Dukat Sale Conference Call

November 22, 2004

Operator:      Good afternoon ladies and gentlemen and welcome to the Pan American Silver Corporation conference call.  At this time all participants have been placed on a listen only mode and the floor will be open for questions following the presentation.  It is now my pleasure to turn the floor over to your host, Mr. Ross Beaty.  Sir, you may begin.

Ross Beaty: Thank you very much operator and good day ladies and gentlemen.  With me on this call from Vancouver are Geoff Burns, Pan American Silver’s President and CEO, and Brenda Radies, Pan American Silver’s VP of Corporate Relations.

This conference call is to discuss Pan American’s announcement this morning that we sold our 20% interest in the Dukat silver mine in Russia for $20.5 million in cash and up to $22.5 million in future payments.  And I would like to remind everyone that all dollar amounts today are in U.S. dollars. 

So this morning I’m going to briefly outline the history of our involvement in Russia, this deal that we announced this morning and its impact on us relative to our present corporate condition.  We began looking at Dukat in 1997, 3 years after we began as a silver company in 1994.  And we participated in an auction to acquire it in late 1997 in a joint venture with a Russian company called Geometal; absolutely nothing to do with Polymetal.  In early 1998 Pan American and Geometal won the auction for the Dukat license, which covered a large known silver deposit that had been mined in the 1980s and 1990s before being shut down in 1994.  By late 1999, Pan American Silver and Geometal had completed a feasibility study on re-opening Dukat, and we had raised $120 million to do so and in fact, we’d started construction.  Pan American’s interest at that time was 60%, Geometal’s was 30% and the International Finance Corporation had an interest of 10%. 

At the end of 1999 the Russian company Polymetal, which operated a nearby gold/silver property called Lunnoye, surprised us by acquiring some assets that were critical to our development plan.  A protracted court battle ensued in 2000 in various Russian courts, which culminated in Pan American entering into a deal with Polymetal to reduce Pan American’s interest from 60% to 20% in exchange for Polymetal funding 100% of future costs to construct a mine at Dukat, and Polymetal then went about to acquire the remaining interest of Geometal and the property.  I should, I made an error - IFC, International Finance Corporation - did not actually own an interest at that time, but had a right to acquire one, which would have happened in 2000, had it not occurred.  It never did end up owning an interest in the mine.  So, by the end of about 2000, Polymetal had an 80% interest in Dukat, full funding obligations for the whole remaining costs and Pan American had 20%. 

Quite frankly, we found working in Russia very difficult and we saw this settlement as a way to keep a minority stake in the project with no financial or management burden, which freed us up to focus on our strong growth prospect in Latin America.  But since we could not predict if, or when, we might see any return from Dukat, we took the prudent course in 2000 of writing off all of our $37 million historic investment in the mine.  We did, however, maintain professional contact with Polymetal as it continued work, over the next three years, to rebuild Dukat.  And in 2003, Dukat began operations again, producing about 9 million ounces of silver.  I don’t actually know what the production plan is for 2004, as Polymetal is now combining its Dukat and Lunnoye production into one operation.  Earlier in 2004 we were advised by Polymetal that it would like to purchase our interest, and today’s announcement is a result of negotiations over the last 6months or so to that end.

 I am very pleased that we stand an excellent chance to recover even more than we initially invested at Dukat, and that Polymetal paid a fair price for our interest.  It is important to mention that our 20% interest was really just a 20% net profits interest.  Our agreement in 2000 with Polymetal provided that Polymetal would first recover its capital investment, plus interest on its debt, plus a large management fee before we participated in profit sharing.  Well, Polymetal spent well over $100 million on Dukat capital costs, all funded by high interest debt, so we felt there was little prospect of a financial return from Dukat for many years, if ever.  Plus, of course, it was in Russia, and all the uncertainties and difficulties in Russia that are well known, added to the question of whether we would recover anything from our Dukat interest.  So we accepted Polymetal’s offer, we were paid $20.5 million last week, and we expect to receive all of the $22.5 million balance over the next few years, although it will, to some degree, depend on future silver prices.  We will take all net proceeds from this deal into income.  So it will add $20.36 million to our fourth quarter income for this year, or about 30 cents per share.  

There will be a minor impact on our 2004 inventory of silver reserves and resources, with a decrease of 48 million ounces of silver reserves and 44 million ounces of silver resources; though this has nearly been totally offset by the 88 million ounce increase in our 2004 silver reserves and resources by virtue of our purchase of the Morococha mine in Peru in August of this year.  And needless to say, not all ounces are the same.  We would expect anyone to put a pretty high discount on the value of reserves at a Russian mine operated by a third party, compared to a Peru mine that we operate, for example.  And most of this Dukat silver resource; we should point out, is very low grade, and may never be recovered.  The average grade, for example, of the reserves is about 750 grams per ton, and the average grade of the resource is about 290 grams per ton, well below the offered and economic cutoff today.  And, of course we now have $20 million to use to seek additional silver reserves and resources through exploration and new acquisitions.  On balance, we are pleased to have ended our Russian adventure with the likelihood of recovering more than all our historic investment, and while retaining a positive and professional relationship with Polymetal.  We certainly wish Polymetal every success in the future at Dukat. 

Finally, let me put this deal in context.  This year marked Pan American’s 10th anniversary.  We began in 1994 from scratch, with nothing but a vision to build the world’s pre-eminent silver mining company.  Despite a number of road bumps along our journey, I’m very proud to say that in the third quarter of this year, Pan American achieved that objective, becoming the largest primary silver producer in the world.  We produced 3.2 million ounces in the third quarter, compared to the next largest producer, Cour d’Alene which produced only 3 million ounces.  Besides this record production from our fixed operating silver mines, we have 4 mines in Peru, 1 in Bolivia and 1 in Mexico.

 We also reported record earnings in the third quarter, and record operating cash flow.  Pan American enjoys the best balance sheet in the silver industry now, with over $100 million in cash and no debts.  We are in great shape today and the wind is in our sales.  Silver prices are strong, and the outlook is good for continuing strength.  We expect to produce over 15 million ounces of silver in 2005 and we have 3 development projects that will increase our silver production to over 23 million ounces by late 2007.  Pan American has become the largest silver company by market capitalization in North America, and by far the most liquid, with over 1.3 million shares worth over $20 million per day, traded on the TSX and NASDAQ exchanges.  We now have over 4,000 employees and over 35,000 great shareholders.

 We are successfully closing the Russian chapter in our short history to date, and we will now continue our journey to make ourselves larger, stronger and even better as the silver story for equity investors.  Watch this space on how we deploy the Dukat sales proceeds.  I am confident that we will use them well to create further wealth to our shareholders.  And with that preamble, I would like to open the call to questions, operator.

Operator:      Thank you sir, the floor is now open for questions.  If you wish to ask a question, please press “star, then one” on your touchtone telephone at this time.  If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.  We do ask that while you pose your question, that you please pick up your handset to provide optimum sound quality.  Once again, ladies and gentlemen, that is “star, then one” on your touchtone telephones at this time.  Your first question is coming from Drew Hasselback with National Post.

Drew Hasselback:              Hi, Ross.  In the past, the Dukat experience has been held up as perhaps an example of the problems that Canadian companies and international companies have in dealing with Russia.  Is today’s result, perhaps, an example of how that might have changed, how Russia might be a more, a safer place to do business these days?

Ross Beaty:              Drew, there’s absolutely no question of that.  Russia is a better place to work in today, it’s a more, I think a more, it’s a safer place to work.  It still has many, many risks, it’s still not the same as working in, you know, Ontario, but it is better.  But, you know, the years we worked in Russia in 1997 to 2000 were really tough years.  We went through 5 different Prime Ministers, for example.  It was a revolving door, and tremendous chaos; currency crises, all sorts of chicanery going on with Russian companies.  Courts you couldn’t rely on and, unfortunately, I think we found that to our detriment.  But, there’s no question the last 3 years seems to have been a lot better, there’s more maturity, I think, in Russian companies, and what would have been inconceivable, this deal would have been inconceivable, I think, in 2000, is not inconceivable today.  We have also maintained cordial relationship with Dukat, our protagonist in 2000, because it was good business to do that.  We took a back seat, for sure, on development of the Dukat project letting Polymetal develop it as they saw fit and with the budget that they put in place, but we kept a watching brief over it, we made periodic trips to Russia to meet with them, to discuss the project, and through doing so, ended up in quite a positive business relationship with them.  And I think all of that was important in getting to the deal we got to.  It was a fair deal, it was a fair market deal, and I think it was a win-win for both parties. 

Drew Hasselback:             I have another question, I don’t know if there’s other people in the queue, though.

Ross Beaty:              Yes, go ahead Drew.

Drew Hasselback:             The proceeds that you’re putting on the books, this $20 million, $20.36 million, is that all going to wind up going to exploration or would you perhaps give that back to shareholders in some form?

Ross Beaty:              We hope to give more money back to shareholders when we have, when we’ve ended our spectacular growth that we’re involved in right now.  Pan American is really in the middle of, just, explosive growth.  We, as you probably saw in our third quarter we had revenue 131% over revenue from the third quarter of 2003.  Our production increased dramatically from year on year, this, 45% for example, over the third period of, third quarter of 2003.  Production last year was 8.6 million, production this year we’re forecasting at over 11 million ounces, production next year over 15 million ounces and production by end of 2007 over 23 million ounces.  So, we’ve still got 2 mines to build in Latin America, 1 in Mexico and 1 in Argentina.  Those will cost us in the range of between, say 110 and 150 million, the numbers are still very much in flux right now.  The latter number is probably the wrong even upside, it’s probably going to be substantially less than that, but in any case, we have plenty of capital projects yet to embark on in order to fulfill the growth projections that we just made to you.  That’s going to take cash and, so, this cash is going to be deployed to that end, as well as, potential new deals that we see coming along that are just too good to turn down.  When we complete all of that growth, we should be in a happy position of making pretty good cash flow, good earnings and have a balance sheet that’s enviable and gives us the ability to return dividends to shareholders.                        

Drew Hasselback:             Thanks.

Operator:       Thank you, our next question is coming from Haytham Hodaly with Salman Partners.

Haytham Hodaly:    Good morning Ross, how are you?

Ross Beaty :  Good.  Thanks Haytham.

Haytham Hodaly:  Just a couple of quick ones, I promised Brenda I wouldn’t ask too many because it was pretty self explanatory.  Is the $20.34 million; is that the after tax, what’s going to show up on your interest statement?

Geoff Burns:             Haytham, this is Geoff.  Yeah, that should be the, should be the numbers, I still think we have sufficient losses to cover that, at this stage.

Haytham Hodaly:     Would you expect tax treatment on the remaining $22.5 million as it comes in?

Ross Beaty:             That is correct.

Haytham Hodaly:    Ok, and then, what’s the royalty versus payment breakdown.  I think it said a maximum of $8 million a year was it?  But what’s the actual payment in…based on which silver price?

Ross Beaty:             Haytham, there’s a schedule.  It varies between zero below 550 and then it goes up from there, up to $8 million over $10 dollars.  There’s about 8 different categories still.  It’s more or less scaled.

Haytham Hodaly:  Ok, will that be filed, I guess under SEDAR somewhere?

Ross Beaty:   Uh, don’t know.  Could be, probably will be.  We can give it to you; if anybody’s interested we’ll be happy to give it to you.  It’s not secret.

Haytham Hodaly:  That’s fine, I can get it.  Brenda can give it to me.

Ross Beaty:             Yeah, and I can tell you right now, if you’d like, it’s below, it’s half a million between $5.50 and $6, a million between $ 6and $7, 2 million between $7 and $8, 5 million between $8 and $9, and 6 million between $9 and $10, and 8 million over $10.

Haytham Hodaly:    Eight million over $10/oz.  Perfect, thank you, Ross.

Ross Beaty:              And, also there’s a provision in the agreement for early payment of substantial part of that on certain events happening, for example, if Polymetal goes public, we would get half right away.  Half the remaining amount’s due right away. 

Haytham Hodaly:  Perfect, now, it’s nice to see some cash probably come out of that deal.  Thank you.

Ross Beaty:             Thank you very much, Haytham.

Operator:      Thank you.  Once again ladies and gentlemen, if you wish to ask a question, please press “star, then one” on your touchtone telephone at this time.  Your next question is a follow up from Drew Hasselback with The National Post.

Drew Hasselback:              Hi again.  Just, you’ve talked about some of the things that led you to reach the decision to go ahead with this deal today.  I’m just wondering about some other factors, perhaps the silver price, or changes in the exchange rate, are those factors in any way?

Ross Beaty:             The strong silver price, for sure, has facilitated this agreement, because it meant there was some more cash, I think, on the table for the Russians to pay us with, and more of a sentiment that it was a good thing for them to do.  The property has zero value at $5 silver, because, of course that’s around the cost of production.  And so, to the extent that silver’s $7.50 today, they’re making pretty good money there, and they would have the ability to pay us and consolidate their interest in this project.  So certainly the strong silver prices helped facilitate the transaction. 

The climate, you know, the business climate’s good for continuing silver prices and silver strength, so I think that also helped.  And, quite frankly, what’s going on in Russia, Putin was re-election for a second term last year.  He is very much of a nationalist and he, I think, would encourage the almost, quote “repatriation of Russian assets to Russian companies.”  So I think the Polymetal group is going to get a real political benefit from buying us out here, especially buying us out in a fair transaction, which is seen as fair even by Russian sources, as opposed to the, sort of, brutal tactics that were going on there during the 1990s.

Drew Hasselback:             Ok, thank you.

Operator:      Thank you.  Once again ladies and gentlemen, if you wish to ask a question, you may press “star one” on your touchtone telephone at this time.  I’m showing no further questions at this time.

Ross Beaty:             Very good.  We’ll end the call.  Thank you very much operator, and if anyone has further questions, don’t hesitate to call me or Brenda Radies at Vancouver, (604) 684-1175.  Thank you very much for joining us today.

Operator:      Thank you.  This does conclude today’s teleconference.  You may disconnect your lines at this time and have a wonderful day.