EX-99.1 2 financials.htm FINANCIAL STATEMENTS Financial Statements
Financial & Operating Highlights                               
                                
   
 Three month ended
  
 Nine months ended
  
   
September 30 
  
 September 30
  
 
 
2005
  
2004
  
2005
  
2004
  
                                
Consolidated Financial Highlights (in thousands of US dollars)
                               
                                
Net income (loss) for the period
        
$
2,328
        
$
3,289
        
$
(536
)
$
4,210
  
Earnings (loss) per share
        
$
0.03
        
$
0.05
        
$
(0.01
)
$
(0.11
)
Cash flow from operations before working capital adjustments
        
$
6,959
        
$
7,135
        
$
11,402
  
$
11,580
  
Capital spending
        
$
16,482
        
$
**39,327
        
$
40,575
  
$
**45,799
  
Exploration expenses
        
$
545
        
$
1,213
        
$
2,703
  
$
2,878
  
Cash and short-term investments
        
$
68,364
        
$
80,839
        
$
68,364
  
$
80,839
  
Working capital
        
$
89,225
        
$
97,076
        
$
89,225
  
$
97,076
  
                                             
**Includes the acquisition of the Morococha mine for $36,214
                                            
                                             
Consolidated Metals Recovered to Concentrate
                              
                                             
Silver metal - ounces
          
3,202,289
          
3,162,847
          
9,286,658
    
8,047,483
  
Zinc metal - tonnes
          
9,977
          
10,377
          
28,094
    
24,899
  
Lead metal - tonnes
          
4,113
          
4,865
          
11,492
    
12,955
  
Copper metal - tonnes
          
1,042
          
1,100
          
3,020
    
2,370
  
                                             
Consolidated Cost per Ounce of Silver (net of by-product credits)
                              
                                             
Total cash cost per ounce
        
$
4.15
        
$
4.05
        
$
4.38
  
$
3.98
  
Total production cost per ounce
        
$
5.52
        
$
5.21
        
$
5.72
  
$
5.11
  
                                             
In thousands of US dollars
                                            
                                             
Direct operating costs, royalties, treatment and refining charges
        
$
30,935
        
$
26,808
        
$
89,724
  
$
66,190
  
By-product credits
          
(18,769
)
        
(15,585
)
        
(52,605
)
  
(38,263
)
Cash operating costs
          
12,165
          
11,224
          
37,119
    
27,927
  
Depreciation, amortization & reclamation
          
3,998
          
3,195
          
11,391
    
7,903
  
Production costs
        
$
16,163
        
$
14,418
        
$
48,511
  
$
35,830
  
                                             
Payable ounces of silver (used in cost per ounce calculations)
          
2,930,179
          
2,768,841
          
8,479,763
    
7,012,651
  
                                             
Average Metal Prices
                                            
Silver - London Fixing
        
$
7.07
        
$
6.46
        
$
7.06
  
$
6.47
  
Zinc - LME Cash Settlement per pound
        
$
0.59
        
$
0.44
        
$
0.59
  
$
0.47
  
Lead - LME Cash Settlement per pound
        
$
0.40
        
$
0.42
        
$
0.43
  
$
0.39
  
Copper - LME Cash Settlement per pound
        
$
1.70
        
$
1.29
        
$
1.58
  
$
1.27
  






-1-



Mine Operations Highlights
  
Three month ended
  
Nine months ended
  
   
September 30
  
September 30
  
Morococha Mine*
  
2005
  
2004
  
2005
  
2004
  
           
Tonnes milled
    
119,953
          
112,580
          
347,023
          
112,580
  
Average silver grade - grams per tonne
    
216
          
227
          
218
          
227
  
Average zinc grade - percent
    
4.58
%
        
3.69
%
        
4.30
%
        
3.69
%
Silver - ounces
    
705,981
          
685,937
          
2,051,128
          
685,937
  
Zinc - tonnes
    
4,455
          
3,089
          
11,554
          
3,089
  
Lead - tonnes
    
1,724
          
1,161
          
4,228
          
1,161
  
Copper - tonnes
    
227
          
284
          
685
          
284
  
                                             
Total cash cost per ounce
  
$
1.99
        
$
3.57
        
$
2.82
        
$
3.57
  
Total production cost per ounce
  
$
3.68
        
$
5.21
        
$
4.54
        
$
5.21
  
                                             
In thousands of US dollars
                                            
                                             
Direct operating costs, royalties, treatments and refining charges
  
$
8,582
        
$
6,540
        
$
24,207
        
$
6,540
  
By-product credits
    
(7,322
)
        
(4,326
)
        
(19,000
)
        
(4,326
)
Cash operating costs
    
1,260
          
2,215
          
5,207
          
2,215
  
Depreciation, amortization, reclamation
    
1,077
          
1,015
          
3,178
          
1,015
  
Production costs
  
$
2,337
        
$
3,230
        
$
8,385
        
$
3,230
  
                                             
Payable ounces of silver (used in cost per ounce calculations)
    
634,104
          
619,862
          
1,847,927
          
619,862
  
                                             
*Production and cost figures are for Pan American’s share only. Pan American’s ownership was approximately 87% during the quarter.
       
 
           
Huaron Mine
  
2005
  
2004
  
2005
  
2004
  
           
Tonnes milled
    
167,585
          
166,965
          
427,814
          
481,445
  
Average silver grade - grams per tonne
    
212
          
228
          
214
          
230
  
Average zinc grade - percent
    
2.70
%
        
3.13
%
        
2.86
%
        
3.22
%
Silver - ounces
    
940,400
          
1,062,949
          
2,747,189
          
3,126,738
  
Zinc - tonnes
    
2,823
          
3,856
          
9,067
          
11,877
  
Lead - tonnes
    
1,635
          
2,815
          
5,161
          
8,660
  
Copper - tonnes
    
449
          
491
          
1,326
          
1,250
  
                                             
Total cash cost per ounce
  
$
5.13
        
$
3.85
        
$
5.04
        
$
3.89
  
Total production cost per ounce
  
$
6.37
        
$
5.12
        
$
6.25
        
$
5.14
  
                                             
In thousands of US dollars
                                            
                                             
Direct operating costs, royalties, treatments, and refining charges
  
$
10,456
        
$
10,635
        
$
31,456
        
$
31,604
  
By-product credits
    
(6,067
)
        
(6,909
)
        
(18,872
)
        
(20,471
)
Cash operating costs
    
4,389
          
3,726
          
12,583
          
11,133
  
Depreciation, amortization, and reclamation
    
1,064
          
1,234
          
3,026
          
3,571
  
Production costs
  
$
5,453
        
$
4,960
        
$
15,610
        
$
14,704
  
                                             
Payable ounces of silver (used in cost per ounce calculations)
    
856,228
          
968,624
          
2,496,885
          
2,859,286
  
                                             
 
 
-2-
 
                       
Mine Operations Highlights
  
Three month ended
  
Nine months ended
  
   
September 30
  
September 30
  
Quiruvilca Mine
  
2005
  
2004
      
2005
  
2004
  
                       
Tonnes milled
    
95,539
    
98,625
          
275,792
    
284,590
  
Average silver grade - grams per tonne
    
217
    
235
          
223
    
236
  
Average zinc grade - percent
    
3.34
%
  
3.48
%
        
3.21
%
  
3.66
%
Silver - ounces
    
579,586
    
654,182
          
1,723,973
    
1,892,383
  
Zinc - tonnes
    
2,698
    
2,920
          
7,472
    
8,994
  
Lead - tonnes
    
754
    
890
          
2,103
    
2,998
  
Copper - tonnes
    
366
    
310
          
1,009
    
800
  
                                 
Total cash cost per ounce
  
$
3.55
  
$
3.55
        
$
4.07
  
$
3.42
  
Total production cost per ounce
  
$
4.10
  
$
3.82
        
$
4.62
  
$
3.70
  
                                 
In thousands of US dollars
                                
                                 
Direct operating costs, royalties, treatments and refining charges
  
$
6,914
  
$
6,304
        
$
20,251
  
$
18,688
  
By-product credits
    
(5,007
)
  
(4,142
)
        
(13,723
)
  
(12,673
)
Cash operating costs
    
1,907
    
2,161
          
6,528
    
6,014
  
Depreciation, amortization and reclamation
    
296
    
162
          
879
    
487
  
Production costs
  
$
2,203
  
$
2,324
        
$
7,407
  
$
6,502
  
                                 
Payable ounces of silver (used in cost per ounce calculations)
    
537,719
    
608,010
          
1,603,593
    
1,757,629
  
                                 
 
                   
La Colorada Mine
                  
                   
Tonnes milled
    
56,746
    
34,822
    
156,209
    
126,211
  
Average silver grade - grams per tonne
    
510
    
510
    
537
    
457
  
Silver - ounces
    
817,744
    
441,959
    
2,249,760
    
1,352,549
  
Zinc - tonnes
    
-
    
-
    
-
    
122
  
Lead - tonnes
    
-
    
-
    
-
    
136
  
                           
Total cash cost per ounce
  
$
5.48
  
$
7.05
  
$
5.48
  
$
6.41
  
Total production cost per ounce
  
$
7.40
  
$
8.83
  
$
7.40
  
$
8.53
  
                           
In thousands of US dollars
                          
                           
Direct operating costs, royalties, treatments and refining charges
  
$
4,832
  
$
3,316
  
$
13,300
  
$
9,324
  
By-product credits
    
(374
)
  
(208
)
  
(1,009
)
  
(793
)
Cash operating costs
    
4,458
    
3,109
    
12,291
    
8,531
  
Depreciation, amortization, reclamation
    
1,561
    
783
    
4,308
    
2,829
  
Production costs
  
$
6,019
  
$
3,982
  
$
16,599
  
$
11,360
  
                           
Payable ounces of silver (used in cost per ounce calculations)
    
813,752
    
440,854
    
2,242,188
    
1,331,696
  


-3-


   
Three month ended
  
Nine months ended
  
   
September 30
  
September 30
  
Pyrite Stockpile Sales
  
2005
  
2004
  
2005
  
2004
  
                               
Tonnes sold
    
15,076
          
19,214
          
46,488
          
64,050
  
Average silver grade - grams per tonne
    
327
          
374
          
327
          
378
  
Silver - ounces
    
158,578
          
231,115
          
514,608
          
779,426
  
                                             
Total cash cost per ounce
  
$
1.72
        
$
0.10
        
$
1.76
        
$
0.08
  
Total production cost per ounce
  
$
1.72
        
$
0.10
        
$
1.76
        
$
0.08
  
                                             
In thousands of US dollars
                                            
                                             
Direct operating costs, royalties, treatments and refining charges
  
$
152
        
$
13
        
$
510
        
$
34
  
By-product credits
    
-
                      
-
              
Cash operating costs
    
152
          
13
          
510
          
34
  
Depreciation, amortization, reclamation
    
-
                      
-
              
Production costs
  
$
152
        
$
13
        
$
510
        
$
34
  
                                             
Payable ounces of silver (used in cost per ounce calculations)
    
88,376
          
131,491
          
289,169
          
444,178
  
                                             
                                             
 
San Vincente Mine**
                  
                   
Tonnes milled
    
-
    
7,920
    
-
    
18,649
  
Average silver grade - grams per tonne
    
-
    
389
    
-
    
408
  
Average zinc grade - percent
    
-
    
7.48
%
  
-
    
5.28
%
Silver - ounces
    
-
    
86,704
    
-
    
210,451
  
Zinc - tonnes
    
-
    
512
    
-
    
817
  
Copper - tonnes
    
-
    
15
    
-
    
36
  
                           
**Pan American does not include San Vincente production in its cost per ounce calculations. The production statistics represent Pan American’s  50% interest in the mine.



-4-


PAN AMERICAN SILVER CORP.
  
Consolidated Balance Sheets
  
(In thousands of U.S. dollars)
  
                
   
Sep. 30
2005
  
Dec. 31
2004
  
   
(Unaudited)
  
(Audited)
  
Assets
           
Current
           
Cash and cash equivalents
  
$
22,501
        
$
28,345
  
Short-term investments
    
45,863
          
69,791
  
Accounts receivable, net of $Nil provision for doubtful accounts
    
20,091
          
25,757
  
Inventories
    
14,233
          
10,674
  
Prepaid expenses
    
4,034
          
1,684
  
Total Current Assets
    
106,722
          
136,251
  
                     
Mineral property, plant and equipment, net (note 3)
    
119,957
          
104,647
  
Investment and non-producing properties (note 4)
    
142,202
          
125,863
  
Direct smelting ore
    
2,343
          
2,671
  
Other assets
    
518
          
647
  
Total Assets
  
$
371,742
        
$
370,079
  
                     
Liabilities
                    
Current
                    
Accounts payable and accrued liabilities
  
$
17,135
        
$
20,331
  
Advances for metal shipments
    
-
          
652
  
Current portion of bank loans and capital lease
   
-
          
134
  
Current portion of non-current liabilities
    
362
          
479
  
Total Current Liabilities
    
17,497
          
21,596
  
                     
Liability component of convertible debentures
    
99
          
134
  
Provision for asset retirement obligation and reclamation
   
32,858
          
32,012
  
Provision for future income taxes
    
31,594
          
33,212
  
Other liabilities and provisions
    
1,500
          
1,144
  
Severance indemnities and commitments
    
143
          
398
  
Non-controlling interest
    
2,368
          
1,379
  
Total Liabilities
    
86,059
          
89,875
  
                     
Shareholders’ Equity
                    
Share capital (note 5)
                    
Authorized:
                    
100,000,000 common shares of no par value
                    
Issued:
                    
December 31, 2004 - 66,835,378 common shares
                    
September 30, 2005 - 67,166,373 common shares
    
383,772
          
380,571
  
Equity component of convertible debentures
    
636
          
633
  
Additional paid in capital
    
13,790
          
10,976
  
Deficit
    
(112,515
)
        
(111,976
)
Total Shareholders’ Equity
    
285,683
          
280,204
  
Total Liabilities and Shareholders’ Equity
  
$
371,742
        
$
370,079
  

See accompanying notes to consolidated financial statements


-5-



Pan American Silver Corp.
Consolidated Statements of Operations
(Unaudited - in thousands of U.S. dollars, except for shares and per share amounts)



   
Three months ended
  
Nine months ended
  
   
September 30
  
September 30
  
   
2005
  
2004
  
2005
  
2004
  
                                   
Revenue
        
$
30,044
        
$
27,409
        
$
81,030
        
$
63,510
  
Operating costs
          
(21,337
)
        
(18,526
)
        
(62,134
)
        
(46,225
)
Depreciation and amortization
          
(3,788
)
        
(3,033
)
        
(9,421
)
        
(7,186
)
Mine operating earnings
          
4,919
          
5,850
          
9,475
          
10,099
  
                                                   
General and administrative, including stock-based compensation
          
2,065
          
1,452
          
5,378
          
4,581
  
Exploration
          
545
          
1,213
          
2,703
          
2,878
  
Asset retirement and reclamation
          
735
          
302
          
1,674
          
905
  
Interest and financing expenses
          
126
          
66
          
312
          
823
  
Operating income (loss)
          
1,448
          
2,817
          
(592
)
        
912
  
Investment and other income
          
1,341
          
792
          
2,438
          
3,618
  
Income before taxes and non-controlling interest
          
2,789
          
3,609
          
1,846
          
4,530
  
Income tax benefit (provision)
          
79
          
-
         
(1,609
)
        
-
 
Non-controlling interest
          
(540
)
        
(320
)
        
(773
)
        
(320
)
Net income (loss) for the period
        
$
2,328
        
$
3,289
        
$
(536
)
      
$
4,210
  
                                                   
                                                   
Attributable to common shareholders:
                                                  
                                                   
Net income (loss) for the period
        
$
2,328
        
$
3,289
        
$
(536
)
      
$
4,210
  
Accretion of convertible debentures
          
-
          
-
          
(3
)
        
(11,302
)
Adjusted net income (loss) for the period attributable to common shareholders
        
$
2,328
        
$
3,289
        
$
(539
)
      
$
(7,092
)
                                                   
Basic and diluted income (loss) per share
       
$
0.03
        
$
0.05
        
$
(0.01
)
      
$
(0.11
)
                                                   
Weighted average shares outstanding - Basic
          
66,943
          
66,660
          
66,943
          
61,947
  
                                                   
Weighted average shares outstanding - Diluted
          
71,926
          
72,213
          
71,532
          
67,499
  

See accompanying notes to consolidated financial statements



-6-


Pan American Silver Corp.
Consolidated Statements of Cash Flows
(Unaudited - in thousands of U.S. dollars)

   
Three months ended
  
Nine months ended
  
   
September 30
  
September 30
  
   
2005
  
2004
  
2005
  
2004
  
                               
 
Operating activities
                              
Net income (loss) for the period
  
$
2,328
        
$
3,289
        
$
(536
)
      
$
4,210
  
Reclamation expenditures
    
(324
)
        
(327
)
        
(824
)
        
(919
)
Items not involving cash
                                            
Gain on sale of assets
    
(453
)
        
-
          
(453
)
        
(3,583
)
Depreciation and amortization
    
3,788
          
3,033
          
9,421
          
7,186
  
Non-controlling interest
    
540
          
320
          
773
          
320
  
Accretion on convertible debentures
    
-
          
-
          
-
          
366
  
Stock-based compensation
    
345
          
518
          
1,347
          
1,887
  
Debt settlement expense
    
-
          
-
          
-
          
1,208
  
Asset retirement and reclamation
    
735
          
302
          
1,674
          
905
  
Future income tax
    
(1,313
)
        
-
          
(1,618
)
        
-
  
Changes in operating working capital items (note 6)
    
(1,419
)
        
(6,722
)
        
(1,477
)
        
(11,065
)
Cash generated by operations
    
4,227
          
413
          
8,307
          
515
  
                                             
Financing activities
                                            
Shares issued for cash
    
1,539
          
812
          
2,740
          
61,817
  
Share issue costs
    
-
          
-
          
-
          
(180
)
Interest payment on convertible debentures
   
-
          
(22
)
        
-
          
(13,542
)
Repayment of bank loans and capital lease
    
(408
)
        
-
          
(693
)
        
(13,096
)
Cash generated by financing activities
    
1,131
          
790
          
2,047
          
34,999
  
                                             
Investing activities
                                            
Mineral property, plant and equipment expenditures
    
(1,856
)
        
(2,679
)
        
(13,543
)
        
(8,687
)
Investment and non-producing property expenditures
    
(14,626
)
        
(434
)
        
(27,032
)
        
(988
)
Acquisition of net assets of subsidiary
    
-
          
(36,214
)
        
-
          
(36,214
)
Maturity of short-term investments
    
9,630
          
2,007
          
23,428
          
12,463
  
Proceeds from sale of assets
    
383
          
-
          
883
          
3,583
  
Other
    
164
          
-
          
66
          
(2,000
)
Cash used in investing activities
    
(6,305
)
        
(37,320
)
        
(16,198
)
        
(31,843
)
                                             
(Decrease)/increase in cash and cash equivalents during the period
    
(947
)
        
(36,117
)
        
(5,844
)
        
3,671
  
Cash and cash equivalents, beginning of period
    
23,448
          
53,979
          
28,345
          
14,191
  
Cash and cash equivalents, end of period
  
$
22,501
          
17,862
          
22,501
          
17,862
  
Supplementary Disclosures
                                            
Shares issued for compensation
  
$
-
        
$
-
          
410
        
$
245
  
Share purchase warrants issued
  
$
2,100
        
$
-
          
2,100
        
$
-
  
Shares issued for conversion of convertible debentures
  
$
-
        
$
-
          
88,848
        
$
-
  
                                             
Cash payments
                                            
Interest paid
  
$
18
        
$
18
        
$
36
        
$
409
  
                                             
Taxes paid
  
$
1,001
        
$
311
        
$
4,112
        
$
509
  
                                             
See accompanying notes to consolidated financial statements


-7-


PAN AMERICAN SILVER CORP.

Consolidated Statements of Shareholders’ Equity
For the nine months ended September 30, 2005
(in thousands of U.S. dollars, except for amounts of shares)


   
Common Shares
  
Convertible
  
Additional
          
   
Shares
  
Amount
  
Debentures
  
Paid in Capital
  
Deficit
  
Total
  
Balance, December 31, 2003
    
53,009,851
        
$
225,154
        
$
66,735
        
$
12,752
        
$
(120,543
)
      
$
184,098
  
Issued on the exercise of stock options
    
785,095
          
9,437
          
-
          
(3,965
)
        
-
          
5,472
  
Issued on the exercise of share purchase warrants
    
544,775
          
1,965
          
-
          
-
          
-
          
1,965
  
Stock-based compensation
    
-
          
-
          
-
          
2,189
          
-
          
2,189
  
Issued for cash, net of issue costs
    
3,333,333
          
54,820
          
-
          
-
          
-
          
54,820
  
Accretion of convertible debentures
    
-
          
-
          
2,871
          
-
          
(2,871
)
        
-
  
Issued on the conversion of convertible debentures
    
9,145,700
          
88,950
          
(68,973
)
        
-
          
(8,464
)
        
11,513
  
Issued as compensation
    
16,624
          
245
          
-
          
-
          
-
          
245
  
Net income for the year
    
-
          
-
          
-
          
-
          
19,902
          
19,902
  
Balance, December 31, 2004
    
66,835,378
          
380,571
          
633
          
10,976
          
(111,976
)
        
280,204
  
Issued on the exercise of stock options
    
300,325
          
2,780
          
-
          
(51
)
        
-
          
2,729
  
Issued on the exercise of share purchase warrants
    
1,186
          
11
          
-
          
-
          
-
          
11
  
Issued warrants on settlement of debt
    
-
          
-
          
-
          
2,100
          
-
          
2,100
  
Stock-based compensation on granting of stock options
    
-
          
-
          
-
          
937
          
-
          
937
  
Issued as compensation
    
29,484
          
410
          
-
          
-
          
-
          
410
  
Accretion of convertible debentures
    
-
          
-
          
3
          
-
          
(3
)
        
-
  
Other
    
-
          
-
          
-
          
(172
)
        
-
          
(172
)
Net loss for the period
    
-
          
-
          
-
          
-
          
(536
)
        
(536
)
Balance, September 30, 2005
    
67,166,373
        
$
383,772
        
$
636
        
$
13,790
        
$
(112,515
)
      
$
285,683
  
                                                                     







-8-


Pan American Silver Corp.
Notes to Unaudited Interim Consolidated Financial Statements as at September 30, 2005 and 2004 and for the three month and nine month periods then ended.
 
(Tabular amounts are in thousands of U.S. dollars, except for numbers of shares, price per share and per share amounts)
 
 
1.  
Nature of Operations
 
Pan American Silver Corp (the “Company”) is engaged in silver mining and related activities, including exploration, extraction, processing, refining and reclamation. The Company has mining operations in Peru, Mexico and Bolivia, project development activities in Argentina, Mexico and Bolivia, and exploration activities in South America.
 
 
2.  
Summary of Significant Accounting Policies
 
a)  Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada for interim financial information and follow the same accounting policies and methods as our most recent annual financial statements. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in Canada for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month and nine month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
 
The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in Canada for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Pan American Silver Corp. (the “Company”) Annual Report for the year ended December 31, 2004.
 
b)  Principles of Consolidation: The consolidated financial statements include the wholly-owned and partially-owned subsidiaries of the Company, the most significant of which are presented in the following table:
 
Subsidiary
Location
Ownership interest
Status
Operations and Development Projects
         
Pan American Silver S.A.C.
Peru
100%
Consolidated
Quiruvilca Mine
Compañía Minera Huaron S.A.
Peru
100%
Consolidated
Huaron Mine
Compañía Minera Argentum S.A.
Peru
87.5%
Consolidated
Morococha Mine
Minera Corner Bay S.A.
Mexico
100%
Consolidated
Alamo Dorado Project
Plata Panamericana S.A. de C.V.
Mexico
100%
Consolidated
La Colorada Mine

Inter-company balances and transactions have been eliminated in consolidation. Investments in corporate joint ventures where the Company has ownership of 50% or less and funds its proportionate share of expenditures are accounted for under the equity method. The Company has no investments in entities in which it has greater than 20% ownership interest accounted for using the cost method.
 
-9-
 
c)  Revenue Recognition: Revenue is recognized when title and risk of ownership of metals or metal bearing concentrate passes to the buyer and when collection is reasonably assured. The passing of title to the customer is based on the terms of the sales contract. Product pricing is determined at the point revenue is recognized by reference to active and freely traded commodity markets.
 
Under our concentrate sales contracts with third-party smelters, final commodity prices are set on a specified future quotational period, typically one to three months, after the shipment arrives at the smelter based on market metal prices. Revenues are recorded under these contracts at the time title passes to the buyer based on the expected settlement period. The contracts, in general, provide for a provisional payment based upon provisional assays and quoted metal prices. Final settlement is based on the average applicable price for a specified future period, and generally occurs from three to six months after shipment. Final sales are settled using smelter weights, settlement assays (average of assays exchanged and/or umpire assay results) and are priced as specified in the smelter contract.
 
Third party smelting and refining costs are recorded as a reduction of revenue.
 
d)  Cash and Cash Equivalents: Cash and cash equivalents include cash, bank deposits, and all highly-liquid investments with a maturity of three months or less at the date of purchase. The Company minimizes its credit risk by investing its cash and cash equivalents with major international banks and financial institutions located principally in Canada and Peru with a minimum credit rating of A1 as defined by Standard & Poor’s. The Company’s management believes that no concentration of credit risk exists with respect to investment of its cash and cash equivalents. Due to the short maturity of cash equivalents, their carrying amounts approximate their fair value.
 
e)  Short-term Investments: Short-term investments principally consist of highly-liquid debt securities with original maturities in excess of three months and less than one year. These debt securities include corporate bonds with S & P rating of A- to AAA with an overall average of single A high. The Company classifies all short-term investments as available-for-sale securities. Unrealized gains and losses are recognized on these investments at the end of each period and are included in determining net income/ (loss).
 
f)  Inventories: Inventories include concentrate ore, doré, ore in stockpiles and operating materials and supplies. 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 actual production costs incurred or estimated net realizable value based upon the period ending prices of contained metal. 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. All metal inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. Supplies inventories are valued at the lower of average cost and replacement cost, net of obsolescence. Concentrate and doré inventory includes product at the mine site, the port warehouse and product held by refineries, and are also valued at lower of cost or market.
 
g)  Property, Plant, and Equipment: Expenditures for new facilities, new assets or expenditures that extend the useful lives of existing facilities are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the shorter of estimated productive lives of such facilities or the useful life of the individual assets ranging from five to twenty years. Certain mining equipment is depreciated using the units-of-production method based upon estimated total proven and probable reserves. Maintenance and repairs are expensed as incurred.
 
-10-
 
h)  Operational Mining Properties and Mine Development: Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs incurred to develop such property including costs to further delineate the ore body and remove over burden to initially expose the ore body, are 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. Significant payments related to the acquisition of the land and mineral rights are capitalized as incurred. Prior to acquiring such land or mineral rights the Company generally makes a preliminary evaluation to determine that the property has significant potential to develop an economic ore body. The time between initial acquisition and full evaluation of a property’s potential is variable and is dependant on many factors including: location relative to existing infrastructure, the property’s stage of development, geological controls and metal prices. If a mineable ore body is discovered, such costs are amortized when production begins. If no mineable ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value. Interest expense allocable to the cost of developing mining properties and to construct new facilities is capitalized until the assets are ready for their intended use. Gains or losses from sales or retirements of assets are included in other income or expense. Ongoing mining expenditures on producing properties are charged against earnings as incurred. Major development expenditures incurred to increase production or extend the life of the mine are capitalized.
 
i)  Asset Impairment: Management reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if total estimated future cash flows or probability-weighted cash flows on an undiscounted basis are less than the carrying amount of the assets, including mineral property, plant and equipment, non-producing property, and any deferred costs such as deferred stripping. An impairment loss is measured and recorded based on discounted estimated future cash flows or the application of an expected present value technique to estimate fair value in the absence of a market price. Future cash flows include estimates of proven, probable, and a portion of resource recoverable ounces, gold and silver prices (considering current and historical prices, price trends and related factors), production levels, capital and reclamation costs, all based on detailed engineering life-of-mine plans. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Any differences between significant assumptions and market conditions and/or the Company’s performance could have a material effect on any impairment provision, and on the Company’s financial position and results of operations. In estimating future cash flows, assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of cash flows from other groups. Generally, in estimating future cash flows, all assets are grouped at a particular mine for which there is identifiable cash flow.
 
j)  Reclamation and Remediation Costs: Estimated future reclamation and remediation costs are based principally on legal and regulatory requirements.
 
The asset retirement obligation is measured using assumptions for cash outflows such as expected labor costs, allocated overhead and equipment charges, contractor markup, and inflation adjustments to determine the total obligation.  The sum of all these costs are discounted, using the credit adjusted risk-free interest rate from the time the Company expects to pay the retirement obligation to the time the Company incurs the obligation. The measurement objective is to determine the amount a third party would demand to assume the asset retirement obligation.
 
Upon initial recognition of a liability for an asset retirement obligation, the Company capitalizes the asset retirement cost to the related long-lived asset. The Company amortizes this amount to operating expense using the units-of-production method. The Company evaluates the cash flow estimates at the end of each reporting period to determine whether the estimates continue to be appropriate. Upward revisions in the amount of undiscounted cash flows will be discounted using the current credit-adjusted risk-free rate. Downward revisions will be discounted using the credit-adjusted risk-free rate that existed when the original liability was recorded.
 
-11-
 
k)  Foreign Currency Translation: The Company’s functional currency is the U.S. dollar. The accounts of subsidiaries, not reporting in U.S. dollars, and which are integrated operations, are translated into U.S. dollars using the temporal method. Under this method, substantially all assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the date of the transaction or at end of each period. Revenues and expenses are translated at the average exchange rate for the period. Foreign currency transaction gains and losses are included in the determination of net income/ (loss).
 
l)  Stock-based Compensation Plans: The Company provides stock grants or options to buy common shares of the Company to directors, officers, employees and service providers. The board of directors grants such options for periods of up to ten years, vesting period of up to four years and at prices equal to or greater than the weighted average market price of the five trading days prior to the date the options were granted.
 
The Company applies the fair-value method of accounting in accordance with recommendation of CICA Handbook Section (“CICA 3870”), “Stock-based Compensation and Other Stock-based Payments”. Stock-based compensation expense is calculated using the Black-Scholes option pricing model or stock at market price.
 
m)  Income Taxes: The Company computes income taxes in accordance with CICA Handbook Section (“CICA 3465”), “Income Taxes”, that requires an asset and liability approach which results in the recognition of future tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities, as well as operating loss and tax credit carry-forwards, using enacted or substantially enacted, as applicable, tax rates in effect in the years in which the differences are expected to reverse.
 
n)  Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in Canada requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
o)  Earnings (Loss) Per Share: Basic earnings (loss) per share calculations are based on the net income (loss) attributable to common shareholders for the period divided by the weighted average number of common shares issued and outstanding during the period.
 
The diluted earnings/(loss) per share calculations are based on the weighted average number of common shares outstanding during the period, plus the effects of dilutive common share equivalents. This method requires that the dilutive effect of outstanding options and warrants issued should be calculated using the treasury stock method. This method assumes that all common share equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the period.
 
For convertible securities that may be settled in cash or shares at the holder’s option the more dilutive of cash settlement and share settlement is used in computing diluted earnings/(loss) per share. For settlements in common shares, the if-converted method is used, which requires that returns on senior convertible equity instruments and income charges applicable to convertible financial liabilities be added back to net earnings/(loss), and the net earnings/(loss) is also adjusted for any non-discretionary changes that would arise from the beginning of the period (or at the time of issuance, if later).
 
Potentially dilutive securities totaling 5,013,642 for the nine months ended September 30, 2005 (74,922, 874,308 and 4,064,412 shares arising from convertible debentures, outstanding and exercisable stock options and share purchase warrants, respectively) and 4,904,736 shares for the nine months ended September 30, 2004 (74,922, 1,015,344 and 3,814,470 shares arising from convertible debentures, outstanding stock options and share purchase warrants, respectively) were not included as they were anti-dilutive.
 
-12-
 
Reclassifications: Certain reclassifications of prior year balances have been made to conform to current year presentation.
 
 
3.  
Mineral property, plant and equipment
 
Mineral property, plant and equipment consist of:
 
   
September 30, 2005
  
December 31, 2004
  
   
Cost
  
Accumulated
Amortization
  
Net Book
Value
  
Cost
  
Accumulated
Amortization
  
Net Book
Value
  
Morococha mine, Peru
        
$
32,347
        
$
(5,352
)
      
$
26,995
  
$
18,217
        
$
(2,099
)
      
$
16,118
  
La Colorada mine, Mexico
          
60,571
          
(9,435
)
        
51,136
    
54,848
          
( 5,261
)
        
49,587
  
Huaron mine, Peru
          
57,656
          
(18,733
)
        
38,923
    
53,628
          
( 16,039
)
        
37,589
  
Quiruvilca mine, Peru
          
17,007
          
(14,643
)
        
2,364
    
25,601
          
( 24,616
)
        
985
  
Other
          
1,121
          
(582
)
        
539
    
904
          
( 536
)
        
368
  
TOTAL
        
$
168,702
        
$
(48,745
)
      
$
119,957
  
$
153,198
        
$
(48,551
)
      
$
104,647
  

 
4.  
Investment and non-producing properties
 
Acquisition costs of investment and non-producing properties together with costs directly related to mine development expenditures are deferred. Exploration expenditures on investment and non-producing properties are charged to operations in the period they are incurred.
 
The carrying values of these properties are as follows:
 
   
September 30, 2005
  
December 31, 2004
  
   
Cost
  
Accumulated
Amortization
  
Net Book
Value
  
Cost
  
Accumulated
Amortization
  
Net Book
Value
  
                                                
Morococha mine, Peru
        
$
31,052
        
$
-
        
$
31,052
  
$
40,472
        
$
-
        
$
40,472
  
Manantial Espejo, Argentina
          
3,446
          
-
          
3,446
    
2,012
          
-
          
2,012
  
Alamo Dorado, Mexico
          
104,361
          
-
          
104,361
    
81,692
          
-
          
81,692
  
San Vicente, Bolivia
          
1,814
          
-
          
1,814
    
-
          
-
          
-
  
Other
          
1,529
          
-
          
1,529
    
1,687
          
-
          
1,687
  
TOTAL
        
$
142,202
        
$
-
        
$
142,202
  
$
125,863
        
$
-
        
$
125,863
  

 
 
5.  
Share Capital
 
p)  Share Option Plan
 
The Company has a comprehensive stock option plan for its employees, directors and officers. The plan provides for the issuance of incentive stock options to acquire up to a total of 10% of the issued and outstanding common shares of the Company on a non-diluted basis. The exercise price of each option shall be the weighted average trading price of the Company’s stock on the five days prior to the award date. The options can be granted for a maximum term of 10 years with vesting provides determined by the Company.
 
-13-
 
 
The following table summarizes information concerning stock options outstanding as at September 30, 2005:
 
   
Options Outstanding
Options Exercisable
Range of Exercise Prices
Year of Expiry
Number Outstanding as at September 30, 2005
Weighted Average Remaining Contractual Life (months)
Number Exercisable as at September 30, 2005
Weighted Average Exercise Price
           
$4.31 - $7.93
2006
86,333
8.51
86,333
$5.08
$8.32 - $8.70
2007
308,500
25.41
266,500
$8.62
$7.67 - $12.43
2008
357,308
32.99
37,308
$8.74
$14.21 - $19.72
2009
424,108
42.45
214,108
$16.63
$4.31 - $16.19
2010
294,000
61.32
74,000
$10.55
 
 
1,470,249
34.14
678,249
$9.92

During the nine month period ended September 30, 2005, 300,325 common shares were issued for proceeds of $2.7 million in connection with the exercise of options. Also in the period the Company recognized $0.9 million of stock-based compensation expense for options issued in 2005, 2004 and 2003. The Company used as its assumptions for calculating expense a discount rate of 3.4%, volatility of 55.6, 42.0, and 41.0 for expected lives of 3.0, 2.3, and 1.5, respectively and an exercise price of Cdn $18.80 per share.
 
q)  Share purchase warrants
 
On September 15, 2005 the Company issued 255,781 share purchase warrants to the International Finance Corporation (“IFC”) as settlement for the cancellation of the obligation related to payments on the La Colorada Mine. The warrants have a fair value of $2.1 million and allow the holder to purchase 255,781 common shares of the Company for $16.91 per share for a period of 5 years after the date of issue.
 
As at September 30, 2005 there were warrants outstanding that allow the holders to purchase 3,808,626 common shares of the Company at Cdn$12.00 per share, which expire on February 20, 2008.
 
In the period, 1,186 common shares were issued for proceeds of $11 in connection with the exercise of outstanding warrants.
 

-14-
 
6.  
Changes in operating working capital items
 
The following table summarizes the changes in operating working capital items:
 
   
Three Months Ended
September 30
  
Nine Months Ended
September 30
  
   
2005
  
2004
  
2005
  
2004
  
Short - term investments
       
$
-
        
$
(475
)
      
$
-
        
$
(475
)
Accounts receivable
          
(155
)
        
(3,320
)
        
5,666
          
(5,047
)
Inventories
          
(1,416
)
        
(212
)
        
(2,147
)
        
803
  
Prepaid expenses
          
(1,450
)
        
(210
)
        
(2,350
)
        
(1,241
)
Accounts payable and accrued liabilities
          
2,722
          
(1,635
)
        
(1,739
)
        
(3,029
)
Advances for metal shipments
          
(367
)
        
(1,388
)
        
(652
)
        
(3,292
)
Severance, indemnities and commitments
          
(753
)
        
518
          
(255
)
        
1,216
  
         
$
(1,419
)
      
$
(6,722
)
      
$
(1,477
)
      
$
(11,065
)

 
 
7.  
Segmented information
 
Substantially all of the Company’s operations are within the mining sector, conducted through operations in six countries. Due to differences between mining and exploration activities, the Company has a separate budgeting process and measures the results of operations and exploration activities separately. The Corporate office provides support to the mining and exploration activities with respect to financial, human resources and technical support.
 
Segmented disclosures and enterprise-wide information are as follows:
 
 
     
 For the three months ended September 30, 2005
   
Mining & Development
              
 
 
  
 Mexico
  
Peru 
  
 Investment and exploration
  
 Corporate
  
 Total
  
Revenue from external customers
      
$
5,355
  
$
24,731
  
$
-
  
$
(42
)
$
30,044
  
Investment and other income
      
$
(5
)
$
13
  
$
420
  
$
913
  
$
1,341
  
Interest and financing expenses
      
$
-
  
$
(154
)
$
-
  
$
28
  
$
(126
)
Exploration
      
$
-
  
$
(511
)
$
(193
)
$
159
  
$
(545
)
Depreciation and amortization
      
$
(1,489
)
$
(2,274
)
$
(8
)
$
(17
)
$
(3,788
)
Net income (loss) for the period
      
$
(1,803
)
$
3,358
  
$
(271
)
$
1,044
  
$
2,328
  
Property, plant and equipment capital expenditures
      
$
12,186
  
$
4,033
  
$
1,970
  
$
(1,707
)
$
16,482
  
Segment assets
      
$
82,362
  
$
136,518
  
$
89,761
  
$
63,101
  
$
371,742
  

   
 For the three months ended September 30, 2004
   
Mining & Development
              
 
 
  
 Mexico
  
Peru 
  
 Investment and exploration
  
 Corporate
  
 Total
  
Revenue from external customers
      
$
2,901
  
$
25,155
  
$
-
  
$
(647
)
$
27,409
  
Investment and other income
      
$
3
 
$
5
  
$
559
  
$
225
  
$
792
  
Interest and financing expenses
      
$
-
  
$
(66
)
$
-
  
$
-
  
$
(66
)
Exploration
      
$
(1
 ) 
$
(48
)
$
(387
)
$
(777
 ) 
$
(1,213
)
Depreciation and amortization
      
$
(618
)
$
(2,404
)
$
-
 
$
(11
)
$
(3,033
)
Net income (loss) for the period
      
$
(993
)
$
6,360
  
$
169
 
$
(2,247
 ) 
$
3,289
  
Property, plant and equipment capital expenditures
      
$
1,493
  
$
36,537
  
$
422
  
$
875
 
$
39,327
  
Segment assets
      
$
51,530
  
$
127,461
  
$
90,575
  
$
72,382
  
$
341,948
  
 
 
-15-

 
     
 For the nine months ended September 30, 2005
   
Mining & Development
              
 
 
  
 Mexico
  
Peru 
  
 Investment and exploration
  
 Corporate
  
 Total
  
Revenue from external customers
      
$
14,739
  
$
69,792
  
$
-
  
$
(3,500
)
$
81,030
  
Investment and other income
      
$
(5
)
$
439
  
$
399
  
$
1,605
  
$
2,438
  
Interest and financing expenses
      
$
-
  
$
(267
)
$
-
  
$
(45
 ) 
$
(312
)
Exploration
      
$
(2
 ) 
$
(511
)
$
(2,077
)
$
113
  
$
(2,703
)
Depreciation and amortization
      
$
(3,439
)
$
(5,944
)
$
(8
)
$
(30
)
$
(9,421
)
Net income (loss) for the period
      
$
(1,952
)
$
8,994
  
$
(2,418
)
$
(5,160
 ) 
$
(536
 ) 
Property, plant and equipment capital expenditures
      
$
26,702
  
$
12,149
  
$
3,404
  
$
(1,680
)
$
40,575
  
Segment assets
      
$
82,362
  
$
136,518
  
$
89,761
  
$
63,101
  
$
371,742
  

   
 For the nine months ended September 30, 2004
   
Mining & Development
              
 
 
  
 Mexico
  
Peru 
  
 Investment and exploration
  
 Corporate
  
 Total
  
Revenue from external customers
      
$
8,912
  
$
57,295
  
$
-
  
$
(2,697
)
$
63,510
  
Investment and other income
      
$
14
 
$
3,438
  
$
785
  
$
(619
 ) 
$
3,618
  
Interest and financing expenses
      
$
(229
 ) 
$
(229
)
$
-
  
$
(365
 ) 
$
(823
)
Exploration
      
$
(15
 ) 
$
(48
)
$
(556
)
$
(2,259
 ) 
$
(2,878
)
Depreciation and amortization
      
$
(2,238
)
$
(4,915
)
$
-
 
$
(33
)
$
(7,186
)
Net income (loss) for the period
      
$
(2,386
)
$
16,822
  
$
203
 
$
(10,429
 ) 
$
4,210
  
Property, plant and equipment capital expenditures
      
$
4,472
  
$
39,456
  
$
897
  
$
1,064
 
$
45,889
  
Segment assets
      
$
51,530
  
$
127,461
  
$
90,575
  
$
72,382
  
$
341,948
  
 

 
-16-