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Mon Aug 13, 2001
Pan American Silver Reports Second Quarter Results
Full quarterly results including Notes to Financial Statements and Management's Discussion and Analysis of Results are posted on Pan American's website (http://www.panamericansilver.com), and will be mailed to shareholders. Pan American will host a conference call on Tuesday, August 14th at 9 a.m. Pacific time (12 noon Eastern time) to discuss quarterly results and give updates on projects. To access the call, dial 1-800-640-9765. To listen to a playback within two weeks of the call, dial (416) 695-5800 and enter the code 878841. The conference call will also be broadcast live and archived for playback on the Internet at http://www.q1234.com.
HIGHLIGHTS
- Increased quarterly silver production by 93 percent compared with the second quarter 2000 by initiating production from the Huaron mine and the La Colorada mine. Silver production in June was 722,657 ounces, up 136 percent from 305,659 ounces in June 2000.
- Endured extremely weak silver and zinc prices, with both setting multi-decade lows in constant dollar terms.
- Effected further cost reductions at all operations.
- Completed exploration deals in Peru with Anglo American and in Mexico on the new Ocotlan property.
- Raised $9 million through public offering of 3 million shares in May.
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SECOND QUARTER REPORT TO SHAREHOLDERS ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL
(all amounts are expressed in US dollars)
Operating results in the quarter were negatively affected by very weak metal prices and delayed shipments of zinc concentrate. For the three months ended June 30, 2001, the company lost $2.8 million or $0.08 per share (2000 - net loss of $0.8 million or $0.02 per share). For the six month period, the company lost $4.4 million or $0.13 per share (2000 -- net loss of $1.5 million or $0.04 per share).
Revenue for the second quarter was $8.1 million, slightly higher than last year's (2000 - $7.0 million) and, although metal production was significantly higher, revenue of $12.6 million for the first half of the year was lower than that of last year (2000 - $14.3 million) due to severely depressed metals prices and delayed concentrate shipments. The average realized silver price for the quarter was 8 percent lower and the average realized zinc price was 18 percent lower than last year. During the second quarter, only 13,042 tonnes of zinc concentrate were shipped (2000 -- 14,644 tonnes), leaving approximately 13,000 tonnes of zinc concentrate in inventory awaiting shipment. Included in current liabilities is $5.4 million representing partial advance payments for delayed shipments of concentrates. Revenue for metal contained in this concentrate will be recognized when it is shipped in the third quarter.
At June 30, working capital amounted to $2.7 million -- a $5.1 million dollar improvement from March 31. This was largely the result of completing of a $9 million equity financing late in the second quarter, offset principally by $1.3 million in debt repayments and capital expenditures of $1.6 million. The Company's cash position improved to $8.6 million at June 30.
Although Pan American has always operated with an emphasis on cost-efficiency, a number of actions are being implemented to further improve operating margins and strengthen financial resources during this cycle of persistently low metal prices. Such actions include reducing production at the Quiruvilca mine, applying new cost control initiatives and eliminating discretionary spending. The revised mining plan at Quiruvilca has reduced 100 contract labor positions from the mine's work force. In addition, a number of administrative personnel reductions were effected in Lima despite the additional administrative burden resulting from the company's new Huaron mine. Results from these cost reduction and performance improvement measures will be realized over the balance of the year.
Commercial production started at the Huaron mine during the quarter and resulted in a small operating contribution. Full-scale production should be achieved in the third quarter, resulting in an increased positive contribution. The La Colorada mine in Mexico continues to operate on a limited scale and also provided a modest operating contribution during the quarter. Quiruvilca operations were not profitable in the second quarter but new cost-cutting measures are expected to eliminate the operating losses - even at current metal prices - during the third quarter. Spending for the balance of 2001 is for sustaining capital items only as the Huaron mine capital expenditures have now been completed.
Consolidated silver production for the second quarter of 2001 increased by 93 percent to 1,725,357 ounces (2000 -- 895,115 ounces), zinc production increased by 18 percent to 7,197 tonnes (2000 -- 6,122 tonnes), lead production increased by 114 percent to 4,567 tonnes (2000 -- 2,134 tonnes) and copper production increased by 62 percent to 482 tonnes (2000 -- 298 tonnes). During the month of June, consolidated silver production was 722,657 ounces, up 136 percent from the 305,659 ounces produced in June 2000, due to the effect of new production from the Huaron and La Colorada mines.
Significantly lower zinc prices during the quarter generated much lower by-product revenues. This and expected higher costs during the Huaron start-up months resulted in higher cash and total production costs per ounce of silver produced (net of by-product credits) of $4.12 and $4.87 respectively (2000 - $ 3.13 and $ 3.95 respectively).
QUIRUVILCA MINE, PERU
The Quiruvilca mill treated 141,054 tonnes during the quarter (2000 - 150,958 tonnes) for production of 808,699 ounces of silver and 5,273 tonnes of zinc (2000 - 895,115 ounces of silver and 6,122 tonnes of zinc). In accordance with this year's mine plan and the reduced production plan implemented in April, metal production was somewhat lower due to the elimination of production from lower grade stopes
HUARON MINE, PERU
The new Huaron silver-zinc mine began operations on April 17 and reached commercial production in May. Start-up has been quite smooth. First concentrates were shipped from the mine on April 28 and production has scaled up to nearly the mine's design capacity of 50,000 tonnes per month. Full-scale production in the third quarter should result in an annual output of 4.3 million ounces of silver and 15,000 tonnes of zinc metal to concentrates. Second quarter silver production at Huaron totaled 687,048 ounces of silver, 1,882 tonnes of zinc and 2,286 tonnes of lead from 87,881 tonnes of ore milled during May and June. The mine generated a positive operating cash flow of $140,000 in June and this is expected to increase during the balance of 2001 even at present metal prices. All staff in Peru and Canada are commended for this successful start-up.
In early August, an agreement was reached with a local Peruvian mining company for an exchange of a portion of the Huaron land holding, for $200,000 in cash, $500,000 in the company's stock, the remaining 27 percent of Huaron shares not held by Pan American, and other benefits. Pan American will record a gain of approximately $2.5 million in the third quarter to reflect this transaction. The Company now effectively owns all of the Huaron mine and 69,000-hectare property, one of the largest land holdings in the Cerro de Pasco mining district.
On June 3rd, Alejandro Toledo was elected as Peru's incoming president, ending more than a year of political instability in Peru. We look forward to a long period of political stability as a result of this election and to maintenance of Peru's positive investment climate.
LA COLORADA MINE, MEXICO
The limited scale operation at the La Colorada mine continued during the second quarter. It met the goals of maintaining the operating team and generating sufficient operating cash flow to more than offset the holding costs of our Mexican activities. Monthly silver production now averages nearly 80,000 ounces. Pan American is reviewing an intermediate scale operation of 750 tonnes per day that appears to be profitable even at today's metal prices. Financing discussions are planned during the third quarter to pursue this operating plan.
EXPLORATION PROJECTS
At the Los Angeles gold project near our Quiruvilca mine in Peru, Barrick Gold Corporation recently completed a drilling program and is reviewing results. Also in Peru, an exploration joint venture was signed with Anglo American, one of the world's largest mining companies, where Anglo American will explore 29,008 hectares of land held by Huaron and potentially earn a 51 percent interest by spending $3 million over a 4-year period.
In Mexico, Pan American signed an option to purchase the high-grade Ocotlan silver-gold vein deposit on which a small mine currently operates. Pan American has now begun surface exploration work and plans a drilling program for late September.
SILVER MARKET
Silver prices in the quarter continued the disappointing downward trend set in late 2000, reaching a low of $4.30 in late June. July prices trended lower again, to a low of $4.19 on July 16. This is a 26-year low in real terms and, we believe, is simply unsustainable in the face of the massive silver deficit which has consumed over one billion ounces of silver inventories since 1990. Despite economic weakness in major markets, silver use in industrial and photographic markets has increased to date in 2001, according to a recent independent report by CPM Group, though silver use in jewelry and silverware registered a modest decline.
We believe mine production of silver will decline in 2001 and for the next few years due to the closure of many large silver-producing mines and the opening of few new ones. The silver market at present, like many other markets, is technically driven rather than fundamentally driven but it is inevitable that the fundamentals will be asserted at some time and this should be accompanied by a strong upward correction in silver prices.
Pan American is seeking to capitalize on the current weakness in silver prices by acquiring new silver exploration, development and investment projects such as Ocotlan in Mexico. Another acquisition is at an advanced stage of negotiation.
Respectfully submitted,
Ross J. Beaty
Chairman & C.E.O
John Wright
President & C.O.O.
www.panamericansilver.com
The statements that are not historical facts are forward-looking statements involving known and unknown risks and uncertainties that could cause actual results to vary materially from the targeted results. Such risks and uncertainties include those described in the Company's Form 40-F as amended. All amounts are expressed in U.S. dollars.
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