costs and a stronger local currency.
Morococha’s capital budget totals $15 million, and represents a substantial
reduction from capital expenditure levels in 2012. The majority of the
capital expenditures in 2013 are planned for the mine and include ramp
development advances and ventilation system expansions, overhaul and
replacements of certain aged mobile mine equipment and near-mine
exploration activities.
San Vicente Mine
Our plans for San Vicente in 2013 contemplate a rise in throughput
rates while being able to hold silver grades and recoveries close to 2012
levels. Based on those operating parameters, San Vicente is expected to
contribute around 3.8 million ounces of silver to Pan American in 2013 for
our 95% interest. Continued development of the high-grade Litoral vein
is expected to deliver ore with higher zinc and lead grades than in 2012,
and should result in significant increases in zinc and lead production.
Cash costs per ounce are expected to decline by at least 5% over the
2012 actual cash costs due primarily to an increase in by-product credits
from higher zinc and lead production in 2013 partially offset with lower
base metal price projections. Royalties payable to Comibol, which are
calculated on operating cash flow, are expected to constitute as much
as 40% of our cash costs in 2013. Costs per tonne milled are budgeted
to increase by 7% as compared to 2012 as a result of a 10% increase in
operating costs driven predominantly by an 11% increase in materials
and a 6% increase in labour costs, partially offset by the cost benefit of
processing higher tonnage.
The capital budget for 2013 at San Vicente totals $11.5 million and
includes $5.0 million for mine development and underground mobile
equipment maintenance, and $3.6 million for a raise of the tailings dam.
Manantial Espejo Mine
Our key objectives for 2013 at Manantial Espejo are to increase plant
throughput by 7% to 2,150 tonnes per day at a slightly lower silver grade,
but a substantially higher gold grade according to the areas of mining
scheduled. Achieving the increased throughput rates is dependent on
improving mobile equipment and plant availabilities and utilizations from
2012 levels. With steady recovery rates, we expected silver production to
decline to around 3.4 million ounces and an increase to gold production
to between 53,500 and 57,500 ounces, an increase of at least 23% over
2012 gold production
Cash costs per ounce at Manantial Espejo in 2013 are expected to decline
by between 3% and 11%, thanks in large part to higher gold by-product
credits and the expectation of a continuing devaluation of the Argentine
peso. Operating costs are expected to increase by approximately 9%
due to the expectation of continued cost inflation in Argentina, which
especially affects costs of labor and consumables, largely offset by the
weaker local currency.
Capital investments in 2013 total $20 million and include the open pit
pre-strip development and equipment acquisitions, which are expected
to require $13.5 million, while another $2.5 million will be incurred in
underground mine development. Expanding and improving the camp
infrastructure and mill upgrades are both expected to require approximately
$1.1 million each.
2013 PROJECT DEVELOPMENT OUTLOOK
The Company’s 2013 Project Development efforts will be primarily
dedicated to the Dolores leach pad expansions. We anticipate project
capital spending of $31 million at Dolores, $26 million of which is related
to expanding the leach pads (pad #2 expansion and pad #3 construction)
and $5 million for initiation of an interconnecting grid power line project
as well as advancing a study to increase metal recoveries with a grinding
circuit.
2012 OPERATING PERFORMANCE
The following table reflects silver production and cash costs at each of
Pan American’s operations for 2012, as compared to 2011 and 2010.
La Colorada
Alamo Dorado
Dolores
Huaron
Quiruvilca
Morococha⁽�⁾
San Vicente⁽�⁾
Manantial Espejo
CONSOLIDATED TOTAL⁽�⁾
SILVER PRODUCTION (ounces ‘000s)
2012 2011 2010
3,702
6,721
-
2,987
1,245
2,633
3,033
3,965
24,286
4,431
5,364
2,652
2,909
275
2,083
3,726
3,632
25,075
4,296
5,300
-
2,769
881
1,712
3,130
3,767
21,855
CASH COSTS⁽�⁾ ($ per ounce)
2011
$ 7.74
$ 4.80
-
$ 14.03
$ 17.47
$ 16.11
$ 13.48
$ 7.36
$ 9.44
2012
$ 8.64
$ 5.05
$ 4.05
$ 17.51
$ 36.33
$ 23.48
$ 18.92
$ 14.65
$ 12.03
2010
$ 8.59
$ 3.16
-
$ 12.35
$ 5.87
$ 4.43
$ 8.21
$ 1.61
$ 5.69
⁽�⁾ Cash costs per ounce is a non-GAAP measurement. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed reconciliation of this
measure to our cost of sales.
⁽�⁾ Morococha data represents Pan American’s 92.2% interest in the mine’s production.
⁽�⁾ San Vicente data represents Pan American’s 95.0% interest in the mine’s production.
⁽�⁾ Totals may not add up due to rounding.
The graph below presents silver production by mine in 2012 and highlights the diverse nature of Pan American’s silver production.
Quiruvilca,
1.1%
Huaron,
11.6%
San Vicente 14.9%
Manantial
Espejo
14.5%
Dolores
10.6%
Alamo Dorado
21.4%
Morococha
8.3%
Mexico
Peru
Bolivia
Argentina
La Colorada
17.7%
In 2012, Pan American’s silver production increased by 15% from production levels in 2011 of 21.9 million ounces. While this increase was mainly
attributable to additional production from the Dolores mine, which was acquired upon the closing of the Minefinders acquisition transaction on
March 30, 2012, increases in silver production were recorded at all of Pan American’s mines, other than Manantial Espejo. These increases in silver
production more than offset the loss of production resulting from the sale of the Quiruvilca mine on June 1, 2012.
Silver production in 2012 was at the higher end of management’s forecast range of between 24.25 million and 25.5 million ounces as described
in the Q1 2012 MD&A, which incorporated production from Dolores into our forecast. Alamo Dorado, La Colorada, Huaron, Morococha, and San
Vicente were at or exceeded the high end of our guidance, while only Manantial Espejo and Dolores were below guidance.
20 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
Consolidated cash costs per ounce of silver were $12.03 in 2012, a 27% increase from 2011’s cash costs per ounce of $9.44, but in line with forecast
for the year. This increase was moderated by the contribution of low-cost ounces from Dolores, where cash costs averaged $4.05 per ounce for
the nine months under Pan American ownership. Excluding the positive influence of Dolores, the increase in cash costs were primarily due to an
11% increase in unit operating costs per tonne, which were driven by increases in mining royalties, an increase in underground mine development
rates at Huaron and Morococha, and higher labour and consumable costs. The increase in operating costs was exacerbated by a 10% decrease in
by-product credits as a result of lower gold (ex-Dolores) and base metal by-product production in 2012, combined with lower base metal prices.
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:
Gold ounces
Zinc tonnes
Lead tonnes
Copper tonnes
BY-PRODUCT PRODUCTION
2012 2011
112,283
78,426
36,848
37,234
12,266
12,701
4,162
4,544
2010
89,555
43,103
13,629
5,221
Silver/ounce
Gold/ounce
Zinc/tonne
Lead/tonne
Copper/tonne
REALIZED PRICES
2012 2011
$
35.03
$
1,567
$
2,208
$
2,402
$
8,625
31.26
1,672
1,961
2,052
7,879
2010
19.87
1,216
2,160
2,147
7,457
In 2012, production of gold increased by 43% as a result of additional
production from Dolores, which more than offset the decline at Manantial
Espejo. Base metal production declined slightly due to the loss of
production from the Quiruvilca mine, offset by increased production
from continuing operations.
As first discussed in our Q3 2012 MD&A, gold production in 2012
was trending below management’s expectations and we revised our
forecast to 114,000 ounces, below our original guidance of 124,000 to
133,000 ounces. The primary reasons for the lower than anticipated
gold production were (i) at Manantial Espejo, below planned open-pit
mining rates were achieved due to low equipment availability, largely as
importation restrictions in Argentina persisted and (ii) at Dolores, more
dilution than anticipated was incurred in certain narrow structured gold
dominant zones, resulting in lower than expected grades being stacked.
Robust base metal production in 2012 at our Peruvian and Bolivian
operations, exceeded the high end of management’s forecasted ranges
for zinc (33,000 – 34,000 tonnes), lead (11,000 – 11,500 tonnes) and
copper (2,500 – 3,000 tonnes).
An analysis of each operation’s 2012 operating performance follows, as
compared to 2011 operating performance, and management’s guidance
for 2012, as contained in the 2011 year-end MD&A.
2012 versus 2012 Guidance
Silver production at La Colorada in 2012 exceeded the top of management’s forecast range of 4.1 million to 4.26 million ounces, as higher than
expected throughput rates and grades were achieved. By-product production also benefited from better than expected throughput rates and
recoveries, resulting in gold, zinc and lead production which exceeded our guidance.
Actual cash costs of $8.64 were 9% lower than the bottom of management’s forecast range of between $9.50 and $9.90 per ounce. This positive
variance at La Colorada was driven by stronger than expected by-product credits, thanks to higher production and prices, while operating costs
were largely as expected.
Capital expenditures at La Colorada during 2012 totalled $21.7 million, which exceeded our forecast of $16.1 million. The capital was spent mainly
on advancing both oxide and sulfide tailings dam expansions; mine equipment, infrastructure and development; site infrastructure upgrades and
increased exploration drilling particularly given the successes in the Amolillo vein extensions.
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 ounce ⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands
TWELVE MONTHS ENDED DECEMBER 31,
2012
2011
1,697,941
116
0.38
85.6%
5,364,011
17,966
117
5.05
7.95
5,345,677
10,936
$
$
$
1,848,230
105
0.33
83.6%
5,299,841
16,607
66
4.80
8.29
5,278,892
8,287
$
$
$
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
reconciliation of these measures to our cost of sales.
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 ounce ⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands
$
$
$
TWELVE MONTHS ENDED DECEMBER 31,
2011
404,533
369
89.5%
4,295,783
4,104
4,466
2,388
7.74
8.99
4,093,851
13,301
2012
419,591
374
89.6%
4,431,111
3,578
5,599
2,766
8.64
9.96
4,215,075
21,700
$
$
$
⁽�⁾ Reported metal figures in the tables in this section are volume of metal produced.
2012 versus 2011
Silver production at the La Colorada mine in 2012 was 4.4 million ounces,
a 3% increase compared to the previous year. This increase was due to
higher throughput rates and slightly improved silver grades. Production
of lead and zinc benefited from higher throughput, while anticipated
lower gold grades led to a modest decrease in gold production.
Cash costs increased by 12% in 2012 compared to 2011 to $8.64 per
ounce as a result of higher operating costs while by-product credits
remained similar to the prior year as increased base metal production
was offset by lower realized prices and gold production.
Cash costs were 21% lower than the low end of our forecast range of
$6.40 to $6.80 per ounce as a result the strong silver production and
higher realized gold by-product credits resulting from stronger than
expected gold production and gold metal prices.
Capital expenditures at Alamo Dorado during 2012 totalled $10.9 million,
compared to management’s guidance of $10.3 million primarily for
waste pre-stripping, mine equipment, leach tank expansions and site
infrastructure upgrades.
2012 versus 2011
Alamo Dorado remained the Company’s largest silver producer in 2012,
with silver production of 5.4 million ounces, which was a slight increase
from the silver production achieved in 2011. Silver production saw
significantly better silver grades and recoveries, partially offset by lower
throughput rates, caused by harder ore being processed. Gold production
of approximately 18,000 ounces in 2012 represented an 8% increase
over production levels in 2011 as better gold grades and recoveries also
overcame the effects of lower throughput rates.
Alamo Dorado’s cash costs per ounce were $5.05 in 2012, a 5% increase
from the 2011 cash costs of $4.80 due to higher operating costs, partially
offset by higher gold by-product credits due to increased production and
stronger realized gold prices in 2012.
2012 versus 2012 Guidance
Alamo Dorado’s silver production in 2012 was right at the top of
management’s forecast range of 5.07 million to 5.37 million ounces, the
result of silver grades that were well above our expectations, however
throughput rates lagged. Gold production was 17% above the top of
our guidance range of 15,300 ounces as actual gold grades significantly
exceeded expectations.
22 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
DOLORES 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 ounce⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands⁽�⁾
NINE MONTHS ENDED DECEMBER 31,
2012
4,346,595
42
0.40
45.7%
78.0%
2,652,851
43,476
4.05
16.88
2,646,219
59,038
$
$
$
* Results for the nine months of 2012 that the Company operated the Dolores mine.
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
reconciliation of these measures to our cost of sales.
⁽�⁾
Sustaining capital expenditures including capital incurred on the leach pad projects as disclosed in the section Project Development Update.
2012 versus 2012 Guidance
In the first nine months under Pan American stewardship, the Dolores Mine produced 2.7 million ounces of silver and approximately 43,500 ounces
of gold. Silver production was 5% below management’s expectations of between 2.8 million and 3 million ounces, a result of mine sequencing
and unscheduled crusher repairs that resulted in less ore tonnes stacked than anticipated. Gold production was affected by more dilution than
anticipated in some more structurally controlled gold zones being mined during the year, resulting in lower than expected grades being stacked
and lagged management’s guidance of between 49,000 and 53,000 ounces in by 11%.
Cash costs for 2012 were $4.05 per ounce of silver, 19% below the $5.00 to $6.00 per ounce forecast provided by management. Operating costs
were significantly lower than anticipated, partially offset by lower silver production and lower gold credits than forecasted.
Capital expenditures at Dolores during the last nine months of 2012 totalled $59 million, primarily for ongoing leach pad construction, capitalized
stripping to develop access to ore that is to be mined in future periods, near-mine exploration drilling, mine equipment refurbishments, and camp
expansions. Management continues to focus on stabilizing the heap leach pad operation and advance a thorough analysis of additional optimization
opportunities.
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 ounce ⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands
$
$
$
TWELVE MONTHS ENDED DECEMBER 31,
2011
614,437
177
2.46%
79.1%
2,768,768
1,339
9,555
4,865
1,278
14.03
16.89
2,491,190
13,021
2012
683,483
162
2.54%
81.7%
2,909,890
655
11,824
4,727
2,257
17.51
21.02
2,506,481
22,936
$
$
$
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a
detailed reconciliation of these measures to our cost of sales.
2012 versus 2011
In 2012, mill throughput at Huaron ramped up by 11% relative to 2011
and recoveries improved by 3%, however, these increases were partially
offset by an 8% drop in silver grades, resulting in silver production that
rose by 5% year-on-year. Zinc and copper production also rose on higher
throughput rates and recoveries, by 24% and 77%, respectively. Lead and
gold production slipped on account of a drop in grades and recoveries.
Cash costs at Huaron increased by 25% in 2012 to $17.51 per ounce mainly
due to a 37% increase in underground mine development advances in
actively producing zones, general operating cost escalations and the
strengthening local currency. Cash costs benefited from a rise in by-
product credits at Huaron as higher production of zinc and copper were
only partially offset by lower lead and gold production and by lower
base metal prices in 2012.
2012 versus 2012 Guidance
Silver production in 2012 was 3% ahead of management’s forecast
of between 2.73 million and 2.82 million ounces. Throughput rates
and recoveries positively outperformed management’s expectations,
which were the same reasons that all base metal production was above
management’s guidance.
The actual cash costs in 2012 were 16% better than the bottom of our
forecast range of $20.90 to $22.70 per ounce. This positive performance
was attributable to higher by-product credits and better than expected
silver production.
Capital expenditures at Huaron during 2012 totalled $22.9 million,
compared to our forecast of $19.2 million, primarily for mine development,
equipment, a tailings dam expansion, site infrastructure upgrades and
exploration.
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 ounce⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands ⁽�⁾
TWELVE MONTHS ENDED DECEMBER 31,
2012
535,086
143
2.83%
84.9%
2,083,726
2,840
11,925
3,601
1,502
23.48
29.75
1,776,333
27,194
$
$
$
2011
483,104
128
2.74%
86.1%
1,711,668
1,691
10,676
3,050
1,522
16.11
22.19
1,520,702
17,289
$
$
$
* Production and cost figures are for Pan American’s 92.2% share only.
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
reconciliation of these measures to our cost of sales.
⁽�⁾
Sustaining capital expenditures including capital incurred at the Morococha project as disclosed in the section Project Development Update.
2012 versus 2011
Morococha’s 2012 silver production increased by 22% as compared to
2011 mainly due to an 11% increase in throughput rates combined with
12% better silver grades. Zinc, lead and gold production also benefited
from higher throughput rates, while lower copper grades and recoveries
resulted in similar production of copper to 2011.
Cash costs at Morococha increased by 46% in 2012 to $23.48 per ounce
due to the substantially higher operating costs for 2012 compared to
2011. The increase in operating costs was primarily a result of a 17%
increase in underground mine development in actively producing zones,
general operating cost escalations and the strengthening local currency.
By-product credits remained similar to the prior year as higher by-product
production was offset by lower realized prices.
2012 versus 2012 Guidance
Silver production performance at Morococha in 2012 was 14% above the
top end of management’s guidance range of 1.74 million to 1.82 million
ounces. Similarly, actual gold, lead and copper production all exceeded
our guidance ranges, while zinc production was within guidance. Mine
sequencing as well as better than expected throughput rates and grades
were the main reasons for the positive by-product production variances.
The actual cash costs in 2012 were 5% lower than the bottom end of
our forecast of $24.60 to $26.50 per ounce due primarily to actual silver
production and by-product credits being higher than expected.
Sustaining capital expenditures at Morococha during 2012 totalled $20.8
million, compared to management’s guidance of $19.3 million. The
capital spending was primarily on increased long term mine development
infrastructure upgrades, exploration drilling, as well as mine and plant
equipment replacements. In addition, the Company invested $6.4 million
in capital for the Morococha project as described in the “2012 Project
Development Update” which follows.
24 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25
SAN VICENTE MINE*
MANANTIAL ESPEJO MINE
TWELVE MONTHS ENDED DECEMBER 31,
TWELVE MONTHS ENDED DECEMBER 31,
Tonnes milled
Average silver grade – grams per tonne
Average zinc grade – %
Average silver recovery - %
Silver – ounces
Zinc – tonnes
Copper – tonnes
Lead - tonnes
Cash costs per ounce ⁽�⁾
Total costs per ounce⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands
2012
306,063
419
2.15%
90.71%
3,726,024
4,918
-
432
18.92
22.05
3,390,683
3,053
$
$
$
2011
282,960
382
2.26%
90.1%
3,130,145
4,792
649
-
13.48
17.14
2,849,243
4,975
$
$
$
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 ounce ⁽�⁾
Total costs per ounce ⁽�⁾
Payable ounces of silver
Capital Expenditures - thousands
2012
734,335
170
1.94
89.8%
94.2%
3,632,550
43,339
14.65
22.73
3,625,285
15,858
$
$
$
2011
697,205
185
2.48
90.2%
95.1%
3,766,504
52,998
7.36
15.89
3,758,971
16,916
$
$
$
* Production and interest figures are for Pan American’s 95.0% share only.
reconciliation of these measures to our cost of sales.
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
reconciliation of these measures to our cost of sales.
⁽�⁾ Cash costs per ounce and total costs per ounce are non-GAAP measurements. Please refer to section Alternative Performance (Non-GAAP) Measures for a detailed
management’s guidance range while lower than expected zinc grades
and recoveries resulted in zinc production that fell 7% short of guidance.
Actual cash costs of $18.92 were 1% above management’s forecast range
due to marginally lower than expected by-product credits on lower than
expected zinc production.
Capital expenditures at San Vicente during 2012 totalled $2.9 million,
which was below management’s forecast of $5.4 million. Capital spending
in 2012 was for mine infrastructure upgrades, additional underground
mine equipment and exploration drilling.
2012 versus 2011
In 2012, San Vicente’s silver production increased by 19% compared to
2011, mainly due to 10% better grades and 8% higher throughput. Zinc
production improved by 3% while a change in the commercial strategy
at San Vicente resulted in our silver concentrates being marketed to
lead smelters instead of copper smelters, which means that we are now
paid for the lead content of the concentrates, but not for the contained
copper. As a consequence, for 2012 we report lead production instead
of copper production.
Cash costs at San Vicente increased by 40% to $18.92 in 2012 as compared
to the previous year. The higher cash costs in 2012 resulted from the
combined effect of (i) a 113% increase in royalties as a result of increasing
the COMIBOL royalty at San Vicente following the recovery of our
investment as defined in the joint venture contract, (ii) a 44% increase
in smelting costs, primarily due to the deterioration in terms for high
silver grade concentrates, (iii) a 13% increase in operating costs, primarily
driven by increases in labour costs, and (iv) lower by-product credits due
to lower base metal prices and the switch from a copper payment to a
lead payment for our concentrates.
2012 versus 2012 Guidance
Silver production attributable to Pan American in 2012 of 3.7 million
ounces was 6% over management’s forecast range of 3.4 million to
3.52 million ounces, as silver grades surprised on the upside. Higher
than expected lead grades resulted in an 11% positive variance above
2012 versus 2011
Silver production at the Manantial Espejo mine in 2012 was 3.6 million
ounces, a 4% decrease from the production level in 2011. This decrease
was a result of an 8% decline in grades combined with a slight dip in
recoveries, which outweighed the 5% lift in throughput rates from the
previous year. Gold production dropped by 18% in 2012 due similarly
to lower gold grades and recoveries according to the mine sequencing,
which was expected to be approximately 2.05 grams per tonne. Lower
gold grades were also partially offset by higher throughput rates.
In 2012, cash costs at Manantial Espejo increased to $14.65, almost
double 2011’s cash costs of $7.36 per ounce. The main drivers of the
increase in cash costs were a 13% increase in operating costs together
with a 13% decline in by-product gold credits. The higher operating costs
were mainly due to an increase in labour costs and the effects from the
high sustained inflation rates in Argentina.
2012 versus 2012 Guidance
In 2012, Manantial Espejo’s actual throughput rates and silver grades were
below management’s forecast, resulting in 15% lower silver production
than our forecast range of 4.25 million to 4.5 million ounces. Throughput
rates were significantly challenged by mobile equipment availability issues
largely as a consequence of importation restrictions that severely limited
the flow of spare parts and materials necessary to sustain operations.
Gold production suffered for the same reasons, resulting in a 20%
negative variance compared to the lower limit of our range forecast of
54,200 to 58,400 ounces.
The actual cash costs in 2012 of $14.65 per ounce were 41% above
the forecast range of $8.60 to $10.40 per ounce. The main drivers for
the higher than expected cash costs were lower than expected silver
production, compounded by lower by-product gold credits.
Capital expenditures at Manantial Espejo during 2012 totalled $15.2
million, compared to management’s forecast capital expenditures
of $17.2 million. The capital expenditures consisted mainly of camp
upgrades, mine development including capitalized stripping, mine and
plant equipment upgrades, and infrastructure improvements.
26 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
2012 PROJECT DEVELOPMENT UPDATE
OVERVIEW OF 2012 FINANCIAL RESULTS
The following table reflects the amounts spent at each of Pan American’s significant projects in 2012, as compared to 2011 and 2010. Our accounting
policies determine what portion of the amounts spent at our projects is capitalized and what portion is expensed during the period.
Navidad
Dolores leach pads
Morococha Project
Calcatreu
Waterloo
La Preciosa
Navidad
At the Navidad project, the Company spent a total of $20.0 million in
2012, of which $11.3 million was capitalized.
Work during the first half of 2012 focused on the advancement of the
project’s Environmental Impact Assessment (“EIA”) and progressing an
updated feasibility study. Progress included updated economics based
on current capital and operating costs estimates, and the inclusion of
additional mineral resources defined by our exploration drilling program.
Work on the updated feasibility study and EIA was suspended in July 2012
pending clarity and final definition of the draft mining legislation in the
province of Chubut, Argentina where Navidad is located. Pan American
has curtailed activities related to project engineering, procurement
and development until the new the law is passed and the final tax
and royalties implications can be assessed. Local community support
activities in Chubut continued in order to sustain the social acceptance
of the project which the Company has worked hard to obtain. The EIA
is well advanced, with finalization pending on the passing of a law that
permits open pit mining in Chubut.
With the project placed on care and maintenance in the fourth quarter, as
part of the fourth quarter testing for the recoverability of asset carrying
values (impairment testing), the Company recorded a partial write-down
against the carrying value of the Navidad project. Please see the Income
Statement section of this MD&A for discussion of this non-cash charge.
Dolores
At the Dolores leach pad projects, the Company spent a total of $21.3
million in the nine months of 2012 that the mine operated under the
Company’s stewardship. Management continued to focus on achieving
increased reliability of heap leach pad #2 and advancing the construction
of pad #3 in order to stabilize the current operation and allow thorough
analysis of potential optimization opportunities.
Morococha
At the Morococha plant relocation project, the Company invested $6.4
million in 2012, largely completing this project. The main focus of the
work in 2012 included:
• Completed construction of all new surface buildings, which include
an administration building, maintenance shop, warehouse, change
TOTAL PROJECT SPENDING
2012
20,044
21,291
6,389
2,407
848
989
$
$
$
$
$
$
2011
33,200
-
26,218
1,656
-
2,400
$
$
$
$
$
$
$
$
$
$
$
$
2010
37,177
-
10,259
323
-
9,989
house, kitchen, 300 person camp, laboratory, and compressor building.
Connecting these new facilities to a power supply is scheduled to be
completed in early 2013.
• Completed new main water supply lines and new compressed air line
for the mine operations.
Waterloo
At the Waterloo project, the Company decided to actively evaluate the
potential of the property and started a drilling campaign in 2012 concluding
the year with approximately 2,700 meters of RC and diamond drilling.
Further efforts were focused on metallurgical test work, geological
mapping and geophysical surveys, the initial results of which were
encouraging of the project’s potential.
La Preciosa
In early April 2012, the Company provided notice to Orko Silver Corp.
(“Orko”) that it had decided not to deliver a feasibility study for the
La Preciosa project, as required under the terms of the joint venture
agreement between Orko and Pan American. As a result, Pan American
relinquished its right to earn a 55% interest in the La Preciosa project.
After completing almost three years of exploration, engineering and
project development work, the Company came to the conclusion that any
continued participation in the La Preciosa project is unlikely to generate
a rate of return that meets Pan American’s internal economic hurdle
rate. Because the Company had no carrying value in this project, there
was no loss on relinquishment of the project.
Calcatreu
At the Calcatreu project, the Company spent $2.4 million in 2012, all of
which was expensed. Work during the year included:
• Completion of nearly 3,000 meters of diamond drilling, mostly as
confirmation holes and the collection of fresh metallurgical samples.
Results of testing performed on these samples are still pending and
the Company has not yet had an opportunity to confirm and update
the resource estimate, which was prepared in April 2008 by Micon for
Aquiline Resources Inc., the previous owners of the project.
For the year ended December 31, 2012, the Company’s net income and cash flow from operations decreased from the comparable period in 2011.
The results were primarily due to lower realized metal prices, partially offset by higher quantities of all metals sold. A partial write-down of the
Navidad project book value was recorded in the fourth quarter of 2012 due to economic conditions having deteriorated in Argentina and the lack of
clarity with regards to progress towards a change in the law in Chubut that would allow for the construction of the mine as an open pit operation.
The following table sets out selected quarterly results for the past twelve quarters, which are stated in thousands of USD, except for the per share
amounts. The dominant factor affecting results in the quarters presented below is volatility of metal prices realized, near continuous industry wide
cost pressures, and the timing of the sales of production which varies. Results starting with the second quarter of 2012 include those of the Dolores
mine acquired with the completion of the Minefinders acquisition on March 30, 2012.
QUARTERS ENDED
YEAR ENDED
2012
Revenue
Mine operating earnings
Attributable earnings (loss) for the period
Adjusted attributable earnings for the period⁽�⁾
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash flow from (used in) operating activities
Cash dividends paid per share
Other financial information
Total assets
Total long term financial liabilities
Total attributable shareholders’ equity
2011
Revenue
Mine operating earnings
Attributable earnings for the period
Adjusted attributable earnings for the period⁽�⁾
Basic earnings per share
Diluted earnings per share⁽�⁾
Cash flow from operating activities
Cash dividends paid
Other financial information
Total assets
Total long term financial liabilities
Total shareholders’ equity
MARCH 31 JUNE 30 SEPT 30 DEC 31 DEC 31
928,594
$
251,843
311,363
$
68,160
87,513
$
22,612
177,859
$
37,604
0.62
$
0.15
0.55
0.15
$
193,305
79,507
$
0.175
0.05
$
247,335
85,011
(29,411)
55,777
(0.19)
(0.24)
81,603
0.05
200,597
56,296
43,924
15,229
0.29
0.23
(5,200)
0.0375
228,819
101,896
49,883
69,231
0.47
0.47
37,395
0.0375
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,387,979
143,022
2,719,401
$
$
$
MARCH 31 JUNE 30 SEPT 30 DEC 31 DEC 31
QUARTERS ENDED
YEAR ENDED
$
190,481
96,018
$
$
92,161
$
64,638
$
0.86
$
0.60
$
59,465
$
0.025
$
$
$
$
$
$
$
$
231,866
118,629
112,623
76,093
1.04
1.04
104,127
0.025
$
$
$
$
$
$
$
$
220,567
106,208
52,354
45,573
0.49
0.48
90,896
0.025
$
$
$
$
$
$
$
$
212,361
88,270
95,356
64,362
0.89
0.89
104,967
0.025
$
$
$
$
$
$
$
$
885,275
409,125
352,494
250,666
3.31
3.31
359,455
0.10
1,951,796
118,984
1,593,839
$
$
$
28 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
2010
Revenue
Mine operating earnings
Attributable earnings (loss) for the period
Adjusted attributable earnings for the period⁽�⁾
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
YEAR ENDED
MARCH 31 JUNE 30 SEPT 30 DEC 31 DEC 31
164,530
$
646,553
61,293
241,115
$
21
13,711
$
27,372
104,372
$
0.00
0.13
$
0.00
0.13
$
65,066
242,256
$
0.025
0.075
$
195,646
89,777
(6,324)
55,368
(0.06)
(0.07)
83,206
0.025
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
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,738,796
228,054
1,341,358
⁽�⁾ Adjusted attributable earnings for the period is an alternative performance measure. Please refer to the section, Alternative Performance (Non-GAAP) Measures,
of this MD&A for a calculation of adjusted earnings for the period.
⁽�⁾ 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.
The following graph illustrates the key factors leading to the change in adjusted net earnings between 2011 and the year ended December 31, 2012.
Analysis of the key factors and the changes is discussed in the section that follows.
$23
$10
($164)
$187
$251M
($96)
$450
$350
$250
$150
$50
h
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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 decline in realized metal prices for silver, zinc, lead and copper, however a sharp jump in the quantities of precious metals
sold in 2012 compared to 2011.
Silver – in ounces
Gold – in ounces
Zinc – in tonnes
Lead – in tonnes
Copper – in tonnes
2012
31.26⁽�⁾
1,672⁽�⁾
1,961⁽�⁾
2,052⁽�⁾
7,879⁽�⁾
$
$
$
$
$
⁽�⁾ Metal price per ounce.
⁽�⁾ Metal price stated as cash settlement per tonne.
REALIZED METAL PRICES QUANTITIES OF METAL SOLD
Year ended December 31, Year ended December 31,
2011
19,516,483
75,904
30,157
11,885
3,991
2011
35.03
1,568
2,208
2,402
8,625
2012
23,037,493
108,075
31,443
11,396
3,412
$
$
$
$
$
INCOME STATEMENT
Earnings for 2012 were $87.5 million, compared to earnings of $354.1
million in 2011. Basic earnings per share for 2012 were $0.62 compared
to $3.31 in 2011. A key reason behind the decrease in earnings was that
the Company recorded a non-cash write-down of the carrying value of
$100.0 million on the Navidad project as discussed below. Adjusted
earnings were $177.9 million for 2012 compared to $251.2 million in
2011 (please refer to the section, “Alternative Performance (Non-GAAP)
Measures”, of this MD&A for description of adjusted earnings). Adjusted
basic earnings per share for 2012 were $1.26 compared to $2.36 for
2011 which was significantly impacted by the Minefinders transaction
for which 49.4 million shares were issued. Adjusted earnings benefited
from increases in overall quantities of most metals sold, as reflected in
the tables above, but offset by decreases in the realized metal prices
received. Higher cost of sales in 2012, which includes production costs,
depreciation and amortization, and royalty expense, reflected an increase
in the quantities sold, operating costs escalation discussed in the section
“Operating Performance”, as well as higher amortization and depreciation
charges resulting from the Dolores acquisition.
Revenue for 2012 was $928.6 million, a 9% increase from revenue for
2011 of $855.3 million. This increase was driven by a $187.4 million
positive volume variance from higher quantities of most metals sold,
partially offset by a $95.8 million price variance from lower metal prices
realized, with the exception of realized gold prices, which rose by 7%
year over year.
Mine operating earnings were $311.4 million in 2012, a decrease of
24% from the $409.1 million generated in 2011. This decrease resulted
from higher cost of sales by $171.1 million outweighing an increase in
revenue as noted above. Mine operating earnings are equal to revenue
less cost of sales, which is considered to be substantially the same as
gross margin. In addition to higher operating costs in the current year,
depreciation and amortization increased as a result of newly constructed
assets put into use and the amortization of the Dolores mine costs.
A write-down of mineral property of $100.0 million was recorded as a
non-cash charge on the Navidad project. The impairment charge was a
result of deteriorated economic conditions in Argentina including rampant
inflation increasing capital and operating costs, government imposed
capital restrictions, and the nationalization of certain petroleum assets
in 2012, which resulted in higher discount rates used in the company’s
impairment testing for this project. Furthermore, the lack of progress
by the province of Chubut with regards to legislation that would allow
open pit mining at Navidad and define a tax regime that allows for
reasonable sharing of the benefits amongst stakeholders, resulted in
the incorporation of delays to the start of construction in the Company’s
economic value models for the project. In addition, the valuation models
also incorporated uncertainty in the potential tax regime outcomes,
which negatively impacted the recoverable value of the project. These
factors contributed to the Company’s decision to place the project on
care and maintenance in December 2012, and resulted in the write-down
occurring as of the year-end. The impairment charge was excluded
from adjusted earnings due to its non-recurring nature (please refer to
the section, “Alternative Performance (Non-GAAP) Measures”, of this
MD&A for a description of adjusted earnings).
The Company was required to record an impairment charge when it
determined that the accounting carrying value of approximately $568
million related to the Navidad project was greater than the higher of i)
the value estimated to be obtained from development and operation
of Navidad or ii) the proceeds realizable from the sale of the project.
At December 31, 2012, the Company tested the recoverability of its
investment in the Navidad project as required under IFRS based on the
factors described above and concluded that the recoverable amount
was $468 million. The Company used the most up to date internally
developed technical information available, a long term silver price of
$25 per ounce along with long term lead prices of $1,850 per tonne,
a probability weighted range of possible outcomes related to taxation
scenarios, regulatory and economic risks including a range of possible
future exchange rates between the USD and the Argentine peso (“ARG”)
ranging from 4.5 to 10.5 ARG/USD, and a risk adjusted project specific
discount rate of 12.5%. In addition, value was assigned to un-modeled
but in-situ resources representative of potential geologic value that
such a deposit holds. It was determined that the estimated realizable
value of the Navidad project fell short of its carrying value and thus an
impairment loss was warranted at December 31, 2012.
The Company evaluated the sensitivity of the recoverable amount of the
project to a range of taxation and regulatory outcomes together with
30 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31
a range of discount rates from 10.5% to 13.5%. These scenarios produced recoverable amounts ranging from $732 million to $353 million. Due
to the sensitivity of the recoverable amount to the various factors mentioned as well as yet unforeseen factors, any significant change in the key
assumptions and inputs could result in additional impairment charges in future periods.
Income taxes for 2012 were $93.8 million, a $23.3 million decrease from the $117.1 million income tax provision recorded in 2011 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
Provision for income taxes
2012
2011
$
$
93,857
7,193
101,050
(2,705)
(4,523)
(7,228)
93,822
$
$
110,620
(1,273)
109,347
4,133
3,638
7,771
117,118
The decrease in the provision for income taxes was primarily a consequence of decreased 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, 2012 and the comparable period of
2011 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. In addition, the 2012 effective tax rate was affected by the
non-deductible write-down of the Navidad mineral property which was not tax affected. The Company expects that these and other factors will
continue to cause volatility in effective tax rates in the future.
YEAR ENDED DECEMBER 31,
Income before taxes
Statutory tax rate
Income tax expense based on above rates
Increase (decrease) due to:
Non-deductible expenses
Increase to estimated deductible expenses not recorded in earnings
Change in net deferred assets not recognized
Non-taxable unrealized (gain) on derivatives 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
Impairment of Navidad
Other
Effective tax rate
$
$
$
2012 2011
471,264
26.5%
124,885
181,335
25%
45,334
$
$
5,196
(3,009)
5,145
(6,040)
(1,141)
9,418
2,111
(2,716)
35,003
4,521
93,822
51.7%
2,028
(12,986)
286
(26,984)
14,642
9,914
6,207
2,277
-
(3,151)
117,118
24.9%
$
⁽�⁾
The 2012 statutory income tax rates in the countries that the Company has operations in are as follows: Argentina – 35%, Bolivia – 25%, Mexico –29%, Peru – 30%.
STATEMENT OF CASH FLOWS
Cash flow from operations, generated $193.3 million in 2012, a 46%
decrease from the $359.5 million generated a year ago. A large part of
the decrease in cash flow from operations resulted from the timing of
the payment of income taxes as well as the decrease in mine operating
earnings, as discussed previously. In 2012, $152.3 million was paid in
cash income taxes largely as a result of higher taxable income generated
in 2011, whereas cash taxes paid in 2011 was $58.7 million and related
to the lower operating earnings of 2010. Changes in non-cash working
capital used $22.2 million compared with $39.4 million in 2011. The
net non-cash working capital used in 2012 consisted primarily of a $30.8
million increase in inventories which was primarily attributable to the
timing of doré and concentrate shipments as well as the buildup of ore on
the heap leach pads at Dolores, an increase of $19.1 million in accounts
receivable and prepaid expenses, which was partially offset by a $27.7
million increase in current liabilities. In 2011, non-cash working capital
was primarily increased by a $28.4 million rise in doré and concentrate
inventory, and $8.6 million added in accounts receivable.
Investing activities used $39.3 million in 2012, inclusive of $30.4 million
generated from net short-term investment liquidations and $86.5 million
net cash acquired with Minefinders. As part of the consideration paid
for Minefinders, the Company paid $165.4 million in cash but acquired
$251.9 million of cash for a net cash acquisition of $86.5 million. The
balance of investing activities consisted primarily of spending $159.9
million on capital including $11.3 million at the Navidad project and
$21.3 million related to Dolores leach pads and sustaining investments in
property, plant and equipment at Dolores, Manantial Espejo, Morococha,
La Colorada, Huaron, Alamo Dorado and San Vicente of $37.7 million,
$15.2 million, $20.8 million, $21.7 million, $22.9 million, $10.9 million
and $2.9 million, respectively. Finally, $2.0 million of refundable VAT
tax was paid in Argentina and Bolivia net of collections in addition to
other asset expenditures.
Investing activities used $172.6 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 certain capital equipment and sustaining investments in property,
plant and equipment primarily 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 and $3.9 million was paid as refundable VAT tax in
Argentina and Bolivia.
Financing activities in 2012 used $70.8 million, whereas financing
activities in 2011 used $104.1 million. Cash used in financing activities in
2012 was a result of $41.8 million used for the share buy-back program,
$24.9 million in dividend payments to our shareholders, and $6.2 million
repaid to construction and equipment leases which was offset by $3.2
million in proceeds from the exercising of options.
In 2011, the $104.1 million in cash used in financing activities consisted
primarily of $94.0 million used for the share buy-back program, $10.7
million in dividend payments to our shareholders, and $4.6 million repaid
to construction and equipment leases which was offset by $4.5 million
in proceeds from the exercising of options and warrants.
INCOME STATEMENT Q4 2012
Revenue rose compared to the fourth quarter of 2011 largely due to a
positive volume variance which combined with a modest positive price
variance. The following table reflects the metal prices that the Company
realized and the quantities of metal sold during each respective period.
Silver – in ounces
Gold – in ounces
Zinc – in tonnes
Lead – in tonnes
Copper – in tonnes
REALIZED METAL PRICES
Three months ended December 31,
QUANTITIES OF METAL SOLD
Three months ended December 31,
2012 2011
2012 2011
$
$
$
$
$
33.41⁽�⁾
1,728⁽�⁾
1,999⁽�⁾
2,239⁽�⁾
8,066⁽�⁾
$
$
$
$
$
32.49
1,683
1,964
1,980
7,100
6,104,487
30,450
7,139
2,454
1,018
5,369,259
19,296
8,410
2,877
1,038
⁽�⁾ Metal price per ounce.
⁽�⁾ Metal price stated as cash settlement per tonne.
Earnings in the fourth quarter of 2012 (“Q4 2012”) were negative with a loss of $29.4 million or $(0.19) per share compared to earnings of $95.5
million or $0.89 per share for the comparable period in 2011. As discussed previously, the Company recorded a non-cash write-down of carrying
value of $100.0 million on the Navidad project in Q4 2012 which was solely responsible for the negative earnings for the quarter. Adjusted earnings
were $55.8 million for Q4 2012, approximately the same as $55.8 million in Q4 2011 (please refer to the section, “Alternative Performance (Non-
GAAP) Measures”, of this MD&A for description of adjusted earnings). Adjusted basic earnings per share for Q4 2012 were $0.37 compared to
$0.52 for the corresponding period in 2011, impacted by the Minefinders transaction in which 49.4 million shares were issued. Adjusted earnings
32 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 33
benefited from higher revenues, however the increase in revenues was
outweighed by increased cost of sales due to operating costs escalation
described in the section “ Operating Performance” as well as the cost
increase associated with higher quantities sold. Adjusted earnings in Q4
2011 benefited from the classification of certain cash receipts as part of
the Morococha relocation project being recorded in other income for
$10.1 million while net other income in the current quarter was NIL.
Revenue for Q4 2012 was $247.3 million, a 16% increase from revenue
in the comparable period in 2011. This increase was driven by slightly
higher metal prices realized, combined with higher quantities of all
metals sold, as described above.
Mine operating earnings decreased slightly to $85.0 million in Q4 2012
from $88.3 million in the same quarter last year. Despite increased
revenue, the 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 $8.8 million from $23.5 million to $32.2 million which
is included as part of the cost of sales and attributable to the newly
acquired Dolores mine. Cost of sales for Q4 2012 of $162.3 million was an
increase of 31% from $124.1 million in the comparable period last year.
Income tax provision during Q4 2012 amounted to $19.9 million compared
to $21.3 million in Q4 2011 and was largely in line with the comparable
period on account of the flat operating earnings. As described above
for the full year 2012, the main factors which impacted the effective tax
rates for Q4 2012 versus the expected statutory rate were the unrealized
gains and losses on the Company’s warrants position, foreign income tax
rate differentials, foreign exchange gains and losses and in Q4 2012, the
non-deductible write-down of the Navidad mineral property.
STATEMENT OF CASH FLOWS Q4 2012
Cash flow from operations generated $81.6 million in Q4 2012, down
from the $105.0 million generated one year ago. Changes in non-cash
working capital used $4.5 million compared with non-cash working
capital generating $8.5 million in Q4 2011. The net non-cash working
capital used in Q4 2012 consisted primarily of an increase in accounts
receivable and prepaids of $10.1 million and an increase in inventories
of $2.7 million, which were offset by an increase in accounts payable
and accrued liabilities of $8.5 million. Additionally, cash flows from
operating activities in Q4 2012 were affected by higher income taxes
paid of $19.2 million compared to $5.5 million in the comparable period
of 2011. In Q4 2011, the net working capital generation of $8.5 million
was an aggregate of various timing differences in the normal course of
operations.
Cash flow from investing activities used $140.9 million in Q4 2012. This
consisted primarily of $77.1 million in purchases of short term investments,
and an aggregate $65.3 million primarily in capital investments at the
operating mines. Investing activities in Q4 of 2011 used $71.4 million,
which consisted primarily of $36.6 million in the purchase of short term
investments, $5.7 million spending on the Navidad project and an additional
$33.1 million in sustaining capital investments at the operating mines.
Financing activities in Q4 2012 used $20.1 million and consisted primarily
of $10.7 million used in the share buy-back program and $7.6 million
in dividend payments to our shareholders. In Q4 of 2011, financing
activities used $71.1 million and consisted primarily of $66.1 million used
for the share buy-back program and $2.6 million in dividend payments
to our shareholders.
INVESTMENTS AND INVESTMENT INCOME
At the end of 2012, cash plus short-term investments were $542.3 million
($491.2 million at December 31, 2011), as described in the “Liquidity
Position” section below.
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, 2012 totalled $6.2
million (2011 - $3.1 million) and consisted mainly of interest income and
net gains from the sales of the securities within the Company’s short-
term investment portfolio.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative costs, including share based compensation,
increased by 14% in 2012 to $20.8 million (2011-$18.3 million). This
increase was primarily as a result of the addition of new employees in
2012 and various expenses related to increased business development
activity, including increased use of consultants and travel.
Our 2013 general and administrative costs, including share based
compensation, are expected to remain similar to our 2012 level at
approximately $20.0 million. This figure is subject to fluctuations in the
Canadian dollar (“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 2013 against the general and administrative costs incurred over
the previous two years, on a per ounce of silver produced basis, a non-
GAAP measure.
General and administrative costs
(in ‘000s of USD)
Silver production (in ‘000s of ounces)
General and administrative costs per silver ounce produced⁽�⁾
ACTUAL
2011 2012
FORECAST⁽�⁾
2013
$
$
18,291
21,854
0.84
$
$
20,790
25,075
0.83
$
$
20,000
25,500
0.78
⁽�⁾
Forecast silver production at the mid-point of the guidance given in this MD&A on page 8 from the Company’s existing operations.
⁽�⁾ General and administrative costs per silver ounce produced is a non-GAAP measure used by the Company to assess the amount of general and administrative
costs relative to production. It is calculated as general and administrative costs divided by total ounces of silver production in the period.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2012, a company indirectly owned by a trust of which a director of the Company, Robert Pirooz, is a beneficiary,
was paid approximately $0.3 million (2011 - $0.4 million) for consulting services, charged to general and administrative costs. Similarly, at December
31, 2012 an accrual was recorded for consulting services from the same individual under the same arrangement for a nominal amount (2011 - $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.
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
Total
2012
7,288
1,857
9,145
$
$
2011
7,451
2,245
9,696
$
$
EXPLORATION AND PROJECT DEVELOPMENT
Exploration and project development expenses in 2012 were $36.7 million compared to $27.7 million incurred in 2011. The expenses recorded
in 2012 primarily represented the exploration and project development expenses incurred for the advancement of the Navidad project in the
early part of the year (other than those expenditures deemed evaluation work, which are capitalized), at the exploration properties acquired with
Minefinders, and for exploration activity in the vicinity of our existing mines.
The 2012 “near-mine exploration” program was successful at replacing 120% of the 2012 silver ounces mined by adding 37 million ounces to the
mineral reserve, most of the cost of which was capitalized. A total of 139,200 meters of diamond drilling was completed at the operating mines,
while an additional 29,950 meters were drilled at the Navidad, La Virginia, Calcatreu, and Waterloo projects, and 7,300 meters drilled at other
“greenfield” targets in Mexico.
Our greenfield exploration activities in 2013 are expected to cost approximately $15 million, which will be expensed. Greenfield exploration drilling
will be focused in the vicinity of our current operations (Dolores, Alamo Dorado, Morococha and Huaron) and only a few select additional projects
(La Virginia and Waterloo) will attract expenditures.
Our near-mine exploration program will continue to be very active in 2013 with approximately 123 km of drilling planned. The cost of these programs
is included as part of each mine’s capital budget (exploration and resource to reserve conversion drilling) or included in its operating costs (infill
drilling). The total amount expected to be spent on this drilling in 2013 is approximately $16.3 million. The main objective of this program is to
replace reserves and resources mined at our sites and as such, expenditures related to the this program will be capitalized. The main targets for
these resource additions include the deep sulphide zones at La Colorada, and multiple structures at Morococha and Huaron.
34 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 35
LIQUIDITY POSITION
The Company’s cash balance at December 31, 2012 was $346.2 million,
which was an increase of $83.3 million from the balance at December
31, 2011. The balance of the Company’s short-term investments at
December 31, 2012 was $196.1 million, a decrease of $32.2 million
from a year ago. The net cash and short term investment increase in
liquidity in 2012 resulted primarily from cash generated by operating
activities and the net amount acquired from Minefinders, 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, 2012 was $778.7 million, an increase
of $212.2 million from the prior year-end’s working capital of $566.4
million. The increase in working capital was mainly due to the increase
in cash and short-term investments described above plus an increase in
inventories of $134.4 million, accounts receivable of $31.2 million and
a decrease in net taxes payable of $50.1 million. These were partially
offset by an increase in account payable and other current liabilities of
$54.8 million. The increase in inventory is mainly attributable to the
Company incorporating the Dolores leach pad inventory on its books
and an increase in both silver doré inventory and concentrates inventory
due to the timing of shipments. Similarly, the addition of the Dolores
mine also increased other operating working capital accounts such as
accounts payable.
The Company’s financial position at December 31, 2012 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
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 “2013 Operating Outlook”
section of this MD&A for a more detailed description of the sustaining
capital expenditures planned for each mine in 2013.
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.
CAPITAL RESOURCES
million and 106.4 million shares for the years ended December 31, 2012,
and 2011, respectively.
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. The Company had repurchased 100% of the shares
under the program as of August 31, 2012 at an average price of $23.14
which completed this first issuer bid.
On August 29, 2012, the Company announced that the TSX accepted the
Company’s notice of its intention to initiate a second normal course issuer
bid to purchase up to 7,607,277 of its common shares, representing up
to 5% of Pan American’s issued and outstanding shares. The period of
the bid began on September 4, 2012 and will continue until September
3, 2013 or an earlier date should the Company complete its purchases.
As of the date of this MD&A, 852,900 shares have been acquired under
this second program, of which 597,900 were purchased and cancelled as
of December 31, 2012. Under the two programs, in 2012 the Company
acquired and cancelled 2,411,240 of its shares. 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. Pan American is not obligated to make any
further purchases under the program. All common shares acquired by
the Company under the share buy-back programs have been cancelled
and purchases were funded out of Pan American’s working capital.
Pan American maintains 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.
Total shareholders’ equity at December 31, 2012 was $2,719.4 million, an
increase of $1,125.6 million from December 31, 2011, primarily as a result
of the issuance of shares in the Minefinders transaction described below
and the net income of the current year, offset by the share repurchase
and cancellation program, and dividends paid. As at December 31,
2012, the Company had approximately 151.8 million common shares
outstanding for a share capital balance of $2,300.5 million. The basic
weighted average number of common shares outstanding was 140.9
As at December 31, 2012, the Company had approximately 2.2 million
stock options outstanding, with exercise prices in the range of CAD
$15.66 and $40.22 and a weighted average life of 43.8 months, including
replacement options issued to holders of Minefinders options with
the closing of the transaction. Approximately 1.6 million of the stock
options were vested and exercisable at December 31, 2012 with an
average weighted exercise price of $24.94 per share. Additionally, as
described in the section “Minefinders Transaction” and the Long Term
Debt (Note 17) in the December 31, 2012 audited financial statements,
the Company has outstanding convertible notes that could result in the
issuance of a variable amount of common shares.
The following table sets out the common shares, warrants and options
outstanding as at the date of this MD&A:
Common shares
Warrants
Options
Total
OUTSTANDING AS AT MARCH 22, 2013
151,565,635
7,814,605
1,962,026
161,342,266
The above noted 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.
FINANCIAL INSTRUMENTS
From time to time, Pan American mitigates the price risk associated with
its base metal production by committing some of its future production
under forward sales or option contracts. At December 31, 2012, the
Company had zinc option contracts for 7,500 tonnes, which have the
effect of ensuring a price between $2,000 and $2,200 per tonne on
that quantity of zinc, settling monthly between January and December
of 2013. At the date of this MD&A, these positions had an insignificant
mark-to-market valuation.
A part 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 the USD. At December 31, 2012,
the Company had foreign currency contract positions with a nominal
value of $18.0 million of Peruvian nuevo soles (“PEN”) settling between
February and November 2013 at an average PEN/USD exchange rate
of 2.62. At the date of this MD&A, these positions had an insignificant
mark-to-market valuation. The Company also held cash and short term
investments of $117.2 million in CAD and $3.8 million in Mexican pesos
at the balance sheet date.
The Company recorded a net gain on commodity and foreign currency
contracts of $0.4 million in the current year, compared to a gain of $0.7
million in 2011.
The carrying value of share purchase warrants and the conversion feature
on convertible notes are 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.
The 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 7.8
million warrants outstanding at December 31, 2012 a risk free interest
rate of 1.1%, expected stock price volatility of 43%, expected life of
1.9 years (expiry in December 2014), expected dividend yield of 1.1%,
a quoted market price of the Company’s shares on the Toronto Stock
Exchange of $18.26, an exchange rate of 1 CAD to USD of 1.01, 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 result in significant volatility of our effective tax rate.
The conversion feature of the convertible notes acquired in the Minefinders
transaction is carried at fair value and will be adjusted each period. The
Company has the right to pay all or part of the liability associated with
the Company’s outstanding convertible notes in cash on the conversion
date. Accordingly, the Company classifies the convertible notes as a
financial liability with an embedded derivative. The financial liability
and embedded derivative are recognized initially at their respective
fair values. The embedded derivative is subsequently recognized at fair
value with changes in fair value reflected in profit or loss and the debt
liability component is recognized as amortized cost using the effective
interest method. Interest gains and losses related to the debt liability
component or embedded derivatives are recognized in profit or loss. On
conversion, the equity instrument is measured at the carrying value of
the liability component and the fair value of the derivative component
on the conversion date. Assumptions used in the fair value calculation
of the embedded derivative component at December 31, 2012 were
expected stock price volatility of 47%, expected life of 2.9 years, and
expected dividend yield of 1.1%.
During the year ended December 31, 2012, the Company recorded a gain
on the revaluation of the two categories of derivatives of $24.2 million
(year ended December 31, 2011 – gain of $101.8 million).
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.
36 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 37
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 future 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 inflated and undiscounted amount of estimated cash flows required to settle the Company’s estimated future closure and decommissioning
costs is $83.5 million (2011 - $103.7 million) which has been discounted using discount rates between 3% and 13%. The provision on the statement
of financial position as at December 31, 2012 is $45.6 million (2011 - $55.8 million). Decommissioning obligations at the Alamo Dorado mine are
expected to be incurred starting in four to five years while the remainder of the obligations are expected to be paid through 2028 or later if mine
life is extended. In addition to the change in the provision due to the sale of the Quiruvilca mine and the acquisition of the Dolores mine, revisions
made to the reclamation obligations in 2012 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 2012 earnings as finance expense was $3.0 million compared to $3.3 million in 2011. Reclamation
expenditures incurred during the current year were down slightly from the previous year at $1.2 million (2011 - $2.0 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.
The Company had the following contractual obligations at the end of 2012:
PAYMENTS DUE BY PERIOD - 2012
Finance lease obligations⁽�⁾
Current liabilities
Severance accrual
Employee compensation plan⁽�⁾
Convertible notes ⁽�⁾
Total contractual obligations⁽�⁾
$
$
TOTAL WITHIN 1 YEAR⁽�⁾ 2 - 3 YEARS 4- 5 YEARS AFTER 5 YEARS
-
-
553
-
-
553
13,759
180,932
966
4,763
1,631
202,051
40,142
180,932
3,434
9,526
41,127
275,161
14,761
-
771
4,763
39,496
59,791
11,622
-
1,144
-
-
12,766
$
$
$
$
$
$
$
$
⁽�⁾
Includes lease obligations in the amount of $39.7 million (December 31, 2011 - $10.1 million) with a net present value of $36.4 million (December 31, 2011 - $9.8
million) and equipment and construction advances in the amount of $0.4 million (December 31, 2011 - $21.9 million); both discussed further in Note 16.
⁽�⁾
Includes all current liabilities as per the statement of financial position less items presented separately in this table that are expected to be paid but not accrued
in the books of the Company. A reconciliation of the current liabilities balance per the statement of financial position to the total contractual obligations within
one year per the commitment schedule is shown in the table below.
Total current liabilities per Statements of Financial Position
Add:
Future interest component of:
-
-
Future commitments less portion accrued for:
-
-
Total contractual obligations within one year
Restricted Share Units
Contribution plan
Finance lease
Convertible note
2012
196,598
$
1,286
1,631
768
1,768
202,051
$
⁽�⁾
Includes a retention plan obligation in the amount of $7.8 million (2011 - $3.5 million) that vests in two instalments, the first 50% on June 1, 2013 and the remaining
50% on June 1, 2014 and a RSU obligation in the amount of $1.7 million (2011 – N/A) that will be settled in cash. The RSU’s vest in two instalments, the first 50%
vest on December 7, 2013 and a further 50% vest on December 7, 2014.
⁽�⁾ Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition. Refer to Note 17 for further
details.
⁽�⁾ Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation, the deferred credit arising from the
Aquiline acquisition discussed in Note 18 and deferred tax liabilities.
MINEFINDERS TRANSACTION
PURCHASE ALLOCATION
On March 26, 2012, the Company announced the positive results of the
shareholder votes of the Company and of Minefinders that approved the
previously announced plan of arrangement (the “Arrangement”) allowing
Pan American to acquire all of the issued and outstanding common shares
of Minefinders. The overwhelming majority of both Pan American and
Minefinders’ shareholders voted in favour of the Arrangement at their
respective special shareholders’ meetings.
As a result, on March 30, 2012, the Company announced that it had
completed the Arrangement under the Business Corporations Act (Ontario)
whereby Pan American acquired all of the issued and outstanding
common shares of Minefinders.
Under the terms of the Arrangement, former Minefinders shareholders
who elected the full proration option received CAD$1.84 and 0.55 of
a Pan American share in respect of each of their Minefinders shares.
Former Minefinders shareholders who elected the Pan American share
option received 0.6235 Pan American shares and CAD$0.0001 for each
of their Minefinders shares, and those who elected the cash option
received CAD$2.0306 and 0.5423 of a Pan American share in respect
of each of their shares.
The purchase consideration total was $1,264.3 million, comprised of
$1,088.1 million in common shares of Pan American, (approximately
49.4 million shares issued), $165.4 million in cash, and $10.7 million
in replacement options. The Company incurred approximately $16.2
million of transaction costs.
Pan American exchanged and replaced all outstanding Minefinders
options at an exchange ratio of 0.6235 and at strike prices equivalent
to the original strike prices divided by 0.6235.
Pan American share value utilized for valuing the consideration of shares
issued was the closing price on March 30, 2012, the effective date of
the transaction.
Replacement options were valued using the Black-Scholes option pricing
model. Assumptions used were as follows:
Dividend yield
Expected volatility
Risk free interest rate
Expected life
0.3%
40.75%
0.93%
0.25 – 3.5 years
Pan American’s management believes that the strategic benefits to
shareholders resulting from the acquisition include: (i) enhanced
portfolio diversification of producing assets into a more stable mining
jurisdiction, (ii) additional near-term cash flow, (iii) improved organic
growth opportunities, (iv) a meaningful reduction of average silver cash
costs across the Company’s production portfolio, (v) addition of significant
silver and gold mineral reserves and resources with excellent potential
to increase even further through exploration; and (vi) increases in the
Company’s exposure to the prices of silver and gold.
As at December 31, 2012, the allocation of the purchase price has not
been finalized. The Company is currently in the process of determining
the fair values of identifiable assets acquired and liabilities assumed,
measuring the associated deferred income tax assets and liabilities
and determining the value of goodwill. The preliminary purchase price
allocation for the Minefinders transaction is calculated and presented
as follows, with the final allocation to be completed and presented
as part of the first quarter 2013 financial results, as required by the
applicable regulations:
38 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39
PURCHASE CONSIDERATION:
Cash
Replacement options
Fair value of Pan American shares issued
THE PURCHASE PRICE ALLOCATION WAS CALCULATED AS FOLLOWS:
Net working capital acquired (including cash of $251.9 million and receivables of $10.9 million)
Mineral property, plant and equipment (Note 11)
Goodwill
Closure and decommissioning provision (Note 15)
Long-term debt
Deferred tax liability
$
$
$
$
165,413
10,739
1,088,104
1,264,256
326,211
1,052,593
211,292
(10,880)
(49,685)
(265,275)
1,264,256
CASH AND TOTAL COST PER OUNCE RECONCILIATION
(In thousands of usd)
Production Costs
Add / (Subtract)
Royalties
Smelting, refining, & transportation
By-product credits
Worker’s participation and voluntary payments
Change in inventories
Other
Non-controlling interest
Cash Operating Costs
Add / (Subtract)
Depreciation & amortization
Closure and decommissioning provision
Change in inventories
Other
Non-controlling interest
2012 2011 2010
$
474,001 $
341,363 $
307,787
A
35,077
68,097
(303,035)
(1,573)
22,521
(2,475)
(6,914)
285,699
108,153
2,999
6,273
(746)
(1,504)
22,031
64,132
(255,820)
(5,632)
30,103
3,765
(4,099)
195,843
82,756
3,268
659
(815)
(1,334)
14,567
66,441
(253,925)
(6,230)
10,620
(5,092)
(2,114)
132,054
83,084
2,929
4,611
(755)
(1,108)
Goodwill has been preliminarily and primarily recognized as a result
of the requirement to record a deferred tax liability for the difference
between the assigned values and the tax bases of assets acquired and
liabilities assumed and none of this is deductible for tax purposes.
During the quarter ended March 31, 2012, there was nil net income
recorded for Minefinders (period from acquisition date of March 30,
2012 to March 31, 2012) while in the nine months to December 31,
2012 since the acquisition, financial results of the Minefinders group
are consolidated in the audited financial statements for the year ending
December 31, 2012. The incremental impact to the revenue of the
Company for the year ended December 31, 2012, had the acquisition
occurred on January 1, 2012, would result in an increase in the Company’s
revenue of $52.9 million. Accordingly, the Company’s revenue for the
year ended December 31, 2012 would be $981.5 million. The incremental
impact to net earnings of the Company for the year ended December 31,
2012, had the acquisition occurred on January 1, 2012, would result in
an increase in the Company’s net earnings of $9.4 million. Accordingly,
the Company’s net earnings for the year ended December 31, 2012
would be $96.9 million. Total transaction costs incurred relating to the
acquisition and recognized in the Consolidated Income Statement for
the year ended December 31, 2012 amounted to $16.2 million. The
cash flow from the acquisition of Minefinders, net of cash received,
amounted to $86.5 million.
As part of the Minefinders acquisition and pursuant to the First
Supplemental Indenture Agreement dated March 30, 2012, the Company
issued replacement unsecured convertible senior notes with an aggregate
principal amount of $36.2 million (the “Notes”). Until such time as the
earlier of December 15, 2015 and the date the Notes are converted,
each Note shall bear interest at 4.5% payable semi-annually on June
15 and December 15 of each year. The principal outstanding on the
Notes is due on December 15, 2015, if any Notes are still outstanding at
that time. Furthermore, on April 19, 2012, the Company entered into a
Second Supplemental Indenture Agreement (the “Agreement”) as part
of the Minefinders acquisition that established, amongst other terms,
the convertibility features of these Notes. Further details related to
these Notes and their convertibility can be found in the interim financial
statement Note 17, Long Term Debt.
Further details related to the Minefinders transaction can be found in
Note 6 of the consolidated financial statements.
ALTERNATIVE PERFORMANCE
(NON-GAAP) 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
2012, 2011 and 2010.
Total Costs
Payable Silver Production (000’s ounces)
Cash Costs per ounce
Total Costs per ounce
B
C
(A*$1000)/C
(B*$1000)/C
$ 400,874 $
280,377 $
220,815
23,746,108 20,753,040 23,224,367
5.69
9.51
12.03 $
16.88 $
9.44 $
13.51 $
$
$
ADJUSTED EARNINGS AND BASIC ADJUSTED EARNINGS PER SHARE
Adjusted earnings is a non-GAAP measure that the Company considers to better reflect normalized earnings as it eliminates items that may be
volatile from period to period, relating to positions which will settle in future periods, and items that are non-recurring.
ADJUSTED EARNINGS RECONCILIATION
Net earnings for the period
Adjust derivative gains
Adjust unrealized foreign exchange gains
Adjust unrealized (gains) losses of commodity contracts
Adjust acquisition costs
Adjust gain on sale of mineral property
Adjust write-down of mineral assets
Adjusted earnings for the period
Basic weighted average shares outstanding
Basic adjusted EPS
RISKS AND UNCERTAINTIES
2012 2011
87,513
$
$
(24,159)
6,124
(25)
16,162
(7,765)
100,009
177,859
140,883
1.26
$
$
$
$
$
$
354,146
(101,828)
(1,071)
-
-
-
-
251,247
106,434
2.36
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, 2012. 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.
FOREIGN JURISDICTION 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 in the following section. The Company is unable to determine the impact of these risks on
40 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41
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.
All of Pan American’s current production and revenue is derived from its
operations in Peru, Mexico, Argentina and Bolivia, where the majority of Pan
American’s operations are conducted. As Pan American’s business is carried
on in a number of developing countries, it is exposed to a number of risks
and uncertainties, including the following: expropriation or nationalization
without adequate compensation; economic and regulatory instability;
military repression and increased likelihood of international conflicts or
aggression; possible need to obtain political risk insurance and the costs
and availability of this and other insurance; unreliable or undeveloped
infrastructure; labour unrest; lack of availability of skilled labour; difficulty
obtaining key equipment and components for equipment; regulations
and restrictions with respect to import and export and currency controls;
changing fiscal regimes; high rates of inflation; the possible unilateral
cancellation or forced renegotiation of contracts; unanticipated changes
to royalty and tax regimes; extreme fluctuations in currency exchange
rates; volatile local political and economic developments; uncertainty
regarding enforceability of contractual rights; difficulty understanding
and complying with the regulatory and legal framework respecting the
ownership and maintenance of mineral properties, mines and mining
operations, and with respect to permitting; violence and more prevalent
or stronger organized crime groups; terrorism and hostage taking;
difficulties enforcing judgments obtained in Canadian or United States
courts against assets and entities located outside of those jurisdictions;
and increased public health concerns. In most cases, the effect of these
factors cannot be accurately predicted.
The Company’s Mexican operations Alamo Dorado and La Colorada,
suffered from armed robberies of doré within the past three 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.
Local opposition to mine development projects has arisen in Peru in
the past, and such opposition has at times been violent. In particular, in
November 2004, approximately 200 farmers attacked and damaged the
La Zanja exploration camp located in Santa Cruz province, Peru, which
was owned by Compañía de Minas Buenaventura and Newmont Mining
Corporation. One person was killed and three injured during the protest.
There can be no assurance that similar local opposition will not arise
in the future with respect to Pan American’s foreign operations. If Pan
American were to experience resistance or unrest in connection with
its foreign operations, it could have a material adverse effect on Pan
American’s operations or profitability.
offshore shareholders. Maintaining operating revenues in Argentine pesos could expose the Company to the risks of peso devaluation and high
domestic inflation.
On September 22, 2011, Peru’s Parliament approved a law that increased
mining taxes to fund anti-poverty infrastructure projects in the country,
effective October 1, 2011. The law changed the scheme for royalty
payments, so that mining companies that had not signed legal stability
agreements with the government had 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 were subject
to a “special tax” at a rate ranging from 2% to 8.4% of operating profit.
Companies that had 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 change in the royalty
and the new tax had no material impact on the results of the Company’s
Peruvian operations.
Government regulation in Argentina related to the economy has increased
substantially over the past year. In particular, the government has
intensified the use of price, foreign exchange, and import controls in
response to unfavourable domestic economic trends. An example of the
changing regulations which have affected the Companies activities in
Argentina was the Argentinean Ministry of Economy and Public Finance
resolution that reduced the time within which exporters were required
to repatriate net proceeds from export sales from 180 days to 15 days
after the date of export. As a result of this change, the Manantial Espejo
operation temporarily suspended doré shipments earlier this year while
local management reviewed how the new resolution would be applied
by the government. In response to petitions from numerous exporters
for relief from the new resolution, shortly thereafter the Ministry issued
a revised resolution which extended the 15-day limit to 120 days and
the effect of the delayed shipments and sales was made up during the
quarter ended September 30, 2012.
The Argentine government has also imposed restrictions on the importation
of goods and services and increased administrative procedures required
to import equipment, materials and services required for operations at
Manantial Espejo. In addition, in May 2012, the government mandated
that mining companies establish an internal function to be responsible
for substituting Argentinian-produced goods and materials for imported
goods and materials. Under this mandate, the Company is required to
submit its plans to import goods and materials for government review
120 days in advance of the desired date of importation.
The government of Argentina has also tightened control over capital
flows and foreign exchange, including informal restrictions on dividend,
interest, and service payments abroad and limitations on the ability of
individuals and businesses to convert Argentine pesos into United States
dollars or other hard currencies. These measures, which are intended to
curtail the outflow of hard currency and protect Argentina’s international
currency reserves, may adversely affect the Company’s ability to convert
dividends paid by current operations or revenues generated by future
operations into hard currency and to distribute those revenues to
In early 2009, a new constitution was enacted in Bolivia that further entrenches the government’s ability to amend or enact certain laws, including
those that may affect mining. 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 and this has caused some concerns amongst foreign companies doing business in
Bolivia due to the government’s policy objective of nationalizing parts of the resource sector. 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 it is expected that normal operations will continue status quo. Pan American will take every measure available to enforce its
rights under its agreement with COMIBOL, but there is no guarantee that governmental actions will not impact the San Vicente operation and its
profitability. 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.
In December 2012, the Mexican government introduced changes to the Federal labour law which made certain amendments to the law relating to
the use of service companies and subcontractors and the obligations with respect to employee benefits. These amendments may have an effect on
the distribution of profits to workers and this could result in additional financial obligations to the Company. At this time, the Company is evaluating
these amendments in detail, but currently believes that it continues to be in compliance with the federal labour law and that these amendments
will not result in any new material obligations for the Company. Based on this assessment, the Company has not accrued any amounts for the
year ended December 31, 2012. During 2013, the Company will continue to monitor developments in Mexico and to assess the potential impact
of these amendments.
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 strategies, including employing qualified and experienced 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 significant 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.
EXPECTED 2013 REVENUE (000’S USD)
GOLD PRICE
E
C
I
R
P
R
E
V
L
I
S
$27.00
$29.00
$30.00
$32.00
$34.00
$36.00
$38.00
$40.00
$1,600 $1,700 $1,800 $1,900 $2,000
$967,749
$1,013,661
$1,036,617
$1,082,529
$1,128,441
$1,174,353
$1,220,265
$1,266,177
$953,707
$999,619
$1,022,575
$1,068,487
$1,114,399
$1,160,311
$1,206,223
$1,252,135
$939,664
$985,576
$1,008,532
$1,054,444
$1,100,356
$1,146,268
$1,192,180
$1,238,092
$925,621
$971,533
$994,490
$1,040,402
$1,086,314
$1,132,226
$1,178,138
$1,224,050
$911,579
$957,491
$980,447
$1,026,359
$1,072,271
$1,118,183
$1,164,095
$1,210,007
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.
42 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 43
CASH COST PER OUNCE OF SILVER PRODUCED (USD/OZ)
GOLD PRICE
E
C
I
R
P
C
N
I
Z
$1,850
$1,875
$1,900
$1,925
$1,975
$2,000
$2,250
$2,275
$1,600
$12.26
$12.24
$12.21
$12.18
$12.14
$12.11
$11.88
$11.86
$1,700
$11.69
$11.66
$11.63
$11.61
$11.56
$11.54
$11.31
$11.28
$1,800
$11.12
$11.09
$11.06
$11.03
$10.99
$10.96
$10.73
$10.71
$1,900
$10.54
$10.51
$10.48
$10.46
$10.41
$10.39
$10.16
$10.13
$2,000
$9.97
$9.94
$9.91
$9.89
$9.84
$9.82
$9.58
$9.56
The Company has long-term contracts to sell the zinc, lead and copper
concentrates produced by the 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 2012 and at the date of this MD&A, the DRP smelter remains
closed and Pan American is owed approximately $8.2 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.
At December 31, 2012 the Company had receivable balances associated
with buyers of our concentrates of $39.1 million (2011 - $40.5 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, 2012 the Company had approximately
$48.8 million (2011 - $35.9 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.
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, 2012, the Company has $36.4 million in lease obligations
(2011 - $9.8 million), equipment and construction advances of $0.4 million
(2011 - $21.9 million) that are subject to an annualized interest rate of
2.2% and unsecured convertible notes with a principal amount of $36.2
million (2011 – N/A) that bear interest at 4.5%, payable semi-annually
on June 15 and December 15. The interest paid by the Company for the
year ended December 31, 2012 on its lease obligations and equipment
and construction advances was $1.4 million (2011 – $0.5 million). The
interest paid by the Company for the year ended December 31, 2012
on the convertible notes was $1.6 million (2011 – N/A). The average
interest rate earned by the Company during the year ended December
31, 2012 on its cash and short term investments was 0.5%. A 10%
increase or decrease in the interest earned from financial institutions on
cash and short term investments would result in a $0.3 million increase
or decrease in the Company’s before tax earnings (2011 – 0.1 million).
EXCHANGE RATE RISK
Pan American 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 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:
MXN/USD
11.00
109%
108%
106%
105%
104%
12.00
106%
105%
104%
102%
101%
13.00
104%
102%
101%
100%
99%
14.00
102%
100%
99%
98%
97%
15.00
100%
99%
97%
96%
95%
E 2.00
2.20
2.40
2.60
2.80
C
I
R
P
R
E
V
L
I
S
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, 2012, the Company had $18.0 million in PEN forward positions, and
was holding approximately 23% of its cash and short term investment
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.
LIQUIDITY RISK
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.
The Company manages its 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.
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.
EMPLOYEE RELATIONS
Pan American’s business depends on good relations with its employees.
At December 31, 2012 there were approximately 7,768 employees and
employees of mining contractors performing work for the Comp[any,
of which approximately 60% were represented by unions or covered by
union agreements in Mexico, Peru, Argentina and Bolivia. 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.
44 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 45
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- or current 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
Commitments and Contingencies Note 27 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.
SIGNIFICANT JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY 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.
Readers should also refer to Note 2 of the consolidated financial statements
for the year ended December 31, 2012, for the Company’s summary of
significant 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 evaluation costs: The Company has determined that
evaluation costs capitalized during the year relating to the operating
mines, the Navidad project and certain other exploration interests have
potential future economic benefits and are potentially economically
recoverable, subject to impairment analysis as discussed in Note 12 of
the consolidated financial statements. In making this judgement, the
Company has assessed various sources of information including but not
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. As
at December 31, 2012, the Company capitalized a total of $11.3 million
(2011 - $22.3 million) of evaluation costs and mineral property, plant
and equipment including additions of $0.9 million (2011 - $2.4 million).
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.
Functional currency: The functional currency for the Company and its
subsidiaries 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 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.
A business consists of inputs, including non-current assets and processes,
including operational processes, that when applied to those inputs have
the ability to create outputs that provide a return to the Company and
its shareholders.
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 on a units of production basis over the reserves
that directly benefit from the specific stripping activity. As at December
31, 2012, the carrying amount of stripping costs capitalized was $22.1
million comprised of Manantial - $5.3 million, Dolores - $13.5 million
and Minera Corner Bay - $3.2 million (2011 - $1.6 million comprised of
$1.6 million, nil, and nil, respectively).
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 holder subsequently
selected the Silver Stream contract. The convertible debenture is classified
and accounted for as a deferred credit. 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, 2012,
the carrying amount of the deferred credit arising from the Aquiline
acquisition was $20.8 million (2011 - $20.8 million).
Convertible Notes: The Company has the right to pay all or part of the
liability associated with the Company’s outstanding convertible notes
in cash on the conversion date. Accordingly, the Company classifies the
convertible notes as a financial liability with an embedded derivative.
The financial liability and embedded derivative are recognized initially
at their respective fair values. The embedded derivative is subsequently
recognized at fair value with changes in fair value reflected in profit or
loss and the debt liability component is recognized at amortized cost
using the effective interest method. Interest gains and losses related to
the debt liability component or embedded derivatives are recognized
in profit or loss. On conversion, the equity instrument is measured at
the carrying value of the liability component and the fair value of the
derivative component on the conversion date.
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.
“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 and geological
interpretation. Differences between management’s assumptions including
economic 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.
Valuation of Inventory: In determining mine production costs recognized
in the consolidated income statement, the Company makes estimates
of quantities of ore stacked in stockpiles, placed on the heap leach pad
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, 2012, the
carrying amount of current inventories excluding supplies was $215.0
million (2011 - $99.7 million). Refer to Note 10 of the consolidated
financial statements for further details.
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 prospectively. A change in the mineral reserve
estimate for assets depreciated using the units of production method
would impact depreciation expense prospectively.
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. 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 amount of mining interests. Internal sources of
information include the manner in which mineral property, plant and
equipment are being used or are expected to be used and indications
of the 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. At December 31, 2012, it
was determined that the estimated recoverable amount of the Navidad
project was below its carrying value and an impairment charge of $100.0
million was warranted as discussed previously.
Mineral reserve estimates: The figures for mineral reserves and mineral
resources are determined in accordance with National Instrument 43-101,
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
46 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 47
IAS 32 Financial Instruments: Presentation. The amendments to IAS 32
address inconsistencies in current practice when applying the requirements.
The amendments also provided relief from the requirements to restate
comparative financial statements for the effects of applying IFRS 9. The
Company is currently evaluating the impact the final standard is expected
to have on its consolidated financial statements.
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, 2012, the carrying amount of the Company’s provision
for the closure and decommissioning cost obligation was $45.6 million
(2011 - $55.8 million). Refer to Note 15 of the consolidated financial
statements for further details.
Income taxes and recoverability of deferred tax assets: In assessing the
probability of realizing income tax assets recognized, the Company makes
estimates related to expectations of future taxable income, 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.
CHANGES IN ACCOUNTING
STANDARDS
Accounting standards effective in 2013 and 2015 are disclosed in the
Company’s consolidated financial statements for the year ended December
31, 2012, Note 3. The following standards are effective in future periods:
ACCOUNTING STANDARDS 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. The application of IFRS 10 will not have
a significant impact on the Company’s consolidated financial statements.
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. The Company has completed
its assessment on this standard and concluded that this standard will
not have an impact on the consolidated financial statements.
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. The Company
has completed its assessment on this standard and concluded that this
standard will not have an impact on the consolidated financial statements.
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. The Company has completed its assessment on
this standard and concluded that this standard will not have an impact
on the consolidated financial statements.
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 application of the amended IAS 19 will not have
a significant impact on the consolidated financial statements.
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 application of IFRIC 20 will not have
a significant impact on the consolidated financial statements.
ACCOUNTING STANDARDS EFFECTIVE
JANUARY 1, 2015
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. IASB
approved amendments to IFRS 7 Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. The
common disclosure requirements issued by the IASB and the FASB in
December 2011 are intended to help investors and other users to better
assess the effect or potential effect of offsetting arrangements on a
company’s financial position. In addition, the IASB clarified aspects of
48 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 49
GOVERNANCE CORPORATE SOCIAL RESPONSIBILITY
AND ENVIRONMENTAL STEWARDSHIP
GOVERNANCE
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 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 eight
directors, six of whom are independent. 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.
COMMUNITY RELATIONS
We are committed to creating sustainable value in the communities
where our people work and live. Guided by research conducted by our
local offices, we participate in, and contribute to numerous community
programs. They typically center on education and health, nutrition,
environmental awareness, local infrastructure and alternative economic
activities. Some of our key initiatives are:
• Strengthening the production chain of livestock breeding.
• Value adding through the development of alpaca textiles weaving
workshops with product commercialization in North America.
• Improving nutrition, focusing on children and pregnant women.
• Promoting community health with emphasis on immunizations,
optometry, 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.
ENVIRONMENTAL STEWARDSHIP
We are committed to operating our mines and developing our new projects
in an environmentally responsible manner guided by our Corporate
Environmental Policy, we take every practical measure to minimize the
environmental impacts of our operations in every phase of the mining
cycle, from early exploration through development, construction and
operation, up to and after the mine’s closure.
We build and operate mines in varied environments across the Americas.
From the Patagonian plateau to the Sierra Madre in Mexico, our mines are
generally located in isolated places where information about environmental
and cultural values is often limited. Our mines in Peru and Bolivia are
situated in historic mining districts where previous operations have left
significant environmental liabilities that have potential to impact on
surrounding habitats and communities.
We manage these challenges using best practice methods in environmental
impact assessment and teams of leading local and international
professionals who clearly determine pre-existing environmental values
at each location. These extensive baseline studies often take years of
work and cover issues such as biodiversity and ecosystems, surface and
groundwater resources, air quality, soils, landscape, archeology and
paleontology, and the potential for acid rock drainage in the natural
rocks of each new mineral deposit or historic waste or tailings dump.
The data collected often significantly advances scientific knowledge
about the environments and regions where we work.
The baseline information is then used interactively in the design of each
new mine or to develop management and closure plans for historic
environmental liabilities, in open consultation with local communities and
government authorities. We conduct detailed modeling and simulation of
the environmental effects of each alternative design in order to determine
the optimum solution, always aiming for a net benefit.
Once construction and operations begin, we conduct regular monitoring
of all relevant environmental variables in order to measure real impacts
against baseline data and report to the government and communities on
our progress. Community participation in environmental monitoring is
encouraged across all our mines. We implement management systems,
work procedures and regular staff training to ensure optimum day-to-
day management of issues like waste separation and disposal, water
conservation, spill prevention, and incident investigation and analysis.
We conduct corporate environmental audits of our operations to ensure
optimum environmental performance. Environmental staff from all mines
participate in the audits which improves integration and consolidation
of company-wide standards across our operations. In 2012, audits were
conducted at Morococha, San Vicente and Huaron mines.
SUBSEQUENT EVENTS
On February 24, 2013, the Company signed an agreement with Esperanza
Resources Corp. which contemplates the transfer of certain non-core
gold assets in the Company’s mineral property portfolio including the
La Bolsa, Calcatreu and Pico Machay early stage projects to Esperanza.
Preliminary details of the proposed transaction are that in exchange
for these properties plus CAD $35 million dollars; the Company would
receive an aggregate of 71.5 million shares and 10 million warrants (at
a CAD $1.80 strike price). Also, the Company plans to make available a
CAD $15 million standby convertible credit facility. The financial effect
cannot be determined due to the early stage of this transaction. The
transaction is expected to close during the second quarter of 2013.
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, 2012, 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, 2012, 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 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 as issued
by the International Accounting Standards Board (“IFRS”). 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, 2012, 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 concludes that, as
of December 31, 2012, Pan American’s internal control over financial
reporting is effective.
Management excluded from its assessment the internal control over
financial reporting at Minefinders Corporation Ltd. (“Minefinders”)
which was acquired on March 30, 2012. This interest consists of the
Company’s 100% interest in the Dolores gold and silver mine located
in Mexico and other exploration properties in Mexico and the United
States. Minefinders’ financial statements constitute 44% and 42% of
the Company’s total and net assets, respectively, 15% of the Company’s
revenues, 11% of the Company’s earnings from operations and 20% of
the Company’s net earnings as of and for the year ended December 31,
2012. As permitted under National Instrument 52-109 Certification of
Disclosure, the Company will include its assessment of Minefinders’
internal control over financial reporting in its 2013 annual management
report on internal control.
Management reviewed the results of management’s assessment with
the Audit Committee of the Company’s Board of Directors. Deloitte
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, 2012. Deloitte LLP has provided
such opinions.
50 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 51
MINERAL RESERVES AND RESOURCES
MINERAL RESOURCES – INFERRED
LOCATION
CLASSIFICATION
Huaron
Peru
Morococha (92.2%)
Peru
La Colorada
Mexico
Dolores
Mexico
Alamo Dorado
Mexico
La Bolsa
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
TOTALS⁽i⁾
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven
Probable
Proven + Probable
TONNES
(Mt)
6.6
4.7
2.8
2.7
2.0
3.1
49.4
38.4
6.0
1.7
9.5
6.2
3.4
1.8
1.9
0.8
140.8
AG
(g/t)
171
171
187
203
397
390
29
25
74
89
10
7
127
129
428
395
70
CONTAINED AG
(Moz)
36.1
25.5
16.8
17.4
25.8
39.0
45.6
30.5
14.3
4.8
3.1
1.4
13.9
7.3
25.8
9.8
316.9
Au
(g/t)
N/A
N/A
N/A
N/A
0.38
0.42
0.59
0.55
0.25
0.55
0.67
0.57
2.02
2.11
N/A
N/A
0.62
CONTAINED
Au (000’s oz)
N/A
N/A
N/A
N/A
24.9
42.1
934.4
682.5
48.9
29.4
203.0
113.1
221.8
119.2
N/A
N/A
2,419.4
Cu
(%)
0.32
0.27
0.58
0.60
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.39
MINERAL RESOURCES – MEASURED AND INDICATED
LOCATION
CLASSIFICATION
Huaron
Peru
Morococha (92.2%)
Peru
La Colorada
Mexico
Dolores
Mexico
Alamo Dorado
Mexico
La Bolsa
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Navidad
Argentina
Pico Machay
Peru
Calcatreu
TOTALS⁽i⁾
Argentina
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Measured
Indicated
Indicated
Measured +
Indicated
TONNES
(Mt)
1.0
0.8
1.0
1.3
0.2
2.0
6.1
31.2
0.0
1.2
1.4
4.5
2.9
3.8
0.5
0.2
15.4
139.8
4.7
5.9
8.0
231.8
Ag
(g/t)
151
148
191
217
161
268
23
22
54
78
11
9
119
81
131
116
137
126
N/A
N/A
26
103
CONTAINED
Ag (Moz)
4.9
3.6
6.1
8.8
1.1
17.1
4.5
21.9
0.1
2.9
0.3
1.1
11.1
9.8
2.2
0.9
67.8
564.5
N/A
N/A
6.6
735.4
Au
(g/t)
N/A
N/A
N/A
N/A
0.12
0.32
0.46
0.53
0.35
0.30
0.90
0.50
1.43
0.99
N/A
N/A
N/A
N/A
0.91
0.67
2.63
0.85
CONTAINED
Au (000’s oz)
N/A
N/A
N/A
N/A
0.8
20.7
89.4
531.6
0.5
11.4
31.4
59.8
133.3
120.0
N/A
N/A
N/A
N/A
137.5
127.1
676.0
1,939.5
Cu
(%)
0.63
0.83
0.61
0.46
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.30
0.09
0.10
0.04
N/A
N/A
N/A
0.06
Pb
(%)
1.34
1.40
1.32
1.36
1.21
1.73
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.51
0.42
1.30
Pb
(%)
1.94
1.76
1.42
1.65
0.66
0.49
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1.44
0.79
N/A
N/A
N/A
0.87
Zn
(%)
2.90
2.84
3.51
3.47
2.28
3.20
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.98
3.23
3.02
Zn
(%)
3.00
2.93
3.85
3.17
0.95
0.76
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.06
1.66
N/A
N/A
N/A
N/A
N/A
2.33
PROPERTY
LOCATION
CLASSIFICATION
Huaron
Morococha (92.2%)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Manantial Espejo
San Vicente (95%)
Navidad
Pico Machay
Calcatreu
TOTALS⁽i⁾
Peru
Peru
Mexico
Mexico
Mexico
Mexico
Argentina
Bolivia
Argentina
Peru
Argentina
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
HISTORICAL ESTIMATES
TONNES
(Mt)
8.8
5.3
2.0
6.3
0.0
13.7
1.6
2.8
45.9
23.9
3.4
113.7
Ag
(g/t)
165
191
304
17
156
8
89
347
81
N/A
17
91
CONTAINED
Ag (Moz)
46.5
32.4
20.0
3.4
0.0
3.3
4.6
31.4
119.4
N/A
1.8
262.8
Au
(g/t)
N/A
N/A
0.34
0.58
0.29
0.51
1.07
N/A
N/A
0.58
2.06
0.66
CONTAINED
Au (000’s oz)
N/A
N/A
22.6
116.8
0.1
222.4
54.7
N/A
N/A
445.7
226.0
1,088.4
Cu
(%)
0.27
0.49
N/A
N/A
N/A
N/A
N/A
0.28
0.02
N/A
N/A
0.10
Pb
(%)
1.59
1.26
1.61
N/A
N/A
N/A
N/A
N/A
0.57
N/A
N/A
0.81
Zn
(%)
2.87
3.39
2.64
N/A
N/A
N/A
N/A
2.02
N/A
N/A
N/A
2.15
PROPERTY
LOCATION
UNCLASSIFIED
Hog Heaven ⁽ii⁾
Hog Heaven ⁽ii⁾
Waterloo ⁽iii⁾⁽v⁾
TOTALS⁽i⁾
USA
USA
USA
Historical ⁽ii⁾
Historical ⁽ii⁾⁽iv⁾
Historical
Historical
TONNES
(Mt)
2.7
7.6
33.8
44.1
Ag
(g/t)
167
133
93
104
CONTAINED Ag
(Moz)
14.6
32.7
100.9
148.2
Au
(g/t)
0.62
0.70
N/A
0.68
CONTAINED Au
(000’s oz)
53.9
171.9
N/A
225.8
NOTES: Mineral reserves and resources are as defined by the Canadian
Institute of Mining, Metallurgy and Petroleum. Mineral resources
do not have demonstrated economic viability.
Pan American does not expect these mineral reserve estimates to be
materially affected by metallurgical, environmental, permitting, legal,
taxation, socio-economic, political, marketing or other relevant issues.
These tables illustrate 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.
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.
Metal prices used for La Bolsa were Ag: $14.00/oz and Au: $825/oz
(i)
Totals may not add-up due to rounding.
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
Proven Reserves
Probable & Possible
Reserves
Heap leach ore
Possible Resources
Inferred Resources
TONS
2,981,690
oz/ton Ag
4.88
oz/ton Au
0.018
904,200
316,100
4,500,000
2,700,000
10.40
1.56
2.41
4.44
0.020
0.014
0.020
0.022
(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
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.
52 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 53
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.
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.
(iv)
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 NI 43-101 category of “inferred resources”
Mineral resource and reserve estimates for Huaron, Dolores, San Vicente,
La Colorada, Manantial Espejo, Alamo Dorado, Morococha, Pico Machay
and Calcatreu were prepared under the supervision, or were reviewed
by Michael Steinmann, P. Geo., Executive Vice-President Corporate
Development and Geology and Martin G. Wafforn, P. Eng., Vice-President
Technical Services as Qualified Persons as that term is defined in National
Instrument 43-101 (“NI 43-101”). Navidad mineral resource estimates were
prepared by Pamela De Mark, P. Geo., Director, Resources, formerly Sr.
Consultant of Snowden Mining Industry Consultants, also a Qualified Person
as that term is defined in NI 43-101Mineral 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
CERTAIN OF THE STATEMENTS AND INFORMATION IN THIS MD&A
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 MD&A THE WORDS,
“BELIEVES”, “EXPECTS”, “INTENDS”, “PLANS”, “FORECAST”, “OBJECTIVE”,
“OUTLOOK”, “POSITIONING”, “POTENTIAL”, “ANTICIPATED”, “BUDGET”,
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 PRODUCED
BY THE COMPANY; 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 THE LAWS IN THE PROVINCE OF CHUBUT, ARGENTINA, WHICH,
CURRENTLY HAVE SIGNIFICANT RESTRICTIONS ON MINING, AND RECENT
AMENDMENTS TO THE LABOUR LAWS IN MEXICO WHICH COULD PLACE
ADDITIONAL FINANCIAL OBLIGATIONS ON OUR MEXICAN SUSBSIDIARIES;
THE CONTINUING NATURE OF HIGH INFLATION, RISING CAPITAL AND
OPERATING COSTS, CAPITAL RESTRICTIONS AND RISKS OF EXPROPRIATION
RELATIVE TO CERTAIN OF OUR OPERATIONS, PARTICULARLY IN
ARGENTINA, AND THEIR EFFECTS ON OUR BUSINESS; FUTURE SUCCESSFUL
DEVELOPMENT OF THE NAVIDAD 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; 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; 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 MD&A 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.
54 PAN AMERICAN SILVER CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 55
Deloitte LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: 604-669-4466
Fax: 778-374-0496
www.deloitte.ca
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
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 International Financial Reporting Standards as issued by the International
Accounting Standards Board (“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 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”
“Signed”
Geoff Burns
President and Chief Executive Officer
A. Robert Doyle
Chief Financial Officer
March 22, 2013
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, 2012 and December 31, 2011, and the consolidated income statements,
statements of comprehensive income, cash flows, and changes in equity
for the years ended December 31, 2012 and December 31, 2011, 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
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, 2012 and December 31, 2011 and
their financial performance and cash flows for the years ended December
31, 2012 and December 31, 2011 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, 2012, 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 22, 2013 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ Deloitte LLP
Independent Registered Chartered Accountants
March 22, 2013
Vancouver, Canada
56 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 57
Deloitte LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: 604-669-4466
Fax: 778-374-0496
www.deloitte.ca
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Pan American Silver Corp.
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, 2012, 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, 2012 of the Company and
our report dated March 22, 2013 expressed an unqualified opinion on
those financial statements.
We have audited the internal control over financial reporting of Pan
American Silver Corp. and subsidiaries (the “Company”) as of December
31, 2012, based on the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. As described in Management’s Report on
Internal Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at Minefinders
Corporation Ltd. (“Minefinders”) which was acquired on March 30,
2012. This interest consists of the Company’s 100% interest in the
Dolores gold and silver mine located in Mexico and other exploration
properties in Mexico and the United States. Minefinders’ financial
statements constitute 44% and 42% of the Company’s total and net assets,
respectively, 15% of the Company’s revenues, 11% of the Company’s
earnings from operations and 20% of the Company’s net earnings as of
and for the year ended December 31, 2012. Accordingly, our audit did
not include the internal control over financial reporting of Minefinders.
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
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31, 2012 and 2011
(in thousands of U.S. dollars)
ASSETS
Current assets
Cash and cash equivalents (Note 2)
Short-term investments (Note 9)
Trade and other receivables (Note 8)
Income taxes receivable
Inventories (Note 10)
Derivative financial instruments
Prepaids and other current assets
Non-current assets
Mineral properties, plant and equipment (Note 11)
Long-term refundable tax
Deferred tax assets (Note 26)
Other assets (Note 13)
Goodwill (Note 6)
Total Assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (Note 14)
Provisions (Note 15)
Current portion of finance lease (Note 16)
Current income tax liabilities
Non-current liabilities
Provisions (Note 15)
Deferred tax liabilities (Note 26)
Share purchase warrants (Note 19)
Long-term portion of finance lease (Note 16)
Long-term debt (Note 17)
Other long-term liabilities (Note 18)
Total Liabilities
EQUITY
Capital and reserves (Note 19)
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
APPROVED BY THE BOARD ON MARCH 22, 2013
DECEMBER 31, 2012
DECEMBER 31, 2011
$
$
$
$
346,208
196,116
134,612
18,671
270,089
25
9,546
975,267
2,182,742
9,937
1,450
7,291
211,292
3,387,979
136,757
7,022
12,473
40,346
196,598
45,661
321,630
8,594
24,377
41,134
23,256
661,250
2,300,517
20,560
964
397,360
2,719,401
7,328
2,726,729
3,387,979
$
-
-
$
$
$
262,901
228,321
103,433
2,542
135,696
9,343
742,236
1,189,708
10,253
4,170
5,429
1,951,796
78,258
2,341
20,841
74,366
175,806
59,052
54,919
23,651
10,824
-
25,457
349,709
1,243,241
8,631
2,146
339,821
1,593,839
8,248
1,602,087
1,951,796
/s/ Deloitte LLP
Independent Registered Chartered Accountants
March 22, 2013
Vancouver, Canada
Signed
Ross Beaty, Director
Signed
Geoff A. Burns, Director
58 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 59
CONSOLIDATED INCOME STATEMENTS
For the years ended December 31, 2012 and 2011
(in thousands of U.S. dollars)
Revenue (Note 24)
Cost of sales
Production costs (Note 20)
Depreciation and amortization
Royalties
Mine operating earnings
General and administrative
Exploration and project development
Impairment charge (Note 12)
Acquisition costs (Note 6)
Foreign exchange gains (losses)
Gain on commodity and foreign currency contracts
Gain on sale of mineral properties, plant and equipment (Note 6)
Other income (Note 25)
Earnings from operations
Gain on derivatives (Note 19)
Investment income
Interest and finance expense
Earnings before income taxes
Income taxes (Note 26)
Net earnings for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share attributable to common shareholders (Note 22)
Basic earnings per share
Diluted earnings 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, 2012 and 2011
(in thousands of U.S. dollars)
Net earnings for the year
Unrealized net gains (losses) on available for sale securities
(net of zero dollars tax in 2012 and 2011)
Reclassification adjustment for net loss included in earnings
(net of zero dollars tax in 2012 and 2011)
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
See accompanying notes to the consolidated financial statements
60 PAN AMERICAN SILVER CORP.
$
$
$
$
$
$
$
2012
928,594 $
2011
855,275
(474,001)
(108,153)
(35,077)
(617,231)
311,363 $
(20,790)
(36,746)
(100,009)
(16,162)
5,577
421
9,652
5,370
158,676
24,159
6,178
(7,678)
181,335
(93,822)
87,513 $
(341,363)
(82,756)
(22,031)
(446,150)
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)
354,146
87,359 $
154
87,513
352,494
1,652
$ 354,146
0.62 $
0.55 $
140,883
142,442
3.31
3.31
106,434
106,598
2012
2011
$
87,513
$ 354,146
2,452
(3,979)
(3,634)
86,331
(1,573)
$ 348,594
86,177
154
86,331
$ 346,942
1,652
$ 348,594
$
$
$
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2012 and 2011
(in thousands of U.S. dollars)
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings for the year
Current income tax expense (Note 26)
Deferred income (recovery) tax expense (Note 26)
Depreciation and amortization (Note 11)
Impairment of mineral property (Note 12)
Accretion on closure and decommissioning provision (Note 15)
Unrealized losses (gains) on foreign exchange
Share-based compensation expense
Unrealized gains on commodity contracts
Gain on derivatives (Note 19)
Gain on sale of mineral property, plant and equipment (Note 6)
Changes in non-cash operating working capital (Note 23)
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 properties, plant and equipment
Maturity (purchase) of short term investments
Acquisition of Minefinders, net of cash acquired (Note 6)
Proceeds from sale of mineral property, plant and equipment (Note 6)
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 19)
Dividends paid
Repayment of construction and equipment leases
(Distributions to)/contributions from non-controlling interests
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash at the beginning of the year
Cash and cash equivalents at the end of the year
See accompanying notes to the consolidated financial statements
2012
2011
$
87,513
$
354,146
101,050
(7,228)
108,153
100,009
2,999
6,124
4,142
(25)
(24,159)
(9,652)
(22,224)
346,702
(3,639)
2,575
(152,333)
$ 193,305
(159,915)
30,383
86,528
1,692
1,989
$ (39,323)
3,195
(41,749)
(24,919)
(6,213)
(1,074)
$ (70,760)
85
83,307
262,901
$ 346,208
$
-
$
$
$
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
(118,933)
(51,071)
1,297
(3,915)
(172,622)
4,453
(94,034)
(10,732)
(4,646)
904
(104,055)
202
82,980
179,921
262,901
CONSOLIDATED FINANCIAL STATEMENTS 61
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2012 and 2011
(in thousands of U.S. dollars, except for number of shares)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2012 and 2011
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
SHARE
INVESTMENT
NON-
ISSUED
ISSUED
OPTION
REVALUATION
RETAINED
CONTROLLING
TOTAL
SHARES
107,791,368
CAPITAL
$ 1,276,887
RESERVE
$ 7,022
RESERVE
$ 7,698
EARNINGS
$ 49,751
TOTAL
$1,341,358
INTERESTS
$8,651
EQUITY
$1,350,009
-
-
-
-
-
-
-
-
-
-
(5,552)
(5,552)
352,494
-
352,494
352,494
(5,552)
346,942
1,652
-
1,652
90,093
53,721
2,692
1,329
(503)
-
139,761
(3,582,200)
4,675
(42,342)
-
-
-
-
-
-
-
-
-
-
-
-
2,189
1,329
-
(51,692)
4,675
(94,034)
-
-
-
-
-
-
(2,055)
(2,055)
-
-
104,492,743
-
-
$ 1,243,241
2,112
-
$ 8,631
-
-
$2,146
-
(10,732)
$ 339,821
2,112
(10,732)
$1,593,839
-
-
$8,248
2,112
(10,732)
$1,602,087
354,146
(5,552)
348,594
2,189
1,329
4,675
(94,034)
-
-
-
-
-
-
-
-
-
-
(1,182)
(1,182)
87,359
-
87,359
288,796
57,369
4,947
1,060
379
(2,411,240)
49,392,588
-
13
(36,848)
1,088,104
-
(1,765)
-
-
-
10,739
699
-
-
-
-
-
-
-
-
-
-
87,359
(1,182)
86,177
3,182
1,060
-
-
-
(4,901)
-
-
13
(41,749)
1,098,843
699
154
-
154
-
-
-
-
-
-
87,513
(1,182)
86,331
3,182
1,060
13
(41,749)
1,098,843
699
-
-
(1,074)
(1,074)
-
-
151,820,635
-
-
$ 2,300,517
2,256
-
$ 20,560
-
-
$ 964
-
(24,919)
$397,360
2,256
(24,919)
$2,719,401
-
-
$7,328
2,256
(24,919)
$2,726,729
Balance, December 31, 2010
Total comprehensive income
Net earnings for the year
Other comprehensive loss
Shares issued on the exercise of
stock options
Shares issued as compensation
Shares issued on the exercise of
warrants
Shares repurchased and cancelled
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
Balance, December 31, 2011
Total comprehensive income
Net earnings for the year
Other comprehensive loss
Shares issued on the exercise of
stock options
Shares issued as compensation
Shares issued on the exercise of
warrants
Shares repurchased and cancelled
Issued to acquire Minefinders
Issued on replacement awards
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
Balance, December 31, 2012
See accompanying notes to the consolidated financial statements.
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
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, Mexico, and the United States.
SUMMARY OF SIGNIFICANT
2.
ACCOUNTING POLICIES
Statement of Compliance
a.
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board (“IFRS”). The policies
applied in these financial statements are based on IFRS’s in effect as of
December 31, 2012.
These consolidated financial statements were approved for issuance by
the Board of Directors on March 22, 2013.
Basis of Preparation
b.
The Company’s accounting policies have been applied consistently in
preparing these consolidated annual financial statements for the year
ended December 31, 2012, and the comparative information as at
December 31, 2011, with the exception of certain comparative figures
that have been adjusted to properly reflect an immaterial error relating
to investing and financing activities in the statement of cash flows in
2011. In 2011, the Company netted lease payments against payments
for mineral property, plant and equipment and is now showing the lease
payments of $4.6 million as a financing activity in the 2011 comparative
statement of cash flows. There is no net impact on the cash flow statement
and no impact on the consolidated statements of financial position, the
consolidated income statements or earnings or diluted earnings per
share in either 2012 or 2011.
Significant Accounting Policies
c.
Principles of Consolidation: The financial statements consolidate the
financial statements of Pan American and its subsidiaries. All intercompany
balances, transactions, 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 interest” 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 at
December 31, 2012 and 2011 are presented in the following table:
Subsidiary
Pan American Silver Huaron S.A.
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 Dolores S.A. de C.V.
Compañía Minera Tritón S.A.
Pan American Silver (Bolivia) S.A.
Minera Argenta S.A.
LOCATION
Peru
Peru
Peru
Mexico
Mexico
Mexico
Argentina
Bolivia
Argentina
OWNERSHIP
INTEREST (2012)
100%⁽�⁾
0%⁽�⁾
92%
100%
100%
100%
100%
95%
100%
OWNERSHIP
INTEREST (2011)
0%
100%
92%
100%
100%
0%
100%
95%
100%
STATUS
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
OPERATIONS AND DEVELOPMENT
PROJECTS OWNED
Huaron Mine
Quiruvilca Mine/ Huaron Mine
Morococha Mine
Alamo Dorado Mine
La Colorada Mine
Dolores Mine
Manantial Espejo Mine
San Vicente Mine
Navidad Project
⁽�⁾In February 2012, the Company transferred the assets of Huaron, included in Pan American Silver S.A. Mina Quiruvilca, into a new entity named Pan American Silver
Huaron S.A. In June 2012, the Company sold Quiruvilca. Refer to Note 6 for further details.
62 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 63
Investments in 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.
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.
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 and
each of the subsidiaries 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 the acquisition exceeds the fair value
attributable to the Company’s share of the identifiable net assets, the
difference is treated as purchased goodwill, which is not amortized and
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. Additionally, any change relating to interest previously
recognized in other comprehensive income is reclassified to the income
statement upon the acquisition of control.
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
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 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 adjustments 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 under the sales contract with third-party
smelters are netted against revenue for sales of metal concentrate.
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 categories:
at fair value through profit or loss, loans 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.
(a) Financial assets at fair value through profit or loss
in income when the investments are derecognized or impaired, as well
as through the amortization process.
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
(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.
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.
(IV) FAIR VALUE
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
64 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 65
(as significant adverse changes in the technological, market, economic
or legal environment in which the investee 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
FINANCIAL ASSETS
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.
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.
Derivatives, including certain conversion options and warrants with exercise
prices in a currency other than the functional currency, are recognized
at fair value with changes in fair value recognized in profit or loss.
FINANCIAL LIABILITIES
A financial liability is de-recognized when the obligation under the liability
is discharged, cancelled or expired. Gains and losses on de-recognition
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.
(VII) TRADE RECEIVABLES
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 against ‘doubtful accounts provision’ in the
income statement.
(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.
Convertible Notes: The Company has the right to pay all or part of the
liability associated with the Company’s outstanding convertible notes
in cash on the conversion date. Accordingly, the Company classifies the
convertible notes as a financial liability with an embedded derivative.
The financial liability and embedded derivative are recognized initially
at their respective fair values. The embedded derivative is subsequently
recognized at fair value with changes in fair value reflected in profit or
loss and the debt liability component is recognized at amortized cost
using the effective interest method. Interest gains and losses related to
the debt liability component or embedded derivatives are recognized
in profit or loss. On conversion, the equity instrument is measured at
the carrying value of the liability component and the fair value of the
derivative component on the conversion date.
Cash and cash equivalents: Cash and cash equivalents of $346.2 million
at December 31, 2012 includes cash on hand and cash in banks of
$323.0 million (2011 - $262.9 million), held primarily in USD and CAD.
It also includes short-term money market investments of $23.2 million
(2011 – nil) that are readily convertible to cash with original terms of
three months or less. Cash and cash equivalents are classified as loans
and receivables and therefore are stated at amortized cost, less any
impairment.
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.
Inventories: Inventories include work in progress, concentrate ore, doré,
processed silver and gold, heap leach inventory, 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.
The costs incurred in the construction of the heap leach pad are capitalized.
Heap leach inventory represents silver and gold contained in ore that
has been placed on the leach pad for cyanide irrigation. The heap leach
process is a process of extracting silver and gold by placing ore on an
impermeable pad and applying a diluted cyanide solution that dissolves a
portion of the contained silver and gold, which are then recovered during
the metallurgical process. When the ore is placed on the pad, an estimate
of the recoverable ounces is made based on tonnage, ore grade and
estimated recoveries of the ore type placed on the pad. The estimated
recoverable ounces on the pad are used to compile the inventory cost.
The Company uses several integrated steps to scientifically measure
the metal content of the ore placed on the leach pads. The tonnage,
grade, and ore type to be mined in a period is first estimated using the
Mineral Resource model. As the ore body is drilled in preparation for the
blasting process, samples are taken of the drill residue which is assayed
to determine their metal content and quantities of contained metal.
The estimated recoverable ounces carried in the leach pad inventory
are adjusted based on actual recoveries being experienced. Actual and
estimated recoveries achieved are measured to the extent possible using
various indicators including, but not limited to, individual cell recoveries,
the use of leach curve recovery, trends in the levels of carried ounces
depending on the circumstances or cumulative pad recoveries.
The Company then processes the ore through the crushing facility where
the output is again weighed and sampled for assaying. A metallurgical
reconciliation with the data collected from the mining operation is
completed with appropriate adjustments made to previous estimates.
The crushed ore is then transported to the leach pad for application of the
leaching solution. The samples from the automated sampler are assayed
each shift and used for process control. The quantity of leach solution
is measured by flow meters throughout the leaching and precipitation
process. The pregnant solution from the heap leach is collected and
passed through the processing circuit to produce precipitate which is
retorted and then smelted to produce doré bars.
The inventory is stated at lower of cost or net realizable value, with cost
being determined using a weighted average cost method. The ending
inventory value of ounces associated with the leach pad is equal to
opening recoverable ounces plus recoverable ounces placed less ounces
produced plus or minus ounce adjustments.
The estimate of both the ultimate recovery expected over time and
the quantity of metal that may be extracted relative to the time the
leach process occurs requires the use of estimates which rely upon
laboratory test work and estimated models of the leaching kenetics in
the heap leach pads. Test work consists of leach columns of up to 400
day duration with 150 days being the average, from which the Company
projects metal recoveries up to three years in the future. The quantities
of metal contained in the ore are based upon actual weights and assay
analysis. The rate at which the leach process extracts gold and silver
from the crushed ore is based upon laboratory column tests and actual
experience. The assumptions used by the Company to measure metal
content during each stage of the inventory conversion process includes
estimated recovery rates based on laboratory testing and assaying. The
Company periodically reviews its estimates compared to actual experience
and revises its estimates when appropriate. The ultimate recovery will
not be known until the leaching operations cease.
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 part of the cost of
the related assets, 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.
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
66 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 67
remaining useful lives and residual values are reviewed annually. Changes
in estimates are accounted for prospectively.
units-of-production method (described below) over the life of the mine,
commencing on the date of commercial service.
STRAIGHT LINE BASIS
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
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.
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 expenditures 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.
Expenditures on exploration activity are not capitalized.
Capitalization of evaluation expenditures commences when there is a high
degree of confidence in the project’s viability and hence it is probable
that future economic benefits will flow to the Company.
Evaluation expenditures, 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 the 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 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 on a units of production basis 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 the recoverable amount is assessed using discounted cash flow
techniques, the resulting estimates are based on detailed mine and/or
68 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 69
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 “Impairment of Assets.” 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. Non-financial assets
other than goodwill that have suffered 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 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 a component of the cost of
the related 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 in 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.
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.
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 the 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 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.
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
The tax effect of certain temporary differences is not recognized,
principally with respect to goodwill; temporary differences arising on
70 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 71
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.
Borrowing Costs: Borrowing costs that are directly attributable to the
acquisition, construction or production of qualified assets are capitalized.
Qualifying assets are assets that require a substantial amount of time
to prepare for their intended use, including mineral properties in the
evaluation stage where there is a high likelihood of commercial exploitation.
Qualifying assets also include significant expansion projects at the
operating mines. Borrowing costs are considered an element of the
historical cost of the qualifying asset. Capitalization ceases when the
asset is substantially complete or if construction is interrupted for an
extended period. Where the funds used to finance a qualifying asset
form part of general borrowings, the amount capitalized is calculated
using a weighted average of rates applicable to the relevant borrowings
during the period. Where funds borrowed are directly attributable to a
qualifying asset, the amount capitalized represents the borrowing costs
specific to those borrowings. Where surplus funds available out of money
borrowed specifically to finance a project are temporarily invested, the
total borrowing cost is reduced by income generated from short-term
investments of such funds.
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 investments in
subsidiaries, jointly 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 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.
3. CHANGES IN ACCOUNTING STANDARDS
ACCOUNTING STANDARDS 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. The application of IFRS 10 will not have
a significant impact on the Company’s consolidated financial statements.
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. The Company has completed
its assessment on this standard and concluded that this standard will
not have an impact on the consolidated financial statements.
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. The Company
has completed its assessment on this standard and concluded that this
standard will not have an impact on the consolidated financial statements.
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. The Company has completed its assessment on
this standard and concluded that this standard will not have an impact
on the consolidated financial statements.
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 application of the amended IAS 19 will not have
a significant impact on the consolidated financial statements.
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 application of IFRIC 20 will not have
a significant impact on the consolidated financial statements.
ACCOUNTING STANDARDS EFFECTIVE
JANUARY 1, 2015
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
72 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 73
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. IASB
approved amendments to IFRS 7 Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. The
common disclosure requirements issued by the IASB and the FASB in
December 2011 are intended to help investors and other users to better
assess the effect or potential effect of offsetting arrangements on a
company’s financial position. In addition, the IASB clarified aspects of
IAS 32 Financial Instruments: Presentation. The amendments to IAS 32
address inconsistencies in current practice when applying the requirements.
The amendments also provided relief from the requirements to restate
comparative financial statements for the effects of applying IFRS 9. The
Company is currently evaluating the impact the final standard is expected
to have on its consolidated financial statements.
SIGNIFICANT JUDGEMENTS IN
4.
APPLYING 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 evaluation costs: The Company has determined that
evaluation costs capitalized during the year relating to the operating
mines, the Navidad project and certain other exploration interests have
potential future economic benefits and are potentially economically
recoverable, subject to impairment analysis as discussed in Note 12. In
making this judgement, the Company has assessed various sources of
information including but not 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. As at December 31, 2012,
the Company capitalized a total of $11.3 million (2011 - $22.3 million) of
evaluation costs and mineral property, plant and equipment including
additions of $0.9 million (2011 - $2.4 million).
• Commencement of commercial 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 based on a percentage
of design capacity along with various qualitative factors including but
not limited to the achievement of mechanical completion, continuous
nominated level of production, the working effectiveness of the plant and
equipment at or near expected levels and whether there is a sustainable
level of production input available including power, water and diesel.
• 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.
• Functional currency: The functional currency for the Company and
its subsidiaries 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 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. A business consists of inputs, including non-current assets
and processes, including operational processes, that when applied to
those inputs have the ability to create outputs that provide a return to
the Company and its shareholders.
• 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 on a units of production basis over the
reserves that directly benefit from the specific stripping activity. As at
December 31, 2012, the carrying amount of stripping costs capitalized
was $22.1 million comprised of Manantial - $5.3 million, Dolores - $13.5
million and Alamo Dorado - $3.2 million (2011 - $1.6 million comprised
of $1.6 million, nil, and nil, respectively).
• 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 holder subsequently
selected the Silver Stream contract. The convertible debenture is classified
and accounted for as a deferred credit. 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, 2012,
the carrying amount of the deferred credit arising from the Aquiline
acquisition was $20.8 million (2011 - $20.8 million).
• Convertible Notes: The Company has the right to pay all or part of the
liability associated with the Company’s outstanding convertible notes in
cash on the conversion date. Accordingly, the Company classifies the
convertible notes as a financial liability with an embedded derivative.
The financial liability and embedded derivative are recognized initially
at their respective fair values. The embedded derivative is subsequently
recognized at fair value with changes in fair value reflected in profit or
loss and the debt liability component is recognized at amortized cost
using the effective interest method. Interest gains and losses related to
the debt liability component or embedded derivatives are recognized
in profit or loss. On conversion, the equity instrument is measured at
the carrying value of the liability component and the fair value of the
derivative component on the conversion date.
KEY SOURCES OF ESTIMATION
5.
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 in accordance with National Instrument 43-101,
“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 and geological
interpretation. Differences between management’s assumptions including
economic 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.
• Valuation of Inventory: In determining mine production costs recognized
in the consolidated income statement, the Company makes estimates
of quantities of ore stacked in stockpiles, placed on the heap leach pad
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, 2012, the
carrying amount of current inventories excluding supplies was $215.0
million (2011 - $99.7 million). Refer to Note 10 for further details.
• 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 prospectively. A change in the mineral reserve
estimate for assets depreciated using the units of production method
would impact depreciation expense prospectively.
• 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. 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 amount of mining interests. Internal sources of
information include the manner in which mineral property, plant and
equipment are being used or are expected to be used and indications
of the 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. At December 31, 2012, it
was determined that the estimated recoverable amount of the Navidad
project was below its carrying value and an impairment charge of $100.0
million was warranted as discussed in Note 12.
• 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
74 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 75
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, 2012, the carrying amount of the Company’s provision
for the closure and decommissioning cost obligation was $45.6 million
(2011 - $55.8 million). Refer to Note 15 for further details.
• Income taxes and recoverability of deferred tax assets: In assessing the
probability of realizing income tax assets recognized, the Company makes
estimates related to expectations of future taxable income, 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 provisional fair value of assets
acquired and liabilities assumed and the resulting goodwill, if any, requires
that management make certain judgements and estimates taking into
account information available at the time of acquisition about future
events, including, but not restricted to, estimates of mineral reserves
and resources required, exploration potential, future operating costs and
capital expenditures, future metal prices, long-term foreign exchange rates
and discount rates. 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 the acquisition date).
• Share purchase warrants: The carrying value of share purchase warrants
is equal to 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. As at December 31, 2012, the
fair value of the share purchase warrants was $8.6 million (2011 - $23.7
million). Additionally, during the year ended December 31, 2012, there
was a derivative unrealized gain of $15.1 million (2011 – derivative
unrealized gain of $101.8 million). Refer to Note 19 for further details.
• 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. Refer to Note 27 for further discussion on contingencies.
6. ACQUISITION AND DIVESTURE
a.
Acquisition of Minefinders Corporation Ltd.
On March 30, 2012, the Company acquired all of the issued and outstanding
common shares of Minefinders Corporation Ltd. (“Minefinders”) for total
consideration amounting to $1,264.3 million, comprising $1,088.1 million
in common shares of Pan American, $165.4 million in cash, and $10.7
million in replacement awards. Minefinders was engaged in precious
metals mining and had exploration properties in Mexico and the United
States. Minefinders’ primary mining property was its 100% owned
Dolores gold and silver mine located in Chihuahua, Mexico.
The acquisition is aligned with management’s objectives of enhanced
operating and development portfolio diversification and mission to be
the largest low-cost primary silver mining company worldwide. The
Company believes that the strategic benefits to shareholders resulting
from the acquisition include: (i) enhanced portfolio diversification of
producing assets into a more stable mining jurisdiction, (ii) additional
near-term cash flow, (iii) improved organic growth opportunities, (iv) a
meaningful reduction of average silver cash costs across the Company’s
production portfolio, (v) addition of significant silver and gold mineral
reserves and resources with excellent potential to increase even further
through exploration; and (vi) increases in the Company’s exposure to
the prices of silver and gold. The transaction was accounted for as a
business combination with Pan American as the acquirer.
Under the terms of the arrangement former Minefinders shareholders
who elected the full proration option received CDN $1.84 and 0.55 of
a Pan American share in respect of each of their Minefinders shares.
Former Minefinders shareholders who elected the Pan American share
option received 0.6235 Pan American shares and CDN$0.0001 for each
of their Minefinders shares, and those who elected the cash option
received CDN$2.0306 and 0.5423 of a Pan American share in respect
of each of their shares.
Pan American exchanged and replaced all outstanding options at an
exchange ratio of 0.6325 and at a strike price equivalent to the original
strike prices divided by 0.6325.
transaction costs incurred relating to the acquisition and recognized in
the Consolidated Income Statement for the year ended December 31,
2012 amounted to $16.2 million. The cash flow from the acquisition of
Minefinders, net of cash received, amounted to $86.5 million.
Pan American share value utilized for valuing the consideration of shares
issued was the closing price on March 30, 2012, the effective date of
the transaction.
Replacement awards were valued using the Black-Scholes option pricing
model. Assumptions used were as follows:
Dividend yield
Expected volatility
Risk free interest rate
Expected life
0.3%
40.75%
0.93%
0.25 – 3.5 years
A preliminary purchase price allocation for the Minefinders transaction
is calculated and presented as follows:
Purchase consideration
Cash
Replacement award
Fair value of Pan American shares issued
$
$
165,413
10,739
1,088,104
1,264,256
$
The purchase price allocation was calculated as follows:
Net working capital acquired (including
cash of $251.9 million and receivables
of $10.9 million)
Mineral property, plant and equipment
(Note 11)
Goodwill
Closure and decommissioning provision
(Note 15)
Long-term debt
Deferred tax liability
$
326,211
1,052,593
211,292
(10,880)
(49,685)
(265,275)
1,264,256
Goodwill has been primarily recognized as a result of the requirement to
record a deferred tax liability for the difference between the fair values
of assets acquired and liabilities assumed over the tax bases of assets
acquired and liabilities assumed; none of the goodwill is deductible for
tax purposes.
The incremental impact to the revenue of the Company for the year ended
December 31, 2012, had the acquisition occurred on January 1, 2012,
would result in an increase in the Company’s revenue of $52.9 million.
Accordingly, the Company’s revenue for the year ended December 31,
2012 would be $981.5 million. The incremental impact to net earnings of
the Company for the year ended December 31, 2012, had the acquisition
occurred on January 1, 2012, would result in an increase in the Company’s
net earnings of $9.4 million. Accordingly, the Company’s net earnings
for the year ended December 31, 2012 would be $96.9 million. Total
As at December 31, 2012, the allocation of the purchase price has not
been finalized. The Company is currently in the process of determining
the fair values of identifiable assets acquired and liabilities assumed,
measuring the associated deferred income tax assets and liabilities and
determining the value of goodwill. The allocation of the purchase price
will be finalized during the first quarter of 2013.
Disposition of Mineral Property, Plant and
b.
Equipment
On June 26, 2012, the Company announced that it completed the sale of
its Quiruvilca operation, located in the northern Andean region of Peru,
to Quiruvilca Ltd., a subsidiary of Southern Peaks Mining L.P. Under
the terms of the sale agreement, effective June 1, 2012, the Company
sold 100% of its ownership interest in Quiruvilca for $2 million, subject
to certain adjustments, and, at the Company’s election, either: (i) a 2%
net smelter returns royalty on all saleable metals, exercisable when the
price of silver is above $15 per ounce; the price of zinc is above $1,200
per tonne; and the price of copper is above $6,061 per tonne, or (ii) the
price difference between $23 per ounce of silver and the market price on
50% of Quiruvilca’s future payable silver production for the applicable
quarter; provided, however, that such payments will be capped at $3
million in any 12 month period until such time as Quiruvilca generates
$25 million in earnings before income tax, depreciation, and amortization
(“EBITDA”) as calculated pursuant to the sale agreement. The Quiruvilca
mineral property had a carrying value of $nil at the date of sale.
During the year ended December 31, 2012, the Company sold Quiruvilca
and recorded a gain of $7.7 million, in addition to other assets disposed
of in the amount of $2.0 million, resulting in a total gain on sale of
property, plant and equipment for the year ended December 31, 2012
of $9.7 million (2011 - $1.2 million). No value was assigned to the future
contingent payments in calculating the gain on the sale of Quiruvilca.
The cash inflow of $0.5 million from the sale of Quiruvilca, netted with
outflows of cash included in working capital of $0.8 million, resulted in
net cash outflow of $0.3 million. Total proceeds from all dispositions,
including Quiruvilca totaled $1.7 million for the year ended December
31, 2012 (2011 – $1.3 million).
The gain on sale of Quiruvilca was calculated as follows:
Consideration received ($0.5 million in cash)
De-recognition of working capital (including cash
of $0.8 million)
De-recognition of reclamation accrual
De-recognition of deferred tax asset
$
$
500
402
18,178
(11,384)
7,696
76 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 77
7. 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 $2.7 billion as at December 31,
2012 (2011 - $1.6 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 had a $150 million credit facility
with a syndicate of international banks which the Company cancelled,
effective December 31, 2012.
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, 2011.
8.
FINANCIAL INSTRUMENTS
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
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 significant 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 all metal prices
for the year ended December 31, 2012, would result in an increase of
approximately $97.2 million (2011 – $89.5 million) in the Company’s
revenues. A 10% decrease in all metal prices for the same period would
result in a decrease of approximately $98.2 million (2011 - $88.0 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 Huaron, Morococha, San Vicente and La Colorada mines.
A 10% increase in metal prices (zinc, lead and copper) on open positions
for provisional concentrate contracts for the year ended December 31,
2012 would result in an increase of approximately $11.5 million (2011
- $9.1 million) in the Company’s before tax earnings which would be
reflected in 2013 results. A 10% decrease in metal prices for the same
period would result in a decrease of approximately $11.8 million (2011
- $8.9 million) in the Company’s before tax earnings.
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,
2012, the Company had contracts to sell 7,500 tonnes of zinc and 2,400
tonnes of lead with a negative mark-to-market valuation of $0.1 million
and $0.2 million, respectively.
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 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, 2012 the Company had receivable balances associated
with buyers of its concentrates of $39.2 million (2011 - $40.5 million).
The vast majority of the Company’s concentrate is sold to eight well
known concentrate buyers.
Silver doré production from La Colorada, Alamo Dorado, Dolores 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, 2012 the Company had approximately
$48.8 million (2011 - $35.9 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, 2012, there is an allowance for doubtful accounts provision recorded in the amount of $7.6 million (2011 – $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, 2012, no additional provision for doubtful account was recorded as there are no material past due trade or other receivables.
Cash, trade accounts receivable and other receivables that represent the maximum credit risk to the Company consist of the following:
Cash
Current portion of refundable tax
Trade accounts receivable
Advances to suppliers and contractors
Export tax receivable
Insurance receivable
Royalty Receivable
Employee Loans
Silver royalty receivable (Note 25)
Other
Total accounts receivable
Total cash and accounts receivable
Long-term refundable tax receivable
Total
2012
346,208
46,680
39,116
21,144
5,996
5,081
4,828
2,097
1,572
8,098
134,612
480,820
9,937
490,757
$
$
$
DECEMBER 31,
$
2011
262,901
37,082
40,477
7,599
6,613
3,500
700
2,481
-
4,981
103,433
366,334
10,253
376,587
$
$
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.
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, 2012, the Company has $36.4 million in lease obligations
(2011 - $9.8 million), equipment and construction advances of $0.4 million
(2011 - $21.9 million) that are subject to an annualized interest rate of
2.2% and unsecured convertible notes with a principal amount of $36.2
million (2011 – N/A) that bear interest at 4.5%, payable semi-annually
on June 15 and December 15. The interest paid by the Company for the
year ended December 31, 2012 on its lease obligations and equipment
and construction advances was $1.4 million (2011 – $0.5 million). The
interest paid by the Company for the year ended December 31, 2012
on the convertible notes was $1.6 million (2011 – N/A). The average
interest rate earned by the Company during the year ended December
31, 2012 on its cash and short term investments was 0.5%. A 10%
increase or decrease in the interest earned from financial institutions on
cash and short term investments would result in a $0.3 million increase
or decrease in the Company’s before tax earnings (2011 – 0.1 million).
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
78 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 79
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.
PAYMENTS DUE BY PERIOD - 2011
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, 2012 the Company’s had contracts to purchase $18.0 million in Peruvian Nuevo soles with a positive
mark-to-market of $0.3 million. 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 is exposed to foreign exchange risk through the
following financial assets and liabilities and deferred income tax liabilities denominated in currencies other than USD as shown in the table below.
The Company estimates that a 10% change in the exchange rate of the foreign currencies in which its December 31, 2012 non-USD net monetary
liabilities were denominated would result in an income before taxes change of about $24.2 million (2011 - $13.3 million).
Finance lease obligations⁽�⁾
Current liabilities
Long term income taxes payable
Severance accrual
Employee compensation plan⁽�⁾
Total contractual obligations⁽�⁾
TOTAL WITHIN 1 YEAR⁽�⁾ 2 - 3 YEARS 4- 5 YEARS AFTER 5 YEARS
$
10,915
$
$
$
$
31,983
149,785
2,274
5,427
3,478
192,947
$
21,068
149,785
-
3,032
3,478
177,363
$
-
-
-
-
-
-
2,274
2,395
-
$
10,915
$
4,669
$
-
-
-
-
-
-
AT DECEMBER 31,
2012
Canadian dollar
Mexican peso
Argentinian peso
Bolivian boliviano
Peruvian peso
AT DECEMBER 31,
2011
Canadian dollar
Mexican peso
Argentinian peso
Bolivian boliviano
Peruvian peso
$
$
$
$
CASH AND
OTHER CURRENT AND
INCOME TAXES RECEIVABLE
ACCOUNTS PAYABLE AND
DEFERRED INCOME TAX
⁽�⁾
Includes all current liabilities as per the statement of financial position less items presented separately in this table that are expected to be paid but not accrued
SHORT-TERM
NON-CURRENT ASSETS
(PAYABLE), CURRENT AND
ACCRUED LIABILITIES AND
ASSETS (LIABILITIES)
in the books of the Company. A reconciliation of the current liabilities balance per the statement of financial position to the total contractual obligations within
⁽�⁾
Includes lease obligations in the amount of $39.7 million (December 31, 2011 - $10.1 million) with a net present value of $36.4 million (December 31, 2011 - $9.8
million) and equipment and construction advances in the amount of $0.4 million (December 31, 2011 - $21.9 million); both discussed further in Note 16.
INVESTMENTS
117,175
3,836
173
293
2,174
123,651
$
$
3,619
35,214
43,875
2,037
12,960
97,705
-
$
$
NON-CURRENT
(4,763)
(11,426)
(7,697)
2,956
(20,930)
$
NON-CURRENT LIABILITIES
(10,353)
(43,046)
(33,352)
(6,116)
(29,411)
(122,278)
$
-
$
(269,515)
(26,309)
352
(24,801)
(320,273)
$
CASH AND
OTHER CURRENT AND
INCOME TAXES RECEIVABLE
ACCOUNTS PAYABLE AND
DEFERRED INCOME TAX
SHORT-TERM
NON-CURRENT ASSETS
(PAYABLE), CURRENT AND
ACCRUED LIABILITIES AND
ASSETS (LIABILITIES)
one year per the commitment schedule is shown in the table below.
Finance lease
Convertible note
Total current liabilities per Statements of Financial Position
Add:
Future interest component of:
-
-
Future commitments less portion accrued for:
-
-
Total contractual obligations within one year
RSU
Contribution plan
2012
196,598
$
2011
175,806
$
1,286
1,631
768
1,768
202,051
$
-
-
227
1,330
177,363
$
INVESTMENTS
205,490
38,252
347
2,188
2,276
248,553
$
$
597
4,778
54,266
8,198
7,299
75,138
-
$
$
NON-CURRENT
(47,359)
408
(21,023)
(3,107)
(71,081)
$
NON-CURRENT LIABILITIES
(7,041)
(9,345)
(13,426)
(4,686)
(33,966)
(68,464)
$
-
$
$
(3,379)
(38,145)
584
(9,809)
(50,749)
⁽�⁾
Includes a retention plan obligation in the amount of $7.8 million (2011 - $3.5 million) that vests in two instalments, the first 50% on June 1, 2013 and the remaining
50% on June 1, 2014 and a RSU obligation in the amount of $1.7 million (2011 – N/A) that will be settled in cash. The RSU’s vest in two instalments, the first 50%
vest on December 7, 2013 and a further 50% vest on December 7, 2014.
⁽�⁾ Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition. Refer to Note 17 for further
details.
⁽�⁾ Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation, the deferred credit arising from the
Aquiline acquisition discussed in Note 18 and deferred tax liabilities.
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.
COMMITMENTS
The Company’s commitments have contractual maturities which are summarized below:
TOTAL WITHIN 1 YEAR⁽�⁾ 2 - 3 YEARS 4- 5 YEARS AFTER 5 YEARS
PAYMENTS DUE BY PERIOD - 2012
Finance lease obligations⁽�⁾
Current liabilities
Severance accrual
Employee compensation plan⁽�⁾
Convertible notes ⁽�⁾
Total contractual obligations⁽�⁾
$
$
40,142
180,932
3,434
9,526
41,127
275,161
-
$
$
13,759
180,932
966
4,763
1,631
202,051
-
-
-
771
4,763
39,496
59,791
$
$
14,761
$
11,622
1,144
$
-
-
-
-
553
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of share purchase warrants and the conversion feature
on the convertible notes are stated 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. 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.
to which the fair value is observable. The hierarchy gives the highest
priority to unadjusted quoted prices 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).
$
12,766
$
553
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
80 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 81
At December 31, 2012, 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:
9.
SHORT TERM INVESTMENTS
FAIR VALUE AT DECEMBER 31, 2012
AVAILABLE FOR SALE
FAIR VALUE
DECEMBER 31, 2012
COST
ACCUMULATED
FAIR VALUE
DECEMBER 31, 2011
COST
Assets and Liabilities:
Short-term investments
Trade receivable from provisional concentrate sales
Derivative financial instruments
Non-current share purchase warrants
Non-current conversion feature of convertible notes
Assets and Liabilities:
Short-term investments
Trade receivable from provisional concentrate sales
Non-current share purchase warrants
$
$
$
$
$
$
$
$
$
$
LEVEL 2
LEVEL 3
TOTAL
196,116
39,116
25
(8,594)
(9,746)
216,917
LEVEL 1
196,116
-
-
-
-
196,116
$
$
$
$
$
$
$
$
$
$
$
$
-
39,116
25
(8,594)
(9,746)
20,801
FAIR VALUE AT DECEMBER 31, 2011
TOTAL
LEVEL 1
LEVEL 2
228,321
40,477
(23,651)
245,147
-
-
$
$
$
$
228,321
228,321
-
40,477
(23,651)
16,826
$
$
$
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
LEVEL 3
Short term investments
$ 196,116
$ 195,152
UNREALIZED
HOLDING GAINS
$ 964
$ 228,321
$ 226,997
HOLDING GAINS
$ 1,324
ACCUMULATED
UNREALIZED
10.
INVENTORIES
Inventories consist of:
Concentrate inventory
Stockpile ore
Heap leach inventory
Doré and finished inventory
Materials and supplies
DECEMBER 31, 2012
$
26,617
48,828
78,086
61,443
55,115
270,089
$
DECEMBER 31, 2011
$
21,473
31,704
-
$
46,558
35,961
135,696
The methodology and assessment of inputs for determining the fair value of financial assets and liabilities as well as the levels of hierarchy for the
Company’s financial assets and liabilities measured at fair value remains unchanged from that at December 31, 2011, except for the convertible
notes assumed as part of the Minefinders acquisition during the year.
Production costs, including depreciation and amortization and royalties for the year ended December 31, 2012 were $617.2 million (2011 - $446.2
million). Production costs represent cost of inventories sold during the year.
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.
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, 2012, the unrealized gains and losses on commodity and
foreign currency contracts was $0.4 million (2011 - $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. The share purchase warrants are
classified and accounted for as a financial liability at fair value with
changes in fair value included in net earnings. The fair value of the
share purchase warrants is determined using the Black Scholes pricing
model which is further discussed in Note 19. During the year ended
December 31, 2012, the unrealized gain on share purchase warrants
was $15.1 million (2011 - $101.8 million).
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.
11. MINERAL PROPERTY, PLANT AND EQUIPMENT
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.
CONVERTIBLE NOTES
The Company’s unrealized gains and losses on conversion feature of
the convertible note are valued using observable inputs and as such are
classified as Level 2 of the fair market value hierarchy. The conversion
feature on the convertible notes is considered an embedded derivative
and re-measured at fair value each reporting period. The fair value of
the conversion feature of the convertible notes is determined using a
model that includes the volatility and price of the Company’s common
shares and a credit spread structure with reference to the corresponding
fair value of the debt component of the convertible notes. During the
year ended December 31, 2012, the unrealized gain on the convertible
note was $9.1 million (2011 – N/A). The approximate current fair value
of the notes, excluding the conversion feature at December 31, 2012 is
$34.4 million (2011 – N/A).
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.
82 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 83
MINING PROPERTIES
Mineral property, plant and equipment consist of:
DEPLETABLE
RESERVES
NON-DEPLETABLE
RESERVES
EXPLORATION
PLANT
TOTAL
AND RESOURCES
AND RESOURCES
AND EVALUATION
AND EQUIPMENT
COST
As at December 31, 2011
Additions
Acquisition of Minefinders (Note 6)
Disposals
Transfers
VAT collected
Closure and decommissioning –
changes in estimate (Note 15)
As at December 31, 2012
$
475,434
91,796
800,997
(222)
2,105
(2,093)
(6,059)
1,361,958
$
ACCUMULATED DEPRECIATION
As at December 31, 2011
Depreciation charge
Depreciation charge captured in inventory
Impairment charge (Note 12)
Disposals
Transfers
As at December 31, 2012
Carrying value – December 31, 2012
-
-
$
(194,851)
(50,079)
(15,654)
4,653
(255,931)
1,106,027
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
24,974
1,086
(24)
(1,564)
24,472
-
24,472
-
-
-
-
-
-
$
$
$
$
$
590,795
10,149
180,000
(501)
780,443
-
-
-
-
(100,009)
-
(100,009)
680,434
$
$
$
$
$
476,596
71,115
71,596
(4,496)
(40)
-
614,771
(183,240)
(58,074)
-
3,005
(4,653)
(242,962)
371,809
-
$
$
$
$
$
1,567,799
174,146
1,052,593
(4,742)
(2,093)
(6,059)
2,781,644
(378,091)
(108,153)
(15,654)
(100,009)
3,005
(598,902)
2,182,742
DECEMBER 31, 2012
DECEMBER 31, 2011
$
COST
$
ACCUMULATED
AMORTIZATION
(53,702)
137,340
(51,369)
183,907
(126,028)
184,866
(45,030)
93,839
(42,266)
925,027
(130,217)
309,744
CARRYING VALUE
COST
$
$
83,638
132,538
58,838
48,809
882,761
-
179,527
113,362
155,524
174,067
71,602
296,431
$
ACCUMULATED
AMORTIZATION
(44,935)
(41,048)
(110,882)
(40,793)
-
(102,126)
117,751
24,255
1,976,729
$
(46,306)
(3,975)
(498,893)
71,445
20,280
1,477,836
$
$
115,848
25,196
952,030
$
(35,200)
(3,107)
(378,091)
$
Huaron mine, Peru
Morococha mine, Peru
Alamo Dorado mine, Mexico
La Colorada mine, Mexico
Dolores mine, Mexico
Manantial Espejo mine,
Argentina
San Vicente mine, Bolivia
Other
Total
LAND AND EXPLORATION AND EVALUATION:
Land
Navidad project, Argentina
Minefinders exploration projects, Mexico
Morococha, Peru
Other
Total non-producing properties
Total mineral property, plant and equipment
$
$
$
8,497
462,400
180,000
15,474
38,535
704,906
2,182,742
CARRYING
VALUE
68,427
114,476
63,185
30,809
-
194,305
80,648
22,089
573,939
-
8,999
552,265
15,975
38,530
615,769
1,189,708
$
$
$
$
$
MINING PROPERTIES
DEPLETABLE
RESERVES
NON-DEPLETABLE
RESERVES
EXPLORATION
PLANT
TOTAL
AND RESOURCES
AND RESOURCES
AND EVALUATION
AND EQUIPMENT
COST
As at December 31, 2010
Additions
Disposals
Transfers
VAT collected
Closure and decommissioning –
changes in Estimate
Other
As at December 31, 2011
-
$
466,172
33,554
3,859
(13,314)
(14,694)
(143)
475,434
$
ACCUMULATED DEPRECIATION
As at December 31, 2010
Depreciation charge
Depreciation charge captured in inventory
Disposals
Transfers
As at December 31, 2011
Carrying value – December 31, 2011
$
$
$
(154,746)
(38,732)
(330)
-
(1,043)
(194,851)
280,583
-
-
-
-
-
-
-
$
$
$
$
$
24,404
2,361
(1,791)
-
24,974
-
-
-
-
-
-
24,974
$
$
$
$
$
573,746
19,932
(2,914)
45
-
-
(14)
590,795
393,944
89,916
(4,504)
(2,113)
-
-
(647)
476,596
(142,197)
(44,024)
$
$
$
-
-
-
-
590,795
(1,938)
1,043
(183,240)
293,356
$
$
-
$
$
$
1,458,266
145,763
(7,418)
(13,314)
(14,694)
(804)
1,567,799
(296,943)
(82,756)
(330)
(1,938)
$
$
(378,091)
1,189,708
Navidad Project, Argentina
During the year ended December 31, 2012 the Company capitalized $11.3
million of evaluation costs and mineral property, plant and equipment
at the Navidad Project in Argentina (2011 - $22.3 million) including land
additions of $0.9 million (2011 - $2.4 million).
At December 31, 2012, it was determined that the estimated realizable
value of the Navidad project was below its carrying value and an impairment
charge of $100.0 million was warranted (2011 - $nil). Refer to Note 12
for further details.
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 had to, 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. For the
year ended December 31, 2012 the exploration expense recognized for
the La Preciosa project is $1.0 million (2011-$2.4 million).
In April 2012, the Company provided notice to Orko that it had decided
not to deliver a feasibility study before April 13, 2012 for the La Preciosa
project as required under the terms of the joint venture agreement
between Orko and Pan American. As a result, Pan American relinquished
its right to earn a 55% interest in the La Preciosa project and Orko
retained 100% of the project. After completing almost three years of
exploration, engineering and project development work, the Company
concluded that continued participation in the La Preciosa project was
unlikely to generate a sufficient rate of return to meet Pan American’s
internal economic hurdle rate. As the Company had no carrying value in
this project, there was no loss on relinquishment of the project.
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
84 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 85
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, 2012, 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 $26.5 million to date, of which $26.1 million has been converted into
a leasing arrangement as at December 31, 2012. 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 the remaining advance payments of $0.4 million will be
converted into a leasing arrangement. For the year ended December
31, 2012, the Company capitalized $1.2 million in interest related to the
advances on capital expenditures (2011 - $0.5 million).
Dolores Mine, Mexico
On March 30, 2012, the Company acquired all of the issued and outstanding
common shares of Minefinders. Minefinders’ primary mining property
is its 100% owned Dolores gold and silver mine located in Chihuahua,
Mexico. Refer to Note 6 for further details about the acquisition.
IMPAIRMENT OF NON-CURRENT
12.
ASSETS AND GOODWILL
Non-current assets are tested for impairment when events or changes in
circumstance indicate that the carrying amount may not be recoverable.
The Company performs an impairment test for goodwill at each financial
year end and when events or changes in circumstances indicate that the
related carrying value may not be recoverable. During 2012, a change in
the business climate as evidenced by continuing deterioration of economic
conditions in Argentina including rampant inflation, government imposed
capital restrictions, the nationalization of certain petroleum assets, a lack
of progress by the province of Chubut with regards to the development
of legislation that would allow for zonation of the province to allow open
pit mining at Navidad, and the Company’s decision to place the project
on care and maintenance in December 2012, are indicators of possible
impairment of the Navidad project.
At December 31, 2012, the Company tested the recoverability of its
investment in the Navidad project. The Company used for key assumptions
current information on operating and capital costs, a long term silver
price of $25 per ounce along with long term forecast base metal prices,
a probability weighted range of possible outcomes related to the timing
of the start of construction, taxation, regulatory and economic risks
including a range of possible future exchange rates between the USD
and the Argentine peso (“ARG”) ranging from 4.5 to 10.5 ARS/USD, and a
risk adjusted project specific discount rate of 12.5%. It was determined
that the estimated recoverable value of the Navidad project on a value
in use basis (“VIU”) was below its carrying value, and as a result an
impairment charge of $100.0 million was recorded at December 31,
2012 (2011 -$nil). Specifically, the deterioration of certain of the above
noted inputs as well as the Company’s decision to place the project on
care and maintenance in December 2012 and the recognition of the
probable delay to the start of construction resulted in the write-down
occurring in December 2012.
The Company evaluated the sensitivity of the recoverable amount of
the project to a range of taxation and regulatory outcomes together
with a range of discount rates from 10.5% to 13.5%. These scenarios
produced recoverable amounts ranging from $732 million to $353 million.
Due to the sensitivity of the recoverable amount to the various factors
mentioned as well as yet unforeseen factors, any significant change in
the key assumptions and inputs could result in additional impairment
charges in future periods.
Key assumptions and sensitivity
The key assumptions in determining the recoverable amount of the
Company’s mineral projects of an investment in non-current assets are
commodity prices, discount rates, operating costs, exchange rates and
capital expenditures. At December 31, 2012, the Company performed
a sensitivity analysis on all key assumptions that assumed a negative
10% change for each individual assumption while holding the other
assumptions constant. It was determined that, other than as discussed
below and previously for the Navidad project, no reasonably possible
change in any of the key assumptions would cause the carrying value of
the Company’s mineral projects, including goodwill where applicable,
to exceed their recoverable amount for the purposes of the impairment
test, if an indicator of potential impairment for the non-current asset
was noted or assumed.
For the Huaron mine, a decrease in the silver price of 6% or the increase in
operating costs of 6% would in isolation, cause the estimated recoverable
amount on a VIU basis, to be equal to the carrying value of $62.4 million
(2011 – 17%, 17% and $59.3 million, respectively).
For the Morococha mine, a decrease in the silver price of 6% or an
increase in operating costs of 8%, would in isolation, cause the estimated
recoverable amount on a VIU basis, to be equal to the carrying value
of $125.0 million (2011 – 1%, 2% and $114.6 million respectively).
Additionally, in 2011, a decrease in the zinc price of 5%, an increase
in capital expenditures of 5%, and an unfavourable foreign exchange
movement of 2% would have caused the estimated recoverable amount
to be equal to the carrying value.
For the Dolores mine including the associated goodwill, the Company’s
current mine and economic plan is the basis for the preliminary carrying
value of this business unit which is also considered its fair value. There is
only an insignificant margin between the carrying value and the company’s
estimate of a recoverable amount, on a VIU basis. A 10% decrease in
any one key assumption will reduce the recoverable amount below the
carrying amount of $903.6 million (2011 – N/A).
13. OTHER ASSETS
Other assets consist of:
Long-term prepaid expense⁽�⁾
Investments in Associates
Reclamation bonds
Other assets
⁽�⁾ Represents a prepaid deposit related to the Gas Line Project at the Manantial mine.
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
Trade accounts payable⁽�⁾
Royalties payable
Other accounts payable and trade related accruals
Payroll and related benefits
Severance accruals
Other taxes payable
Other
$
DECEMBER 31, 2012 DECEMBER 31, 2011
$
5,205
-
224
-
5,429
5,239
1,450
539
63
7,291
$
$
$
DECEMBER 31, 2012 DECEMBER 31, 2011
$
24,041
6,838
13,199
24,174
3,032
152
6,822
78,258
56,059
17,025
33,730
21,388
966
633
6,956
136,757
$
$
⁽�⁾No interest is charged on the trades paybles 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.
15. PROVISIONS
December 31, 2010
Revisions in estimates and obligations incurred
Charged (credited) to earnings:
-new provisions
-unused amounts reversed
-exchange loss on provisions
Charged in the year
Accretion expense
December 31, 2011
Revisions in estimates and obligations incurred
Minefinders acquisition (Note 6)
Quiruvilca disposition (Note 6)
Orko disposition
Charged (credited) to earnings:
-new provisions
-exchange loss on provisions
Charged in the year
Accretion expense
December 31, 2012
CLOSURE AND
DECOMMISSIONING
$
71,550
(17,086)
-
-
-
(1,959)
3,268
55,773
(4,667)
10,880
(18,178)
(272)
-
-
(895)
2,999
45,640
$
$
$
LITIGATION
TOTAL
$
$
$
$
5,916
-
1,607
(147)
169
(1,925)
-
5,620
-
3,500
(3,151)
-
1,825
103
(854)
-
7,043
$
$
$
$
77,466
(17,086)
1,607
(147)
169
(3,884)
3,268
61,393
(4,667)
14,380
(21,329)
(272)
1,825
103
(1,749)
2,999
52,683
86 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 87
Maturity analysis of total provisions:
Current
Non-Current
DECEMBER 31, 2012 DECEMBER 31, 2011
$
$
7,022
45,661
52,683
$
$
2,341
59,052
61,393
17.
LONG TERM DEBT
Convertible notes
Conversion feature on the convertible notes
Total long-term debt
Closure and Decommissioning Cost Provision
The total inflated and undiscounted amount of estimated cash flows required to settle the Company’s closure and decommissioning provision is
$83.5 million (2011 - $103.7 million) which has been discounted using discount rates between 3% and 13%. Revisions made to the reclamation
obligations in 2012 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 2012 earnings as finance expense was $3.0 million compared to $3.3 million in 2011. Reclamation expenditures
during the current year were $1.2 million compared to $2.0 million in 2011.
Litigation Provision
The litigation provision consists of amounts accrued for labour claims at several of the Company’s mine operations. The balance of $7.0 million
at December 31, 2012 (2011 - $5.6 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.
16. FINANCE LEASE OBLIGATIONS
Lease obligations⁽�⁾
Equipment and construction advances⁽�⁾
Maturity analysis of finance leases:
Current
Non-Current
DECEMBER 31, 2012 DECEMBER 31, 2011
$
$
36,411
439
36,850
$
$
9,764
21,901
31,665
DECEMBER 31, 2012
DECEMBER 31, 2011
$
$
12,473
24,377
36,850
$
$
20,841
10,824
31,665
⁽�⁾ 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, 2012 to their present value is presented in the table below.
⁽�⁾ Represents a funding arrangement the Company entered into whereby it receives advances toward some of the project capital expenditures at the Morococha
As part of the Minefinders acquisition and pursuant to the First
Supplemental Indenture Agreement, the Company issued replacement
unsecured convertible senior notes with an aggregate principal amount
of $36.2 million (the “Notes”). Until such time as the earlier of December
15, 2015 and the date the Notes are converted, each Note shall bear
interest at 4.5% payable semi-annually on June 15 and December 15 of
each year. The principal outstanding on the Notes is due on December
15, 2015, if any Notes are still outstanding at that time. The Notes are
convertible into a combination of cash and Pan American shares.
On April 19, 2012, the Company entered into a Second Supplemental
Indenture Agreement (the “Agreement”) as part of the Minefinders
acquisition. The terms of the Agreement stipulate the following: If a
Noteholder elects to convert all or part of its principal amounts of Notes
on or prior to November 4, 2015, for each $1,000 principal amount of
converted Notes, such Notes shall be converted at the discretion of
Pan American, into:
96.670 Preferred Shares (the “Conversion Rate”) upon conversion
a)
by a holder of Notes, the Company may issue Class A voting, participating,
6.5% cumulative convertible preferred shares in the capital of Minefinders
(the “Preferred Shares”);
b)
an amount of cash equal to the Conversion Rate multiplied
by CAD$1.84 plus the market value of 0.55 of a Pan American common
share (the “Market Value of the Consideration”) at the time of such
conversion; or
c)
a combination of Preferred Shares and cash having a combined
value equal to the Cash Equivalent Conversion Consideration which is the
amount of cash equal to the Conversion Rate multiplied by the Market
Value of the Consideration at the time of such conversion.
mine. These advances are subject to an annualized interest rate of 2.2% and are paid monthly until the completion of the construction, at which point these
advance payments are converted into a leasing arrangement. The $0.4 million remaining balance as at December 31, 2012 is anticipated to be converted into a
On November 4, 2015 each holder of Preferred Shares shall receive in
exchange for each Preferred Share at the discretion of Pan American:
DECEMBER 31, 2012 DECEMBER 31, 2011
$
$
31,388
9,746
41,134
$
$
-
-
-
principal amount of converted Notes, the Notes shall be converted, at
the option of Pan American into:
a)
the number of Preferred Shares equal to the Conversion Rate;
an amount of cash equal to the Cash Equivalent Conversion
b)
Consideration that is 1.84 plus 0.55 Pan American shares multiplied by
the average of the daily volume weighted average price (“VWAP”) of
Pan American shares for the 10 consecutive Pan American trading days
commencing on the first Pan American trading day after the date of the
Company’s notice of election to deliver the conversion consideration in
cash or a combination of Preferred shares and cash if the Noteholder
has not given a notice of redemption pursuant to the terms of the
Agreement; or
c)
such combination of Preferred Shares and cash having a
combined value equal to the Cash Equivalent Conversion Consideration.
For purposes of this clause each Preferred Share shall be deemed to have
a value equal to the Market Value of the Consideration at the time of
conversion, and immediately there upon, each preferred share so issued,
shall be automatically exchanged for a Consideration Unit of CAD$1.84
plus the market value of 0.55 of a Pan American common share.
The interest and principal amounts of the Notes are classified as debt
liabilities and the conversion option is classified as a derivative liability.
The debt liability is measured at amortized cost. As a result, the carrying
value of the debt liability is lower than the aggregate face value of the
Notes. The unwinding of the discount is accreted as interest expense
over the terms of the notes using an effective interest rate. For the
year ended December 31, 2012, $1.7 million was capitalized to mineral
property, plant and equipment (2011 – $nil). The Company has the right
to pay all or part of the liability associated with the Company’s outstanding
convertible notes in cash on the conversion date. Accordingly, the
conversion feature on the convertible notes is considered an embedded
derivative and re-measured at fair value each reporting period. The fair
value of the conversion feature of the convertible notes is determined
using a model that includes the volatility and price of the Company’s
common shares and a credit spread structure with reference to the
corresponding fair value of the debt component of the convertible notes.
Assumptions used in the fair value calculation of the embedded derivative
component at December 31, 2012 were expected stock price volatility of
47.1%, expected life of 3.0 years, and expected dividend yield of 1.1%.
leasing arrangement in the first quarter of 2013.
Less than a year
2 years
3 years
4 years
5 years
Less future finance charges
Present value of minimum lease payments
88 PAN AMERICAN SILVER CORP.
DECEMBER 31, 2012 DECEMBER 31, 2011
$
$
13,320
8,913
5,848
5,811
5,811
39,703
(3,292)
36,411
$
$
5,737
3,787
558
-
-
10,082
(318)
9,764
a)
b)
CAD$1.84 and 0.55 of Pan American common shares;
an amount of cash equal to the Market Value of the Consideration;
c)
a combination of Pan American Shares and cash having a
combined value equal to the Market Value of the Consideration at
November 4, 2015.
If the Noteholder elects to convert all or part of the principal amount of
Notes held by such Noteholder after November 4, 2015, for each $1,000
During the year ended December 31, 2012, the Company recorded a
$9.1 million gain on the revaluation of the embedded derivative on the
convertible notes (2011 – nil).
CONSOLIDATED FINANCIAL STATEMENTS 89
18. OTHER LONG TERM LIABILITIES
Other long term liabilities consist of:
Deferred credit⁽�⁾
Long term income
tax payable
Severance accruals
DECEMBER 31, 2012 DECEMBER 31, 2011
$
20,788
20,788
$
-
2,468
23,256
$
2,274
2,395
25,457
$
⁽�⁾ 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 selected
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.
19. SHARE CAPITAL AND EMPLOYEE COMPENSATION PLANS
Transactions concerning stock options and share purchase warrants are summarized as follows in CAD:
STOCK OPTIONS
SHARE PURCHASE WARRANTS
SHARES
1,448,396
373,853
(90,093)
(449,097)
(39,747)
1,243,312
2,016,376
(288,796)
(90,836)
(683,491)
2,196,565
WEIGHTED AVERAGE
EXERCISE PRICE CAD$
$
32.95
$
24.90
$
23.61
$
48.10
$
27.15
$
25.92
$
19.37
$
15.79
$
28.41
$
16.47
$
24.07
WARRANTS
7,954,745
-
(139,761)
-
-
7,814,984
-
(379)
-
-
7,814,605
WEIGHTED AVERAGE
EXERCISE PRICE CAD$
$
34.67
$
-
$
16.05
$
-
$
-
$
35.00
$
-
$
35.00
$
-
$
-
$
35.00
As at December 31, 2010
Granted
Exercised
Expired
Forfeited
As at December 31, 2011
Granted⁽�⁾
Exercised⁽�⁾
Expired
Forfeited
As at December 31, 2012
⁽�⁾
Includes 12,245 options granted in lieu of director fees.
⁽�⁾ The weighted average share price at the date of exercise at December 31, 2012 was CAD$17.87 (2011 - CAD $38.13).
TOTAL
9,403,141
373,853
(229,854)
(449,097)
(39,747)
9,058,296
2,016,376
(289,175)
(90,836)
(683,491)
10,011,170
The Company has a comprehensive stock compensation plan for its employees, directors and officers (the “Compensation Plan”). The Compensation
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 Compensation 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
Compensation Plan require shareholders’ approval.
Long Term Incentive Plan
During the year ended December 31, 2012, the Company awarded 49,716 (2011 – 50,745) shares of common stock with a two year holding period
and granted 243,426 (2011 – 373,853) options under this plan. The Company used as its assumptions for calculating the fair value a risk free interest
rate of 1.26% to 1.42% (2011 – 0.85% to 0.93%), weighted average volatility of 36.93% to 39.84% using a historical share price (2011 – 36.7% to
40.67%), expected lives ranging from 3 to 4 (2011 – 1.8 to 3.0) years, historical expected dividend yield of 1.1%, and an exercise price of CAD$18.53
(2011 – CAD$24.90) per share. The weighted average fair value of each option was determined to be CAD$4.69 (2011 – CAD$5.99).
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 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. Additionally, from time to time, the Company issues
replacement awards and warrants related to acquisitions.
As part of the Minefinders acquisition each Minefinders option holder was provided a replacement option that is exercisable to purchase Pan
American shares. The number of Pan American shares the replacement option holder is entitled to purchase equals 0.6235 multiplied by the
number of Minefinders shares subject to the Minefinders Option (rounded down to the nearest whole number of Pan American shares). The
exercise price per Pan American share equals the exercise price per Minefinders share otherwise purchasable pursuant to the current Minefinders
Option, divided by 0.6235 (rounded up to the nearest whole cent).
On March 30, 2012, the Company issued 1,760,705 replacement awards with a fair value of $10.7 million. Replacement awards were valued using
the Black-Scholes option pricing model. Assumptions used were a dividend yield of 0.3%, expected volatility of 40.75%, risk free interest rate of
0.93% and expected life of 0.25 to 3.5 years.
During the year end December 31, 2012, 4,424 common shares were issued for proceeds of $0.08 million in connection with the exercise of options
under the plan (December 31, 2011 – 90,093 common shares for proceeds of $2.2 million).
Replacement Awards
During the year ended December 31, 2012, 284,372 common shares were issued for proceeds of $3.1 million, including 90,197 common shares
that were issued by way of a cashless option exercise valued at $1.7 million (2011 – nil).
Share Option Plan
The following table summarizes information concerning stock options outstanding and options exercisable as at December 31, 2012. The underlying
option agreements are specified in Canadian dollar amounts.
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
RANGE OF
EXERCISE
PRICES CAD$
$15.66 - $17.73
$17.74 - $22.23
$22.24 - $25.19
$25.20 - $36.66
$36.67 - $40.22
NUMBER
OUTSTANDING
AS AT DECEMBER 31,
2012
320,044
376,507
1,305,841
96,246
97,927
2,196,565
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL
LIFE (MONTHS)
17.54
54.45
49.13
0.33
59.30
43.75
WEIGHTED AVERAGE
EXERCISE PRICE CAD$
NUMBER EXERCISABLE
AS AT DECEMBER 31,
2012
WEIGHTED AVERAGE
EXERCISE PRICE CAD$
$
$
$
$
$
$
17.22
19.84
24.83
36.66
40.22
24.07
320,044
-
1,056,624
96,246
97,927
1,570,841
$
$
$
$
$
$
17.22
-
24.79
36.66
40.22
24.94
For the year ended December 31, 2012, the total employee stock-based compensation expense recognized in the income statement was $4.1
million (2011 - $3.5 million).
90 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 91
SHARE PURCHASE WARRANTS
As part of the acquisition of Aquiline Resources Inc. in 2009 the Company issued share purchase warrants. The following table summarizes information
concerning the warrants outstanding and warrants exercisable as at December 31, 2012. The underlying option agreements are specified in
Canadian dollar amounts.
WARRANTS OUTSTANDING
WARRANTS EXERCISABLE
EXERCISE PRICE
CAD$
NUMBER OUTSTANDING
AS AT DECEMBER 31, 2012
$35.00
7,814,605
AVERAGE REMAINING
CONTRACTUAL LIFE
(MONTHS)
23.20
$
AVERAGE EXERCISE
PRICE CAD$
35.00
NUMBER EXERCISABLE
AS AT DECEMBER 31,
2012
7,814,605
AVERAGE EXERCISE
PRICE CAD$
$
35.00
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. During the year ended December 31, 2012, there was a derivative gain of $15.1 million (2011 – gain of $101.8 million). The following
table provides detail on the movement of the share purchase warrant liability between December 31, 2011 and December 31, 2012:
SHARE PURCHASE WARRANT LIABILITY
December 31, 2010
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
December 31, 2011
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
December 31, 2012
$
$
$
127,890
(2,411)
(101,828)
23,651
(1)
(15,056)
8,594
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
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected warrant life in years
Quoted market price at period end
$
DECEMBER 31, 2012
35.00
1.0051
1.1%
1.1%
43.0%
1.93
$18.64
$
$
DECEMBER 31, 2011
35.00
0.9771
1.0%
0.5%
41.5%
2.9
22.28
$
The conversion feature on the convertible note, further discussed in Note 17, is considered an embedded derivative and is classified and accounted
for as a financial liability at fair value with changes in fair value included in net earnings. At December 31, 2012, the total unrealized derivative gain
attributable to both the warrants and convertible notes was $24.2 million (2011 - $101.8 million).
Restricted Share Units (RSUs)
Under the Company’s RSU plan, selected employees are granted RSUs where each RSU has a value equivalent to one Pan American common share.
The RSUs are settled in cash and vest in two instalments, the first 50% vest on the first anniversary date of the grant and a further 50% vest on the
second anniversary date of the grant. Additional RSUs are credited to reflect dividends paid on Pan American common share over the vesting period.
Compensation expense for RSU’s was $0.08 million in 2012 (2011 – N/A) and is presented as a component of general and administrative expense.
At December 31, 2012, the weighted average remaining contractual life of RSUs was 1.5 years.
RSU ACTIVITY
As at December 31, 2011
Granted
Change in value
As at December 31, 2012
NUMBER
OUTSTANDING
-
91,226
-
91,226
FAIR VALUE
$
$
-
1,704
5
1,709
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. On May 15, 2012, the directors of the Company
approved the extension of the Key Employee Long Term Contribution
Plan (the “2012 Contribution Plan”), effective on June 1, 2012.
The 2012 Contribution Plan is a two year plan with a percentage of the
retention bonus payable at the end of each year of the program. The
2012 Contribution Plan design consists of three bonus levels that are
commensurate with various levels of responsibility, and provides for
a specified annual payment for two years starting in June 2012. Each
year, the annual contribution award will be paid in the form of either
cash or shares of the Company. The minimum aggregate value that will
be paid in cash or issued in shares over the 2 year period of the plan
is $7.8 million. As of December 31, 2012, $7.8 million remains to be
paid as described in Note 8. No shares will be issued from the treasury
pursuant to the 2012 Contribution Plan without the prior approval of the
plan by the shareholders of the Company and any applicable securities
regulatory authorities. The Company’s Contribution Plan is classified and
accounted for as a financial liability and as such this liability is marked-to-
market with changes in value included in net earnings. During the year
ended December 31, 2012, there was a $0.3 million unrealized gain on
the mark-to-market of the Contribution Plan. The Company uses the
Black Scholes pricing model to determine the fair value of the Canadian
dollar denominated Contribution Plan. Assumptions used are as follows:
stock price - $18.64 CAD, exercise price - $17.91 CAD, expected life in
years – 0.42 and 1.42 years, annualized volatility 44.33% and 43.93%,
expected dividend yield – 1.1% risk free interest rate - 1.1%, exchange
rate (1CAD=USD) – 1.0051.
Issued share capital
The Company is authorized to issue 200,000,000 common shares of
no par value.
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. The Company completed the approved normal course issuer
bid program during the quarter ended September 30, 2012.
On August 29, 2012, the Company received regulatory approval for
a second normal course issuer bid to purchase up to 7,607,277 of its
common shares, during the one year period from September 4, 2012
to September 3, 2013.
During the year ended December 31, 2012, the Company purchased and
cancelled 2,411,240 shares (2011 – 3,582,200) for a total consideration
of $41.7 million allocated between retained earnings ($4.9 million) and
share capital ($36.8 million) (2011 - $94.0 million, $51.7 million, and
$42.3 million, respectively).
Dividends
On February 22, 2012, the Company declared a dividend of $0.0375 per
common share paid to holders of record of its common share as of the
close of business on March 5, 2012.
On May 15, 2012, the Company declared a quarterly dividend of $0.0375
per common share paid to holders of record of its common shares as of
the close of business on May 28, 2012.
On August 14, 2012, the Company declared a quarterly dividend of $0.05
per common share paid to holders of record of its common shares as of
the close of business on August 27, 2012.
On November 7, 2012, the Company declared a quarterly dividend of
$0.05 per common share paid to holders of record of its common shares
as of the close of business on November 19, 2012.
On February 20, 2013, the Company declared dividends payable of
$0.125 per common share for total dividends of $19.0 million, payable
to holders of record of its common shares as of the close of business
day on March 4, 2013. These dividends were not recognized in the year
ended December 31, 2012.
92 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 93
20. PRODUCTION COSTS
23. SUPPLEMENTAL CASH FLOW INFORMATION
Production costs are comprised of the following:
The following tables summarize the changes in operating working capital items and significant non-cash items:
Consumption of raw materials and consumables
Employee compensation and benefits expense
Contractors and outside services
Utilities
Other expenses
Changes in inventories
2012
175,503
149,082
105,210
24,512
49,556
(29,862)
474,001
$
$
21. 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
$
2012
181,437
3,443
184,880
(18,115)
(8,847)
(8,836)
$
$
$
2011
121,366
119,430
69,740
39,446
18,755
(27,374)
341,363
2011
148,951
3,502
152,453
(15,953)
(8,205)
(8,865)
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:
Fair value of shares issued as part of Minefinders acquisition
Replacement awards issued as part of the Minefinders acquisition
Post-acquisition expenditures associated with the replacement awards
Fair value adjustment of options and warrants exercised
Advances received for construction and equipment leases
Share-based compensation issued to employees and directors
2012
(20,418)
(30,804)
1,283
27,462
253
(22,224)
$
$
2012
$ 1,088,104
10,739
$
699
$
1,765
$
11,538
$
1,060
$
2011
(8,595)
(28,416)
(2,799)
2,631
(2,256)
(39,435)
2011
-
-
-
2,914
26,757
1,329
$
$
$
$
$
$
$
$
$
149,082
$
119,430
24. SEGMENTED INFORMATION
22. EARNINGS PER SHARE (BASIC AND DILUTED)
Net Earnings⁽�⁾
Basic EPS
Effect of Dilutive Securities:
Stock Options
Convertible notes
Diluted EPS
EARNINGS
(NUMERATOR)
$
87,359
$
87,359
-
(9,103)
78,256
$
2012
SHARES
(DENOMINATOR)
PER-SHARE
AMOUNT
140,883
$
0.62
EARNINGS
(NUMERATOR)
352,494
352,494
$
$
107
1,452
142,442
$
0.55
$
-
-
352,494
2011
SHARES
(DENOMINATOR)
PER-SHARE
AMOUNT
106,434
164
-
106,598
$
$
3.31
3.31
⁽�⁾ 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, 2012 were 9,447,700 out-of-
money options and warrants (2011 – 8,018,637).
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.
94 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 95
PERU
YEAR ENDED DECEMBER 31, 2012
ARGENTINA
BOLIVIA
LA
MANANTIAL
MEXICO
ALAMO
HUARON
MOROCOCHA
QUIRUVILCA
DOLORES
DORADO
COLORADA
ESPEJO
NAVIDAD
SAN VICENTE
OTHER
TOTAL
Revenue from external customers
$
100,787
Depreciation and amortization
$
(8,686)
Exploration and project development
$
(813)
Acquisition costs
Interest income
Interest and financing expenses
Gain (loss) on disposition of assets
Gain on derivatives
Foreign exchange (loss) gain
Gain on commodity and foreign
currency contracts
Impairment charge
Earnings (loss) before income taxes
Income taxes (recovery)
Net earnings (loss) for the period
Capital expenditures
Total assets
Total liabilities
$
$
$
$
$
$
$
$
$
$
$
$
-
494
(739)
28
-
(177)
-
-
18,468
(6,925)
11,543
22,936
$
157,476
$
49,337
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
78,609
(11,117)
(2,335)
-
55
(675)
243
-
49
-
-
(4,119)
(3,124)
(7,243)
27,194
210,319
72,271
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
PERU
13,954
(340)
-
-
136
(313)
-
-
(42)
-
-
(1,433)
318
(1,115)
353
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
139,406
$
201,195
(26,802)
$
(16,337)
(2,420)
-
659
(112)
(10)
-
(2,165)
-
-
$
$
$
$
$
$
$
$
$
(1,806)
-
21
(192)
13
-
(464)
-
-
31,015
$
121,812
(6,662)
$
(39,797)
24,353
59,038
$
$
82,015
10,936
-
-
$
1,358,817
$
179,883
$
313,228
$
9,037
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
126,360
(4,761)
(1,129)
-
17
(238)
(51)
-
(1,433)
-
-
71,999
(14,220)
57,779
21,700
123,965
20,842
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
171,943
(27,785)
(217)
-
115
(1,466)
289
-
(5,108)
-
-
$
$
$
$
$
$
$
$
$
$
-
(296)
(10,482)
-
-
(46)
-
-
3,049
-
$
(100,009)
19,100
$
(109,216)
(13,312)
$
1,439
5,788
$
(107,777)
15,858
301,472
83,794
$
$
$
11,292
469,897
1,582
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
96,340
(11,299)
-
-
-
(298)
-
-
632
-
-
27,621
(8,492)
19,129
3,053
105,298
34,309
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(730)
(17,544)
(16,162)
1,079
(3,599)
9,140
24,159
11,236
421
-
6,088
(3,047)
3,041
1,786
480,852
76,850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
928,594
(108,153)
(36,746)
(16,162)
2,576
(7,678)
9,652
24,159
5,577
421
(100,009)
181,335
(93,822)
87,513
174,146
3,387,979
661,250
YEAR ENDED DECEMBER 31, 2011
MEXICO
ALAMO
ARGENTINA
BOLIVIA
LA
MANANTIAL
HUARON
MOROCOCHA
QUIRUVILCA
DOLORES
DORADO
COLORADA
ESPEJO
NAVIDAD
SAN VICENTE
OTHER
TOTAL
Revenue from external customers
Depreciation and amortization
$
$
99,236
(6,515)
Exploration and project development
$
(303)
Interest income
Interest and financing expenses
Gain (loss) on disposition of assets
Gain on derivatives
Foreign exchange gain (losses)
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
$
$
$
$
$
$
$
$
$
$
$
$
326
(358)
(65)
-
(456)
-
33,194
(9,260)
23,934
13,021
69,014
22,397
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
83,467
$
45,927
(9,679)
$
(1,515)
(3,619)
$
103
$
(514)
$
1,097
$
-
$
-
58
(648)
-
-
(300)
$
(180)
-
$
-
17,477
$
13,143
(4,683)
$
(5,045)
12,794
$
41,669
$
8,098
1,515
160,773
$
79,613
65,256
$
54,586
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
174,387
(16,637)
(2,098)
-
(363)
8
-
331
-
115,293
(36,261)
79,032
8,287
128,875
12,258
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
147,654
(4,077)
(845)
17
(313)
124
-
775
-
104,254
(30,418)
73,836
13,301
95,274
22,652
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
213,796
(33,675)
(2,189)
12
(1,468)
-
-
(2,490)
-
68,066
(14,737)
53,329
16,916
340,659
248,016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
(207)
(20,705)
228
(67)
-
-
557
-
(22,008)
(202)
(22,210)
22,333
559,911
3,086
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
85,446
(9,985)
-
216
(317)
26
-
(38)
-
38,398
(15,045)
23,353
4,975
118,147
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,362
(466)
2,032
521
(2,151)
-
101,828
(6,325)
681
103,447
(1,467)
101,980
23,746
$
$
$
$
$
$
$
$
$
$
$
$
$
855,275
(82,756)
(27,727)
1,481
(6,199)
1,190
101,828
(8,126)
681
471,264
(117,118)
354,146
145,763
399,530
$
1,951,796
67,242
$
(145,784)
$
349,709
Product Revenue
Refined silver and gold
Zinc concentrate
Lead concentrate
Copper concentrate
Total
2012
554,813
72,502
120,178
181,101
928,594
$
$
2011
432,634
67,037
156,960
198,644
855,275
$
$
The Company has 15 customers that account for 100% of the concentrate and silver and gold sales revenue. The Company has 4 customers that
accounted for 27%, 27%, 13% and 10% of total sales in 2012, and 4 customers that accounted for 34%, 21%, 15% and 14% of total sales in 2011.
The loss of certain of these customers or curtailment of purchases by such customers could have a material adverse effect on the Company’s results
of operations, financial condition, and cash flows.
25. OTHER INCOME
Insurance proceeds, net⁽�⁾
Royalties income
Transaction break fee
Reversal of present value long term receivable
Income – Quiruvilca property⁽�⁾
Initiation fee on Shalipayco property⁽�⁾
Chinalco grants (Note 11)
Other
Total
$
$
2012
-
323
-
-
1,572
2,500
-
975
5,370
⁽�⁾ Represents insurance recoveries related to the theft of doré at one of the Company’s mines.
⁽�⁾ Represents income received on the Quiruvilca sales agreement. Refer to Note 6 for further details.
⁽�⁾ Represents an initiation fee paid by a third party to commence exploration activities on the Shalipayco property.
26.
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
Provision for income taxes
2012
93,857
7,193
101,050
(2,705)
(4,523)
(7,228)
93,822
$
$
$
-
-
$
$
$
2011
3,849
1,039
1,400
2,174
4,546
2,720
15,728
2011
110,620
(1,273)
109,347
4,133
3,638
7,771
117,118
As of January 1, 2012, the applicable income tax rate in Canada was reduced from 26.5% to 25%. The change in tax rate has no income tax impact
because of the tax losses carried forward.
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, 2012 and the comparable
period of 2011 were the non-taxable portion of unrealized gains and losses on the Company’s derivatives, foreign income tax rate differentials,
foreign exchange and non-recognition of certain deferred tax assets. In addition, the Company took a non-cash impairment charge on its Navidad
assets. The Company expects that these and other factors will continue to cause volatility in effective tax rates in the future.
96 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 97
Income before taxes
Statutory tax rate
Income tax expense based on above rates
Increase (decrease) due to:
Non-deductible expenses
Increase to estimated deductible expenses not recorded in earnings
Change in net deferred tax assets not recognized
Non-taxable unrealized (gain) 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
Impairment of Navidad
Other
Effective tax rate
Deferred tax assets and liabilities
$
$
$
2012
181,335
25.0%
45,334
5,196
(3,009)
5,145
(6,040)
(1,141)
9,418
2,111
(2,716)
35,003
4,521
93,822
51.7%
$
$
-
$
2011
471,264
26.5%
124,885
2,028
(12,986)
286
(26,984)
14,642
9,914
6,207
2,277
(3,151)
117,118
24.9%
The following is the analysis of the deferred tax assets (liabilities) presented in the consolidated financial statements:
Net deferred assets (liabilities) beginning of year
Deferred tax liability resulting from Minefinders acquisition (Note 6)
Recognized in net earnings in year
Deferred tax assets derecognized for investment sold (Note 6)
Net deferred assets (liabilities) end of year
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
$
DECEMBER 31, 2012
(50,749)
(265,275)
7,228
(11,384)
(320,180)
1,450
(321,630)
(320,180)
$
$
DECEMBER 31, 2011
$
(42,978)
-
-
$
$
(7,771)
(50,749)
4,170
(54,919)
(50,749)
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
The deferred tax assets (liabilities) are comprised of the various temporary differences as detailed below:
Deferred tax assets (liabilities) arising from:
Closure and decommissioning costs
Provisions for doubtful debts and inventory adjustments
Accounts payable and accrued liabilities
Mineral properties, plant and equipment
Prepaids and other current assets
Other temporary differences and provisions
Net deferred tax asset (liability)
DECEMBER 31, 2012
DECEMBER 31, 2011
$
$
623
(8,153)
472
(257,365)
(416)
(436)
(265,275)
-
-
-
-
-
-
-
$
$
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)
Net tax loss (capital in nature)
Resource pools
Financing fees
Property plant and equipment
Closure and decommissioning costs
Exploration expenses
Vacation accruals
Other temporary differences
DECEMBER 31, 2012
$
127,185
10,531
23,500
5,833
16,609
22,842
22,822
998
654
230,974
$
DECEMBER 31, 2011
$
86,015
10,022
12,773
9,650
5,524
17,567
11,971
1,048
98
154,668
$
Included in the above amount are the losses, which if not utilized will expire as follows:
2013
2014
2015
2016 -2026 and after
Total tax losses
$
$
CANADA
413
11,180
20,572
71,623
103,788
$
-
-
$
US
-
13,117
13,117
$
-
-
$
MEXICO
-
10,280
10,280
TOTAL
413
11,180
20,572
95,020
127,185
$
$
DECEMBER 31, 2012
DECEMBER 31, 2011
Taxable temporary differences associated with investment in subsidiaries
Deferred tax assets (liabilities) arising from:
Closure and decommissioning costs
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
Withholding tax obligations
Other temporary differences and provisions
Net deferred tax asset (liability)
$
$
7,004
110
-
408
8,636
8,612
(328,642)
(11,351)
(5,434)
(834)
1,311
(320,180)
-
-
$
11,604
As at December 31, 2012, taxable temporary differences of $126.8 million (2011 – $138.7 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.
345
92
6,657
15,103
(71,300)
(14,616)
(1,000)
2,366
(50,749)
$
Included in the amounts above are the following deferred tax assets (liabilities) resulting from the acquisition of Minefinders:
98 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 99
27. COMMITMENTS AND
CONTINGENCIES
General
a.
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.
Purchase Commitments
b.
The Company had no purchase commitments other than those
commitments described in Note 8.
Credit Facility
c.
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. The Company cancelled the $150
million credit facility effective December 31, 2012.
Environmental Matters
d.
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.
Estimated future reclamation costs are based 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,
2012 and December 31, 2011 $45.6 million and $55.8 million, respectively,
were accrued for reclamation costs relating to mineral properties. See
also Note 15.
Income Taxes
e.
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 nil
(2011 - $2.3 million)
Finance Leases
f.
The present value of future minimum lease payments classified as finance
leases at December 31, 2012 is $36.4 million (2011: $9.8 million) and the
schedule of timing of payments for this obligation is found in Note 16.
Law changes in Argentina
g.
Government regulation in Argentina related to the economy has increased
substantially over the past year. In particular, the government has
intensified the use of price, foreign exchange, and import controls in
response to unfavourable domestic economic trends. During 2012, an
Argentinean Ministry of Economy and Public Finance resolution reduced
the time within which exporters were required to repatriate net proceeds
from export sales from 180 days to 15 days after the date of export.
As a result of this change, the Manantial Espejo operation temporarily
suspended doré shipments while local management reviewed how the
new resolution would be applied by the government. In response to
petitions from numerous exporters for relief from the new resolution,
on July 17, 2012 the Ministry issued a revised resolution which extended
the 15-day limit to 120 days.
The Argentine government has also imposed restrictions on the importation
of goods and services and increased administrative procedures required
to import equipment, materials and services required for operations at
Manantial Espejo. In addition, in May 2012, the government mandated
that mining companies establish an internal function to be responsible
for substituting Argentinian-produced goods and materials for imported
goods and materials. Under this mandate, the Company is required to
submit its plans to import goods and materials for government review
120 days in advance of the desired date of importation.
The government of Argentina has also tightened control over capital
flows and foreign exchange, including informal restrictions on dividend,
interest, and service payments abroad and limitations on the ability of
individuals and businesses to convert Argentine pesos into United States
dollars or other hard currencies. These measures, which are intended to
curtail the outflow of hard currency and protect Argentina’s international
currency reserves, may adversely affect the Company’s ability to convert
dividends paid by current operations or revenues generated by future
operations into hard currency and to distribute those revenues to
offshore shareholders. Maintaining operating revenues in Argentine
pesos could expose the Company to the risks of peso devaluation and
high domestic inflation.
Labour Law Changes in Mexico
h.
In December 2012, the Mexican government introduced changes to the
Federal labour law which made certain amendments to the law relating
to the use of service companies and subcontractors and the obligations
with respect to employee benefits. These amendments may have an
effect on the distribution of profits to workers and this could result in
additional financial obligations to the Company. At this time, the Company
is evaluating these amendments in detail, but currently believes that
it continues to be in compliance with the federal labour law and that
these amendments will not result in any new material obligations for
the Company. Based on this assessment, the Company has not accrued
any amounts for the year ended December 31, 2012. During 2013, the
Company will continue to monitor developments in Mexico and to assess
the potential impact of these amendments.
Political Changes in Bolivia
i.
In early 2009, a new constitution was enacted in Bolivia that further
entrenches the government’s ability to amend or enact certain laws,
including those that may affect mining. 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 and
this has caused some concerns amongst foreign companies doing business
in Bolivia due to the government’s policy objective of nationalizing parts
of the resource sector. 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 it is expected that normal operations will
continue status quo. Pan American will take every measure available to
enforce its rights under its agreement with COMIBOL, but there is no
guarantee that governmental actions will not impact the San Vicente
operation and its profitability. 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.
Other Legal Matters
j.
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 un-asserted claims that may result
in such proceedings, the Company and its legal counsel evaluate the
perceived merits of any legal proceedings or un-asserted 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.
Title Risk
k.
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.
Royalty Agreements and Participation Agreements
l.
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 liabilities 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.
On September 22, 2011, Peru’s Parliament approved a law that increased
mining taxes to fund anti-poverty infrastructure projects in the country,
effective October 1, 2011. The law changed the scheme for royalty
payments, so that mining companies that had not signed legal stability
agreements with the government had 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 were subject
to a “special tax” at a rate ranging from 2% to 8.4% of operating profit.
Companies that had 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 change in the royalty
and the new tax had no material impact 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.
Additionally, the governor of the province of Chubut, Argentina, has
submitted to the provincial legislature draft law which if passed will
introduce a 5% net smelter return royalty, in addition to the 3% provincial
royalty discussed above. Refer below to the Navidad project section
below for further details.
100 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 101
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
29. SUBSEQUENT EVENTS
2012
7,288
1,857
9,145
$
$
2011
7,451
2,245
9,696
$
$
On February 24, 2013, the Company signed an agreement with Esperanza Resources Corp. which contemplates the transfer of certain non-core gold
assets in the Company’s mineral property portfolio including the La Bolsa, Calcatreu and Pico Machay early stage projects to Esperanza. Preliminary
details of the proposed transaction are that in exchange for these properties plus CAD $35 million dollars; the Company would receive an aggregate
of 71.5 million shares and 10 million warrants (at a CAD $1.80 strike price). Also, the Company plans to make available a CAD $15 million standby
convertible credit facility. The financial effect cannot be determined due to the early stage of this transaction. The transaction is expected to close
during the second quarter of 2013
Dolores mine
Production from the Dolores mine is subject to underlying net smelter
return royalties comprised of 2% on gold and silver production and
1.25% on gold production. These royalties are payable to Royal Gold Inc.
and were effective in full as of May 1, 2009, on the commencement of
commercial production at the Dolores mine. For the year ended December
31, 2012, the royalties to Royal Gold amounted to approximately $3.4
million (2011 - nil).
Navidad project
In late June 2012 the governor of the province of Chubut submitted to
the provincial legislature a draft law which, if passed, would regulate
all future oil and gas and mining activities in the province. The draft
legislation incorporated the expected re-zoning of the province, allowing
for the development of Navidad as an open pit mine. However, the draft
legislation also introduced a series of new regulations that would have
greatly increased provincial royalties and imposed the province’s direct
participation in all mining projects, including Navidad.
In October 2012, the proposed bill was withdrawn for further study;
however, as a result of uncertainty over the zoning, regulatory and
tax laws which will ultimately apply, the Company has been forced to
temporarily suspend project development activities at Navidad. As a
consequence of these events, Pan American recognized an impairment
charge of $100.0 million against the carrying value of the project for the
year ended December 31, 2012. The Company remains committed to the
development of Navidad and to contributing to the positive economic
and social development of the province of Chubut upon the adoption
of a favorable legislative framework.
28. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2012, a company indirectly owned
by a trust of which a director of the Company is a beneficiary, was paid
approximately $0.3 million (2011 - $0.4 million) for consulting services.
Similarly, at December 31, 2012 an accrual was recorded for consulting
services for a nominal amount (2011 - $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.
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. 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 as disclosed in Note 18.
Huaron 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.
Manantial Espejo mine
Production from the Manantial Espejo property is subject to royalties
to be paid to Barrick Gold Corp. 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 operation’s cash flow. Once
full commercial production of San Vicente began, the Participation Fee
was reduced by 75% until the Company recovered its investment in the
property. The Participation Fee has now reverted back to the original
percentage. For the year ended December 31, 2012, the royalties to
COMIBOL amounted to approximately $20.2 million (2011 - $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 return royalty (as per the
Agreement) 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. 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.
102 PAN AMERICAN SILVER CORP.
CONSOLIDATED FINANCIAL STATEMENTS 103
Investing in our Communities
HUARON, PERU
DOLORES, MEXICO
NAVIDAD, ARGENTINA
DIRECTORS
Ross J. Beaty – Chairman (Independent)
Geoff A. Burns – President & Chief Executive Officer
Michael Carroll (Independent)
Neil de Gelder (Independent)
Noel Dunn (Independent)
Robert Pirooz – General Counsel
David Press (Independent)
Walter Segsworth (Independent)
EXECUTIVE MANAGEMENT
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 – VP, Legal Affairs & Corporate Secretary
George Greer – Sr. VP, Project Development
Sean McAleer – VP, Human Resources & Security
Robert Pirooz – General Counsel
Michael Steinmann – Executive VP, Corporate
Development & Geology
Wayne Vincent – VP, Accounting & Financial Reporting
Martin Wafforn – VP, Technical Service
COUNTRY MANAGERS
Bret Boster – Argentina
Gary Hannan – Bolivia
Chris Warwick – Mexico
Jorge Ugarte – Peru
ANNUAL GENERAL MEETING
Monday, May 13, 2013 – 2:00pm (PST)
Four Seasons Hotel, Arbutus Room
791 West Georgia St. Vancouver, BC
INVESTOR RELATIONS
Kettina Cordero – Manager, Investor Relations
ir@panamericansilver.com
AUDITORS
Deloitte LLP
2800 – 1055 Dunsmuir Street
4 Bentall Centre
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
At December 31, 2012: 151,820,635 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
983_Fin.p104.pdf // April 8, 2013 15:55:28 Page 1 Modified w/Pitstop
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CORPORATE HEADQUARTERS -
VANCOUVER
Pan American Silver Corp.
Suite 1440 – 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
BOLIVIA OFFICE
Pan American Silver (Bolivia) S.A.
T. 59-1-2-279-69900
F. 59-1221-54216
MEXICO OFFICE
Plata Panamericana S.A. de C.V.
T. 52-618-128-0709 x 101
F. 52-618-128-0692 x 102
PERU OFFICE
Pan American Silver Peru S.A.C.
T. 51-1-618-9700
F. 51-1-618-9729
Design: Danielle Connor
dconnordesigns.com