Cost Per Ounce Calculations

Pan American, like many other precious metals producers, uses methods established by The Gold Institute (Production Cost Standards, Nov. 1999) to calculate costs per ounce of silver produced at mine operations. All of Pan American's operations are "primary" silver mines -- meaning that the majority of their value (revenue) comes from silver. The "cash cost per ounce" of silver for each mine is based on the ounces of silver for which we are paid, which excludes the ounces lost in smelting and refining. For each mine we total all direct mining costs, add smelting and shipping costs plus royalties, production-related taxes, interest on loans and mine management/administration costs. From this total operating cost, we subtract the amount we receive from selling the mine's by-products (zinc, lead, copper, and gold) to get the "cash cost per ounce" of silver produced. This calculation allows comparison of our operational efficiency at a mine relative to its performance in previous years and also allows comparison with peer companies' operations. This cost reflects by-product metal prices, too. For instance, when zinc prices are low, we get lower by-product revenues from zinc. Subtracting this smaller by-product revenue from our total costs yields a higher total cash cost per ounce of silver produced. The "total production cost per ounce" of silver differs from the "cash cost per ounce" of silver in that it includes provisions for DD&A (depreciation, depletion and amortization) and reclamation, which are non-cash items on our financial statements and the effect of all other taxes. The DD&A number is an accounting allowance for the cost to acquire, develop, construct and sustain a mining operation. The reclamation component is an accounting allowance of the estimated cost to reclaim the mine at the end of its life. The bulk of these expenditures occur at the beginning or end of a mine's life but reflect the true total mine cost.