Pan American Silver Corp. (TSX:PAA/NASDAQ:PAAS)

BUSINESS SUMMARY

Pan American Silver Corp. was founded in 1994 upon a single mission: to be the best vehicle for equity investors wanting real exposure to higher silver prices.To achieve this mission the Company is focused on a clear strategy:

1. acquire new, low-cost ounces to maintain a pipeline of future growth;
2. replenish reserves and resources at existing minesites through targeted exploration programs;
3. maintain a consolidated cash cost of less than $3.50/ounce to increase profitability
4. remain unhedged and fully exposed to a rising silver price.

In 2004 Pan American Silver Corp. marked its tenth anniversary with its tenth consecutive year of growth in silver production, a new record for cash flow from operations and a new record for mine operating earnings.

Silver production rose 30% to 11.2 million ounces, thanks to the purchase of the Morococha silver mine in Peru and the expansion of the La Colorada mine in Mexico. The Company began construction of the new Alamo Dorado silver mine in Mexico in the second quarter, it has fast-tracked development of the San Vicente mine in Bolivia and it expects to make a production decision on the Manantial Espejo project later in 2005.

By 2008 the Company plans to have annual silver production of 25 million ounces from eight mines.

Alamo Dorado Project, Mexico (100%)

The Alamo Dorado deposit is located in northern Mexico in the state of Sonora, approximately 200 miles from the state capital of Hermosillo. The Alamo Dorado deposit is the only economic primary silver discoveriy made in the last decade. Corner Bay Silver, a Toronto-listed exploration company, began grassroots reconnaissance of the area in 1997, received encouraging surface mapping and assay results and conducted the first phase of confirmation drilling in mid-1998. In 1999 a preliminary resource was calculated and a scoping study prompted further infill drilling and metallurgical testing. Pan American Silver acquired Corner Bay and the Alamo Dorado project in February, 2003.

In 2004 Pan American revised the geological model of the deposit and initiated an alternative development plan for the property.

In February, 2005 Pan American announced a positive production decision on the project based on its strong economics at current silver prices and the positive outlook for long-term prices.

In the second quarter of 2005, Pan American began construction of a primary crushing circuit, SAG ball mill, conventional cyanide leach recovery circuit and a dry, stackable tailings system. The mine will also employ a tailings treatment process called AVR which neutralizes mine waste, thus reducing the mine's environmental impact and future reclamation costs. Capital costs for the project are estimated at $76.6 million. Pan American has sufficient cash on hand to fund the project completely.

With proven and probable reserves of 11.6 million tonnes of ore grading 118 g/tonne silver and 0.33 g/tonne gold, plus measured and indicated resources of 3.1 million tonnes grading 74 g/tonne silver and .28 g/tonne gold, the mine is expected to have a life of 8 years.

Starting in 2007, Alamo Dorado is expected to produce on average approximately 5 million ounces of silver and 12,000 ounces of gold annually at an average cash cost of $3.25/oz of silver or less, net of gold by-product revenues.

La Colorada Mine, Mexico (100%)

The La Colorada property is located approximately midway between the cities of Zacatecas and Durango in west central Mexico. The project lies within a geologic belt known as the "faja de plata" (silver belt) that extends for approximately 800 km along the Sierra Madre Mountains and is defined by great silver deposits that make Mexico the largest silver producing country in the world. La Colorada contains mineralization styles of both the Fresnillo mine, the world's second largest primary silver mine with 29 million ounces of annual silver production, and the San Martin/Sabinas mine complex, also a significant silver and base metal producer.

At La Colorada the potential for extending reserves through discovery and additional development is considered to be excellent.

Manantial Espejo, Argentina (50%)

The Manantial Espejo project is a 50/50 joint venture with Silver Standard Resources.

The project is located in the Santa Cruz province of southern Argentina, in the mineral-rich Patagonia region. Nearby operations include AngloGold's Cerro Vanguardia gold mine, and Coeur d'Alene's Martha silver mine. Historic exploration spending on Manantial Espejo totals over $18 million and includes over 47,000 meters of drilling. In late 2001, Pincock Allen & Holt performed a resource estimate for the project and defined measured and indicated resources of over 37 million ounces of silver and more than 600,000 ounces of gold, and inferred resources of 1.59 million tonnes of ore grading 259 g/tonne silver and 3.65 g/tonne gold for an additional 13 million ounces of silver.

Pan American is managing the project development and a feasibility study is well underway. In 2004, nearly 20,000 meters of infill and exploration drilling were completed to advance mine planning and to expand the mineral resources.

Current mine plans are based on a combined surface and underground operation to exploit the Maria, Karina Union, Melissa and Concepcion deposits. Preliminary estimates suggest annual production of approximately 4 million ounces of silver and 60,000 ounces of gold. Metallurgical, geotechnical, hydrological and environmental baseline studies have been completed and an environmental impact study has been submitted to authorities.

San Vicente Mine, Bolivia (50%)

The San Vicente silver-zinc mine is located in the Potosí Department of the Bolivian Andes. More than 20 bonanza type silver-zinc veins are known to occur over an area of 1.5 km on surface and extend to at least 200 m in depth. San Vicente was operated by COMIBOL, the Bolivian state mining company, from 1972 until 1993 when mining was suspended, pending privatization. Mine infrastructure at the site includes a flotation mill, tailings facility, power and water supplies, and worker housing.

Pan American optioned the San Vicente project from COMIBOL in 1999 and advanced the project through drilling, underground sampling and metallurgical test work. Due to extremely low metal prices, especially zinc, in 2001 Pan American renegotiated its acquisition contract to reduce spending requirements for 2001 and 2002. In late 2001 Pan American and COMIBOL entered into a two-year toll milling agreement with EMUSA, a well-established Bolivian mining company, to process up to 250 tonnes per day of San Vicente's ore at EMUSA's nearby mill. This arrangement generated sufficient revenue to offset the property's holding costs and generated valuable information on the mining and milling characteristics of San Vicente's ore. In the fourth quarter of 2003, Pan American signed a joint-venture agreement with EMUSA granting them an option to earn a 50 percent interest in the project.

In October, 2005, Pan American increased its interest in San Vicente to 55%. The Company also negotiated another toll milling agreement with EMUSA under which ore will be processed at a nearby facility until the mill on site at San Vicente is refurbished in July, 2006. Once operational, the new mill is expected to produce at an annualized rate of approximately 2.5 million ounces of silver (100% basis).

Huaron Mine, Peru (100%)

The Huaron silver-zinc mine is located 300 km northeast of Lima in the heart of the Cerro de Pasco district, one of Peru's most important mining districts. This district accounts for over half of Peru's silver production and nearly 80 percent of its base metal output, hosting 12 large producing mines and the La Oroya smelter and refinery complex. Huaron is a primary silver mine that historically produced more than 220 million ounces of silver from 70 known veins since operations began in 1912. In April 1998, Huaron's production ceased after its underground workings were flooded due to an accident at a neighbouring mine.

Pan American acquired a majority interest in the Huaron mine in March 2000 and fast-tracked the project through feasibility, financing and construction to begin full-scale operation in April 2001 and subsequently acquired the remaining interest.

Quiruvilca Mine, Peru (100%)

Pan American has operated the Quiruvilca mine in Peru since late 1995. The mine is located at an elevation of 3,800 meters in the Andes Mountains of northern Peru, approximately 130 kilometers inland from the coastal city of Trujillo. It is one of Peru's oldest mines with evidence of mining activity dating back to at least the 1500s. The underground workings at Quiruvilca cover an area four kilometers long by three kilometers wide and extend to more than 400 meters in depth.

Silver-Rich Stockpiles (100%/60%)

The Stockpiles are also in the Cerro de Pasco mining district of Peru. Volcan Compania Minera, a Peruvian mining company, is the largest producer in this district. For many decades, Volcan's Cerro de Pasco mine accumulated large silver-rich pyrite stockpiles from which the silver could not be extracted by standard metallurgical processes.

Current estimates show that the stockpiles contain an aggregate of nearly 116 million ounces of contained silver, probably the largest above-ground inventory of silver ore in the world. In November 2002, Pan American entered into two agreements to acquire these stockpiles.

The first agreement grants Pan American the right to mine and sell 600,000 tonnes of the highest grade silver stockpiles to a smelter, where the ore is used as process flux and Pan American is paid for the silver contained. A ten-year contract to process this material was negotiated with Doe Run's La Oroya smelter. The purchase price for this small mining operation was $4.5 million, plus a production bonus to Volcan after recovery of Pan American's acquisition, tax and interest costs. Pan American began to pay Volcan its share in December of 2004. Production from these stockpiles in 2004 totaled 961,000 ounces of silver at a cash cost of $2.95/oz and a total cost of $3.58/oz.

For 2005 and beyond, stockpile sales are expected to average approximately 80,000 tonnes per year resulting in annual silver production of approximately 960,000 ounces at a cash cost rising to $3.41/oz due to Volcan's participation.

The second agreement gives Pan American the option to acquire a 60 percent ownership in a number of other stockpiles by spending $2 million over a three-year period, with a further option to increase its interest to 100 percent by paying $3 million plus a production royalty within the following 12 months. Pan American is evaluating different options under which these stockpiles could be processed economically.

Fundamental Considerations

Mineral reserves (proven and probable) and mineral resources (measured, indicated and inferred) amount to roughly 750 million ounces of silver as per December 31, 2004.

If the silver price can maintain the recently multi-year level of $ 14 to 15/ounce, it would have a tremendous impact on net earnings of the company in future years.

Why then has the share price, after reaching a multi-year high of CAD 32, fallen by almost 30%?

Pan American Silver has operations in Bolivia and Peru.

Bolivia

As of May 1, 2006, president Evo Morales signed a decree stating that all natural gas reserves were to be nationalized: "the state recovers ownership, possession and total and absolute control" of hydrocarbons (Bolivia has the second largest resources of natural gas in South America - 48.7 trillion cubic feet-, after Venezuela). He thus realized his electoral promises made during the various Gas Wars, declaring that "We are not a government of mere promises: we follow through on what we propose and what the people demand".

The mining industry fears the same destiny and share prices of mining stocks suffered heavy selling pressure.

Peru: Peru's election: An unattractive choice: A nationalist outsider or a failed president

Peru was offered a choice of 20 different presidential candidates, but Peru's voters did not seem particularly impressed by any of them. An election on April 9th was won by Ollanta Humala, a former army officer at the head of an improvised nationalist party, but with only 31% of the vote. He will face a run-off ballot in late May or early June. So close was the battle for second place that his opponent was not confirmed for at least a week. But it turned out to be Alan García, a former president, with some 25%, just ahead of Lourdes Flores, a conservative.

That means that Peru faces a choice between two versions of populism. Mr Humala, who staged a brief military rebellion in 2000, had no previous political experience. He promised a firm hand and a nationalist economic policy, together with a bigger role for the state and curbs on foreign investment. Mr García steered a middle course between Ms Flores's backing for free-market policies and the leap into the unknown embodied by Mr Humala.

The run-off may well be tight. Mr García would have to struggle against memories of his disastrous presidency in 1985-90, when Peru suffered hyperinflation, economic collapse and guerrilla violence. But whereas Mr García has been rising in the opinion polls, Mr Humala's support peaked in mid-March. He has been accused of abuses when commanding troops against the Shining Path guerrillas. He is also alleged to have links with Vladimiro Montesinos, the jailed spy chief who ran a massive corruption scheme during the presidency of Alberto Fujimori in the 1990s.

Whoever wins will face a divided Congress. Mr Humala's supporters look set for a third of the 120 seats, ahead of Mr García's APRA with some 35 and a score for Ms Flores's party. Mr Fujimori, who is in custody in Chile pending extradition to face criminal charges, will have some supporters in Congress. His daughter, Keiko, won more votes than any other congressional candidate. She is likely to offer her support to the winner in return for a pardon for her father.

Conclusion: A lot of uncertainty which never attracts investments!

Technical Considerations

"The long-term technical view on silver is incredibly bullish! The moment the silver price can finally break above its 2004 high of USD8.35/oz, it will be tantamount to a breakout from a massive twenty-year base and suggests that double-digit silver prices are a certainty in the near future." This was our opinion expressed on June 24, 2005.

Wait for the Peruvian election outcome before committing new funds!

Peter Zihlmann


www.pzim.com
[email protected]