A Reputation
for Excellence
ANNUAL REPORT 2014
2014 Highlights
Our vision is to be the world’s pre-eminent silver producer,
with a reputation for excellence in discovery, engineering,
innovation and sustainable development.
In 2014, Pan American produced a record 26.1 million ounces
of silver and 161,500 ounces of gold. In addition, we increased
our base metals production and established a new consolidated
copper production record of nearly 9,000 tonnes.
Consolidated cash costs of $11.46 per ounce of silver, net of
by-product credits, were well within the Company’s annual
forecast, while consolidated all-in sustaining cost per silver
ounce sold, net of by-product credits, (“AISCSOS”) of $17.88
were both within our annual forecast and 20% lower than the
$22.26 posted in 2012.
Despite lower metal prices, we maintain a strong balance
sheet, which allowed us to continue paying an industry-leading
quarterly cash dividend of $0.125 per common share during
2014, or $0.50 per common share on an annualized basis.
Our annual dividend represented a yield of 5.4% based on
our share’s December 31, 2014 closing price on NASDAQ of
US$9.20 per share.
In 2014, Pan American spent $16.62 million on mine-site
exploration and completed over 152.5 kilometres of diamond
drilling. The Company discovered approximately 29.4 million
ounces, depleted 32.9 million ounces of contained silver
through production, and re-categorized 20.1 million ounces
of silver, primarily due to lower metal prices. At December 31,
2014, Pan American’s mineral reserves are estimated to contain
299.9 million ounces of silver and 2.3 million ounces of gold. (1)
2014 also marked the commencement of work on the
expansion of our La Colorada mine, which has become our
largest and lowest cost silver producer. Last year, we made
significant progress and the project is advancing on budget
and on time.
In 2015, Pan American expects to produce between 25.50
and 26.50 million ounces of silver, as well as between 165,000
and 175,000 ounces of gold at consolidated cash costs of
between $10.80 and $11.80 per ounce of silver, net of by-
product credits. AISCSOS for 2015 are expected to decline to
between $15.50 and $16.50.
26.1
million silver
ounces produced
161.5
thousand gold
ounces produced
Reduced our aiscsos by
20%
since 2012, down to
$17.88 per ounce
Environmental stewardship is everyone’s
responsibility. In an effort to reduce waste and
carbon footprint, we encourage readers to
download a digital copy of this report or
to read its web-based version at:
www.panamericansilver.com/annualreport2014
PRODUCTION
Silver (million ounces)
Gold ounces (thousand ounces)
Zinc tonnes (thousand tonnes)
Lead tonnes (thousand tonnes)
Copper tonnes (thousand tonnes)
Cash costs per silver ounce, net of by-product credits (2)
AISCSOS(3) net of by-product credits (US$ per ounce)
Average silver price (US$ per ounce, London fix)
FINANCIAL (all amounts in million US$)
Revenue
Net loss
Adjusted loss (4)
Mine operating earnings
Net cash generated from operating activities
Dividends paid
Shares repurchased
Cash and short-term investments at December 31
Working Capital (5) at December 31
STAKEHOLDERS
Common shares outstanding at December 31 (million)
Employees and contractors at December 31
(1) For Pan American’s complete Mineral Reserve and Resources tables,
please refer to page 50 of this annual report.
(2) Cash costs per silver ounce, net of by-product credits and Total costs
per silver ounce are non-GAAP measures. Refer to the cash costs and
total production costs per ounce of payable silver reconciliation on page
37 of the Company’s MD&A dated December 31, 2014 for a breakdown of
these calculations.
(3) 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. Please refer to
the AISCSOS reconciliation on page 34 of the Company’s MD&A dated
December 31, 2014 for an explanation of the measure and a breakdown
of the calculation.
2014
26.1
161.5
43.5
15.0
9.0
$11.46
$17.88
$19.08
$751.9
$(544.8)
$(20.8)
$8.1
$124.2
$75.8
-
$330.4
$522.7
151.6
6,983
2013
26.0
149.8
42.1
13.5
5.5
$10.96
$17.91
$23.79
$824.5
$(445.8)
$(42.8)
$131.5
$119.6
$75.8
$6.7
$422.7
$689.0
151.5
7,339
(4) Adjusted loss is a Non-GAAP measure. Adjusted (loss) is calculated
as net (loss) 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, net realizable value adjustment to long term heap inventory,
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. Refer to page 40 of the Company’s MD&A dated December 31,
2014 for an explanation of the measure and a breakdown of
the calculation.
(5) Working capital is a non-GAAP measure calculated as current assets
less current liabilities. The Company and certain investors use this
information to evaluate whether the Company is able to meet its current
obligations using its current assets.
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2014 annual report Chairman’s Message
In 2014, Pan American completed its twentieth year as
a silver company. Through hard work, strong financial
management and a wonderful team of mine builders,
mine operators and support personnel, Pan American
has grown to become the world’s second largest primary
silver mining company.
In 2014, Pan American completed its twentieth year as a
silver mining company. Through hard work, strong financial
management and a wonderful team of geologists, mine
builders, mine operators and support personnel, Pan American
has grown to become the world’s second largest primary silver
mining company. In 2014, we produced a company record of
26.1 million ounces of silver as well as 161,500 ounces of gold
and significant amounts of lead, zinc and copper – and we are
on target for producing even more in 2015. This is, to say the
least, gratifying.
What has not been gratifying has been the slide in silver prices
from a high of $48.70 per silver ounce in April 2011 to the low
of $15.28 per ounce on November 6, 2014. In 2014 alone, silver
prices slid from $19.94 per ounce to end the year at $15.97 per
ounce; gold prices had a similar slide from $1,225 per ounce
to $1,206 per ounce at year-end. Our shareholders know the
profound effect on our revenues and cash flows from this deep
drop in the price of our primary products. But with proven and
probable silver reserves of nearly 300 million ounces and silver
resources totaling more than one billion ounces, Pan American
continues to maintain its position as one of the world’s leading
silver-leveraged equity investments. This is why the company
was created in 1994 – we have strongly delivered on this
mission and will continue to do so in future.
Whereto the silver price in 2015 and beyond? Why am I
optimistic we will see higher silver prices as the year unfolds?
Simply put: silver is THE indispensable metal with more uses
in our modern world than any other metal, and many of these
uses should continue to grow strongly during 2015. This,
coupled with low silver supply growth during 2015, should
result in higher prices. More specifically, silver demand is
growing robustly in the solar electricity generation business, the
biomedical industry and the digital electronics industry among
the industrial demand sectors, and as an investment metal. With
all of today’s astonishingly complex changes in currency rates,
energy prices, and other macroeconomic forces coupled with
geopolitical issues, climate actions and demographics, I believe
there will arise in 2015 a number of unintended consequences
that will result in rising precious metals prices, benefiting silver
and gold. Silver has underperformed relative to gold in recent
months and I believe this will reverse in the near future.
Along with our portfolio of seven operating silver mines and
development assets such as the giant Navidad silver project,
Pan American’s strongest assets are its exceptional balance
sheet and its people. Our cash reserves and balance sheet
strength, which we built up when silver prices were high, have
allowed us to maintain our industry-leading dividend even as
our operating margins have narrowed at today’s silver price.
Our dividend is a long term objective - a return of wealth to
our owners, and while we remain keenly aware of the effects of
lower silver prices on our current cash flows, our cash balance
remains robust and we have plenty of scope to continue to
pay a dividend while remaining in a strong financial condition.
Silver prices go up and down daily and I remain optimistic that
the silver price will recover during 2015, with an immediate
salubrious effect on our income statement and balance sheet.
I am always impressed at the talent Pan American has
attracted to its management ranks and its operations. We have
a deep talent pool in all aspects of our business and I know
2
pan american silver corp. our shareholders share my appreciation for all the hard work
everyone in the company puts in to advance our business. The
results speak for themselves: our reputation for excellence in
mine expansion through reserve replacement, construction and
operation is unparalleled in the silver mining business.
On the sustainability front, our shareholders should also feel
good at the reputation and results we are achieving. In 2014,
we enjoyed another industry-leading result in employee safety.
Our Mexican mines especially stood out in this regard – our
Dolores Mine achieved over six million hours without a lost time
accident; our Alamo Dorado Mine achieved more than five and
a half million hours without a lost time accident and our La
Colorada Mine achieved over two and a half million hours. In
fact we had zero lost time accidents in Mexico in 2014 – a really
wonderful result that came from steadfast attention to safety
throughout our labour structure.
We also had a good year in environmental compliance and in
community engagement. The hallmark of a great company
is one that rewards its shareholders financially AND because
it looks after its employees, contractors, environment,
communities and countries where it works. We cannot control
the silver price that so profoundly affects our financial results;
but we can control how we mine and how we interact with our
employees, communities and environment. We have a stellar
reputation because we do these things well. These positive
results do not happen in isolation and I want to thank each
of our employees and stakeholders for their part in achieving
excellence. I know I speak on behalf of each one of our
shareholders in expressing this appreciation.
Respectfully submitted,
Ross Beaty, Chairman
For Pan American’s complete Mineral Reserve and Resources
tables, please refer to page 50 of this annual report.
Starting the morning shift at Huaron
2014 annual report
3
CEO’s Message
Pan American celebrated its 20th year anniversary in
the silver business in 2014. A true milestone. It has
taken us two decades to build Pan American into the
world’s second-largest primary silver producer, with
seven operations throughout Latin America and one
tremendous development stage project.
It has been a very challenging couple of years for silver miners
and for Pan American, as the price of our primary product,
silver, has declined by almost 50% since early 2013. However,
we entered this period in excellent financial condition with
more than $0.5 billion in cash and almost no debt, as a direct
consequence of sound fiscal management and a disciplined
approach to project investment. In addition, using the same
disciplined approach, we have systematically and relentlessly
retuned and restructured our operations to reduce costs and
improve productivity in order to try to recover some of the
margin we have lost in the face of declining prices. And this
work continues today.
As a direct result of the efforts of our operating personnel at
each and every one of our mines, we were again able to produce
a new Pan American record of 26.1 million ounces of silver
in 2014, as well as a new annual record for gold production
at 161,500 ounces. At the same time, we reduced our “all in
sustaining costs per silver ounce sold” (AISCSOS) to $17.88
per ounce, down approximately 20% from where we were
in 2012 at $22.26 per ounce. We were able to achieve these
excellent production results in spite of the expected decline in
silver production at Alamo Dorado, which had been our largest
and lowest cost silver mine until last year and is now close to
exhausting its mineral reserves after almost eight years of
highly successful and lucrative operation. Production increases
at La Colorada, Huaron and Manantial Espejo were more than
sufficient to offset the decline at Alamo Dorado and our focus
on these operations into 2015 will put us on a path to achieve
yet another record year of silver production.
Perhaps more importantly, our operating achievements
translated into increased net operating cash flow, even as silver
and gold prices declined. In 2014 we generated $124.2 million
in net operating cash flow, an improvement from the $119.6
million generated in 2013. This was sufficient to fund all of our
sustaining capital and pay a large portion of our dividend, which
we maintained intact as a sign of our commitment to returning
value to our shareholders, even during difficult times. We ended
2014 with arguably one of the strongest balance sheets in our
industry, with over $330 million in cash and equivalents, net
working capital of over $0.5 billion and about $60 million
in debt.
While clearly focused on the present and doing our utmost to
realize every dollar we can from our operations, we have not and
will not sacrifice our future. With a reduced exploration budget
in hand and a clear mandate to focus on near-mine targets, we
completed another successful exploration campaign in 2014.
We discovered 29.4 million ounces of contained silver over the
past year, which nearly replaced the silver ounces we mined
and processed in 2014. While we were busy finding more silver
with our exploration drilling programs, 20.1 million ounces of
our proven and probable silver reserves were re-categorized,
primarily as a consequence of lowering our long term price
assumptions, which left our 2014 year end reserves lower than
they were a year ago. However, at close to 300 million ounces
of silver in proven and probable reserves and a further 731.5
million ounces of silver in measured and indicated resources,
our future as a long term leading silver producer is still
very secure.
Also looking to the future, this past year the Company
commenced a major expansion project at our La Colorada
mine in Mexico. The expansion, when completed in late 2017,
is expected to substantially increase the mine’s annual silver
production, increasing it to almost 8.0 million ounces per
annum from the current 5.0 million ounces, while at the same
time significantly reducing the cash production costs per
silver ounce. Now well underway, this relatively low risk and
modest capital cost project is a clear example of the disciplined
investment approach that Pan American utilizes. La Colorada
is one of our highest grade operations with our largest proven
4
pan american silver corp. and probable silver reserve, and the expansion project should
generate positive after tax returns at silver prices far below the
current price. In other words, we are willing and able to invest in
our future, but we are doing so with an extremely well-defined,
high-quality project.
Pan American celebrated its 20th year anniversary in the silver
business in 2014. A true milestone. It has taken us two decades
to build Pan American into the world’s second-largest primary
silver producer, with seven operations throughout Latin America
and one tremendous development stage project. I have had
the privilege and honor over the past 12 years of working with
a group of operators, mine builders, geoscientists, CSR and
financial specialists and other support staff who are second to
none in our sector. Pan American’s people are our foundation,
our strength and our competitive advantage.
I would be remiss if I did not personally acknowledge their
contributions and stress that our achievements and successes
over this past year are due to our 7,000 employees and
contractors, to their families and to the members of the
communities where we operate. We have shared a year of hard
work and sacrifice and I know that this has made Pan American
a stronger and better company. From safety, to environmental
stewardship, from operations and exploration to financial
management, your commitment to excellence in all that we
do will continue to separate Pan American as the pre-eminent
silver mining company. On behalf of the board of directors, I
thank you for your outstanding dedication and hard work.
I would like also to specifically congratulate Michael Steinmann
for his recent promotion to President of our Company. I have
known Michael since he joined Pan American some 11 years
ago and I am extremely confident that his knowledge and
professional expertise will allow him to succeed in his new
position and strengthen Pan American even further.
In closing I want to share with you my optimism for the future
of Pan American and for silver. Pan American will not only
endure this period of lower silver prices, but we will continue
to take the necessary steps to ensure a stronger Pan American
and a prosperous future. Furthermore, for the reasons
described so eloquently by our Chairman in his letter, I am as
confident as he that the silver price will once again rise and rise
strongly in the not too distant future and that our shareholders,
our employees and all of our stakeholders who have patiently
worked with and supported us will be handsomely rewarded.
Of this I am convinced.
Geoff Burns, Chief Executive Officer
Sincerely,
For Pan American’s complete Mineral Reserve and Resources
tables, please refer to page 50 of this annual report.
Exploration team at Morococha
5
2014 annual report CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS INFORMATION
TO, OR DIFFICULTY IN MAINTAINING, THE COMPANY’S TITLE TO PROPERTIES AND
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
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.
CAUTIONARY NOTE TO US INVESTORS CONCERNING ESTIMATES OF RESERVES AND
RESOURCES
OF THE COMPANY TO ACHIEVE ANY PLANNED EXPANSIONS AND DEVELOPMENT,
THIS ANNUAL REPORT HAS BEEN PREPARED IN ACCORDANCE WITH THE
INCLUDING BUT NOT LIMITED TO, POTENTIAL OPPORTUNITIES AT THE DOLORES MINE,
REQUIREMENTS OF CANADIAN PROVINCIAL SECURITIES LAWS, WHICH DIFFER FROM
AND THE EXPANSION OF THE LA COLORADA MINE, AND THE TIMING FOR THE SAME; THE
THE REQUIREMENTS OF U.S. SECURITIES LAWS. UNLESS OTHERWISE INDICATED,
ESTIMATES OF EXPECTED OR ANTICIPATED ECONOMIC RETURNS FROM THE COMPANY’S
ALL MINERAL RESERVE AND RESOURCE ESTIMATES INCLUDED IN THIS MD&A HAVE
MINING PROJECTS; FORECAST CAPITAL AND NON-OPERATING SPENDING; AND THE
BEEN PREPARED IN ACCORDANCE WITH CANADIAN NATIONAL INSTRUMENT 43-101
COMPANY’S PLANS AND EXPECTATIONS FOR ITS PROPERTIES AND OPERATIONS.
– STANDARDS OF DISCLOSURE FOR MINERAL PROJECTS (‘‘NI 43-101’’) AND THE
THESE STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO
CANADIAN INSTITUTE OF MINING, METALLURGY AND PETROLEUM CLASSIFICATION
FUTURE EVENTS AND ARE NECESSARILY BASED UPON A NUMBER OF ASSUMPTIONS
SYSTEM. NI 43-101 IS A RULE DEVELOPED BY THE CANADIAN SECURITIES
THAT, WHILE CONSIDERED REASONABLE BY THE COMPANY, ARE INHERENTLY SUBJECT
ADMINISTRATORS THAT ESTABLISHES STANDARDS FOR ALL PUBLIC DISCLOSURE
TO SIGNIFICANT BUSINESS, ECONOMIC, COMPETITIVE, POLITICAL AND SOCIAL
AN ISSUER MAKES OF SCIENTIFIC AND TECHNICAL INFORMATION CONCERNING
UNCERTAINTIES AND CONTINGENCIES. SUCH ASSUMPTIONS INCLUDE, WITHOUT
MINERAL PROJECTS.
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.
CANADIAN STANDARDS, INCLUDIN 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
MANY FACTORS, BOTH KNOWN AND UNKNOWN, COULD CAUSE ACTUAL RESULTS,
PARTICULAR, AND WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THIS
PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THE RESULTS,
MD&A USES THE TERMS ‘‘MEASURED RESOURCES’’, ‘‘INDICATED RESOURCES’’ AND
PERFORMANCE OR ACHIEVEMENTS THAT ARE OR MAY BE EXPRESSED OR IMPLIED BY
‘‘INFERRED RESOURCES’’. U.S. INVESTORS ARE ADVISED THAT, WHILE SUCH TERMS
SUCH FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT AND
ARE RECOGNIZED AND REQUIRED BY CANADIAN SECURITIES LAWS, THE SEC DOES
THE COMPANY HAS MADE ASSUMPTIONS BASED ON OR RELATED TO MANY OF THESE
NOT RECOGNIZE THEM. UNDER U.S. STANDARDS, MINERALIZATION MAY NOT BE
FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION: FLUCTUATIONS IN SPOT
CLASSIFIED AS A ‘‘RESERVE’’ UNLESS THE DETERMINATION HAS BEEN MADE THAT
AND FORWARD MARKETS FOR SILVER, GOLD, BASE METALS AND CERTAIN OTHER
THE MINERALIZATION COULD BE ECONOMICALLY AND LEGALLY PRODUCED OR
COMMODITIES (SUCH AS NATURAL GAS, FUEL OIL AND ELECTRICITY); FLUCTUATIONS
EXTRACTED AT THE TIME THE RESERVE DETERMINATION IS MADE. U.S. INVESTORS
IN CURRENCY MARKETS (SUCH AS THE CANADIAN DOLLAR, PERUVIAN SOL, MEXICAN
ARE CAUTIONED NOT TO ASSUME THAT ANY PART OF A “MEASURED RESOURCE”
PESO, ARGENTINE PESO AND BOLIVIAN BOLIVIANO VERSUS THE U.S. DOLLAR); RISKS
OR “INDICATED RESOURCE” WILL EVER BE CONVERTED INTO A “RESERVE”. U.S.
RELATED TO THE TECHNOLOGICAL AND OPERATIONAL NATURE OF THE COMPANY’S
INVESTORS SHOULD ALSO UNDERSTAND THAT “INFERRED RESOURCES” HAVE A
BUSINESS; CHANGES IN NATIONAL AND LOCAL GOVERNMENT, LEGISLATION, TAXATION,
GREAT AMOUNT OF UNCERTAINTY AS TO THEIR EXISTENCE AND GREAT UNCERTAINTY
CONTROLS OR REGULATIONS INCLUDING AMONG OTHERS, CHANGES TO IMPORT
AS TO THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE ASSUMED THAT ALL
AND EXPORT REGULATIONS, LAWS RELATING TO THE REPATRIATION OF CAPITAL
OR ANY PART OF “INFERRED RESOURCES” EXIST, ARE ECONOMICALLY OR LEGALLY
AND FOREIGN CURRENCY CONTROLS AND LABOUR LAWS; POLITICAL OR ECONOMIC
MINEABLE OR WILL EVER BE UPGRADED TO A HIGHER CATEGORY. UNDER CANADIAN
DEVELOPMENTS IN CANADA, THE UNITED STATES, MEXICO, PERU, ARGENTINA,
SECURITIES LAWS, ESTIMATED “INFERRED RESOURCES” MAY NOT FORM THE BASIS
BOLIVIA OR OTHER COUNTRIES WHERE THE COMPANY MAY CARRY ON BUSINESS IN
OF FEASIBILITY OR PRE-FEASIBILITY STUDIES EXCEPT IN RARE CASES. DISCLOSURE
THE FUTURE; RISKS AND HAZARDS ASSOCIATED WITH THE BUSINESS OF MINERAL
OF “CONTAINED OUNCES” IN A MINERAL RESOURCE IS PERMITTED DISCLOSURE
EXPLORATION, DEVELOPMENT AND MINING (INCLUDING ENVIRONMENTAL HAZARDS,
UNDER CANADIAN SECURITIES LAWS. HOWEVER, THE SEC NORMALLY ONLY PERMITS
INDUSTRIAL ACCIDENTS, UNUSUAL OR UNEXPECTED GEOLOGICAL OR STRUCTURAL
ISSUERS TO REPORT MINERALIZATION THAT DOES NOT CONSTITUTE “RESERVES” BY
FORMATIONS, PRESSURES, CAVE-INS AND FLOODING); RISKS RELATING TO THE
SEC STANDARDS AS IN PLACE TONNAGE AND GRADE, WITHOUT REFERENCE TO UNIT
CREDIT WORTHINESS OR FINANCIAL CONDITION OF SUPPLIERS, REFINERS AND OTHER
MEASURES. THE REQUIREMENTS OF NI 43-101 FOR IDENTIFICATION OF “RESERVES”
PARTIES WITH WHOM THE COMPANY DOES BUSINESS; INADEQUATE INSURANCE, OR
ARE ALSO NOT THE SAME AS THOSE OF THE SEC, AND RESERVES REPORTED BY THE
INABILITY TO OBTAIN INSURANCE, TO COVER THESE RISKS AND HAZARDS; EMPLOYEE
COMPANY IN COMPLIANCE WITH NI 43-101 MAY NOT QUALIFY AS “RESERVES” UNDER
RELATIONS AND THE EFFECTS OF LABOUR LAWS IN THOSE COUNTRIES IN WHICH THE
SEC STANDARDS. ACCORDINGLY, INFORMATION CONCERNING MINERAL DEPOSITS
COMPANY OPERATES; RELATIONSHIPS WITH AND CLAIMS BY LOCAL COMMUNITIES AND
SET FORTH HEREIN MAY NOT BE COMPARABLE WITH INFORMATION MADE PUBLIC BY
INDIGENOUS POPULATIONS; AVAILABILITY AND INCREASING COSTS ASSOCIATED WITH
COMPANIES THAT REPORT IN ACCORDANCE WITH U.S. STANDARDS.
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
Technical information contained in this Annual Report with respect to Pan American has been
reviewed by Michael Steinmann, P.Geo., President, and Martin Wafforn, P.Eng., VP Technical
Services, who are Qualified Persons for the purposes of NI 43-101.
6
pan american silver corp. MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2014
TABLE OF CONTENTS
Introduction
Core Business and Strategy
Highlights of 2014
Financial
2015 Operating Outlook
2014 Operating Performance
2014 Exploration and Project Development Results
Overview of 2014 Financial Results
Related Party Transactions
Liquidity Position
Capital Resources
Financial Instruments
Closure and Decommissioning Cost Provision
Contractual Commitments and Contingencies
Alternative Performance (non-GAAP) Measures
Risks and Uncertainties
Significant 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
Corporate Governance, Social Responsibility, and
Environmental Stewardship
Disclosure Controls and Procedures
Mineral Reserves and Resources
8
8
9
10
10
14
22
22
30
30
31
31
32
32
34
41
45
46
48
48
49
50
7
2014 annual report
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, 2014
(“2014 Financial Statements”) 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 2014 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 earnings 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 46 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 these
measures 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 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., President 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 actual 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”) 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:
• Generate sustainable profits and superior returns on
investments through the safe, efficient and environmentally
sound development and operation of silver assets
8
pan american silver corp. • Constantly replace and grow our mineable silver reserves
HIGHLIGHTS OF 2014
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.
OPERATIONS & PROJECT DEVELOPMENT
• Record Silver and Gold Production
Silver production in 2014 was a record 26.1 million ounces,
comfortably within management’s 2014 forecast range and
slightly higher than the 26.0 million ounces produced in 2013.
This new annual silver production record was achieved with
production gains at La Colorada, Manantial Espejo, Dolores and
Huaron, and despite the expected silver production decline at
Alamo Dorado. As anticipated, 2014 gold production also set
a new Company record at 161,500 ounces, 8% higher than
2013, achieved through increased production at Dolores and
Manantial Espejo.
• Annual Cash Costs and AISCSOS Targets Achieved
Consolidated cash costs, net of by-product credits for 2014 of
$11.46 per silver ounce were well below management’s 2014
guidance of $11.70 to $12.70 per ounce on account of better
than expected performances at La Colorada, Huaron and
Morococha, partly offset by slightly higher than expected cash
costs at San Vicente and Manantial Espejo.
All-in sustaining costs per silver ounce sold net of by-product
credits (“AISCSOS”) in 2014 were $17.88, in line with guidance
of $17.00 to $18.00, and a slight decrease from the $17.91 in
2013. Excluding the effects of downward net realizable value
(“NRV”) adjustments to inventories during the year (2014 NRV
adjustments: $1.17 per ounce), 2014 AISCSOS were $16.71
per ounce a 4% decrease from 2013 NRV adjusted AISCSOS
of $17.40.
• Dolores Project Development
The Company announced the positive results of a Preliminary
Economic Assessment (“PEA”) for the Dolores expansion
project in the second quarter of 2014. As disclosed in the
PEA the Dolores project contemplates the addition of a
milling and pulp agglomeration circuit to the processing flow
sheet to enhance silver and gold recoveries of higher grade
mineralization, as well as the development of an underground
mine to extract mineral resources that exist beneath the
ultimate open pit floor and to the south of the current final pit.
The PEA results indicated that this project has the potential
to generate an estimated after-tax net present value of the
incremental cash flow of $90 million at an 8% discount
rate, which represents an internal rate of return of 33%, and
a capital payback period of 1.7 years using metal prices of
$22 per ounce of silver and $1,300 per ounce of gold. The
project would increase average annual silver production to
an estimated 5.04 million ounces, while average annual gold
production would increase to an estimated 148,000 ounces.
The PEA contemplated an incremental capital investment of
$105 million. The project economics remain accretive at the
Company’s current reserve prices of $18.50 per ounce of silver
and $1,250 per ounce of gold. The Company has deferred
making a construction decision for the next 12 months while
modest 2015 investments (estimated at $2.5 million) are
planned for additional studies and continued delineation of the
underground accessible mineralization in order to further de-
risk this opportunity.
9
2014 annual report • La Colorada Organic Growth
FINANCIAL
The Company continued with the expansion of its La Colorada
mine in Mexico, based on the positive results of a PEA published
in late 2013. The PEA demonstrates that the relatively low-risk
expansion project has the potential to provide robust after-tax
economic returns using a $19.00 per ounce long-term silver
price. During 2014, the following progress on the expansion
project was achieved: completed the basic engineering package
for the new processing plant, ordered all major equipment for
the plant, and commenced detailed engineering and equipment
fabrication; selected the plant engineering procurement and
construction contractor; completed over 1,500 meters of
development to enable access at the future shaft bottom,
and completed a ventilation raise to provide the necessary
ventilation to advance project development; and, awarded the
raise boring contract for the new shaft, and commenced the
pilot hole drilling.
• Robust Proven and Probable Silver Mineral Reserves
As at December 31, 2014, Pan American’s mineral reserves
are estimated to contain 299.9 million ounces of silver and 2.3
million ounces of gold, down from the 323.5 million ounces
of silver and 2.5 million ounces of gold reported a year ago.
The Company used long term metal prices assumptions of
$18.50 per ounce of silver and $1,250 per ounce of gold to
estimate its current reserves at its operating mines except at
Alamo Dorado where metal prices of $17.00 per ounce of silver
and $1,200 per ounce of gold were used. At the same time,
the Company reported that its measured and indicated silver
mineral resources increased 2% to 731.5 million ounces, while
measured and indicated gold mineral resources increased 13%
to 1.8 million ounces. For the complete breakdown of mineral
reserves and resources by property and category, refer to the
section “Mineral Reserves and Resources” of this MD&A.
2015 OPERATING OUTLOOK
• Challenging Metal Price Environment
The mining industry generally, and precious metal producers in
particular, were impacted by a sharp decline in metal prices in
2014. 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.
• Strong Operating Cash Flow, Liquidity, and Working Capital
Position
Despite the 2014 decrease in metal prices, cash flow from
operations was $124.2 million which, together with strong
balance sheet liquidity allowed the Company to comfortably
fund sustaining and expansionary capital expenditures of $131.8
million during the year. The Company had cash and short term
investment balances of $330.4 million and a working capital
position of $522.7 million at December 31, 2014, a decrease of
$92.3 million and $166.4 million, respectively, from a year ago.
Total debt stood at a modest $60.4 million at the end of 2014.
• Return of Value to Shareholders
Strong operating cash flow facilitated the continued return of
value to shareholders in 2014 by way of approximately $75.8
million in dividend payments. The Company paid quarterly
dividends during 2014 of $0.125 per common share or $0.50
per common share on an annual basis. The Company received
approval for a fourth share repurchase program in late 2014,
an initiative which started in September, 2011. At the date of
this MD&A and since 2010 the Company has returned a total of
$356.7 million to shareholders by way of dividends and share
repurchase programs.
These estimates are forward-looking statements and information that are subject to the cautionary
note associated with forward-looking statements and information at the end of this MD&A.
2015 Silver Production, Cash Costs and AISCSOS Forecasts:
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total
Silver Production (million ounces)
Cash Costs per ounce (1)
AISCSOS(1)
4.90 – 5.00
4.00 – 4.15
2.95 – 3.20
3.70 – 3.80
2.30 – 2.40
4.00 – 4.15
3.65 – 3.80
$8.50 – $9.25
$8.50 – $10.00
$14.00 – $14.50
$13.00 – $13.75
$12.75 – $14.25
$11.00 – $12.00
$10.50 – $11.75
$10.95 – $11.70
$17.00 – $18.50
$14.30 – $14.80
$16.00 – $17.00
$16.00 – $17.50
$12.25 – $13.25
$13.80 – $15.05
25.50 – 26.50
$10.80 – $11.80
$15.50 – $ 16.50
(1) Cash costs per ounce and AISCSOS 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 $2,200/tonne ($1.00/lb) for
zinc, $2,000/tonne ($0.91/lb.) for lead, $6,800/tonne ($3.08/lb.) for copper, and $1,200/oz. for gold.
The Company expects its seven mines to produce between
25.50 million and 26.50 million ounces of silver in 2015, similar
to 2014 production of 26.1 million ounces. Improved grades
at Dolores and San Vicente along with increased throughput
rates at San Vicente and Huaron are expected to increase silver
production sufficiently to offset the anticipated decrease in
silver production at Alamo Dorado due to lower silver grades
as open pit mining winds down. La Colorada, Morococha, and
Manantial Espejo are expected to maintain silver production
levels consistent with those in 2014.
Cash costs for 2015 are expected to be between $10.80 and
$11.80 per ounce of silver, net of by-product credits, relatively
similar to 2014 cash costs of $11.46 per ounce. The Company
expects operating costs to increase in 2015, primarily from
10
pan american silver corp. increased open pit waste mining rates at Manantial Espejo,
increased ore stockpile inventory draw-downs at Dolores, and
labor cost increases across the Company. The cost increases
are expected to be partially offset by reduced open pit mining
rates at Alamo Dorado, reduced inventory variations at
Manantial Espejo, the continued downward trend in certain
costs correlated with decreased oil prices, benefits from
reduced growth in demand for certain consumables, and from
sustained devaluation of the Mexican Peso, Peruvian Sol and
Argentine Peso.
Consolidated AISCSOS in 2015 is expected to be between
$15.50 and $16.50 per ounce, a substantial decrease from the
2014 AISCSOS of $17.88 per ounce. The expected year-over-
year AISCSOS decrease is primarily driven by the following
anticipated factors:
• A decrease in cost of sales due primarily to lower net
realizable value adjustments expected for 2015 and the
devaluation of the Mexican Peso,
•
•
An increase in by-product credits driven largely by higher
gold production
A decrease in royalty payments resulting from lower metal
prices; and,
• A reduction in sustaining capital expenditures.
2015 By-product Production Forecasts:
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total
Gold (koz)
2.5 – 2.7
75.0 – 80.0
15.5 – 16.6
1.0 – 1.2
2.0 – 2.5
–
Zinc (kt)
7.00 – 7.50
–
–
13.50 – 14.00
14.50 – 15.00
6.00 – 6.50
69.0 – 72.0
–
Lead (kt)
3.70 – 3.80
–
–
6.10 – 6.20
4.20 – 4.40
0.50 – 0.60
–
Copper (kt)
–
–
0.01 – 0.01
4.75 – 5.00
3.24 – 3.49
–
–
165.0 – 175.0
41.00 – 43.00
14.50 – 15.00
8.00 – 8.50
Gold production is expected to increase to between 165,000
ounces and 175,000 ounces, almost exclusively driven by a
12,100 ounce (18%) increase in gold production from Dolores
anticipated through improved grades as the mine develops
into the higher gold grade portion of the deposit. Zinc, copper
and lead are expected to remain relatively similar to 2014
production volumes.
2015 Capital Expenditure Forecasts
Pan American expects a reduction in sustaining capital
investments compared to 2014, due to reduced pre-stripping
at Manantial Espejo, fewer mining equipment purchases,
and underground infrastructure developments at Huaron
and Morococha as the multi-year mechanization program
at Peruvian operations is largely complete. In total, the
Company plans to spend between $71.0 and $84.0 million on
sustaining capital at its seven operating mines, which includes
approximately $10.0 million to complete approximately 83
kilometers of development diamond drilling, down from the
$99.1 million spent on sustaining capital in 2014. Further details
of planned sustaining capital at each operation can be found in
the “2015 Mine Operations Forecasts” section of this MD&A.
Pan American also expects to invest between $90.0 and $97.0
million on long term development and expansion projects,
which are mainly for the La Colorada expansion project and at
Dolores for the construction of the new power line. The following
table details the forecast capital investments at the Company’s
operations and projects in 2015:
2015 Forecast Capital Investment
($ millions)
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Sustaining Capital Sub-Total
La Colorada Expansion Project
Dolores Project
Project Sub-total
2014 Total Capital
11.0 – 12.0
30.0 – 35.0
–
8.0 – 10.0
6.0 – 8.0
4.0 – 5.0
12.0 – 14.0
71.0 – 84.0
75.0 – 80.0
15.0 – 17.0
90.0 – 97.0
161.0 – 181.0
The La Colorada expansion project is expected to advance
substantially during 2015 with a forecast expenditure of
between $75.0 and $80.0 million primarily for the following:
$25.8 million for the new hoist and new shaft installations,
which is targeted for completion by mid-2016; $29.4 million
for construction of the new plant which is also targeted for
completion by mid-2016; $3.7 million on on-going underground
mine development and additional equipment; $3.1 million
for the new power line; and $3.0 million for the expansion of
site infrastructure. Key milestones planned for 2015 include
completing the physical excavation and detailed engineering for
all shaft works, installing the new hoist, fabricating and installing
a new headframe, advancing the lining and equipping of the
shaft, and completing construction of the new plant sufficiently
that commissioning can be completed by mid-year 2016.
11
2014 annual report 2015 General and Administrative Cost Forecast
Our 2015 general and administrative costs (“G&A”), including
share based compensation, are expected to be approximately
$17.5 million, relatively consistent with 2014 G&A. This figure is
subject to fluctuations in the Canadian dollar (“CAD”) to USD
exchange rate, and the Company’s ability to allocate certain
costs incurred at head office that are directly attributable to
operating subsidiaries.
The following table compares our 2015 forecast G&A
against those incurred over the previous two years, as well
as G&A on a per ounce of silver produced basis, which is a
non-GAAP measure.
Forecast
Actual
2015
2014
2013
General and administrative
costs (in ‘000s of USD)
$ 17,500 $ 17,908 $ 17,596
Silver production
which are expected to be partially offset by Mexican
Peso devaluation.
Sustaining capital expenditure at La Colorada in 2015 is
expected to decrease from 2014 levels down to $11.0 to
$12.0 million. The major elements making up this planned
sustaining capital are as follows: $7.2 million in mine related
capital, the largest components being a mine discharge water
treatment plant (primarily sediment removal), a ventilation
raise, and equipment rehabilitation; $1.4 million in development
exploration; and $1.1 million in processing plant capital.
AISCSOS at La Colorada for 2015 is expected to be between
$10.95 and $11.70 per ounce, in-line with the $10.90 per ounce
reported in 2014.
In addition, capital expenditures relating to an expansion
project for the La Colorada mine are expected to require $75.0
million to $80.0 million in 2015. Please see “2015 Capital
Expenditure Forecast” section for a detailed description of
these expenditures.
(in ‘000s of ounces) (1)
26,000
26,112
25,959
• Dolores mine
General and administra-
tive costs per silver ounce
produced (2)
$
0.67
$
0.69
$
0.68
(1) Forecast silver production at the mid-point of the guidance given in
this MD&A for the Company’s existing operations.
(2) G&A cost per silver ounce produced is a non-GAAP measure used by
the Company to assess G&A costs relative to production. It is calculated
as G&A costs divided by total ounces of silver production in the period.
2015 Exploration and Project Development Expense
Forecast
Exploration and project development expenses for Pan
American in 2015 are expected to total approximately $16.5
million, which is a $3.3 million increase from 2014 and includes
advancing surface exploration on targets defined for certain
Mexican and Peruvian properties, as well as holding costs for
various exploration properties, including Navidad.
2015 Mine Operation Forecasts
Management’s expectations of each mine’s operating
performance in 2015 are set out below, including discussion
on expected production, cash costs and AISCSOS, and
capital expenditures.
• La Colorada mine
La Colorada 2015 silver production is expected to be similar
to the 5.0 million ounces produced in 2014. The 2015 mine
plan contemplates a processing rate of between 1,260 to 1,275
tonnes per day, with sulphide ore from the Candelaria mine
zone comprising 60% of the total mine production, which is
similar to the 2014 distribution. Oxide mine feed is anticipated
to represent the remaining 40% of the processing feed with
the majority coming from the Estrella mine zone. With similar
distributions of sulphide and oxide feed planned for 2015, it
is expected that base metal by-product production will be
consistent with 2014 production.
2015 cash costs per ounce of $8.50 to $9.25 are expected to
increase from the $8.14 per ounce in 2014, primarily due to
minor interferences expected from the new shaft excavation
project somewhat reducing underground mine productivities,
We expect reasonably similar heap stacking rates at Dolores
during 2015 as compared to 2014. However, we anticipate
an improvement in silver production to between 4.00 million
and 4.15 million ounces, from 3.98 million in 2014, as a result
of an increase in silver grades offset by an expected in-heap
inventory build-up. Similarly, gold grades are expected to
improve significantly, again partially offset by the in-heap
inventory build-up, resulting in forecasted 2015 gold production
of between 75,000 ounces and 80,000 ounces, up from the
66,800 ounces in 2014.
The expected increase in 2015 silver and gold production,
a continuance of the general downward trend in certain
costs associated with lower oil prices and reduced growth in
demand for certain consumables and sustained Mexican Peso
devaluation result in forecasted 2015 cash costs per ounce of
between $8.50 and $10.00 per ounce, a substantial decrease
from the $12.94 per ounce cash costs for Dolores in 2014.
Sustaining capital expenditures at Dolores is forecast at
between $30.0 million and $35.0 million, an increase from the
$27.6 million expended in 2014. The sustaining capital planned
for 2015 is primarily comprised of pre-stripping activities, truck
rehabilitations, loading and drilling equipment rehabilitations
and the installation of a contingent process solution treatment
plant to address unexpectedly large precipitation and/or power
outage events.
AISCSOS at Dolores for 2015 is expected to be between $17.00
and $18.50 per ounce, significantly down from the $27.02 per
ounce reported in 2014 due primarily to the expectation that
NRV adjustments on inventories of $23.3 million in 2014 will not
be incurred in 2015.
In addition to sustaining capital expenditures, capital
expenditures relating primarily to a new power line installation
and process plant optimization projects are expected to require
between $15.0 million and $17.0 million.
• Alamo Dorado mine
As anticipated the Alamo Dorado mine will continue along a
declining production profile as it enters the final year of its open
pit mine life. Although anticipated throughput of 1.7 million
tonnes is expected to remain relatively consistent with 2014
12
pan american silver corp. levels, a larger percent of the mill feed will be sourced from the
lower grade mined ores and stockpiles. 2015 silver production
is expected to be between 2.95 million and 3.20 million ounces,
a decline of at least 8% from 2014 production of 3.47 million
ounces. Similarly, gold production is anticipated to decrease
from 2014 levels as a result of expected decreased grades.
Despite lower operating costs in 2015, cash costs per ounce are
expected to increase from $12.89 in 2014 to between $14.00
and $14.50 per ounce in 2015 due to the lower silver and gold
production as well as lower gold prices.
Given that Alamo Dorado is in its final years, no sustaining
capital expenditure has been planned for 2015.
AISCSOS at Alamo Dorado for 2015 is expected to be between
$14.30 and $14.80 per ounce, up from $13.05 per ounce
reported in 2014 due to the anticipated decrease in silver sales
from processing lower grade mined ores
and stockpiles.
• Huaron mine
We anticipate a continued positive trend in increased mining
and milling rates at Huaron in 2015, resulting in a modest
increase in silver produced to between 3.7 million and 3.8
million ounces from the 3.64 million ounces produced in 2014.
The increased throughput rates are the result of the increased
amount of ore available by mechanized long-hole mining, which
is a benefit of the previous years’ investments. Zinc and copper
production are expected to decrease as a result of lower grades,
while lead production is expected to remain
relatively consistent.
Cash costs per ounce of between $13.00 and $13.75 per
ounce are expected to increase from the 2014 level of $11.56
per ounce, primarily driven by a decline in by-product credits
resulting from lower copper, lead and gold prices anticipated
for 2015.
Sustaining capital expenditure in 2015 of between $8.0 million
and $10.0 million is expected to be significantly lower than
the $17.3 million in 2014. The 2015 capital budget is primarily
comprised of a tailings dam expansion, near-mine diamond
drilling, ventilation raises and mining equipment, camp
additions and general equipment maintenance.
AISCSOS at Huaron for 2015 is expected to be between $16.00
and $17.00 per ounce, representing an average 13% decrease
from the $19.07 per ounce reported in 2014 due primarily to
lower sustaining capital expenditures.
• Morococha mine
Milled tonnes, silver grades and recoveries, and silver
production in 2015 are all expected to be relatively consistent
with 2014 levels. 2015 copper production is expected to
increase due to an improvement in copper grades and
recoveries from mine sequencing, while zinc and lead
production should remain stable with 2014 levels.
Cash costs are anticipated to remain between $12.75 and
$14.25 per ounce in 2015, comparable to 2014 cash costs
of $13.22 per ounce. Cash costs at Morococha in 2015 are
expected to benefit from an increase in copper by-product
credits, offset by an increase in concentrate treatment costs
and lower lead production.
Morococha’s sustaining capital for 2015 is expected to be
between $6.0 million and $8.0 million, substantially lower
than the 2014 capital spending of $10.2 million. The major
components of the 2015 capital expenditures includes: $1.5
million in near-mine diamond drilling, $1.3 million in mining
equipment, and $1.0 million on studies for deepening the
Manuelita mine area beneath the primary drainage tunnel.
AISCSOS at Morococha for 2015 is expected to be between
$16.00 and $17.50 per ounce, a 10% to 17% decrease from
the $19.39 per ounce reported in 2014 primarily due to lower
sustaining capital.
• San Vicente mine
In 2015, we expect similar throughput rates and recoveries to
the 2014 levels, and a modest improvement in silver grades due
to mine sequencing and reductions in mine dilution through
mining method improvements. The aggregate effect is expected
to result in 2015 silver production of between 4.0 million and
4.15 million ounces, an increase from the 3.95 million ounces
produced in 2014. Anticipated improvements in zinc and lead
grades are expected to drive increased zinc and lead by-product
production as well.
Expected 2015 cash costs per ounce of between $11.00 and
$12.00 are lower than 2014 cash costs of $13.16 per ounce, due
primarily to an expected improvement in by-product credits
resulting from higher zinc and lead production. In addition,
cash costs are expected to benefit from reductions in royalties
from reduced metal prices as well as reduced concentrate
treatment costs.
The 2015 expected sustaining capital at San Vicente is between
$4.0 million and $5.0 million, an increase from sustaining
capital levels in 2014. Major components of the 2015 sustaining
capital budget includes $1.0 million in mill equipment
refurbishment, $1.1 million in mine equipment replacements, a
ventilation raise and pump station installations and $0.6 million
in exploration.
AISCSOS at San Vicente for 2015 is expected to be between
$12.25 and $13.25 per ounce, a slight decline from the $13.78
per ounce reported in 2014, as the same factors expected
to reduce cash costs in 2015 described above will also
benefit AISCSOS.
• Manantial Espejo mine
The 2015 silver production objective for the Manantial Espejo
mine is to maintain silver production levels consistent with
those achieved in 2014. We anticipate a slight decline in silver
grades to be offset by modestly higher throughput rates. Gold
grades, recoveries, and production levels in 2015 are expected
to be consistent with 2014 gold production.
Under the assumption that the devaluation of the Argentine
peso will keep pace with local inflation rates during 2015,
we expect that production costs will increase primarily
from increased waste mining rates, and a swing in inventory
variations from last year’s inventory build-up to an expected
reduction of inventory in 2015. Combined with decreased gold
credits, driven by the decline in gold price from 2014, we expect
higher cash costs from $10.12 per ounce for 2014 to between
$10.50 and $11.75 per ounce in 2015.
Sustaining capital expenditure in 2015 is expected to be
between $12.0 million and $14.0 million, a significant decrease
13
2014 annual report from the $26.7 million spent in 2014. The majority of the
2015 capital budget is related to Maria open pit pre-stripping
activities. The other major element of the 2015 sustaining
capital budget is $2.5 million expected for brownfield
exploration spending focused during January through
June 2015.
AISCSOS at Manantial Espejo for 2015 is expected to be
between $13.80 and $15.05 per ounce, a significant decrease
from the $17.93 per ounce reported in 2014 due mainly to lower
sustaining capital and lower net realizable value adjustments
than were incurred in 2014.
2014 OPERATING PERFORMANCE
The following table reflects silver production and cash costs, net
of by-product credits, at each of Pan American’s operations in
2014 as compared to 2013.
Silver Production
(ounces ‘000s)
Cash Costs(1)
($ per ounce)
2014
2013
2014
2013
4,979
3,982
3,473
3,635
2,370
3,949
3,725
4,566
3,503
5,079
3,304
2,397
3,967
3,144
$8.14
12.94
12.89
11.56
13.22
13.16
10.12
$9.43
7.47
7.45
15.46
18.14
15.51
8.55
La Colorada
Dolores
Alamo Dorado
Huaron (5)
Morococha(2)(5)
San Vicente(3)
Manantial Espejo
Consolidated Total (4)
26,112
25,959
$11.46
$10.96
(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) Morococha data represents Pan American’s 92.3% interest in the
mine’s production.
(3) San Vicente data represents Pan American’s 95.0% interest in the
mine’s production.
(4) Totals may not add due to rounding.
(5) Previously reported cash costs for the Company’s Peruvian
operations overstated copper by-product credits. Both consolidated
and Peruvian annual cash costs for 2014 and 2013 have been adjusted
to correct for this overstatement. The effect of these corrections on
2014’s annual cash costs was as follows: a $0.50 per ounce increase
to consolidated cash costs (2013 - $0.15); a $2.87 per ounce increase
to Huaron cash costs (2013 - $0.85); and a $1.72 per ounce increase to
Morococha cash costs (2013 - $0.58). Please refer to Note 3 under the
table “Total Cash Costs and Total Production Costs per Ounce of Payable
Silver, net of by-product credits” included in the Alternative Performance
(Non-GAAP) Measures section of this MD&A for further details.
The graph below presents silver production by mine in 2014:
Manantial Espejo
14%
San Vicente
15%
Morococha
9%
La Colorada
19%
Alamo
Dorado
14%
Huaron
14%
Dolores
15%
Mexico
Peru
Bolivia
Argentina
Pan American’s 2014 silver production of 26.1 million ounces
was relatively consistent with 2013 production levels of 26.0
million ounces. Stable silver production was largely achieved
as a result of the following: record silver production at La
Colorada which increased 9% from the prior year via increased
throughput; a 14% increase in Dolores silver production from
higher throughput and the increased leach times provided by
the larger leach pad 3; and a throughput driven 10% increase
in silver production at Huaron, a result of successful multi-
year mine mechanization efforts. Also, San Vicente posted
near-record annual silver production due to higher throughput,
despite a two-week work stoppage during the third quarter of
2014. These production increases offset the expected decline
in Alamo Dorado silver production as the mine approaches the
end of its planned mine-life.
2014 silver production was well within management’s forecast
range of between 25.75 million and 26.75 million ounces, as
described in the December 31, 2013 MD&A. Dolores, Huaron
and La Colorada all exceeded 2014 guidance; San Vicente
achieved 2014 guidance levels despite the work stoppage, while
Alamo Dorado, Morococha, and Manantial Espejo were below
2014 guidance.
Pan American’s consolidated cash costs net of by-product
credits for 2014 were $11.46 per silver ounce, which compares
to cash costs of $10.96 per ounce for 2013. The 2014
consolidated cash costs of $11.46 per ounce were less than
the 2014 guidance of $11.70 to $12.70 per ounce, and were
5% higher than the 2013 adjusted cash costs of $10.96 per
ounce. The year over year increase to cash costs was primarily
attributable to increased cash costs at Dolores and Manantial
Espejo, primarily from large swings in inventory variations,
and at Alamo Dorado, from the expected grade reductions.
Consolidated cash costs were also negatively affected by
decreased by-product credits at the Dolores and Alamo Dorado
mines, which were largely driven by declining gold prices. These
increases were partially offset by decreased cash costs at the
Peruvian operations, San Vicente, and at the La Colorada mine,
all driven mainly from increased by-product production and unit
cost benefits of increased throughputs.
The following tables set out the Company’s by-product
production over the past two years and the average market
metal price metal produced:
14
pan american silver corp. By-Product Production
Gold (ounces ‘000s)
Zinc (tonnes ‘000s)
Lead (tonnes ‘000s)
Copper (tonnes ‘000s)
Average Market Metal Prices
Silver/ounce
Gold/ounce
Zinc/tonne
Lead/tonne
Copper/tonne
2014
161.5
43.5
15.0
9.0
2014
19.08
1,266
2,164
2,096
6,862
$
$
$
$
$
2013
149.8
42.1
13.5
5.5
2013
23.79
1,411
1,909
2,141
7,322
Consolidated gold production in 2014 was 161,500 ounces, an
8% increase from 2013 production levels. The year over year
increase was mainly the result of additional gold produced at
Manantial Espejo and Dolores in 2014. Both the Dolores and
Manantial Espejo gold production increases were primarily a
result of higher throughput rates in 2014 compared to 2013.
Pan American’s 2014 base metals production increased
significantly from 2013 levels. Consolidated copper production
rose to a Company record 9,000 tonnes, 64% greater than
2013 due to significant production increases at Huaron and
Morococha. Consolidated lead production increased 11% from
2013 to 15,000 tonnes, with higher production achieved at La
Colorada and Morococha, partially offset by lower production at
San Vicente. Consolidated zinc production rose 3% from 2013
to 43,500 tonnes, primarily on account of higher production at
La Colorada.
2014 AISCSOS
The following table reflects the quantities of payable silver sold
and AISCSOS at each of Pan American’s operations for 2014, as
compared to 2013.
Payable Silver Sold
(ounces ‘000s)
AISCSOS(1)
($ per ounce)
2014
2013
2013
2012
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente(2)
4,726
3,912
3,607
3,025
2,125
4,177
4,449
3,361
5,566
2,878
2,216
3,702
Manantial Espejo
3,860
3,306
Consolidated Total (2)(3)
25,431
25,478
10.90
12.14
27.02
13.05
19.07
24.07
8.58
23.23
19.39
30.80
13.78
17.93
17.88
15.75
16.84
17.91
(1) Please refer to the section “Alternative Performance (Non-GAAP)
Measures” for a detailed description of the AISCSOS calculation and
a reconciliation of this measure to the Audited Consolidated Financial
Statements. Corporate G&A costs are included in the Consolidated
AISCSOS, but not allocated in calculating AISCSOS for each operation.
(2) In 2014 it was determined that certain charges to metal sales
were being treated differently in the quantification of AISCSOS for the
Company’s San Vicente operation compared to the Company’s other
operations. As such previously reported AISCSOS for the San Vicente
operation have been revised to quantify AISCSOS with a methodology
consistent with that used by Company’s other operations. The effect of
this revision for year ended December 31, 2013 was a $0.42 decrease to
the Company’s previously reported consolidated AISCSOS of $18.33.
(3) Totals may not add due to rounding.
AISCSOS in 2014 were $17.88 per ounce, similar to the $17.91
per ounce AISCSOS in 2013. As shown in the table below, the
relatively consistent year over year AISCSOS resulted from
increased production and refining costs in 2014, which were
significantly affected by larger negative NRV adjustments, offset
by higher by-product credits and decreased sustaining capital
and exploration expenses than in 2013. Consolidated silver sales
quantities remained consistent from 2013 to 2014.
INDIVIDUAL OPERATIONS
The following tables summarize the metal production and cash costs achieved for each individual operation compared to that
forecasted in the 2013 annual MD&A. Following the summary tables is analyses of each operation’s 2014 operating performance
as compared to 2013, as well as an analysis of 2014 operating performance compared to management’s 2014 guidance. Reported
metal figures included in tables in this section are volumes of metal produced.
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total (3)
2014 Silver Production
(million ounces)
2014 Cash Costs(1)
($ per ounce)
Forecast (2)
Actual
Forecast (2)
Actual
4.85 - 4.95
3.60 - 3.85
3.75 - 3.80
3.40 - 3.50
2.50 - 2.60
3.90 - 4.00
3.75 - 4.05
4.98
3.98
3.47
3.64
2.37
3.95
3.73
25.75 - 26.75
26.11
√
√
×
√
×
√
×
√
$9.00 - $9.50
$12.25 - $14.25
$12.50 - $13.50
$14.50 - $15.00
$15.00 - $16.50
$12.50 - $13.00
$8.75 - $10.00
8.14
12.94
12.89
11.56
13.22
13.16
10.12
$11.70 - $12.70
$11.46
√
√
√
√
√
×
×
√
(1) Refer to footnotes to previous tables in the 2014 Operating Performance section of this MD&A
(2) Forecasted amount per guidance included in the annual MD&A for fiscal 2013 dated March 26, 2014.
(3) Totals may not add due to rounding.
15
2014 annual report La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total (2)
La Colorada
Dolores
Alamo Dorado
Huaron
Morococha
San Vicente
Manantial Espejo
Consolidated Total (2)
2014 Gold Production
(koz)
Forecast (2)
Actual
2.60 - 2.80
64.00 - 68.00
17.00 - 19.00
0.60 - 1.20
1.80 - 2.00
-
69.00 - 72.00
155.0 - 165.0
2.57
66.82
17.56
1.16
2.92
-
70.47
161.5
2014 Lead Production
(kt)
Forecast (2)
3.10 - 3.50
Actual
3.74
-
-
5.35 - 5.70
3.80 - 4.00
0.45 - 0.50
-
12.7 - 13.7
-
-
6.03
4.74
0.50
-
15.0
2014 Zinc Production
(kt)
Forecast (2)
6.50 - 7.00
-
-
13.50 - 14.00
14.00 - 15.50
5.50 - 6.00
-
39.5 - 42.5
Actual
7.70
-
-
14.20
15.80
5.84
-
43.5
2014 Copper Production
(kt)
Forecast (2)
Actual
-
-
0.07 - 0.07
3.35 - 3.55
1.78 - 2.08
-
-
5.2 - 5.7
-
-
0.03
5.88
3.08
-
-
9.0
×
√
√
√
√
-
√
√
√
-
-
√
√
√
-
√
√
-
-
√
√
√
-
√
-
-
×
√
√
-
-
√
(1) Forecasted amount per guidance included in the annual MD&A for fiscal 2013 dated March 26, 2014.
(2) Totals may not add due to rounding.
• La Colorada mine
2014 versus 2013
Tonnes milled – kt
Average silver grade – grams per
tonne
Average silver recovery – %
Silver – koz
Gold – koz
Zinc – kt
Lead – kt
Cash cost per ounce net of
by-products(1)
Total cost per ounce net of
by-products(1)
AISCSOS (1)
Payable silver – koz
$
$
$
Twelve months ended
December 31,
2014
471.3
366
89.8
4,979
2.57
7.70
3.74
8.14
10.09
10.90
4,756
$
$
$
2013
448.7
352
89.9
4,566
2.58
6.76
3.32
9.43
11.27
12.14
4,365
Sustaining capital expenditures –
thousands (2)
$
13,476
$
13,574
(1) AISCSOS and 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 excludes $17.9 million in 2014 related
to investment capital incurred on the expansion project as disclosed in
the Project Development Update and Alternative Performance (Non-
GAAP) Measures sections.
Silver production at the La Colorada mine in 2014 was a record
5.0 million ounces, a 9% increase compared to 2013 silver
production, making La Colorada the Company’s largest silver
producer. The 2014 production increase resulted from 5%
higher throughput and a 4% increase in average silver grades
which were achieved using additional equipment acquired as
part of the mine’s expansion project.
Despite the increased throughput, gold production in 2014
remained consistent with 2013 production levels due to a 4%
reduction in average gold grades and a 3% decrease to gold
recoveries compared to the prior year, stemming from the
mine sequencing. Increased sulphide ore throughput had a
positive effect on base metal grades and recoveries, yielding
records in annual zinc production of 7,700 tonnes and lead
production of 3,700 tonnes, 14% and 13% greater than 2013
production, respectively.
2014 cash costs, net of by-products were $8.14 per ounce,
the lowest in the Company, and a 14% decrease from those in
2013. The decrease in cash costs resulted from a 9% increase
in silver production coupled with a 17% increase in by-product
credits driven by the previously discussed record base metal
production, which was slightly offset by lower realized gold
prices and gold production.
2014 AISCSOS decreased by 10% to $10.90 from $12.14 in the
previous year due to a 4% decrease in production costs, a 6%
increase in by-product credits and a 6% increase in the amount
of payable silver ounces sold from 2013 levels.
16
pan american silver corp. 2014 versus 2014 Guidance
2014 versus 2013
Silver production at La Colorada in 2014 exceeded the high end
of management’s forecast range of 4.85 million to 4.95 million
ounces as a result of realizing higher than expected throughput
rates at the expected silver grades and recoveries. 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 $8.14 per ounce were lower than
management’s forecast range of between $9.00 and $9.50
per ounce. Cash costs at La Colorada in 2014 were positively
influenced by better than expected silver, zinc and lead
productions.
Sustaining capital expenditures at La Colorada during 2014
totalled $13.5 million, consistent with the $13.6 million in
2013, though $5.5 million more than our 2014 forecast of $8
million. The 2014 sustaining capital included a $5.6 million
investment in a tailings dam expansion at La Colorada, which
was reclassified from project capital to sustaining capital. In
addition, the 2014 sustaining capital included expenditures
in mine ventilation, mine site exploration drilling, equipment
replacements and overhauls, and infrastructure upgrades.
This capital excludes $17.9 million spent on the La Colorada
expansion project during the year which is further described in
the 2014 Project Development Update section of this MD&A.
• Dolores mine
Tonnes milled – kt
Average silver grade – grams per
tonne
Average gold grade – grams per
tonne
Average silver recovery – %
Average gold recovery – %
Silver – koz
Gold – koz
Cash cost per ounce net of
by-products(1)
Total cost per ounce net of
by-products(1)
AISCSOS (1)
Payable silver koz
Twelve months ended
December 31,
2014
6,053.9
2013
5.351.9
40
0.44
51.8
78.3
3,982
66.82
12.94
27.39
27.02
3,969
$
$
$
$
$
$
48
0.46
42.7
82.1
3,503
65.23
7.47
20.12
24.07
3,494
Sustaining capital expenditures –
thousands (2)
$
27,632
$
36,159
(1) AISCSOS and 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 $17.3 million and $50.5
million, in the 2014 and 2013 reporting periods, respectively, related
to capital incurred on the leach pad and other expansion projects as
disclosed in the Project Development Update section and Alternative
Performance (non-GAAP) Measures section of this MD&A.
Dolores produced 4.0 million ounces of silver in 2014, 14%
higher than the 3.5 million ounces produced in 2013, a result
of a 13% increase to stacking rates and a 9% improvement
to silver recoveries which more than offset a 17% decrease to
average silver grades. Improved recoveries in 2014 were realized
from the benefits of the multi-stage leach process, whereby
solutions recovered from the leaching of ore stacked on pad
2 were further enriched by the leaching of newly stacked ore
on pad 3. In addition, the benefit of the increased heap leach
surface area on pad 3 continues to allow for longer primary
leach cycle times, further enhancing recovery rates from
previously experienced levels.
Gold production of 66,800 ounces in 2014 favourably compared
to the 65,200 ounces produced in 2013, as the increased
processing throughput was partially offset by a 5% decrease in
gold grades and recoveries.
Dolores’s cash costs per ounce were $12.94 in 2014, a
significant increase from the 2013 cash costs of $7.47 due
to a large inventory variation swing as ore stockpiles grew in
2013 and were reduced in 2014 following the expected mine
sequencing, in addition to a 19% decline in by-product credits
per ounce resulting from lower realized gold prices in 2014.
2014 AISCSOS increased by 12% to $27.02 from $24.07 in the
previous year driven by a 25% increase in production costs,
which included a $10.3 million increase in NRV adjustments,
and a $4.7 million decrease in by-product credits, largely
attributable to the decline in gold price. These negative
AISCSOS factors were partially offset by the benefits of a 17%
increase in payable silver ounces sold in 2014, an $8.5 million
and $2.3 million reductions in sustaining capital and exploration
expenses, respectively.
2014 versus 2014 Guidance
In 2014 silver production was 3% more than the top-end of
management’s guidance range of 3.6 million to 3.85 million
ounces, a result of better than anticipated stacking rates
and silver recoveries, which outweighed the effect of lower
than expected average silver grades. Gold production was
within management’s guidance range of 64,000 ounces and
68,000 ounces.
Cash costs for 2014 were $12.94 per ounce of silver, within
the $12.25 to $14.25 per ounce 2014 forecast range provided
by management.
Sustaining capital expenditures in 2014 totalled $27.6 million
18% lower than the $32.5 million forecasted following a decision
to lease several new mine haul trucks. The 2014 sustaining
capital was mainly spent on stripping activities, mine site
exploration, access roads and camp upgrades, and on mining
equipment replacements. Sustaining capital excludes $17.3
million in project capital spent during the year, which is further
described in the 2014 Project Development Update section of
this MD&A.
17
2014 annual report • Alamo Dorado mine
Tonnes milled – kt
Average silver grade – grams per
tonne
Average gold grade – grams per
tonne
Average silver recovery – %
Silver – koz
Gold – koz
Copper – tonnes
Cash cost per ounce net of
by-products(1)
Total cost per ounce net of
by-products(1)
AISCSOS (1)
Payable silver – koz
Sustaining capital expenditures –
thousands
Twelve months ended
December 31,
2014
1,763.0
2013
1,790.3
75
0.37
81.4
3,473
17.56
30
12.89
16.28
13.05
3,454
$
$
$
101
0.36
87.1
5,079
17.6
120
7.45
10.98
8.58
5,043
293
$
7,621
$
$
$
$
(1) AISCSOS and 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.
2014 versus 2013
As expected, 2014 silver production of 3.5 million ounces at
Alamo Dorado was significantly less than the 5.1 million ounces
produced in 2013. Silver production decreased primarily due
to the planned processing of lower silver grade ores with lower
silver recoveries which decreased by 26% and 7%, respectively.
Despite a slight decrease in throughput rates and gold
recoveries from 2013 levels, the 2014 gold production was
comparable to 2013 as a result of a 4% improvement in realized
average gold grades in 2014.
Alamo Dorado’s cash costs per ounce were $12.89 in 2014,
a significant increase from the 2013 cash costs of $7.45 due
primarily to increased waste mining and lower silver production
as a result of processing lower silver grade ores, which was
partially offset by improved by-product credits per ounce as
gold production levels remained consistent year over year while
silver production decreased substantially.
2014 AISCSOS increased by $4.47 to $13.05 from $8.58 in
2013. Although year over year direct production costs remained
relatively consistent, the lower 2014 silver production resulted
in 35% less payable silver ounces being sold in 2014, which
along with a $1.9 million NRV adjustment drove the increase to
AISCSOS in 2014.
2014 versus 2014 Guidance
Alamo Dorado’s silver production in 2014 was 7% lower than the
bottom end of management’s forecast range of 3.75 million to
3.8 million ounces, the result of below expected silver recoveries
on the lower grade ore processed in the year. Gold production
was within management’s guidance range of between 17,000
ounces and 19,000 ounces.
Cash costs of $12.89 per ounce were consistent with
management’s forecasted range of $12.50 to $13.50 per
ounce as slightly higher operating costs per ounce were
offset by better than expected gold by-product credits.
Capital expenditures at Alamo Dorado during 2014 totalled
$0.3 million, slightly lower than management’s guidance
of $0.5 million.
• Huaron mine
Tonnes milled – kt
Average silver grade – grams per
tonne
Average zinc grade – %
Average silver recovery – %
Silver – koz
Gold – koz
Zinc – kt
Lead – kt
Copper – kt
Cash cost per ounce net of
by-products(2)
Total cost per ounce net of
by-products(2)
AISCSOS (1)
Payable silver – koz (2)
$
$
$
Twelve months ended
December 31,
2014
892.8
154
2.41
83.2
3,635
1.16
14.20
6.03
5.88
11.56
15.54
19.07
3,120
$
$
$
2013
802.3
158
2.53
81.8
3,304
0.94
14.02
5.84
3.39
15.46
19.51
23.23
2,879
Sustaining capital expenditures –
thousands
$
17,327
$
15,474
(1) AISCSOS and 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) Previously reported cash costs and total costs for the Company’s
Peruvian operations overstated copper by-product credits. Both
consolidated and Peruvian annual cash costs for 2014 and 2013 have
been adjusted to correct for this overstatement. The effect of these
corrections on 2014’s annual cash costs was as follows: a $0.50 per
ounce increase to consolidated cash costs (2013 - $0.15) and a $2.87 per
ounce increase to Huaron cash costs (2013 - $0.85). There was also an
immaterial change to previously reported payable silver production as
a result of this correction. Please refer to Note 3 under the table “Total
Cash Costs and Total Production Costs per Ounce of Payable Silver, Net
of By-Product Credits” included in the Alternative Performance (Non-
GAAP) Measures section of this MD&A for further details.
2014 versus 2013
In 2014 mill throughput at Huaron increased by 11% relative to
2013 which more than offset a 3% decrease in average silver
grades and resulted in a 10% increase in silver production
to a record 3.64 million ounces. The increased throughput
rate reflected the benefits obtained from the multi-year mine
mechanization effort which also focused on high-grade copper
ore zones and led to a 73% increase in copper production to
a record 5,900 tonnes. Lead and zinc production were largely
consistent with 2013 production levels increasing by 3% and
1%, respectively.
Cash costs at Huaron in 2014 decreased to $11.56 per ounce,
25% below 2013’s cash costs. The lower cash costs were
18
pan american silver corp. achieved primarily through reduced operating costs of the
mechanized mining methods; unit cost benefits associated
with the increased throughput rates, and improved by-product
credits per ounce driven largely from record copper production
partially offset by reduced copper prices.
2014 AISCSOS of $19.07 was 18% lower than the $23.23 in
the previous years. The decrease was largely attributable to
by-product credits which increased by $16.5 million, and a 5%
increase in Huaron payable silver ounces sold, which resulted
from increased silver production.
2014 versus 2014 Guidance
Silver production in 2014 was 4% above the high end of
management’s 2014 guidance of 3.4 million to 3.5 million
ounces. The benefits of mechanized mining at Huaron has
outperformed management’s expectations and the associated
higher throughputs obtained more than offset less than
expected silver grades. The production of all base metals
was above management’s guidance as a result of better than
expected throughput rates and metal recoveries.
The actual cash costs in 2014 were 20% better than the bottom
of our forecast range of $14.50 to $15.00 per ounce. This
positive performance was attributable to better than expected
throughputs driving reduced unit costs as well as better than
expected by-product production, primarily copper.
Capital expenditures at Huaron during 2014 totalled $17.3
million, compared to our forecast of $9.5 million. The increased
sustaining capital expenditure related primarily to additional
upgrades and underground 250-level development (primary
drainage and haulage level) which was determined to be
accretive in 2014 and thus progressed accordingly. Other costs
included in 2014 sustaining capital included upgrades to the
shaft loading pockets, mine site exploration, and a tailings
dam raise.
• Morococha mine (1)
Tonnes milled – kt
Average silver grade – grams per
tonne
Average zinc grade – %
Average silver recovery – %
Silver – koz
Gold – koz
Zinc – kt
Lead – kt
Copper – kt
Cash cost per ounce net of
by-products(3)
Total cost per ounce net of
by-products(3)
AISCSOS (2)
Payable silver – koz (3)
$
$
$
Twelve months ended
December 31,
2014
566.3
152
3.60
86.39
2,370
2.92
15.80
4.74
3.08
13.22
22.23
19.39
2,010
$
$
$
2013
573.3
149
3.20
87.9
2,397
2.65
15.16
3.77
2.03
18.14
26.76
30.80
2,046
Sustaining capital expenditures –
thousands
$
10,199
$
18,653
(1) Production and cost figures are for Pan American’s 92.3% share only
(2) AISCSOS and 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.
(3) Previously reported cash costs and total costs for the Company’s
Peruvian operations overstated copper by-product credits. Both
consolidated and Peruvian annual cash costs for 2014 and 2013 have
been adjusted to correct for this overstatement. The effect of these
corrections on 2014’s annual cash costs was as follows: a $0.50 per
ounce increase to consolidated cash costs (2013 - $0.15) and a $1.72 per
ounce increase to Morococha cash costs (2013 - $0.58). There was also
an immaterial change to previously reported payable silver production
as a result of this correction. Please refer to Note 3 under the table “Total
Cash Costs and Total Production Costs per Ounce of Payable Silver, Net
of By-Product Credits” included in the Alternative Performance (Non-
GAAP) Measures section of this MD&A for further details.
2014 versus 2013
With a slight decrease in throughput rates from the prior year,
Morococha produced 2.37 million ounces of silver in 2014, 1%
less than in 2013. Mine sequencing into higher-grade lead and
copper ores resulted in a 26% increase in lead production to
4,700 tonnes, a 52% increase in copper production to a record
3,100 tonnes, and a 4% increase in zinc production to 15,800
tonnes in comparison to 2013 production.
Cash costs at Morococha decreased by 27% in 2014 to $13.22
per ounce of silver due mainly to successful cost reductions
as well as from substantially higher by-product production.
The increased quantities of by-product metals produced were
partially offset by lower copper and lead prices.
2014 AISCSOS was $19.39 a 37% decrease from $30.80
AISCSOS in 2013. Despite 3% less payable silver ounces sold
from Morococha in 2014, AISCSOS decreased as a result of an
$8.7 million reduction in direct operating costs, and an $8.8
million increase in by-product credits.
2014 versus 2014 Guidance
Silver production at Morococha in 2014 was 5% lower than the
bottom end of management’s guidance range of 2.5 million to
2.6 million ounces. Gold production was within management’s
guidance range, while actual copper, lead and zinc production
all exceeded the top-end of management’s guidance range
by 48%, 19% and 2%, respectively. Actual throughput rates
and silver grades fell 5% short of management’s original
expectations as the mechanization efforts have not been as
successful as expected given worse than expected ground
conditions driving a mine re-sequencing into higher grade lead
and copper ores and lower grade silver ores. Gold, copper, lead
and zinc grades all exceeded management’s expectations by
47%, 39%, 23%, 6%, respectively; while recoveries remained
consistent with expectations with the exception of zinc which
was 8% less than originally planned.
Actual cash costs in 2014 were 12% lower than the bottom end
of management’s forecast range of $15.00 to $16.50 per ounce
due primarily to successful cost reductions as well as from
greater by-product production.
Sustaining capital expenditures at Morococha during 2014
totalled $10.2 million, compared to management’s guidance
of $9.0 million. The majority of the capital expenditures in
2014 were on mine development and infrastructure, mine site
exploration, plant upgrades and equipment overhauls.
19
2014 annual report • San Vicente mine (1)
Tonnes milled – kt
Average silver grade – grams per
tonne
Average zinc grade – %
Average silver recovery – %
Silver – koz
Zinc – kt
Lead – kt
Cash cost per ounce net of
by-products(2)
Total cost per ounce net of
by-products(2)
AISCSOS (2)
Payable silver – koz
$
$
$
Twelve months ended
December 31,
2014
316.0
417
2.37
93.2
3,949
5.84
0.50
13.16
15.36
13.78
3,636
$
$
$
2013
319.4
412
2.48
93.8
3,967
6.20
0.56
15.51
18.07
15.75
3,614
Sustaining capital expenditures –
thousands
$
3,415
$
8,165
(1) Production and interest figures are for Pan American’s 95.0%
share only.
(2) AISCSOS and 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. In 2014 it was determined that certain
charges to metal sales were being treated differently in the quantification
of AISCSOS for the Company’s San Vicente operation compared to the
Company’s other operations. As such previously reported AISCSOS for
the San Vicente operation have been revised to quantify AISCSOS with a
methodology consistent with that used by Company’s other operations.
The effect of this revision for year ended December 31, 2013 was a $0.42
decrease to the Company’s previously reported consolidated AISCSOS
of $18.33.
2014 versus 2013
In 2014, San Vicente’s silver production remained consistent
with the prior year as throughput rates, silver recoveries, and
grades all remained stable. The steady throughput in 2014 was
achieved despite a two-week shutdown in July that resulted
from a strike at the mine. Zinc production decreased by 6% and
lead production decreased by 11% primarily on account of
decreased grades.
Cash costs at San Vicente decreased by 15% to $13.16 in 2014
as compared to 2013. The lower cash costs in 2014 resulted
primarily from lower concentrate treatment and royalty costs
from lower metal prices realized in 2014.
2014 AISCSOS decreased by 13% to $13.78 from $15.75 in the
previous year. The 2014 decrease was primarily attributable to
13% more payable silver ounces being sold, along with a $4.8
million reduction to sustaining capital expense.
2014 versus 2014 Guidance
Attributable silver production in 2014 of 3.9 million ounces
was in-line with management’s forecast range of 3.9 million
to 4.0 million ounces. 2014 silver production was able to meet
forecasted amounts as a result of slightly better than expected
grades and recoveries despite the mine having a two week
shutdown in mid-2014. Actual zinc and lead production were
within management’s guidance.
Actual cash costs of $13.16 per ounce of silver were slightly
higher than management’s forecast range of $12.50 to $13.00
per ounce due to slightly higher than expected employment and
concentrate treatment costs.
Capital expenditures at San Vicente during 2014 totalled $3.4
million, which was below management’s forecast of $6.0 million,
and significantly lower than the $8.2 million incurred in 2013,
due to capital rationing initiatives. Capital spending in 2014 was
primarily on mine infrastructure, equipment overhauls, and
mine site exploration.
• Manantial Espejo mine
Tonnes milled – kt
Average silver grade – grams per
tonne
Average gold grade – grams per
tonne
Average silver recovery – %
Average gold recovery – %
Silver – koz
Gold – koz
Cash cost per ounce net of
by-products(1)
Total cost per ounce net of
by-products(1)
AISCSOS (1)
Payable silver – koz
$
$
$
Twelve months ended
December 31,
2014
796.9
157
2.82
92.1
95.2
3,725
70.47
10.12
20.76
17.93
3,717
$
$
$
2013
719.6
150
2.81
91.3
95.4
3,144
60.82
8.55
19.03
16.84
3,138
Sustaining capital expenditures –
thousands
$
26,741
$
12,002
(1) AISCSOS and 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.
2014 versus 2013
Silver production in 2014 at the Manantial Espejo mine was
3.7 million ounces, a 18% increase from 2013 production.
This increase was the combined result of an 11% increase in
throughput rates, a 5% improvement in silver grades, and a
1% improvement to silver recoveries largely achieved through
successful plant optimization efforts.
2014 gold production of 70,500 ounces was 16% more than
2013 gold production of 60,800. The improved gold production
was primarily driven by record mill throughput as gold grades
and recoveries were consistent with those in 2013.
In 2014, cash costs at Manantial Espejo increased to $10.12 per
ounce of silver, 18% higher than 2013 cash costs of $8.55 per
ounce. The main drivers of the increased cash costs were a large
swing in inventory variations moving from stockpile building in
2013 to stockpile draw-downs in 2014 partially offset by reduced
non-capitalized waste mining rates. In addition, lower realized
gold prices more than offset the benefit of increased year-over-
year gold production.
20
pan american silver corp. 2014 AISCSOS increased 6% to $17.93 from $16.84 AISCSOS
in 2013 due largely to a $14.7 million increase in sustaining
capital, and a $4.7 million increase in production costs from
2014 NRV adjustments. These 2014 negative AISCSOS factors
were partially offset by an 18% increase in payable Manantial
Espejo silver ounces sold, and a $13.9 million increase in
by-product credits.
2014 versus 2014 Guidance
Manantial Espejo’s actual throughput rates and silver recoveries
were slightly better than expected, though average 2014
realized silver grades were lower than planned. The combined
result was Manantial Espejo’s 2014 silver production being
slightly below management’s forecasted range of 3.75 million to
4.05 million ounces.
2014 cash costs of $10.12 per silver ounce were 1% higher than
the forecast range of $8.75 to $10.00 per ounce. The main
driver for the higher than expected cash costs was lower than
expected by-product credits driven by 2014 declining
gold prices.
Sustaining capital expenditures at Manantial Espejo during
2014 totalled $26.7 million, 11% lower than the $30.0 million
forecast for 2014 and $14.7 million higher than that in 2013. The
2014 sustaining capital expenditure was primarily for open pit
pre-stripping as well as a tailings dam expansion and mine
site exploration.
2014 PROJECT DEVELOPMENT UPDATE
The following table reflects the amounts spent at each of Pan
American’s significant projects in 2014, as compared to 2013
and 2012. Our accounting policies determine which portion
of the amounts spent at our projects is capitalized and which
portion is expensed during the period.
Project Development Spending
(thousands of USD)
2014
2013
2012
Dolores Projects
La Colorada
Expansion
Navidad (1)
Morococha Project
Other
$
$
$
$
$
17,254
$
50,482
17,924
4,437
-
-
$
$
$
$
-
2,761
-
203
$
$
$
$
$
21,291
-
20,044
6,389
4,244
(1) Development spending at Navidad is expensed as incurred which will
continue until such time a change in circumstances regarding the project
warrant project costs being accordingly capitalized.
• La Colorada Expansion
Pan American invested $17.9 million on the La Colorada
expansion, of which $5.6 million was used to purchase new
underground mobile mining equipment and to advance project-
related underground mine lateral development, $5.1 million
was spent on engineering work and equipment purchases for
the plant expansion, $3.4 million was spent on new community
infrastructure, $1.5 million was spent on procurement of the
new production hoist, $0.9 million in camp expansions and
expanded site infrastructure, and the remainder was required to
fund indirect project costs.
During 2014 the following progress on the expansion project
was achieved:
• Completed the basic engineering package for the new
processing plant, ordered all major equipment for
the plant, and commenced detailed engineering and
equipment fabrication;
• Selected the plant engineering procurement and
construction contractor;
• Completed over 1,500 meters of development to enable
access at the future shaft-bottom, and completed a
ventilation raise to provide the necessary ventilation to
advance underground project development;
• Purchased the required new mobile underground
equipment;
• Procured a new production hoist for the future shaft;
• Awarded the shaft engineering and procurement
contract; and,
• Awarded the raise boring contract for the new shaft
and commenced the pilot hole drilling.
• Dolores Projects
The Company invested $17.3 million in project capital during
2014, the major items of which involved: the second phase
of the Dolores’ leach pad 3 expansion (approximately $14.2
million); advancement of the new power line (approximately
$1.4 million); and performing processing optimization studies,
which included completing a PEA on a Dolores expansion
that adds a new milling and pulp agglomeration circuit and an
underground mine (approximately $1.0 million).
The second phase of the expansion of leach pad 3 was
essentially completed in 2014 both on schedule and on
budget, and included the successful commissioning of a new
solution pumping system. Pad 3 currently provides sufficient
stacking room for ore production until mid-2017, at which
time the completion of further lining on pad 3 will be required.
Approximately $2.0 million of investment remain for the
installation of a lime silo and conveyor belt which has been
carried over into 2015.
The new Dolores power line project advanced during 2014. When
completed the new line will replace the current diesel generated
power with grid power from the state of Chihuahua. The project
is expected to have a pay-back period of approximately 2 years.
Approval for the design of the line and the supply of electrical
power was received from the Mexican national power utility CFE
in 2014. Working with a third party engineering and construction
company, the Company advanced negotiations with local
land owners regarding power line right of way acquisitions
during the year, and an agreement was executed whereby the
state power supply company will take ownership of the power
line upon its completion, as required in Mexico. Environmental
impact assessments were completed and submitted for
regulatory approvals.
• Navidad
At the Navidad project, the Company spent a total of $4.4
million in 2014, this was all expensed. The project was place
on care and maintenance in the fourth quarter of 2013 and
remained as such throughout 2014. The Company continued
its focus on local community support activities in Chubut in
21
2014 annual report 2014. Activities related to project engineering, procurement and
development have been curtailed since late 2013 until a new law
is passed allowing for open pit mining and any associated tax
and royalty implications can be assessed.
diminished by 44,000 ounces. These ounces have been moved
from mineral reserves to mineral resources due to lower metal
prices and may be re-classified should metal prices or the cost
environment improve.
2014 EXPLORATION AND PROJECT
DEVELOPMENT RESULTS
The Company completed over 152.5 kilometers of diamond
drilling in 2014. Through these exploration activities the
Company discovered approximately 29.6 million ounces of new
silver mineral reserves, while at the same time depleting 32.9
million ounces of contained silver through production, and
re-categorizing 20.1 million ounces of silver reserves primarily
due to lower metal prices. While reserves declined modestly,
the average reserve silver grade increased by 4.1%, and average
reserve gold grade rose by 5.5%.
The La Colorada mine, which holds Pan American’s largest
reserves, had a net addition of 5.5 million silver ounces in 2014
for a total of 86 million ounces of silver reserves, a 6% year-
over-year increase. Exploration activities were restricted to
certain areas at La Colorada, due to the development work for
the expansion project.
The San Vicente mine replaced all of the 4.5 million ounces of
silver mined during 2014 and added another 0.9 million ounces
of new reserves.
As expected, lower precious metal price assumptions and
depletion from 2014 production more than offset reserve
additions at Dolores, Huaron, and Morococha. Net of 2014
production and exploration additions, reserves at Dolores
declined by 0.8 million ounces of silver and increased by
52,000 ounces of gold, due to pit optimization. At Huaron,
mineral reserves declined by 0.9 million ounces of silver and at
Morococha reserves declined by a modest 0.2 million ounces.
The largest change in 2014 was at Manantial Espejo, where
silver reserves declined by 3.4 million ounces and gold
For a complete breakdown of the Company silver resources and
reserves by property and category, refer to the section “Mineral
Reserves and Resources” of this MD&A.
OVERVIEW OF 2014 FINANCIAL RESULTS
For the year ended December 31, 2014, Pan American generated
a net loss of $544.8 million compared to a net loss of $445.8
million generated in 2013. Net losses in 2014 and 2013 were
both primarily the result of pre-tax non-cash impairment
charges on certain mineral property plant and equipment
assets, in the amounts of $596.3 million and $540.2 million,
respectively. The 2014 impairment charges, discussed in
detail in “Net impairment of mining assets and goodwill”
section of this MD&A, were directly attributable to decreases
in metal prices in the later part of 2014. These market price
decreases led the Company to lower the silver and gold prices
assumptions used both to estimate reserves and in discounted
life of mine cash flow models. Decreased realized metal prices
had a negative effect on revenue which declined 9% in 2014
from 2013, and significantly contributed to the 2014 net loss.
However, despite the 2014 increased net loss, 2014 net cash
generated from operating activities increased to $124.2 million
compared to the $119.6 million generated in 2013, as lower cash
operating margins were more than offset by lower income taxes
paid and working capital movements.
The following tables set out selected quarterly results for the
past eight 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 the volatility of
realized metal prices, industry wide cost pressures, and the
timing of the sales of production which varies with the timing
of shipments.
2014 (in thousands of USD, other
than per share amounts)
Revenue
Mine operating earnings (loss)
Attributable earnings (loss) for the period
Basic earnings (loss) per share
Diluted earnings (loss) 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
Quarters Ended (unaudited)
Year Ended
March 31
June 30
Sept 30
Dec 31
Dec 31
$
$
$
$
$
$
$
209,734
31,576
6,844
0.05
0.05
36,125
0.125
$
$
$
$
$
$
$
200,847 $
178,265
10,245 $
(12,378)
(5,472) $
(20,254)
(0.04) $
(0.04) $
(0.13)
(0.15)
48,895 $
38,345
0.125 $
0.125
$
$
$
$
$
$
$
163,096 $
751,942
(21,369) $
8,073
(526,706) $
(545,588)
(3.48) $
(3.48) $
(3.60)
(3.60)
823 $
124,188
0.125 $
0.50
$
$
$
2,017,873
79,823
1,563,092
22
pan american silver corp. 2013 (in thousands of USD, other
than per share amounts)
Revenue
Mine operating earnings
Attributable earnings (loss) for the period
Basic earnings (loss) per share
Diluted earnings (loss) 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
Quarters Ended (unaudited)
Year Ended
March 31
June 30
Sept 30
Dec 31
Dec 31
$
$
$
$
$
$
$
243,012
74,816
$
$
175,576 $
213,556
3,814 $
33,934
20,148
$ (186,539) $
14,154
0.13
0.10
32,251
0.125
$
$
$
$
(1.23) $
(1.23) $
0.09
0.09
469 $
40,730
0.125 $
0.125
$
$
$
$
$
$
$
192,360 $
824,504
18,955 $
131,519
(293,615) $
(445,851)
(1.94) $
(1.94) $
(2.94)
(2.96)
46,156 $
119,606
0.125 $
0.50
$
$
$
2,767,456
110,088
2,182,334
•
Income Statement
A net loss of $544.8 million was incurred in 2014 compared to
a net loss of $445.8 million in 2013. The basic loss per share
for 2014 was $3.60 compared to the $2.94 loss per share in
2013. The major contributors to the 2014 increased loss were:
a $78.3 million increase to net of tax non-cash impairment
charges taken on certain mineral property assets; a $72.6
million decrease in revenues, driven primarily by lower realized
metal prices partially offset by increased sales volumes; a $50.9
million increase in cost of sales made up of increases to both
depreciation and annual production costs, driven by increased
throughput and higher negative non-cash NRV charges to in-
process inventories; and, a combined $23.7 million decrease
in net gains on derivatives, commodity contracts and asset
sales. These factors were offset by various expense reductions
in 2014, the most significant being a $131.5 million decrease in
income tax expense (excluding the tax effect of the non-cash
impairments), and a $2.3 million decrease in exploration and
project development expenses.
The following table highlights the key items that affected net
loss year over year:
Net loss for 2013
Decreased revenue:
Lower realized metal prices, net of changes in settlement adjustments
$
(112,878)
43,542
(3,226)
(39,086)
(11,797)
Higher quantities of metal sold
Increased TCRCs
Total change in revenue
Increased cost of sales:
Higher production costs and royalty charges
Higher depreciation and amortization
Total change in cost of sales
Net of tax 2014 impairment, incremental to 2013
Decreased net realized gain on derivatives, commodity contracts and asset sales
Decreased other income
Decreased income tax, excluding effect of mineral property impairments
Decreased exploration and project development expense
Decreased net finance and interest expense
Decreased FX loss
Net change in other items
Net loss for 2014
$
(445,846)
$
(72,562)
(50,883)
(78,293)
(23,739)
(9,601)
131,510
2,250
1,292
1,362
(313)
$
(544,823)
Revenue for 2014 was $751.9 million, a 9% decrease from
2013 revenue of $824.5 million. The decrease in revenue was
driven by a $136.2 million price variance from lower metal
prices realized for all metals but zinc, and a $3.2 million year
over year increase in treatment and refining charges (“TCRC”)
included in revenue. These negative effects were offset by a
$43.5 million positive volume variance from higher quantities of
all metals sold, and approximately $23.3 million less in negative
provisional price and quantity adjustments in 2014 compared to
those in 2013.
The following table reflects the metal prices that the Company
realized, and the quantities of metal sold during each period.
Realized prices for all metals sold decreased from 2013 with
the exception of zinc, which increased 13%. Silver and gold
23
2014 annual report experienced the most significant decreases falling 20% and 9%,
respectively. Silver sales volumes in 2014 were essentially the
same as those in 2013, while copper and gold sales quantities
increased significantly with 57% and 12% more metal sold in
2014 than 2013, respectively. Lead sales quantities increased
6% from 2013 while 2014 zinc sales volumes were consistent
with 2013 levels.
Silver (1) – ounces
Gold (1) – ounces
Zinc (1) – tonnes
Lead (1) – tonnes
Copper (1) – tonnes
Realized Metal Prices
Year ended December 31,
Quantities of Metal Sold
Year ended December 31,
2014
2013
2014
2013
$
$
$
$
$
18.53
1,268
2,160
2,085
6,825
$
$
$
$
$
23.29
1,398
1,908
2,141
7,251
25,430,519
25,478,014
158,095
37,547
14,071
7,396
141,341
37,510
13,262
4,718
(1) Metal price stated as dollars per ounce for silver and gold, and dollars per tonne for zinc, lead and copper.
Mine operating earnings were $8.1 million in 2014, a decrease
of $123.4 million from the $131.5 million generated in 2013.
Mine operating earnings are equal to revenue less cost of sales,
which is considered to be substantially the same as gross
margin. The decrease in mine operating earnings was primarily
the result of the $72.6 million lower revenues noted above, and
an increase in cost of sales, which was $50.9 million higher
in 2014 than in 2013. The year over year increase to cost of
sales was largely from higher production costs at Dolores and
Manantial Espejo, mines which as discussed in the respective
operations summaries experienced increased throughput and
costs per ounce in 2014 compared to 2013. Also contributing
to increased 2014 production costs was the 2014 inclusion of
total negative period end in-process inventory NRV adjustments
of $29.9 million compared to $13.0 million in 2013. The 2014
NRV inventory adjustments were comprised of a $19.7 million
adjustment on heap inventory, and adjustments of $7.0 million,
$0.9 million and $2.3 million on doré, stockpile and in-process
inventories, respectively. The comparative total $13.0
million NRV adjustment in 2013 was comprised of
adjustments for $10.3 million and $2.7 million on heap and
doré inventories, respectively.
Impairments of mineral property plant and equipment
assets and goodwill of $596.3 million pre-tax ($498.7
million net of tax) were recorded in 2014 relating to certain
mining assets of the Company as summarized in the
table below. This compares to the non-cash impairments
of $540.2 million pre-tax ($420.4 million net of tax)
recorded in 2013 primarily related to the Dolores mine
and associated goodwill arising upon the acquisition of
Minefinders in March 2012.
The following table summarizes the before and after tax
impairment charges taken on the Company’s mineral
property assets in 2014 and 2013:
Mine assets:
Dolores mine (1)
Manantial Espejo mine
Alamo Dorado mine
Total mine assets
Development properties:
Navidad property
Minefinders exploration properties (2)
Pico Machay property
Total development properties
Total
December 31, 2014
December 31, 2013
(millions)
(millions)
Pre-tax
Net of tax
Pre-tax
Net of tax
$
$
$
$
$
170.6
$
110.8
$
525.4
$
405.6
76.7
23.7
55.9
17.7
-
-
-
-
271.0
$
184.4
$
525.4
$
405.6
286.1
$
286.1
$
-
$
34.4
4.8
325.3
596.3
$
$
23.4
4.8
314.3
498.7
$
$
14.8
-
14.8
540.2
$
$
-
14.8
-
14.8
420.4
(1) The 2013 Dolores impairment charge includes a $184.7 million write-down to goodwill.
(2) The 2014 Exploration asset impairment includes a $4.1 million write-down to related goodwill, while the 2013
impairment includes a $7.1 million write down to related goodwill.
24
pan american silver corp. Due to a sustained decrease in metal prices that began during
the third quarter of 2014 during the fourth quarter of 2014 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 2018) in its life of mine
cash flow models. The Company concluded that these changes
constituted an indication of impairment in the fourth quarter of
2014. Based on the Company’s estimation of the recoverable
amounts of its mineral properties as at December 31, 2014,
determined on a fair value less costs to sell basis, the Company
concluded that impairment charges were required on the
Dolores, Manantial Espejo and Alamo Dorado mines, as well
as on the Navidad project, and certain non-core
exploration properties.
The Company’s key assumptions for each impairment test
included the most current information on operating and capital
costs, and risk adjusted project specific discount rates. The
Company used a median of analysts’ consensus pricing for
the first four years of its economic modeling for impairment
purposes, and long term reserve prices for the remainder
of each asset’s life. The prices used can be found in the key
assumptions and sensitivity section below.
At its Dolores property, the Company determined that the
carrying value of approximately $516.1 million, net of associated
deferred tax liabilities was greater than its recoverable amount
of $405.3 million when using a 5% risk adjusted discount rate.
Based on the assessment at December 31, 2014, the Company
recorded a further impairment charge related to the Dolores
mine of $170.6 million before tax ($110.8 million net of tax)
comprised of mineral property of $88.6 million, exploration and
evaluation property of $72.0 million, and property, plant and
equipment assets of $10.0 million.
At its Manantial Espejo property, the Company determined
that the carrying value of approximately $142.1 million, net
of associated deferred tax liabilities, was greater than its
recoverable amount of $86.2 million when using a 9% risk
adjusted discount rate. Based on the above assessment at
December 31, 2014, the Company recorded an impairment
charge related to the Manantial Espejo mine of $76.7 million
before tax ($55.9 million net of tax) comprised of mineral
property of $46.3 million, and property, plant and equipment
assets of $30.4 million.
At its Alamo Dorado property, the Company determined that the
carrying value of approximately $45.6 million, net of associated
deferred tax liabilities, was greater than its recoverable amount
of $27.6 million when using a 5% risk adjusted discount
rate. Based on this assessment the Company recorded an
impairment charge related to the Alamo Dorado mine of $23.7
million before tax ($17.7 million net of tax) comprised of mineral
property of $7.4 million, and property, plant and equipment
assets of $16.3 million.
With regard to its Navidad property, the Company concluded
an impairment at December 31, 2014 was warranted given
the sustained decrease in metal prices and thus the implied
market value of exploration and development-stage mineral
properties, and the relatively high discount rate utilized for
the recoverability assessment which reflects the currently
challenging Argentine economic and mining industry conditions.
The Company used a range of expected FX assumptions, and a
risk adjusted project specific discount rate of 11.25% to develop
a discounted cash flow model. Additionally, the Company
compiled market data to develop an in-situ based valuation
of the property. The result indicated that an impairment of
$286.1 million before tax ($286.1 million net of tax) comprised
of $271.9 million exploration and evaluation property, $3.6
million of land, and $10.6 million of equipment was necessary to
reduce the approximate carrying value of $486.5 million to the
estimated recoverable value of $200.4 million, inclusive of land
and equipment.
Furthermore, in the fourth quarter of 2014 the Company
determined that its La Bolsa, La Virginia, and Pico Machay
properties at December 31, 2014 all had recoverable values,
on a fair value less cost of sales basis, below their carrying
values. For the La Bolsa property an impairment of $10.3 million
before tax ($6.4 million net of tax) was warranted to reduce
the carrying value of $25.2 million. The La Virginia property
was written off entirely, including related goodwill $4.1 million,
resulting in a total $24.1 million charge before tax ($17.0
million net of tax). At the Pico Machay property the Company
determined that a $4.8 million impairment (both before and
after tax) was appropriate to reduce the carrying value of
approximately $22.2 million to $17.4 million.
Similarly, in 2013 primarily due to a sustained decrease in metal
prices that began during the second quarter and continued
through the balance of 2013, the Company concluded that
impairment indicators existed and ultimately impairments were
required at both June 30, 2013 and December 31, 2013.
For the June 30, 2013 impairment assessment the Company
used then-current information for key assumptions 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. 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 a Dolores mine related 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
$3.9 million.
In 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 which ultimately lead to
a conclusion that an impairment charge of $218.1 million net
of tax ($336.8 million before tax), was required on the Dolores
asset, which was allocated pro-rata amongst the mineral
property ($194.6 million), exploration and evaluation property
($116.1 million), and property, plant and equipment assets
($26.1 million). This Q4 2013 impairment was in addition to a
June 30, 2013 Dolores net of tax impairment of $187.5 million
($188.6 million before tax), further discussed in the paragraph
above. For the purposes of the December 31, 2013 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
25
2014 annual report were substantively enacted at that time, 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.
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
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.
Key assumptions and sensitivity
The metal prices used to calculate the recoverable amounts at
December 31, 2014, December 31, 2013 and June 30, 2013 are
based on analyst consensus prices and the Company’s long
term reserve prices, and are summarized in the following tables:
Metal prices used at December 31, 2014
Commodity Prices
2015-2018 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper - $/tonne
Lead Price - $/tonne
$19.03
$1,266
$2,423
$6,996
$2,255
$18.50
$1,250
$2,000
$6,800
$2,000
Metal prices used at December 31, 2013
Commodity Prices
2014-2017 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper - $/tonne
Lead Price - $/tonne
$22.43
$1,338
$2,184
$7,001
$2,205
$22.00
$1,300
$1,850
$6,800
$1,950
Metal prices used at June 30, 2013
Commodity Prices
2013-2016 average
Long term
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper - $/tonne
Lead Price - $/tonne
$26.79
$1,508
$2,238
$7,436
$2,221
$25.00
$1,350
$1,750
$6,500
$1,850
The Company assesses impairment, when events or changes
in circumstances indicate that the related carrying value
may not be recoverable, at the cash-generating unit level
(“CGU”), 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 7.5% for 2014 (2013 – 8%), with rates applied to
the various mines and projects ranging from 4.75% to 11.25%
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, 2014, the Company performed a sensitivity
analysis on all key assumptions that assumed a negative 10%
change to each individual assumption while holding the other
assumptions constant. Under certain such scenarios the
carrying value of the Company’s mineral properties associated
with the Huaron mine and the Morococha mine may exceed
their recoverable amount for the purposes of an
impairment test.
For the Huaron mine, either of a 2% decrease in the long
term silver price, a 4% decrease in the long term zinc price,
a 6% decrease in the long term lead price, a 9% decrease in
the long term copper price, a 1% increase in operating costs,
a 4% appreciation of the Peruvian sol, or an 8% increase in
capital expenditures would all in isolation cause the estimated
recoverable amount to be equal to the CGU carrying value of
$72.0 million (2013–$65.8 million). At December 31, 2013, none
of these factors, if negatively affected by 10%, would have caused
the carrying value to equal or exceed the recoverable value.
For the Morococha mine, either of an 8% decrease in the long
term silver price, or a 7% increase in operating costs would
in isolation, cause the estimated recoverable amount to be
equal to the CGU carrying value of $121.4 million (2013–$125.6
million). At December 31, 2013, 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 Alamo Dorado mine, the
Manantial Espejo 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.
General and Administrative expense for 2014 was a $17.9
million comparable to the $17.6 million expense recorded in
2013. 2014 G&A expense included $2.5 million in share-based
compensation, also comparable to the $2.2 million share based
compensation included in 2013.
Exploration and project development expense was $13.2 million
in 2014, a $2.3 million decrease compared to the $15.5 million
expense in 2013. Both 2014 and 2013 exploration and project
development expenditures were primarily related to greenfield
exploration drilling activities predominantly within the vicinity
of current operations. Also included in these expenses was
approximately $4.8 million relating to the Navidad project
compared to approximately $3.3 million of Navidad expense
in 2013.
26
pan american silver corp. Investment income for the year ended December 31, 2014
totalled $2.8 million (2013 - $3.1 million) and consisted mainly
of interest income and net gains from the sales of the securities
within the Company’s short-term investment portfolio.
Income taxes for 2014 were a $92.5 million recovery, a $109.3
million decrease from the $16.8 million income tax expense
recorded in 2013. The 2014 and 2013 income tax provisions
were comprised of current and deferred income taxes
as follows:
Current taxes
Current tax expense in respect of the current year
$
35,763
$
2014
2013
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
Reduction in deferred tax liabilities due to tax impact of net realizable value
charge to inventory
Provision for income taxes
44
35,807
(20,199)
2,862
(2,876)
54,365
1,326
55,691
(865)
(523)
86,825
(97,541)
(119,800)
(10,547)
(128,301)
$
(92,494)
$
(4,571)
(38,934)
16,757
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 an effective tax rate that varies 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, 2014 and the comparable period
of 2013 were then non-deductible foreign exchange (gains)/
losses, foreign tax rate differences, mining taxes paid, and
withholding tax on payments from foreign subsidiaries.
In 2014, the Company recorded a non-cash impairment charge
on non-current assets on several properties, and on goodwill
associated with the La Virginia property. No tax benefit was
recognized on a substantial portion of these impairment
charges, mainly related to the non-current assets of Navidad
and the goodwill related to La Virginia.
In 2013, the Company recorded a non-cash impairment
charge on goodwill related to Dolores and other Minefinders’
exploration properties. No tax benefit was recognized for
these transactions.
The Company expects that these and other factors will continue
to cause volatility in effective tax rates in the future.
27
2014 annual report
Loss taxes
Statutory tax rate
Income tax expense based on above rates
Increase (decrease) due to:
Non-deductible expenses
Foreign tax rate differences
Change in net deferred tax assets not recognized:
Argentina exploration expenses
Other deferred tax assets not recognized
Non-taxable unrealized gains on derivative financial instruments
Effect of other taxes paid (mining and withholding)
Non-deductible foreign exchange loss
Change to temporary differences on inventory
Impact of Peruvian tax rate change
Effect of change in deferred tax resulting from prior asset purchase
accounting under IAS12
Impairment charges
Impact of Mexican tax reform
Other
Effective tax rate
2014
2013
$
$
(637,315)
26.00%
(165,702)
$
$
4,902
(61,445)
847
2,289
(350)
8,050
4,430
2,647
(2,876)
3,272
110,692
-
750
$
(92,494)
$
14.51%
(429,089)
25.75%
(110,490)
5,198
(22,164)
3,598
2,042
(4,304)
14,451
242
-
-
3,394
41,166
86,825
(3,201)
16,757
(3.91%)
* The 2014 statutory income tax rates in the countries that the Company has operations in are as follows:
Argentina – 35%, Bolivia – 25%, Mexico –30%, Peru – 30%.
• Statement of Cash Flows
Cash flow from operations generated $124.2 million in 2014,
a 4% increase from the $119.6 million generated a year ago. A
large part of the increase in cash flow from operations resulted
from the $64.9 million decrease to income tax paid in 2014
compared to 2013, and a positive $32.9 million change in
working capital movement which was a $11.6 million source
of cash in 2014 compared to a $21.3 million use of cash flow
in 2013. The major difference in year over year working capital
movements was the effect of inventory balances decreases
in 2014 versus increases in 2013, which resulted in working
capital cash generation of $11.3 million 2014 compared to a $25
million cash use in 2013. The positive effect of income taxes and
working capital variances on 2014 cash flows offset the effect
of lower cash operating margins driven largely by the previously
discussed 2014 decline in realized metal prices.
Investing activities used $143.2 million in 2014, inclusive of
$13.5 million spent on net short-term investments, and $1.9
million cash generated by asset dispositions. The balance
of investing activities consisted primarily of spending $131.8
million on capital at the Company’s mines and projects
as described in the “2014 Operating Performance” section
above. In 2013, investing activities used $125.3 million,
inclusive of $19.9 million generated from net short-term
investment liquidations and $13.7 million cash generated by
asset dispositions.
Financing activities in 2014 used $83.9 million, whereas
financing activities in 2013 used $90.2 million. Cash used
in financing activities in 2014 consisted of $75.8 million paid
as dividends to shareholders, $5.3 million in repayments
of construction and equipment leases and $2.4 million in
repayments of short-term debt.
In 2013, $90.2 million in cash was used in financing activities
consisting 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 were 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.
•
Income Statement Q4 2014
Net losses for the three month periods ended December 31,
2014 and December 31, 2013 were $525.7 million and $293.1
million, respectively. Net losses in both periods were primarily
the result of previously discussed pre-tax impairment charges
taken in in both Q4 2014 and Q4 2013. The basic loss per share
in Q4 2014 was $3.48 compared to the $1.94 loss per share
in Q4 2013. The major contributors to the 2014 increased
loss were: a $280.6 million increase to net of tax non-cash
impairment charges taken on certain mineral property assets;
a $29.3 million decrease in revenues, driven primarily by
lower realized metal prices and decreased sales volumes; a
$11.1 million increase in cost of sales primarily from increased
depreciation and negatively affected NRV adjusted production
costs, and a $11.8 million decrease in other income driven
mainly by nonrecurring Morococha relocation payments
received in 2013. These factors were offset by various expense
reductions in 2014, the most significant being a $107.2 million
decrease in income tax expense which excludes the tax effect of
the non-cash impairments.
28
pan american silver corp. The following table highlights the key items that affected net loss quarter over quarter:
Q4 2013 net loss
Decreased revenue:
Lower realized metal prices, net of changes in settlement adjustments
$
(25,354)
(1,814)
(2,096)
(6,881)
(4,179)
Lower quantities of metal sold
Increased TCRCs
Total change in revenue
Increased cost of sales:
Higher depreciation and amortization
Higher production costs net of royalty charges
Total change in cost of sales
Net of tax 2014 impairment, incremental to 2013
Decreased other income
Increased exploration and project development expense
Decreased net realized gain on derivatives, commodity contracts and asset sales
Decreased income tax, excluding effect of mineral property impairments
Decreased net finance and interest expense
Decreased FX loss
Net change in other items
Q4 2014 net loss
$
(293,064)
$
(29,264)
(11,060)
(280,636)
(11,793)
(3,288)
(7,574)
107,145
2,785
1,472
(456)
$
(525,727)
Revenue for Q4 2014 was $163.1 million, a 15% decrease from
revenue in the comparable period in 2013. At the end of the Q4
2014 the Company decided to defer the sale of approximately
7,000 ounces of gold and 150,000 ounces of silver produced at
Manantial Espejo mine until the first quarter of 2015. While this
negatively impacted fourth quarter revenues and operating cash
flows, the Company did receive approximately $0.8 million of
additional revenue when this production was sold. Other factors
driving the 15% decrease include a $30.6 million price variance
from lower metal prices realized for all metals but zinc, and a
$2.1 million year-over-year increase in treatment and refining
charges included in revenue, and $1.8 million negative volume
variance from lower quantities of all metals sold. These negative
variances were offset by approximately $5.2 million less in
negative provisional price and quantity adjustments in Q4 2014
compared to those in Q4 2013.
The following table reflects the metal prices that the Company
realized and the quantities of metal sold during each
respective period:
Silver (1) – ounces
Gold (1) – ounces
Zinc (1) – tonnes
Lead (1) – tonnes
Copper (1) – tonnes
Realized Metal Prices
Quantities of Metal Sold
Three months ended December 31,
Three months ended December 31,
2014
2013
2014
2013
$
$
$
$
$
15.70
1,205
2,233
1,960
6,621
$
$
$
$
$
20.28
1,285
1,911
2,143
6,915
6,352,562
6,436,002
35,686
8,563
3,467
2,332
39,746
9,394
3,635
1,286
(1) Metal price stated as dollars per ounce for silver and gold, and dollars per tonne for zinc, lead and copper.
Realized prices for all metals sold decreased from Q4 2013
with the exception of zinc which increased 17%. Silver, lead and
gold experienced the most significant decreases falling 23%,
9% and 6%, respectively. Silver sales volumes in Q4 2014 were
essentially the same as those in 2013, while gold, zinc and lead
decreased 10%, 9% and 5% respectively. The Company had
record copper sales in Q4 2014, selling 81% more than in
Q4 2013.
Mine operating loss in Q4 2014 was $21.4 million, representing
a $40.3 million decrease from mine operating earnings of
$19.0 million in the same quarter last year. The lower revenue
described above, combined with higher production costs and
depreciation and amortization, largely due to higher volumes,
resulted in decreased mine operating earnings. Cost of sales for
Q4 2014 of $184.5 million was an increase of 6% from $173.4
million in the comparable period last year. Q4 2014 results were
also impacted by negative sales adjustments to previously
reported provisional sales of $4.4 million (Q4 2013: $5.8) and
by net realizable value adjustments of $2.2 million
(Q4 2013: $8.4m).
Impairments of mining assets during 2014, as previously
discussed, all took place in Q4 2014 and amounted to $498.7
million, net of tax ($596.3 million before tax), where Q4 2013
impairments to the Dolores mine, as described previously,
amounted to $218.1 million, net of tax ($336.8 million
before tax).
29
2014 annual report General and Administrative expense for Q4 2014 was $3.1
million comparable to the $2.6 million expense recorded in
2013. The slight quarter over quarter increase was driven by
higher share based compensation in Q4 2014 compared to Q4
2013 as the comparable period included expense recoveries
made on year-end adjustments with no such recovery in
Q4 2014.
Exploration and project development expense in Q4 2014
was $4.3 million compared to the $1.0 million in Q4 2013.
Approximately $1.7 million of the Q4 2014 expense related to
Navidad project costs compared to nil in Q4 2013. Consistent
with the annual exploration and project development, the fourth
quarter expenses primarily related to greenfield exploration
drilling activities were predominantly within the vicinity of
current operations.
Income tax provision during Q4 2014 amounted to a recovery
of $105.3 million compared to $19.3 million in Q4 2013. The
main factors which impacted the effective tax rates for Q4
2014 versus the expected statutory rate were similar to those
described above for the full year 2014. The primary reason for
the change in the provision from an expense to a recovery was
the tax impact of impairment charges.
• Statement of Cash Flows Q4 2014
Cash flow from operations generated $0.8 million in Q4
2014, down from the $46.2 million generated one year ago.
The decrease is largely explained by decreases in cash mine
operating earnings, excluding non-cash depreciation and
amortization, and by changes in working capital. The decrease
was offset partially by a $14.4 million decrease in income
taxes paid in Q4 2014 compared to Q4 2013. Changes in
non-cash working capital generated $4.2 million in Q4 2014
compared to $13.0 million in Q4 2013, an $8.8 million decrease.
The decreased cash flow from working capital changes was
primarily attributable to a $13.2 million decrease in cash
generated from receivables movements, which generated
$0.7 million in Q4 2014 compared to $13.9 million in Q4 2013.
Other significant movements were a $6.5 million decrease in
cash generated by changes in liabilities and provisions, which
generated $1.8 million in Q4 2014, compared to $8.3 million in
Q4 2013, offset by an additional $10.9 million source of cash
from movements in prepaid expenditures and inventories, which
generated $1.7 million of cash-flow in Q4 2014 compared to a
$9.2 million use of cash in Q4 2013.
Cash flow from investing activities generated $6.4 million
in Q4 2014 compared to $13.4 million in Q4 2013. Investing
activities in Q4 2014 included cash generation of $33.7 million
in liquidations of short term investments, $30.1 million used
in capital investments, and an aggregate $2.8 million in cash
generated on asset sale proceeds and tax refunds. The Q4
2013 investing activities consisted primarily of $41.2 million in
cash from liquidations of short term investments, an aggregate
of $33.7 million used in capital investments at the operating
mines, and $5.8 million in cash received from proceeds from
asset sales and tax refunds.
Financing activities in Q4 2014 used $20.9 million and
consisted of $18.9 million in dividend payments to our
shareholders, $1.5 million in payments on construction and
equipment leases, and $0.4 million used for the repayment of
short term loans. Financing activities in Q4 2013 used $17.2
million and consisted primarily of $18.9 million in dividend
payments to our shareholders, $2.6 million in payments on
construction and equipment leases, 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.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2014, a company indirectly
owned by a trust of which a director of the Company, Robert
Pirooz, is a beneficiary, was paid approximately $0.4 million
(2013 - $0.4 million) for consulting services. Similarly, at
December 31, 2014 and 2013 an accrual was recorded for
consulting services for a 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 were as follows, in
thousands of USD:
Short-term benefits
Share-based payments
2014
2013
$
$
9,700
$
2,487
8,274
1,890
12,187
$
10,164
LIQUIDITY POSITION
The Company’s cash and short-term investments balances
at December 31, 2014 totaled $330.4 million, which was a
decrease of $92.3 million from the balances at December 31,
2013. The decrease in net cash and short term investments
in 2014 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 and
proceeds from the sales of assets.
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. 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, 2014 was $522.7 million, a
decrease of $166.3 million from the prior year-end’s working
capital of $689.0 million. The decrease in working capital
was primarily due to the decrease in cash and short-term
investments described above, a reclassification of $34.8
million in long term loans to the current liabilities section of
our balance sheet, a decrease in inventories of $31.8 million
and a decline in trade and other receivable balances of $9.1
million. The reclassification of long term debt was based on the
maturity date of a convertible debenture note acquired through
the Minefinders transaction in 2012 occurring on December
15, 2015. The decreases noted in inventories balances were
30
pan american silver corp. driven primarily by negative net realizable adjustments while
trade receivable balances were impacted by negative price
adjustments to provisionally priced sales. Other 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, 2014,
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
sustaining and project capital expenditures for in 2015 of
$161.0 million to $181.0 million and to discharge liabilities as
they come due, including the redemption of the convertible
note of approximately $34.8 million in December 2015. Please
refer to the “2015 Capital Expenditure Forecasts” section
of this MD&A for a more detailed description of the capital
expenditures planned for each mine and projects in 2015. 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,
2014 was $1,563.1 million, a decrease of $619.2 million from
December 31, 2013, primarily as a result of the net loss incurred
in the current year and dividends paid. As at December 31, 2014,
the Company had approximately 151.6 million common shares
outstanding for a share capital balance of $2,296.7 million
(December 31, 2013 – 151.5 million and $2,295.2 million). The
basic weighted average number of common shares outstanding
was 151.6 million for the year ended December 31, 2014, and
151.5 million for year ended December 31, 2013.
On December 17, 2014, 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 7,570,290 of its common
shares, representing up to 5% of Pan American’s issued and
outstanding shares. The period of the bid began on December
22, 2014 and will continue until December 21, 2015 or an earlier
date should the Company complete its purchases. This is the
Company’s fourth 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 December 04, 2014, nil shares were purchased. 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, 2014, 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 53.68 months. Approximately 1.0 million of the stock
options were vested and exercisable at December 31, 2014
with an average weighted exercise price of $22.65 per share.
Additionally, as described in note 17 of the 2014 Financial
Statements entitled Long Term Debt, 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 and options
outstanding as at the date of this MD&A:
Common shares
Options
Total
Outstanding as at
March 26, 2015
151,643,372
1,203,653
152,847,025
The Company issued warrants as part of the Aquiline
acquisition in December 2009 with an exercise price of CAD
$35.00. These warrants expired without being exercised in
December 2014.
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, 2014 and at the date of this MD&A,
the Company had no metal under contract.
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 $74.3 million in CAD, $18.7
million in Mexican Pesos and $4.8 million in Peruvian Soles at
the balance sheet date. At December 31, 2014 and at the date of
this MD&A, all foreign currency forward contract positions had
been closed out. During 2014, the Company maintained short
term bank loans in Argentina and at December 31, 2014 had a
balance outstanding of $17.6 million (2013: $20.1 million). These
loans are denominated in Argentine Pesos and were drawn for
31
2014 annual report 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 $99.7 million (2013
- $107.5 million) which has been discounted using discount
rates between 1% and 21%. The provision on the statement
of financial position as at December 31, 2014 is $43.2 million
(2013 - $41.5 million). Decommissioning obligations at the
Alamo Dorado and Manantial Espejo mines are estimated
to be incurred starting in 2016 and 2017, respectively, while
the remainder of the obligations are expected to be paid
through 2026 or later if mine life is extended. Revisions made
to the reclamation obligations in 2014 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 and related costs,
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 2014 earnings as
finance expense was $3.2 million in line with $3.0 million in
2013. Reclamation expenditures incurred during the current
year were $2.0 million (2013 - $0.4 million).
CONTRACTUAL COMMITMENTS AND
CONTINGENCIES
The Company does not have any off-balance sheet
arrangements or commitments that have a current or future
effect on its financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources, that are material, other
than those disclosed in this MD&A and the 2014 Financial
Statements and the related notes.
the purposes of short term cash management and to partially
offset the foreign exchange exposure of holding local currency
denominated financial assets.
The Company did not record any gains or losses on its forward
contracts and commodity and foreign currency contracts in
2014, compared to a loss of $4.6 million in 2013.
The carrying value of 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 with an exercise
price of CAD $35 per share expired in December 2014. The
change in the valuation of these share purchase warrants
creates a permanent difference for tax purposes and resulted 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, 2014 were expected stock price volatility of
53.57%, expected life of 1.0 years, and expected dividend yield
of 5.44%.
During the years ended December 31, 2014 and 2013, the
Company recorded a gain on the revaluation of the share
purchase warrants and the convertible notes of $1.3 million and
$16.7 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
32
pan american silver corp. The Company had the following contractual obligations at the end of 2014:
Current liabilities
Loan obligation
Finance lease obligations (1)
Severance accrual
Provisions
Income taxes payable
Restricted share units (“RSUs”) (3)
Preferred share units (“PSUs”)
Current portion of long term debt (4)
Payments due by period 2014
Total
Within 1 year(2)
2 - 3 years
4- 5 years
After 5 years
$
125,031
$
125,031
$
17,600
8,425
4,135
3,121
22,321
2,261
281
37,867
17,600
4,238
749
3,121
22,321
1,498
-
37,867
$
-
-
4,187
469
-
-
763
281
-
$
-
-
-
-
-
2,053
864
-
-
-
-
-
-
Total contractual obligations (5)
$
221,042
$
212,425
$
5,700
$
2,053
$
864
(1) Includes lease obligations in the amount of $8.4 million (December 31, 2013 - $10.9 million) with a net present value of $8.0 million (December 31,
2013 - $10.2 million) discussed further in Note 16 of the 2014 Financial Statements and notes.
(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.
December 31, 2014
Current portion of:
Accounts payable and other liabilities
Loan obligation
Current severance liability
Current portion of finance lease
Employee Compensation PSU’s & RSU’s
Convertible note
Provisions
Income tax payable
Total contractual obligations within one year
Future interest
component
Within 1 year
$
$
125,031
17,600
749
3,993
429
34,797
3,121
22,321
208,041
$
$
-
-
-
245
1,069
3,070
-
-
4,384
$
$
125,031
17,600
749
4,238
1,498
37,867
3,121
22,321
212,425
(3) Includes RSU obligation in the amount of $2.2 million (2013 – $2.3 million) that will be settled in cash. The RSUs vest in two instalments, 50% in
December 2014 and 50% in December 2015.
(4) Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition. Refer to Note 17
of the 2014 Financial Statements 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 18 of the 2014 Financial Statements, and deferred tax liabilities.
33
2014 annual report ALTERNATIVE PERFORMANCE (NON-GAAP)
MEASURES
• AISCSOS
We believe that AISCSOS reflects a comprehensive measure
of the full cost of operating our consolidated business given it
includes the cost of replacing silver 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 these measures to the cost of sales,
as reported in the consolidated income statements for the
respective periods.
(in thousands USD, unless otherwise stated)
2014
2013
2014
2013
Three months ended
December 31,
Twelve months ended
December 31,
Direct Operating Costs
Net Realizable Value Adjustments
Production Costs (1)
Royalties
Smelting, refining and transportation charges
Less by-product credits
Cash cost of sales net of by- products (1)
Sustaining capital (3)
Exploration
Reclamation cost accretion
General & administrative expense
All-in sustaining costs (1)
Payable ounces sold (in koz)
All-in sustaining cost per silver ounce sold,
net of by-products (2)
All-in sustaining cost per silver ounce sold,
net of by-products (Excludes NRV Adj.)
(1) Totals may not add due to rounding.
$
138,484 $
127,812 $
538,251 $
517,646
2,212
8,411
29,953
140,695
136,223
568,204
5,277
24,159
5,570
22,063
27,955
86,470
12,967
530,613
26,459
83,244
(84,141)
(85,696)
(361,309)
(331,809)
85,989
24,172
4,278
809
3,051
78,160
25,086
990
757
2,602
321,320
99,083
13,225
3,238
17,908
308,507
111,647
15,475
3,030
17,596
A
B
(A*$1000)/B
$
118,298 $
107,595 $
454,744 $
456,255
6,352.6
6,436.0
25,430.5
25,478.0
$
$
18.62 $
16.72 $
17.88 $
17.91
18.27 $
15.41 $
16.71 $
17.40
(2) In 2014 it was determined that certain charges to metal sales were being treated differently in the quantification of AISCSOS for the Company’s
San Vicente operation compared to the Company’s other operations. As such previously reported AISCSOS for the San Vicente operation have been
revised to quantify AISCSOS with a methodology consistent with that used by Company’s other operations. For the three months ended December
31, 2013 (“Q4-13”) the effect of this revision was a $0.31 decrease to the previously reported consolidated Q4-13 AISCSOS of $17.03. The effect of this
revision for year ended December 31, 2013 was a $0.42 decrease to the Company’s previously reported consolidated AISCSOS of $18.33.
(3) Please refer to the table below
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 silver ounces sold as opposed to investment capital,
which is expected to increase future production. For the periods
under review, the below noted items associated with the La
Colorada expansion project and the Dolores are considered
investment capital projects.
Reconciliation of payments for mineral property, plant and
equipment and sustaining capital (in thousands of USD)
Three months ended
December 31,
Twelve months ended
December 31,
2014
2013
2014
2013
Payments for mineral property, plant and equipment (1)
$
30,131 $
33,669 $
131,761 $
159,401
Add/(Subtract)
Advances received for leases (1)
Project capital (La Colorada expansion project,
and Dolores projects)
636
331
3,230
3,331
(6,595)
(8,914)
(35,908)
(51,085)
Sustaining Capital (2)
$
24,172 $
25,086 $
99,083 $
111,647
(1) As presented on the unaudited condensed interim consolidated statements of cash flows.
(2) Totals may not add due to rounding.
34
pan american silver corp. AISCSOS
Direct Operating Costs
Net Realizable Value Adjustments
Production costs
Royalties
Smelting, refining and other direct
selling charges
Less by-product credits
Cash cost per ounce of silver net of
by-product credits (1)
Sustaining capital
Exploration
Reclamation cost accretion
General & Administrative expense
La
Colorada
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
PAS
CORP
Consolidated
Total
Three months ended December 31, 2014
$
$
11,676 $
29,668 $
18,309 $
20,589 $
16,583 $
8,353 $
-
6,341
1,248
-
-
-
11,676 $
36,009 $
19,557 $
20,589 $
16,583 $
8,353 $
95
1,023
96
-
-
3,112
33,307
(5,377)
27,929
951
2,775
(5,980)
49
149
10,363
5,163
3,471
2,188
(17,859)
(5,870)
(18,525)
(15,198)
(2,681)
(18,027)
$
8,565 $
19,222 $
13,931 $
12,428 $
6,549 $
12,254 $
1,488
1
59
-
7,962
264
90
-
67
135
58
-
4,970
59
150
-
3,149
1,056
96
-
992
-
56
-
13,041
5,543
294
274
-
2,469
25
3,051
$
$
$
138,484
2,212
140,695
5,277
24,159
(84,141)
85,989
24,172
4,278
809
3,051
All-in sustaining costs (1)
$
10,113 $
27,538 $
14,191 $
17,607 $
10,849 $
13,302 $
19,152 $
5,545 $
118,298
Payable silver ounces sold
1,098,949
882,500
816,061
787,616
537,071
1,117,385
1,112,980
6,352,562
All-in Sustaining Costs per Silver
Ounce Sold
All-in Sustaining Costs per Silver
Ounce Sold (Excludes NRV Adj)
$
$
(1) Totals may not add due to rounding.
9.20 $
31.20 $
17.39 $
22.35 $
20.20 $
11.90 $
17.21
N/A $
18.62
9.20
24.02 $
15.86 $
22.35 $
20.20 $
11.90 $
22.04
$
18.27
La
Colorada
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
PAS
CORP
Consolidat-
ed Total
Twelve months ended December 31, 2014
$
$
49,992 $
129,154 $
65,519 $
77,013 $
68,873 $
34,126 $
113,573
-
23,253
1,947
-
-
-
4,753
49,992 $
152,407 $
67,466 $
77,013 $
68,873 $
34,126 $
118,326
436
4,888
457
-
-
17,900
4,273
Less by-product credits
(23,761)
(81,377)
(22,370)
(70,723)
(59,487)
11,142
178
633
32,146
19,799
13,638
(11,753)
8,934
(91,838)
$
37,808 $
76,097 $
46,187 $
38,437 $
29,185 $
53,911 $
13,476
9
237
-
27,632
1,602
362
-
293
336
232
-
17,327
1,312
600
-
10,199
1,453
384
-
3,415
-
226
-
39,695
26,741
1,657
1,096
6,855
102
-
17,908
$
51,530 $
105,693 $
47,048 $
57,676 $
41,221 $
57,552 $
69,189 $ 24,865 $
454,774
4,726,138
3,911,600
3,605,832
3,024,572
2,125,430
4,177,048
3,859,900
25,430,519
$
$
10.90 $
27.02 $
13.05 $
19.07 $
19.39 $
13.78 $
17.93
N/A $
17.88
10.90
21.08 $
12.51 $
19.07 $
19.39 $
13.78 $
16.69
$
16.71
AISCSOS
Direct Operating Costs
Net Realizable Value Adjustments
Production costs
Royalties
Smelting, refining and other direct
selling charges
Cash cost per ounce of silver net of
by-product credits (1)
Sustaining capital
Exploration
Reclamation cost accretion
General & Administrative expense
All-in sustaining costs (1)
Payable silver ounces sold
All-in Sustaining Costs per Silver
Ounce Sold
All-in Sustaining Costs per Silver
Ounce Sold (Excludes NRV Adj)
$
$
538,251
29,953
568,204
27,955
86,470
(361,309)
$
321,320
99,083
13,225
3,238
17,908
(1) Totals may not add due to rounding.
35
2014 annual report
$
$
$
127,812
8,411
136,223
5,570
22,063
(85,696)
78,160
25,086
991
757
2,602
AISCSOS
La
Colorada
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente (2)
Manantial
Espejo
PAS
CORP
Consolidat-
ed Total
Three months ended December 31, 2013
Direct Operating Costs
Net Realizable Value Adjustments
Production costs
Royalties
$
$
14,887 $ 32,288 $
18,365 $
19,265 $
17,744 $
6,025 $
-
12,967
-
-
-
-
14,887 $
45,255 $
18,365 $
19,265 $
17,744 $
6,025 $
-
1,119
-
-
-
3,110
19,239
(4,557)
14,682
1,341
Smelting, refining and other direct selling
charges
3,186
29
147
6,039
5,594
Less by-product credits
(6,275)
(22,695)
(8,787)
(13,392)
(14,187)
4,450
(2,159)
2,618
(18,201)
Cash cost per ounce of silver net of
by-product credits (1)
Sustaining capital
Exploration
Reclamation cost accretion
General & Administrative expense
All-in sustaining costs (1)
Payable silver ounces sold
$
11,798 $
23,707 $
9,725 $
11,911 $
9,151 $
11,426 $
2,161
10,314
542
3,019
2,823
1,864
30
53
-
625
80
-
42
48
-
309
137
-
145
99
-
-
70
-
441
4,362
124
244
(286)
26
-
2,602
$
14,042 $
34,727 $
10,357 $
15,376 $
12,218 $
13,360 $
5,172 $
2,342 $
107,595
1,290,798
955,000
1,305,008
730,651
578,615
835,919
740,010
6,436,002
All-in Sustaining Costs per Silver Ounce
Sold(2)
All-in Sustaining Costs per Silver Ounce
Sold (Excludes NRV Adj)
$
$
(1) Totals may not add due to rounding.
10.88 $
36.36 $
7.94 $
21.04 $
21.12 $
15.98 $
6.99
N/A $
16.72
10.88
22.78 $
7.94 $
21.04 $
21.12 $
15.98 $
13.15
$
15.41
(2) In 2014 it was determined that certain charges to metal sales were being treated differently in the quantification of AISCSOS for the Company’s San Vicente
operation compared to the Company’s other operations. As such previously reported AISCSOS for the San Vicente operation have been revised to quantify
AISCSOS with a methodology consistent with that used by Company’s other operations. For the three months ended December 31, 2013 (“Q4-13”) the effect of
this revision was a $0.31 decrease to the previously reported consolidated Q4-13 AISCSOS of $17.03.
AISCSOS
La
Colorada
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
PAS
CORP
Consolidat-
ed Total
Twelve months ended December 31, 2013
Direct Operating Costs
$ 51,831 $
109,082 $
66,044 $
77,379 $
77,590 $
28,422 $
107,299
Net Realizable Value Adjustments
-
12,967
-
-
-
-
-
$
51,831 $
122,049 $
66,044 $
77,379 $
77,590 $
28,422 $
107,299
-
4,497
-
-
-
17,508
4,454
Less by-product credits
(22,421)
(86,098)
(27,922)
(54,240)
(50,711)
(12,440)
10,589
98
530
26,754
20,611
16,358
$
$
517,646
12,967
530,613
26,459
83,244
(331,809)
$
308,509
111,648
15,475
3,030
17,596
8,304
(77,976)
42,082
12,002
608
977
6,831
103
-
17,596
$
39,999 $
40,546 $
38,652 $
49,893 $
47,490 $
49,847 $
13,574
225
211
-
36,159
3,856
321
-
7,621
1,297
192
-
15,474
18,653
936
549
-
1,722
397
-
8,165
-
280
-
$
54,008 $
80,882 $
47,761 $
66,852 $
68,262 $
58,293 $
55,669 $ 24,530 $
456,259
4,448,788
3,360,730
5,565,694
2,878,029
2,216,331
3,702,012
3,306,429
25,478,014
$
$
12.14 $
24.07 $
8.58 $
23.23 $
30.80 $
15.75 $
16.84
N/A $
17.91
12.14
20.21 $
8.58 $
23.23 $
30.80 $
15.75 $
16.84
N/A $
17.40
Production costs (1)
Royalties
Smelting, refining and other direct
selling charges
Cash cost per ounce of silver net of
by-product credits (1)
Sustaining capital
Exploration
Reclamation cost accretion
General & Administrative expense
All-in sustaining costs (1)
Payable silver ounces sold
All-in Sustaining Costs per Silver
Ounce Sold(2)
All-in Sustaining Costs per Silver
Ounce Sold (Excludes NRV Adj)
(1) Totals may not add due to rounding.
(2) In 2014 it was determined that certain charges to metal sales were being treated differently in the quantification of AISCSOS for the Company’s San
Vicente operation compared to the Company’s other operations. As such previously reported AISCSOS for the San Vicente operation have been revised
to quantify AISCSOS with a methodology consistent with that used by Company’s other operations. The effect of this revision for year ended December
31, 2013 was a $0.42 decrease to the Company’s previously reported consolidated AISCSOS of $18.33.
• 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. Sales of silver contributed approximately
54% of our total revenues for Q4 2014, compared to 60% in
Q4 2013 while by-products were responsible for the remaining
46%, compared to 40% in Q4 2013. As a performance measure,
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 this metric is useful to investors as it facilitates
comparison, on a mine by mine basis, notwithstanding the
unique mix of incidental by-product production at each mine,
the relative performance of each of our operations’ relative
performance on a period by period basis, and that performance
relative to the operations of our peers in the silver industry on a
consistent basis.
36
pan american silver corp.
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:
Total Cash Costs and Total Production Costs per Ounce
of Payable Silver, net of by-product credits
(Unaudited in thousands of U.S. dollars)
Production costs
Add/(Subtract)
Royalties
Smelting, refining, and transportation charges
Worker’s participation and voluntary payments
Change in inventories
Other
Non-controlling interests(1)
Metal Inventory write-down
Three months ended
December 31,
Twelve months ended
December 31,
2014
2013
2014
2013
$
140,695 $
136,223 $
568,204 $
530,613
5,277
21,195
113
8,966
(1,461)
(1,204)
(2,212)
5,570
19,767
(531)
4,050
1,311
27,955
76,968
(484)
15,835
(5,653)
(1,239)
(4,746)
(8,411)
(29,953)
26,459
76,547
(1,067)
(624)
(5,408)
(5,967)
(12,967)
607,586
Cash Operating Costs before by-product credits
171,369
156,740
648,126
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
(51,794)
(57,882)
(201,317)
(205,204)
(19,676)
(18,680)
(81,357)
(69,688)
(7,412)
(7,079)
(29,903)
(27,694)
(16,935)
(9,872)
(52,856)
(35,609)
Cash Operating Costs net of by-product credits
A
75,554
63,228
282,693
269,391
Add/(Subtract)
Depreciation and amortization
Closure and decommissioning provision
Change in inventories
Other
Non-controlling interests(1)
Total Production Costs net of by-product credits(3)
Payable Silver Production (koz.)
Cash Costs per ounce net of by-product credits
Total Production Costs per ounce net of by-product credits
38,493
31,612
147,710
135,913
809
3,712
-
(493)
758
525
(248)
(494)
3,238
7,422
-
3,030
5,451
(971)
(1,938)
(2,109)
$
118,072 $
95,381 $
439,124 $
410,706
6,340.4
6,419.1
24,663.4
24,578.5
B
C
(A*$1000)
/C
(B*$1000)
/C
$
$
11.92
9.85 (2) $
11.46 (2)
10.96 (2)
18.62
14.86 $
17.80
16.71
(1) 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.
(2) Previously reported cash costs and total costs for the Company’s Peruvian operations overstated copper by-product credits. Both consolidated and
Peruvian annual cash costs for 2014 and 2013 have been adjusted to correct for this overstatement. The effect of these corrections on 2014’s annual
cash costs was as follows: a $0.50 per ounce increase to consolidated cash costs (2013 - $0.15); a $2.87 per ounce increase to Huaron cash costs
(2013 - $0.85); and a $1.72 per ounce increase to Morococha cash costs (2013 - $0.58). The fourth quarter 2013 cash costs have also been adjusted to
correct for this overstatement. The effect of these corrections on the fourth quarter of 2013’s cash costs was as follows: a $0.29 per ounce increase to
consolidated cash costs; a $1.74 per ounce increase to Huaron cash costs and a $1.02 per ounce increase to Morococha cash costs.
(3) Totals may not add due to rounding.
37
2014 annual report Cash Costs before by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
A
b1
b2
b3
b4
Sub-total by-product credits(1)
B=(b1+ b2+
b3+ b4)
Cash Costs net of by-product credits (1)
C=(A+B)
Depreciation, amortization &
reclamation
Total production costs net of by-product
credits(1)
Payable ounces of silver (koz)
D
E=(C+D)
F
Three months ended December 31, 2014
La
Colorada
$
15,824 $
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
Consolidat-
ed Total
33,909 $
18,896 $
29,001 $
22,046 $
15,736 $
34,500 $
169,913
$
$
$
$
$
$
$
$
(681) $
(21,555) $
(6,775) $
(36) $
(798) $
(67) $
(21,812) $
(51,724)
(4,154) $
(1,897) $
- $
- $
- $
- $
- $
- $
(6,177) $
(6,110) $
(2,586) $
(3,049) $
(2,069) $
(211) $
(32) $
(9,746) $
(6,604) $
- $
- $
- $
- $
(19,028)
(7,227)
(16,382)
(6,731) $
(21,555) $
(6,807) $
(19,009) $
(15,581) $
(2,864) $
(21,812) $
(94,360)
9,093 $
12,354 $
12,089 $
9,993 $
6,465 $
12,872 $
12,688 $
75,553
2,371 $
17,337 $
2,484 $
3,223 $
4,566 $
2,131 $
10,414 $
42,526
11,464 $
29,691 $
14,573 $
13,216 $
11,031 $
15,003 $
23,102 $
118,079
1,202
951
859
818
516
1,084
911
6,340
Cash cost per Ounce of Silver net of by-product credits
Total cash cost per ounce net of by-
products
Total production cost per ounce net of
by-products
=C/F
=E/F
$
$
7.57 $
12.99 $
14.07 $
12.22 $
12.53 $
11.88 $
13.93 $
11.92
9.54 $
31.22 $
16.96 $
16.16 $
21.38 $
13.84 $
25.36 $
18.62
Cash Costs before by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
Twelve months ended December 31, 2014
La
Colorada
$
62,635 $
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
Consolidat-
ed Total
135,665 $
66,727 $
107,990 $
83,915 $
59,287 $
126,500 $
642,720
$
$
$
$
(2,534) $
(84,317) $ (22,048) $
(295) $
(2,730) $
(254) $ (88,898) $ (201,075)
(14,128) $
(7,265) $
- $
- $
- $
- $
- $
- $
(25,414) $
(28,381) $
(10,504) $
(11,817) $
(9,340) $
(663) $
(164) $
(34,394) $
(16,884) $
- $
- $
- $
- $
(78,426)
(29,086)
(51,442)
A
b1
b2
b3
b4
Sub-total by-product credits(1)
B=(b1+ b2+
b3+ b4)
$ (23,927) $
(84,317) $
(22,212) $
(71,920) $
(57,335) $
(11,420) $ (88,898) $ (360,028)
Cash Costs net of by-product credits (1)
C=(A+B)
Depreciation, amortization &
reclamation
D
Total production costs net of by-product
credits(1)
E=(C+D)
$
$
$
38,708 $
51,347 $
44,516 $
36,070 $
26,581 $
47,867 $
37,602 $
282,692
9,278 $
57,372 $
11,716 $
12,417 $
18,118 $
7,979 $
39,551 $
156,432
47,986 $
108,720 $
56,231 $
48,488 $
44,699 $
55,846 $
77,154 $
439,123
Payable ounces of silver (koz)
F
4,756
3,969
3,454
3,120
2,010
3,636
3,717
24,663
Cash cost per Ounce of Silver net of by-product credits
Total cash cost per ounce net of by-
products
Total production cost per ounce net of
by-products
=C/F
=E/F
$
$
(1) Totals may not add due to rounding.
8.14 $
12.94 $
12.89 $
11.56 (2) $
13.22 (2) $
13.16 $
10.12 $
11.46 (2)
10.09 $
27.39 $
16.28 $
15.54 $
22.23 $
15.36 $
20.76 $
17.80
(2) Previously reported cash costs for the Company's Peruvian operations overstated copper by-product credits. Both consolidated and Peruvian
annual cash costs for 2014 and 2013 have been adjusted to correct for this overstatement. The effect of these corrections on 2014's annual cash costs
was as follows: a $0.50 per ounce increase to consolidated cash costs (2013 - $0.15); a $2.87 per ounce increase to Huaron cash costs (2013 - $0.85);
and a $1.72 per ounce increase to Morococha cash costs (2013 - $0.58). The fourth quarter 2013 cash costs have also been adjusted to correct for this
overstatement. The effect of these corrections on the fourth quarter of 2013's cash costs was as follows: a $0.29 per ounce increase to consolidated
cash costs; a $1.74 per ounce increase to Huaron cash costs and a $1.02 per ounce increase to Morococha cash costs.
38
pan american silver corp. Cash Costs before by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
A
b1
b2
b3
b4
Sub-total by-product credits(1)
B=(b1+ b2+
b3+ b4)
Cash Costs net of by-product credits (1)
C=(A+B)
Depreciation, amortization &
reclamation
Total production costs net of by-
product credits(1)
Payable ounces of silver (koz)
D
E=(C+D)
F
$
$
$
$
$
$
$
$
La
Colorada
$
15,161 $
Three months ended December 31, 2013
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
Consolidat-
ed Total
32,484 $
18,634 $
25,198 $
20,430 $
16,116 $
27,464 $
(690) $
(19,818) $
(7,527) $
(86) $
(855) $
- $
(28,835) $
(3,001) $
(1,697) $
- $
- $
- $
- $
- $
- $
(5,585) $
(6,850) $
(2,536) $
(2,934) $
(281) $
(5,461) $
(1,868) $
(3,810) $
(402) $
- $
- $
- $
- $
155,487
(57,810)
(17,972)
(6,902)
(9,552)
(5,388) $
(19,818) $
(7,807) $
(14,066) $
(13,384) $
(2,938) $
(28,835) $
(92,236)
9,773 $
12,666 $
10,827 $
11,132 $
7,046 $
13,178 $
(1,372) $
63,251
2,245 $
9,021 $
3,676 $
3,132 $
4,622 $
2,284 $
7,173 $
32,153
12,018 $
21,688 $
14,503 $
14,263 $
11,668 $
15,463 $
5,801 $
1,191
920
1,228
760
543
907
869
95,404
6,419
Cash cost per Ounce of Silver net of by-product credits
Total cash cost per ounce net of by-
products
Total production cost per ounce net of
by-products
=C/F
=E/F
$
$
8.20 $
13.77 $
8.81 $
14.65 (2) $
12.97 (2) $
14.53 $
(1.58) $
9.85 (2)
10.09 $
23.57 $
11.81 $
18.77 $
21.49 $
17.05 $
6.67 $
14.86
$
$
$
$
Cash Costs before by-product credits
Less gold credit
Less zinc credit
Less lead credit
Less copper credit
A
b1
b2
b3
b4
Sub-total by-product credits(1)
B=(b1+ b2+
b3+ b4)
Cash Costs net of by-product credits (1)
C=(A+B)
Depreciation, amortization &
reclamation
Total production costs net of by-
product credits(1)
Payable ounces of silver (koz)
D
E=(C+D)
F
La
Colorada
$
61,554 $
Twelve months ended December 31, 2013
Dolores
Alamo
Dorado
Huaron Morococha
San
Vicente
Manantial
Espejo
Consolidat-
ed Total
117,203 $
62,454 $
99,745 $
(2,894) $
(91,113) $ (24,194) $
(177) $
84,087 $
(2,611) $
67,123 $
110,810 $
602,976
- $
(83,995) $
(204,985)
(10,895) $
(6,605) $
- $
- $
- $
- $
- $
- $
(22,245) $
(24,110) $
(9,897) $
(11,685) $
(7,553) $
(1,157) $
(712) $
(21,128) $
(12,704) $
- $
- $
- $
- $
(67,148)
(27,000)
(34,544)
$ (20,394) $
(91,113) $ (24,907) $
(55,235) $
(46,978) $
(11,055) $
(83,995) $
(333,677)
$
$
$
41,160 $
26,090 $
37,548 $
44,510 $
37,109 $
56,068 $
26,815 $
269,299
8,010 $
44,210 $
17,813 $
11,667 $
17,648 $
9,226 $
32,885 $
141,460
49,170 $
70,301 $
55,361 $
56,177 $
54,757 $
65,294 $
59,700 $
4,365
3,494
5,043
2,879
2,046
3,614
3,138
410,759
24,578
Cash cost per Ounce of Silver net of by-product credits
Total cash cost per ounce net of by-
products
Total production cost per ounce net of
by-products
=C/F
=E/F
$
$
(1) Totals may not add due to rounding.
9.43 $
7.47 $
7.45 $
15.46 (2) $
18.14 (2) $
15.51 $
8.55 $
10.96 (2)
11.27 $
20.12 $
10.98 $
19.51 $
26.76 $
18.07 $
19.03 $
16.71
(2) Previously reported cash costs for the Company’s Peruvian operations overstated copper by-product credits. Both consolidated and Peruvian
annual cash costs for 2014 and 2013 have been adjusted to correct for this overstatement. The effect of these corrections on 2014’s annual cash costs
was as follows: a $0.50 per ounce increase to consolidated cash costs (2013 - $0.15); a $2.87 per ounce increase to Huaron cash costs (2013 - $0.85);
and a $1.72 per ounce increase to Morococha cash costs (2013 - $0.58). The fourth quarter 2013 cash costs have also been adjusted to correct for this
overstatement. The effect of these corrections on the fourth quarter of 2013’s cash costs was as follows: a $0.29 per ounce increase to consolidated
cash costs; a $1.74 per ounce increase to Huaron cash costs and a $1.02 per ounce increase to Morococha cash costs.
• 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 2014 and 2013, to
the net (loss) earnings for each period.
39
2014 annual report Adjusted Earnings Reconciliation
Net (loss) earnings for the period
Adjust derivative losses (gains)
Adjust gain on sale of mineral properties
Adjust unrealized foreign exchange (gains) losses
Adjust net realizable value of inventory
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 write-down of mining assets
Adjust for effect of taxes on above items
Adjusted (loss) earnings for the period
Weighted average shares for the period
Three months ended
Twelve months ended
December 31,
December 31,
2014
2013
2014
2013
$ (525,727)
$ (293,064) $
(544,823)
$
(445,846)
252
(945)
(618)
10,982
-
-
-
(1,249)
(5,969)
(656)
10,281
(1,127)
260
-
(1,348)
(1,145)
4,034
36,578
-
-
-
596,262
336,785
596,262
(101,413)
(122,909)
(110,383)
(16,715)
(14,068)
(922)
10,281
5,127
25
617
540,228
(121,571)
$
(21,207)
$
(77,648) $
(20,825)
$
(42,844)
151,534
151,428
151,511
151,501
Adjusted earnings (loss) per share for the period
$
(0.14)
$
(0.51) $
(0.14)
$
(0.28)
(1) In 2014 the Company began excluding net realizable value adjustments to long term heap inventory from adjusted earnings, and as such certain
prior period adjusted losses have been revised to reflect this treatment. As a result the adjusted losses for the three and twelve month periods ended
December 31, 2014 decreased by $6,658 from the $(84,306) and $(49,502) adjusted losses previously reported for these periods, respectively.
The following graph illustrates the key factors leading to the change from adjusted net loss for the year ended December 31, 2013 to
the adjusted net loss incurred in 2014.
Adjusted Earnings (loss) Analysis – 2013 over 2014
$0
-$50
($43)
($113)
s
n
o
i
l
l
i
M
-$100
-$150
($21)
$120
($13)
($12)
($10)
($3)
$2
$6
$44
-$200
YE 2013
Decrease in
metal prices
net of ad-
justments
NRV adjust-
ment & other
operating
cost
Increased
Deprecia-
tion
Net other
items
Increase in
TCRCs
Decreased
exploration
expense net
of G&A
Negative
realized FX
variance
Increased
sales
volume
Effect of
income tax
provision
YE 2014
The following graph illustrates the key factors leading to the change from adjusted net loss for Q4 2013 to that in Q4 2014.
Adjusted loss Analysis – Q4 2013 over Q4 2014
$0
-$20
-$40
($78)
s
n
o
i
l
l
i
M
-$60
-$80
-$100
-$120
-$140
40
($21)
$107
($25)
($9)
($7)
($4)
($4)
$(2)
$(2)
$2
Q4 2013
Decrease in
metal prices
net of ad-
justments
Net other
items
Increased
Deprecia-
tion
NRV adjust-
ment & other
operating
cost
Decreased
exploration
expense net
of G&A
Increase in
TCRCs
Decrease
sales
volume
Negative
realized FX
variance
Increase in
income tax
provision
Q4 2014
pan american silver corp. 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, 2014. 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, have suffered from armed robberies of doré in the
past. 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 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.
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,
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
41
2014 annual report 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.
On May 28, 2014, the Bolivian government enacted Mining
Law No. 535 (the “New Mining Law”). Among other things,
Expected 2015 Revenue (000’s USD)
the New Mining Law has established a new Bolivian mining
authority to provide principal mining oversight (varying the
role of COMIBOL) and sets out a number of new economic
and operational requirements relating to state participation
in mining projects. Further, the New Mining Law provides that
all pre-existing contracts are to migrate to one of several new
forms of agreement within a prescribed period of time. As a
result, we anticipate that our current joint venture agreement
with COMIBOL relating to the San Vicente mine will be subject
to migration to a new form of agreement and may require
renegotiation of some terms in order to conform to the New
Mining Law requirements. We are assessing the potential
impacts of the New Mining Law on our business and are
awaiting further regulatory developments, but the primary
effects on the San Vicente operation and our interest therein
will not be known until such time as we have, if required to do
so, renegotiated the existing contract, and the full impact may
only be realized over time. In the meantime, we understand that
pre-existing agreements will be respected during the period of
migration and we will take appropriate steps to protect and, if
necessary, enforce our rights under our existing agreement with
COMIBOL. There is, however, no guarantee that governmental
actions, including possible expropriation or additional changes
in the law, and the migration of our contract will not impact our
involvement in the San Vicente operation in an adverse way and
such actions could have a material adverse effect on us and
our business.
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 2015. This analysis assumes that
quantities of silver and gold produced and sold remain constant
under all price scenarios presented.
Gold Price
e
c
i
r
P
r
e
v
l
i
S
$14
$15
$16
$17
$18
$19
$20
$21
$900
$1,000
$1,100
$1,200
$1,300
$1,400
$1,500
$569,000
$585,000
$601,000
$617,000
$634,000
$650,000
$666,000
$591,000
$607,000
$624,000
$640,000
$656,000
$672,000
$689,000
$614,000
$630,000
$646,000
$662,000
$679,000
$695,000
$711,000
$636,000
$653,000
$669,000
$685,000
$701,000
$718,000
$734,000
$659,000
$675,000
$691,000
$708,000
$724,000
$740,000
$756,000
$682,000
$698,000
$714,000
$730,000
$747,000
$763,000
$779,000
$704,000
$720,000
$737,000
$753,000
$769,000
$785,000
$802,000
$727,000
$743,000
$759,000
$775,000
$792,000
$808,000
$824,000
42
pan american silver corp.
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.
Cash Cost per Ounce of Silver Produced (000’s USD)
Since base metal and gold revenue are treated as a by-
product credit for purposes of calculating cash costs per
ounce of silver and AISCSOS, these non-GAAP measures
are 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 2015 forecast
against various price assumptions for the Company’s two
main by-product credits, zinc and gold.
Cash Costs
Gold Price
e
c
i
r
P
c
n
Z
i
$1,900
$2,000
$2,100
$2,200
$2,300
$2,400
$2,500
$2,600
$900
$13.25
$13.11
$12.97
$12.85
$12.70
$12.56
$12.42
$12.28
$1,000
$1,100
$1,200
$1,300
$1,400
$1,500
$12.58
$12.44
$12.30
$12.18
$12.04
$11.89
$11.75
$11.61
$11.91
$11.77
$11.64
$11.51
$11.37
$11.22
$11.08
$10.95
$11.24
$11.11
$10.97
$10.84
$10.70
$10.55
$10.41
$10.28
$10.58
$10.44
$10.30
$10.18
$10.03
$9.88
$9.75
$9.61
$9.91
$9.77
$9.63
$9.51
$9.36
$9.22
$9.08
$8.94
$9.24
$9.10
$8.96
$8.84
$8.69
$8.55
$8.41
$8.27
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.
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, 2014 the Company had receivable balances
associated with buyers of our concentrates of $29.3 million
(2013 - $31.7 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.
• 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
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, 2014 the Company
had approximately $44.7 million (2013 - $54.7 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
43
2014 annual report
to the credit risk of our counterparties to the extent that our
trading positions have a positive mark-to-market value.
an additional $49.5 million Argentine pesos (equivalent to USD
$6.0 million) at an interest rate of 25.0% due January 2, 2015.
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, 2014, the Company
had $8.0 million in lease obligations (2013 - $10.2 million) that
are subject to an annual interest rate of 2.2%, and unsecured
convertible notes with a principal amount of $36.2 million
(2013 – $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, 2014 on its lease
obligations and equipment and construction advances was $0.4
million (2013 – $0.2 million).
On October 31, 2014 an Argentine subsidiary of the Company
received an unsecured bank loan for $60.0 million Argentine
pesos (equivalent to USD $7.0 million) in order to meet its short
term obligations, on November 13, 2014 an additional loan was
received for $4.7 million U.S. dollars. The loan terms are one
year from October 31, 2014 and 90 days from November 13,
2014 with interest rates of 32.9% for Argentine peso loans and
3.2% for USD loans respectively. In addition to the loans the
Argentine subsidiary had drawn on an available line of credit for
The interest paid by the Company for the year ended December
31, 2014 on the convertible notes was $1.6 million (2013 – $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, 2014 on its cash and short term
investments was 0.54%. 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 (2013 –
$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 2015, expressed in percentage terms:
MXN/USD
$13.00
$13.50
$14.00
$14.50
$15.00
$15.50
$16.00
D
S
U
/
N
E
P
$2.80
$2.85
$2.90
$2.95
$3.00
$3.05
$3.10
$3.15
103%
102%
102%
102%
101%
101%
101%
100%
102%
101%
101%
101%
101%
100%
100%
100%
101%
101%
100%
100%
100%
99%
99%
99%
100%
100%
99%
99%
99%
99%
98%
98%
99%
99%
99%
98%
98%
98%
97%
97%
98%
98%
98%
97%
97%
97%
96%
96%
97%
97%
97%
97%
96%
96%
96%
95%
Under this analysis, our cost of sales is reflected at 100% of our
forecasted foreign exchange assumptions for the PEN and MXN
of 2.95 and 14.00 per one USD, respectively. Devaluation of the
USD relative to the PEN and MXN has the effect of increasing
our anticipated cost of sales above 100%, and vice versa.
In order to mitigate this exposure, the Company maintains
a portion of its cash balances in PEN, MXN and CAD and,
from time to time, enters into forward currency positions to
match anticipated spending 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.
• Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they come due. The volatility
of the metals markets can impact the Company’s ability to
forecast cash flow from operations.
The Company must maintain sufficient liquidity to meet its
short-term business requirements, taking into account its
anticipated cash flows from operations, its holdings of cash and
cash equivalents and committed loan facilities.
The Company manages its liquidity risk by continuously
monitoring forecasted and actual cash flows. The Company has
in place a rigorous reporting, planning and budgeting process
44
pan american silver corp. 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.
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 2014 Financial Statements for
further information.
• Environmental and Health and Safety Risks
• Corporate Development Activities
Pan American’s activities are subject to extensive laws and
regulations governing environmental protection and employee
health and safety. Environmental laws and regulations are
complex and have tended to become more stringent over time.
Pan American is required to obtain governmental permits and
in some instances provide bonding requirements under federal,
state, or provincial air, water quality, and mine reclamation
rules and permits. Although Pan American makes provisions for
reclamation costs, it cannot be assured that these provisions
will be adequate to discharge its future obligations for
these costs.
Failure to comply with applicable environmental and health and
safety laws may result in injunctions, damages, suspension or
revocation of permits and imposition of penalties. While the
health and safety of our people and responsible environmental
stewardship are our top priorities, there can be no assurance
that Pan American has been or will be at all times in complete
compliance with such laws, regulations and permits, or that
the costs of complying with current and future environmental
and health and safety laws and permits will not materially and
adversely affect Pan American’s business, results of operations
or financial condition.
• Employee Relations
Pan American’s business depends on good relations with its
employees. At December 31, 2014 there were approximately
6,983 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
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 2014 Financial
Statements for the Company’s summary of significant
accounting policies.
Significant Judgments in the Application of 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.
45
2014 annual report Commencement of commercial production: During the
determination of whether a mine has reached an operating
level that is consistent with the use intended by management,
costs incurred are capitalized as mineral property, plant and
equipment and any consideration from commissioning sales
are offset against costs capitalized. The Company defines
commencement of commercial production as the date
that a mine has achieved a sustainable level of production
based on a percentage of design capacity along with various
qualitative factors including but not limited to the achievement
of mechanical completion, continuous nominated level
of production, the working effectiveness of the plant and
equipment at or near expected levels and whether there is a
sustainable level of production input available including power,
water and diesel.
Assets’ carrying values and impairment charges: In
determining carrying values and impairment charges the
Company looks at recoverable amounts, defined as the higher
of value in use or fair value less cost to sell in the case of assets,
and at objective evidence that identifies significant or prolonged
decline of fair value on financial assets indicating impairment.
These determinations and their individual assumptions require
that management make a decision based on the best available
information at each reporting period.
Functional currency: The functional currency for the
Company and its subsidiaries is the currency of the primary
economic environment in which each operates. The Company
has determined that its functional currency and that of its
subsidiaries is the USD. The determination of functional
currency may require certain 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, 2014, the carrying amount of stripping costs
capitalized was $54.1 million comprised of Manantial - $13.0
million, Dolores - $36.4 million and Alamo Dorado - $4.8 million
(2013 - $59.2 million was capitalized comprised of $13.8, $32.8,
and $12.6 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, 2014, the carrying amount
of the deferred credit arising from the Aquiline acquisition was
$20.8 million (2013 - $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 National
Instrument 43 -101, “Standards of Disclosure for Mineral
Projects”, issued by the Canadian Securities Administrators,
and in accordance with “Estimation of Mineral Resources and
Mineral Reserves Best Practice Guidelines – adopted November
23, 2003” prepared by the CIM Standing Committee on Reserve
46
pan american silver corp. Definitions. 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.
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 11 of the 2014 Financial Statements.
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 15 of the
2014 Financial Statements 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).
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 28 of the Audited Consolidated Financial
Statements for further discussion on contingencies.
47
2014 annual report CHANGES IN ACCOUNTING STANDARDS
The Company adopted the following new accounting standards
along with any consequential amendments, 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 application of IFRIC 21 did
not result in an adjustment to the Company’s consolidated
financial statements.
Accounting standards issued but not yet effective
IFRS 9 Financial Instruments (“IFRS 9”) was issued by
the IASB on July 24, 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 utilizes
a single approach to determine whether a financial asset is
measured at amortized cost or fair value and a new mixed
measurement model for debt instruments having only two
categories: amortized cost and fair value. The approach in IFRS
9 is based on how an entity manages its financial instruments
in the context of its business model and the contractual cash
flow characteristics of the financial assets. Final amendments
released on July 24, 2014 also introduce a new expected loss
impairment model and limited changes to the classification
and measurement requirements for financial assets. IFRS 9
is effective for annual periods beginning on or after January 1,
2018. The Company is currently evaluating the impact the
final standard and amendments on its consolidated
financial statements.
IFRS 15, Revenue from Contracts with Customers (“IFRS
15”) In May 2014, the IASB and the Financial Accounting
Standards Board (“FASB”) completed its joint project to
clarify the principles for recognizing revenue and to develop a
common revenue standard for IFRS and US GAAP. As a result
of the joint project, the IASB issued IFRS 15, Revenue from
Contracts with Customers, and will replace IAS 18, Revenue,
IAS 11, Construction Contracts, and related interpretations on
revenue. IFRS 15 establishes principles to address the nature,
amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. Companies
can elect to use either a full or modified retrospective approach
when adopting this standard and it is effective for annual
periods beginning on or after January 1, 1017. The Company will
apply IFRS 15 beginning on January 1, 2017. The Company is in
the process of analyzing IFRS 15 and determining the effect on
our consolidated financial statements as a result of adopting
this standard.
CORPORATE GOVERNANCE, SOCIAL
RESPONSIBILITY, AND ENVIRONMENTAL
STEWARDSHIP
Governance
Pan American adheres to high 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,
oversee the business generally and evaluate corporate
performance. The Health, Safety and Environment 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 each phase of the mining cycle, from early
exploration through development, construction and operation,
up to and after the mine’s closure.
48
pan american silver corp. 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 2014, audits were conducted at
Morococha, San Vicente and Huaron mines.
Changes in Internal Controls over Financial Reporting
There was no change in the Company’s internal control over
financial reporting that occurred during the period that has
materially affected or is reasonably likely to materially affect, its
internal control over financial reporting.
Management’s Report on Internal Control over
Financial Reporting
Management of Pan American is responsible for establishing
and maintaining an adequate system of internal control,
including internal controls over financial reporting. Internal
control over financial reporting is a process designed by, or
under the supervision of, the President and Chief Executive
Officer and the Chief Financial Officer and effected by the Board
of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with 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 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.
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.
Management assessed the effectiveness of Pan American’s
internal control over financial reporting as at December 31,
2014, based on the criteria set forth in Internal Control –
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management concludes that, as
of December 31, 2014, Pan American’s internal control over
financial reporting is effective.
As of December 31, 2014, 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, 2014, the Company’s disclosure
controls and procedures were effective.
Management reviewed the results of management’s assessment
with the Audit Committee of the Company’s Board of Directors.
Deloitte LLP, an 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, 2014. Deloitte LLP has provided
such opinions.
49
2014 annual report MINERAL RESERVES AND RESOURCES
MINERAL RESERVES - PROVEN AND PROBABLE
Tonnes
Ag grade
Contained Ag
ounces
Au grade
Contained Au
ounces
Cu grade
Pb grade
Zn grade
Location
Classification
(millions)
(g/t)
(millions)
(g/t)
(thousands)
Huaron
Morococha (92.3%) (1)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Manantial Espejo
Peru
Peru
Proven
Probable
Proven
Probable
Mexico
Proven
Probable
Mexico
Proven
Probable
Mexico
Proven
Probable
Mexico
Proven
Probable
Argentina
Proven
San Vicente (95%) (1)
Bolivia
TOTALS (2)
Probable
Proven
Probable
Proven +
Probable
MINERAL RESOURCES - MEASURED AND INDICATED
6.5
4.2
2.4
2.7
3.0
3.8
28.1
31.8
2.8
0.6
9.5
6.2
2.4
0.4
1.9
0.7
106.9
165
166
181
202
427
364
32
35
60
84
10
7
123
193
460
425
87
34.4
22.6
13.9
17.3
41.0
45.0
28.5
35.6
5.4
1.5
3.1
1.4
9.5
2.2
28.4
9.9
299.9
N/A
N/A
N/A
N/A
0.33
0.37
0.91
0.88
0.25
0.61
0.67
0.57
1.82
3.08
N/A
N/A
0.82
N/A
N/A
N/A
N/A
31.9
45.9
820.8
897.3
22.6
11.0
203.0
113.1
141.5
35.5
N/A
N/A
(%)
0.35
0.40
1.15
0.67
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(%)
1.35
1.52
1.18
1.36
1.46
1.29
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.39
0.49
1.27
(%)
2.86
2.89
3.32
3.90
2.65
2.26
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3.03
2.44
2.90
2,322.5
0.54
Tonnes
Ag grade
Contained Ag
ounces
Au grade
Contained
Au ounces
Cu grade
Pb grade
Zn grade
Location
Classification
(millions)
(g/t)
(millions)
(g/t)
(thousands)
Peru
Peru
Measured
Indicated
Measured
Indicated
Mexico
Measured
Indicated
Mexico
Measured
Indicated
Mexico
Measured
Indicated
Mexico
Measured
Indicated
Argentina
Measured
Indicated
Bolivia
Measured
Indicated
Argentina
Measured
Peru
Indicated
Measured
Indicated
Argentina
Indicated
Measured +
Indicated
2.1
1.5
0.5
1.0
0.3
2.3
13.4
21.9
1.2
1.0
1.4
4.5
2.8
2.0
0.6
0.3
15.4
139.8
4.7
5.9
8.0
230.4
155
161
125
163
153
222
17
26
50
79
11
9
66
113
169
156
137
126
N/A
N/A
26
104
10.3
7.8
2.1
5.0
1.7
16.2
7.3
18.4
1.9
2.5
0.3
1.1
5.9
7.3
3.4
1.3
67.8
564.5
N/A
N/A
6.6
731.5
N/A
N/A
N/A
N/A
0.13
0.23
0.27
0.63
0.23
0.39
0.90
0.50
0.79
1.50
N/A
N/A
N/A
N/A
0.91
0.67
2.63
0.82
N/A
N/A
N/A
N/A
1.5
16.9
116.8
445.4
8.7
12.0
31.4
59.8
70.5
97.0
N/A
N/A
N/A
N/A
137.5
127.1
676.0
1,800.6
(%)
0.50
0.60
0.33
0.53
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
0.06
(%)
1.46
1.44
1.16
1.34
0.33
0.48
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.15
0.12
1.44
0.79
N/A
N/A
N/A
0.86
(%)
2.76
2.88
3.32
4.05
0.59
0.71
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.45
2.12
N/A
N/A
N/A
N/A
N/A
2.29
Huaron
Morococha (92.3%) (1)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Manantial Espejo
San Vicente (95%) (1)
Navidad
Pico Machay
Calcatreu
TOTALS (2)
50
pan american silver corp.
MINERAL RESOURCES - INFERRED
Huaron
Morococha (92.3%) (1)
La Colorada
Dolores
Alamo Dorado
La Bolsa
Manantial Espejo
San Vicente (95%) (1)
Navidad
Pico Machay
Calcatreu
TOTALS (2)
HISTORICAL ESTIMATES
Property
Hog Heaven (3)
Hog Heaven (3)
Waterloo (4)
TOTAL (2)
Notes:
Tonnes
Ag grade
Contained Ag
ounces
Au grade
Contained Au
ounces
Cu grade
Pb grade
Zn grade
Location
Classification
(millions)
(g/t)
(millions)
(g/t)
(thousands)
Peru
Peru
Mexico
Mexico
Mexico
Mexico
Inferred
Inferred
Inferred
Inferred
Inferred
Inferred
Argentina
Inferred
Bolivia
Inferred
Argentina
Inferred
Peru
Inferred
Argentina
Inferred
8.4
6.5
3.4
4.9
0.0
13.7
0.3
3.0
45.9
23.9
3.4
Inferred
113.3
154
247
251
28
41
8
129
366
81
N/A
17
99
41.5
51.7
27.5
4.4
0.0
3.3
1.1
34.8
119.4
N/A
1.8
285.5
N/A
N/A
0.51
1.05
0.65
0.51
1.98
N/A
N/A
0.58
2.06
0.71
N/A
N/A
55.4
164.4
0.0
222.4
16.8
N/A
N/A
445.7
226.0
1,130.8
(%)
0.32
0.44
N/A
N/A
N/A
N/A
N/A
N/A
0.02
N/A
N/A
0.10
(%)
1.45
1.31
1.77
N/A
N/A
N/A
N/A
0.33
0.57
N/A
N/A
0.80
(%)
2.67
3.27
3.02
N/A
N/A
N/A
N/A
2.68
N/A
N/A
N/A
2.37
Location
USA
USA
USA
Tonnes
(millions)
Ag grade
(g/t)
Contained Ag
ounces (millions)
Au grade
(g/t)
Contained Au ounces
(thousands)
2.7
7.6
33.8
44.1
167
133
93
104
14.6
32.7
100.9
148.2
0.62
0.70
N/A
53.9
171.9
N/A
225.8
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.
Pan American reports mineral resources and mineral reserves separately.
Reported mineral resources do not include amounts identified as mineral
reserves.
Metal prices used for all mines were: $18.50 per ounce of silver, $1,250
per ounce of gold, $2,000 per tonne of lead, $2,000 per tonne of zinc,
and $6,800 per tonne of copper., except at Alamo Dorado due to its
limited remaining mine life, where metal prices of $17.00 per ounce of
silver and $1,200 per ounce of gold were used.
Metal prices used for reserves at all mines were: $18.50 per ounce of
silver, $1,250 per ounce of gold, $2,000 per tonne of lead, $2,000 per
tonne of zinc, and $6,800 per tonne of copper, except at Alamo Dorado
due to its limited remaining mine life, where metal prices of $17.00 per
ounce of silver and $1,200 per ounce of gold were used.
Metal prices for Dolores and Alamo Dorado resources were $30 per
ounce of silver and $1,400 per ounce of gold.
Metal prices for Manantial Espejo mineral resources were $30.00 per
ounce of silver and $1,800 per ounce of gold.
Metal prices used for Navidad were $12.52 per ounce of silver and $1,100
per tonne of lead.
Metal prices used for Calcatreu were $12.50 per ounce of silver and $650
per ounce of gold.
(1) This information represents the portion of mineral reserves and
resources attributable to Pan American based on its ownership interest in
the operating entity as indicated.
(2) Totals may not add-up due to rounding.
(3) 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:
51
2014 annual report
Category
Tons
oz/ton
Ag
oz/ton
Au
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INFORMATION
Proven Reserves
2,981,690
Probable & Possible Reserves
904,200
Heap leach ore
Possible Resources
Inferred Resources
316,100
4,500,000
2,700,000
4.88
10.40
1.56
2.41
4.44
0.018
0.020
0.014
0.020
0.022
However, the Company has not completed the work necessary to verify
the historical estimate. Accordingly, the Company is not treating the
historical estimate as 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”.
(4) 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.
Mineral resource and reserve estimates for Huaron, Morococha, La
Colorada, Dolores, Alamo Dorado, Manantial Espejo, San Vicente, La
Bolsa, 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.
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 SUBSIDIARIES; 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 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
52
pan american silver corp. CANADIAN STANDARDS, INCLUDIN 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.
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.
53
2014 annual report CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND DECEMBER 31, 2013
54
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
Chief Executive Officer
March 26, 2015
“signed”
A. Robert Doyle
Chief Financial Officer
55
2014 annual report
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, 2014 and December 31, 2013, and the consolidated income statements, statements of
comprehensive loss, cash flows and changes in equity for each of the years in the two year period ended
December 31, 2014, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Pan American Silver Corp. and subsidiaries as at December 31, 2014 and December 31, 2013,
and their financial performance and their cash flows for each of the years in the two year period ended
December 31, 2014 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, 2014, based
on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2015 expressed an
unmodified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte LLP
Chartered Accountants
Vancouver, Canada
March 26, 2015
56
pan american silver corp. 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, 2014, based on the criteria established in Internal Control – Integrated
Framework (2013) 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, 2014, based on the criteria established in Internal Control – Integrated
Framework (2013) 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, 2014 of the Company and our report dated March
26, 2015 expressed an unqualified opinion on those financial statements.
/s/ Deloitte LLP
Chartered Accountants
Vancouver, Canada
March 26, 2015
57
2014 annual report Pan American Silver Corp.
Consolidated Statements of Financial Position
As at December 31, 2014 and 2013
(in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents (Note 24)
Short-term investments (Note 8)
Trade and other receivables (Note 7)
Income taxes receivable
Inventories (Note 9)
Prepaids and other current assets
Non-current assets
Mineral properties, plant and equipment (Note 10)
Long-term refundable tax (Note 7)
Deferred tax assets (Note 27)
Other assets (Note 12)
Goodwill (Note 11)
Total Assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 13)
Loan payable (Note 14)
Current portion of long term debt (Note 17)
Provisions (Note 15)
Current portion of finance lease (Note 16)
Current income tax liabilities
Non-current liabilities
Provisions (Note 15)
Deferred tax liabilities (Note 27)
Share purchase warrants (Note 7, 19)
Long-term portion of finance lease (Note 16)
Long-term debt (Note 17)
Other long-term liabilities (Note 18)
Total Liabilities
Equity
Capital and reserves (Note 19)
Issued capital
Share option reserve
Investment revaluation reserve
Retained deficit
Total Equity attributable to equity holders of the Company
Non-controlling interests
Total Equity
Total Liabilities and Equity
Commitments and Contingencies (Notes 7, 28)
See accompanying notes to the consolidated financial statements
APPROVED BY THE BOARD ON MARCH 26, 2014
December 31, 2014
December 31, 2013
$
$
$
$
$
146,193
184,220
105,644
37,626
252,549
4,464
730,696
249,937
172,785
114,782
40,685
284,352
9,123
871,664
1,266,391
1,870,678
7,698
2,584
7,447
3,057
2,017,873
126,209
17,600
34,797
3,121
3,993
22,321
208,041
45,063
160,072
-
4,044
-
30,716
447,936
2,296,672
22,091
(485)
(755,186)
1,563,092
6,845
1,569,937
2,017,873
$
$
$
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
“signed” Ross Beaty, Director
“signed” Geoff A. Burns, Director
58
pan american silver corp.
Pan American Silver Corp.
Consolidated Income Statements
For the years ended December 31, 2014 and 2013
(in thousands of U.S. dollars)
Revenue (Note 25)
Cost of sales
Production costs (Note 20)
Depreciation and amortization (Note 10)
Royalties
Mine operating earnings
General and administrative
Exploration and project development
Impairment charge (Note 11)
Foreign exchange gains (losses)
Losses on commodity and foreign currency contracts
Gain on sale of mineral properties, plant and equipment
Other (expenses) income (Note 26)
Loss from operations
Gain on derivatives (Note 19)
Investment income
Interest and finance expense (Note 22)
Loss before income taxes
Income taxes recovery (expense) (Note 27)
Net loss for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Loss per share attributable to common shareholders (Note 23)
Basic loss per share
Diluted loss per share
Weighted average shares outstanding (in 000’s) Basic
Weighted average shares outstanding (in 000’s) Diluted
Consolidated Statements of Comprehensive loss
For the years ended December 31, 2014 and 2013
(in thousands of U.S. dollars)
Net loss for the year
Items that may be reclassified subsequently to net earnings:
Unrealized net losses on available for sale securities
(net of zero dollars tax in 2014 and 2013)
Reclassification adjustment for net losses on available for sale securities
included in earnings (net of zero dollars tax in 2014 and 2013)
Total comprehensive loss for the year
Total comprehensive loss attributable to:
Equity holders of the Company
Non-controlling interests
$
$
$
$
$
$
$
2014
751,942
$
(568,204)
(147,710)
(27,955)
(743,869)
8,073
$
(17,908)
(13,225)
(596,262)
(13,275)
-
1,145
(1,314)
(632,766)
1,348
2,840
(8,739)
(637,317)
92,494
(544,823)
(545,588)
765
(544,823)
(3.60)
(3.60)
151,511
151,511
$
$
$
$
$
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
2014
2013
$
(544,823)
$
(445,846)
(1,429)
1,081
(545,171)
(545,936)
765
(545,171)
$
$
$
$
$
$
(2,163)
1,062
(446,947)
(446,952)
5
(446,947)
59
2014 annual report Pan American Silver Corp.
Consolidated Statements of Cash Flows
For the years ended December 31, 2014 and 2013
(in thousands of U.S. dollars)
Cash flow from operating activities
Net loss for the year
Current income tax expense (Note 27)
Deferred income tax recovery (Note 27)
Interest Expense (Note 22)
Depreciation and amortization (Note 10)
Impairment of mineral properties and goodwill (Note 11)
Accretion on closure and decommissioning provision (Note 15)
Unrealized losses (gains) on foreign exchange
Share-based compensation expense
Unrealized losses on commodity contracts (Note 7)
Gain on derivatives (Note 19)
Gain on sale of mineral property, plant and equipment
Net realizable value adjustment for inventory
Changes in non-cash operating working capital (Note 24)
Operating cash flows before interest and income taxes
Interest paid
Interest received
Income taxes paid
Net cash generated from operating activities
Cash flow from investing activities
Payments for mineral properties, plant and equipment
(Purchase of) proceeds from short term investments
Proceeds from sale of mineral property, plant and equipment
Net refundable tax and other asset expenditures
Net cash used in investing activities
Cash flow from financing activities
Proceeds from issue of equity shares
Shares repurchased and cancelled (Note 19)
Dividends paid
(Payment) proceeds from short term loan (Note 14)
Payment of 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 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.
60
2014
2013
As adjusted (Note 24)
$
(544,823)
$
(445,846)
35,807
(128,301)
5,072
147,710
596,262
3,238
4,034
2,529
-
(1,348)
(1,145)
29,953
11,597
160,585
(5,051)
1,792
(33,138)
124,188
(131,761)
(13,524)
1,852
187
$
55,691
(38,934)
6,664
135,913
540,228
3,030
(922)
2,173
25
(16,715)
(14,068)
12,967
(21,304)
218,902
(3,425)
2,138
(98,009)
119,606
(159,401)
19,920
13,681
452
(143,246)
$
(125,348)
3
-
(75,751)
(2,438)
(5,347)
(375)
(83,908)
(778)
(103,744)
249,937
146,193
$
$
-
(6,740)
(75,755)
23,496
(30,238)
(925)
(90,162)
(367)
(96,271)
346,208
249,937
$
$
$
$
$
pan american silver corp. Pan American Silver Corp.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2014 and 2013
(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
deficit
Total
Non-
controlling
interests
Total equity
151,820,635 $
2,300,517 $ 20,560 $
964 $
388,202 $ 2,710,243 $
7,328 $
2,717,571
Balance, December 31, 2012
Total comprehensive income
Net loss for the year
Other comprehensive loss
Shares issued as compensation
94,659
Shares repurchased and cancelled
(415,000)
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
-
-
-
-
-
-
-
-
-
1,035
(6,344)
-
-
-
-
-
-
-
-
-
550
-
-
-
-
-
-
-
(445,851)
(445,851)
(1,101)
(1,101)
-
(1,101)
(445,851)
(446,952)
-
(396)
1,035
(6,740)
5
-
5
-
-
(445,846)
(1,101)
(446,947)
1,035
(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
Total comprehensive loss
Net loss for the year
Other comprehensive loss
-
-
-
-
-
-
-
-
Shares issued as compensation
142,986
1,461
Shares issued on the exercise of
warrants
Distributions by subsidiaries to
non-controlling interests
Share-based compensation on
option grants
Dividends paid
92
-
-
-
3
-
-
-
-
-
-
-
-
-
-
981
-
-
-
(348)
(348)
-
(545,588)
(545,588)
-
(348)
(545,588)
(545,936)
-
-
-
-
-
-
-
-
-
1,461
3
-
981
(75,751)
(75,751)
-
765
-
765
-
-
(544,823)
(348)
(545,171)
1,461
3
(375)
(375)
-
-
981
(75,751)
Balance, December 31, 2014
151,643,372 $
2,296,672 $ 22,091 $
(485) $ (755,186) $ 1,563,092 $
6,845 $
1,569,937
See accompanying notes to the consolidated financial statements.
61
2014 annual report Pan American Silver Corp.
Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
1. Nature of Operations
b. Basis of Preparation
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, 2014 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, 2014 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
(“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). IFRS comprises IFRSs, International Accounting
Standards (“IAS”), and interpretations issued by the IFRS
Interpretations Committee (“IFRICs”) and the former Standing
Interpretations Committee (“SIC”).
These consolidated financial statements were approved for
issuance by the Board of Directors on March 26, 2015.
The Company’s accounting policies have been applied
consistently in preparing these consolidated annual financial
statements for the year ended December 31, 2014, and the
comparative information as at December 31, 2013.
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 interests” in the
consolidated statements 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, 2014 and 2013 are presented
in the following table:
Subsidiary
Location
Ownership
Interest
Status
Operations and Development
Projects Owned
Pan American Silver Huaron S.A.
Compañía Minera Argentum S.A.
Minera Corner Bay S.A. de C.V.
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.
Peru
Peru
Mexico
Mexico
Mexico
Argentina
Bolivia
Argentina
100%
92%
100%
100%
100%
100%
95%
100%
Consolidated
Huaron mine
Consolidated
Morococha mine
Consolidated
Alamo Dorado mine
Consolidated
La Colorada mine
Consolidated
Dolores mine
Consolidated
Manantial Espejo mine
Consolidated
San Vicente mine
Consolidated
Navidad Project
62
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
63
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
receivables, available-for-sale and held-to-maturity investments.
The classification depends on the purpose for which the
financial assets were acquired. Management determines the
classification of financial assets at initial recognition.
(a) Financial assets at fair value through profit or loss
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
64
pan american silver corp. as to whether a decline in fair value is ‘significant’ or ‘prolonged’
based on an analysis of indicators such as significant adverse
changes in the technological, market, economic or legal
environment in which the 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
Gains and losses on discharge, cancellation or expiry of a
financial liability 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 settlement 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.
65
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Inventories: Inventories include work in progress, concentrate
ore, doré, processed silver and gold, heap leach inventory, and
operating materials, and supplies. Work in progress inventory
includes ore stockpiles and other partly processed material.
Stockpiles represent ore that has been extracted and is
available for further processing. The classification of inventory
is determined by the stage at which the ore is in the production
process. Inventories of ore are sampled for metal content and
are valued based on the lower of cost or estimated net realizable
value based upon the period ending prices of contained metal.
Cost is determined on a weighted average basis or using a first-
in-first-out basis and includes all costs incurred in the normal
course of business including direct material and direct labour
costs and an allocation of production overheads, depreciation
and amortization, and other costs, based on normal production
capacity, incurred in bringing each product to its present
location and condition. Material that does not contain a
minimum quantity of metal to cover estimated processing
expense to recover the contained metal is not classified as
inventory and is assigned no value. 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 Reserve 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 doré inventory, production costs are allocated
based on the silver equivalent ounces contained within the
respective concentrate and doré.
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 kinetics 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.
66
pan american silver corp. In subsequent periods, buildings, plant and equipment
are stated at cost less accumulated depreciation and any
impairment in value, whilst land is stated at cost less any
impairment in value and is not depreciated.
Each asset or part’s estimated useful life has due regard to both
its own physical life limitations and the present assessment
of economically recoverable reserves of the mine property at
which the item is located, and to possible future variations in
those assessments. Estimates of 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
economically develop the deposit. 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 deposit is
discovered, such costs are amortized when production begins.
If no mineable deposit 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 VAT and where there is uncertainty of its recoverability, the
VAT payments have either been deferred with mineral property
costs relating to the property or expensed if it relates to mineral
exploration. If the Company ultimately makes recoveries of
the VAT, the amount received will be applied to reduce mineral
property costs or taken as a credit against current expenses
depending on the prior treatment.
Major development expenditures on producing properties
incurred to increase production or extend the life of the mine
are capitalized while ongoing mining expenditures on producing
properties are charged against earnings as incurred. Gains or
losses from sales or retirements of assets are included in gain
or loss on sale of assets.
Depreciation of Mineral Property, Plant and Equipment: The
carrying amounts of mineral property, plant and equipment
(including initial and any subsequent capital expenditure) are
depreciated to their estimated residual value over the estimated
useful lives of the specific assets concerned, or the estimated
life of the associated mine or mineral lease, if shorter. Estimates
of residual values and useful lives are reviewed annually and any
change in estimate is taken into account in the determination
of remaining depreciation charges, and adjusted if appropriate,
at each statement of financial position date. Changes to the
estimated residual values or useful lives are accounted for
prospectively. Depreciation commences on the date when the
asset is available for use as intended by management.
Units of production basis
For mining properties and leases and certain mining equipment,
the economic benefits from the asset are consumed in a pattern
which is linked to the production level. Except as noted below,
such assets are depreciated on a unit of production basis.
In applying the units of production method, depreciation is
normally calculated using the quantity of material extracted
from the mine in the period as a percentage of the total quantity
of material to be extracted in current and future periods based
on proven and probable reserves.
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.
67
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Mineral property, plant and equipment are depreciated over
its useful life, or over the remaining life of the mine if shorter.
The major categories of property, plant and equipment are
depreciated on a unit of production and/or straight-line basis
as follows:
• Land – not depreciated
• Mobile equipment – 3 to 7 years
• Buildings and plant facilities – 25 to 50 years
• Mining properties and leases – based on reserves on a unit
of production basis. Capitalized evaluation and development
expenditure – based on applicable reserves on a unit of
production basis
• Exploration and evaluation – not depreciated until mine
goes into production
• Assets under construction – not depreciated until assets are
ready for their intended use
Exploration and Evaluation Expenditure: relates to costs
incurred on the exploration and evaluation of potential mineral
reserves and resources and includes costs such as exploratory
drilling and sample testing and the costs of pre-feasibility
studies. Exploration expenditures relates to the initial search for
deposits with economic potential. Evaluation expenditure arises
from a detailed assessment of deposits or other projects that
have been identified as having economic potential.
Expenditures on exploration activity are not capitalized.
Capitalization of evaluation expenditures commences when
there is a high degree of confidence in the project’s viability and
hence it is probable that future economic benefits will flow to
the Company.
Evaluation expenditures, other than that acquired from the
purchase of another mining company, is carried forward as an
asset provided that such costs are expected to be recovered in full
through successful development and exploration of the area of
interest or alternatively, by its sale.
Purchased exploration and evaluation assets are recognized as
assets at their cost of acquisition or at fair value if purchased as
part of a business combination.
In the case of undeveloped projects there may be only inferred
resources to form a basis for the impairment review. The review
is based on a status report regarding the Company’s intentions
for the development of the undeveloped project. In some cases,
the undeveloped projects are regarded as successors to ore
bodies, smelters or refineries currently in production. Where
this is the case, it is intended that these will be developed and
go into production when the current source of ore is exhausted
or to replace the reduced output, which results where existing
smelters and/or refineries are closed. It is often the case that
technological and other improvements will allow successor
smelters and/or refineries to more than replace the capacity
of their predecessors. Subsequent recovery of the resulting
carrying value depends on successful development or sale
of the undeveloped project. If a project does not prove viable,
all irrecoverable costs associated with the project net of any
related impairment provisions are written off.
An impairment review is performed, either individually or at the
cash generating unit level, when there are indicators that the
carrying amount of the assets may exceed their recoverable
amounts. To the extent that this occurs, the excess is expensed
in the financial year in which this is determined. Capitalized
exploration and evaluation assets are reassessed on a regular
basis and these costs are carried forward provided that the
conditions discussed above for expenditure on exploration
activity and evaluation expenditure are met.
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. In order to demonstrate
technical feasibility and commercial viability, the Company
evaluates the individual project and its established mineral
reserves, assesses the relevant findings and conclusions
from the Company’s activities and in applicable technical or
other studies relating to the project, and considers whether
and how any additional factors and circumstances might
impact the project, particularly in light of the Company’s
capabilities, risk tolerance and desired economic returns. The
Company conducts its managerial evaluation for commercial
viability by assessing the factors it considers relevant to
the commercial development of the project, taking into
consideration the exploration and technical evaluation activities
and work undertaken in relation to the project. If the asset
demonstrates technical feasibility and commercial viability,
the asset is reclassified to mineral properties, plant and
equipment. Assessment for impairment is conducted before
reclassification.
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
68
pan american silver corp. (“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 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, 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, 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.
69
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
The provision is reviewed at the end of each reporting period for
changes to obligations, legislation or discount rates that impact
estimated costs or lives of operations and adjusted to reflect
current best estimate. The cost of the related asset is adjusted for
changes in the provision resulting from changes in the estimated
cash flows or discount rate and the adjusted cost of the asset is
depreciated prospectively.
Foreign Currency Translation: The Company’s functional
currency and that of its subsidiaries is the USD as this is the
principal currency of the economic environments in which they
operate. Transaction amounts denominated in foreign currencies
(currencies other than USD) are translated into USD at exchange
rates prevailing at the transaction dates. Carrying values of
foreign currency monetary assets and liabilities are re-translated
at each statement of financial position date to reflect the U.S.
exchange rate prevailing at that date.
Gains and losses arising from translation of foreign currency
monetary assets and liabilities at each period end are included
in earnings except for differences arising on decommissioning
provisions which are capitalized for operating mines.
Share-based Payments: The Company makes share-based
awards, including free shares and options, to certain employees.
For equity-settled awards, the fair value is charged to the income
statement and credited to equity, on a straight-line basis over
the vesting period, after adjusting for the estimated number of
awards that are expected to vest. The fair value of the equity-
settled awards is determined at the date of grant. Non-vesting
conditions and market conditions, such as target share price
upon which vesting is conditioned, are factored into the
determination of fair value at the date of grant. All other vesting
conditions are excluded from the determination of fair value and
included in management’s estimate of the number of awards
ultimately expected to vest.
The fair value is determined by using option pricing models.
At each statement of financial position date prior to vesting,
the cumulative expense representing the extent to which the
vesting period has expired and management’s best estimate
of the awards that are ultimately expected to vest is computed
(after adjusting for non-market performance conditions). The
movement in cumulative expense is recognized in the income
statement with a corresponding entry within equity. No expense
is recognized for awards that do not ultimately vest, except for
awards where vesting is conditional upon a market condition,
which are treated as vesting irrespective of whether or not the
market condition is satisfied, provided that all other performance
conditions are satisfied.
Where the terms of an equity-settled award are modified, as
a minimum an expense is recognized as if the terms had not
been modified over the original vesting period. In addition, an
expense is recognized for any modification, which increases the
total fair value of the share-based payment arrangement, or is
otherwise beneficial to the employee as measured at the date of
modification, over the remainder of the new vesting period.
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.
70
pan american silver corp. 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 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 is 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
interpretation along with any consequential amendments,
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 application of IFRIC 21 did
not result in an adjustment to the Company’s consolidated
financial statements.
71
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Accounting standards issued but not yet effective
• Commencement of commercial production: During
IFRS 9 Financial Instruments (“IFRS 9”) was issued by
the IASB on July 24, 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 utilizes
a single approach to determine whether a financial asset is
measured at amortized cost or fair value and a new mixed
measurement model for debt instruments having only two
categories: amortized cost and fair value. The approach in IFRS
9 is based on how an entity manages its financial instruments
in the context of its business model and the contractual cash
flow characteristics of the financial assets. Final amendments
released on July 24, 2014 also introduce a new expected loss
impairment model and limited changes to the classification
and measurement requirements for financial assets. IFRS 9
is effective for annual periods beginning on or after January 1,
2018. The Company is currently evaluating the impact the
final standard and amendments on its consolidated
financial statements.
IFRS 15, Revenue from Contracts with Customers (“IFRS
15”) In May 2014, the IASB and the Financial Accounting
Standards Board (“FASB”) completed its joint project to
clarify the principles for recognizing revenue and to develop a
common revenue standard for IFRS and US GAAP. As a result
of the joint project, the IASB issued IFRS 15, Revenue from
Contracts with Customers, and will replace IAS 18, Revenue,
IAS 11, Construction Contracts, and related interpretations on
revenue. IFRS 15 establishes principles to address the nature,
amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. Companies
can elect to use either a full or modified retrospective approach
when adopting this standard and it is effective for annual
periods beginning on or after January 1, 1017. The Company will
apply IFRS 15 beginning on January 1, 2017. The Company is in
the process of analyzing IFRS 15 and determining the effect on
our consolidated financial statements as a result of adopting
this standard.
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 11. 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.
the determination of whether a mine has reached an
operating level that is consistent with the use intended by
management, costs incurred are capitalized as mineral
property, plant and equipment and any consideration from
commissioning sales are offset against costs capitalized.
The Company defines commencement of commercial
production as the date that a mine has achieved a
sustainable level of production based on a percentage
of design capacity along with various qualitative factors
including but not limited to the achievement of mechanical
completion, continuous nominated level of production, the
working effectiveness of the plant and equipment at or near
expected levels and whether there is a sustainable level of
production input available including power, water and diesel.
• Assets’ carrying values and impairment charges: In
determining carrying values and impairment charges the
Company looks at recoverable amounts, defined as the
higher of value in use or fair value less cost to sell in the
case of assets, and at objective evidence that identifies
significant or prolonged decline of fair value on financial
assets indicating impairment. These determinations and
their individual assumptions require that management make
a decision based on the best available information at each
reporting period.
• Functional currency: The functional currency for the
Company and its subsidiaries is the currency of the
primary economic environment in which each operates.
The Company has determined that its functional currency
and that of its subsidiaries is the USD. The determination
of functional currency may require certain judgements
to determine the primary economic environment. The
Company reconsiders the functional currency used when
there is a change in events and conditions which determined
the primary economic environment.
• Business combinations: Determination of whether a set
of assets acquired and liabilities assumed constitute
a business may require the Company to make certain
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 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, 2014, the carrying amount of
stripping costs capitalized was $46.2 million comprised of
Manantial - $13.0 million, Dolores - $28.4 million and Alamo
Dorado - $4.8 million (2013 - $59.2 million was capitalized
comprised of $13.8, $32.8, and $12.6 million, respectively).
72
pan american silver corp. • 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, 2014,
the carrying amount of the deferred credit arising from the
Aquiline acquisition was $20.8 million (2013 - $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.
National Instrument 43 -101, “Standards of Disclosure
for Mineral Projects”, issued by the Canadian Securities
Administrators and in accordance with “Estimation of
Mineral Resources and Mineral Reserves Best Practice
Guidelines – adopted November 23, 2003”, prepared by
the CIM Standing Committee on Reserve Definitions.
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 9 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.
•
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 11.
• Mineral reserve estimates: The figures for mineral reserves
and mineral resources are determined in accordance with
• Estimation of decommissioning and restoration costs
and the timing of expenditures: The cost estimates are
73
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
•
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 15
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.
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).
74
• 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 28 for further discussion
on contingencies.
6. 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 deficit, plus investment
revaluation reserve) with a balance of $1.6 billion as at
December 31, 2014 (2013 - $2.2 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 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, 2013.
7. 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 liability
Conversion feature on
convertible notes
Share purchase warrants
Conversion feature on
convertible notes
December 31,
December 31,
2014
2013
$
$
$
$
(278)
(278)
-
-
-
$
$
$
$
-
-
(207)
(1,419)
(1,626)
In addition, trade and other receivables include accounts
receivable arising from sales of metal concentrates and have
been designated and classified as at FVTPL. The total trade and
other receivables are as follows:
• Accounting for acquisitions: The provisional fair value of
Non-current derivative liabilities
pan american silver corp. December 31,
December 31,
2014
2013
Trade receivables from provisional
concentrates sales
$
29,288
$
31,727
Not arising from sale of metal
concentrates
76,356
83,055
Trade and other receivables
$
105,644
$
114,782
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.
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 for the
years ended December 31, were as follows:
Twelve months ended
December 31,
2014
2013
Unrealized loss on equity securities
$
(1,429) $
(2,163)
Reclassification adjustment for net
losses on available for sale securities
included in earnings
$
$
1,081 $
1,062
(348) $
(1,101)
d) Risk
Overview
The Company has exposure to risks of varying degrees of
significance which could affect its ability to achieve its strategic
objectives for growth and shareholder returns. The principal
financial risks to which the Company is exposed are metal
price risk, credit risk, interest rate risk, foreign exchange rate
risk, and liquidity risk. The Company’s Board of Directors has
overall responsibility for the establishment and oversight of
the Company’s risk management framework and reviews the
Company’s policies on an ongoing basis.
Metal Price Risk
Metal price risk is the risk that changes in metal prices will
affect the Company’s income or the value of its related financial
instruments. The Company derives its revenue from the sale
of silver, gold, lead, copper, and zinc. The Company’s sales are
directly dependent on metal prices that have shown significant
volatility and are beyond the Company’s control. Consistent
with the Company’s mission to provide equity investors with
exposure to changes in silver prices, the Company’s current
policy is to not hedge the price of silver. A 10% increase in all
metal prices for the year ended December 31, 2014, would
result in an increase of approximately $79.4 million (2013 –
$88.7 million) in the Company’s revenues. A 10% decrease
in all metal prices for the same period would result in a
decrease of approximately $83.8 million (2013 - $90.7 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, 2014
would result in an increase of approximately $6.3 million (2013 -
$19.4 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
$6.5 million (2013 - $19.7 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, 2014, 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 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, 2014 the Company had receivable balances
associated with buyers of its concentrates of $29.3 million
(2013 - $31.7 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, 2014 the Company
had approximately $44.7 million (2013 - $54.7 million) of
75
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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, 2014, the Company has recorded an allowance
for doubtful accounts provision in the amount of $7.6 million
(2013 – $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, 2014, 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:
December 31,
2014
2013
Cash and cash equivalents
$
146,193
$
249,937
Trade accounts receivable
29,288
31,727
Advances to suppliers and
contractors
Export tax receivable
Insurance receivable
Royalty receivable
Employee loans
Other
22,766
24,265
-
4,447
4,274
1,107
8,913
3,803
3,855
2,370
1,768
8,769
Total accounts receivable
61,795
76,557
Total cash and cash equivalents,
and accounts receivable
$
207,988
$
326,494
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, 2014, the Company has
$8.0 million in lease obligations (2013 - $10.2 million), that are
subject to an annualized interest rate of 2.2% and unsecured
convertible notes with a principal amount of $36.2 million
(2013 – $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, 2014 on its
lease obligations was $0.4 million (2013 – $0.2 million). The
Company has received short term loans in Argentina totaling
$60 million Argentinean Pesos (USD $7.0 million) at an annual
interest rate of 32.9% and USD $4.7 million at an annual
interest rate of 3.2%. In addition the Company has also drawn
on an available line of credit in Argentina for $49.5 million
Argentinean Pesos (USD $6.0 million) at an interest rate of
25.0%. $49.5 million Argentinean Pesos are due in January
2015, $60 million Argentinean Pesos are due in October 2015
and USD $4.7 million are due in November 2015. The interest
paid by the Company for the year ended December 31, 2014
on the convertible notes was $1.6 million (2013 – $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, 2014 on its cash and short term
investments was 0.54%. 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 (2013 –
$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 Sol (“PEN”), Mexican
Peso (“MXN”) and CAD to match anticipated spending. At
December 31, 2014 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
76
pan american silver corp. 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, 2014 non-USD net monetary liabilities were denominated
would result in an income before taxes change of about $5.3
million (2013 - $38.3 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, 2014
investments
assets
current
current liabilities
liabilities
Cash and
Other current
receivable (payable),
and accrued
Deferred income
short-term
and non-current
current and non-
liabilities and non-
tax assets and
Income taxes
Accounts payable
Canadian Dollar
Mexican Peso
Argentinian Peso
Bolivian Boliviano
European Euro
Peruvian Nuevo Sol
$
74,262
$
232
$
(243)
$
(259)
$
180
18,735
157
401
41
4,844
11,389
31,301
10,777
-
2,593
12,592
1,767
(4,077)
-
5,266
(136)
(53,600)
-
(95)
(135,421)
(1,914)
(2,453)
-
(11,145)
(17,520)
$
98,440
$
56,292
$
15,305
$
(65,235)
$
(157,488)
At December 31, 2013
investments
assets
current
current liabilities
liabilities
Cash and
Other current
receivable (payable),
and accrued
Deferred income
short-term
and non-current
current and non-
liabilities and non-
tax assets and
Income taxes
Accounts payable
$
156,610
$
1,769
$
4
$
(5,143)
$
-
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)
Canadian Dollar
Mexican Peso
Argentinian Peso
Bolivian Boliviano
Peruvian Nuevo Sol
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they come due. The Company
manages its liquidity risk by continuously monitoring forecasted
and actual cash flows. The Company has in place a rigorous
planning and budgeting process to help determine the
funds required to support the Company’s normal operating
requirements on an ongoing basis and its expansion plans.
The Company strives to maintain sufficient liquidity to meet
its short-term business requirements, taking into account its
anticipated cash flows from operations, its holdings of cash and
short-term investments, and its committed loan facilities.
e) Commitments
The Company’s commitments have contractual maturities
which are summarized below:
Current liabilities
Loan obligation (Note 15)
Finance lease obligations (1)
Severance accrual
Provisions
Income taxes payable
Restricted share units (“RSUs”)
Preferred share units (“PSUs”)
Current portion of long term debt (4)
Payments due by period 2014
Total
Within 1
year(2)
2 - 3 years
4- 5 years
After 5 years
$
125,031 $
125,031 $
17,600
8,425
4,135
3,121
22,321
2,261
281
37,867
17,600
4,238
749
3,121
22,321
1,498
-
37,867
$
-
-
4,187
469
-
-
763
281
-
$
-
-
-
-
-
-
2,053
864
-
-
-
-
-
-
-
-
Total contractual obligations (5)
$
221,042 $
212,425 $
5,700 $
2,053
$
864
77
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Current liabilities
Loan obligation (Note 15)
Finance lease obligations (1)
Severance accrual
Employee compensation plan (3)
Restricted share units (“RSUs”) (3)
Long term debt (4)
Payments due by period 2013
Total
Within 1
2 - 3 years
4- 5 years
After 5 years
year(2)
$
156,241 $
156,241 $
20,095
10,856
3,726
3,228
2,288
39,497
20,095
4,800
649
3,228
1,393
1,631
$
-
-
$
-
-
4,417
412
-
895
37,866
1,639
2,138
-
-
-
-
-
-
527
-
-
-
Total contractual obligations (5)
$
235,931 $
188,037 $
43,590 $
3,777
$
527
(1) Includes lease obligations in the amount of $8.4 million (December 31, 2013 - $10.9 million) with a net present value of $8.0 million
(December 31, 2013 - $10.2 million) discussed further in Note 16.
(2) Includes all current liabilities as per the statement of financial position plus 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.
December 31, 2014
Current portion of:
Accounts payable and other liabilities
Loan obligation
Current severance liability
Current portion of finance lease
Employee Compensation PSU’s & RSU’s
Convertible note
Provisions
Income tax payable
Total contractual obligations within one year
December 31, 2013
Current portion of:
Accounts payable and other liabilities
Loan obligation
Current severance liability
Current portion of finance lease
Employee Compensation & RSU’s
Convertible note
Provisions
Income tax payable
Total contractual obligations within one year
Future interest
component
Within 1 year
-
-
-
245
1,069
3,070
-
-
4,384
Future interest
component
-
-
-
363
3,411
1,631
-
-
5,405
$
$
$
$
125,031
17,600
749
4,238
1,498
37,867
3,121
22,321
212,425
Within 1 year
123,750
20,095
649
4,800
4,621
1,631
3,172
29,319
188,037
125,031
17,600
749
3,993
429
34,797
3,121
22,321
208,041
123,750
20,095
649
4,437
1,210
-
3,172
29,319
182,632
$
$
$
$
$
$
$
$
(3) Includes RSU obligation in the amount of $2.2 million (2013 – $2.3 million) that will be settled in cash. The RSUs vest in two
instalments, 50% in December 2014 and 50% in December 2015.
(4) Represents the face value of the replacement convertible note and future interest payments related to the Minefinders acquisition.
Refer to Note 17 for further details.
(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 18, and deferred tax liabilities.
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, short-term investments,
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
78
pan american silver corp. 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, 2014, 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
Conversion feature of convertible notes
Assets and Liabilities:
Short-term investments
Trade receivable from provisional concentrate sales
Share purchase warrants
Conversion feature of convertible notes
Fair Value at December 31, 2014
Total
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
$
184,220
29,288
(278)
213,230
Total
172,785
31,727
(207)
(1,419)
202,886
$
$
$
$
$
$
$
$
$
184,220
-
-
184,220
$
$
$
$
-
29,288
(278)
29,010
$
$
$
$
Fair Value at December 31, 2013
Level 1
Level 2
Level 3
172,785
-
-
-
172,785
$
$
$
$
$
-
31,727
(207)
(1,419)
30,101
$
$
$
$
$
-
-
-
-
-
-
-
-
-
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, 2013.
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, 2014, the unrealized gains
and losses on commodity and foreign currency contracts was
$nil (2013 - $nil).
Share purchase warrants
The Company’s unrealized gains and losses on share purchase
warrants are valued using observable inputs and as such are
classified as Level 2 of the fair market value hierarchy. The
share purchase warrants are classified and accounted for
as a financial liability at fair value with changes in fair value
included in net earnings. These warrants expired December 7th,
2014; see further discussion in Note 19. During the year ended
December 31, 2014, the unrealized gain on share purchase
warrants was $0.2 million (2013 - $8.4 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, 2014,
the unrealized gain on the convertible note was $1.1 million
(2013 – $8.3million). The approximate current fair value of the
notes, excluding the conversion feature at December 31, 2014 is
$35.6 million (2013 – $34.7 million).
Receivables from Provisional Concentrate Sales
The Company’s trade receivables arose from provisional
concentrate sales and are valued using quoted market prices
based on the forward London Metal Exchange (“LME”)
for copper, zinc and lead and the London Bullion Market
Association P.M. fix (“London P.M. fix”) for gold and silver.
79
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
8. Short Term Investments
Available for Sale
Fair Value
Cost
ized holding losses
Fair Value
Cost
ized holding gains
Short term investments
$ 184,220 $ 184,705 $
(485) $
172,785 $
172,922 $
(137)
December 31, 2014
December 31, 2013
Accumulated unreal-
Accumulated unreal-
10. 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.
Mineral properties, plant and equipment consist of:
9. Inventories
Inventories consist of:
December 31,
December 31,
2014
2013
Concentrate inventory
$
16,679
$
17,024
Stockpile ore (1)
44,236
55,356
Heap leach inventory and in
process (2)
Doré and finished inventory(3)
Materials and supplies
78,564
57,175
55,895
94,820
56,090
61,062
$
252,549
$
284,352
(1) Includes an impairment charge of $0.9 million to reduce the cost of
inventory to NRV at Manantial Espejo mine (December 31, 2013 – nil).
(2) Includes an impairment charge of $32.3 million to reduce the cost
of inventory to NRV at Dolores and Alamo Dorado mines (December 31,
2013 - $10.3 million).
(3) Includes an impairment charge of $9.7 million to reduce the cost of
inventory to NRV at Dolores, Alamo Dorado and Manantial Espejo mines
(December 31, 2013 - $2.7).
Production costs, including depreciation and amortization and
royalties for the year ended December 31, 2014 were $743.9
million (2013 - $693.0 million). Production costs represent
cost of inventories sold during the year. During 2014, $30.0
million (2013 - $13.0 million) net realizable value adjustment
was recognized and included in production costs (Note 20).
The Stockpile ore of $32.7 million (2013 – $42.4 million) and a
portion of the heap leach inventory amounting to $54.0 million
(2013 - $49.3 million) are expected to be recovered or settled
after more than twelve months.
80
pan american silver corp. Mining Properties
Depletable
Non-depletable
Reserves and
Resources
Reserves and
Resources
Exploration
and
Evaluation
Plant and
Equipment
Total
Carrying value
As at January 1, 2014
Net of accumulated depreciation
$
706,831 $
226,415 $
602,816
$
334,616 $
1,870,678
Additions
Disposals
Depreciation
Depreciation charge captured in inventory
Impairment charges
Transfers (1)
Capitalized borrowing costs
Closure and decommissioning – changes in estimate
107,650
-
(70,749)
(9,418)
-
-
-
-
17
(377)
-
-
(142,269)
(72,038)
(310,593)
51,297
2,338
694
(24,433)
(10,411)
-
-
-
(51)
33,911
(267)
141,578
(644)
(76,961)
(147,710)
-
(9,418)
(67,286)
(15,341)
-
-
(592,186)
1,112
2,338
643
As at December 31, 2014
$
646,374 $
129,944 $
281,401
$
208,672 $
1,266,391
Cost as at December 31, 2014
$
1,373,338 $
336,353 $
682,940
$
690,368 $
3,082,999
Accumulated depreciation and impairments
(726,964)
(206,409)
(401,539)
(481,696)
(1,816,608)
Carrying value –
December 31, 2014
$
646,374 $
129,944 $
281,401
$
208,672 $
1,266,391
(1) Includes amounts transferred from Accounts Receivable for advances.
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
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
-
-
-
48,738
(2,371)
162,733
(2,371)
(68,463)
(135,913)
-
(5,581)
(197,044)
(109,921)
(15,387)
(26,065)
(348,417)
(293)
1,658
(5,758)
(5,042)
-
-
846
-
(925)
4,489
-
-
-
1,658
(6,683)
As at December 31, 2013
$
706,831 $
226,415
$
602,816 $
334,616 $
1,870,678
Cost as at December 31, 2013
$
1,221,767 $
336,336
$
718,212 $
665,710
$
2,942,025
Accumulated depreciation and impairments
(514,936)
(109,921)
(115,396)
(331,094)
(1,071,347)
Carrying value –
December 31, 2013
$
706,831 $
226,415
$
602,816 $
334,616 $
1,870,678
81
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
December 31, 2014
Accumulated
Depreciation and
Impairment
Cost
Carrying
Value
Cost
December 31, 2013
Accumulated
Depreciation
and Impairment
Carrying
Value
Huaron mine, Peru
$
158,750 $
(71,351) $
87,399 $
147,391 $
(62,878) $
84,513
Morococha mine, Peru
Alamo Dorado mine, Mexico
La Colorada mine, Mexico
Dolores mine, Mexico
Manantial Espejo mine, Argentina
San Vicente mine, Bolivia
Other
Total
211,545
193,715
140,784
859,655
346,498
128,014
24,745
(86,936)
124,609
(179,274)
(61,650)
14,441
79,134
(452,645)
407,010
(277,296)
(63,812)
(15,696)
69,202
64,202
9,049
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
$ 2,063,706 $
(1,208,660) $
855,046 $
1,887,476 $
(846,028) $
1,041,448
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
$
4,977
$
8,513
190,471
180,074
9,674
26,149
$
411,345
$ 1,266,391
462,400
317,117
10,432
30,768
$
$
829,230
1,870,678
Navidad Project, Argentina
During the year ended December 31, 2014 the Company
capitalized $nil of evaluation costs and mineral property, plant
and equipment at the Navidad Project in Argentina (2013 - $nil).
At December 31, 2014, it was determined that the estimated
realizable value of the Navidad project was below its carrying
value and an impairment charge of $286.1 million was recorded.
Refer to Note 11 for further details.
Morococha Mine, Peru
During the second quarter of 2010, the Company’s subsidiary
Compañia Minera Argentum S.A. (“Argentum”), reached an
agreement with Minera Chinalco Perú (“MCP” or “Chinalco”), a
subsidiary of the Aluminum Corporation of China which clearly
defines each party’s long term surface rights in the area of the
Morococha mine. The primary focus of the agreement is on
the lands and concessions around the Morococha mine and
MCP’s Toromocho copper project. MCP requires certain lands
and concessions in order to proceed with the development of
Toromocho, including the surface lands within the planned open
pit mining area of the Toromocho project. While Argentum does
not own this land, much of the Morococha mine infrastructure
and facilities are located on this ground.
Under the terms of the agreement, Argentum would 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, 2014, the
Company received $23.8 million (2013 - $23.8 million) which
has been recognized as other income.
Dolores Mine, Mexico
On March 30, 2012, the Company acquired all of the issued
and outstanding common shares of Minefinders. Minefinders’
primary mining property is its 100% owned Dolores gold and
silver mine located in Chihuahua, Mexico.
During the year ended December 31, 2014 the Company
capitalized $49.7 million of mineral property, plant and
equipment (2013 - $86.6 million) which included pad 3
construction additions of $17.5 million (2013 - $27.2 million). For
the year ended December 31, 2014, the Company capitalized
$2.3 million in interest related to the capital expenditures (2013
- $1.7 million) at a capitalization rate of 10% (2013: 10%).
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 11 for further details.
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 11 for further details.
At December 31, 2014, it was determined that the estimated
realizable value of the Dolores mine was below its carrying value
82
pan american silver corp. and a further impairment charge of $170.6 million (net of tax of
$110.8 million) was recorded. Refer to Note 11 for further details.
11. 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. The CGU carrying
amount for purposes of this test includes the carrying value of
the mineral properties plant and equipment less deferred tax
liabilities and closure and decommissioning liabilities related to
each CGU.
Impairment at December 31, 2014
Due to a sustained decrease in metal prices that began during
the third quarter of 2014 and carried on through the remainder
of the year, during the fourth quarter of 2014 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 2018) in its life of mine cash flow
models, and concluded that these changes constituted an
indication of impairment in the fourth quarter.
Based on the Company’s assessment at December 31, 2014 of
potential impairments with respect to its mineral properties,
the Company concluded that impairment charges were
required for the Dolores mine, the Alamo Dorado Mine, the
Manantial Espejo mine, the Navidad Project, and certain non-
core exploration properties.
The Company’s key assumptions for each impairment test
included the most current information on operating and capital
costs, and risk adjusted project specific discount rates. The
Company used a median of analysts’ consensus pricing for
the first four years of its economic modeling for impairment
purposes, and long term reserve prices for the remainder
of each asset’s life. The prices used can be found in the key
assumptions and sensitivity section below.
At its Dolores property, the Company determined that the
carrying value of approximately $516.1 million, net of associated
deferred tax liabilities was greater than its recoverable amount
of $405.3 million when using a 5% risk adjusted discount rate.
Based on the above assessment at December 31, 2014, the
Company recorded a further impairment charge related to the
Dolores mine of $170.6 million, before tax ($110.8 million net of
tax) comprised of mineral property of $88.6 million, exploration
and evaluation property of $72.0 million, and property, plant and
equipment assets of $10.0 million.
At its Manantial Espejo property, the Company determined
that the carrying value of approximately $142.1 million, net
of associated deferred tax liabilities was greater than its
recoverable amount of $86.2 million when using a 9% risk
adjusted discount rate. Based on the above assessment at
December 31, 2014, the Company recorded an impairment
charge related to the Manantial Espejo mine of $76.7 million,
before tax ($55.9 million net of tax) comprised of mineral
property of $46.3 million, and property, plant and equipment
assets of $30.4 million.
At its Alamo Dorado property, the Company determined that the
carrying value of approximately $45.6 million, net of associated
deferred tax liabilities was greater than its recoverable amount
of $27.6 million when using a 5% risk adjusted discount rate.
Based on the above assessment at December 31, 2014, the
Company recorded an impairment charge related to the Alamo
Dorado mine of $23.7 million, before tax ($17.7 million net of
tax) comprised of mineral property of $7.4 million, and property,
plant and equipment assets of $16.3 million.
Furthermore, the Company determined that its La Bolsa, La
Virginia, Pico Machay, and Navidad properties at December 31,
2014, all had recoverable values on a fair value less cost of sales
basis below their carrying values. For the La Bolsa property, an
impairment of $10.3 million, before tax ($6.4 million net of tax)
was warranted to reduce the carrying value of $25.2 million. The
La Virginia property was written off completely, including related
goodwill of $4.1million, resulting in a $24.1 million, before
tax ($17.0 million net of tax) impairment. At the Pico Machay
property, the Company determined that a $4.8 million, before
tax ($4.8 million net of tax) impairment was appropriate to
reduce the carrying value of approximately $22.2 million down
to $17.4 million.
Lastly, at its Navidad property, the company found that at
December 31, 2014 a further impairment was warranted given
the deteriorating economic environment in Argentina, and the
precious metals market. The Company used a range of expected
FX assumptions, and a risk adjusted project specific discount
rate of 11.25% to develop a discounted cash flow model.
Additionally, the Company compiled market data to develop an
in-situ based valuation of the property. The result warranted
an impairment charge of $286.1 million, before tax ($286.1
million net of tax) comprised of $271.9 million exploration and
evaluation property, $3.6 million of land, and $10.6 million of
equipment to reduce the approximate carrying value of $486.1
million to the estimated recoverable value of $200.3 million
comprised of exploration and evaluation property of $190.5
million, land of $2.4 million and equipment of $7.4 million.
Impairment at June 30, 2013
At June 30, 2013, the Company determined that the carrying
value of the Dolores mine 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.
At June 30 2013, it was determined that the estimated
recoverable value of certain exploration assets was greater
than their recoverable amount on a fair value less costs to sell
basis. Based on this assessment the Company recorded an
impairment charge of approximately $14.9 million as at June 30,
2013, for these properties.
Impairment at December 31, 2013
Based on the Company’s assessment at December 31, 2013 of
potential impairments with respect to its mineral properties,
83
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
the Company concluded that further impairment charges were
required for the Dolores mine from those recorded at
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).
Key assumptions and sensitivity
The metal prices used to calculate the recoverable amounts at
December 31, 2014 are based on analysts’ consensus prices and
the Company’s long term reserve prices and are summarized in
the following table:
Commodity Prices
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper price - $/tonne
Lead Price - $/tonne
2015-2018
average
Long term
$19.03
$1,266
$2,423
$6,996
$2,225
$18.50
$1,250
$2,000
$6,800
$2,000
Metal prices used at December 31, 2013
Commodity Prices
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper Price - $/tonne
Lead Price - $/tonne
2014-2017
average
Long term
$22.43
$1,338
$2,184
$7,001
$2,205
$22.00
$1,300
$1,850
$6,800
$1,950
Metal prices used at June 30, 2013
The Company assesses impairment, when events or changes
in circumstances indicate that the related carrying value may
not be recoverable, 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 7.5% for 2014 (2013 – 8%), with rates applied to
the various mines and projects ranging from 4.75% to 11.25%
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, 2014, 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 Huaron mine and the Morococha mine may
exceed their recoverable amount for the purposes of the
impairment test.
For the Huaron mine, either of a decrease in the long term silver
price of 2%, a decrease in the long term zinc price of 4%, a
decrease in the long term lead price of 6%, a decrease in the
long term copper price of 9%, an increase in operating costs of
1%, an appreciation of the Peruvian sol of 2%, or an increase
in capital expenditures of 8% would in insolation cause the
estimated recoverable amount to be equal to the CGU carrying
value of $72.0 million (2013–$65.8 million). At December 31,
2013, none of these factors, if negatively affected by 10%,
would have caused the carrying value to equal or exceed the
recoverable value.
For the Morococha mine, either of a decrease in the long term
silver price of 8%, or an increase in operating costs of 7%
would in isolation, cause the estimated recoverable amount
to be equal to the CGU carrying value of $121.4 million (2013–
$125.6 million). At December 31, 2013, 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 Alamo Dorado mine, the
Manantial Espejo 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.
Commodity Prices
Silver Price - $/oz.
Gold Price - $/oz.
Zinc Price - $/tonne
Copper Price - $/tonne
Lead Price - $/DMT
2013-2016
average
Long term
Goodwill consists of:
$26.79
$1,508
$2,238
$7,436
$2,221
$25.00
$1,350
$1,750
$6,500
$1,850
As at December 31, 2012
Impairments (1) (2)
As at December 31, 2013
Impairments (3)
As at December 31, 2014
$
$
198,946
(191,812)
7,134
(4,077)
3,057
84
(1) Impairment Exploration property La Bolsa. March, 2013
(2) Impairment Dolores mine. December, 2013
(3) Impairment Exploration properties La Virginia and other. December, 2014
pan american silver corp. 12. Other Assets
Other assets consist of:
15. Provisions
December 31,
2014
December 31,
2013
Long-term receivable (1)
$
5,461 $
Investments in Associates
Reclamation bonds
Lease receivable
Other assets
1,450
91
408
37
5,648
1,450
92
788
36
$
7,447 $
8,014
(1) Represents a deposit related to the Gas Line Project at the
Manantial mine.
13. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of:
December 31,
2014
December 31,
2013
Trade accounts payable(1)
$
52,985
$
Royalties payable
Other accounts payable and
trade related accruals
Payroll and related benefits
Severance accruals
Other taxes payable
Advances on concentrate
inventory
Other
6,019
33,780
18,808
749
1,541
2,345
9,982
649
235
7,810
7,644
$
126,209
$
125,609
(1) No interest is charged on the trade accounts payable 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.
14. Loan payable
December
31, 2014
December
31, 2013
Loan payable (1)
$
17,658
$
23,496
Unrealized gain on foreign exchange
(58)
(3,401)
Net loan payable
$
17,600 $
20,095
(1) On October 31, 2014, one of the Company’s subsidiaries (Minera
Triton Argentina S.A.) received an unsecured bank loan for $60.0 million
Argentine pesos (equivalent to USD$7.0 million) in order to meet its short
term obligations. On November 13, 2014 an additional loan was received
for USD$4.7 million. The loan terms are one year from October 31, 2014
and 90 days from November 13, 2014 with interest rates of 32.9% and
3.2% respectively. In addition to the loans the subsidiary had drawn
on an available line of credit for an additional $49.5 million Argentine
pesos (equivalent to USD$6.0 million) at an interest rate of 25.0% due
January 2, 2015. At December 31, 2014, the combined fair values of the
loans payable were $17.6 million. 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 million 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, 2012
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 22)
December 31, 2013
Revisions in estimates and
obligations incurred
Charged (credited) to
earnings:
-new provisions
-unused amounts reversed
Closure and
Decommis-
Litigation
Total
sioning
45,640
7,043
52,683
(6,789)
-
(6,789)
-
-
-
1,238
1,238
(1,166)
(1,166)
(341)
(341)
(412)
3,030
(1,254)
-
(1,666)
3,030
41,469 $
5,520
46,989
421
421
-
-
-
375
(91)
(284)
375
(91)
(284)
(1,955)
3,238
(509)
(2,464)
-
3,238
51,590
9,799
28,419
-exchange gains on
provisions
Charged in the year
Accretion expense (Note 22)
19,463
December 31, 2014
$
43,173 $
5,011 $
48,184
Maturity analysis of total provisions:
Current
Non-Current
December 31,
2014
December 31,
2013
$
$
3,121
$
45,063
3,172
43,817
48,184 $
46,989
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 $99.7 million (2013 - $107.5
million) which has been discounted using discount rates
between 1% and 21% (2013 – 4% and 11%). Revisions made
to the reclamation obligations in 2014 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 2014 earnings as finance
expense was $3.2 million compared to $3.0 million in 2013.
Reclamation expenditures paid during the current year were
$2.0 million compared to $0.4 million in 2013.
Litigation Provision
The litigation provision consists of amounts accrued for
labour claims at several of the Company’s mine operations.
The balance of $5.0 million at December 31, 2014 (2013 - $5.5
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.
85
2014 annual report
Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
16. Finance Lease Obligations
Lease obligations(1)
$
8,037 $
10.154
December 31,
2014
December 31,
2013
Maturity analysis of finance leases:
Current
Non-Current
December 31,
2014
December 31,
2013
$
$
3,993 $
4,044
4,437
5,717
8,037 $
10,154
(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.
December 31,
2014
December 31,
2013
Less than a year
$
4,238
$
2 years
3 years
4 years
5 years
Less future finance charges
Present value of minimum lease
payments
$
17. Long Term Debt
Convertible notes
Conversion feature on the
convertible notes
Total long-term debt
Maturity analysis of Long Term Debt
Current
Non-Current
2,697
1,490
-
-
8,425
(388)
4,800
2,585
1,832
1,639
-
10,856
(702)
8,037
$
10,154
December 31,
2014
December 31,
2013
$
$
34,519
$
32,883
278
1,419
34,797
$
34,302
December 31,
2014
December 31,
2013
$
$
34,797 $
-
-
34,302
34,797 $
34,302
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
86
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:
a) CAD$1.84 and 0.55 of Pan American common shares;
b) an amount of cash equal to the Market Value of the
Consideration; or
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:
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
pan american silver corp. 19. 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 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. In early
2014, the Board approved the adding of performance share
units (“PSUs”) to the Company’s LTIP, plan described below.
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.
Transactions concerning stock options and share purchase
warrants are summarized as follows in CAD:
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, 2014, $2.3 million was capitalized to
mineral property, plant and equipment (2013 – $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, 2014 were expected stock price
volatility of 53.57%, expected life of 1.0 years, and expected
dividend yield of 5.44%.
During the year ended December 31, 2014, the Company
recorded a $1.1 million gain on the revaluation of the embedded
derivative on the convertible notes (2013 – $8.3 million).
18. Other Long Term Liabilities
Other long term liabilities consist of:
December 31,
2014
December 31,
2013
Deferred credit(1)
$
20,788
$
20,788
Other income tax payable
Severance accruals
6,542
3,386
2,180
3,077
$
30,716
$
26,045
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.
87
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Stock Options
Share Purchase Warrants
Shares
Weighted
Average Exercise
Price CAD$
Warrants
Weighted
Average Exercise
Price CAD$
Total
As at December 31, 2012
Granted(1)
Exercised
Expired
Forfeited
As at December 31, 2013
Granted
Exercised
Expired
Forfeited
As at December 31, 2014
2,196,565
326,047
-
(922,965)
(202,277)
1,397,370
212,869
-
(195,562)
(20,162)
1,394,515
$
$
$
$
$
$
$
$
$
$
$
24.07
7,814,605
11.57
-
25.19
21.63
-
-
-
-
20.76
7,814,605
11.58
-
-
(92)
17.73
(7,814,513)
$
$
$
$
$
$
$
$
$
$
23.02
19.74
-
- $
35.00
10,011,170
-
-
-
-
326,047
-
(922,965)
(202,277)
35.00
9,211,975
-
212,869
35.00
(92)
35.00
(8,010,075)
-
-
(20,162)
1,394,515
criteria and the application of the corresponding performance
multiplier determine how many PSUs vest for each participant.
The Board approved the issuance of 30,408 PSUs with a share
price of CAD $11.51 as of December 31, 2014. Compensation
expense for PSUs was $0.005 million in 2014 and is presented
as a component of general and administrative expense.
PSU
As at December 31, 2013
Granted
Paid out
Forfeited
Change in value
Number
Oustanding
Fair Value
-
30,408
-
-
-
-
305
-
-
(24)
281
As at December 31, 2014
30,408
(1) Includes 20,642 options granted in lieu of director fees during 2013.
Long Term Incentive Plan
During the year ended December 31, 2014, the Company
awarded 137,465 (2013 – 94,659) shares of common stock
with a two year holding period and granted 212,869 (2013 –
326,047) options under this plan. During 2014, 5,521 common
shares were issued to directors in lieu of directors fees. The
Company used as its assumptions for calculating the fair
value a risk free interest rate of 1.2% (2013 – 1.46%), weighted
average volatility of 50% using a historical share price (2013
– 47%), expected lives ranging from 3.5 to 4.5 (2013 – 4 to
5) years, historical expected dividend yield of 3.4%, and an
exercise price of CAD $11.58 (2013 – CAD $11.49) per share. The
weighted average fair value of each option was determined to
be CAD $3.51 (2013 – CAD $3.38).
During the year end December 31, 2014, nil common shares
were issued in connection with the exercise of options under the
plan (December 31, 2013 – nil common shares) 195,562 options
expired (2013 - 922,965) and 20,162 options were forfeited
(2013 – 202,277).
During the year ended December 31, 2014, 92 common shares
were issued in connection with the exercise of warrants (2013,
- nil common shares) the remaining 7,814,513 warrants expired
(2013 – nil).
Performance Shares Units
In early 2014, the Board approved the adding of performance
share units (“PSUs”) to the Company’s LTIP. PSUs are notional
share units that mirror the market value of the Company’s
common shares (the “Shares”). Each vested PSU entitles
the participant to a cash payment equal to the value of an
underlying share, less applicable taxes, at the end of the term,
plus the cash equivalent of any dividends distributed by the
Company during the three-year performance period. PSU grants
will vest on the date that is three years from the date of grant
subject to certain exceptions. Performance results at the end of
the performance period relative to predetermined performance
88
pan american silver corp. Share Option Plan
The following table summarizes information concerning stock options outstanding and options exercisable
as at December 31, 2014. The underlying option agreements are specified in Canadian dollar amounts.
Range of Exercise
Prices CAD$
$11.49 - $11.57
$11.58 - $12.60
$12.61 - $18.53
$18.54 - $24.90
$24.91 - $40.22
Options Outstanding
Options Exercisable
Number
Outstanding as at
December 31, 2014
Weighted Average
Remaining Contractual
Life (months)
Weighted Average
Exercise Price
CAD$
Number Exercisable
as at December 31,
2014
Weighted Average
Exercise Price
CAD$
305,405
212,869
246,827
347,964
281,450
1,394,515
71.43
83.38
64.30
46.57
11.46
53.68
$
$
$
$
$
$
11.49
11.58
17.97
24.89
30.03
19.74
152,706
-
246,827
347,964
281,450
1,028,947
$
$
$
$
$
$
11.49
-
17.97
24.89
30.03
22.65
For the year ended December 31, 2014, the total employee
stock-based compensation expense recognized in the income
statement was $2.5 million (2013 - $2.2 million).
Share Purchase Warrants
As part of the acquisition of Aquiline Resources Inc. in 2009
the Company issued share purchase warrants. During 2014, 92
warrants were exercised for common shares for proceeds of
$0.003 million. The outstanding warrants of 7,814,513 expired
on December 7, 2014 as per the agreement.
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, 2014, there was a derivative gain of $0.2 million
(2013 – gain of $8.4 million). The following table provides
detail on the movement of the share purchase warrant liability
between December 31, 2012 and December 31, 2014:
Share Purchase Warrant Liability
December 31, 2012
Warrants exercised during the year
$
8,594
-
The conversion feature on the convertible note, further
discussed in Note 17, is considered an embedded derivative and
is classified and accounted for as a financial liability at fair value
with changes in fair value included in net earnings. At December
31, 2014, the total unrealized derivative gain attributable to both
the warrants and convertible notes was $1.3 million (2013 -
$16.7 million).
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 or
Common Shares at the discretion of the Board 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. Additionally RSU value is adjusted to reflect
dividends paid on Pan American common share over the
vesting period.
Compensation expense for RSU’s was $0.9 million in 2014
(2013 – $0.6 million) and is presented as a component of
general and administrative expense.
Mark-to-market gain on the revaluation of warrants
(8,387)
At December 31, 2014, the following RSU’s were outstanding:
December 31, 2013
Warrants exercised during the year
Mark-to-market gain on the revaluation of warrants
December 31, 2014
$
$
207
-
(207)
-
The Company uses the Black Scholes pricing model to
determine the fair value of the Canadian dollar denominated
warrants. Assumptions used are as follows:
Warrant strike price
Exchange rate (CAD 1:USD 0.94)
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected warrant life in years
Quoted market price at period end
December 31,
2013
$
$
35.00
0.94
1.0%
4.0%
46.8%
0.93
12.41
RSU
Number
Outstanding
Fair Value
As at December 31, 2012
91,226
$
Granted
Paid out
Forfeited
Change in value
153,393
(42,709)
(5,808)
-
1,709
1,662
(497)
(67)
(519)
As at December 31, 2013
196,102
$
2,288
Granted
Paid out
Forfeited
Change in value
165,240
(116,381)
(4,204)
-
As at December 31, 2014
240,757
$
1,670
(1,224)
(44)
(429)
2,261
89
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
On February 19, 2015, 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 2,
2015. These dividends were declared subsequent to the year
end and have not been recognized as distributions to owners
during the period presented.
20. Production Costs
Production costs are comprised of the following:
Consumption of raw materials and
consumables
Employee compensation and
benefits expense (Note 21)
Contractors and outside services
Utilities
Other expenses
Changes in inventories (1)
2014
2013
$
223,238
$
214,638
172,558
87,023
25,229
25,360
34,796
152,417
89,564
22,781
58,124
(6,911)
$
568,204
$
530,613
(1) Includes NRV charge $30.0 million (2013-$13.0 million)
21. Employee Compensation and Benefit Expense
Wages, salaries and bonuses
$
189,656
$
170,127
Share-based payments
2,529
2,173
2014
2013
Total employee compensation and
benefit expenses
Less: Expensed within General and
Administrative expenses
Less: Expensed Exploration
expenses
Employee compensation and
benefits expenses included in
production costs (Note 20)
192,185
172,300
(16,086)
(14,712)
(3,541)
(5,171)
$
172,558
$
152,417
22. Interest and Finance Expense
Interest expense
Finance fees
Accretion of Reclamation expense
(Note 15)
2014
2013
$
5,072
$
6,664
429
583
3,238
3,030
$
8,739
$
10,277
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 was 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 was 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
consisted of three bonus levels that were commensurate with
various levels of responsibility, and provided for a specified
annual payment for two years starting in June 2012. Each year,
the annual contribution award was paid in the form of cash. The
minimum aggregate value that was paid in cash over the 2-year
period of the plan was $7.2 million. As of December 31, 2014,
this plan has been terminated and $nil remains to be paid.
Issued share capital
The Company is authorized to issue 200,000,000 common
shares of no par value.
Normal Course Issuer Bid
On November 28, 2013, the Company received regulatory
approval for a 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.
On December 17, 2014 the Company received regulatory
approval for a normal course issuer bid to purchase up to
7,575,290 of its common shares, during one year period from
December 22, 2014 and December 21, 2015.
No common shares were purchased during the year
ended December 31, 2014 (2013 – 415,000 common shares
were purchased).
Dividends
On February 19, 2014, the Company declared a dividend of
$0.125 per common share paid to holders of record of its
common share as of the close of business on March 17, 2014.
On May 8, 2014, the Company declared a dividend of $0.125 per
common share paid to holders of record of its common share as
of the close of business on June 3, 2014.
On August 13, 2014, 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
September 5, 2014.
On November 13, 2014, the Company declared a quarterly
dividend of $0.125 per common share to be paid to holders
of record of its common shares as of the close of business on
December 8, 2014.
90
pan american silver corp. 23. Loss Per Share (“LPS”) (Basic and Diluted)
For the year ended December 31,
2014
2013
Net loss (1)
Basic LPS
Effect of Dilutive Securities:
Stock Options
Convertible notes
Diluted LPS
Earnings
(Numerator)
Shares (000’s)
(Denominator)
Per-Share
Amount
Earnings
(Numerator)
Shares (000’s)
(Denominator)
Per-Share
Amount
$
$
(545,588)
(545,588)
$ (445,851)
151,511 $
(3.60) $ (445,851)
151,501
$
(2.94)
-
-
-
-
-
(8,327)
-
1,929
$
(545,588)
151,511 $
(3.60) $
(454,178)
153,430
$
(2.96)
Cash and Cash Equivalents
2014
2013
Cash in banks
Short term money markets
Cash and cash equivalents
$
$
118,099
$
242,191
28,094
7,746
146,193
$
249,937
25. 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:
(1) Net loss 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, 2014 were 1,394,515 out-of-money options and warrants
(2013 – 9,211,975).
24. 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:
2014
2013
Trade and other receivables
$
7,373
$
15,903
Inventories
Prepaid expenditures
Accounts payable and accrued
liabilities
Provisions
11,267
4,659
(8,398)
(3,304)
(25,012)
423
(10,959)
(1,659)
$
11,597
$
(21,304)
(1) The disclosure for Consolidated Statements of Cash Flows for 2013
has been changed from prior year audited amounts to reflect interest
expense of $6.7 million and net realizable value adjustments of $13.0
million as individual lines on the Consolidated Statements of Cash Flows
for the year ended December 31, 2013 in order to correct an immaterial
error. There is no net impact on the Consolidated Income Statements or
Loss or diluted loss per share. Details of the change are reflected in the
following table:
Previously
Reported
Current
Report
Difference
Inventories
$ (12,045) $ (25,012)
$ (12,967)
Accounts payable and
Accrued liabilities
Changes in non-cash
operating working
capital Items
$ (4,295)
$ (10,959)
$ (6,664)
$ (1,673)
$ (21,304)
$ (19,631)
Significant non-cash items:
2014
2013
Advances received for construction and
equipment leases
$
3,230 $
3,331
Share-based compensation issued to
employees and directors
$
1,461 $
1,035
91
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Revenue from external customers
Depreciation and amortization
Exploration and project development
Interest income
Interest and financing expenses
Gain (loss) on disposition of assets
Gain on derivatives
Foreign exchange gain (loss)
Impairment charge
Earnings (loss) before income taxes
Income tax (expense) recovery
Net earnings (loss) for the period
Capital expenditures
Total assets
Total liabilities
Peru
Huaron
Moroco-
cha
Dolores
Twelve Months ended December 31, 2014
Mexico
Alamo
Dorado
Argentina
La
Colorada
Manantial
Espejo
Navidad
Bolivia
San
Vicente
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
94,985
(11,877)
(1,312)
291
(751)
17
-
190
-
3,631
(1,494)
2,137
14,948
125,071
34,162
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
79,070 $
156,559 $
90,477 $
98,024
$
156,076 $
- $
76,751 $
- $
751,942
(18,745) $
(47,776) $
(12,693) $
(8,784)
$ (38,031) $
(166) $ (8,986) $
(652) $
(147,710)
(1,453) $
(1,242) $
(336) $
22 $
9 $
299 $
(9)
251
(778) $
(1,353) $
(241) $
(256)
404 $
- $
2 $
- $
- $
- $
-
-
(364) $
1,322 $
(1,494) $
(1,143)
$
$
$
$
$
$
(1,657) $
(4,437) $
723 $
15 $
- $
- $
(2,779) $
(13,225)
182 $
1,792
(4,087) $
(45) $
(226) $
(1,002) $
(8,739)
(102) $
- $
- $
- $
(6) $
830 $
- $
1,348 $
1,145
1,348
4,818 $
(388) $
290 $ (16,506) $
(13,275)
- $ (170,579) $
(23,721) $
-
$ (76,697) $ (286,076) $
- $ (39,189) $
(596,262)
(13,345) $
(251,621) $
(17,517) $
14,611
3,565 $
87,350 $
(1,566) $
(4,477)
$
$
(87,183) $ (292,397) $
15,091 $
(8,587) $
(637,317)
23,078 $
(77) $ (7,544) $
(6,341) $
92,494
(9,780) $
(164,271) $
(19,083) $
10,134
$ (64,105) $ (292,474) $
7,547 $ (14,928) $
(544,823)
9,348 $
44,887 $
293 $
31,400
167,862 $
744,498 $
99,334 $
117,219
35,954 $
175,195 $
15,596 $
30,382
$
$
$
26,741 $
50 $
3,415 $
679 $
131,761
183,402 $
192,651 $
91,712 $ 296,124 $
2,017,873
79,648 $
1,632 $ 24,589 $
50,778 $
447,936
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 (expense) recovery
Net earnings (loss) for the period
Capital expenditures
Total assets
Total liabilities
Peru
Huaron
Moroco-
cha
Dolores
Twelve Months ended December 31, 2013
Mexico
Alamo
Dorado
Argentina
La
Colorada
Manantial
Espejo
Navidad
Bolivia
San
Vicente
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
92,887
(11,176)
(936)
-
487
(722)
4,963
-
48
-
-
8,015
(4,770)
3,245
13,687
129,134
41,104
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
82,260 $
164,016 $
160,129 $
101,458
$
149,718 $
- $
74,036 $
- $
824,504
(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 $
(1,004) $
(1,071) $
(202) $
1,477 $
- $
13 $
- $
(216) $
- $
(561) $
(150) $
(565) $
- $
(561) $
(852) $
- $ (525,332) $
- $
-
142
(227)
8,011
-
634
(85)
-
(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 $
86,641 $
7,621 $
13,574
$
$
$
$
$
$
$
$
$
$
$
$
$
(608) $
(2,515) $
- $
164 $
- $
- $
- $
- $
- $
(6,895) $
(15,475)
- $
-
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 $
246 $
8,165 $
356 $
159,401
181,798 $
973,078 $
112,861 $
99,523
$ 298,544 $ 470,240 $
97,001 $
405,277 $
2,767,456
43,828 $
260,120 $
10,689 $
25,870
$
111,160 $
1,471 $
30,259 $
54,166 $
578,667
Twelve Months ended Dec 31,
26. Other Income and (expenses)
Product Revenue
2014
2013
Refined silver and gold
$
424,591 $
500,928
Zinc concentrate
Lead concentrate
Copper concentrate
73,487
163,854
90,010
68,094
162,601
92,881
Total
$
751,942 $
824,504
Royalties income
Chinalco grants
Other (expenses)
Total
2014
2013
$
144 $
355
-
(1,458)
10,000
(2,068)
$
(1,314) $
8,287
The Company has 15 customers that account for 100% of the
concentrate and silver and gold sales revenue. The Company
has 7 customers that accounted for 30%, 16%, 13%, 10%,
9%, 8%, and 6% of total sales in 2014, and 4 customers
that accounted for 33%, 22%, 13% and 10% of total sales in
2013. 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.
92
pan american silver corp. 2014
2013
$
35,763 $
54,365
Loss taxes
Statutory tax rate
Income tax recovery based on
above rates
Increase (decrease) due to:
2014
2013
$
(637,317) $
(429,089)
26.00%
25.75%
$
(165,702) $
(110,490)
44
35,807
1,326
55,691
Non-deductible expenses
4,902
5,198
Foreign tax rate differences
(61,445)
(22,164)
27. Income Taxes
Current tax expense
Current tax expense in respect of
the current year
Adjustments recognized in the
current year with respect to prior
years
Deferred tax expense (recovery)
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 10, 11)
Reduction in deferred tax liabilities
due to tax impact of net realizable
value charge to inventory (Note 20)
(20,199)
(865)
2,862
(523)
(2,876)
86,825
(97,541)
(119,800)
(10,547)
(128,301)
(4,571)
(38,934)
Provision for income tax (recovery)
expense
$
(92,494) $
16,757
As of April 1, 2013, the applicable income tax rate in Canada
was increased from 25.00% to 26.00%. 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 amount 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 results in an
effective tax rate that varies considerably from the comparable
period. The main factors which have affected the effective tax
rate for the year ended December 31, 2014 and the comparable
period of 2013 were the non-deductible foreign exchange
(gains)/losses, foreign tax rate differences, mining taxes paid,
and withholding tax on payments from foreign subsidiaries.
In 2014, the Company recorded a non-cash impairment charge
on non-current assets on several properties, with no tax benefit
recognized on a substantial portion of the properties including
Navidad. A non-cash impairment charge was also recorded on
goodwill associated with the La Virginia property with no tax
benefit recognized.
In 2013, the Company recorded a non-cash impairment
charge on goodwill related to Dolores and other Minefinders’
exploration properties. No tax benefit was recognized for
these transactions.
The Company continues to expect that these and other factors
will continue to cause volatility in effective tax rates in
the future.
Change in net deferred tax assets
not recognized:
- Argentina exploration
expenses
- Other deferred tax assets
not recognized
Non-taxable unrealized gains on
derivative financial instruments
Effect of other taxes paid (mining
and withholding)
Non-deductible foreign
exchange loss
Change to temporary differences
on inventory
Impact of Peruvian tax
rate change
Effect of change in deferred
tax resulting from prior asset
purchase accounting under IAS12
Impairment charges
Impact of Mexican tax reform
Other
847
3,598
2,289
2,042
(350)
(4,304)
8,050
14,451
4,430
242
2,647
(2,876)
3,272
110,692
-
750
-
-
3,394
41,166
86,825
(3,201)
Income tax (recovery) expense
$
(92,494) $
16,757
Effective tax rate
14.51%
(3.91%)
Deferred tax assets and liabilities
The following is the analysis of the deferred tax assets
(liabilities) presented in the consolidated financial statements:
Net deferred assets (liabilities)
beginning of year
Recognized in net (loss) earnings
in year
Other
2014
2013
$ (285,782) $
(324,813)
128,301
(7)
38,934
97
Net deferred assets (liabilities) end
of year
(157,488)
(285,782)
Deferred tax assets
2,584
165
Deferred tax liabilities
$ (160,072) $
(285,947)
Net deferred tax liability
(157,488)
(285,782)
93
2014 annual report
Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
Components of deferred tax assets and liabilities
The deferred tax assets (liabilities) are comprised of the various
temporary differences as detailed below:
At December 31, 2014, there were tax losses of $39.4 million
(deferred tax impact of $11.8 million) that will expire after the
2024 year-end if unused, and $34.8 million (deferred tax impact
of $9.0 million) that have no expiry.
Deferred tax assets (liabilities)
arising from:
Closure and decommissioning
costs
Tax losses
Deductible Mexican mining taxes
Tax credit resulting from Mexican
de-consolidation
Accounts payable and accrued
liabilities
Trade and other receivables
Provision for doubtful debts and
inventory adjustments
Mineral properties, plant, and
equipment
Estimated sales provisions
Prepaids and other current assets
Other temporary differences and
provisions
2014
2013
$
6,273 $
20,866
1,633
8,337
5,081
7,806
6,419
13,965
-
-
5,405
10,319
At December 31, 2013, there were tax losses of $ 24.3 million
(deferred tax impact of $8.5 million) that will expire after the
2023 year end if unused, and $17.7 million (deferred tax impact
of $5.4 million) that have no expiry.
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)
$
144,287 $
117,100
2014
2013
(2,778)
(16,361)
Net tax loss (capital in nature)
Resource pools
(197,108)
(294,347)
Financing fees
(7,573)
(959)
(10,276)
Property plant and equipment
(1,609)
Closure and decommissioning costs
934
703
Exploration expenses
Payroll and vacation accruals
Other temporary differences
-
22,675
-
27,113
23,435
49,783
1,158
286
10,531
22,682
1,777
8,684
21,948
25,495
1,078
262
$
268,737 $
209,557
Net deferred tax asset (liability)
$ (157,488) $
(285,782)
Included in the above amount are losses, which if not utilized will expire as follows:
2015
2016
2017 – and after
Total tax losses
Canada
US
Spain
Peru
Mexico
Barbados
Argentina
Total
20,572
-
-
-
-
-
31
71
-
-
90,036
13,471
17,398
1,101
1,403
13
7
99
-
-
20,616
78
85
123,593
$
110,608 $
13,471 $
17,398 $
1,203 $ 1,403 $
119 $
85 $
144,287
Taxable temporary differences associated with investment in
subsidiaries
As at December 31, 2014, taxable temporary differences of
$144.0 million (2013 – $118.8 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.
28. Commitments and Contingencies
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 7.
c. Credit Facility
The Company cancelled the $150.0 million credit facility
effective December 31, 2012.
a. General
d. Environmental Matters
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’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
94
pan american silver corp. 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, 2014 and December
31, 2013 $43.2 million and $41.5 million, respectively, were
accrued for reclamation costs relating to mineral properties.
See also Note 15.
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 2014, the Peruvian Parliament approved a bill that
decreases the effective tax rate applicable to the Company’s
Peruvian operations. The law is effective January 1, 2015 and
decreases the future corporate income tax rate from 30% in
2014, to 28% in 2015 and 2016, 27% in 2017 and 2018, and
to 26% in 2019 and future years. In addition, this new law will
increase withholding tax on dividends paid to non-resident
shareholders from 4.1% in 2014, to 6.8% in 2015 and 2016, 8%
in 2017 and 2018, and to 9.3% in 2019 and future years.
As a result of this law becoming enacted in the fourth quarter
of 2014, the Company recognized a non-cash recovery of $2.9
million related to the deferred tax impacts of the above
tax changes.
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, 2014 is $8.0 million (2013
$10.2 million) and the schedule of timing of payments for this
obligation is found in Note 16.
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.
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.
95
2014 annual report Notes to the Consolidated Financial Statements
As at December 31, 2014 and 2013
(Tabular amounts are in thousands of U.S. dollars except number of options and warrants and per share amounts)
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
On May 28, 2014, the Bolivian government enacted Mining
Law No. 535 (the “New Mining Law”). Among other things,
the New Mining Law has established a new Bolivian mining
authority to provide principal mining oversight (varying the
role of COMIBOL) and sets out a number of new economic
and operational requirements relating to state participation
in mining projects. Further, the New Mining Law provides that
all pre-existing contracts are to migrate to one of several new
forms of agreement within a prescribed period of time. As a
result, we anticipate that our current joint venture agreement
with COMIBOL relating to the San Vicente mine will be subject
to migration to a new form of agreement and may require
renegotiation of some terms in order to conform to the New
Mining Law requirements. We are assessing the potential
impacts of the New Mining Law on our business and are
awaiting further regulatory developments, but the primary
effects on the San Vicente operation and our interest therein
will not be known until such time as we have, if required to do
so, renegotiated the existing contract, and the full impact may
only be realized over time. In the meantime, we understand that
pre-existing agreements will be respected during the period of
migration and we will take appropriate steps to protect and, if
necessary, enforce our rights under our existing agreement with
COMIBOL. There is, however, no guarantee that governmental
actions, including possible expropriation or additional changes
in the law, and the migration of our contract will not impact our
involvement in the San Vicente operation in an adverse way and
such actions could have a material adverse effect on us and
our business.
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 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. 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 18.
96
pan american silver corp. 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.
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.
29. Related Party Transactions
During the year ended December 31, 2014, a company indirectly
owned by a trust of which a director of the Company is a
beneficiary, was paid approximately $0.4 million (2013 - $0.4
million) for consulting services. Similarly, at December 31, 2014
and 2013 an accrual was recorded for consulting services for a
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.
Compensation of key management personnel
The remuneration of directors and other members of key
management personnel during the year were as follows:
Short-term benefits
Share-based payments
2014
2013
$
$
9,648
$
2,487
8,274
1,890
12,135
$
10,164
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, 2014, the royalties
to COMIBOL amounted to approximately $10.4 million
(2013 - $17.5 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, 2014, the
royalties to Royal Gold amounted to approximately $4.9 million
(2013 – $4.5 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
97
2014 annual report “Since 1994, we have built and operated silver
mines responsibly throughout Latin America. We
currently employ almost 7,000 people at our
7 operating mines, produced 26.1 million ounces
of silver in 2014, and we actively contribute to the
long-term prosperity of the communities and the
countries in which we operate. Shareholders of
Pan American Silver participate in a responsible
and profitable silver mining company.”
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 – Luis Collarte
MEXICO OFFICE
Pan American Silver Mexico
Tel. 52-618-128-0709 x 10
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
100%