pan american SILVER posts record silver and gold production in the second quarter

 (All amounts in US dollars unless otherwise stated and all production figures are approximate)

Vancouver, B.C.  August 11, 2009  Pan American Silver Corp. (NASDAQ: PAAS; TSX: PAA) today reported unaudited financial and operating results for the quarter ended June 30, 2009.  The Company also provided an update on operations.

This earnings release should be read in conjunction with the Company’s MD&A, Financial Statements and Notes to Financial Statements for the corresponding period, which are available on the Company’s website at www.panamericansilver.com, and have been posted on SEDAR at www.sedar.com. 

Second Quarter 2009 Highlights¹

¹ Financial information based on Canadian GAAP; results are unaudited; percentages compare Q2 2009 with Q2 2008

² Cash costs per ounce, and mine operating earnings are non-GAAP measures; for detailed descriptions see pages 4 and 11 of the MD&A, respectively

I am very pleased with the way we have been able to turn around our business and deliver great results in just two quarters, said Geoff Burns, President and CEO.  During the second quarter we continued building on the positive trend we set in the first three months of 2009 and produced 5.8 million ounces of silver and over 25,000 ounces of gold.  Both new quarterly records for Pan American Silver.  Thanks to the outstanding ramp up at Manantial Espejo, and continued fiscal discipline, we kept cash costs below our annual guidance and recorded strong quarterly net earnings and operating cash flows.  With San Vicente’s new processing plant rapidly approaching design capacity, I am confident that we will continue generating healthy earnings and cash flow, and delivering value to our shareholders through the balance of 2009 and beyond.

Financial Results

Pan American had sales of $111.4 million during the second quarter of 2009, a new quarterly record and a 7% increase from last year’s second quarter.  The increase was the result of higher quantities of silver, zinc and gold sold, which more than offset lower silver and base metals prices.  Silver sales remained the Company’s mainstay, accounting for 58% of total revenues, and gold contributed 18%, increasing the Company’s exposure to precious metals to 76% of total revenues.

Cost of sales for the quarter was $66.0 million, which was 27% higher than a year ago. The increase, mainly attributable to higher sales volumes of silver, was held in check by cost controls implemented by management last year which continued during the current year, plus general reductions in the cost of energy, consumables and favourable foreign exchange rates.

Mine operating earnings totaled $23.5 million, a 40% decrease from the second quarter of 2008, but more than double the $10.5 million posted for the first three months of 2009.  The year over year decline resulted from higher sales volumes being outweighed by increased depreciation and amortization expenses at Manantial Espejo and San Vicente and increased cost of sales. 

During the quarter the Company generated $32.0 million in cash flow from operating activities or $0.37 per share outstanding, which was 21% less than in the second quarter of 2008.   However, the current quarter’s operating cash flow was up sharply as compared to the first quarter of 2009, increasing by more that by $37 million.

Pan American generated net income of $10.2 million or $0.12 per share in the second quarter of 2009, versus net income of $21.4 million or $0.26 per share generated in the second quarter of last year.  Excluding the $3.3 million non-cash, after tax charge for the write down of a smelter receivable, adjusted net income was $13.5 million or $0.16 per share.

At June 30, 2009 Pan American had $112.4 million in cash and short-term investments, representing an increase of $82.2 million from December 31, 2008.  The increase was due to a public offering of common shares in February 2009, which generated net proceeds of $98.6 million.  The Company’s working capital increased to $216.1 million at June 30, 2009 from $95.1 million at the end of 2008.  Pan American remains debt-free and fully funded to complete its short term growth projects.  In addition, the Company has access to a $70.0 million credit facility, which is undrawn and intended for general corporate purposes and strategic business development opportunities.

Production And Operations

Pan American produced 5.8 million ounces of silver during the second quarter of 2009, which was 24% more than the same period in 2008 and represents a new quarterly production record for the Company.  The increase was mainly due to the new Manantial Espejo mine in Argentina, which reached commercial production in January 2009.  As expected, silver production from the Company’s Peruvian operations was slightly lower than last year due to lower throughput rates, partially offset by higher ore grades.  Silver production from the Company’s Mexican operations declined as a result of planned lower throughput at the La Colorada mine and planned lower grades at the Alamo Dorado mine, which were not quite off-set by higher throughput rates. 

During the second quarter, the Company produced 25,068 ounces of gold, which was also a new quarterly record and represented an increase of 270% over the second quarter of 2008. Gold has now become Pan American’s single most valuable by-product, accounting for 18% of the total value of metals produced during the second quarter.

Consolidated cash costs for the quarter were $5.99 per ounce of silver, compared to $5.28 in the same period of last year and in line with the Company’s guidance for 2009.  The increase was mainly driven by sharply reduced by-product credits due to lower base metal prices, partly offset by increased gold and base metals output. 

In April 2009, Pan American and Orko Silver Corp. (Orko) announced that they had reached an agreement allowing for the joint development of the La Preciosa silver project in the state of Durango, Mexico.  Pan American will spend a minimum of $5.0 million in the first 12 months of the development program,  prepare and deliver a feasibility study over the next 36 months and ultimately fund the construction of a mine and processing facility in order to earn its 55% interest in La Preciosa.  Coincident with the agreement, Pan American also purchased, on a private placement basis, 4,000,000 common shares of Orko at a purchase price of CDN $1.25 per share.  

In June 2009, Pan American and Orko announced that a comprehensive exploration and delineation drilling program at the La Preciosa silver project had commenced.  The companies expect to complete approximately 30,000 meters of drilling on the property between June and the end of December of this year. 

In March 2009, Pan American’s largest buyer of copper concentrate, Doe Run Peru (DRP) began experiencing financial pressure after financial institutions cancelled its credit facilities.  Due to its inability to fund its working capital, DRP stopped operations at its La Oroya smelter in June.  As a result, Pan American has been selling its Peruvian copper concentrates to other buyers under less favorable terms, which added approximately $1.17 per ounce to the cash costs of its Peruvian operations. 

DRP owes Pan American approximately $8.8 million, and while the Company continues to pursue all legal avenues to collect the outstanding amount, a full collection of the DRP receivable is uncertain.  Consequently, Pan American has recorded in the second quarter a doubtful debt provision of 4.4 million and reclassified the remaining receivable from current assets into long term assets.  The combined after tax effect of these charges on second quarter earnings was $3.3 million or $0.4 per share.

Outlook

In November 2008 Pan American began a complete review of its portfolio of assets to optimize operations, reduce overhead and operating costs and improve cash flows and profitability across the board amid a new financial environment.  Results from the first six months of 2009 clearly demonstrate that these efforts have had a positive impact and the Company has again generated strong cash flows and earnings. 

In Argentina, the Manantial Espejo mine, which began commercial production in the first quarter of 2009, is performing well above expectations.  In Bolivia, the San Vicente mine expansion was commissioned during the second quarter and the new processing plant has begun producing concentrate.  With these two projects now actively contributing to the Company’s production and cash flows, Pan American believes it will meet its annual production target of 21.5 million ounces of silver and 85,000 ounces of gold at cash costs of approximately $6.00 per ounce of silver.

Having already achieved commercial production status at San Vicente and with its ramp up to full capacity progressing well beyond expectations, Pan American is now focusing on exploration of the La Preciosa project.

Pan American’s financial strength remains intact.  The Company has over $112 million in cash and short term investments, working capital in excess of $216 million, no debt and an undrawn credit facility of $70 million.  With all its development capital expenditures behind it and the expectation of generating positive cash flows and earnings, the Company is in an optimal  position to finance current operations and to take advantage of new business opportunities as they arise.

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About Pan American Silver

Pan American Silver’s mission is to be the world’s largest and lowest cost primary silver mining company by increasing its low cost silver production and silver reserves.  The Company has eight operating mines in Mexico, Peru, Argentina and Bolivia.

Technical information contained in this news release has been reviewed by Michael Steinmann,

P.Geo., Executive Vice President Geology & Exploration, and Martin Wafforn, P.Eng., VP Technical Services, who are the Company’s Qualified Persons for the purposes of NI 43-101.

Information Contact

Kettina Cordero

Coordinator, Investor Relations

(604) 684-1175

info@panamericansilver.com

www.panamericansilver.com

(1)     Total cash cost per ounce and total production cost per ounce are non-GAAP measurements and investors are cautioned not to place undue reliance on them and are urged to read all GAAP accounting disclosures presented in the unaudited consolidated financial statements.  In addition, see the reconciliation of operating costs to Cash Cost per Ounce of Payable Silver set forth in page 4 of the MD&A section entitled Operating Results.

(2)     Adjusted net income for the period is a non-GAAP measure and is equal to net income for the period, excluding the after-tax charges related to smelter receivables of $3.3 million.