Pan American Silver Corp.
Fourth Quarter 2005 Earnings
February 23, 2006

Operator: Good afternoon ladies and gentlemen.  My name is Sandra and I will be your conference facilitator today.  At this time, I would like to welcome everyone to your Pan American Silver Corp’s Fourth Quarter 2005 Earnings Conference Call.  All lines have been placed on mute to prevent any background noise.  After the speaker’s remarks, there will be a question and answer period.  If you would like to ask a question during this time, please press star, then the number one on your telephone keypad.  If you would like to withdraw your question, press the pound key. 

Thank you; it is now my pleasure to turn the floor over to your host, Mr. Ross Beaty, Chairman and CEO.  Sir, you may begin your conference

Ross Beaty: Thank you very much, Operator.  Good morning and good afternoon ladies and gentlemen.  Welcome to the Pan American’s 2005 Results Conference Call.  With my are, in Vancouver are Geoff Burns, who actually is Pan American’s CEO, and Geoff will reveal our operations and projects with you after I have some preliminary comments.  We also have our VP Operations, Andy Pooler, our VP of Projects, Steve Busby and our CFO Rob Doyle as well as Brenda Radies, our VP of Corporate Relations.

Starting with our financial and operating results; our Q4 results and annual results do not really reflect our good operating picture today.  They’re heavily skewed by one-time non-cash charges in Q4 2005 and our one-time gain in Q4 of 2004 resulted from our sale of the Dukat mine.  I have to begin by saying that I am frustrated by our need to restate our 2004 and 2005 earnings due to a mistake in interpretation and hedge accounting by our auditors.  We have hedged our base metal production for years and all our accounting for this was reviewed quarterly and received the blessing of our auditors.  This year, and we were only informed of this 10 days ago, our auditors told us they thought we had changed how we accounted for this hedged production, resulting in our need to restate the last seven quarters and use the new method to account for our hedges.  Now, I’m not an accountant, but I know we are hedging our lead and zinc production through our forward sales program.  So it’s pretty strange to me to be told we can’t use hedge accounting.  In any event, this is a non-cash restatement and we have made the changes, but it resulted in a $6.2 million charge to earnings in Q4, and that sounds a lot worse than it actually was, hence my frustration.

The other non-cash financial adjustment in Q4 was the $29.7 million write-down of the carrying value of our La Colorada mine.  This results from our conclusion that the very high water inflows and bad ground conditions we are seeing at La Colorada might render deeper mineralization and lower grade mineralization unrecoverable, meaning that our mineable reserves are lower and we reduce them by about 14 million ounces.  Needless to say, I hope we discover more ounces that are accessible to mining during future exploration, as well as find ways to deal with the water, in which case, we will recover those ounces and hopefully the carrying value we are writing down. 

And I would just remind our longer term shareholders, we actually wrote off our entire Quiruvilca mine carrying value in 2002 when we were about to close the mine due to our heavy losses there from the very low metal prices at the time.  Well, not only is the Quiruvilca mine still running today, but it has generated over $16 million in operating earnings since then and has a plus-five year mine life at today’s prices.

Stripping all the non-cash items out, we actually had a record year in 2005.  We generated record mine operating earnings of $21.7 million and record consolidated revenue of $122 million.  This was due to our record production of 12.5 million ounces of silver and the strong metal prices of the year.  Our 2005 cash costs averaged $4.38 per ounce versus $4.17 in 2004.  Higher by-product revenues were more than offset by higher operating costs and by the very high cash costs we experienced at the La Colorada operation.  Our real star operation in 2005 was Morococha, where cash costs declined all year and averaged just $2.10 per ounce in the fourth quarter.  Geoff will talk about that in more detail.

Looking forward, I want to emphasize today how much better I expect our results to be in 2006.  January for example, was a record month at our operations in terms of cash generated, by far.  Geoff will go into details of our various projects and plans and will explain why I am so optimistic about 2006 and quite frankly, future years.  Our medium-term plans are for a doubling of our production by 2008 to over 25 million ounces and at much lower cash costs as our new mines are lower cash cost operations.  So I expect we will generate pretty robust cash flow and earnings, especially if metal prices continue to be buoyant in 2006 and beyond. 

And on that note, I’ll ask Geoff to summarize our operations and projects.

Geoff Burns: Thanks, Ross.  As has been mentioned, our consolidated silver production grew by 12% to 12.5 million ounces in 2005, our 11th consecutive year of production growth.  Let’s deal with two of our mining operations in 2005, and I’ll make some comments on what to expect in 2006.

Starting in Peru; our Morococha mine was our most profitable operation in 2005, generating $10.4 million in mine operating earnings on silver production of 2.7 million ounces.  Cash costs at Morococha were $2.61/oz for the year of 2005, down almost $2.00 from 2004, as our by-product zinc production continued to climb and our silver recoveries improved.  As we envisioned, we have been investing in Morococha since we acquired the mine last year, almost $9 million in the last 18 months.  We’ve been pushing underground development to access some of the new veins and mantos that we’ve discovered, we’ve been systematically upgrading most of our basic infrastructure, and we’ve invested in our mill facility to increase throughput.  These investments are going to allow us to increase our throughput to 50,000 tonnes a month in 2006, up from approximately 45,000 tonnes a month in 2005, which should see us produce close to 2.9 million ounces of silver to our account in this year at similar cash costs.  Longer term, we have initiated the basic engineering work designed to increase our production further and take Morococha to the next level.  I am confident that we will see a doubling of the mine’s production over the next three years.

Our Quiruvilca operation continues its sold, predictable performance.  We produced 2.2 million ounces of silver at Quiruvilca in 2005 at a cost of $4.11 per ounce.  We will continue to follow the main vein systems deeper in 2006, developing below the 340 level, and for 2006 we see production and costs that are very similar to what we have just accomplished.  There are a couple of potential opportunities at Quiruvilca that we will be evaluating early this year.  We still have excess mill capacity and we have developed lower grade ore reserves in the north zone of the mine, which we closed when silver and zinc prices were much lower than they are at the moment.  We’re going to have a careful look to see if there’s an opportunity to bring some of that material back into our mine plans.

At Huaron, we had a reasonable year in 2005.  It did not quite meet our expectations.  Production declined to 3.7 million ounces and costs climbed to $5.12/oz.  The mine still generated good cash flow given the strong silver and zinc prices, but I know we will do better in 2006.  While I was not at all concerned with the modest decline in silver production, you mine the grades that are scheduled to be broken in your mine plan, and these can increase or decrease to a certain degree in any given quarter or year, I was concerned by the difficulties we were encountering with our zinc recovery, which dropped to as low as 60% in 2005.  This was by far the most significant contributor to our increase in cash costs.  To address this, we made some minor modifications to our floatation circuit, looked carefully at our ore types and ore blend, and hired a new metallurgist. 

The good news is that in January, we have seen our zinc recoveries improve by almost 7% and are well on the way to restoring them to historic averages.  This should certainly help get our cost per ounce lower at Huaron, where we plan to produce 3.7 million ounces in 2006 at $4.70 per ounce.  The silver rich stockpiles continue to be a nice little cash cow.  We produced almost 700,000 ounces of silver at a cost of under $2.00 per ounce in 2005.  I see pretty much the same again this year.

Moving to our La Colorada operation in Mexico; we made some huge strides in production in 2005.  Silver production was up over a million ounces to 3.1 million, and cash costs declined by $0.75 per ounce, a pretty remarkable improvement over the previous year, but it has come at a significantly higher cost.  We are continuing to deal with underground water flows that are both hotter and greater than predicted by the hydro-geologists we brought in to the study the situation.  We’ve got the pumping under control at the moment, but the horsepower we had to engage is costing us significantly more in power than we had hoped.  We’re still expecting to increase our production to four million ounces in 2006, but we’re just not going to see the cost improvements that we had previously predicted.  We’re still going to be north of $5.00 per ounce, which is going to make us some reasonably decent cash flow this year.  If we get a break on the water, we might see some improvement in this, but Mother Nature’s going to have to help a little.

Finally the San Vicente in Bolivia, where we increased our interest to 55% in 2005.  We started small scale mining and stockpiling of ore at the sight in June of last year at a little over 200 tonnes per day and commenced shipping the ore about 30 kilometers away to our joint venture partner’s mill for toll processing in October.  In 2006, we plan to continue to mine at this small scale, which should provide us almost 300,000 ounces of silver at $3.50 an ounce.  The real story at San Vicente is that we are close to completing a feasibility study for the operation, which would see us build a new mill at the mine site, develop the underground for an increased production rate, and really take advantage of the excellent silver and zinc ore grades that the San Vicente reserve has to offer.

Putting this all together, we see another year of production growth for Pan American in 2006.  We plan to produce 14.1 million ounces at $4.43 per ounce this year.  Before moving to our development projects, I would like to make a couple of comments on our operating costs.  Costs were higher in 2005, as the affects of the weakened US dollar, higher oil prices and competition for goods and services increased our costs to move and process a ton of ore.  I am hopeful that these costs inputs have stabilized for 2006, but we’re just going to have to see. 

As you probably are all aware, we have been busy constructing our Alamo Dorado Silver mine in Mexico since February of last year.  I could go on at length about all the activities and how exciting it is to be building our latest and most modern mine, but there are really two, only two important things to say about Alamo Dorado.  It is on schedule for startup in October of this year and it’s on budget.  We expect to be producing silver at an annual rate of almost five million ounces at a cash cost of $3.50 per ounce starting later this year.

At Manantial Espejo; our 50/50 joint venture project in Argentina, we have completed the feasibility study.  We filed our environmental impact statement with the province of Santa Cruz in November of last year and just recently received their comments.  We’re diligently working to respond to their questions and plan on submitting those responses in approximately two weeks time.  We didn’t see anything in their questions that has raised any red flags and we are hopeful that we will have our mine operating permit in very short order.  As soon as we have that in our hands, we will be in position to talk to you more openly about the feasibility economics as well as make a construction decision.  Please stay tuned as I am still very optimistic that we’ll be building at Manantial Espejo this year.  Ross?

Ross Beaty: Great, thanks Geoff.  Okay, to finish off I’ll just add a few words about our reserves and resources, our exploration success and some views on the silver market.  First, I was very pleased that we increased our proven and probable reserves in 2005 by 23%.  Even after accounting for the reserve write-down at La Colorada and the 15 million ounces we mined in 2005, it came off the reserves.  Reserves were increased at nearly all our operations, led by Morococha where we added 18 million ounces, an increase of 60% from just a year ago.  In fact, since July 2004 when we acquired Morococha, we’ve increased reserves there by over 100%, even after accounting for two years of depletion by mining.  A very happy story that will continue in 2006 since we have just received drill results confirming the discovery of a new very wide zone - by wide I’m talking width of 20 to 30 meters - it will definitely add significant new ounces in 2006.  Morococha is indeed a star asset of ours that will contribute to our future for decades.

Company-wide, we plan on drilling over 60,000 meters this year and we have about 20 drills active at our mines and projects.  This is the best way to create shareholder value and I already know we will have some great results from this work, as we did in 2005. 

One of the things I think that separates Pan American Silver, in fact, from many of our competitors, is that we have such strong organic growth potential, from our projects that are going into production and also from our existing operations, where we have such good exploration potential around them.  Many of our shareholders have actually contacted us and said “why aren’t we making acquisitions this year, why aren’t we buying Silver Streams and the like” and our answer is “we haven’t seen anything that offers us really good value.  It’s a bull market.  Prices are very high.  We are known to be frugal operators and also we feel we have such excellent potential in our existing operations.” So we see our ability to double our production from current levels to over 25 million ounces a year simply by developing our existing assets.

And what about those silver markets?  2005 was a great year for silver; its highest average price since 1981.  It is easy to paint a bullish picture for 2006 too, as I see few changes to the factors that gave rise to such good markets in 2005.  The big event I eagerly await is the introduction of the silver ETF to market.  I expect the Barkley’s Silver Exchange Traded Fund to come to market very soon and for it to offer investors a much simpler way to buy physical silver.  This should add to global silver demand and have a very salubrious effect on the silver price, and thus Pan American’s operating earnings.

Last year Pan American introduced a line of silver coins and bars for its shareholders and silver investors to purchase.  As of January, the mint has sold over 500,000 ounces of our La Colorada silver and is now introducing a 100 ounce bar for investors who want this form of physical silver.  I am very pleased with the great reception we have enjoyed to this line of silver products and I expect a similar positive reception to the introduction of a silver ETF.

In addition to strong silver investment demand which was a powerful influence on the silver market in 2005, silver demand also rose in the large industrial sector by 6% and in jewelry by about 14% and the latter was mostly due to much higher sales in India after quite lackluster sales in 2004.  Not surprisingly, silver demand declined in the photographic sector.  But even after this decline, total demand rose by 4% in 2005.  On the supply side, mine production was relatively flat.  That’s the largest contributor to silver supply.  And both scrap and government inventory sales declined sharply.  These are all strong fundamentals that we see continuing in 2006.  There will be higher silver mine production in future years as new mines are open due to current high metal prices across the board.  But mine openings will be offset by mine closures, and there are some large silver producers that are scheduled for depletion in the next five years.  And new mine openings will also be much delayed due to all the obstacles to new mine development that exist in the real world.

The silver market has been in deficit for the last 15 years.  Global inventories are drastically depleted.  Current strong silver prices reflect this and we see no reason this will change for the foreseeable future.  In this environment, Pan American Silver will really prosper. 

And on that note, I think I’ll open this conference call to questions, and thank you again for joining us today.

Operator:                              Thank you.  Your first question is coming from John Doody of Gold Stock Analyst.

John Doody: Good afternoon and congratulations on a good year despite all the one-time events.  As I add up your forecast production for 2006, I get to, from the existing mines, I get 13.3 million ounces.  So that implies 800,000 ounces at Alamo?

Ross Beaty: We got approximately 500,000 coming from Alamo, John, and the other 3 or 400, I don’t know where. 

John Doody: Okay, I plugged in San Vicente at 300,000.  Okay, but as long as you’re carrying 500 at Alamo, I’ll figure out the rest.  Thank you.

Operator: Your next question is coming from Haytham Hodaly of Salman Partners.

Haytham Hodaly: Morning, gentlemen.

Ross Beaty: Hi, Haytham.

Haytham Hodaly: Ross, I have to say after all these years, your silver price prediction’s finally coming true.

Ross Beaty: Can I consider that a compliment?

Haytham Hodaly: It is definitely; you’re just ahead of your time.  Just, a couple of questions actually; just a quick note or a quick question on reserves.  You did indicate that there was a significant increase and yes, we did see that, but was there a change in silver price assumption use?  And if so, what was the difference, the change, what would the change in, our increase in reserves have been without the change in silver price assumption?

Ross Beaty: I’m going to use that question as a bit of a soap box that I’m going to get on.  Let’s put it this way, this year our reserves and resources are the best we’ve ever had.  We went through every single one of our operations and while we increased the price we used for our reserves very modestly, we went from $5.50 the year before to $6.25, and I forget what exactly our zinc – our zinc number was about the same sort of increase.  So, it was a fairly modest increase, Haytham, we’re using $6.25 for our silver reserves.  We did gain a little bit from that.  More importantly, we actually went through every one of our major veins at our different mines and we adjusted our reserves to reflect metallurgical recoveries.  They’re silver, lead, zinc and often silver and gold, so it’s a fairly complex equation, and we adopted, as I said, the most sophisticated and, I think, accurate statement of reserves that we’ve ever had.

Haytham Hodaly: Maybe I could just ask another question.  Just with regards to the longer term profile, you say you want to get to 25 million ounces.  Based on the projects you have and based on some of the mine plans that have been released in the past, I could see 19.  Where does the difference, where do you think the difference will come from longer term?

Ross Beaty: Right, it’ll be, it’ll come in two places.  It’ll come from continuing expansion at Morococha; that’s the one operation which we’re very confident we’re going to be able to double our production from at least, and then development of the Manantial Espejo project.  And I guess as an add-on, we will expand the San Vicente and I think that’s about it.  Those are the existing ones we’ve got.

Haytham Hodaly: Perfect, thank you very much.

Ross Beaty: Thanks, Haytham.

Operator: Thank you, You’re next question is coming from Ivan Sacks of Institutional Equity.

Ivan Sacks: Well, good afternoon.  I believe it was a good result even though I thought there were a lot of one-time charges.  Please if you wouldn’t mind, I’m fairly new to this area of silver; could you please give me the global demand picture for silver?  I know many people speak about photography having been a big factor but there’s many meant to be, many other factors that create the demand, if you could just speak to that for a moment please.

Ross Beaty: Absolutely.  You know, I could speak for a long, long time, but I’m not going to.  First of all, I would say you should listen to the latter part of my presentation here today.  I’m not going to repeat that.  I did speak about the silver market in summary form.  The bottom line is that you have a very robust picture on the demand side for continuing demand growth in all sectors of silver demand, all major sectors, meaning industrial, jewelry and silverware and investment demand, which account now for over about 80% of total world silver demands.  The 20% factor of photography is shrinking and the losses there are more than made up for by the gains in the other sectors so that net silver demand last year we estimate went up about 4%, which is a very robust growth, notwithstanding the decline in photography.

On the supply side, supply was relatively flat, in fact it was flat to down from the year before because mine supply was flat, and the other two major components of supply, which are scrap and government sales, both declined significantly.  Scrap declined in large part because there was less photographic waste coming into the market because there was less photographic silver being used, so the photographic decline in demand is very much offset by a decline in supply and has really very little to do with the net silver equation at the end of the day.  So that the demand forces were strong on what I call the fundamental areas.

The real kicker was the importance of investment demand to the silver equation.  Investment demand was really I think, what has driven silver prices from $5.50 up to $9.00 an ounce, I mean that’s been the really significant new marginal demand that’s really kicked the price up in the absence of any significant silver supply coming on to meet that.  That’s a reflection of the fact that there weren’t very much in that we have silver inventories, silver supply sites, very hard to change quickly and that’s why you’ve seen the silver base go up and stay up.

Ivan Sacks: Right.  Excuse my ignorance again one more time.  Thank you for that bit, it was very helpful and I’m very sorry I didn’t hear your earlier comments and I will go back to the transcript.  But in, what, what is the situation with, how does Pan American Silver stack up versus let’s say, any of the other silver companies in terms of size?  Say it will just be a brief answer if you wouldn’t mind just speaking to that, just in terms of what you’ve put in the silver company picture.

Ross Beaty: Right, you know I think I’ll duck that question.  You’ll have to get that from analysts in the sector.  I will just say that Pan American is one of the leading silver producers in the world with one of the largest silver reserves and resource positions in the world.  We are, I think the most focused, dedicated silver producing mining company in the world, with the absolute corporate mission to become the number one world silver producing mining company.  And we’re going to get there in the next year or two, if we’re not there already.

Ivan Sacks: Good, thank you.

Ross Beaty: You’re welcome.

Operator: Thank you.  Your next question is coming from Adrian Day of Adrian Day Asset Management.

Adrian Day: Good afternoon.  Let me ask you a question on hedging if I may, Ross.  Do you expect to continue hedging the zinc, you know, continue further out, and then do you have, without talking specifically about Manantial Espejo, what is your general view on hedging; hedging gold?

Geoff Burns: Yeah, Adrian, this is Geoff Burns, I’m going to jump in and take your question.  At the moment we’re not active in the zinc market.  Certainly, I think we have all followed the prices much higher in the last few months and at the moment we see continuing declines in inventory, almost on a daily basis, and so we’re not pre-disposed at this time to jump back into that market.  Having said that, we are not opposed to hedging our zinc at some point in the future; it is a by-product credit for us and locking in this higher price or higher gives us a very favorable cost position to provide silver to the market.

Ross Beaty: And furthermore it also increases our purity to silver and our leverage to silver.

Geoff Burns: Absolutely, thanks Ross.  Now in terms of hedging gold, that certainly is going to be a question we’re going to tackle and look at very carefully with respect to Manantial.  Our mission is to deliver unhedged silver production to the market.  That’s what we’re after.  Given the high gold prices right now, we would be remiss in not looking carefully at the opportunities that that could provide for Manantial.

Adrian Day:Okay, okay.  No, I appreciate that.  Thank you.

Geoff Burns: You’re welcome.

Operator:Thank you.  At this time there appear to be no further questions.

Ross Beaty: Good.  Well, I invite any other listeners to not hesitate to call Brenda Radies here and, and she’ll answer your questions the best she can or direct them to Geoff and myself, or any of the other people in the room here.  And on that note, the thirty minutes are up. 

Thank you very much for listening everybody and good day.

Operator: Thank you.  This does conclude today’s teleconference.  You may now disconnect and have a wonderful day.