Financial & Operating Highlights
Three Months ended Nine Months ended
September 30 September 30
2003 2002 2003 2002
Consolidated Financial Highlights (in thousands of US dollars)
Net income (loss) $ (390) $ (17,387) $ (1,936) $ (19,937)
Earnings (loss) per
share (0.01) (0.40) (0.04) (0.48)
Net income (loss)
before unusual items $ (390) $ (2,258) $ (1,936) $ (4,808)
Earnings (loss) per
share before unusual
items (0.01) (0.05) (0.04) (0.12)
Contribution from
mining operations 1,690 (252) 3,303 1,553
Capital spending 3,513 3,224 10,015 6,166
Exploration expense 600 234 1,588 577
Cash 92,839 17,964 92,839 17,964
Working capital $ 87,054 $ 13,700 $ 87,054 $ 13,700
Consolidated Ore Milled & Metals Recovered to Concentrate
Tonnes milled 302,847 287,831 918,730 876,383
Silver metal - ounces 2,187,508 1,750,467 6,518,167 5,755,367
Zinc metal - tonnes 7,578 9,947 24,759 29,526
Lead metal - tonnes 4,332 4,993 14,836 15,576
Copper metal - tonnes 841 723 2,625 2,105
Net smelter return
per tonne milled $ 42.52 $ 37.35 $ 39.84 $ 40.27
Cost per tonne 37.59 38.21 38.00 39.64
-------------------------------------------------------------------------
Margin (loss) per
tonne $ 4.93 $ (0.86) $ 1.84 $ 0.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Cost per Ounce of Silver (net of by-product credits)
Total cash cost per
ounce $ 3.93 $ 4.53 $ 4.16 $ 4.23
Total production cost
per ounce $ 4.33 $ 5.45 $ 4.58 $ 5.08
In thousands of US dollars
Direct operating costs
& value of metals lost
in smelting and
refining 11,638 12,259 36,201 37,434
By-product credits (4,003) (4,583) (11,869) (13,298)
-------------------------------------------------------------------------
Cash operating costs 7,636 7,676 24,333 24,136
Depreciation,
amortization &
reclamation 771 1,565 2,457 4,821
-------------------------------------------------------------------------
Production costs 8,407 9,241 26,790 28,956
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces used in cost
per ounce
calculations 1,942,537 1,695,468 5,846,927 5,700,368
Average Metal Prices
Silver - London
Fixing $ 4.99 $ 4.67 $ 4.75 $ 4.63
Zinc - LME Cash
Settlement per pound $ 0.37 $ 0.35 $ 0.36 $ 0.35
Lead - LME Cash
Settlement per pound $ 0.23 $ 0.20 $ 0.22 $ 0.21
Copper - LME Cash
Settlement per pound $ 0.79 $ 0.69 $ 0.77 $ 0.71
Average Prices Realized
Silver - per ounce
(note) $ 4.71 $ 4.34 $ 4.46 $ 4.29
Zinc - per pound $ 0.37 $ 0.35 $ 0.36 $ 0.35
Lead - per pound $ 0.23 $ 0.20 $ 0.22 $ 0.21
Copper - per pound
(note) $ 0.71 $ 0.62 $ 0.68 $ 0.62
Note - Pan American pays a refining charge for silver and copper
Mine Operations Highlights
Three Months ended Nine Months ended
September 30 September 30
Huaron Mine 2003 2002 2003 2002
Tonnes milled 148,630 150,330 461,570 449,995
Average silver grade
- grams per tonne 246 257 256 264
Average zinc grade
- percent 3.75% 4.15% 3.83% 4.08%
Silver - ounces 1,047,616 1,101,005 3,398,329 3,393,069
Zinc - tonnes 4,598 5,285 14,881 15,440
Lead - tonnes 3,247 3,338 11,277 10,275
Copper - tonnes 362 471 1,050 1,334
Net smelter return
per tonne $ 46.42 $ 43.21 $ 44.97 $ 44.41
Cost per tonne 41.70 39.59 41.11 38.14
-------------------------------------------------------------------------
Margin (loss) per
tonne $ 4.72 $ 3.62 $ 3.86 $ 6.27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per
ounce $ 3.94 $ 4.17 $ 3.98 $ 3.65
Total production
cost per ounce $ 4.42 $ 4.63 $ 4.51 $ 4.10
In thousands of US dollars
Direct operating
costs & value of
metals lost in
smelting and
refining $ 6,688 $ 6,730 $ 20,648 $ 19,065
By-product credits (2,560) (2,143) (7,118) (6,675)
-------------------------------------------------------------------------
Cash operating costs 4,128 4,586 13,530 12,390
Depreciation,
amortization and
reclamation 505 511 1,792 1,530
-------------------------------------------------------------------------
Production costs $ 4,633 $ 5,097 $ 15,322 $ 13,920
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per
ounce calculations 1,047,616 1,101,005 3,398,329 3,393,069
Quiruvilca Mine
Tonnes milled 106,930 131,200 352,199 389,254
Average silver grade
- grams per tonne 212 164 191 178
Average zinc grade
- percent 3.17% 3.97% 3.17% 3.99%
Silver - ounces 641,747 594,463 1,875,775 1,933,526
Zinc - tonnes 2,845 4,622 9,525 13,854
Lead - tonnes 980 1,620 3,266 5,070
Copper - tonnes 479 252 1,575 771
Net smelter return
per tonne $ 38.42 $ 32.42 $ 34.02 $ 34.90
Cost per tonne 38.87 38.46 38.92 39.53
-------------------------------------------------------------------------
Margin (loss) per
tonne $ (0.45) $ (6.04) $ (4.90) $ (4.63)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost per
ounce $ 4.61 $ 5.20 $ 5.12 $ 5.04
Total production
cost per ounce $ 4.77 $ 6.97 $ 5.27 $ 6.62
In thousands of US dollars
Direct operating
costs & value of
metals lost in
smelting and
refining $ 4,402 $ 5,529 $ 14,350 $ 16,368
By-product credits (1,443) (2,440) (4,751) (6,615)
-------------------------------------------------------------------------
Cash operating costs 2,959 3,089 9,599 9,752
Capital spending
expensed and
reclamation 104 1,054 288 3,049
-------------------------------------------------------------------------
Production costs $ 3,063 $ 4,143 $ 9,887 $ 12,801
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per
ounce calculations 641,747 594,463 1,875,775 1,933,526
La Colorada Mine
Tonnes milled 27,090 6,301 57,920 37,134
Average silver grade
- grams per tonne 430 336 467 414
Silver - ounces 244,971 54,999 671,240 428,772
Zinc - tonnes 135 40 353 232
Lead - tonnes 105 35 293 231
Net smelter return
per tonne $ - $ - $ - $ 46.36
Cost per tonne - - - 58.96
-------------------------------------------------------------------------
Margin (loss)
per tonne $ - $ - $ - $ (12.60)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost
per ounce $ - $ - $ - $ 5.33
Total production
cost per ounce $ - $ - $ - $ 5.98
In thousands of
US dollars
Direct operating
costs & value
of metals lost in
smelting and
refining $ - $ - $ - $ 2,001
By-product credits - - - (8)
-------------------------------------------------------------------------
Cash operating costs - - - 1,993
Depreciation,
amortization and
reclamation - - - 243
-------------------------------------------------------------------------
Production costs $ - $ - $ - $ 2,236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per
ounce calculations - - - 373,773
Pyrite Stockpile Sales
Tonnes sold 20,197 - 47,041 -
Average silver grade
- grams per tonne 391 - 379 -
Silver ounces 253,174 - 572,823 -
Net smelter return
per tonne $ 35.55 $ - $ 33.08 $ -
Cost per tonne 0.56 - 0.60 -
-------------------------------------------------------------------------
Margin (loss)
per tonne $ 34.99 $ - $ 32.48 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total cash cost
per ounce $ 2.17 $ - $ 2.10 $ -
Total production
cost per ounce $ 2.81 $ - $ 2.76 $ -
In thousands of
US dollars
Value of metals
lost in smelting
and refining $ 549 $ - $ 1,203 $ -
By-product credits - - - -
-------------------------------------------------------------------------
Cash operating costs 549 - 1,203 -
Depreciation,
amortization and
reclamation 162 - 377 -
-------------------------------------------------------------------------
Production costs $ 711 $ - $ 1,580 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Ounces for cost per
ounce calculations 253,174 - 572,823 -
PAN AMERICAN SILVER CORP.
Consolidated Balance Sheets
(Unaudited - in thousands of U.S. dollars)
September 30 December 31
2003 2002
ASSETS
Current
Cash and cash equivalents $ 92,839 $ 10,185
Short-term investments 13 13
Accounts receivable 5,599 4,598
Inventories 6,736 4,637
Prepaid expenses 1,924 3,197
-------------------------------------------------------------------------
Total Current Assets 107,111 22,630
Mineral property, plant and equipment, net 72,275 59,447
Investment and other properties - note 3 83,337 4,193
Direct smelting ore 4,012 4,303
Other assets 3,975 4,393
-------------------------------------------------------------------------
Total Assets $ 270,710 $ 94,966
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Operating line of credit $ - $ 125
Accounts payable and accrued
liabilities - note 4 11,303 15,227
Advances for metal shipments 4,763 2,158
Current portion of bank loans - note 5 1,620 1,625
Current portion of capital lease 75 13
Current portion of convertible
debenture liability - note 6 1,213 -
Current portion of severance indemnity
and commitments 953 953
Current portion of deferred revenue 130 130
-------------------------------------------------------------------------
Total Current Liabilities 20,057 20,231
Deferred revenue 880 923
Bank loans - note 5 10,307 3,521
Capital lease 209 421
Liability component of convertible
debenture - note 6 21,634 -
Provision for reclamation 13,184 12,971
Provision for future income tax - note 3 19,035 -
Severance indemnities and other liabilities 1,781 1,407
-------------------------------------------------------------------------
Total Liabilities 87,087 39,474
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital - note 7
Authorized:
100,000,000 common shares of no par value
Issued:
December 31, 2002 - 43,883,454
common shares
September 30, 2003 - 52,609,853
common shares 220,865 161,024
Convertible debentures - note 6 64,176 -
Additional paid in capital 11,117 1,092
Deficit (112,535) (106,624)
-------------------------------------------------------------------------
Total Shareholders' Equity 183,623 55,492
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 270,710 $ 94,966
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
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
2003 2002 2003 2002
-------------------------------------------------------------------------
Revenue $ 11,890 $ 11,195 $ 32,265 $ 33,009
Expenses
Operating 10,200 11,447 28,962 31,456
General and
administration 565 379 1,548 1,236
Depreciation and
amortization 432 1,316 1,365 4,180
Reclamation 75 226 231 645
Exploration 600 234 1,588 577
Interest and
financing costs 678 250 1,015 765
Write down of
mineral properties - 15,129 - 15,129
-------------------------------------------------------------------------
12,550 28,981 34,709 53,988
-------------------------------------------------------------------------
Net loss from
operations (660) (17,786) (2,444) (20,979)
Other income
and expenses 270 399 508 802
-------------------------------------------------------------------------
Net loss before
income tax (390) (17,387) (1,936) (20,177)
Future income
tax recovery - - - 240
-------------------------------------------------------------------------
Net loss for
the period $ (390) $ (17,387) $ (1,936) $ (19,937)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic & fully
diluted loss
per share $ (0.01) $ (0.40) $ (0.04) $ (0.48)
Weighted average
shares outstanding 52,307,032 43,193,324 51,030,066 41,751,774
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statements of Cash Flows - Direct Method
(Unaudited - in thousands of U.S. dollars)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
-------------------------------------------------------------------------
Operating activities
Sales proceeds $ 11,680 $ 9,983 $ 33,407 $ 33,386
Hedging activities 52 253 360 723
Interest paid (290) (250) (627) (765)
Other income and
expenses 104 126 343 769
Products and
services purchased (11,035) (8,437) (32,691) (31,385)
Exploration (456) (192) (1,546) (557)
General and
administration (557) (317) (1,971) (1,086)
-------------------------------------------------------------------------
(502) 1,166 (2,725) 1,085
-------------------------------------------------------------------------
Financing activities
Shares issued
for cash 2,940 90 5,638 22,708
Shares issue costs - - - (956)
Convertible
debentures - note 6 86,250 - 86,250 -
Debt issue costs (2,993) - (3,000) -
Repayment of line
of credit - (490) (125) (670)
Capital lease
(payments) (75) - (150) 233
Proceeds from
bank loans - - 8,000 -
Repayment of
bank loans (406) (603) (1,219) (1,601)
-------------------------------------------------------------------------
85,716 (1,003) 95,394 19,714
-------------------------------------------------------------------------
Investing activities
Mineral property,
plant and equipment
expenditures (3,006) (3,185) (11,644) (5,286)
Investment and
other property
expenditures (492) - (869) (762)
Acquisition of cash
of subsidiary - - 2,393 -
Proceeds from sale
of marketable
securities 165 - 165 -
Other (180) (39) (60) (118)
-------------------------------------------------------------------------
(3,513) (3,224) (10,015) (6,166)
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents for
the period 81,701 (3,061) 82,654 14,633
Cash and cash
equivalents,
beginning of period 11,138 21,025 10,185 3,331
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 92,839 $ 17,964 $ 92,839 $ 17,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
disclosure of
non-cash transactions
Shares issued for
acquisition of
mineral property $ - $ - $ - $ 1,250
Shares issued for
royalty purchase - - - 3,000
Shares issued for
compensation expense - - - 254
Shares, warrants and
stock options issued
for acquisition of
subsidiary - - 64,228 -
-------------------------------------------------------------------------
$ - $ - $ 64,228 $ 4,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
PAN AMERICAN SILVER CORP.
Consolidated Statements of Cash Flows - Indirect Method
For the nine months ended September 30, 2003 and 2002
(Unaudited - in thousands of U.S. dollars)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
-------------------------------------------------------------------------
Operating activities
Net loss for
the period $ (390) $ (17,387) $ (1,936) $ (19,937)
Items not
involving cash
Depreciation and
amortization 432 1,316 1,365 4,180
Reclamation
provision 75 226 231 645
Operating cost
provisions 350 314 849 131
Gain on sale of
marketable
securities (165) - (165) -
Future income tax - - - (240)
Write down of
mineral properties - 15,129 - 15,129
Changes in non-cash
operating working
capital items (804) 1,568 (3,069) 1,177
-------------------------------------------------------------------------
(502) 1,166 (2,725) 1,085
-------------------------------------------------------------------------
Financing activities
Shares issued for
cash 2,940 90 5,638 22,646
Share issue costs - - - (894)
Convertible
debentures - note 6 86,250 - 86,250 -
Debt issue costs (2,993) - (3,000) -
Capital leases
(payments) (75) - (150) 233
Repayment of line
of credit - (490) (125) (670)
Proceeds from
bank loans - - 8,000 -
Repayment of
bank loans (406) (603) (1,219) (1,601)
-------------------------------------------------------------------------
85,716 (1,003) 95,394 19,714
-------------------------------------------------------------------------
Investing activities
Mineral property,
plant and equipment
expenditures (3,006) (3,185) (11,644) (5,286)
Investment and other
property
expenditures (492) - (869) (762)
Acquisition of cash
of subsidiary - - 2,393 -
Proceeds from sale
of marketable
securities 165 - 165 -
Other (180) (39) (60) (118)
-------------------------------------------------------------------------
(3,513) (3,224) (10,015) (6,166)
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents for
the period 81,701 (3,061) 82,654 14,633
Cash and cash
equivalents,
beginning of period 11,138 21,025 10,185 3,331
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 92,839 $ 17,964 $ 92,839 $ 17,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
disclosure of
non-cash transactions
Shares issued for
acquisition of
mineral property $ - $ - $ - $ 1,250
Shares issued for
royalty purchase - - - 3,000
Shares issued for
compensation expense - - - 254
Shares, warrants and
stock options issued
for acquisition of
subsidiary - - 64,228 -
-------------------------------------------------------------------------
$ - $ - $ 64,228 $ 4,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Pan American Silver Corp.
Consolidated Statements of Shareholders' Equity
For the nine months ended September 30, 2003
(in thousands of US dollars, except for shares)
Common Shares Additional
------------------- Convertible Paid In
Shares Amount Debentures Capital Deficit Total
-------------------------------------------------------------------------
Balance,
December
31, 2001 37,628,234 $130,723 $ - $ 1,120 $(72,966) $ 58,877
Exercise
of stock
options 1,445,400 6,102 - - - 6,102
Shares
issued for
cash, net
of share
issue
costs 3,450,000 15,599 - - - 15,599
Issued on
acquisi-
tion of
Manantial
Espejo 231,511 1,250 - - - 1,250
Issued on
acquisi-
tion of
royalty 390,117 3,000 - - - 3,000
Issued as
compen-
sation
payable 69,000 253 - - - 253
Issued to
purchase
silver
pyrite
stockpiles 636,942 4,000 - - - 4,000
Exercise
of share
purchase
warrants 32,250 97 - - - 97
Foreign
exchange
translation
adjustment - - - (28) - (28)
Net loss
for the
year - - - - (33,658) (33,658)
-------------------------------------------------------------------------
Balance,
December
31, 2002 43,883,454 161,024 - 1,092 (106,624) 55,492
Exercise
of stock
options 989,202 5,133 - - - 5,133
Shares
issued for
acquisi-
tion of
subsidiary
- note 3 7,636,659 54,203 - - - 54,203
Convertible
debentures
- note 6 - - 63,201 - - 63,201
Convertible
debentures
issue
costs -
note 6 - - - - (3,000) (3,000)
Fair value
of stock
options
granted -
note 3 - - - 1,136 - 1,136
Fair value
of warrants
granted -
note 3 - - - 8,889 - 8,889
Exercise of
share
purchase
warrants 100,538 505 - - - 505
Net loss for
the period - - - - (1,936) (1,936)
Accretion to
convertible
debentures
- note 6 - - 975 - (975) -
-------------------------------------------------------------------------
Balance,
September
30, 2003 52,609,853 $220,865 $ 64,176 $ 11,117 $(112,535) $183,623
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Unaudited Interim Consolidated Financial Statements
(As at September 30, 2003 and 2002 and for the three and nine month
periods then ended)
(Tabular amounts are in thousands of US dollars, except for shares, price
per share and per share amounts)
1. Basis of and Responsibility for Presentation
These unaudited interim consolidated financial statements are
expressed in United States dollars and are prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP") that
are more fully described in the annual audited consolidated financial
statements for the year ended December 31, 2002 which are included in the
Company's 2002 Annual Report. These statements do not include all of the
disclosures required by Canadian GAAP for annual financial statements.
Certain comparative figures have been reclassified to conform to the
current presentation. Significant differences from United States
accounting principles are described in note 8.
In management's opinion all adjustments necessary for fair
presentation have been included in these financial statements.
2. Segmented Information
The Company operates in one industry, has three reporting segments
and has activities in six countries. Segmented disclosures and enterprise-
wide information are as follows:
For the three months ended September 30, 2003
----------------------------------------------
Corporate Exploration &
Mining Office Development Total
---------------------------------------------------------------------
Revenue from
external customers $ 11,838 $ 52 $ - $ 11,890
Net income (loss) 655 (806) (239) (390)
Segmented assets $ 92,611 $ 91,696 $ 86,403 $ 270,710
For the three months ended September 30, 2002
----------------------------------------------
Corporate Exploration &
Mining Office Development Total
---------------------------------------------------------------------
Revenue from
external customers $ 10,942 $ 253 $ - $ 11,195
Net loss (17,167) (49) (171) (17,387)
Segmented assets $ 73,431 $ 18,616 $ 3,759 $ 95,806
For the nine months ended September 30, 2003
----------------------------------------------
Corporate Exploration &
Mining Office Development Total
---------------------------------------------------------------------
Revenue from
external customers $ 31,905 $ 360 $ - $ 32,265
Net income (loss) 333 (1,421) (848) (1,936)
Segmented assets $ 92,611 $ 91,696 $ 86,403 $ 270,710
For the nine months ended September 30, 2002
----------------------------------------------
Corporate Exploration &
Mining Office Development Total
---------------------------------------------------------------------
Revenue from
external customers $ 32,286 $ 723 $ - $ 33,009
Net loss (19,269) (331) (337) (19,937)
Segmented assets $ 73,431 $ 18,616 $ 3,759 $ 95,806
3. Business Combination
On February 20, 2003, the Company acquired a 100% interest in Corner
Bay Silver Inc. ("Corner Bay"). The consideration paid to the
shareholders of Corner Bay was 7,636,659 common shares of the Company (a
"Pan American share"), representing 0.3846 of a share of the Company for
each share of Corner Bay and 3,818,329 warrants (the "Pan American
warrant") to purchase common shares of the Company, representing 0.1923
of a warrant for each share of Corner Bay. The common shares issued were
valued at $54,203,000, which was derived from an issue price of Cdn$11.30
translated at $0.6595 for each U.S. dollar, less a deemed 5% issue
expense of $2,707,000. The share purchase warrants were assigned a value
of $8,889,000, which was derived from a warrant valued at $2.328 per
warrant. The warrants were valued using an option pricing model assuming
a weighted average volatility of the Company's share price of 35 percent
and a weighted average annual risk free rate of 4.16 percent.
The value of the common shares issued by the Company was estimated
based on the average closing price of the Company's common shares for the
period before and after the date that the terms of the transaction were
agreed and announced.
Each whole Pan American warrant allows the holder to purchase a Pan
American share for a price of Cdn$12.00 for a five-year period ending
February 20, 2008.
In addition, the Company agreed to grant 553,846 stock options to
purchase Pan American shares. These options replace 960,000 fully vested
stock options held by employees and shareholders of Corner Bay. The value
of the stock options granted was determined to be $1,136,000. The options
granted have a weighted average exercise price of Cdn$8.46 and a weighted
average remaining life of 26 months.
The purchase method of accounting was applied to account for this
acquisition, which results in the allocation of the consideration paid to
the fair value of the assets acquired and the liabilities assumed as
follows:
As at
February 20,
2003
--------------
Fair value of net assets acquired (000's)
Current assets $ 2,512
Equipment 2,500
Mineral properties 79,008
Other assets 29
--------------
84,049
Less:
Current liabilities 104
Provision for future income tax liability 19,035
--------------
$ 64,910
--------------
--------------
Consideration paid:
Issue of 7,636,659 common shares $ 54,203
Issue of 3,818,329 share purchase warrants 8,889
Issue of 553,846 replacement stock options 1,136
--------------
64,228
Add: Estimated costs of acquisition 682
--------------
$ 64,910
--------------
--------------
The purchase consideration of $64,910,000 for 100% of Corner Bay
exceeded the carrying value of the net assets acquired by $54,108,000,
which was applied to increase the carrying value of the mineral property.
This excess amount did not increase the carrying value of the underlying
assets for tax purposes resulting in a temporary difference between the
accounting and tax carrying values. The resulting estimated future income
tax liability associated with this temporary difference of $19,035,000
was also applied to increase the carrying value of the mineral property.
4. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of:
September 30 December 31
2003 2002
---------------------------------------------------------------------
Trade payables $ 8,805 $ 13,528
Payroll and related benefits 926 1,242
Sales tax 733 237
Royalty 74 111
Accrued interest and other 765 109
--------------------------
$ 11,303 $ 15,227
--------------------------
--------------------------
5. Bank loans
During the nine months ending September 30, 2003, the Company reduced
its Huaron loan by $1,219,000 to $3,927,000 of which $1,620,000 is
current. This loan bears interest at 6-month LIBOR plus 3% and is
repayable at the rate of $135,000 per month until February 2006. Certain
assets of the Company's subsidiary, Compania Minera Huaron S.A., have
been pledged as security for the loan.
As at September 30, 2003, the Company had borrowed $8,000,000 of its
$10,000,000 La Colorada project loan facility with International Finance
Corporation ("IFC Loan") (note 9d). The IFC Loan bears interest at 6-
month LIBOR plus 3.50% until certain technical and financial tests are
achieved and 6-month LIBOR plus 3.25% thereafter and is repayable in semi-
annual installments of $1,000,000, commencing November 14, 2004. For the
nine months ended September 30, 2003, the Company incurred $227,000 of
interest, which has been deferred as part of the La Colorada development
costs. The Company's interest in its wholly-owned subsidiary, Plata
Panamericana S.A. de C.V. ("Plata") and substantially all of the assets
of Plata have been pledged as security for the IFC Loan.
6. Convertible Debenture
During the third quarter ending September 30, 2003, the Company
completed an offering of $86,250,000 convertible, unsecured senior
subordinated debentures (the "Debentures"), which are due on July 31,
2009. These Debentures bear interest at a rate of 5.25% per annum,
payable semi-annually on January 31 and July 31 of each year, beginning
on January 31, 2004. The Company has the option to discharge interest
payments from the proceeds of the sale of common shares issued to a
trustee for the purpose of converting such shares into cash.
The Debentures are convertible, at the option of the holder, at any
time prior to maturity or redemption into common shares of the Company at
a price of $9.57 per common share (the "Conversion Price"). The Company
may not redeem the Debentures prior to July 31, 2006. After July 31,
2006, the Company may redeem the Debentures provided that the Company's
common shares trade at 125% or more of the Conversion Price. Since
redemption can be made either by cash or by common shares at the option
of the Company, the Debentures are classified as a compound financial
instrument for accounting purposes.
The value of the Debentures is comprised of a $35,357,000 fair value
of the Debentures, $23,049,000 fair value of the future interest payments
and $27,844,000 fair value ascribed to the holder's option to convert the
principal balance into common shares. These components have been measured
at their respective fair values on the date the Debentures were issued.
The $23,049,000 fair value of the future interest payments is classified
as a liability and the $63,201,000 fair value of the Debentures and the
conversion option have been classified in shareholders' equity as
"Convertible Debentures". Over the six-year term of the Debentures, the
carrying value of the Debentures is accreted to their face value and the
fair value of the future interest payments is amortized. The periodic
accretion is charged to deficit. For the three months ended September 30,
2003, the Company recorded accretion totaling $975,000 for the accretion
of conversion option amounting to $773,000 and interest amortization of
$202,000. As at September 30, 2003, the Company had accrued $765,000 of
interest of which $563,000 is reflected in interest and financing costs
and $202,000 is reflected as a reduction in the liability component of
convertible debenture.
The Company incurred $3.0 million of debt issue expenses, which were
charged to deficit.
7. Share capital
During the nine-month period ended September 30, 2003 the Company:
1) issued 989,202 Common Shares for proceeds of $5,133,000 pursuant
to the exercise of stock options;
2) issued 100,538 Common Shares for proceeds of $505,000 pursuant to
the exercise of share purchase warrants; and
3) issued 7,636,659 common shares valued at $54,203,000, 3,818,330
warrants valued at $8,889,000 and 553,846 replacement stock
options valued at $1,136,000 for the purchase of Corner Bay Silver
Inc. Each warrant allows the holder to purchase one Common Share
of the Company for a price of Cdn$12.00 up to and including
February 20, 2008. The replacement stock options have exercise
prices of between Cdn$4.55 and Cdn$12.00 and exercise periods of
between one and five years from the date of grant.
The following table summarizes information concerning stock options
outstanding as at September 30, 2003:
Options Outstanding Options Exercisable
-----------------------------------------------------
Number Weighted Number
Outstanding Average Exercisable Weighted
Range of as at Remaining as at Average
Exercise Year of September Contractual September Exercise
Prices Expiry 30, 2003 Life (months) 30, 2003 Price
-------------------------------------------------------------------------
$3.37 - $6.85 2004 138,498 9.00 138,498 $5.88
$6.85 - $8.89 2005 214,416 18.71 214,416 $8.37
$3.70 2006 250,000 31.50 250,000 $3.70
$6.30 - $7.48 2007 703,860 47.86 627,860 $7.42
$6.59 - $8.89 2008 699,231 56.32 219,231 $7.16
$3.70 2010 295,000 73.48 295,000 $3.70
-------------------------------------------------------------------------
2,301,005 20.35 1,745,005 $6.22
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2003 there were warrants outstanding to allow the
holder to purchase 3,817,791 Common Shares of the Company for Cdn$12.00
per share. These warrants expire on February 20, 2008. There were also
warrants outstanding to allow the holder to purchase 537,110 Common
shares of the Company for Cdn$3.47 per share. These warrants expire on
November 4, 2004.
The Company accounts for stock options granted to employees and
directors under the intrinsic value method. Stock options granted to non-
employees under the Company's Stock Option Plans are accounted for under
the fair value method. The following pro forma financial information
presents the net loss and the basic loss per common share for the three-
month and nine- month periods ended September 30, 2003 had the Company
adopted the fair value method of accounting for stock options as set out
in CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-
Based Payments.
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Net loss for the period $ (390) $ (17,387) $ (1,936) $ (19,937)
Stock-based compensation
costs (259) - (355) (128)
-------------------------------------------------------------------------
Pro forma net loss $ (649) $ (17,387) $ (2,291) $ (20,065)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma basic loss
per share $ (0.01) $ (0.40) $ (0.04) $ (0.48)
For purposes of this presentation the fair value of the stock options
granted was calculated using an option-pricing model based on the
following assumptions - no dividends were paid, a weighted average
volatility of the Company's share price of 74%, weighted average annual
risk free rate of 4.03% and an expected life of options granted of 5
years. The model resulted in a weighted average option price of $6.02 per
share.
8. Differences between Canadian and United States Generally Accepted
Accounting Principles
The differences between Canadian GAAP and accounting principles
generally accepted in the United States ("US GAAP") as they relate to
these interim financial statements are summarized below and more fully
discussed in Note 16 of the Company's annual audited consolidated
financial statements included in the Company's 2002 Annual Report.
In June 2001, FASB Statement No. 141 ("SFAS 141"), "Business
Combinations", was issued. SFAS 141 addresses financial accounting and
reporting for business combinations and supercedes APB Opinion No. 16,
Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. Under SFAS 141,
supplemental pro-forma information that discloses the results of
operations for the current period and the current year-to-date and for
comparative periods is required that discloses information as though the
business combination disclosed in Note 3 had been completed as of the
beginning of the period being reported on.
Combined results of operations for the periods prior to acquisition are
outlined below.
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Revenue $ 11,890 $ 11,195 $ 32,265 $ 33,009
Net loss for the period (390) (17,743) (2,221) (21,107)
Loss per share $ (0.01) $ (0.41) $ (0.04) $ (0.51)
FASB Statement No. 143, "Accounting for Asset Retirement Obligations
("SFAS 143"), addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or the normal
operation of long-lived assets, except for certain obligations of leases.
SFAS 143 is effective for financial statements issued for financial years
beginning after June 15, 2002. Under SFAS 143, the Company's provision
for reclamation of $13,184,000 would be removed from the accounts with a
credit to earnings. The expected fair value of future site restoration
costs for the La Colorada, Huaron and Quiruvilca mines is estimated at
$19,600,000 and would be recorded as part of the carrying value of the
asset and as a corresponding liability. Due to the impairment in the
carrying value of the Quiruvilca mine, the Company would recognize a
$12,500,000 charge to earnings. The current period's reclamation
provision of $231,000 would be reversed and future period operations
would be charged with annual amortization of future site restoration cost
of $710,000 and the accretion of a liability for future site restoration
costs of $418,000.
In April 2003, FASB Statement No. 149 ("SFAS 149") "Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities" was issued.
SFAS 149 is effective for contracts entered into or modified after June
30, 2003, except for certain provisions that relate to SFAS No. 133
"Implementation Issues" that had been effective prior to June 15, 2003.
This Statement amends and clarifies accounting for derivative financial
instruments and for hedging activities. In particular it clarifies the
circumstances under which a contract with an initial net investment meets
the characteristics of a derivative as contemplated in SFAS No. 133 and
it clarifies when a derivative contains a financing component. In
addition, this Statement amends the definition of an underlying to make
it conform to FASB Interpretation No. 45, "Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and also amends certain other existing accounting
pronouncements. The application of SFAS 149 did not have a material
effect on the Company's results of operations or its financial position.
In May 2003, FASB Statement No. 150 ("SFAS 150"), "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity" was issued. This Statement requires that three types of
financial instruments be reported as liabilities by their issuers. Those
types of instruments include: mandatorily redeemable instruments; forward
purchase contracts, written put options and other financial instruments
not in the form of shares that either obligate the issuer to repurchase
its equity shares and settle its obligation for cash or by transferring
other assets; and certain financial instruments that include an
obligation that may be settled in a variable number of equity shares, has
a fixed or benchmark tied value at inception that varies inversely with
the fair value of the equity shares. SFAS 150 is effective for
instruments entered into or modified after May 31, 2003. In accordance
with SFAS 150 the resulting change to the financial statements would be
to increase liabilities by $63,201,000 and decrease shareholders' equity
by a corresponding amount. Debt issue expenses of $3,000,000 would be
reclassified from shareholders' equity to assets and would be amortized
over three years at an annual rate of $1,000,000. Interest expense would
be higher by $202,000.
The following tables illustrate how SFAS 143 and 150, if applied, would
change the balance sheets and statements of operations of the Company.
September 30, 2003
---------------------------------------
Total Total Shareholders'
Assets Liabilities Equity
-------------------------------------------------------------------------
Reported under Canadian GAAP $ 270,710 $ 87,087 $ 183,623
SFAS 143 adjustments
Expected future site
restoration costs 19,600 19,600 -
Impairment of mining assets (12,500) - (12,500)
Reverse provision for
reclamation - (13,184) 13,184
Amortization of future site
restoration costs (533) - (533)
Accretion of future site
restoration costs - 313 (313)
SFAS 150 adjustments
Reclassify convertible
debentures - 63,201 (63,201)
Deferred debt issue costs 3,000 - 3,000
Amortization of debt issue costs (167) - (167)
-------------------------------------------------------------------------
Reported under US GAAP $ 280,110 $ 157,017 $ 123,093
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2002
---------------------------------------
Total Total Shareholders'
Assets Liabilities Equity
-------------------------------------------------------------------------
Reported under Canadian GAAP $ 94,966 $ 39,474 $ 55,492
SFAS 143 adjustments
Expected future site
restoration costs 19,600 19,600 -
Impairment of mining assets (12,500) - (12,500)
Reverse provision for
reclamation - (12,971) 12,971
-------------------------------------------------------------------------
Reported under US GAAP $ 102,066 $ 46,103 $ 55,963
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Net loss under Canadian
GAAP $ (390) $ (17,387) $ (1,936) $ (19,937)
SFAS 143 adjustments
Reclamation 75 - 231 -
Amortization of future
site restoration costs (178) - (533) -
Accretion for future site
restoration costs (105) - (313) -
-------------------------------------------------------------------------
Sub-total (598) (17,387) (2,551) (19,937)
SFAS 150 adjustments
Additional interest
expense (202) - (202) -
Amortization of debt
issue costs (167) - (167) -
-------------------------------------------------------------------------
Net loss before cumulative
effect of change in
accounting policy (967) (17,387) (2,920) (19,937)
Change in accounting policy - - 684 -
-------------------------------------------------------------------------
Net loss under US GAAP $ (967) $ (17,387) $ (2,236) $ (19,937)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Subsequent Events
Subsequent to September 30, 2003, the Company:
a. purchased the 3% Net Smelter Royalty over its Huaron silver mine
in Peru for $2,500,000;
b. sold its 50% interest in the Tres Cruces gold project in Peru to
New Oroperu Resources Inc. for 3,500,000 Oroperu common shares and
a 1.5 percent net smelter royalty. The Company has recorded this
exchange at fair value which approximates book value;
c. sold forward 2,800 tonnes of zinc at an average price of $901 per
tonne. These sales were designated as a hedge and represent sales
of 200 tonnes per month for each of the months of November 2003
through and including December 2004. The difference between the
average monthly London zinc cash settlement price and the forward
sales price will be credited or charged to revenue during November
2003 through December 2004 period;
d. borrowed an additional $1,500,000 from its $10,000,000 La Colorada
project loan facility with International Finance Corporation,
which brought the amount outstanding to $9,500,000; and
e. learned that on October 14, 2003, the Peruvian government
published Law 28090 "Mine Closure Law" which establishes
provisions related to mine closure plans. For existing mining
operations the law provides that a mine closure plan must be
submitted, for certification, to the Ministry of Energy and Mines
within six months of the law entering into force. No enabling
regulations were published with the law. Therefore, the possible
effects of this law on the Company's Peruvian mining and
exploration activities cannot be predicted.
The law provides that a mine operator must grant an environmental
warranty for the estimated costs associated with its mine closure
plan(s). The law does not establish when such warranties must be
in place nor does the law specify the form of the required
warranty. However, the law indicates that a warranty may take the
form of insurance, cash collateral, a trust agreement or other
forms as permitted by the Civil Code of Peru. The Company's Huaron
and Quiruvilca mines shall submit closure plans as required by the
law, but until these plans have been certified and the nature and
form of whatever environmental warranty is required have been
determined no estimate of the affect of this law on the Company's
financial condition or results of operations may be made.
Third Quarter 2003 Management's Discussion
Results of Operations (all financial amounts are expressed in US dollars)
For
the three-month period ended September 30, 2003 the Company's net loss was
$0.39 million ($0.01 per share) compared to a net loss of $17.39 million ($0.40
per share) for the three-month period ended September 30, 2002. The net loss
for the nine-month period ended September 30, 2003 was $1.94 million ($0.04 per
share) compared to $19.94 million ($0.48 per share) for the corresponding
period in 2002. The three and nine-month periods ended September 30, 2002
included a $15.13 million ($0.35 per share) write down of the Company's
investment in the Quiruvilca mine. Excluding the write down in 2002 the
comparable net losses for the three-month periods ending September 30, 2003 and
2002 were $0.39 million ($0.01 per share) and $2.26 million ($0.05 per share),
respectively. For the nine-month periods the comparable net losses were $1.94
million ($0.04 per share) for 2003 and $4.81 million ($0.12 per share) for 2002.
The
Company's improved net loss for the three and nine month periods of 2003
relative to the same periods in 2002 was partially due to depreciation,
amortization and reclamation expenses and improved mine operating results. For
the three-month period depreciation and reclamation was $1.04 million less than
in 2002 and for the nine-month period these expenses were $3.23 million lower
than for the same period of last year. Depreciation and amortization and
reclamation provisions are lower than in 2002 because of the write down and the
reclamation provision taken in the second half of 2002 against the Quiruvilca
mine. Mine operating results have improved as a result of low cost sales from
the pyrites stockpiles acquired in late 2002 and lower operating costs due to
closing the high cost North Zone of the Quiruvilca mine.
The
lower non-cash depreciation and amortization and reclamation expenses as well
as the improved operating performance were partially offset by higher
exploration, general and administration and interest expenses.
Interest
expense increased because of charges related to the convertible debenture
issued early in the third quarter of 2003. Exploration expense is higher
because of activities at the Company's Manantial Espejo property in Argentina
and general fieldwork in Mexico. General and administration expense is higher
because of the costs of managing the Company's growth.
Revenue
was $11.89 million for the third quarter of 2003 which was 6 percent greater
than revenue for the corresponding period of 2002. Revenue increased because of
higher metal prices. For the third quarter of 2003 relative to the same
three-month period of 2002 the Company's average realized prices were 9 per
cent higher for silver, 6 per cent higher for zinc and 15 per cent higher for
each of lead and copper. Metals produced during the third quarter of 2003
included 2,187,508 ounces of silver (2002 - 1,750,467 ounces), 7,578 tonnes of
zinc (2002- 9,947 tonnes), 4,332 tonnes of lead (2002 - 4,993 tonnes) and 841
tonnes of copper (2002 - 723 tonnes). The increased silver production was
primarily due to sales from pyrite stockpiles and improvements in the grade of
ore mined at Quiruvilca partially offset by lower production from Huaron due to
mining lower grade silver ores during the quarter. Lower zinc and lead
production is due to a reduction in the tonnage mined at the Quiruvilca mine.
The North Zone of Quiruvilca was closed during the quarter and mine output has
decreased.
Revenue
for the nine months ended September 30, 2003 was 2 per cent less than revenue
for the corresponding period of 2002. The decrease in revenue for the
nine-month period relative to last year was attributable to lower shipments,
principally lead concentrate, when compared to the prior year. Average metal
prices for the first three quarters of 2003 were slightly higher than in 2002.
For the nine months ended September 30, 2003 the Company's average realized
metals prices were: silver $4.46 per ounce (2002 - $4.29 per ounce); zinc $0.36
per pound (2002 - $0.35 per pound); lead $0.22 per pound (2002 - $0.21 per
pound); and copper $0.68 per pound (2001 - $0.62 per pound).
In
order to partially protect against declines in the zinc price and to take
advantage of instances of price strengthening the Company had, at September 30,
2003, forward zinc sales of 11,000 tonnes at an average price of $827 per tonne
or $0.38 per pound. In early October another 2,800 tonnes of zinc were sold
forward at $901 per tonne ($0.41 per pound) for a total outstanding forward
sales commitment of 13,800 tonnes, which will be settled during the period
October 2003 through December 2004. Of these sales 4,900 tonnes are to be
settled during 2003 at $833 per tonne ($0.38 per pound) and the balance in 2004
at $847 per tonne ($38 per pound). The Company has no other outstanding forward
sales, future contracts, options or derivative positions and is fully exposed
to changes in the price of silver, lead, copper, currency exchange rates and
interest rates.
The
Company's zinc forward sales will limit participation in higher zinc prices and
provide protection against lower prices for about 71 per cent of the Company's
expected production for the fourth quarter and 42 per cent of expected
production for 2004. Any improvement or deterioration in the prices of silver
or other base metals will be fully reflected in the sales of future periods.
Exploration
and Development Activities
Drilling
for the purpose of providing infill data for the resource model started at the
50 per cent owned Manantial Espejo project. The results of this drilling will
be incorporated into the feasibility study that commenced during the most
recent quarter. Expenditures at Manantial Espejo are expensed as incurred.
A
one million dollar diamond drilling program designed to upgrade resources to
reserves and to explore for vein extensions was initiated at the Huaron mine.
This program will run through January 2004 and forms part of an overall project
to further expand the mine's production. The costs of this project will be
capitalized. Also at Huaron the Company purchased, in October, the outstanding
3 per cent net smelter return royalty of the mine's production for cash
consideration of $2.5 million.
At
Alamo Dorado two drill programs were completed during the quarter. These
programs provided additional information necessary for a detailed mining plan.
The costs of these programs and ongoing metallurgical test work, permitting and
related direct costs at Alamo Dorado are being capitalized. For the nine months
ended September 30, 2003 expenditures of $869,000 were capitalized at the Alamo
Dorado property bringing the carrying value of this project to $79.56 million.
Other
exploration programs were conducted at properties in Mexico and Peru. The costs
of these programs were expensed.
Convertible
Debenture and Interest Expense
Under
the terms of the Company's $86.25 million of 5.25 per cent convertible
debentures (the "Debentures") the Company may satisfy the periodic
interest payments and the principal amount in Common shares. Consequently,
Canadian generally accepted accounting principles require that the Debentures
be recorded as part debt and part equity.
Upon
initial recognition of the Debentures an amount of $23.05 million representing
the present value of future interest payments was recorded as a liability and
$63.20 million representing the theoretical equity component of the Debentures
was recorded as a component of shareholders' equity. The equity component of
the debentures consisted of two elements - an amount of $27.84 million as the
fair value of the holders' conversion option and $35.36 million as the
principal equity component. Over the life of the Debentures the $35.36 million
principal equity component is to be accreted to $86.25 million - the face value
of the Debentures - by charges to accumulated deficit. The liability for future
interest payments is to be fully amortized to over the life of the debentures.
The initial fair value of the holders' conversion option is carried at its
initial value within shareholders' equity until settlement when it would be
charged against shareholders' equity.
In
addition, Canadian generally accepted accounting principles require that the
$3.0 million of costs associated with completing the offering of the Debenture
are to be recorded as a component of shareholders' equity as a charge to
deficit.
Normally
a financial statement reader would expect the interest cost associated with the
Debentures to be reflected in the statement of operations as interest expense.
Under the existing accounting rules the interest payment is accounted for in a
manner parallel to the initial recognition of the Debentures as part interest
expense and in part as a reduction to the liability component of the
Debentures. Similarly, a reader would expect that the debenture issue costs
would be amortized over the minimum life of the Debentures and be reflected as
a charge in the statement of operations. Since all of the issue costs were
charged to shareholders' equity no amortization of those costs is recorded.
There
are proposed amendments to Canadian accounting principles that would lead to
new accounting rules for financial instruments similar to the Debentures. The
change would require that the Debentures be accounted for as debt and not as a
partial debt and partial equity instrument under existing accounting standards.
The proposed amendments are likely to become effective for the first quarter of
2004 and, if adopted, are expected to be applied retroactively. In such an
event the Company's accounting for the Debentures and the associated issue
costs will change. Such a change would require restatement of the accounts.
Total
interest expense during the first nine months of 2003 amounted to $1.02
million. Interest expense for the Company's $86.25 million 5.25 per cent
convertible debenture amounted to $0.56 million during the third quarter and
the nine months ended September 30, 2003. Interest incurred on the Huaron
expansion loan was $0.18 million and interest on concentrate and supplier
advances accounted for the balance. During 2002 interest expense of $0.77
million consisted primarily of $0.18 million on the Huaron loan and charges
related to concentrate and supplier advances.
In
addition to the interest expense associated with the debentures $0.98 million
was accreted to the Debentures in the statement of shareholders' equity
consisting of $0.20 million related to amortization of the liability for future
interest payments and $0.77 million in respect of accretion of the principal
equity component of the Debentures.
For
the year-to-date $0.23 million of interest was deferred as part of the La
Colorada expansion.
Other
income to September 30, 2003 includes interest income of $0.18 million and a
$0.17 million gain on disposal of marketable securities.
Corporate
Office Costs
General
and administration costs of $0.57 million for the quarter ($1.55 million for
the nine months) were higher than they were in 2002 and will trend slightly
higher for the rest of 2003 because of the addition of senior technical staff.
Operating
Costs
Operating
costs for the third quarter ended September 30, 2003 are relatively lower than
the same period of last year due to the closure of the North Zone of the
Quiruvilca mine and production from the low cost pyrite ore stockpiles. For the
year-to-date differences between comparable periods reflect the impact of sales
from the pyrite stockpiles. The Company's gross margin (the difference between
revenue and operating costs divided by operating costs) improved to 11 per cent
for the nine months ended September 30, 2003 from 5 per cent for the comparable
period last year. This improvement is due in part to lower operating costs and
slightly higher metals prices.
Cash
Flow
Cash
consumed by operating activities was $0.50 million for the third quarter of
2003. For the corresponding period of 2002, cash provided by operations was
$1.17 million. The $1.67 million decrease in cash provided for operating
activities was due to changes in non-cash working capital items principally a
reduction in accounts payable and an increase in concentrates inventory.
For
the third quarter of 2003 debt repayments consumed $0.41 million ($1.22 million
for the nine months ended September 30, 2003). There were no borrowings under
the La Colorada loan during the quarter. For the year-to- September 30, 2003
proceeds from the La Colorada loan amounted to $8.0 million. During the third
quarter proceeds of $2.94 million were realized from the exercise of stock
options. Net proceeds from financing activities were $85.72 million, which
included the Debenture issue. For the first nine months of 2003 financing
activities generated $95.39 million. For the first three quarters of 2002 net
financing activities generated $19.71 million including $21.75 million from the
issue of shares offset by debt repayments of $2.27 million.
During
the third quarter of 2003 investing activities included plant and equipment
expenditures of $3.00 million. Expenditures were principally for the expansion
of La Colorada. The expansion project was substantially complete in July 2003
and commercial production levels were expected to be achieved by the end of the
third quarter of 2003. In addition to typical start-up and commissioning
processes, a severe flood event in September 2003 delayed achievement of
commercial production levels. It is expected that planned production levels
will be achieved by late 2003 or early 2004. Flood damage is being assessed.
The cost of and time required for repair and reconstruction and the amount and
extent of insurance coverage have not been determined. To the end of September
2003 investing activities, net of cash received upon the acquisition of Corner
Bay Silver Inc., totaled $10.02 million and included $11.64 million for plant
and equipment of which the majority was for La Colorada. For the corresponding
period of 2003 net investing activities amounted to $6.17 million most of which
was related to La Colorada.
Liquidity
and Capital Resources
Working
capital, including cash of $92.84 million, was $87.05 million at September 30,
2003. This is an increase of $84.66 million from December 31, 2002. The
increase is due to net proceeds from financing activities of $95.39 million of
which $10.02 million were invested in plant and equipment.
During
the quarter ended September 30, 2003 the Company received net proceeds of
$83.25 million from the issuance, to a syndicate of underwriters, of $86.25
million of 5.25% convertible unsecured senior subordinated debentures. The net
proceeds from the Debentures should be sufficient to fund the Company's
expansion plan for the Huaron mine, the likely mine construction at its Alamo
Dorado property in Mexico or potential acquisitions as well as provide liquidity
for the foreseeable future.
Subsequent
Events
During
October 2003 the following events occurred that could affect the Company's
future financial position or results of operations.
In
early October the Company sold forward 2,800 tonnes of zinc at $901 per tonne
($0.41 per pound). These sales are to be settled at the rate of 200 tonnes per
month from November 2003 through December 2004 against the average monthly
price of zinc during those months.
In
early October the Company purchased for $2.5 million in cash the existing 3 per
cent net smelter return royalty over the future production from the Huaron
mine.
In
mid-October a new mine closure law was enacted in Peru. No enabling regulations
have been published, and therefore, determining how this law will affect the
Company's Peruvian operations is difficult to predict; however, the law
provides that within six months each operating mine in Peru must complete and
submit for certification a mine closure plan setting out the technical,
economical, financial and social aspects of its closure plan. Furthermore, the
law provides that each operating mine must provide a guarantee for payment of
the eventual closure and post-closure phases of its operation. The form of
guarantee has not been specified, but it seems that a guarantee may take the
form of cash, a third party guarantee or a company guarantee. Until the
enabling regulations are passed and the closure certification process is
complete the possible effects of this law on the Company's financial condition
and results of operation are unknown.
In
mid-October the Company borrowed an additional $1.5 million of the $10.0
million La Colorada expansion loan facility. The outstanding balance of the
loan is $9.5 million which bears interest at LIBOR plus 3.5 per cent.
In
late-October the Company exchanged its 50 per cent ownership in the Tres Cruces
exploration property for 3.5 million common shares of New Oroperu Resources
Inc. and a 1.5 per cent net smelter return royalty interest over future
production from this property. The transaction was recorded at fair value,
which approximated the carrying value of the Company's investment in the
property.