Progress
UNITING OUR CORE VALUES
ANNUAL REPORT 2013 2013 Annual Report
TABLE OF CONTENTS
Our Operations
Highlights of 2013
Chairman’s Letter
President’s Letter
Outstanding Results Through Exploration
The Silver Market in 2013
La Colorada
Properties at a Glance
Cautionary Notes
Corporate Information
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9
10
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16
Progress
UNITING OUR CORE VALUES
SUSTAINABILITY
REPORT 2013
Our 2013 Sustainability
Report describes our
efforts in progressing
communities towards
sustainable development
while protecting the
environment and
adhering to the highest
safety standards.
The report will be available in late April 2013 at:
www.panamericansilver.com/sustainability/
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.
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 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 CHUBUT, ARGENTINA, WHICH CURRENTLY HAVE SIGNIFICANT RESTRICTIONS ON MINING, RECENT TAX CHANGES IN SANTA CRUZ, ARGENTINA, AND RECENT AMENDMENTS
TO LABOUR AND TAX LAWS IN MEXICO; THE CONTINUING NATURE OF HIGH INFLATION, RISING CAPITAL AND OPERATING COSTS, CAPITAL RESTRICTIONS AND RISKS OF EXPROPRIATION IN ARGENTINA AND
THEIR EFFECTS ON THE COMPANY; 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; THE ABILITY OF THE COMPANY TO ACHIEVE ANY PLANNED EXPANSIONS AND DEVELOPMENT, INCLUDING BUT NOT LIMITED TO, POTENTIAL OPPORTUNITIES AT THE DOLORES MINE, AND THE
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; 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 THAT, WHILE CONSIDERED
REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, POLITICAL AND SOCIAL UNCERTAINTIES AND CONTINGENCIES. SUCH ASSUMPTIONS
INCLUDE, WITHOUT LIMITATION: ORE GRADES AND RECOVERIES; METAL PRICES; RECLAMATION ESTIMATES; THE ACCURACY OF OUR MINERAL RESOURCES AND RESERVES; PRICES FOR INPUTS SUCH AS
ENERGY, LABOUR, MATERIALS AND SERVICES; AND THAT ALL NECESSARY PERMITS, LICENSES AND APPROVALS ARE OBTAINED OR MAINTAINED FOR OUR OPERATIONS.
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 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; DIMINISHING QUANTITIES OR GRADES OF MINERAL RESERVES AS PROPERTIES ARE MINED;
GLOBAL FINANCIAL CONDITIONS; 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 AND INFORMATION. FORWARD-LOOKING
STATEMENTS AND INFORMATION ARE DESIGNED TO HELP READERS UNDERSTAND MANAGEMENT’S CURRENT VIEWS OF OUR NEAR AND LONGER TERM PROSPECTS, AND MAY NOT BE APPROPRIATE FOR
OTHER PURPOSES. 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, CHANGES IN CIRCUMSTANCES OR ANY OTHER EVENTS AFFECTING SUCH STATEMENTS OR INFORMATION, EXCEPT TO THE EXTENT
REQUIRED BY LAW.
SUSTAINABILITY REPORT 2013
Our Operations
Mining Operations
Silver Development and Advanced
Stage Exploration Projects
Gold Development and Advanced
Stage Exploration Projects
Exploration Projects
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2
3
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5
6
NORTH AMERICA
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8
9
SOUTH AMERICA
HEAD OFFICE
Vancouver, Canada
UNITED STATES
1 Waterloo
MEXICO
2 La Bolsa
3 La Virginia
4 Dolores
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
DOLORES MINE, MEXICO
1
Annual Report 2013 Highlights of 2013
In 2013, we set a new production record of 26 million ounces of silver and 149,800 ounces of gold, we
grew our proven and probable silver mineral reserves by 2% to a record 323.5 million ounces of silver
and we made a positive decision to expand our La Colorada mine, one of our most profitable operations.
In a year of dramatic metal price declines, we reduced our cash costs(1) by 10% to $10.81 per ounce
of silver, net of by-product credits, we posted industry-leading All-in Sustaining Cost per Silver Ounce
Sold (“AISCSOS”)(2) of $18.33 net of by-product credits and we maintained our industry-leading cash
dividend, paying a total of $75.8 million to our shareholders. Our achievements attest to our operational
excellence, our financial strength and the compelling cash returns we offer our shareholders.
SILVER
PRODUCTION
GOLD
PRODUCTION
CASH COSTS (1)
DIVIDENDS
PAID
4%
INCREASE
33%
INCREASE
10%
DECREASE
204%
INCREASE
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5
2
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2013
2012
2013 SILVER
PRODUCTION
2014 AVERAGE SILVER
PRODUCTION FORECAST BY MINE
3.1 Moz
4.6 Moz
3.9 Moz
4.9 Moz
4.0 Moz
2.4 Moz
26 Moz
5.1 Moz
4.0 Moz
2.6 Moz
25.75-26.75
Moz
3.8 Moz
3.7 Moz
3.3 Moz
3.5 Moz
3.5 Moz
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial
Espejo
(1) Cash costs per payable ounce of silver, net of by-product credits, is a non-GAAP measure. The Company believes that in addition to production costs, depreciation and amortization, and royalties, cash costs per ounce is a
useful and complementary benchmark that investors use to evaluate the Company’s performance and ability to generate cash flow and is well understood and widely reported in the silver mining industry. However, cash costs 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 and, accordingly, the
Company’s cash costs per ounce may not be comparable to similarly titled measures used by other entities. See “Alternative Performance (Non-GAAP) Measures” in the Company’s MD&A for the year-ended December 31, 2013 for a
reconciliation of this measure to the Company’s production costs, depreciation and amortization, and royalties.
(2) All-in sustaining costs per silver ounce sold (“AISCSOS”) is a non-GAAP measure. The Company has adopted the reporting of AISCSOS as a measure of a silver mining company’s consolidated operating performance and the
ability to generate cash flow from all operations collectively. We believe it is a more comprehensive measure of the cost of operating our consolidated business than traditional cash and total costs per ounce as it includes the cost
of replacing ounces through exploration, the cost of ongoing capital investments (sustaining capital), general and administrative expenses, as well as other items that affect the Company’s consolidated earnings and cash flow. This
measure including its subcomponent Sustaining Capital are non – GAAP measures. Please see “Alternative Performance (Non-GAAP) Measures” in the Company’s MD&A for the year ended December 31, 2013.
2
Pan American Silver Corp.
PRODUCTION
Silver (million ounces)
Gold (ounces)
Zinc (tonnes)
Lead (tonnes)
Copper (tonnes)
Average price per silver ounce (US$ London fix)
Average price per gold ounce (US$ London fix)
FINANCIAL (all amounts in million US$ except AISCSOS)(3)
Net (loss)/earnings
Adjusted (loss)/earnings (4)
Mine operating earning (5)
Net cash generated from operating activites
Dividends paid
Share repurchasing program
2013
26.0
2012
25.1
149,800
112,300
42,100
13,500
5,500
$23.79
$1,411
$(445.9)
$(49.5)
$131.5
$119.6
$75.8
$6.7
36,800
12,300
4,200
$31.15
$1,669
$78.4
$166.8
$303.9
$193.3
$24.9
$41.7
Cash and short term investments at December 31
$422.7
$542.3
AISCSOS, net of by-product credits (US$) (2)
$18.33
$22.26
STAKEHOLDERS
Common shares outstanding at December 31 (million)
Employees and contractors at December 31
151.5
7,339
151.8
8,327
(3) Recast 2012 financial results for the finalization of the purchase price allocation of Minefinders.
(4) Adjusted (loss)/earnings are non-GAAP measures. Adjusted earnings is calculated as net (loss)/earnings for the period adjusting for the gains or losses recorded on fair market value adjustments on the Company’s outstanding
derivative instruments, impairment of mineral property, unrealized foreign exchange gains or losses, unrealized gain or loss on commodity contracts, realized and unrealized losses on silver and gold forward contracts, severance
expense, the transaction costs arising from the Minefinders transaction, gain or loss on sale of assets, and the effect for taxes on the above items. 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 see “Alternative Performance (Non-GAAP) Measures” in the Company’s MD&A for the year ended December 31, 2013.
(5) Mine operating earnings is a non-GAAP measure used by the Company to assess the performance of its silver mining operations. Mine operating earnings is calculated as revenue less production costs, depreciation and
amortization and royalties. The Company and certain investors use this information to evaluate the Company’s performance. Please see “Alternative Performance (Non-GAAP) Measures” in the Company’s MD&A for the year
ended December 31, 2013.
MINERS, SAN VICENTE, BOLIVIA
3
Annual Report 2013 Ross Beaty, Chairman
Chairman’s Letter
Pan American Silver celebrates its 20th anniversary this year
as a silver mining company. When we began our journey in
1994, our mission was to become the world’s biggest and
best primary silver mining company and to deliver to our
shareholders the greatest possible leverage to higher silver
prices. This was a bold mission in 1994 since our shares
were trading at only $0.10 and we had no assets! But when
we announced our objectives we were rewarded with
tremendous support and loyalty from our early shareholders,
and this allowed us to march forward along an unwavering
path towards our goal.
Today, Pan American Silver has grown to become the
world’s second largest primary silver mining company,
behind the great Mexican silver company Fresnillo, whose
operations have been in production for many decades. This
achievement has happened with the dedication and hard
work of thousands of people throughout the Americas, not
least of whom include the over 7,300 individuals who today
gain employment from Pan American Silver at our operations
and administration offices. I’m sure you can imagine my
pride and pleasure at our achievements as a great team, all
working to a common purpose – and also with the support
of the communities around our operations, the governments
of the countries where we work, and the large number of
supporting companies and individuals who work with us
daily as contractors, suppliers and consultants. To each of
these groups and individuals I extend my appreciation. With
our growing silver production, our enormous silver reserves
and resources and our wonderful team I look forward with
optimism to the future and to achieving our mission of
becoming the world’s pre-eminent primary silver producer.
The year 2013 was really a year of two halves. The first half
was tough – the silver price dropped sharply from $30.87
per ounce on January 1st to $18.61 per ounce on June 27,
along with a similar sharp decline in the price of our most
important by-product metal, gold. This resulted in significant
revenue declines at all of our operations and serious
increases in our cash costs of production. The second half
was better, however. Beginning in May, we embarked on
a round of major cost reductions and focused productivity
improvements throughout the company. This was a hard and
difficult task, but necessary. It resulted in greatly improved
production and financial results, which began in the third
quarter and continued in the fourth quarter of 2013. I expect
we will continue to see these positive results during 2014.
Pan American Silver now has one of the best balance sheets
in the mining industry – we ended the year with cash and
short term investments of $423 million, working capital
of $689 million and long-term debt of only $40 million. In
4
Pan American Silver Corp.
Ross Beaty, Chairman
addition, our shareholders enjoy receiving one of the highest
dividends in the precious metals industry – at our April third
share price of $13.17, our dividend of $0.50 per share on an
annual basis yields about 3.8 percent. Our Board of Directors
is assiduous in its dedication to preserving this dividend in
good times and bad. Even though current silver prices remain
challenging, I expect Pan American Silver will continue to
maintain its strong balance sheet and dividend record.
During 2013, operations remained steady and on budget
at Manantial Espejo in Argentina, San Vicente in Bolivia,
Morococha and Huaron in Peru and Alamo Dorado in Mexico.
The most exciting developments during the year were at our
La Colorada and Dolores mines in Mexico. At La Colorada,
the spectacular exploration discoveries over the last few
years resulted in our decision late in 2013 to expand the
mine’s production from about 4.6 million ounces annually
to an estimated 7.7 million ounces by 2018, after we invest
approximately $80 million. This is especially pleasing since we
began operating the mine in 2001 with less than one year of
reserves. Not only have reserves increased profoundly since
then, I believe we will continue to make new discoveries in
the near future that will allow the mine to further extend its
life and add additional value to our company. At the Dolores
mine, we made major efforts in 2013 to add leach capacity to
the operation in order to improve profitability. We continue
to review a pulp agglomeration project that would improve
recoveries and enhance value and hope to make a go-ahead
decision on this project during 2014.
I remain hopeful that we will be able to advance our
great Navidad silver project in Argentina during 2014. Our
efforts during 2012 and 2013 to advance the project were
frustrated by political events particularly in the province
of Chubut where the deposit is located. However, there
are clear indications that the situation in Chubut and in
Argentina is improving and becoming more favourable for
the development of Navidad in the near future. Navidad
holds silver resources of more than 750 million ounces and
could result in annual production of over 20 million ounces of
silver which would be a huge economic benefit to Chubut, to
Argentina, to our shareholders and to the local communities
around the deposit.
I expect Pan American Silver will have another record year of
silver production in 2014, and that we will continue to deliver
value to our owners and those around our operations – our
communities, regional and national governments, suppliers
and employees. I thank you all for your efforts during 2013
and your efforts to come in 2014.
“Pan American Silver now has one
of the best balance sheets in the
mining industry – we ended the year
with cash and short term investments
of $423 million, working capital of
$689 million and long-term debt of
only $40 million. ”
5
Annual Report 2013
Geoff Burns, President & CEO
President’s Letter
Mining companies are typically valued on their mine’s quality,
the veracity and longevity of their reserves and resources,
their growth prospects, and their financial performance.
There is no question that these are vital elements in
understanding our worth and future prospects, but I believe
that our most valuable asset is our people, and I want to start
by thanking every one of our employees, their families, and
our contractors for their extraordinary efforts in 2013. Thanks
“We are more productive,
and better able to utilize
our financial, personnel
and mineral resources,
which translated into record
silver and gold production,
lower costs and tremendous
exploration success.”
to their sacrifice and
dedication Pan American
Silver quickly adjusted
to dramatically different
prices by recalibrating
and refocusing our
business. This allowed
us to post another
record year for silver
and gold production,
while simultaneously
significantly reducing
our costs, thereby
strengthening our
company and regaining our ability to generate profits for
our shareholders and continued well-being for our local
communities. This is an outstanding achievement worthy of
praise and recognition.
2013 was one of our most challenging years. It started out
very promising with good metal prices and strong margins,
but it rapidly deteriorated. Silver tumbled from over $28 per
ounce in late March to under $19 in late June, while gold, our
second most important product, started the year at almost
$1,700 per ounce only to dip to a low of $1,192. These
sudden and unpredictable drops put our industry and us on
red alert and prompted us, much like in 2008, to re-evaluate
our short-term business plan in order to adapt to the new
reality of lower metal prices.
However, unlike 2008, this time we were in a much stronger
financial position, which allowed us to systematically and
logically review all our mining operations, looking for costs
savings, enhanced productivity and to adjust our mining
plans, without compromising our longer-term ability to
optimize our mineral resources or slow our growth prospects.
Through hard work, innovation and discipline, we revitalized
our business and drastically reduced our costs in two short
quarters. We achieved this by cutting exploration and capital
spending, reducing company-wide employment levels by
13%, or 1,000 jobs, cancelling discretionary expenses, and in
particular by adjusting our mining plans at our higher-cost
mines in Peru.
These actions proved highly effective and in the third quarter
of 2013 cash costs were down 25% from the previous year
and down 14% from the second quarter. At the same time
our silver and gold production actually increased 8% and
39%, respectively, from the second quarter. Perhaps as
importantly, the production gains and cost reductions we
achieved were sustained throughout the fourth quarter and
continue well into 2014.
With our third quarter results, we also published for the
first time a metric that I have internally followed for years:
All-in Sustaining Costs per Silver Ounce Sold (or “AISCSOS”).
AISCSOS measures our ability to generate cash by considering
every element required to run our business, including
general and administrative expenses, exploration costs,
and sustaining capital, which gives a clearer picture of our
true earnings potential at different silver prices. What was
particularly gratifying for me was demonstrating that our real
cost of mining each silver ounce is in the lowest quartile in
our sector, which is in contrast to the view of some who see
Pan American Silver as a high-cost producer. In the fourth
quarter of last year our AISCSOS was $17.03 per ounce, and
in 2014 we are forecasting $17.00 to $18.00 per ounce. We
remain extremely competitive at current silver prices.
In short, we are more productive,
and better able to utilize our financial,
personnel and mineral resources,
which translated into record silver
and gold production, lower costs and
tremendous exploration success. In
2013, our exploration programs still
delivered another year of mineral
reserve growth, even assuming lower
long-term metal prices. Due mostly to
an outstanding exploration campaign
at our La Colorada mine, we finished
2013 with record proven and probable
mineral reserves: 323.5 million ounces
of silver and 2.5 million ounces of
6
Pan American Silver Corp.
Geoff Burns, President & CEO
gold. At current mining rates we can sustain over 10 years’
production with our resources. In addition, we have industry-
leading mineral resources in excess of 715 million ounces of
silver in the ground. I am confident that the great exploration
potential of our key assets and our large mineral resources
will be the genesis for further production growth and strong
cash-flow generation for many years.
the best safety record in our history. Pan American Silver
achieved world class safety performance as measured by
industry standard Lost Time Injury Frequency and Lost Time
Injury Severity. My personal thanks to each and every one
of our workers who made safety their number one priority
every day and every shift and who helped create a safer and
healthier environment throughout the Company.
This is particularly true of our La Colorada and Dolores
mines. After years of outstanding reserve growth, we have
decided to significantly expand La Colorada’s production
capacity. When the expansion is complete in 2018, the mine
is expected to become our largest, lowest cost and one of our
most profitable mines. At a price of $19 per silver ounce, the
expansion will generate an after-tax IRR of 22% and it will pay
back our expansion investment in 2.5 years. In addition, I am
also optimistic about the results of the technical study we are
preparing for the addition of a pulp agglomeration circuit at
Dolores. Not only does it look technically feasible, but the
preliminary economics are very promising and would boost
silver and gold recoveries, as well as allow us to potentially
tap into significant silver and gold mineral resources that are
almost certainly available only through underground mining.
I look forward to sharing the results of this study with you in
the first half of this year.
Production growth, mineral reserve growth, costs
containment, organic growth projects; while 2013 was
indeed challenging, we achieved a great deal. But without
question our most important accomplishment was attaining
It is always difficult to predict the future price of any
commodity and silver is no exception. In the short term I
have no strong conviction as to the direction of the silver
price from the current levels of approximately $20 per
ounce. However, I believe we are at or very close to a cyclical
bottom, and we have certainly retooled Pan American Silver
to thrive and continue to grow at this price level or even
somewhat lower. Longer-term I am more convinced than
ever that silver and gold will again become an investment of
choice when investors realize the speculative nature of the
stock market’s rally over the past 24 months, the enormous
and ever-growing government debt levels in the developed
countries and the truly astonishing amount of money still
being printed by central banks in the US, Europe and Japan.
Silver and gold will again be seen as stores of real value,
against mounting levels of fiat currency.
In closing, I would like to thank our shareholders for their
continued support. I firmly believe that your patience with
us last year will be handsomely rewarded and look forward
to updating you on our achievements throughout 2014
and beyond.
OPERATIONS TEAM, DOLORES MINE
7
Annual Report 2013
Outstanding Results
Through Exploration
Pan American Silver’s proven and probable mineral reserves
hit a record 323.5 million ounces of silver and 2.5 million
ounces of gold in 2013. Silver mineral reserves rose 2% and
gold reserves rose 3%, net of annual production. This result
was remarkable because it was achieved despite significantly
lower long-term metal price assumptions.
“Since 2004, our exploration
programs have added close
to 270 million new silver
ounces to our mineral
reserves at an average cost
of just $0.38 per ounce.”
Replacing mined
mineral reserves is
vital for our business.
Decisions on capital
investments, mine
expansions and long
term mine plans are
the driving factors
for our cash flow and
earnings and have
to be based on solid,
long-term reserves.
We can replace or grow mineral reserves through mine-
site exploration, greenfield exploration of new projects, or
acquisitions, and we are active in all three of these methods.
Although lower metal prices forced us to make cut-backs
on our greenfield exploration spending, we are still actively
looking for new discoveries, especially if they are in close
proximity to our operations. Very few exploration projects
actually make it into production. Acquiring discovered
mineralization is a good way to reduce risk and to fast-track
new projects towards production.
In any mine, new or mature, mine-site exploration is
paramount. Since 2004, our exploration programs have
added close to 270 million new silver ounces to our mineral
reserves at an average cost of just $0.38 per ounce and
today, our proven and probable silver reserves can sustain
current production levels for at least 10 years. I think this
is a fantastic return on our investment. Most of our recent
exploration success was at La Colorada where we discovered
over 86 million ounces of silver in the last 5 years.
In 2013, we invested $16.3 million to drill almost 150
kilometers at our mines and successfully replaced the silver
ounces mined at La Colorada, Huaron, Morococha and San
Vicente. In total, we discovered 40.1 million contained silver
ounces of new mineral reserves, which far exceeded the
33.7 million contained silver ounces we mined last year. In
addition, we optimized Dolores’ mineral reserve estimate by
focusing on lower tonnage, but at significantly higher grades.
In 2014, we will continue to explore some very promising
targets in and around our mines. We plan to invest $14.8
million on approximately 108 kilometers of diamond drilling,
with special emphasis on La Colorada, Dolores, Huaron and
San Vicente. We will also devote approximately $6.5 million
to a few selected greenfield exploration activities.
Michael Steinmann, Executive Vice President, Corporate
Development and Geology
PROVEN AND PROBABLE SILVER MINERAL RESERVES
Property
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha (92.3%)
San Vicente (95%)
Manantial Espejo
La Bolsa
Total (3)
Reserves 2013 (1)
(Ag Moz)
Mined 2013
(Ag Moz)
Gained/Lost
(Ag Moz)
Reserves 2014(2)
(Ag Moz)
64.8
76.1
19.1
61.6
34.2
35.6
21.2
4.5
317.0
(5.1)
(8.2)
(5.8)
(4.1)
(2.8)
(4.2)
(3.5)
0.0
(33.7)
21.7
4.7
(1.5)
4.8
2.9
6.1
1.5
0.0
40.1
81.4
72.6
11.7
62.3
34.3
37.5
19.2
4.5
323.5
For our complete mineral reserves and resources, please refer to page 14.
(1) Mineral Reserves as at December 31, 2012
(2) Mineral Reserves as at December 31, 2013; estimated using cut off grades calculated using the following metal prices:
Ag $22/oz, Au $1,300/oz, Cu $6,800/tonne, Pb, $1,950/tonne and Zn $1,850/tonne
(3) Totals may not add-up due to rounding
8
Pan American Silver Corp. The Silver Market in 2013
2013 will be remembered as a tough year for precious
metals. Although there had been some signs of weakness
as early as the summer of 2012, gold and silver performed
well during that year and the silver price held well above $30
per ounce until the first few months of 2013. Last year, silver
climbed from $30.87 per ounce on January 1st to its high
of $32.00 per ounce on February 5th, after which it steadily
descended to a low of $18.61 per ounce on June 27. Silver
traded at $19.50 per ounce on December 31, 2013, averaging
$23.79 for the full-year.
Investment demand continued to drive silver prices.
Last year’s precipitous price decline was largely due
to institutional investors’ exodus from precious metals
markets. Large institutions liquidated their precious metals
investments when, after years of hedging their bets on hard
assets in anticipation of high inflation and rising interest
rates, early signals of economic recovery in the US and
Europe and the absence of inflation encouraged them to seek
higher returns in stock markets.
The brusque price fall provided a strong incentive to retail
investment demand, mostly in the bullion sector, lending
support to the silver price in late summer. In August and
September silver averaged over $24 per ounce, but it slid
down again towards the end of the year to finish 2013 at
$19.50 per ounce. In 2013, silver lost 37% of its value while
gold lost 29% of its value. According to CPM Research, total
silver Exchange Traded Funds (ETFs) holdings lost only 13
million ounces during 2013 and ended the year close to 617
million ounces. In contrast, in 2013 the largest gold exchange
traded fund, the Gold SPDR, lost 40% of its holdings. Silver
also found price support due to higher fabrication demand,
which represents 50% of total global demand, and from
purchases from India, where restrictions on gold imports
prompted investors to move to silver.
“In the first quarter of
2014, precious metals prices
seem to have stabilized,
with silver prices hovering
around $20 per ounce.”
In the first quarter of 2014,
precious metals prices
seem to have stabilized,
with silver prices hovering
around $20 per ounce and
gold trading in a range
of $1,220 and $1,385
per ounce. Investment
demand seems to have
found its footing after the first effects of the tapering
announced by the US Federal Reserve passed. In fact,
February of 2014 was the first month when ETFs were net
buyers of silver in over a year. As for gold, the world’s largest
buyers are ramping up purchases and there seems to be
more upside as India appears set to remove restrictions on
gold imports. Another promising sign is that in January 2014,
China’s gold demand reached its highest level in the past
nine months.
Currently, the precious metals market seems to have moved
past the bottom of the recent downward cycle, although
risks to the downside still exist. In any event, drops in prices
will likely be seen as buying opportunities, especially by retail
and long-term investors who continue to believe that
the massive amounts of world-wide liquidity
will sooner or later bode very well for
precious metal prices.
SILVER - LONDON FIX PRICE (US$/Oz Ag)
45
40
35
30
25
20
15
10
5
0
Jan-07
M ar-07
M ay-07
Jul-07
Sep-07
N ov-07
Jan-08
M ar-08
M ay-08
Jul-08
Sep-08
N ov-08
Jan-09
M ar-09
M ay-09
Jul-09
Sep-09
N ov-09
Jan-10
M ar-10
M ay-10
Jul-10
Sep-10
N ov-10
Jan-11
M ar-11
M ay-11
Jul-11
Sep-11
N ov-11
Jan-12
M ar-12
M ay-12
Jul-12
Sep-12
N ov-12
Jan-13
M ar-13
M ay-13
Jul-13
Sep-13
N ov-13
Jan-14
M ar-14
9
Annual Report 2013 La Colorada
The La Colorada mine is located in the state of Zacatecas,
Mexico, in an area called the Faja de Plata (Silver Belt), one
of the world’s most prolific silver mining districts and host
to some of the largest silver-producing mines like Fresnillo
and Peñasquito. An epithermal vein deposit with 81.4 million
ounces of proven and probable silver mineral reserves at
an average grade of 388 grams per tonne, La Colorada has
become Pan American’s largest mineral reserve and is our
most exciting growth project today. The mine utilizes safe
and efficient mechanized and semi-mechanized overhand cut
and fill vein mining methods and produces doré bars from a
conventional cyanide leach plant that treats approximately
400 tonnes per day of oxide ore, in addition to silver-rich
lead and zinc concentrates from a flotation plant that treats
approximately 800 tonnes per day of sulphide ore. Currently,
both plants share a common crushing circuit yielding a
combined total capacity of approximately 1,200 tonnes
per day.
Since 2009, La Colorada’s silver production has steadily
increased as a result of the mine’s increased sulphide
ore production. During the same time, the silver mineral
reserves have more than doubled to today’s 81.4 million
ounces of proven and probable silver mineral reserves. This
was largely due to the extension of the NC2 vein, which still
remains open at depth and to the east, as well as to the
discovery of the Amolillo vein, a parallel structure to the
main NC2 vein which also remains largely open for further
increases. Motivated by the recent exploration success,
we thoroughly analyzed the possibility of expanding the
mine’s output and in December of 2013, our Board of
Directors approved the La Colorada expansion project that is
now underway.
The expansion project will build upon the safe and effective
mining and processing techniques currently used with its key
components being:
• The installation of a new 600 metre-deep shaft and
hoisting system strategically located between the two
primary mineralized structures,
• the development of additional mining zones both deeper
and laterally within the existing mine,
• the expansion of the existing underground mining fleet,
LA COLORADA, MINE STAFF
10
Pan American Silver Corp. • the expansion of the sulphide plant to approximately 1,500
tonnes per day,
• expansions and upgrades to the mine’s dewatering and
ventilation systems,
• the expansion of the tailings storage facilities, and
• the construction of a new 115 Kv power line to the
mine site.
The new shaft will be constructed between the Candelaria
and Estrella mines. The new shaft may be developed using
a modern raise-boring technique and will be fitted with
a hoisting system located on the surface equipped with a
single-deck cage, which will increase the mine’s extraction
capacity to approximately 2,300 tonnes per day by 2018. The
hoist will accommodate both ore and waste extraction, as
well as serve as the main access to working areas for mine
personnel. The expansion plan contemplates mining the
deepest defined ore reserves on the Candelaria structure at
the 740 metre level with potential to increase mining depths
to where the deepest drill hole intercepted mineralization to
date at the 1,010 metre level. The plan also contemplates
mining the deepest defined ore reserves on the Amolillo
LA COLORADA, PANORAMIC VIEw
ABOUT THE PROJECT
The expansion project will increase the mine’s
annual silver production by approximately 67%
from 2013’s 4.6 million ounces to 7.7 million silver
ounces by 2018. The project will be built from
2014 until the end of 2017, progressively ramping
up mining rates from today’s 1,200 tonnes per day
to 1,500 tonnes per day in early 2016 and to 1,800
tonnes per day by the end of 2017.
SILVER PRODUCTION
67%
INCREASE
6
4
.
7
7
.
s
e
c
n
u
o
n
o
i
l
l
i
m
2013
2018E
“La Colorada has become
one of the pillars of our
business and we are very
much looking forward to
developing its full potential for
the benefit of our Company
and all of our stakeholders.”
11
Annual Report 2013
structure at the 610 metre level and potentially going to the
deepest mineralized drill hole intercept to date at the 735
metre level. Given La Colorada’s outstanding exploration
potential, the new shaft has been designed to sustain the
2,300 tonne per day capacity down to just below 1,000
metres below surface.
A key aspect of La Colorada’s expansion is that it is relatively
low risk in terms of operational execution, regulatory
environment, metallurgy, and project economics given that it
is an expansion of a successful existing operation. The mine
is fully permitted and we possess a good understanding of
the challenges and the potential of the ore body.
Currently, the mine’s only existing shaft, the El Aguila shaft in
the Candelaria mine, was installed in the 1950’s and would
require replacement to sustain the current mining rates
from the new reserve expansions. Therefore, the expansion
project’s incremental capital of $80 million represents a very
modest investment for the 67% production increase.
La Colorada’s expansion has an estimated minimum project
mine-life of 10 years following completion in 2018. At
the more conservative silver price of $19 per ounce, the
expansion PEA estimates that the project will generate
approximately $1.9 billion in net revenue and $510 million of
undiscounted after tax cash flow over a 14 year mine life. This
is without consideration of any future explorations successes
that could further extend the mine life.
In 2014, our project team will focus on detailed engineering,
mine development and on preparations to start constructing
the new shaft and plant expansion in 2015. La Colorada has
become one of the pillars of our business and we are very
much looking forward to developing its full potential for the
benefit of our Company and all of our stakeholders.
Steve Busby, Chief Operating Officer
LA COLORADA, MINER UNDERGROUND
“A key aspect of La Colorada’s
expansion is that it is relatively
low risk in terms of operational
execution, regulatory environment,
metallurgy and project economics
given that it is an expansion of a
successful existing operation.”
12
Pan American Silver Corp. EXPANSION HIGHLIGHTS(1)
ANNUAL PRODUCTION
CASH COSTS (2)(3)
SILVER
zINC
LEAD
67%
INCREASE
s
e
c
n
u
o
n
o
i
l
l
i
m
6
4
.
7
7
.
0
0
8
6
,
0
0
1
6
1
,
s
e
n
n
o
t
0
0
3
3
,
0
0
4
9
,
s
e
n
n
o
t
2013
2018E
2013
2018E
2013
2018E
35%
DECREASE
3
4
9
$
.
e
c
n
u
o
r
e
p
r
e
v
l
i
s
f
o
9
0
6
$
.
2013
2018E
PROCESSING RATES
MINE SHAFT
EXTRACTION CAPACITY
THROUGHPUT
50%
INCREASE
y
a
d
/
s
e
n
n
o
t
0
0
8
1
,
0
0
2
1
,
SULPHIDE
PLANT
OXIDE PLANT
75%
INCREASE
0
0
8
y
a
d
/
s
e
n
n
o
t
0
0
4
1
,
y
a
d
/
s
e
n
n
o
t
0
0
4
0
0
4
2013
2018E
2013
2018E
2013
2018E
92%
INCREASE
0
0
2
1
,
0
0
3
2
,
y
a
d
/
s
e
n
n
o
t
2013
2018E
LA COLORADA, PROCESSING PLANT
(1) 2018 figures are estimates. The complete preliminary economic assessment (“PEA”) for La Colorada’s expansion project can be obtained at SEDAR at www.sedar.com
(2) Prices assumed are Au $1,200/oz, Zn $1,800/tonne, Pb $2,100 per tonne, and Cu $7,000/tonne.
(3) Cash costs are a Non-GAAP measure. Please refer to footnote (1) on page 2 of this Annual Report.
13
Annual Report 2013
Mineral Reserves
and Resources
MINERAL RESERVES - PROVEN AND PROBABLE
Huaron
Location
Peru
Type
Vein
Vein
Proven
Probable
Morococha (92.3%)
Peru
Vein/Mantos
Proven
La Colorada
Mexico
Dolores
Mexico
Vein/Mantos
Probable
Vein
Vein
Vein
Vein
Proven
Probable
Proven
Probable
Alamo Dorado
Mexico
Disseminated
Proven
Disseminated
Probable
La Bolsa
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Vein
Vein
Vein
Vein
Vein
Vein
TOTALS (1)
Proven
Probable
Proven
Probable
Proven
Probable
Proven +
Probable
Tonnes
Classification
(Mt)
Ag
(g/t)
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
6.9
4.7
2.7
2.7
2.4
4.1
39.4
29.2
4.4
0.7
9.5
6.2
3.0
1.3
2.1
0.7
120.1
169
163
188
206
406
378
31
35
68
88
10
7
135
140
413
406
84
37.3
24.9
16.3
18.1
31.2
50.2
39.9
32.7
9.7
2.0
3.1
1.4
13.2
6.0
28.1
9.4
323.5
N/A
N/A
N/A
N/A
0.31
0.39
0.75
0.85
0.29
0.61
0.67
0.57
2.06
2.17
N/A
N/A
0.77
N/A
N/A
N/A
N/A
23.5
51.9
949.5
802.3
41.0
13.8
203.0
113.1
200.7
92.4
N/A
N/A
2,491.3
0.48
Cu
(%)
0.44
0.42
0.47
0.69
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
MINERAL RESOURCES - MEASURED AND INDICATED
Huaron
Location
Peru
Type
Vein
Vein
Classification
Measured
Indicated
Morococha (92.3%)
Peru
Vein/ Mantos
Measured
Vein/ Mantos
Indicated
La Colorada
Mexico
Dolores
Mexico
Vein
Vein
Vein
Vein
Measured
Indicated
Measured
Indicated
Alamo Dorado
Mexico
Disseminated
Measured
Disseminated
Indicated
La Bolsa
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Vein
Vein
Vein
Vein
Vein
Vein
Measured
Indicated
Measured
Indicated
Measured
Indicated
Navidad
Argentina
Mantos, Diss.
Measured
Pico Machay
Peru
Disseminated
Measured
Mantos, Diss.
Indicated
Calcatreu
TOTALS (1)
Disseminated
Argentina
Vein
Indicated
Indicated
Measured +
Indicated
Tonnes
(Mt)
1.5
1.0
0.8
1.1
0.4
1.7
2.4
9.0
1.0
1.2
1.4
4.5
2.0
3.4
0.5
0.2
15.4
139.8
4.7
5.9
8.0
206.0
Ag
(g/t)
162
166
150
202
164
255
31
32
43
78
11
9
93
90
117
129
137
126
N/A
N/A
26
114
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
7.9
5.2
3.9
7.4
2.2
13.8
2.5
9.2
1.3
3.1
0.3
1.1
5.9
9.9
1.9
0.9
67.8
564.5
N/A
N/A
6.6
715.4
N/A
N/A
N/A
N/A
0.15
0.29
0.51
0.96
0.22
0.40
0.90
0.50
1.26
1.16
N/A
N/A
N/A
N/A
0.91
0.67
2.63
1.10
N/A
N/A
N/A
N/A
2.1
15.7
40.4
279.0
6.8
15.9
31.4
59.8
79.1
127.7
N/A
N/A
N/A
N/A
137.5
127.1
676.0
1,598.5
Cu
(%)
0.20
0.24
0.41
0.54
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.10
0.04
N/A
N/A
N/A
0.05
14
Pb
(%)
1.41
1.50
1.32
1.31
1.35
1.30
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.35
0.34
1.27
Pb
(%)
1.85
1.89
1.31
1.45
0.40
0.51
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.19
0.12
1.44
0.79
N/A
N/A
N/A
0.87
Zn
(%)
2.95
2.89
4.32
4.06
2.47
2.35
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.85
2.55
3.04
Zn
(%)
3.06
3.22
3.57
3.37
0.65
0.83
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.16
1.47
N/A
N/A
N/A
N/A
N/A
2.43
Pan American Silver Corp.
MINERAL RESOURCES - INFERRED
Tonnes
Classification
(Mt)
Location
Peru
Peru
Mexico
Mexico
Mexico
Mexico
Argentina
Bolivia
Type
Vein
Inferred
Vein/Mantos
Inferred
Vein
Vein
Inferred
Inferred
Disseminated
Inferred
Vein
Vein
Vein
Inferred
Inferred
Inferred
Argentina Mantos, Diss.
Inferred
Peru
Disseminated
Inferred
Argentina
Vein
Inferred
Inferred
8.5
8.0
2.9
10.7
0.0
13.7
1.4
3.1
45.9
23.9
3.4
121.5
Huaron
Morococha (92.3%)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Manantial Espejo
San Vicente (95%)
Navidad
Pico Machay
Calcatreu
TOTALS (1)
Notes:
The foregoing tables illustrate Pan American’s share of mineral reserves and resources.
Properties in which Pan American has less than 100% interest are noted next to the property
name.
Mineral reserves and resources are as defined by the Canadian Institute of Mining,
Metallurgy and Petroleum.
Mineral resources that are not mineral reserves have no demonstrated economic viability.
Pan American does not expect these mineral reserve and resource estimates to be materially
affected by metallurgical, environmental, permitting, legal, taxation, socio-economic,
political, and marketing or other relevant issues.
See the Company’s Annual Information Form dated March 28, 2014 for more information
concerning associated QA/QC and data verification matters, the key assumptions, parameters
and methods used by the Company to estimate mineral reserves and mineral resources, and
for a detailed description of known legal, political, environmental, and other risks that could
materially affect the Company’s business and the potential development of the Company’s
mineral reserves and resources.
Grades are shown as contained metal before mill recoveries are applied.
Ag
(g/t)
161
209
265
39
39
8
99
330
81
N/A
17
95
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
44.0
53.9
24.5
13.3
0.0
3.3
4.3
33.2
119.4
N/A
1.8
297.7
N/A
N/A
0.42
0.97
0.54
0.51
1.17
N/A
N/A
0.58
2.06
0.73
N/A
N/A
38.8
334.5
0.0
222.4
51.2
N/A
N/A
445.7
226.0
1,318.7
Cu
(%)
0.29
0.43
N/A
N/A
N/A
N/A
N/A
N/A
0.02
N/A
N/A
0.09
Pb
(%)
1.61
1.45
1.34
N/A
N/A
N/A
N/A
0.28
0.57
N/A
N/A
0.82
Zn
(%)
2.72
5.11
2.17
N/A
N/A
N/A
N/A
2.53
N/A
N/A
N/A
2.36
Pan American reports mineral resources and mineral reserves separately. Reported mineral
resources do not include amounts identified as mineral reserves.
Metal prices used for reserves at all Mines: Ag: $22.00/oz, Au: $1,300/oz, Pb: $1,950/
Tonne,Cu: $6,800/Tonne,Zn: $1,850/Tonne
Metal prices used for La Bolsa reserves were Ag: $14.00/oz and Au: $825/oz
Metal prices used for Calcatreu resources and reserves were Ag: $12.50/oz and Au: $650/oz.
Metal prices use for resources vary according to mine and mining area.
Metal prices used for Navidad resources were Ag: $12.52/oz and Pb: $1,100/tonne.
Metal prices for Dolores and Alamo Dorado resources: Ag $35/oz, Au: $1,400/oz
(1) Totals may not add-up due to rounding.
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 of, 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, each of whom are 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 43-101.
TECHNICAL INFORMATION
MICHAEL STEINMANN, P.GEO., AND MARTIN WAFFORN P.ENG., EACH OF WHOM ARE QUALIFIED PERSONS, AS THE TERM IS DEFINED IN NI 43-101, HAVE
REVIEWED AND APPROVED THE CONTENTS OF THIS ANNUAL REPORT.
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. UNDER U.S. STANDARDS,
MINERALIZATION MAY NOT BE CLASSIFIED AS A “RESERVE” UNLESS THE DETERMINATION HAS BEEN MADE THAT THE MINERALIZATION COULD BE ECONOMICALLY
AND LEGALLY PRODUCED OR EXTRACTED AT THE TIME THE RESERVE DETERMINATION IS MADE. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY
PART OF A “MEASURED RESOURCE” OR “INDICATED RESOURCE” WILL EVER BE CONVERTED INTO A “RESERVE”. U.S. 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. 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.
15
Annual Report 2013 Corporate Information
DIRECTORS
Ross J. Beaty – Chairman (Independant)
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, VANCOUVER
Matt Andrews - VP, Environment & Sustainability
Geoff Burns – President & Chief Executive Officer
Steven Busby – Chief Operating Officer
Ignacio Couturier – VP, Finance
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 Services
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, 2013: 151,500,294 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
ANNUAL GENERAL MEETING
Thursday, May 8, 2014 – 2:00pm (PST)
Fairmont Vancouver Waterfront, Malaspina Room
900 Canada Place Way, Vancouver, BC
16
Pan American Silver Corp. CORPORATE OFFICE,
VANCOUVER
Pan American Silver Corp.
Suite 1440 – 625 Howe Street
Vancouver, British Columbia
Canada, V6C 2T6
Tel. 604-684-1175
Fax 604-684-0147
info@panamericansilver.com
www.panamericansilver.com
ARGENTINA OFFICE
Pan American Silver Argentina
Tel. 54-11-5533-8700
Fax 54-11-5533-8700 ext 1110
Country Manager – Bret Boster
BOLIVIA OFFICE
Pan American Silver (Bolivia) S.A.
Tel. 59-1-2-279-69900
Fax 59-1221-54216
Country Manager – Gary Hannan
MExICO OFFICE
Pan American Silver Mexico
Tel. 52-618-128-0709 x 101
Fax 52-618-128-0692 x 102
Country Manager – Chris Warwick
PERU OFFICE
Pan American Silver Peru S.A.C.
Tel. 51-1-618-9700
Fax 51-1-618-9729
Country Manager – Jorge Ugarte
DESIGN:
Danielle Connor
dconnordesigns.com
Consolidated FinanCial
statements and notes
For the years ended
deCember 31, 2013 and deCember 31, 2012
1
management’s disCussion and analysis
For the year ended deCember 31, 2013
2
PAN AMERICAN SILVER CORP. table oF Contents
Introduction
Core Business and Strategy
Highlights of 2013
2014 Operating Outlook
2014 Project Development Outlook
2013 Project Development Update
Overview of 2013 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 Price Allocation
Alternative Performance (non-GAAP) Measures
Risks and Uncertainties
Significanat Judgments and Key Sources of Estimation Uncertainty in the Application
of Accounting Policies
Key Sources of Estimation Uncertainty in the Application of
Accounting Policies
Changes in Accounting Standards
Governance Corporate Social Responsibility and
Environmental Stewardship
Disclosure Controls and Procedures
Mineral Reserves and Resources
Consolidated Financial Statements and Notes
4
4
5
6
9
16
17
23
23
24
24
24
25
25
26
27
27
27
28
32
36
37
38
39
40
42
46
3
management’s disCussion and analysis oF
FinanCial Condition and results oF operations
March 26, 2014
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, 2013 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 (“non-GAAP”) measures, such as “all-in sustaining
cost per silver ounce sold”, “cash costs per ounce of silver”,
“total cost per ounce of silver”, “adjusted earnings” and “basic
adjusted earning per share”, 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 mining industry
as benchmarks for performance, but do not have standardized
meaning. To facilitate a better understanding of these non-GAAP
measures as calculated by the Company, additional information
has been provided in this MD&A. Please refer to the section
entitled “Alternative Performance (Non-GAAP) Measures”
beginning on page 40 for a detailed description of all-in sustaining
cost per silver ounce sold, total cost per ounce of silver, adjusted
earnings and basic adjusted earnings, as well as the cash cost
calculation, details of the Company’s by-product credits and
a reconciliation of this measure to the Audited Consolidated
Financial Statements.
Any reference to “cash costs” or “cash costs per ounce of silver” in
this MD&A should be understood to mean cash costs per ounce of
silver, net of by-product credits.
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, La Bolsa 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 - Standards of Disclosure
of Mineral Projects (“NI 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.
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.
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 Global Select Market (“NASDAQ”) Exchange in
New York (Symbol: PAAS).
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:
4
PAN AMERICAN SILVER CORP. • 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 knowledge
and experience in all aspects of our business 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.
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.
highlights oF 2013
operations & proJeCt deVelopment
• Record Silver and Gold Production
Silver production was a record 26.0 million ounces in 2013, an
increase of 4% over the 25.1 million ounces produced in 2012,
while gold production also set a new Company record at 149,800
ounces, 33% higher than 2012 production. The increase in silver
production was mainly attributable to a full year of production
from the Dolores mine in Mexico, which was acquired upon
the closing of the Minefinders transaction on March 30, 2012,
augmented by higher silver production at all of Pan American’s
mines, other than Manantial Espejo and Alamo Dorado, over 2012
levels. Gold production increases in 2013 were driven by a full
year of production at Dolores and significantly higher grades at
Manantial Espejo.
• Disciplined Cost Control
An extensive range of operational optimizations and cost cutting
initiatives were analysed and executed to realign the Company’s
operational performance with the prevailing price environment
and to ensure that we maintained our strong financial position.
All-in sustaining cost per ounce of silver sold declined by 18% in
2013 relative the 2012, down $3.93 to $18.33 per ounce. Cash
costs were $10.81 for 2013 as compared to $12.03 in 2012 and
well below management’s guidance range of $11.80 to $12.80 per
silver ounce.
• Organic Growth
The Company decided to proceed with the expansion of its La
Colorada mine in Mexico, based on the positive results of a
recently completed Preliminary Economic Assessment (the “PEA”).
The PEA demonstrates that the relatively low-risk expansion
project has the potential to provide robust after-tax economic
returns using a $19 per ounce long-term silver price. The PEA
contemplates an increase in silver production from the current
level of approximately 4.6 million ounces per year to 7.7 million
ounces per year by the end of 2017, for an incremental capital
investment of $80.0 million, the majority of which will be spent
over the next 3 years.
• Robust Proven and Probable Silver Mineral Reserves
A successful exploration and resource conversion program in
2013 more than replaced mineral reserves that were mined
during the year. As at December 31, 2013, Proven and Probable
mineral reserves totalled 323.5 million ounces. For the complete
breakdown of mineral reserves and resources by property and
category, refer to the section “Mineral Reserves and Resources”
contained herein.
FinanCial
• Challenging Metal Price Environment
The mining industry generally and precious metal producers in
particular were impacted by a sharp decline in metal prices in
2013. The Company’s financial performance year over year was
negatively affected by the decrease in silver and gold prices with
reduced revenue and mine operating earnings as well as the
triggering of impairment charges to certain mineral properties and
goodwill.
5
• Strong Operating Cash Flow, Liquidity, and Working Capital
Position
Despite the decrease in metal prices, cash flow from operations
was $119.6 million and together with its strong balance sheet
liquidity, the Company was comfortably able to fund capital
expenditures of $159.4 million during the year. The Company had
cash and short term investment balances of $422.7 million and a
working capital position of $689.0 million at December 31, 2013,
a decrease of $119.6 million and $74.9 million, respectively, from
a year ago.
• Return of Value to Shareholders
Strong operating cash flow facilitated the continued return of
value to shareholders in 2013 by way of approximately $75.8
million in dividend payments and $6.7 million of common share
repurchases under the Company’s normal course issuer bid
program. The Company received approval and commenced a third
share repurchase program in late 2013, an initiative which started
in September, 2011. The Company’s quarterly dividend continues
to be an industry-leading $0.125 per share or $0.50 on an annual
basis.
• Robust Revenue
Revenue in 2013 was $824.5 million, a decrease of 11% as
compared to 2012 revenue, driven primarily by lower realized
prices for silver and gold, and negative price and quantity
adjustments of $25.4 million related to provisionally priced sales
recorded in 2012, partially offset by record quantities of silver and
gold sold.
• Margins and Earnings
The Company was able to achieve a gross margin (mine operating
earnings/revenue) of 16% with mine operating earnings of $131.5
million in 2013, despite lower realized metal prices, negative price
and quantity adjustments of $25.4 million related to provisionally
priced sales recorded in 2012 and a $13.0 million negative
adjustment for the net realizable value of in-process inventories.
This compared to a gross margin of 33% achieved in 2012. A net
loss was recorded in 2013 of $445.8 million or $2.94 per share,
primarily due to impairment charges net of tax of $420.4 million
and an $86.8 million deferred tax charge relating to Mexican tax
reforms that included new taxes and changes to income tax rates.
This compared to net earnings of $78.4 million achieved in 2012.
2014 operating outlook
These estimates are forward-looking statements and information that 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 2014 forecast for each operation’s silver production, cash and total costs per ounce, by-
product production and expected capital investments. We also provide our expected consolidated all-in sustaining costs per silver ounce
sold for 2014.
silVer produCtion, Cash and total Costs ForeCasts
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
Silver Production
(Moz)
Cash Costs
per ounce (1)
Total Costs
per ounce (1)
4.85 - 4.95
3.75 - 3.80
3.60 - 3.85
3.40 - 3.50
2.50 - 2.60
3.90 - 4.00
3.75 - 4.05
$9.00 - $9.50
$10.55 - $10.95
$12.50 - $13.50
$16.27 - $17.27
$12.25 - $14.25
$24.67 - $26.67
$14.50 - $15.00
$18.15 - $18.65
$15.00 - $16.50
$22.76 - $24.26
$12.50 - $13.00
$15.09 - $15.59
$8.75 - $10.00
$24.32 - $25.57
Consolidated Total
25.75 - 26.75
$11.70 - $12.70
$18.48 - $19.49
(1) 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 how these
measures are calculated. The
cash cost forecasts assume
by-product credit prices of
$1,850/tonne ($0.84lb) for
zinc, $2,100/tonne ($0.95/
lb.) for lead, $7,000/tonne
($3.18/lb.) for copper, and
$1,200/oz. for gold.
The Company expects its seven mines to produce between 25.75 million and 26.75 million ounces of silver in 2014, similar to, or
potentially a modest increase from 2013 production of 26.0 million ounces
Cash costs for the full year 2014 are expected to increase to between $11.70 and $12.70 per ounce of silver, net of by-product credits,
which represents an increase of between 8% and 17% as compared to 2013 cash costs of $10.81 per ounce. The largest factor behind
this increase in cash costs is the lower assumed gold by-product credits in 2014 based on a gold price of $1,200 per ounce for estimating
gold by-product credits, which is a 15% reduction compared to the average market price in 2013 of $1,411 per ounce.
6
PAN AMERICAN SILVER CORP. by-produCt produCtion ForeCast (in thousands oF ounCes or tonnes)
Gold (ounces)
Zinc (tonnes)
Lead (tonnes)
Copper (tonnes)
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total
2.6 – 2.8
17.0 – 19.0
64.0 – 68.0
0.6 – 1.2
1.8 – 2.0
–
6.50 – 7.00
3.10 – 3.50
–
–
–
13.50 – 14.00
14.00 – 15.50
5.50 – 6.00
–
–
5.35 – 5.70
3.80 – 4.00
0.45 – 0.50
–
0.07 – 0.07
–
3.35 – 3.55
1.78 – 2.08
–
–
69.0 – 72.0
–
155.0 – 165.0
39.50 – 42.50
12.70 – 13.70
5.20 – 5.70
Gold production is expected to increase to between 155,000 and
165,000 ounces on the strength of higher gold grades at Manantial
Espejo, where increased open pit stripping in the first part of 2014
should provide access to better gold grade ore during the fourth
quarter of the year.
In 2014, Pan American anticipates base metals production
to remain consistent with 2013 levels and forecasts full-year
consolidated production of between 39,500 tonnes to 42,500
tonnes of zinc, 12,700 tonnes to 13,700 tonnes of lead, and 5,200
tonnes to 5,700 tonnes of copper.
Capital expenditure ForeCasts
Pan American plans to spend $95.5 million on sustaining capital
and a further $67.0 million on long term projects in 2014. The
following table details the estimate of capital to be invested at
each operation and project:
Dolores. Dolores’ expenditures are predominantly for leach pad
3 expansion, but also include further process plant optimization
and the commencement of work on a new 115 kV power line to
the mine.
all-in sustaining Costs per silVer ounCe sold
The Company has adopted the reporting of AISCSOS as a
non-GAAP measure of a silver mining company’s operating
performance and the ability to generate cash flow from
operations. The following table details Pan American’s expected
AISCSOS for 2014. The measure is on a by-products basis,
excludes taxes, and uses sustaining capital expenditures as
opposed to depreciation and amortization. Investment capital is
defined as capital spent that increases future production and/or is
materially higher than that required for current production.
2014 Capital
La Colorada
Alamo Dorado
Dolores
Huaron
Morococha
San Vicente
Manantial Espejo
Sustaining Capital Sub-Total
La Colorada Project
Dolores Project
Project Sub-total
2014 Total Capital
(in $ thousands)
Cash cost of sales net
of by- products
Sustaining capital
Exploration
Reclamation cost
accretion
General &
administrative expense
All-in sustaining costs
Payable ounces sold
All-in sustaining cost
per silver ounce sold,
net of by-products
Guidance 2014
Low
High
$
298,000
$
306,500
95,500
15,750
95,500
15,750
3,000
3,000
19,600
19,600
A
B
$
431,850
$
440,350
25,400,000
24,460,000
(A*$1000)
/B
$
17.00
$
18.00
(in millions)
$8.0
$0.5
$32.5
$9.5
$9.0
$6.0
$30.0
$95.5
$32.0
$35.0
$67.0
$162.5
Planned sustaining capital investments for 2014 include $26.0
million for open pit pre-stripping and haul truck replacements
at Dolores, $25.0 million for open pit pre-stripping and a tailings
dam expansion at Manantial Espejo, approximately $7.0 million
for underground development across all 5 underground mines,
and $13.0 million for near mine exploration. In addition, the
Company plans project capital expenditures of approximately
$32.0 million for the La Colorada expansion and $35.0 million at
7
2014 mine operation
ForeCasts
Management’s expectations of each mine’s operating
performance in 2014 are set out below, including discussion
on expected production, cash costs per ounce and capital
expenditures.
• La Colorada mine
La Colorada plans to increase ore mined from the sulphide
zone, to ensure that the sulphide plant runs at 850 tpd while
maintaining production rates from the oxide plant at 400 tpd.
The increased overall throughput rates, combined with modestly
higher silver grades are expected to result in higher silver
production in 2014. The shift towards a higher proportion of
ore feed coming from the sulphide zone is expected to result in
higher base metal by-product production, while gold production is
expected to benefit from slightly higher grades in 2014.
Cash costs per ounce are expected to remain similar to 2013
cash costs as an increase in by-product credits (despite lower
price assumptions) and the benefits of higher silver production
will likely be offset by an increase in direct operating costs.
The expected increase in operating costs is driven primarily by
assumed escalations in electricity and diesel costs of 15% and in
labour and security costs of 3%.
Capital expenditures at La Colorada in 2014 are expected to
increase from 2013 levels to $40.0 million, inclusive of $32.0
million related to the expansion project. Please see “2014 Project
Development Outlook” section for a detailed description of the
expenditures planned for the La Colorada expansion project. The
remaining capital expenditures of $8.0 million for the existing
operation includes equipment repair and replacements and
upgrades for $2.7 million, underground ventilation systems for
$1.5 million, and near-mine exploration for $3.8 million.
• Alamo Dorado mine
2014 signals the beginning of a declining production profile at
Alamo Dorado as the operation begins to process more ore from
the lower grade stockpiles while the mining operation depletes
the last of the reserves over the next two years at higher effective
strip ratios. We expect to hold processing rates steady at 4,750
tpd, but a decline in silver grades and recoveries are likely to result
in a drop in silver production. Gold production in 2014 is expected
to benefit from marginally higher grades from a gold zone that will
be mined along the northern pit limits, resulting in an uptick in
gold production.
Cash costs are expected to increase significantly at Alamo Dorado
in 2014 as a result of higher direct operating costs and lower silver
production. Cost escalations are expected from the increased
waste stripping required to extract the remaining ore reserve
extensions, as well as higher diesel fuel and energy costs.
Capital expenditures at Alamo Dorado in 2014 are expected to
be $0.5 million, predominantly for tailings dam and laboratory
equipment replacements.
• Dolores mine
Dolores will aim to stack an average of 16,200 tpd onto leach pads
in 2014, a 10% improvement on 2013 stacking rates, combined
with better expected recoveries. This will be partially offset
by an anticipated decline in silver grades. The combination of
these operating parameters is expected to result in higher silver
production, while gold grades are expected to hold steady but be
offset by lower recoveries, resulting in similar gold production as
was achieved in 2013.
Cash costs are expected to increase sharply from 2013 levels,
primarily due to significantly lower by-product credits on a per
ounce basis due to the lower anticipated gold price. Operating
costs on a per tonne basis are expected to remain similar to 2013
costs, with increases anticipated in materials (most notably diesel,
lime and explosives costs) offset by reductions in staffing costs and
the benefit of higher stacking rates.
Capital expenditures of a sustaining nature for the existing
operation at Dolores are expected to be $32.5 million, which
include pit pre-stripping for $18.2 million, equipment repair and
replacements of $7.8 million, access road improvements of $0.8
million, and support infrastructure upgrades of $1.9 million. The
proposed sustaining capital program also includes $3.6 million for
near-mine exploration.
In addition, capital expenditures relating to the pad 3 expansion,
a new power line installation and process plant optimization
projects are expected to require $35 million. These are discussed
separately under the “2014 Project Development Outlook” section
of this MD&A.
• Huaron mine
In 2014, the plan at Huaron is to continue the positive trend of
increasing mining and milling rates, as compared to the 2013
rates. The increases in these throughput rates have been enabled
by progressively increasing the amount of ore released from
long-hole mining, facilitated by direct capital investments in
mechanizations made over the past few years. The improved
throughput in 2014 is expected to be coupled with modestly
higher silver grades from mine sequencing and recoveries to result
in greater silver production. Base metal production is expected to
fall slightly from 2013 production levels.
Cash costs per ounce are expected to remain similar to 2013 cash
costs, as the benefit of higher silver production is expected to be
offset by a decline in by-product credits based on lower expected
by-product metal prices. We expect to hold operating costs
stable while achieving increased processing rates, assuming a 3%
devaluation of the local Peruvian currency.
Capital spending at Huaron in 2014 is expected to be drastically
reduced from the elevated levels seen in previous years as the
intensive mechanization efforts are largely completed. The 2014
capital budget totals $9.5 million and is comprised of sustaining
investments related to repair and replacements of equipment for
$2.4 million, upgrades to the ventilation systems of $1.4 million,
and regional infrastructure for $0.5 million. In addition, business
improvement projects are proposed for camp upgrades for $0.5
million as well as near-mine exploration for $1.6 million.
8
PAN AMERICAN SILVER CORP. • Morococha mine
Tonnes milled and silver, zinc and copper grades and recoveries
at Morococha in 2014 are all expected to improve compared to
2013 levels, resulting in higher production of silver and all by-
product base metals. These expected improvements are possible
due to multi-year mechanization and enhanced development
investments that the Company has made at the Morococha mine.
We anticipate cash costs per ounce in 2014 to reduce sharply
compared to 2013 due primarily to the benefits of lower operating
costs coupled with higher grade ore. 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 2013. Operating costs are expected to decline over
2013 costs primarily as a result of reductions in third party ore
mining services, which have largely been replaced with the use of
more productive company employees, together with the benefit
of an assumed weaker local Peruvian currency.
Morococha’s capital budget for 2014 of $9.0 million is
substantially lower than the prior year’s capital spending as the
intensive multi-year mechanization and development efforts are
largely completed. The majority of the capital expenditures in
2014 are planned for sustaining the mine and includes crosscuts
and ventilation raises for $2.3 million, additional reserve definition
drilling of $1.6 million, and overhaul of equipment for $2.1
million. There is an additional $0.8 million for advancing on a
mine deepening project and $0.5 million for metallurgical testing
to refine future plant flowsheets.
• San Vicente mine
We plan to maintain throughput rates near 2013 levels in 2014
while being able to hold silver grades and recoveries stable.
Based on those operating parameters, San Vicente is expected to
contribute similar quantities of silver to Pan American in 2014.
Steady-state mining rates are expected to deliver ore with similar
zinc and lead grades as 2013 levels, resulting in stable zinc and
lead production.
Operating costs are expected to increase slightly as compared to
2013, driven predominantly by anticipated wage increases. More
than offsetting these cost increases, we expect improved market
conditions in the high-grade silver concentrates market to result
in lower smelting and refining charges and we expect declining
royalties paid to Comibol based on a lower expected silver price.
Cash costs per ounce are expected to decline noticeably over the
2013 cash costs due primarily the decrease in smelting and royalty
costs, offset partially by the higher wage rates.
With the tailings dam raise completed in 2013, the capital
budget in 2014 of $6.0 million is significantly reduced from
2013 spending. The main sustaining capital includes $0.7 million
for equipment repair and replacements and, $0.7 million for
near-mine exploration, and $1.8 million for other equipment
enhancements, optimizations and upgrades. In addition, there is
$0.9 million forecasted for projects underway at the end of 2013
primarily associated with a shaft and hoist upgrade project.
• Manantial Espejo mine
We plan to increase plant throughput by 8% to 2,150 tonnes per
day in 2014 at significantly better silver and gold grades according
to the mine planned sequencing. Achieving the increased
plant throughput rates is highly dependent on sustaining plant
availabilities and utilizations throughout the year and avoiding
unscheduled disruptions as occurred during the first half of 2013.
With steady recovery rates, we expect silver production and gold
production to be up to 25% higher than 2013 production.
Direct operating costs, refining costs and royalties are expected to
increase in 2014, but should be offset by an expected increase in
silver and gold production resulting in cash costs per ounce, net
of by-products, remaining similar to 2013 cash costs. Operating
costs on a per tonne basis are expected to remain stable with
the assumption of continued cost inflation in Argentina, which
especially affects costs of labor and consumables, fully offset a
weaker Peso.
Capital investments planned at Manantial Espejo total $30.0
million in 2014 dominated by $23.8 million for capitalized
open pit pre-stripping in Maria and Concepcion and capitalized
underground development. Additionally, $1.3 million is needed
for a tailings dam expansion, $0.8 million for equipment repair
and replacements, $1.4 million for business enhancement
projects, and another $1.4 million for near-mine exploration
around current workings.
2014 proJeCt deVelopment
outlook
The major projects for Pan American in 2014 are:
1. An expansion of the La Colorada operation requiring
capital investments of $32.0 million in 2014, including the
commencement of a shaft and hoist installation of $8.8 million;
plant expansion of $3.6 million; infrastructure upgrades of
$6.5 million; tailings expansion of $5.0 million; system and
equipment upgrades of $3.2 million; and project indirects
associated with the shaft and hoist installation and plant
expansion of $2.3 million.
2. The next construction phase of Dolores’ leach pad 3 is
advancing to increase the storage capacity of the pad to
provide sufficient volume to sustain operations into 2017,
which will require capital expenditures of approximately $24.0
million in 2014.
3. A power line construction project at Dolores by a third party
contractor is expected to commence in 2014 and require an
investment of $8.0 million for completion and power delivery
to operations in 2015.
4. The pulp agglomeration expansion project studies at Dolores,
metallurgical testing, pit dewatering and other smaller
associated projects are expected to require approximately $3.0
million in capital spending.
We are assuming that the law in Chubut will not be amended in
2014 in a manner which encourages further investment at this
stage at the Navidad project and as such, our 2014 plans are for
the project to remain focused on “care and maintenance” as well
as adhering to the investment plan filed with the authorities. All
expenditures at Navidad in 2014 will be expensed as incurred
under exploration and project development and are expected to
total $3.9 million.
9
2013 operating perFormanCe
The following table reflects silver production and cash costs, net of
by-product credits at each of Pan American’s operations for 2013,
as compared to 2012 and 2011.
Silver Production
(ounces ‘000s)
Cash Costs(1)
($ per ounce)
2013
2012
2011
2013
2012
2011
4,566
5,079
3,503
3,304
-
2,397
3,967
4,431
5,364
2,652
2,909
275
2,083
3,726
4,296
5,300
-
$9.43
$7.45
$7.47
2,769
$14.61
881
1,712
3,130
-
$17.56
$15.51
$8.64
$5.05
$4.05
$17.51
$36.33
$23.48
$18.92
$7.74
$4.80
-
$14.03
$17.47
$16.11
$13.48
3,144
3,632
3,767
$8.55
$14.65
$7.36
25,959
25,075
21,855
$10.81
$12.03
$9.44
La Colorada
Alamo Dorado
Dolores(2)
Huaron
Quiruvilca
Morococha(3)
San Vicente(4)
Manantial
Espejo
Consolidated
Total(5)
(1) Any reference to “cash costs” in this MD&A
is defined as cash costs net of by-product
credits. Please refer to the section Alternative
Performance (Non-GAAP) Measures for a
detailed description of the cash cost calculation,
details of the Company’s by-product credits and
a reconciliation of this measure to the Audited
Consolidated Financial Statements.
(2) The Dolores mine was acquired on March
30, 2012 and as such the 2012 figure is the
production for 9 months of the Company’s
ownership.
(3) Morococha data represents Pan American’s
92.3% interest in the mine’s production.
(4) San Vicente data represents Pan American’s
95.0% interest in the mine’s production.
(5) Totals may not add due to rounding.
The graph below presents silver production by mine in 2013 and
highlights the diverse nature of Pan American’s silver production.
Manantial Espejo
3.1 Moz
La Colorada
4.6 Moz
Alamo Dorado
5.1 Moz
Huaron
3.3 Moz
Dolores
3.5 Moz
San Vicente
4.0 Moz
Morococha
2.4 Moz
Mexico
Peru
Bolivia
Bolivia
10
In 2013, Pan American’s silver production increased to 26.0 million
ounces, 4% higher than production levels in 2012. The increase
in silver production was mainly attributable to a full year of
production from the Dolores mine in Mexico, which was acquired
upon the closing of the Minefinders transaction on March 30,
2012. Higher annual silver production was achieved at all of
Pan American’s mines, other than Manantial Espejo, and Alamo
Dorado. The Quiruvilca mine was sold by Pan American effective
from June 1, 2012 and was not part of 2013 production.
Silver production in 2013 was at the top end of management’s
forecast range of between 25.0 million and 26.0 million ounces
as described in the December 31, 2012 MD&A. Alamo Dorado,
Dolores, Huaron and San Vicente all exceeded the high end of
our guidance, La Colorada and Morococha achieved the guidance
range, while only Manantial Espejo was below guidance.
Consolidated cash costs per ounce of silver were $10.81 in 2013, a
10% decrease from 2012 cash costs per ounce of $12.03, and well
below management’s forecast range $11.80 to $12.80 per silver
ounce for the year. The decrease year over year was attributable
to a significant increase in by-products produced, including a
33% increase in gold produced, and meaningful reductions in
cash costs at our Peruvian operations due to more mechanized
mining at Huaron and higher grades, recoveries and throughputs
at Morococha. Manantial Espejo cash costs were also reduced
significantly with the devaluation of the Argentine peso outpacing
local inflation in 2013, in addition to the 40% increase in gold
produced at that mine. Offsetting these positive effects on cash
costs were the lower by-product prices realized, especially for
gold, and cost increases at Alamo Dorado where lower grades
had a negative effect on production and costs, and at Dolores,
where costs rose mainly on higher non-capitalized pre-stripping
expenditures.
PAN AMERICAN SILVER CORP. The following tables set out the Company’s by-product production over the past three years and the metal prices realized for each
metal produced:
By-Product Production
2013
2012
Gold ounces
149,815
112,283
Zinc tonnes
Lead tonnes
Copper tonnes
42,141
13,499
5,543
36,848
12,266
4,162
2011
78,426
37,234
12,701
4,544
Silver/ounce
Gold/ounce
Zinc/tonne
Lead/tonne
Copper/tonne
$
$
$
$
$
Realized Prices
2013
23.29
1,398
1,908
2,141
7,251
2012
31.26
1,672
1,961
2,052
7,879
2011
35.03
1,567
2,208
2,402
8,625
In 2013, production of gold increased by 33% as a result of additional production from Dolores and Manantial Espejo. An additional
quarter of production at Dolores following the March 30, 2012 acquisition of the mine and an anticipated increase in gold grade at
Manantial Espejo were the main factors behind these increases.
Consolidated base metal production achieved double-digit percentage increases as a result of higher production at all of our
polymetalic operations, most notably at the Company’s Peruvian mines. Base metal production in 2013 easily exceeded the high end of
management’s forecasted ranges for zinc (36,000 – 39,000 tonnes), lead (11,500 – 12,500 tonnes) and copper (3,500 – 4,000 tonnes) as
a combined result of better than expected throughput rates, grades and recoveries.
all-in sustaining Costs per silVer ounCe sold
We believe that AISCSOS is a more comprehensive measure of the cost of operating our consolidated business than traditional cash and
total costs per ounce as it includes the cost of replacing ounces through exploration, the cost of ongoing capital investments (sustaining
capital), general and administrative expenses, as well as other items that affect the Company’s consolidated earnings and cash flow.
To facilitate a better understanding of these measures as calculated by the Company, the following table provides the detailed
reconciliation of this measure to the applicable cost items, as reported in the consolidated income statements for the respective
periods:
Production costs
Royalties
Smelting, refining and transportation charges(1)
Less by-product credits(1)
Cash cost of sales net of by-products
Sustaining capital(2)
Exploration and project development
Reclamation cost accretion
General & administrative expense
All-in sustaining costs
Payable ounces sold
A
B
All-in sustaining cost per silver ounce sold, net of
by-products
(A*$1000)/B
2013
2012
530,613
26,459
93,926
(331,809)
319,189
111,647
15,475
3,030
17,596
466,937
$
$
$
$
$
$
$
$
$
$
485,163
35,077
94,438
(293,208)
321,470
130,721
36,746
2,999
20,790
512,726
25,478,014
23,037,493
18.33
$
22.26
$
$
$
$
$
$
$
$
$
$
$
(1) Included in the revenue line of
the audited consolidated income
statements and are reflective
of realized metal prices for the
applicable periods.
(2) Non – GAAP measure: please
refer to section Alternative
Performance (Non-GAAP)
Measures for a reconciliation
of this measure to the Audited
Consolidated Financial Statements.
AISCSOS declined by 18% in 2013 relative the 2012, down $3.93 to $18.33 per ounce. Some expense items in our business are directly
correlated with metal prices, such as royalties, which declined in 2013 in unison with lower metal prices. Discretionary expense items,
such as exploration and general and administrative expense were reduced in 2013 relative to the prior year as an extensive range of cost
cutting initiatives were analysed and executed to realign the Company’s operational performance with the prevailing price environment
and to ensure that we maintained our strong financial position.
An analysis of each operation’s 2013 operating performance follows, as compared to 2012 operating performance and management’s
guidance for 2013, as contained in the 2012 year-end MD&A.
11
• La Colorada mine
Tonnes milled
Average silver grade – grams
per tonne
Average silver recovery - %
Silver– ounces
Gold – ounces
Zinc – tonnes
Lead – tonnes
Twelve months ended
December 31,
2013
448,659
352
89.9
2012
419,591
374
89.6
4,566,377
4,431,111
2,579
6,759
3,324
3,578
5,599
2,766
Payable ounces of silver
4,364,727
4,215,075
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures - thousands
$
$
$
9.43
11.27
13,574
$
$
$
8.64
9.96
21,700
(1) 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.
• Reported metal figures in the tables in this section are volume of
metal produced.
2013 Versus 2012
Silver production at the La Colorada mine in 2013 was 4.6 million
ounces, a 3% increase compared to the previous year. This
increase was due to 7% higher throughput rates and slightly
improved silver recoveries, partially offset by a 6% decline in
silver grades. Production of lead and zinc benefited from higher
throughput, while anticipated lower gold grades led to a modest
decrease in gold production.
2013 cash costs increased by 9% to $9.43 per ounce of silver when
compared to 2012. The increase was the result of higher operating
costs while by-product credits remained similar to the prior year
as increased base metal production was offset by lower gold
production and realized prices.
2013 Versus 2013 guidanCe
Silver production at La Colorada in 2013 was in line with the low
end of management’s forecast range of 4.6 million to 4.7 million
ounces, as higher than expected throughput rates were offset by
below-expected grades. Base metal production benefited from
the better than expected throughput rates, grades and recoveries,
resulting in zinc and lead production which exceeded our
guidance. Gold grades lagged management’s expectation, leading
to actual gold production falling short of guidance.
Actual cash costs of $9.43 per ounce were within management’s
forecast range of between $9.00 and $9.75 per ounce. Cash costs
at La Colorada in 2013 were positively influenced by stronger
than expected by-product production, while offset by significantly
lower realized prices than forecast.
Capital expenditures at La Colorada during 2013 totalled $13.6
million, below our forecast of $15.0 million. The capital was spent
mainly on mine development and equipment purchases for the
Estrella and Candelaria mines, an Estrella mine expansion, and a
continuation of the near-mine exploration drilling program.
• Alamo Dorado mine
Twelve months ended
December 31,
2013
2012
Tonnes milled
1,790,317
1,697,941
Average silver grade – grams
per tonne
Average gold grade – grams
per tonne
Average silver recovery - %
Silver– ounces
Gold – ounces
Copper – tonnes
101
0.36
87.1
116
0.38
85.6
5,078,807
5,364,011
17,600
123
17,966
117
Payable ounces of silver
5,042,779
5,345,677
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures - thousands
$
$
$
7.45
10.98
7,621
$
$
$
5.05
7.95
10,936
(1) 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.
2013 Versus 2012
While silver production at Alamo Dorado in 2013 declined to
5.1 million ounces from 5.4 million ounces produced in 2012,
it remained the Company’s largest silver producer. Silver
production was impacted as expected by lower silver grades,
partially offset by higher throughput rates and recoveries. Gold
production of 17,600 ounces in 2013 represented a 2% decrease
over production levels in 2012 as lower gold grades were largely
overcome by higher throughput rates.
Alamo Dorado’s cash costs per ounce were $7.45 in 2013, a
48% increase from the 2012 cash costs of $5.05 due to higher
operating costs and a significant decline in gold by-product credits
due to lower gold prices in 2013.
12
PAN AMERICAN SILVER CORP. 2013 Versus 2013 guidanCe
2013 Versus 2012
Dolores produced 3.5 million ounces of silver and 65,230 ounces
of gold from a full year of production in 2013, significantly
higher than silver and gold production for the 9 months that
Pan American owned and operated the mine in 2012. On an
annualized basis, the 2013 silver production rate was in line with
that of 2012, despite 2013 production being affected by leach pad
construction mid-way through the year, which hindered efficient
pad loading and leaching. However, the successful completion of
the extension of pad 2 in June of 2013, and the commissioning
of the first phase of pad 3 on schedule in October 2013 allowed
for uninterrupted stacking and leaching operations throughout
the remainder of the year, apart from planned maintenance and
commissioning outages. Decreased stacking throughput was
offset by higher silver grades processed. The annualized gold
production rate of 2012 was exceeded in 2013 due to higher gold
grades stacked and improved recoveries.
Dolores’s cash costs per ounce were $7.47 in 2013, an 84%
increase from the 2012 cash costs of $4.05 due to higher
operating costs and a decline in gold by-product credits per ounce
resulting from lower actual gold prices in 2013.
2013 Versus 2013 guidanCe
Silver production was 2% above the top of management’s
guidance range of between 3.25 million and 3.45 million ounces,
a result of higher silver grades outweighing the effect of less ore
tonnes stacked than anticipated. Gold production was within
management’s expected range as better than expected recoveries
were offset by lower stacking rates.
Cash costs for 2013 were $7.47 per ounce of silver, 113%
above the $2.25 to $3.50 per ounce forecast range provided by
management. The main causes for this negative variance were
significantly lower gold credits than forecasted due to lower gold
prices, together with operating costs that were slightly higher than
anticipated.
Capital expenditures at Dolores in 2013 totalled $36.2
million, excluding the leach pad expansions projects and mine
optimization projects, which was in line with management’s
guidance of $37.0 million. Capital expenditures in 2013 at Dolores
were predominantly related to mine operations, comprised of
pre-stripping activities, truck rehabilitation and other mobile
equipment purchases, near-mine exploration and other sustaining
infrastructure.
Alamo Dorado’s silver production in 2013 exceeded the top of
management’s forecast range of 4.8 million to 5.0 million ounces,
the result of throughput rates that were above our expectations.
Gold production was 7% above the top of our guidance range
of 16,500 ounces as actual throughput rates and gold grades
exceeded expectations.
Cash costs were 10% lower than the low end of our forecast range
of $8.25 to $8.50 per ounce as a result the better than expected
silver production and higher gold by-product credits resulting from
stronger than expected gold production, partially offset by lower
actual gold prices than assumed.
Capital expenditures at Alamo Dorado during 2013 totalled $7.6
million, compared to management’s guidance of $7.5 million,
predominantly for pre-stripping of the phase II pit expansion and
mine equipment.
• Dolores mine*
Twelve months ended
December 31,
2013
2012
Tonnes milled
5,351,851
4,346,595
Average silver grade – grams per
tonne
Average gold grade – grams
per tonne
Average silver recovery - %
Average gold recovery - %
48
0.46
42.7
82.1
42
0.40
45.7
78.0
Silver– ounces
Gold – ounces
3,502,522
2,652,851
65,230
43,476
Payable ounces of silver
3,493,766
2,646,219
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures(2) - thousands
$
$
$
7.47
20.12
36,159
$
$
$
4.05
16.88
35,352
* Results for the nine months of 2012 that the Company operated the
Dolores mine.
(1) 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.
(2) Sustaining capital expenditures excluded $50.5 million and $21.8 million,
in the 2013 and 2012 reporting periods, respectively, related to capital
incurred on the leach pad and other expansion projects as disclosed in the
section Alternative Performance (non-GAAP) Measures.
13
• 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
Twelve months ended
December 31,
2013
802,300
158
2.5
81.8
2012
683,483
162
2.5
81.7
3,303,595
2,909,890
936
14,017
5,842
3,395
655
11,824
4,727
2,257
Payable ounces of silver
2,883,758
2,506,481
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures - thousands
$
$
$
14.61
18.65
15,474
$
$
$
17.51
21.02
22,936
(1) 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.
2013 Versus 2012
In 2013, mill throughput at Huaron increased by 17% relative to
2012, partially offset by slightly lower silver grades processed,
resulting in silver production that rose by 14% year-on-year.
Base metal and gold production also rose at Huaron on higher
throughput rates and recoveries.
Cash costs at Huaron decreased by 17% in 2013 to $14.61 per
ounce. Cash costs benefited from higher silver production and a
rise in by-product credits as higher production of all by-product
metals were only partially offset by lower by-product metal prices
in 2013.
compared to our forecast of $20.0 million, as several discretionary
capital projects were rationalized in response to lower metal
prices. Capital expenditures were primarily to complete a
significant tailings dam expansion project initiated in 2012, to
purchase and overhaul mobile mine equipment, and to continue
near-mine 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
Twelve months ended
December 31,
2013
573,295
2012
535,086
149
3.2
87.9
143
2.8
84.9
2,396,767
2,083,726
2,650
15,165
3,769
2,026
2,840
11,925
3,601
1,502
Payable ounces of silver
2,049,487
1,776,333
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures(2) - thousands
$
$
$
17.56
26.17
18,652
$
$
$
23.48
29.75
20,805
* Production and cost figures are for Pan American’s 92.3% share only.
(1) 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.
(2) Sustaining capital expenditures excluding $6.4 million in 2012, of capital
incurred at the Morococha project as disclosed in the section Alternative
Performance (non-GAAP) Measures.
2013 Versus 2013 guidanCe
2013 Versus 2012
Silver production in 2013 was 12% above the high end of
management’s guidance of between 2.85 million and 2.95 million
ounces. Throughput rates, grades and recoveries positively
outperformed management’s expectations, and the result was
that production of all base metals was above management’s
guidance.
Morococha’s 2013 silver production increased to 2.4 million
ounces, or 15% as compared to 2012 due to increased silver
grades, combined with higher throughput rates and recoveries.
Base metal production also benefited from higher grades,
throughput rates and recoveries, resulting in increased
production, particularly of zinc and copper.
The actual cash costs in 2013 were 27% better than the bottom
of our forecast range of $20 to $22 per ounce. This positive
performance was attributable to better than expected silver
production and higher by-product credits, driven by higher
quantities of by-product metals produced that were partially
offset by lower metal prices.
Cash costs at Morococha decreased by 25% in 2013 to $17.56
per ounce of silver due mainly to substantially higher by-product
credits and higher silver production, while holding operating costs
steady for 2013 compared to 2012. The increase in by-product
credits was driven by higher quantities of by-product metals
produced that were partially offset by lower metal prices.
Capital expenditures at Huaron during 2013 totalled $15.5 million,
14
PAN AMERICAN SILVER CORP. 2013 Versus 2013 guidanCe
Silver production performance at Morococha in 2013 was in
line with the bottom end of management’s guidance range
of 2.4 million to 2.6 million ounces. Actual gold, zinc and
copper production all exceeded our guidance ranges, while
lead production was within guidance. Actual throughput rates
fell slightly short of management’s expectations but were
compensated by modestly better than expected silver grades
and recoveries. Gold, zinc and copper grades and recoveries all
exceeded management’s forecasts and more than offset the lower
than anticipated throughput rates.
Actual cash costs in 2013 were 14% lower than the bottom end of
our forecast range of $20.50 to $22.25 per ounce due primarily to
actual by-product credits being higher than expected.
Sustaining capital expenditures at Morococha during 2013 totalled
$18.7 million, compared to management’s guidance of $15.0
million. The majority of the capital expenditures in 2013 were
for the mine development and included ramp advances and
ventilation system expansions, overhaul and replacements of
certain aged mobile mine equipment and near-mine exploration
activities.
• San Vicente mine*
Tonnes milled
Average silver grade – grams per
tonne
Average zinc grade - %
Average silver recovery - %
Silver– ounces
Zinc – tonnes
Lead – tonnes
Twelve months ended
December 31,
2013
319,433
2012
306,063
412
2.5
93.8
419
2.2
90.7
3,967,263
3,726,024
6,201
564
4,918
432
Cash costs at San Vicente decreased by 18% to $15.51 in 2013
as compared to the previous year. The lower cash costs in 2013
resulted from the combined effect of lower operating costs, higher
by-product credits and an increase in silver production. The lower
operating costs were primarily driven by a decline in royalties
paid, which were highly correlated to the lower metal prices
realized in 2013. Higher by-product zinc and lead revenues were a
result of increased production of those metals.
2013 Versus 2013 guidanCe
Silver production attributable to Pan American in 2013 of 4.0
million ounces was 3% over management’s forecast range of
3.75 million to 3.85 million ounces, as silver recoveries exceeded
expectations. Both actual zinc and lead production were
within management’s guidance as slightly better than expected
recoveries offset small shortfalls in expected grades.
Actual cash costs of $15.5 per ounce of silver were 10% below
management’s forecast range of $17.26 to $18.00 per ounce due
to lower than expected operating costs as actual royalties were
well below management’s expectations.
Capital expenditures at San Vicente during 2013 totalled $8.2
million, which was below management’s forecast of $11.5 million,
due to capital rationing initiatives. Capital spending in 2013 was
primarily for mine development, underground mobile equipment
maintenance, and exploration.
• Manantial Espejo mine
Tonnes milled
Average silver grade – grams per
tonne
Average gold grade – grams
per tonne
Twelve months ended
December 31,
2013
719,607
2012
734,335
150
2.81
91.3
95.4
170
1.94
89.8
94.2
Payable ounces of silver
3,614,290
3,390,683
Average silver recovery - %
Cash cost per ounce of silver net of by-product credits
Average gold recovery - %
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures - thousands
$
$
$
15.51
18.07
8,165
$
$
$
18.92
22.05
3,053
* Production and interest figures are for Pan American’s 95.0% share only.
(1) Cash costs per ounce and total costs per ounce are non-GAAP
measurements. Please refer to section Alternative Performance (Non-
GAAP) Measures for a detailed reconciliation of these measures to our cost
of sales.
Silver– ounces
Gold – ounces
3,144,008
3,632,550
60,820
43,339
Payable ounces of silver
3,137,720
3,625,285
Cash cost per ounce of silver net of by-product credits
Cash cost per ounce net of by-
products(1)
Total cost per ounce net of by-
products(1)
Capital Expenditures - thousands
$
$
$
8.55
19.03
12,002
$
$
$
14.65
22.73
15,858
2013 Versus 2012
In 2013, San Vicente’s silver production increased by 6% compared
to 2012, due to higher throughput rates and an increase in
recoveries. Zinc production improved by 26% and lead production
by 31% on account of the throughput increase in combination
with higher grades and recoveries.
(1) 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.
15
2013 Versus 2012
Silver production at the Manantial Espejo mine in 2013 was 3.1
million ounces, a 13% decrease from the production level in 2012.
This decrease was the result of a 12% decline in grades and a 2%
decrease in throughput offset by a similar increase in recoveries
from the previous year. Gold production jumped significantly, by
40% in 2013 due to higher gold grades and recoveries in line with
the mine plan.
In 2013, cash costs at Manantial Espejo decreased to $8.55 per
ounce of silver, 42% below 2012 cash costs of $14.65 per ounce.
The main drivers of the decrease in cash costs were a 12%
reduction in operating costs together with a 16% lift in by-product
gold credits. The lower operating costs were mainly due to lower
royalty expenses, cost cutting initiatives and the devaluation of the
local currency, offset by high sustained inflation rates in Argentina.
2013 Versus 2013 guidanCe
In 2013, Manantial Espejo’s actual throughput rates and silver
grades were below management’s forecast, resulting in 6%
lower silver production than our forecast range of 3.35 million
to 3.45 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 exceeded management’s guidance range of
53,500 ounces to 57,500 ounces as higher than expected grades
overcame lower than expected throughput rates.
Actual cash costs in 2013 of $8.55 per ounce of silver were 34%
below the forecast range of $13.00 to $14.25 per ounce. The main
drivers for the lower than expected cash costs were lower than
expected operating costs, combined with better than anticipated
by-product gold credits on higher production quantities.
Capital expenditures at Manantial Espejo during 2013 totalled
$12.0 million, compared to management’s forecast capital
expenditures of $20.0 million. Capital spending was lower than
forecast due to the decision to defer some pre-stripping activities
in response to the downturn in precious metal prices. The capital
expenditures consisted mainly of open pit pre-strip development
and equipment acquisitions, underground mine development and
improving the camp infrastructure and mill upgrades.
2013 proJeCt deVelopment
update
The following table reflects the amounts spent at each of Pan
American’s significant projects in 2013, as compared to 2012 and
2011. Our accounting policies determine what portion of the
amounts spent at our projects is capitalized and what portion is
expensed during the period.
Total Project Spending
2013
2012
2011
$
$
$
$
50,482
2,761
-
203
$
$
$
$
21,291
20,044
6,389
4,244
$
$
$
$
-
33,200
26,218
4,056
Dolores leach pads and
expansion projects
Navidad
Morococha Project
Other
• Dolores projects
At the Dolores mine, the Company spent a total of $50.5 million
in 2013 on various expansion projects which included completion
of the phase I and start of the phase II of the pad 3 construction,
expansion of leach pad 2, preliminary engineering for a future
power line, and processing improvements. Management
advanced the investigation into processing optimization
opportunities, including the possibility of adding a milling and pulp
agglomeration circuit to the processing flow sheet to enhance
silver and gold recoveries on high grade ores.
• Navidad
At the Navidad project, the Company spent a total of $2.8 million
in 2013, of which $0.2 million was capitalized.
With the project placed on care and maintenance in the fourth
quarter of 2012, the Company focused on local community
support activities in Chubut. Activities related to project
engineering, procurement and development have been curtailed
since late 2012 until a new law is passed allowing for open pit
mining and any associated tax and royalty implications can be
assessed.
16
PAN AMERICAN SILVER CORP. oVerVieW oF 2013 FinanCial results
For the year ended December 31, 2013, the Company’s net
income and cash flow from operations decreased from the
comparable period in 2012. The results were primarily due to
lower realized metal prices, partially offset by higher quantities
of all metals sold. In addition, write-downs of the Dolores mine
and associated goodwill were recorded in the second and fourth
quarters of 2013, due largely to the decline in precious metal
prices. Furthermore, reforms to Mexican taxes were enacted
in the fourth quarter resulting in a charge to non-cash deferred
taxes.
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,
industry wide cost pressures, and the timing of the sales of
production which varies with the timing of shipments. Beginning
in the second quarter of 2012, results include the Dolores mine
which was acquired with the completion of the Minefinders
acquisition on March 30, 2012. The fourth quarter of 2012
included a partial write-down of the Navidad project discussed
further in the section that follows.
2013
Revenue
Mine operating earnings
Attributable (loss) earnings for the period
Adjusted attributable earnings (loss) for the period(2)(3)
Basic (loss) earnings per share
Diluted (loss) earnings per share
Cash flow from operating activities
Cash dividends paid per share
Other financial information
Total assets
Total long term financial liabilities
Total attributable shareholders’ equity
2012
Revenue
Mine operating earnings (1)
Attributable (loss) earnings for the period
Adjusted attributable earnings (loss) for the period(1)(2)
Basic (loss) earnings per share (1)
Diluted (loss) earnings per share (1)
Cash flow from operating activities
Cash dividends paid per share
Other financial information
Total assets (1)
Total long term financial liabilities
Total attributable shareholders’ equity (1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Quarters Ended (unaudited)
March 31
June 30
Sept 30
Dec 31
Year Ended
Dec 31
243,012
74,816
20,148
40,044
0.13
0.10
32,251
0.125
$
$
$
$
$
$
$
$
175,576
3,814
(186,539)
(16,853)
(1.23)
(1.23)
469
0.125
$
$
$
$
$
$
$
$
213,556
33,934
14,154
12,158
0.09
0.09
40,730
0.125
$
$
$
$
$
$
$
$
192,360
18,955
(293,615)
(84,857)
(1.94)
(1.94)
46,156
0.125
Quarters Ended (unaudited)
March 31
June 30
Sept 30
Dec 31
228,819
101,896
49,883
68,781
0.47
0.47
37,395
0.0375
$
$
$
$
$
$
$
$
200,597
51,517
36,920
8,108
0.24
0.18
(5,200)
0.0375
$
$
$
$
$
$
$
$
251,843
65,440
22,582
37,548
0.15
0.15
79,507
0.05
$
$
$
$
$
$
$
$
247,335
85,091
(31,185)
54,110
(0.18)
(0.23)
81,603
0.05
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
824,504
131,519
(445,851)
(49,507)
(2.94)
(2.96)
119,606
0.50
2,767,456
110,088
2,182,334
Year Ended
Dec 31
928,594
303,944
78,200
168,547
0.56
0.49
193,305
0.175
3,394,625
143,022
2,710,243
17
2011
Revenue
Mine operating earnings
Attributable earnings for the period
Adjusted attributable earnings for the period(2)
Basic earnings per share
Diluted earnings per share (4)
Cash flow from operating activities
Cash dividends paid per share
Other financial information
Total assets
Total long term financial liabilities
Total attributable shareholders’ equity (1)
Quarters Ended (unaudited)
March 31
June 30
Sept 30
Dec 31
$
$
$
$
$
$
$
$
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
Year Ended
Dec 31
855,275
409,125
352,494
250,666
3.31
3.31
359,455
0.10
1,951,796
118,984
1,593,839
$
$
$
$
$
$
$
$
$
$
$
(1) Mine operating earnings, unadjusted and adjusted attributable earnings, and basic and diluted earnings per share for the quarters ended June 30,
September 30, December 31, 2012 and the year ended December 31, 2012 have been recast for the finalization of the Minefinders purchase price
allocation. This recast also affected total assets and total attributable shareholders’ equity as at December 31, 2012. Readers should refer to Notes of the
Audited Consolidated Financial Statements for full details of the recast results.
(2) 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.
(3) The adjusted attributable loss for the three months ended June 30, 2013 has been revised to $(16,853) from the amount previously presented of
$(9,371). In Q2 2013, the Company added back $13.2 million of net realizable value of inventory write-downs ($7.5 million net of tax) applicable to certain
doré and stockpiles. As the doré was sold in the normal course of business during Q3 2013 and a partial reversal of the stockpile was recognized in Q3
2013, the Company no longer presents this item as an adjusting item.
(4) The diluted earnings per share for the three months ended March 31, 2011 has been revised to $0.60 per share from the amount previously presented
of $0.86 per share, to properly reflect the effect under IFRS of the dilutive share purchase warrants which are classified as a liability.
The following graph illustrates the key factors leading to the change from net earnings in the year ended December 31, 2012 to the net
loss incurred in 2013. Further analysis of the key factors and the changes is discussed in the section that follows.
$45
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$158
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I n
PAN AMERICAN SILVER CORP. The following table reflects the metal prices that the Company realized and the quantities of metal sold during each period. As seen
below, there was a sharp decline in realized metal prices for silver and gold, but also, a sharp increase in the quantities of all metals sold
in 2013 compared to 2012.
Realized Metal Prices
Year ended December 31,
Quantities of Metal Sold
Year ended December 31,
2013
2012
2013
2012
$
$
$
$
$
23.29(1)
1,398(1)
1,908(2)
2,141(2)
7,251(2)
$
$
$
$
$
31.26
1,672
1,971
2,071
7,879
25,478,014
141,341
37,510
13,262
4,718
23,037,493
108,075
31,443
11,396
3,412
Silver – in ounces
Gold – in ounces
Zinc – in tonnes
Lead – in tonnes
Copper – in tonnes
(1) Metal price per ounce.
(2) Metal price stated as cash settlement per tonne.
• Income Statement
Earnings for 2013 were negative $445.8 million, compared to earnings of $78.4 million in 2012, and basic loss per share for 2013
of $2.94 compared to earnings of $0.56 per share in 2012. Two key reasons behind the decrease in earnings in 2013 were that the
Company recorded net of tax, non-cash write-downs of $420.4 million primarily related to the Dolores mine and associated goodwill
(2012 – impairment charge of $100.0 million related to Navidad), in addition to an $86.8 million deferred tax adjustment arising from
the introduction of Mexican tax reforms. The Company’s bottom line benefited from increases in overall quantities of most metals sold,
as reflected in the table above, but was offset by decreases in the realized metal prices received. Higher cost of sales in 2013, which
includes production costs, depreciation and amortization, and royalty expense, primarily reflected an increase in the quantities sold,
with operating cost pressures more than offset by cost reduction benefits realized.
The following table highlights the key items that affected net income (loss) year over year.
Net earnings for 2012
Increased sales volume
Decreased income tax expense
Decreased exploration expense
Net other items
Net of tax 2013 impairment, incremental to 2012 impairment
Decreased metal prices
Deferred tax impact of Mexican tax reform
Increased production costs (due to increased production)
Increased amortization
Net change in FX
Inventory adjustments to net realizable value
Net loss for 2013
$
78,355
158,022
45,359
21,271
8,968
(320,391)
(253,494)
(86,800)
(32,451)
(31,504)
(20,214)
(12,967)
$
(445,846)
Revenue for 2013 was $824.5 million, an 11% decrease from
revenue for 2012 of $928.6 million. This decrease was driven by a
$253.5 million price variance from lower metal prices realized for
most metals, inclusive of negative price and quantity adjustments
in 2013 of $25.4 million, offset by a $158.0 million positive volume
variance from higher quantities of metals sold.
Mine operating earnings were $131.5 million in 2013, a decrease
of 57% from the $303.9 million generated in 2012. This decrease
resulted from the lower revenue noted above and an increase
in cost of sales by $68.3 million, which primarily reflected higher
volumes sold. Mine operating earnings are equal to revenue less
cost of sales, which is considered to be substantially the same
as gross margin. Production costs included write-downs of in-
process inventory to net realizable value of $13.0 million, which
was comprised of a write-down of $10.3 million to heap leach
inventories at Dolores and $2.7 million to dore inventory also at
Dolores.
Net write-downs of mining assets and goodwill of $540.2 million
pre-tax ($420.4 million net of tax) were recorded in 2013 as non-
19
for this project. The Company’s key assumptions were 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 fair value less costs
to sell (“FVLCTS”) was below its carrying value, and as a result an
impairment charge of $100.0 million was recorded at December
31, 2012. The Company concluded that, as at December 31, 2013
there was no further impairment or reversal of impairment to be
recorded.
Key assumptions and sensitivity
The metal prices used to calculate the recoverable amounts at
December 31, 2013 are based on analysts’ consensus prices and
the Company’s long term reserve prices, and are summarized in
the following table:
Commodity Prices
2014-2017 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$22.43
$1,338
$2,184
$2,205
$22.00
$1,300
$1,850
$1,950
Metal prices used at June 30, 2013
Commodity Prices
2013-2016 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$26.79
$1,508
$2,238
$2,221
$25.00
$1,350
$1,750
$1,850
Metal prices used at December 31, 2012
Commodity Prices
2013-2016 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$30.38
$1,647
$2,289
$2,213
$25.00
$1,350
$1,750
$1,850
cash charges primarily related to the Dolores mine and associated
goodwill arising upon the acquisition of Minefinders in 2012.
The sharp declines in metal prices that occurred in the quarter
ended June 30, 2013 caused the Company to conclude that
these were significant enough to constitute an indication of
impairment, triggering impairment testing as per the Company’s
accounting policies and applicable accounting standards. In
addition to the recent metal price declines, the valuation models
also incorporated the potential implementation of new Mexican
taxes. Accordingly, an impairment charge of $187.5 million, net
of tax ($188.6 million before tax) comprised of goodwill of $184.7
million and non-current assets of $2.8 million, was determined to
be appropriate in the second quarter of 2013.
Due to the sustained decrease in metal prices that began during
the second quarter of 2013 and continued through the balance of
the year, during the fourth quarter of 2013 the Company lowered
the silver and gold prices assumed in its reserve and resource
estimates and its life of mine cash flow models, and concluded
that these changes constituted a further indication of impairment.
Based on the Company’s assessment at December 31, 2013 of the
recoverable amounts of its mineral properties, determined on a
fair value less costs to sell basis, the Company concluded that a
further impairment charge was required for the Dolores mine. As
a result, the Company recorded an impairment charge of $218.1
million, net of tax ($336.8 million before tax), which was allocated
pro-rata amongst the Dolores mineral property ($194.6 million),
exploration and evaluation property ($116.1 million) and property,
plant and equipment assets ($26.1 million). For the purposes of
this impairment review, the Company’s key assumptions included
the most current information on operating and capital costs, a
long term silver price of $22 per ounce, a long term gold price
of $1,300 per ounce, the effects of the Mexican tax reforms
that were substantively enacted in the fourth quarter, and a risk
adjusted project specific discount rate of 6%. The Company used
a median of analysts’ consensus pricing for the first four years
of its economic modeling for impairment purposes, which had
further deteriorated since June 30, 2013. At December 31, 2013,
the Company determined that the carrying value related to the
Dolores mine of approximately $723.1 million, net of associated
deferred tax liabilities, was greater than its recoverable amount of
$505.1 million.
At June 30, 2013, the Company reclassified certain exploration
assets from assets held for sale to exploration and evaluation
property, which required assessment of their carrying amounts
based on fair value less costs to sell. These assets were classified
as held for sale in the first quarter of 2013 when the Company
entered into an agreement to potentially dispose of them and
recorded an impairment charge of $18.3 million. At June 30
2013, it was determined that the estimated recoverable value
of the non-current assets on a fair value less costs to sell basis
required an impairment recovery of $3.4 million and brought the
impairment charge for these properties to approximately $14.9
million as of June 30, 2013.
The 2012 impairment charge of $100.0 million (with nil tax effect)
related to the Navidad project in Argentina. The impairment was
a result of the deterioration in 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.These factors resulted in
higher discount rates used in the company’s impairment testing
20
PAN AMERICAN SILVER CORP. The Company assesses impairment at the cash-generating unit
(“CGU”) level, which is considered to be individual mine sites
or development properties. The discount rates used to present
value the Company’s life of mine cash flows are derived from the
Company’s weighted average cost of capital which was calculated
as 8% for 2013 (2012 – 8%), with rates applied to the various
mines and projects ranging from 5.5% to 12.5% depending on
the Company’s assessment of country risk, project risk, and other
potential risks specific to each CGU.
The key assumptions in determining the recoverable value of
the Company’s mineral properties are metal prices, operating
and capital costs, foreign exchange rates and discount rates. At
December 31, 2013, 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. Under certain of such scenarios, the carrying value
of the Company’s mineral properties associated with the Alamo
Dorado mine and the Manantial Espejo mine may exceed their
recoverable amount for the purposes of the impairment test.
For the Alamo Dorado mine, either of a decrease in the silver price
of 2%, a decrease in the gold price of 8%, an increase in operating
costs of 2%, or an appreciation of the Mexican peso of 5% would
in isolation, cause the estimated recoverable amount to be equal
to the carrying value of $ 57.7 million (2012–$56.9 million). At
December 31, 2012, none of these factors, if negatively affected
by 10%, would have caused the carrying value to equal or exceed
the recoverable value.
For the Manantial Espejo mine, either a decrease in the silver or
gold price of 7%, or an increase in operating costs of 4% would,
in isolation, cause the estimated recoverable amount to be equal
to the carrying value of $ 160.5 million (2012–$146.7 million). At
December 31, 2012, none of these factors, if negatively affected
by 10%, would have caused the carrying value to equal or exceed
the recoverable value.
In the case of the Dolores mine, the Navidad project and certain
non-core exploration properties, which all have had their carrying
values adjusted to fair value less cost to sell through impairment
charges, a modest decrease in any one key assumption would
reduce the recoverable amount below the carrying amount as
there is only a thin margin between the two.
Income taxes for 2013 were $16.8 million, a $78.8 million
decrease from the $95.6 million income tax provision recorded in
2012 and were comprised of current and deferred income taxes
as follows:
2013
2012 (Recast)
Current taxes
Current tax expense in respect of the current year
$
54,365
$
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
Adjustments to deferred tax attributable to changes in tax rates and laws
Reduction in deferred tax liabilities due to tax impact of impairment of property, plant, and equipment
Reduction in deferred tax liabilities due to tax impact of net realizable value charge to inventory
1,326
55,691
(865)
(523)
86,825
(119,800)
(4,571)
(38,934)
Provision for income taxes
$
16,757
$
93,857
7,193
101,050
(965)
(4,523)
-
-
-
(5,488)
95,562
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. These result
in effective tax rates that vary considerably from the comparable
period and from the amount that would result from applying
the Canadian federal and provincial 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,
2013 and the comparable period of 2012 were the non-taxable
portion of the unrealized gains on the Company’s derivatives,
foreign income tax rate differentials, additional mining taxes paid,
and withholding taxes paid on payments from foreign subsidiaries.
In addition to the non-cash impairment charge the Company
took on its Dolores assets, the Company recorded the deferred
tax impact of the Mexican corporate income tax rate increase
and new special mining duty, which were substantively enacted
in 2013. The Company expects that these and other factors will
continue to cause volatility in effective tax rates in the future.
21
2013
2012 (Recast)
(Loss) income before taxes
Statutory tax rate
Income tax (recovery) expense based on above rates
(Increase) decrease due to:
Non-deductible expenses
Change in net deferred tax assets not recognized
Non-taxable unrealized (gain) on derivative financial instruments – warrants and
convertible notes
Foreign tax rate differences
Effect of other taxes paid (mining and withholding)
Change in net deferred tax assets not recognized for exploration expenses
Non- deductible foreign exchange (gain) loss
Impairment charges
Impact of Mexican tax reform
Other
Effective tax rate
$
$
(429,089)
25.75%
(110,490)
$
$
5,198
3,598
(4,304)
(22,164)
14,451
2,042
242
41,166
86,825
193
$
16,757
$
(3.91%)
173,917
25.00%
43,479
5,170
5,145
(6,040)
5,148
9,418
2,111
(2,549)
35,003
-
(1,323)
95,562
54.95%
* The 2013 statutory income tax rates in the countries that the Company has operations in are as follows: Argentina – 35%, Bolivia – 25%, Mexico –30%,
Peru – 30%.
* The 2012 amounts have been recast to reflect the final Purchase Price Allocation for the Acquisition of Minefinders.
• Statement of Cash Flows
Cash flow from operations generated $119.6 million in 2013, a
38% decrease from the $193.3 million generated a year ago. A
large part of the decrease in cash flow from operations resulted
from the decrease in cash mine operating earnings, as discussed
previously, partly offset by less payment for income taxes. In
2013, $98.0 million was paid in cash income taxes compared to
$152.3 million paid in 2012, largely as a result of higher taxable
income generated in 2012. Cash income tax payments have a
lagged effect and as such a portion of 2013 taxes paid related to
the high operating income of 2012. Changes in non-cash working
capital used $1.7 million compared to $11.1 million used in 2012.
Investing activities used $125.3 million in 2013, inclusive of $19.9
million generated from net short-term investment liquidations and
$13.7 million cash generated by proceeds of asset dispositions.
The balance of investing activities consisted primarily of spending
$159.4 million on capital at the Company’s mines and projects as
described in the “2013 Operational Performance” section above.
Investing activities used $39.3 million in 2012, inclusive of $30.4
million generated from net short-term investment liquidations
and $86.5 million in net cash acquired in the acquisition of
Minefinders. Capital at the Company’s mines and projects in 2012
used $159.9 million, similar to 2013.
Financing activities in 2013 used $90.2 million, whereas financing
activities in 2012 used $70.8 million. Cash used in financing
activities in 2013 consisted of $75.8 million paid as dividends to
shareholders, $6.7 million used in the share buy-back program,
and $30.2 million in repayments of construction and equipment
leases which was offset by $23.5 million received as proceeds (in
Argentine pesos) from a short term bank loan received by one
of the Company’s subsidiaries for short term cash management
purposes and mitigating exposure to foreign exchange risk.
In 2012, the $70.8 million in cash used in financing activities
consisted primarily of $41.7 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 and warrants.
• Income Statement Q4 2013
The following table reflects the metal prices that the Company
realized and the quantities of metal sold during each respective
period.
22
PAN AMERICAN SILVER CORP. Realized Metal Prices
Three months ended December 31,
Quantities of Metal Sold
Three months eded December 31,
2013
2012
2013
2012
Silver – in ounces
Gold – in ounces
Zinc – in tonnes
Lead – in tonnes
Copper – in tonnes
$
$
$
$
$
20.28(1)
1,285(1)
1,911(2)
2,143(2)
6,915(2)
$
$
$
$
$
(1) Metal price per ounce.
(2) Metal price stated as cash settlement per tonne.
33.41
1,729
2,049
2,374
8,066
6,436,002
5,678,802
39,746
9,394
3,635
1,286
30,216
6,782
2,095
1,018
Earnings in the fourth quarter of 2013 (“Q4 2013”) were a loss of
$293.1 million or $1.94 per share compared to a net loss of $31.5
million or $0.18 per share for the comparable period in 2012. As
discussed previously, in Q4 2013 the Company recorded a non-
cash write-down related to the Dolores mine of $218.1 million net
of tax as well as an $86.8 million deferred tax adjustment arising
from Mexican tax reforms. In Q4 2012 the Company recorded a
write-down of $100.0 million related to the Navidad project.
Cash flow from investing activities used $13.4 million in Q4
2013. This consisted primarily of $41.2 million in liquidations
of short term investments, and an aggregate of $33.7 million in
capital investments at the operating mines. Investing activities
in Q4 of 2012 used $140.9 million, which consisted primarily of
$77.1 million in the purchase of short term investments and an
additional $65.3 million in capital investments at the operating
mines.
Revenue for Q4 2013 was $192.4 million, a 22% decrease from
revenue in the comparable period in 2012. This decrease was
driven by significantly lower metal prices realized, offset by higher
quantities of all metals sold, as illustrated in the table above.
Mine operating earnings decreased to $19.0 million in Q4 2013
from $85.1 million in the same quarter last year. The lower
revenue described above, combined with the higher cost of sales
and depreciation and amortization largely due to higher volumes,
resulted in lower mine operating earnings. Cost of sales for Q4
2013 of $173.4 million was an increase of 7% from $162.2 million
in the comparable period last year.
Income tax provision during Q4 2013 amounted to a recovery
of $19.3 million compared to an expense of $22.1 million in Q4
2012. The main factors which impacted the effective tax rates for
Q4 2013 versus the expected statutory rate were similar to those
described above for the full year 2013. The primary reason for
the change in the provision from an expense to a recovery is the
tax impact of the fourth quarter impairment charges offset by
the impact of the adjustment arising upon the enactment of the
Mexican tax reforms.
A net write-down of mining assets related to the Dolores mine
was recorded in the fourth quarter as described previously,
amounting to $218.1 million, net of tax ($336.8 million before tax).
• Statement of Cash Flows Q4 2013
Cash flow from operations generated $46.2 million in Q4 2013,
down from the $81.6 million generated one year ago. The change
is largely explained by the decrease in cash mine operating
earnings, excluding non-cash depreciation and amortization,
and to a lesser degree the change in working capital. Changes in
non-cash working capital generated $21.4 million compared with
working capital using $2.2 million in Q4 2012. The net non-cash
working capital generated in Q4 2013 consisted primarily of a
decrease in accounts receivable and prepaids of $10.8 million,
an increase in accounts payable and accrued liabilities of $8.2
million, and a decrease in inventories of $2.3 million. In Q4 2012,
the net working capital used was an aggregate of various, largely
offsetting timing differences in the normal course of operations.
Financing activities in Q4 2013 used $17.2 million and
consisted primarily of $18.9 million in dividend payments to
our shareholders offset by $4.9 million in proceeds received
from a short term bank loan received by one of the Company’s
subsidiaries for short term cash management purposes and
mitigating exposure to foreign exchange risk. In Q4 of 2012,
financing activities used $20.1 million and consisted primarily
of $10.7 million used for the share buy-back program and $7.6
million in dividend payments to our shareholders.
inVestments and inVestment
inCome
At the end of 2013, cash plus short-term investments were $422.7
million ($542.3 million at December 31, 2012), 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, 2013
totalled $3.1 million (2012 - $6.2 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, decreased by 15% in 2013 to $17.6 million (2012 -
$20.8 million). This decrease was primarily as a result of the cost
reduction initiatives adopted by the Company in response to the
reduced metal price environment.
Our 2014 general and administrative costs, including share based
compensation, are expected to increase slightly from our 2013
level to approximately $19.6 million. This figure is subject to
23
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 operating subsidiaries.
The following table compares our general and administrative forecast for 2014 against the general and administrative costs incurred
over the previous two years, as well as on a per ounce of silver produced basis, a non-GAAP measure.
Forecast
2014
Actual
2013
2012
General and administrative costs (in ‘000s of USD)
Silver production (in ‘000s of ounces)
General and administrative costs per silver ounce produced(2)
$
$
19,600
26,250(1)
0.75
$
$
17,596
25,959
0.68
$
$
20,790
25,075
0.83
(1) Forecast silver production at the mid-point of the guidance given in this MD&A for the Company’s existing operations.
(2) 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, 2013, a company indirectly
owned by a trust of which a director of the Company, Robert
Pirooz, is a beneficiary, was paid $0.4 million (2012 - $0.3 million)
for consulting services, charged to general and administrative
costs. Similarly, at December 31, 2013 an accrual was recorded
for consulting services from the same individual under the same
arrangement for a nominal amount (2012 – nominal amount).
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.
The remuneration of directors and other members of key
management personnel during the year was as follows:
Short-term benefits
Share-based payments
2013
2012
$
$
8,274
1,890
10,164
$
$
7,288
1,857
9,145
exploration and proJeCt
deVelopment
Exploration and project development expenses in 2013 were
$15.5 million compared to $36.7 million incurred in 2012. The
expenses incurred in 2013 were reduced from the prior year levels
given the decline in metal prices. Exploration activities in 2013
focused on greenfield exploration in the vicinity of our existing
mines.
Our greenfield exploration activities in 2014 are expected to cost
approximately $15.8 million, which will be expensed. Greenfield
exploration drilling will again be focused in the vicinity of our
current operations and only a few select additional projects will
attract expenditures.
The 2013 near-mine exploration programs were successful at
replacing 119% of the 2013 contained silver ounces mined by
adding 6.4 million ounces to the proven and probable mineral
reserves having completed nearly 150 kilometers of diamond
drilling at the operating mines at a cost of $16.3 million, most of
which was capitalized.
Our near-mine exploration program will continue to be very
active in 2014 with approximately 106 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 2014 is
approximately $13.9 million. The main objective of this program is
to replace reserves and resources mined at our sites and as such,
expenditures related to this program will be capitalized. The main
targets for these reserve additions include the Amolillo and NC
zones at La Colorada, Morro Solar at Morococha, Tapada and San
Narciso at Huaron, Maria and Melissa at Manantial Espejo, and
Litoral-R2 at San Vicente. Inferred resources will also be defined
for future upgrade to reserves at each operation. At Dolores, the
south zone will be upgraded to indicated, the confidence level to
be converted to reserves once economic viability is demonstrated,
and the far south extension of the two main structures will be
tested at wide spacing.
liQuidity position
The Company’s cash balance at December 31, 2013 was $249.9
million, which was a decrease of $96.3 million from the balance
at December 31, 2012. The balance of the Company’s short-term
investments at December 31, 2013 was $172.8 million, a decrease
of $23.3 million from a year ago. The decrease in net cash and
short term investments in 2013 resulted primarily from capital
expenditures on property, plant and equipment, the payment
of dividends to our shareholders, and the cash utilized to repay
construction leases that outpaced cash generated by operating
activities, proceeds from short term loans and proceeds from the
sales of assets.
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, 2013 was $689.0 million, a
decrease of $74.9 million from the prior year-end’s working capital
of $764.0 million. The decrease in working capital was due to the
decrease in cash and short-term investments described above, a
decrease in accounts receivable of $19.8 million, and an increase
in loans payable of $20.1 million. These items were partially offset
by a change in net taxes payable of $44.9 million, a decrease in
accounts payables, current portion of leases and provisions of
24
PAN AMERICAN SILVER CORP. $22.4 million, and an increase in inventories of $17.7 million.
These changes to non-cash working capital were in the normal
course of operations and fluctuated with the timing of payments,
receipts, and shipments.
The Company’s financial position at December 31, 2013, 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. Please refer to the “2014 Operating Outlook” section of
this MD&A for a more detailed description of the sustaining
capital expenditures planned for each mine in 2014. The
Company remains well positioned to take advantage of strategic
opportunities as they become available.
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
Total attributable shareholders’ equity at December 31, 2013 was
$2,182.3 million, a decrease of $527.9 million from December
31, 2012, primarily as a result of the net loss incurred in the
current year, dividends paid, and the share repurchase and
cancellation program. As at December 31, 2013, the Company
had approximately 151.5 million common shares outstanding for
a share capital balance of $2,295.2 million (December 31, 2012 –
151.8 million and $2,300.5 million). The basic weighted average
number of common shares outstanding was 151.5 million and
140.9 million for the years ended December 31, 2013, and 2012,
respectively. The increase in 2013 was due to the shares issued as
consideration in the Minefinders acquisition on March 30, 2012.
On November 28, 2013, 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 (“NCIB”) to purchase
up to 7,570,535 of its common shares, representing up to 5% of
Pan American’s issued and outstanding shares. The period of the
bid began on December 5, 2013 and will continue until December
4, 2014 or an earlier date should the Company complete its
purchases. This is the Company’s third consecutive NCIB program;
however no shares have been repurchased under this program
up until the date of this MD&A. Under the Company’s previous
program that ended on September 3, 2013, the Company acquired
a total of 1,012,900 of its common shares at an average price of
$17.21, 415,000 of such shares being purchased in the calendar
year 2013. Since initiating share buy backs in 2011, the Company
has acquired and cancelled approximately 6.5 million of its shares.
Purchases pursuant to the NCIB are required to be made on the
open market through the facilities of the TSX and the NASDAQ
at the market price at the time of acquisition of any common
shares, and 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 NCIB 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 NCIB
filed with the TSX can be obtained from the Corporate Secretary of
Pan American without charge.
As at December 31, 2013, the Company had approximately 1.4
million stock options outstanding, with exercise prices in the range
of CAD $11.49 to CAD $40.22 and a weighted average life of 52
months. Approximately 1.0 million of the stock options were
vested and exercisable at December 31, 2013 with an average
weighted exercise price of $23.90 per share. Additionally, as
described in the December 31, 2013 audited financial statements
in the notes entitled Acquisition and Divestiture and Long Term
Debt (Notes 6.a and 18, respectively in the consolidated audited
financial statements), the Company has outstanding convertible
notes associated with the Minefinders acquisition 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 26, 2014
151,500,294
7,814,605
1,397,370
160,712,269
The warrants noted were all issued as part of the Aquiline
acquisition in December of 2009, and expire in December 2014,
with 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.
However, at December 31, 2013, the Company had no metal
under contract. At December 31, 2012, the Company had zinc
option contracts for 7,500 tonnes, with floor and cap strike prices
assuring settlement between $2,000 and $2,200 per tonne on that
quantity of zinc, that were settled monthly between January and
December of 2013.
A part of the Company’s operating and capital expenditures is
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, entering into contracts designed to fix or limit the
Company’s exposure to changes in the value of local currencies
relative to the USD, or assuming liability positions to offset
financial assets subject to currency risk. The Company held cash
and short term investments of $156.6 million in CAD and $6.1
25
million in Mexican pesos at the balance sheet date. At December
31, 2013 and at the date of this MD&A, all foreign currency
forward contract positions had been closed out. Additionally, in
the second and fourth quarters of 2013, the Company entered
into short term bank loans in Argentina for proceeds of $18.6
million and $4.9 million. These loans are denominated in
Argentine pesos and were drawn for the purposes of short term
cash management and to partially offset the foreign exchange
exposure of holding local currency denominated financial assets.
In response to the sharp decline in silver and gold prices in
the quarter ended June 30, 2013, the Company evaluated its
alternatives to mitigate the financial risk of further price declines.
The Company decided it was appropriate to protect a portion
of its precious metal production associated with its higher cost
Peruvian and Argentine operations against the potential of further
price erosion. As such, during July 2013, the Company entered
into forward contracts of up to one year for up to 25% of its silver
and gold production, contracting for the sale of 5.3 million ounces
of silver and 24,000 ounces of gold.
On September 10, 2013, the Company decided to accelerate the
closing out of its outstanding silver and gold hedges after a re-
evaluation of the financial risk of further price declines. The total
realized loss recognized from closing the Company’s silver and
gold hedges in 2013 was $5.1 million. At December 31, 2013 there
were no outstanding positions under this program.
In aggregate, the Company recorded a net loss on its forward
contracts and commodity and foreign currency contracts of $4.6
million in 2013, compared to a gain of $0.4 million in 2012.
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 Company’s 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, 2013 a risk free interest rate of
1.0%, expected stock price volatility of 46.8%, expected life of
0.93 years (expiry in December 2014), expected dividend yield
of 4.0%, a quoted market price of the Company’s shares on the
TSX of $12.41, an exchange rate of 1 CAD to USD of 0.94, and an
exercise price of CAD $35 per share. The change in the valuation
of these share purchase warrants creates a permanent difference
for tax purposes and results 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 is 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 were recognized initially at their respective fair values.
The embedded derivative is now 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, 2013 were expected stock
price volatility of 44%, expected life of 1.96 years, and expected
dividend yield of 4%.
During the years ended December 31, 2013 and 2012, the
Company recorded a gain on the revaluation of the share purchase
warrants and the convertible notes of $16.7 million and $24.2
million, respectively.
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.
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 accretion 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 $107.5 million (2012 - $83.5 million)
which has been discounted using discount rates between 4%
and 11%. The provision on the statement of financial position
as at December 31, 2013 is $41.4 million (2012 - $45.6 million).
Decommissioning obligations at the Alamo Dorado and Manantial
Espejo mines are estimated to be incurred starting in two to
three years, respectively, while the remainder of the obligations
are expected to be paid through 2035 or later if mine life is
extended. Revisions made to the reclamation obligations in 2013
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 accretion of the discount charged to 2013 earnings as
finance expense was $3.0 million in line with $3.0 million in 2012.
Reclamation expenditures incurred during the current year were
down slightly from the previous year at $0.4 million (2012 - $0.9
million).
26
PAN AMERICAN SILVER CORP. 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 2013:
Payments due by period 2013
Total
Within 1 year(2)
2 - 3 years
4- 5 years
After 5 years
Finance lease obligations(1)
$
10,856
$
4,800
$
4,417
$
1,639
$
Current liabilities
Loan obligation
Severance accrual
Employee compensation plan(3)
Restricted share units (“RSUs”)(3)
Convertible notes (4)
156,241
20,095
3,726
3,228
2,288
39,497
156,241
20,095
649
3,228
1,393
1,631
-
-
412
-
895
37,866
-
-
-
-
-
2,138
527
-
-
-
-
-
Total contractual obligations (5)
$
235,931
$
188,037
$
43,590
$
3,777
$
527
(1) Includes lease obligations in the amount of $10.9 million (December 31, 2012 - $39.7 million) with a net present value of $10.2 million (December 31,
2012 - $36.4 million) and equipment and construction advances in the amount of nil (December 31, 2012 - $0.4 million); both discussed.
(2) 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:
- Finance lease
- Convertible note
Future commitments less portion accrued for:
- Restricted share units
- Contribution plan
Total contractual obligations within one year
2013
2012 (Recast)
182,632
$
207,861
363
1,631
1,050
2,361
188,037
$
1,286
1,631
768
1,768
213,314
$
$
(3) Includes a retention plan obligation in the amount of $3.4 million (2012 - $7.8 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 $2.3 million (2012 – $1.7 million) 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.
(4) Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition.
(5) 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 19 and deferred tax liabilities of the Audited Consolidated Financial Statements.
mineFinders transaCtion
On March 30, 2012, the Company announced that it had
completed the acquisition of all of the issued and outstanding
common shares of Minefinders.
purChase priCe alloCation
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.
The purchase consideration has been allocated to the assets
acquired and liabilities assumed based upon their estimated fair
values at the date of acquisition. Fair values were determined
using the income, cost and market price valuation methods as
deemed appropriate. The purchase price allocation was finalized
during the quarter ended March 31, 2013, with the assistance
of an independent third party, resulting in adjustments to the
preliminary allocations. These adjustments resulted in a $10.7
million increase in fair value allocated to mineral interests
as compared to the preliminary fair value. Retrospective
application of the changes made to the allocation of the purchase
consideration in the first quarter of 2013 decreased retained
earnings, a component of equity as of December 31, 2012 and net
27
alternatiVe perFormanCe
(non-gaap) measures
• Cash and Total Costs per Ounce of Silver, net of by-product
credits
Pan American produces by-product metals incidentally to our
silver mining activities. For the year ended December 31, 2013,
sales of silver contributed approximately 64% of our total
revenues while by-products were responsible for the remaining
36%. We have adopted the practice of calculating the net cost
of producing an ounce of silver, our primary payable metal, after
deducting revenues gained from incidental by-product production,
as a performance measure. This performance measurement has
been commonly used in the mining industry for many years and
was developed as a relatively simple way of comparing the net
production costs of the primary metal for a specific period against
the prevailing market price of that metal.
Cash costs per ounce, net of by-product credits, are utilized
extensively in our internal decision making processes. We believe
they are useful to investors as these metrics facilitate comparison,
on a mine by mine basis, notwithstanding the unique mix of
incidental by-product production at each mine, of our operations’
relative performance on a period by period basis, and against the
operations of our peers in the silver industry on a consistent basis.
To facilitate a better understanding of these measures as
calculated by the Company, the following table provides the
detailed reconciliation of these measures to the production
costs, as reported in the consolidated income statements for the
respective periods:
earnings due to an increase in depreciation and value of inventory
by $9.2 million for the year ended December 31, 2012.
Goodwill has been 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 following tables summarize the final purchase consideration,
the preliminary purchase price allocation reported in the Company
2012 year-end financial statements and the final purchase price
allocation, with the applicable recast adjustments made upon
finalization during the 2013 first quarter.
Purchase consideration
Cash
Replacement option award
Fair value of Pan American shares issued
$
$
165,413
10,739
1,088,104
1,264,256
Purchase price
allocation
Net working capital
acquired(1)
Mineral property,
plant and equipment
Preliminary
Adjustments
Final
$
333,478
$
(897)
$
332,581
1,045,326
10,728
1,056,054
Goodwill
211,292
(12,346)
198,946
Closure and
decommissioning
provisions
Long-term debt
(10,880)
(49,685)
5,316
-
(5,564)
(49,685)
Deferred tax liabilities
(265,275)
(2,801)
(268,076)
$
1,264,256
$
-
$
1,264,256
(1) Includes cash of $251.9 million for net cash received of $86.5 million and
accounts receivable of $11.3 million.
Further details related to the Minefinders transaction can be
found in Note 6 of the consolidated financial statements.
28
PAN AMERICAN SILVER CORP.
Total Cash Costs and Total Production Costs per Ounce of Payable Silver, net of by-product credits
(Unaudited in thousands of U.S. dollars)
Twelve months ended
December 31,
2013
$
530,613
$
Production costs
Add/(Subtract)
Royalties
Smelting, refining, and transportation charges
Worker’s participation and voluntary payments
Change in inventories
Other
Non-controlling interests(2)
Metal Inventory write-down
Cash Operating Costs before by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
Cash Operating Costs net of by-product credits
Add/(Subtract)
Depreciation and amortization
Closure and decommissioning provision
Change in inventories
Other
Non-controlling interests(2)
Total Production Costs net of by-product credits(1)
Payable Silver Production (oz.)
A
B
C
Total Cash Costs per ounce net of by-product credits
Total Production Costs per ounce net of by-product credits
(A*$1000)/C
(B*$1000)/C
(1) Figures in this table and in the associated tables below may not add due to rounding.
26,459
76,837
(1,067)
(625)
(5,408)
(5,967)
(12,967)
607,875
(205,207)
(69,776)
(27,757)
(39,341)
265,794
135,913
3,030
5,452
(971)
(1,964)
407,254
$
$
$
$
400,874
24,586,527
23,746,108
10.81
16.56
12.03
16.88
2012
(Recast)
485,163
35,077
68,098
(1,573)
11,358
(2,475)
(6,914)
-
588,734
(184,300)
(62,155)
(24,676)
(31,904)
285,699
104,409
2,999
10,017
(746)
(1,504)
(2) Figures presented in the reconciliation table above are on a 100% basis as presented in the unaudited condensed interim consolidated financial
statements with an adjustment line item to account for the portion of the Morococha and San Vicente mines owned by non-controlling interests, an
expense item not included in operating cash costs. The associated tables below are for the Company’s share of ownership only.
29
La Colorada
Alamo
Dorado
Dolores
Huaron
Morococha Quiruvilca** San Vicente
Manantial
Espejo
Consolidated
Total
Twelve months ended December 31, 2013
Cash Costs before
by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
Sub-total by-
product credits
Cash Costs net of
by-product credits
Depreciation,
amortization &
reclamation
Total production
costs net of by-
product credits
Payable ounces of
A
b1
b2
b3
b4
B=( b1+ b2+
b3+ b4)
C=(A+B)
D
$
$
$
$
$
$
$
$
61,554 $
(2,894) $
(10,895) $
(6,605) $
- $
62,454 $
(24,194) $
- $
- $
(712) $
117,203 $
(91,113) $
- $
- $
- $
99,909 $
(178) $
(22,285) $
(11,722) $
(23,605) $
84,203 $
(2,614) $
(24,154) $
(7,577) $
(13,862) $
(20,394) $
(24,906) $
(91,113) $
(57,790) $
(48,207) $
41,160 $
37,548 $
26,090 $
42,119 $
35,996 $
8,010 $
17,813 $
44,211 $
11,667 $
17,649 $
E=(C+D)
$
49,170 $
55,361 $
70,301 $
53,786 $
53,645 $
silver
F
Cash cost per Ounce of Silver net of by-product credits
Total cash cost
4,364,727
per ounce net of
5,042,779
3,493,766
2,883,758
2,049,487
by-products
=C*1000/F
$
9.43 $
7.45 $
7.47 $
14.61 $
17.56 $
=E *1000/F
$
11.27 $
10.98 $
20.12 $
18.65 $
26.17 $
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
67,123 $
- $
(9,898) $
(1,157) $
- $
110,810 $
(83,995) $
- $
- $
- $
603,256
(204,988)
(67,232)
(27,061)
(38,179)
(11,055) $
(83,995) $
(337,460)
56,068 $
26,815 $
265,796
9,226 $
32,885 $
141,461
65,294 $
59,700 $
407,257
3,614,290
3,137,720
24,586,527
15.51 $
8.55 $
10.81
18.07 $
19.03 $
16.56
Total production
cost per ounce net
of by-products
Cash Costs before
by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
Sub-total by-
product credits
Cash Costs net of
by-product credits
Depreciation,
amortization &
reclamation
Total production
costs net of by-
product credits
Payable ounces
La Colorada
Alamo
Dorado
Dolores*
Huaron
Morococha
Quiruvilca**
San Vicente
Manantial
Espejo
Consolidated
Total
Twelve months ended December 31, 2012
A
b1
b2
b3
b4
B=( b1+ b2+
b3+ b4)
C=(A+B)
D
$
$
$
$
$
$
$
$
56,228 $
(5,240) $
(9,270) $
(5,304) $
- $
57,536 $
(29,809) $
- $
- $
(746) $
82,926 $
(72,198) $
- $
- $
- $
89,341 $
(197) $
(19,096) $
(9,215) $
(16,939) $
82,958 $
(3,840) $
(19,281) $
(6,956) $
(11,174) $
17,219 $
(550) $
(4,391) $
(1,448) $
(2,097) $
73,311 $
- $
(8,058) $
(1,104) $
- $
125,233 $
(72,140) $
- $
- $
- $
584,752
(183,974)
(60,096)
(24,027)
(30,956)
(19,814) $
(30,555) $
(72,198) $
(45,447) $
(41,251) $
(8,486) $
(9,162) $
(72,140) $
(299,053)
36,414 $
26,981 $
10,728 $
43,894 $
41,707 $
8,733 $
64,149 $
53,093 $
285,699
5,571 $
15,537 $
33,931 $
8,790 $
11,145 $
271 $
10,614 $
29,317 $
115,176
E=(C+D)
$
41,985 $
42,518 $
44,659 $
52,684 $
52,852 $
9,004 $
74,763 $
82,410 $
400,875
of silver
F
Cash cost per Ounce of Silver net of by-product credits
Total cash cost
4,215,075
5,345,677
2,646,219
2,506,481
1,776,333
240,354
3,390,683
3,625,285
23,746,108
per ounce net of
by-products
Total production
cost per ounce net
of by-products
=C*1000/F $
8.64 $
5.05 $
4.05 $
17.51 $
23.48 $
36.33 $
18.92 $
14.65 $
12.03
=E *1000/F $
9.96 $
7.95 $
16.88 $
21.02 $
29.75 $
37.46 $
22.05 $
22.73 $
16.88
* The Dolores mine was acquired with effect from March 30, 2012 and therefore the operations under Pan American’s ownership are only for the nine
months ended December 31, 2012.
** The Quiruvilca mine was sold to a private company effective June 1, 2012
30
PAN AMERICAN SILVER CORP. 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. Certain
items that become applicable in a period may be adjusted for, with the Company retroactively presenting comparable periods with
an adjustment for such items and conversely, items no longer applicable may be removed from the calculation. The Company adjusts
certain items in the periods that they occurred but does not reverse or otherwise unwind the effect of such items in future periods.
The following table shows a reconciliation of adjusted loss and earnings for the fourth quarter and full year of 2013 and 2012, to the net
(loss) earnings for each period.
Three months ended December 31,
Twelve months ended December 31,
Adjusted Earnings Reconciliation
Net (loss) earnings for the period
Adjust derivative gains
Adjust unrealized foreign exchange (gains) losses
Adjust realized (gains) losses on silver and gold hedge program
Adjust realized and unrealized (gains) losses on commodity contracts
Adjust severance and acquisition costs
Adjust gain (loss) on sale of mineral properties
Adjust write-down of mining assets
Adjust for effect of taxes on above items
2013
2012
(Recast)
2013
$
(293,064)
$
(31,535)
$
(445,846)
$
(1,249)
(656)
(1,127)
260
-
(5,969)
336,785
(119,286)
(14,203)
(584)
-
(34)
-
1,466
100,009
(16,715)
(922)
5,127
25
617
(14,068)
540,228
-
(117,948)
Adjusted (loss) earnings for the period
$
(84,306)
$
55,119
$
(49,502)
$
Basic weighted average shares outstanding
Basic adjusted EPS
151,428
(0.56)
152,332
0.36
151,501
(0.33)
2012
(Recast)
78,355
(24,159)
6,124
-
(25)
16,162
(9,652)
100,009
-
166,814
140,883
1.18
all-in sustaining Costs per silVer ounCe sold
As discussed and presented in the sections “2014 Operating Outlook” and “2013 Operating Performance”, the Company has adopted
the reporting of AISCSOS as a non-GAAP measure of a silver mining company’s operating performance and the ability to generate cash
flow from operations.
As part of the AISCSOS measure, sustaining capital is included while expansionary or acquisition capital (referred to by the Company as
investment capital) is not. Inclusion of sustaining capital only is a better measure of capital costs associated with current ounces sold
as opposed to investment capital from which benefits will flow to future ounces. For the periods under review, the below noted items
associated with the Morococha relocation project, Navidad project, and Dolores’ leach pad and other expansionary expenditures are
considered investment capital projects.
Reconciliation of payments for mineral property, plant and equipment and sustaining capital
Twelve months ended December 31,
(in thousands of USD)
Payments for mineral property, plant and equipment(1)
Add/(Subtract)
Advances received for leases(1)
Morococha relocation project capital
Navidad project capital
Dolores leach pads & other expansion projects
Other non-operating capital
Sustaining Capital
2013
159,401
3,331
-
(246)
(50,482)
(357)
111,647
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2012
159,915
11,538
(6,389)
(11,318)
(21,766)
(1,259)
130,721
(1) As presented on the Audited Consolidated Financial Statements Segmented Information Note #26.
31
risks and unCertainties
The Company is exposed to many risks in conducting its business,
including but not limited to: metal price risk as the Company
derives its revenue from the sale of silver, zinc, lead, copper,
and gold; credit risk in the normal course of dealing with other
companies; foreign exchange risk as the Company reports its
financial statements in USD whereas the Company operates
in jurisdictions that utilize other currencies; the inherent risk
of uncertainties in estimating mineral reserves and mineral
resources; political risks; and environmental risks and risks
related to its relations with employees. These and other risks are
described in Pan American’s Annual Information Form (available
on SEDAR at www.sedar.com), Form 40-F filed with the SEC, and
the Audited Annual Consolidated Financial Statements for the
year ended December 31, 2013. 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 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. 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.
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 years ended December 31, 2012 or
2013. The Company will continue to monitor developments in
Mexico to assess the potential impact of these amendments.
In 2013, the Mexican government introduced various 2014 tax
reforms. Amongst other changes, the bill proposed a deductible
royalty of 7.5% on mine operating income before certain
deductions including amortization and depreciation as well as a
0.5% mining duty on mining companies’ precious metal revenue.
In addition, the corporate income tax rate is expected to remain at
30% whereas it was previously forecast to be reduced to 28% by
2015. The Company has evaluated the effects of the tax reforms
on our future cash flows and future earnings, and recorded a
deferred tax charge of $86.0 million in the fourth quarter of 2013,
in addition to incorporating the impact of the tax returns in our
impairment models for the Company’s Mexican mining assets.
Local opposition to mine development projects has arisen
periodically in some of the jurisdictions in which we operate,
and such opposition has at times been violent. 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.
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 while; 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 few years. In particular, the
government has intensified the use of price, foreign exchange,
32
PAN AMERICAN SILVER CORP. and import controls in response to unfavourable domestic
economic trends. An example of the changing regulations which
have affected the Company’s activities in Argentina was the
Argentinean Ministry of Economy and Public Finance resolution
in 2012 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 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
remainder of 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 offshore shareholders. Maintaining operating revenues in
Argentine pesos could expose the Company to the risks of peso
devaluation and high domestic inflation.
In September 2013, the provincial government of Santa Cruz,
Argentina passed amendments to its tax code that introduced a
new mining property tax with a rate of 1% to be charged annually
on published proven reserves, which has the potential to affect
the Manantial Espejo mine as well as other companies operating
in the province. The new law came into effect on July 5, 2013.
The Company has in place certain contracts that could potentially
affect or exempt the Company from having this new tax applicable
and as such is evaluating its options with its advisors. The
Company and potentially other mining companies in the province
are also evaluating options that include challenging the legality
and constitutionality of the tax. As at December 31, 2013, the
Company has estimated that the annual tax impact for the first
year of this new law would be $2.7 million.
In Bolivia, a new constitution was enacted in 2009 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, President 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.
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 2014.
This analysis assumes that quantities of silver and gold produced
and sold remain constant under all price scenarios presented.
expeCted 2014 reVenue (000’s usd)
e
c
i
r
P
r
e
v
l
i
S
$18.00
$19.00
$20.00
$21.00
$22.00
$23.00
$24.00
$25.00
$1,000
$666,905
$690,687
$714,469
$738,251
$762,033
$785,815
$809,597
$833,379
Gold Price
$1,100
$682,887
$706,669
$730,451
$754,233
$778,015
$801,797
$825,579
$849,361
$1,200
$698,868
$722,650
$746,432
$770,215
$793,997
$817,779
$841,561
$865,343
$1,300
$714,850
$738,632
$762,414
$786,196
$809,978
$833,760
$857,543
$881,325
$1,400
$730,832
$754,614
$778,396
$802,178
$825,960
$849,742
$873,524
$897,306
$1,500
$746,814
$770,596
$794,378
$818,160
$841,942
$865,724
$889,506
$913,288
33
Pan American Silver takes the view that its precious metals production should not be hedged, thereby allowing the Company to
maintain maximum exposure to precious metal prices.
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 our 2014 forecast against various price assumptions for the Company’s two main by-product credits, zinc and
gold.
Cash Cost per ounCe oF silVer produCed (usd/oz)
e
c
i
r
P
c
n
i
Z
$1,550
$1,650
$1,750
$1,850
$1,950
$2,050
$2,150
$2,250
$1,000
$13.45
$13.32
$13.18
$13.05
$12.92
$12.82
$12.72
$12.61
$1,100
$12.82
$12.69
$12.55
$12.42
$12.30
$12.19
$12.09
$11.99
Gold Price
$1,200
$12.19
$12.06
$11.92
$11.79
$11.67
$11.56
$11.46
$11.36
$1,300
$11.56
$11.43
$11.29
$11.16
$11.04
$10.93
$10.83
$10.73
$1,400
$10.93
$10.80
$10.67
$10.53
$10.41
$10.30
$10.20
$10.10
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 2013 and at the date of this MD&A,
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, 2013 the Company had receivable balances
associated with buyers of our concentrates of $31.7 million
(2012 - $39.1 million). All of this receivable balance is owed by
nine 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 four 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, 2013 the Company had approximately $54.7
million (2012 - $48.8 million) of value contained in precious
metal inventory at refineries. The Company maintains insurance
coverage against the loss of precious metal doré and base metal
concentrates at our mine sites, in-transit to refineries and while at
the refineries and smelters.
Refined silver and gold is sold on the spot market to various
bullion traders and banks. Credit risk may arise from these
activities if the Company is not paid for metal at the time it is
delivered, as required by spot sale contracts.
The Company maintains trading facilities with several banks and
bullion dealers for the purposes of transacting the Company’s
trading activities. None of these facilities are subject to margin
arrangements. The Company’s trading activities can expose us to
the credit risk of our counterparties to the extent that our trading
positions have a positive mark-to-market value.
34
PAN AMERICAN SILVER CORP.
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, 2013, the Company has $10.2
million in lease obligations (2012 - $36.4 million), equipment
and construction advances of $nil (2012 - $0.4 million) that are
subject to an annualized interest rate of 2.2% and unsecured
convertible notes with a principal amount of $36.2 million
(2012 – $36.2 million) 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, 2013 on its lease
obligations and equipment and construction advances was $0.2
million (2012 – $1.4 million). The Company has received short
term loans in Argentina totaling $130.0 million Argentina Pesos
(USD $23.5 million) at an annual interest rate of 25.7%. $30.0
million Argentine pesos are due at February 2014 and $100.0
million Argentine pesos are due in June 2014. The interest paid
by the Company for the year ended December 31, 2013 on the
convertible notes was $1.6 million (2012 – $1.6 million). The
Company is not subjected to variable market interest rate changes
as all debt included above have stated interest rates.
The average interest rate earned by the Company during the year
ended December 31, 2013 on its cash and short term investments
was 0.68%. 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 (2012 – $0.3 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 2014, expressed in percentage terms:
D
S
U
/
N
E
P
2.20
2.40
2.60
2.80
3.00
3.20
3.40
9.75
111%
110%
109%
108%
107%
106%
106%
10.75
11.75
108%
107%
106%
105%
104%
103%
103%
105%
104%
103%
102%
101%
101%
100%
MXN/USD
12.75
103%
102%
101%
100%
99%
99%
98%
13.75
101%
100%
99%
98%
97%
97%
96%
14.75
100%
98%
97%
97%
96%
95%
94%
15.75
98%
97%
96%
95%
94%
94%
93%
Under this analysis, our cost of sales is reflected at 100% of our
forecasted foreign exchange assumptions for the PEN and MXN
of 2.80 and 12.75 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 as discussed in the section “Financial
Instruments”.
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.
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
cash flow from operations in 2014 and to utilize this and the
strength of its balance sheet to manage its liquidity position.
• Liquidity Risk
• Environmental and Health and Safety Risks
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
Pan American’s activities are subject to extensive laws and
regulations governing environmental protection and employee
35
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, 2013 there were approximately
7,339 employees and employees of mining contractors performing
work for the Company, 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.
• 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 29 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 Judgments 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, 2013, for the
Company’s summary of significant accounting policies.
Judgments 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 and certain other exploration interests
have potential future economic benefits and are potentially
economically recoverable, subject to impairment analysis. 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.
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.
36
PAN AMERICAN SILVER CORP. 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 judgments 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 judgments, 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 unit of production basis over the reserves that directly benefit
from the specific stripping activity. As at December 31, 2013,
the carrying amount of stripping costs capitalized was $59.2
million comprised of Manantial - $13.8 million, Dolores - $32.8
million and Alamo Dorado - $12.6 million (2012 - $22.1 million
was capitalized comprised of $5.3, $13.5, and $3.2 million,
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, 2013,
the carrying amount of the deferred credit arising from the
Aquiline acquisition was $20.8 million (2012 - $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 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 N I43-101,
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 judgments 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.
37
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. Impairments
of mining interests are discussed in Note 12 of the Audited
Consolidated Financial Statements for the year ended December
31, 2013.
Estimation of decommissioning and restoration costs and
the timing of expenditures: The cost estimates are updated
annually during the life of a mine to reflect known developments,
(e.g. revisions to cost estimates and to the estimated lives of
operations), and are subject to review at regular intervals.
Decommissioning, restoration and similar liabilities are estimated
based on the Company’s interpretation of current regulatory
requirements, constructive obligations and are measured at
the best estimate of expenditure required to settle the present
obligation of decommissioning, restoration or similar liabilities
that may occur upon decommissioning of the mine at the end of
the reporting period. The carrying amount is determined based
on the net present value of estimated future cash expenditures
for the settlement of decommissioning, restoration or similar
liabilities that may occur upon decommissioning of the mine. Such
estimates are subject to change based on changes in laws and
regulations and negotiations with regulatory authorities.
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 judgments 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,
are 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 judgment 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. Refer to Note 20 of the Audited Consolidated Financial
Statements for the year ended December 31, 2013 for details on
share purchase warrants.
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 29 of the Audited Consolidated Financial Statements
for the year ended December 31, 2013 for further discussion on
contingencies.
Changes in aCCounting
standards
The Company adopted the following new accounting standards
along with any consequential amendments, 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
38
PAN AMERICAN SILVER CORP. 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. The application of IFRS
10 does not have an 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. The Company
has completed its assessment on this standard and concluded
that this standard does 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. The
Company has completed its assessment on this standard and
concluded that this standard does not have a significant 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. The Company has
completed its assessment on this standard and concluded that
this standard did not have an impact on the consolidated financial
statements. The Company has applied IFRS 13 on a prospective
basis, commencing January 1, 2013. Additional disclosure on
the fair value of certain financial instruments is included in the
consolidated financial statements as a result of applying IFRS 13.
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 application of IAS 1 does not
have a significant impact on the Company’s 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
does not have a significant impact on the Company’s 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. The application of IFRIC 20 did not
result in an adjustment to the Company’s consolidated financial
statements.
Accounting interpretation effective January 1, 2014
IFRIC 21 Levies (“IFRIC 21”) is an interpretation of IAS 37
Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”),
on the accounting for levies imposed by governments. In IAS 37,
the criterion for recognizing a liability includes the requirement
for an entity to have a present obligation resulting from a past
event. IFRIC 21 provides clarification on the past event that gives
rise to the obligation to pay a levy as the activity described in the
relevant legislation that triggers the payment of the levy. IFRIC
21 is effective for annual periods commencing on or after January
1, 2014. The Company does not anticipate the application of
IFRIC 21 to have a material impact on its consolidated financial
statements.
Accounting standards issued but not yet effective
IFRS 9 Financial Instruments is intended to replace IAS 39
Financial Instruments: Recognition and Measurement in its
entirety and some of the requirements of IFRS 7 Financial
Instruments: Disclosures, including added disclosure about
investments in equity instruments measured at fair value in
Other Comprehensive Income (“OCI”), and guidance on financial
liabilities and derecognition of financial instruments. The
mandatory effective date will be added when all phases of IFRS 9
are completed with sufficient lead time for implementation.
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 meet or 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 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,
39
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
staffs 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.
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, 2013, 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, 2013,
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
40
PAN AMERICAN SILVER CORP. 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, 2013,
based on the criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission 1992 (COSO). Based on this
assessment, management concludes that, as of December 31,
2013, Pan American’s internal control over financial reporting is
effective.
Management reviewed the results of management’s assessment
with the Audit Committee of the Company’s Board of Directors.
Deloitte LLP, independent registered public accounting firm, 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, 2013. Deloitte LLP has provided such opinions.
41
mineral reserVes and resourCes
mineral reserVes - proVen and probable
Huaron
Location
Peru
Type
Vein
Vein
Proven
Probable
Morococha (92.3%)
Peru
Vein/Mantos
Proven
La Colorada
Mexico
Dolores
Mexico
Vein/Mantos
Probable
Vein
Vein
Vein
Vein
Proven
Probable
Proven
Probable
Alamo Dorado
Mexico
Disseminated
Proven
Disseminated
Probable
La Bolsa
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Vein
Vein
Vein
Vein
Vein
Vein
TOTALS (1)
Proven
Probable
Proven
Probable
Proven
Probable
Proven +
Probable
Tonnes
Classification
(Mt)
Ag
(g/t)
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
6.9
4.7
2.7
2.7
2.4
4.1
39.4
29.2
4.4
0.7
9.5
6.2
3.0
1.3
2.1
0.7
120.1
169
163
188
206
406
378
31
35
68
88
10
7
135
140
413
406
84
37.3
24.9
16.3
18.1
31.2
50.2
39.9
32.7
9.7
2.0
3.1
1.4
13.2
6.0
28.1
9.4
323.5
N/A
N/A
N/A
N/A
0.31
0.39
0.75
0.85
0.29
0.61
0.67
0.57
2.06
2.17
N/A
N/A
0.77
N/A
N/A
N/A
N/A
23.5
51.9
949.5
802.3
41.0
13.8
203.0
113.1
200.7
92.4
N/A
N/A
2,491.3
0.48
Cu
(%)
0.44
0.42
0.47
0.69
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
mineral resourCes - measured and indiCated
Huaron
Location
Peru
Type
Vein
Vein
Tonnes
Classification
(Mt)
Measured
Indicated
Ag
(g/t)
162
166
150
202
164
255
31
32
43
78
11
9
93
90
117
129
137
126
N/A
N/A
26
114
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
7.9
5.2
3.9
7.4
2.2
13.8
2.5
9.2
1.3
3.1
0.3
1.1
5.9
9.9
1.9
0.9
67.8
564.5
N/A
N/A
6.6
715.4
N/A
N/A
N/A
N/A
0.15
0.29
0.51
0.96
0.22
0.40
0.90
0.50
1.26
1.16
N/A
N/A
N/A
N/A
0.91
0.67
2.63
1.10
N/A
N/A
N/A
N/A
2.1
15.7
40.4
279.0
6.8
15.9
31.4
59.8
79.1
127.7
N/A
N/A
N/A
N/A
137.5
127.1
676.0
1,598.5
Cu
(%)
0.20
0.24
0.41
0.54
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.10
0.04
N/A
N/A
N/A
0.05
1.5
1.0
0.8
1.1
0.4
1.7
2.4
9.0
1.0
1.2
1.4
4.5
2.0
3.4
0.5
0.2
15.4
139.8
4.7
5.9
8.0
206.0
Morococha (92.3%)
Peru
Vein/ Mantos
Measured
Vein/ Mantos
Indicated
La Colorada
Mexico
Dolores
Mexico
Vein
Vein
Vein
Vein
Measured
Indicated
Measured
Indicated
Alamo Dorado
Mexico
Disseminated
Measured
Disseminated
Indicated
La Bolsa
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Vein
Vein
Vein
Vein
Vein
Vein
Measured
Indicated
Measured
Indicated
Measured
Indicated
Navidad
Argentina
Mantos, Diss.
Measured
Pico Machay
Peru
Disseminated
Measured
Mantos, Diss.
Indicated
Disseminated
Indicated
Calcatreu
TOTALS (1)
Argentina
Vein
Indicated
Measured +
Indicated
42
Pb
(%)
1.41
1.50
1.32
1.31
1.35
1.30
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.35
0.34
1.27
Pb
(%)
1.85
1.89
1.31
1.45
0.40
0.51
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.19
0.12
1.44
0.79
N/A
N/A
N/A
0.87
Zn
(%)
2.95
2.89
4.32
4.06
2.47
2.35
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.85
2.55
3.04
Zn
(%)
3.06
3.22
3.57
3.37
0.65
0.83
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.16
1.47
N/A
N/A
N/A
N/A
N/A
2.43
PAN AMERICAN SILVER CORP.
mineral resourCes - inFerred
Tonnes
Classification
(Mt)
Huaron
Morococha (92.3%)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Location
Peru
Peru
Mexico
Mexico
Mexico
Mexico
Manantial Espejo
Argentina
San Vicente (95%)
Bolivia
Type
Vein
Inferred
Vein/Mantos
Inferred
Vein
Vein
Inferred
Inferred
Disseminated
Inferred
Vein
Vein
Vein
Inferred
Inferred
Inferred
Navidad
Argentina Mantos, Diss.
Inferred
Pico Machay
Peru
Disseminated
Inferred
Calcatreu
TOTALS (1)
Argentina
Vein
Inferred
Inferred
historiCal estimates
Ag
(g/t)
161
209
265
39
39
8
99
330
81
N/A
17
95
Contained Ag
(Moz)
Au
(g/t)
Contained Au
(000's oz)
44.0
53.9
24.5
13.3
0.0
3.3
4.3
33.2
119.4
N/A
1.8
297.7
N/A
N/A
0.42
0.97
0.54
0.51
1.17
N/A
N/A
0.58
2.06
0.73
N/A
N/A
38.8
334.5
0.0
222.4
51.2
N/A
N/A
445.7
226.0
1,318.7
Cu
(%)
0.29
0.43
N/A
N/A
N/A
N/A
N/A
N/A
0.02
N/A
N/A
0.09
8.5
8.0
2.9
10.7
0.0
13.7
1.4
3.1
45.9
23.9
3.4
121.5
Property
Location
Unclassified
Hog Heaven (ii)
Hog Heaven (ii)
Waterloo (v)
TOTAL
USA
USA
USA
Historical (ii)(iii)
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
Pb
(%)
N/A
N/A
N/A
Contained Au
(000's oz)
53.9
171.9
N/A
225.8
Notes:
(i) Totals may not add-up due to rounding.
Pb
(%)
1.61
1.45
1.34
N/A
N/A
N/A
N/A
0.28
0.57
N/A
N/A
0.82
Zn
(%)
N/A
N/A
N/A
Zn
(%)
2.72
5.11
2.17
N/A
N/A
N/A
N/A
2.53
N/A
N/A
N/A
2.36
Cu
(%)
N/A
N/A
N/A
The foregoing tables illustrate Pan American’s share of mineral reserves and
resources. Properties in which Pan American has less than 100% interest
are noted next to the property name.
Mineral reserves and resources are as defined by the Canadian Institute of
Mining, Metallurgy and Petroleum.
Mineral resources that are not mineral reserves have no demonstrated
economic viability.
Pan American does not expect these mineral reserve and resource
estimates to be materially affected by metallurgical, environmental,
permitting, legal, taxation, socio-economic, political, and marketing or other
relevant issues.
See the Company’s Annual Information Form dated March 28, 2014 for
more information concerning associated QA/QC and data verification
matters, the key assumptions, parameters and methods used by the
Company to estimate mineral reserves and mineral resources, and for a
detailed description of known legal, political, environmental, and other
risks that could materially affect the Company’s business and the potential
development of the Company’s mineral reserves and resources.
Pan American reports mineral resources and mineral reserves separately.
Reported mineral resources do not include amounts identified as mineral
reserves.
Metal prices used for reserves at all Mines: Ag: $22.00/oz, Au: $1,300/oz,
Pb: $1,950/Tonne,Cu: $6,800/Tonne,Zn: $1,850/Tonne
Metal prices used for La Bolsa reserves were Ag: $14.00/oz and Au: $825/oz
Metal prices used for Calcatreu resources and reserves were Ag: $12.50/oz
and Au: $650/oz.
Metal prices use for resources vary according to mine and mining area.
Metal prices used for Navidad resources were Ag: $12.52/oz and
Pb: $1,100/tonne.
Metal prices for Dolores and Alamo Dorado resources: Ag $35/oz,
Au: $1,400/oz
(ii) The historical estimate for Hog Heaven was prepared by Gregory Hahn,
Chief Geological Engineer for CoCa Mines Inc., a previous owner of the
property, in a report titled “Hog Heaven Project Optimization Study” dated
May 1989, prior to implementation of NI 43-101. The historical estimate
was based on extensive diamond drilling, and was estimated using a silver
price of $6.50 per ounce and a gold price of $400 per ounce (these were
relevant prices at the time of the estimate). Michael Steinmann, P.Geo,
has reviewed the available data, including drill sections, surface maps, and
additional supporting information sources, and believes that the historic
estimate was conducted in a professional and competent manner and is
relevant for the purposes of the Company’s decision to maintain its interest
in this property. In the study, the historic estimate was sub-categorized as
follows:
Category
Tons
oz/ton Ag
oz/ton Au
Proven Reserves
2,981,690
4.88
Probable & Possible Reserves
904,200
10.40
Heap leach ore
316,100
1.56
Inferred Resources
2,700,000
4.44
0.018
0.020
0.014
0.020
0.022
However, the Company has not completed the work necessary to verify the
historical estimate. Accordingly, the Company is not treating the historical
estimate as current, NI 43-101-compliant mineral resources based on
information prepared by or under the supervision of a QP. These historical
estimates should not be relied upon.
The Company believes that the historical estimate category of “proven
reserves” for Hog Heaven most closely corresponds to 2,705,000 tonnes in
the CIM definition category of “indicated mineral resources”.
The Company believes that the historical estimate categories of “proven
& possible reserves”, “heap leach ore stockpile”, “possible resources” and
“inferred resources” most closely correspond to 7,639,000 tonnes in the
CIM definition category of “inferred mineral resources”.
43
Grades are shown as contained metal before mill recoveries are applied.
Possible Resources
4,500,000
2.41
(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 current, NI 43-101
compliant 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”
(v) 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., QP for the
Company, 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 NI 43-101 category of “indicated 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 current,
NI 43-101 compliant mineral resources based on information prepared by
or under the supervision of a QP. These historical estimates should not be
relied upon.
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 of, 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, each of whom are 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 43-101. Mineral
resource estimates for Hog Heaven and Waterloo are based on historical
third party estimates.
TECHNICAL INFORMATION
Michael Steinmann and Martin Wafforn, each of whom are Qualified
Persons, as the term is defined in NI 43-101, have reviewed and approved
the contents of this MD&A.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND
INFORMATION
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 AND TAX LAWS IN MEXICO AND THE INTRODUCTION
OF THE NEW MINING PROPERTY TAX IN SANTA CRUZ, ARGENTINA, EACH
OF 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 BOLIVIA, 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; THE SUCCESSFUL IMPLEMENTATION AND EFFECTS OF ONGOING
OR FUTURE DEVELOPMENT AND EXPANSION 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
44
PAN AMERICAN SILVER CORP. 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.
CAUTIONARY NOTE TO US INVESTORS CONCERNING ESTIMATES OF
RESERVES AND RESOURCES
THIS MD&A 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 MD&A HAVE BEEN PREPARED IN ACCORDANCE WITH
CANADIAN NATIONAL INSTRUMENT 43-101 – STANDARDS OF DISCLOSURE
FOR MINERAL PROJECTS (‘‘NI 43-101’’) AND THE CANADIAN INSTITUTE OF
MINING, METALLURGY AND PETROLEUM CLASSIFICATION SYSTEM. NI 43-
101 IS A RULE DEVELOPED BY THE CANADIAN SECURITIES ADMINISTRATORS
THAT ESTABLISHES STANDARDS FOR ALL PUBLIC DISCLOSURE AN ISSUER
MAKES OF SCIENTIFIC AND TECHNICAL INFORMATION CONCERNING
MINERAL PROJECTS.
CANADIAN STANDARDS, INCLUDING NI 43-101, DIFFER SIGNIFICANTLY
FROM THE REQUIREMENTS OF THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE “SEC”), AND INFORMATION CONCERNING
MINERALIZATION, DEPOSITS, MINERAL RESERVE AND RESOURCE
INFORMATION CONTAINED OR REFERRED TO HEREIN MAY NOT BE
COMPARABLE TO SIMILAR INFORMATION DISCLOSED BY U.S. COMPANIES.
IN PARTICULAR, AND WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, THIS MD&A USES THE TERMS ‘‘MEASURED RESOURCES’’,
‘‘INDICATED RESOURCES’’ AND ‘‘INFERRED RESOURCES’’. U.S. INVESTORS
ARE ADVISED THAT, WHILE SUCH TERMS ARE RECOGNIZED AND REQUIRED
BY CANADIAN SECURITIES LAWS, THE SEC DOES NOT RECOGNIZE THEM.
UNDER U.S. STANDARDS, MINERALIZATION MAY NOT BE CLASSIFIED AS
A ‘‘RESERVE’’ UNLESS THE DETERMINATION HAS BEEN MADE THAT THE
MINERALIZATION COULD BE ECONOMICALLY AND LEGALLY PRODUCED
OR EXTRACTED AT THE TIME THE RESERVE DETERMINATION IS MADE.
U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY PART
OF A “MEASURED RESOURCE” OR “INDICATED RESOURCE” WILL EVER
BE CONVERTED INTO A “RESERVE”. U.S. INVESTORS SHOULD ALSO
UNDERSTAND THAT “INFERRED RESOURCES” HAVE A GREAT AMOUNT OF
UNCERTAINTY AS TO THEIR EXISTENCE AND GREAT UNCERTAINTY AS TO
THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE ASSUMED THAT
ALL OR ANY PART OF “INFERRED RESOURCES” EXIST, ARE ECONOMICALLY
OR LEGALLY MINEABLE OR WILL EVER BE UPGRADED TO A HIGHER
CATEGORY. UNDER CANADIAN SECURITIES LAWS, ESTIMATED “INFERRED
RESOURCES” MAY NOT FORM THE BASIS OF FEASIBILITY OR PRE-FEASIBILITY
STUDIES EXCEPT IN RARE CASES. DISCLOSURE OF “CONTAINED OUNCES”
IN A MINERAL RESOURCE IS PERMITTED DISCLOSURE UNDER CANADIAN
SECURITIES LAWS. HOWEVER, THE SEC NORMALLY ONLY PERMITS ISSUERS
TO REPORT MINERALIZATION THAT DOES NOT CONSTITUTE “RESERVES”
BY SEC STANDARDS AS IN PLACE TONNAGE AND GRADE, WITHOUT
REFERENCE TO UNIT MEASURES. THE REQUIREMENTS OF NI 43-101 FOR
IDENTIFICATION OF “RESERVES” ARE ALSO NOT THE SAME AS THOSE OF
THE SEC, AND RESERVES REPORTED BY THE COMPANY IN COMPLIANCE
WITH NI 43-101 MAY NOT QUALIFY AS “RESERVES” UNDER SEC STANDARDS.
ACCORDINGLY, INFORMATION CONCERNING MINERAL DEPOSITS SET FORTH
HEREIN MAY NOT BE COMPARABLE WITH INFORMATION MADE PUBLIC BY
COMPANIES THAT REPORT IN ACCORDANCE WITH U.S. STANDARDS.
45
Consolidated FinanCial statements and notes
For the years ended deCember 31, 2013 and deCember 31, 2012
46
PAN AMERICAN SILVER CORP. Management’s Responsibility For Financial Reporting
The accompanying Consolidated Financial Statements of Pan American Silver Corp. were prepared by management,
which is responsible for the integrity and fairness of the information presented, including the many amounts that
must of necessity be based on estimates and judgments. These Consolidated Financial Statements were prepared in
accordance with 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 Public Accounting Firm appointed by the shareholders of Pan American Silver
Corp. upon the recommendation of the Audit Committee and Board, have performed an independent audit of the
Consolidated Financial Statements and their report follows. The auditors have full and unrestricted access to the Audit
Committee to discuss their audit and related findings.
“signed”
Geoff Burns
“signed”
A. Robert Doyle
President and Chief Executive Officer
Chief Financial Officer
March 26, 2014
47
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 PUBLIC ACCOUNTING FIRM
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, 2013 and December 31, 2012, and the
consolidated income statements, statements of comprehensive (loss) income, cash flows and changes in equity for each of the years in
the two year period ended December 31, 2013, 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
reasonableassurance 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, 2013 and December 31, 2012, and their financial performance and their cash flows for each
of the years in the two year period ended December 31, 2013 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, 2013, based on the criteria established in Internal Control –
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 26, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte LLP
Chartered Accountants
Vancouver, Canada
March 26, 2014
48
PAN AMERICAN SILVER CORP. 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 PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Pan American Silver Corp.
We have audited the internal control over financial reporting of Pan American Silver Corp. and subsidiaries (the “Company”) as of
December 31, 2013, based on the criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board. 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 International Financial Reporting Standards as issued by the International Accounting Standards
Board, 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, 2013, based on the criteria established in Internal Control – Integrated Framework (1992) 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 of and for the year ended December 31, 2013 of
the Company and our report dated March 26, 2014 expressed an unqualified opinion on those financial statements.
/s/ Deloitte LLP
Chartered Accountants
Vancouver, Canada
March 26, 2014
49
pan ameriCan silVer Corp.
Consolidated Statements of Financial Position
As at December 31, 2013 and 2012
(in thousands of U.S. dollars)
Decemer 31, 2013
Decemer 31, 2012 (Recast)
Assets
Current assets
Cash and cash equivalents (Note 25)
Short-term investments (Note 9)
Trade and other receivables (Note 8)
Income taxes receivable
Inventories (Note 10)
Derivative financial instruments (Note 8)
Prepaids and other current assets
Non-current assets
Mineral properties, plant and equipment (Note 11)
Long-term refundable tax (Note 8)
Deferred tax assets (Note 28)
Other assets (Note 13)
Goodwill (Note 12)
Total Assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 14)
Loan payable (Note 15)
Provisions (Note 16)
Current portion of finance lease (Note 17)
Current income tax liabilities
Non-current liabilities
Provisions (Note 16)
Deferred tax liabilities (Note 28)
Share purchase warrants (Note 8, 20)
Long-term portion of finance lease (Note 17)
Long-term debt (Note 18)
Other long-term liabilities (Note 19)
Total Liabilities
Equity
Capital and reserves (Note 20)
Issued capital
Share option reserve
Investment revaluation reserve
Retained (deficit) earnings
Total Equity attributable to equity holders of the Company
Non-controlling interests
Total Equity
Total Liabilities and Equity
Commitments and Contingencies (Notes 8, 29)
See accompanying notes to the consolidated financial statements
APPROVED BY THE BOARD ON MARCH 26, 2014
$
$
$
$
249,937
172,785
114,782
40,685
284,352
-
9,123
871,664
1,870,678
9,801
165
8,014
7,134
2,767,456
125,609
20,095
3,172
4,437
29,319
182,632
43,817
285,947
207
5,717
34,302
26,045
578,667
2,295,208
21,110
(137)
(133,847)
2,182,334
6,455
2,188,789
2,767,456
$
$
$
$
346,208
196,116
134,612
18,671
266,663
25
9,546
971,841
2,205,252
9,937
1,358
7,291
198,946
3,394,625
136,149
-
7,022
12,473
52,217
207,861
45,661
326,171
8,594
24,377
41,134
23,256
677,054
2,300,517
20,560
964
388,202
2,710,243
7,328
2,717,571
3,394,625
“signed” Ross Beaty, Director
“signed” Geoff A. Burns, Director
50
PAN AMERICAN SILVER CORP.
pan ameriCan silVer Corp.
Consolidated Income Statements
For the years ended December 31, 2013 and 2012
(in thousands of U.S. dollars)
Revenue (Note 26)
Cost of sales
Production costs (Note 21)
Depreciation and amortization (Note 11)
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 and (expenses) (Note 27)
(Loss) earnings from operations
Gain on derivatives (Note 20)
Investment income
Interest and finance expense (Note 23)
(Loss) earnings before income taxes
Income taxes (Note 28)
Net (loss) earnings for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
(Loss) earnings per share attributable to common shareholders (Note 24)
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted average shares outstanding (in 000’s) Basic
Weighted average shares outstanding (in 000’s) Diluted
Consolidated Statements of Comprehensive (loss) Income
For the years ended December 31, 2013 and 2012
(in thousands of U.S. dollars)
Net (loss) earnings for the year
Items that may be reclassified subsequently to net earnings:
Unrealized net (losses) gains on available for sale securities
(net of zero dollars tax in 2013 and 2012)
Reclassification adjustment for net losses (gains) on available for sale
securities included in earnings (net of zero dollars tax in 2013 and 2012)
Total comprehensive (loss) income for the year
Total comprehensive (loss) income attributable to:
Equity holders of the Company
Non-controlling interests
$
$
$
$
$
$
$
$
$
$
$
2013
824,504
(530,613)
(135,913)
(26,459)
(692,985)
131,519
(17,596)
(15,475)
(540,228)
-
(14,637)
(4,551)
14,068
8,287
(438,613)
16,715
3,086
(10,277)
(429,089)
(16,757)
(445,846)
(445,851)
5
(445,846)
(2.94)
(2.96)
151,501
153,430
2013
(445,846)
(2,163)
1,062
(446,947)
(446,952)
5
(446,947)
$
$
$
$
$
$
$
$
$
$
$
2012 (Recast)
928,594
(485,163)
(104,409)
(35,077)
(624,649)
303,945
(20,790)
(36,746)
(100,009)
(16,162)
5,577
421
9,652
5,370
151,258
24,159
6,178
(7,678)
173,917
(95,562)
78,355
78,201
154
78,355
0.56
0.49
140,883
142,442
2012 (Recast)
78,355
2,452
(3,634)
77,173
77,019
154
77,173
51
Net cash generated from operating activities
$
pan ameriCan silVer Corp.
Consolidated Statements of Cash Flows
For the years ended December 31, 2013 and 2012
(in thousands of U.S. dollars)
Cash flow from operating activities
Net (loss) earnings for the year
Current income tax expense (Note 28)
Deferred income tax recovery (Note 28)
Depreciation and amortization (Note 11)
Impairment of mineral property (Note 12)
Accretion on closure and decommissioning provision (Note 16)
Unrealized (gains) losses on foreign exchange
Share-based compensation expense
Unrealized losses (gains) on commodity contracts (Note 8)
Gain on derivatives (Note 20)
Gain on sale of mineral property, plant and equipment (Note 6)
Changes in non-cash operating working capital (Note 25)
Operating cash flows before interest and income taxes
Interest paid
Interest received
Income taxes paid
Cash flow from investing activities
Payments for mineral properties, plant and equipment
Proceeds from short term investments
Acquisition of Minefinders, net of cash acquired (Note 6)
Proceeds from sale of mineral property, plant and equipment
Net refundable tax and other asset expenditures
Net cash used in investing activities
Cash flow from financing activities
Proceeds from issue of equity shares
Shares repurchased and cancelled (Note 20)
Dividends paid
Proceeds from short term loan (Note 15)
Payment of construction and equipment leases
Distributions to non-controlling interests
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease) 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.
52
2013
2012 (Recast)
$
(445,846)
$
78,355
55,691
(38,934)
135,913
540,228
3,030
(922)
2,173
25
(16,715)
(14,068)
(1,673)
218,902
(3,425)
2,138
(98,009)
119,606
(159,401)
19,920
-
13,681
452
$
$
(125,348)
$
-
(6,740)
(75,755)
23,496
(30,238)
(925)
(90,162)
(367)
(96,271)
346,208
249,937
$
$
$
$
101,050
(5,488)
104,409
100,009
2,999
6,124
4,142
(25)
(24,159)
(9,652)
(11,062)
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
PAN AMERICAN SILVER CORP. pan ameriCan silVer Corp.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2013 and 2012
(in thousands of U.S. dollars, except for number of shares)
Attributable to equity holders of the Company
Issued shares
Issued capital
Share
option
reserve
Investment
revaluation
reserve
Retained
earnings
(deficit)
Total
Non-
controlling
interests
Total equity
Balance, December 31, 2011
104,492,743 $ 1,243,241 $
8,631 $
2,146
$
339,821 $ 1,593,839 $
8,248 $
1,602,087
Issued to acquire Minefinders
49,392,588
1,088,104
-
-
-
-
-
-
-
-
-
-
78,201
(1,182)
(1,182)
-
78,201
288,796
57,369
4,947
1,060
379
13
(2,411,240)
(36,848)
-
-
-
-
-
-
-
-
(1,765)
-
-
-
10,739
699
-
2,256
-
-
-
-
-
-
-
-
-
-
78,201
(1,182)
77,019
3,182
1,060
13
154
-
154
-
-
-
-
-
-
78,355
(1,182)
77,173
3,182
1,060
13
(41,749)
1,098,843
699
(4,901)
(41,749)
1,098,843
699
-
(1,074)
(1,074)
2,256
(24,919)
(24,919)
-
-
2,256
(24,919)
-
-
-
-
-
-
-
151,820,635 $ 2,300,517 $
20,560 $
964
$
388,202 $ 2,710,243 $
7,328 $
2,717,571
Total comprehensive income
Net earnings for the year
Other comprehensive loss
Transaction with owners
Shares issued on the exercise of
stock options
Shares issued as compensation
Shares issued on the exercise
of warrants
Shares repurchased and
cancelled
Issued on replacement awards
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
Balance, December 31, 2012
(Recast)
Total comprehensive (loss)
income
Net loss for the year
Other comprehensive loss
Transaction with owners
Shares issued as compensation
94,659
1,035
Shares repurchased and
cancelled
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
(415,000)
(6,344)
-
-
-
-
-
-
-
-
-
-
-
-
-
(445,851)
(445,851)
(1,101)
(1,101)
-
(1,101)
(445,851)
(446,952)
-
-
-
-
-
-
550
-
5
-
5
-
-
(445,846)
(1,101)
(446,947)
1,035
(6,740)
-
-
-
-
-
-
1,035
(396)
(6,740)
(47)
-
(47)
(878)
(925)
550
(75,755)
(75,755)
-
-
550
(75,755)
Balance, December 31, 2013
151,500,294 $ 2,295,208 $
21,110 $
(137)
$
(133,847) $ 2,182,334 $
6,455 $
2,188,789
See accompanying notes to the consolidated financial statements.
53
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
1. nature oF operations
Pan American Silver Corp. is the ultimate parent company of its
subsidiary group (collectively, the “Company”, or “Pan American”).
Pan American Silver Corp is incorporated and domiciled in Canada,
and its 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.
At December 31, 2013 the Company’s principal producing
properties were comprised of the Huaron and Morococha mines
located in Peru, the Alamo Dorado, La Colorada and Dolores mines
located in Mexico, the San Vicente mine located in Bolivia and the
Manantial Espejo mine located in Argentina.
The Company’s significant development project at December 31,
2013 was the Navidad project in Argentina.
2. summary oF signiFiCant
aCCounting poliCies
a. Statement of Compliance
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board (“IFRS”).
IFRS comprises IFRSs, International Accounting Standards (“IASs”),
and interpretations issued by the IFRS Interpretations Committee
(“IFRICs”) and the former Standing Interpretations Committee
(“SICs”).
These consolidated financial statements were approved for
issuance by the Board of Directors on March 26, 2014.
b. Basis of Preparation
The Company’s accounting policies have been applied consistently
in preparing these consolidated annual financial statements
for the year ended December 31, 2013, and the comparative
information as at December 31, 2012, which has been recast due
to finalization of the purchase price allocation for the acquisition
of Minefinders (note 6).
c. Significant Accounting Policies
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 is exposed,
or has rights, to variable returns from its involvement with an
investee and has the ability to affect those returns through its
power over the investee. This occurs when the Company has
existing rights that give it the current ability to direct the relevant
activities, is exposed, or has rights, to variable returns from its
involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s
performance and the ability to use its power over the investee
to affect the amount of the investor’s returns. 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, consolidated income
statement. Total comprehensive income is attributable to the
owners of the Company and to the non-controlling interests
even if this results in the non-controlling interest having a deficit
balance.
The consolidated financial statements include the wholly-owned
and partially-owned subsidiaries of the Company; the most
significant at December 31, 2013 and 2012 are presented in the
following table:
Subsidiary
Pan American Silver Huaron S.A.
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.
Minera Tritón Argentina S.A.
Pan American Silver (Bolivia) S.A.
Minera Argenta S.A.
Location
Peru
Peru
Mexico
Mexico
Mexico
Argentina
Bolivia
Argentina
Ownership
Interest (2013)
100%
92%
100%
100%
100%
100%
95%
100%
Status
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Operations and Development
Projects Owned
Huaron mine
Morococha mine
Alamo Dorado mine
La Colorada mine
Dolores mine
Manantial Espejo mine
San Vicente mine
Navidad Project
54
PAN AMERICAN SILVER CORP. 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 participate in the financial and operating policy decisions
affecting the entity. The Company’s share of the net assets and
net earnings or loss is accounted for in the consolidated financial
statements using the equity method of accounting.
Basis of measurement: These consolidated financial statements
have been prepared on a historical cost basis except for derivative
financial instruments, share purchase warrants and assets
classified as at fair value through profit or loss or available-for-sale
which are measured at fair value. Additionally, these consolidated
financial statements have been prepared using the accrual basis of
accounting, except for cash flow information.
Currency of presentation: The consolidated financial statements
are presented in United States dollars (“USD”), which is
the Company’s 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.
Non-controlling interests are measured either at fair value or
at the non-controlling interests’ proportionate share of the
recognized amounts of the acquirers’ identifiable net assets as at
the date of acquisition. The choice of measurement basis is made
on a transaction by transaction basis.
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.
If the initial accounting for a business combination is incomplete
by the end of the reporting period in which the combination
occurs, the Company reports provisional amounts for the items for
which the accounting is incomplete. These provisional amounts
are adjusted during the measurement period, or additional assets
or liabilities are recognized, to reflect new information obtained
about facts and circumstances that existed at the acquisition date
that, if known, would have affected the amounts recognized at
that date.
Revenue recognition: Revenue associated with the sale of
commodities is recognized when all significant risks and rewards
of ownership of the asset sold are transferred to the customer,
usually when insurance risk and title has passed to the customer
and the commodity has been delivered to the shipping agent. At
this point the Company retains neither continuing managerial
involvement to the degree usually associated with ownership nor
effective control over the commodities and the costs incurred, or
to be incurred, in respect of the sale, can be reliably measured.
Revenue is recognized at the fair value of the consideration
receivable, to the extent that it is probable that economic
benefits will flow to the Company and the revenue can be
reliably measured. Sales revenue is recognized at the fair value of
consideration received, which in most cases is based on invoiced
amounts.
The Company’s concentrate sales contracts with third-party
smelters, in general, provide for a provisional payment based
upon provisional assays and quoted metal prices. Final settlement
is based on applicable commodity prices set on specified
quotational periods, typically ranging from one month prior to
shipment, and can extend to three months after the shipment
arrives at the smelter and is based on average market metal
prices. For this purpose, the selling price can be 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.
55
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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
Financial assets are classified as at fair value through profit or
loss when the financial asset is either held for trading or it is
designated as at fair value through profit and loss. Derivatives are
included in this category and are classified as current assets or
non-current assets based on their maturity date. The Company
does not acquire financial assets for the purpose of selling in the
short term. Financial assets carried at fair value through profit or
loss, are initially recognized at fair value. The directly attributable
transaction costs are expensed in the income statement in the
period in which they are incurred. Subsequent changes in fair
value are recognized in net earnings.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an
active market. Loans and receivables comprise ‘trade and other
receivables’, ‘other assets’ and ‘cash’ in the statement of financial
position. Loans and receivables are carried at amortized cost less
any impairment.
(c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are
either specifically designated as available-for- sale or not classified
in any of the other categories. They are included in non-current
assets unless the Company intends to dispose of the investment
within 12 months of the statement of financial position date.
Changes in the fair value of available-for-sale financial assets
denominated in a currency other than the functional currency of
the holder, other than equity investments, are analyzed between
translation differences and other changes in the carrying amount
of the security. The translation differences are recognized in the
income statement. Any impairment charges are also recognized
in the income statement, while other changes in fair value are
recognized in other comprehensive income. When financial assets
classified as available-for-sale are sold, the accumulated fair
value adjustments previously recognized in accumulated other
comprehensive income are reclassified to the income statement.
Dividends on available-for-sale equity instruments are also
recognized in the income statement within investment income
when the Company’s right to receive payments is established.
(d) Held-to-maturity investments
Non-derivative financial assets with fixed or determinable
payments and fixed maturity are classified as held-to-maturity
when the Company has the positive intention and ability to hold
to maturity. Investments intended to be held for an undefined
period are not included in this classification. Other long-term
investments that are intended to be held-to-maturity, such as
bonds, are measured at amortized cost. This cost is computed
as the amount initially recognized minus principal repayments,
plus or minus the cumulative amortization using the effective
interest method of any difference between the initially recognized
amount and the maturity amount. This calculation includes all
fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and
all other premiums and discounts. For investments carried at
amortized cost, gains and losses are recognized in income when
the investments are derecognized or impaired, as well as through
the amortization process.
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 price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. 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, and 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
56
PAN AMERICAN SILVER CORP. ‘prolonged’ based on an analysis of indicators such 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
A financial asset is derecognized when its contractual rights to the
cash flows that comprise the financial asset expire or substantially
all the risks and rewards of the asset are transferred.
Financial liabilities
A financial liability is 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.
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.
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.
Normal purchase or sale exemption: Contracts that were entered
into and continue to be held for the purpose of the receipt or
delivery of a nonfinancial item in accordance with the Company’s
expected purchase, sale or usage requirements fall in the
exemption from IAS 32 and IAS 39, which is known as the “normal
purchase or sale exemption” (with the exception of those with
quotational period clauses, which result in the recognition of an
embedded derivative. Refer to note 8b for more information).
For these contracts and the host part of the contracts containing
embedded derivatives, they are accounted for as executory
contracts. The Company recognizes such contracts in its statement
of financial position only when one of the parties meets its
obligation under the contract to deliver either cash or a non-
financial asset.
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 include cash
on hand and cash in banks. It also includes short-term money
market investments 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
57
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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. The work in progress inventory is considered part of the
operating cycle which the Company classifies as current inventory
and hence heap leach and stockpiles are included in current
inventory. 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 Company allocates direct and indirect production costs to
by-products on a systematic and rational basis. With respect to
concentrate and dore inventory, production costs are allocated
based on the silver equivalent ounces contained within the
respective concentrate and dore.
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.
58
PAN AMERICAN SILVER CORP. Each asset or part’s estimated useful life has due regard to both
its own physical life limitations and the present assessment of
economically recoverable reserves of the mine property at which
the item is located, and to possible future variations in those
assessments. Estimates of remaining useful lives and residual
values are reviewed annually. Changes in estimates are accounted
for prospectively.
The expected useful lives are included below in the accounting
policy for depreciation of property, plant, and equipment. The
net carrying amounts of mineral property, land, buildings, plant
and equipment are reviewed for impairment either individually
or at the cash-generating unit level when events and changes
in circumstances indicate that the carrying amounts may not
be recoverable. To the extent that these values exceed their
recoverable amounts, that excess is recorded as an impairment
provision in the financial year in which this is determined.
In countries where the Company paid Value Added Tax (“VAT”)
and where there is uncertainty of its recoverability, the VAT
payments have either been deferred with mineral property
costs relating to the property or expensed if it relates to mineral
exploration. If the Company ultimately recovers previously
deferred amounts, the amount received will be applied to
reduce mineral property costs or taken as a credit against current
expenses depending on the prior treatment.
Expenditure on major maintenance or repairs includes the cost of
the replacement of parts of assets and overhaul costs. Where an
asset or part of an asset is replaced and it is probable that future
economic benefits associated with the item will be available to
the Company, the expenditure is capitalized and the carrying
amount of the item replaced derecognized. Similarly, overhaul
costs associated with major maintenance are capitalized and
depreciated over their useful lives where it is probable that future
economic benefits will be available and any remaining carrying
amounts of the cost of previous overhauls are derecognized. All
other costs are expensed as incurred.
Where an item of mineral property, plant and equipment is
disposed of, it is derecognized and the difference between its
carrying value and net sales proceeds is disclosed as earnings or
loss on disposal in the income statement. Any items of mineral
property, plant or equipment that cease to have future economic
benefits are derecognized with any gain or loss included in the
financial year in which the item is derecognized.
Operational Mining Properties and Mine Development: When it
has been determined that a mineral property can be economically
developed as a result of establishing proven and probable reserves
(which occurs upon completion of a positive economic analysis of
the mineral deposit), the costs incurred to develop such property
including costs to further delineate the ore body and remove
overburden to initially expose the ore body prior to the start of
mining operations, are also capitalized. Such costs are amortized
using the units-of-production method over the estimated life of
the ore body based on proven and probable reserves.
Costs associated with commissioning activities on constructed
plants are deferred from the date of mechanical completion of
the facilities until the date the Company is ready to commence
commercial service. Any revenues earned during this period
are recorded as a reduction in deferred commissioning costs.
These costs are amortized using the units-of-production method
(described below) over the life of the mine, commencing on the
date of commercial service.
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 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.
Straight line basis
Assets within operations for which production is not expected to
fluctuate significantly from one year to another or which have a
physical life shorter than the related mine are depreciated on a
straight line basis.
Mineral property, plant and equipment are depreciated over
its useful life, or over the remaining life of the mine if shorter.
The major categories of property, plant and equipment are
depreciated on a unit of production and/or straight-line basis as
follows:
59
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
• 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.
Expenditures are transferred to mining properties and leases
or assets under construction once the technical feasibility
and commercial viability of extracting a mineral resource are
demonstrable and the work completed to date supports the
future development of the property
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 unit 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 that are 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 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
60
PAN AMERICAN SILVER CORP. 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
61
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
statement and credited to equity, on a straight-line basis over
the vesting period, after adjusting for the estimated number of
awards that are expected to vest. The fair value of the equity-
settled awards is determined at the date of grant. Non-vesting
conditions and market conditions, such as target share price upon
which vesting is conditioned, are factored into the determination
of fair value at the date of grant. All other vesting conditions
are excluded from the determination of fair value and included
in management’s estimate of the number of awards ultimately
expected to vest.
The fair value is determined by using option pricing models. At
each statement of financial position date prior to vesting, the
cumulative expense representing the extent to which the vesting
period has expired and management’s best estimate of the awards
that are ultimately expected to vest is computed (after adjusting
for non-market performance conditions). The movement in
cumulative expense is recognized in the income statement with
a corresponding entry within equity. No expense is recognized
for awards that do not ultimately vest, except for awards where
vesting is conditional upon a market condition, which are treated
as vesting irrespective of whether or not the market condition
is satisfied, provided that all other performance conditions are
satisfied.
Where the terms of an equity-settled award are modified, as
a minimum an expense is recognized as if the terms had not
been modified over the original vesting period. In addition, an
expense is recognized for any modification, which increases the
total fair value of the share-based payment arrangement, or is
otherwise beneficial to the employee as measured at the date of
modification, over the remainder of the new vesting period.
Where an equity-settled award is cancelled, it is treated as if
it had vested on the date of cancellation, and any expense not
yet recognized for the award is recognized immediately. Any
compensation paid up to the fair value of the awards at the
cancellation or settlement date is deducted from equity, with
any excess over fair value being treated as an expense in the
income statement. However, if a new award is substituted for the
cancelled award, and designated as a replacement award on the
date that it is granted, the new awards are treated as if they are
a modification of the original award, as described in the previous
paragraph.
Leases: The determination of whether an arrangement is, or
contains a lease is based in the substance of the arrangement
at 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.
The tax effect of certain temporary differences is not recognized,
principally with respect to goodwill; temporary differences
arising on the initial recognition of assets or liabilities (other
than those arising in a business combination or in a manner that
initially impacted accounting or taxable earnings); and temporary
differences relating to 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
62
PAN AMERICAN SILVER CORP. 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.
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.
3. Changes in aCCounting
standards
Changes in Accounting Policies
The Company adopted the following new accounting standards
along with any consequential amendments, 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. The application of IFRS
10 does not have an 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. The application
of IFRS 11 does 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. The
Company has completed its assessment on this standard and
concluded that this standard does not have a significant 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
63
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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. The Company has
completed its assessment on this standard and concluded that
this standard did not have an impact on the consolidated financial
statements. The Company has applied IFRS 13 on a prospective
basis, commencing January 1, 2013. Additional disclosure on
the fair value of certain financial instruments is included in the
consolidated financial statements as a result of applying IFRS 13.
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 application of IAS 1 does not
have a significant impact on the Company’s 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
does not have a significant impact on the Company’s 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. The application of IFRIC 20 did not
result in an adjustment to the Company’s consolidated financial
statements.
Accounting interpretation effective January 1, 2014
IFRIC 21 Levies (“IFRIC 21”) is an interpretation of IAS 37
Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”),
on the accounting for levies imposed by governments. In IAS 37,
the criterion for recognizing a liability includes the requirement
for an entity to have a present obligation resulting from a past
event. IFRIC 21 provides clarification on the past event that gives
rise to the obligation to pay a levy as the activity described in the
relevant legislation that triggers the payment of the levy. IFRIC
21 is effective for annual periods commencing on or after January
1, 2014. The Company does not anticipate the application of
IFRIC 21 to have a material impact on its consolidated financial
statements.
Accounting standards issued but not yet effective
IFRS 9 Financial Instruments is intended to replace IAS 39
Financial Instruments: Recognition and Measurement in its
entirety and some of the requirements of IFRS 7 Financial
Instruments: Disclosures, including added disclosure about
investments in equity instruments measured at fair value in
Other Comprehensive Income (“OCI”), and guidance on financial
liabilities and derecognition of financial instruments. The
mandatory effective date will be added when all phases of IFRS 9
are completed with sufficient lead time for implementation.
4. signiFiCant Judgements in
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 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.
• 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
64
PAN AMERICAN SILVER CORP. 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 judgments, 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 unit of production basis over the reserves
that directly benefit from the specific stripping activity. As at
December 31, 2013, the carrying amount of stripping costs
capitalized was $59.2 million comprised of Manantial - $13.8
million, Dolores - $32.8 million and Alamo Dorado - $12.6 million
(2012 - $23.6 million was capitalized comprised of $6.9, $13.5, and
$3.2 million, 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, 2013, the carrying amount of the deferred credit arising from
the Aquiline acquisition was $20.8 million (2012 - $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.
5. key sourCes oF estimation
unCertainty in the
appliCation oF aCCounting
poliCies
Key sources of estimation uncertainty that have a significant risk
of causing a material adjustment to the carrying amounts of assets
and liabilities are:
• Revenue recognition: Revenue from the sale of concentrate
to independent smelters is recorded at the time the risks and
rewards of ownership pass to the buyer using forward market
prices on the expected date that final sales prices will be fixed.
Variations between the prices set under the smelting contracts
may be caused by changes in market prices and result in an
embedded derivative in the accounts receivable. The embedded
derivative is recorded at fair value each period until final
settlement occurs, with changes in the fair value classified in
revenue. In a period of high price volatility, as experienced under
current economic conditions, the effect of mark-to-market price
adjustments related to the quantity of metal which remains to
be settled with independent smelters could be significant. For
changes in metal quantities upon receipt of new information and
assay, the provisional sales quantities are adjusted.
• Estimated recoverable ounces: The carrying amounts of the
Company’s mining properties are depleted based on recoverable
ounces. Changes to estimates of recoverable ounces and
depletable costs including changes resulting from revisions to the
Company’s mine plans and changes in metal price forecasts can
result in a change to future depletion rates.
• Mineral reserve estimates: The figures for mineral reserves and
mineral resources are determined 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 judgments 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. Refer to Note 10 for 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.
65
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
• 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. Impairments
of mining interests are 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 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. Refer to
Note 16 for details on decommissioning and restoration costs.
• 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 judgments 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,
are 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
judgment 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. Refer to Note 20 for details on share purchase
warrants.
• 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 29 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
options. In addition, the Company recorded $16.2 million of
acquisition costs to complete this transaction. 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 was aligned with management’s objectives of
enhanced operating and development portfolio diversification
66
PAN AMERICAN SILVER CORP. and its 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 on a net of by-product basis, (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
$1.84 Canadian (“CAD”) 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.
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. 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
The purchase consideration has been allocated to the assets
acquired and liabilities assumed based upon their estimated fair
values at the date of acquisition. Fair values were determined
using the income, cost and market price valuation methods as
deemed appropriate. The purchase price allocation was finalized
during the quarter ended March 31, 2013, with the assistance
of an independent third party, resulting in adjustments to the
preliminary allocations. These adjustments resulted in a $10.7
million increase in fair value allocated to mineral interests
as compared to the preliminary fair value. Retrospective
application of the changes made to the allocation of the purchase
consideration in the 2013 first quarter decreased net earnings
for the year ended December 31, 2012 by $9.2 million, due to an
increase in cost of sales, reduced by depreciation and income tax
expense.
Goodwill was 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 following tables summarize the final purchase consideration,
the preliminary purchase price allocation reported in the
Company’s 2012 year-end financial statements and the final
purchase price allocation, with the applicable recast adjustments
made upon finalization during the first quarter of 2013.
Purchase consideration
Cash
Replacement option awards
Fair value of Pan American shares issued
$
$
165,413
10,739
1,088,104
1,264,256
Purchase price
allocation
Net working
capital acquired(1)
Mineral property,
plant and
equipment
Preliminary
Adjustments
Final
333,478
$
(897)
$
332,581
1,045,326
10,728
1,056,054
Goodwill
211,292
(12,346)
198,946
Closure and
decommissioning
provisions
Long-term debt
Deferred tax
liabilities
(10,880)
(49,685)
5,316
-
(5,564)
(49,685)
(265,275)
(2,801)
(268,076)
$
1,264,256
$
-
$
1,264,256
(1) Includes cash of $251.9 million for net cash received of $86.5 million and
accounts receivable of $11.3 million.
The following table summarizes the Company’s recast and
previously reported December 31, 2012 consolidated balance
sheets:
Assets
Inventories
Mineral property, plant and
equipment
Deferred tax asset
Goodwill
Liabilities and Equity
Accounts payable and accrued
liabilities
Income tax liabilities
Deferred tax liabilities
Retained earnings
December 31,
2012 (Recast)
December 31,
2012 (1)
$
$
$
$
$
$
$
$
266,663
2,205,252
1,358
198,946
136,149
52,217
326,171
388,202
$
$
$
$
$
$
$
$
270,089
2,182,742
1,450
211,292
136,757
40,346
321,630
397,360
(1) As previously presented in the consolidated financial statements for
the year ended December 31, 2012.
67
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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 $2.2 billion as at December 31, 2013
(2012 - $2.7 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 $150.0 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, 2012.
8. FinanCial instruments
a) Financial assets and liabilities classified as at fair value
through profit or loss (“FVTPL”)
The Company’s financial assets and liabilities classified as at FVTPL
are as follows:
Current derivative assets
Commodity and foreign currency
contracts
Non-current derivative liabilities
Share purchase warrants
Conversion feature on
convertible notes
December 31,
2013
December 31,
2012
$
$
$
$
-
-
(207)
(1,419)
(1,626)
$
$
$
$
25
25
(8,594)
(9,746)
(18,340)
The following table summarize the Company’s recast and
previously reported year ended December 31, 2012 consolidated
income statements.
Revenue
Cost of Sales
Production costs
Depreciation and amortization
Royalties
Mine operating earnings
Earnings from operations
Earnings before income taxes
Income taxes
Net earnings for the period
Attributable to :
Equity holders of the Company
Non- controlling interests
Earnings per share attributable
to common shareholders
Basic earnings per share
Diluted earnings per share
Twelve months ended December 31,
2012 (Recast)
2012 (1)
$
928,594
$
928,594
(485,163)
(104,409)
(35,077)
(624,649)
303,945
151,258
173,917
(95,562)
$
$
$
$
(474,001)
(108,153)
(35,077)
(617,231)
311,363
158,676
181,335
(93,822)
78,355
$
87,513
78,201
154
78,355
87,359
154
87,513
0.56
0.49
$
$
0.62
0.55
$
$
$
$
$
$
$
(1) As previously presented in the annual consolidated financial
statements for the year ended December 31, 2012.
b) Dispositions of mineral property, plant and equipment
On January 30, 2013, a subsidiary of the Company (Plata
Panamericana S.A. de C.V.) entered into a sale and option
agreement with Compañía Minera Cuzcatlan SA de C.V.
(“Cuzcatlan”) to sell 55% of its interest in certain Mexican
exploration properties to Cuzcatlan for $4.0 million. The Company
also granted Cuzcatlan the option to acquire the remaining
45% interest in the exploration properties for $6.0 million (of
which $2.0 million was paid to a third party according to a prior
unrelated agreement), within ten days of Cuzcatlan making
a production decision. The option was exercised during the
second quarter of 2013. In addition the Company agreed to sell
concessions near the Huaron mine to a nearby mining company.
For the year ended December 31, 2013, the Company recorded a
gain on sale of assets of $8.0 million and $5.0 million, respectively
related to the disposition of the above interests in exploration
properties. The Company recorded a net gain on disposition of
assets of $14.1 million during 2013 (2012 - $9.7 million).
68
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. In addition, accounts receivable arising from sales of metal
concentrates have been designated and classified as at FVTPL.
December 31,
2013
December 31,
2012
Trade receivables from
provisional concentrates sales
Not arising from sale of metal
concentrates
$
31,727
$
39,116
83,055
95,496
Trade and other receivables
$
114,782
$
134,612
b) Normal purchase or sale exemption
Contracts that were entered into and continue to be held for
the purpose of the receipt or delivery of a nonfinancial item in
accordance with the Company’s expected purchase, sale or usage
requirements fall in the exemption from IAS 32 and IAS 39, which
is known as the ”normal purchase or sale exemption”. For these
contracts and the host part of the contracts containing embedded
derivatives, they are accounted for as executory contracts. The
Company recognizes such contracts in its statement of financial
position only when one of the parties meets its obligation under
the contract to deliver either cash or a non-financial asset.
In response to the sharp decline in silver and gold prices in
the quarter-ended June 30, 2013, the Company evaluated its
alternatives to mitigate the financial risk of further price declines.
The Company decided it was appropriate to protect a portion
of its precious metal production associated with its higher cost
Peruvian and Argentine operations against the potential of further
price erosion. As such, starting July 2013 program, the Company
entered into forward contracts limited to 1 year and up to 25% of
its silver and gold production.
On September 10, 2013, the Company decided to discontinue
its silver and gold hedges after a re-evaluation of the financial
risk of further price declines. The re-evaluation of the financial
risk resulted in the Company concluding that as of September
10, 2013 these forward contracts were financial liabilities. It was
determined that for accounting purposes upon the re-evaluation
event that the forward contract derivative be initially recognized
at fair value and then subsequently measured at fair value
through profit or loss. At December 31, 2013, the total realized
loss recognized from the Company’s silver and gold hedges is $5.2
million.
c) Financial assets designated as available-for-sale
The Company’s short term investments are designated as
available-for-sale. The unrealized losses on available-for-sale
investments recognized in other comprehensive (loss) income for
the years ended December 31, were as follows:
Unrealized (loss) gain on equity
securities
Reclassification adjustment for net
losses (gains) on available for sale
securities included in earnings
December 31,
2013
December 31,
2012
$
$
$
(2,163)
$
2,452
1,062
(1,101)
$
$
(3,634)
(1,182)
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. Except for the
short hedging program described above in Note 8b, and consistent
with the Company’s mission to provide equity investors with
exposure to changes in silver prices, the Company’s current policy
is to not hedge the price of silver. A 10% increase in all metal
prices for the year ended December 31, 2013, would result in an
increase of approximately $88.7 million (2012 – $97.2 million)
in the Company’s revenues. A 10% decrease in all metal prices
for the same period would result in a decrease of approximately
$90.7 million (2012 - $98.2 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, copper and silver) on open
positions for provisional concentrate contracts for the year ended
December 31, 2013 would result in an increase of approximately
$19.4 million (2012 - $11.5 million) in the Company’s before
tax earnings which would be reflected in 2014 results. A 10%
decrease in metal prices for the same period would result in a
decrease of approximately $19.7 million (2012 - $11.8 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, 2013, the Company
did not have outstanding contracts to sell any of its base metals
production.
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
69
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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 honor 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, 2013 the Company had
receivable balances associated with buyers of its concentrates
of $31.7 million (2012 - $39.1 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, 2013 the Company had approximately $54.7
million (2012 - $48.8 million) of value contained in precious
metal inventory at refineries. The Company maintains insurance
coverage against the loss of precious metals at the Company’s
mine sites, in-transit to refineries and whilst at the refineries.
The Company maintains trading facilities with several banks and
bullion dealers for the purposes of transacting the Company’s
trading activities. None of these facilities are subject to margin
arrangements. The Company’s trading activities can expose the
Company to the credit risk of its counterparties to the extent
that our trading positions have a positive mark-to-market value.
However, the Company minimizes this risk by ensuring there is no
excessive concentration of credit risk with any single counterparty,
by active credit management and monitoring.
Refined silver and gold is sold in the spot market to various bullion
traders and banks. Credit risk may arise from these activities if
the Company is not paid for metal at the time it is delivered, as
required by spot sale contracts.
Management constantly monitors and assesses the credit risk
resulting from its refining arrangements, concentrate sales and
commodity contracts with its refiners, trading counterparties
and customers. Furthermore, management carefully considers
credit risk when allocating prospective sales and refining business
to counterparties. In making allocation decisions, Management
attempts to avoid unacceptable concentration of credit risk to any
single counterparty.
At December 31, 2013, the Company has recorded an allowance
for doubtful accounts provision in the amount of $7.6 million
(2012 – $7.6 million). $7.6 million 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, 2013, no additional provision for doubtful accounts
were recorded other than those described above.
Cash, trade accounts receivable and other receivables that
represent the maximum credit risk to the Company consist of the
following:
Cash and cash equivalents
$
249,937
$
346,208
December 31,
2013
2012
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
38,225
31,727
24,265
3,803
3,855
2,370
1,768
-
8,769
46,680
39,116
21,144
5,996
5,081
4,828
2,097
1,572
8,098
Total accounts receivable
$
114,782
$
134,612
Total cash and accounts
receivable
Long-term refundable tax
receivable
364,719
480,820
9,801
9,937
Total
$
374,520
$
490,757
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, 2013, the Company has $10.2
million in lease obligations (2012 - $36.4 million), equipment
and construction advances of $nil (2012 - $0.4 million) that are
subject to an annualized interest rate of 2.2% and unsecured
convertible notes with a principal amount of $36.2 million
(2012 – $36.2 million) 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, 2013 on its lease
obligations and equipment and construction advances was $0.2
million (2012 – $1.4 million). The Company has received short
term loans in Argentina totaling $130.0 million Argentina Pesos
(USD $23.5 million) at an annual interest rate of 25.7%. $30.0
million Argentine pesos are due in February 2014 and $100.0
million Argentine pesos are due in June 2014. The interest paid
by the Company for the year ended December 31, 2013 on the
70
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. convertible notes was $1.6 million (2012 – $1.6 million). The
Company is not subjected to variable market interest rate changes
as all debt included above have stated interest rates.
The average interest rate earned by the Company during the year
ended December 31, 2013 on its cash and short term investments
was 0.68%. 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 (2012 – $0.3 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 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.
In order to mitigate this exposure, from time to time the Company
has purchased Peruvian Nuevo soles (“PEN”), Mexican pesos
(“MXN”) and CAD to match anticipated spending. At December
31, 2013 the Company had no outstanding contracts to purchase
in PEN, MXN or CAD. 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, 2013 non-USD net monetary liabilities
were denominated would result in an income before taxes change
of about $38.3 million (2012 - $24.2 million).
The Company is exposed to currency risk through the following
financial assets and liabilities, and deferred income tax assets and
liabilities denominated in foreign currencies:
At December 31, 2013
Cash and short-
term investments
Other current and
non-current assets
Income taxes receivable
(payable), current and
non-current
Accounts payable and
accrued liabilities and
non-current liabilities
Deferred income tax
assets (liabilities)
Canadian dollar
$
156,610
$
1,769
$
4
$
(5,143)
$
-
Mexican peso
Argentinian peso
Bolivian boliviano
Peruvian Nuevo soles
6,149
4,178
1,635
3,279
34,105
36,315
1,187
13,838
8,776
3,075
(3,104)
3,359
(39,067)
(47,055)
(7,017)
(27,832)
(235,513)
(26,720)
(217)
(23,332)
$
171,851
$
87,214
$
12,110
$
(126,114)
$
(285,782)
At December 31, 2012
Cash and short-
term investments
Other current and
non-current assets
Income taxes receivable
(payable), current and
non-current
Accounts payable and
accrued liabilities and
non-current liabilities
Deferred income tax
assets (liabilities)
Canadian dollar
$
117,175
$
3,619
$
-
$
(10,353)
$
Mexican peso
Argentinian peso
Bolivian boliviano
Peruvian Nuevo soles
Liquidity Risk
3,836
173
293
2,174
$
123,651
$
35,214
43,875
2,037
12,960
97,705
(4,763)
(11,426)
(7,697)
2,956
(43,046)
(33,352)
(6,116)
(29,411)
-
(269,515)
(26,309)
352
(24,801)
$
(20,930)
$
(122,278)
$
(320,273)
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.
71
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Commitments
The Company’s commitments have contractual maturities which are summarized below:
Finance lease obligations (1)
Current liabilities
Loan obligation (Note 15)
Severance accrual
Employee compensation plan (3)
Restricted share units (“RSUs”) (3)
Convertible notes (4)
Payments due by period 2013
Total
Within 1 year(2)
2 - 3 years
4- 5 years
After 5 years
$
10,856
$
4,800
$
4,417
$
1,639
$
156,241
20,095
3,726
3,228
2,288
39,497
156,241
20,095
649
3,228
1,393
1,631
-
-
412
-
895
37,866
-
-
-
-
-
2,138
527
-
-
-
-
-
-
Total contractual obligations (5)
$
235,931
$
188,037
$
43,590
$
3,777
$
527
Finance lease obligations (1)
Current liabilities
Severance accrual
Employee compensation plan (3)
Convertible notes (4)
Total contractual obligations (5)
Payments due by period 2012 (Recast)
Total
Within 1 year(2)
2 - 3 years
4- 5 years
After 5 years
$
$
40,142
$
13,759
$
14,761
$
11,622
$
192,195
192,195
3,434
9,526
41,127
966
4,763
1,631
-
771
4,763
39,496
-
1,144
-
-
-
-
553
-
-
286,424
$
213,314
$
59,791
$
12,766
$
553
(1) Includes lease obligations in the amount of $10.9 million (December 31, 2012 - $39.7 million) with a net present value of $10.2 million (December 31,
2012 - $36.4 million) and equipment and construction advances in the amount of nil (December 31, 2012 - $0.4 million); both discussed further in Note 17.
(2) 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:
- Finance lease
- Convertible note
Future commitments less portion accrued for:
- Restricted share units
- Contribution plan
Total contractual obligations within one year
$
$
2013
182,632
$
2012 (Recast)
207,861
363
1,631
1,050
2,361
188,037
$
1,286
1,631
768
1,768
213,314
(3) Includes a retention plan obligation in the amount of $3.4 million (2012 - $7.8 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 $2.3 million (2012 – $1.7 million) 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.
(4) Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition. Refer to Note 18 for
further details.
(5) 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 19 and deferred tax liabilities.
72
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. 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.
The following table sets forth the Company’s financial assets and
liabilities measured at fair value, grouped into Levels 1 to 3 based
on the degree to which the fair value is observable. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are
described as follows:
Level 1: Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs
that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable
(supported by little or no observable market data).
At December 31, 2013, 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:
Assets and Liabilities:
Short-term investments
Trade receivable from provisional concentrate sales
Share purchase warrants
Conversion feature of convertible notes
Assets and Liabilities:
Short-term investments
Trade receivable from provisional concentrate sales
Derivative financial instruments
Share purchase warrants
Conversion feature of convertible notes
Fair Value at December 31, 2013
Total
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
$
$
$
172,785
31,727
(207)
(1,419)
202,886
Total
196,116
39,116
25
(8,594)
(9,746)
216,917
$
$
$
$
$
$
$
$
$
$
$
172,785
-
-
-
172,785
$
$
$
$
$
-
31,727
(207)
(1,419)
30,101
Fair Value at December 31, 2012
Level 1
Level 2
196,116
-
-
-
-
196,116
$
$
$
$
$
$
-
39,116
25
(8,594)
(9,746)
20,801
$
$
$
$
$
$
$
$
$
$
$
Level 3
-
-
-
-
-
-
-
-
-
-
-
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, 2012.
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, 2013, the unrealized gains
and losses on commodity and foreign currency contracts was $nil
(2012 - $0.4 million).
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
73
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
discussed in Note 20. During the year ended December 31, 2013,
the unrealized gain on share purchase warrants was $8.4 million
(2012 - $15.1 million).
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, 2013, the unrealized gain on the convertible
note was $8.3 million (2012 – $9.1 million). The approximate
current fair value of the notes, excluding the conversion feature at
December 31, 2013 is $34.7 million (2012 – $34.4 million).
Receivables from Provisional Concentrate Sales
The Company’s trade receivables arose from provisional
concentrate sales and are valued using quoted market prices
based on the forward London Metal Exchange (“LME”) for copper,
zinc and lead and the London Bullion Market Association P.M. fix
(“London P.M. fix”) for gold and silver.
9. short term inVestments
December 31, 2013
December 31, 2012
Available for Sale
Fair Value
Cost
Accumulated unrealized
holding losses
Fair Value
Cost
Accumulated unrealized
holding gains
Short term investments
$
172,785
$
172,922
$
(137)
$
196,116
$
195,152
$
964
10. inVentories
Inventories consist of:
December 31,
2013
December 31,
2012 (Recast)
Concentrate inventory
$
32,189
$
26,617
Stockpile ore
Heap leach inventory
Doré and finished inventory
Materials and supplies
42,389
90,456
58,256
61,062
48,243
75,471
61,217
55,115
$
284,352
$
266,663
Production costs, including depreciation and amortization and
royalties for the year ended December 31, 2013 were $693.0
million (2012 - $624.6 million). Production costs represent cost of
inventories sold during the year. During 2013, $13.0 million (2012 -
$nil) net realizable value adjustment was recognized and included
in production costs (Note 21). The Stockpile ore of $42.4 million
(2012 – $48.2 million) and a portion of the heap leach inventory
amounting to $49.3 million (2012 - $41.0 million) are expected to
be recovered or settled after more than twelve months.
11. mineral properties, plant
and eQuipment
Acquisition costs of investment and non-producing properties
together with costs directly related to mine development
expenditures are capitalized. Exploration expenditures on
investment and non-producing properties are charged to expense
in the period they are incurred.
Capitalization of evaluation expenditures commences when
there is a high degree of confidence in the project’s viability and
hence it is potential that future economic benefits will flow to the
Company. Evaluation expenditures, other than that acquired from
the purchase of another mining company, are carried forward as
an asset provided that such costs are expected to be recovered in
full through successful development and exploration of the area
of interest or alternatively, by its sale. Evaluation expenditures
include delineation drilling, metallurgical evaluations, and
geotechnical evaluations amongst others.
74
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. Mineral properties, plant and equipment consist of:
Carrying value
As at January 1, 2013
Additions
Disposals
Depreciation
Depreciation charge captured in inventory
Impairment charges
Transfers
Capitalized borrowing costs
Closure and decommissioning – changes in estimate
(Note 16)
As at December 31, 2013
Cost as at December 31, 2013
Accumulated depreciation and impairments
Carrying value –
December 31, 2013
$
$
$
Mining Properties
Depletable
Non-depletable
Reserves and
Resources
Reserves and
Resources
Exploration
and Evaluation
Plant and
Equipment
Total
$
867,381
$
341,362
$
618,221
$
378,288
$
2,205,252
113,918
-
(67,450)
(5,581)
16
-
-
-
61
-
-
-
(197,044)
(109,921)
(15,387)
(293)
1,658
(5,758)
(5,042)
-
-
846
-
(925)
706,831
$
226,415
$
602,816
1,221,767
$
336,336
$
718,212
48,738
(2,371)
(68,463)
-
(26,065)
4,489
-
-
162,733
(2,371)
(135,913)
(5,581)
(348,417)
-
1,658
(6,683)
$
$
334,616
$
1,870,678
665,710
$
2,942,025
(514,936)
(109,921)
(115,396)
(331,094)
(1,071,347)
706,831
$
226,415
$
602,816
$
334,616
$
1,870,678
Mining Properties
Depletable
Non-depletable
Reserves and
Resources
Reserves and
Resources
Exploration
and Evaluation
Plant and
Equipment
Total
$
280,583
$
24,974
$
590,795
$
293,356
$
1,189,708
91,295
541,399
(222)
(46,335)
(6,583)
-
8,661
1,419
(2,093)
(743)
1,086
318,101
(24)
-
-
-
10,149
117,787
-
-
-
(100,009)
(2,775)
(501)
(5,385)
-
-
-
-
-
-
-
-
-
71,115
78,767
(1,491)
173,645
1,056,054
(1,737)
(58,074)
(104,409)
-
-
(6,583)
(100,009)
-
1,419
(2,093)
(743)
Carrying Value
As at January 1, 2012
Additions
Acquisition of operations
Disposals
Depreciation
Depreciation charge captured in inventory
Impairments charges
Transfers
Capitalized borrowing costs
VAT collected
Closure and decommissioning – changes in estimate
(Note 16)
As at December 31, 2012 (Recast)
$
867,381
$
341,362
$
618,221
$
378,288
$
2,205,252
As at December 31, 2012
Cost
$
1,110,493
$
341,362
$
718,230
$
619,401
$
2,789,486
Accumulated depreciation and impairments
(243,112)
-
(100,009)
(241,113)
(584,234)
Carrying value –
December 31, 2012 (Recast)
$
867,381
$
341,362
$
618,221
$
378,288
$
2,205,252
75
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
December 31, 2013
December 31, 2012 (Recast)
Cost
Accumulated
Depreciation
and
Impairment
Carrying Value
Cost
Accumulated
Depreciation
and
Impairment
Carrying Value
$
147,391
$
(62,878)
$
84,513
$
135,485
$
(51,847)
$
83,638
202,213
193,035
107,002
767,194
321,047
124,859
24,735
(68,220)
133,993
(143,330)
(52,588)
(296,751)
(162,058)
(55,727)
(4,476)
49,705
54,414
470,443
158,989
69,132
20,259
183,907
184,866
93,839
680,047
309,744
117,751
24,255
(51,369)
132,538
(126,028)
(45,030)
(29,453)
(130,217)
(46,306)
(3,975)
58,838
48,809
650,594
179,527
71,445
20,280
$
1,887,476
$
(846,028)
$
1,041,448
$
1,729,894
$
(484,225)
$
1,245,669
$
$
$
8,513
$
462,400
317,117
10,432
30,768
829,230
1,870,678
$
$
8,497
462,400
434,677
15,474
38,535
959,583
2,205,252
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 properties, plant and equipment
Navidad Project, Argentina
During the year ended December 31, 2013 the Company
capitalized $nil of evaluation costs and mineral property, plant
and equipment at the Navidad Project in Argentina (2012 - $11.3
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 recorded.
The Company concluded that, as at December 31, 2013 there was
no further impairment or reversal of impairment to be recorded.
Refer to Note 12 for further details.
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 $40.0 million, of which,
to December 31, 2013, the Company received $23.8 million (2012
- $13.8 million) which has been recognized as other income. For
the year ended December 31, 2013, the Company capitalized nil
in interest related to the advances on capital expenditures (2012
- $1.2 million).
Morococha Mine, Peru
Dolores Mine, Mexico
During the second quarter of 2010, the Company’s wholly owned
subsidiary Compañia Minera Argentum S.A. (“Argentum”), reached
an agreement with Minera Chinalco Perú (“MCP” or “Chinalco”),
a subsidiary of the Aluminum Corporation of China which clearly
defines each party’s long term surface rights in the area of the
Morococha mine. The primary focus of the agreement is on
the lands and concessions around the Morococha mine and
MCP’s Toromocho copper project. MCP requires certain lands
and concessions in order to proceed with the development of
Toromocho, including the surface lands within the planned open
pit mining area of the Toromocho project. While Argentum does
not own this land, much of the Morococha mine infrastructure
and facilities are located on this ground.
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.
During the year ended December 31, 2013 the Company
capitalized $86.6 million of mineral property, plant and equipment
(2012 - $57.1 million) which included pad 3 construction additions
of $27.2 million (2012 - $15.0 million). For the year ended
December 31, 2013, the Company capitalized $1.6 million in
interest related to the capital expenditures (2012 - $1.4 million) at
a capitalization rate of 10% (2012: 10%).
76
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. At June 30, 2013, it was determined that the estimated realizable
value of the Dolores mine was below its carrying value and an
impairment charge of $187.5 million (net of tax of $1.1 million)
was recorded which included $184.7 million of goodwill. Refer to
Note 12 for further details.
June 30 2013, it was determined that the estimated recoverable
value of the non-current assets on a fair value less costs to sell
basis required an impairment recovery of $3.4 million and brought
the impairment charge of approximately $14.9 million as at June
30, 2013, for these properties.
At December 31, 2013, it was determined that the estimated
realizable value of the Dolores mine was below its carrying value
and a further impairment charge of $218.1 million (net of tax of
$118.7 million) was recorded. Refer to Note 12 for further details.
12. ImpaIrment of non-
Current 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. The Company considers use of
its internal discounted cash flow economic models as a proxy
for the calculation of fair value less cost to sell, given a willing
market participant would use such models in establishing a value
for the properties. The Company considered impairment at the
cash generating unit (“CGU”) level, which is considered to be an
individual mine or a development property.
Impairment at June 30, 2013
As at June 30, 2013, the Company determined there were several
indicators of potential impairment of its producing mineral
properties which included the sharp decline in silver and gold
metal prices during the quarter ended June 30, 2013 and as well
as other regulatory changes introduced in Mexico and Argentina.
Based on the Company’s assessment at June 30, 2013 of potential
impairments with respect to its mineral properties, the Company
concluded that impairment charges were required as at June 30,
2013 for the Dolores mine.
The Company used for key assumptions then-current information
on operating and capital costs, a long term silver price of $25 per
ounce, a long term gold price of $1,350 per ounce, a range of
possible outcomes related to a proposed Mexican royalty, and a
risk adjusted project specific discount rate of 6%. Additionally,
and consistent with prior periods, the Company used analysts’
consensus pricing for the first four years of its economic modeling
for impairment purposes and as such, these near metal prices
had deteriorated considerably since year end 2012. At June 30,
2013, the Company determined that the carrying value related
to the Dolores mine of approximately $1,061 million, including
goodwill and net of associated deferred tax liabilities was greater
than its recoverable amount of $872.5 million. Based on the
above assessment at June 30, 2013, the Company recorded an
impairment charge related to the Dolores mine of $187.5 million,
net of tax ($188.6 million before tax) comprised of goodwill of
$184.7 million and non-current assets of $3.9 million.
Furthermore, at June 30, 2013, the Company reclassified certain
exploration assets from assets held for sale to exploration and
evaluation property which required assessment of their carrying
amount based on fair value less costs to sell. These assets were
classified as held for sale in the first quarter of 2013 when the
Company entered into an agreement to potentially dispose of
them and recorded an impairment charge of $18.3 million. At
Impairment at December 31, 2013
Due to the sustained decrease in metal prices that began during
the second quarter of 2013 and carried on through the year,
during the fourth quarter of 2013 the Company lowered the silver
and gold prices used in its long term reserve prices and updated
the metal prices used in the near-term and mid-term periods (up
to 2017) in its life of mine cash flow models, and concluded that
these changes constituted a further indication of impairment
indicator in the fourth quarter.
Based on the Company’s assessment at December 31, 2013 of
potential impairments with respect to its mineral properties,
the Company concluded that further impairment charges were
required for the Dolores mine from those recorded at June 30,
2013.
The Company’s key assumptions included the most current
information on operating and capital costs, a long term silver price
of $22 per ounce, a long term gold price of $1,300 per ounce, the
effects of the Mexican tax reforms that were substantively enacted
in the fourth quarter, and a risk adjusted project specific discount
rate of 6%. The Company used a median of analysts’ consensus
pricing for the first four years of its economic modeling for
impairment purposes, which had further deteriorated since June
30, 2013. At December 31, 2013, the Company determined that
the carrying value related to the Dolores mine of approximately
$723.1 million, net of associated deferred tax liabilities was
greater than its recoverable amount of $505.1 million. Based
on the above assessment at December 31, 2013, the Company
recorded a further charge related to the Dolores mine of $218.1
million, net of tax ($336.8 million before tax) comprised of mineral
property of $194.6 million, exploration and evaluation property of
$116.1 million, and property, plant and equipment assets of $26.1
million.
The total impairment charge for the year ended December 31,
2013 is $420.4 million, net of tax of $119.8 million (before tax -
$540.2 million). The total impairment charge for the year ended
December 31, 2012 associated with the Navidad project was
$100.0 million, net of tax of $nil.
Impairment at December 31, 2012
The 2012 impairment charge of $100.0 million (with nil tax effect)
related to the Navidad project in Argentina. The impairment was
a result of the deterioration in 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. The Company used for key assumptions 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
77
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
recoverable value of the Navidad project on a FVLCTS basis was
below its carrying value, and as a result an impairment charge of
$100.0 million was recorded at December 31, 2012. The Company
concluded that, as at December 31, 2013 there was no further
impairment or reversal of impairment to be recorded.
Key assumptions and sensitivity
The metal prices used to calculate the recoverable amounts at
December 31, 2013 are based on analysts’ consensus prices and
the Company’s long term reserve prices and are summarized in
the following table:
Commodity Prices
2014-2017 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$22.43
$1,338
$2,184
$2,205
$22.00
$1,300
$1,850
$1,950
Metal prices used at June 30, 2013
Commodity Prices
2013-2016 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$26.79
$1,508
$2,238
$2,221
$25.00
$1,350
$1,750
$1,850
Metal prices used at December 31, 2012
Commodity Prices
2013-2016 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/DMT
Lead Price - $/DMT
$30.38
$1,647
$2,289
$2,213
$25.00
$1,350
$1,750
$1,850
The Company assesses impairment at the cash-generating
unit level, which is considered to be individual mine sites or
development properties. The discount rates used to present
value the Company’s life of mine cash flows are derived from the
Company’s weighted average cost of capital which was calculated
as 8% for 2013 (2012 – 8%), with rates applied to the various
mines and projects ranging from 5.5% to 12.5% depending on
the Company’s assessment of country risk, project risk, and other
potential risks specific to each CGU.
The key assumptions in determining the recoverable value of
the Company’s mineral properties are metal prices, operating
and capital costs, foreign exchange rates and discount rates. At
December 31, 2013, 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. Under certain of such scenarios, the carrying value
of the Company’s mineral properties associated with the Alamo
Dorado mine and the Manantial Espejo mine may exceed their
recoverable amount for the purposes of the impairment test.
For the Alamo Dorado mine, either of a decrease in the silver price
of 2%, a decrease in the gold price of 8%, an increase in operating
costs of 2%, or an appreciation of the Mexican peso of 5% would
in isolation, cause the estimated recoverable amount to be equal
to the carrying value of $57.7 million (2012–$56.9 million). At
December 31, 2012, none of these factors, if negatively affected
by 10%, would have caused the carrying value to equal or exceed
the recoverable value.
For the Manantial Espejo mine, either of a decrease in the silver
or gold price of 7%, or an increase in operating costs of 4% would
in isolation, cause the estimated recoverable amount to be equal
to the carrying value of $160.5 million (2012–$146.7 million). At
December 31, 2012, none of these factors, if negatively affected
by 10%, would have caused the carrying value to equal or exceed
the recoverable value.
In the case of the Dolores mine, the Navidad project and certain
non-core exploration properties, which all have had their carrying
values adjusted to fair value less cost to sell through impairment
charges, a modest decrease in any one key assumption would
reduce the recoverable amount below the carrying amount as
there is only a thin margin between the carrying value and the
company’s estimate of a recoverable amount.
Goodwill consists of:
As at December 31, 2011
$
-
Acquisition of Minefinders (Note 6)
As at December 31, 2012
Impairment of La Bolsa property
Impairment of Dolores mine
As at December 31, 2013
13. other assets
Other assets consist of:
198,946
198,946
(7,124)
(184,688)
$
7,134
December 31,
2013
December 31,
2012
Long-term prepaid expense(1)
$
5,648
$
Investments in Associates
Reclamation bonds
Lease receivable
Other assets
1,450
92
788
36
5,239
1,450
602
-
-
$
8,014
$
7,291
(1) Represents a prepaid deposit related to the Gas Line Project at the
Manantial mine.
78
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP.
14. aCCounts payable and
aCCrued liabilities
Accounts payable and accrued liabilities consist of:
16. proVisions
December 31,
2013
December 31,
2012 (Recast)
$
125,609
$
136,149
December 31, 2012 (Recast)
6,348
Accretion expense (Note 23)
Trade accounts payable(1)
$
51,590
$
Royalties payable
Other accounts payable and
trade related accruals
Payroll and related benefits
Severance accruals
Other taxes payable
Advances on concentrate
Other
9,799
28,419
19,463
649
235
7,810
7,644
(1) No interest is charged on the trades payables ranging from 30 to 60 days
from the invoice date. The Company has policies in place to ensure that all
payables are paid within the credit terms.
15. loan payable
December 31,
2013
December 31,
2012
Loan payable (1)
Unrealized gain on foreign exchange
Net loan payable
$
$
23,496
$
(3,401)
20,095
$
-
-
-
(1) On June 25, 2013, one of the Company’s subsidiaries (Minera Triton
Argentina S.A.) received an unsecured bank loan for $100.0 million
Argentine pesos (equivalent to USD$18.6 million) in order to meet its short
term obligations. On November 27, 2013 an additional loan was received
for $30.0 million Argentine pesos (USD$4.7 million) for a total cumulative of
$130.0 Argentine pesos (US$23.3 million). The loan terms are one year from
June 25, 2013 and 90 days from November 27, 2013 with interest rates of
25.3% and 27.25% respectively. At December 31, 2013, the combined fair
values of the loans payable were $20.1 million.
December 31, 2011
Revisions in estimates and
obligations incurred
Minefinders acquisition
(Note 6)
Quiruvilca disposition
Orko disposition
Charged (credited) to earnings:
-new provisions
-exchange loss on provisions
Charged in the year
56,059
17,025
33,730
21,388
966
633
-
Revisions in estimates and
obligations incurred
Charged (credited) to
earnings:
-new provisions
-unused amounts reversed
-exchange gains on provisions
Charged in the year
Accretion expense (Note 23)
Closure and
Decommis-
sioning
Litigation
Total
$
$
$
$
55,773
5,620
61,393
649
-
649
5,564
(18,178)
(272)
3,500
(3,151)
-
9,064
(21,329)
(272)
-
-
(895)
2,999
1,825
103
(854)
-
45,640 $
7,043
(6,789)
-
-
-
(412)
3,030
1,238
(1,166)
(341)
(1,254)
-
1,825
103
(1,749)
2,999
52,683
(6,789)
1,238
(1,166)
(341)
(1,666)
3,030
December 31, 2013
$
41,469 $
5,520
$
46,989
Maturity analysis of total provisions:
Current
Non-Current
December 31,
2013
December 31,
2012
$
$
3,172
43,817
46,989
$
$
7,022
45,661
52,683
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 $107.5 million (2012 - $83.5 million)
which has been discounted using discount rates between 4%
and 11%. Revisions made to the reclamation obligations in 2013
were primarily a result of increased site disturbance 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 2013 earnings as finance
expense was $3.0 million compared to $3.0 million in 2012.
Reclamation expenditures during the current year were $0.4
million compared to $0.9 million in 2012.
79
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Litigation Provision
18. long term debt
The litigation provision consists of amounts accrued for labour
claims at several of the Company’s mine operations. The balance
of $5.5 million at December 31, 2013 (2012 - $7.0 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.
17. FinanCe lease obligations
Lease obligations(1)
Equipment and construction
advances(2)
Maturity analysis of finance leases:
Current
Non-Current
December 31,
2013
December 31,
2012
$
$
10,154
$
36,411
-
439
10,154
$
36,850
December 31,
2013
December 31,
2012
$
$
4,437
$
5,717
10,154
$
12,473
24,377
36,850
(1) Represents equipment lease obligations at several of the Company’s
subsidiaries. A reconciliation of the total future minimum lease payments
at December 31 to their present value is presented in the table below.
(2) Represents a funding arrangement the Company entered into whereby
it receives advances toward some of the project capital expenditures at the
Morococha mine. These advances are subject to an annualized interest
rate of 2.2% and are paid monthly until the completion of the construction,
at which point these advance payments are converted into a leasing
arrangement. The $0.4 million remaining balance as at December 31, 2012
was converted into a leasing arrangement in the first quarter of 2013.
December 31,
2013
December 31,
2012
Less than a year
$
4,800
$
13,320
2 years
3 years
4 years
5 years
Less future finance charges
Present value of minimum
lease payments
8,913
5,848
5,811
5,811
2,585
1,832
1,639
-
10,856
(702)
Convertible notes
Conversion feature on the
convertible notes
Total long-term debt
December 31,
2013
December 31,
2012
$
$
32,883
$
1,419
31,388
9,746
34,302
$
41,134
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 Note holder 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:
a) 96.670 Preferred Shares (the “Conversion Rate”) upon
conversion 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.
On November 4, 2015 each holder of Preferred Shares shall
receive in exchange for each Preferred Share at the discretion of
Pan American:
39,703
a) CAD$1.84 and 0.55 of Pan American common shares;
(3,292)
b) an amount of cash equal to the Market Value of the
Consideration; or
$
10,154
$
36,411
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 principal amount of converted Notes, the
Notes shall be converted, at the option of Pan American into:
80
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. a) the number of Preferred Shares equal to the Conversion Rate;
b) an amount of cash equal to the Cash Equivalent Conversion
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, 2013, $1.6 million was capitalized to mineral
property, plant and equipment (2012 – $1.7 million). 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, 2013
were expected stock price volatility of 47.1%, expected life of 2.0
years, and expected dividend yield of 1.1%.
During the year ended December 31, 2013, the Company recorded
a $8.3 million gain on the revaluation of the embedded derivative
on the convertible notes (2012 – $9.1 million).
19. other long term liabilities
Other long term liabilities consist of:
Deferred credit(1)
Other income tax payable
Severance accruals
December 31,
2013
December 31,
2012
$
$
20,788
$
20,788
2,180
3,077
26,045
$
-
2,468
23,256
(1) As part of the 2009 Aquiline transaction the Company issued a
replacement convertible debenture that allowed the holder to convert
the debenture into either 363,854 Pan American Shares or a Silver Stream
contract related to certain production from the Navidad project. Regarding
the replacement convertible debenture, it was concluded that the deferred
credit presentation was the most appropriate and best representation
of the economics underlying the contract as of the date the Company
assumed the obligation as part of the Aquiline acquisition. Subsequent to
the acquisition, the counterparty to the replacement debenture selected
the silver stream alternative. The final contract for the alternative is being
discussed and pending the final resolution of this discussion, the Company
continues to classify the fair value calculated at the acquisition of this
alternative, as a deferred credit.
20. share Capital and
employee Compensation plans
The Company has a comprehensive stock option and
compensation share 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 trading 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. Subject to certain exceptions, any
modifications to the Compensation Plan require shareholders’
approval.
The Board has developed long term incentive plan (“LTIP”)
guidelines, which provide 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 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. In addition, the restricted share units (“RSUs”)
plan described below is part of the LTIP plan. 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 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 $10.7 million. Replacement awards
were valued using the Black-Scholes option pricing model.
Assumptions used were a dividend yield of 0.3%, expected
volatility of 40.75%, risk free interest rate of 0.93% and expected
life of 0.25 to 3.5 years.
81
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Transactions concerning stock options and share purchase warrants are summarized as follows in CAD:
As at December 31, 2011
Granted(1)
Exercised(2)
Expired
Forfeited
As at December 31, 2012
Granted(1)
Exercised
Expired
Forfeited
As at December 31, 2013
Stock Options
Share Purchase Warrants
Shares
Weighted Average
Exercise Price CAD$
1,243,312
2,016,376
(288,796)
(90,836)
(683,491)
2,196,565
326,047
-
(922,965)
(202,277)
1,397,370
$
$
$
$
$
$
$
$
$
$
$
25.92
19.37
15.79
28.41
16.47
24.07
11.57
-
25.19
21.63
20.76
Warrants
7,814,984
-
(379)
-
-
7,814,605
-
-
-
-
7,814,605
Weighted Average
Exercise Price CAD$
Total
$
$
$
$
$
$
$
$
$
$
$
35.00
9,058,296
-
2,016,376
35.00
(289,175)
-
-
(90,836)
(683,491)
35.00
10,011,170
-
-
-
-
326,047
-
(922,965)
(202,277)
35.00
9,211,975
(1) Includes 20,642 and 12,245 options granted in lieu of director fees during 2013 and 2012, respectively.
(2) The weighted average share price at the date of exercise at December 31, 2012 was CAD$17.87
Long Term Incentive Plan
During the year ended December 31, 2013, the Company awarded
94,659 (2012 – 49,716) shares of common stock with a two year
holding period and granted 326,047 (2012 – 243,426) options
under this plan. The Company used as its assumptions for
calculating the fair value a risk free interest rate of 1.46% (2012 –
1.26%), weighted average volatility of 47% using a historical share
price (2012 – 38%), expected lives ranging from 4 to 5 (2012 – 3
to 4) years, historical expected dividend yield of 3.6%, and an
exercise price of CAD$11.49 (2012 – CAD$18.53) per share. The
weighted average fair value of each option was determined to be
CAD$3.38 (2012 – CAD$4.69).
During the year end December 31, 2013, nil common shares were
issued in connection with the exercise of options under the plan
(December 31, 2012 – 4,424 common shares for proceeds of
$0.08 million).
Replacement Awards
During the year ended December 31, 2013, nil common shares
were issued (2012 – 284,372 shares were issued).
Share Option Plan
The following table summarizes information concerning stock
options outstanding and options exercisable as at December
31, 2013. The underlying option agreements are specified in
Canadian dollar amounts.
Options Outstanding
Range of Exercise
Prices CAD$
Range of Exercise
Prices CAD$
Weighted Average Remaining
Contractual Life (months)
Weighted Average
Exercise Price CAD$
Number Exercisable as
at December 31, 2013
Weighted Average
Exercise Price CAD$
$11.49 - $22.23
$22.24 - $25.19
$36.37 - $40.22
754,029
550,999
92,342
1,397,370
59.95
42.19
47.31
52.11
$
$
$
$
15.29
25.00
40.22
20.76
338,542
550,999
92,342
981,883
$
$
$
$
17.66
25.00
40.22
23.90
For the year ended December 31, 2013, the total employee stock-based compensation expense recognized in the income statement
was $2.2 million (2012 - $4.1 million).
share purChase Warrants
As part of the acquisition of Aquiline Resources Inc. in 2009 the Company issued share purchase warrants. The following table
summarizes information concerning the warrants outstanding and warrants exercisable as at December 31, 2013. The underlying
option agreements are specified in Canadian dollar amounts.
82
pan ameriCan silVer Corp.
PAN AMERICAN SILVER CORP. Warrants Outstanding
Warrants Exercisable
Exercise Price
CAD$
$35.00
Number Outstanding as
at December 31, 2013
Average Remaining
Contractual Life (months)
Average Exercise
Price CAD$
Number Exercisable as at
December 31, 2013
Average Exercise
Price CAD$
7,814,605
11.20
$
35.00
7,814,605
$
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, 2013, there was a derivative gain of $8.4 million
(2012 – gain of $15.1 million). The following table provides detail
on the movement of the share purchase warrant liability between
December 31, 2011 and December 31, 2013:
Restricted Share Units
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.
23,651
(1)
Compensation expense for RSU’s was $0.6 million in 2013 (2012
– $0.08 million) and is presented as a component of general and
administrative expense.
(15,056)
At December 31, 2013, the following RSU’s were outstanding:
Share Purchase Warrant Liability
December 31, 2011
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
December 31, 2012
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
December 31, 2013
$
$
$
8,594
-
(8,387)
207
1.1%
1.1%
43.0%
1.93
18.64
The Company uses the Black Scholes pricing model to determine
the fair value of the Canadian dollar denominated warrants.
Assumptions used are as follows:
December 31,
2013
December 31,
2012
Granted
Paid out
Forfeited
Warrant strike price
Exchange rate
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected warrant life in years
0.94
1.0%
4.0%
46.8%
0.93
Quoted market price at period end
$
12.41
$
The conversion feature on the convertible note, further discussed
in Note 18, 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, 2013, the
total unrealized derivative gain attributable to both the warrants
and convertible notes was $16.7 million (2012 - $24.2 million).
$
35.00
$
35.00
Change in value
1.0051
As at December 31, 2013
196,102
$
RSU
As at December 31, 2011
Granted
Change in value
Number
Outstanding
Fair Value
-
$
91,226
As at December 31, 2012
91,226
$
-
1,704
5
1,709
1,662
(497)
(67)
(519)
2,288
153,393
(42,709)
(5,808)
-
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, 2013, $3.4 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
83
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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, 2013, 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 - $12.41 CAD, exercise price -
$17.91 CAD, expected life in years 0.42 years, annualized volatility
47.62%, expected dividend yield – 4.029% risk free interest rate –
1.0%, 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.
On November 28, 2013, the Company received regulatory
approval for a third normal course issuer bid to purchase up to
7,570,535 of its common shares, during the one year period from
December 5, 2013 to December 4, 2014.
During the year ended December 31, 2013, the Company
purchased and cancelled 415,000 shares (2012 – 2,411,240
shares) for a total consideration of $6.7 million allocated between
retained earnings ($0.4 million) and share capital ($6.3 million)
(2012 - $41.7 million, $4.9 million, and $36.8 million, respectively).
Dividends
On February 20, 2013, the Company declared dividends payable
of $0.125 per common share payable to holders of record of its
common shares as of the close of business day on March 4, 2013.
On May 13, 2013, the Company declared a quarterly dividend of
$0.125 per common share paid to holders of record of its common
shares as of the close of business on May 24, 2013.
On August 14, 2013, the Company declared a quarterly dividend
of $0.125 per common share paid to holders of record of its
common shares as of the close of business on August 26, 2013.
On November 13, 2013, the Company declared a quarterly
dividend of $0.125 per common share paid to holders of record
of its common shares as of the close of business on November 25,
2013.
On February 19, 2014, the Company declared dividends payable
of $0.125 per common share payable to holders of record of its
common shares as of the close of business day on March 3, 2014.
These dividends were declared subsequent to the year end and
have not been recognized as distributions to owners during the
period presented.
21. produCtion Costs
Production costs are comprised of the following:
Consumption of raw materials and
consumables
Employee compensation and
benefits expense (Note 22)
Contractors and outside services
Utilities
Other expenses
Changes in inventories (1)
2013
2012 (Recast)
$
214,638
$
175,503
152,417
89,564
22,781
58,124
(6,911)
149,082
105,210
24,512
49,556
(18,700)
$
530,613
$
485,163
(1) Includes Net realizable value charge $13.0 million (2012-$nil)
22. employee Compensation
and beneFit expenses
Wages, salaries and bonuses
$
175,112
$
181,437
Share-based payments
2,173
3,443
2013
2012
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
177,285
184,880
(14,712)
(18,115)
(5,171)
(4,985)
(8,847)
(8,836)
$
152,417
$
149,082
23. interest and FinanCe
expense
Interest expense
Finance fees
Accretion of Reclamation expense
(Note 16)
2013
2012
$
6,664
$
583
3,030
$
10,277
$
1,542
3,137
2,999
7,678
84
PAN AMERICAN SILVER CORP. 24. earnings per share (basiC and diluted)
Twelve months ended Dec 31
2013
2012 (Recast)
Net (loss) earnings(1)
Basic EPS
Effect of Dilutive Securities:
Stock Options
Convertible notes
Diluted EPS
Earnings
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Earnings
(Numerator)
Shares
(Denominator)
Per-Share
Amount
$
$
(445,851)
(445,851)
151,501
$
(2.94)
$
$
78,201
78,201
140,883
$
0.56
(8,327)
-
1,929
$
(454,178)
153,430
$
(2.96)
$
(9,103)
69,098
107
1,452
142,442
$
0.49
(1) Net (loss) earnings attributable to equity holders of the Company.
Potentially dilutive securities excluded in the diluted earnings
per share calculation for the twelve months ended December 31,
2013 were 9,211,975 out-of-money options and warrants (2012 –
9,447,700).
25. supplemental Cash FloW
inFormation
The following tables summarize the changes in operating working
capital items and significant non-cash items:
Changes in non-cash operating
working capital items:
2013
2012 (Recast)
Trade and other receivables
$
15,903
$
(20,418)
Inventories
Prepaid expenditures
Accounts payable and accrued
liabilities
Provisions
(12,045)
423
(4,295)
(1,659)
(19,642)
1,283
27,462
253
$
(1,673)
$
(11,062)
Significant non-cash items:
2013
2012
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
$
$
$
$
$
$
-
-
-
-
3,331
1,035
$
$
$
$
$
$
1,088,104
10,739
699
1,765
11,538
1,060
Cash and Cash Equivalents
Cash in banks
Short term money markets
Cash and cash equivalents
2013
242,191
7,746
249,937
$
$
2012
323,008
23,200
346,208
$
$
26. segmented inFormation
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 in nature 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. Operating results of operating segments
are reviewed by the Company’s operating decision maker to make
decisions about resources to be allocated to the segments and
assess their performance. 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. Significant information
relating to the Company’s reportable operating segments is
summarized in the table below:
85
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Peru
Huaron
Morococha
Quiruvilca
Dolores
Twelve Months ended December 31, 2013
Mexico
Alamo
Dorado
Argentina
La Colorada
Manantial
Espejo
Navidad
Bolivia
San
Vicente
Other
Total
92,887
$
82,260 $
- $
164,016 $
160,129 $ 101,458
$ 149,718 $
- $ 74,036 $
- $
824,504
$
$
$
$
$
$
Revenue from external
customers
Depreciation and
amortization
Exploration and project
development
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
$
$
$
$
$
$
$ (11,176)
(936)
-
487
(722)
4,963
-
48
-
-
8,015
(4,770)
3,245
$
13,687
$ 129,134
Total liabilities
$
41,104
$ (18,976) $
- $
(37,114) $
(18,769) $
(7,395)
$ (32,333) $
(170) $ (9,156) $
(824) $
(135,913)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1,722) $
- $
(1,278) $
(1,296) $
(225)
- $
55 $
- $
- $
- $
14 $
- $
370 $
-
142
(1,004) $
- $
(1,071) $
(202) $
(227)
1,477 $
- $
(561) $
- $
- $
- $
13 $
(216) $
8,011
- $
- $
-
(150) $
(565) $
634
- $
- $
(561) $
(852) $
(85)
- $
- $ (525,332) $
- $
-
(7,987) $
- $ (540,067) $
71,164 $
28,434
645 $
- $
46,029 $
(27,223) $ (16,969)
(7,342) $
- $ (494,038) $
43,941 $
11,465
17,109 $
181,798 $
- $
- $
86,641 $
973,078 $
7,621 $
112,861 $
13,574
99,523
$
$
$
$
$
$
$
$
$
$
$
$
(608) $
(2,515) $
- $
(6,895) $
(15,475)
- $
164 $
- $
- $
- $
- $
- $
906 $
-
2,138
(5,194) $
(47) $
(281) $
(1,529) $
(10,277)
(194) $
- $
1 $
- $
17 $
(4) $
14,068
- $
16,715 $
16,715
4,559 $
(1,676) $
1,176 $
(18,102) $
(14,637)
- $
- $
- $
- $
- $
(3,053) $
(4,551)
- $
(14,896) $
(540,228)
(1,379) $
(5,855) $ 18,097 $
489 $
(429,089)
(1,068) $
(67) $ (5,452) $
(7,882) $
(16,757)
(2,447) $
(5,922) $ 12,645 $
(7,393) $
(445,846)
12,002 $
$
8,165 $
$ 298,544 $ 470,240 $ 97,001 $
246 $
356 $
405,277 $
159,401
2,767,456
43,828 $
- $
260,120 $
10,689 $
25,870
$ 111,160 $
1,471 $ 30,259 $
54,166 $
578,667
Peru
Huaron
Morococha Quiruvilca
Dolores
Twelve Months ended December 31, 2012 (Recast)
Argentina
Mexico
Alamo
Dorado
La Colorada
Manantial
Espejo
Navidad
Bolivia
San
Vicente
Other
Total
$ 100,787 $
78,609
$ 13,954 $
139,406 $
201,195 $ 126,360 $ 171,943 $
- $
96,340 $
- $
928,594
$
$
$
$
$
$
$
$
$
$
$
$
$
(8,686) $ (11,117)
(813) $
(2,335)
- $
494 $
-
55
(739) $
(675)
28 $
243
- $
(177) $
- $
- $
-
49
-
-
$
$
$
$
$
$
$
$
$
$
(340) $
(23,058) $
(16,337) $
(4,761) $ (27,785) $
(296) $ (11,299) $
(730) $ (104,409)
- $
(2,420) $
(1,806) $
(1,129) $
(217) $
(10,482) $
- $ (17,544) $
(36,746)
- $
136 $
- $
659 $
- $
21 $
- $
17 $
- $
115 $
- $
- $
- $ (16,162) $
1,079 $
- $
(16,162)
2,576
(313) $
(112) $
(192) $
(238) $
(1,466) $
(46) $
(298) $
(3,599) $
(7,678)
- $
- $
(10) $
13 $
(51) $
289 $
- $
- $
- $
- $
- $
- $
- $
9,140 $
9,652
- $
24,159 $
24,159
(42) $
(2,165) $
(464) $
(1,433) $
(5,108) $
3,049 $
632 $
11,236 $
5,577
$
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
421 $
421
- $ (100,009) $
- $
- $ (100,009)
18,468 $
(4,119)
$ (1,433) $
23,597 $
121,812 $
71,999 $
19,100 $ (109,216) $
27,621 $
6,088 $
173,917
(6,925) $
(3,124)
$
318 $
(8,402) $
(39,797) $ (14,220) $ (13,312) $
1,439 $
(8,492) $
(3,047) $
(95,562)
11,543 $
(7,243)
$ (1,115) $
15,195 $
82,015 $
57,779 $
5,788 $ (107,777) $
19,129 $
3,041 $
78,355
$
22,936 $
$ 157,476 $
27,194
210,319
$
$
$
353 $
59,038 $
- $ 1,365,463 $
10,936 $
21,700 $
15,858 $
179,883 $ 123,965 $ 301,472 $
11,292 $
174,146
469,897 $ 105,298 $ 480,852 $ 3,394,625
1,786 $
3,053 $
- $
329,032 $
9,037 $
20,842 $
83,794 $
1,582 $
34,309 $
76,850 $
677,054
Revenue from
external customers
Depreciation and
amortization
Exploration and
project development
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
$
49,337 $
72,271
86
PAN AMERICAN SILVER CORP. Twelve Months ended Dec 31,
Product Revenue
2013
2012
Refined silver and gold
$
500,928
$
554,813
Zinc concentrate
Lead concentrate
Copper concentrate
68,094
162,601
92,881
72,502
120,178
181,101
Total
$
824,504
$
928,594
The Company has 14 customers that account for 100% of the
concentrate and silver and gold sales revenue. The Company
has 4 customers that accounted for 33%, 22%, 13% and 10% of
total sales in 2013, and 4 customers that accounted for 27%,
27%, 13% and 10% of total sales in 2012. 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.
27.other inCome and (expenses)
As of April 1, 2013, the applicable income tax rate in Canada was
increased from 25.00% to 25.75%. The change in tax rate has no
income tax impact because the deductible temporary differences
in Canada are not recognized.
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, 2013 and the comparable
period of 2012 were the non-taxable portion of unrealized
gains on the Company’s derivatives, foreign income tax rate
differentials, additional mining taxes paid, and withholding
taxes paid on payments from foreign subsidiaries. In addition
to the non-cash impairment charge it took on its Dolores assets,
the Company recorded the deferred tax impact of the Mexican
corporate tax rate increase and new special mining duty which
were substantively enacted in 2013. The Company expects that
these and other factors will continue to cause volatility in effective
tax rates in the future.
Royalties income
$
355
$
2013
2012
Income – Quiruvilca property (1)
Initiation fee on Shalipayco
property(2)
Chinalco grants (Note 11)
Other
Total
-
-
10,000
(2,068)
323
1,572
2,500
-
975
$
8,287
$
5,370
(1) Represents income received on the Quiruvilca sales agreement.
(2) Represents an initiation fee paid by a third party to commence
exploration activities on the Shalipayco property.
28. inCome taxes
2013
2012
(Recast)
$
54,365
$
93,857
1,326
55,691
7,193
101,050
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 recovery recognized in the
current year
Adjustments recognized in the current
year with respect to prior years
Adjustments to deferred tax attributable
to changes in tax rates and laws
Reduction in deferred tax liabilities due
to tax impact of impairment of mineral
property, plant, and equipment (Note
11,12)
Reduction in deferred tax liabilities due
to tax impact of net realizable value
charge to inventory (Note 21)
(Loss) income before taxes
Statutory tax rate
Income tax (recovery) expense
based on above rates
(Increase) decrease due to:
Non-deductible expenses
Change in net deferred tax
assets not recognized
Non-taxable unrealized
(gain) on derivative financial
instruments – warrants and
convertible notes
Foreign tax rate differences
Effect of other taxes paid
(mining and withholding)
Change in net deferred tax
assets not recognized for
exploration expenses
Non-deductible foreign
exchange (gain) loss
Impairment charges
Impact of Mexican tax reform
2013
2012 (Recast)
(429,089)
25.75%
173,917
25.00%
(110,490)
43,479
5,198
3,598
5,170
5,145
(4,304)
(22,164)
(6,040)
5,148
14,451
9,418
2,042
2,111
242
41,166
86,825
193
16,757
(3.91%)
(2,549)
35,003
-
(1,323)
95,562
54.95%
(865)
(965)
Other
(523)
(4,523)
Effective tax rate
*The 2012 amounts have been recast to reflect the final Purchase Price
Adjustment.
86,825
(119,800)
(4,571)
(38,934)
-
-
-
(5,488)
Provision for income taxes
$
16,757
$
95,562
87
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Deferred tax assets and liabilities
The following is the analysis of the deferred tax assets (liabilities)
presented in the consolidated financial statements:
Included in the amounts above are the following deferred tax
assets (liabilities) resulting from the acquisition of Minefinders:
December 31,
2013
December 31,
2012 (Recast)
Deferred tax assets (liabilities) arising from:
Closure and decommissioning costs
$
623
March 30, 2012
Net deferred assets (liabilities)
beginning of year
Deferred tax liability resulting
from Minefinders acquisition
(Note 6)
Recognized in net (loss) earnings
in year
Deferred tax assets derecognized
for investment sold
Other
Net deferred assets (liabilities)
end of year
$
(324,813)
$
(50,749)
-
(268,076)
38,934
5,488
-
97
(11,384)
(92)
$
(285,782)
$
(324,813)
Deferred tax assets
165
1,358
Deferred tax liabilities
(285,947)
(326,171)
Net deferred tax liability
$
(285,782)
$
(324,813)
Components of deferred tax assets and liabilities
The deferred tax assets (liabilities) are comprised of the various
temporary differences as detailed below:
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
(9,396)
1,556
(260,767)
(114)
22
Net deferred tax asset (liability)
$
(268,076)
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)
$
117,100
$
127,185
December 31,
2013
December 31,
2012 (Recast)
Net tax loss (capital in nature)
10,531
22,682
1,777
8,684
21,948
25,495
1,078
262
10,531
23,500
5,833
12,631
22,842
22,822
998
654
$
209,557
$
226,996
December 31,
2013
December 31,
2012 (Recast)
Resource pools
Financing fees
Deferred tax assets (liabilities) arising
from:
Closure and decommissioning costs
$
6,419
$
Tax losses
13,965
7,004
110
Property plant and equipment
Closure and decommissioning costs
Exploration expenses
Vacation accruals
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
(16,361)
(2,507)
Other temporary differences
494
5,405
10,319
408
8,636
8,612
(294,347)
(334,631)
(10,276)
(1,609)
-
209
(11,351)
(1,480)
(834)
1,220
Net deferred tax asset (liability)
$
(285,782)
$
(324,813)
88
PAN AMERICAN SILVER CORP. Included in the above amount are the losses, which if not utilized will expire as follows:
Canada
US
Spain
Peru
Mexico
Barbados
Argentina
Total
2014
2015
2016 – and after
344
20,572
75,091
-
-
-
-
13,542
2,565
2,642
33
1,013
-
-
1,162
Total tax losses
$
96,007
$
13,542
$
2,565
$
3,688
$
1,162
$
1
13
38
52
$
-
-
84
84
2,987
20,618
93,495
$
117,100
Taxable temporary differences associated with investment in
subsidiaries
As at December 31, 2013, taxable temporary differences of $118.8
million (2012 – $126.8 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.
29. Commitments and
ContingenCies
a. General
The Company is subject to various investigations, claims and legal
and tax proceedings covering matters that arise in the ordinary
course of business activities. Each of these matters is subject
to various uncertainties and it is possible that some of these
matters may be resolved unfavorably to the Company. Certain
conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company. In the opinion
of management none of these matters are expected to have a
material effect on the results of operations or financial conditions
of the Company.
b. Purchase Commitments
The Company had no purchase commitments other than those
commitments described in Note 8.
c. Credit Facility
The Company cancelled the $150.0 million credit facility effective
December 31, 2012.
d. Environmental Matters
The Company’s mining and exploration activities are subject to
various laws and regulations governing the protection of the
environment. These laws and regulations are continually changing
and are generally becoming more restrictive. The Company
conducts its operations so as to protect the public health and
environment and believes its operations are in compliance
with applicable laws and regulations in all material respects.
The Company has made, and expects to make in the future,
expenditures to comply with such laws and regulations, but
cannot predict the full amount of such future expenditures.
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, 2013 and December
31, 2012 $41.5 million and $45.6 million, respectively, were
accrued for reclamation costs relating to mineral properties. See
also Note 16.
e. Income Taxes
The Company operates in numerous countries around the world
and accordingly it is subject to, and pays annual income taxes
under the various income tax regimes in the countries in which it
operates. Some of these tax regimes are defined by contractual
agreements with the local government, and others are defined
by the general corporate income tax laws of the country. The
Company has historically filed, and continues to file, all required
income tax returns and to pay the taxes reasonably determined
to be due. The tax rules and regulations in many countries are
highly complex and subject to interpretation. From time to time
the Company is subject to a review of its historic income tax filings
and in connection with such reviews, disputes can arise with the
taxing authorities over the interpretation or application of certain
rules to the Company’s business conducted within the country
involved.
In December 2013, the Mexican President passed a bill that
increases the effective tax rate applicable to the Company’s
Mexican operations. The law is effective January 1, 2014 and
increases the future corporate income tax rate to 30%, creates
a 10% withholding tax on dividends paid to non-resident
shareholders (subject to any reduction by an Income Tax Treaty)
and creates a new Extraordinary Mining Duty equal to 0.5% of
gross revenues from the sale of gold, silver, and platinum. In
addition, the law requires taxpayers with mining concessions to
pay a new 7.5% Special Mining Duty. The Extraordinary Mining
Duty and Special Mining Duty will be tax deductible for income tax
purposes. The Special Mining Duty will generally be applicable to
earnings before income tax, depreciation, depletion, amortization,
and interest. In calculating the Special Mining Duty there will be
no deductions related to development type costs but exploration
and prospecting costs are deductible when incurred.
As a result of the law becoming enacted in the fourth quarter of
2013, the Company recognized a non-cash charge of $86.8 million
related to the deferred tax impacts of the above tax changes.
f. Finance Leases
The present value of future minimum lease payments classified as
finance leases at December 31, 2013 is $10.2 million (2012 $36.4
million) and the schedule of timing of payments for this obligation
is found in Note 17.
g. Law changes in Argentina
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.
89
Notes to the Consolidated Financial Statements
As at December 31, 2013 and 2012
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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.
In September 2013, the provincial government of Santa Cruz,
Argentina passed amendments to its tax code that introduced a
new mining property tax with a rate of 1% to be charged annually
on published “measured” reserves, which has the potential to
affect the Manantial Espejo mine as well as other companies
operating in the province. The new law came into effect on
July 5, 2013. The Company has in place certain contracts that
could potentially affect or exempt the Company from having
this new tax applicable and as such is evaluating its options with
its advisors. The Company and other mining companies in the
province are also evaluating options that include challenging the
legality and constitutionality of the tax.
On September 23, 2013, Argentina’s federal Income Tax Statute
was amended to include a 10% income tax withholding on
dividend distributions by Argentine corporations and branch profit
distributions by foreign corporations.
h. Labour law change in Mexico
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 did not accrue
any amounts for the year ended December 31, 2013. During
2014, the Company will continue to monitor developments in
Mexico and to assess the potential impact of these amendments.
i. Political changes in Bolivia
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.
j. Other Legal Matters
The Company is subject to various claims and legal proceedings
covering a wide range of matters that arise in the ordinary course
of business activities, many of them relating to ex-employees.
Each of these matters is subject to various uncertainties and it is
possible that some of these matters may be resolved unfavorably
to the Company. The Company establishes provisions for matters
that are probable and can be reasonably estimated, included
within current liabilities, and amounts are not considered
material.
In assessing loss contingencies related to legal proceedings
that are pending against the Company or 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.
k. Title Risk
Although the Company has taken steps to verify title to properties
in which it has an interest, these procedures do not guarantee the
Company’s title. Property title may be subject to, among other
things, unregistered prior agreements or transfers and may be
affected by undetected defects.
l. Royalty Agreements and Participation Agreements
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
90
PAN AMERICAN SILVER CORP. 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.
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 19.
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 $60.0 million; (ii) 2.0% for
companies with sales between $60.0 million and $120.0 million;
and (iii) 3.0% for companies with sales greater than $120.0 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 1.0 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, 2013, the royalties
to COMIBOL amounted to approximately $17.5 million (2012 -
$20.2 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.
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, 2013, the
royalties to Royal Gold amounted to approximately $4.5 million
(2012 – $3.4 million).
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.
30.related party transaCtions
During the year ended December 31, 2013, a company indirectly
owned by a trust of which a director of the Company is a
beneficiary, was paid approximately $0.4 million (2012 - $0.3
million) for consulting services. Similarly, at December 31, 2013
an accrual was recorded for consulting services for a nominal
amount (2012 - $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
2013
2012
$
$
8,274
1,890
10,164
$
$
7,288
1,857
9,145
91
92
PAN AMERICAN SILVER CORP.