EX-99.1 2 v439563_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

UNAUDITED CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS AND NOTES

FOR THE FIRST QUARTER ENDING MARCH 31, 2016

Pan American Silver Corp.

Condensed Interim Consolidated Statements of Financial Position

(unaudited in thousands of U.S. dollars)

	March 31, 2016			December 31, 2015
Assets
Current assets
Cash and cash equivalents (Note 18)	$	120,387		$	133,963
Short-term investments (Note 5)		57,231			92,678
Trade and other receivables (Note 4)		113,912			87,041
Income taxes receivable		26,482			27,373
Inventories (Note 6)		205,897			204,361
Derivative financial instruments (Note 4)		230			-
Prepaid expenses and other current assets		9,307			6,748
		533,446			552,164
Non-current assets
Mineral properties, plant and equipment (Note 7)		1,158,688			1,145,221
Long-term refundable tax		10,441			8,994
Deferred tax assets		3,221			3,730
Other assets (Note 9)		1,850			1,871
Goodwill (Note 8)		3,057			3,057
Total Assets	$	1,710,703		$	1,715,037

Liabilities
Current liabilities
Accounts payable and accrued liabilities (Note 10)	$	105,365		$	112,829
Loan payable (Note 11)		18,401			19,578
Derivative financial instruments (Note 4)		1,601			2,835
Provisions (Note 12)		10,193			8,979
Current portion of finance lease (Note 13)		2,354			2,238
Current income tax liabilities		11,866			13,481
		149,780			159,940
Non-current liabilities
Provisions (Note 12)		47,840			45,892
Deferred tax liabilities		142,333			142,127
Long-term portion of finance lease (Note 13)		2,578			1,759
Long-term debt (Note 14)		36,200			36,200
Other long-term liabilities (Note 15)		31,709			30,503
Total Liabilities		410,440			416,421

Equity
Capital and reserves (Note 16)
Issued capital		2,299,358			2,298,390
Share option reserve		22,983			22,829
Investment revaluation reserve		92			(458	)
Deficit		(1,023,701	)		(1,023,539	)
Total Equity attributable to equity holders of the Company		1,298,732			1,297,222
Non-controlling interests		1,531			1,394
Total Equity		1,300,263			1,298,616
Total Liabilities and Equity	$	1,710,703		$	1,715,037

Commitments and Contingencies (Notes 4, 23)

Subsequent Events (Note 25)

See accompanying notes to the condensed interim consolidated financial statements.

APPROVED BY THE BOARD ON MAY 11, 2016

“signed”

Ross Beaty, Director

“signed”

Michael Steinmann, Director

Pan American Silver Corp.

Condensed Interim Consolidated Statements of Income (Loss)

(unaudited in thousands of U.S. dollars, except for earnings per share)

	Three months ended March 31,
	2016			2015
Revenue (Note 19)	$	158,275		$	178,125
Cost of sales
Production costs (Note 20)		(105,808	)		(128,974	)
Depreciation and amortization		(29,371	)		(40,518	)
Royalties		(6,398	)		(6,003	)
		(141,577	)		(175,495	)
Mine operating earnings	$	16,698		$	2,630

General and administrative		(5,734	)		(5,700	)
Exploration and project development		(1,282	)		(3,754	)
Foreign exchange losses		(1,772	)		(6,386	)
(Losses) gains on commodity and foreign currency contracts (Note 4)		(58	)		641
Gain on sale of mineral properties, plant and equipment		104			133
Other (expense) income		(487	)		1,014
Earnings (loss) from operations		7,469			(11,422	)

Gain on derivatives (Note 4)		-			229
Investment income		304			333
Interest and finance expense (Note 21)		(1,798	)		(2,224	)
Earnings (loss) before income taxes		5,975			(13,084	)
Income taxes (Note 22)		(4,100	)		(6,701	)
Net earnings (loss) for the period	$	1,875		$	(19,785	)

Attributable to:
Equity holders of the Company	$	1,738		$	(19,371	)
Non-controlling interests		137			(414	)
	$	1,875		$	(19,785	)

Earnings (loss) per share attributable to common shareholders (Note 17)
Basic earnings (loss) per share	$	0.01		$	(0.13	)
Diluted earnings (loss) per share	$	0.01		$	(0.13	)
Weighted average shares outstanding (in 000’s) Basic		151,982			151,643
Weighted average shares outstanding (in 000’s) Diluted		152,062			151,643

Condensed Interim Consolidated Statements of Comprehensive Income (Loss)

(unaudited in thousands of U.S. dollars)

	Three months ended March 31,
	2016			2015
Net earnings (loss) for the period	$	1,875		$	(19,785	)
Items that may be reclassified subsequently to net earnings:
Unrealized net gains (losses) on available for sale securities (net of zero dollars tax in 2016 and 2015)		568			(175	)
Reclassification adjustment for net (losses) gains on available for sale securities included in earnings (net of zero dollars tax in 2016 and 2015)		(18	)		143
Total comprehensive income (loss) for the period	$	2,425		$	(19,817	)

Total comprehensive income (loss) attributable to:
Equity holders of the Company	$	2,288		$	(19,403	)
Non-controlling interests		137			(414	)
Total comprehensive income (loss) for the period	$	2,425		$	(19,817	)

See accompanying notes to the condensed interim consolidated financial statements.

Pan American Silver Corp.

Condensed Interim Consolidated Statements of Cash Flows

(unaudited in thousands of U.S. dollars)

	Three months ended March 31,
	2016			2015
Cash flow from operating activities
Net earnings (loss) for the period	$	1,875		$	(19,785	)

Current income tax expense (Note 22)		3,387			4,379
Deferred income tax expense (Note 22)		713			2,322
Interest expense (Note 21)		512			1,339
Depreciation and amortization		29,371			40,518
Accretion on closure and decommissioning provision (Note 12)		719			810
Unrealized losses on foreign exchange		1,308			2,073
Share-based compensation expense		702			784
Losses (Gains) on commodity and foreign currency contracts (Note 4)		58			(544	)
Gain on derivatives (Note 4)		-			(229	)
Gain on sale of mineral properties, plant and equipment		(104	)		(133	)
Net realizable value adjustment for inventory		(3,424	)		(12,060	)
Changes in non-cash operating working capital (Note 18)		(27,600	)		4,522
Operating cash flows before interest and income taxes		7,517			23,996

Interest paid		(322	)		(1,038	)
Interest received		323			193
Income taxes paid		(6,747	)		(11,205	)
Net cash generated from operating activities	$	771		$	11,946

Cash flow from investing activities
Payments for mineral properties, plant and equipment		(44,900	)		(32,446	)
Proceeds from sales (purchase) of short term investments		36,025			(1,240	)
Proceeds from sale of mineral property, plant and equipment		110			140
Net payments from commodity and foreign currency contracts		(1,522	)		-
Net cash used in investing activities	$	(10,287	)	$	(33,546	)

Cash flow from financing activities
Proceeds from issue of equity shares		210			-
Dividends paid		(1,900	)		(18,955	)
(Payment of) Proceeds from short term loans (Note 11)		(1,236	)		5,293
Payment of construction and equipment leases		(729	)		(1,341	)
Net cash used in financing activities	$	(3,655	)	$	(15,003	)
Effects of exchange rate changes on cash and cash equivalents		(405	)		331
Net decrease in cash and cash equivalents		(13,576	)		(36,272	)
Cash and cash equivalents at the beginning of the period		133,963			146,193
Cash and cash equivalents at the end of the period	$	120,387		$	109,921

See accompanying notes to the condensed interim consolidated financial statements.

Pan American Silver Corp.

Condensed Interim Consolidated Statements of Changes in Equity

(unaudited in thousands of U.S. dollars, except for number of shares)

	Attributable to equity holders of the Company
	Issued shares		Issued capital		Share option reserve			Investment revaluation reserve			Deficit			Total			Non- controlling interests			Total equity
Balance, December 31, 2014		151,643,372		2,296,672		22,091			(485	)		(755,186	)		1,563,092			6,845			1,569,937
Total comprehensive loss
Net loss for the year		-		-		-			-			(226,650	)		(226,650	)		(4,906	)		(231,556	)
Other comprehensive income		-		-		-			27			-			27			-			27
									27			(226,650	)		(226,623	)		(4,906	)		(231,529	)
Shares issued as compensation		240,362		1,718		-									1,718						1,718
Distributions by subsidiaries to non-controlling interests		-		-		-			-			-			-			(545	)		(545	)
Stock-based compensation on option grants		-		-		738			-			-			738			-			738
Dividends paid												(41,703	)		(41,703	)		-			(41,703	)
Balance, December 31, 2015		151,883,734	$	2,298,390	$	22,829		$	(458	)	$	(1,023,539	)	$	1,297,222		$	1,394		$	1,298,616
Total comprehensive income
Net income for the period		-		-		-			-			1,738			1,738			137			1,875
Other comprehensive income		-		-		-			550			-			550			-			550
		-		-		-			550			1,738			2,288			137			2,425
Shares issued on the exercise of stock options		24,349		288		(78	)		-			-			210			-			210
Shares issued as compensation		100,000		680		-			-			-			680			-			680
Share-based compensation on option grants		-		-		232			-			-			232			-			232
Dividends paid		-		-		-			-			(1,900	)		(1,900	)		-			(1,900	)
Balance, March 31, 2016		152,008,083	$	2,299,358	$	22,983		$	92		$	(1,023,701	)	$	1,298,732		$	1,531		$	1,300,263

	Attributable to equity holders of the Company
	Issued shares		Issued capital		Share option reserve			Investment revaluation reserve			Deficit			Total			Non- controlling interests			Total equity
Balance, December 31, 2014		151,643,372	$	2,296,672	$	22,091		$	(485	)	$	(755,186	)	$	1,563,092		$	6,845		$	1,569,937
Total comprehensive loss
Net loss for the period		-		-		-			-			(19,371	)		(19,371	)		(414	)		(19,785	)
Other comprehensive loss		-		-		-			(32	)		-			(32	)		-			(32	)
		-		-		-			(32	)		(19,371	)		(19,403	)		(414	)		(19,817	)
Share-based compensation on option grants		-		-		177			-			-			177			-			177
Dividends paid		-		-		-			-			(18,955	)		(18,955	)		-			(18,955	)
Balance, March 31, 2015		151,643,372	$	2,296,672	$	22,268		$	(517	)	$	(793,512	)	$	1,524,911		$	6,431		$	1,531,342

See accompanying notes to the condensed interim consolidated financial statements.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Nature of Operations

Pan American Silver Corp. is the ultimate parent company of its subsidiary group (collectively, the “Company”, or “Pan American”). The Company is incorporated and domiciled in Canada, and its registered office is at Suite 1500 – 625 Howe Street, Vancouver, British Columbia, V6C 2T6.

The Company is engaged in the production and sale of silver, gold and base metals including copper, lead and zinc as well as other related activities, including exploration, extraction, processing, refining and reclamation. The Company’s primary product (silver) is produced in Mexico, Peru, Argentina and Bolivia. Additionally, the Company has project development activities in Mexico, Peru and Argentina, and exploration activities throughout South America, Mexico and the United States.

Summary of Significant Accounting Policies

Basis of Preparation

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting (“IAS 34”) as issued by the International Accounting Standards Board (“IASB”) and follow the same accounting policies applied and disclosed in the Company’s consolidated financial statements for the year ended December 31, 2015. Accordingly, these condensed interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2015, as they do not include all the information and disclosures 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 of these condensed interim consolidated financial statements have been included. Operating results for the three-month period ending March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report for the year ended December 31, 2015.

Changes in Accounting Policies

There were no significant accounting standards or interpretations, along with any consequential amendments, required for the Company to adopt effective January 1, 2016.

Accounting Standards Issued But Not Yet Effective

IFRS 9 Financial Instruments (“IFRS 9”) was issued by the IASB on July 24, 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 utilizes a single approach to determine whether a financial asset is measured at amortized cost or fair value and a new mixed measurement model for debt instruments having only two categories: amortized cost and fair value. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Final amendments released on July 24, 2014 also introduce a new expected loss impairment model and limited changes to the classification and measurement requirements for financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of the final standard and amendments on its consolidated financial statements.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014, the IASB and the Financial Accounting Standards Board (“FASB”) completed its joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for IFRS and US GAAP. As a result of the joint project, the IASB issued IFRS 15, Revenue from Contracts with Customers, and will replace IAS 18, Revenue, IAS 11, Construction Contracts, and related interpretations on revenue. IFRS 15 establishes principles to address the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Companies can elect to use either a full or modified retrospective approach when adopting this standard. On April 28, 2015, the IASB decided to defer the effective date of IFRS 15 to January 1, 2018. The Company is currently evaluating the impact of the financial standard and amendments on its consolidated financial statements.

IFRS 16, Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16 – Leases which replaces IAS 17 – Leases and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements.

IAS 7, Statement of Cash Flows (“IAS 7”) Amendments to IAS 7, Statement of Cash Flows were issued in January 2016 as part of the IASB’s Disclosure Initiative. The amendments require certain enhanced disclosures of the cash and non-cash components of changes in liabilities resulting from financing activities and are required to be applied for years beginning on or after January 1, 2017. The Company is currently evaluating the impact of the amendments on its consolidated financial statements.

Basis of Consolidation

These unaudited condensed interim 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 Owned

Pan American Silver Huaron S.A.

Peru

100

Consolidated

Huaron Mine

Compañía Minera Argentum S.A.

Peru

Consolidated

Morococha Mine

Minera Corner Bay S.A. de C.V.

Mexico

100

Consolidated

Alamo Dorado Mine

Plata Panamericana S.A. de C.V.

Mexico

100

Consolidated

La Colorada Mine

Compañía Minera Dolores S.A. de C.V.

Mexico

100

Consolidated

Dolores Mine

Minera Tritón Argentina S.A.

Argentina

100

Consolidated

Manantial Espejo Mine

Pan American Silver (Bolivia) S.A.

Bolivia

Consolidated

San Vicente Mine

Minera Argenta S.A.

Argentina

100

Consolidated

Navidad Project

Management of Capital

The Company’s objective when managing its capital is to maintain its ability to continue as a going concern while at the same time maximizing growth of its business and providing returns to its shareholders. The Company’s capital structure consists of equity, comprised of issued capital plus share option reserve plus investment revaluation reserve plus retained deficit with a balance of $1.3 billion as at March 31, 2016 (December 31, 2015 - $1.3 billion). The Company manages its capital structure and makes adjustments based on changes to its economic environment and the risk characteristics of the Company’s assets. The Company’s capital requirements are effectively managed based on the Company having a thorough reporting, planning and forecasting process to help identify the funds required to ensure the Company is able to meet its operating and growth objectives.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital risk management remains unchanged from the year ended December 31, 2015. Refer to note 14 for details of the Company’s revolving credit facility and related covenants.

Financial Instruments

Financial assets and liabilities classified as at fair value through profit or loss (“FVTPL”)

The Company’s financial assets and liabilities classified as at FVTPL are as follow:

	March 31, 2016		December 31, 2015
Current derivative assets:
Lead contracts	$	158	$	-
Foreign currency contracts		72		-
	$	230	$	-
Current derivative liabilities:
Zinc contracts	$	97	$	-
Foreign currency contracts		-	$	168
Diesel fuel swaps		1,504		2,667
	$	1,601	$	2,835

In addition, trade and other receivables include accounts receivable arising from sales of metal concentrates and have been designated and classified as at FVTPL. The total trade and other receivables are as follows:

	March 31, 2016		December 31, 2015
Trade receivables from provisional concentrates sales	$	40,814	$	21,272
Not arising from sale of metal concentrates		73,098		65,769
Trade and other receivables	$	113,912	$	87,041

The net (losses) gains on derivatives for the three months ended March 31 were comprised of the following:

	2016			2015
Losses (gains) on commodity, diesel fuel swap and foreign currency contracts:
Realized (losses) gains on foreign currency, diesel fuel swap and commodity contracts	$	(1,522	)	$	97
Unrealized gains on commodity, diesel fuel swap and foreign currency contracts		1,464			544
	$	(58	)	$	641
Gain on derivatives
Gain on conversion feature of convertible notes	$	-		$	229

	$	-		$	229

Financial assets designated as available-for-sale

The Company’s investments in marketable securities are designated as available-for-sale. The unrealized gains (losses) on available-for-sale investments recognized in other comprehensive income (loss) for the three months ended March 31 were as follows:

	March 31, 2016			March 31, 2015
Unrealized gains (losses) on equity securities	$	568		$	(175	)
Reclassification adjustment for realized (losses) gains on equity securities included in earnings		(18	)		143
	$	550		$	(32	)

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Fair Value of Financial Instruments

(i)

Fair value measurement of financial assets and liabilities recognized in the condensed interim consolidated financial statements

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following table sets forth the Company’s financial assets and liabilities measured at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no observable market data).

At March 31, 2016, the levels in the fair value hierarchy into which the Company’s financial assets and liabilities are measured and recognized on the Consolidated Statements of Financial Position at fair value on a recurring basis are categorized as follows:

	March 31, 2016					December 31, 2015
	Level 1		Level 2			Level 1		Level 2
Assets and Liabilities:
Short-term investments	$	57,231	$	-		$	92,678	$	-
Trade receivables from provisional concentrate sales		-		40,814			-		21,272
Lead contracts		-		158			-		-
Zinc contracts		-		(97	)		-		-
Foreign currency contracts		-		72			-		(168	)
Diesel fuel swap contracts		-		(1,504	)		-		(2,667	)
	$	57,231	$	39,443		$	92,678	$	18,437

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2016. At March 31, 2016, there were no financial assets or liabilities measured at fair value on the Condensed Interim Consolidated Balance Sheet that would be categorized within Level 3 of the fair value hierarchy (December 31, 2015 - $nil).

(ii)

Valuation Techniques

Short-term investments

The Company’s short-term investments and other investments are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy and are primarily money market and U.S. Treasury securities. The fair value of investment securities is calculated as the quoted market price of the investment and in the case of equity securities, the quoted market price multiplied by the quantity of shares held by the Company.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Receivables from provisional concentrate sales

The Company’s trade receivables arose from provisional concentrate sales and are valued using quoted market prices based on the forward London Metal Exchange (“LME”) price for copper, zinc and lead and the London Bullion Market Association P.M. fix (“London P.M. fix”) for gold and silver.

Derivative financial instruments

The Company’s unrealized gains and losses on commodity contracts, diesel fuel swaps, and foreign currency contracts are valued using observable market prices and as such are classified as Level 2 of the fair market value hierarchy.

During the three months ended March 31, 2016 the Company entered into diesel swap contracts designed to fix or limit the Company’s exposure to higher fuel prices (the “Diesel Swaps”). During the fourth quarter of 2015 (“Q4 2015”), the Company entered into additional Diesel Swaps with an initial notional value of $12.5 million. A total of $9.2 million of the notional amounts of the Diesel Swaps remained outstanding as of March 31, 2016. The Company recorded a $0.3 million loss on the Diesel Swaps in the three months ended March 31, 2016 (2015 - $0.6 million gain).

Financial Instruments and Related Risks

The Company has exposure to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks to which the Company is exposed are metal price risk, credit risk, foreign exchange rate risk, and liquidity risk. The Company’s Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.

(i)

Metal Price Risk

Metal price risk is the risk that changes in metal prices will affect the Company’s income or the value of its related financial instruments. The Company derives its revenue from the sale of silver, gold, lead, copper, and zinc. The Company’s sales are directly dependent on metal prices that have shown extreme volatility and are beyond the Company’s control. Consistent with the Company’s mission to provide equity investors with exposure to changes in silver prices, the Company’s policy is to not hedge the price of silver.

The Company mitigates the price risk associated with its base metal production by committing some of its forecasted base metal production from time to time under forward sales and option contracts. The Board of Directors continually assess the Company’s strategy towards its base metal exposure, depending on market conditions.

During the three months ended March 31, 2016, the Company collared a portion of its zinc production in order to limit its exposure to lower zinc prices on 5,040 metric tonnes (“MT”) of zinc at a fixed minimum price of $1,700 per MT and a maximum price of $1,900 per MT. The contracts have settlement dates between March, 2016 and February, 2017. The Company recorded losses of $0.1 million and $nil on zinc positions during the three months ended March 31, 2016 and 2015, respectively.

Further, during the three months ended March 31, 2016, the Company collared a portion of its lead production in in order to limit its exposure to lower lead prices. These contracts were on 3,720 MT of lead at a fixed minimum price of $1,650 per MT and a maximum price of $1,965 per MT. These contracts have settlement dates between March, 2016 and February, 2017. The Company recorded gains of $0.2 million and $nil on the lead positions during the three months ended March 31, 2016 and 2015, respectively.

(ii)

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables. The carrying value of financial assets represents the maximum credit exposure.

The Company has long-term concentrate contracts to sell the zinc, lead and copper concentrates produced by the Huaron, Morococha, San Vicente and La Colorada mines. Concentrate contracts are common business practice in the mining industry. The terms of the concentrate contracts may require the Company to deliver concentrate that has a value greater than the payment received at the time of delivery, thereby introducing the Company to credit risk of the buyers of our concentrates. Should any of these counterparties not honour supply arrangements, or should any of them become insolvent, the Company may incur losses for products already shipped and be forced to sell its concentrates on the spot market or it may not have a market for its concentrates and therefore its future operating results may be materially adversely impacted. At March 31, 2016, the Company had receivable balances associated with buyers of its concentrates of $40.8 million (December 31, 2015 - $21.3 million). The vast majority of the Company’s concentrate is sold to eight well known concentrate buyers.

Silver doré production from La Colorada, Alamo Dorado, Dolores and Manantial Espejo is refined under long-term agreements with fixed refining terms at three separate refineries worldwide. The Company generally retains the risk and title to the precious metals throughout the process of refining and therefore is exposed to the risk that the refineries will not be able to perform in accordance with the refining contract and that the Company may not be able to fully recover precious metals in such circumstances. At March 31, 2016, the Company had approximately $29.7 million (December 31, 2015 - $21.4 million) of value contained in precious metal inventory at refineries. The Company maintains insurance coverage against the loss of precious metals at the Company’s mine sites, in-transit to refineries and whilst at the refineries.

The Company maintains trading facilities with several banks and bullion dealers for the purposes of transacting the Company’s trading activities. None of these facilities are subject to margin arrangements. The Company’s trading activities can expose the Company to the credit risk of its counterparties to the extent that our trading positions have a positive mark-to-market value. However, the Company minimizes this risk by ensuring there is no excessive concentration of credit risk with any single counterparty, by active credit management and monitoring.

Refined silver and gold is sold in the spot market to various bullion traders and banks. Credit risk may arise from these activities if the Company is not paid for metal at the time it is delivered, as required by spot sale contracts.

Management constantly monitors and assesses the credit risk resulting from its refining arrangements, concentrate sales and commodity contracts with its refiners, trading counterparties and customers. Furthermore, management carefully considers credit risk when allocating prospective sales and refining business to counterparties. In making allocation decisions, Management attempts to avoid unacceptable concentration of credit risk to any single counterparty.

The Company invests its cash with the objective of maintaining safety of principal and providing adequate liquidity to meet all current payment obligations. The credit risk, which the Company regularly assesses, is that the bank as an issuer of a financial instrument will default.

(iii)

Foreign Exchange Rate Risk

The Company reports its financial statements in United States dollars (“USD”); however, the Company operates in jurisdictions that utilize other currencies. As a consequence, the financial results of the Company’s operations as reported in USD are subject to changes in the value of the USD relative to local currencies. Since the Company’s sales are denominated in USD and a portion of the Company’s operating costs and capital spending are in local currencies, the Company is negatively impacted by strengthening local currencies relative to the USD and positively impacted by the inverse.

To mitigate this exposure, from time to time the Company has purchased Peruvian Nuevo soles (“PEN”), Mexican pesos (“MXN”) and Canadian Dollars (“CAD”) to match anticipated spending. At March 31, 2016, the Company had the following foreign cash balances stated in USD: $6.7 million of CAD, $3.2 million of PEN, and $7.9 million of MXN.

At March 31, 2016, the Company had no outstanding contracts to purchase CAD or PEN. At March 31, 2016, the Company has collared its foreign currency exposure of MXN purchases with puts and call contracts which have a nominal value of $29.7 million and have settlement dates between April, 2016 and December, 2016. The positions have a weighted average floor of $16.61 and on average cap of $18.60. The Company recorded gains of $0.2 million and $nil on the foreign exchange positions during the three months ended March 31, 2016, and 2015, respectively.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

(iv)

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by continuously monitoring forecasted and actual cash flows. The Company has in place a rigorous planning and budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its expansion plans. The Company strives to maintain sufficient liquidity to meet its short-term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash and short-term investments, and its committed loan facilities.

(v)

Commitments

The Company’s commitments at March 31, 2016 have contractual maturities as summarized below:

	Payments due by period
	Total		Within 1 year⁽²⁾		2 - 3 years		4- 5 years		After 5 years

Current liabilities	$	102,660	$	102,660	$	-	$	-	$	-
Credit Facility		39,160		960		1,920		36,280		-
Loan obligation (Note 11)		18,490		18,490		-		-		-
Finance lease obligations⁽¹⁾		5,103		2,458		2,645		-		-
Severance accrual		4,833		1,387		776		370		2,300
Employee compensation⁽³⁾		5,277		2,824		2,453		-		-
Loss on commodity contracts		1,601		1,601		-		-		-
Provisions		4,362		3,225		374		436		327
Income taxes payable		11,866		11,866		-		-		-
Total contractual obligations⁽⁴⁾	$	193,352	$	145,471	$	8,168	$	37,086	$	2,627

(1)

Includes lease obligations in the amount of $5.1 million (December 31, 2015 - $4.1 million) with a net present value of $4.9 million (December 31, 2015 - $4.0 million) discussed further in Note 13.

(2)

Includes all current liabilities as per the statement of financial position plus items presented separately in this table that are expected to be paid but not accrued in the books of the Company. A reconciliation of the current liabilities balance per the statement of financial position to the total contractual obligations within one year per the commitment schedule is shown in the table below.

March 31, 2016	Future interest component				Within 1 year
Current portion of:
Accounts payable and other liabilities	$	102,660	$	-	$	102,660
Credit facility		-		960		960
Loan obligation		18,401		89		18,490
Current portion of finance lease		2,354		104		2,458
Current severance liability		1,387		-		1,387
Employee Compensation RSU’s & PSU’s		1,318		1,506		2,824
Unrealized loss on commodity contracts		1,601		-		1,601
Provisions		3,225		-		3,225
Income tax payable		11,866		-		11,866
Total contractual obligations within one year⁽⁴⁾	$	142,812	$	2,659	$	145,471

(3)

Includes RSU and PSU obligation in the amount of $4.1 million (December 31, 2015 – $2.5 million) and $1.1 million (December 31, 2015 - $0.7 million) that will be settled in cash. The RSUs vest in two instalments, 50% in December 2016 and 50% in December 2017. The PSU obligation vests over three years (see Note 16).

(4)

Amounts above do not include payments related to the Company’s anticipated closure and decommissioning obligation of: current of $7.0 million, and and long-term of $46.7 million (December 31, 2015 – current of $6.0 million, long term $44.5 million), the deferred credit arising from the Aquiline acquisition of $20.8 million (December 31, 2015 - $20.8 million) discussed in Note 15, and deferred tax liabilities of $142.3 million (December 31, 2015 - $142.1 million).

Short Term Investments

	March 31, 2016						December 31, 2015
Available for sale	Fair Value		Cost		Accumulated unrealized holding gains		Fair Value		Cost		Accumulated unrealized holding losses
Short term investments	$	57,231	$	57,139	$	92	$	92,678	$	93,136	$	(458	)

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Inventories

Inventories consist of:

	March 31, 2016		December 31, 2015
Concentrate inventory	$	19,638	$	17,216
Stockpile ore⁽¹⁾		15,160		18,988
Heap leach inventory and in process ⁽²⁾		82,977		82,846
Doré and finished inventory⁽³⁾		38,852		33,981
Materials and supplies		49,270		51,330
	$	205,897	$	204,361

(1)

Includes an impairment charge of $29.5 million to reduce the cost of inventory to net realizable value (“NRV “) at Dolores, Manantial Espejo, and Alamo Dorado mines (December 31, 2015 – $28.8 million).

(2)

Includes an impairment charge of $20.5 million to reduce the cost of inventory to NRV at Dolores, and Manantial Espejo mines (December 31, 2015 - $21.3 million).

(3)

Includes an impairment charge of $0.4 million to reduce the cost of inventory to NRV at the Dolores mine (December 31, 2015 - $3.7 million).

Mineral Properties, Plant and Equipment

Acquisition costs of investment and non-producing properties together with costs directly related to mine development expenditures are capitalized. Exploration expenditures on investment and non-producing properties are charged to operations in the period they are incurred.

Capitalization of evaluation expenditures commences when there is a high degree of confidence in the project’s viability and hence it is very likely that future economic benefits will flow to the Company. Evaluation expenditures, other than that acquired from the purchase of another mining company, are carried forward as an asset provided that such costs are expected to be recovered in full through successful development and exploration of the area of interest or alternatively, by its sale. Evaluation expenditures include delineation drilling, metallurgical evaluations, and geotechnical evaluations, amongst others.

Mineral properties, plant and equipment consist of:

	March 31, 2016							December 31, 2015
	Cost		Accumulated Depreciation and Impairment			Carrying Value		Cost		Accumulated Depreciation and Impairment			Carrying Value
Huaron mine, Peru	$	174,355	$	(86,021	)	$	88,334	$	171,574	$	(82,896	)	$	88,678
Morococha mine, Peru		216,453		(181,661	)		34,792		214,855		(177,621	)		37,234
Alamo Dorado mine, Mexico		198,714		(198,714	)		-		198,950		(198,950	)		-
La Colorada mine, Mexico		216,467		(75,251	)		141,216		200,083		(72,732	)		127,351
Dolores mine, Mexico		1,062,893		(569,895	)		492,998		921,169		(512,308	)		408,861
Manantial Espejo mine, Argentina		361,541		(344,003	)		17,538		360,735		(341,457	)		19,278
San Vicente mine, Bolivia		131,373		(74,433	)		56,940		130,595		(72,230	)		58,365
Other		24,960		(16,537	)		8,423		25,237		(16,441	)		8,796
Total	$	2,386,756	$	(1,546,515	)	$	840,241	$	2,223,198	$	(1,474,635	)	$	748,563

Land and Exploration and Evaluation:
Land						$	3,515						$	3,515
Navidad Project, Argentina							190,471							190,471
Minefinders exploration projects, Mexico							95,100							173,401
Morococha, Peru							3,238							3,238
Other							26,123							26,033
Total non-producing properties						$	318,447						$	396,658
Total mineral properties, plant and equipment						$	1,158,688						$	1,145,221

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Impairment of Non-Current Assets and Goodwill

Non-current assets are tested for impairment when events or changes in assumptions indicate that the carrying amount may not be recoverable. The Company performs an impairment test for goodwill at each financial year end and when events or changes in circumstances indicate that the related carrying value may not be recoverable.

Based on the Company’s assessment at March 31, 2016 of potential impairments with respect to its mineral properties, the Company has concluded that there are no impairment charges required as at March 31, 2016.

Goodwill arose when the Company acquired Minefinders in 2012 and consists of:

	2016		2015
As at January 1,	$	3,057	$	3,057
As at March 31,	$	3,057	$	3,057

	2015
As at January 1,	$	3,057
As at December 31, 2015	$	3,057

Other Assets

Other assets consist of:

	March 31, 2016		December 31, 2015
Investments in Associates		1,450		1,450
Reclamation bonds		199		199
Lease receivable		164		185
Other assets		37		37
	$	1,850	$	1,871

10.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

	March 31, 2016		December 31, 2015
Trade accounts payable⁽¹⁾	$	45,090	$	53,570
Royalties payable		3,849		1,947
Other accounts payable and trade related accruals		30,641		28,796
Payroll and related benefits		15,048		17,366
Severance accruals		1,387		720
Other taxes payable		2,496		1,220
Advances on concentrate inventory not sold		1,355		-
Other		5,499		9,210
	$	105,365	$	112,829

No interest is charged on the trade accounts payable ranging from 30 to 60 days from the invoice date.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

11.

Loans payable

	March 31, 2016⁽¹⁾		December 31, 2015⁽²⁾
Loans payable	$	18,401	$	19,578
Net loans payable⁽¹⁾	$	18,401	$	19,578

(1)

As at March 31, 2016
Due	Argentine Peso		US$		Int. Rate	Total US$
April 1, 2016	$	-	$	2,008	4.35%	$	2,008
April 20, 2016		-		2,325	4.35%		2,325
April 20, 2016		-		1,195	4.35%		1,195
April 22, 2016		-		3,030	4.41%		3,030
May 12, 2016		-		2,320	4.80%		2,320
May 27, 2016		-		4,016	4.50%		4,016
June 16, 2016		-		3,507	4.24%		3,507
	$	-	$	18,401		$	18,401

As at December 31, 2015
Due	Argentine Peso		US$		Int. Rate	Total US$
January 6, 2016	$	5,291	$	-	40.00%	$	406
January 15, 2016		89,065		-	30.00%		6,872
January 23, 2016		-		2,305	3.90%		2,305
January 29, 2016		-		300	5.30%		300
January 29, 2016		-		2,500	3.82%		2,500
February 28, 2016		-		3,195	4.25%		3,195
March 9, 2016		-		3,200	3.35%		3,200
March 9, 2016		-		800	3.85%		800
	$	94,356	$	12,300		$	19,578

12.

Provisions

	Closure and Decommissioning			Litigation			Total
December 31, 2015	$	50,453		$	4,418		$	54,871
Revisions in estimates and obligations incurred		3,075			-			3,075
Charged (credited) to earnings:
-new provisions		-			196			196
-unused amounts reversed		-			(66	)		(66	)
-exchange gains on provisions		-			10			10
Gain in the period		(576	)		(196	)		(772	)
Accretion expense (Note 21)		719			-			719
March 31, 2016	$	53,671		$	4,362		$	58,033

Maturity analysis of total provisions:

	March 31, 2016		December 31, 2015
Current	$	10,193	$	8,979
Non-Current		47,840		45,892
	$	58,033	$	54,871

13.

Finance Lease Obligations

		March 31, 2016				December 31, 2015
Lease obligations⁽¹⁾		$	4,932			$	3,997

		March 31, 2016		December 31, 2015
Maturity analysis of finance leases:
Current	$	2,354	$	2,238
Non-current		2,578		1,759
	$	4,932	$	3,997

(1)

Represents equipment lease obligations at several of the Company’s subsidiaries. A reconciliation of the total future minimum lease payments at March 31, 2016 and December 31, 2015 to their present value is presented in the table below.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

	March 31, 2016			December 31, 2015
Less than a year	$	2,458		$	2,319
2 years		1,440			1,030
3 years		1,205			775
4 years		-			-
5 years		-			-
		5,103			4,124
Less future finance charges		(171	)		(127	)
Present value of minimum lease payments	$	4,932		$	3,997

14.

Long Term Debt

	March 31, 2016		December 31, 2015
Credit Facility	$	36,200	$	36,200
Total long-term debt	$	36,200	$	36,200

	March 31, 2016		December 31, 2015
Maturity analysis of Long Term Debt:
Current	$	-	$	-
Non-Current		36,200		36,200
	$	36,200	$	36,200

On April 15, 2015 the Company entered into a new $300.0 million secured revolving credit facility with a 4-year term (the “Credit Facility”). In connection with the Credit Facility the Company paid upfront costs of $3.0 million which have been recorded as an asset under the classification Prepaids and other current assets and are being amortized over the life of the Credit Facility. The Credit Facility can be drawn down at any time to finance the Company’s working capital requirements, acquisitions, investments and for general corporate purposes.

At the option of the Company, amounts can be drawn under the Credit Facility and will incur interest based on the Company’s leverage ratio at either (i) LIBOR plus 2.125% to 3.125% or; (ii) the Bank of Nova Scotia’s Base Rate plus 1.125% to 2.125%. Undrawn amounts under the Revolving Facility are subject to a stand-by fee of 0.478% to 0.703% per annum, dependent on the Company’s leverage ratio.

Under the Credit Facility, the Company is subject to various general and financial covenants, the financial covenants include the requirement for the Company to maintain: (i) a leverage ratio less than or equal to 3.5:1; (ii) an interest coverage ratio more than or equal to 3.0:1; and (iii) a tangible net worth (exclusive of any prospective write-downs of certain assets) of greater than $1,248.0 million plus 50% of the positive net earnings for each subsequent fiscal quarter. As of March 31, 2016 the Company was in compliance with all covenants required by the Credit Facility.

At March 31, 2016 and December 31, 2015 $36.2 million was drawn on the Credit Facility under LIBOR loans at an average annual rate of 2.55%. During the three months ended March 31, 2016, the Company has incurred $0.3 million (2015 - $nil) in standby charges on undrawn amounts and $0.2 million (2015 - $nil) in interest on drawn amounts under this Facility.

15.

Other Long Term Liabilities

Other long term liabilities consist of:

	March 31, 2016		December 31, 2015
Deferred credit⁽¹⁾	$	20,788	$	20,788
Other income tax payable		7,475		6,624
Severance accruals		3,446		3,091
	$	31,709	$	30,503

(1) As part of the 2009 Aquiline transaction, the Company issued a replacement convertible debenture that allowed the holder to convert the debenture into either 363,854 Pan American Shares or a Silver Stream contract related to certain production from the Navidad project. Regarding the replacement convertible debenture, it was concluded that the deferred credit presentation was the most appropriate and best representation of the economics underlying the contract as of the date the Company assumed the obligation as part of the Aquiline acquisition. Subsequent to the acquisition, the counterparty to the replacement debenture selected the silver stream alternative. The final contract for the alternative is being discussed and pending the final resolution of this discussion, the Company continues to classify the fair value calculated at the acquisition of this alternative, as a deferred credit.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

16.

Share Capital and Employee Compensation Plans

The Company has a comprehensive stock option and compensation share plan for its employees, directors and officers (the “Compensation Plan”). The Compensation Plan provides for the issuance of common shares and stock options, as incentives. The maximum number of shares which may be issued pursuant to options granted or bonus shares issued under the Compensation Plan may be equal to, but will not exceed 6,461,470 shares. The exercise price of each option shall be the weighted average trading price of the Company’s stock for the five trading days prior to the award date. The options can be granted for a maximum term of 10 years with vesting provisions determined by the Company’s Board of Directors. Subject to certain exceptions, any modifications to the Compensation Plan require shareholders’ approval.

The Board has developed long term incentive plan (“LTIP”) guidelines, which provide annual compensation to the senior managers of the Company based on the long term performance of both the Company and the individuals that participate in the plan. The LTIP consists of an annual grant of options to buy shares of the Company and a grant of the Company’s common shares with a two year no trading legend. The options are seven year options which vest evenly in two annual instalments. Options and common shares granted under the LTIP plan are based on employee salary levels, individual performance and their future potential. In addition, the restricted share units (“RSUs”) plan described below is part of the LTIP plan. In early 2014, the Board approved the adding of performance share units (“PSUs”) to the Company’s LTIP, plan described below.

The Compensation Committee oversees the LTIP on behalf of the Board of Directors. The LTIP plan guidelines can be modified or suspended, at the discretion of the Board of Directors. Additionally, from time to time, the Company issues replacement awards and warrants related to acquisitions.

Transactions concerning stock options is summarized as follows in CAD:

	Stock Options
	Shares			Weighted Average Exercise Price CAD$
As at December 31, 2014		1,394,515		$	19.74
Granted		446,279		$	9.76
Exercised		-		$	-
Expired		(190,862	)	$	25.19
Forfeited		(97,009	)	$	23.21
As at December 31, 2015		1,552,923		$	15.98
Granted		-		$	-
Exercised		(24,349	)	$	11.49
Expired		-		$	-
Forfeited		(22,810	)	$	20.49
As at March 31, 2016		1,505,764		$	15.99

Long Term Incentive Plan

During the three months ended March 31, 2016, 24,349 common shares were issued in connection with the exercise of options under the plan (2015 – nil), nil options expired (2015 – 190,862) and 22,810 options were forfeited (2015 – nil).

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Share Option Plan

The following table summarizes information concerning stock options outstanding and options exercisable as at March 31, 2016. The underlying options agreements are specified in Canadian dollar amounts.

	Options Outstanding						Options Exercisable
Range of Exercise Prices CAD$	Number Outstanding as at March 31, 2016		Weighted Average Remaining Contractual Life (months)		Weighted Average Exercise Price CAD$		Number Exercisable as at March 31, 2016		Weighted Average Exercise Price CAD$
$9.76 - $11.57		719,477		71.28	$	10.42		273,198	$	11.49
$11.58 - $17.01		228,398		69.98	$	11.68		124,522	$	11.77
$17.02 - $18.53		174,635		46.51	$	18.42		174,635	$	18.42
$18.54 - $24.90		308,150		31.50	$	24.89		308,150	$	24.89
$24.91 – $40.22		75,104		20.34	$	40.22		75,104	$	40.22
		1,505,764		57.53	$	15.99		955,609	$	19.37

During the three months ended March 31, 2016, the total employee share-based compensation expense related to options recognized in the income statement was $0.2 million (2015 - $0.2 million). In addition, the Company accrued for $0.5 million in share based compensation expense related to estimated shares to be issued under the LTIP plan (2015 - $0.6 million).

Performance Shares Units

In early 2014, the Board approved the adding of performance share units (“PSUs”) to the Company’s LTIP. PSUs are notional share units that mirror the market value of the Company’s common shares (the “Shares”). Each vested PSU entitles the participant to a cash payment equal to the value of an underlying share, less applicable taxes, at the end of the term, plus the cash equivalent of any dividends distributed by the Company during the three-year performance period. PSU grants will vest on the date that is three years from the date of grant subject to certain exceptions. Performance results at the end of the performance period relative to predetermined performance criteria and the application of the corresponding performance multiplier determine how many PSUs vest for each participant. The Board has not yet approved the issuance of PSUs for 2016 (2015 – 30,408 PSUs approved at a share price of CAD $11.51). For the three month period ended March 31, 2016 compensation expense for PSUs was $0.2 million in (2015 – $0.02 million) and is presented as a component of general and administrative expense.

PSU	Number Outstanding		Fair Value
As at December 31, 2014		30,408	$	281
Granted		73,263		503
Paid out		-		-
Forfeited		-		-
Change in value		-		(101	)
As at December 31, 2015		103,671	$	683
Granted		-		-
Paid out		-		-
Forfeited		-		-
Change in value		-		455
As at March 31, 2016		103,671	$	1,138

Restricted Share Units (“RSUs”)

Under the Company’s RSU plan, selected employees are granted RSUs where each RSU has a value equivalent to one Pan American common share. The RSUs are settled in cash or Common Shares at the discretion of the Board and vest in two instalments, the first 50% vest on the first anniversary date of the grant and a further 50% vest on the second anniversary date of the grant. Additionally, RSU value is adjusted to reflect dividends paid on Pan American common share over the vesting period.

Compensation expense for RSU’s was $0.8 million in 2016 (2015 – $0.2 million) and is presented as a component of general and administrative expense.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

At March 31, 2016, the following RSU’s were outstanding:

RSU	Number Outstanding			Fair Value
As at December 31, 2014		240,757		$	2,261
Granted		305,455			2,192
Paid out		(148,891	)		(1,068	)
Forfeited		(17,177	)		(112	)
Change in value		-			(778	)
As at December 31, 2015		380,144		$	2,495
Granted		-			-
Paid out		-			-
Forfeited		(2,435	)		(27	)
Change in value		-			1,670
As at March 31, 2016		377,709		$	4,138

Dividends

On May 11, 2016, the Company declared a quarterly dividend of $0.0125 per common share paid to holders of record of its common shares as of the close of business day on May 24, 2016. These dividends were declared subsequent to the first quarter of 2016 and have not been recognized as distributions to owners during the period presented.

On February 18, 2016, the Company declared a quarterly dividend of $0.0125 per common share paid to holders of record of its common shares as of the close of business day on February 29, 2016.

On February 19, 2015, the Company declared dividends payable of $0.125 per common share payable to holders of record of its common shares as of the close of business day on March 2, 2015.

17.

Earnings (Loss) Per Share (Basic and Diluted)

Three months ended March 31,	2016						2015
	Earnings (Numerator)		Shares (Denominator)		Per-Share Amount		Loss (Numerator)			Shares (Denominator)		Per-Share Amount
Net Earnings (Loss)⁽¹⁾	$	1,738					$	(19,371	)		-		-

Basic EPS	$	1,738		151,982	$	0.01	$	(19,371	)		151,643	$	(0.13	)
Effect of Dilutive Securities:
Stock Options				80				-			-		-
Diluted EPS	$	1,738		152,062	$	0.01	$	(19,371	)		151,643	$	(0.13	)

⁽¹⁾

Net earnings attributable to equity holders of the Company.

Potentially dilutive securities excluded in the diluted earnings per share calculation for the three months ended March 31, 2016 were 578,531 out-of-money options (2015 – 1,203,653 options).

18.

Supplemental Cash Flow Information

The following tables summarize the changes in operating working capital items and significant non-cash items:

Three months ended March 31,	2016			2015
Changes in non-cash operating working capital items:
Trade and other receivables	$	(22,262	)	$	2,424
Inventories		4,366			14,692
Prepaid expenditures		(2,558	)		(3,269	)
Accounts payable and accrued liabilities		(6,627	)		(8,250	)
Provisions		(519	)		(1,075	)
	$	(27,600	)	$	4,522

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Three months ended March 31,	2016		2015
Significant Non-Cash Items:
Equipment acquired under finance lease	$	1,664	$	920

Cash and cash equivalents are comprised of:	March 31, 2016		December 31, 2015
Cash in banks	$	66,441	$	123,144
Short term money markets		53,946		10,819
Cash and cash equivalents	$	120,387	$	133,963

19.

Segmented Information

All of the Company’s operations are within the mining sector, conducted through operations in six countries. Major products are silver, gold, zinc, lead and copper produced from mines located in Mexico, Peru, Argentina and Bolivia. Due to geographic and political diversity, the Company’s mining operations are decentralized whereby Mine General Managers are responsible for achieving specified business results within a framework of global policies and standards. Country corporate offices provide support infrastructure to the mines in addressing local and country issues including financial, human resources, and exploration support. The Company has a separate budgeting process and measures the results of operations and exploration activities independently. The Company’s head office provides support to the mining and exploration activities with respect to financial, human resources and technical support.

	Three months ended March 2016
	Peru						Mexico									Argentina						Bolivia
	Huaron			Morococha			Dolores			Alamo Dorado			La Colorada			Manantial Espejo			Navidad			San Vicente			Other			Total
Revenue from external customers	$	22,351		$	21,542		$	36,755		$	15,588		$	22,121		$	27,320		$	-		$	12,598		$	-		$	158,275
Depreciation and amortization	$	(3,285	)	$	(4,334	)	$	(11,284	)	$	(1,986	)	$	(2,383	)	$	(4,358	)	$	(31	)	$	(1,562	)	$	(148	)	$	(29,371	)
Exploration and project development	$	(46	)	$	(155	)	$	(6	)	$	-		$	(122	)	$	-		$	(34	)	$	-		$	(919	)	$	(1,282	)
Interest income	$	5		$	1		$	-		$	-		$	-		$	33		$	-		$	-		$	284		$	323
Interest and financing expenses	$	(163	)	$	(120	)	$	(177	)	$	285		$	(75	)	$	(906	)	$	(17	)	$	(54	)	$	(571	)	$	(1,798	)
Gain on disposition of assets	$	-		$	92		$	5		$	5		$	2		$	-		$	-		$	-		$	-		$	104
Foreign exchange (loss) gain	$	(94	)	$	(6	)	$	99		$	16		$	99		$	(780	)	$	(44	)	$	242		$	(1,304	)	$	(1,772	)
Loss on commodity, fuel swaps and foreign currency contracts	$	-		$	-		$	-		$	-		$	-		$	-			-		$	-			(58	)	$	(58	)
Earnings (loss) before income taxes	$	2,539		$	2,142		$	(4,379	)	$	1,098		$	4,246		$	(2,373	)	$	(770	)	$	663		$	2,809		$	5,975
Income tax (expense) recovery	$	(791	)	$	(901	)	$	954		$	(204	)	$	(1,738	)	$	-		$	(6	)	$	(441	)	$	(973	)	$	(4,100	)
Net earnings (loss) for the period	$	1,748		$	1,241		$	(3,425	)	$	894		$	2,508		$	(2,373	)	$	(776	)	$	222		$	1,836		$	1,875
Capital expenditures	$	999		$	796		$	22,231		$	-		$	19,428		$	945		$	5		$	460		$	36		$	44,900
Total assets	$	112,598		$	65,356		$	752,219		$	47,545		$	183,268		$	91,660		$	193,127		$	87,333		$	177,597		$	1,710,703
Total liabilities	$	34,456		$	18,872		$	170,242		$	14,332		$	18,637		$	58,269		$	1,073		$	23,065		$	71,494		$	410,440

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

	Three months ended March 31, 2015
	Peru						Mexico									Argentina						Bolivia
	Huaron			Morococha			Dolores			Alamo Dorado			La Colorada			Manantial Espejo			Navidad			San Vicente			Other			Total
Revenue from external customers	$	19,952		$	17,352		$	45,318		$	19,016		$	25,318		$	38,455		$	-		$	12,714		$	-		$	178,125
Depreciation and amortization	$	(2,910	)	$	(4,977	)	$	(15,074	)	$	(3,045	)	$	(2,742	)	$	(10,190	)	$	(43	)	$	(1,372	)	$	(165	)	$	(40,518	)
Exploration and project development	$	(73	)	$	(169	)	$	(124	)	$	(2	)	$	(1	)	$	-		$	(2,656	)	$	-		$	(729	)	$	(3,754	)
Interest income	$	40		$	3		$	1		$	132		$	-		$	41		$	-		$	-		$	(24	)	$	193
Interest and financing expenses	$	(179	)	$	(163	)	$	(88	)	$	(60	)	$	(63	)	$	(1,410	)	$	(11	)	$	(56	)	$	(194	)	$	(2,224	)
Gain on disposition of assets	$	4		$	94		$	15		$	3		$	17		$	-		$	-		$	-		$	-		$	133
Gain on derivatives	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	229		$	229
Foreign exchange gain (loss)	$	28		$	(137	)	$	168		$	(714	)	$	(376	)	$	433		$	(43	)	$	218		$	(5,963	)	$	(6,386	)
Loss on commodity, fuel swaps and foreign currency contracts	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	641		$	641
(Loss) earnings before income taxes	$	(97	)	$	(7,065	)	$	1,664		$	(1,808	)	$	3,602		$	(7,488	)	$	(3,277	)	$	1,936		$	(551	)	$	(13,084	)
Income taxes (expense) recovery	$	(815	)	$	909		$	(4,278	)	$	(1,063	)	$	(1,782	)	$	2,703		$	(13	)	$	(516	)	$	(1,846	)	$	(6,701	)
Net (loss) earnings for the period	$	(912	)	$	(6,156	)	$	(2,614	)	$	(2,871	)	$	1,820		$	(4,785	)	$	(3,290	)	$	1,420		$	(2,397	)	$	(19,785	)
Capital expenditures	$	1,798		$	1,493		$	12,929		$	-		$	10,767		$	4,880		$	104		$	464		$	11		$	32,446

	As at December 31, 2015
	Huaron		Morococha		Dolores		Alamo Dorado		La Colorada		Manantial Espejo		Navidad		San Vicente		Other		Total
Total assets	$	111,999	$	62,012	$	721,926	$	68,575	$	167,836	$	95,866	$	193,213	$	81,981	$	211,629	$	1,715,037
Total liabilities	$	33,576	$	19,235	$	164,900	$	16,909	$	25,305	$	63,020	$	1,379	$	17,974	$	74,123	$	416,421

	Three months ended March 31,
Product Revenue	2016		2015
Refined silver and gold	$	83,866	$	109,188
Zinc concentrate		16,145		19,008
Lead concentrate		33,695		22,690
Copper concentrate		24,569		27,239
Total	$	158,275	$	178,125

20.

Production Costs

Production costs are comprised of the following:

For the three months ended March 31,	2016			2015
Consumption of raw materials and consumables	$	40,297		$	51,176
Employee compensation and benefits expense		34,292			39,193
Contractors and outside services		18,062			20,912
Utilities		4,572			5,640
Other expenses		9,713			8,711
Changes in inventory⁽¹⁾		(1,128	)		3,342
	$	105,808		$	128,974

(1)

Includes NRV adjustments to inventory to reduce production costs by $3.4 million for the 3 months ended March 31, 2016 (2015 - $12.1 million reduction)

21.

Interest and Finance Expense

For the three months ended March 31,	2016		2015
Interest expense	$	512	$	1,339
Finance fees		567		75
Accretion of closure and decommissioning provision (Note 12)		719		810
	$	1,798	$	2,224

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

22.

Income Taxes

For the three months ended March 31,	2016		2015
Current income tax expense	$	3,387	$	4,379
Deferred income tax expense		713		2,322
Provision for income taxes	$	4,100	$	6,701

Income tax expense differs from the amounts that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes. These differences result from the items shown on the following table, which result in effective tax rates that vary considerably from the comparable periods. The main factors which have affected the effective tax rates for the three months ended March 31, 2016 and the comparable period of 2015 were non-taxable foreign exchange rate fluctuations, non-recognition of certain deferred tax assets, mining taxes paid, and withholding taxes paid on payments from foreign subsidiaries. The Company continues to expect that these and other factors will continue to cause volatility in effective tax rates in the future.

Three months ended March 31,	2016			2015
Income (loss) before taxes	$	5,975		$	(13,084	)
Statutory tax rate		26.00	%		26.00	%
Income tax expense (recovery) based on above rates	$	1,554		$	(3,402	)
Increase (decrease) due to:
Non-deductible expenses		1,495			895
Foreign tax rate differences		(524	)		(1,244	)
Change in net deferred tax assets not recognized
- Argentina exploration expenses		205			1,149
- Other deferred tax assets not recognized		3,244			1,806
Non-taxable portion of net earnings of affiliates		(1,229	)		(1,225	)
Effect of other taxes paid (mining and withholding)		1,157			3,276
Effect of foreign exchange on tax expense		(2,214	)		5,294
Effect of change in deferred tax resulting from prior asset purchase accounting under IAS12		331			300
Other		81			(148	)
Income tax expense	$	4,100		$	6,701
Effective tax rate		68.62	%		(51.22	)%

23.

Commitments and Contingencies

General

The Company is subject to various investigations, claims and legal and tax proceedings covering matters that arise in the ordinary course of business activities. Each of these matters is subject to various uncertainties and it is possible that some of these matters may be resolved unfavorably to the Company. Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company. In the opinion of management, none of these matters are expected to have a material effect on the results of operations or financial condition of the Company.

Purchase Commitments

The Company had no purchase commitments other than those commitments described in Note 4.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Environmental Matters

The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.

Estimated future reclamation costs are based the extent of work required and the associated costs are dependent on the requirements of relevant authorities and the Company’s environmental policies. As of March 31, 2016 and December 31, 2015, $53.7 million, and $50.5 million, respectively, were accrued for closure and decommissioning costs relating to mineral properties. See also Note 12.

Income Taxes

The Company operates in numerous countries around the world and accordingly it is subject to, and pays annual income taxes under the various income tax regimes in the countries in which it operates. Some of these tax regimes are defined by contractual agreements with the local government, and others are defined by the general corporate income tax laws of the country. The Company has historically filed, and continues to file, all required income tax returns and to pay the taxes reasonably determined to be due. The tax rules and regulations in many countries are highly complex and subject to interpretation. From time to time, the Company is subject to a review of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved.

Law changes in Argentina

Under the previous political regime in Argentina, the government intensified the use of price, foreign exchange, and import controls in response to unfavourable domestic economic trends. Among other the things, the Argentine government has imposed restrictions on the importation of goods and services and increased administrative procedures required to import equipment, materials and services required for operations at Manantial Espejo. In support of this policy, in May 2012, the government mandated that mining companies establish an internal function to be responsible for substituting Argentinian-produced goods and materials for imported goods and materials and required advance government review of plans to import goods and materials. In addition, the government of Argentina also tightened control over capital flows and foreign exchange in an attempt to curtail the outflow of hard currencies and protect its foreign currency reserves, including mandatory repatriation and conversion of foreign currency funds in certain circumstances, informal restrictions on dividend, interest, and service payments abroad and limitations on the ability of individuals and businesses to convert Argentine pesos into USD or other hard currencies, exposing us to additional risks of Peso devaluation and high domestic inflation.

While a new federal government was elected in Argentina in late 2015 and has since taken steps to ease some of the previously instituted controls and restrictions, particularly relaxing certain rules relating to the inflow and outflow of foreign currencies, many of the policies of the previous government continue to adversely affect the Company’s Argentine operations. It is unknown whether these recent changes will be lasting, what, if any, additional steps will be taken by the new administration or what financial and operational impacts these and any future changes might have on the Company. As such, the Company continues to monitor and assess the situation in Argentina.

In September 2013, the provincial government of Santa Cruz, Argentina passed amendments to its tax code that introduced a new mining property tax with a rate of 1% to be charged annually on published “measured” reserves, which has the potential to affect the Manantial Espejo mine as well as other companies operating in the province. In December 2015, the legislature of the Province of Santa Cruz passed a bill abrogating this mining property tax and the bill became law and was published in the Official Gazette on December 31, 2015, as Law 3,462. Law 3,462 was promulgated through a decree that confirmed that the tax was unconstitutional because: (i) it contravened the contents of Federal Mining Investments Law, and (ii) it attempted to regulate matters reserved to Federal legislation.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Political changes in Bolivia

On May 28, 2014, the Bolivian government enacted Mining Law No. 535 (the “New Mining Law”). Among other things, the New Mining Law has established a new Bolivian mining authority to provide principal mining oversight (varying the role of COMIBOL) and sets out a number of new economic and operational requirements relating to state participation in mining projects. Further, the New Mining Law provides that all pre-existing contracts are to migrate to one of several new forms of agreement within a prescribed period of time. As a result, we anticipate that our current joint venture agreement with COMIBOL relating to the San Vicente mine will be subject to migration to a new form of agreement and may require renegotiation of some terms in order to conform to the New Mining Law requirements. We are assessing the potential impacts of the New Mining Law on our business and are awaiting further regulatory developments, but the primary effects on the San Vicente operation and our interest therein will not be known until such time as we have, if required to do so, renegotiated the existing contract, and the full impact may only be realized over time. In the meantime, we understand that pre-existing agreements will be respected during the period of migration and we will take appropriate steps to protect and, if necessary, enforce our rights under our existing agreement with COMIBOL. There is, however, no guarantee that governmental actions, including possible expropriation or additional changes in the law, and the migration of our contract will not impact our involvement in the San Vicente operation in an adverse way and such actions could have a material adverse effect on us and our business.

Other Legal Matters

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of business activities, many of them relating to ex-employees. Each of these matters is subject to various uncertainties and it is possible that some of these matters may be resolved unfavorably to the Company. The Company establishes provisions for matters that are probable and can be reasonably estimated, included within current liabilities, and amounts are not considered material.

In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company and its legal counsel evaluate the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. In the opinion of management there are no claims expected to have a material effect on the results of operations or financial condition of the Company.

Title Risk

Although the Company has taken steps to verify title to properties in which it has an interest, these procedures do not guarantee the Company’s title. Property title may be subject to, among other things, unregistered prior agreements or transfers and may be affected by undetected defects.

Royalty Agreements and Participation Agreements

The Company has various royalty agreements on certain mineral properties entitling the counterparties to the agreements to receive payments per terms as summarized below. Royalty liabilities incurred on acquisitions of properties are netted against mineral property while royalties that become payable upon production are expensed at the time of sale of the production.

On September 22, 2011, Peru’s Parliament approved new laws that increase mining taxes to fund anti-poverty infrastructure projects in the country, effective October 1, 2011. The new law changes the scheme for royalty payments, so that mining companies that have not signed legal stability agreements with the government will have to pay royalties of 1% to 12% on operating profit; royalties under the previous rules were 1% to 3% on net sales. In addition to these royalties, such companies will be subject to a “special tax” at a rate ranging from 2% to 8.4% of operating profit. Companies that have concluded legal stability agreements (under the General Mining Law) will be required to pay a “special contribution” of between 4% and 13.12% of operating profits. The Company’s calculations of the change in the royalty and the new tax indicate that no material impact is expected on the results of the Company’s Peruvian operations.

In the province of Chubut, Argentina, which is the location of the Company’s Navidad property, there is a provincial royalty of 3% of the “Operating Income”. Operating income is defined as revenue minus production costs (not including mining costs), treatment and transportation charges. Refer to the Navidad project section below for further details.

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

As part of the 2009 Aquiline transaction the Company issued a replacement convertible debenture that allowed the holder to convert the debenture into either 363,854 Pan American shares or a silver stream contract related to certain production from the Navidad project. Subsequent to the acquisition, the counterparty to the replacement debenture has indicated its intention to elect the silver stream alternative. The final contract for the alternative is being discussed and pending the final resolution to this alternative, the Company continues to classify the fair value calculated at the acquisition of this alternative, as a deferred credit as disclosed in Note 15.

Huaron and Morococha mines

In June 2004, Peru’s Congress approved a bill that allows royalties to be charged on mining projects. These royalties are payable on Peruvian mine production at the following progressive rates: (i) 1.0% for companies with sales up to $60 million; (ii) 2.0% for companies with sales between $60 million and $120 million; and (iii) 3.0% for companies with sales greater than $120 million. This royalty is a net smelter returns royalty, the cost of which is deductible for income tax purposes.

Manantial Espejo mine

Production from the Manantial Espejo property is subject to royalties to be paid to Barrick Gold Corp. according to the following: (i) $0.60 per metric tonne of ore mined from the property and fed to process at a mill or leaching facility to a maximum of 1 million tonnes; and (ii) one-half of one percent (0.5%) of net smelter returns derived from the production of minerals from the property. In addition, the Company has negotiated a royalty equal to 3.0% of operating cash flow payable to the Province of Santa Cruz.

San Vicente mine

Pursuant to an option agreement entered into with COMIBOL, a Bolivian state mining company, with respect to the development of the San Vicente property, the Company is obligated to pay COMIBOL a participation fee of 37.5% (the “Participation Fee”) of the operation’s cash flow. Once full commercial production of San Vicente began, the Participation Fee was reduced by 75% until the Company recovered its investment in the property. The Participation Fee has now reverted back to the original percentage. For the three months ended March 31, 2016, the royalties to COMIBOL amounted to approximately $3.3 million (2015 - $2.5 million).

A royalty is also payable to EMUSA, a former partner of the Company on the project. The royalty is a 2% net smelter return royalty (as per the Agreement) payable only after the Company has recovered its capital investment in the project and only when the average price of silver in a given financial quarter is $9.00 per ounce or greater. For the three months ended March 31, 2016 the royalties to EMUSA amounted to approximately $0.2 million (2015 - $0.2 million).

In December 2007, the Bolivian government introduced a new mining royalty that affects the San Vicente project. The royalty is applied to gross metal value of sales (before smelting and refining deductions) and the royalty percentage is a sliding scale depending on metal prices. At current metal prices, the royalty is 6% for silver metal value, 4% for zinc metal value, and 5% for copper metal value of sales. The royalty is income tax deductible. For the three months ended March 31, 2016 and 2015 the royalty amounted to $0.9 million and $0.9 million, respectively.

Dolores mine

Production from the Dolores mine is subject to underlying net smelter return royalties comprised of 2% on gold and silver production and 1.25% on gold production. These royalties are payable to Royal Gold Inc. and were effective in full as of May 1, 2009, on the commencement of commercial production at the Dolores mine. The royalties to Royal Gold amounted to approximately $1.1 million for the three months ended March 31, 2016 (2015 – $1.5 million).

Pan American Silver Corp.

Notes to the Condensed Interim Consolidated Financial Statements

As at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

(unaudited tabular amounts are in thousands of U.S. dollars except number of options, share units and warrants and per share amounts)

Navidad project

In late June 2012, the governor of the province of Chubut submitted to the provincial legislature a draft law which, if passed, would regulate all future oil and gas and mining activities in the province. The draft legislation incorporated the expected re-zoning of the province, allowing for the development of Navidad as an open pit mine. However, the draft legislation also introduced a series of new regulations that would have greatly increased provincial royalties and imposed the province’s direct participation in all mining projects, including Navidad.

In October 2012, the proposed bill was withdrawn for further study; however, as a result of uncertainty over the zoning, regulatory and tax laws which will ultimately apply, the Company has been forced to temporarily suspend project development activities at Navidad.

The Company remains committed to the development of Navidad and to contributing to the positive economic and social development of the province of Chubut upon the adoption of a favorable legislative framework.

24.

Related Party Transactions

A company indirectly owned by a trust of which a director of the Company is a beneficiary, was paid approximately $1.4 million in the first quarter of 2015 for consulting services. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the parties. This contract was terminated in March 2015.

25.

Subsequent Events

On April 18, 2016, the Company entered into an arrangement (“the Arrangement”) with MacMillan Minerals Inc. (“MacMillan”) and Maverix Metals Inc. (“Maverix”). MacMillan is a TSX-V listed company and Maverix is a private company whose Chairman is Pan American’s former CEO. Pursuant to the terms of the Arrangement once the necessary regulatory, shareholder, and court approvals have been obtained and the transaction closes, Maverix will be a wholly-owned subsidiary of MacMillan, MacMillan will be renamed “Maverix Metals Inc.” (“New Maverix”) and New Maverix will be a publically listed royalty and streaming company that will trade as MMX on the TSX Venture Exchange.

Under the terms of the Arrangement, Pan American will sell thirteen royalties and precious metal streams on certain of the Company’s mineral property assets to New Maverix and will receive approximately 54% of the issued and outstanding common shares of New Maverix (approximately 63% fully diluted), together with 20 million common share purchase warrants, exercisable for five years after closing of the arrangement. Pan American’s former CEO will be appointed as the Chairman of New Maverix, and Pan American representatives will make up two of five members of New Maverix’s Board of Directors.

The Company is currently evaluating the accounting treatment of this transaction.

On May 6, 2016 the Company completed the sale of 75% of the shares in its wholly-owned subsidiary Compania Minera Shalipayco S.A.C. (“Shalipayco”) to Votorantim Metais – Cajamarquilla S.A. (“Votorantim”) for $15.0 million in cash and a 1% net smelter returns royalty. Votorantim will also provide the Company with a free carry of its remaining 25% ownership interest to commercial production. Shalipayco owns the Shalipayco zinc development project consisting of forty-nine mining concessions covering an area of 21,000 hectares located in the Pasco and Junin departments of Peru (the “Shalipayco Asset”). As of March 31, 2016 the Shalipayco Asset had a balance sheet carrying value of nil.