**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 20-F**

 

**Annual Report Pursuant to Section 15(d)of the Securities Exchange Act of 1934**

 

**Forthe Fiscal Year Ended December 31, 2002**

**CommissionFile Number 333-08430**

 

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**GRUPO MINERO MÉXICO, S.A. DE C.V.**

(Exact name ofRegistrant as specified in its charter)

 

**MEXICO MINING GROUP**

(Translation ofRegistrant’s name into English)

 

**UnitedMexican States**

(Jurisdiction ofincorporation or organization)

 

**GrupoMinero México, S.A. de C.V.Baja California 200Col. Roma Sur06760 México, D.F.**(Address of principal executive offices)

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

 

**None**

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

 

**None**

 

Securities forwhich there is a reporting obligation pursuant to Section 15(d) of the Act:

**8.25%Series A Guaranteed Senior Notes due 2008**

**9.25%Series B Guaranteed Senior Notes due 2028**

 

Indicate thenumber of outstanding shares of each of the Issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

**Shares ofcommon stock:  650,161,917 Class ISeries B Shares**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý            No  o

 

Indicate by checkmark which financial statement item the registrant has elected to follow.

 

Item17  o            Item18  ý

** **

 

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**Table of Contents**

 
| PRESENTATION OF INFORMATION |
|-----------------------------|
| FORWARD LOOKING STATEMENTS  |
| **PART I.**                 |
|                        |
| ITEM 1.                     | IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISORS |
| ITEM 2.                     | OFFER STATISTICS AND  EXPECTED TIMETABLE |
| ITEM 3.                     | KEY INFORMATION |
|                        |   | SELECTED  FINANCIAL DATA |
|                        |   | SELECTED  OPERATING DATA |
|                        |   | EXCHANGE RATES |
|                        |   | RISK FACTORS |
| ITEM 4.                     | INFORMATION ON THE  COMPANY |
|                        |   | HISTORY AND  DEVELOPMENT OF THE COMPANY |
|                        |   | ORGANIZATIONAL  STRUCTURE |
|                        |   | BUSINESS  OVERVIEW |
|                        |   | DESCRIPTION OF  PROPERTY, PLANTS AND EQUIPMENT |
|                        |   | CAPITAL  EXPENDITURES |
| ITEM 5.                     | OPERATING AND  FINANCIAL REVIEW AND PROSPECTS |
|                        |   | OPERATING  RESULTS |
|                        |   | TREND  INFORMATION |
| ITEM 6.                     | DIRECTORS, SENIOR  MANAGEMENT AND EMPLOYEES. |
|                        |   | DIRECTORS AND SENIOR  MANAGEMENT |
|                        |   | COMPENSATION |
|                        |   | BOARD PRACTICES |
|                        |   | EMPLOYEES |
|                        |   | SHARE OWNERSHIP |
| ITEM 7.                     | MAJOR SHAREHOLDERS AND  RELATED PARTY TRANSACTIONS |
|                        |   | MAJOR  SHAREHOLDERS |
|                        |   | RELATED PARTY TRANSACTIONS |
| ITEM 8.                     | FINANCIAL INFORMATION |
|                        |   | FINANCIAL  STATEMENTS |
|                        |   | OTHER FINANCIAL INFORMATION |
| ITEM 9.                     | THE OFFER AND LISTING |
| ITEM 10.                    | ADDITIONAL  INFORMATION |
|                        |   | MEMORANDUM  AND ARTICLES OF ASSOCIATION (ESTATUTOS SOCIALES) |
|                        |   | MATERIAL  CONTRACTS |
|                        |   | EXCHANGE  CONTROLS |
|                        |   | TAXATION |
|                        |   | DOCUMENTS  ON DISPLAY |
|                        |   | SUBSIDIARY  INFORMATION |
| ITEM 11.                    | QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|                        |   | INTEREST  RATE RISK |
|                        |   | FOREIGN  EXCHANGE RISK |
|                        |   | COMMODITY  PRICE RISK |
|                        |   | SENSITIVITY  ANALYSIS |
| ITEM 12.                    | DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES |
|                        |   |
| **PART  II.**               |
|                        |   |
| ITEM 13.                    | DEFAULTS, DIVIDEND  ARREARAGES AND DELINQUENCIES |
| ITEM 14.                    | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |

 

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| ITEM 15.          | CONTROLS AND  PROCEDURES                                        |
|-------------------|-----------------------------------------------------------------|
| ITEM 16.          | [RESERVED]                                                      |
|              |
| **PART  III.**    |
|              |
| ITEM 17.          | FINANCIAL STATEMENTS                                            |
| ITEM 18.          | FINANCIAL STATEMENTS                                            |
| ITEM 19.          | EXHIBITS                                                        |
|              |
| Annex  A          | Glossary  of Certain Mining Terms                               |
| Annex  F          | Financial  Statements of Grupo Minero México, S.A. de C.V. |
| Annex  F-1        | Financial  Statements of Mexicana de Cobre, S.A. de C.V.        |
| Annex  F-2        | Financial  Statements of Mexicana de Cananea, S.A. de C.V.      |
| Index to Exhibits |

 

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# **PRESENTATIONOF INFORMATION**

 

We are Grupo Minero México, S.A. de C.V., acorporation (*sociedad anónima de capital variable*) organized under thelaws of the United Mexican States (“Mexico”) and are required to file an annualreport on Form 20-F pursuant to Section 15(d) of the Securities Exchange Act of1934, as amended (the “Exchange Act”), and Rule 15d-1 thereunder, because weissued the 8.25% Series A Guaranteed Senior Notes due 2008 (the “Series ANotes”) and 9.25% Series B Guaranteed Senior Notes due 2028 (the “Series BNotes” and, together with the Series A Notes, the “Notes”). The Notes wereissued and sold pursuant to a registration statement on Form F-1 under theSecurities Act of 1933, as amended (the “Act”) (Commission File No. 333-8430).

 

We present our financial statements in pesos and inaccordance with accounting principles generally accepted in Mexico (“MexicanGAAP”). Mexican GAAP provides for the recognition of certain effects ofinflation by restating nonmonetary assets and liabilities using the MexicanNational Consumer Price Index (the “NCPI”), restating the components ofstockholders’ equity using the NCPI and recording gains or losses in purchasingpower from holding monetary liabilities or assets. Mexican GAAP also requiresrestatement of financial statements to pesos of purchasing power as of the dateof the most recent balance sheet presented. All data in the financialstatements included in this Annual Report, the selected financial informationderived therefrom and other financial information included in this AnnualReport have been restated to pesos of purchasing power as of December 31, 2002,except as otherwise indicated.

 

Mexican GAAP differs in certain significant respectsfrom accounting principles generally accepted in the United States of America(“U.S. GAAP”).  For a discussion ofcertain significant differences between Mexican GAAP and U.S. GAAP as theyrelate to us, together with a reconciliation of net (loss) income andstockholders’ equity to U.S. GAAP, see Note 18 to our audited consolidatedfinancial statements as of December 31, 2001 and 2002 and for the years endedDecember 31, 2000, 2001 and 2002 (together with the notes thereto, the“Financial Statements”), set forth herein at Annex F. The effect of price-levelrestatement under Mexican GAAP has not been reversed in the reconciliation toU.S. GAAP. See Note 18 to the Financial Statements.

 

In addition to our Financial Statements, there arealso included herein, audited consolidated financial statements as of December31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002,together with notes thereto, for each of Mexicana de Cobre, S.A. de C.V., our96.43% owned subsidiary (“Mexcobre”), and Mexicana de Cananea, S.A. de C.V.,our 98.49% owned subsidiary (“Mexcananea”). Mexcobre, Mexcananea and three otherof our subsidiaries have guaranteed, jointly and severally, the Notes, thesecurities in respect of which this Annual Report on Form 20-F has been filed.The financial statements of Mexcobre and Mexcananea are set forth herein atAnnex F-1 and Annex F-2, respectively.

 

References in this Annual Report to “U.S. dollars” or“US$” are to the lawful currency of the United States.  References in this Annual Report to “pesos”or “Ps.” are to the lawful currency of Mexico.

 

This Annual Report contains translations of certainpeso amounts into U.S. dollars at specified rates solely for the convenience ofthe reader. These translations should not be construed as representations thatthe peso amounts actually represent such U.S. dollar amounts or could beconverted into U.S. dollars at the rate indicated or any other rate. Unlessotherwise indicated, such U.S. dollar amounts have been translated from pesosat an exchange rate of Ps. 10.3125 to US$ 1.00, the exchange rate as ofDecember 31, 2002 published by Banco de México (the “Mexican Central Bank”). OnDecember 31, 2002, the difference between the exchange rate published by theMexican Central Bank and the noon buying rate in New York City for cabletransfers in pesos as certified for customs purposes by the Federal ReserveBank of New York (the “noon buying rate”) of Ps. 10.4250 to US$ 1.00 was notmaterial. See “Item 3. Key Information—Exchange Rates” for informationregarding exchange rates since 1997. On June 23, 2003 the exchange ratepublished by the Mexican Central Bank was Ps. 10.4858 per US$ 1.00 and the noonbuying rate was Ps. 10.4745 per US$ 1.00.

 

Unless otherwise indicated, all references herein tovolumes of ore, concentrates and other metal products are expressed in metrictons. One metric ton equals approximately 2,204.62 pounds.

 

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# **FORWARDLOOKING STATEMENTS**

 

In this document we may from time to time make writtenor oral forward-looking statements. In the future, we may also make suchforward-looking statements in our periodic reports to the Securities andExchange Commission (the “SEC”) on Forms 20-F and 6-K, in our annual report toshareholders, in offering circulars and prospectuses, in press releases andother written materials, and in oral statements made by any of our officers,directors or employees to analysts, institutional investors, representatives ofthe media and others. These statements appear in a number of places in thisAnnual Report and include statements regarding our current intent, belief orexpectations or those of our officers with respect to trends affecting ourfinancial condition or results of operations. When used in this Annual Report,the words “anticipate”, “believe,” “estimate,” “expect,” “intend,” “plan” and“project” and similar expressions, as they relate to us or our management areintended to identify such forward-looking statements. Such forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties, and actual results may differ materially from those in theforward-looking statements as a result of various factors. The informationcontained in this Annual Report, including, without limitation, the informationunder “Item 4.  Information on theCompany” and “Item 5. Operating and Financial Review and Prospects”, identifiesimportant factors that could cause such differences. Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date thereof. We undertake no obligation to release publicly theresult of any revisions to these forward-looking statements, which may be madeto reflect events or circumstances after the date hereof, including, withoutlimitation, changes in our business strategy or planned capital expenditures,or to reflect the occurrence of unanticipated events.

 

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**PART****I.**

 

### **ITEM1.**                                            IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Items 1.A and 1.B are not applicable. Item 1.C,Auditors, is as follows:

 

Our external auditors are Galaz, Yamazaki, Ruíz Urquiza,S.C. (“Galaz”), the Mexican national practice of Deloitte Touche Tohmatsu(“DTT”). Prior to June 10, 2002, our external auditors were Ruiz, Urquiza yCía., S.C. (“Ruiz Urquiza”), a former member firm of Andersen Worldwide, whichwas subject to the quality control procedures of Arthur Andersen LLP requiredfor foreign associated firms that are embodied in the requirements of theSecurities and Exchange Commission Practice Section of the American Instituteof Certified Public Accountants. Subsequent to June 9, 2002, Ruiz Urquiza wassubject to the quality control procedures of Deloitte & Touche LLP. Thechange in external auditors resulted from the integration of the partners andpersonnel of Ruíz Urquiza with DTT’s prior Mexican national practice, Galaz,Gomez Morfín, Chavero, Yamazaki, S.C.

 

### **ITEM2.**                                           OFFERSTATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

### **ITEM3.**                                           KEYINFORMATION

 

#### **SELECTED FINANCIAL DATA**

 

The information set forth below has been derived fromour financial statements, including the Financial Statements included elsewherein this Annual Report. This information should be read in conjunction with, andis qualified in its entirety by reference to, the Financial Statements,including the notes thereto, and “Item 5. Operating and Financial Review andProspects.”

 

The Financial Statements have been prepared inaccordance with Mexican GAAP, which differ in certain significant respects fromU.S. GAAP.  Note 18 to the FinancialStatements provides a description of the principal differences between MexicanGAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP ofstockholders’ equity and majority net (loss) income as of December 31, 2001 and2002 and for the years ended December 31, 2000, 2001 and 2002.  See “Presentation of Information.”

 

Our financial statements have been prepared givingeffect to Bulletin B-10, as amended, and Bulletin B-12 issued by the MexicanInstitute of Public Accountants. Generally, Bulletin B-10 is designed toprovide for the recognition of the effects of inflation by requiring us torestate nonmonetary assets and liabilities using the NCPI, to restate thecomponents of stockholders’ equity using the NCPI and to record gains or lossesin purchasing power from holding monetary liabilities or assets. The ThirdAmendment to Bulletin B-10 requires restatement of all financial statements topesos of purchasing power as of the date of the most recent balance sheetpresented. All data in the financial statements included in this Annual Reportand the selected financial information derived therefrom set forth below havebeen restated to pesos of purchasing power as of December 31, 2002, except asotherwise indicated. Bulletin B-12 requires that the statement of changes infinancial position reconcile changes from the restated prior year balance sheetto the current balance sheet. The effects of price-level restatement underMexican GAAP have not been reversed in the reconciliation to U.S. GAAP. SeeNote 18 to the Financial Statements.

 

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|                                                                                                                                                         |   | **As of and  for the year ended December 31,**                                                  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                         |   | **1998**                                                                                        |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2002** |   |
|                                                                                                                                                         |   | **(Millions  of constant pesos as of December 31, 2002, except ratios and per share  data)(1)** |   | **(Millions  of  US$)(1)** |   |
| **Income  Statement Data:**                                                                                                                                  |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| *Mexican  GAAP*                                                                                                                                              |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                                                                                                                   |   | Ps. 14,185.6                                                                                    |   | Ps.12,427.0 |   | Ps. 12,918.0 |   | Ps. 9,455.1 |   | Ps. 7,352.8 |   | US$713.0 |   |
| Cost  of sales                                                                                                                                               |   | 9,617.6                                                                                         |   | 8,981.3 |   | 10,004.9 |   | 8,442.0 |   | 6,089.3 |   | 590.5 |   |
| Gross  profit                                                                                                                                                |   | 4,568.0                                                                                         |   | 3,445.7 |   | 2,913.1 |   | 1,013.1 |   | 1,263.5 |   | 122.5 |   |
| Depreciation,  amortization and depletion                                                                                                                    |   | 1,773.1                                                                                         |   | 1,665.7 |   | 1,673.2 |   | 1,720.4 |   | 1,743.9 |   | 169.1 |   |
| Operating  income (loss)                                                                                                                                     |   | 2,273.4                                                                                         |   | 1,309.7 |   | 801.7 |   | (1,095.4 | ) | (883.8 | ) | (85.7 | ) |
| Net  comprehensive financing result                                                                                                                          |   | (1,001.3                                                                                        | )      | 442.9 |   | (96.4 | ) | (180.2 | ) | (698.9 | ) | (67.8 | ) |
| Income  (loss) before unusual charge and write - down for plant closure, income taxes  and employee statutory profit - sharing                               |   | 1,265.0                                                                                         |   | 1,805.7 |   | 679.4 |   | (1,202.8 | ) | (1,591.2 | ) | (154.3 | ) |
| Unusual  charge and write - down for plant closure(2)                                                                                                        |   | 446.1                                                                                           |   | 92.2 |   | — |   | — |   | — |   | — |   |
| Net  income (loss)                                                                                                                                           |   | 103.2                                                                                           |   | 1,350.7 |   | 266.2 |   | (874.1 | ) | (1,178.3 | ) | (114.3 | ) |
| Weighted  average basic and diluted common shares outstanding, in thousands                                                                                  |   | 650,162                                                                                         |   | 650,162 |   | 650,162 |   | 650,162 |   | 650,162 |   | 650,162 |   |
| Earnings  (loss) per share for income (loss) before unusual charge and write - down for  plant closure, income taxes and employee statutory profit - sharing |   | 1.94                                                                                            |   | 2.77 |   | 1.04 |   | (1.85 | ) | (2.44 | ) | (0.24 | ) |
| Loss  per share for unusual charge and write - down for plant closure                                                                                        |   | (.67                                                                                            | )      | (0.14 | ) | — |   | — |   | — |   | — |   |
| Earnings  (loss) per share of the majority                                                                                                                   |   | 0.07                                                                                            |   | 2.05 |   | 0.41 |   | (1.34 | ) | (1.81 | ) | (0.18 | ) |
| Dividends  declared per share                                                                                                                                |   | —                                                                                          |   | — |   | — |   | — |   | 20.69 |   | 2.01 |   |
| *U.S.  GAAP*                                                                                                                                                 |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                                                                                                                   |   | 13,284.6                                                                                        |   | 11,710.1 |   | 12,221.3 |   | 9,093.0 |   | 7,189.8 |   | 697.2 |   |
| Operating  income (loss)                                                                                                                                     |   | 1,881.0                                                                                         |   | 1,252.9 |   | 1,109.6 |   | 61.7 |   | 237.4 |   | 23.0 |   |
| Extraordinary  items                                                                                                                                         |   | 117.4                                                                                           |   | 20.8 |   | — |   | — |   | — |   | — |   |
| Net  income (loss)                                                                                                                                           |   | 2,523.6                                                                                         |   | 1,463.9 |   | 135.8 |   | (1,804.2 | ) | 167.1 |   | 16.2 |   |
| Earning  per share for operating income (loss)                                                                                                               |   | 2.89                                                                                            |   | 1.93 |   | 1.71 |   | 0.09 |   | 0.36 |   | 0.04 |   |
| Earning  per share for extraordinary item                                                                                                                    |   | 0.18                                                                                            |   | 0.03 |   | — |   | — |   | — |   | — |   |
| Basic  and diluted net income (loss) per share   (majority)                                                                                             |   | 3.88                                                                                            |   | 2.25 |   | 0.21 |   | (2.77 | ) | 0.26 |   | 0.02 |   |
| **Balance  Sheet Data:**                                                                                                                                     |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| *Mexican  GAAP*                                                                                                                                              |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Working  capital (deficiency)                                                                                                                                |   | 8,917.1                                                                                         |   | 3,931.3 |   | 2,992.2 |   | 8,715.6 |   | (9,831.7 | ) | (953.4 | ) |
| Current  assets                                                                                                                                              |   | 11,506.4                                                                                        |   | 6,081.3 |   | 6,816.5 |   | 6,571.1 |   | 6.979.1 |   | 676.8 |   |
| Property  and equipment                                                                                                                                      |   | 32,606.7                                                                                        |   | 32,330.2 |   | 31,677.1 |   | 30,368.4 |   | 28,699.7 |   | 2,783.0 |   |
| Total  assets                                                                                                                                                |   | 51,389.2                                                                                        |   | 50,017.5 |   | 49,097.8 |   | 47,178.8 |   | 47,350.0 |   | 4,591.5 |   |
| Short-term  debt and interest  payable                                                                                                                  |   | 835.8                                                                                           |   | 748.7 |   | 1,904.0 |   | 12,947.6 |   | 186.6 |   | 18.1 |   |
| Long-term  debt                                                                                                                                              |   | 16,614.2                                                                                        |   | 13,720.1 |   | 11,831.6 |   | — |   | 13,635.1 |   | 1,322.2 |   |
| Total  debt and interest payable                                                                                                                             |   | 17,450.0                                                                                        |   | 14,468.8 |   | 13,735.6 |   | 12,947.6 |   | 13,821.7 |   | 1,340.3 |   |
| Stockholders’  equity                                                                                                                                   |   | 31,201.6                                                                                        |   | 33,031.9 |   | 24,070.2 |   | 22,684.6 |   | 8,209.1 |   | 796.0 |   |
| *U.S.  GAAP*                                                                                                                                                 |   |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Total  assets                                                                                                                                                |   | 44,864.9                                                                                        |   | 44,006.2 |   | 44,536,0 |   | 44,318.6 |   | 45,413.4 |   | 4,403.7 |   |
| Long-term  debt                                                                                                                                              |   | 16,498.0                                                                                        |   | 13,595.7 |   | 11,831.6 |   | — |   | 13,635.1 |   | 1,322.2 |   |
| Stockholders’  equity                                                                                                                                   |   | 18,595.4                                                                                        |   | 20,412.1 |   | 20,035.5 |   | 18,203.4 |   | 6,112.0 |   | 592.7 |   |

 

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(1)                                  U.S.dollar amounts provided are translations from the peso amounts, solely for theconvenience of the reader, at the exchange rate of Ps. 10.3125 per U.S.dollar as of December 31, 2002 published by the Mexican Central Bank.

 

(2)                                  Thosenonrecurring charges relate to the strike at the Cananea Unit. We incurrednonrecurring charges of Ps. 84.9 million and Ps. 92.2 million in 1998and 1999, respectively, consisting of nonproductive fixed costs expended duringthe stoppage and a charge of Ps. 361.2 million in 1998 from the write-downof the smelter plant, the tailings dam and water supplies operations.

 

4

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#### **SELECTED OPERATING DATA**

 

The following tables present our selected productionand other operating data on a consolidated basis and for the Mexcobre Unit, theImmsa Unit and the Cananea Unit (as such terms are defined under “Item 4.Information on the Company—Organizational Structure”). Our selected operatingdata presented on a consolidated basis eliminate intercompany sales and includemetal contained in concentrates produced from our own mines and copper cathodesproduced by the Cananea Unit and the Mexcobre Unit. The data for each of ouroperating units include production sold to the other operating units.

 

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|                                        |   | **Year ended  December 31,**                              |   |
|---------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                        |   | **1998**                                                  |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                        |   | **(Volumes  in metric tons, unless otherwise indicated)** |   |
| **Grupo  Minero México, S.A. de C.V.** |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  production:                         |   |                                                      |   |   |   |   |   |   |   |   |   |
| Metric  tons                                |   | 336,909                                                   |   | 314,633 |   | 313,626 |   | 306,341 |   | 267,532 |   |
| Thousands  of pounds                        |   | 742,756                                                   |   | 693,646 |   | 691,426 |   | 675,365 |   | 589,806 |   |
| Zinc  production:                           |   |                                                      |   |   |   |   |   |   |   |   |   |
| Metric  tons                                |   | 170,331                                                   |   | 167,283 |   | 167,798 |   | 149,252 |   | 135,442 |   |
| Thousands  of pounds                        |   | 375,515                                                   |   | 368,795 |   | 369,931 |   | 329,044 |   | 298,598 |   |
| Lead  production:                           |   |                                                      |   |   |   |   |   |   |   |   |   |
| Metric  tons                                |   | 30,530                                                    |   | 34,716 |   | 29,230 |   | 28,991 |   | 23,800 |   |
| Thousands  of pounds                        |   | 67,307                                                    |   | 76,536 |   | 64,441 |   | 63,914 |   | 52,470 |   |
| Silver  production:                         |   |                                                      |   |   |   |   |   |   |   |   |   |
| Metric  tons                                |   | 501                                                       |   | 519 |   | 528 |   | 510 |   | 450 |   |
| Thousands  of ounces                        |   | 16,106                                                    |   | 16,673 |   | 16,986 |   | 16,407 |   | 14,462 |   |
| Gold  production:                           |   |                                                      |   |   |   |   |   |   |   |   |   |
| Kilograms                                   |   | 979                                                       |   | 878 |   | 846 |   | 741 |   | 632 |   |
| Thousands  of ounces                        |   | 31                                                        |   | 28 |   | 27 |   | 24 |   | 20 |   |
| **Mexcobre  Unit**                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Material  moved (metric tons in thousands)  |   | 80,533                                                    |   | 81,931 |   | 84,175 |   | 84,204 |   | 62,592 |   |
| Ore  milled (metric tons in thousands)      |   | 33,410                                                    |   | 33,439 |   | 33,308 |   | 32,762 |   | 21,750 |   |
| Ore  grade (average % copper for period)    |   | 0.56                                                      |   | 0.54 |   | 0.49 |   | 0.53 |   | 0.54 |   |
| Leach  ore (metric tons in thousands)       |   | 19,422                                                    |   | 17,814 |   | 17,099 |   | 24,428 |   | 25,531 |   |
| Waste  (metric tons in thousands)           |   | 27,701                                                    |   | 30,679 |   | 33,768 |   | 27,014 |   | 15,311 |   |
| Stripping  ratio(1)                         |   | 1.41                                                      |   | 1.45 |   | 1.53 |   | 1.57 |   | 1.88 |   |
| Concentrate  production:                    |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper                                      |   | 507,975                                                   |   | 505,988 |   | 462,196 |   | 503,834 |   | 333,885 |   |
| Molybdenum                                  |   | 10,321                                                    |   | 13,839 |   | 12,009 |   | 9,579 |   | 5,944 |   |
| Metal  contained in concentrate production: |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper                                      |   | 156,759                                                   |   | 152,860 |   | 136,680 |   | 140,760 |   | 91,925 |   |
| Silver                                      |   | 67                                                        |   | 66 |   | 63 |   | 59 |   | 44 |   |
| Gold  (kilograms)                           |   | 152                                                       |   | 141 |   | 138 |   | 163 |   | 132 |   |
| Molybdenum                                  |   | 5,949                                                     |   | 7,961 |   | 6,886 |   | 5,518 |   | 3,428 |   |
| Smelter(2)  and SX-EW production:(7)        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  anodes                              |   | 298,781                                                   |   | 343,919 |   | 295,533 |   | 317,133 |   | 239,031 |   |
| Copper  cathodes                            |   | 20,754                                                    |   | 22,224 |   | 21,772 |   | 20,609 |   | 19,295 |   |
| Sulfuric  acid                              |   | 871,000                                                   |   | 1,009,000 |   | 857,300 |   | 965,850 |   | 703,801 |   |
| Refinery  production:(4)                    |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  cathodes                            |   | 226,569                                                   |   | 274,990 |   | 244,153 |   | 257,495 |   | 199,905 |   |
| Refined  silver                             |   | —                                                    |   | 66 |   | 244 |   | 206 |   | 212 |   |
| Refined  gold (kilograms)                   |   | —                                                    |   | 379 |   | 1,312 |   | 1,177 |   | 742 |   |
| Rod  plant production:(5)                   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  rod                                 |   | 50,047                                                    |   | 98,615 |   | 130,611 |   | 129,562 |   | 97,485 |   |

 

6

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|                                        |   | **Year ended  December 31,**                              |   |
|---------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                        |   | **1998**                                                  |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                        |   | **(Volumes  in metric tons, unless otherwise indicated)** |   |
| **Immsa  Unit**                             |   |                                                      |   |   |   |   |   |   |   |   |   |
| Ore  milled (metric tons in thousands)      |   | 6,363                                                     |   | 6,284 |   | 5,900 |   | 5,717 |   | 4,604 |   |
| Concentrate  production:                    |   |                                                      |   |   |   |   |   |   |   |   |   |
| Zinc                                        |   | 321,297                                                   |   | 317,522 |   | 314,457 |   | 276,996 |   | 249,619 |   |
| Copper                                      |   | 109,745                                                   |   | 111,705 |   | 107,208 |   | 99,428 |   | 87,877 |   |
| Lead                                        |   | 58,728                                                    |   | 65,623 |   | 55,370 |   | 52,233 |   | 43,870 |   |
| Metal  contained in concentrate production: |   |                                                      |   |   |   |   |   |   |   |   |   |
| Zinc                                        |   | 170,331                                                   |   | 167,283 |   | 167,798 |   | 149,252 |   | 135,442 |   |
| Copper                                      |   | 25,450                                                    |   | 26,210 |   | 23,935 |   | 22,822 |   | 19,630 |   |
| Silver                                      |   | 404                                                       |   | 423 |   | 425 |   | 421 |   | 381 |   |
| Gold  (kilograms)                           |   | 420                                                       |   | 406 |   | 332 |   | 278 |   | 266 |   |
| Lead                                        |   | 30,530                                                    |   | 34,716 |   | 29,230 |   | 28,991 |   | 23,800 |   |
| San  Luis Potosi-zinc refinery production:  |   |                                                      |   |   |   |   |   |   |   |   |   |
| Refined  zinc                               |   | 101,355                                                   |   | 99,576 |   | 105,879 |   | 107,005 |   | 92,012 |   |
| Cadmium                                     |   | 601                                                       |   | 541 |   | 606 |   | 696 |   | 587 |   |
| San  Luis Potosi-copper smelter production: |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  blister                             |   | 33,053                                                    |   | 30,798 |   | 31,239 |   | 30,664 |   | 24,381 |   |
| Arsenic  trioxide                           |   | 2,573                                                     |   | 2,419 |   | 2,523 |   | 2,380 |   | 1,947 |   |
| Monterrey  refinery production:(3)          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Refined  silver                             |   | 353                                                       |   | 223 |   | 161 |   | 178 |   | 157 |   |
| Refined  gold (kilograms)                   |   | 1,781                                                     |   | 725 |   | 212 |   | 164 |   | 155 |   |
| Refined  lead                               |   | 30,154                                                    |   | 26,937 |   | 27,904 |   | 30,430 |   | 17,659 |   |
| Nueva  Rosita facilities production:        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Coal                                        |   | 296,605                                                   |   | 200,292 |   | 1,677,241 |   | 1,776,529 |   | 1,050,296 |   |
| Coke                                        |   | 98,695                                                    |   | 93,830 |   | 86,957 |   | 88,339 |   | 83,456 |   |
| **Cananea  Unit**                           |   |                                                      |   |   |   |   |   |   |   |   |   |
| Material  moved (metric tons in thousands)  |   | 103,890                                                   |   | 84,477 |   | 103,475 |   | 94,551 |   | 88,435 |   |
| Ore  milled (metric tons in thousands)      |   | 22,056                                                    |   | 20,955 |   | 23,371 |   | 20,507 |   | 19,026 |   |
| Ore  grade (average % copper for period)    |   | 0.58                                                      |   | 0.50 |   | 0.52 |   | 0.50 |   | 0.57 |   |
| Leach  ore (metric tons in thousands)       |   | 31,356                                                    |   | 22,147 |   | 30,671 |   | 33,774 |   | 31,876 |   |
| Waste  (metric tons in thousands)           |   | 50,481                                                    |   | 41,375 |   | 49,433 |   | 40,270 |   | 37,533 |   |
| Stripping  ratio(1)                         |   | 3.71                                                      |   | 3.03 |   | 3.43 |   | 3.61 |   | 3.65 |   |
| Copper  concentrate production              |   | 385,621                                                   |   | 329,302 |   | 379,640 |   | 314,354 |   | 323,351 |   |
| Metal  contained in concentrate production: |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper                                      |   | 105,882                                                   |   | 84,610 |   | 97,451 |   | 82,198 |   | 86,641 |   |
| Silver                                      |   | 30                                                        |   | 30 |   | 40 |   | 31 |   | 25 |   |
| Gold  (kilograms)                           |   | 407                                                       |   | 331 |   | 376 |   | 300 |   | 234 |   |
| Smelter(6)  and SX-EW(7) production:        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  blister                             |   | 49,592                                                    |   | — |   | — |   | — |   | — |   |
| Copper  cathodes                            |   | 28,064                                                    |   | 28,729 |   | 33,788 |   | 39,952 |   | 50,041 |   |

 

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(1)                                  Strippingratio is waste plus leachable ore divided by ore mined in the material moved inan open pit operation.

 

(2)                                  Smeltercapacity was increased to 360,000 tons per year in June 1999 with the additionof a new shaft furnace at the La Caridad smelter.

 

(3)                                  Includesproduction from the Monterrey plant and refining operations with third parties.

 

(4)                                  Theprecious metals refinery at La Caridad commenced operations in July 1999.

 

(5)                                  Therod plant at La Caridad commenced operations in April 1998.

 

(6)                                  TheCananea smelter ceased operations in November 1998 and was closed in February1999.

 

(7)                                  Productionat the Mexcobre and Cananea SX-EW facilities includes the production of copperfrom leaching materials.

 

7

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#### **EXCHANGE RATES**

 

Mexico has had a free market for foreign exchangesince November 1991. Prior to December 1994, the Mexican Central Bank kept thepeso-U.S. dollar exchange rate within a range prescribed by the Governmentthrough intervention in the foreign exchange market. In December 1994, theGovernment suspended intervention by the Mexican Central Bank and allowed thepeso to float freely against the U.S. dollar.

 

During much of 1998, the foreign exchange markets werevolatile as a result of financial crises in Asia and Russia and financialturmoil in certain countries, including Brazil and Venezuela. The peso declinedduring this period, but was relatively stable in 1999 and in 2000. The pesoappreciated in value against the U.S. dollar in 2001 and continued to do soduring the first quarter of 2002. During the remainder of 2002 and the firstquarter of 2003, however, the peso has depreciated against the U.S. dollar.  There can be no assurance that thegovernment will maintain its current policies with regard to the peso or thatthe peso will not depreciate or appreciate in the future.

 

The following table sets forth, for the periodsindicated, the high, low, average and period-end noon buying rate, expressed innominal pesos per U.S. dollar.

 
|                          |   | **Exchange  Rate** |   |
|-------------------------------|--------|--------------------|--------|
| **Period**                    |   | **High**           |   | **Low** |   | **Average(1)** |   | **Period-end** |   |
| 2002:                         |   |               |   |   |   |   |   |   |   |
| December                      |   | 10.31              |   | 10.10 |   | 10.20 |   | 10.31 |   |
| 2003:                         |   |               |   |   |   |   |   |   |   |
| January                       |   | 10.99              |   | 10.33 |   | 10.55 |   | 10.99 |   |
| February                      |   | 11.06              |   | 10.77 |   | 10.91 |   | 11.03 |   |
| March                         |   | 11.23              |   | 10.72 |   | 10.94 |   | 10.77 |   |
| April                         |   | 10.79              |   | 10.43 |   | 10.63 |   | 10.43 |   |
| May                           |   | 10.41              |   | 10.11 |   | 10.26 |   | 10.32 |   |
| June  (through June 23, 2003) |   | 10.74              |   | 10.24 |   | 10.50 |   | 10.47 |   |

 

----

(1)                                  Averageof daily rates.

 

 
|                          |   | **Exchange  Rate** |   |
|-------------------------------|--------|--------------------|--------|
| **Year ended December 31,**   |   | **Average(1)**     |   | **Period-end** |   |
| 1998                          |   | 9.25               |   | 9.90 |   |
| 1999                          |   | 9.56               |   | 9.48 |   |
| 2000                          |   | 9.46               |   | 9.60 |   |
| 2001                          |   | 9.34               |   | 9.17 |   |
| 2002                          |   | 9.66               |   | 10.31 |   |
| 2003  (through June 23, 2003) |   | 10.63              |   | 10.47 |   |

 

----

(1)                                  Averageof rates on the last day of each month in the period.

 

As of June 23, 2003, the noon buying rate was 10.4745pesos per U.S. dollar.

 

8

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#### **RISK FACTORS**

 

*We aresubject to various changing competitive, economic, political and social risksand conditions which are described below:*

 

**CertainFactors Relating to Our Business**

 

*Fluctuationsin the market price of the metals we produce may significantly affect ourfinancial performance*

 

Our financial performance is significantly affected bythe market prices of the metals that we produce and, in particular, marketprices of copper, zinc and silver. These prices have historically been subjectto wide fluctuations and are affected by numerous factors beyond our control,including international economic and political conditions, levels of supply anddemand, the availability and cost of substitutes, inventory levels maintainedby producers and others and, to a lesser degree, inventory carrying costs andcurrency exchange rates.  In addition, themarket prices of certain metals have on occasion been subject to rapidshort-term changes due to speculative activities.

 

Our results were adversely affected in 1998, 1999,2001 and 2002 by decreases in copper prices. Copper prices averagedUS$ 0.72 per pound during 2002, as compared to an average of US$ 0.73per pound during 2001 and US$ 0.84 per pound during 2000. The price ofcopper was US$ 0.70 per pound at December 31, 2002 and the lowest price ofcopper during 2002 was US$ 0.65 per pound on January 2, 2002. The price ofcopper was US$ 0.77 per pound at June 23, 2003. The current low level ofcopper prices resulted in lower net sales, a loss from operations and a netloss in 2002.  Copper prices reboundedslightly during the latter part of 2002 and the first quarter of 2003. In theevent of a substantial and sustained decline in the price of copper, thesetrends in operating results may persist or worsen, and we might, in veryadverse market conditions, consider curtailing or modifying certain of our miningand processing operations.  See Item 5.“Operating and Financial Review and Prospects—Operating Results—CommodityPrices; —Summary of Prices, Volumes Sold and Net Sales.”

 

*Despiteour financial restructuring, our financial condition and liquidity may notimprove*

* *

As a result of the decline in the market prices of themetals we produce during the past several years, in 2001 and 2002 we were notin compliance with certain debt covenants and were in default under certainpayment obligations.  On April 29, 2003,we entered into several definitive agreements through which we restructured theterms of our defaulted indebtedness. Although we are not aware of any existing default with respect to theterms of our indebtedness after the financial restructuring, the current lowlevel of metals prices may continue to place significant strains on our resultsof operations and liquidity.  As themarket prices of the metals we produce is outside of our control, ourrestructuring may not result in any lasting improvement in our financialcondition and liquidity.  In addition,we continue to be exposed to the other risks enumerated in these “Risk Factors”even after the restructuring.  There canbe no assurance that we will be able to comply with the terms of our indebtednessor that we will not be in payment default in the future.

 

*We maybe adversely affected by the imposition of more stringent environmentalregulations that would require us to spend additional funds*

* *

The mining and processing industries in Mexico aresubject to federal and state laws and regulations (including certain industrytechnical standards) governing protection and remediation of the environment,mining operations, occupational health and safety and other matters. Mexicanenvironmental regulations have become increasingly stringent over the lastdecade. This trend is likely to continue and may be influenced by theenvironmental agreement entered into by Mexico, the United States and Canada inconnection with the North American Free Trade Agreement (“NAFTA”). Accordingly,although we believe that all of our facilities are in material compliance withapplicable environmental, mining and other laws and regulations, there can beno assurance that more stringent enforcement of existing laws and regulationsor the adoption of additional laws and regulations would not have an adverseeffect on our business, properties, results of operations, financial conditionor prospects. See Item 4.  “Informationon the Company—Business Overview—Environmental and Other Regulations.”

 

9

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*Ouractual reserves may not conform to current expectations*

* *

The proven and probable ore reserve data included inthis Annual Report are estimates based on standard evaluation methods generallyused in the international mining industry. There can be no assurance thatactual reserves will conform to geological, metallurgical or other expectationsor that the estimated volume and grade of ore will be recovered. Lower marketprices increased production costs, reduced recovery rates and other factors,may render proven and probable reserves uneconomic to exploit and may result inrevision of reserve data from time to time. Reserve data are not indicative offuture results of operations. See Item 4. “Information on the Company—Description of Property, Plants andEquipment—Reserves.”

 

*Ourmetals exploration efforts are highly speculative in nature and may beunsuccessful*

* *

Metals exploration is highly speculative in nature,involves many risks and frequently is unsuccessful.  Once mineralization is discovered, it may take a number of yearsfrom the initial phases of drilling before production is possible, during whichtime the economic feasibility of production may change. Substantialexpenditures are required to establish proven and probable ore reserves throughdrilling, to determine metallurgical processes to extract the metals from theore and, in the case of new properties, to construct mining and processingfacilities. As a result of the foregoing uncertainties, no assurance can begiven that our exploration programs will result in the expansion or replacementof current production with new proven and probable ore reserves. See Item4.  “Information on theCompany—Description of Property, Plants and Equipment—Exploration.”

 

*Ourinsurance coverage may be insufficient to cover our losses*

* *

The business of mining, smelting and refining copper,zinc and other metals is generally subject to a number of risks and hazards,including industrial accidents, labor disputes, unusual or unexpectedgeological conditions, changes in the regulatory environment, environmentalhazards and weather and other natural phenomena such as earthquakes. Suchoccurrences could result in damage to, or destruction of, mining, monetarylosses and possible legal liability. We maintain insurance against these andother risks, which may not provide adequate coverage in certain circumstances.Insurance against certain risks (including certain liabilities forenvironmental pollution or other hazards as a result of exploration andproduction) is not generally available to us or to other companies within theindustry.

 

*We areuncertain as to the termination and renewal of our concessions*

* *

Under Mexican law, mineral resources belong to theMexican nation and a concession from the Mexican federal government is requiredto explore for or exploit mineral reserves. Our mineral rights derive fromconcessions granted by the Secretaría de Economía, formerly known as Secretaríade Comercio y Fomento Industrial (the “Secretary of Economy”) pursuant to theLey Minera (the “Mining Law”) and regulations thereunder.

 

Mining concessions may be terminated if theobligations of the concessionaire are not satisfied. A concessionaire of amining concession is obligated, among other things, to explore or exploit therelevant concession, to pay any relevant fees, to comply with all environmentaland safety standards, and to provide information to the Secretary of Economyand permit inspections by the Secretary of Economy.  See Item 4.  “Informationon the Company—Description of Property, Plants and Equipment—Mining Concessionsand Properties.”

 

*Changesin the level of industrial and consumer users’ demand for our metal productsmay adversely affect our product sales revenues*

* *

The level of our product sales revenues is dependenton the level of industrial and consumer users’ demand for the concentrates andrefined and semi-refined metal products we sell. Changes in technology,industrial processes and consumer habits may affect the level of that demand tothe extent that such changes increase or decrease the need for our metalproducts. Technological developments in industries as diverse as fiber optics(in which communications network links are fabricated from glass fiber ratherthan copper wire) and digital photography (which employs memory chips in lieuof traditional film that relies on developing techniques using silver) mayaffect overall levels of demand for certain metals.

 

10

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**CertainFactors Relating to Mexico and Elsewhere May Adversely Affect Our Business,Results of Operations and Financial Condition**

 

*Mexicaneconomic and political conditions may have an adverse impact on our business*

* *

Beginning in December 1994 and continuing into 1996,Mexico experienced an economic crisis characterized by exchange rateinstability and significant devaluation of the peso, increased inflation, highdomestic interest rates, a substantial outflow of capital, negative economicgrowth, reduced consumer purchasing power and high unemployment. The economiccrisis occurred in the context of a series of internal disruptions andpolitical events including a large current account deficit, civil unrest in thesouthern state of Chiapas, the assassination of two prominent politicalfigures, a substantial outflow of capital and a significant devaluation of thepeso.

 

The annual inflation rate in Mexico was 18.6% in 1998,12.8% in 1999, 9.0% in 2000, 4.4% in 2001 and 5.7% in 2002. The Mexicangovernment has publicly announced that it does not expect inflation to exceed3.0% in 2003.  Interest rates on 28-dayCetes or Mexican treasury bills were an average of 24.8% per annum in 1998,16.25% per annum in 1999, 15.24% per annum in 2000, 11.26% per annum in 2001and 7.09% per annum in 2002. On June 20, 2003, the 28-day Cetes rate was 7.17%per annum. Mexico’s gross domestic product increased at an annual rate of 4.8%in 1998, 3.7% in 1999, 6.9% in 2000, decreased 0.3% in 2001 and increased 0.9%in 2002. Gross domestic product decreased at an annualized rate of 2.3% in thefirst three months of 2003. International reserves were US$ 30.1 billion at December 31, 1998, US$30.7 billion at December 31, 1999, US$ 33.6 billion at December 31, 2000, US$40.9 billion at December 31, 2001, US$ 48.0 billion at December 31, 2002 and US$53.3 billion at June 20, 2003.

 

The Mexican government has exercised, and continues toexercise, significant influence over the Mexican economy. Economic plans of theMexican government in the past have not, in certain respects, fully achievedtheir objectives, and there can be no assurance that these and other economicplans of the Mexican government will achieve their stated goals. Future Mexicangovernmental actions could have an adverse effect on market conditions, pricesand returns on Mexican securities (including our securities) and Mexicancompanies (including us, our business, results of operations, financialcondition, ability to obtain financing and prospects).

 

*Inflation, restrictive exchangecontrol policies and devaluation of the peso may adversely affect our financialcondition and results of operations*

* *

The inflation rate in Mexico, as measured by the NCPI,was 18.6% in 1998, 12.3% in 1999, 9.0% in 2000, 4.4% in 2001 and 5.7% in 2002.At the same time, the peso has been subject in the past to significantdevaluation, which may not have been proportionate to the inflation rate andmay not be proportionate to the inflation rate in the future. The value of thepeso declined by 23.2% in 1998, 4.2% in 1999, and 0.81% in 2000, appreciated by4.48% in 2001 and declined by 12.47% in 2002. See “Item 3. KeyInformation—Exchange Rates”.

 

Although all of our sales of metals are priced andinvoiced in U.S. dollars, a substantial portion of our cost of sales(approximately 71% in 2002) is denominated in pesos. Accordingly, wheninflation in Mexico increases without a corresponding devaluation of the peso,as it did in 1999, 2000 and in 2001, our net income is adversely affected.  See Item 5. “Operating and Financial Reviewand Prospects—Operating Results—Effects of Exchange Rate Fluctuations andInflation.”

 

We have significant liabilities and assets denominatedin U.S. dollars and, to the extent we have net U.S. dollar-denominatedliabilities, we are exposed to foreign exchange losses when the peso declinesin value against the U.S. dollar. We recorded net foreign exchange losses ofPs. 271.6 million in 2002. The peso has been subject to significantdevaluation in the past and has caused us to suffer net foreign exchangeslosses. There can be no assurance that such devaluation will not occur in thefuture or that it will not result in net foreign exchange losses for us. SeeItem 3. “Key Information—Exchange Rates,” Item 5. “Operating and Financial Review and Prospects—OperatingResults—Effects of Exchange Rate Fluctuations and Inflation”, and Item 11.“Quantitative and Qualitative Disclosure about Market Risk.”

 

In the event of renewed shortages of foreign currency,no assurance can be given that the Mexican government will not instituterestrictive exchange control policies in the future. The imposition of suchpolicies in the future could impair our ability to obtain imported goods and tomeet our U.S. dollar-denominated obligations (including our Notes) and couldhave an adverse effect on our business and financial condition.  See Item 3. “Key Information—ExchangeRates.”

 

11

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*Developmentsin other emerging markets countries and in the United States  may adverselyaffect the market price of the Notes*

* *

The market value of securities of Mexican companiesis, to varying degrees, affected by economic and market conditions in otheremerging market countries. Although economic conditions in such countries maydiffer significantly from economic conditions in Mexico, investors’ reactionsto developments in any of these other countries may have an adverse effect onthe market value of securities of Mexican issuers. In late October 1997, pricesof both Mexican debt securities and Mexican equity securities droppedsubstantially, precipitated by a sharp drop in values of securities in theAsian markets.  Similarly, in the secondhalf of 1998 and in early 1999, prices of Mexican securities were adverselyaffected by the economic crises in Russia and Brazil. There can be no assurancethat the market value of the Notes would not be adversely affected by eventselsewhere, especially in emerging market countries.

 

There is concern that Argentina’s insolvency anddefault on its public debt, which deepened the existing financial, economic,and political crises in that country, may adversely affect securities ofissuers or guarantors in other countries, including Mexico. The devaluation ofthe Argentine peso has had a material adverse effect on Argentina and hascreated a crisis in the Argentine financial system. The Argentine governmenthas substantially impeded the ability of Argentine debtors to service theirexternal debt without Argentine Central Bank approval. To the extent that theArgentine government is unsuccessful in preventing further economic declinethrough its implementation of various economic measures, this crisis mayadversely affect issuers or guarantors in other countries, including Mexico.

 

In addition, in recent years economic conditions inMexico have increasingly become correlated to U.S. economic conditions.Therefore, adverse economic conditions in the United States could have asignificant adverse effect on Mexican economic conditions.

 

**CertainFactors Relating to the Notes**

 

*Ourability to repay the Notes is almost exclusively dependent on cash flows fromour subsidiaries*

* *

We are a holding company that has no businessoperations other than (i) holding the capital stock of our subsidiaries, (ii)holding cash and short-term investments and (iii) advancing funds to, andreceiving funds from, subsidiaries engaged in operations or in providingservices to other subsidiaries.  Inrepaying the Notes, we will rely almost exclusively on cash flows from oursubsidiaries. See Item 4. “Information on the Company—Organizational Structure”and Item 5. “Operating and Financial Review and Prospects—Liquidity and CapitalResources.”  The ability of our subsidiariesto make payments with respect to advances from us or to advance funds to uswill be affected by the obligations of the subsidiaries to their creditors, andclaims of the holders of the Notes against the cash flows and assets of oursubsidiaries other than the subsidiaries which are guarantors of the Notes(“Guarantors”) will be effectively subordinated to claims of such creditors. AtDecember 31, 2002, approximately 1.6% of our consolidated stockholders’ equitywas in these non-Guarantor subsidiaries. The ability of our subsidiaries to paydividends will be subject to applicable provisions of Mexican corporate law,the by-laws of each subsidiary and applicable contractual restriction. TheGuarantors will be subject to similar limitations on the ability of theirrespective subsidiaries to make payments to them.

 

*TheNotes are structurally subordinate to substantially all of our indebtedness,which is now secured*

 

As a result of the restructuring of our financialindebtedness, which concluded on April 29, 2003 with the execution ofdefinitive agreements by and among, among others, us and our creditors,substantially all of our indebtedness is now secured by collateral comprised ofour assets and those of our subsidiaries. The collateral securing our obligations in connection with therestructured indebtedness includes, without limitation, substantially all ofour assets, our common stock and the common stock of Minera México. As aresult, the Notes are structurally subordinated to our restructuredindebtedness to the extent of such collateral. In addition, this restructured indebtedness imposes financial and otherrestrictions on us and our subsidiaries, including limitations on theincurrence of debt and liens and on our ability to dispose of assets. Theserestrictions may reduce our flexibility in responding to changing business oreconomic conditions. Failure by us to comply with certain covenants will givethe relevant lenders the right to retain the proceeds of the collateral, todeclare the indebtedness to be in default, to accelerate the maturity of theindebtedness or to take other enforcement action against us.  See Item 5. “Operating and Financial Reviewand Prospects—Liquidity and Capital Resources.”  Any such enforcement action would have an adverse effect on ourfinancial position.

 

12

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*We maynot have sufficient assets to satisfy claims with respect to any guarantee ofthe Notes that is held to be unenforceable*

 

To the extent that the guarantees with respect to theNotes (the “Guarantees”) are valid and enforceable in accordance with the lawsof the State of New York and the United States (subject to bankruptcy,insolvency and other circumstances in which such enforceability may belimited), the laws of Mexico do not prevent the Guarantees from being valid,binding and enforceable against the Guarantors in accordance with their terms.In the event that U.S. federal or state fraudulent conveyance or similar lawsare applied to the issuance of a Guarantee, if any Guarantor, at the time it incurredsuch Guarantee, (a)(i) was or is insolvent or rendered insolvent by reason ofsuch incurrence, (ii) was or is engaged in a business or transaction for whichthe assets remaining with such Guarantor constituted unreasonably small capitalor (iii) intended or intends to incur, or believed or believes that it wouldincur, debts beyond its ability to pay such debts as they mature and (b)received or receives less than reasonably equivalent value or fairconsideration, the obligations of such Guarantor under its Guarantee could beavoided, or claims in respect of such Guarantee could be subordinated to allother debts of such Guarantor.  Amongother things, a legal challenge to a Guarantee on fraudulent conveyance groundsmay focus on benefits, if any, realized by such Guarantor as a result of ourissuance of the Notes. To the extent that any Guarantee were held to be afraudulent conveyance or unenforceable for any other reason, the holders of theNotes would cease to have any claim in respect of the Guarantor issuing suchGuarantee and would have a claim solely with respect to any Guarantors whoseGuarantees were not avoided or held unenforceable. There can be no assurancethat, after providing for all prior claims, there would be sufficient assets tosatisfy the claims of the holders of the Notes relating to any avoided portionof a Guarantee.  See “—Holding CompanyStructure”.

 

*Thereis no public market for the Notes*

* *

There can be no assurance regarding the futuredevelopment or continuation of a market for the Notes, the ability of holdersof the Notes to sell their Notes or the price for which such holders may beable to sell their Notes.  In such amarket, the Notes could trade at prices that may be higher or lower than theinitial offering price, depending on many factors, including some beyond ourcontrol. The liquidity of, and trading market for, the Notes may also beadversely affected by changes in interest rates and declines and volatility inthe market for similar securities as well as by any changes in our financialcondition or results of operations.

 

*We maynot have sufficient resources to satisfy our obligation to repurchase the Notesupon a change of control*

* *

The Indenture under which the Notes were issuedprovides that upon the occurrence of a Change of Control (as defined below), wewill be required to offer to holder of the Notes to repurchase any and all ofthe Notes at a purchase price equal to 100% of the aggregate principal amountthereof, plus accrued and unpaid interest, if any, to the date ofpurchase.  In general, a Change ofControl will be deemed to have occurred when (i) Grupo México, S.A. de C.V.(hereinafter “Grupo México”) and its controlling shareholders beneficially own(within the meaning of Rule 13d-3 under the Exchange Act), directly orindirectly, in the aggregate less than 51% of our Voting Stock or (ii) any“person” or “group” (as such terms are used in Section 13(d) and 14(d) of theExchange Act) other than Grupo México or its controlling shareholders shallhave the right or ability by voting power, contract or otherwise to elect ordesignate for election a majority of our Board of Directors. We do not have theability under the Indenture to waive or otherwise unilaterally amend ourobligation to repurchase the Notes upon the occurrence of a Change of Control.There can be no assurance that we would have sufficient resources to repurchasethe Notes upon a Change of Control if required to do so under the terms of theIndenture. Our failure to repurchase the Notes in such event could result in anEvent of Default under the Indenture.

 

13

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*Paymenton the Notes in pesos under some circumstances may have unfavorableconsequences*

 

We will be required to make payments of amounts owedon the Notes in U.S. dollars. Under the Ley Monetaria de los Estados UnidosMexicanos (the Mexican Monetary Law), however, obligations to make payments inMexico in foreign currency, whether by agreement or upon enforcement of ajudgment, may be discharged in pesos at the rate of exchange for pesosprevailing at the time and place of payment or judgment. Accordingly, since theNotes are payable outside Mexico, we will be legally entitled to make paymentof amounts due on the Notes in pesos if payment of the Notes is sought inMexico through the enforcement of a non-Mexican judgment or otherwise. If weelect to make payments due on the Notes in pesos under such circumstances inaccordance with the Mexican Monetary Law, there can be no assurance that the amountsso paid would be convertible by the payee into U.S. dollars or that, ifconvertible, such amounts would be sufficient to purchase U.S. dollars equal tothe amount of principal, interest or additional amounts due on the Notes. Wehave agreed under the Indenture to indemnify the holder of any Note for thedifference between the U.S. dollar amount expressed to be due to the recipientunder such Note and the U.S. dollar amount that the recipient is able topurchase with the amount received or recovered in that other currency (in thiscase, pesos) on the date of that receipt or recovery.

 

### **ITEM4.**                                           INFORMATIONON THE COMPANY

 

#### **HISTORY ANDDEVELOPMENT OF THE COMPANY**

* *

*Organization*

* *

We are a Mexican corporation with variable capital *(sociedadanónima de capital variable)* organized under the laws of Mexico andwe were incorporated in Mexico in 1978 with duration of 99 years. Ourregistered office is located at Avenida Baja California No. 200, Roma Sur,Mexico, D.F., C.P. 06760, and our telephone number is 52-55-5564-7066.

 

*HistoricalBackground*

* *

Our origins can be traced to the early 1900s when theAmerican Smelting and Refining Company, which later changed its name to AsarcoIncorporated (“Asarco”), expanded its mining operations into Mexico anddeveloped the Santa Eulalia mine and the Chihuahua smelter through awholly-owned subsidiary, Compañía Minera Asarco, S.A. In 1965, Compañía MineraAsarco, S.A. was reorganized, and several Mexican investors acquired a majorityownership position. In 1974, Asarco sold part of its interest thereby reducingits ownership to 34% and Compañía Minera Asarco changed its name to AsarcoMexicana, S.A. In 1978, the Larrea family acquired a majority ownership ofAsarco Mexicana, which had changed its name to Industrial Minera México, S.A.,and we were formed as a holding company for Industrial Minera México, S.A. deC.V. (“Immsa”). Shortly thereafter, Asarco exchanged its ownership interest inImmsa for a 38% interest in us. From 1979 to 1992 Asarco reduced itsparticipation in us to 31.17%.

 

In 1978, Grupo Industrial Minera México, S.A. de C.V.(“GIMMSA”) was formed in order to become our holding company and to create apublic market for GIMMSA shares. In 1994, pursuant to an exchange offer withGIMMSA, Grupo México S.A. de C.V., as it existed at that time (the “formerGrupo México”), became our successor holding company and our shares that wereheld by Asarco were exchanged for a 26% interest in the former Grupo México.Asarco then ceased to hold a significant ownership interest in the former GrupoMéxico. In October 1997, we changed our name to Grupo Minero México, S.A. deC.V. Subsequently, pursuant to a tender offer that was consummated in November1999, a wholly-owned subsidiary of the former Grupo México acquired all of theoutstanding capital stock of Asarco not owned by the former Grupo México or itsaffiliates.

 

In December 2000, the former Grupo México underwent arestructuring designed to (i) create a structure that would allow for theglobalization of its mining division, which operates in Mexico, Peru and theUnited States, (ii) reduce the “country risk” cost associated with financing,(iii) improve access to the capital markets, (iv) improve share liquidity, (v)maintain the tax consolidation previously experienced by the former GrupoMéxico, (vi) separate the railway business and new infrastructure projects fromthe internationalized mining division and (vii) allow for the acquisition ofmining companies through a non-Mexican vehicle while maintaining taxconsolidation in Mexico.  As part of thecorporate restructuring, on September 2, 1999, Nueva G. México, S.A. de C.V.(“Nueva G. México”) was incorporated, and after exchanging shares with theshareholders of the former Grupo México, became the ultimate parent companyand, as of December 1, 2000, changed its name from Nueva G. México to GrupoMéxico, S.A. de C.V. (“Grupo México”). In turn, the former Grupo México changedits name to Minera México, S.A. de C.V. (“Minera México”) and remained as theholding company for the mining division in Mexico after the restructuring.Minera México continues to hold a 98.85% interest in us.

 

14

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Mexicana de Cobre, S.A. de C.V. (“Mexcobre”), oursubsidiary, was established in 1968 pursuant to a concession from the Mexicanauthorities to explore the La Caridad property. Exploitation of the mine beganin 1979, with the company under the joint control of Nacional Financiera,S.N.C. (“Nafin”), a government development bank, and another Mexican governmentalagency, and Fomento Industrial del Norte de México, S.A. de C.V. (“Fidenome”),an investment vehicle owned by a group of Mexican investors, including membersof the Larrea family. By 1988, primarily as a result of cost overruns andconstruction delays associated with a new smelter, Mexcobre was unable to meetits financial obligations. In 1988, Fidenome transferred its Mexcobre shares toa trust in preparation for the financial restructuring and sale of Mexcobre bythe Mexican government to the private sector. In November 1988, we acquired 91% of the shares of Mexcobre through apublic auction for a purchase price of approximately US$ 680 million.

 

The Cananea mine is the oldest continuously operatingcopper mine in North America, with operations tracing back to 1899. The minewas purchased by the Anaconda Company (“Anaconda”) in 1917 and minedexclusively for underground metals until the early 1940s, when the first openpit was developed. Underground mining ceased in 1966. Anaconda sold 51% of the Cananeamining company to Nafin in 1971 and transferred its remaining interest to Nafinin 1982. Two attempts to sell the company in 1988 failed, and a strike in 1989precipitated bankruptcy proceedings. In 1990, Mexcobre acquired a controllinginterest in the Cananea mine and processing facilities through a public auctionfor a purchase price of approximately US$ 475 million.

 

15

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#### **ORGANIZATIONALSTRUCTURE**

 

We are a 98.85% owned subsidiary of Minera México, S.A.de C.V. We are also a holding company and all of our operations are conductedthrough subsidiaries that are grouped into (a) Mexicana de Cobre, S.A. de C.V.(“Mexcobre,” and together with its subsidiaries, the “Mexcobre Unit”), (b)Industrial Minera México, S.A. de C.V. (“Immsa”) and Minerales Metálicos delNorte, S.A. (“Mimenosa,” and together with Immsa and their subsidiaries, the“Immsa Unit”) and (c) Mexicana de Cananea, S.A. de C.V. (“Mexcananea,” andtogether with its subsidiaries, the “Cananea Unit”).

 

On May 28, 2003, we and Minera México heldextraordinary shareholders’ meetings approving our merger with and into MineraMéxico.  Between us and Minera México,the merger is effective as of June 1, 2003. The executed resolutions andaccompanying merger agreement were registered on July 2, 2003,****withthe Mexican Public Registry of Commerce. Under Mexican law, the merger is effective with respect to third partiesninety days after the registration of the shareholders’ resolutions andaccompanying merger agreement with the Mexican Public Registry of Commerce.

 

The table set forth below lists our subsidiaries,their jurisdiction of organization and the percentage of their voting stockowned by us.

 
| **Name of Subsidiary**                            |   | **Jurisdiction** |   | **Percentage  of Voting Stock  Owned by us** |   |
|---------------------------------------------------|--------|------------------|--------|----------------------------------------------|--------|
| Mexicana  de Cobre, S.A. de C.V.                  |   | Mexico           |   | 96.4                                         | %      |
| Mexicana  de Cananea, S.A. de C.V.                |   | Mexico           |   | 98.5                                         | %      |
| Industrial  Minera México, S.A. de C.V.      |   | Mexico           |   | 100.0                                        | %      |
| Servicios  de Apoyo Administrativo, S.A. de C.V.  |   | Mexico           |   | 100.0                                        | %      |
| México  Compañía Inmobiliaria S.A. |   | Mexico           |   | 100.0                                        | %      |
| Minerales  y Minas Mexicanas, S.A. de C.V.        |   | Mexico           |   | 100.0                                        | %      |
| Minerales  Metálicos del Norte, S.A.         |   | Mexico           |   | 100.0                                        | %      |
| Mexicana  del Arco, S.A. de C.V.                  |   | Mexico           |   | 100.0                                        | %      |
| Western  Copper Supplies, Inc.                    |   | U.S.A.           |   | 100.0                                        | %      |
| Minera  Mexico Internacional, Inc.                |   | U.S.A.           |   | 100.0                                        | %      |

 

Our Mexcobre Unit, which owns and operates the mineand processing facilities at La Caridad, includes Mexcobre and itssubsidiaries. The Cananea Unit, which owns and operates the mine and processingfacilities at Cananea, includes Mexcananea and its subsidiaries. The ImmsaUnit, which owns and operates four mining complexes, three processingfacilities and a coal and coke complex, includes two operating companies (Immsaand Mimenosa). Our subsidiaries also include two exploration companies,Mexicana del Arco, S.A. de C.V. and Minerales y Minas Mexicanas, S.A. de C.V.,a services company, Servicios de Apoyo Administrativos, S.A. de C.V., a realestate company, México Compañía Inmobiliaria, S.A., a U.S. purchasing company(Western Copper Supplies, Inc.), and a U.S. sales company, Minera México,Internacional, Inc.

 

Minority investors own 1.51% of the capital stock ofMexcananea and 3.57% of the capital stock of Mexcobre. Other minority interestsin our subsidiaries are not material. On December 29, 1997, we purchased forUS$ 122 million in cash the 15.35% of Mexcananea’s capital stock thatpreviously had been owned by a minority investor.

 

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#### **BUSINESS OVERVIEW**

 

We are Mexico’s largest mining company based onconsolidated net sales of Ps. 7,352.8 million (US$ 713.0 million) in2002 and total assets of Ps. 47,350.0 million (US$ 4,591.5 million)at December 31, 2002. We are engaged principally in the mining and processingof copper, zinc, silver, gold, lead and molybdenum. Of our consolidated netsales in 2002, 62.8% was from sales of copper rod, copper cathodes and copperblister, 14.3% was from sales of zinc, 10.0% was from sales of silver and thebalance was from sales of gold, lead and other metals and by-products and frommetals trading activities. In 2002, we produced 279,673 metric tons of copper,126,499 metric tons of zinc and 500 metric tons of silver. Export salesrepresented 42.7% of our net sales in 2002 and substantially all of ourrevenues are derived from the sale of our metals in U.S. dollar-denominatedtransactions. All of our mining and processing operations, as well as ourextensive exploration activities, are located in Mexico. We have substantialore reserves and believe that we are among the lowest-cost producers of copperin the world.

 

We are a holding company that has no businessoperations other than (a) holding the capital stock of our subsidiaries, (b)holding cash and short-term investments and (c) advancing funds to, andreceiving funds from, our subsidiaries engaged in operations or in providingservices to other subsidiaries. Of our consolidated net sales in 2002, theMexcobre Unit accounted for 59.4%, the Immsa Unit accounted for 27.1% and theCananea Unit accounted for 13.6%.  See“—Organizational Structure.”

 

The Mexcobre Unit, which was acquired from the Mexicangovernment in 1988, and the Cananea Unit, which was acquired from the Mexicangovernment in 1990, operates major open-pit copper mines in northwestern Mexicoat La Caridad and Cananea, respectively. The Cananea copper mine is one of thelargest actively mined copper ore deposits in the world.

 

As of December 31, 2002, the Immsa Unit’s miningoperations consisted of five operating underground mines situated in centraland northern Mexico, where zinc, copper, lead, silver and gold are mined,including the San Martín mine, which is the largest underground mine in Mexico,and the Charcas mine, which is the largest producer of zinc in Mexico. TheImmsa Unit also operates coal mines and a coking operation to supply a portionof the energy requirements of its processing plants.

 

We have metals processing facilities at each of ouroperating units.  In recent years, wehave upgraded and expanded our processing facilities to incorporatestate-of-the-art technology, to integrate processing capacity in the Mexcobreand Cananea Units, and to increase vertical integration. In 1998, increasingcapacity at the Mexcobre smelter allowed to us to close the antiquated Cananeasmelter earlier than anticipated, and we opened a copper refinery and a copperrod plant at La Caridad. We have a precious metals refinery at La Caridad andwe completed the first phase of expanding the Cananea Unit’s SX-EW leachingfacility in November 2001. The Immsa Unit has its own processing and refiningfacilities, including a cost-efficient zinc refinery and copper smelter at SanLuis Potosí.

 

In 2002, our annual consolidated sales decreased byPs. 2,102.4 million, or 22.2% compared to annual consolidated net sales in2001, and generated a consolidated net loss in 2002 of  Ps. 178.3 million pesos.  The decrease in annual consolidated netsales from the year ended 2001 to the year ended December 31, 2002 was duemainly to the decrease in the volume sold of each of copper, zinc and silver byapproximately 20.8%, 10.9% and 23.4%, respectively. The decrease in salesvolumes was largely the result of a strategy adopted during the year thatplaced greater emphasis on cost reduction. In order to successfully implementthis strategy, the following steps were taken: a) suspension of nonprofitableoperations in three mining units of our subsidiary Immsa, b) adjusting ourplans for mining operations and, c) improving the efficiency of the productionprocess in order to reduce the production cost per copper pound sold, mainly bycausing the smelting plants and refineries to adapt to current industrystandards, resulting in significantly lower smelting and refining charges andreduced mineral purchases from third parties for processing at oursubsidiaries’ plants.  These activitiesallowed us to obtain significant operating cost savings compared to theprevious year.

 

Our financial results in recent years have beensignificantly and deleteriously affected by the decline in the market prices ofthe metals we produce.  As a result ofthis situation, during 2002 and 2001, we were not in compliance with certaindebt covenants and were in default under certain payment obligations.  We began to renegotiate the terms of ourdebt in the fourth quarter of 2002 and on December 4, 2002, we executed a termsheet with the holders of our secured export notes (such holders, the “SENHolders”) and the banks with which we have previously entered into creditarrangements (the “Bank Lenders”), in which the new terms and conditions of therestructured debt were agreed.  On April29, 2003, we entered into a series of definitive agreements restructuring theterms of our indebtedness. The most significant of these agreements (the“Common Agreement”) was executed by and among us, Minera México, S.A. de C.V.,certain of our subsidiaries, as guarantors of our obligations thereunder, theSEN Holders, the Bank Lenders, HSBC Bank, as shared payment and collateralagent for the SEN Holders and the Bank Lenders, Bank of America, asadministrative agent of the Bank Lenders, and The Bank of New York, as trusteeof our secured export notes.

 

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**Strategy**

 

During 2002, we continued to implement differentmeasures at our mining operations to counteract the substantial decrease in thevolume of metals sold. In addition, economic growth in the U.S. and in othercountries throughout the world did not meet expectations. Metals prices, especiallycopper, remained near their lowest levels in decades and were highly volatile,despite sustained demand from Chinese entities. During 2002, the average marketprice of copper fell by 1.2%, the price of zinc dropped by 12.2%; and the priceof lead fell by 5.1%, compared to the prices at the end of the prior year. Onlyprecious metals increased in 2002. During 2002, the price of silver increased by 4.5% and the price of goldincreased by 14.4% compared to the prices at the end of the prior year. Weundertook certain operating changes and cost reductions designed to strengthenour financial position and to position ourselves to take advantage of anyfuture improvements in the market conditions for our products. In this regard,we consolidated operating and administrative activities by closing down orreducing certain operations, selling off excess assets, and suspending certainpurchases from third parties as deemed necessary. Our workforce has also beenreduced and programs have been implemented to increase productivity.

 

The key elements of our strategy are as follows:

 

*Improvedproductivity of mining and processing operations*

* *

We seek to further reduce our costs of productionthrough:

 

Modernization of miningand processing facilities. We have invested more thanPs. 13,721.1 million (US$ 1,313.5 million in historical U.S. dollars)since 1992 in capital projects designed to modernize our facilities, improveproductivity and improve the quality of our metals products. These investmentsinclude upgrading stripping equipment at the Cananea mine, upgrading andexpanding the concentrator and smelter at La Caridad and constructingstate-of-the-art copper and precious metals refineries and a copper rod plantat La Caridad, which permitted us to close the Cananea smelter in late 1998without reducing the volume of copper produced. In addition, we have developedmodern SX-EW facilities at both La Caridad and Cananea, enabling us to utilizeleachable ore that otherwise would be wasted and to reduce significantly ouraverage costs of copper production.  OurSX-EW facilities, as well as our zinc refinery at San Luis Potosí, received ISO9002 certification from the International Standards Organization in 1998.  We have also invested in advancedinformation technology to improve production process monitoring and incommunications equipment to link our geographically diverse operations. At theCananea Unit, we completed the first phase of our expansion of the SX-EWfacility in November 2001 in an effort to increase production of value addedproducts and reduce the unit cost on our production of copper cathodes.

 

Improved laborproductivity and further workforce reductions. We seek toimprove labor productivity through incentive systems, worker training and theintroduction of new technology. We have worked in conjunction with labor unionrepresentatives to introduce productivity incentives and streamline work rules,allowing us to increase production without increasing our workforce.  In early 1999, we successfully resolved aserious labor problem when, after a 82-day strike at the Cananea Unit, ourunions agreed to lay-off of approximately 1,000 union and non-union employeesand to accelerate the closure of the Cananea smelter. In March 2002, weexperienced four strikes, three occurring at Immsa and one occurring atMexcobre, and in June 2002 we had two additional strikes, one of which occurredat Immsa and the other of which occurred at Mexcananea. Each of these strikeshas been resolved through agreement with the union representing the strikingemployees. See “Item 6.  Directors,Senior Management and Employees—Employees”.

 

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Improved operatingefficiencies through lower consumption of energy, water and supplies.In recent years, we have attained significant operating efficiencies in ourmining units and metallurgical plants through new technology that permits lowerenergy, water and supply consumption. We built a natural gas pipeline, whichopened in May 1999, to provide operations at the Mexcobre Unit with a cleanerand cheaper source of energy. In addition, we have installed “expert” computermonitoring systems that improve productivity by coordinating inflows andoptimizing the use of energy, water and spare parts. We will continue to seekways to improve operating efficiencies, particularly by exploring differentalternatives to produce or acquire energy at lower cost.

 

*Verticalintegration among operating units and increased sales of refined metals*

 

As part of its vertical integration strategy, we haveexpanded the capacity of Mexcobre’s low-cost smelter from 180,000 metric tonsto 360,000 metric tons of copper per year in order to consolidate our copperprocessing capacity at La Caridad. In 1997, we completed the construction of acopper refinery at La Caridad, which has an operating capacity of 300,000metric tons per year. In 1998, we completed construction of a copper rod plant.We completed the construction of a precious metals refinery as part of the samecomplex and commenced operations in July 1999. This facility has the capacityto produce approximately 467 metric tons of refined silver and 2,800 kilogramsof refined gold per annum. These facilities have allowed us to sellpredominantly refined products and to realize additional margins associatedwith sales of high grade refined metals. We will continue to seek opportunitiesfor vertical integration in copper, zinc, gold, silver and coal.

 

*Continueddiversification of markets and expansion of customer base*

* *

We seek to remain as Mexico’s leading supplier ofcopper and zinc, while continuing to strengthen our market share in the UnitedStates, Europe and Asia. In addition, we seek to continue broadening ourcustomer base by increasing our sales of high quality refined metals toend-users and providing specialized products and services to our customers.

 

**ProductionProcesses**

** **

*OpenPit Mining*

* *

In an open pit mine, the production process begins atthe mine pit, where waste rock, leachable ore and copper ore are drilled andblasted and then loaded onto diesel-electric trucks by electric shovels. Wasteis hauled to dump areas and leachable ore is hauled to leaching dumps. The oreto be milled is transported to the primary crusher. Crushed ore is then sent tothe concentrator.

 

*UndergroundMining*

* *

In an underground mine, the production process beginsat the stopes, where copper, zinc and lead veins are drilled and blasted andthen the ore is hauled to the underground crusher station. The crushed ore isthen hoisted to the surface for processing.

 

*Concentrating*

* *

The copper ore from the open pit primary crusher orthe copper, zinc and lead bearing ore from the underground mines is transportedto a concentrator plant where a crushing circuit with gyratory crushers breaksthe ore into sizes no larger than 3/4 inch. The ore is then sent to a millsection where it is ground to the consistency of sand. The finely ground ore isagitated in a chemical and water solution and pumped as a slurry to theflotation separator. The separator causes a froth that carries minerals to thesurface but not waste rock. The froth is skimmed off and filtered to produceconcentrates with a metal content of approximately 25% to 30% for copper, or55% for lead or zinc, with silver and gold associated with the copper, zinc orlead.

 

*CopperSmelting*

* *

Copper concentrates are transported to a smelter,where they are smelted using a furnace, converter and anode furnace to produceeither copper blister (which is in the form of cakes with air pockets) orcopper anodes (which are cleaned of air pockets). We produce copper anodes of99.6% purity at the La Caridad smelter and copper blister of 97.4% purity atthe San Luis Potosí smelter.

 

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*CopperRefining*

* *

Copper anodes are then sent to an electrolyticrefinery where they are treated by electrolysis to produce 99.99% pure copperand to separate silver and gold, which are recovered as slimes for furthertreatment to produce refined silver and gold. In July 1997, we completed theconstruction of an electrolytic copper refinery at La Caridad, which reachedits operating capacity of  300,000metric tons per year in June 1999.

 

*CopperRod Production*

* *

To produce copper rods, copper cathodes are firstliquefied in a furnace and then dosified in a casting machine. The dosifiedcopper is then passed through a cooling system that begins solidification ofthe copper into a 60 x 50 mm copper bar. The resulting copper bar is graduallyreduced in a rolling mill to achieve the desired diameter. The rolled bar isthen cooled and sprayed with wax as a preservation agent and collected into arod coil, which is compacted and sent to market. We completed construction of acopper rod plant at La Caridad in April 1998, which reached its operatingcapacity of 150,000 metric tons per year in May 1999.

 

*SX-EW*

* *

An alternative to the conventionalconcentrator/smelter/refinery process is the leaching and SX-EW process inwhich ore is treated with a sulfuric acid solution for a period of several years,producing a copper-pregnant solution from which copper is recovered by solventextraction and then by electrowinning to produce copper cathodes. We have SX-EWfacilities at the Cananea and La Caridad mining complexes. Refined copper canbe produced more economically (though over a longer period), and with lowergrade ore, using the SX-EW process than using the traditional concentrating,smelting and refining process.

 

*ZincRefining*

* *

Metallic zinc is produced through electrolysis usingzinc concentrates and zinc oxides. Sulfur is eliminated from the concentratesby roasting, and then the zinc oxide is dissolved in sulfuric acid solution toeliminate solid impurities. The purified zinc sulfide solution is treated byelectrolysis to produce refined zinc and to separate silver and gold, which arerecovered as concentrates.

 

*SulfuricAcid Production*

* *

Sulfur dioxide gases are produced in the coppersmelting and zinc refining processes. As a part of its environmentalpreservation program, we treat the sulfur dioxide emissions at two of ourplants, producing sulfuric acid, some of which is, in turn, used for theleaching process with the rest sold to fertilizer companies located in Mexico,the United States, Chile, Australia and elsewhere.

 

*MolybdenumProduction*

* *

Molybdenum is recovered from copper-molybdenumconcentrates produced at the concentrator. The copper-molybdenum concentrate isfirst treated through a thickener until it becomes slurry with 60% solids. Theslurry is then agitated in a chemical and water solution and pumped to theflotation separator. The separator causes a froth that carries molybdenum tothe surface but not the copper mineral (which is later filtered to producecopper concentrates of approximately 30%). The molybdenum froth is skimmed off,filtered and dried to produce molybdenum concentrates of approximately 58%.

 

*Silverand Gold Refining*

* *

Silver and gold are recovered from copper, zinc andlead concentrates in the smelters and refineries, and from slimes throughelectrolytic refining. Construction of a silver and gold refinery was completedand operations at this facility commenced in July 1999 at the Mexcobre Unit.

 

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**MetalsPrices**

** **

Our products are internationally tradedcommodities.  Prices are established onthe Commodity Exchange, Inc. (“Comex”) in New York and the London MetalExchange (“LME”), two of the most important metal exchanges. These exchangesbroadly reflect the worldwide balance of supply and demand of metals. Theprofitability of our operations is dependent on, and our financial performanceis significantly affected by, the international market prices for the metals weproduce, especially for copper, zinc and silver. Metals prices havehistorically been subject to wide fluctuations and are affected by numerousfactors beyond our control. These factors, which affect each commodity tovarying degrees, include international economic and political conditions,levels of supply and demand, the availability and cost of substitutes,inventory levels maintained by producers and others and, to a lesser degree,inventory carrying costs and currency exchange rates.  In addition, the market prices of certain metals have on occasionbeen subject to rapid short-term changes due to speculative activities. Copperprices have been in a general downward trend since mid-1997. In recent years,the market price of copper, our principal product, has remained weak and we donot expect a material improvement in the near term.

 

The following tables set forth high, low and averagespot prices in U.S. dollars for copper, zinc and silver for the periods and onthe metals exchanges indicated.

 
| **Period**         |   | **Copper  Prices—Comex** |   | **Zinc  Prices—LME** |   | **Silver  Prices—Comex** |   |
|--------------------|--------|-------------------------------|--------|---------------------------|--------|-------------------------------|--------|
|               |   | **High**                      |   | **Low**                   |   | **Period  average**           |   | **High** |   | **Low** |   | **Period  average** |   | **High** |   | **Low** |   | **Period  average** |   |
|               |   | **(US$per  pound)**           |   | **(US$per  pound)**       |   | **(US$per  ounce)**           |   |
| 1996               |   | $                             | 1.30   |                      | $      | 0.87                          |   | $ | 1.06 |   | $ | 0.50 |   | $ | 0.44 |   | $ | 0.47 |   | $ | 5.82 |   | $ | 4.68 |   | $ | 5.18 |   |
| 1997               |   | 1.22                          |   | 0.77                      |   | 1.04                          |   | 0.80 |   | 0.47 |   | 0.60 |   | 6.34 |   | 4.16 |   | 4.88 |   |
| 1998               |   | 0.86                          |   | 0.65                      |   | 0.75                          |   | 0.52 |   | 0.42 |   | 0.46 |   | 7.26 |   | 4.62 |   | 5.51 |   |
| 1999:              |   | 0.85                          |   | 0.61                      |   | 0.72                          |   | 0.56 |   | 0.41 |   | 0.49 |   | 5.76 |   | 4.87 |   | 5.22 |   |
| 2000:              |   | 0.93                          |   | 0.74                      |   | 0.84                          |   | 0.58 |   | 0.46 |   | 0.51 |   | 5.55 |   | 4.56 |   | 4.97 |   |
| 2001:              |   |                          |   |                      |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First  quarter     |   | 0.87                          |   | 0.76                      |   | 0.82                          |   | 0.48 |   | 0.44 |   | 0.46 |   | 4.81 |   | 4.28 |   | 4.53 |   |
| Second  quarter    |   | 0.80                          |   | 0.70                      |   | 0.75                          |   | 0.45 |   | 0.39 |   | 0.42 |   | 4.60 |   | 4.29 |   | 4.38 |   |
| Third  quarter     |   | 0.71                          |   | 0.65                      |   | 0.67                          |   | 0.39 |   | 0.35 |   | 0.37 |   | 4.72 |   | 4.14 |   | 4.27 |   |
| Fourth  quarter    |   | 0.72                          |   | 0.60                      |   | 0.66                          |   | 0.37 |   | 0.33 |   | 0.35 |   | 4.67 |   | 4.03 |   | 4.27 |   |
| Year               |   | 0.87                          |   | 0.60                      |   | 0.73                          |   | 0.48 |   | 0.33 |   | 0.40 |   | 4.81 |   | 4.03 |   | 4.36 |   |
| 2002               |   |                          |   |                      |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First  quarter     |   | 0.77                          |   | 0.65                      |   | 0.72                          |   | 0.38 |   | 0.34 |   | 0.36 |   | 4.70 |   | 4.22 |   | 4.47 |   |
| Second  quarter    |   | 0.78                          |   | 0.71                      |   | 0.74                          |   | 0.38 |   | 0.34 |   | 0.35 |   | 5.11 |   | 4.40 |   | 4.73 |   |
| Third  quarter     |   | 0.77                          |   | 0.66                      |   | 0.69                          |   | 0.38 |   | 0.33 |   | 0.35 |   | 5.10 |   | 4.40 |   | 4.66 |   |
| Fourth  quarter    |   | 0.76                          |   | 0.66                      |   | 0.71                          |   | 0.37 |   | 0.33 |   | 0.35 |   | 4.80 |   | 4.27 |   | 4.52 |   |
| Year               |   | 0.78                          |   | 0.65                      |   | 0.72                          |   | 0.38 |   | 0.33 |   | 0.35 |   | 5.11 |   | 4.22 |   | 4.60 |   |
| 2003               |   |                          |   |                      |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First  quarter     |   | 0.80                          |   | 0.71                      |   | 0.76                          |   | 0.37 |   | 0.34 |   | 0.36 |   | 4.91 |   | 4.35 |   | 4.66 |   |
| Second  quarter(1) |   | 0.79                          |   | 0.71                      |   | 0.75                          |   | 0.37 |   | 0.34 |   | 0.35 |   | 4.86 |   | 4.40 |   | 4.59 |   |
|                    |        |                               |        |                           |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Through June 23,2003.

 

The low level of copper prices resulted in lower netsales, lower operating income and lower net income (a net loss) in 2001 and2002.  This trend of low copper priceshas continued during the first half of 2003, although there was a slightfirming in the price of copper in the first quarter of 2003. See Item 5.“Operating and Financial Review and Prospects—Results of Operations for 2002,2001 and 2000.” If low prices continue or fall further, these effects willpersist and may be magnified. In the event of a substantial and sustainedfurther decline in prices, we might, in very adverse market conditions,consider curtailing or modifying certain of our mining and processingoperations.  See Item 3. “KeyInformation—Risk Factors.”

 

From time to time, we have entered into hedgingtransactions to provide partial protection against future decreases in themarket price of metals and we may do so under certain market conditions. In2002 and to date in 2003, however, we have not entered into any materialhedging transactions. See Item 11. “Quantitative and Qualitative DisclosuresAbout Market Risk—Commodity Price Risk.”

 

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**CashCost of Production in Terms of Copper**

** **

Presented below is a table summarizing our averageconsolidated cash cost of production of copper during each period indicated.Our cash cost of production includes all operating costs, costs of purchasingconcentrates, treatment and refining charges (which represent allowances orcosts incurred on the sale of unrefined products) and freight and other salescosts. By-product credits include the net realized value of zinc, silver, gold,lead and other by-product sales. Administrative expenses include corporateheadquarters expenses. The calculation excludes the effects of depreciation andamortization, net financing (cost) income, employee profit sharing andextraordinary items. Each component of our cash cost of production is recordedin pesos and translated into U.S. dollars at the average exchange rate for themonth in which such costs are paid or incurred or, in the case of by-productcredits, at the exchange rate on the date the corresponding sales are invoiced.

 
|                              |   | **Year ended  December 31,**                     |   |
|-----------------------------------|--------|--------------------------------------------------|--------|
|                              |   | **1998**                                         |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                              |   | **(Price in  U.S. dollars per pound of copper)** |   |
| Operating  costs                  |   | .583                                             |   | .632 |   | .712 |   | .773 |   | .718 |   |
| Costs  of purchasing concentrates |   | .111                                             |   | .113 |   | .079 |   | .103 |   | .033 |   |
| Treatment  and refining charges   |   | .081                                             |   | .076 |   | .075 |   | .044 |   | .027 |   |
| Freight  and other sales costs    |   | .068                                             |   | .091 |   | .076 |   | .078 |   | .084 |   |
| By-product  credits               |   | (.505                                            | )      | (.502 | ) | (.546 | ) | (.449 | ) | (.480 | ) |
| Administrative  expenses          |   | .048                                             |   | .050 |   | .047 |   | .050 |   | .054 |   |
| Total  cash cost of production    |   | .386                                             |   | .460 |   | .443 |   | .599 |   | .436 |   |

 

The decrease in operating costs in 2002 compared to 2001was due to primarily to the decreased cost of energy and maintenance materials.Cash cost of production is also affected by economic conditions beyond ourcontrol.

 

The decrease of the total cash cost of production in2002 compared to 2001 was primarily due to the depreciation of the Mexican pesoagainst the dollar (which, in U.S. dollar terms, makes operating costs lower)and the increase in the by-product credits in 2002 due to an increase inprecious and specialty metals prices.

 

**Marketsand Distribution**

 

Our marketing strategy is to remain Mexico’s leadingsupplier of copper and one of Mexico’s largest zinc suppliers, whilecomplementing our domestic strength with a strong international presence. Asone of Mexico’s leading exporters, we devote significant marketing efforts toexpanding our diverse international customer base. We coordinate our globalmarketing to international consumers and commodity traders through our MexicoCity and our Phoenix sales offices. Our principal customers for metal productsare industrial refiners and end-users, commodity traders and buyers of lastresort.  In general, for refinedproducts, we and our end-user customers enter into one year supply contracts atspecified prices and volumes, subject to adjustments.  In addition, we sell refined copper, silver and gold on a spotsale basis. For concentrates, we may enter into supply agreements of one tothree years.  See Note 4 to theFinancial Statements—Revenue Recognition.

 

Our three largest customers accounted for 23%, 7% and7% of total sales in 2002, 10%, 10% and 5% of total sales in 2001 and 10%, 8%and 7% of total sales in 2000.

 

In 2000, 2001 and 2002, our export sales represented62%, 60% and 43%, respectively, of our net sales.  See Item 8. “Financial Information—Export Sales” and Note 16 tothe Financial Statements—Segment Information.

 

The primary uses of copper are in the building andconstruction industries, electrical and electronic products and, to a lesserextent, industrial machinery and equipment, consumer and general products andtransportation. We sell copper anodes and copper blister to copper refiners,and we sell copper cathodes and copper rod to industrial users. The majority ofour copper sales are pursuant to annual contracts, and the six largest customers,which included two Mexican refineries and four U.S. industrial rodmanufacturers, accounted for 63%, 63% and 63% of net sales in 2000, 2001 and2002, respectively.

 

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In 2002, approximately 53% of our copper sales was inMexico and 47% was in the United States. We are the leading supplier of copperin Mexico. In addition, we believe that we will be able to qualify and registerour copper cathode products with the LME, which will permit us to sell coppercathodes directly to the LME as a buyer of last resort.

 

Zinc is primarily used to make galvanized metalproducts, alloys, brass products, zinc oxide and rolled zinc and for otherindustrial uses. We sell three grades of refined zinc, two of which are registeredon the LME, to industrial users, principally steel mills, and we sell zincconcentrates to other zinc refiners. Refined zinc is sold under annualcontracts with U.S. customers, under monthly contracts with Mexican customersand on a spot basis.

 

In 2002, approximately 49% of our refined zinc andzinc concentrate sales was in Mexico, 35% was in the United States, 11% was inEurope, 1% was in the Asia and 4% was in Central and South America. In 2002, wesupplied approximately 65% of the refined zinc sold in Mexico. Our principalMexican competitor is Peñoles. We are seeking to diversify the types ofcustomers and uses for our zinc, to include die-casting, bronze mills andgalvanizing mills.

 

The principal uses for silver are for photographicuses, electrical and electronic products, silverware and jewelry and, to alesser extent, brazing alloys and solders and miscellaneous uses. We sellsilver to metals traders on a spot basis, as well as to industrial userspursuant to long-term contracts. In 2002, 61% of our silver sales was in Mexicoand approximately 39% was in the United States. We have registered our silverrefined production on the LME, Comex and with the London Bullion MarketAssociation.

 

After completing the copper refinery at La Caridad in1998, we sell approximately 100% of our volume in the form of refined metals.Whereas past sales have been made predominantly to a group of approximately 10to 20 regular wholesale customers, we are seeking to market our refinedproducts to a customer base of end-users and wholesalers numbering in thehundreds.

 

The table below sets forth our revenues by productcategory in the geographic markets and for the periods indicated.

 

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**GrupoMinero México, S.A. de C.V.Sales Distribution 2000, 2001 and 2002(Revenues in Thousands of Historical U.S. Dollars)**

 
| **2000** |   | **Mexico** |    | **USA** |   | **Europe** |   | **Asia** |   | **Latin  America** |   | **Total** |   |
|----------|--------|------------|---------|---------|--------|------------|--------|----------|--------|--------------------|--------|-----------|--------|
| Copper   |   | US$        | 231,187 |    | US$    | 487,328    |   | US$      | — |               | US$    | 1,964     |   | US$ | 20,020 |   | US$ | 740,499 |   |
| Zinc     |   | 81,237     |    | 43,177  |   | 33,879     |   | —   |   | 352                |   | 158,645   |   |
| Silver   |   | 21,156     |    | 82,237  |   | 655        |   | 2,936    |   | 1,518              |   | 108,502   |   |
| Gold     |   | 12,182     |    | 9,654   |   | 97         |   | —   |   | 33                 |   | 21,966    |   |
| Lead     |   | 11,576     |    | 803     |   | 85         |   | 673      |   | —             |   | 13,137    |   |
| Others   |   | 70,972     |    | 6,762   |   | 5,470      |   | 2,026    |   | 56                 |   | 85,286    |   |
| Total    |   | US$        | 428,310 |    | US$    | 629,961    |   | US$      | 40,185 |               | US$    | 7,600     |   | US$ | 21,979 |   | US$ | 1,128,035 |   |
|          |        |            |         |         |        |            |        |          |        |                    |        |           |        |  |  |  |  |  |  |  |

 
| **2001** |   | **Mexico** |    | **USA** |   | **Europe** |   | **Asia** |   | **Latin  America** |   | **Total** |   |
|----------|--------|------------|---------|---------|--------|------------|--------|----------|--------|--------------------|--------|-----------|--------|
| Copper   |   | US$        | 176,135 |    | US$    | 402,677    |   | US$      | — |               | US$    | 579       |   | US$ | — |   | US$ | 579,391 |   |
| Zinc     |   | 49,521     |    | 41,268  |   | 15,934     |   | 1,834    |   | 6,076              |   | 114,633   |   |
| Silver   |   | 30,279     |    | 56,829  |   | 178        |   | 1,510    |   | —             |   | 88,796    |   |
| Gold     |   | 9,489      |    | 8,430   |   | —     |   | 237      |   | 91                 |   | 18,247    |   |
| Lead     |   | 13,570     |    | —  |   | —     |   | 853      |   | 279                |   | 14,702    |   |
| Others   |   | 78,706     |    | (907    | )      | 2,528      |   | 1,209    |   | 4,226              |   | 85,762    |   |
| Total    |   | US$        | 357,700 |    | US$    | 508,297    |   | US$      | 18,640 |               | US$    | 6,222     |   | US$ | 10,672 |   | US$ | 901,531 |   |

 
| **2002** |   | **Mexico** |    | **USA** |   | **Europe** |   | **Asia** |   | **Latin  America** |   | **Total** |   |
|----------|--------|------------|---------|---------|--------|------------|--------|----------|--------|--------------------|--------|-----------|--------|
| Copper   |   | US$        | 245,234 |    | US$    | 220,990    |   | US$      | — |               | US$    | —    |   | US$ | — |   | US$ | 466,224 |   |
| Zinc     |   | 46,275     |    | 32,720  |   | 9,909      |   | 1,122    |   | 3,459              |   | 93,485    |   |
| Silver   |   | 44,665     |    | 28,577  |   | 220        |   | (735     | )      | 735                |   | 73,462    |   |
| Gold     |   | 7,455      |    | 2,522   |   | —     |   | (240     | )      | 270                |   | 10,007    |   |
| Lead     |   | 11,236     |    | —  |   | —     |   | (872     | )      | 1,113              |   | 11,477    |   |
| Others   |   | 59,896     |    | (246    | )      | 5,099      |   | 773      |   | 3,594              |   | 69,116    |   |
| Total    |   | US$        | 414,761 |    | US$    | 284,562    |   | US$      | 15,229 |               | US$    | 48        |   | US$ | 9,171 |   | US$ | 723,771 |   |
|          |        |            |         |         |        |            |        |          |        |                    |        |           |        |  |  |  |  |  |  |  |

 

See Item 5. “Operating and Financial Review and Prospects—Summary of Prices, VolumesSold and Net Sales” for further information relating to revenues by productcategory for 2000, 2001 and 2002.

 

**Environmentaland Other Regulations**

** **

Our operations are subject to Mexican federal, stateand municipal environmental laws, to Mexican Official Standards, and toregulations for the protection of the environment, including regulationsrelating to water supply, water pollution, air pollution, noise pollution,hazardous and solid wastes and soil pollution. The principal legislation is thefederal Ley General del Equilibrio Ecológico y la Protección al Ambiente (theGeneral Law of Ecological Balance and Environmental Protection or the “EnvironmentalLaw”), which is enforced by the Procuraduría Federal de Protección al Ambiente(Federal Bureau of Environmental Protection or “PROFEPA”).  PROFEPA monitors compliance withenvironmental legislation and enforces Mexican environmental laws, regulationsand official standards. PROFEPA can bring administrative and criminalproceedings against companies that violate environmental laws, and it also hasthe power to close noncomplying facilities, to revoke operating licensesrequired to operate such facilities and to impose sanctions and fines.

 

Our operations near the U.S.-Mexican border are alsosubject to the Agreement on the Cooperation for the Protection and Improvementof the Environment (the “La Paz Agreement”), which was concluded in 1983between the United States and Mexico for the purpose of improving air qualityin the border area. The La Paz Agreement establishes sulfur dioxide emissionsstandards and requires the installation and maintenance of emission monitoringand record-keeping systems at the smelters.

 

Mexican environmental regulations have becomeincreasingly stringent over the last decade, and this trend is likely tocontinue and may be influenced by the environmental agreement entered into byMexico, the United States and Canada in connection with NAFTA in February1999.  In order to maintain compliancewith sulfur dioxide emissions standards promulgated under the Environmental Lawand the La Paz Agreement, we shut down the Cananea smelter and its preciousmetals refinery and operations at Monterrey in December 1999. We intend tophase out our copper smelting operations at San Luis Potosí during 2004 and toconsolidate those refining and smelting operations at La Caridad.  Management does not believe that continuedcompliance with the Environmental Law or Mexican state environmental laws willhave a material adverse effect on our business, properties, results ofoperations, financial condition or prospects or will result in material capitalexpenditures. Nevertheless, although we believe that all of our facilities arein material compliance with applicable environmental, mining and other laws andregulations, there can be no assurance that stricter enforcement of existinglaws and regulations or the adoption of additional laws and regulations wouldnot have a material effect on our business, properties, results of operations,financial condition or prospects.

 

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In December 2001, the Mexican Congress passed a newlaw regarding general access to formerly restricted information, includingofficial records concerning environmental matters. In addition, in February2002, the Mexican Congress amended the Federal Criminal Code in order toinclude, as environmental crimes, several actions related to various industrialoperations. Notwithstanding the fact that this law and the legal provisionsrelated thereto are in their early stages and have not been fully implemented,several actions have already been taken against environmental offenders. Webelieve however, that even when fully implemented, the amendment to the FederalCriminal Code will have not any material effect on our business, properties,results of operations, financial condition or prospects.

 

We have instituted extensive environmental conservationprograms at our mining facilities. Our environmental programs include waterrecovery systems to conserve water and minimize contamination of nearbystreams, revegetation programs to stabilize the surfaces of the tailings damsand the implementation of scrubbing technology in the mines to reduce dustemissions.

 

**Suppliers**

 

We have undertaken a program to reduce spare partsinventories and to coordinate purchasing functions.  Inventory reduction strategies include a consignment system forsuppliers and a coding system for spare parts to permit inventory transfersamong operating units. Reduced import duties under the North American FreeTrade Agreement (“NAFTA”) has broadened the number of suppliers from which wemay purchase equipment and supplies.

 

In addition, subsequent to the former Grupo México’sacquisition of Asarco in November 1999, we and Asarco had implemented a jointpurchasing program aimed at reducing costs through higher volume purchases ofmining supplies, chemicals, heavy equipment, tires and other operatingsupplies.

 

The principal raw materials for our operations areores from our own mines. We have in the past purchased raw materials from timeto time for each of our facilities, although we have substantially reduced ourpurchases of ores in recent years due to the current low level of the metals weproduce.  During 2002 and the first halfof 2003, we also used heavy oil due to the substantial increase in the price ofnatural gas. We do, however, continue to regularly purchase copper concentratesfor the San Luis Potosí copper smelter and the La Caridad copper smelter, andzinc oxide for the San Luis Potosí zinc refinery. Our expenditures forpurchased ores in 2002 totaled Ps. 202.1 million. If the prices of the metalswe produce improve, we anticipate our purchases of ore from third parties. Wealso process metals on a toll basis for other mining operators at our San LuisPotosí facilities. We and Asarco are also employing economies of scale in thejoint purchases and sales of concentrates and semi-refined products.

 

Aside from ore, the principal raw materials for ouroperations are fuel (including fuel oil to power generators and diesel fuel formining equipment), electricity and water. Fuel is purchased directly or indirectly from Petroleos Mexicanos(“Pemex”), the state oil monopoly. Electricity, which is used as the soleenergy source at each mining complex we operate is purchased from the *ComisiónFederal de Electricidad* (Federal Electricity Commission, or “CFE”),the state electrical power producer, or steam-generated at Mexcobre’s smelterand by using purchased fuel or, in the case of the San Luis Potosí coppersmelter, coke from coal we mine. Accordingly, a significant portion of ouroperating costs are dependent upon the pricing policies of Pemex and CFE, whichreflect government policy as well as international market prices for crude oiland conditions in the crude oil and refinery markets. Our natural gas pipeline(between Douglas, Arizona and Nacozari, Sonora) that began operating in May1999 permits us to import natural gas from the United States into Mexico atmarket prices and thereby reduce operational costs. During 2002 and the firsthalf of 2003, we also used heavy oil due to the substantial increase in theprice of natural gas. In addition, we are studying the possibility of extendingour alternative sources of electrical power by investing in additionalgenerating facilities.

 

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We obtain water pursuant to permits granted by theComisión Nacional del Agua (National Water Commission, or “CNA”), for which wepay fees to CNA.  In recent years, theCNA has been increasing the price of water. At the Cananea facility, wemaintain our own well but must pay the CNA for water measured by usage.

 

We believe that supplies of fuel, electricity andwater are readily available. Although the prices of these raw materials mayfluctuate, we have generally been able to offset all or a portion of ourincreased costs through cost savings measures or increased prices for ourproducts.

 

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#### **DESCRIPTION OF**PROPERTY, PLANTS AND EQUIPMENT

#### ** **

The map that follows sets forth the locations of ourprincipal mines, and smelting, refining and SX-EW facilities as well as ourcorporate and sales office as of December 31, 2002.

 

 

**MexcobreUnit Operations**

 

The Mexcobre Unit is currently engaged in theproduction of copper rod, copper cathodes and copper anodes, with quantities ofgold and silver, molybdenum and sulfuric acid. It operates the La Caridadmining complex, located in the State of Sonora, 22 kilometers southeast of thetown of Nacozari de Garcia and 120 kilometers south of the U.S.-Mexico border.It includes an open-pit mine, concentrator, smelter, refinery, rod plant, SX-EWplant, lime plant and two sulfuric acid plants. The smelter and the sulfuricacid plants, as well as the new refineries and rod plant, are located 23kilometers from the mine, and the lime plant is situated 18 kilometers from theU.S. border. Access is by paved highway and by railroad. The concentrator beganoperations in June 1979, the molybdenum plant in June 1982, the smelter in June1986, the first sulfuric acid plant in July 1988 and the SX-EW plant in July1995; the second sulfuric acid plant began operating in January 1997, thecopper refinery in July 1997, the rod plant in April 1998 and the preciousmetals refinery in July 1999. The total book value of Mexcobre’s property andequipment was Ps. 16,343.2 million as of December 31, 2002 (restated inaccordance with Mexican GAAP).

 

The Mexcobre Unit accounted for 59.4% and 58.3% of our2002 consolidated net sales and operating loss, respectively, and 59.8% of ourtotal assets as of December 31, 2002.

 

*Geology*

 

The La Caridad deposit is a porphyry copper deposittypical of those in the southern basin and range province in the southwesternUnited States. The main rock types that predate the mineralizing processes are,in chronological order, diorite, granodiorite, quartz monzonite and pegmatite.Breccia bodies are also present. Alteration and mine realization patterns at LaCaridad are comparable to those of other porphyry copper deposits in thesouthwestern United States. Minable copper mineralization is mainly chalcocite,covellite (in a secondary enrichment blanket) and chalcopyrite.

 

27

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*Mining Operations*

 

The Mexcobre Unit uses a conventional open-pit miningmethod. The ore body is situated within a mountain top, which gives La Caridadthe advantage of a relatively low waste-stripping ratio, natural pit drainageand relatively short haul distances for both ore and waste. The mining methodinvolves drilling, blasting, loading and haulage of waste, leach and ore towaste and leaching dumps and to the primary crushers. Drills, trucks andshovels are used in the mining process. The mine, which was originally designedto produce 72,000 metric tons of ore per day, has been expanded to produce90,000 metric tons of ore per day in order to keep pace with the expansion ofthe concentrator. An average of 91,005, 89,759 and 67,547 metric tons per dayof ore was mined in 2000, 2001 and 2002, respectively.  The average copper content of the ore minedwas 0.491% for 2000, 0.525% for 2001 and 0.535% for 2002. The stripping ratioat the mine (i.e., the ratio of waste materials plus leachable ore to oremined) for 2002 was 1.88 to 1. The mine plan calls for an ultimate pit coveringan area six square kilometers. The final pit has been designed with 45° maximumslopes, forty 15-meter benches, and a minimum of six months of exposedore.  Mining equipment includes 18170-ton, seven TITAN 200-ton and 13 240-ton diesel-electric trucks, fourelectric shovels with dipper sizes ranging from 16 to 17 cubic yards, oneelectric shovel with a 38 cubic yard dipper, three electric shovels with a 40cubic yard dipper, six electric rotary blasthole drills and a fleet ofbulldozers, road graders, water trucks and other equipment.

 

*ConcentratingOperations*

 

The concentrator, which began operations in 1979, wasdesigned to process 72,000 metric tons of ore per day. It has undergone severalstages of modification and has a current capacity of 90,000 metric tons of oreper day.  Mexcobre uses state-of-the-art“expert” computer monitoring systems at the concentrator, the crushing plantand the flotation circuit in order to coordinate inflows and optimizeoperations.

 

Ore extracted from the mine is processed at theconcentrator, which produces a copper- molybdenum concentrate. Concentrationconsists of crushing and grinding the ore and separating copper-molybdenum oresfrom waste material by flotation. The copper-molybdenum concentrate is furtherprocessed at the molybdenum plant into copper concentrates and molybdenumconcentrates. The copper concentrates are sent to the smelter and themolybdenum is exported. The molybdenum recovery plant has a capacity of 2,000metric tons per day of copper-molybdenum concentrates. A lime plant was builtin 1980 to produce lime from limestone for use in the concentrating process.The lime plant has a capacity of 340 metric tons of finished product per day.

 

In 2000, 2001 and 2002, the copper ore processedaveraged 91,164, 90,025 and 67,789 metric tons per day, respectively, with anaverage grade of 0.491%, 0.525% and 0.535% copper, respectively, and of0.0430%, 0.0399% and 0.0403% molybdenum, respectively. During the same periods,462,196, 503,834 and 333,885 metric tons of copper concentrates were produced,with average grades of 29.57%, 27.94% and 27.53%, respectively. The copperrecovery was 83.45% for 2000, 81.57% for 2001 and 78.73% for 2002.

 

*SmeltingOperations*

 

Copper concentrates are carried by trucks from theconcentrator to the smelter, where they are processed and cast into copperanodes of 99.7% purity to be sold to refineries.  Mexcobre’s flash smelter of Outokumpu design became operationalin 1986. The smelter’s initial capacity of 180,000 metric tons per year was increasedto 330,000 tons as of March 1997 with the addition of an El Teniente converter,and was further increased to 360,000 metric tons per year with the addition ofa new shaft furnace in June 1999. Sulfur dioxide off-gases collected from the flash furnaces andconverters are processed into sulfuric acid at two sulfuric acid plants andsold to third parties.  The firstsulfuric acid plant, which started operations in July 1988, has a capacity of2,650 metric tons of sulfuric acid per day, and the second plant, which startedoperations in January 1997, has a capacity of 2,160 metric tons of sulfuricacid per day.

 

*RefiningOperations*

 

In July 1997, the Mexcobre Unit completed theconstruction of an electrolytic copper refinery at La Caridad. The refinery,which uses the permanent cathode technology developed by the Canadian companyKidd Creek, reached its maximum capacity of 300,000 metric tons per year inJune 1999. The refinery consists of an anode plant with an AISCO preparationmachine, an electrolytic plant, a slimes treatment plant and a number ofancillary installations. The refinery is producing Grade “A” copper cathode of99.99% purity. Anodic slimes are recovered from the refining process and sentto the slimes treatment plant where additional copper is extracted. The slimesare then filtered, packed and shipped to the La Caridad precious metalsrefinery to produce silver and gold. Construction of this refinery was completed in July 1999, whenoperations commenced.

 

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*CopperRod Plant*

 

A rod plant at the Mexcobre Unit was completed inApril 1998 and reached its maximum annual operating capacity of 150,000 metrictons by May 1999. The plant is producing 8 mm copper rods with a purity of99.99%.

 

*SX-EWFacilities*

 

Approximately 186 million metric tons of leachable orehave been extracted from La Caridad open-pit mine with grades between 0.10% to0.32% sulfide copper. With an average grade of approximately 0.25% copper, thisore cannot be processed economically using the conventional smelting processand has been deposited in leaching dumps. In 1995, Mexcobre completed theconstruction of a new SX-EW facility at La Caridad, which has allowedprocessing of this ore and certain leach ore reserves that are unmined and hasresulted in a reduction in Mexcobre’s production costs of copper. The facilityhas an annual production capacity of 21,900 metric tons and has received ISO9002 certification from the International Standards Organization.

 

**ImmsaUnit Mining Operations**

 

The Immsa Unit operates four underground miningcomplexes situated in central and northern Mexico.  All of Immsa’s mining facilities employ exploitation system andconventional equipment. All plants and equipment are in good operating condition.The total book value of the Immsa Unit’s mining and metallurgical facilitieswas Ps. 4,647.6 million as of December 31, 2002 (restated in accordance withMexican GAAP). Each of the Immsa’s principal mining complexes is describedbelow. The Nueva Rosita Coal Complex is described under “—Immsa Unit ProcessingOperations.”

 

The Immsa Unit accounted for 27.1% and 47.8% of our2002 consolidated net sales and operating loss, respectively, and 17.1% of ourtotal assets as of December 31, 2002.

 

*Charcas*

 

The Charcas mining complex is located 110 kilometersnorth of the city of San Luis Potosí in the State of San Luis Potosí. Access isby paved road.  The complex includes anunderground mine and one flotation plant and produces zinc, lead and copperconcentrates, with significant amounts of silver. The Charcas mining districtwas discovered in 1573, and operations in the 20th century resumed in 1911. TheCharcas mine is characterized by low operating costs and good quality ores, andit is situated near the zinc refinery. We have expanded production capacity ofthe mine by 32% since 1993, and the Charcas mine is now Mexico’s largestproducer of zinc.

 

The Charcas mining district occupies the east-centralpart of the Central Mesa and is part of the Sierra Madre Metallogenic Province.The dominant mineral structures in the region are folds associated with faultsin Mesozoic carbonate rocks. The Charcas mine encompasses the Zacatecas,Taraises and Cupido geological formations, which contain most of the silver,lead, copper and zinc ores. Ore occurs as filling fractures and as replacementsat vein walls where limestone strata host rocks are favorable to substitutionprocesses. The economically significant minerals located in the Charcas minesinclude pirargyrite, argentite, sphalerite, galena, pyrite and chalcopyrite.

 

The Charcas mine uses the hydraulic cut-and-fillmethod and the room and pillar mining method with descending benches. Thebroken ore is hauled to the underground crusher station. The crushed ore isthen hoisted to the surface for processing in the flotation plant to producelead, zinc and copper concentrates. The capacity of the flotation plant is4,000 metric tons of ore per day. 1,429,287, 1,445,849 and 1,342,703 metric tons of ore were mined atCharcas during 2000, 2001 and 2002, respectively.  The lead concentrate produced at Charcas is sold to third partiesin Mexico. The zinc and copper concentrates are treated at the San Luis Potosízinc refinery and copper smelter.

 

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*SantaBárbara*

 

The Santa Bárbara mining complex is located 25kilometers southwest of the city of Hidalgo del Parral in southern Chihuahua.Access is by paved road.  It includesthree main underground mines and a flotation plant and produces lead, copperand zinc concentrates, with significant amounts of silver. Gold-bearing veinswere discovered in the Santa Bárbara district as early as 1536. Miningactivities in the 20th century resumed in 1913.

 

The regional geology of the Santa Bárbara minesconsists of Cretaceous shales and interbedded limestones of the ParralFormation. The majority of the zinc, copper and lead ores produced at SantaBárbara come from quartz veins occupying fractures previously existing in theLucite and andesite rocks with dips of 50o to 90o. Thezinc and lead content of the ore tends to decrease with depth while coppercontent in general increases with depth. Minerals formed at the Santa Bárbaramine include sphalerite, marmatite, galena, chalcopyrite and tetrahedrite.Gangue minerals include quartz, pyrite, magnetite, pyrrhotite, arsenopyrite andflourite.

 

The mining operations at Santa Bárbara are morediverse and complex than at any of our other mines, with veins that aggregateapproximately 20 kilometers in length. Each of the three underground mines hasseveral shafts and crushers. Due to the variable characteristics of the orebodies, four types of mining methods are used: shrinkage stopes, long-holedrilled open stopes, cut-and-fill stopes and horizontal benching stopes. Theore, once crushed, is processed in the flotation plant to produce concentrates.The flotation plant has a capacity of 4,800 metric tons of ore per day.  1,787,225, 1,847,975 and 1,590,650 metrictons of ore were mined at the Santa Bárbara mine during 2000, 2001 and 2002,respectively. The lead concentrate produced is sold to third parties in Mexico.The copper concentrates are treated at the San Luis Potosí copper smelter, andthe zinc concentrates are either treated at the San Luis Potosí zinc refineryor exported.

 

*SanMartín*

 

The San Martín mining complex is located in themunicipality of Sombrerete in the western part of the state of Zacatecasapproximately 100 kilometers southeast of the City of Durango. Access is bypaved road. The complex includes an underground mine and one flotation plantand produces lead, copper and zinc concentrates, with significant amounts ofsilver. The mining district in which the San Martín mine is located wasdiscovered in 1555.  Mining operationsin the 20th century resumed in 1949.

 

San Martín lies in the Mesa Central between the SierraMadre Occidental and the Sierra Madre Oriental.  The Mesa Central consists of Cretaceous carbonate sequences withinterbedded chert and shale deposits overlain by Tertiary volcanic rocks of theSierra Madre Occidental. The principal sedimentary rock formation in the SanMartín district is the Upper Cretaceous Age Cuesta del Cura limestone, whichconsists of an interlayered sequence of shallow marine limestone and blackchert, overlain by shales and fine-grained clayed limestones. San Martín’smineral deposits are of three types: (i) veins; (ii) replacement ore bodies ofmetasomatic origin associated with veins; and (iii) sedimentary strata. Themost important mineral deposits of San Martín are replacement veins and bodiesfound in the Cerro de La Gloria granodiorite intrusion. An extensive zone oftactites west of the Cerro de La Gloria intrusion hosts the San Marcial,Ibarra, Ramal Ibarra and Gallo-Gallina veins. The replacement bodies and veinsare comprised of chalcopyrite, sphalerite, bornite, tetrahedrite, nativesilver, arsenopyrite, pyrrhotite, stibnite, and galena. Tactite deposits aredispersed throughout layers that alternate with barren chert beds.

 

The horizontal cut-and-fill mining method is used atthe San Martín mine. The broken ore is hauled to the underground crusherstation. The ore is then brought to the surface and fed to the flotation plantto produce concentrates. The flotation plant has a total capacity of 4,600metric tons of ore per day.  1,683,933,1,863,002 and 1,237,051 metric tons of ore were mined at San Martín in 2000,2001 and 2002, respectively. The lead concentrate is sold to third parties inMexico. The copper concentrate is treated at the San Luis Potosí copper smelterand zinc concentrate is either treated at the San Luis Potosí zinc refinery orexported.

 

*SantaEulalia*

 

The Santa Eulalia mining complex is located in themunicipality of Aquiles Serdan, in the central region of the State ofChihuahua, 25 kilometers east of the city of Chihuahua. Access is by pavedroad. The complex includes two underground mines and a flotation plant andproduces lead and zinc concentrates, with significant amounts of silver. Themining district in which the Santa Eulalia mines are located was discovered in1591. Mining activities in the 20th century resumed in 1918. Although SantaEulalia has one of the richest mineral bodies of all of the Immsa Unit’s mines,the cost of operation is high because water must be removed in order to extractthe ore.

 

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Santa Eulalia represents the largest district of itskind in the intersection of the Laramide-aged Mexican Thrust Belt and thetertiary volcanic plateau of the Western Sierra Madre. The region containsJurassic-Cretaceous carbonates, which overlie pre-Paleozoic continental crust.A column of sediments at the base of the Santa Eulalia overlain by calcareousrocks contains most of the mineralized orebodies in the district. The SantaEulalia district contains iron, calcium and manganese, as well as lead, zinc,copper and iron sulphides. The mineral deposit is classified as metasomaticwith low temperatures and pressures of formation (mesothermal), and consistsprincipally of chimneys and strata.

 

The Santa Eulalia mining complex consisted of the SanAntonio and Buena Tierra underground mines. San Antonio generated approximately100% of the production. The hydraulic cut-and-fill and descending benchesmining methods were used at the mines. The flotation plant has a capacity of1,500 metric tons of ore per day, which reflects an increase from 800 metrictons of ore per day in April 1998. A total of 225,844 metric tons of ore weremined at Santa Eulalia in 2000.  Thelead concentrate was sold to third parties in Mexico. The zinc concentrate waseither treated at the San Luis Potosí zinc refinery or exported.

 

In October 2000, we shut down the Santa Eulalia mineafter disgruntled workers, together with union representatives, initiated awork stoppage and prevented trucks and contractors from entering the mine.  In October 2002, the Mexican FederalSecretary of Labor declared the activities of the workers and the unionrepresentatives illegal. We are currently negotiating a new collectivebargaining agreement with the union representatives and expect to re-open theSanta Eulalia mine sometime during 2004. See “Item 6.  Directors, Senior Management and Employees—Employees”.

 

*Velardeña*

 

The Velardeña mining complex is located in thenorth-eastern part of the state of Durango, approximately 85 kilometerssouth-southwest of the city of Torreon in the state of Coahuila. Access is bypaved road. It includes two underground mines and a flotation plant andproduces lead, zinc and copper concentrates. The mining district in which the Velardeñamines are located was discovered in the 16th century. The Velardeña miningcomplex was operated intermittently from 1890 to 1920 and reopened in 1980.

 

The Velardeña mining district consists of a sequenceof Cretaceous sedimentary rocks intruded by plutons and dikes of variouscompositions. The Cretaceous sedimentary sequence is formed by basal limestonecovered by siltstones, sandstones, shales and black chert. Andesite andtrachyte dikes are also present in the two mines.  Mineralization at the Santa Maria mine is located on a trachytedike which trends northwest and intrudes limestone beds along the northeastflank of the Sierra Santa Maria. Zinc ore occurs as fissure filings,stockworks, dissemination and replacement bodies in the limestone. The mineralsin the deposit include sphalerite, marmatite (iron-rich sphalerite), galena,argentite and chalcopyrite. Gangue minerals include calcite, pyrrhotite, pyriteand arsenopyrite.

 

Both mines employed the shrinkage and room and pillarmining methods. The flotation plant has a capacity of 850 metric tons of oreper day. A total of 222,479 metric tons of ore were mined at Velardeña in 2000.The lead concentrate was sold in Mexico and the copper concentrate was eithersold in Mexico to third parties or exported. The zinc concentrate was either treated at the San Luis Potosí zincrefinery or exported.

 

Operations at the Velardeña mines were suspended inSeptember 2000 to reduce costs and facilitate exploration for reserves. Pendingevaluation of the results of this activity, expected sometime during 2004, wewill determine whether resumption of operations is economically warranted.

 

*Rosario*

 

The Rosario mining complex is located in the southeastof the state of Sinaloa, on the western side of the western Sierra Madre range100 kilometers east of the seaport of Mazatlán. Access is by dirt road.  It includes the Plomosas underground mineand a flotation plant and produces lead and zinc concentrates, with significantamounts of gold and silver. The Rosario mines were discovered in the middle ofthe 16th century. Limited mining activities were conducted intermittently from1950 until 1989, when large-scale mining began following our development of aflotation process capable of separating and concentrating the complex lead,zinc and silver ores. Shortly thereafter, the La Cruz Vein, Rosario’s mostsignificant ore deposit, was discovered and has become the center of miningoperations at Rosario.

 

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The Plomosas mine is located in the metallogenicregion of the Western Sierra Madre Range and consists of sequences ofandesites, rhyolites, tuffs and ignimbrites covering Pre-Cambrian or Paleozoicmetamorphic rocks and Mesozoic sedimentary igneous rocks. The lead, zinc,copper, gold and silver ore bodies are of hydrothermal cavity-filling origins.The mineralization is found in veins, breccias and stockworks.

 

The room and pillar mining method with descendingbenches was used in the mine. The flotation plant has a capacity of 600 metrictons of ore per day. A total of 98,162 metric tons of ore were mined at Rosarioin 2000.  The lead concentrate was soldto third parties in Mexico. The zinc concentrate was primarily exported

 

Operations at the Rosario mine were suspended inOctober 2000 to reduce costs and facilitate exploration.  Pending evaluation of the results of thisactivity, expected to occur during 2005, we will determine whether resumptionof operations is economically warranted.

 

*Taxco*

 

The Taxco mining complex is located on the outskirtsof the city of Taxco in the northern part of Guerrero State, approximately 70kilometers from Cuernavaca. Access is by paved road. The complex includesseveral underground mines and a flotation plant and produces lead and zinc concentrates,with some amounts of gold and silver. The mining district in which the Taxcomines are located was discovered in 1519. Mining activities in the 20th centurycommenced in 1918.

 

The Taxco district lies in the northern part of theBalsas-Mexcala basin adjacent to the Paleozoic Taxco-Zitacuaro Massif. Thegeology of the Taxco district consists of basement schists overlain by LowerCretaceous limestone and Upper Cretaceous shales. The ore bodies of Taxco areof three types: (i) ore filling fractures (veins formed from hydrothermalfluids); (ii) replacement ore bodies in calcerous rock; and (iii) brecciapipes. Fissure veins in the layer of schists, such as the el Cobre vein,contain the most important copper ore deposits.  Silver and lead ores are also present in the fissure veins. Thereare over 40 veins in the Taxco district, 10 of which are currently being mined.

 

Immsa employs the shrinkage, cut-and-fill and the roomand pillar mining methods at the Taxco mines. The flotation plant has a capacity of 3,300 metric tons of ore perday.  453,228, 559,839 and 433,800metric tons of ore were mined at Taxco in 2000, 2001 and 2002, respectively.The lead concentrate is sold in Mexico. The zinc concentrate is either treatedat the San Luis Potosí zinc refinery or exported. See “Item 6. Directors,Senior Management and Employees—Employees.”

 

**ImmsaUnit Processing Operations**

 

*SanLuis Potosí Zinc Refinery*

 

The San Luis Potosí electrolytic zinc refinery islocated in the city of San Luis Potosí, state of San Luis Potosí. Built in1982, it is one of the most cost efficient zinc refineries in the world. Therefinery’s cost of production, at less than US$ 400 per metric ton of zincafter credits for by-products including sulfuric acid and silver, is among thelowest in the world. The total book value of the refinery was Ps. 1,122.4million as of December 31, 2002 (restated in accordance with Mexican GAAP).

 

The plant was designed to produce 105,000 metric tonsof refined zinc per year, by treating up to 185,000 metric tons of zincconcentrate from our own mines, principally Charcas, located only 70 miles fromthe refinery, and 15,000 tons of zinc oxide. Refined zinc production in 2000,2001 and 2002 amounted to 105,879, 107,005 and 92,012 metric tons, respectively.The refinery produces special high grade zinc (99.995% zinc), high grade zinc(over 99.9% zinc) and zinc-based alloys with aluminum, lead, copper ormagnesium in varying quantities and sizes depending on market demand. In 2002,the plant produced as by-products 169,014 metric tons of sulfuric acid, 587metric tons of refined cadmium, 5,000 metric tons of copper residues and 15,000metric tons of lead-silver residues.

 

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*SanLuis Potosí Copper Smelter*

 

The San Luis Potosí copper smelter is adjacent to theSan Luis Potosí zinc refinery. The plant, which has been in operation since1925, has gone through several phases of expansion and modernization,principally over the last ten years. The total book value of the smelter wasPs. 224.4 million as of December 31, 2002 (restated in accordance with MexicanGAAP).

 

The plant operates one blast furnaces (with a secondon stand-by), which smelt incoming materials, mainly copper concentrates andcopper by-products from lead plants, to produce a copper matte.  The copper matte is then treated in one ofthe two Pierce Smith converters, producing an impure copper blister (97.4%copper), which in 2002 contained approximately one ounce of gold and 380 ouncesof silver per metric ton of copper blister produced. Of a total copper intakeof 61,561 metric tons for 2002, approximately 95% was supplied by the ImmsaUnit’s mines and the remaining amount was smelted under toll arrangements withthird parties. Copper blister production in 2000, 2001 and 2002 amounted to31,239, 30,664 and 24,381 metric tons, respectively.

 

As the materials treated at the smelter containvarious impurities (especially lead and arsenic), the facility has beenequipped with an arsenic recovery plant for treatment of the flue dust producedin the blast furnace section.  Thismaterial contains approximately 35% lead and 20% arsenic which, when treated,produces approximately 2,500 metric tons per year of high purity arsenictrioxide, which is, in turn, sold in the United States principally to the woodpreserving industry. Approximately 15,000 metric tons per year of lead bearingcalcines (approximately 27% lead) are sold annually to Industrias Peñoles, S.A.de C.V. (“Peñoles”). In order to maintain compliance with Mexican environmentallaws, we intend to phase out operations at the San Luis Potosí smelter by 2004and to consolidate its smelting operations at La Caridad. We do not expect toincur significant remediation costs for the shut down of this plant, butfreight costs associated with transport of copper concentrates to the LaCaridad Smelter have increased.

 

*NuevaRosita Coal and Coke Complex*

 

The Nueva Rosita coal and coke complex commencedoperations in 1924. The complex is located in the state of Coahuila, on theoutskirts of the city of Nueva Rosita near the Texas border. It comprises anunderground coal mine, with a present yearly capacity of approximately 280,000metric tons of coal, and a 21-coke oven facility capable of producing 90,000metric tons of metallurgical coke per year at an average cost approximately 40%below international market prices. The room-and-pillar mining method isemployed at the underground coal mine with continuous miners. The coke oveninstallation supplies the San Luis Potosí copper smelter with low cost coke,resulting in a significant cost savings to the smelter. The surplus production(approximately 70,000 metric tons per year) is sold to Peñoles and otherMexican consumers in northern Mexico. The total book value of the complex wasPs. 397.4 million as of December 31, 2002 (restated in accordance with MexicanGAAP). The complex includes a coal washing plant completed in 1998, which has acapacity of 550,000 metric tons per year and produces cleaner coal of a higherquality.

 

**CananeaUnit Operations**

 

The Cananea Unit is engaged in the production ofcopper concentrates and copper cathodes. It operates the Cananea miningcomplex, located 70 kilometers from La Caridad and 60 kilometers south of theArizona border on the outskirts of the town of Cananea. The mining complexincludes an open-pit mine, a concentrator and two SX-EW plants. Access is bypaved highway and railroad. The Cananea deposit is one of the world’s largestporphyry copper deposits. The total book value of the Cananea Unit’s propertyand equipment was Ps. 7,185.7 million as of December 31, 2002 (restated inaccordance with Mexican GAAP).

 

For the year ended December 31, 2002, the Cananea Unitaccounted for 13.6% and 6.0% of our consolidated net sales and operating loss,respectively, and accounted for 23.1% of our total assets as of December 31,2002.

 

*Geology*

 

The Cananea mine is unusual in that the ore exploredand sampled at the mine has been of consistent quality, unlike most copperdeposits, which evidence a decline in quality at deeper strata. The Cananearegion is within the southern Cordilleran region, extending from southernMexico to the northwestern United States. Geological and structural features in the district setting arerepresentative of large copper deposits of the disseminated porphyry type. Thedistrict lies within the Basin and Range Metallogenic province. A series ofPaleozoic sediments from Cambrian to Carboniferous, lithologically equivalentto a section in southeastern Arizona, unconformably overlie a Pre-Cambriangranitic basement.

 

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Mineralization occurred in several stages. An earlypegmatitic stage, associated with bornite-chalcopyrite-pyrite-molybdeniteassemblage in breccia pipes, is followed by a widespread flooding ofhydrothermal solutions accompanying extensive quartz-pyritic-chalcopyritemineralization. A distinct pyrite-quartz stage envelopes and closes the primarysequence. An extensive and pervasive feldspar destructive sericitic andargillic alteration events is evident throughout the district’s igneous rockcomplex.

 

*MiningOperations*

 

Cananea uses a conventional open-pit mining method. Inrecent years the Cananea Unit has invested in equipment to improve strippingcapacity and has undertaken accelerated removal of the substantial excessoverburden from the mine. An average of 282,719, 259,755 and 242,288 metrictons of material per day were mined in 2000, 2001 and 2002, respectively. Thestripping ratio was approximately 0.74 to 1.0 during 2002 and the averagecopper content for 2002 was approximately 0.565%. Mining equipment includes 11rotary drills, five 360-ton trucks, seven 260-ton trucks, 20 240-ton trucks and26 170-ton trucks, one 70-cubic yard shovel, one 54-cubic yard shovel, two40-cubic yard shovels, one 36-cubic yard shovel and five 30-cubic yard shovels.

 

*ConcentratingOperations*

 

Cananea’s concentrator was constructed in 1986. Itoriginally had a capacity of 62,500 metric tons of ore per day, which wasincreased to 80,000 metric tons per day in May 1998. During 2000, 2001 and2002, daily averages of 63,943, 56,250 and 53,314 metric tons of ore wereprocessed with an average grade of 0.521%, 0.501% and 0.565% copper,respectively. During the same periods, 379,640, 314,354 and 323,351 metric tonsof copper concentrates were produced, with average grades of 25.70%, 26.15% and26.79% copper, respectively. The copper recovery was 79.86% for 2000, 80.03%for 2001 and 80.48% for 2002. Copper concentrates are currently sold to theMexcobre Unit for further processing.

 

*NewCrushing System*

 

The Cananea Unit’s leachable ore crushing system forlow-grade ore was built during 1997. This system improves the metallurgicalrecoveries and reduces the operating cost.

 

We completed construction of a crushing system at theCananea Unit in 1999, at cost of approximately US $38.5 million. See “—CapitalExpenditures.”

 

*SX-EWFacilities*

 

The Cananea Unit operates a leaching facility and twoSX-EW plants. All copper ore with a grade lower than the mill cut-off grade(0.4%), but higher than 0.15% copper, is delivered to the leaching dumps. Acycle of leaching and resting occurs for approximately five years to achieve a56% recovery. In November 2001, we completed the first phase of the expansionof one of the SX-EW facilities.  TheCananea Unit currently maintains 4.2 million cubic meters of pregnant leachsolution in the old Cananea pit with a concentration of approximately 1.0 gramsof copper per liter. The SX-EW facilities have a total capacity of 54,750metric tons of copper cathodes per year. In 2000, 2001 and 2002 copper cathodeproduction was 33,788, 39,952, and 50,041 metric tons, respectively. In July1998, the SX-EW facilities at Cananea received ISO 9002 certification from theInternational Standards Organization.

 

*Capitalizationof leaching  material*

 

From 1999 to 2001, Mexcananea conducted major drillingstudies and metallurgic testing to better locate copper deposits and also toobtain greater yields.  According tothese studies, we determined that the Cananea mine has large quantities ofmaterial known as chalcocite, which has proven beneficial when processedthrough the hydrometallurgical process known as leaching.  In order to begin exploiting these leachingmaterials, during 2001 we accumulated large quantities of leaching materials insites known as leaching dumps, from which copper is extracted through a processof irrigation, filtering and electrolysis. According to Mexcananea’s studies, copper can be recovered through the leachingprocess over a period of approximately five to eight years.  Amortization of the costs incurred inprocessing the leaching material, which are capitalized once such materials areremoved from the mine, is based on the actual depletion of each of the leachingdumps.  As of December 31, 2002 and2001, the gross amount capitalized for this activity was Ps. 919.1 million andPs. 532.0 million, respectively.  Priorto 2001, such leaching materials were considered to be waste materials andtherefore figured into the determination of stripping ratios, which are used todetermine capitalized stripping costs. The implementation of processing leaching materials resulted in a netreduction of our cost of sales of Ps. 141.3 million in 2002 and Ps. 169.1million in 2001.

 

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The table below sets forth production capacity andcapacity utilization for our mining, concentrating, smelting and refiningfacilities during 2002.

 

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**GrupoMinero México, S.A. de C.V.Mines And Plants Capacity Utilization In 2002**

** **
| **Facility**                |   | **Unit**                   |   | **Product**                 |   | **Capacity(1)** |   | **Production(1)** |   | **Capacity  Utilization** |   |
|-----------------------------|--------|----------------------------|--------|-----------------------------|--------|-----------------|--------|-------------------|--------|---------------------------|--------|
|                        |   |                       |   |                        |   |            |   |              |   |                      |   |
| Mine/Concentrator           |   | Mexcobre                   |   | Extraction and milling  ore |   | 32,400,000      |   | 21,828,000        |   | 67                        | %      |
| Molybdenum  Plant           |   | Mexcobre                   |   | Molybdenum ore              |   | 720,000         |   | 720,000           |   | 100                       | %      |
| Smelting                    |   | Mexcobre                   |   | Anodes                      |   | 360,000         |   | 239,031           |   | 66                        | %      |
| Sulfuric  Acid Plant        |   | Mexcobre                   |   | Sulfuric acid               |   | 1,565,520       |   | 703,801           |   | 45                        | %      |
| SX/EW  Plant                |   | Mexcobre                   |   | Cathodes                    |   | 21,900          |   | 19,295            |   | 88                        | %      |
| Copper  Refinery            |   | Mexcobre                   |   | Cathodes                    |   | 300,000         |   | 199,905           |   | 67                        | %      |
| Copper  Rod Plant           |   | Mexcobre                   |   | Wire rod                    |   | 150,000         |   | 97,485            |   | 65                        | %      |
| Precious  Metals Plant      |   | Mexcobre                   |   | Anode slimes                |   | 2,800           |   | 1,157             |   | 41                        | %      |
| Lime  Plant                 |   | Mexcobre                   |   | Lime                        |   | 122,400         |   | 96,256            |   | 79                        | %      |
| Smelting                    |   | Immsa San Luis Potosí |   | Concentrates smelted        |   | 230,000         |   | 108,338           |   | 47                        | %      |
| Electrolytic  Zinc Refinery |   | Immsa San Luis Potosí |   | Zinc                        |   | 100,000         |   | 92,012            |   | 92                        | %      |
| Electrolytic  Zinc Refinery |   | Immsa San Luis Potosí |   | Cadmium                     |   | 600             |   | 587               |   | 98                        | %      |
| Electrolytic  Zinc Refinery |   | Immsa San Luis Potosí |   | Sulfuric acid               |   | 175,000         |   | 169,014           |   | 97                        | %      |
| Coke  Plant                 |   | Immsa Nueva Rosita         |   | Coke                        |   | 120,000         |   | 83,456            |   | 70                        | %      |
| Coal  Mine                  |   | Immsa Nueva Rosita         |   | Coal                        |   | 1,068,000       |   | 1,050,296         |   | 98                        | %      |
| Concentrate  Mine           |   | Immsa Charcas              |   | Extraction and milling  ore |   | 1,476,000       |   | 1,342,703         |   | 91                        | %      |
| Concentrate  Mine           |   | Immsa Taxco                |   | Extraction and milling  ore |   | 1,079,100       |   | 433,800           |   | 40                        | %      |
| Concentrate  Mine           |   | Immsa San Martin           |   | Extraction and milling  ore |   | 2,230,400       |   | 1,237,051         |   | 55                        | %      |
| Concentrate  Mine           |   | Immsa Santa Barbara        |   | Extraction and milling  ore |   | 1,574,400       |   | 1,590,650         |   | 101                       | %      |
| Mine/Concentrator           |   | Mexcananea                 |   | Extraction and milling  ore |   | 29,200,000      |   | 19,033,000        |   | 65                        | %      |
| SX/EW  Plant                |   | Mexcananea                 |   | Cathodes                    |   | 54,750          |   | 50,041            |   | 91                        | %      |

 

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(1)                                  Metrictons per annum except where noted.

 

**Reserves**

 

We have estimates of ore reserves prepared withrespect to each of our units as of January 1 of each year. The ore reserveestimates set forth below have been prepared by our engineering staff inconjunction with the engineering staffs of our units using evaluation methodsgenerally used in the international mining industry, including standard methodsof mapping, drilling, sampling, assaying and modeling.  The reserves may not conform to geological,metallurgical or other expectations, and the volume and grade of ore recoveredmay be below the expected levels. Lower market prices, increased productioncosts, reduced recovery rates and other factors may render proven and probablereserves unprofitable to exploit and result in revision of reserve data fromtime to time. Reserve data are not indicative of future results of operations.See Item 3.  “Key Information—RiskFactors.”

 

The terms “reserves,” “proven reserves,” “probablereserves,” “dilution,” “total leaching recovery,” “total metal recoverable” and“total mill recovery,” which are used in the following tables, are defined in“Annex A— Glossary of Certain Mining Terms.”

 

The following tables set forth estimated reserve dataof the Mexcobre Unit, Immsa Unit and Cananea Unit as of January 1, 2003, whichare prepared by the Department of Mining, Planning and Control at eachoperating unit under the supervision of our Director of Mining, Planning andControl.  See Item 6.  “Directors, Senior Management andEmployees—Directors and Senior Management.”

 

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**OreReserves—Open Pit Mines**

** **

**MexcobreUnit(estimated as of January 1, 2003)**

** **
|                                                |   | **Ore**                         |   | **Copper**                                                    |   | **Molybdenum** |   |
|-----------------------------------------------------|--------|---------------------------------|--------|---------------------------------------------------------------|--------|----------------|--------|
|                                                |   | **(Thousands  of metric tons)** |   | **(Average  grade  percentage, unless  otherwise indicated)** |   |
| Mill  ore:                                          |   |                            |   |                                                          |   |           |   |
| Proven                                              |   | 673,415                         |   | 0.42  0.023                                              |   |           |   |
| Probable                                            |   | 36,925                          |   | 0.38                                                          |   | 0.020          |   |
| Total                                               |   | 710,340                         |   | 0.42                                                          |   | 0.023          |   |
| Total  mill recovery                                |   | —                          |   | 84.31                                                         | %      | 44.59          | %      |
| Total  metal recoverable (thousands of metric tons) |   | —                          |   | 2,503                                                         |   | 72             |   |
| Leach  ore:                                         |   |                            |   |                                                          |   |           |   |
| Proven                                              |   | 567,897                         |   | 0.24                                                          |   | —         |   |
| Probable                                            |   | 45,101                          |   | 0.24                                                          |   | —         |   |
| Total                                               |   | 612,998                         |   | 0.24                                                          |   | —         |   |
| Total  leaching recovery                            |   | —                          |   | 18.98                                                         | %      | —         |   |
| Total  metal recoverable (thousands of metric tons) |   | —                          |   | 279                                                           |   | —         |   |

 

**CananeaUnit(estimated as of January 1, 2003)**

 
|                                                |   | **Copper**                      |   | **Molybdenum**                                                |   |
|-----------------------------------------------------|--------|---------------------------------|--------|---------------------------------------------------------------|--------|
|                                                |   | **(Thousands  of metric tons)** |   | **(Average  grade percentage,   unless otherwise indicated)** |   |
| Mill  ore:                                          |   |                            |   |                                                          |   |
| Proven                                              |   | 2,260,400                       |   | 0.58                                                          |   |
| Probable                                            |   | 603,500                         |   | 0.55                                                          |   |
| Total                                               |   | 2,863,900                       |   | 0.58                                                          |   |
| Total  mill recovery                                |   | —                          |   | 81.00                                                         | %      |
| Total  metal recoverable (thousands of metric tons) |   | —                          |   | 13,363                                                        |   |
| Leach  ore:                                         |   |                            |   |                                                          |   |
| Proven                                              |   | 1,935,300                       |   | 0.22                                                          |   |
| Probable                                            |   | 381,200                         |   | 0.21                                                          |   |
| Total                                               |   | 2,316,500                       |   | 0.22                                                          |   |
| Total  leaching recovery                            |   | —                          |   | 50.00                                                         | %      |
| Total  metal recoverable (thousands of metric tons) |   | —                          |   | 2,550                                                         |   |

 

 

37

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**OreReserves—Underground Mines**

 

**ImmsaUnit(estimated as of January 1, 2003)**

 
| **Mine Unit**                          |   | **Ore**                         |   | **Zinc**                                                      |   | **Copper**                                               |   | **Lead** |   | **Silver** |   | **Gold** |   |
|----------------------------------------|--------|---------------------------------|--------|---------------------------------------------------------------|--------|----------------------------------------------------------|--------|----------|--------|------------|--------|----------|--------|
|                                   |   | **(Thousands  of metric tons)** |   | **(Average  grade percentage, unless   otherwise indicated)** |   | **(Grams per  metric ton,  unless otherwise indicated)** |   |
|                                   |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| *Charcas*                              |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 4,493                           |   | 5.90                                                          |   | 0.29                                                     |   | 0.46     |   | 79         |   | 0.00     |   |
| Probable                               |   | 4,501                           |   | 5.81                                                          |   | 0.27                                                     |   | 0.26     |   | 67         |   | 0.00     |   |
| Total                                  |   | 8,994                           |   | 5.86                                                          |   | 0.28                                                     |   | 0.36     |   | 73         |   | 0.00     |   |
| Total  mill recovery                   |   |                            |   | 93.60                                                         | %      | 36.99                                                    | %      | 71.03    | %      | 80.24      | %      | 0.00     | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 493,309                                                       |   | 9,315                                                    |   | 22,998   |   | 526.81     |   | 0.00     |   |
| *Santa  Bárbara*                  |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 9,170                           |   | 3.38                                                          |   | 0.48                                                     |   | 1.94     |   | 103        |   | 0.45     |   |
| Probable                               |   | 10,329                          |   | 3.30                                                          |   | 0.55                                                     |   | 1.53     |   | 121        |   | 0.31     |   |
| Total                                  |   | 19,499                          |   | 3.34                                                          |   | 0.52                                                     |   | 1.72     |   | 113        |   | 0.38     |   |
| Total  mill recovery                   |   |                            |   | 84.00                                                         | %      | 58.00                                                    | %      | 82.50    | %      | 87.68      | %      | 42.36    | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 547,081                                                       |   | 58,810                                                   |   | 276,699  |   | 1,931.99   |   | 3.14     |   |
| *San  Martín*                     |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 3,692                           |   | 3.63                                                          |   | 1.02                                                     |   | 0.42     |   | 101        |   | 0.00     |   |
| Probable                               |   | 7,768                           |   | 3.30                                                          |   | 1.05                                                     |   | 0.56     |   | 141        |   | 0.00     |   |
| Total                                  |   | 11,460                          |   | 3.41                                                          |   | 1.04                                                     |   | 0.51     |   | 128        |   | 0.00     |   |
| Total  mill recovery                   |   |                            |   | 67.99                                                         | %      | 84.49                                                    | %      | 87.00    | %      | 76.30      | %      | 0.00     | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 265,680                                                       |   | 100,692                                                  |   | 50,845   |   | 1,119.16   |   | 0.00     |   |
| *Velardeña*                       |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 35                              |   | 7.31                                                          |   | 0.03                                                     |   | 1.41     |   | 61         |   | 0.00     |   |
| Probable                               |   | 492                             |   | 8.17                                                          |   | 0.10                                                     |   | 1.31     |   | 72         |   | 0.00     |   |
| Total                                  |   | 527                             |   | 8.11                                                          |   | 0.10                                                     |   | 1.32     |   | 71         |   | 0.00     |   |
| Total  mill recovery                   |   |                            |   | 69.48                                                         | %      | 62.53                                                    | %      | 74.31    | %      | 62.48      | %      | 0.00     | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 29,657                                                        |   | 329                                                      |   | 5,163    |   | 23.35      |   | 0.00     |   |
| *Santa  Eulalia*                       |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 526                             |   | 8.39                                                          |   | 0.09                                                     |   | 2.12     |   | 107        |   | 0.00     |   |
| Probable                               |   | 1,502                           |   | 6.92                                                          |   | 0.21                                                     |   | 1.68     |   | 101        |   | 0.00     |   |
| Total                                  |   | 2,028                           |   | 7.30                                                          |   | 0.18                                                     |   | 1.80     |   | 103        |   | 0.00     |   |
| Total  mill recovery                   |   |                            |   | 86.00                                                         | %      | 30.23                                                    | %      | 83.00    | %      | 77.98      | %      | 0.00     | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 127,372                                                       |   | 1,103                                                    |   | 30,311   |   | 162.96     |   | 0.00     |   |
| *Rosario*                              |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 14                              |   | 5.75                                                          |   | 0.68                                                     |   | 2.64     |   | 60         |   | 1.65     |   |
| Probable                               |   | 307                             |   | 3.23                                                          |   | 0.21                                                     |   | 2.19     |   | 121        |   | 0.91     |   |
| Total                                  |   | 321                             |   | 3.34                                                          |   | 0.23                                                     |   | 2.21     |   | 118        |   | 0.94     |   |
| Total  mill recovery                   |   |                            |   | 69.68                                                         | %      | 65.63                                                    | %      | 77.77    | %      | 67.24      | %      | 64.55    | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 7,464                                                         |   | 484                                                      |   | 5,512    |   | 37.84      |   | 0.19     |   |
| *Taxco*                                |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 368                             |   | 4.39                                                          |   | —                                                   |   | 2.45     |   | 198        |   | 0.00     |   |
| Probable                               |   | 1,527                           |   | 4.87                                                          |   | —                                                   |   | 1.96     |   | 148        |   | 0.00     |   |
| Total                                  |   | 1,895                           |   | 4.78                                                          |   | —                                                   |   | 2.06     |   | 158        |   | 0.00     |   |
| Total  mill recovery                   |   |                            |   | 81.98                                                         | %      | —                                                   |   | 82.12    | %      | 73.32      | %      | 0.00     | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 74,252                                                        |   | —                                                   |   | 32,054   |   | 219.51     |   | 0.00     |   |
| *Immsa  Unit total*                    |   |                            |   |                                                          |   |                                                     |   |     |   |       |   |     |   |
| Proven                                 |   | 18,298                          |   | 4.22                                                          |   | 0.52                                                     |   | 1.28     |   | 98         |   | 0.23     |   |
| Probable                               |   | 26,426                          |   | 4.11                                                          |   | 0.59                                                     |   | 1.06     |   | 117        |   | 0.13     |   |
| Total                                  |   | 44,724                          |   | 4.16                                                          |   | 0.56                                                     |   | 1.15     |   | 109        |   | 0.17     |   |
| Total  mill recovery                   |   |                            |   | 83.03                                                         | %      | 68.17                                                    | %      | 82.35    | %      | 82.49      | %      | 43.79    | %      |
| Total  metal recoverable (metric tons) |   |                            |   | 1,544,815                                                     |   | 170,733                                                  |   | 423,582  |   | 4,021.62   |   | 3.33     |   |

 

38

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The above reserve estimates take into accountestimated dilution (extracting loss) by applying to mine ore grades a factorderived from historical mine–concentrator grade differences.

 

**Exploration**

 

We conduct mineral exploration programs at each of ourexisting mines with a view to locating new ore reserves to replace oreextracted in mining operations. The size of the ore deposits at the Cananea andLa Caridad sites has permitted us to achieve this objective at such siteswithout material expenditure, and, based on current test drilling and samplingresults, we expect this situation to continue for the life of each mine. Webelieve that the exploration budget of the Immsa Unit is also sufficient tomeet this goal under currently foreseeable circumstances.

 

In addition to exploratory drilling programs atexisting mines, we are currently conducting exploration to locate mineralreserves at 42 other sites in Mexico. In particular, we have identifiedsignificant copper and gold deposits at the El Arco site in the state of BajaCalifornia. Preliminary investigations of the El Arco site indicate that thedeposit contains approximately 846 million metric tons of sulfide ore withaverage grades of 0.51% copper and 0.14 grams of gold per metric ton, and 170million metric tons of leachable ore with average grades of 0.56%. A reserve of13.0 million metric tons of ore at Angangueo site in the state of Michoacán hasbeen identified with diamond drilling. This reserve contains 0.16 grams of goldper metric ton, 262 grams of silver per metric ton, and comprised of 0.79% oflead, .97% of copper and 3.5% of zinc. This ore reserve is sufficient toproceed to the pre-feasibility stage, which includes additional metallurgicaltests to ascertain the feasibility of developing the project. Metallurgicalstudies at the Buenavista Project site (in the state of Sonora) have shown thata commercial operation can be carry out in such site, where there is a reserveof 36 million tons of ore containing 29 grams of silver per metric ton, 0.69%of copper and 3.3% of zinc.

 

We spent Ps. 281.6 million (US$ 29.0 million) onexploration programs in 2000, Ps. 121.5 million (US$ 13.1 million) in 2001and Ps. 70.2 million (US$ 6.7 million) in 2002 and have budgeted Ps. 83.3million (US$ 8.1 million) for 2003.

 

**MiningConcessions and Properties**

 

Under Mexican law, mineral resources belong to theMexican nation and a concession from the Mexican federal government is requiredto explore for or exploit mineral reserves. Our mineral rights derive fromconcessions granted by the Secretary of Economy pursuant to the Mining Law andregulations thereunder. The current Mining Law, enacted in 1992, simplifiedprocedures for obtaining concessions, extended the life of exploitationconcessions from 25 years to 50 years and eliminated the maximum level ofnon-Mexican ownership of mining concessionaires, which was previously 49%.Certain excise taxes previously applicable to mining revenues have also beeneliminated.

 

Mining concessions are granted either for explorationor for exploitation. An exploration concession permits us to explore formineral resources on a specified claim for a non-renewable period of six yearsand confers priority in seeking an exploitation concession for the same claim.An exploitation concession permits us to extract specified minerals from aspecified claim for a renewable period of up to 50 years, provided that we paya nominal fee and comply with a program of exploitation submitted to theMexican Secretary of Economy.

 

Mining concessions grant several specified rights tothe concessionaire, including (i) the right to freely dispose of mineralproducts obtained as a result of the exploitation of the concession, (ii) theright to obtain the expropriation of, or an easement with respect to, the landwhere the exploration or exploitation will be carried out and (iii) the rightto use water in the mine to facilitate extraction, subject to securing andmaintaining the required permits from the CNA under applicable laws and regulations.  In addition, a concessionaire of a miningconcession is obligated, among other things, (i) to explore or exploit therelevant concession, (ii) to pay any relevant fees, (iii) to comply with allenvironmental and safety standards and (iv) to provide information to theMexican Secretary of Economy and permit inspections by the Mexican Secretary ofEconomy. Mining concessions may be terminated if, among other things, mineralsbeing mined are not included in the concession or the obligations of the concessionaireare not satisfied.  An assignment ofmining concessions is only effective if the assignment is registered with theMexican Public Registry of Mining.

 

39

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We generally own the land to which our concessionsrelate, although ownership is not required in order to operate a concession. Wealso own all of our processing facilities. Our headquarters are in Mexico Cityand we have a sales office in Phoenix, Arizona and a purchasing and logisticsoffice in Tucson, Arizona.

 

#### **CAPITAL EXPENDITURES**

 

We made capital expenditures of Ps. 1,006.3 million,Ps. 388.1 million and Ps. 208.8 million in 2000, 2001 and 2002, respectively,and expect to make capital expenditures of approximately US$ 52.4 million in2003. All capital expenditures in 2003 are anticipated to be funded byinternally generated funds, as has been principally the case in the past. Ingeneral, the capital expenditures and projects described below are intended tocontribute to further vertical integration of our operations by increasing thecapacity for production of refined metals products.

 

We have budgeted US$ 52.4 million in capitalexpenditures in 2003 for the tailing dams expansion in the San Martin unit, andupgrading Mexcobre’s smelter.

 

Our capital expenditures are made primarily in U.S.dollars, and accordingly, budgeted amounts in the table below are presented inU.S. dollars. Expenditures in past reporting periods are presented in constantpesos in conformity with the presentation of our Financial Statements. Changesin peso-U.S. dollar exchange rates and inflation in the Mexican economy infuture periods will affect the reported amount of future expenditures in pesoterms.

 

The following table sets forth our capitalexpenditures on the items specified at December 31, 2000, 2001 and 2002 andprincipal capital expenditures projected through 2003.

 

40

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|                                                                                              |   | **For the  year ended at December 31,**                    |   |                  |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                              |   | **2000**                                                   |   | **2001**              |   | **2002** |   | **2003  projected** |   |
|                                                                                              |   | **(Million  of constant pesos as of   December 31, 2002)** |   | **(Million  of US$)** |   |
| **New  Projects**                                                                                 |   |                                                       |   |                  |   |   |   |   |   |
| Immsa  zinc refinery                                                                              |   | 0.0                                                        |   | 0.0                   |   | 0.0 |   | — |   |
| Cananea  Quebalix System                                                                          |   | 0.0                                                        |   | 0.0                   |   | 0.0 |   | — |   |
| La  Caridad copper refinery, precious metals refinery, copper dust treatment plant  and rod plant |   | 7.4                                                        |   | 3.4                   |   | 0.0 |   | — |   |
| La  Caridad natural gas pipeline                                                                  |   | 12.5                                                       |   | 4.0                   |   | 0.0 |   | — |   |
| Total  new projects                                                                               |   | 19.9                                                       |   | 7.4                   |   | 0.0 |   | — |   |
|                                                                                              |   |                                                       |   |                  |   |   |   |   |   |
| **Capacity  Expansions**                                                                          |   |                                                       |   |                  |   |   |   |   |   |
| San  Martin Unit, Santa Barbara Unit and Charcas Unit                                             |   | 60.6                                                       |   | 67.7                  |   | 10.6 |   | 2.3 |   |
| La  Caridad copper smelter                                                                        |   | 24.6                                                       |   | 31.9                  |   | 3.0 |   | 10.5 |   |
| Cananea  SX-EW plants                                                                             |   | 331.3                                                      |   | 173.6                 |   | 18.0 |   | — |   |
| Cananea  concentrator plant                                                                       |   | 35.1                                                       |   | 38.7                  |   | 4.6 |   | — |   |
| Coal  washing plant                                                                               |   | 4.3                                                        |   | 0.0                   |   | 0.0 |   | 10.0 |   |
| Total  capacity expansions                                                                        |   | 455.9                                                      |   | 311.9                 |   | 36.2 |   | 22.8 |   |
|                                                                                              |   |                                                       |   |                  |   |   |   |   |   |
| **Equipment  and Machinery Replacement**                                                          |   |                                                       |   |                  |   |   |   |   |   |
| Investments  in tailing dams, water recovery and plant                                            |   | 175.3                                                      |   | 35.4                  |   | 0.1 |   | 6.1 |   |
| Other  investments                                                                                |   | 496.1                                                      |   | 314.5                 |   | 191.6 |   | 23.5 |   |
| Total  equipment and machinery replacement                                                        |   | 671.4                                                      |   | 349.9                 |   | 191.7 |   | 29.6 |   |
|                                                                                              |   |                                                       |   |                  |   |   |   |   |   |
| Total  Capital Expenditures                                                                       |   | 1,147.2                                                    |   | 669.2                 |   | 227.9 |   | 52.4 |   |
|                                                                                              |   |                                                       |   |                  |   |   |   |   |   |
| Less  net book value of retirements                                                               |   | 140.9                                                      |   | 32.8                  |   | 19.1 |   | — |   |
|                                                                                              |   |                                                       |   |                  |   |   |   |   |   |
| Capital  Expenditures net of retirements                                                          |   | 1,006.3                                                    |   | 636.4                 |   | 208.8 |   | 52.4 |   |

### ** **

### **ITEM5.**                                           OPERATINGAND FINANCIAL REVIEW AND PROSPECTS

### ** **

The following discussion should be read in conjunctionwith the Financial Statements included elsewhere in this Annual Report. TheFinancial Statements have been prepared in accordance with Mexican GAAP, whichdiffers in certain significant respects from U.S. GAAP. Note 18 to theFinancial Statements provides a description of the principal differencesbetween Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliationto U.S. GAAP of stockholders’ equity and net income as of December 31, 2001 and2002 and for the years ended December 31, 2000, 2001 and 2002.

 

In accordance with Mexican GAAP rules on price-levelrestatement of financial statements, the Financial Statements included in thisAnnual Report recognize certain effects of inflation.  In addition, the Financial Statements and, unless otherwisespecified, the other financial data included in this Annual Report are restatedin constant pesos as of December 31, 2002. The effects of price-levelrestatement in accordance with Mexican GAAP have not been reversed in thereconciliation to U.S. GAAP. See Item 3. “Key Information—Selected FinancialData” and Note 18 to the Financial Statements.

 

**Restatement of previously reported U.S. GAAPconsolidating financial information**

 

Subsequent to the issuance of the Company’s 2001financial statements, management determined that push-down accountingadjustments related to the acquisitions of its mostly owned guarantor subsidiaryhad not been properly reported in the Company’s consolidating U.S. GAAPfinancial information presented in Note 21 to the financial statements includedin Item 18.  Push-down accounting is notrequired under Mexican GAAP.  As aresult, such consolidating U.S. GAAP financial information has been restated toreflect the push-down effects of the excess purchase price paid over the fairvalue of the assets and liabilities of Mexcananea, and the excess of the bookvalue of the assets and liabilities of Mexcobre over the purchase pricepaid.  The application of push-downaccounting for the Company’s mostly owned guarantor subsidiaries does notchange the Company’s 2001 or 2000 consolidated financial information under U.S.GAAP or Mexican GAAP.

 

**Critical Accounting Policies andEstimates**

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in Mexico requiresus to make estimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates and assumptions are based on 

 

41

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historical experience and various other factors that are believed to bereasonable under the circumstances. Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

We believe that the following accounting policies arethe most critical to our consolidated financial statements since these policiesrequire significant judgment or involve complex estimates that are important tothe portrayal of our financial condition and results of operations.

 

*Ore reserves*

 

We periodically reevaluate estimates of our orereserves, which represent our estimate as to the amount of unmined copper,zinc, lead, silver and gold remaining in existing mine locations that can beproduced and sold at a profit.  Suchestimates are based on engineering evaluations derived from samples of drillholes and other openings, combined with assumptions about market prices andproduction costs relating to the metals. We believe that the metals price assumptions used are consistent with averagehistorical prices over recent full economic and pricing cycles.

 

The reserve estimates have been adjusted for actualproduction since the most recent reserve declarations.  Many companies declare their ore reserves onan annual basis.  We believe that ourestimates as to ore reserves closely approximate the ore reserve quantitiesthat would have been determined as of December 31, 2002.****Thereserve estimates have been calculated as of January 1 on an annual basis.

 

We use ore reserve estimates in determining, amongother things, the recoverability of long-lived assets, the amount ofcapitalized stripping and units of production amortization of capitalized minestripping.  We believe this pricereflects a valid price assumption over the remaining lives of our mines, whichrange from 15 to 102 years.  Weunderstand that the SEC has recently indicated that in calculating orereserves, companies should use no more than a three-year historical averageprice.  Price assumptions utilized by usin determining ore reserves and three year average market price data are asfollows:

 
|       |   | **Price  Assumption Utilized in  Determining Ore Reserves**                                       |   | **Three Year  Average  Market Prices** |   |
|------------|--------|---------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|       |   | **(per pound  in U.S. Dollars, except for gold and silver, which is per ounce in U.S.  Dollars)** |   |
|       |   |                                                                                              |   |                                   |   |
| Copper     |   |                                                                                              | US     | $                                      | 0.90   |   |   | US | $ | 0.76216 |   |
| Molybdenum |   |                                                                                              |   | 3.00                                   |   |   |   | 2.481 |   |
| Zinc       |   |                                                                                              |   | 0.50                                   |   |   |   | 0.46724 |   |
| Gold       |   |                                                                                              |   | 300.00                                 |   |   |   | 276.44 |   |
| Silver     |   |                                                                                              |   | 5.00                                   |   |   |   | 4.848 |   |
| Lead       |   |                                                                                              | US     | $                                      | 0.24   |   |   | US | $ | 0.21663 |   |

 

We believe the price assumptions used to determine orereserves are reasonable and appropriate for the purpose of managing operations.

 

*CapitalizedExpenditures*

 

Stripping costs:  In carrying out operations in open-pitmines, we are required to remove waste materials to access mineraldeposits.  Because the concentration ofmineral deposits is not evenly distributed throughout the mines, there areperiods during the life of the mine where we mine more (or better quality)reserves as compared to waste removed, and periods during which we mine less(or lower quality) reserves as compared to waste removed.

 

For each of our existing production stage open-pitmines, mine engineers have calculated a life-of-mine stripping ratio, whichrepresents our estimate of the total amount of waste to be incurred divided bythe estimated total proven and probable reserve at each such mine.  The mine stripping ratios are used todetermine the amount of mine production costs to be charged againstearnings.  In periods when the actualratio of waste to mineral ore extracted exceeds the life-of-mine strippingratios, we capitalize production costs associated with mining operations inproportion to the excess waste mined. Such capitalized costs are included in net capitalized mine stripping,and are amortized using the units of production method.  Copper resources contained in piles ofleachable materials that 

 

42

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have been extracted from the mines are not included in thedetermination of units of production amortization.  Conversely, in periods when the actual ratio of waste to mineralore mined is less than the life-of-mine stripping ratios, we reduce the netcapitalized mine stripping asset proportionally with a charge of amortizationexpense.

 

We understand that the SEC is currently evaluatingmethods for accounting for mine stripping costs.  In addition, we are aware that in recent public comments, the SEChas expressed unfavorable views towards our method of accounting for minestripping costs, which is also shared by others within the industry.  However, we believe that our method ofaccounting for mine stripping costs, which effectively results in the smoothingof production costs over the lives of our mines, accurately reflects theresults and operations of our mining operations and also facilitates improvedmatching of revenues and related expenses.

 

During 2002, 2001 and 2000, actual stripping ratioswere higher than the life-of-mine stripping ratios for our mines, whichresulted in the capitalization of mine costs associated with the additionalwaste mined.  If we were to haveexpensed all production costs associated with its mining operations asincurred, net operating costs expenses would have increased by Ps. 98.8million, Ps. 208.9 million and Ps. 572.4 million, for the years endedDecember 31, 2002, 2001 and 2000, respectively.

 

Estimated life-of-mine stripping ratios for each ofthe Company’s mines for the years ended December 31, 2002, 2001 and 2000,were as follows:

 
|   |   | **Life-of-Mine  Stripping Ratio With Respect to** |   |
|--------|--------|---------------------------------------------------|--------|
|   |   | **Mexcananea  Unit**                              |   | **Mexcobre  Unit** |   |
| 2002   |   | 0.56                                              |   | 1.60 |   |
| 2001   |   | 0.56                                              |   | 1.61 |   |
| 2000   |   | 0.59                                              |   | 1.08 |   |

 

Leaching material:We capitalize the cost of materials with low copper content extracted duringthe mining process (“leaching material”), which are accumulated in areas knownas leaching dumps. The amortization of the capitalized costs is determinedbased on the individual depletion of the leaching dumps, which occurs inapproximately 5 to 8 years.

 

Mine development costs:Exploration costs incurred before site operation are expensed as incurred,except for expenditures related to specific properties where proven andprobable mineral resource have been confirmed, in which case the expendituresare capitalized as mine development costs. Capitalized mine development costsare amortized on a straight-line basis over the estimated useful lives of thecorresponding proven metal reserves.

 

*Employeebenefit obligations*

 

In accordance with Mexican Labor Law and ourcollective bargaining agreements, a liability results from the voluntarydeparture of employees who have worked for a company for a minimum number ofyears. In addition, in accordance with the Federal Labor Law, companies haveobligations resulting from indemnities and seniority premiums payable toemployees terminated under certain circumstances. We record the liabilitiesfrom voluntary employee departures, indemnities and seniority premiums as theyaccrue, in accordance with actuarial computations.

 

Mexcananea provides medical and hospital services toall active and retired unionized employees and members of their familiesthrough one of its subsidiaries, Hospital del Ronquillo, S. de R.L. de C.V.Beginning in 1999, Mexcananea adopted revised bulletin D-3, “EmployeeBenefits”. Accordingly, Mexcananea recorded the liability for post-retirementmedical benefits in accordance with actuarial calculations. When there is asignificant reduction in personnel due to a restructuring of the labor force orthe closing of a plant, the corresponding costs, net of the correspondingreduction in projected benefit obligations and other related items, are chargedto results.

 

We are accruing a liability that at present value willcover the projected benefit obligations owed to our employees at theirrespective estimated retirement dates. Payments are charged to results in theperiod in which they are made. Our plan assets related to voluntary employeedepartures and seniority premiums consist of investments in Mexican governmenttreasury certificates (40%) and various equity securities of large Mexicancompanies (60%).

 

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*Revenuerecognition*

 

Most of our copper is sold as refined metal underannual contracts or on a spot sale basis. The balance of our copper productionis sold in the form of concentrate under contracts of one to three years induration. Silver and gold are sold under monthly contracts or in spotsales.  Revenues are recognized upon theshipment of products to customers in satisfaction of orders.

 

Sales of copper concentrate are recorded in the monththe product is shipped to customers. For those sales of copper products wherein customers are given theoption to select a monthly average LME or Comex price ranging between one andthree months subsequent to shipment, revenue is recorded at a provisional priceat the time of shipment, based on LME or Comex spot prices for coppersales.  The provisionally priced salesare adjusted to reflect spot prices at the end of each month until a finaladjustment is made to the price of the shipments upon settlement with customerspursuant to the terms of the contract.

 

#### **OPERATING RESULTS**

 

Our business is affected by a number of factorsdescribed below that should be considered in evaluating our financial position,results of operations and cash flows for the periods described in this AnnualReport.

 

**CommodityPrices**

 

Our selling prices depend principally upon the marketprices of metals we produce, especially copper. Such prices can fluctuatewidely and are beyond our control. Since the maximum volume of metals weproduce can generally be sold at prevailing market prices, our results ofoperations are highly sensitive to such prices. Our results were adverselyaffected in 2000, 2001 and 2002 by decreases in copper prices, although the diversityof our metals production partly mitigated the effects of these market pricefluctuations. Copper prices averaged US$ 0.72 per pound during 2002, ascompared to an average of US$ 0.73 per pound during 2001.  The price of copper was US$ 0.73 per pound atDecember 31, 2002 and the lowest price of copper during 2002 was US$ 0.65per pound on January 2, 2002. Low copper prices resulted in lower net sales,lower operating income and lower net income (a net loss) in 2002.  Low prices for copper have continued in2003. See “—Results of Operations for 2002, 2001 and 2000.” If low copperprices continue at present levels or fall further, these trends in operatingresults will persist or be magnified.

 

In 2002, each change of US$ 0.01 per pound in theaverage price of each of the following metals (except for silver, whichreflects a change of US$ 0.01 per ounce) would have changed net income byapproximately the amount indicated: copper — Ps. 35.6 million; zinc — Ps. 16.1million; lead — Ps. 3.4 million; and silver — Ps. 0.9 million.  See “—Summary of Prices, Volumes Sold andNet Sales” and Item 4. “Information on the Company—Metals Prices” forinformation concerning market prices for metals.

 

From time to time we have entered into options andfutures contracts or fixed-price forward sales contracts with respect to aportion of our expected future production of metals. See Item 11. “Quantitativeand Qualitative Disclosure About Market Risk—Commodity Price Risk.” Gains andlosses on such transactions, together with amortization of any initial fees orother costs of such transactions, are reported net under cost of sales.

 

**Effectsof Exchange Rate Fluctuations and Inflation**

 

All of our sales of metals are priced and invoiced inU.S. dollars (although domestic sales are paid in pesos), while a substantialportion of our cost of sales (approximately 71% in 2002) is denominated inpesos. As a result, period-to-period comparisons of net sales and other itemsin the statement of operations as restated in constant pesos will be affectedwhen the rate of inflation differs from the rate of devaluation of the pesoagainst the U.S. dollar. When the rate of devaluation exceeds the rate ofinflation, net sales and operating income expressed in constant pesos will, allother things being equal, increase from one period to the next. Conversely,when the rate of devaluation is less than the rate of inflation, net sales andoperating income expressed in constant pesos will, all other things beingequal, decline.

 

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Effective January 1, 1997, under the Fifth Amendmentto Bulletin B-10 of the Mexican Institute of Public Accountants, we restate allnonmonetary assets using the NCPI. The Fifth Amendment to Bulletin B-10establishes net replacement cost determined as of December 31, 1996 as thebasis for future NCPI adjustment. Prior to the adoption of the Fifth Amendmentto Bulletin B-10, nonmonetary assets could be valued in accordance with thereplacement cost method, which required an independent appraisal of such assetsas of the most recent balance sheet date. Because most of our equipment isvalued in U.S. dollars, prior to this amendment our appraised value asexpressed in constant pesos varied with the real change in the value of the pesoagainst the U.S. dollar. In periods of real devaluation of the peso, such as1998, depreciation is higher under this amendment than it would have been underthe prior method.

 

For information regarding recent U.S. dollar-Pesoexchange rates, see the tables set forth at Item 3. “Key Information—ExchangeRates”.

 

We have significant assets and liabilities denominatedin U.S. dollars and, because we have net U.S. dollar-denominated liabilities,are exposed to foreign exchange losses when the peso declines in value againstthe U.S. dollar. See Item 3. “Key Information—Exchange Rates,” Item 5.“Operating and Financial Review and Prospects—Results of Operations for 2002,2001 and 2000” and Item 11. “Quantitative and Qualitative Disclosure AboutMarket Risk.”

 

We have had a substantialnet monetary liability position (monetary liabilities exceeding monetaryassets) for all periods discussed in this Annual Report and have recorded netgain on monetary position during these periods. When inflation is higher, we recorda greater gain on monetary position.

 

**Summaryof Prices, Volumes Sold and Net Sales**

 

We invoice our customers for all of our products onthe basis of market prices for refined metals and the amounts of metalcontained in our products and this gross value is recorded under net sales.Where products are sold in impure form, like copper anodes, copper blister orcopper concentrates, the invoice also includes a debit for treatment andrefining charges, which is recorded under cost of sales. Other by-products areinvoiced based on market prices and the invoiced value is recorded under netsales. The prices of unrefined products are estimated at the time of theinitial invoice, because certain physical properties (such as metal content andmoisture content) cannot be finally determined until they have been processedfurther and because invoices are often based on references to market pricesthat are not yet determined at the time of the initial invoice. When the priceis finally determined, a further invoice is sent and an adjustment to net salesis recognized.

 

The following table sets forth, for each of theperiods indicated and for each of our principal categories of metal products,average realized prices (expressed in historical U.S. dollars), volumes sold andnet sales (expressed in constant pesos and historical U.S. dollars).

 

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|                                                                |   | **Year ended  December 31,** |   |
|---------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                |   | **2000**                     |   | **2001** |   | **2002** |   |
| **Average  Realized Price (US$)**                                   |   |                         |   |   |   |   |   |
| Metallic  copper (per pound)                                        |   |                         | US     | $ | 0.88 |   | US$ | 0.76 |   | US$ | 0.76 |   |
| Refined  zinc (per pound)                                           |   | 0.55                         |   | 0.45 |   | 0.39 |   |
| Zinc  concentrate (per pound of zinc contained)                     |   | 0.51                         |   | 0.36 |   | 0.36 |   |
| Silver  (per ounce)                                                 |   | 4.94                         |   | 4.36 |   | 4.57 |   |
| Gold  (per ounce)                                                   |   | 275.71                       |   | 270.92 |   | 309.98 |   |
| Lead  (per pound)                                                   |   | 0.19                         |   | 0.21 |   | 0.21 |   |
| **Volume  Sold**                                                    |   |                         |   |   |   |   |   |
| Metallic  copper (metric tons)                                      |   |                         |   | 368,492 |   | 341,515 |   | 280,216 |   |
| Copper  concentrate (metric tons of copper contained)               |   |                         |   | 21,155 |   | 11,549 |   | (543 | ) |
| Refined  zinc (metric tons)                                         |   |                         |   | 107,397 |   | 104,256 |   | 95,088 |   |
| Zinc  concentrate (metric tons of zinc contained)                   |   |                         |   | 47,858 |   | 37,657 |   | 31,411 |   |
| Silver  (kilograms)                                                 |   |                         |   | 690,263 |   | 652,336 |   | 499,572 |   |
| Gold  (kilograms)                                                   |   |                         |   | 2,528 |   | 2,116 |   | 1,002 |   |
| Lead  (metric tons)                                                 |   |                         |   | 37,712 |   | 34,214 |   | 26,804 |   |
| **Net  Sales (millions of constant pesos as of December 31, 2002)** |   |                         |   |   |   |   |   |   |   |
| Copper:                                                             |   |                         |   |   |   |   |   |   |   |
| Metallic                                                            |   |                         | Ps.    | 7,756.6 |   | Ps. | 5,779.6 |   | Ps. | 4,628.4 |   |
| Concentrate                                                         |   |                         |   | 442.8 |   | 176.5 |   | (5.5 | ) |
| Total                                                               |   |                         |   | 8,199.4 |   | 5,956.1 |   | 4,622.9 |   |
| Zinc:                                                               |   |                         |   |   |   |   |   |   |   |
| Refined                                                             |   |                         |   | 1,417.0 |   | 1,032.2 |   | 808.0 |   |
| Concentrate                                                         |   |                         |   | 581.5 |   | 303.1 |   | 245.3 |   |
| Total                                                               |   |                         |   | 1,998.5 |   | 1,335.3 |   | 1,053.3 |   |
| Silver                                                              |   |                         |   | 1,177.0 |   | 916.9 |   | 734.9 |   |
| Gold                                                                |   |                         |   | 238.5 |   | 184.8 |   | 100.1 |   |
| Lead                                                                |   |                         |   | 155.2 |   | 158.5 |   | 117.7 |   |
| Other                                                               |   |                         |   | 1,149.4 |   | 903.5 |   | 723.9 |   |
| Total                                                               |   |                         | Ps.    | 12,918.0 |   | Ps.  | 9,455.1 |   | Ps. | 7,352.8 |   |
| Percentage  change from prior period                                |   |                         |   | 3.9 | % | (26.8 | )% | (22.2 | )% |
| **Net  Sales (millions of historical U.S.$)**                       |   |                         | US     | $ | 1,128.0 |   | US$ | 901.5 |   | US$ | 723.8 |   |
| Percentage  change from prior period                                |   |                         |   | 15.2 | % | (20.1 | )% | (19.7 | )% |

 

**Resultsof Operations for 2002, 2001 and 2000**

 

We reported an operating loss of Ps. 883.8 million in2002, a 19.3% reduction in operating loss from the Ps. 1,095.4 millionoperating loss reported in 2001.  Thisdecrease was primarily due to a decline in the cost of sales, causing lower purchasedconcentrates from third parties during 2002 compared to 2001 and partiallyoffset decrease in volume sales for copper (73,391 fewer metric tons sold),zinc (15,414 fewer metric tons sold), silver (153 fewer metric tons sold) andgold (1,114 fewer kilograms sold).

 

We reported an operating loss of Ps. 1,095.4 millionin 2001, a 236.6% decrease from the Ps. 801.7 million operating income reportedin 2000.  This decrease was primarilydue to lower average prices and sales volume for copper (US$ 0.12 less perpound), zinc (US$ 0.10 less per pound), silver (US$ 0.58 less per ounce) andgold (US$ 4.79 less per ounce) in 2001 as compared to 2000, and theappreciation of the Mexican peso in respect of the dollar.

 

We reported net loss of Ps. 1,178.3 million in 2002,compared to net loss of Ps. 874.1 million in 2001 and net income of  Ps. 266.2 million in 2000.

 

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*Netsales*

 

Net sales in 2002 were Ps. 7,352.8 million, 22.2%lower than the Ps. 9,455.1 million of net sales in 2001. The decrease was dueto lower sales volumes of copper, zinc, silver and gold. Net sales expressed inhistorical dollars decreased 19.7%.

 

Net sales in 2001 were Ps. 9,455.2 million, 26.8%lower than the Ps. 12,918.0 million of net sales in 2000. The decrease was dueto lower sales volumes of copper, zinc, silver, and gold and by decreasedaverage prices of copper, zinc, silver and gold. Net sales expressed inhistorical dollars decreased 20.1%.

 

Copper sales.Net copper sales in 2002 were Ps. 4,622.9 million, 22.4% lower than the Ps.5,956.1 million of copper sales in 2001. This decrease was due to a lower sales volume of copper. Net coppersales in 2001 were Ps. 5,956.1 million, 27.4% lower than the Ps. 8,199.4million of copper sales in 2000. This decrease was due to a 14% lower salesvolume of copper and a 13.7% decline in the price of refined copper.

 

Zinc sales.Net zinc sales in 2002 were Ps. 1,053.3 million, 21.1% lower than the Ps.1,335.3 million of zinc sales in 2001. This decrease was due to a 13.3%decrease in the price of zinc and a 10.9% decrease in the sales volume ofzinc.  Net zinc sales in 2001 were Ps.1,335.3 million, 33.2% lower than the Ps. 1,998.5 million of zinc sales in 2000.This decrease was due to the 4.48% appreciation of the Mexican peso against theU.S. dollar, a 22% decrease in the price of zinc and a 8.6% decrease in thesales volume of zinc.

 

Silver sales.Net silver sales in 2002 were Ps. 734.9 million, 19.9% lower than the Ps. 917.0million of silver sales in 2001.  Thisdecrease was due to a 23.4% lower sales volume of silver partially offset by a4.8% increase in the price of silver. Net silver sales in 2001 were Ps. 917.0 million, 22.1% lower than thePs. 1,177.0 million of silver sales in 2000. This decrease was due primarily to a 5.5% lower sales volume of silverand a 12% decline in the price of silver.

 

Gold sales.Net gold sales in 2002 were Ps. 100.1 million, 45.8% lower than the Ps. 184.8million of gold sales in 2001. This decrease was due to a 52.6% decrease in thesales volume of gold partially offset by a 14.4% increase in the price ofgold.  Net gold sales in 2001 were Ps.184.8 million, 22.5% lower than the Ps. 238.5 million of gold sales in 2000. Thisdecrease was due to a 16.3% decrease in sales volume of gold.

 

Lead sales.Net lead sales in 2002 were Ps. 117.7 million, 25.7% lower than the Ps. 158.5million of lead sales in 2001.  Thisdecrease was due to 21.7% decline in the sales volume of lead.  Net lead sales in 2001 were Ps. 158.5 million,2.2% higher than the Ps. 155.2 million of lead sales in 2000. This increase wasdue to a US$ 0.02 per pound increase in the price of lead.

 

*Cost ofsales*

 

Cost of sales in 2002 was Ps. 6,089.3 million, 82.8%of net sales, and was 27.9% lower than the Ps. 8,442.0 million of cost of salesin 2001.  The decrease in real terms incost of sales was primarily due to fewer purchases of concentrates from thirdparties.  Cost of sales in 2001 was Ps.8,442.0 million, 89.3% of net sales and were 15.6% lower than the Ps. 10,004.9million of cost of sales in 2000. The decrease in real terms in cost of saleswas due to fewer purchases of concentrates from third parties. See Item 4.  “Information on the Company—Cash Cost ofProduction in Terms of Copper.”

 

*Administrativeexpenses*

 

Administrative expenses in 2002 were Ps. 403.4million, 5.5% of net sales, and were 3.9% higher than in 2001 due primarily toexpenses related to our financial restructuring, including legal expenses,which were Ps. 68.0 million more than in the prior year, incurred as a resultof the restructuring process. Administrative expenses in 2001 were Ps. 388.1 million, 4.1% of netsales and were 11.4% lower than in 2000 due primarily to the continuance of ourcost control policy, reduction in the number of our employees, and improvementsin corporate and sales systems and communications.

 

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*Depreciation*

 

Depreciation expense in 2002 was Ps.1,743.9 million,1.4% higher than in 2001. Depreciation expense in 2001 was Ps. 1,720.4 million,2.8% higher than in 2000.

 

*Netcomprehensive financing cost*

 

Net comprehensive financing cost represents the neteffect of interest expense, interest income, foreign exchange loss and gain onnet monetary position, which arises from the effect of inflation on the averagenet balance of monetary liabilities, and loss on hedging activities.  Net comprehensive financing cost has beenaffected by (i) the level of our cash and temporary investments; (ii) the ratesof return on short-term investments; (iii) the level of our indebtedness; (iv)the rates of interest on our indebtedness; (v) the rate of inflation; and (vi)the fluctuations in foreign currency exchange rates.

 

Net comprehensive financing cost was an expense of Ps.698.9 million in 2002, an expense of Ps. 180.2 million in 2001 and expense ofPs. 96.4 million in 2000. This change was in 2002 due primarily to a decreaseof Ps. 329.3 million (40.1% from the prior) year in interest income as a resultof lower average balances of investments and a lower rate of return oninvestments, and the recognition of Ps. 271.6 million of foreign exchange lossdue to the depreciation of the Mexican peso against the U.S. dollar compared toa Ps. 169.9 million gain in 2001, partially offset by a Ps. 62.4 million(55.9%) increase in the gain on monetary position due to higher inflation.

 

*Otherincome (expense), net*

 

Other income (expense), net, consisted of a Ps. 8.5million expense in 2002, compared to income of Ps. 72.8 million in 2001 andincome of Ps. 25.9 million in 2000. Other expense, net, in 2002 consistedprimarily of net loss on sales of used equipment.  Other income, net, in 2001 consisted of an insurance recovery,net gain or sales of used equipment and a non-recurring gain on natural gassales.

 

*Incometaxes*

 

Our tax returns and those of our subsidiaries areconsolidated and filed by Minera México, our 98.5% shareholder. Each year weand our subsidiaries pay to Minera México the amount of tax, if any, we wouldhave paid had we filed a separate tax return. In the event Minera Méxicoreduces its consolidated tax liability through the use of tax losscarryforwards or other tax benefits to which we or our subsidiaries areentitled, Minera México is obligated to reimburse us or such subsidiary forsuch tax benefit at the time such benefit would otherwise have reduced the taxpayable by us or such subsidiary. Beginning in 1999, Mexican law changed toreduce the extent to which a company can benefit from tax consolidation, from100% to 60% of the possible benefits. See Note 14 to the Financial Statements.At December 31, 2002, we had tax loss carryforwards amounting to Ps. 2,077.7million, all of which were attributable to Mexcananea and Mexcobre and all ofwhich has been applied to reduce the income taxes of Minera México.

 

We are subject to income tax and to an alternativeminimum corporate tax known as asset tax, which is currently assessed at 1.8%of the net average balance of certain assets and liabilities. Our subsidiariesand we are also required under Mexican law to pay employees, in addition totheir normal compensation and benefits, profit sharing in amounts based on thetaxable income of the employing entity.

 

The aggregate effective rate of income tax was 25.6%in 2002, 31.7% in 2001, and 45.1% in 2000. The difference between the aggregateeffective rate of income tax of 2002 and 2001 was primarily due to the declinein our deferred taxes resulting from a decrease in the statutory income taxrate, partially offset by an increase in taxes related to the sale of shares ofour stock to our employees.  Thedifference between the aggregate effective rate of income tax of 2001 and 2000was primarily due to the losses suffered in 2001 and the profits obtained in2000.

 

*Minorityinterest*

 

Minority interest in net loss was Ps. 10.5 million in2002. Minority interest in net loss was Ps. 10.2 million in 2001 and net incomeof Ps. 7.8 million in 2000.

 

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**Liquidityand Capital Resources**

 

Our principal capital requirements are to financecapital expenditures. Capital expenditures were Ps. 208.8 million in 2002, Ps.388.1 million in 2001 and Ps. 1,006.3 million in 2000. We have budgeted totalcapital expenditures for 2003 of approximately US$ 52.4 million. See “Item4.  Information on the Company—CapitalExpenditures.” The actual amount we spend in each year will depend to somedegree on the pace at which current investment projects are implemented and changein market prices for metals. The bulk of capital expenditures are priced inforeign currencies, principally U.S. dollars, so the amount of capitalexpenditures as stated in constant pesos in our Financial Statements will alsodepend on the exchange rate between the peso and the U.S. dollar.

 

From time to time, we provide funding to ourshareholder Minera México.  In March1998, we advanced to the former Grupo México US$ 420 million from the proceedsof issuance of our Notes, which it applied to repay short-term financing forits investment in Grupo Ferroviario Mexicano, a railway network acquired fromthe Mexican government. The balance owed by Minera México (the former GrupoMéxico) at December 31, 2002 was Ps. 9,047.8 million.

 

We pay dividends to our stockholders out of fundslegally available therefor as voted by Minera México at the annual meeting ofstockholders.  At our stockholders’Ordinary General Meeting held on December 30, 2002, an in kind dividend wasdeclared consisting of 662,467,000 shares of Mexcobre common stock.  The value of this in kind dividend was equalto approximately US$ 13,450,800 at December 31, 2002, based on the accountingvalue of the shares of Mexcobre on that date. This first installment of this dividend was distributed on May 15 in theamount  90,622,066 Mexcobre shares(0.13938 multiplied by 650,161,917, the number of our shares of commonstock).  The second installment of thisdividend was cancelled as a result of our merger with and into Minera México.  See “Item 8. Financial Information—OtherFinancial Information.”

 

We have generally met our capital requirements out ofcash flow from operations, supplemented to the extent required by borrowingsfor specific investment projects and by general borrowings.  At December 31, 2002, we had Ps. 1,193.8million in cash and cash equivalents.

 

Resources provided by operations are lower in yearswhen low metals prices adversely affect our earnings.  Resources provided by operations under Mexican GAAP were Ps.15,606.2 million in 2002 and Ps. 1,478.5 million in 2001.

 

As of December 31, 2002, our total indebtedness wasPs. 13,821.7 million (US$ 1,340.3 million), compared to Ps. 12,947.6 million(US$ 1,255.5 million) in 2000.  See Note9 to the Financial Statements for information relating to the maturity profileof our indebtedness. At December 31, 2001, 100% of our total indebtedness wasdenominated in U.S. dollars and 45.7% thereof bore interest at floating rates.In September 1998 and February 1999, we repurchased a portion of our Notes asan investment, in the amounts of US$ 40 million and US$ 5 million,respectively, which represented the fair market value at the date of purchase.We recognized these promissory notes as redeemed in June 2000 and recordedfinancial income of US$ 13.7 million. These notes are reflected as a reductionof US$ 49.2 million in long-term debt in 1999, which corresponds to the nominalvalue of cancelled debt as of that date. See Note 9 to the FinancialStatements.

 

As previously discussed, our financial results weresignificantly affected in recent years by the decline in the market prices ofthe metals we produce.  As a result ofthis situation, during 2002 and 2001, we were not in compliance with certaindebt covenants and were in default under certain payment obligations. We beganto renegotiate the terms of our debt in the fourth quarter of 2002 and onDecember 4, 2002, we executed a term sheet with the SEN Holders and the BankLenders, in which the terms of the restructured debt were described.

 

On April 29, 2003, we entered into a series ofdefinitive agreements restructuring the terms of our indebtedness.  The most significant of these agreements,the Common Agreement, was entered into by and among us, Minera México, asguarantor, certain of our subsidiaries, as guarantors of our obligationsthereunder, the SEN Holders, the Bank Lenders, HSBC Bank, as collateral agentfor the SEN Holders, HSBC Bank, as shared payment and collateral agent for theSEN Holders and the Bank Lenders, Bank of America, as administrative agent ofthe Bank Lenders, and the Bank of New York, as trustee of our secured exportnotes.  The definitive agreementsexecuted in connection with our restructuring of our indebtedness, includingthe Common Agreement, restructure the terms and payment obligations of ourpreviously defaulted financial indebtedness and serve to cure and/or waiveprevious defaults related thereto.

 

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The definitive agreements related to our restructuringalso provide that Minera México, our parent company, and certain of oursubsidiaries will guarantee our obligations thereunder.  Our subsidiary guarantors of therestructured debt include the following: Industrial Minera México, S.A. de C.V., Minera México InternacionalInc., Mexicana de Cobre, S.A. de C.V., Minerales Metálicos del Norte, S.A. deC.V., Mexicana de Cananea, S.A. de C.V., Mexicana del Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A.de C.V., Compañía de Terrenos e Inversiones de San Luis Potosí, S.C. porAcciones, S.A., México Compañía Inmobiliaria, S.A. and ProyeccionesUrbanísticas  S. de R.L. de C.V.

 

Pursuant to the restructuring agreements, the SENHolders and the Bank Lenders indebtedness is divided into two series (Series Aand Series B), with amortization periods from June 25, 2004 to March 30, 2007.The original and restructured indebtedness and the respective amounts andinterest rates are detailed below (as of December 31, 2002 and 2001, the Londoninterbank offered rate (“LIBOR”) was 1.38% and 1.88%, respectively):

 

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| **Debt**                                   |   | **Description**                 |         | **Scheduled  Principal  Payment Dates** |             | **Interest  rate** |   | **Original  Principal  Amount**        |   | **Restructured  Principal Amount** |   |
|--------------------------------------------|--------|---------------------------------|--------------|-----------------------------------------|------------------|--------------------|--------|----------------------------------------|--------|------------------------------------|--------|
| **Original**                               |   | **Restructured**                | **Original** |                                    | **Restructured** | **Series A**       |   | **Series  B**                     |   | **Total**                          |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   | **(expressed in thousands of U.S. dollars)** |   |
| The Bank of New York (Agent)               |   | Secured  export notes           |         | 1998 to 2011                            |             | 2004 to 2007       |   | 9.80%, 10.26%, 11.18% and LIBOR + 2.39 | %      | 11.01%,  11.18% and  LIBOR + 3.75  | %      | $ | 473,231 |   | $ | 145,205 |   | $ | 328,026 |   | $ | 473,231 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of America (Agent)                    |   | Syndicated  term loan           |         | 2001 to 2003                            |             | 2004 to 2007       |   | LIBOR + 0.90                           | %      | LIBOR + 3.75                       | %      | 104,000 |   | 31,911 |   | 72,089 |   | 104,000 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of America (Agent)                    |   | Down  payment agreement         |         | 2003 to 2006                            |             | 2004 to 2007       |   | LIBOR + 1.86                           | %      | LIBOR + 3.75                       | %      | 7,694 |   | 2,361 |   | 5,333 |   | 7,694 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of America y and Export-Import Bank   |   | Export  related loan agreements |         | 2001 to 2007                            |             | 2004 to 2007       |   | LIBOR + 0.1                            | %      | LIBOR + 3.75                       | %      | 36,747 |   | 11,275 |   | 25,472 |   | 36,747 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of Nova Scotia                        |   | Term  credit facility           |         | 2004                                    |             | 2004 to2007        |   | LIBOR + 2.25                           | %      | LIBOR + 3.75                       | %      | 102,237 |   | 31,370 |   | 70,867 |   | 102,237 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Banco Nacional de Comercio Exterior        |   | Revolving  credit facility      |         | 2007                                    |             | 2004 to 2007       |   | LIBOR + 1.59                           | %      | LIBOR + 3.75                       | %      | 50,000 |   | 15,342 |   | 34,658 |   | 50,000 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of America (Agent)                    |   | Letter  of credit facility      |         | 2003                                    |             | 2004 to 2007       |   | Prime + 2.0                            | %      | LIBOR + 3.75                       | %      | 39,826 |   | 12,220 |   | 27,606 |   | 39,826 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Export Development Corporation             |   | Loan  agreement                 |         | 1997 to 2005                            |             | 2004 to 2007       |   | LIBOR + 0.75                           | %      | LIBOR + 0.625% and LIBOR + 3.75    | %      | 39,580 |   | 12,145 |   | 27,435 |   | 39,580 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Societé Generale e Import-Export Bank |   | Export  loan                    |         | 1998 to 2004                            |             | 2004 to 2007       |   | LIBOR + 0.25                           | %      | LIBOR + 3.75                       | %      | 7,628 |   | 2,341 |   | 5,287 |   | 7,628 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Enron, Siemens Financial and West LB AG    |   | Non  payment liability          |         | 2002                                    |             | 2004 to 2007       |   | LIBOR + 2.625                          | %      | LIBOR + 3.75                       | %      | 20,000 |   | 6,137 |   | 13,863 |   | 20,000 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   | 880,943 |   | $ | 270,307 |   | $ | 610,636 |   | $ | 880,943 |   |
| The Notes                                  |   | Guaranteed  senior notes        |         | 2008 and 2028                           |             | Not restructured   |   | 8.25 and 9.25                          | %      | Not restructured                   |   | 441,245 |   |   |   |   |   | 441,245 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   |   |   |   |   |   |   |   |   |
| Bank of America                            |   | Capitalized  interest           |         | 2003                                    |             |               |   |                                   |   |                               |   | 514 |   |   |   |   |   | 514 |   |
| Bank of America                            |   | Accrued  interest               |         | 2003                                    |             |               |   |                                   |   |                               |   | 17,582 |   |   |   |   |   | 17,582 |   |
|                                       |   |                            |         |                                    |             |               |   |                                   |   |                               |   | $ | 1,340,284 |   |   |   |   |   | $ | 1,340,284 |   |

 

Interest paid by the Company during 2002, 2001 and2000 was US$ 94.4 million, US$ 104.1 million and US$ 111.2 million,respectively.

 

The original and restructured maturities of our debtand the and the principal amounts payable thereunder according to year are asfollows:

 
|                 |   | **2002**                                                                                     |      | **2001**         |   |
|----------------------|--------|----------------------------------------------------------------------------------------------|-----------|------------------|--------|
| **Maturity**         |   | **Original**                                                                                 |      | **Restructured** |   | **(in  thousands of Constant Pesos as of December 31, 2002   or U.S. dollars, as indicated)** |   |
|                 |   | **(in  thousands of Constant Pesos as of December 31, 2002  or U.S. dollars, as indicated)** |      |             |   |   |   |
| 2002                 |   | —                                                                                       |      | —           |   | — |   | — |   | US$ | 167,417 |   | Ps. $ | 1,622,582 |   |
| 2003                 |   | US$                                                                                          | 434,266   |             | Ps.    | 4,478,364 |   | US$ | 18,096 |   | Ps. | 186,615 |   | 271,083 |   | 2,627,295 |   |
| 2004                 |   | 240,544                                                                                      |      | 2,480,614        |   | 55,307 |   | 570,353 |   | 247,626 |   | 2,399,949 |   |
| 2005                 |   | 44,382                                                                                       |      | 457,691          |   | 94,000 |   | 969,375 |   | 46,188 |   | 447,649 |   |
| 2006                 |   | 22,113                                                                                       |      | 228,041          |   | 94,000 |   | 969,375 |   | 22,927 |   | 222,207 |   |
| 2007                 |   | 107,632                                                                                      |      | 1,109,955        |   | 637,636 |   | 6,575,621 |   | 87,021 |   | 797,916 |   |
| 2008  and thereafter |   | 491,347                                                                                      |      | 5,067,013        |   | 441,245 |   | 4,550,339 |   | 493,662 |   | 4,829,974 |   |
|                 |   |                                                                                         |      |             |   |   |   |   |   |   |   |   |   |
|                 |   | $                                                                                            | 1,340,284 |             | Ps.    | 13,821,678 |   | $ | 1,340,284 |   | Ps. | 13,821,678 |   | $ | 1,335,924 |   | Ps. | 12,947,572 |   |
|                      |        |                                                                                              |           |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

51

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*Terms of our indebtedness prior to the restructuring*

 

We issued the Notes in March 1998.  The proceeds from the issuance of the Noteswere used to repay certain outstanding indebtedness of the former Grupo México,to make a short term advance to the former Grupo México to enable it to repayshort term loans and to consolidate the total indebtedness of the former GrupoMéxico in us.  The balance of the netproceeds was used for general corporate purposes.  The facility is divided into two series: Series A  Notes in the amount of US$ 375.0 millionmaturing in 2008 and Series B Notes in the amount of US$ 125.0 million maturingin 2028.  The Series A Guaranteed SeniorNotes bear interest at a fixed rate of 8.25% per annum and the Series BGuaranteed Senior Notes bear interest at a fixed rate of 9.25% per annum.  The Notes are guaranteed by Mexcobre, Immsa,Mexcananea, Mimenosa and Minera México Internacional.  Under the terms of the Notes, we must comply with certainfinancial covenants that prohibit us from incurring indebtedness unless the proforma ratio of earnings before interest, taxes, depreciation and amortizationto consolidated interest expense would be equal or greater than 2.5:1.  During 2000, we repaid US$ 58.8 million inprincipal amount of these Notes before maturity.  On December 31, 2002 and 2001, the remaining balance due underthese Notes was US$ 441.2 million.  Wedid not default on the terms of the Notes and therefore were not required torestructure the terms thereof.

 

We issued our secured export notes (the “SecuredExport Notes”) in November 1995, October 1996 and August 1997.  The proceeds from the issuance of theSecured Export Notes were used for the repayment of debt and for capitalexpenditures. At December 31, 2002, our Secured Export Notes were divided intothree series.  Denominated Series C, Dand E, approximately US$ 189.6 million, US$ 76.5 million and US$ 207.2 million,respectively, was outstanding at December 31, 2002 under each such series.  At December 31, 2002, the total outstandingamount of Secured Export Notes was US$ 473.2 million.  After the restructuring, principal is now scheduled to be paidwith respect to the Secured Export Notes periodically beginning June 25, 2004until maturity on March 30, 2007, and interest is borne at rates of 11.01%,11.18% and LIBOR + 3.75%.

 

On October 6, 1998, we entered into a long-termsyndicated loan from Bank of America in the amount of US$ 130 million.Mexcobre, Immsa, Mexcananea, Mimenosa and Minera México Internacionalpreviously guaranteed this loan.  AtDecember 31, 2002, US$ 104.5 million (including US$ 0.5 million of interestpayable) of this loan was outstanding under this loan.  This debt obligation was restructured inaccordance with the terms of our restructuring on April 29, 2003.

 

On February 6, 2001, we entered into an unsecured loanagreement with Bank of America in the amount of US$ 11 million in order toacquire foreign goods. The guarantors of this loan were Mexcobre, Immsa,Mexcananea, Mimenosa and Minerales y Minas Mexicanas, S.A. de C.V.  At December 31, 2002, US$ 7.7 million wasoutstanding under this agreement.  Thisdebt obligation was restructured in accordance with the terms of ourrestructuring on April 29, 2003.

 

On February 6, 2001, we entered into twoexport-related loan agreements with Bank of America and Export-Import Bank ofthe United States, in the amounts of US$ 49.9 million and US$21.4 million tofinance the acquisition of foreign capital goods, equipment and spareparts.  To date, the Company has drawnUS$ 22.3 million from the first loan and the entire available balance of thesecond one.  The guarantors of theseloans were Mexcobre, Immsa, Mexcananea, Mimenosa and Minerales y MinasMexicanas, S.A. de C.V.  At December 31,2002, US$ 36.7 million was outstanding under this agreement.  This debt obligation was restructured inaccordance with the terms of our restructuring on April 29, 2003.

 

On August 30, 2001, we entered into a long-term loanagreement with The Bank of Nova Scotia in the amount of US$ 100 million. Theguarantors of this loan previously were Mexcobre, Immsa, Mexcananea, Mimenosaand Minera México Internacional in addition to the corporate guarantee of GrupoMexico. At December 31, 2002, US$  102.2million was outstanding under this agreement. This debt obligation was restructured in accordance with the terms ofour restructuring on April 29, 2003.

 

On August 10, 2001, we entered into a revolving creditagreement with Banco Nacional de Comercio Exterior, S.N.C., in the amount ofUS$ 50 million.  The guarantors of thisloan previously were Mexcobre, Immsa, Mexcananea and Mimenosa. At December 31,2002, US$ 50 million was outstanding under this credit agreement.  This debt obligation was restructured inaccordance with the terms of our restructuring on April 29, 2003.

 

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On June 9, 2000, we entered into a syndicated loanarrangement with Bank of America, as agent, in the amount of US$ 100million.  The loan previously wasguaranteed by Mexcobre, Immsa, Mexcananea, Mimenosa and Minera MéxicoInternacional. On September 10, 2001, the revolver credit balance was prepaidand only the letters of credit remained outstanding.  At December 31, 2002, US$ 39.8 million remains outstanding underthe letters of credit. These letters of credit are divided into three amountsof US$ 21.0 million, US$ 11.3 million and US$ 7.5 million, and bear interest atthe rate of Prime plus 2.0% per annum and mature in 2003.  This debt obligation was restructured inaccordance with the terms of our restructuring on April 29, 2003.

 

On November 18, 1996, we entered into a long-term loanagreement with Export Development Corporation (“EDC”) in the amount of US$ 49.9million to finance the expansion of the copper smelter owned by Mexcobre.Mexcobre, Immsa, Mexcananea, Mimenosa and Minera México Internacional previouslyguaranteed this loan.  This debtobligation was restructured in accordance with the terms of our restructuringon April 29, 2003.

 

On June 15, 1998, we entered into a long-term creditagreement with Export Development Corporation for up to US$ 75 million tofinance the purchase of Canadian-made assets for the construction of a copperand precious metals refining plant owned by Mexcobre and other assets for thesubsidiaries.  US$ 60.7 million has beendrawn under this credit agreement. Mexcobre, Immsa, Mexcananea, Mimenosa andMinera México Internacional previously guaranteed this loan. At December 31,2002, US$ 40.0 million was outstanding under this agreement.  This debt obligation was restructured inaccordance with the terms of our restructuring on April 29, 2003.

 

On August 21, 1996, we entered into a long-term exportfinance credit agreement with Société Générale and the Export-Import Bank ofthe United States in the amount of US$ 21.3 million.  Mexcobre and Immsa previously were guarantors of this loan.  At December 31, 2002, US$ 7.6 million wasoutstanding under this credit agreement. This debt obligation was restructured in accordance with the terms ofour restructuring on April 29, 2003.

 

In 2002, Siemens Financial Services GMBH, and West LBAG commenced legal action against Mexcobre for failure to pay under anagreement related to the purchase of an electrolyte cathode in the amount ofUS$ 20 million. A restructuring agreement was subsequently reached with most ofour lenders and this amount was included in long term debt.

 

*Terms of the Restructuring*

 

The following are general descriptions of certainconvenants that we are required to satisfy according to the terms of therestructuring: (i) Our net consolidated working capital, defined as currentassets less current liabilities, may not be less than US$ 170 million in 2003,US$ 180 million in 2004, and US$ 190 million in 2005 and thereafter; (ii)  Our interest coverage ratio, defined asearnings before interest, taxes, depreciation and amortization, less Capex andcapitalized stripping, divided by interest expense for the twelve past months,may not be less than 0.6 in 2004, 1.5 in 2005, and 1.8 in 2006; (iii)  Our debt coverage ratio, defined as earningsbefore interest, taxes, depreciation and amortization, less Capex andcapitalized stripping, divided by scheduled principal payments for the previoustwelve months, may not be less than 0.4 in 2004, 0.7 in 2005, and 0.8 as of2006; (iv)  As of the quarter endedMarch 31, 2004, the total debt to net capitalization ratio, defined as totaldebt divided by net capitalization, may not be less than 2.3 in 2004, 2.6 in2005 and 2.6 as of 2006; and (v)  We andour subsidiaries may not incur any liabilities other than permitted debt, whichmay not exceed US$ 30 million.

 

In addition, upon the occurrence of any of thefollowing, we will be required to prepay our restructured indebtedness asdescribed:  (i) In the event of excesscash flow (i.e., net quarterly working capital, after Capex, capitalizedstripping, interest paid, amortization, taxes, employee statutoryprofit-sharing (PTU), and payments from increased metal prices, exceedsestablished amounts), 50% of such surplus amount will be distributed to theholders of our restructured debt; (ii) When the prices of copper, zinc andsilver exceed US$ 0.88 per pound, US$ 0.485 per pound, and US$ 5.00 per ounce,respectively, we will pay an amount equal to 75% of the excess cash flowgenerated by the increased metal prices, which will be applied to the amortizationof Series B; (iii) When our net surplus working capital exceeds US$ 240million, 100% of the surplus will be used to amortize Series B; or (iv) Whenthe value  of sales of non-strategicland not utilized for operating purposes exceed US$ 81 million, 100% of thesurplus will be used to amortize Series B.

 

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*SecurityAgreement*

 

To secure our obligations under the Common Agreement,a security agreement (the “Mexican Security Trust Agreement”) was executed byand among us, Immsa, Mexcobre, Mimenosa, Mexcananea, Mexarco, Minerales y MinasMexicanas, America’s Mining Corporation, Minera México, Compañía de Terrenos eInversiones de San Luis Potosí, S.C. por A., S.A. and Mexci, each as a grantor,and GE Capital Bank, S.A., Institución de Banca Múltiple and GE Capital GrupoFinanciero, as trustees.  In addition, aseparate security agreement (the “US Security Agreement” and, together with theMexican Security Trust Agreement, the “Security Agreements”) was executed byand among us, Minera México, Immsa, Minera Mexico Internacional, Inc.,Mexcobre, Mimenosa, Mexcananea, Mexarco, Minerales y Minas Mexicanas, Compañíade Terrenos e Inversiones de San Luis Potosí, S.C. por A., S.A., MexicoCompañía Inmobiliaria, S.A., Proyecciones Urbanisticas, S. de R.L. de C.V.,each as a grantor, and HSBC Bank USA, as the shared payment and collateralagent.

 

Pursuant to the terms of the Mexican Security TrustAgreement, the grantors pledged certain property to the trustees thereunder,including the following:  (i) The amountof Ps. 25,000, which will be deposited in a trust account; (ii) Real property,tangible movable assets and intangible assets, as established by the trust;(iii) The shares representing our common stock and that of Minera México, heldby Minera México and America’s Mining Corporation, respectively, andexploitation concessions (pursuant to the Mining Law and the restrictionsimposed by the Economy Department; (iv) Any assets and additional sharestransferred to the trust pursuant to the terms of the Mexican  Security Trust Agreement. (v) Any securitiesor other instruments acquired with proceeds resulting from the sale of assets;(vi) Any amounts kept in the trust account at any time; and (vii) Any otherassets that may be transferred to the trust.

 

Pursuant to the terms of the US Security Agreement,the grantors pledged the following to the shared payment and collateral agentthereunder:  (i) All inventory that islocated in the United States consisting of copper cathodes, copper rod, copperanode, and other copper or metal products, and any records, bills of lading orother documents relating thereto; and (ii) all deposit accounts and securitiesaccounts, together with all monies, credit balances and investments heldtherein or credited thereto, and any and all agreements establishing suchaccounts (collectively, the “Collateral”). The Collateral shall not include any properties, assets and rights tothe extent such properties are subject to the Mexican Security Trust Agreement.

 

As a result of the Security Agreements, we haveeffectively pledged substantially all of our assets as collateral in connectionwith our restructured indebtedness.

 

**Reconciliationto U.S. GAAP**

 

The principal differences between Mexican GAAP andU.S. GAAP, as they relate to us in 2000, 2001 and 2002, concern (i) deferredincome taxes and deferred profit sharing (ii) the amortization of the negativegoodwill that was recorded in the acquisition of Mexcobre and (iii) accountingfor start-up costs. With the adoption of revised Bulletin D-4, “Accounting forIncome and Asset Taxes and Employee Profit Sharing”, effective in 2000, thetreatment of deferred income taxes under Mexican GAAP is now similar to thetreatment under U.S. GAAP. Under U.S. GAAP, we would have experienced aconsolidated majority interest in net loss of Ps. 618.2 million, net loss ofPs. 1,760.9 million and net income of Ps. 106.9 million for the years endedDecember 31, 2002, 2001 and 2000, respectively, compared to a net loss of Ps.1,188.8 million, net loss of Ps. 863.9 million and net income of Ps. 258.5million, respectively, under Mexican GAAP. Total majority stockholders’ equityunder U.S. GAAP would have been Ps. 6,112.0 million and Ps. 18,203.4 million asof December 31, 2002 and 2001, compared to Ps. 8,209.1 million and Ps. 22,684.6million, respectively, under Mexican GAAP. See Note 18 to the FinancialStatements.

 

*Impactof New****U.S.****GAAP****Accounting****Standards*

 

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations”, which is effective for all business combinations initiated afterJune 30, 2001. SFAS No. 141 requires all business combinations to be accountedfor using the purchase method. The adoption of this new standard did not have amaterial impact on our financial position or results of operations.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwilland Other Intangible Assets”, which was effective for us beginning in 2002.With the adoption of SFAS No. 142, goodwill is no longer subject toamortization over its estimated useful life, but rather it will be subject toat least an annual assessment for impairment by applying a fair-value-basedtest. Additionally, negative goodwill is recognized as an extraordinary gain atthe time of the business combination. The adoption of this new standard resulted in the discontinuation ofannual goodwill amortization, for US GAAP purposes.  Goodwill amortization for Mexican GAAP purposes, amounted to Ps.20.8 million, Ps. 22.0 million and Ps. 25.9 million in 2002, 2001 and 2000,respectively.

 

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In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations”, which was effective for usbeginning in 2003. We plan to adopt this new standard in 2003. SFAS No. 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. It applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset, except forcertain obligations of lessees. This SFAS requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. We are currently evaluating the effect that thisnew standard will have on our financial position and results of operations.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  We adopted this standard in 2002. SFAS No.144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of.” SFAS No. 144 also expandsthe scope of discontinued operations to a component of an entity and eliminatesthe exception to consolidation for a temporarily controlled subsidiary. Theadoption of this standard did not have a material impact on our financialposition and results of operations.

 

In June 2002, the FASB issued SFAS No. 146 Accountingfor Costs Associated with “Exit or Disposal Activities”, which will be requiredto be effective for exit or disposal activities that are initiated afterDecember 31, 2002.  This statementaddresses financial accounting and reporting for cost associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  We adopted the provisionsof SFAS No. 146 on January 1, 2003, which did not have a material effect on ourfinancial statements.

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, including IndirectGuarantees of Indebtedness of Others”*(“FIN 45”) FIN 45 requiresthat the guarantor recognize, at the inception of certain guarantees, aliability for the fair value of the obligation undertaken in issuing suchguarantee.  FIN 45 also requiresadditional disclosure requirements about the guarantor’s obligations undercertain guarantees that it has issued. The initial recognition and measurement provisions of thisinterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002 and the disclosure requirement are effectivefor financial statement periods ending after December 15, 2002.  We do not expect the adoption of FIN 45 willhave a material impact on our financial position, results of operations or cashflows.

 

In January 2003, the FASB issued FASB InterpretationNo. 46 *“Consolidationof Variable Interest Entities”*(“FIN 46”).  FIN 46 clarifies the application of Accounting Research BulletinNo. 51, *“ConsolidatedFinancial Statement”,* to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  FIN 46 is effective immediately for allcompanies that hold a variable interest in a variable interest entity createdafter January 31, 2003.  For a variableinterest held by us in a variable interest entity created before February 1,2003, we will apply the provisions of FIN 46 no later than the end of the firstannual reporting period beginning after June 15, 2003.  We do not expect that the adoption of FIN 46will have a material impact on our financial position, results of operations orcash flow.

 

In April 2003, the FASB issued SFAS No. 149 *“Amendmentsof Statement 133 on Derivative Instruments and Hedging Activities”*,which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133 *“Accounting for Derivative Instrumentsand Hedging Activities”. *Thechanges in SFAS No. 149 improve financial reporting by requiring that contractswith comparable characteristics be accounted for similarly.  SFAS No. 149 will be effective for contractsentered into or modified after June 30, 2003, except as stated below, and forhedging relationships designated after June 30, 2003.  In addition, except as stated below, all provisions of thisstatement should be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133implementation issues that have been effective for fiscal quarters that beganprior to June 15, 2003, should continue to be applied in accordance with theirrespective effective dates.  We do notanticipate that the adoption of SFAS No. 149 will have a material impact on ourfinancial position, results of operations or cash flow.

 

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In May 2003, the FASB issued SFAS No. 150, *“Accountingfor Certain Financial Instruments with Characteristic of both Liabilities andEquity”*.  SFAS No. 150 aimsto eliminate diversity in practice by requiring that the following three typesof financial instruments be reported as liabilities by their issuers:

 

•                                          Mandatorilyredeemable instruments (i.e., instruments issued in the form of shares thatunconditionally obligate the issuer to redeem the shares for cash or bytransferring other assets)

 

•                                          Forwardpurchase contracts, written put options, and other financial instruments not inthe form of shares that either obligate or may obligate the issuer to settleits obligation for cash or by transferring other assets

 

•                                          Certainfinancial instrument that include on obligation that (1) the issuer may or mustsettle by issuing a variable number of its equity share and (2) has a “monetaryvalue” at inception that (a) is fixed, (b) is tied to a market index or otherbenchmark (something other than the fair value of the issuer’s equity shares),or (c) varies inversely with the fair value of the equity shares, for example,a written put option.

 

Until now, these types of instruments have been variously reported bytheir issuers as liabilities, as part of equity, or between the liabilities andequity sections (sometimes referred as “mezzanine” reporting) of the balancesheet.  The provisions of SFAS 150 areeffective for financial instruments for the first fiscal period beginning afterDecember 15, 2003.  We do not expectthat the adoption of SFAS No. 150 will have a material impact on its financialposition, results of operations or cash flow.

 

**Off-BalanceSheet Arrangements**

 

We have not entered into any material off-balancesheet arrangements as defined by SEC rules.

 

#### **TREND INFORMATION**

 

As described under Item 4. “Information on the Company—BusinessOverview” and Item 5. “Operating and Financial Review and Prospects—OperatingResults,” the most significant trend affecting our results of operationscurrently and during the past few fiscal years is the depressed market pricesfor metals and metal products we sell. See Item 3.  “Key Information—Risk Factors—Certain Factors Relating to OurBusiness.”  In addition, anothersignificant trend that has appeared in the last fiscal year is the decline inthe sales volumes of our metals.  We areunable to predict the possible impact on cash costs of production, andtherefore on gross profit, of changes in rates of inflation relative to theexchange rate of the peso compared to the U.S. dollar. See Item 4.  “Information on the Company—BusinessOverview—Cash Cost of Production in Terms of Copper.”

 

On May 28, 2003, we and Minera México heldextraordinary shareholders’ meetings approving our merger with and into MineraMéxico. Between us and Minera México, the merger is effective as of June 1,2003.  The executed resolutions andaccompanying merger agreement were registered on July 2, 2003, with the MexicanPublic Registry of Commerce.  UnderMexican law, the merger is effective with respect to third parties ninety daysafter the registration of the shareholders’ resolutions and accompanying mergeragreement with the Mexican Public Registry of Commerce.

 

#### **CONTRACTUAL OBLIGATIONS**

#### ** **

The following table summarizes our significantcontractual obligations (as defined by Section 13(j) of the Securities ExchangeAct of 1934, as amended) as of December 31, 2002 (expressed in millions ofpesos):

 
|            |   | **Payment  due by Period** |   |
|-----------------|--------|----------------------------|--------|
|            |   | **Total**                  |   | **2003** |   | **2004 to  2005** |   | **2006 to  2007** |   | **2008 and  Thereafter** |   |
| Long-term  debt |   | 13,635.1                   |   | — |   | 1,539.7 |   | 7,545.0 |   | 4,550.4 |   |

 

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**ITEM6****.****                                                     DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES.**

 

**DIRECTORS AND SENIOR MANAGEMENT**

 

Our Board of Directors currently consists of sevendirectors. The term of office is for one year, and each director is elected atthe annual meeting of shareholders.  Ourdirectors do not have any compensation or service agreements.  We currently do not have alternate directors(although C.P. Arturo García Bello is our alternate examiner). The currentdirectors are as follows:

 

| **Name**                             |   | **Position** |   | **Years as  Director** |
|--------------------------------------|--------|--------------|--------|------------------------|
| Germán Larrea  Mota-Velasco     |   | Chairman     |   | 22                     |
| Juan Sánchez-Navarro  Peón |   | Director     |   | 23                     |
| Prudencio López  Martínez  |   | Director     |   | 17                     |
| Juan I. Gallardo  Thurlow            |   | Director     |   | 14                     |
| Carlos Girón Peltier            |   | Director     |   | 17                     |
| Agustín Santamarina V.          |   | Director     |   | 14                     |
| Genaro Larrea  Mota-Velasco          |   | Director     |   | 16                     |
| Rolando Vega Íniguez            |   | Examiner     |   | 24                     |

 

Germán Larrea Mota-Velasco and Genaro LarreaMota-Velasco are officers or employees of Grupo México, Minera México, AsarcoIncorporated and us. The remaining directors are neither affiliated with us,Grupo México, Minera México nor Asarco.

 

Germán Larrea Mota-Velasco and Genaro LarreaMota-Velasco are brothers.

 

Each of our executive officers is appointed for anindefinite term. No such officer has a contract of employment.  Our executive officers are as follows:

 
| **Name**                              |   | **Current  Position**                               |   | **Years  in this  Position** |   | **Years  as an  Employee** |
|---------------------------------------|--------|-----------------------------------------------------|--------|------------------------------|--------|----------------------------|
| Germán Larrea  Mota-Velasco      |   | Executive President                                 |   | 12                           |   | 13                         |
| Xavier García de  Quevedo Topete |   | President and General  Director (MM)                |   | 2                            |   | 7                          |
| Daniel Chávez Carreón       |   | General Director  Operations (MM)                   |   | 2                            |   | 22                         |
| Julian Chavira Quintana               |   | Director-Mining Units  Operations IMMSA             |   | 2                            |   | 4                          |
| Arturo Bermea Castro                  |   | Director-Metallurgical  Operations, Coal and Coke   |   | 12                           |   | 39                         |
| J. Eduardo González  Félix  |   | Director-Finance                                    |   | 2                            |   | 4                          |
| Alfonso González  Schiavon       |   | Director-Human  Resources                           |   | 3                            |   | 3                          |
| Manuel Calderón  Cárdenas   |   | Director-Planning  and Control of Mining Operations |   | 13                           |   | 35                         |
| Ruben Tello Flores                    |   | Director-Mining  Operations  (Mexcobre)        |   | 10                           |   | 43                         |
| Isaac López Arzola               |   | Director-Mining  Operations (Mexcananea)            |   | 7                            |   | 28                         |
| Jorge Meza Viveros                    |   | Director-Metallurgical  Operations, Mexcobre        |   | 5                            |   | 18                         |
| Mario Vinageras Barroso               |   | Corporate  Director-Commercial                      |   | 2                            |   | 27                         |
| Agustín Avila Martínez      |   | Director-Controller                                 |   | 2                            |   | 15                         |
| Ligia Sandoval Parra                  |   | Director-Legal Matters                              |   | —                       |   | 7                          |

 

There are no arrangements by or between any personswhereby such person was elected or designated as one of our officers ordirectors.

 

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Set forth below is a summary of the principal businessactivities of our directors and executive officers in addition to thoseperformed on our behalf.

 

Germán LarreaMota-Velasco. Executive President. Mr. Germán Larrea has beenthe Chairman and Chief Executive Officer of Grupo México since 1994 and MineraMéxico since its incorporation. Prior to 1994, Mr. Larrea was the ExecutiveVice President of Grupo México S.A. de C.V., a position that he assumed inDecember 1989. Mr. Larrea also serves as a Director of the Board of GrupoMéxico, a position that he has held since 1981, and as a director of MineraMéxico, Asarco and of Southern Peru Corporation, a majority-owned publicsubsidiary of Asarco (“SPCC”). Mr. Larrea is also Chairman of the Board andChief Executive Officer of Compañía Perforadora México and México CompañíaConstructora. Mr. Larrea founded Grupo Impresa in 1978 and was a ChiefExecutive Officer until 1989 when that company was sold. Mr. Larrea is also amember of the Board of Directors of Grupo Financiero Banamex/Accival, BancoNacional de México, Grupo Televisa, Grupo Bursátil Mexicano, Seguros ComercialAmérica, Bolsa Mexicana de Valores, Consejo Mexicano de Hombres de Negocios,Cámara Minera de México and Perforadora México.

 

Juan Sánchez-Navarro Peón.Vice President of Grupo Modelo, S.A. de C.V. since 1993. Chairman of BancoInternacional, S.A. from July 22, 1992 to April 23, 1997. Chairman of GrupoFinanciero Bital, S.A. de C.V. from July 22, 1992, to April 23, 1997.  Director since 1994.

 

Carlos Girón Peltier.Retired in 1995. Director since 1994.

 

Prudencio López Martínez.  President of Sanvica, S.A. de C.V. since1982. Director since 1994.

 

Juan I. Gallardo Thurlow.Chairman of the Board of Grupo Azucarero de México, S.A. de C.V. since 1995.Chairman of the Board of Grupo Embotelladoras Unidas, S.A. de C.V. since 1986.Director since 1994.

 

Agustín SantamarinaVázquez. Partner of Santamarina y Steta, S.C. and outsidecounsel to Grupo México since July 1, 1992 and Minera México since itsincorporation. Director since 1994.

 

Genaro LarreaMota-Velasco. President and General Director Asarco sinceOctober 2001. Managing Director, Commercial of Grupo México from 1994 to August2001 and Minera México since its incorporation to September 2001. Previously,he served as International Operations Director from 1989 to 1993 and Assistantto the Managing Director from 1987 to 1989 at Grupo México; Treasurer from 1984to 1987 and Deputy Treasurer from 1982 to 1984 at Mexcobre.  Mr. Larrea is also a Director of Asarco andof SPCC.

 

Xavier García de QuevedoTopete. Mr. García de Quevedo has been President and GeneralDirector of Minera México since September 2001. Mr. García de Quevedo wasPresident and Chief Operating Officer of Asarco from January 2000 to August2001 and Director of Asarco since November 1999.  Mr. Garcia de Quevedo was Managing Director of Grupo FerroviarioMexicano, S.A. de C.V. and Ferrocarril Mexicano, S.A. de C.V. from December1997 to December 1999 and Managing Director for Exploration and Development atGrupo México from 1994 to 1997. He is member of the Board of Directors of GrupoMéxico since 1998 and Director of Asarco and SPCC since November 1999.

 

Daniel Chávez Carreón.Daniel Chávez Carreón joined Immsa in 1989 as Purchasing Manager. In 1989, Mr.Chávez left Immsa to serve as General Manager of W.M. Mexicana. In 1991, herejoined Grupo México as Director of Corporate Purchasing of the group. Mr.Chávez was the Managing Director of Immsa from 1997 to June 2001. Mr. Chávezhas been General Director Operations of Minera México since July 2001.

 

Manuel Calderón Cárdenas.Director-Planning and Control of Mining Operations.  Mr. Cárdenas joined Immsa as Chief Engineer in 1956 and assumedhis current position in January 1989. His responsibilities include thefinancial and economic valuation of new mining ventures, planning andscheduling of mine operations and analysis of capital and operations costs.Previously, he served as Mine Superintendent in 1965, Planning DepartmentManager in 1975 and Subdirector of the commercial department in 1982. Mr. Calderónis also a Member of the Board of Directors of Asarco.

 

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José Julián ChaviraQuintana. Mr. Chavira has been a director of the North ZoneUnderground Mining Operation since September 1998 to February 2002. He has beenthe Mining Operation Director of Industrial Minera México, S.A. de C.V. fromMarch 2002 to the present.

 

Arturo Bermea Castro.Mr. Bermea has worked for us since 1964. From 1972 to 1975 he was GeneralManager of the Chihuahua Plant. From 1976 to 1982, he was the Regional Managerfor copper and lead plants. Since 1991, he has been Director of MetallurgicalOperations, Coal and Coke.

 

J. Eduardo González Félix.Mr. González has been Finance and Administration Director since October 2001.Previously, he was Treasurer (January 2001 to October 2001) and Subdirector forInvestor Relations (March 1999 to December 2000). He was a Senior Associate ofMcKinsey and Company Inc. from 1997 to 1998.

 

Alfonso González Schiavón.Mr. González has been the Human Resources Director since February 2000.Previously, he was Corporate Director of Grupo Transportación MarítimaMexicana, S.A., de C.V. from July 1995 to February 2000.

 

Rubén Tello Flores.Mr. Tello is Director-Mining Operations, Mexcobre. He has served in his currentposition since 1993. He was Manager of Operations at Mexcobre from 1990 to 1993and Superintendent of Concentrator at Mexcobre from 1980 to 1990. Mr. Tellojoined Immsa in 1960 and has served in several positions in the operatingareas.

 

Isaac López Arzola.Mr. López has been Managing Director of Mexcananea since March 1, 2000.Previously, he was Director of Operations at Mexicana de Cananea from November1, 1996 to February 29, 2000. He has worked for different companies of thegroup since August 1, 1975.

 

Jorge Meza Viveros.Mr. Meza is the Metallurgical Plants Director. Mr. Meza has been director ofMetallurgical Plants of Mexcobre since June 1997. He has had other positions inMexcobre since 1984.

 

Mario Vinageras Barroso.Mr. Vinageras is the Corporate Director-Commercial of Grupo México since June1, 2000. He has also been Commercial Managing Director for Minera México sinceSeptember 1994 and Commercial Vice President for Southern Peru CopperCorporation since April 2002.

 

Agustín Avila Martínez.  Mr. Avila has been the Director-Controllersince March 2000. From November 1993 until March 2000 he was Deputy Controllerand from September 1988 until November 1993 he was General Controller ofMexcobre and Mexcananea.

 

Ligia Sandoval Parra.  Ms. Sandoval was recently appointed theDirector of the Legal Department of Minera México. From June 2000 to June 2003,she was Deputy Legal Director at Grupo México. She has had held other positionsat Grupo México since 1996.

 

#### **COMPENSATION**

#### ** **

For the year ended December 31, 2002, the aggregatecompensation paid and benefits in kind granted to our directors and officersfor services in such capacities by us and our subsidiaries was approximatelyPs. 36.7 million (nominal value). Such compensation includes such persons’benefits realized under our Employee Stock Purchase Plan (as defined below).

 

The total amount set aside and accrued by oursubsidiaries and us in 2002 to such persons to provide retirement, pension orsimilar benefits was Ps. 22.7 million.

 

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**BOARD PRACTICES**

 

Management of our business is vested in the Board ofDirectors. Our by-laws provide that our shareholders elect our directors andmay elect up to an equal number of alternate directors. Alternate directors, ifappointed, are authorized to serve on the Board of Directors in place ofdirectors who are unable to attend meetings. Directors and alternate directorsare elected at the annual meeting of shareholders for a one-year term. We havenot appointed alternate directors.  Wehave not entered into any service or employment contracts with any of ourdirectors and executive officers.

 

The examiner reports to the shareholders at the annualordinary general meeting regarding the accuracy of the financial informationpresented to such holders by the Board of Directors and generally review ouraffairs. Generally, examiners are also authorized (i) to call ordinary orextraordinary shareholders’ meetings, (ii) to place items on the agenda formeetings of shareholders or the Board of Directors and (iii) to attend meetingsof shareholders or the Board of Directors (without the right to vote).  Examiners also receive monthly reports fromthe Board of Directors regarding material aspects of our affairs, including ourfinancial condition.  Our examiner hasbeen Rolando Vega Íniguez for 24 years, and the alternate examiner has beenC.P. Arturo García Bello, of Ruíz Urquiza y Cía, S.C., for 2 years.

 

**EMPLOYEES**

 

At December 31, 2002, we had 9,139 employees, of whom6,025 were in mining operations, 2,703 were in processing operations and 411were in headquarters. The size of our workforce has generally been stable,although steadily declining since 1994. We have generally negotiated workforcereductions with representatives of the labor union in exchange for severancecompensation. As a result of the strike at the Cananea mine, however, theCananea Unit laid off approximately 1,000 union and non-union employees duringthe months of February, March and April 1999.

 

We have undertaken a number of measures to improvelabor productivity at our facilities, including simplification of jobcategories, increased flexibility and establishment of worker productivityincentives.

 

Approximately 75% of our labor force at December 31,2002 were members of the Sindicato Nacional de Trabajadores Minero Metalúrgicosy Similares de la República Mexicana, A.C. (the “National Mine Workers Union”or the “Union”). Under Mexican law, the terms of employment for unionizedworkers is set forth in collective bargaining agreements. Mexican companiesnegotiate the salary provisions of collective bargaining agreements with thelabor unions annually and negotiate other benefits every two years. We conductnegotiations separately at each mining complex and each processing plant.

 

Between April 9, 2003 and June 10, 2003, we conductedsalary and contract negotiations at the San Luis Potosí Copper smelter, theCharcas mine, the Santa Bárbara mine, the Taxco mine and the Nueva RositaPlant.  As of yet, however, we have beenunable to finalize these negotiations due to delays by the National MineWorkers Union in connection with an interunion conflict at the ImmsaElectrolytic Zinc Plant.  We do notanticipate a strike by the Union in connection with these negotiations.

 

We have recently experienced labor unrest that hasaffected our operations. Notwithstanding this occasional labor unrest, weregard our present relations with our employees as satisfactory.

 

On January 20, 2003, approximately 1,117 members ofthe Union went on strike at the Mexcananea’s Cananea mine in the state ofSonora, alleging a violation of their collective bargaining agreement.  This strike was resolved on February 5,2003.

 

On October 30, 2002, approximately 453 members of theUnion went on strike at Immsa’s Electrolytic Zinc Plant, in the state of SanLuis Potosí, alleging a violation of their collective bargainingagreement.  This strike was resolvedbefore the Mexican Ministry of Labor declared the strike illegal on November14, 2002.

 

On June 3, 2002, approximately 1,256 members of theUnion went on strike at Mexcananea’s Cananea mine in the state of Sonoraalleging a violation of their collective bargain agreement. This strike wasresolved on June 9, 2002, and Mexcananea and the Union agreed to a 5.25%,salary increase and a reclassification of the categories of employees thatimplied an increase in the maximum salary per category of 4.75%.

 

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On June 3, 2002, approximately 280 members of theUnion went on strike at the Immsa’s Nueva Rosita Plant, in the state ofCoahuila, as a result of a disagreement in the manner in which raises were tobe determined during 2002. This strike was resolved on June 8, 2002, and Immsaand the Union agreed to a 5.25% salary increase and a reclassification of thecategories of employees that implied an increase in the maximum salary percategory of 4.75%.

 

On March 5, 2002, approximately 212 members of theUnion went on strike at Immsa’s Pasta de Conchos Unit, in the state ofCoahuila, as a result of a disagreement in the manner in which raises were tobe determined during 2002. This strike was resolved on March 19, 2002, andImmsa and the Union agreed to a 5.25% salary increase.

 

On March 5, 2002, approximately 531 members of theUnion went on strike at Immsa’s San Martín mine, in the state of Zacatecas, asa result of a disagreement in the manner in which raises were to be determinedin the year 2002. This strike was resolved on April 4, 2002, and Immsa and theUnion agreed to a 5.75% salary increase.

 

On March 5, 2002, approximately 1,239 members of theUnion went on strike at Mexcobre’s concentrator mine, in the state of Sonora,as a result of a disagreement in the manner in which raises were to be determinedin the year 2002.  This strike wasresolved on April 16, 2002, and Mexcobre and the Union agreed to a 5.75% salaryincrease.

 

On March 7, 2002, approximately 468 members of theUnion went on strike at the Immsa’s Electrolytic Zinc Plant, in the state ofSan Luis Potosí, as a result of a disagreement in the manner in which raiseswere to be determined in the year 2002. This strike was resolved on March 19,2002, and Immsa and the Union agreed to a 5.25% salary increase.

 

We have undertaken a number of measures to improvelabor productivity at our facilities, including simplification of jobcategories, increased flexibility and the establishment of workers’productivity incentives.

 

In April 2000, approximately 458 members of the Unionat Immsa’s Taxco, Guerrero mine went out on strike as a result of adisagreement over wages. The strike was resolved on June 5, 2000. Prior to theTaxco work stoppage, Immsa experienced an 80-day strike at the San Luis Potosízinc refinery in 1992 and a 50-day general work stoppage at the Santa Bárbaramine in the same year.

 

On October 10, 2000, approximately 196 members of theUnion blocked the San Antonio mine at the Santa Eulalia Unit, in the state ofChihuahua, as a result of a disagreement regarding the collective bargainingagreement.  This dispute was resolved onOctober 2, 2001, and Immsa and the Union agreed to suspend operations at SantaEulalia’s Unit and to terminate the collective bargain agreement. The SantaEulalia unit mine represented 3.83% of Immsa’s total mining production in 2000.As a result of this closure, Immsa dismissed approximately 196 union workers.Until 1998, Mexcananea had experienced two labor strikes, the first a 45-daystrike at the Cananea concentrator in 1991 and the second an 11-day generalwork stoppage in 1995. Prior to our ownership, Mexcobre had experienced onlytwo strikes.

 

Employees of the Mexcobre and Cananea Units reside intown sites at La Caridad and Cananea, respectively, where we have builtapproximately 1,800 houses and apartments and 300 houses and apartments,respectively. Employees of the Immsa Unit principally reside on the grounds ofthe mining or processing complexes in which they work and we have builtapproximately 900 houses and apartments for such employees.  Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees. Ourtown sites and housing complexes include educational and, in some units,medical facilities, churches, social clubs, shopping, banking and other services.At the Cananea Unit, health care is provided free of charge to employees andtheir families.

 

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**SHARE OWNERSHIP**

 

We offer eligible employees a stock purchase plan (the“Employee Stock Purchase Plan”) through a trust that acquires shares of GrupoMéxico for future sale to our employees, subsidiaries and certain affiliatedcompanies.  Our officers and directorsare eligible to participate in the Employee Stock Purchase Plan. Sales are atthe approximate fair market value of the shares at the date of sale, and theemployees pay for such shares over periods extending to a maximum of eightyears on an interest-free basis. The number of shares allotted to each eligibleemployee is determined by the employee’s position.

 

**ITEM7****.****                                                     MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

** **

**MAJOR SHAREHOLDERS**

** **

As of December 31, 2002, Minera México owned642,685,055 capital shares, or 98.85% of our capital stock, and the remaining7,476,862 capital shares, or 1.15% of our capital stock, were owned by certainminority investors.

 

Our Board of Directors and that of Minera Méxicocalled a meeting (a Stockholders’ Extraordinary General Meeting) of thestockholders of each on May 28, 2003, at which resolutions were approved withrespect to our merger into Minera México.

 

The shares of Grupo México, the indirect owner of99.81% of Minera México, are listed on the Bolsa Mexicana de Valores, S.A. deC.V. (the Mexican Stock Exchange). A holding company controlled by the Larreafamily, which includes Germán Larrea Mota-Velasco, Chairman of the Board, andGenaro Larrea Mota-Velasco, Asarco’s President, together with the holdings ofvarious family members and of other stockholders who have supported the Larreafamily, directly or indirectly may be deemed to control a majority of thecapital stock of Grupo México.

 

**RELATED PARTY TRANSACTIONS**

** **

The Larrea family controls a majority of the capitalstock of Grupo México, as described above, has extensive interests in otherbusinesses, including oil drilling services, construction and real estate. Weengage in certain transactions in the ordinary course of business with otherentities controlled by the Larrea family, including the mining refining, thelease of office space, as well as air transportation and construction services.These transactions amounted to approximately Ps. 189.3 million in 2002. All ofthese transactions were conducted under standard terms.

 

We lend to and borrow among our affiliates from timeto time to fund acquisitions and for other corporate purposes. The proceeds ofthe sale of the Notes were used in part to repay certain indebtedness of theformer Grupo México and to make a short-term advance to it to repay otherliabilities.  See Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources” and Notes 9 and 13 to the “FinancialStatements. These financing transactions bear interest at market rates.

 

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**ITEM8****.****                                                     FINANCIALINFORMATION**

** **

**FINANCIAL STATEMENTS**

** **

See our Financial Statements at Annex F, the financialstatements of Mexcobre at Annex F-1 and the financial statements of Mexcananeaat Annex F-2.

 

**OTHER FINANCIAL INFORMATION**

 

**ExportSales**

 

The volumes of total sales and export sales and exportsales as a percentage of total sales for the periods indicated were as follows:

 

**GRUPOMINERO MÉXICO, S.A. DE C.V.VOLUME SALES DISTRIBUTION 2000, 2001 AND 2002(1)**

 
|           |   | **2000**         |   | **2001**          |   | **2002** |   |
|----------------|--------|------------------|--------|-------------------|--------|----------|--------|
| **Metal Type** |   | **Total  Sales** |   | **Export  Sales** |   | **%**    |   | **Total  Sales** |   | **Export  Sales** |   | **%** |   | **Total  Sales** |   | **Export  Sales** |   | **%** |   |
| Copper         |   | 389,647          |   | 267,997           |   | 68.8     | %      | 353,064 |   | 245,733 |   | 69.6 | % | 279,673 |   | 132,565 |   | 47.4 | % |
| Zinc           |   | 155,255          |   | 75,754            |   | 48.8     | %      | 141,913 |   | 80,607 |   | 56.8 | % | 126,499 |   | 63,882 |   | 50.5 | % |
| Silver(2)      |   | 690,263          |   | 555,676           |   | 80.5     | %      | 652,336 |   | 429,889 |   | 65.9 | % | 499,572 |   | 195,832 |   | 39.2 | % |
| Lead           |   | 37,712           |   | 4,481             |   | 11.9     | %      | 34,214 |   | 2,634 |   | 7.7 | % | 26,804 |   | 563 |   | 2.1 | % |
| Gold(2)        |   | 2,528            |   | 1,126             |   | 44.5     | %      | 2,116 |   | 1,016 |   | 48.0 | % | 1,002 |   | 256 |   | 25.5 | % |

 

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(1)                                  Metrictons except as noted.

 

(2)                                  Kilograms.

 

**LegalProceedings**

 

*Ejido*

 

In July 1991, the agricultural community of Pilares deNacozari Ejido (the “Ejido”) commenced an action (“Amparo”) in the firstfederal district court in Sonora, Mexico against the Ministry of AgrarianReform (the “Ministry”), alleging that the expropriation of approximately 1,500hectares of land on which certain of Mexcobre’s facilities are currentlylocated, which land is adjacent to the land where the mine is located, wasimproper.  Mexcobre was not named as adefendant in the Amparo, although it was included as an interested third partydue to its ownership of the land. Mexcobre bought the land in question in 1976from the Banco Nacional de Obras y Servicios Publicos, which had previouslyacquired it as a beneficiary of the expropriation by the Ministry in 1973.

 

The claim alleged by the Ejido states that theMinistry failed to notify one of three legal representatives of the Ejido ofthe expropriation.  In 1994, the MexicanDistrict Court Judge of Hermosillo granted the Amparo ruling the expropriationby the Ministry legally void and in 1997 made a second ruling ordering theMinistry to return the land.  As aresult of the second ruling, Mexcobre filed an ancillary action alleging theimpossibility of returning the land.

 

There has been no final resolution of this matter, butthe Mexican District Court Judge of Hermosillo before whom this matter ispresently docketed has twice before issued a ruling stating that it isimpossible to return the land as a means of restitution.  A third and final ruling from the MexicanDistrict Court Judge of Hermosillo is expected soon.  Mexcobre and we believe that if the Ejido requests indemnityinstead of a return of the land, Mexcobre’s financial responsibility withrespect to such compensation would not be material.

 

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*CoremiRoyalties*

 

When Mexcobre originally received mining concessionsrelated to its “La Caridad” unit in 1970, it was forced to pay royalties to theCouncil of Mineral Resources (“Coremi”). When the Mining Law came into effect in 1992, however, said obligationwas abrogated.  Coremi, the Mexican****Superintendentof Mining and the Mexican Secretary of Economy, however, have interpreted in adifferent way from us and Mexcobre the inception of the Mining Law and, in1995, Coremi and Mexcobre initiated series of legal actions that are stillpending.  In August 2002, Coremi filedwith the Third Federal District Judge in Civil Matter, certain civilianactions, demanding from Mexcobre the payment of royalties due since 1997.  Mexcobre answered and denied Coremi’s claimsin October 2002.  We and Mexcobrebelieve that any such payment related to this matter would not be material tous or to Mexcobre.

 

*LaCaridad - Mining Concessions*

 

Since 1995, the Mexican Superintendent of Mining hasrequested proof from Mexcobre that it satisfied its obligation to pay certain“discovery bonuses” allegedly due in connection with the grant of 13 miningconcessions at La Caridad.  If saidproof is not provided, the Mexican Superintendent of Mining has threatened tocancel Mexcobre’s concessions.  Mexcobrehas challenged these demands by filing a writ before a hierarchically superioradministrative body, in which Mexcobre states its “defenses” against thealleged claims and by filing an Amparo on May 2, 2003, with the Tenth DistrictFederal Judge in Administrative Matters. Mexcobre believes that its obligation to make the demanded payments wasabrogated when the Mining Law came into effect in November 1992, that theMexican Superintendent of Mining confuses “bonuses” with “royalties” and thatany claims related thereto are without merit.

 

We are involved in various other legal proceedingsincidental to our operations, but we do not believe that decisions in any suchproceedings would, individually or in the aggregate, have a material adverseeffect on our financial position and results of operations.

 

**DividendPolicy**

 

We pay dividends to our stockholders out of fundslegally available therefor as voted by Minera México at the annual meeting ofstockholders. At our Stockholders’ Ordinary General Meeting held on December30, 2002, an in kind dividend was declared consisting of 662,467,000 shares ofthe common stock of Mexcobre.  The valueof this in kind dividend was equal to Ps. 13,450,800 at December 31, 2002,based on the accounting value of Mexcobre’s common stock on that date. Thefirst installment of this dividend was distributed on May 15, 2003 in theamount of 90,622,066 Mexcobre shares (0.13938 multiplied by 650,161,917, thenumber of shares of our common stock). The second installment of this dividendwas cancelled as a result of our merger with and into Minera México. See “Item3. Key Information—Selected Financial Data.”** **We had not previously paid dividends since April 1996.

 

**ITEM9****.****                                                     THEOFFER AND LISTING**

** **

Our only classes of registered securities under theExchange Act are our Notes. The Notes are not traded on any organized market.

 

**ITEM10****.****                                              ADDITIONALINFORMATION**

** **

**MEMORANDUMAND ARTICLES OF ASSOCIATION (ESTATUTOS SOCIALES)**

** **

*Setforth below is certain information concerning our capital structure and adescription of certain provisions of our estatutos sociales (by-laws) andMexican law to the extent applicable for inclusion in this Annual Report. Thedescription does not purport to be complete and is qualified entirely byreference to our estatutos sociales and Mexican law.*

 

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**General**

 

We were incorporated on December 26, 1978 as asociedad anónima de capital variable (corporation with variable capital) underthe laws of Mexico. We are registered in the Registro Público de Comercio delDistrito Federal (Public Commercial Registry of the Federal District of Mexico)under file number 122. Our corporate domicile is Mexico City, Federal Districtand our principal administrative office is located at Avenida Baja California,No. 200, Col. Roma Sur, Mexico, D.F., 06760. Our corporate purpose, as setforth in our estatutos sociales, is to invest in companies generally engaged inthe mining-metallurgical industry, including any activities related to thatindustry.

 

**Administration(Board of Directors)**

 

We are administered by a Board of Directors. Thenumber of directors is determined by the shareholders at the annual ordinarygeneral shareholders’ meeting. Members of our Board of Directors serve terms ofone year and may be reelected. There is no requirement under our estatutossociales or Mexican law that a director owns any of our shares. The majority ofthe members of our Board of Directors (including the president, delegatedadvisors and executive members, or those with equivalent functions) must beMexican nationals. Our director or general manager must also be a Mexicannational. Our estatutos sociales and Mexican law set no age limit for theretirement of directors. Our Board of Directors may act by a majority of thevotes cast by members present. Minority shareholders with at least 25% of theoutstanding shares have the right to elect one director and one alternate director.Mexican law requires that a director of a company must abstain from voting onany proposal, arrangement or contract in which that director has an interestcontrary to that of the company.

 

**CapitalStock**

 

As a sociedad anónima de capital variable, we musthave fixed capital and may have variable capital.  Currently, we have no shares outstanding representing variablecapital.

 

Our minimum fixed capital without right of withdrawalis Ps.1,305,489,937.18 and is represented by 650,161,917 ordinary registeredClass I, Series B shares, no par value, subscribed and fully paid (the “SeriesB Shares”) Series B shares represent 100% of our current outstandingcapital.  Our variable capital isunlimited and is represented by unissued Class II shares with characteristicsas determined by the shareholders in a general shareholder meeting authorizingtheir issuance. There are no other shares currently authorized. Theauthorization of a new series of shares would require an amendment to theestatutos sociales approved at an extraordinary shareholders meeting.

 

All Series B shares have the same value and confer thesame rights and obligations on each of the shareholders. Series B shares may befreely subscribed for and thus may be acquired by both Mexican and non-Mexicanindividuals and legal entities, with the exception of sovereign states ornon-Mexican governments. Any subscription or acquisition of shares by asovereign state or non-Mexican government violates our by-laws and is void.

 

**DividendRights**

 

Mexican law requires that we contribute 5% of aftertax profits, calculated at the end of each fiscal year, to a legal reserve funduntil this fund reaches 20% of our social capital. After directing the amountsthat by law must be distributed to our workers, the remaining amount is appliedas our shareholders determine. All Series B Shares would share equally in anydividend. Dividends declared but not claimed for five years revert back to us.

 

**Changesin Capital Stock, Preemptive Rights and Redemption**

 

The fixed portion of our capital stock may only beincreased or decreased by resolution at an extraordinary general shareholders’meeting and the subsequent amendment of the estatutos sociales. The variableportion of our capital stock may be increased or decreased by resolution of theshareholders at an ordinary general shareholders’ meeting without amending theestatutos sociales. Increases or decreases in the fixed or variable portion ofthe capital must be recorded in our registry of capital variations.

 

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Increases in our paid capital may be made by thecapitalization of retained earnings or surplus or by the issuance of additionalshares in consideration for cash or in-kind payment. In the event of increasesby the capitalization of retained earnings or surplus, each of the shareholdersholding ordinary shares at the moment the increase is determined have the rightto participate in the increase in proportion to their holdings.  In the event of an increase in the capitalstock by issuance of additional shares in consideration of cash or in-kindpayment, our shareholders will have preemptive rights to subscribe for newshares in proportion to their holdings. The subscription period for theexercise of preemptive rights is fifteen days following the publication of anotice of the issuance of new shares in the Gaceta Oficial del Distrito Federal(Official Gazette of the Federal District). If after the fifteen-day periodthere remain shares not subscribed to in the exercise of preemptive rights, theBoard of Directors may offer those unsubscribed shares to third parties.

 

Decreases in capital may be made to absorb losses, torepay shareholders, to release shareholders from outstanding payments inconnection with an increase of capital not fully paid or in the case thatshareholders exercise the right of withdrawal in Article 220 of the MexicanGeneral Corporation Law. In no event may the social capital be reduced to lessthan the legal minimum. Decreases of capital to absorb losses are madeproportionally (pro rata) to the fixed capital and to the variable capital,without the need to cancel shares. Article 135 of the Mexican General Corporation Law provides that in adecrease of capital to repay shareholders, the decision of what shares are tobe cancelled must be made by a drawing held in the presence of a notary orlicensed broker.

 

In accordance with the terms of Article 136 of MexicanGeneral Corporation Law, shares representing our capital stock are subject toredemption in connection with retained earnings. The redemption of shares mustbe approved by resolution of an extraordinary shareholders’ meeting. In thecase of redemption with retained earnings, the redemption shall be conductedpro rata among the shareholders, unless the shareholders determine otherwise.

 

**Shareholders’Meetings**

 

Shareholders meetings are either ordinary orextraordinary and, at such meetings, shareholders may exercise their powersunder Articles 181 and 182 of the Mexican General Corporation Law. Ordinaryshareholders’ meetings take place at least once a year within the first fourmonths after the end of the fiscal year. Extraordinary shareholders meetings take place when called by our Boardof Directors. In order for a general ordinary shareholders’ meeting to be validat least 50% of the shares of the capital must be present. In order for ageneral extraordinary shareholders’ meeting to be valid at least 75% of theshares of the capital must be present or represented by proxy. The Board of Directorsmust publish a notice in the Gaceta Oficial del Distrito Federal or in anewspaper of general circulation in Mexico City at least fifteen days beforethe date of either an ordinary or extraordinary shareholders’ meeting.Shareholders may attend the general shareholders meetings in person or bywritten proxy.  Only shareholdersregistered in our shareholder registry may attend a shareholders’ meeting.  For purposes of establishing qualificationto attend shareholders’ meetings, the shareholders’ registry will be closedfive working days before each meeting. Resolutions may be adopted at ordinaryshareholders’ meetings by majority vote, while resolutions may be adopted atextraordinary shareholders meetings by the favorable vote of the shareholdersholding at least 50% of the outstanding shares.

 

**MATERIAL CONTRACTS**

** **

On April 28, 2003, we and Minera México heldextraordinary shareholders’ meetings approving our merger with and into MineraMéxico. Between us and Minera México, the merger is effective as of June 1,2003.  The executed resolutions andaccompanying merger agreement were registered on July 2, 2003 with the MexicanPublic Registry of Commerce.  UnderMexican law, the merger is effective with respect to third parties ninety daysafter the registration of the shareholders’ resolutions and accompanying mergeragreement with the Mexican Public Registry of Commerce.

 

On April 29, 2003, we entered into a series ofdefinitive agreements restructuring the terms of our indebtedness.  The most significant of these agreements,the Common Agreement, was entered into by and among us, Minera México, asguarantor, certain of our subsidiaries, as guarantors of our obligationsthereunder, the SEN Holders, the Bank Lenders, HSBC Bank, as collateral agentfor the SEN Holders, HSBC Bank, as shared payment and collateral agent for theSEN Holders and the Bank Lenders, Bank of America, as administrative agent ofthe Bank Lenders, and the Bank of New York, as trustee of the secured exporttrust.  Our repayment obligations to theSEN Holders and the Bank Lenders are divided into two series (Series A andSeries B), with payments of principal occurring periodically beginning on June25, 2004 until maturity on March 30, 2007 for a total amount of 

 

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US$ 1,340.3 million.  See Item5.  “Operating and Financial Review andProspects—Liquidity and Capital Resources” and Exhibit 4(b) hereto.

 

In connection with our restructuring and the CommonAgreement, on April 29, 2003, we entered into the Amended and Restated CreditAgreement by and among us, Minera México, certain of our subsidiaries, asguarantors of our obligations thereunder, certain financial institutions andBank of America, N.A. as the administrative agent for the financialinstitutions, pursuant to which previous credit facilities entered into by usand our subsidiaries with the financial institutions were restructured.  See Exhibit 4(c) hereto.

 

In connection with our restructuring and the CommonAgreement, on April 29, 2003, we entered into the SEN Security Agreement by andamong us, Minera México, as guarantor, certain of our subsidiaries, asguarantors of our obligations thereunder, The Bank of New York, as trustee ofGrupo México Export Master Trust No. 1, as SEN Trustee, and HSBC Bank USA, asSEN Collateral Agent, pursuant to which we and certain guarantors pledgedcertain assets to the SEN Collateral Agent as security for our indebtedness tothe SEN Holders.  See Exhibit 4(d) hereto.

 

In connection with our restructuring and the CommonAgreement, on April 29, 2003, we entered into the U.S. Security Agreement byand among us, Minera México, as grantor of collateral, certain of oursubsidiaries, as grantors of collateral, HSBC Bank USA, as shared payment andcollateral agent and HSBC Bank, pursuant to which we and our subsidiariespledged certain U.S. based assets to the shared payment and collateral agent assecurity for the obligations thereunder. See Exhibit 4(e) hereto.

 

In connection with our restructuring and the CommonAgreement, on April 29, 2003, we entered into the Mexican Security TrustAgreement by and among us, Minera México, as grantor of collateral, certain ofour subsidiaries, as grantors of collateral, GE Capital Bank, S.A., Institucion de Banca Múltiple, GECapital Grupo Financiero, as trustee, pursuant to which we and certainguarantors pledged certain assets to the trustee as security for ourobligations thereunder.  See Exhibit4(f) hereto.

 

In connection with our restructuring and the CommonAgreement, on April 29, 2003, we entered into the Amended and Restated TrustIndenture by and among, us, The Bank of New York, as trustee of Grupo MéxicoExport Master Trust No. 1, as issuer of the secured notes and HSBC Bank USA, asSEN collateral agent, pursuant to which our previously issued notes thereunderwere restructured and reissued.  SeeExhibit 4(g) hereto.

 

**EXCHANGE CONTROLS**

** **

Except for the period from September through December1982 during the Mexican liquidity crisis, the Mexican Central Bank consistentlyhas made foreign currency available to Mexican private sector entities (such asus) to meet their foreign currency obligations. Nevertheless, in the event ofrenewed shortages of foreign currency, there can be no assurance that theMexican Central Bank would continue to make foreign currency available toprivate sector companies or that foreign currency needed by us to serviceforeign currency obligations could be purchased in the open market withoutsubstantial additional cost.

 

No assurance can be given that the Mexican governmentwill not institute restrictive exchange control policies in the future.  The imposition of such policies in thefuture could impair our ability to obtain imported goods and to meet its U.S.dollar-denominated obligations and could have a material adverse effect on ourbusiness and financial condition.  See“Item 3.  Key Information—SelectedFinancial Data—Exchange Rates.”

 

**TAXATION**

** **

The following summary contains a description of theprincipal U.S. federal income and Mexican federal tax consequences of thepurchase, ownership and disposition of Notes by a holder that is an individualcitizen or resident of the United States, a U.S. domestic corporation orpartnership, an estate the income of which is subject to U.S. Federal incometax regardless of source other than a foreign state, a trust if a court withinthe United States is able to exercise primary supervision over theadministration of the trust and one or more United States persons have theauthority to control all substantial decisions of the trust or any holder of aNote whose income or gain with respect to its investment in such note iseffectively connected with the conduct of a U.S. trade or business (a “U.S.holder”), but it does not purport to be a comprehensive description of all ofthe tax considerations that may be

 

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relevant to a decision to purchase the Notes. In particular, thesummary deals only with U.S. holders that will hold the Notes as capital assetsand does not address the tax treatment of a U.S. holder that owns or is treatedas owning 10% or more of our voting shares, nor does it address the situationof holders of the Notes who did not acquire such Notes as part of the initialdistribution (except where otherwise specifically noted). Moreover, thissummary deals only with Notes held as capital assets and does not purport todeal with persons in special tax situations, such as financial institutions,insurance companies, regulated investment companies, dealers in securities orcurrencies, persons holding Notes as a hedge or as a position in a “straddle”for tax purposes, or persons whose functional currency is not the U.S. dollar.

 

The summary is based upon tax laws of the UnitedStates and Mexico as in effect on the date of this Annual Report, including theprovisions of the income tax treaty between the United States and Mexico (the“Tax Treaty”), which are subject to change and except with respect to the TaxTreaty, possibly with retroactive effect. Holders of the Notes should consult their own tax advisers as to theU.S., Mexican or other tax consequences of the purchase, ownership anddisposition of the Notes including, in particular, the effect of any federal,foreign, state or local tax laws.

 

For purposes of this summary, the term “non-residentholder” shall mean a holder that is not a resident of Mexico and that will nothold the Notes described in this Annual Report, or a beneficial interesttherein, in connection with the conduct of a trade or business through apermanent establishment in Mexico.

 

For purposes of Mexican taxation, a natural person isa resident of Mexico if he has established his home in Mexico, unless he hasresided in another country for more than 183 days during a calendar year,whether consecutive or not, and can demonstrate that he has become a residentof that country for tax purposes, and a legal entity is a resident of Mexicoeither if it was established under Mexican law or if it has its principal placeof business or its place of effective management in Mexico.  If a non-resident has a permanentestablishment or fixed base in Mexico for tax purposes, all income attributableto such permanent establishment or fixed base will be subject to Mexican taxes,in accordance with applicable tax laws.

 

**MexicanTaxation**

 

*Taxationof Interest and Principal*

 

Under the Mexican Income Tax Law, payments of interestmade by a Mexican issuer in respect of the Notes (including payments ofprincipal in excess of the issue price of such Notes, which, under Mexican law,are deemed to be interest) to a U.S. holder will generally be subject to aMexican withholding tax assessed at a rate of 15%. If the Notes are registeredwith the Special Section of the National Registry of Securities and Intermediaries(the “Registry”), the withholding tax rate will be 10%.

 

Pursuant to the Mexican Income Tax Law, payments ofinterest made until June 30, 2001 by us in respect of the Notes to anon-resident holder that are subject to a withholding tax will be subject to areduced 4.9% Mexican withholding tax rate (the “Reduced Rate”) if (i) theeffective beneficiary is a resident of a country which has entered into atreaty to avoid double taxation with Mexico, (ii) the requirements for theapplication of a lower rate established in the applicable treaty are satisfied,and (iii) the Notes are registered with the Registry. Under the Tax Treaty,non-resident holders that are U.S. holders may be eligible for the ReducedRate. In the absence of legislation renewing the reduced rate of 4.9%, webelieve that the withholding rate will be 10%.

 

Pursuant to general tax rules issued by the MexicanMinistry of Finance and Public Credit (the “Special Rate Regulations”), ingeneral, we are required to withhold Mexican tax at a 4.9% rate in respect ofthe entirety of each payment of interest so long as no more than 5% of suchpayment of interest is made to effective beneficiaries of such payment ofinterest that are (i) our shareholders that own, directly or indirectly,individually or collectively with related persons, more than 10% of our votingstock, or (ii) corporations more than 20% of whose stock is owned, directly orindirectly, individually or collectively with related persons, by us or bypersons related to us, and certain other conditions are met. The Special RateRegulations, together with other tax regulations, are promulgated on an annualbasis, and there can be no assurance that the Special Rate Regulations will beextended beyond June 30, 2001.

 

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Apart from the Reduced Rate, other special rates ofMexican withholding tax may apply.  Inparticular, under the Tax Treaty, the Mexican withholding tax rate is reducedto 4.9% (the “Treaty Rate”) for certain holders that are residents of theUnited States (within the meaning of the Tax Treaty) under certaincircumstances contemplated in this Annual Report.

 

Payments of interest made by us with respect to theNotes to non-Mexican pension or retirement funds will be exempt from Mexicanwithholding taxes, provided that any such fund (i) is the effective beneficiaryof the interest, (ii) is duly incorporated pursuant to the laws of its countryof origin, (iii) is exempt from the payment of income tax in such country and(iv) is registered with the Ministry of Finance for that purpose.

 

Under existing Mexican law and regulations, we willnot subject to any Mexican taxes in respect of payments of principal make anon-resident holder with respect to the Notes.

 

*AdditionalAmounts*

 

We have agreed, subject to specified exceptions andlimitations, to pay Additional Amounts (as defined in the Indentures relatingto the Notes included as exhibits to the F-1 Registration Statement) to theholders of the Notes in respect of the Mexican withholding taxes mentionedabove. If we pay Additional Amounts in respect of such Mexican withholdingtaxes, any refunds received with respect to such Additional Amounts will be forour account.

 

Holders or beneficial owners of the Notes may berequested to provide certain information or documentation necessary to enableus to establish the appropriate Mexican withholding tax rate applicable to suchholders or beneficial owners. In the event that the specified information ordocumentation concerning the holder or beneficial owner, if requested, is notprovided on a timely basis, our obligation to pay Additional Amounts will belimited.

 

*Taxationof Dispositions*

 

Capital gains resulting from the sale or otherdisposition of the Notes by a non-resident holder will not be subject toMexican income or other taxes.

 

*OtherMexican Taxes*

 

There are no Mexican inheritance, gift, succession orvalue added taxes applicable to the ownership, transfer or disposition of theNotes by non-resident holders. There are no Mexican stamp, issue, registrationor similar taxes or duties payable by non-resident holders of the Notes.

 

**U.S. TaxConsiderations**

 

*General*

 

A U.S. holder will treat the gross amount of interestand Additional Amounts (i.e., without reduction for Mexican withholding taxes)received in respect of the Notes as ordinary interest income from a non-U.S.source.  Mexican withholding taxes paidat the appropriate rate applicable to the U.S. holder will generally be treatedas foreign income taxes eligible for credit against such U.S. holder’s U.S.federal income tax liability, subject to generally applicable limitations andconditions, or, at the election of such U.S. holder, for deduction in computingsuch U.S. holder’s taxable income. For foreign tax credit purposes, during anyperiod in which the Special Rate Regulations are in effect, as well as when theTreaty Rate is 4.9%, such income generally will constitute “passive income” or,in the case of certain holders, “financial services income.” If the Mexicanwithholding tax rate applicable to the U.S. holder is 5% or more, however, suchincome generally will constitute “high withholding tax interest.”

 

The calculation of foreign tax credits and, in thecase of a U.S. holder that elects to deduct foreign taxes, the availability ofdeductions, involves the application of rules that depend on a U.S. holder’sparticular circumstances. U.S. holders should consult their own tax advisorsregarding the availability of foreign tax credits and the treatment ofAdditional Amounts.

 

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Foreign tax credits will not be allowed for foreignwithholding taxes imposed in respect of certain short-term or hedged positionsin securities. U.S. holders should consult their own advisers concerning theimplications of these rules in light of their particular circumstances.

 

Subject to the discussion of backup withholding below,a holder or beneficial owner of the Notes that is not a U.S. holder (a“non-U.S. holder”) generally will not be subject to U.S. federal income orwithholding tax on interest income and Additional Amounts earned in respect ofthe Notes.

 

*Taxation of Dispositions*

 

A U.S. holder generally will recognize gain or loss onthe sale, redemption or other disposition of the Notes in an amount equal tothe difference between the amount realized on such sale, redemption or otherdisposition (less any amounts attributable to accrued but unpaid interest,which will be taxable as such) and the U.S. holder’s tax basis in the Notes. AU.S. holder’s tax basis in the Notes generally will be its cost. Gain or lossrealized by a U.S. holder on such sale, redemption or other dispositiongenerally will be long-term capital gain or loss if, at the time of thedisposition, the Notes have been held for more than one year provided the Notesare held as capital assets. Long-term capital gain realized by a U.S. holderthat is an individual generally is subject to a maximum federal income tax rateof 15%.

 

Subject to the discussion of backup withholding below,a non-U.S. holder of Notes will not be subject to U.S. federal income orwithholding tax on gain realized on the sale or other disposition of Notesunless (i) such gain is effectively connected with the conduct by the non-U.S.holder of a trade or business in the United States or (ii) in the case of gainrealized by an individual non-U.S. holder, the non-U.S. holder is present inthe United States for 183 days or more in the taxable year of the sale andcertain other conditions are met.

 

*BackupWithholding and Information Reporting*

 

The Paying Agent will be required to file informationreturns with the Internal Revenue Service with respect to payments made tocertain U.S. holders of Notes. In addition, certain U.S. holders may be subjectto a 28% backup withholding tax in respect of such payments if they do notprovide their accurate taxpayer identification numbers to the Paying Agent orin certain other circumstances. Persons holding Notes who are non-U.S. holdersmay be required to comply with applicable certification procedures to establishthat they are not U.S. holders in order to avoid the application of suchinformation reporting requirements and backup withholding tax.

 

**DOCUMENTS ON DISPLAY**

** **

Our constituent documents, exhibits to this andprevious Annual Reports and other documents referred to herein may be inspectedat our main corporate office at Baja California 200, Col. Roma Sur 06760,Mexico City, Federal District, Mexico.

 

**SUBSIDIARYINFORMATION**

** **

See the information set forth under “Item 4.  Information on the Company—OrganizationalStructure.”

 

**ITEM11****.****                                              QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

In the normal course of business, we hold or issuevarious financial instruments that expose us to financial risks involvingfluctuations in currency exchange rates and interest rates.  Also, commodity price movements affect ourmetal business. We may use derivative financial and commodity instruments tomanage these risks. All financial instruments held by us are for purposes otherthan trading.

 

As part of a risk management strategy, we haveestablished an independent risk management team. The function of this team isto monitor and manage our risk exposure. This team has developed a manual ofpolicies and procedures for the use of derivatives as hedging instruments,reviewing limits, reports and authorization processes in order to monitoroperations.

 

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**INTEREST RATE RISK**

** **

Our exposure to interest rate risk relates primarilyto our Secured Expert Notes and bank debt obligations. Our strategy is to mangeour interest rate risk through a combination of fixed and floating rateinstruments.  Currently, all of our debtis U.S. dollar- denominated, which exposes us to risks associated with changesin foreign exchange rates. However, the interest rates have usually been morecompetitive for loans negotiated in U.S. dollar than in Mexican pesos. As ofDecember 31, 2002, the 54% of our total debt was based on fixed interest rates,and 46% based on floating rates.

 

All of our floating rate debt, is based on LIBORquotations plus the corresponding margin. Provided below is informationregarding our debt obligations that are sensitive to changes in interest ratesand have we assume for the purposes of the chart below that all of ouroutstanding debt is current.  We haveseen some increase in the interest rate margin during the year.

 

During 2002, we made interest payments on all existingfinancial debt, but defaulted some payments of principal. As a result, many ofour financial instruments were capable of being accelerated. We did not holdany interest rate sensitive derivative financial instruments during the year.

 

The following chart presents the interest rate riskexposure, including the principal cash flows and related weighted averageinterest rates by expected restructuring maturity dates. The fair value oflong-term debt is based on the quoted market prices for the same or similarissues, as well as on the present value of future cash flows. The informationin the chart may not necessarily correspond with the Financial Statements.

** **
|                               |   | **Expected  Maturity Date**                                                   |   |     |   |     |   |     |   |
|------------------------------------|--------|-------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                               |   | **2003**                                                                      |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
|                               |   | **(millions  of constant pesos as of December 31, 2001, except percentages)** |   |
| Fixed  Rate Debt                   |   | Ps.555.8                                                                      |   | Ps.663.0 |   | Ps.693.0 |   | Ps.629.5 |   | Ps.4,752.4 |   | Ps.7,294.6 |   | Ps.9,170.5 |   |
| Weighted  Average Interest Rate(1) |   | 9.64                                                                          | %      | 9.24     | %      | 9.66     | %      | 9.92     | %      | 9.44 | % |   |   |   |   |
| Floating  Rate Debt                |   | Ps.345.8                                                                      |   | Ps.780.0 |   | Ps.984.0 |   | Ps.885.7 |   | Ps.3,344.0 |   | Ps.6,340.5 |   | Ps.7,190.0 |   |
| Weighted  Average Interest Rate(2) |   | 6.18                                                                          | %      | 8.46     | %      | 9.86     | %      | 10.19    | %      | 9.50 | % |   |   |   |   |

 

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(1)                                  Fixedinterest rates shown are weighted averages as contracted.

 

(2)                                  Floatinginterest rates shown are based on forward semi-annual LIBOR curve plus weightedaverages spreads for us.

 

**FOREIGN EXCHANGE RISK**

 

Our exposure to market risk associated with changes inforeign currency exchange rates, relates primarily to our debt obligationswhich are denominated in U.S. dollars, as shown in the interest risk tableabove. However, we have a natural hedge that mitigates much of our exposure, inthat all of our sales are denominated in U.S. dollars.  In addition, we may utilize currency forwardcontracts to hedge our exposure to the U.S. dollar. As of December 31, 2002, wedid not hold any currency forwards.

 

Although all of our sales are priced and invoiced inU.S. dollars, a substantial portion of our cost of sales (approximately 71% in2002) is denominated in pesos. Accordingly, when inflation in Mexico increases without a correspondingdevaluation of the peso, our operating income is negatively affected.  Nevertheless, when inflation in Mexico islower than the devaluation of the peso, our operating income is positivelyaffected. We have significant liabilities and assets denominated in U.S.dollars therefore exposing us to foreign exchange losses when the peso declinesin value against the U.S. dollar.

 

**COMMODITY PRICE RISK**

** **

Our exposure to commodity price fluctuations relatesprimarily to copper, zinc and silver, as well as other industrial and preciousmetals we produce. Our selling prices depend principally upon market prices formetals, especially copper and, to a lesser extent, zinc and silver. Such pricescan fluctuate widely and are beyond our control. Since the metals produced byus can generally be sold at prevailing market prices, our results of operationsare highly sensitive to such prices. See “Item 5. Operating and Financial Review and Prospects—General—CommodityPrices.”

 

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From time to time we have entered into hedgingtransactions to provide partial protection against future decreases in themarket price of metals and we may do so when we believe the market presents theright conditions. Our policy is to enter into over-the-counter transactionswith major international participants in the commodities options and futuresmarkets. Hedging transactions may take the form of put options that effectivelyestablish a minimum price for our sale of a specified volume of a metal, orthey may take the form of swaps, forward sales or futures contracts that fixthe price for a specified volume of a metal. We may also enter intocombinations of transactions, with a view to establishing minimum prices for ourmetals products while preserving potential benefits if market prices increase.Our senior management committee, currently consisting of our ExecutivePresident, the President of Finance and Administration and the manager of riskmanagement, makes decisions on each transaction and on hedging policy generallycentrally to ensure that the risks and benefits have been appropriatelyevaluated.

 

Depending upon market conditions, we may utilize swapcontracts to hedge against adverse movements in the price of metals weproduce.  For example, swap contractsare sometimes used to fix the selling price of copper and zinc refined when weenter a supply contract.

 

The table below provides information about ourinventory of metals that are sensitive to changes in commodity prices. Thetable presents the fair value based on spot prices as of December 31, 2002.

 
| **Inventory of Metals** |   | **Total  (Tons)** |       | **Fair Value  (millions of constant pesos  as of December 31, 2002)** |       |
|-------------------------|--------|-------------------|------------|-----------------------------------------------------------------------|------------|
|                    |   |              | ** ** |                                                                  | ** ** |
| Copper                  |   | 39,797            |       | Ps. 630.6                                                             |       |
| Zinc                    |   | 22,435            |       | Ps. 173.4                                                             |       |
| Silver                  |   | 250.3             |       | Ps. 398.4                                                             |       |
| Lead                    |   | 17,160            |       | Ps.   74.6                                                  |       |
| Gold                    |   | .6                |       | Ps.   69.6                                                  |       |

 

See “Item 5. Operating and Financial Review andProspects—Operating Results—Commodity Prices.”

 

**SENSITIVITY ANALYSIS**

** **

During 2002, a hypothetical, instantaneous andunfavorable 10% change in currency exchange rates would have resulted in anestimated foreign exchange loss of approximately Ps. 1,343.5 million,reflecting the increased value in pesos of our non-peso denominatedindebtedness.  Such a change would also haveresulted in additional interest expense of approximately Ps. 87.7 million peryear, reflecting the increased cost in pesos of servicing our U.S. dollardenominated indebtedness.  Thissensitivity analysis assumes an instantaneous unfavorable 10% fluctuation inthe exchange rate of pesos to U.S. dollars.

 

A hypothetical, instantaneous and unfavorable changeof 100 basis points in LIBOR applicable to our floating-rate financial assetsand liabilities held at December 31, 2002 would have resulted in additional netfinancing expense of approximately Ps. 61.4 million for the year.  This sensitivity analysis is based on theassumption of an unfavorable 100 basis point movement of the interest ratesapplicable to each homogeneous category of financial assets andliabilities.  A homogeneous category isdefined according to the currency in which financial assets and liabilities aredenominated and assumes the same interest rate movement with each homogeneouscategory.

 

**ITEM12****.****                                              DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES**

 

Not applicable.

 

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** **

**PART II.**

** **

**ITEM 13****.****                                              DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

** **

Our financial results in recent years have beensignificantly and deleteriously affected by the decline in the market prices ofthe metals we produce.  As a result ofthis situation, we previously were not in compliance with certain debtcovenants and were in default under certain payment obligations.  On April 29, 2003, we entered into a seriesof definitive agreements restructuring the terms of our indebtedness and, toour knowledge, are not currently in default under the terms of our debt.  See “Item 5. Operating and Financial Reviewand Prospects”.

 

**ITEM 14****.****                                              MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

** **

None reportable in respect of A through D.

 

**ITEM 15****.****                                              CONTROLSAND PROCEDURES**

 

(a)                                  Withinthe 90 days prior to the filing date of this annual report, we carried out anevaluation under the supervision and with the participation of our management,including our (i) President and General Director and (ii) Finance Director, ofthe effectiveness of the design and operation of our disclosure controls andprocedures.  Based upon and as of thedate of our evaluation, our (i) President and General Director and (ii) FinanceDirector concluded that our disclosure controls and procedures were adequateand designed to ensure that material information relating to us and ourconsolidated subsidiaries as required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported as and when required.

 

(b)                                 Therewere no significant changes in our internal controls or, to our knowledge, inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

**ITEM 16****.****                                              [RESERVED]**

 

**PART III.**

 

**ITEM 17****.****                                              FINANCIALSTATEMENTS**

 

Not applicable.

 

**ITEM 18****.****                                              FINANCIALSTATEMENTS**

 

Our financial statements are included in this AnnualReport beginning at page 1 of Annex F.

 

(a)                                  FinancialStatements of Grupo Minero México, S.A. de C.V.  (Annex F)

 

Independent Auditors’ Report

 

Consolidated Balance Sheets as of December 31, 2002and 2001

 

Consolidated Statements of Income (Loss) for the yearsended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in Stockholders’Equity for the years ended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in FinancialPosition for the years ended December 31, 2002, 2001 and 2000

 

Notes to Financial Statements

 

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(b)                                 FinancialStatements of Mexicana de Cobre, S.A. de C.V. (Annex F-1)

 

Independent Auditors’ Report

 

Consolidated Balance Sheets as of December 31, 2002and 2001

 

Consolidated Statements of Income (Loss) for the yearsended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in Stockholders’Equity for the years ended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in FinancialPosition for the years ended December 31, 2002, 2001 and 2000

 

Notes to Financial Statements

 

(c)                                  FinancialStatements of Mexicana de Cananea, S.A. de C.V.  (Annex F-2)

 

Independent Auditors’ Report

 

Consolidated Balance Sheets as of December 31, 2002and 2001

 

Consolidated Statements of Income (Loss) for the yearsended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in Stockholders’Equity for the years ended December 31, 2002, 2001 and 2000

 

Consolidated Statements of Changes in FinancialPosition for the years ended December 31, 2002, 2001 and 2000

 

Notes to Financial Statements

 

**ITEM 19****.****                                              EXHIBITS**

 
| **Exhibit** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(a)        |   | Merger Agreement, dated  May 28, 2003 among Minera México and Grupo Minero México (Translation from  Spanish into English).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(b)        |   | Common Agreement, dated  April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera México, S.A. de C.V., Industrial Minera México, S.A. de C.V., Minera  México Internacional, Inc., Mexicana  de Cobre, S.A. de C.V., Minerales Metálicos del Norte, S.A., Mexicana de  Cananea, S.A. de C.V., Mexicana del Arco, S.A. de C.V., Minerales y Minas  Mexicanas, S.A. de C.V., Compañía de Terrrenos e Inversiones de San Luis  Potosí, Sociedad Civil por Acciones S.A., México Compañía Inmobiliaria, S.A.,  Proyecciones Urbanisticas S. de R.L. C.V., Bank of America N.A., as  administrative agent to the bank holders, HSBC Bank USA, as shared payment  agent and collateral agent, HSBC Bank, USA, as SEN collateral agent, The  Bank of New York, as trustee for Grupo Mexico Export Master Trust No. 1, as  SEN Trustee. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(c)        |   | Amended and Restated  Trust Indenture, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., as  issuer of the Borrower Notes, The Bank of New York, as trustee of Grupo  Mexico Export Master Trust No. 1, as issuer of the Secured Notes and HSBC  Bank USA, as SEN collateral agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(d)        |   | SEN Security Agreement,  dated as of April 29, 2003, among Grupo Minero México, S.A. de C.V., as  borrower, The Bank of New York, as trustee of Grupo México Export Master  Trust No. 1, as SEN Trustee, Minera México, S.A. de C.V., Industrial Minera  México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V., Minerales  Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V., Mexicana del  Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V., Compañía de  Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por Acciones S.A.,  México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas S. de R.L.  C.V., as guarantors and HSBC Bank USA, as SEN collateral agent.                                                                                     |

 

74

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| 4(e)   |   | U.S. Security  Agreement, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera  México, S.A. de C.V., Industrial  Minera México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V.,  Minerales Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V.,  Mexicana del Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V.,  Compañía de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por  Acciones S.A., México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas  S. de R.L. C.V., HSBC Bank USA, as shared payment agent and collateral agent,  and HSBC Bank, USA, acting in its individual capacity. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(f)   |   | Mexican Security Trust Agreement, dated April 29, 2003, among Grupo  Minero México, S.A. de C.V., Industrial Minera México, S.A. de C.V., Mexicana  de Cobre, S.A. de C.V., Minerales Metálicos del Norte, S.A., Mexicana de  Cananea, S.A. de C.V., Mexicana del Arco, S.A. de C.V., Minerales y Minas  Mexicanas, S.A. de C.V., Americas Mining Corporation, Minera México, S.A. de  C.V., Compañía de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil  por Acciones S.A. and México Compañía Inmobiliaria, S.A., collectively, as  grantors, and GE Capital Bank, S.A., Institucion de Banca Múltiple and  Capital Grupo Financiero, as trustees.                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(g)   |   | Amended and Restated  Credit Agreement, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera  México, S.A. de C.V., Industrial  Minera México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V.,  Minerales Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V.,  Mexicana del Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V.,  Compañía de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por  Acciones S.A., México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas  S. de R.L. C.V., certain financial institutions as Bank Holders, and Bank of  America N.A., as administrative agent.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(h)   |   | Credit Agreement dated  as of February 6, 2001 among Grupo Minero México, S.A. de C.V., (as borrower), Mexicana de Cobre S.A.  de C.V., Industrial Minera México, S.A. de C.V., Mexicana de Cananea, S.A. de  C.V., Minerales Metálicos del Norte, S.A. and Minerales y Minas Mexicanas,  S.A. de C.V. (as guarantors), Bank of America, N.A. (as lender) and the  Export-Import Bank of the United States in relation to a credit of  US$  21, 445,054 to finance the purchase of foreign capital goods.*                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(i)   |   | Facility Agreement  dated as of February 6, 2001 among Grupo Minero México, S.A. de C.V., (as borrower), Mexicana de  Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V., Mexicana de  Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. and Minerales y  Minas Mexicanas, S.A. de C.V. (as guarantors), Bank of America, N.A. (as  lender) and the Export-Import Bank of the United States in relation to a  facility of US$ 49,878,640 to finance the purchase of foreign captial goods,  equipment and spare parts.**                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(j)   |   | Down Payment Financing  Agreement dated February 6, 2001 among Grupo Minero México, S.A. de C.V., (as borrower),  Mexicana de Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V.,  Mexicana de Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. and  Minerales y Minas Mexicanas, S.A. de C.V. (as guarantors), Bank of America,  N.A. (as lender) in relation to a loan of US$ 11 million to refinance the  down payment portion of the purchase price paid for certain capital goods,  equipment and replacements.***                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(k)   |   | Line of Credit  Agreement dated August 10, 2001 among Grupo Minero México, S.A. de C.V., (as borrower),  Mexicana de Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V.,  Mexicana de Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. (as  guarantors) and Banco Nacional de Comercio Exterior, S.N.C. in relation to a  facility of US$ 50 million to finance working capital needs (Translation from  Spanish into English).****                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4(l)   |   | Credit Agreement dated  August 30, 2001 among Grupo Minero México, S.A. de C.V., (as borrower),                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

75

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|   |   | Grupo México S.A. de C.V. (parent guarantor), Mexicana de Cobre S.A. de  C.V., Industrial Minera México, S.A. de C.V., Mexicana de Cananea, S.A. de  C.V., Minerales Metálicos del Norte, S.A., Minera México Internacional, Inc.  (as subsidiary guarantors), the lending institutions that become parties to  the agreement, and the Bank of Nova Scotia as administrative agent and sole  lead manager in relation to a credit of US$ 100 million to refinance previous  indebtedness and finance capital expenditures and working capital needs.***** |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 8      |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12(a)  |   | Certification of the  President and General Director of the Registrant pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12(b)  |   | Certification of the  Finance Director of the Registrant pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

----

| *     |   | Previously filed and  incorporated by reference to exhibit 4(c) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **    |   | Previously filed and  incorporated by reference to exhibit 4(d) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ***   |   | Previously filed and  incorporated by reference to exhibit 4(e) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ****  |   | Previously filed and  incorporated by reference to exhibit 4(f) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ***** |   | Previously filed and  incorporated by reference to exhibit 4(g) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |

 

76

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**SignaturePages**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-F andthat it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|                      | GRUPO MINERO MÉXICO,  S.A. DE C.V. |
|---------------------------|-----------------------------------------|
|                      |                                    |
|                      |                                    |
|                      | By:                                     | /s/ Daniel Tellechea |   |
|                      |                                    | Name: | Daniel Tellechea Salido |
|                      |                                    | Title: | President Finance and  Administration |
|                      |                                    |
|                      |                                    |
|                      | By:                                     | /s/  Ernesto Duran |   |
|                      |                                    | Name:  Ernesto Duran |
|                      |                                    | Title:  Corporate Comptroller |
|                      |                                    |
|                      |                                    |
| Date:  July 15, 2003 |                                    |
|                           |                                         |  |  |  |

 

77

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**CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

 

I, Xavier García deQuevedo Topete, President and General Director of Grupo Minero México, S.A. deC.V. certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Grupo Minero México, S.A. deC.V.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flow of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: July 15, 2003

 
|   | By:    | /s/ Xavier García de  Quevedo Topete |                                  |
|--------|--------|-------------------------------------------|---------------------------------------|
|   |   | Name:                                     | Xavier García de  Quevedo Topete |
|   |   | Title:                                    | President and General  Director       |
|        |        |                                           |                                       |  |

 

78

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**CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

 

I, Jesus Eduardo GonzálezFélix, Finance Director of Grupo Minero México, S.A. de C.V. certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Grupo Minero México, S.A. deC.V.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flow of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                                  presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  July 15, 2003

 
|   | By:    | /s/ Jesus Eduardo  González Félix |                                    |
|--------|--------|---------------------------------------------|-----------------------------------------|
|   |   | Name:                                       | Jesus Eduardo González  Félix |
|   |   | Title:                                      | Finance Director                        |
|        |        |                                             |                                         |  |

 

79

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**ANNEX A**

 

**GLOSSARYOF CERTAIN MINING TERMS**

 

**Assay**– The act of determining theproportions of metal in ores or concentrates using analytical techniques.

 

**Benches** – A method used in open-pit mininginvolving the cutting of steps to prevent slides.

 

**Calcareous** – Relating to rocks containingcalcium carbonate.

 

**Coke** – Fuel source comprised of bituminouscoal from which the volatile elements have been eliminated by heat.

 

**Concentrate** – Material that has beenobtained through flotation in a concentrator.

 

**Concentrator** – The facility in which ore isprocessed to separate minerals from the host rock.

 

**Copper anodes** – Specially-shaped copperslabs produced in a smelter in the process of refining copper blister in areverberatory furnace.

 

**Copper blister** – An impure intermediateproduct from converters in the process of refining copper. The name is derivedfrom the large blisters that form on the cast surface as a result of theliberation of sulfur dioxide and other gases.

 

**Copper cathodes** – Electrolytically refinedcopper which has been deposited on the cathode of acidified copper sulfatesolution.

 

**Cut-off grade** – The lowest grade ofmineralized material considered economic to extract. Cut-off grade is used inthe calculation of the ore reserves in a given deposit.

 

**Dilution (extracting loss)** – The reductionin grade that results from inclusion of waste material from the foot wall andhanging wall into the vein during exploitation of an underground mine.

 

**Dip** – The angle at which a bed, stratum orvein is inclined from the horizontal by a structural surface (i.e., a beddingor fault plane) and the horizontal measured perpendicular to the strike of thestructure.

 

**Dross** – The material formed on the surfaceof molten metals as a result of oxidation or the distillation of impurities tothe surface. The copper sulfide formed on the surface of molten lead bullion.

 

**Electrolytic refining** – The process ofdissolving impure metal anode and depositing it in a pure state on the cathode.

 

**Electrowinning** – The recovery of metalsfrom a solution through electrolysis.

 

**Exploration** – Prospecting, sampling,mapping, diamond drilling and other work involved in the search formineralization.

 

**Flotation** – A mineral recovery process bywhich minerals are separated from waste to produce mineral concentrates.

 

**Grade** – The percentage of metal content inore.

 

**Heap leaching** – A low-cost process forextracting metals from ore by percolating leaching solutions through heaps ofore placed on impervious pads. Heap leaching is generally used on low-gradeores.

 

A-1

----

 

**Leaching** – The removal of soluble mineralsor elements through the action of percolating solutions. These solutions, whichselectively dissolve metallic elements from ore, are solvents, and includesulfuric acid.

 

**Matte** – The product produced in smeltingsulfide ores of copper and lead or the smelting of copper bearing materials,usually in a reverberatory furnace.

 

**Mineral** – An inorganic substance occurringin nature.

 

**Non-ferrous metals** – Metals not containing,including, or relating to iron.

 

**Open pit** – Surface mining in which the oreis extracted from a pit.

 

**Ore** – A material containing metal orminerals of commercial value.

 

**Overburden** – Waste material overlying orein an open pit mine.

 

**Oxide** – That portion of a mineral depositwithin which sulfide minerals have been oxidized, usually by surface weatheringprocesses.

 

**Porphyry copper** – Disseminated replacementdeposit in which the copper minerals occur as discrete grains and veinletsthroughout a large volume of rock.

 

**Probable reserves** – Reserves for whichquantity and grade are computed from information similar to that used forproven reserves but the sites for inspection, sampling and measurement arefarther apart or are otherwise less adequately spaced. The degree of assurance,although lower than that for proven reserves, is high enough to assumecontinuity between points of observation.

 

**Proven reserves** – Reserves for which (a)quantity is computed from dimensions revealed in outcrops, trenches, workingsor drill holes; (b) grade and/or quality are computed from the results ofdetailed sampling; and (c) the sites for inspection, sampling and measurementare spaced so closely and the geologic character is sufficiently defined thatsize, shape, depth and mineral content of reserves are well established.

 

**Pyrite** – A brassy-colored mineral of ironsulphide (compound of iron and sulfur).

 

**Refinery** – A metallurgical plant in whichthe refining of metals takes place.

 

**Refining** – The final stage of metalpurification in which final impurities are removed.

 

**Reserve** – That part of a mineral deposit,which could be economically and legally extracted or produced at the time ofthe reserve determination.

 

**Room-and-pillar** – A system of mining inwhich the distinguishing feature is 50% of the ore is extracted in the firstworking. The ore is mined in rooms separated by narrow ribs or pillars. The orein the pillars is extracted by subsequent working.

 

**Sampling** – Cutting a representative part ofan ore deposit, which should represent its average value.

 

**Schist** – Crystalline rock whose componentminerals are arranged in a parallel structure developed by shearing andrecrystallization under pressure.

 

**Shaft** – A mine excavation of limited areacompared with its depth made for mining ore, raising water, hoisting ore,lowering miners and material and ventilating underground workings.

 

**Slimes** – Material discharged from arefinery after the primary valuable minerals have been recovered.  Slimes may contain quantities of gold andsilver.

 

A-2

----

 

**Smelter** – A metallurgical plant in whichthe smelting of the concentrates and ores takes place.

 

**Smelting** – The chemical reduction of ametal from its ore by a process usually involving fusion so that otherimpurities can be removed from the reduced metal.

 

**Solvent extraction** – A method of separatingone or more metals from ore, by treating a solution containing the ore with asolvent that dissolves the required substances.

 

**Solvent extraction-electrowinning or SX-EW**– A method, which is a combination of solvent extraction and electrowinning.

 

**Spot price** – The current market price of ametal for immediate delivery.

 

**Stockwork** – A solid mass of ore, or a rockmass so interpenetrated by small veins of ore that the whole must be minedtogether.

 

**Stope** – The underground excavation fromwhich ore is extracted.

 

**Stripping** – The process of removingoverburden to expose ore.

 

**Stripping ratio** – The ratio of wastematerials plus leachable ore to ore mined in the material moved in an open pitoperation.

 

**Sulphide** – A mineral characterized by thelinkages of sulfur with a metal, such as galena, spalerite, chalcocite andpyrite. Also a zone in which sulphide minerals occur.

 

**Tailings** – The waste material from oreafter the economically recoverable metals or minerals have been extracted.Changes in metal prices and improvements in technology can sometimes make thetailings economic to reprocess at a later date.

 

**Toll arrangement** – A contractualarrangement for the treatment of any material in a smelter or refinery underwhich metal content of the smelted or refined product is returned or creditedto the account of the customer of such smelter or refinery.

 

**Total leaching recovery** – The amount ofmetal recovered in the leaching process expressed as a percentage of the metalcontained in the ore.

 

**Total metal recoverable** – The amount ofmetal recoverable after the flotation process. The calculation of total metalrecoverable takes account of dilution and total mill recovery.

 

**Total mill recovery** – The amount of metalrecovered in the concentrator expressed as a percentage of the metal containedin the ore.

 

**Waste** – Rock lacking sufficient gradeand/or other characteristics of ore to be economically mined.

 

A-3

----

 

**ANNEX F**

** **

**FINANCIALSTATEMENTS OF GRUPO MINERO MÉXICO, S.A. DE C.V.**

 

----

 

**INDEX**

 

**GRUPO MINERO MEXICO, S.A. DE C.V. ANDSUBSIDIARIES**

 

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 
| Consolidated Financial  Statements: |
|-------------------------------------|
|                                | Independent Auditor’s  Report |
|                                | Consolidated Balance Sheets  for the Years Ended December 31, 2002 and 2001 |
|                                | Consolidated  Statements of Operations (loss) for the Years Ended December 31, 2002,  2001 and 2000 |
|                                | Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended December  31, 2002, 2001 and 2000 |
|                                | Consolidated  Statements of Changes in Financial Position for the Years Ended December 31,  2002, 2001 and 2000 |
|                                | Notes to  Consolidated Financial Statements |

 

F-1

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

Tothe Stockholders of

Grupo Minero México, S.A. de C.V.:

 

We have audited the accompanyingconsolidated balance sheet of Grupo Minero México, S.A. de C.V. andSubsidiaries (Mexican corporations collectively referred to as the “Company”)as of December 31, 2002, and the related consolidated statements of operations,changes in stockholders’ equity and changes in financial position for the yearthen ended, all expressed in thousands of Mexican pesos of purchasing power asof December 31, 2002.  These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Grupo Minero México, S.A. de C.V. and Subsidiaries as ofDecember 31, 2002, and the related consolidated statements of operations,changes in stockholders’ equity and the changes in financial position for theyear then ended in conformity with accounting principles generally accepted inMexico.

 

Accounting principles generally accepted in Mexicovary in certain significant respects from accounting principles generallyaccepted in the United States of America. The application of the latter would have affected net loss for the yearended December 31, 2002 and stockholders’ equity as of that date to the extentsummarized in Note 18.

 

Our audit also comprehended the translation of theMexican peso amounts into U.S. dollar amounts and, in our opinion, suchtranslation has been made in conformity with the basis stated in Note 2.  The translation of the financial statementamounts into U.S. dollars and the translation of the financial statements intoEnglish have been made solely for the convenience of readers.

 

 
| /s/ Deloitte & Touche |   |
|---------------------------|--------|
| Deloitte & Touche     |

 

 

Mexico City, Mexico

June 13, 2003

 

F-2

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

 

Tothe Stockholders of

  Grupo Minero México, S.A. de C.V.,

 

We have audited the accompanyingconsolidated balance sheets of Grupo Minero México, S.A. de C.V. andSubsidiaries (Mexican corporations collectively referred to as the “Company”)as of December 31, 2001, and the related consolidated statements of operations,changes in stockholders’ equity and changes in financial position for the yearsended December 31, 2001 and 2000, all expressed in thousands of Mexican pesosof purchasing power as of December 31, 2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Grupo Minero México, S.A. de C.V.and Subsidiaries as of December 31, 2001, and the results of their operationsand the changes in their financial position for the years ended December 31,2001 and 2000, in conformity with accounting principles generally accepted inMexico.

 

In 2000, the Company adopted theregulations of revised Bulletin D-4, “Accounting for Income and Asset Taxes andEmployee Profit Sharing”. The initial effect of adopting this bulletin was torecord the deferred income tax effects based on the cumulative effect oftemporary differences as of January 1, 2000, as a long-term liability, directlycharging stockholders’ equity in the new initial effect of deferred incometaxes account for 8,605,740 thousand Mexican pesos. Also, the provision forincome taxes in 2000 increased by 54,026 thousand Mexican pesos, due to thedeferred effects of the year.

 

As explained in Note 4, Bulletin C-2, “FinancialInstruments”, became effective January 1, 2001.  This bulletin establishes the methodology for valuing andrecording financial instruments and requires recognition of all financialinstruments on the balance sheet as either assets or liabilities, affecting theresults of the period for any valuation adjustments of such instruments.  Financial instrument valuation adjustmentscharged as an expense in the statement of operations in the amount of 63,210thousand Mexican pesos were recorded in 2001 in conformity with the guidelinesestablished by this bulletin.

 

F-3

----

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  The downward trend of theprices of the metals that are produced and sold by the Company continued duringthe year ended December 31, 2001, with the prices of copper, zinc, silver andmolybdenum falling by approximately 13%, 22%, 12% and 9%, respectively, duringthe year.  As a result, the Company isin default of certain payments and failed to comply with certain restrictionsestablished in its loan agreements, giving creditors the right to acceleratethe maturity of those agreements. Therefore, the debt has been reclassified as a current liability in theaccompanying financial statements. These factors, among others, raise substantial doubt about the Company’sability to continue as a going concern. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Accounting practices used by theCompany in preparing the accompanying consolidated financial statements conformwith accounting principles generally accepted in Mexico but do not conform withaccounting principles generally accepted in the United States of America (U.S.GAAP).  A description of thesedifferences and a reconciliation of consolidated majority net loss andstockholders’ equity to U.S. GAAP as permitted by Form 20-F, which allowsomission of the requirement to quantify, in the U.S. GAAP reconciliation, thedifferences attributable to the effects of comprehensive inflation adjustmentsrecorded locally, are set forth in Note 18.

 

As discussed in Note 21, the 2001 and 2000, U.S. GAAPconsolidating financial information with respect to the Company’s mostly ownedguarantor subsidiaries of its indebtedness has been restated.

 

 

Ruiz, Urquiza y Cía., S. C.

(A member firm ofAndersen Worldwide until April 9, 2002)

 

 
| /s/ Jorge I. Peralta Alvarez    |   |
|---------------------------------|--------|
| C.P.C. Jorge I. Peralta Alvarez |

 

 

 

Mexico City, Mexico

June 14, 2002 (exceptwith respect to the restatement to

constant Mexican pesosand the restatement of the U.S.

GAAP consolidatingfinancial information presented in Note 21,

as to which the date isJune 13, 2003)

 

F-4

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER31, 2002 AND 2001**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

#### **AS OF DECEMBER 31, 2002**

**(Stated inthousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($))**

 
|                                                                                                                      |   | **Convenience  Translation  (Note 2)  2002** |      | **2002**    |   | **2001**    |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|-------------|--------|-------------|--------|
| **ASSETS**                                                                                                                |   |                                         |      |        |   |        |   |
| CURRENT ASSETS:                                                                                                           |   |                                         |      |        |   |        |   |
| Cash and temporary investments (Note 5)                                                                                   |   | $                                            | 27,719    |        | Ps.    | 285,856     |   | Ps. | 91,267 |   |
| Cash retained in collateral account (Note 1 and 9)                                                                        |   | 88,048                                       |      | 907,992     |   | 363,852     |   |
| Notes and accounts receivable-                                                                                            |   |                                         |      |        |   |        |   |
| Trade, net of allowances for doubtful accounts of  Ps.54,717 and Ps.41,675 as of December 31, 2002 and 2001, respectively |   | 64,403                                       |      | 664,159     |   | 902,519     |   |
| Due from affiliated companies (Note 13)                                                                                   |   | 230,732                                      |      | 2,379,416   |   | 2,491,592   |   |
| Recoverable taxes                                                                                                         |   | 43,105                                       |      | 444,521     |   | 253,268     |   |
| Other                                                                                                                     |   | 15,072                                       |      | 155,431     |   | 66,561      |   |
|                                                                                                                      |   | 353,312                                      |      | 3,643,527   |   | 3,713,940   |   |
| Inventories (Note 6)                                                                                                      |   | 202,431                                      |      | 2,087,568   |   | 2,365,855   |   |
| Prepaid expenses  and other                                                                                               |   | 5,247                                        |      | 54,111      |   | 36,211      |   |
| Total current assets                                                                                                      |   | 676,757                                      |      | 6,979,054   |   | 6,571,125   |   |
|                                                                                                                      |   |                                         |      |        |   |        |   |
| DUE FROM HOLDING COMPANIES (Note 13)                                                                                      |   | 877,365                                      |      | 9,047,822   |   | 7,723,349   |   |
| PROPERTY, PLANT AND EQUIPMENT, net (Note 7)                                                                               |   | 2,782,996                                    |      | 28,699,650  |   | 30,368,393  |   |
| INVESTMENTS IN SHARES OF ASSOCIATED AND OTHER  UNCONSOLIDATED COMPANIES                                                   |   | 572                                          |      | 5,900       |   | 6,138       |   |
| GOODWIIL,  net of accumulated amortization of Ps.103,575 and Ps.82,860 as of December  31, 2002 and 2001, respectively    |   | 10,044                                       |      | 103,575     |   | 124,330     |   |
| OTHER ASSETS:                                                                                                             |   |                                         |      |        |   |        |   |
| Deferred charges, net (Note 8)                                                                                            |   | 203,444                                      |      | 2,098,021   |   | 2,021,418   |   |
| Shares in trust                                                                                                           |   | 40,336                                       |      | 415,964     |   | 364,062     |   |
|                                                                                                                      |   | 243,780                                      |      | 2,513,985   |   | 2,485,480   |   |
| Total assets                                                                                                              |   | $                                            | 4,591,514 |        | Ps.    | 47,349,986  |   | Ps. | 47,178,815 |   |
|                                                                                                                      |   |                                         |      |        |   |        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                             |   |                                         |      |        |   |        |   |
| CURRENT LIABILITIES:                                                                                                      |   |                                         |      |        |   |        |   |
| Current portion of long-term debt and accrued interest  (Note 9)                                                          |   | $                                            | 18,096    |        | Ps.    | 186,615     |   | Ps. | 12,947,572 |   |
| Accounts payable and accrued liabilities                                                                                  |   | 274,889                                      |      | 2,834,790   |   | 2,163,535   |   |
| Due to  affiliated companies (Note 13)                                                                                    |   | 32,361                                       |      | 333,727     |   | 123,116     |   |
| Income and asset  taxes and employee statutory profit sharing payable (Note 14)                                           |   | 465                                          |      | 4,797       |   | 52,522      |   |
| Dividends  payable (Note 11)                                                                                              |   | 1,304,320                                    |      | 13,450,800  |   | —      |   |
| Total current liabilities                                                                                                 |   | 1,630,131                                    |      | 16,810,729  |   | 15,286,745  |   |
|                                                                                                                      |   |                                         |      |        |   |        |   |
| DUE TO GRUPO MÉXICO, S.A. DE C.V., Holding company                                                                   |   | 57,310                                       |      | 591,010     |   | 555,441     |   |
| LONG-TERM DEBT (Note 9)                                                                                                   |   | 1,322,188                                    |      | 13,635,063  |   | —      |   |
| LIABILITY FOR  PENSIONS, SENIORITY PREMIUMS AND MEDICAL SERVICE OBLIGATIONS (Note 10)                                     |   | 34,193                                       |      | 352,617     |   | 266,942     |   |
| DEFERRED INCOME TAXES (Note 14)                                                                                           |   | 667,309                                      |      | 6,881,619   |   | 7,525,452   |   |
| Total liabilities                                                                                                         |   | 3,711,131                                    |      | 38,271,038  |   | 23,634,580  |   |
|                                                                                                                      |   |                                         |      |        |   |        |   |
| STOCKHOLDERS’ EQUITY (Note 11):                                                                                      |   |                                         |      |        |   |        |   |
| Capital stock                                                                                                             |   | 1,138,481                                    |      | 11,740,589  |   | 11,740,589  |   |
| Additional paid-in capital                                                                                                |   | 2,174                                        |      | 22,416      |   | 22,416      |   |
| Advances for future increases in capital stock                                                                            |   | 16,694                                       |      | 172,156     |   | —      |   |
| Retained earnings                                                                                                         |   | 2,375,862                                    |      | 24,501,085  |   | 39,140,661  |   |
| Accumulated other comprehensive loss                                                                                      |   | (1,902,681                                   | )         | (19,621,404 | )      | (19,613,280 | )      |
| Initial effect  of deferred income taxes                                                                                  |   | (834,496                                     | )         | (8,605,740  | )      | (8,605,740  | )      |
| Total majority  stockholders’ equity                                                                                 |   | 796,034                                      |      | 8,209,102   |   | 22,684,646  |   |
| Minority  interest                                                                                                        |   | 84,349                                       |      | 869,846     |   | 859,589     |   |
| Total  stockholders’ equity                                                                                          |   | 880,383                                      |      | 9,078,948   |   | 23,544,235  |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                                            | 4,591,514 |        | Ps.    | 47,349,986  |   | Ps. | 47,178,815 |   |
|                                                                                                                           |        |                                              |           |             |        |             |        |  |  |  |  |  |  |  |

 

The accompanying notesare part of these consolidated financial statements.

 

F-5

----

 

**GRUPO MINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARSENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

#### **AS OF DECEMBER 31, 2002**

**(Stated inthousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($), except pershare data)**

 
|                                                                   |   | **Convenience  Translation  (Note 2)  2002** |     | **2002**   |   | **2001**   |   | **2000**   |      |
|------------------------------------------------------------------------|--------|----------------------------------------------|----------|------------|--------|------------|--------|------------|-----------|
|                                                                   |   |                                         |     |       |   |       |   |       |      |
| NET SALES                                                              |   | $                                            | 713,001  |       | Ps.    | 7,352,832  |   | Ps.        | 9,455,112 |   | Ps. | 12,918,010 |   |
| COST OF SALES                                                          |   | 590,480                                      |     | 6,089,330  |   | 8,442,045  |   | 10,004,914 |      |
| Gross  profit                                                          |   | 122,521                                      |     | 1,263,502  |   | 1,013,067  |   | 2,913,096  |      |
|                                                                   |   |                                         |     |       |   |       |   |       |      |
| OPERATING EXPENSES:                                                    |   |                                         |     |       |   |       |   |       |      |
| Administrative expenses from  operations                               |   | 39,114                                       |     | 403,362    |   | 388,081    |   | 438,220    |      |
| Depreciation, amortization and depletion                               |   | 169,108                                      |     | 1,743,929  |   | 1,720,378  |   | 1,673,169  |      |
|                                                                   |   | 208,222                                      |     | 2,147,291  |   | 2,108,459  |   | 2,111,389  |      |
| (Loss) income from operations                                          |   | (85,701                                      | )        | (883,789   | )      | (1,095,392 | )      | 801,707    |      |
|                                                                   |   |                                         |     |       |   |       |   |       |      |
| NET  COMPREHENSIVE FINANCING COST:                                     |   |                                         |     |       |   |       |   |       |      |
| Interest expense                                                       |   | 105,932                                      |     | 1,092,423  |   | 1,218,880  |   | 1,348,955  |      |
| Interest income                                                        |   | (47,620                                      | )        | (491,083   | )      | (820,384   | )      | (1,022,836 | )         |
| Foreign exchange loss (gain),  net                                     |   | 26,333                                       |     | 271,568    |   | (169,899   | )      | 89,803     |      |
| Monetary position gain                                                 |   | (16,875                                      | )        | (174,025   | )      | (111,614   | )      | (319,511   | )         |
| Realized loss on hedging  activities                                   |   | —                                       |     | —     |   | 63,210     |   | —     |      |
|                                                                   |   | 67,770                                       |     | 698,883    |   | 180,193    |   | 96,411     |      |
| OTHER EXPENSE (INCOME), net                                            |   | 829                                          |     | 8,548      |   | (72,752    | )      | 25,854     |      |
| (Loss) income before income tax  and employee statutory profit-sharing |   | (154,300                                     | )        | (1,591,220 | )      | (1,202,833 | )      | 679,442    |      |
|                                                                   |   |                                         |     |       |   |       |   |       |      |
| INCOME TAXES (Note 14)                                                 |   | (40,421                                      | )        | (416,838   | )      | (381,583   | )      | 306,633    |      |
| EMPLOYEE  STATUTORY PROFIT SHARING (Note 14)                           |   | 379                                          |     | 3,899      |   | 52,817     |   | 106,573    |      |
| Consolidated net (loss) income                                         |   | $                                            | (114,258 | )          | Ps.    | (1,178,281 | )      | Ps.        | (874,067  | ) | Ps. | 266,236 |   |
|                                                                   |   |                                         |     |       |   |       |   |       |      |
| ALLOCATION OF CONSOLIDATED NET  (LOSS) INCOME:                         |   |                                         |     |       |   |       |   |       |      |
| Net (loss) income of the  majority interest                            |   | $                                            | (115,275 | )          | Ps.    | (1,188,776 | )      | Ps.        | (863,891  | ) | Ps. | 258,476 |   |
| Net (loss) income of the minority interest                             |   | 1,017                                        |     | 10,495     |   | (10,176    | )      | 7,760      |      |
|                                                                   |   | $                                            | (114,258 | )          | Ps.    | (1,178,281 | )      | Ps.        | (874,067  | ) | Ps. | 266,236 |   |
| Earnings (loss) per share of  the majority interest                    |   | $                                            | (0.18    | )          | Ps.    | (1.83      | )      | Ps.        | (1.33     | ) | Ps. | 0.40 |   |
| Weighted average number of shares outstanding (in thousands)           |   | 650,162                                      |     | 650,162    |   | 650,162    |   | 650,162    |      |

 

The accompanying notesare part of these consolidated financial statements.

 

F-6

----

 

**GRUPO MINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

#### **FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED INCONSTANT MEXICAN PESOS**

**AS OF DECEMBER31, 2002**

**(Stated inthousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($) )**

 
|                                                   |   |            |      | **Additional  Paid-In  Capital** |   | Advances for**Future Increases  in Capital Stock** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Initial  Effect of  Deferred  Income  Taxes** |   | **Minority  Interest** |       | **Total  Stockholders’  Equity** |   |
|--------------------------------------------------------|--------|-----------------|-----------|----------------------------------|--------|----------------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|-------------------------------------------------|--------|------------------------|------------|---------------------------------------|--------|
|                                                   |
|                                                   |
| **Capital Stock**                                      |
| **Nominal**                                            |   | **Restatement** |
|                                                   |   |            |      |                             |   |                                               |   |                   |   |                                        |   |                                            |   |                   |       |                                  |   |   |   |
| BALANCES AT JANUARY 1, 2000                            |   | Ps.             | 1,305,490 |                             | Ps.    | 10,435,099                                         |   | Ps.                    | 22,416 |                                        | Ps.    | —                                          |   | Ps.                    | 39,746,076 |                                  | Ps.    | (18,474,933 | ) | Ps. | — |   | Ps. | 968,635 |   | Ps. | 34,002,783 |   |
| Cumulative effect of deferred  income tax              |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | —                                          |   | (8,605,740             | )          | —                                |   | (8,605,740 | ) |
| Comprehensive loss:                                    |   |            |      |                             |   |                                               |   |                   |   |                                        |   |                                            |   |                   |       |                                  |   |   |   |
| Consolidated net income                                |   | —          |      | —                           |   | —                                             |   | —                 |   | 258,476                                     |   | —                                          |   | —                 |       | 7,760                                 |   | 266,236 |   |
| Cumulative effect of  restatement                      |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | (597,932                                        | )      | —                 |       | (107,336                              | )      | (705,268 | ) |
| Additional liability for  employee benefit obligations |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | (18,627                                         | )      | —                 |       | —                                |   | (18,627 | ) |
| Total comprehensive loss                               |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | —                                          |   | —                 |       | —                                |   | (457,659 | ) |
| BALANCES AT DECEMBER 31, 2000                          |   | 1,305,490       |      | 10,435,099                       |   | 22,416                                             |   | —                 |   | 40,004,552                                  |   | (19,091,492                                     | )      | (8,605,740             | )          | 869,059                               |   | 24,939,384 |   |
| Comprehensive loss:                                    |   |            |      |                             |   |                                               |   |                   |   |                                        |   |                                            |   |                   |       |                                  |   |   |   |
| Consolidated net loss                                  |   | —          |      | —                           |   | —                                             |   | —                 |   | (863,891                                    | )      | —                                          |   | —                 |       | (10,176                               | )      | (874,067 | ) |
| Cumulative effect of  restatement                      |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | (437,141                                        | )      | —                 |       | 706                                   |   | (436,435 | ) |
| Additional liability for  employee benefit obligations |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | (84,647                                         | )      | —                 |       | —                                |   | (84,647 | ) |
| Total comprehensive loss                               |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | —                                          |   | —                 |       | —                                |   | (1,395,149 | ) |
| BALANCES AT DECEMBER 31, 2001                          |   | 1,305,490       |      | 10,435,099                       |   | 22,416                                             |   | —                 |   | 39,140,661                                  |   | (19,613,280                                     | )      | (8,605,740             | )          | 859,589                               |   | 23,544,235 |   |
| Dividends declared                                     |   | —          |      | —                           |   | —                                             |   | —                 |   | (13,450,800                                 | )      | —                                          |   | —                 |       | —                                |   | (13,450,800 | ) |
| Advances for future increases  in capital stock        |   | —          |      | —                           |   | —                                             |   | 172,156                |   | —                                      |   | —                                          |   | —                 |       | —                                |   | 172,156 |   |
|                                                   |   | 1,305,490       |      | 10,435,099                       |   | 22,416                                             |   | 172,156                |   | 25,689,861                                  |   | (19,613,280                                     | )      | (8,605,740             | )          | 859,589                               |   | 10,265,591 |   |
| Comprehensive loss:                                    |   |            |      |                             |   |                                               |   |                   |   |                                        |   |                                            |   |                   |       |                                  |   |   |   |
| Consolidated net loss                                  |   | —          |      | —                           |   | —                                             |   | —                 |   | (1,188,776                                  | )      | —                                          |   | —                 |       | 10,495                                |   | (1,178,281 | ) |
| Cumulative effect of  restatement                      |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | 33,814                                          |   | —                 |       | (238                                  | )      | 33,576 |   |
| Additional liability for  employee benefit obligations |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | (41,938                                         | )      | —                 |       | —                                |   | (41,938 | ) |
| Total comprehensive loss                               |   | —          |      | —                           |   | —                                             |   | —                 |   | —                                      |   | —                                          |   | —                 |       | —                                |   | (1,186,643 | ) |
| BALANCES AT DECEMBER 31, 2002                          |   | Ps.             | 1,305,490 |                             | Ps.    | 10,435,099                                         |   | Ps.                    | 22,416 |                                        | Ps.    | 172,156                                         |   | Ps.                    | 24,501,085 |                                  | Ps.    | (19,621,404 | ) | Ps. | (8,605,740 | ) | Ps. | 869,846 |   | Ps. | 9,078,948 |   |
|                                                        |        |                 |           |                                  |        |                                                    |        |                        |        |                                             |        |                                                 |        |                        |            |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are part of these consolidated financialstatements.

 

F-7

----

 

**GRUPO MINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARSENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED INCONSTANT MEXICAN PESOS**

**AS OF DECEMBER31, 2002**

**(Stated inthousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($) )**

 
|                                                                            |   | **Convenience    Translation   (Note 2)  2002** |         | **2002**    |   | **2001**      |   | **2000**   |         |
|---------------------------------------------------------------------------------|--------|-------------------------------------------------|--------------|-------------|--------|---------------|--------|------------|--------------|
|                                                                            |   |                                            |         |        |   |          |   |       |         |
| OPERATING ACTIVITIES:                                                           |   |                                            |         |        |   |          |   |       |         |
| Consolidated net (loss) income                                                  |   | $                                               | (114,258     | )           | Ps.    | (1,178,281    | )      | Ps.        | (874,067     | ) | Ps. | 266,236 |   |
| Items that did not require (generate) resources-                                |   |                                            |         |        |   |          |   |       |         |
| Provision for pensions, seniority premiums and medical service  obligations     |   | 4,242                                           |         | 43,737      |   | (51,763       | )      | 3,768      |         |
| Depreciation, amortization and depletion                                        |   | 169,108                                         |         | 1,743,929   |   | 1,720,378     |   | 1,673,169  |         |
| Amortization of goodwill                                                        |   | 2,013                                           |         | 20,755      |   | 20,755        |   | 20,755     |         |
| Project cancellation                                                            |   | 23,735                                          |         | 244,770     |   | —        |   | —     |         |
| Deferred income taxes                                                           |   | (59,096                                         | )            | (609,429    | )      | (514,549      | )      | 54,027     |         |
| Loss (gain) on sale of property and equipment                                   |   | (320                                            | )            | (3,295      | )      | 40,342        |   | 42,826     |         |
| Capitalized mine stripping                                                      |   | (9,581                                          | )            | (98,805     | )      | (208,910      | )      | (572,430   | )            |
|                                                                            |   | 15,833                                          |         | 163,381     |   | 132,186       |   | 1,488,351  |         |
|                                                                            |   |                                            |         |        |   |          |   |       |         |
| Changes in current assets and  liabilities:                                     |   |                                            |         |        |   |          |   |       |         |
| (Increase) decrease in assets-                                                  |   |                                            |         |        |   |          |   |       |         |
| Notes and accounts receivable                                                   |   | (4,050                                          | )            | (41,764     | )      | 160,609       |   | 465,584    |         |
| Due from affiliated companies                                                   |   | 27,009                                          |         | 278,527     |   | (331,382      | )      | —     |         |
| Inventories                                                                     |   | 54,853                                          |         | 565,672     |   | 771,705       |   | (150,811   | )            |
| Prepaid expenses                                                                |   | (1,736                                          | )            | (17,900     | )      | (10,824       | )      | (22,090    | )            |
| Increase (decrease) in  liabilities-                                            |   |                                            |         |        |   |          |   |       |         |
| Accounts payable and accrued  liabilities                                       |   | 87,328                                          |         | 900,568     |   | 710,379       |   | 387,590    |         |
| Due to affiliated companies                                                     |   | 20,423                                          |         | 210,611     |   | (158,461      | )      | (1,549,497 | )            |
| Income and asset taxes and  employee statutory profit sharing payable           |   | (4,628                                          | )            | (47,725     | )      | (50,139       | )      | (264,306   | )            |
| Net resources generated by  operating activities                                |   | 204,943                                         |         | 2,011,370   |   | 1,224,073     |   | 879,589    |         |
|                                                                            |   |                                            |         |        |   |          |   |       |         |
| FINANCING ACTIVITIES:                                                           |   |                                            |         |        |   |          |   |       |         |
| Increase (decrease) in debt in  real terms                                      |   | 130,231                                         |         | 1,343,006   |   | (209,212      | )      | 455,710    |         |
| Effect of variation of  long-term debt in constant Mexican pesos                |   | (67,706                                         | )            | (698,214    | )      | (578,900      | )      | (1,189,875 | )            |
| Due to Grupo México, S.A. de  C.V., Holding company                        |   | 3,449                                           |         | 35,570      |   | 555,441       |   | —     |         |
| Cash retained in collateral  accounts                                           |   | (52,765                                         | )            | (544,140    | )      | (363,852      | )      | —     |         |
| Dividend declared                                                               |   | (1,304,320                                      | )            | (13,450,800 | )      | —        |   | —     |         |
| Dividends payable                                                               |   | 1,304,320                                       |         | 13,450,800  |   | —        |   | —     |         |
| Net resources generated by  (used in) financing activities                      |   | 13,209                                          |         | 136,222     |   | (596,523      | )      | (734,165   | )            |
|                                                                            |   |                                            |         |        |   |          |   |       |         |
| INVESTING  ACTIVITIES:                                                          |   |                                            |         |        |   |          |   |       |         |
| Additions  to property and equipment                                            |   | (23,515                                         | )            | (214,828    | )      | (459,860      | )      | (1,081,678 | )            |
| Net decrease in  investments in shares of subsidiaries and associated companies |   | —                                          |         | —      |   | 203           |   | —     |         |
| Net  increase in deferred charges, except capitalized stripping                 |   | (35,297                                         | )            | (364,001    | )      | (413,792      | )      | (182,387   | )            |
| Proceeds from sale of property and equipment                                    |   | 3,584                                           |         | 9,287       |   | 32,613        |   | 36,956     |         |
| Shares  in trust                                                                |   | (5,720                                          | )            | (58,988     | )      | (88,152       | )      | 146,236    |         |
| Payments  received on notes receivable from holding companies                   |   | —                                          |         | —      |   | 134,670       |   | 894,049    |         |
| Originations  of notes receivables from holding companies                       |   | (128,434                                        | )            | (1,324,473  | )      | —        |   | —     |         |
| Net  resources used in investing activities                                     |   | (189,382                                        | )            | (1,953,003  | )      | (794,318      | )      | (186,824   | )            |
|                                                                            |   |                                            |         |        |   |          |   |       |         |
| Increase  (decrease) in cash and temporary investments                          |   | 18,869                                          |         | 194,589     |   | (166,768      | )      | (575,455   | )            |
| Cash  and temporary investments at beginning of year                            |   | 8,850                                           |         | 91,267      |   | 258,035       |   | 833,490    |         |
| Cash and temporary investments at end of year                                   |   | $                                               |  27,719 |        | Ps.    |  285,856 |   | Ps.        |  91,267 |   | Ps. |  258,035 |   |
|                                                                                 |        |                                                 |              |             |        |               |        |            |              |  |  |  |  |  |  |  |

 

The accompanying notes are part of theseconsolidated financial statements.

 

F-8

----

 

**GRUPO MINERO MEXICO, S. A. DE C. V. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

##### FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

#### **EXPRESSED IN CONSTANT MEXICAN PESOS**

#### **AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) andthousands of U.S. dollars ($), except per share data)**

 

**1. DESCRIPTION OF BUSINESS AND SIGNIFICANT EVENTS:**

 

Grupo Minero México, S.A.de C.V. and subsidiaries (collectively the “Company” or “GMM”) is a majormining company and a majority-owned subsidiary of Minera México, S.A. de C.V.(“MM”), which in turn, is and a 98.91% owned by Grupo México, S.A. de C.V.(“GMEXICO”) through GMEXICO ́s ownership of MM ́s direct holding company,Americas Mining Corporation (“AMC”) holding company.  The Company is engaged principally in the mining and processingof copper, zinc, silver, gold, lead and molybdenum. All of the Company’s miningand processing operations, as well as its exploration activities are conductedin Mexico.

 

**Impact of metal prices on theCompany’s operation**

 

During 2002, the Companycontinued to implement different measures for its mining operations tocounteract unfavorable conditions in the metals market. Economic growth in theU.S. and other countries worldwide did not meet expectations. Metals prices,especially copper, remained at their lowest levels in years and were subject toa high degree of volatility despite sustained demand from China. After droppingin 2001, in 2002, the average market price of copper fell by an additional1.2%; zinc dropped by 12.2%; and lead fell by 5.1%, over the prior year. Onlyprecious metals prices improved: silver increased by 4.5% and gold by 14.4%over the prior year. Consequently, the Company’s sales fell by Ps.2,102 millionpesos, or 22% from than the previous year, resulting in a consolidated net loss for the year of Ps.1,178 millionpesos. The Company consolidated operating and administrative activities byclosing down or reducing certain operations, selling off excess assets, andsuspending certain purchases from third parties as deemed necessary.  The workforce has also been reduced andprograms have been implemented to increase productivity.

 

**Renegotiation of the long-term debt**

 

Due to low metals pricesand the resulting drop in liquidity during the past few years, the Company wasobligated to restructure its debt as a result of its failure to make scheduledpayments and its noncompliance  withcertain financial covenants required by its debt agreements.  In April 2003, the Company successfullyrestructured its indebtedness with a number of institutional investors, U.S.banking institutions and agencies.  Thisrestructuring has resulted in greater financial and operating flexibility andallows management to focus on increasing the productivity and profitability ofthe mining-metallurgical units, despite the adverse  market conditionscurrently faced by the industry. The Company now has a better financialstructure to allow improvement of its daily operations to offset the currentcycle of low metal prices.

 

The restructuring ofindebtedness payable by GMM in the amount of $880.9 million to the holders of its secured export notes and to itsbank lenders occurred on April 29, 2003 with the signing of definitivedocumentation. This restructuring process involved:

 

a.      The modification of interest rates,guarantees and loan payment periods;

 

b.                   Thecontribution of new capital of $110 million that was received on April 29,2003; and

 

c.                    Therelease of funds generated by export sales retained as collateral by the holdersof the secured export notes, which are shown on the accompanying balance sheetunder the heading of “Cash retained in collateral accounts”.

 

F-9

----

 

**Capitalization of leaching material**

 

#### **From1999 to 2001, Mexicana de Cananea, S.A. de C.V. (“Mexcananea”, a subsidiary ofGMM) conducted major drilling studies and metallurgic testing to better locatecopper deposits and also to obtain greater yields.  According to these studies, the Company determined that the Mexicanade Cananea, S.A. de C.V. mine has large quantities of material known aschalcocite, which render benefits when processed through the hydrometallurgicprocess know as leaching.  In order tobegin exploiting such leachable materials, during 2001, the Company accumulatedlarge quantities of leaching material in sites known as leaching dumps, fromwhich copper is extracted through a process of irrigation, filtering andelectrolysis.  According to thesestudies, copper can be recovered through the leaching process overapproximately five to eight years.  Theamortization of the costs incurred in processing the leaching material whichare capitalized once such materials are removed from the mine, is based on theactual depletion of each of the leaching dumps.  As of December 31, 2002 and 2001, the gross amount capitalizedfor this activity was Ps.919,125 and Ps.532,020, respectively.  Prior to 2001, such leaching materials wereconsidered to be waste materials and therefore figured into the determination ofstripping ratios, which are used to determine capitalized stripping costs.  The implementation of processing leachingmaterials in 2001 resulted in a net reduction in cost of sales as recorded inthe statements of operations of Ps.141,316 in 2002 and Ps.169,080 in 2001.**

#### ** **

**2. BASIS OF PRESENTATION:**

 

The accompanyingconsolidated financial statements of the Company are prepared in accordancewith the accounting principles generally accepted in Mexico (“Mexican GAAP”),which differ in certain significant respects from those applicable in theUnited States of America (“U.S. GAAP”). A description of these differences andtheir effects on net (loss) income and stockholders’ equity are set forth inNote 18.

 

The preparation of thefinancial statements in conformity with Mexican GAAP, along with thereconciliation to U.S. GAAP, requires management to make estimates andassumptions that affect the amounts reported in the consolidated financialstatements and the accompanying notes. While these estimates and assumptionsare based on management’s best knowledge of current events, actual results maydiffer.

 

The financial statementsare stated in Mexican pesos. The translation of Mexican pesos into U.S. dollarsis included solely for the convenience of the reader, using the exchange ratepublished by Banco de México as of December 31, 2002 of Ps.10.3125 toU.S.$1.00. The convenience translation should not be construed as arepresentation that the Mexican peso amounts have been, could have been, orcould in the future be, converted into U.S. dollars at this or any other rateof exchange.

 

**3. BASIS OF CONSOLIDATION:**

 

The accompanyingconsolidated financial statements include the financial statements of GMM(98.91% of which is owned by MM), and the following subsidiary companies. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 
|                                                                                           |   | **Percentage of  Ownership as of****December 31,  2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                                           |   |                                                     |   |
| •  Mexicana de Cobre, S.A. de C.V. and  Subsidiaries (“Mexcobre”)          |   | 96.43                                                    | %      |
| •  Industrial Minera México, S.A. de C.V. and  Subsidiaries (“Immsa”) |   | 100.00                                                   | %      |
| •  Minerales Metálicos del Norte, S.A.  (“Mimenosa”)                  |   | 100.00                                                   | %      |
| •  Servicios de Apoyo Administrativo, S.A. de  C.V. (“Saasa”)              |   | 100.00                                                   | %      |
| •  Mexicana de Cananea, S.A. de C.V. and  Subsidiaries (“Mexcananea”)      |   | 98.49                                                    | %      |
| •  México Compañía Inmobiliaria, S.A.  (“Mexci”)            |   | 100.00                                                   | %      |
| •  Minerales y Minas Mexicanas, S.A. de  C.V.(“MMM”)                       |   | 100.00                                                   | %      |
| •  Western Copper Supplies, Inc.  (“WCS”)                                  |   | 100.00                                                   | %      |
| •  Minera México Internacional, Inc. (“MMI”)                          |   | 100.00                                                   | %      |
| •  Mexicana del Arco, S.A. de C.V.  (“Mexarco”)                            |   | 100.00                                                   | %      |

 

F-10

----

 

The financial statementsof foreign subsidiaries whose operations are an integral part of the Companyare translated as follows: monetary items at the exchange rate prevailing atyear end; nonmonetary items, stockholders’ equity and income and expenses atthe exchange rate prevailing at the date the transactions occurred.  The resulting Mexican pesos are restated usingfactors derived from the National Consumer Price Index (“NCPI”).

 

**4. SIGNIFICANT ACCOUNTING POLICIES:**

 

**Effects of accounting principles adopted during the periodspresented**

 

Effective January 1,2001, the Company adopted Bulletin C-2, “Financial Instruments”.  This Bulletin establishes the methodologyfor valuing and recording financial instruments and requires recognition ofcertain financial instruments on the balance sheet as either assets orliabilities at fair values, affecting the results of the period for anyvaluation adjustments of such instruments. In accordance with the guidelinesestablished by this bulletin, the Company recognized charges of Ps.63,210related to fair value adjustments applied to certain financial instrumentsduring 2001.

 

**Recognition of the effects of inflation in the financialstatements**

 

The Company restates allof its financial statements in terms of the purchasing power of the Mexicanpesos as of the end of the latest period, thereby comprehensively recognizingthe effects of inflation. Consequently, all financial statement amounts arecomparable, both for the current and the prior year, since all are stated interms of Mexican pesos of the same purchasing power. Accordingly, the financialstatements of the prior year have been restated in terms of Mexican pesos ofthe latest period and their amounts presented herein differ from thoseoriginally reported in terms of Mexican pesos of the corresponding year.

 

The factors used torestate the 2001 and 2000 financial statements in terms of the purchasing powerof the Mexican currency as of December 31, 2002 are 1.057 and 1.1035,respectively.

 

The consolidatedfinancial statements have been restated as follows:

 

•              *Balance sheets:*

 

Primary metal inventories arestated at international metal market quotations at year end, less the restatedcost of completing the processing cycle to obtain the finished product.  Other inventory items are stated at theirreplacement cost through the application of production cost, without exceedingtheir net realizable value.

 

Property and equipment arerestated by applying a factor derived from the NCPI. Depreciation of restatedassets is calculated based on the estimated useful life of each asset using thestraight-line method.

 

The investment in shares ofassociated and other unconsolidated subsidiaries is accounted for under theequity method, based on the Mexican GAAP financial statements of suchcompanies, restated by a factor derived from the NCPI.

 

Goodwill is restated by applyinga factor derived from the NCPI from the date of the acquisition of thesubsidiary that generated it.

 

Stockholders’ equity and othernonmonetary items are restated using a factor derived from the NCPI cumulativefrom the date of contribution or generation.

 

*•      Statements of operations:*

 

Revenues and expenses that areassociated with a monetary item (cash, trade receivables, liabilities, etc.)are restated from the month in which they arise through year end, based onfactors derived from the NCPI.

 

Cost of sales of primary metalsand other inventories is restated based on the replacement cost of productsconsumed, and restated through year end based on factors derived from the monthin which they arise through year end.

 

F-11

----

 

Depreciation is calculated basedon the estimated useful lives of the NCPI restated assets. Depreciation iscommenced when the related assets are placed in service.

 

The gain or loss on monetary position, which representsthe erosion of the purchasing power of monetary items caused by inflation,is  determined by applying to netmonetary assets or liabilities at the beginning of each month, the factor ofinflation derived from the NCPI and is restated through year end with thecorresponding factor. Gains arise from maintaining an average net monetaryliability position.

 

*•**                  In the other financial statements:*

 

The statements of changes in financial position presentsthe changes in constant Mexican pesos, according to the financial position atprior year end, restated to Mexican pesos of the most recent year end.

 

The gain or loss resulting from inflation presented inthe statement of changes in stockholders’ equity is comprised mainly of theincome or loss resulting from holding nonmonetary assets, which represents thechange in the specific price level of these assets and its effect on results ofoperations compared to the change in the NCPI.

 

**Temporary investments**

 

Temporary investments are primarily short-term investmentfunds and bank deposits, which are valued at market.

 

**Goodwill**

 

Goodwill resulting from the acquisition of shares ofMexcananea is amortized using the straight-line method over a period of 10years.  The amortization period wasdetermined based on the estimated benefit that will be generated from suchinvestment.

 

**Impairment of long-lived assets**

 

Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Assets are determined impaired when theestimated future undiscounted cash flows expected to result from the use of theasset are less than the carrying value of the asset.  The Company measures an impairment loss as the difference betweenthe carrying value of the asset and its fair value. No impairment charges were recorded during the years ended December 31,2002, 2001 and 2000.

 

##### Deferredcharges

 

*•**                  Stripping costs*

 

Strippingcosts are costs associated with the removal of waste materials after productionhas commenced. Over the life of the mine, stripping costs are deferred in periodswhen the actual ratio of waste materials to mineral ore extracted is above thelife-of-mine stripping ratio, which represents the Company’s estimate of thetotal amount of waste to be incurred divided by the estimated total proven andprobable reserves.  In periods when the actual mine stripping ratio isbelow the life-of-mine stripping ratio, the Company reduces the net capitalizedmine stripping asset proportionally with a charge to amortizationexpense.  In addition, deferred mine stripping costs are amortized usingthe units of production method based on proven and probable ore reserves. Copper resources contained in piles of leaching  materials that have been extracted from the mines are notincluded in the determination of units of production amortization.

 

TheCompany’s policy results in the smoothing of stripping costs over the life ofthe mine and, in view of the Company, better facilitates the matching of mineproduction costs over the life of the mine with the mine’s revenues.

 

Whenthere is a significant change to established mineral reserves, the estimatedlevel of stripping costs is adjusted to reflect this change.

 

F-12

----

 

*•**                  Leachablematerial*

 

TheCompany capitalizes the cost of materials with low copper content extractedduring the mining process, which are accumulated in areas known as leachingdumps.  The amortization of thecapitalized cost is determined based on the actual depletion of each of the leachingdumps, which averages  from 5 to 8years.

 

*•      Mine development costs*

 

Explorationcosts incurred before the start of operations of a site are expensed asincurred, except for expenditures on specific properties where the presence ofproven and probable mineral resources have been confirmed, in which case, theexpenditures are capitalized as mine development costs.  Mine development costs are amortized on astraight-line basis over the estimated useful lives of the corresponding provenore reserves.

* *

*•**                  Capitalizationof overhaul*

 

Regularmaintenance and repairs are expensed as incurred. The cost of an engineoverhaul is capitalized and amortized over a term ranging between two and fouryears, depending on the type of overhaul.

 

**Hedging activities**

 

Derivative instruments may beused to manage exposure to market risk from changes in commodity prices (metaland energy products), interest rates or the value of the Company’s assets andliabilities. Derivative instruments, which are designated as hedges, must bedeemed effective at reducing the risk associated with the exposure being hedgedand must be designated as a hedge at the inception of the contract.  During 2001, the Company recognized arealized loss of Ps.63,210 on these hedging transactions. There was no gain orloss from such hedging activities in 2002 or 2000.

 

The Company’s derivativetransactions during 2002 and 2001 were limited in volume and restricted to riskcontrol, and as of December 31, 2002 and 2001 there were no outstanding hedgingderivatives. The Company does not maintain or issue financial instruments forspeculative purposes. Decisions with respect to each transaction and to theoverall hedging policies are made by an Executive Risk Committee. The objectiveof this committee, which is currently comprised of the Chairman of the Board ofDirectors, the Director of Management and Finance and the Assistant Director ofRisk Management, is to ensure that the risks and benefits have beenappropriately assessed.

 

The Company may enter into swapand option transactions or a combination of both to reduce the risk of purchaseor sales price fluctuations. For instance, for the purpose of protecting metalprices, the Company may purchase put options or create synthetic put options toreduce or eliminate the risk of metal price declines below the option strikeprice on a portion of its anticipated future production. The cost of theoptions is amortized using the straight-line method over the period in whichthe options can be exercised. Gains or losses deriving from the sale orexercise of the options, after deducting the acquisition expenses notamortized, are recognized in the results of the period in which the guaranteedproduction or inputs are, respectively, sold or purchased.  The Company also uses futures contracts forhedging the effect of changes in the prices relative to a portion of the assetsthat are sold or purchased.

 

Gains or losses that result fromthese transactions are deferred through their realization date. As a result,derivative instruments held by the Company are closely related with the pricesand amounts of real asset positions, and the notional amounts and expirationdates of the derivative instruments cannot exceed those of the actualunderlying transactions. Under these circumstances, for accounting purposes,derivatives are classified as hedging transactions.

 

**Swap and futures agreements**

 

Swap and futures agreements are used primarily to fixthe price of fuel consumption for a determined period or to limit the cost ofdebt contracted at floating interest rates.

 

F-13

----

 

Interest rate swaps are used to limit the effect ofinterest rate increases on any floating rate debt. The differential to be paidor received as interest rates change is recorded in interest expense in thestatement of income. Fuel swaps limit the effect of the increases in fuelprices. The differential paid or received as changes in the price of fuel occuris recorded as part of cost of sales. Foreign currency swaps limit the effect of exchange rate changes onfuture cash flow obligations denominated in foreign currencies. Thedifferential to be paid or received as exchange rates change is included aspart of the cost of the asset for which the swap was obtained.  As of December 31, 2002 and 2001, there wereno outstanding swap or future agreements.

 

**Investment in common stock of parent company**

 

At December 31, 2002 and 2001,the Company held 31,734,189 and 28,946,434 shares in trust, respectively,representing 4.9% and 4.2% respectively, of GMEXICO’s capital stock. Theseshares are valued at the lower of cost or market value and are intended forsale to non-unionized employees and to workers of subsidiaries and operatingand affiliated companies that directly or indirectly are part of GMEXICO.  Sales are at the approximate fair value ofthe shares at the date of sale and the employees pay for such shares overperiods extending to a maximum of eight years on an interest-free basis.  In 2001, 191,055 shares, were sold toemployees. During 2002 no shares were sold to employees.

 

**Employee benefit obligations**

 

In accordance with Mexican LaborLaw and the Company’s collective bargaining agreements, a liability resultsfrom voluntary separations of employees who have worked for a company for arequired number of years. In addition, in accordance with the Federal LaborLaw, companies have obligations resulting from indemnities and senioritypremiums payable to employees terminated under certain circumstances.

 

The Company records theliabilities from seniority premiums and voluntary separations as they accrue,in accordance with actuarial computations based on the projected unit creditmethod, using real interest rates.

 

Mexcananea provides medical and hospital services toall active and retired unionized employees and the members of their familiesthrough a subsidiary (Hospital del Ronquillo, S. de R.L. de C.V.). Mexcananearecorded the liability for post-retirement medical benefits in accordance withactuarial calculations based on the projected unit credit method, using realinterest rates.

 

When there is a significantreduction in personnel due to the restructuring of the labor force or theclosing of a plant, the corresponding indemnity costs, net of the correspondingreduction in the projected benefit obligation and the related items to beamortized, are charged to results.

 

Accordingly, a liability is beingaccrued, which at present value will cover the obligation for benefitsprojected to the estimated retirement date of the Company’s employees.  Indemnity payments are charged to results inthe period in which they become payable.

 

The Company plan assets relatedto voluntary separations and seniority premiums consist of investments inMexican government treasury certificates (40%) and various equity securities oflarge Mexican companies (60%).  Themarket value of securities of Mexican companies is to varying degrees volatileand may be affected by economic and market conditions in other emerging marketcountries.

 

**Income tax, tax on assets and employee profit sharing**

 

TheCompany determines and records its income tax, tax on assets and employeeprofit sharing in accordance with the tax legislation and revised Bulletin D-4,“Tratamiento Contable del Impuesto Sobre la Renta, del Impuesto al Activo y laParticipación de los Trabajadores en las Utilidades” (Accounting for IncomeTax, Tax on Assets and Employee Profit Sharing), which requires that deferredtax assets and liabilities be recorded for all temporary differences betweenthe accounting and tax bases of assets and liabilities.

 

Thebalance of deferred income tax and deferred tax on assets is determined usingthe liability method, which takes into account all temporary differencesbetween the accounting and tax bases of assets and liabilities.  Deferred employee profit sharing iscalculated considering only those temporary differences that arise from thereconciliation between the accounting (loss) income for the year and the basisfor employee profit sharing that are expected to reverse within a defined period.

 

F-14

----

 

Thebalance of deferred taxes is comprised of monetary and non-monetary items,based on the temporary differences from which it is derived.  The balance is classified as a non-current,regardless of when the temporary differences are expected to reverse.

 

Thedeferred tax provision for the year to be included in the results of operationsis determined by comparing the deferred tax balance at end of the year to thebalance at the beginning of the year, excluding from both balances anytemporary differences that are recorded directly in stockholders’ equity.  The deferred taxes related to such temporarydifferences are recorded in the same stockholder’s equity account.  The initial effect of the application ofthis new bulletin as of January 1, 2000 was recorded in stockholders’ equity inthe initial effect of deferred income taxes account.

 

**Revenue recognition**

 

Silver and gold are sold under monthly contracts or on a spot salebasis.  Most of the Company’s copper issold as refined metal under annual contracts or on a spot sale basis.

 

The balance of the Company’s copper production is sold in the form ofconcentrates under contracts with terms of one to three years.

 

Revenue from sales of copper concentrate is recorded in the month theproduct is delivered to customers based on prices determined in accordance withterms of the related sales contracts.  Forthose sales of copper  products whereincustomers are given the option to select a monthly average provided by theLondon Metals Exchange (“LME”) or the Commodity Exchange, Inc. (“COMEX”) priceranging between one and three months subsequent to shipment, revenue isrecorded at a provisional price at the time of shipment, based on LME or COMEXspot prices for copper sales.  The provisionally priced sales are adjustedto reflect spot prices at the end of each month until a final adjustment ismade to the price of the shipments upon settlement with customers pursuant tothe terms of the contract.

 

**Net comprehensive financing cost (income)**

 

The net comprehensive financing cost includes all financial revenues andexpenses, such as interest, exchange gains or losses and gains or losses onmonetary position as earned or incurred.

 

Transactions in currencies other than the Mexican peso are recorded atthe exchange rate as of the date of the transaction, and the assets andliabilities in foreign currency are adjusted to the exchange rate as of themost recent year end, affecting income as part of the integral result offinancing.

 

**Earnings (loss) per share**

 

Earnings (loss) per share have been computed for each period by dividingincome (loss) of the majority interest, by the weighted average number ofshares outstanding.

 

**Comprehensive income (loss)**

 

Comprehensive income (loss) is comprised of the consolidated net income(loss) for the period plus any gains or losses that according to Mexican GAAPare presented directly in stockholders’ equity, such as the gain or loss fromholding nonmonetary assets and the additional liability for employee benefitobligations.

 

**5.      CASH ANDTEMPORARY INVESTMENTS:**

 

Cash and temporaryinvestments are comprised as follows:

 
|                   |   | **2002** |    | **2001** |   |
|------------------------|--------|----------|---------|----------|--------|
|                   |   |     |    |     |   |
| Cash                   |   | Ps.      | 279,546 |     | Ps.    | 41,646 |   |
| Temporary  investments |   | 6,310    |    | 49,621   |   |
|                   |   | Ps.      | 285,856 |     | Ps.    | 91,267 |   |

 

F-15

----

 

**6.     INVENTORIES:**

 

Inventories wereas follows:

 
|                                               |   | **2002**  |      | **2001**  |   |
|----------------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                               |   |      |      |      |   |
| Copper                                             |   | Ps.       | 618,963   |      | Ps.    | 657,577 |   |
| Silver                                             |   | 328,504   |      | 354,670   |   |
| Lead                                               |   | 75,650    |      | 64,311    |   |
| Zinc                                               |   | 135,892   |      | 136,856   |   |
| Gold                                               |   | 58,393    |      | 33,818    |   |
| Copper concentrates                                |   | 8,468     |      | 184,362   |   |
| Zinc concentrates                                  |   | 20,220    |      | 12,179    |   |
| Lead concentrates                                  |   | 4,692     |      | 4,783     |   |
| Molybdenum concentrates                            |   | 1,083     |      | 324       |   |
| Molybdenum trioxide                                |   | 536       |      | 681       |   |
| Quick lime                                         |   | 13,209    |      | 7,367     |   |
| Coal and coke                                      |   | 11,455    |      | 10,885    |   |
| Sulfuric acid                                      |   | 278       |      | 12,222    |   |
| By products                                        |   | 83,534    |      | 13,033    |   |
| Materials and supplies                             |   | 1,063,102 |      | 1,234,462 |   |
| Merchandise in transit                             |   | 28,047    |      | 17,022    |   |
| Advances to suppliers                              |   | 7,137     |      | 9,692     |   |
|                                               |   | 2,459,163 |      | 2,754,244 |   |
| Less-                                              |   |      |      |      |   |
| Restated cost pending refining or production costs |   | (313,688  | )         | (332,657  | )      |
| Allowance for obsolescence                         |   | (57,907   | )         | (55,732   | )      |
|                                               |   | Ps.       | 2,087,568 |      | Ps.    | 2,365,855 |   |
|                                                    |        |           |           |           |        |  |  |  |

 

**7.     PROPERTY, PLANTAND EQUIPMENT:**

 

Property, plantand equipment were as follows:

 
|                            |   | **2002**    |       | **2001**    |   |
|---------------------------------|--------|-------------|------------|-------------|--------|
|                            |   |        |       |        |   |
| Mining  concessions and land    |   | Ps.         | 2,173,934  |        | Ps.    | 2,239,058 |   |
| Buildings  and improvements     |   | 13,436,906  |       | 13,086,500  |   |
| Automobiles  and trucks         |   | 448,430     |       | 550,648     |   |
| Mobile  equipment               |   | 8,249,411   |       | 9,066,932   |   |
| Processing  equipment      |   | 28,451,845  |       | 27,388,301  |   |
|                            |   | 52,760,526  |       | 52,331,439  |   |
| Less-  Accumulated depreciation |   | (24,751,723 | )          | (23,281,970 | )      |
|                            |   | 28,008,803  |       | 29,049,469  |   |
| Construction-in-progress        |   | 690,847     |       | 1,318,924   |   |
|                            |   | Ps.         | 28,699,650 |        | Ps.    | 30,368,393 |   |
|                                 |        |             |            |             |        |  |  |  |

 

The average annualdepreciation rates were as follows:

 
|                        |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
|                        |   |     |   |     |   |     |   |
| Mining  concessions         |   | 4.9      | %      | 5.8      | %      | 4.0      | %      |
| Buildings  and improvements |   | 3.2      | %      | 2.8      | %      | 2.2      | %      |
| Automobiles  and trucks     |   | 5.7      | %      | 6.0      | %      | 6.0      | %      |
| Mobile  equipment           |   | 4.0      | %      | 4.1      | %      | 4.1      | %      |
| Processing  equipment  |   | 3.6      | %      | 3.7      | %      | 3.9      | %      |

 

F-16

----

 

**8.     DEFERRED CHARGES:**

 

Deferred chargesincluded the following:

 
|                                             |   | **2002**  |            | **2001**  |   |
|--------------------------------------------------|--------|-----------|-----------------|-----------|--------|
|                                             |   |      |            |      |   |
| Stripping  costs                                 |   | Ps.       | 922,869         |      | Ps.    | 789,788 |   |
| Leachable  material                              |   | 919,125   |            | 532,020   |   |
| Preoperating  expenses                           |   | 4,814     |            | 164,542   |   |
| Mining  development cost                         |   | 391,584   |            | 640,062   |   |
| Debt  issuance costs                             |   | 64,039    |            | 137,807   |   |
| Intangible  asset arising from employee benefits |   | 41,625    |            | 48,598    |   |
| Other                                            |   | 86,158    |            | 20,494    |   |
|                                             |   | 2,430,214 |            | 2,333,311 |   |
| Less:  Accumulated amortization and depletion    |   | (332,193  | )               | (311,893  | )      |
|                                             |   | Ps.       |  2,098,021 |      | Ps.    | 2,021,418 |   |

 

During the years endedDecember 31, 2002, 2001 and 2000, the application of deferred strippingaccounting resulted in a decrease in cost of sales and depreciation reported inthe statements of operations of Ps.98,805, Ps.208,910 and Ps.572,430,respectively. Deferred stripping costs will not be fully amortized until thecessation of operations of the mines currently operated by the Company.

 

Based on the amortizationcosts incurred in the most recent three years related to intangible assetssubject to amortization, the Company estimates that amortization costs for suchintangible assets will amount to Ps.127,793 in each at the following fiveyears.

 

**9.     NOTES ANDINTEREST PAYABLE:**

 

As discussed inNote 1, the Company’s financial results were significantly affected by thedecline in the market prices of its main products.  As a result of this situation, during 2002 and 2001, the Companyfailed on several occasions to comply with certain of the terms of itsfinancial indebtedness.  During thefourth quarter of 2001, the Company began the debt renegotiation process, andon December 4, 2002, signed a term sheet with the holders of its Secured ExportNotes (the “SEN Holders”) and its bank lenders, in which the terms andconditions of the restructured debt were described.

 

On April 29, 2003,the Company entered into definitive agreements by and among the Company, itsholding company, Minera México, S.A. de C.V., certain of its subsidiaries, asguarantors, the SEN Holders, its bank lenders, HSBC Bank, as collateral agentfor the SEN Holders, Bank of America, as the administrative agent of the Banks,and the Bank of New York, as trustee of the Secured Export Notes. The mostsignificant of these agreements was the Common Agreement.

 

The subsidiaryguarantors of the restructured debt are listed below:

 

Grupo Minero México, S.A. de C.V.

Minera México, S.A. de C.V.

Industrial Minera México, S.A. de C.V.

Minera Mexico Internacional Inc.

Mexicana de Cobre, S.A. de C.V.

Minerales Metálicos del Norte, S.A.

Mexicana de Cananea, S.A. de C.V.

Mexicana del Arco, S.A. de C.V.

Minerales y Minas Mexicanas, S.A. de C.V.

Compañía de Terrenos e Inversiones de San Luis Potosí, S.C. porAcciones, S.A.

México Compañía Inmobiliaria, S.A.

Proyecciones Urbanísticas  S.de R.L. de C.V.

 

Pursuant to therestructuring agreement, the SEN Holders and bank lenders are divided into twoseries (Series A and Series B), with amortization periods from June 25, 2004,to March 30, 2007. The original and restructured indebtedness, their respectiveamounts and interest rates are detailed below (as of December 31, 2002 and2001, Libor was 1.38% and 1.88%, respectively):

 

F-17

----

 
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   | **Original  amount in  thousands of  U.S. dollars** |             |   |         |
|--------|--------|-----------------------------------------------|--------|--------------------------------------|--------|---------------------|--------|-------------------|--------|------------------------------------------|------------------------------------|------------------------------------|--------|-----------------------------------------------------|------------------|--------|--------------|
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                | **Restructured** |   |
|   |   |                                          |   |                                 |   | **Expiration date** |   | **Interest rate** |   |                                     | **Amount in thousands of dollars** |                               |   |                                                |
|   |   | **Debt**                                      |   | **Characteristics**                  |   | **Original**        |   | **Restructured**  |   | **Original**                             |                               | **Restructured**                   |   |                                                | **Series A**     |   | **Series B** |   | **Total** |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| A)     |   | The  Bank of New York (Agent)                 |   | Series  C, D, E secured export notes |   | 1998 to 2011        |   | 2004 to 2007      |   | 9.80%, 10.26%,  11.18 and  Libor + 2.39% |                               | 11.01%,  11.18% and  Libor + 3.75% |   | $                                                   | 473,231          |   | $            | 145,205 |   | $ | 328,026 |   | $ | 473,231 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| B)     |   | Bank  of America (Agent)                      |   | Syndicated  term loan.               |   | 2001 to 2003        |   | 2004 to 2007      |   | Libor + 0.90%                            |                               | Libor + 3.75%                      |   | 104,000                                             |             | 31,911 |         | 72,089 |   | 104,000 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| C)     |   | Bank  of America (Agent)                      |   | Down  payment agreement              |   | 2003 to 2006        |   | 2004 to 2007      |   | Libor + 1.86%                            |                               | Libor + 3.75%                      |   | 7,694                                               |             | 2,361  |         | 5,333 |   | 7,694 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| D)     |   | Bank  of America and Export-Import Bank       |   | Export  related loan agreement       |   | 2001 to 2007        |   | 2004 to 2007      |   | Libor + 0.1%                             |                               | Libor + 3.75%                      |   | 36,747                                              |             | 11,275 |         | 25,472 |   | 36,747 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| E)     |   | Bank  of Nova Scotia Bank                     |   | Term  credit facility                |   | 2004                |   | 2004 to2007       |   | Libor + 2.25%                            |                               | Libor + 3.75%                      |   | 102,237                                             |             | 31,370 |         | 70,867 |   | 102,237 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| F)     |   | Banco Nacional de Comercio Exterior           |   | Revolving  credit                    |   | 2007                |   | 2004 to 2007      |   | Libor + 1.59%                            |                               | Libor + 3.75%                      |   | 50,000                                              |             | 15,342 |         | 34,658 |   | 50,000 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| G)     |   | Bank  of America (Agent)                      |   | Letter  of credit facility           |   | 2003                |   | 2004 to 2007      |   | Prime + 2%                               |                               | Libor + 3.75%                      |   | 39,826                                              |             | 12,220 |         | 27,606 |   | 39,826 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| H)     |   | Export  Development Corporation               |   | Loan  agreement                      |   | 1997 to 2005        |   | 2004 to 2007      |   | Libor + 0.75%                            |                               | Libor + 0.625%  and Libor +  3.75% |   | 39,580                                              |             | 12,145 |         | 27,435 |   | 39,580 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| I)     |   | Societé  Generale and Import-Export Bank |   | Export  loan                         |   | 1998 to 2004        |   | 2004 to 2007      |   | Libor + 0.25%                            |                               | Libor + 3.75                       |   | 7,628                                               |             | 2,341  |         | 5,287 |   | 7,628 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   |                                                |             |   |         |   |   |   |   |
| J)     |   | Enron,  Siemens Financial and West LB AG      |   | Non  payment liability               |   | 2002                |   | 2004 to 2007      |   | Libor + 2.625%                           |                               | Libor + 3.75%                      |   | 20,000                                              |             | 6,137  |         | 13,863 |   | 20,000 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   | 880,943                                             |             | $      | 270,307      |   | $ | 610,636 |   | 880,943 |   |
| K)     |   | Yankee  Bond                                  |   | Long  term debt                      |   | 2008 and 2028       |   | Not  restructured |   | 8.25% and  9.25%                         |                               | Not  restructured                  |   | 441,245                                             |             |   |         |   |   | 441,245 |   |
|   |   | Bank  of America                              |   | Capitalized  interest                |   | 2003                |   |              |   |                                     |                               |                               |   | 514                                                 |             |   |         |   |   | 514 |   |
|   |   |                                          |   | Accrued  interest                    |   | 2003                |   |              |   |                                     |                               |                               |   | 17,582                                              |             |   |         |   |   | 17,582 |   |
|   |   |                                          |   |                                 |   |                |   |              |   |                                     |                               |                               |   | $                                                   | 1,340,284        |   |         |   |   |   | $ | 1,340,284 |   |

 

Interest paid by theCompany during 2002 and 2001 was $94,374 and $104,914, respectively.

 

The original andrestructured maturities of the company’s debt are as follows:

 
|            |   | **2002**                     |      | **2001**                |   |
|-----------------|--------|------------------------------|-----------|-------------------------|--------|
|            |   | **Original Debt**            |      | **Restructured Debt**   |   |   |   |
| **Expired in:** |   | **Thousands of  US Dollars** |      | **Thousands of  Pesos** |   | **Thousands of  US Dollars** |   | **Thousands of  Pesos** |   | **Thousands of  US Dollars** |   | **Thousands of  Pesos** |   |
|            |   |                         |      |                    |   |   |   |   |   |   |   |   |   |
| 2002            |   |                         |      |                    |   |   |   |   |   | $ | 167,417 |   | Ps. | 1,622,582 |   |
|            |   |                         |      |                    |   |   |   |   |   |   |   |   |   |
| 2003            |   | $                            | 434,266   |                    | Ps.    | 4,478,364 |   | $ | 18,096 |   | Ps. | 186,615 |   | 271,083 |   | 2,627,295 |   |
|            |   |                         |      |                    |   |   |   |   |   |   |   |   |   |
| 2004            |   | 240,544                      |      | 2,480,614               |   | 55,307 |   | 570,353 |   | 247,626 |   | 2,399,949 |   |
| 2005            |   | 44,382                       |      | 457,691                 |   | 94,000 |   | 969,375 |   | 46,188 |   | 447,649 |   |
| 2006            |   | 22,113                       |      | 228,041                 |   | 94,000 |   | 969,375 |   | 22,927 |   | 222,207 |   |
| 2007            |   | 107,632                      |      | 1,109,955               |   | 637,636 |   | 6,575,621 |   | 87,021 |   | 797,916 |   |
| 2008 and after  |   | 491,347                      |      | 5,067,013               |   | 441,245 |   | 4,550,339 |   | 493,662 |   | 4,829,974 |   |
|            |   |                         |      |                    |   |   |   |   |   |   |   |   |   |
|            |   | 906,018                      |      | 9,343,314               |   | 1,322,188 |   | 13,635,063 |   | 1,168,507 |   | 11,324,990 |   |
|            |   |                         |      |                    |   |   |   |   |   |   |   |   |   |
|            |   | $                            | 1,340,284 |                    | Ps.    | 13,821,678 |   | $ | 1,340,284 |   | Ps. | 13,821,678 |   | $ | 1,335,924 |   | Ps. | 12,947,572 |   |

 

F-18

----

 

Notes and interestpayable at December 31, 2002, prior to the Company’s restructuring, consistedmainly of the following:

 

a                      GMM madeprivate placements of Secured Export Notes, of which $525 million were placedon November 28, 1995, and $80 million were placed on October 28, 1996.  In August 1997, the Company issued a newSeries “E” Secured Export Note. At December 31, 2002 and 2001, secured exportnotes were divided into the following three series:

** **

|       |   | **Thousands  of U.S.  Dollars** |                |          |          |
|------------|--------|---------------------------------|---------------------|---------------|---------------|
|       |   |                            | **Payment  Period** |          |
| **Series** |   |                            | **From**            |          | **To**        |   |
|       |   |                            |                |          |          |   |   |
| C          |   | $                               | 189,642             |          | June 25, 2004 |   | March 30, 2007 |   |
| D          |   | 76,467                          |                | June 25, 2004 |          | March 30, 2007 |   |
| E          |   | 207,122                         |                | June 25, 2004 |          | March 30, 2007 |   |
|       |   |                            |                |          |          |   |   |
|       |   | $                               | 473,231             |          |          |   |   |   |

 

The Secured ExportNotes were managed through a trust agreement with the Bank of New York, astrustee and note issuer, GMM as trustor, the SEN Holders as trust beneficiariesand the HSBC Bank USA, as collateral agent. Such notes were guaranteed bycollections on export sales of certain of GMM’s subsidiaries, which were to bedeposited initially into cash collateral accounts.   The subsidiaries could access accrued collection amounts everyfive days, provided there was no default. Furthermore, in addition to thecollateral accounts, in the event of default, a reserve account containing thedebt service amount was created to guarantee interest payments over thefollowing three months. At December 31, 2002, the outstanding balance underthis facility was $473,231.

 

The senior noteswere guaranteed by Mexcobre, Mexcananea, Immsa, Mimenosa and MMI.

 

b                     On October 6,1998, GMM obtained a long-term syndicated loan from Bank of America for $130million. Mexcobre, Immsa, Mexcananea, Mimenosa and MMI previously guaranteedthe loan. At December 31, 2002, the outstanding balance under this facility was$104,514  (which includes $514 ofaccrued interest payable).

 

c                      On February6, 2001, and in order to finance the portion not covered by the loans mentionedin the next paragraph, for the acquisition of foreign goods, GMM entered intoan unsecured loan agreement with Bank of America, amounting to $11 million. Theguarantors of this loan were Mexcobre, Immsa, Mexcananea, Mimenosa and MMI. AtDecember 31, 2002, the outstanding balance under this facility was $7,694.

 

d                     On February6, 2001, GMM entered into two export-related loan agreements with Bank ofAmerica and Export-Import Bank of the United States, amounting to $49.9 and$21.4 million, respectively, to finance the acquisition of foreign capitalgoods, equipment and spare parts.  Todate, the Company has drawn $22.3 million from the first loan and the entireavailable balance of the second one. The guarantors of these loans were Mexcobre, Immsa, Mexcananea, Mimenosaand MMM.  At December 31, 2002, $36,747remained outstanding under this loan.

 

e                      On August30, 2001, GMM entered into a long-term loan agreement with The Bank of NovaScotia amounting to $100 million. The guarantors of this loan were Mexcobre,Immsa, Mexcananea, Mimenosa and MMI in addition to the corporate guarantee ofGMEXICO. At December 31, 2002, $102,237 remained outstanding under this loan.

 

f                        On August10, 2001, GMM entered into a revolving credit agreement with Banco Nacional deComercio Exterior, S.N.C., amounting to $50 million. The guarantors of thisloan were Mexcobre, Immsa, Mexcananea and Mimenosa. At December 31, 2002,$50,000 remained outstanding under this loan.

 

F-19

----

 

g                     On June 9,2000, GMM signed an additional syndicated loan with Bank of America as agent,amounting $100 million through a revolving loan consisting of a $58 million and$42 million for letters of credit. The loan was guaranteed by Mexcobre, Immsa,Mexcananea, Mimenosa and MMI. On September 10, 2001, the revolving creditbalance was prepaid, and only the letters of credit remained outstanding atDecember 31, 2002 in the amount of $39,826. These letters were divided intothree dispositions of $21,000, $11,326 and $7,500 and bear annual interest atPrime plus 2%.

 

h                     On November18, 1996, GMM entered into a long-term loan agreement with Export DevelopmentCorporation (“EDC”) for $49.9 million loan to finance the expansion of thecopper smelter owned by Mexcobre. Mexcobre, Immsa, Mexcananea, Mimenosa and MMIguaranteed this loan.

 

On June 15, 1998,GMM entered into a long-term credit agreement with EDC for up to $75 million tofinance the purchase of Canadian-made assets for the construction of a copperand precious metals refining plant owned by Mexcobre, and other assets for thesubsidiaries. Approximately $60.7 million has been drawn under this creditagreement. Mexcobre, Immsa, Mexcananea, Mimenosa and MMI guaranteed this loan.At December 31, 2002, $39,580 remained outstanding under this loan.

 

i                         On August21, 1996, GMM entered into a long-term export finance credit agreement withSociété Générale and the Export-Import Bank of the United States, for $21.3million. Mexcobre and Immsa guaranteed this loan. At December 31, 2002 $7,628remained outstanding under this loan.

 

j                         In 2002,Siemens Financial Services GMBH and West LBAG, commenced legal action againstMexcobre for failure to pay under an agreement related to the purchase of anelectrolyte cathode for $20 million. A restructuring agreement was subsequentlyreached and this amount is now included in long-term debt.

 

k                      On March 31,1998, GMM issued Guaranteed Senior Notes, divided as follows:

 

| **Series** |   | **Thousands  Of U.S. Dollars** |    | **Interest  Rate** |   | **Payment  Due** |           |
|------------|--------|--------------------------------|---------|--------------------|--------|------------------|----------------|
|       |   |                           |    |               |   |             |           |
| A          |   | $                              | 375,000 |               | 8.25   | %                | April  1, 2008 |   |
| B          |   | 125,000                        |    | 9.25               | %      | April  1, 2008   |           |
|       |   |                           |    |               |   |             |           |
|       |   | $                              | 500,000 |               |   |             |           |   |

 

The senior notes areguaranteed by Mexcobre, Mexcananea, Immsa, Mimenosa and MMI.  During 2000, the Company prepaid $58,755 ofprincipal on such notes before scheduled maturity.  At December 31, 2002 and 2001, the remaining balance due underthese notes was $441,245. The Company did not default under the terms of theGuaranteed Senior Notes and therefore they were not restructured.

 

As previously discussed,as a result of the restructuring, certain additional subsidiaries of theCompany now guarantee the restructured indebtedness.

 

The following are generaldescriptions of certain covenants contained in the Company’s restructuredindebtedness:

 

(i)                  The GMM’s netconsolidated working capital, defined as current assets less currentliabilities, may not be lower than $170 million in 2003, $180 million in 2004,and $190 million as of 2005 and thereafter.

 

(ii)               The interestcoverage ratio, defined as earnings before interest, taxes, depreciation andamortization (EBITDA), less capital expenses (Capex) and capitalized stripping,divided by interest expense for the last twelve months, may not be less than0.6 in 2004, 1.5 in 2005, and 1.8 as of 2006.

 

(iii)            The debt coverageratio defined as EBITDA less Capex and capitalized stripping divided byscheduled principal and interest payment for the last twelve months, may not beless than 0.4 in 2004, 0.7 in 2005, and 0.8 as of 2006.

 

(iv)           As of the quarter endedMarch 31, 2004, the total debt to net capitalization ratio, defined as totaldebt divided by net capitalization (excluding accounts receivable from MM), maynot be less than 2.3 in 2004, 2.6 in 2005 and 2.6 as of 2006.

 

F-20

----

 

In addition, upon theoccurrence of any of the following, GMM will be required to prepay ourrestructured indebtedness as described:

(i)                  In the event ofexcess cash flow, the surplus amount will be distributed to the holders of therestructured debt.

 

(ii)               When the prices ofcopper, zinc and silver exceed $0.88 per pound, $0.485 per pound, and $5.00 perounce, respectively, the Company will pay an amount equal to 75% of the excesscash flow generated by increased metal prices, which will be applied to theamortization of Series B.

 

(iii)            When the net surplusworking capital of GMM exceeds $240 million, 100% of the surplus will be usedto amortize Series B.

 

(iv)           When the value of salesof non-strategic land not utilized for operating purposes exceeds $81 million,100% of the surplus will be used to amortize Series B.

 

**SecurityAgreement**

 

To secure GMM’sobligations under the Common Agreement, a security agreement (the “SecurityAgreement”) was executed by and among GMM, Immsa, Mexcobre, Mimenosa,Mexcananea, Mexarco, Minerales y Minas Mexicanas, S.A. de C.V., Americas MiningCorporation, Minera México International, Compañía de Terrenos e Inversiones deSan Luis Potosí, S.A. and Mexci, each as a guarantor, and GE Capital Bank,S.A., Institución de Banca Múltiple and GE Capital Grupo Financiero, astrustees.

 

Pursuant to the terms ofthe Security Agreement, the guarantors pledged certain assets to the trustees,including, but not limited to, the common stock of GMM and Minera Mexico, and GMMpledged substantially all of its assets.

 

**10.       EMPLOYEERETIREMENT BENEFITS:**

 

The employee benefitobligation relates to pensions, voluntary retirement, seniority premiums andmedical services at retirement.  Theamount resulting from the actuarial calculations prepared by external actuariesis being funded using the projected unit credit method.  Below is a breakdown of this obligation asof December 31, 2002 and 2001:

** **
|                                      |   | **2002**                                        |    | **2001**                              |   |
|-------------------------------------------|--------|-------------------------------------------------|---------|---------------------------------------|--------|
|                                      |   | **Pensions  and  Seniority  Premiums  Reserve** |    | **Postretirement  Medical  Services** |   | **Total** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   |
|                                      |   |                                            |    |                                  |   |   |   |   |   |   |   |   |   |
| Projected  benefit obligation (PBO)       |   | Ps.                                             | 369,266 |                                  | Ps.    | 499,082 |   | Ps. | 868,348 |   | Ps. | 354,834 |   | Ps. | 491,134 |   | Ps. | 845,968 |   |
| Trust funds                               |   | (89,230                                         | )       | —                                |   | (89,230 | ) | (101,543 | ) | — |   | (101,543 | ) |
| Unamortized  transition asset (liability) |   | 31,249                                          |    | (294,719                              | )      | (263,470 | ) | 33,839 |   | (309,455 | ) | (275,616 | ) |
| Past service  costs to be amortized       |   | (36,719                                         | )       | —                                |   | (36,719 | ) | (39,344 | ) | — |   | (39,344 | ) |
| Variances in  assumptions                 |   | (193,802                                        | )       | (115,027                              | )      | (308,829 | ) | (196,483 | ) | (116,024 | ) | (312,507 | ) |
| Additional  liability                     |   | 182,517                                         |    | —                                |   | 182,517 |   | 149,984 |   | — |   | 149,984 |   |
| Net projected  liability                  |   | Ps.                                             | 263,281 |                                  | Ps.    | 89,336 |   | Ps. | 352,617 |   | Ps. | 201,287 |   | Ps. | 65,655 |   | Ps. | 266,942 |   |

 

As of December 31, 2002and 2001, the amounts deposited in the trust funds and the reserves created forpension, voluntary retirement seniority premium payments and postretirementmedical services were equal to the accumulated benefit obligation (equivalent toPBO without projecting wages and salaries through retirement date) ofPs.378,045 and Ps.321,177, respectively, except for some subsidiaries wherethese funds and reserves exceeded the accumulated benefit obligation as ofDecember 31, 2002 and 2001 by Ps.3,450 and Ps.93,317, respectively.

 

F-21

----

 

The cost of employeebenefits for each year is as follows:

 
|                                         |   | **2002**                                        |   | **2001**                              |   | **2000**  |   |
|----------------------------------------------|--------|-------------------------------------------------|--------|---------------------------------------|--------|-----------|--------|
|                                         |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   |
|                                         |   |                                            |   |                                  |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost for the year                    |   | Ps.                                             | 23,928 |                                  | Ps.    | 4,702     |   | Ps. | 28,630 |   | Ps. | 25,614 |   | Ps. | 3,888 |   | Ps. | 29,502 |   | Ps. | 22,671 |   | Ps. | 4,050 |   | Ps. | 26,721 |   |
| Amortization of past service cost            |   | 4,735                                           |   | —                                |   | 4,735     |   | 4,022 |   | — |   | 4,022 |   | 4,735 |   | — |   | 4,735 |   |
| Amortization of transition (asset) liability |   | 2,534                                           |   | 14,736                                |   | 17,270    |   | (917 | ) | 14,736 |   | 13,819 |   | (2,480 | ) | 14,736 |   | 12,256 |   |
| Amortization of variances in assumptions     |   | 6,942                                           |   | 3,346                                 |   | 10,288    |   | 1,249 |   | — |   | 1,249 |   | (903 | ) | — |   | (903 | ) |
| Financial cost for the year                  |   | 14,116                                          |   | 23,646                                |   | 37,762    |   | 17,170 |   | 19,805 |   | 36,975 |   | 15,009 |   | 19,280 |   | 34,289 |   |
| Effect for employee reduction                |   | (1,086                                          | )      | —                                |   | (1,086    | )      | — |   | — |   | — |   | — |   | — |   | — |   |
| Actual return on plan assets                 |   | (7,289                                          | )      | —                                |   | (7,289    | )      | (21,636 | ) | — |   | (21,636 | ) | (23,016 | ) | — |   | (23,016 | ) |
| Net cost for the year                        |   | Ps.                                             | 43,880 |                                  | Ps.    | 46,430    |   | Ps. | 90,310 |   | Ps. | 25,502 |   | Ps. | 38,429 |   | Ps. | 63,931 |   | Ps. | 16,016 |   | Ps. | 38,066 |   | Ps. | 54,082 |   |
|                                              |        |                                                 |        |                                       |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The interest rates usedin the actuarial projections are:

 
|                           |   | **2002**                                        |   | **2001**                              |   | **2000**                                        |   |
|--------------------------------|--------|-------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------------|--------|
|                           |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   |
|                           |   |                                            |   |                                  |   |                                            |   |   |   |   |   |   |   |
| Interest rate                  |   | 5.0                                             | %      | 5.0                                   | %      | 5.0                                             | %      | 5.0 | % | 5.0 | % | 5.0 | % |
| Salary increase  rate          |   | 1.5                                             | %      | —                                |   | 1.5                                             | %      | — |   | 1.5 | % | — |   |
| Investment return  rate        |   | 7.0                                             | %      | —                                |   | 7.0                                             | %      | — |   | 7.0 | % | — |   |
| Medical expense  increase rate |   | —                                          |   | 1.3                                   | %      | —                                          |   | 1.3 | % | — |   | 1.3 | % |

 

The changes in projectedbenefit obligations were as follows:

 
|                   |   | **2002**                                        |    | **2001**                              |   |
|------------------------|--------|-------------------------------------------------|---------|---------------------------------------|--------|
|                   |   | **Pensions  and  Seniority  Premiums  Reserve** |    | **Postretirement  Medical  Services** |   | **Total** |   | **Pensions  and  Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   |
|                   |   |                                            |    |                                  |   |   |   |   |   |   |   |   |   |
| Beginning  balance     |   | Ps.                                             | 201,288 |                                  | Ps.    | 65,654 |   | Ps. | 266,942 |   | Ps. | 110,552 |   | Ps. | 59,643 |   | Ps. | 170,195 |   |
| Provision of the  year |   | 43,880                                          |    | 46,430                                |   | 90,310 |   | 25,502 |   | 38,428 |   | 63,930 |   |
| Payments               |   | (14,389                                         | )       | (22,748                               | )      | (37,137 | ) | (14,143 | ) | (32,417 | ) | (46,560 | ) |
| Additional  liability- |   |                                            |    |                                  |   |   |   |   |   |   |   |   |   |
| Charge to  capital     |   | 42,461                                          |    | —                                |   | 42,461 |   | 84,647 |   | — |   | 84,647 |   |
| Intangible             |   | (9,959                                          | )       | —                                |   | (9,959 | ) | (5,270 | ) | — |   | (5,270 | ) |
| Ending balance         |   | Ps.                                             | 263,281 |                                  | Ps.    | 89,336 |   | Ps. | 352,617 |   | Ps. | 201,288 |   | Ps. | 65,654 |   | Ps. | 266,942 |   |

 

F-22

----

 

The changes in trustfunds were as follows:

 

|                   |   | **2002** |    | **2001** |   |
|------------------------|--------|----------|---------|----------|--------|
|                   |   |     |    |     |   |
| Beginning  balance     |   | Ps.      | 101,543 |     | Ps.    | 307,049 |   |
| Inflation              |   | (5,476   | )       | (12,941  | )      |
| Payments               |   | (4,714   | )       | (4,214   | )      |
| Return  on investments |   | 7,289    |    | 21,636   |   |
| Losses  on investments |   | (9,412   | )       | (209,987 | )      |
|                   |   | Ps.      | 89,230  |     | Ps.    | 101,543 |   |

 

The funds established arecomprised of investments in Federal Government treasury certificates (40%) andinvestments in shares of major Mexican companies (60%).  The fair value of investments in shares isvolatile and may be affected by the economic and market conditions prevailingboth in Mexico and in other emerging market economies.

 

The amortization periodfor unamortized items is as follows:

 

|                         |   |                     |   | **Post  Retirement  Medical  Services** |   |
|------------------------------|--------|--------------------------|--------|-----------------------------------------|--------|
|                         |   | **Remaining  Years**     |   |                                    |
| **Non-Unionized  Personnel** |   | **Unionized  Personnel** |
|                         |   |                     |   |                                    |   |   |   |
| Transition  asset            |   | 10.9                     |   | 10.1                                    |   | — |   |
| Transition  liability        |   | —                   |   | —                                  |   | 21.00 |   |
| Variances in  assumptions    |   | 11.2                     |   | 8.9                                     |   | 20.00 |   |

 

**11.****       STOCKHOLDERS’EQUITY:**

 

**Capital stock**

 

At December 31, 2002 and2001 the Company has 650,161,917 common shares Class I Series “A” shares,representing the fixed capital with no par value and fully paid andsubscribed.  Variable stock is composedof Class II shares with no par value. As of December 31, 2002 the Company has not issued Class II stock,therefore the Company has only Class “A” shares outstanding.

 

The Series “A”, orMexican shares, must represent at least 66% of total capital stock.

 

Stockholdersequity, except restated paid-in capital and tax retained earnings, will besubject a 35% dividend tax. Beginning January 1, 2003, such rate will bereduced by one percentage point each year until reaching 32% in 2005. Anyincome taxes paid on such distribution on or after January 1, 2002, may becredited against future income tax payable by the Company in the three fiscalyears following the fiscal year of such payment.

 

Based on the 2003 taxreform, tax paid on the distribution of stockholders’ equity, as discussed inthe preceding paragraph, can only be credited against income tax for the yearin which taxes are paid on dividends, and in the immediately following twofiscal years.

 

**Retained earnings**

 

As of 2002, thewithholding tax on dividends is eliminated. In addition, if earnings for whichno corporate tax has been paid are distributed, the tax must be paid upondistribution of the dividends. Consequently, the Company must keep a record ofearnings subject to each tax rate. As of December 31, 2002, earnings for whichcorporate taxes have been paid amounted to approximately Ps.9,501,453.

 

F-23

----

 

The Stockholders’ Ordinary General Meeting of December30, 2002, agreed to grant an in kind dividend consisting of 662,467,000 sharesof the common stock of Mexicana de Cobre, S.A. de C.V.  This in kind dividend is based on thecarrying amount of the Company ́s investment in shares of Mexicana de Cobre,S.A. de C.V. at December 31, 2002.The first payment of this dividend was madein the amount of 90,622,066 Mexcobre shares (0.13938 multipled by 650,161,917,the number of shares of common stock) on May 15, 2003. The second installmentof this dividend was cancelled as a result of the merger with and into MM.

 

The annual net income of the each Company is subjectto the legal requirement that 5% thereof be transferred to a legal reserve eachyear until the reserve equals 20% of capital stock.  At December 31, 2002 and 2001, the nominal amount of this reserveamounted to Ps.103,864 and is included in retained earnings.  This reserve may not be distributed tostockholders during the existence of the Company, except in the form of a stockdividend.

 

**12.    FOREIGNCURRENCY POSITION AND TRANSACTIONS:**

 

The consolidated foreign currency position, excludinginventories of primary metals, as of December 31, 2002 and 2001, expressed inthousands of U.S. dollars, was as follows:

 
|                                     |   | **2002**  |       | **2001**  |   |
|------------------------------------------|--------|-----------|------------|-----------|--------|
| Assets-                                  |   |      |       |      |   |
| Current                                  |   | $         | 441,104    |      | $      | 353,700 |   |
| Non-current                              |   | 877,364   |       | 873,730   |   |
|                                     |   | 1,318,468 |       | 1,227,430 |   |
| Liabilities-                             |   |      |       |      |   |
| Current                                  |   | 327,307   |       | 312,463   |   |
| Non-current                              |   | 1,190,583 |       | 1,209,263 |   |
|                                     |   | 1,517,890 |       | 1,521,726 |   |
| Net foreign  currency liability position |   | $         | (199,422   | )         | $      | (294,296 | ) |
|                                     |   |      |       |      |   |
| Equivalent in Mexican pesos              |   | Ps.       | (2,056,539 | )         | Ps.    | (3,034,928 | ) |

 

The main transactions during 2002,2001and 2000 inforeign currency, not including transactions within the group, eliminated inconsolidation, expressed in thousands of U.S. dollars, were as follows:

 
|                              |   | **2002** |    | **2001** |   | **2000** |   |
|-----------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                              |   |     |    |     |   |     |   |
| Sales                             |   | $        | 761,249 |     | $      | 898,030  |   | $ | 847,705 |   |
| Inventory  purchases              |   | $        | 75,618  |     | $      | 147,003  |   | $ | 286,117 |   |
| Machinery and  equipment purchase |   | $        | 3,335   |     | $      | 16,688   |   | $ | — |   |
| Interest expense                  |   | $        | 94,769  |     | $      | 109,059  |   | $ | 129,058 |   |
| Interest income                   |   | $        | 623     |     | $      | 1,533    |   | $ | 22,560 |   |
| Technical  assistance             |   | $        | 4,311   |     | $      | 7,281    |   | $ | 2,454 |   |
| Insurance  coverage               |   | $        | 335     |     | $      | 8,061    |   | $ | — |   |

 

Sales prices of almost all of the Company’s productsare determined by international market quotations in U.S. dollars.

 

At December 31, 2002, 2001 and 2000, the Mexicanpeso/U.S. dollar exchange rates were Ps.10.3125, Ps.9.1692 and Ps.9.5997,respectively.

 

As of June 13, 2003, the date on which these financialstatements were issued, the unaudited foreign exchange position was similar tothat at December 31, 2002, and the exchange rate was Ps.10.5775 Mexican pesosper U.S. dollar.

 

F-24

----

 

**13.    BALANCESAND TRANSACTIONS WITH RELATED PARTIES:**

 

Balances with the Company’s holding company andaffiliated companies that are under common control of GMEXICO are as follows:

 
|                                                                    |   | **2002** |      | **2001** |     |
|-------------------------------------------------------------------------|--------|----------|-----------|----------|----------|
| Accounts receivable-                                                    |   |     | * *  |     | * * |
| Minera Mexico, S.A. de C.V. (formerly Grupo  México, S.A. de C.V.) |   | Ps.      | 2,356,106 |     | Ps.      | 2,472,856 |   |
| Asarco, Inc. (affiliated company)                                       |   | —   |      | 14,970   |     |
| GFM Servicios  Administrativos, S.A. de C.V. (affiliated company)       |   | —   |      | 1,583    |     |
| Intermodal México, S.A. de C.V. (affiliated  company)              |   | 23,220   |      | —   |     |
| Other                                                                   |   | 90       |      | 2,183    |     |
|                                                                    |   | Ps.      | 2,379,416 |     | Ps.      | 2,491,592 |   |
|                                                                    |   |     |      |     |     |
| Accounts  payable-                                                      |   |     |      |     |     |
| Asarco, Inc.                                                            |   | Ps.      | 10,025    |     | Ps.      | — |   |
| Southern Peru  Copper Corporation (affiliated company).                 |   | —   |      | 4,997    |     |
| Ferrocarril Mexicano, S.A. de C.V. (affiliated  company)                |   | —   |      | 77,188   |     |
| Grupo Ferroviario Mexicano, S.A. de C.V.  (affiliated company)          |   | 109,568  |      | 19,604   |     |
| Grupo México, S.A. de C.V. (holding company)                       |   | 213,198  |      | —   |     |
| Other                                                                   |   | 936      |      | 21,327   |     |
|                                                                    |   | Ps.      | 333,727   |     | Ps.      | 123,116 |   |

 

The balance due from holding companies are as follows:

 
| Minera México, S.A. de C.V. |   | Ps.    | 8,976,605 |   | Ps.    | 7,723,349 |   |
|----------------------------------|--------|--------|-----------|--------|--------|-----------|--------|
| Grupo México, S.A. de C.V.  |   | 71,217 |      | — |   |
|                             |   | Ps.    | 9,047,822 |   | Ps.    | 7,723,349 |   |

 

As of December 31, 2002, the Company has a loan fromMM for $442,363 at an annual interest rate of 5.50% with a maturity in 2005,which is included in non-current liabilities in the accompanying balancesheets.

 

The Company also had related party transactions withother entities controlled by its majority owners including the mining refining,lease of office space, as well as railway and air transportation andconstruction services.  Thesetransactions amounted to approximately Ps.189.3, Ps.129.7 and Ps.252.5 millionin 2002, 2001 and 2000, respectively.

 

MM has no productive operations, and its cash flowsdepend on dividends received from GMM or from new capital contributions fromits shareholders.

 

**14.    TAXENVIRONMENT:**

 

**Income and asset tax regulations**

 

The principal items which affect the determination oftaxable income for Mexican companies are the differences between the book andtax bases of cost of sales and certain differences in the recognition of thecomprehensive effect of inflation for book and tax purposes.

 

Through December 31, 2001, the relevant Mexican incometax (“ISR”) rate was 35% with the obligation to pay 30% currently and theoption of deferring payment of the remaining 5% until profits aredistributed.  The new tax law enactedJanuary 1, 2002, eliminated the option to defer the 5% portion of the incometax payment and reduces the 35% tax rate by one percentage point each yearuntil reaching 32% in 2005.  Thededuction for employee statutory profit-sharing (PTU) and the obligation towithhold taxes on dividends paid to individuals or foreign residents was alsoeliminated.

 

F-25

----

 

The relevant Mexican asset tax (“IMPAC”) is calculatedby applying 1.8% to the Company’s asset position, as defined in the law, and ispayable only to the extent that it exceeds ISR payable for the same period. Ifin any year IMPAC exceeds the ISR payable, the IMPAC payment for such excessmay be reduced by the amount by which ISR exceeded IMPAC in the three precedingyears and any required payment of IMPAC is creditable against the excess of ISRover IMPAC of the following ten years.

 

Income taxes, asset taxes and employee profit sharinghave been determined on the basis of each individual company. MM (holdingcompany of GMM) and its subsidiaries obtained authorization to file aconsolidated income and asset tax return. The resulting benefit is recognized in MM.  Each year the Company and each of its subsidiaries pay to MM theamount of tax, if any, it would have paid had it filed a separate tax return.In the event MM reduces its consolidated tax liability through the use of taxloss carryforwards or other tax benefits of the Company or any of itssubsidiaries, MM is obligated to reimburse the Company or such subsidiary forsuch tax benefit at the time that it otherwise would have reduced the taxpayable by the Company or such subsidiary.

 

Income for purposes of PTU does not consider theinflationary component or the unrealized exchange gains or losses.  Depreciation is based on historical ratherthan restated values.  The PTU rate is10% of income for PTU purposes.

#####  

##### Provision for income taxes

 

The income tax is as follows:

 
|     |   | **2002** |     | **2001** |   | **2000** |   |
|----------|--------|----------|----------|----------|--------|----------|--------|
|     |   |     |     |     |   |     |   |
| Current  |   | Ps.      | 192,591  |     | Ps.    | 132,966  |   | Ps. | 252,606 |   |
| Deferred |   | (609,429 | )        | (514,549 | )      | 54,027   |   |
|     |   | Ps.      | (416,838 | )        | Ps.    | (381,583 | )      | Ps. | 306,633 |   |

 

In accordance with Mexican GAAP, the following itemsrepresent the principal differences between Mexican income tax computed at thestatutory tax rate and the Company’s provision for income tax in each year:

 
|                                                          |   | **2002** |     | **2001** |   | **2000** |   |
|---------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
|                                                          |   |     |     |     |   |     |   |   |   |   |   |   |   |
| Income taxes at  statutory rate                               |   | Ps       | (556,927 | )        | 35     | %        | Ps     | (420,991 | ) | 35 | % | Ps | 237,807 |   | 35 | % |
| Increase  (decrease) due to:                                  |   |     |     |     |   |     |   |   |   |   |   |   |   |
| Results from  monetary position                               |   | (60,909  | )        | 3.8      | %      | (39,064  | )      | 3.2 | % | (111,829 | ) | (16.5 | )% |
| Inflationary  component, net                                  |   | 17,738   |     | (1.1     | )%     | 21,239   |   | (1.8 | )% | 116,170 |   | 17.2 | % |
| Non-deductible  items                                         |   | 43,171   |     | (2.7     | )%     | 39,791   |   | (3.3 | )% | 64,036 |   | 9.4 | % |
| Effect of change  in statutory tax rate on deferred ISR       |   | (736,677 | )        | 46       | %      | —   |   | — |   | — |   | — |   |
| Effect of the  legal change of the tax cost of sale of shares |   | 790,510  |     | (50      | )%     | —   |   | — |   | — |   | — |   |
| Other                                                         |   | 86,256   |     | (5.4     | )%     | 17,442   |   | (1.4 | )% | 449 |   | 0.0 | % |
| Tax at effective  tax rate                                    |   | Ps       | (416,838 | )        | 25.60  | %        | Ps     | (381,583 | ) | 31.7 | % | Ps | 306,633 |   | 45.1 | % |

 

**Deferred taxes**

 

The tax effect of the temporary differences thatgenerated a deferred tax liability in accordance with Bulletin D-4 is asfollows:

 
|                                        |   | **2002**  |    | **2001**         |   |
|---------------------------------------------|--------|-----------|---------|------------------|--------|
|                                        |   | **GMM**   |    | **Subsidiaries** |   | **Total** |   | **GMM** |   | **Subsidiaries** |   | **Total** |   |
|                                        |   |      |    |             |   |   |   |   |   |   |   |   |   |
| Marketable  securities                      |   | Ps.       | (34,226 | )                | Ps.    | — |   | Ps. | (34,226 | ) | Ps. | (34,262 | ) | Ps. | — |   | Ps. | (34,262 | ) |
| Allowance for  doubtful accounts receivable |   | —    |    | (18,796          | )      | (18,796 | ) | — |   | (16,464 | ) | (16,464 | ) |
| Inventories                                 |   | 497       |    | 633,483          |   | 633,980 |   | 541 |   | 751,409 |   | 751,950 |   |
| Prepaid expenses                            |   | —    |    | 537              |   | 537 |   | — |   | 2,727 |   | 2,727 |   |
| Property and  equipment                     |   | (99       | )       | 4,848,919        |   | 4,848,820 |   | 517 |   | 5,270,847 |   | 5,271,364 |   |
| Deferred charges                            |   | 13,872    |    | 650,681          |   | 664,553 |   | 24,144 |   | 671,666 |   | 695,810 |   |
| Shares in trust                             |   | (168,092  | )       | —           |   | (168,092 | ) | (155,011 | ) | — |   | (155,011 | ) |
| Goodwill                                    |   | 3,633,819 |    | —           |   | 3,633,819 |   | 3,220,523 |   | — |   | 3,220,523 |   |
| Accounts payable  and accrued liabilities   |   | —    |    | (296,646         | )      | (296,646 | ) | — |   | (148,407 | ) | (148,407 | ) |
|                                             |        |           |         |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-26

----

 
|                                                                              |   | **2002**  |      | **2001**         |   |
|-----------------------------------------------------------------------------------|--------|-----------|-----------|------------------|--------|
|                                                                              |   | **GMM**   |      | **Subsidiaries** |   | **Total** |   | **GMM** |   | **Subsidiaries** |   | **Total** |   |
|                                                                              |   |      |      |             |   |   |   |   |   |   |   |   |   |
| Voluntary  retirement, pension, seniority premium and medical service liabilities |   | —    |      | (63,485          | )      | (63,485 | ) | — |   | (51,616 | ) | (51,616 | ) |
| Tax loss  carryforwards                                                           |   | (706,414  | )         | (1,575,903       | )      | (2,282,317 | ) | (284,994 | ) | (1,373,119 | ) | (1,658,113 | ) |
| Recoverable  asset taxes                                                          |   | (348,433  | )         | (432,252         | )      | (780,685 | ) | (214,939 | ) | (880,917 | ) | (1,095,856 | ) |
|                                                                              |   | 2,390,924 |      | 3,746,538        |   | 6,137,462 |   | 2,556,519 |   | 4,226,126 |   | 6,782,645 |   |
| Valuation  allowance for tax loss carryforwards and recoverable asset taxes       |   | —    |      | 744,157          |   | 744,157 |   | — |   | 742,807 |   | 742,807 |   |
| Total                                                                             |   | Ps.       | 2,390,924 |             | Ps.    | 4,490,695 |   | Ps. | 6,881,619 |   | Ps. | 2,556,519 |   | Ps. | 4,968,933 |   | Ps. | 7,525,452 |   |
|                                                                                   |        |           |           |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2002, Mexcananea has tax losscarryforwards and recoverable asset taxes of Ps.1,210,052 and Ps.320,639respectively, that the Company’s management believes do not have a highprobability of being realized. Accordingly, a valuation allowance of Ps.744,157has been recorded.

 

**Tax loss carryforwards andrecoverable asset taxes**

 

At December 31, 2002, the Company has tax losscarryforwards for income tax purposes and recoverable asset taxes, which willbe indexed for inflation through the year in which they are applied orrecovered in the following restated amounts:

 
| **Expiration  Date** |   | **Tax Loss  Carryforwards** |      | **Recoverable  Asset Taxes** |   |
|----------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                 |   |                        |      |                         |   |
| 2003                 |   | Ps.                         | —    |                         | Ps.    | 12,523 |   |
| 2004                 |   | 276,520                     |      | 94,870                       |   |
| 2007                 |   | 660,201                     |      | 100,278                      |   |
| 2008                 |   | 1,295,573                   |      | 105,804                      |   |
| 2009                 |   | 1,632,152                   |      | 108,303                      |   |
| 2010                 |   | 1,347,544                   |      | 120,126                      |   |
| 2011                 |   | 207,342                     |      | 78,834                       |   |
| 2012                 |   | 1,293,365                   |      | 159,947                      |   |
|                 |   | Ps.                         | 6,712.697 |                         | Ps.    | 780,685 |   |

 

**15.    FINANCIALINSTRUMENTS:**

 

The carrying amounts of cash and cash equivalents andmarketable securities approximate fair value because of the short-term maturityof these instruments.

 

As of December 31, 2002, the book value of therestructured Guaranteed Senior Notes, or Yankee bond, amounted $441.2 millionand the fair value of this debt is $269.9 million.  The Company does not anticipate any significant refinancingactivity that could result in the settlement of any long-term debt at fairvalue.  The fair value of debt,including the Guaranteed Senior Notes, as of December 31, 2002 amounted toapproximately $1,150.9 million, based on the quoted market price for the sameor similar issues, as well as on the present value of future cash flows.

 

As of December 31, 2002 and 2001 there are nooutstanding derivatives other than the derivatives embedded in provisionallypriced sales contracts, the effects of which were immaterial as of both yearends.

 

**16.    SEGMENTINFORMATION**:

 

The Company applies SFAS No. 131, “Disclosure aboutSegments of an Enterprise and Related Information” for U.S. GAAP purposes.  GMM is a major mining company that comprisesthree major business segments involved in vertically integrated copper andpolymetallic operations, including mining, concentrating, electrowinning,smelting and refining, marketing and sales and related activities. GMM is aholding company, and all of its operations are conducted through subsidiariesthat are grouped into the Mexcobre Unit, the Immsa Unit and the Cananea Unit.

 

The Mexcobre and the Cananea Units operate largeopen-pit copper mines in northwestern Mexico. The Mexcobre Unit consists of anopen-pit copper mine, concentrator, electrowinning process, smelter, copperrefinery, copper rod and precious metals refinery. The Cananea Unit operationsinclude an open-pit copper mine, concentrator and electrowinning process. TheImmsa Unit operations include seven underground polymetallic mines situated incentral and northern Mexico, where zinc, copper, lead, silver and gold aremined and concentrated, plus processing facilities that consist of a coppersmelter and zinc  refinery.

 

F-27

----

 

The accompanying tablepresents the results of operations and other financial information for eachoperating segment:

 
| **2002**                                                     |   | **Mexcobre** |       | **Mexcananea** |   | **Immsa** |   | **Other****Subsidiaries** |      | **Consolidation****Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------|--------|--------------|------------|----------------|--------|-----------|--------|---------------------------|-----------|-----------------------------------|--------|------------------|--------|
|                                                         |   |         |       |           |   |      |   |                      |      |                              |   |             |   |
| Net sales                                                    |   | Ps.          | 4,232,932  |           | Ps.    | 2,347,723 |   | Ps.                       | 2,646,805 |                              | Ps.    | 2,412,257        |   | Ps. | (4,286,885 | ) | Ps. | 7,352,832 |   |
| Cost of sales                                                |   | 3,606,295    |       | 1,805,652      |   | 2,512,940 |   | 2,448,828                 |      | (4,284,385                        | )      | 6,089,330        |   |
| Administrative expenses                                      |   | 92,127       |       | 85,394         |   | 110,359   |   | 284,135                   |      | (168,653                          | )      | 403,362          |   |
| Depreciation, amortization and depletion                     |   | 962,919      |       | 412,309        |   | 375,571   |   | 3,559                     |      | (10,429                           | )      | 1,743,929        |   |
| Operating income (loss)                                      |   | Ps.          | (428,409   | )              | Ps.    | 44,368    |   | Ps.                       | (352,065  | )                                 | Ps.    | (324,265         | )      | Ps. | 176,582 |   | Ps. | (883,789 | ) |
| Interest expense                                             |   | Ps.          | 3,011      |           | Ps.    | 37,700    |   | Ps.                       | 14,974    |                              | Ps.    | 1,286,444        |   | Ps. | (249,706 | ) | Ps. | 1,092,423 |   |
| Interest income                                              |   | Ps.          | (283,258   | )              | Ps.    | (623      | )      | Ps.                       | —    |                              | Ps.    | (456,908         | )      | Ps. | 249,706 |   | Ps. | (491,083 | ) |
| Loss before income tax and statutory employee profit sharing |   | Ps.          | 279,728    |           | Ps.    | (26,894   | )      | Ps.                       | (375,495  | )                                 | Ps.    | (1,454,404       | )      | Ps. | (14,155 | ) | Ps. | (1,591,220 | ) |
| Provisions for income tax and employee profit sharing        |   | Ps.          | (131,124   | )              | Ps.    | (53,788   | )      | Ps.                       | (176,192  | )                                 | Ps.    | 137,123          |   | Ps. | -(188,958 | ) | Ps. | (412,939 | ) |
| Consolidated net income (loss)                               |   | Ps.          | 410,852    |           | Ps.    | 26,894    |   | Ps.                       | (183,635  | )                                 | Ps.    | (1,229,279       | )      | Ps. | (203,113 | ) | Ps. | (1,178,281 | ) |
| Capital expenditures (1)                                     |   | Ps.          | 24,920     |           | Ps.    | (47,869   | )      | Ps.                       | 30,054    |                              | Ps.    | 1,710            |   | Ps. | -(217,654 | ) | Ps. | (208,839 | ) |
| Total assets                                                 |   | Ps.          | 24,934,292 |           | Ps.    | 9,613,321 |   | Ps.                       | 7,146,876 |                              | Ps.    | 31,612,842       |   | Ps. | (25,957,345 | ) | Ps. | 47,349,986 |   |

 

 
| **2001**                                                     |   | **Mexcobre** |       | **Mexcananea** |   | **Immsa** |   | **Other****Subsidiaries** |      | **Consolidation****Eliminations** |   | **Consolidated** | ** ** |
|--------------------------------------------------------------|--------|--------------|------------|----------------|--------|-----------|--------|---------------------------|-----------|-----------------------------------|--------|------------------|------------|
|                                                         |   |         |       |           |   |      |   |                      |      |                              |   |             |       |
| Net sales                                                    |   | Ps.          | 5,573,337  |           | Ps.    | 1,878,083 |   | Ps.                       | 3,359,423 |                              | Ps.    | 3,074,686        |       | Ps. | (4,430,417 | ) | Ps. | 9,455,112 |   |
| Cost of sales                                                |   | 4,686,719    |       | 1,589,993      |   | 3,639,552 |   | 3,033,823                 |      | (4,508,042                        | )      | 8,442,045        |       |
| Administrative expenses                                      |   | 94,117       |       | 95,063         |   | 144,997   |   | 236,803                   |      | (182,899                          | )      | 388,081          |       |
| Depreciation, amortization and depletion                     |   | 975,508      |       | 348,564        |   | 405,413   |   | 1,566                     |      | (10,673                           | )      | 1,720,378        |       |
| Operating income (loss)                                      |   | Ps.          | (183,007   | )              | Ps.    | (155,537  | )      | Ps.                       | (830,539  | )                                 | Ps.    | (197,506         | )          | Ps. | 271,197 |   | Ps. | (1,095,392 | ) |
| Interest expense                                             |   | Ps.          | 81,946     |           | Ps.    | 46,825    |   | Ps.                       | 31,415    |                              | Ps.    | 1,423,361        |       | Ps. | (301,457 | ) | Ps. | 1,282,090 |   |
| Interest income                                              |   | Ps.          | (375,657   | )              | Ps.    | (1,188    | )      | Ps.                       | —    |                              | Ps.    | (744,996         | )          | Ps. | 301,457 |   | Ps. | (820,384 | ) |
| Loss before income tax and statutory employee profit sharing |   | Ps.          | (278,990   | )              | Ps.    | (174,476  | )      | Ps.                       | (771,054  | )                                 | Ps.    | (34,356          | )          | Ps. | 56,043 |   | Ps. | (1,202,833 | ) |
| Provisions for income tax and   employee profit sharing |   | Ps.          | (62,339    | )              | Ps.    | (10,551   | )      | Ps.                       | (237,371  | )                                 | Ps.    | (858,984         | )          | Ps. | 840,479 |   | Ps. | (328,766 | ) |
| Consolidated net income (loss)                               |   | Ps.          | (216,651   | )              | Ps.    | (163,925  | )      | Ps.                       | (541,683  | )                                 | Ps.    | (848,330         | )          | Ps. | 896,522 |   | Ps. | (874,067 | ) |
| Capital expenditures (1)                                     |   | Ps.          | (137,062   | )              | Ps.    | (278,080  | )      | Ps.                       | (57,456   | )                                 | Ps.    | (25,874          | )          | Ps. | 110,344 |   | Ps. | (388,128 | ) |
| Total assets                                                 |   | Ps.          | 24,417,919 |           | Ps.    | 9,248,656 |   | Ps.                       | 6,975,590 |                              | Ps.    | 43,936,037       |       | Ps. | (37,399,387 | ) | Ps. | 47,178,815 |   |

 

F-28

----

 
| **2000**                                                     |   | **Mexcobre** |       | **Mexcananea** |   | **Immsa** |   | **Other****Subsidiaries** |      | **Consolidation****Eliminations** |   | **Consolidated** | ** ** |
|--------------------------------------------------------------|--------|--------------|------------|----------------|--------|-----------|--------|---------------------------|-----------|-----------------------------------|--------|------------------|------------|
|                                                         |   |         |       |           |   |      |   |                      |      |                              |   |             |       |
| Net sales                                                    |   | Ps.          | 7,014,638  |           | Ps.    | 2,630,655 |   | Ps.                       | 4,467,695 |                              | Ps.    | 5,502,230        |       | Ps. | (6,697,208 | ) | Ps. | 12,918,010 |   |
| Cost of sales                                                |   | 5,474,608    |       | 1,981,093      |   | 3,704,824 |   | 5,526,863                 |      | (6,682,474                        | )      | 10,004,914       |       |
| Administrative expenses                                      |   | 155,144      |       | 93,422         |   | 178,684   |   | 240,790                   |      | (229,820                          | )      | 438,220          |       |
| Depreciation, amortization and depletion                     |   | 944,150      |       | 307,902        |   | 445,166   |   | 294                       |      | (24,343                           | )      | 1,673,169        |       |
| Operating income (loss)                                      |   | Ps.          | 440,736    |           | Ps.    | 248,238   |   | Ps.                       | 139,021   |                              | Ps.    | (265,717         | )          | Ps. | 239,439 |   | Ps. | 801,707 |   |
| Interest expense                                             |   | Ps.          | 13,600     |           | Ps.    | 12,776    |   | Ps.                       | —    |                              | Ps.    | 1,584,561        |       | Ps. | (261,982 | ) | Ps. | 1,348,955 |   |
| Interest income                                              |   | Ps.          | (287,139   | )              | Ps.    | (2,079    | )      | Ps.                       | (13,841   | )                                 | Ps.    | (981,869         | )          | Ps. | 262,092 |   | Ps. | (1,022,836 | ) |
| Loss before income tax and statutory employee profit sharing |   | Ps.          | 464,527    |           | Ps.    | 233,485   |   | Ps.                       | 89,000    |                              | Ps.    | 207,870          |       | Ps. | (315,440 | ) | Ps. | 679,442 |   |
| Provisions for income tax employee profit sharing            |   | Ps.          | 268,013    |           | Ps.    | 99,667    |   | Ps.                       | 56,143    |                              | Ps.    | (10,617          | )          | Ps. | — |   | Ps. | 413,206 |   |
| Consolidated net income (loss)                               |   | Ps.          | 196,516    |           | Ps.    | 133,815   |   | Ps.                       | 32,855    |                              | Ps.    | 218,484          |       | Ps. | (315,434 | ) | Ps. | 266,236 |   |
| Capital expenditures (1)                                     |   | Ps.          | (249,978   | )              | Ps.    | (516,332  | )      | Ps.                       | (240,037  | )                                 | Ps.    | (38              | )          | Ps. | 38 |   | Ps. | (1,006,347 | ) |
| Total assets                                                 |   | Ps.          | 24,700,004 |           | Ps.    | 8,825,021 |   | Ps.                       | 7,874,165 |                              | Ps.    | 44,754,019       |       | Ps. | (37,055,439 | ) | Ps. | 49,097,770 |   |

 

----

(1)        These includes additions to fixed assetsand deferred charges.

 

The Company had net salesto customers from the following regions:

 
|                             |   | **2002**  |      | **2001**  |   | **2000**  |   |
|----------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
|                             |   |      |      |      |   |      |   |
| United  States                   |   | Ps.       | 2,889,663 |      | Ps.    | 5,313,774 |   | Ps. | 7,184,221 |   |
| México                      |   | 4,213,173 |      | 3,753,680 |   | 4,908,842 |   |
| Europe                           |   | 154,409   |      | 208,012   |   | 456,523   |   |
| Asia                             |   | —    |      | 66,186    |   | 64,074    |   |
| Latin  America, excluding Mexico |   | 95,587    |      | 113,460   |   | 304,350   |   |
| Total  net sales                 |   | Ps.       | 7,352,832 |      | Ps.    | 9,455,112 |   | Ps. | 12,918,010 |   |

 

**17.    CONTINGENCIES:**

 

***Legal Proceedings***

 

*Ejido*

 

In July 1991, the agricultural community of Pilares deNacozari Ejido (the “Ejido”) commenced an action (“Amparo”) in the firstfederal district court in Sonora, Mexico against the Ministry of AgrarianReform (the “Ministry”), alleging that the expropriation of approximately 1,500hectares of land on which certain of Mexcobre’s facilities are currentlylocated, which land is adjacent to the land where the mine is located, was improper.  Mexcobre was not named as a defendant in theAmparo, although it was included as an interested third party due to itsownership of the land. Mexcobre bought the land in question in 1976 from theBanco Nacional de Obras y Servicios Publicos, which had previously acquired itas a beneficiary of the expropriation by the Ministry in 1973.

 

The claim alleged by the Ejido states that theMinistry failed to notify one of three legal representatives of the Ejido ofthe expropriation.  In 1994, the MexicanDistrict Court Judge of Hermosillo granted the Amparo ruling the expropriationby the Ministry legally void and in 1997 made a second ruling ordering theMinistry to return the land.  As aresult of the second ruling, Mexcobre filed an ancillary action alleging theimpossibility of returning the land.

 

There has been no final resolution of this matter, butthe Mexican District Court Judge of Hermosillo before whom this matter ispresently docketed has twice before issued a ruling stating that it is impossibleto return the land as a means of restitution. A third and final ruling from the Mexican District Court Judge ofHermosillo is expected soon.  Mexcobreand we believe that if the Ejido requests indemnity instead of a return of theland, Mexcobre’s financial responsibility with respect to such compensationwould not be material.

* *

*CoremiRoyalties*

 

When Mexcobre originally received mining concessionsrelated to its “La Caridad” unit in 1970, it was forced to pay royalties to theCouncil of Mineral Resources (“Coremi”). When the Mining Law came into effect in 1992, however, said obligationwas abrogated.  Coremi, the Mexican****Superintendentof Mining and the Mexican Secretary of Economy, however, has interpreted in adifferent way from us and Mexcobre the inception of the Mining Law and, in1995, Mexcobre and Coremi initiated series of legal actions that are stillpending.  In August 2002, Coremi filedwith the Third Federal District Judge in Civil Matter, certain civilianactions, demanding from Mexcobre the payment of royalties due since 1997.  Mexcobre answered and denied Coremi’s claimsin October 2002.  We and Mexcobrebelieve that any such payment related to this matter would not be material tous or to Mexcobre.

 

*LaCaridad - Mining Concessions*

 

Since 1995, the Mexican Superintendent of Mining hasrequested proof from Mexcobre that it satisfied its obligation to pay certain“discovery bonuses” allegedly due in connection with the grant of 13 miningconcessions at La Caridad.  If saidproof is not provided, the Mexican Superintendent of Mining has threatened tocancel Mexcobre’s concessions.  Mexcobrehas challenged these demands by filing a writ before a hierarchically superioradministrative body, in which Mexcobre states its “defenses” against the allegedclaims and by filing an Amparo on May 2, 2003, with the Tenth District FederalJudge in Administrative Matters. Mexcobre believes that its obligation to make the demanded payments wasabrogated when the Mining Law came into effect in November 1992, that theMexican Superintendent of Mining confuses “bonuses” with “royalties” and thatany claims related thereto are without merit.

 

We are involved invarious other legal proceedings incidental to our operations, but we do notbelieve that the final decisions in any such proceedings will, individually orin the aggregate, have a material adverse effect on our financial position andresults of operations.

 

F-29

----

 

**18.    DIFFERENCESBETWEEN MEXICAN AND U.S. GAAP:**

 

The consolidatedfinancial statements of the Company are presented on the basis of Mexican GAAP.Certain accounting practices applied by the Company that conform with MexicanGAAP do not conform with U.S. GAAP.

 

This note presents areconciliation of majority net (loss) income and total stockholders’ equity aspresented under Mexican GAAP to U.S. GAAP. However, this reconciliation to U.S.GAAP does not include the reversal of the restatement of the financialstatements to recognize the effects of inflation as required under Mexican GAAPBulletin B-10, “Recognition of the Effects of Inflation in the FinancialInformation”, as amended. The application of Bulletin B-10 represents acomprehensive measure of the effects of price level changes in the inflationaryMexican economy.

 

The additional principaldifferences between Mexican GAAP and U.S. GAAP are described below, togetherwith an explanation, where appropriate, of the method used in the determinationof the adjustments that affect majority net income (loss) and totalstockholders’ equity.

 

**Cash flow information**

 

Under Mexican GAAP, theCompany presents consolidated statements of changes in financial position inaccordance with Bulletin B-12, which specifies the appropriate presentation ofthe statement of changes in financial position when the financial statementshave been restated in constant Mexican pesos (in accordance with the thirdamendment to Bulletin B-10). Bulletin B-12 identifies the generation andapplication of resources representing differences between beginning and endingfinancial statement balances in constant Mexican pesos. Bulletin B-12 alsorequires that monetary and foreign exchange gains and losses be treated as cashitems in the determination of resources provided by operations.

 

The changes in theconsolidated financial statement balances included in this statement constitutecash flow activity stated in constant Mexican pesos (including monetary andunrealized foreign exchange gains and losses on short-term liabilities, whichare considered cash gains and losses in the constant Mexican peso financialstatements).

 

In accordance withMexican GAAP, the reduction in current and long-term debt due to restatement inconstant Mexican pesos and unrealized exchange gains and losses on short-termliabilities are presented in the consolidated statements of changes infinancial position as a resource used by financing activities and the gain frommonetary position is presented as a component of operating activities. SFAS No.95, “Statement of Cash Flows”, does not provide guidance with respect toinflation adjusted financial statements.

 

The following arestatements of cash flows, in accordance with U.S. GAAP, excluding the effectsof inflation:

 
|                                                                                      |   | **2002**  |    | **2001**  |   | **2000**   |   |
|-------------------------------------------------------------------------------------------|--------|-----------|---------|-----------|--------|------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |      |    |      |   |       |   |
| Consolidated net (loss) income                                                            |   | Ps.       | 156,586 |      | Ps.    | (1,760,902 | )      | Ps. | 106,871 |   |
| Effects of inflation                                                                      |   | (137,207  | )       | (99,859   | )      | (304,632   | )      |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities- |   |      |    |      |   |       |   |
| Depreciation, amortization and depreciation                                               |   | 1,743,929 |    | 1,720,378 |   | 1,673,169  |   |
| Amortization of negative goodwill                                                         |   | (754,061  | )       | (754,061  | )      | (754,041   | )      |
| Amortization of positive goodwill                                                         |   | —    |    | 20,755    |   | 20,755     |   |
| Provision for voluntary retirement, pension, seniority premiums and  medical services     |   | 43,737    |    | (51,763   | )      | 3,768      |   |
| Loss (gain) on sale of property and plant                                                 |   | (3,295    | )  | 40,342    |   | 42,826     |   |
| Gain on sale of investments                                                               |   | —    |    | (33,416   | )      | (26,897    | )      |
| Deferred income taxes and employee profit sharing                                         |   | (906,395  | )       | 1,671,310 |   | 1,011,587  |   |
| Capitalized mine stripping                                                                |   | (98,805   | )       | (208,910  | )      | (572,430   | )      |
| Minority interest                                                                         |   | (10,495   | )       | 43,282    |   | (28,931    | )      |
|                                                                                      |   | 33,994    |    | 587,156   |   | 1,172,045  |   |
| Changes in operating assets and liabilities:                                              |   |      |    |      |   |       |   |
| Notes and accounts receivable                                                             |   | (41,764   | )       | 160,609   |   | 465,584    |   |
| Due from affiliated companies                                                             |   | 1,884,345 |    | (344,700  | )      | —     |   |
| Inventories                                                                               |   | 695,059   |    | 411,702   |   | 427,300    |   |
| Prepaid expenses                                                                          |   | (17,900   | )       | (10,824   | )      | (22,090    | )      |
| Accounts payable and accrued liabilities                                                  |   | 900,568   |    | 710,379   |   | 387,590    |   |
| Unrealized exchange (gain) loss                                                           |   | 466,429   |    | (18,488   | )      | 78,672     |   |
| Accrued interest                                                                          |   | 10,491    |    | (24,211   | )      | (15,214    | )      |
| Due to affiliated companies                                                               |   | 80,662    |    | (143,536  | )      | (1,416,916 | )      |
| Income and asset taxes and employee statutory profit sharing                              |   | (47,725   | )       | (50,139   | )      | (264,306   | )      |
| Net cash provided by operating activities                                                 |   | 3,964,159 |    | 1,277,948 |   | 812,665    |   |
|                                                                                           |        |           |         |           |        |            |        |  |  |  |

 

F-30

----

 
|                                                                            |   | **2002**   |       | **2001** |   | **2000**   |   |
|---------------------------------------------------------------------------------|--------|------------|------------|----------|--------|------------|--------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |       |       |     |   |       |   |
| Proceeds from long-term debt                                                    |   | 152,573    |       | 270,023  |   | 280,303    |   |
| Payments of long-term debt                                                      |   | (762,356   | )          | (438,143 | )      | (20,632    | )      |
| Effect of variation of long-term debt in constant Mexican pesos                 |   | (698,214   | )          | (578,900 | )      | (1,189,875 | )      |
| Due to Grupo México, S.A. de C.V., holding company                         |   | 35,570     |       | 555,441  |   | —     |   |
| Cash retained in collateral accounts                                            |   | (544,140   | )          | (363,852 | )      | —     |   |
| Net cash used in financing activities                                           |   | (1,816,567 | )          | (555,431 | )      | (930,204   | )      |
|                                                                            |   |       |       |     |   |       |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |       |       |     |   |       |   |
| Additions to property and equipment                                             |   | (214,828   | )          | (459,860 | )      | (1,081,678 | )      |
| Net decrease in investments in shares of subsidiaries and associated  companies |   | —     |       | 203      |   | —     |   |
| Net increase in deferred charges, except capitalized stripping                  |   | (364,001   | )          | (413,792 | )      | (182,387   | )      |
| Shares in trust                                                                 |   | (58,988    | )          | (88,152  | )      | 146,236    |   |
| Proceeds from sale of property and equipment                                    |   | 9,287      |       | 32,613   |   | 36,956     |   |
| Purchase of investments                                                         |   | —     |       | (94,967  | )      | (271,092   | )      |
| Payments received on notes receivable from holding companies                    |   | —     |       | 134,670  |   | 894,049    |   |
| Origination of notes receivable from holding companies                          |   | (1,324,473 | )          | —   |   | —     |   |
| Net cash used in investing activities                                           |   | (1,953,003 | )          | (889,285 | )      | (457,916   | )      |
|                                                                            |   |       |       |     |   |       |   |
| Increase (decrease) in cash and cash equivalents                                |   | 194,589    |       | (166,768 | )      | (575,455   | )      |
| Cash and cash equivalents at beginning of year                                  |   | 91,267     |       | 258,035  |   | 833,490    |   |
| Cash and cash equivalents at end of year                                        |   | Ps.        | 285,856    |     | Ps.    | 91,267     |   | Ps. | 258,035 |   |
|                                                                            |   |       |       |     |   |       |   |
| Supplemental disclosure of cash flow information:                               |   |       |       |     |   |       |   |
| Cash paid for interest                                                          |   | Ps.        | 911,549    |     | Ps.    | 1,034,642  |   | Ps. | 1,177,483 |   |
| Cash paid for income and asset taxes                                            |   | Ps.        | 52,056     |     | Ps.    | 131,070    |   | Ps. | 130,221 |   |
| Cash paid for employee statutory profit sharing                                 |   | Ps.        | 49,180     |     | Ps.    | 51,983     |   | Ps. | 123,610 |   |
|                                                                            |   |       |       |     |   |       |   |
| Supplemental schedule of non-cash investing and financing activities:           |   |       |       |     |   |       |   |
| Dividends declared                                                              |   | Ps.        | 13,450,800 |     | Ps.    | —     |   | Ps. | — |   |
| Additional liability for employee benefit obligations                           |   | Ps.        | 41,938     |     | Ps.    | 84,647     |   | Ps. | 18,627 |   |

 

**Deferred income taxes and employeeprofit sharing**

 

As explained in Note 4,beginning in 2000 under Mexican GAAP the revised Bulletin D-4 becameeffective.  The Company follows SFAS No.109, “Accounting for Income Taxes” for U.S. GAAP purposes, which differs fromMexican GAAP as follows:

 

•             UnderMexican GAAP deferred taxes are classified as non-current, while under U.S.GAAP the classification is based when the related temporary differences areexpected to reverse.

 

•             UnderMexican GAAP the effects of inflation on the deferred tax balance generated bymonetary items are recognized in results under monetary position gain orloss.  Under U.S. GAAP the deferred taxbalance is classified as a non-monetary item.

 

•             UnderMexican GAAP deferred employee profit sharing is calculated considering onlythose temporary differences that arise during the year and which are expectedto reverse within a defined period, while under U.S. GAAP the same liabilitymethod as used for deferred income taxes is applied.  Also, for U.S. GAAP purposes, employee profit sharing must beclassified as an operating expense.

 

Since employee profitsharing is calculated based on taxable income after certain adjustments and issubject to the future consequences of temporary differences in the same manneras income taxes, deferred employee profit sharing, which is not recorded underMexican GAAP, must be included in the reconciliation of Mexican to U.S. GAAP.

 

F-31

----

 

 

The tax effect oftemporary differences that generated deferred tax liabilities (assets) underSFAS No. 109 are as follows:

 
|                                                                              |   | **2002**         |      | **2001**           |   |
|-----------------------------------------------------------------------------------|--------|------------------|-----------|--------------------|--------|
|                                                                              |   | **Income Taxes** |      | **Profit Sharing** |   | **Income Taxes** |   | **Profit Sharing** |   |
| Current-                                                                          |   |             |      |               |   |   |   |   |   |
| Marketable securities                                                             |   | Ps.              | (33,249   | )                  | Ps.    | (9,779 | ) | Ps. | (34,262 | ) | Ps. | (9,789 | ) |
| Inventories                                                                       |   | 664,122          |      | 195,330            |   | 751,949 |   | 214,843 |   |
| Non-deductible reserves                                                           |   | (212,797         | )         | (62,585            | )      | (129,719 | ) | (37,063 | ) |
| Unrealized exchange loss                                                          |   | —           |      | (26,011            | )      | — |   | (35,467 | ) |
|                                                                              |   | 418,076          |      | 96,955             |   | 587,968 |   | 132,524 |   |
| Non-current-                                                                      |   |             |      |               |   |   |   |   |   |
| Property and equipment                                                            |   | 5,332,559        |      | 2,393,005          |   | 5,336,953 |   | 2,466,251 |   |
| Unamortized portion of negative goodwill applied to  property and equipment       |   | (512,761         | )         | (150,812           | )      | (792,814 | ) | (226,218 | ) |
| Deferred charges                                                                  |   | 495,136          |      | 145,628            |   | 694,264 |   | 180,561 |   |
| Voluntary retirement, pensions, seniority premium  and medical services liability |   | (119,550         | )         | (35,162            | )      | (93,429 | ) | (26,695 | ) |
| Tax loss carryforwards                                                            |   | (2,311,750       | )         | —             |   | (2,080,543 | ) | — |   |
| Asset taxes                                                                       |   | (780,685         | )         | —             |   | (771,535 | ) | — |   |
|                                                                              |   | 2,102,949        |      | 2,352,659          |   | 2,292,896 |   | 2,240,033 |   |
| Valuation allowance for tax loss carryforwards and  asset taxes                   |   | 1,256,918        |      | 150,812            |   | 3,644,893 |   | 226,218 |   |
|                                                                              |   | 3,359,867        |      | 2,503,471          |   | 5,937,789 |   | 2,620,117 |   |
|                                                                              |   | Ps.              | 3,777,943 |               | Ps.    | 2,600,426 |   | Ps. | 6,525,757 |   | Ps. | 2,752,641 |   |

 

For U.S. GAAP purposes,deferred tax assets are reduced by a valuation allowance if it is more likelythan not that some portion or all of the deferred tax assets will not berealized.

 

The components of theincome tax and profit sharing expense for the years ended December 31, 2002,2001 and 2000 are as follows:

 
|                           |   | **2002**   |     | **2001**  |   | **2000**  |   |
|--------------------------------|--------|------------|----------|-----------|--------|-----------|--------|
| Current-                       |   |       |     |      |   |      |   |
| Income taxes                   |   | Ps.        | 192,591  |      | Ps.    | 17,504    |   | Ps. | 136,883 |   |
| Profit sharing                 |   | 3,899      |     | 52,817    |   | 106,571   |   |
|                           |   | 196,490    |     | 70,321    |   | 243,454   |   |
| Deferred-                      |   |       |     |      |   |      |   |
| Income taxes                   |   | 1,353,843  |     | (794,940  | )      | 701,707   |   |
| Profit sharing                 |   | (152,316   | )        | (160,518  | )      | 231,020   |   |
|                           |   | 1,201,527  |     | (955,458  | )      | 932,727   |   |
| Change in valuation allowance- |   |       |     |      |   |      |   |
| Income taxes                   |   | (2,107,922 | )        | 2,626,768 |   | 78,874    |   |
|                           |   | Ps.        | (709,905 | )         | Ps.    | 1,741,631 |   | Ps. | 1,255,055 |   |

 

##### Negativegoodwill

 

Under Bulletin B-8 ofMexican GAAP, any excess book value of a subsidiary over its purchase price isrecorded as a deferred credit and amortized against income over the period inwhich the new business is integrated, not to exceed five years. For MexicanGAAP purposes, negative goodwill related to the 1989 acquisitions has been fullyamortized.

 

Under U.S. GAAP, negativegoodwill must be first allocated to proportionately reduce the values assignedto non-current assets (generally fixed assets).  For U.S. GAAP purposes, the benefit is recognized through reduceddepreciation over a period of 16 years.

 

F-32

----

 

## **Goodwill**

 

Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) SFAS No. 142, “*Goodwill andOther Intangible Assets*,” which requires that goodwill andintangible assets with indefinite lives no longer be amortized, but insteadtested for impairment at least annually and written-down with a charge tooperations when the carrying amount exceeds the estimated fair value.  The cost of intangible assets withdeterminable useful lives continues to be amortized over the useful lives ofthe assets. In connection with the transition provisions for adopting thisstandard, the Company performed a transitional impairment test and found noimpairment and reviewed the classification of its intangible assets. The mostrecent test, which was conducted in December of 2002, revealed no impairment ofgoodwill.

 

A reconciliation of previously reported U.S. GAAP – basisnet (loss) income to the amounts adjusted to exclude goodwill, net of therelated income tax effect, is as follows:

 
|                                   |   | **2002** |     | **2001** |   | **2000**   |   |
|----------------------------------------|--------|----------|----------|----------|--------|------------|--------|
|                                   |   |     |     |     |   |       |   |
| Reported majority net (loss) income    |   | Ps.      | (618,230 | )        | Ps.    | (1,760,902 | )      | Ps. | 106,871 |   |
| Add: Goodwill amortization, net of tax |   | —   |     | 20,755   |   | 20,755     |   |
| Adjusted majority net (loss) income    |   | Ps.      | (618,230 | )        | Ps.    | (1,740,147 | )      | Ps. | 127,626 |   |

 

Basic and diluted U.S. GAAP per share amounts are asfollows:

 
|                                   |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                   |   |     |   |     |   |     |   |
| Reported net (loss) income             |   | Ps.      | (0.95  | )        | Ps.    | (2.71    | )      | Ps. | 0.16 |   |
| Add: Goodwill amortization, net of tax |   | —   |   | 0.03     |   | 0.03     |   |
| Adjusted net (loss) income             |   | Ps.      | (0.95  | )        | Ps.    | (2.68    | )      | Ps. | 0.19 |   |

 

The changes in thecarrying amount of goodwill, all of which relates to the Company ́s Mexcananeasegment, for the years ended December 31, 2002, 2001 and 2000 are as follows:

 
| Balance as of January  1, 1999   |   | Ps.     | 165,840 |   |
|----------------------------------|--------|---------|---------|--------|
| Goodwill acquired                |   | —  |    |
| Amortization                     |   | (20,755 | )       |
| Balance as of December  31, 2000 |   | 145,085 |    |
| Goodwill acquired                |   | —  |    |
| Amortization                     |   | (20,755 | )       |
| Balance as of December 31, 2001  |   | 124,330 |    |
| Goodwill acquired                |   | —  |    |
| Balance as of December 31, 2002  |   | Ps.     | 124,330 |   |

 

Under Mexican GAAP, goodwill continues to be amortizedover its estimated useful life.

 

##### Cost ofpension plans and other employee benefits

 

TheCompany has prepared a study of pension costs under Mexican GAAP (see Note 13).Under Mexican GAAP, the requirement to record liabilities for employee benefitsusing actuarial computations is the same as required by SFAS No. 87,“Employers’ Accounting for Pensions”, except for the initial year ofapplication, which generates a differences in the unamortized prior servicecosts and in the amortization expense.

 

The Company provideshealth care benefits for the retired and active employees of Mexcananea as wellas their family members through a subsidiary of Mexcananea (Hospital delRonquillo, S. de R.L. de C.V.).

 

The Company applies SFASNo. 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits”, which requires additional disclosures. Although the Company’smeasurement or recognition of pensions and postretirement benefit obligationsdoes not change under SFAS No. 132, the following additional disclosureregarding such plans are required.

 

F-33

----

 
|                                            |   | **Pension Benefits** |    | **Other Postretirement  Benefits** |   |
|-------------------------------------------------|--------|----------------------|---------|------------------------------------|--------|
|                                            |   | **2002**             |    | **2001**                           |   | **2002** |   | **2001** |   |
| **Change  in projected benefit obligation**     |   |                 |    |                               |   |   |   |   |   |
| Benefit obligation at beginning of year         |   | Ps.                  | 352,949 |                               | Ps.    | 414,238 |   | Ps. | 491,133 |   | Ps. | 412,291 |   |
| Service  cost                                   |   | 22,604               |    | 25,592                             |   | 4,448 |   | 3,888 |   |
| Interest  cost                                  |   | 13,281               |    | 17,225                             |   | 22,371 |   | 19,805 |   |
| Actuarial  (gain) loss, net                     |   | (6,005               | )       | (64,261                            | )      | 2,651 |   | 87,567 |   |
| Benefits paid                                   |   | (14,035              | )       | (39,845                            | )      | (21,521 | ) | (32,418 | ) |
| Benefit obligation at  end of year              |   | Ps.                  | 368,794 |                               | Ps.    | 352,949 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |
|                                            |   |                 |    |                               |   |   |   |   |   |
| **Change  in plan assets**                      |   |                 |    |                               |   |   |   |   |   |
| Fair  value of plan assets at beginning of year |   | Ps.                  | 101,543 |                               | Ps.    | 307,049 |   | Ps. | — |   | Ps. | — |   |
| Inflation  adjustment                           |   | (5,476               | )       | (12,941                            | )      | — |   | — |   |
| Actual return on plan  assets                   |   | (6,837               | )       | (192,565                           | )      | — |   | — |   |
| Fair  value of plan assets at end of year       |   | Ps.                  | 89,230  |                               | Ps.    | 101,543 |   | Ps. | — |   | Ps. | — |   |
|                                                 |        |                      |         |                                    |        |  |  |  |  |  |  |  |  |  |

 
|                                                         |   | **Pension Benefits** |       | **Other Postretirement Benefits** |       |
|--------------------------------------------------------------|--------|----------------------|------------|-----------------------------------|------------|
|                                                         |   | **2002**             |       | **2001**                          |       | **2002** |   | **2001** |   |
| **Reconciliation  of funded status**                         |   |                 | ** ** |                              | ** ** |   | ** ** |   | ** ** |
| Excess  of plan assets over projected benefits               |   | Ps.                  | 279,563    |                              | Ps.        | 251,406 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |
| Unrecognized  net actuarial loss                             |   | (210,276             | )          | (210,625                          | )          | (115,027 | ) | (116,024 | ) |
| Unrecognized  transition (asset) obligation, net             |   | 38,421               |       | 42,591                            |       | (294,719 | ) | (309,455 | ) |
| Unrecognized  prior service                                  |   | (47,669              | )          | (45,560                           | )          | — |   | — |   |
| Additional minimum  liability                                |   | 196,469              |       | 142,914                           |       | — |   | — |   |
| Accrued  benefit cost, net, under U.S. GAAP                  |   | 256,508              |       | 180,726                           |       | 89,336 |   | 65,654 |   |
| Accrued benefit cost,  net, under Mexican GAAP               |   | 263,281              |       | 201,286                           |       | 89,336 |   | 65,654 |   |
| Additional  benefit that must be recognized under U.S. GAAP: |   | Ps.                  | 6,773      |                              | Ps.        | (20,560 | ) | Ps. | — |   | Ps. | — |   |

 
|                                                        |   | **Pension Benefits** |       | **Other Postretirement Benefits** |       |
|-------------------------------------------------------------|--------|----------------------|------------|-----------------------------------|------------|
|                                                        |   | **2002**             |       | **2001**                          |       | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| **Components  of net periodic benefit cost**                |   |                 | ** ** |                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                        |   |                 | ** ** |                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Service  cost                                               |   | Ps.                  | 23,937     |                              | Ps.        | 25,592 |   | Ps. | 22,089 |   | Ps. | 4,702 |   | Ps. | 3,717 |   | Ps. | 3,718 |   |
| Interest cost                                               |   | 14,060               |       | 17,225                            |       | 37,708 |   | 23,646 |   | 17,695 |   | 17,695 |   |
| Expected return on plan assets                              |   | (6,491               | )          | (21,382                           | )          | (43,170 | ) | — |   | — |   | 13,521 |   |
| Amortization of transition assets, net                      |   | 6,728                |       | (4,177                            | )          | (2,764 | ) | 18,081 |   | 16,655 |   | — |   |
| Recognized net  actuarial loss                              |   | —               |       | 2,999                             |       | (47 | ) | — |   | — |   | — |   |
| Net periodic benefit cost under U.S. GAAP                   |   | 38,234               |       | 20,257                            |       | 13,816 |   | 46,429 |   | 38,067 |   | 34,934 |   |
| Net periodic benefit  cost under Mexican GAAP               |   | 43,880               |       | 25,502                            |       | 16,017 |   | 46,429 |   | 38,067 |   | 38,066 |   |
| Additional benefit that  must be recognized under U.S. GAAP |   | Ps.                  | (5,647     | )                                 | Ps.        | (5,245 | ) | Ps. | (2,201 | ) | Ps. | — |   | Ps. | — |   | Ps. | (3,132 | ) |

 

**Weighted-average  assumptions as of December 31,**

 
|                            |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                            |   |     |   |     |   |     |   |
| Discount  rate                  |   | 5.00     | %      | 5.00     | %      | 5.00     | %      |
| Expected  return on plan assets |   | 7.00     | %      | 7.00     | %      | 7.00     | %      |
| Rate  of compensation increase  |   | 1.50     | %      | 1.50     | %      | 1.50     | %      |

 

Aone-percentage-point change in assumed other benefit cost trend rates for thepostretirement benefit plan will have the following effects:

 

F-34

----

 
|                                                     |   | **1% Point  Increase** |    | **1% Point  Decrease** |   |
|----------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
|                                                     |   |                   |    |                   |   |
| Effect on total of  service and interest cost components |   | Ps.                    | 34,348  |                   | Ps.    | 26,822 |   |
| Effect on the  postretirement benefit obligation         |   | Ps.                    | 556,906 |                   | Ps.    | 445,724 |   |

 

As of December 31, 2002and 2001 the accumulated benefit obligation amounted to Ps.314,569 andPs.321,919, respectively, under U.S. GAAP.

 

**Minority interest**

 

Under Mexican GAAPBulletin B-8, minority interest in consolidated subsidiaries must be includedas a component of stockholders’ equity. Consequently, the minority interest inthe income of such subsidiaries is not included in the determination of net(loss) income in the statements of operations under Mexican GAAP. Under U.S.GAAP, the minority interest in subsidiaries are shown below liabilities on thebalance sheet and not included in stockholders’ equity, and their share of thenet results of the consolidated subsidiaries is deducted before arriving atnet  (loss) income.

 

**Investment in common stock of aparent company**

 

As discussed in Note 4,as of December 31, 2002, the Company holds 31,734,189 shares of common stock ofGMEXICO deposited in a trust for future sale to employees of the Company. UnderMexican GAAP, these shares are included as an asset.

 

Under U.S. GAAP, asubsidiary should account for its purchase of the parent’s stock as a reductionin equity in a manner similar to treasury stock.

 

**Capitalized interest**

 

Under Mexican GAAP, acompany is not required to, but may, capitalize interest incurred on assetsunder construction. The amount to be capitalized in Mexico is based upon the“comprehensive financial cost” (i.e., the net sum of interest income, interestexpense, foreign exchange gains and losses and the gain or loss from monetaryposition).   The Company has generallyelected not to capitalize any comprehensive financial cost under Mexican GAAP.  In connection with the construction of thesmelter held by Mexcobre, the Company capitalized a total of Ps.258,406 netforeign currency exchange losses and monetary position gain for Mexican GAAPpurposes which is being amortized over the estimated useful life of thesmelter.

 

Under U.S. GAAP, interestexpense on all debt, net of the gain on monetary position applicable to Mexicanpeso denominated debt, must be considered an additional cost of constructedassets and is depreciated over the lives of the related assets. Exchange gainsand losses on foreign currency-denominated debt may not be capitalized.

 

**Employee profit sharing**

 

Mexican law requires thepayment to employees of 10% of the Company’s taxable income, excluding certainadjustments for inflation. These amounts are treated as compensation expensesand are reflected after income tax, in the appropriate captions in thestatements of operations.

 

Under U.S. GAAP, employeeprofit sharing must be reflected as an operating expense in the statement ofoperations.

 

**Major customers**

 

The Company hadsignificant sales to three different customers in the last three years.  Sales to these customers accounted for 18%,5% and 5% of total sales in 2002, 10%, 5% and 5% of total net sales in 2001,and 10%, 8% and 7% of total net sales in 2000.

 

**Start-up costs**

 

UnderU.S. GAAP, AICPA Statement of Position No. 98-5, “Reporting on the Costs ofStart-up Activities”, requires that certain costs such as organization,training and pre-feasibility expenses incurred in the start-up phase of aproject be expensed as incurred.

 

Inaccordance with Mexican GAAP, start-up costs are deferred and amortizedbeginning at the commencement of operations, despite the inherent uncertaintyregarding their future recoverability. However, if the project is abandoned and any capitalized start-up costs

 

F-35

----

 

incurred become unrecoverable, such costs are expensedimmediately.  Amortization of deferredcosts is amortized on straight-line basis over the term in which the benefit isexpected to be realized.

 

**Environmental liabilities**

** **

UnderU.S. GAAP, companies must comply with EITF 93-5, "Accounting forEnvironmental Liabilities”, and EITF 90-8, "Capitalization of Costs toTreat Environmental Contamination". These pronouncements require companies to disclose and/or accrue on anundiscounted basis any reclamation and remediation costs that are expected tobe incurred. The Company has properly accrued for all known environmentalmatters at the balance sheet date for U.S. GAAP purposes.

 

F-36

----

 

**Treasurybonds**

 

In 1998 and 1999, GMMrepurchased a portion of the Guaranteed Senior Notes it previously issued, andthey were deducted from long-term debt under Mexican GAAP.  Under Mexican GAAP, the repurchase resultedin an extinguishment of such debt, and as such, a gain of $14,540 (Ps.138,243)was recognized in 2000.

 

Under U.S. GAAP, a debtorshall derecognize (remove previously recognized assets or liabilities from thestatement of financial position) a liability if and only if it has beenextinguished. A liability has been extinguished if the debtor pays the creditorand is relieved of its obligation for the liability. Paying the creditorincludes delivery of cash, other financial assets, goods, or services orreacquisition by the debtor of its outstanding debt securities, whether thesecurities are canceled or held as so-called treasury bonds. The differencebetween the reacquisition price (the amount paid on extinguishment, including acall premium and miscellaneous costs of reacquisition) and the net carryingamount (the amount due at maturity, adjusted for unamortized premium, discount,and cost of issuance) of the extinguished debt shall be recognized currently inincome of the period of extinguishment.

 

If and when the Companyresells treasury bonds, it will treat the transaction as a new issuance ofnotes.  There will be no gain or lossrecognized on reissuance.  Although legallythese are the same Guaranteed Senior Notes, from an accounting point of viewthe resale will be a new borrowing with its own effective interest rate.  Interest expense will accrue on the newlyreissued Guaranteed Senior Notes at their effective interest rate, which willdiffer from the effective interest rate on the remaining original GuaranteedSenior Notes.  Accordingly, the Companydid not recognize a gain or loss on the repurchase of the Guaranteed SeniorNotes referred to above under U.S. GAAP during 2000 as was recognized underMexican GAAP.

 

**Financial instruments**

 

Under Mexican GAAP,Bulletin C-2 went into effect in 2001 and requires the recognition of allderivative financial instruments on the balance sheet as either assets orliabilities.  Additionally, certain, butnot all, derivative financial instruments and the related hedged items must beadjusted to their market value, with all such adjustments recorded in theincome statement, regardless of the nature of the financial instrument.

 

Under U.S. GAAP, SFAS No.133 went into effect in 2001 and requires the adjustment of all financialinstruments to market value, with such adjustments recorded:

 

•     Inthe determination of net income or loss for fair value hedges (fixed tovariable)

•     Inother comprehensive income for qualifying cash flow hedges (variable to fixed)

 

At December 31, 2002 and2001, the Company does not have any outstanding derivative financialinstruments for either Mexican GAAP purposes or U.S. GAAP purposes.

 

##### Sales of unrefined products

 

Under Mexican GAAP, salesdiscounts offered for treatment and refining on unrefined products is includedin cost of sales in the statements of operations.  Under U.S. GAAP, such costs are presented as a reduction of netsales.

 

**Reconciliation of Mexican GAAP toU.S. GAAP**

 

Net income (loss) andstockholders’ equity, adjusted to take into account the significant differencesbetween Mexican GAAP and U.S. GAAP, except for the comprehensive effects ofprice-level changes, are as follows:

 
|                                                                                              |   | **2002**  |       | **2001**   |   | **2000**   |   |
|---------------------------------------------------------------------------------------------------|--------|-----------|------------|------------|--------|------------|--------|
| NET  INCOME (LOSS):                                                                               |   |      |       |       |   |       |   |
| Net  (loss) income of majority interest under Mexican GAAP                                        |   | Ps.       | (1,188,776 | )          | Ps.    | (863,891   | )      | Ps. | 258,478 |   |
| U.S.  GAAP adjustments:                                                                           |   |      |       |       |   |       |   |
| Deferred  income taxes under U.S. GAAP                                                            |   | 754,079   |       | (1,831,828 | )      | (780,565   | )      |
| Deferred  employee profit sharing liability                                                       |   | 152,316   |       | 160,518    |   | (231,022   | )      |
| Deferred  income taxes under Mexican GAAP                                                         |   | (609,429  | )          | (399,086   | )      | 169,752    |   |
| Amortization  of capitalized interest                                                             |   | (8,131    | )          | (7,321     | )      | (7,321     | )      |
| Adoption  of SOP 98-5                                                                             |   | —    |       | —     |   | (117,684   | )      |
| Amortization  of capitalized exchange loss and gain on monetary position                          |   | 6,009     |       | 6,009      |   | 6,009      |   |
| Capitalized  interest                                                                             |   | 32,774    |       | 1,963      |   | —     |   |
| Amortization  of negative goodwill allocated to fixed assets under U.S. GAAP                      |   | 754,061   |       | 754,061    |   | 754,041    |   |
|                                                                                              |   |      |       |       |   |       |   |
| Amortization  of goodwill under Mexican GAAP                                                      |   | 20,755    |       | —     |   | —     |   |
| Pension  plan cost                                                                                |   | 5,646     |       | 5,245      |   | 2,201      |   |
| Reversal  of amortization of preoperating expenses                                                |   | 207,024   |       | 284,055    |   | 950        |   |
| Gain  on extinguishment of debt                                                                   |   | —    |       | —     |   | (138,243   | )      |
| Effects  of inflation accounting on U.S. GAAP adjustments and monetary gain on labor  liabilities |   | 24,078    |       | 96,268     |   | 211,446    |   |
| Effects  on minority interest of U.S. GAAP adjustments                                            |   | 6,180     |       | 33,105     |   | (21,171    | )      |
|                                                                                              |   | 1,345,362 |       | (897,011   | )      | (151,607   | )      |
| Net  income (loss) under U.S. GAAP                                                                |   | Ps.       | 156,586    |       | Ps.    | (1,760,902 | )      | Ps. | 106,871 |   |
|                                                                                                   |        |           |            |            |        |            |        |  |  |  |  |  |

 

F-37

----

 
|                                                                  |   | **2002**   |      | **2001**   |   |
|-----------------------------------------------------------------------|--------|------------|-----------|------------|--------|
| STOCKHOLDERS’  EQUITY:                                           |   |       |      |       |   |
| Stockholders’  equity under Mexican GAAP, less minority interest |   | Ps.        | 8,209,102 |       | Ps.    | .22,684,646 |   |
| U.S.  GAAP adjustments:                                               |   |       |      |       |   |
| Deferred  income taxes under U.S. GAAP                                |   | (3,777,943 | )         | (6,525,757 | )      |
| Deferred  employee profit sharing                                     |   | (2,600,426 | )         | (2,752,641 | )      |
| Deferred  income taxes under Mexican GAAP                             |   | 6,881,619  |      | 7,525,452  |   |
| Capitalized  exchange loss and gain on monetary position              |   | (210,330   | )         | (207,211   | )      |
| Capitalized  interest                                                 |   | 202,651    |      | 178,008    |   |
| Accumulated  pension plan cost                                        |   | 6,773      |      | 20,560     |   |
| Negative  goodwill (previously amortized for Mexican GAAP purposes)   |   | (1,508,122 | )         | (2,262,183 | )      |
| Amortization  of goodwill under Mexican GAAP                          |   | 20,755     |      | —     |   |
| Start-up  costs, net of accumulated amortization                      |   | (4,814     | )         | (211,838   | )      |
| Investment  in common stock of parent company                         |   | (415,964   | )         | (356,976   | )      |
| Effects  on minority interest of U.S. GAAP adjustments                |   | 83,563     |      | 111,335    |   |
|                                                                  |   | (1,319,238 | )         | (4,481,251 | )      |
| Stockholders’  equity under U.S. GAAP                            |   | Ps.        | 6,889,864 |       | Ps.    | 18,203,395 |   |

 

The changes instockholders’ equity under U.S. GAAP for the years ended December 31, 2002,2001 and 2000 are as follows:

 
|                                                             |   | **Capital  Stock** |       | **Additional  Paid- in  Capital** |   | **Advances  for  Future  Increases in  Capital Stock** |   | **Retained  Earnings** |    | **Accumulated  Other  Comprehensive  Income** |   | **Total  Stockholders’  Equity** |   |
|------------------------------------------------------------------|--------|--------------------|------------|-----------------------------------|--------|--------------------------------------------------------|--------|------------------------|---------|-----------------------------------------------|--------|---------------------------------------|--------|
| Stockholders’  equity under U.S. GAAP at January 1, 2000    |   | Ps.                | 9,916,273  |                              | Ps.    | 22,417                                                 |   | Ps.                    | —  |                                          | Ps.    | 28,905,115                            |   | Ps. | (18,431,650 | ) | Ps. | 20,412,155 |   |
| Net  income                                                      |   | —             |       | —                            |   | —                                                 |   | 106,871                |    | —                                        |   | 106,871                               |   |
| Cumulative  restatement effect                                   |   | —             |       | —                            |   | —                                                 |   | —                 |    | (1,267,857                                    | )      | (1,267,857                            | )      |
| Additional  minimum liability and restatement of accrued benefit |   | —             |       | —                            |   | —                                                 |   | —                 |    | (30,710                                       | )      | (30,710                               | )      |
| Comprehensive  loss                                              |   |               |       |                              |   |                                                   |   |                   |    |                                          |   | (1,191,696                            | )      |
| Investment  in common stock of parent company                    |   | 815,025            |       | —                            |   | —                                                 |   | —                 |    | —                                        |   | 815,025                               |   |
| Stockholders’  equity under U.S. GAAP at December 31, 2000  |   | 10,731,298         |       | 22,417                            |   | —                                                 |   | 29,011,986             |    | (19,730,217                                   | )      | 20,035,484                            |   |
|                                                             |   |               |       |                              |   |                                                   |   |                   |    |                                          |   |                                  |   |
| Net  loss                                                        |   | —             |       | —                            |   | —                                                 |   | (1,760,902             | )       | —                                        |   | (1,760,902                            | )      |
| Cumulative  restatement effect                                   |   | —             |       | —                            |   | —                                                 |   | —                 |    | (635,412                                      | )      | (635,412                              | )      |
| Additional  minimum liability and restatement of accrued benefit |   | —             |       | —                            |   | —                                                 |   | —                 |    | (88,511                                       | )      | (88,511                               | )      |
| Comprehensive  loss                                              |   | —             |       | —                            |   | —                                                 |   | —                 |    | —                                        |   | (2,484,825                            | )      |
| Investment  in common stock of parent company                    |   | 652,736            |       | —                            |   | —                                                 |   | —                 |    | —                                        |   | 652,736                               |   |
| Stockholders’  equity under U.S. GAAP at December 31, 2001  |   | 11,384,034         |       | 22,417                            |   |                                                   |   | 27,251,084             |    | (20,454,140                                   | )      | 18,203,395                            |   |
| Net  loss                                                        |   | —             |       | —                            |   | —                                                 |   | 156,586                |    | —                                        |   | 156,586                               |   |
| Cumulative  restatement effect                                   |   | —             |       | —                            |   | —                                                 |   | —                 |    | 1,914,160                                     |   | 1,914,160                             |   |
| Additional  minimum liability and restatement of accrued benefit |   | —             |       | —                            |   | —                                                 |   | —                 |    | (49,645                                       | )      | (49,645                               | )      |
| Comprehensive  loss                                              |   | —             |       | —                            |   | —                                                 |   | —                 |    | —                                        |   | 2,021,101                             |   |
| Dividends  paid                                                  |   | —             |       | —                            |   | —                                                 |   | (13,450,800            | )       | —                                        |   | (13,450,800                           | )      |
| Advances  for future increases in capital stock                  |   | —             |       | —                            |   | 172,156                                                |   | —                 |    | —                                        |   | 172,156                               |   |
| Investment  in common stock of parent company                    |   | (58,988            | )          | —                            |   | —                                                 |   | —                 |    | —                                        |   | (58,988                               | )      |
| Stockholders’  equity under U.S. GAAP at December 31, 2002  |   | Ps.                | 11,325,046 |                              | Ps.    | 22,417                                                 |   | Ps.                    | 172,156 |                                          | Ps.    | 13,956,870                            |   | Ps. | (18,589,625 | ) | Ps. | 6,889,864 |   |
|                                                                  |        |                    |            |                                   |        |                                                        |        |                        |         |                                               |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |

 

F-38

----

 

**Reclassification of balance sheet andstatements of operations**

 

With regard to theconsolidated balance sheets and statements of operations, the followingsignificant captions determined under U.S. GAAP would have been as follows:

 
|                       |   | **2002** |       | **2001** |   |
|----------------------------|--------|----------|------------|----------|--------|
| Balance  sheet:            |   |     |       |     |   |
| Current  assets            |   | Ps.      | 6,979,054  |     | Ps.    | 6,571,125 |   |
| Total  assets              |   | Ps.      | 44,680,101 |     | Ps.    | 44,318,616 |   |
| Current  liabilities       |   | Ps.      | 17,325,768 |     | Ps.    | 16,051,288 |   |
| Total  liabilities         |   | Ps.      | 37,006,994 |     | Ps.    | 25,366,966 |   |
| Minority  interest         |   | Ps.      | 786,243    |     | Ps.    | 748,256 |   |
| Stockholders’  equity |   | Ps.      | 6,889,864  |     | Ps.    | 18,203,395 |   |

 
|                                                                        |   | **2002** |     | **2001** |   | **2000**   |   |
|-----------------------------------------------------------------------------|--------|----------|----------|----------|--------|------------|--------|
| Statement  of operations:                                                   |   |     |     |     |   |       |   |
| Operating  income                                                           |   | Ps.      | 237,368  |     | Ps.    | 61,678     |   | Ps. | 1,109,624 |   |
| Income  taxes                                                               |   | Ps.      | (561,488 | )        | Ps.    | 1,849,331  |   | Ps. | 917,443 |   |
| Consolidated  net income (loss) for the year                                |   | Ps.      | 167,081  |     | Ps.    | (1,804,184 | )      | Ps. | 135,802 |   |
| Weighted  average basic and diluted common shares outstanding, in thousands |   | 650,162  |     | 650,162  |   | 650,162    |   |
| Basic  and diluted net (loss) income per share                              |   | Ps.      | 0.26     |     | Ps.    | (2.77      | )      | Ps. | 0.21 |   |
|                                                                             |        |          |          |          |        |            |        |  |  |  |  |  |

 

F-39

----

 

**19.    FUTURE IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS:**

** **

**Mexican GAAP**

 

In December 2001, theMexican Institute of Public Accountants (MIPA) issued the new Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments ”(“C-9”), whose provisions are mandatory for years beginning as of January,2003, although early application is recommended. C-9 replaces the provisions ofthe former Bulletins C-9 “Liabilities” and C-12, “Contingencies andCommitments”, and establishes, among others, greater accuracy in items relatedto provisions, accumulated obligations and contingent liabilities, and newregulations related to accounting recognition of provisions, the use of presentvalue, and the redemption of obligations when taking place early or substitutedby a new issue.

 

In January 2002, the MIPAissued new Bulletin C-8, “ Intangible Assets ” (“C-8”) with the same effectivedate and recommendation established for Bulletin C-9. C-8 replaces the formerBulletin   C-8, “Intangibles”, andestablishes, among others, that the development costs of a project should becapitalized if they comply with the criteria established for their recognitionas assets; any preoperating costs incurred as of the date of application ofthis Bulletin should be recorded as a cost for the period.  The unamortized balance of capitalizedpreoperating costs in accordance with the former Bulletin C-8 will be amortizedin accordance with the terms of such Bulletin. To reduce as much as possible the remnant that constitutes “goodwill” inthe case of business acquisitions, the intangible items to be identified andquantified are provided.

 

In March 2003, the MIPAissued Bulletin C-15, “Impairment in the Value of Long-Lived Assets and TheirDisposal”, (C-15), whose application is mandatory for financial statements ofperiods beginning on or after January 1, 2004, although early application isencouraged. C-15 establishes, among others, new principles for the calculationand recognition of impairment losses for long-lived assets and their reversal.  It also provides examples of indicators ofpossible impairment in the carrying amount of tangible and intangiblelong-lived assets in use, including goodwill. The calculation of such lossrequires the determination of the recoverable value, which is now defined asthe greater of the net selling price of a cash-generating unit and its value inuse, which is the present value of discounted future net cash flows. Theaccounting principles issued prior to this new Bulletin used future net cashflows, without requiring the discounting of such cash flows.

 

The Company has not fullyassessed the effects of adopting these new accounting principles on itsfinancial position and results of operations.

 

**U.S. GAAP**

 

During 2001, the FASB issued the following guidance:

 

In June 2001, the FASB issuedSFAS No. 141, “Business Combinations”, which is effective for all businesscombinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted forusing the purchase method.  The adoptionof this new standard did not have a material impact on the Company’s financialposition or results of operations.

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets”, which waseffective for the Company beginning in 2002. With the adoption of SFAS No. 142, goodwill is no longer subject toamortization over its estimated useful life, but rather it will be subject toat least an annual assessment for impairment by applying a fair-value-basedtest.  Additionally, negative goodwillis recognized as an extraordinary gain at the time of the business combination.The adoption of this new standard resulted in the discontinuation of annualgoodwill amortization, for U.S. GAAP purposes.

 

In June 2001, the FASBissued SFAS No. 143 “Accounting for Asset Retirement Obligations”, which waseffective for the Company beginning in 2003. The Company plans to adopt this new standard in 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  It applies to legal obligations associated with the retirement oflong-lived assets and the associated asset retirement costs.  It applies to legal obligations associatedwith the retirement of long-lived assets that result from the acquisition,construction, development and/or the normal operation of a long-lived asset,except for certain obligations of lessees. This SFAS requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate can be made.  Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset.  TheCompany is currently evaluating the effect that this new standard will have onits financial position, results of operations and cash flows.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”.  The Company adopted thisstandard in 2002.  SFAS No. 144supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of”. SFAS No. 144 also expands the scope of discontinued operations to acomponent of an entity and eliminates the exception to consolidation for atemporarily controlled subsidiary.  Theadoption of this standard did not have a material impact on the Company’sfinancial position and results of operations.

 

F-40

----

 

During 2002, the FASB issuedthe following guidance:

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with “Exit or DisposalActivities”, which will be required to be effective for exit or disposalactivities that are initiated after December 31, 2002. This statement addressesfinancial accounting and reporting for cost associated with exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Coststo Exit an Activity (including Certain Costs Incurred in a Restructuring)”. TheCompany adopted the provisions of SFAS No. 146 on January 1, 2003, which didnot have a material effect on the Company’s financial statements.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”).  FIN 45 requiresthat the guarantor recognize, at the inception of certain guarantees, aliability for the fair value of the obligation undertaken in issuing suchguarantee.  FIN 45 also requiresadditional disclosure requirements about the guarantor’s obligations undercertain guarantees that it has issued. The initial recognition and measurement provisions of thisinterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002 and the disclosure requirements are effectivefor financial statement periods ending after December 15, 2002.  The Company does not expect the adoption ofFIN 45 will have a material impact on its financial position, results ofoperations or cash flows.

 

During 2003, the FASBissued the following guidance:

 

In January 2003, the FASBissued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities”(“FIN 46”).  FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements”, to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  FIN 46 is effective immediately for all companies that hold avariable interest in a variable interest entity created after January 31, 2003.For a variable interest held by the Company in a variable interest entitycreated before February 1, 2003, the Company will apply the provisions of FIN46 no later than the end of the first annual reporting period beginning afterJune 15, 2003*.*The Company does not expect that the adoption of FIN 46will have a material impact on its financial position, results of operations orcash flows.

 

In April 2003, the FASBissued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments andHedging Activities”, which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities”.  The changes in SFAS No. 149 improvefinancial reporting by requiring that contracts with comparable characteristicsbe accounted for similarly.  SFASNo. 149 will be effective for contracts entered into or modified afterJune 30, 2003, except as stated below, and for hedging relationships designatedafter June 30, 2003.  In addition,expect as stated below, all provisions of this Statement should be appliedprospectively.  The provisions of SFASNo. 149 that relate to SFAS No. 133 implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003, shouldcontinue to be applied in accordance with their respective effective dates.  The Company does not anticipate that theadoption of SFAS No. 149 will have a material impact on the Company’sfinancial position, results of operations or cash flow.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”.  SFAS No. 150 aims to eliminatediversity in practice by requiring that the following three types of financialinstruments be reported as liabilities by their issuers:

 

**•**      Mandatorily redeemable instruments (i.e., instrumentsissued in the form of shares that unconditionally obligate the issuer to redeemthe shares for cash or by transferring other assets)

 

•      Forward purchase contracts,written put options, and other financial instruments not in the form of sharesthat either obligate or may obligate the issuer to settle its obligation forcash or by transferring other assets

 

F-41

----

 

 

•      Certainfinancial instruments that include an obligation that (1) the issuer may or mustsettle by issuing a variable number of its equity shares and (2) has a“monetary value” at inception that (a) is fixed, (b) is tied to a market indexor other benchmark (something other than the fair value of the issuer’s equityshares), or (c) varies inversely with the fair value of the equity shares, forexample, a written put option.

 

Until now, these types ofinstruments have been variously reported by their issuers as liabilities, aspart of equity, or between the liabilities and equity sections (sometimesreferred to as “mezzanine” reporting) of the balance sheet.  The provisions of SFAS No. 150 areeffective for financial instruments for the first fiscal period beginning afterDecember 15, 2003. The Company does not expect that the adoption of SFAS No.150 will have a material impact on its financial position, results ofoperations or cash flows.

 

# **20.**  SUBSEQUENT EVENTS

 

##### Mergerof GMM and MM

 

On May 28, 2003, thestockholders of GMM and MM, during extraordinary meetings, approved the mergerof the two companies, which is to take place during 2003.  Under the planned merger, GMM will mergewith and into MM.

 

**21.****  SUPPLEMENTALGUARANTOR INFORMATION:**

 

The Guaranteed SeniorNotes are fully and unconditionally guaranteed, on an unsecured senior, jointand several basis, by each of the Company’s material subsidiaries. Each of theGuarantor subsidiaries (Mexcobre, Mexcananea, Immsa, Mimenosa and MMI) is awholly-owned subsidiary except for Mexcobre and Mexcananea, for which separatefinancial statements are presented. The following condensed consolidatingfinancial data includes the Guarantor Subsidiaries, Non-Guarantor Subsidiariesand the Parent Company. It is management’s opinion that separate completefinancial statements of the respective Guarantors (other than Mexcobre andMexcananea) would not provide material information to reader of theseconsolidated financial statements.

 

Investments insubsidiaries are accounted for by the parent company under the equity methodfor purposes of the supplemental consolidating presentation. Earnings ofsubsidiaries are therefore reflected in the parent company’s investment accountand earnings. The principal elimination entries eliminate the parent company’sinvestment in subsidiaries and intercompany balances and transactions.

 

The reconciliation ofconsolidated majority net income and stockholders’ equity from Mexican GAAP toU.S. GAAP are included in Note 18.

 

**Restatement**

 

Subsequent to theissuance of the Company’s 2001 financial statements, management determined thatpush-down accounting adjustments related to the acquisitions of its mostlyowned guarantor subsidiaries had not been properly reported in the Company’sconsolidating U.S. GAAP financial information presented below.  Push-down accounting is not required underMexican GAAP.  As a result, theconsolidating U.S. GAAP financial information has been restated to reflect thepush-down effects of the excess purchase price paid over the fair value of theassets and liabilities of Mexcananea, and the excess of the book value of theassets and liabilities of Mexcobre over the purchase price paid.

 

F-42

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET**

**AS OF DECEMBER 31, 2002**

**EXPRESSED IN THOUSANDS OF CONSTANT**

**MEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                              |   | **Parent  Company** |       | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |      | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|-----------|------------------|--------|------------------|--------|
|                                                                              |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Cash, temporary investments and restricted cash in  collateral account            |   | Ps.                 | 668,227    |                                       | Ps.    | 436,696                                        |   | Ps.                               | 79,746    |             | Ps.    | 9,179            |   | Ps. | — |   | Ps. | 1,193,848 |   |
| Notes and accounts receivable                                                     |   | 2,251,394           |       | 5,421,679                                  |   | 1,494,527                                      |   | 156,494                           |      | (5,680,567       | )      | 3,643,527        |   |
| Inventories                                                                       |   | 1,463               |       | 1,355,939                                  |   | 767,841                                        |   | (10,404                           | )         | (27,271          | )      | 2,087,568        |   |
| Prepaid expenses and other                                                        |   | —              |       | —                                     |   | 53,632                                         |   | 479                               |      | —           |   | 54,111           |   |
| Total current assets                                                              |   | 2,921,084           |       | 7,214,314                                  |   | 2,395,746                                      |   | 155,748                           |      | (5,707,838       | )      | 6,979,054        |   |
| Due from Minera Mexico, S.A. de C.V (holding  company).                           |   | 8,216,681           |       | 73,914                                     |   | —                                         |   | —                            |      | 686,010          |   | 8,976,605        |   |
| Due fromGrupo  México, S.A. de C.V.                                          |   | —              |       | 140,955                                    |   | —                                         |   | —                            |      | (69,738          | )      | 71,217           |   |
| Due from  Grupo Minero México S.A. de C.V.                                   |   | —              |       | 1,689,339                                  |   | —                                         |   | —                            |      | (1,689,339       | )      | —           |   |
| Property and equipment                                                            |   | 5,492               |       | 23,528,808                                 |   | 4,647,572                                      |   | 572,541                           |      | (54,763          | )      | 28,699,650       |   |
| Investments in shares of associated companies and  other unconsolidated companies |   | 32,163,386          |       | 1,554                                      |   | 395,675                                        |   | 10                                |      | (32,544,725      | )      | 5,900            |   |
| Other assets                                                                      |   | 433,046             |       | 1,898,729                                  |   | 123,032                                        |   | 53,212                            |      | (17,752          | )      | 2,385,480        |   |
| Goodwill                                                                          |   | 124,330             |       | —                                     |   | —                                         |   | —                            |      | —           |   | 124,330          |   |
| Total assets                                                                      |   | Ps.                 | 43,866,982 |                                       | Ps.    | 34,547,613                                     |   | Ps.                               | 7,562,025 |             | Ps.    | 781,511          |   | Ps. | (39,408,145 | ) | Ps. | 47,349,986 |   |
|                                                                              |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Current portion of long-term debt and interest  payable                           |   | Ps.                 | 186,615    |                                       | Ps.    | —                                         |   | Ps.                               | —    |             | Ps.    | —           |   | Ps. | — |   | Ps. | 186,615 |   |
| Other current liabilities                                                         |   | 14,568,393          |       | 2,675,093                                  |   | 1,559,475                                      |   | 186,746                           |      | (2,365,593       | )      | 16,624,114       |   |
| Total current liabilities                                                         |   | 14,755,008          |       | 2,675,093                                  |   | 1,559,475                                      |   | 186,746                           |      | (2,365,593       | )      | 16,810,729       |   |
| Due to Grupo  México, S.A. de C.V.                                           |   | 4,876,885           |       | —                                     |   | 147,235                                        |   | —                            |      | (4,433,110       | )      | 591,010          |   |
| Long-term debt                                                                    |   | 13,635,063          |       | —                                     |   |                                           |   | —                            |      | —           |   | 13,635,063       |   |
| Other noncurrent liabilities                                                      |   | 2,390,924           |       | 3,376,275                                  |   | 1,222,413                                      |   | 244,624                           |      | —           |   | 7,234,236        |   |
| Stockholders’ equity                                                         |   | 8,209,102           |       | 28,496,245                                 |   | 4,632,902                                      |   | 350,141                           |      | (32,609,442      | )      | 9,078,948        |   |
| Total liabilities and stockholders’ equity                                   |   | Ps.                 | 43,866,982 |                                       | Ps.    | 34,547,613                                     |   | Ps.                               | 7,562,025 |             | Ps.    | 781,511          |   | Ps. | (39,408,145 | ) | Ps. | 47,349,986 |   |

 

F-43

----

 

# **GRUPO MINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET**

**AS OF DECEMBER 31, 2001**

# **EXPRESSED IN THOUSANDS OF CONSTANT     **

# **MEXICAN PESOS ASOF DECEMBER 31, 2002**

 
|                                                                              |   | **Parent  Company** |       | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |      | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|-----------|------------------|--------|------------------|--------|
|                                                                              |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Cash and temporary investments                                                    |   | Ps.                 | 3,181      |                                       | Ps.    | 100,806                                        |   | Ps.                               | 315,756   |             | Ps.    | 35,376           |   | Ps. | — |   | Ps. | 455,119 |   |
| Notes and accounts receivable                                                     |   | 1,689,676           |       | 2,781,287                                  |   | 943,653                                        |   | 272,514                           |      | (1,973,190       | )      | 3,713,940        |   |
| Inventories                                                                       |   | 11,200              |       | 1,569,952                                  |   | 785,808                                        |   | 5,445                             |      | (6,550           | )      | 2,365,855        |   |
| Prepaid expenses and other                                                        |   | —              |       | —                                     |   | 39,760                                         |   | (3,549                            | )         | —           |   | 36,211           |   |
| Total current assets                                                              |   | 1,704,057           |       | 4,452,045                                  |   | 2,084,977                                      |   | 309,786                           |      | (1,979,740       | )      | 6,571,125        |   |
| Due from Minera México, S.A. de C.V. (holding  company)                      |   | 7,723,349           |       | 707,249                                    |   | —                                         |   | —                            |      | (707,249         | )      | 7,723,349        |   |
| Due from  Grupo Minero México, S.A. de C.V.                                  |   | —              |       | 2,224,505                                  |   | —                                         |   | —                            |      | (2,224,505       | )      | —           |   |
| Property and equipment                                                            |   | 7,450               |       | 24,755,856                                 |   | 5,057,407                                      |   | 613,559                           |      | (65,879          | )      | 30,368,393       |   |
| Investments in shares of associated companies and  other unconsolidated companies |   | 32,019,595          |       | 1,554                                      |   | 388,227                                        |   | 11                                |      | (32,403,249      | )      | 6,138            |   |
| Other assets                                                                      |   | 425,960             |       | 1,525,366                                  |   | 348,503                                        |   | 97,331                            |      | (18,766          | )      | 2,378,394        |   |
| Goodwill                                                                          |   | 131,416             |       | —                                     |   | —                                         |   | —                            |      | —           |   | 131,416          |   |
| Total assets                                                                      |   | Ps.                 | 42,011,827 |                                       | Ps.    | 33,666,575                                     |   | Ps.                               | 7,879,114 |             | Ps.    | 1,020,687        |   | Ps. | (37,399,388 | ) | Ps. | 47,178,815 |   |
|                                                                              |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Current portion of long-term debt and interest  payable                           |   | Ps.                 | 11,324,990 |                                       | Ps.    | —                                         |   | Ps.                               | —    |             | Ps.    | —           |   | Ps. | — |   | Ps. | 11,324,990 |   |
| Other current liabilities                                                         |   | 2,152,331           |       | 2,037,006                                  |   | 1,636,603                                      |   | 302,858                           |      | (2,167,043       | )      | 3,961,755        |   |
| Total current liabilities                                                         |   | 13,477,321          |       | 2,037,006                                  |   | 1,636,603                                      |   | 302,858                           |      | (2,167,043       | )      | 15,286,745       |   |
| Due to Grupo  México, S.A. de C.V.                                           |   | 3,293,341           |       | —                                     |   | —                                         |   | 1                                 |      | (2,737,901       | )      | 555,441          |   |
| Long-term debt                                                                    |   | 11,324,990          |       | —                                     |   | —                                         |   | —                            |      | —           |   | 11,324,990       |   |
| Other noncurrent liabilities                                                      |   | 2,556,519           |       | 3,555,225                                  |   | 1,417,520                                      |   | 263,130                           |      | —           |   | 7,792,394        |   |
| Stockholders’ equity                                                         |   | 22,684,646          |       | 28,074,344                                 |   | 4,824,991                                      |   | 454,698                           |      | (32,494,444      | )      | 23,544,235       |   |
| Total liabilities and stockholders’ equity                                   |   | Ps.                 | 42,011,827 |                                       | Ps.    | 33,666,575                                     |   | Ps.                               | 7,879,114 |             | Ps.    | 1,020,687        |   | Ps. | (37,399,388 | ) | Ps. | 47,178,815 |   |

 

F-44

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2002**

#### **EXPRESSEDIN THOUSANDS OF CONSTANT**

##### **MEXICANPESOS AS OF DECEMBER 31, 2002**

** **
|                                                                |   | **Parent  Company** |       | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |      | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------|--------|---------------------|------------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|-----------|------------------|--------|------------------|--------|
|                                                                |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Net sales                                                           |   | Ps.                 | —     |                                       | Ps.    | 6,580,655                                      |   | Ps.                               | 5,059,062 |             | Ps.    | —           |   | Ps. | (4,286,885 | ) | Ps. | 7,352,832 |   |
| Cost of sales                                                       |   | —              |       | 5,411,947                                  |   | 4,906,459                                      |   | 55,309                            |      | (4,284,385       | )      | 6,089,330        |   |
| Gross profit                                                        |   | —              |       | 1,168,708                                  |   | 152,603                                        |   | (55,309                           | )         | (2,500           | )      | 1,263,502        |   |
| Operating expenses                                                  |   | 69,141              |       | 1,552,749                                  |   | 506,409                                        |   | 198,074                           |      | (179,082         | )      | 2,147,291        |   |
| Operating income (loss)                                             |   | (69,141             | )          | (384,041                                   | )      | (353,806                                       | )      | (253,383                          | )         | 176,582          |   | (883,789         | )      |
| Integral result of financing                                        |   | 1,271,238           |       | (629,223                                   | )      | 8,551                                          |   | 48,317                            |      | —           |   | 698,883          |   |
| Other (income) expenses, net                                        |   | 76,664              |       | (7,652                                     | )      | 401                                            |   | (251,602                          | )         | 190,737          |   | 8,548            |   |
| (Benefits) provisions for income taxes and employee  profit sharing |   | (47,143             | )          | (184,912                                   | )      | (185,488                                       | )      | 4,604                             |      | —           |   | (412,939         | )      |
|                                                                |   |                |       |                                       |   |                                           |   |                              |      |             |   |             |   |
| Income (loss) before participation in subsidiary  companies         |   | (1,369,900          | )          | 437,746                                    |   | (177,270                                       | )      | (54,702                           | )         | (14,155          | )      | (1,178,281       | )      |
| Participation in subsidiary companies                               |   | 181,124             |       | —                                     |   | 7,834                                          |   | —                            |      | 188,958          |   | —           |   |
| Net (loss) income for the year                                      |   | Ps.                 | (1,188,776 | )                                          | Ps.    | 437,746                                        |   | Ps.                               | (169,436  | )                | Ps.    | (54,702          | )      | Ps. | (203,113 | ) | Ps. | (1,178,281 | ) |

 

F-45

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2001**

#### **EXPRESSEDIN THOUSANDS OF CONSTANT**

##### **MEXICANPESOS AS OF DECEMBER 31, 2002**

** **
|                                                                |   | **Parent  Company** |     | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |      | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------|--------|---------------------|----------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|-----------|------------------|--------|------------------|--------|
|                                                                |   |                |     |                                       |   |                                           |   |                              |      |             |   |             |   |
| Net sales                                                           |   | Ps.                 | —   |                                       | Ps.    | 7,451,420                                      |   | Ps.                               | 6,434,109 |             | Ps.    | —           |   | Ps. | (4,430,417 | ) | Ps. | 9,455,112 |   |
| Cost of sales                                                       |   | —              |     | 6,276,712                                  |   | 6,672,880                                      |   | 495                               |      | (4,508,042       | )      | 8,442,045        |   |
| Gross profit                                                        |   | —              |     | 1,174,708                                  |   | (238,771                                       | )      | (495                              | )         | 77,625           |   | 1,013,067        |   |
| Operating expenses                                                  |   | 7,458               |     | 1,513,252                                  |   | 569,837                                        |   | 211,484                           |      | (193,572         | )      | 2,108,459        |   |
| Operating income (loss)                                             |   | (7,458              | )        | (338,544                                   | )      | (808,608                                       | )      | (211,979                          | )         | 271,197          |   | (1,095,392       | )      |
| Integral result of financing                                        |   | 41,331              |     | 112,542                                    |   | 24,682                                         |   | 1,637                             |      | 1                |   | 180,193          |   |
| Other (income) expenses, net                                        |   | 20,769              |     | 2,380                                      |   | (82,822                                        | )      | (228,232                          | )         | 215,153          |   | (72,752          | )      |
| (Benefits) provisions for income taxes and employee  profit sharing |   | (42,147             | )        | (72,890                                    | )      | (230,038                                       | )      | 16,309                            |      | —           |   | (328,766         | )      |
|                                                                |   |                |     |                                       |   |                                           |   |                              |      |             |   |             |   |
| Income (loss) before participation in subsidiary  companies         |   | (27,411             | )        | (380,576                                   | )      | (520,430                                       | )      | (1,693                            | )         | 56,043           |   | (874,067         | )      |
| Participation in subsidiary companies                               |   | 836,480             |     | —                                     |   | 4,000                                          |   | (1                                | )         | (840,479         | )      | —           |   |
| Net (loss) income for the year                                      |   | Ps.                 | (863,891 | )                                          | Ps.    | (380,576                                       | )      | Ps.                               | (524,430  | )                | Ps.    | (1,692           | )      | Ps. | 896,522 |   | Ps. | (874,067 | ) |

 

F-46

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2000**

##### **EXPRESSED IN THOUSANDS OF CONSTANT**

**MEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                |   | **Parent  Company** |    | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |      | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------|--------|---------------------|---------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|-----------|------------------|--------|------------------|--------|
|                                                                |   |                |    |                                       |   |                                           |   |                              |      |             |   |             |   |
| Net sales                                                           |   | Ps.                 | —  |                                       | Ps.    | 9,645,293                                      |   | Ps.                               | 9,969,926 |             | Ps.    | —           |   | Ps. | (6,697,209 | ) | Ps. | 12,918,010 |   |
| Cost of sales                                                       |   | —              |    | 7,455,701                                  |   | 9,197,767                                      |   | 33,884                            |      | (6,682,438       | )      | 10,004,914       |   |
| Gross profit                                                        |   | —              |    | 2,189,592                                  |   | 772,159                                        |   | (33,884                           | )         | (14,771          | )      | 2,913,096        |   |
| Operating expenses                                                  |   | 6,608               |    | 1,500,618                                  |   | 650,732                                        |   | 207,597                           |      | (254,166         | )      | 2,111,389        |   |
| Operating income (loss)                                             |   | (6,608              | )       | 688,974                                    |   | 121,427                                        |   | (241,481                          | )         | 239,395          |   | 801,707          |   |
| Integral result of financing                                        |   | 61,871              |    | (4,218                                     | )      | 39,537                                         |   | (892                              | )         | 113              |   | 96,411           |   |
| Other (income) expenses, net                                        |   | 22,181              |    | (4,815                                     | )      | 8,122                                          |   | (282,358                          | )         | 282,724          |   | 25,854           |   |
| (Benefits) provisions for income taxes and employee  profit sharing |   | (80,099             | )       | 367,676                                    |   | 60,726                                         |   | 64,903                            |      | —           |   | 413,206          |   |
| Income (loss) before participation in subsidiary  companies         |   | (10,561             | )       | 330,331                                    |   | 13,042                                         |   | (23,134                           | )         | (43,442          | )      | 266,236          |   |
| Participation in subsidiary companies                               |   | (269,038            | )       | —                                     |   | (2,865                                         | )      | —                            |      | 271,903          |   | —           |   |
| Net (loss) income for the year                                      |   | Ps.                 | 258,477 |                                       | Ps.    | 330,331                                        |   | Ps.                               | 15,907    |             | Ps.    | (23,134          | )      | Ps. | (315,345 | ) | Ps. | 266,236 |   |

 

F-47

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CHANGES IN**

**FINANCIAL POSITION FOR THE YEAR ENDED DECEMBER 31, 2002**

#### **EXPRESSEDIN THOUSANDS OF CONSTANT**

**MEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                                   |   | **Parent  Company** | ** ** | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly****Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |     | **Eliminations** |   | **Consolidated** |   |
|----------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------|----------|------------------|--------|------------------|--------|
| Operations–                                                                       |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Results–                                                                          |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Net loss                                                                               |   | Ps.                 | (1,188,776 | )                                          | Ps.    | 433,122                                          |   | Ps.                               | (169,436 | )                | Ps.    | (54,702          | )      | Ps. | (198,489 | ) | Ps. | (1,178,281 | ) |
| Items that did not require (generate) resources–                                  |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Provision for voluntary retirement, pensions,  seniority premiums and medical services |   | —              |       | 26,182                                     |   | 17,555                                           |   | —                            |     | —           |   | 43,737           |   |
| Depreciation, amortization and depletion                                               |   | 50,432              |       | 1,375,228                                  |   | 395,278                                          |   | 3,559                             |     | (80,568          | )      | 1,743,929        |   |
| Amortization of goodwill                                                               |   | 20,755              |       | —                                     |   | —                                           |   | —                            |     | —           |   | 20,755           |   |
| Project cancellation                                                                   |   | —              |       | —                                     |   | —                                           |   | —                            |     | 244,770          |   | 244,770          |   |
| Deferred income taxes                                                                  |   | (182,757            | )          | (189,271                                   | )      | (225,288                                         | )      | (194,870                          | )        | 182,757          |   | (609,429         | )      |
| Participation in subsidiary companies                                                  |   | (181,124            | )          | —                                     |   | (7,834                                           | )      | —                            |     | 188,958          |   | —           |   |
| Loss (gain) on sale of property and equipment                                          |   | —              |       | 2,164                                      |   | (5,459                                           | )      | —                            |     | —           |   | (3,295           | )      |
| Capitalized mine stripping                                                             |   | —              |       | (98,805                                    | )      | —                                           |   | —                            |     | —           |   | (98,805          | )      |
| Resources obtained from (applied to) results                                           |   | (1,481,470          | )          | 1,548,620                                  |   | 4,816                                            |   | (246,013                          | )        | 337,428          |   | 163,381          |   |
| Resources provided by (used in) working capital                                        |   | 487,552             |       | (1,803,928                                 | )      | (419,379                                         | )      | 234,570                           |     | 3,349,174        |   | 1,847,989        |   |
| Resources provided by (used in) operations                                             |   | (993,918            | )          | (255,308                                   | )      | (414,563                                         | )      | (11,443                           | )        | 3,686,602        |   | 2,011,370        |   |
|                                                                                   |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Financing–                                                                        |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Decrease in long-term debt in real terms                                               |   | 1,343,006           |       | —                                     |   | —                                           |   | —                            |     | —           |   | 1,343,006        |   |
| Effect of variation of long-term debt in  constant Mexican pesos                       |   | (698,214            | )          | —                                     |   | —                                           |   | —                            |     | —           |   | (698,214         | )      |
| Grupo  México, S.A. de C.V.                                                       |   | 1,583,544           |       | —                                     |   | —                                           |   | —                            |     | (1,547,974       | )      | 35,570           |   |
| Restricted cash in collateral account                                                  |   | (665,513            | )          | (187,516                                   | )      | (8,289                                           | )      | —                            |     | 317,178          |   | (544,140         | )      |
| Dividend declared                                                                      |   | (13,450,800         | )          | —                                     |   | —                                           |   | —                            |     | —           |   | (13,450,800      | )      |
| Dividend payable                                                                       |   | 13,505,940          |       | —                                     |   | (7,448                                           | )      | —                            |     | (47,692          | )      | 13,450,800       |   |
| Resources(used in) provided by financing  activities                                   |   | 1,617,963           |       | (187,516                                   | )      | (115,737                                         | )      | —                            |     | (1,278,408       | )      | (136,222         | )      |
|                                                                                   |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Investing–                                                                        |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| Additions to property and equipment                                                    |   | 1,710               |       | (25,966                                    | )      | (27,079                                          | )      | —                            |     | (163,493         | )      | (214,828         | )      |
| Net increase in deferred charges                                                       |   | 757,239             |       | 616,311                                    |   | 204,645                                          |   | 7,497                             |     | (1,949,693       | )      | (364,001         | )      |
| Proceeds from sale of property and equipment                                           |   | —              |       | 853                                        |   | 8,434                                            |   | —                            |     | —           |   | 9,287            |   |
| Shares in trust                                                                        |   | (58,988             | )          | —                                     |   | —                                           |   | —                            |     | —           |   | (58,988          | )      |
| Minera  México, S.A. de C.V. (holding company)                                    |   | (1,324,473          | )          | —                                     |   | —                                           |   | —                            |     | —           |   | (1,324,473       | )      |
| Resources provided by (used in) investing  activities                                  |   | (624,512            | )          | 591,198                                    |   | 186,000                                          |   | 7,497                             |     | (2,113,186       | )      | (1,953,003       | )      |
|                                                                                   |   |                |       |                                       |   |                                             |   |                              |     |             |   |             |   |
| (Decrease) increase in cash and marketable  securities                                 |   | (467                | )          | 148,374                                    |   | (244,300                                         | )      | (3,946                            | )        | 294,928          |   | 194,589          |   |
| Cash and marketable securities at beginning of  year                                   |   | 3,181               |       | 46,339                                     |   | 315,757                                          |   | 13,125                            |     | (287,135         | )      | 91,267           |   |
| Cash and marketable securities at end of year                                          |   | Ps.                 | 2,714      |                                       | Ps.    | 194,713                                          |   | Ps.                               | 71,457   |             | Ps.    | 9,179            |   | Ps. | 7,793 |   | Ps. | 285,856 |   |
|                                                                                        |        |                     |            |                                            |        |                                                  |        |                                   |          |                  |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |

 

F-48

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CHANGES IN**

**FINANCIAL POSITION FOR THE YEAR ENDED DECEMBER 31, 2001**

#### **EXPRESSEDIN THOUSANDS OF CONSTANT**

#### **MEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                                  |   | **Parent  Company** |     | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |     | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------------------|--------|---------------------|----------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|----------|------------------|--------|------------------|--------|
| Operations-                                                                           |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Results-                                                                              |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Net income  (loss)                                                                    |   | Ps.                 | (863,891 | )                                          | Ps.    | (380,576                                       | )      | Ps.                               | (524,430 | )                | Ps.    | (1,694           | )      | Ps. | 896,524 |   | Ps. | (874,067 | ) |
| Items that did  not require (generate) resources-                                     |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Provision for  voluntary retirement, pensions seniority premiums and medical services |   | —              |     | 6,560                                      |   | (60,158                                        | )      | 1,835                             |     | —           |   | (51,763          | )      |
| Depreciation                                                                          |   | 75                  |     | 1,218,695                                  |   | 406,037                                        |   | 942                               |     | 94,629           |   | 1,720,378        |   |
| Amortization of  goodwill                                                             |   | 20,755              |     | —                                     |   | —                                         |   | —                            |     | —           |   | 20,755           |   |
| Deferred income  taxes                                                                |   | (120,815            | )        | (115,121                                   | )      | (280,361                                       | )      | (1,630                            | )        | 3,378            |   | (514,549         | )      |
| Loss (gain) on  sale of property and equipment                                        |   | —              |     | 40,268                                     |   | 74                                             |   | —                            |     | —           |   | 40,342           |   |
| Capitalized mine  stripping                                                           |   | —              |     | (208,910                                   | )      | —                                         |   | —                            |     | —           |   | (208,910         | )      |
| Participation in  subsidiary companies                                                |   | 836,480             |     | —                                     |   | 4,000                                          |   | —                            |     | (840,480         | )      | —           |   |
| Resources  obtained from (applied to) results                                         |   | (127,396            | )        | 560,916                                    |   | (454,838                                       | )      | (547                              | )        | 154,051          |   | 132,186          |   |
| Resources  provided by (used in) working capital                                      |   | (3,717,654          | )        | (151,298                                   | )      | 288,890                                        |   | 40,385                            |     | 4,328,968        |   | 1,091,887        |   |
| Resources  provided by (used in) operations                                           |   | (3,845,050          | )        | 712,214                                    |   | (165,948                                       | )      | 39,838                            |     | 4,483,019        |   | 1,224,073        |   |
|                                                                                  |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Financing-                                                                            |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Increase (decrease)  in long-term debt in real terms                                  |   | (209,212            | )        | —                                     |   | —                                         |   | —                            |     | —           |   | (209,212         | )      |
| Cash retained in  collateral accounts                                                 |   | —              |     | (54,467                                    | )      | (309,385                                       | )      | —                            |     | —           |   | (363,852         | )      |
| Increase in  capital stock                                                            |   | —              |     | —                                     |   | —                                         |   | 4,790                             |     | (4,790           | )      | —           |   |
| Effect of  variation of long-term debt in constant Mexican pesos                      |   | (578,900            | )        | —                                     |   | —                                         |   | —                            |     | —           |   | (578,900         | )      |
| Affiliated  companies                                                                 |   | 3,293,341           |     | 305,770                                    |   | —                                         |   | —                            |     | (3,043,670       | )      | 555,441          |   |
| Resources used  in financing activities                                               |   | 2,505,229           |     | 251,303                                    |   | (309,385                                       | )      | 4,790                             |     | (3,048,460       | )      | (596,523         | )      |
|                                                                                  |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Investing-                                                                            |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Additions to  property and equipment                                                  |   | 3,120               |     | (474,535                                   | )      | (61,075                                        | )      | (28,758                           | )        | 101,388          |   | (459,860         | )      |
| Investment in  shares of associated and other unconsolidated companies                |   | 62,470              |     | —                                     |   | 3,349                                          |   | —                            |     | (65,616          | )      | 203              |   |
| Net increase in  deferred changes                                                     |   | 1,149,889           |     | (547,458                                   | )      | 441,968                                        |   | (106                              | )        | (1,458,085       | )      | (413,792         | )      |
| Proceeds from  sale of property and equipment                                         |   | —              |     | 19,125                                     |   | 13,488                                         |   | —                            |     | —           |   | 32,613           |   |
| Shares in trust                                                                       |   | (88,152             | )        | —                                     |   | —                                         |   | —                            |     | —           |   | (88,152          | )      |
| Due from holding  companies                                                           |   | 134,670             |     | —                                     |   | —                                         |   | —                            |     | —           |   | 134,670          |   |
| Resources  provided by (used in) investing activities                                 |   | 1,261,997           |     | (1,002,868                                 | )      | 397,730                                        |   | (28,864                           | )        | (1,422,313       | )      | (794,318         | )      |
|                                                                                  |   |                |     |                                       |   |                                           |   |                              |     |             |   |             |   |
| Increase  (decrease) in cash and marketable securities                                |   | (77,824             | )        | (39,351                                    | )      | (77,603                                        | )      | 15,764                            |     | 12,246           |   | (166,768         | )      |
| Cash and  marketable securities at beginning of year                                  |   | 81,004              |     | 85,691                                     |   | 83,975                                         |   | 19,611                            |     | (12,246          | )      | 258,035          |   |
| Cash and  marketable securities at end of year                                        |   | Ps.                 | 3,180    |                                       | Ps.    | 46,340                                         |   | Ps.                               | 6,372    |             | Ps.    | 35,375           |   | Ps. | — |   | Ps. | 91,267 |   |
|                                                                                       |        |                     |          |                                            |        |                                                |        |                                   |          |                  |        |                  |        |  |  |  |  |  |  |  |  |  |  |

 

F-49

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CHANGES IN**

**FINANCIAL POSITION FOR THE YEAR ENDED DECEMBER 31, 2000**

#### **EXPRESSEDIN THOUSANDS OF CONSTANT**

**MEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                                   |   | **Parent  Company** |    | **Mostly  Owned  Guarantor  Subsidiaries** |   | **Wholly  Owned****Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|----------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Operations-                                                                            |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Results-                                                                               |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Net income                                                                             |   | Ps.                 | 258,478 |                                       | Ps.    | 330,331                                        |   | Ps.                               | 15,909 |             | Ps.    | (23,048          | )      | Ps. | (315,434 | ) | Ps. | 266,236 |   |
| Items that did  not require (generate) resources-                                      |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Provision for  voluntary retirements pensions, seniority premiums and medical services |   | —              |    | 25,486                                     |   | (20,093                                        | )      | (1,623                            | )      | (2               | )      | 3,768            |   |
| Depreciation                                                                           |   | 422                 |    | 1,252,053                                  |   | 445,461                                        |   | (14,378                           | )      | (10,389          | )      | 1,673,169        |   |
| Amortization of  goodwill                                                              |   | 20,755              |    | —                                     |   | —                                         |   | —                            |   | —           |   | 20,755           |   |
| Loss (gain) on  sale of property and equipment                                         |   | —              |    | 48,527                                     |   | (5,701                                         | )      | —                            |   | —           |   | 42,826           |   |
| Capitalized mine  stripping                                                            |   | —              |    | (572,430                                   | )      | —                                         |   | —                            |   | —           |   | (572,430         | )      |
| Deferred income  taxes                                                                 |   | (169,151            | )       | 289,747                                    |   | (65,368                                        | )      | 1,204                             |   | (2,405           | )      | 54,027           |   |
| Participation in  subsidiary companies                                                 |   | (269,041            | )       | —                                     |   | (2,865                                         | )      | —                            |   | 271,906          |   | —           |   |
| Resources  obtained from (applied to) results                                          |   | (158,537            | )       | 1,373,714                                  |   | 367,343                                        |   | (37,845                           | )      | (56,324          | )      | 1,488,351        |   |
| Resources  provided by (used in) working capital                                       |   | (1,512,258          | )       | 373,630                                    |   | 1,200,755                                      |   | 152,979                           |   | (1,357,923       | )      | (1,142,817       | )      |
| Resources  provided by (used in) operations                                            |   | (1,670,795          | )       | 1,747,344                                  |   | 1,568,098                                      |   | 115,134                           |   | (1,414,247       | )      | 345,534          |   |
|                                                                                   |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Financing-                                                                             |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Increase  (decrease) in long-term debt in real terms                                   |   | (138,792            | )       | (4,818                                     | )      | —                                         |   | —                            |   | 599,320          |   | 455,710          |   |
| Dividends paid                                                                         |   | —              |    | —                                     |   | (1,289,083                                     | )      | (124,431                          | )      | 1,413,514        |   | —           |   |
| Effect of  variation of long-term debt in constant Mexican pesos                       |   | (1,189,875          | )       | (431                                       | )      | —                                         |   | —                            |   | 431              |   | (1,189,875       | )      |
| Resources used  in financing activities                                                |   | (1,328,667          | )       | (5,249                                     | )      | (1,289,083                                     | )      | (124,431                          | )      | 2,013,265        |   | (734,165         | )      |
|                                                                                   |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Investing-                                                                             |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Additions to  property and equipment, less net book value of retirements               |   | —              |    | (845,833                                   | )      | (235,845                                       | )      | (38                               | )      | 38               |   | (1,081,678       | )      |
| Investments in  shares of  associatedand other  unconsolidated companies          |   | 1,248,554           |    | —                                     |   | 46,957                                         |   | —                            |   | (1,295,511       | )      | —           |   |
| Proceeds from  sale of property and equipment                                          |   | —              |    | 30,872                                     |   | 6,084                                          |   | —                            |   | —           |   | 36,956           |   |
| Payments  received on notes receivable from holdingcompanies                           |   | 894,049             |    | —                                     |   | —                                         |   | —                            |   | —           |   | 894,049          |   |
| Shares in trust                                                                        |   | 146,236             |    | —                                     |   | —                                         |   | —                            |   | —           |   | 146,236          |   |
| Other assets                                                                           |   | 116,284             |    | (905,237                                   | )      | (87,776                                        | )      | (1,126                            | )      | 695,468          |   | (182,387         | )      |
|                                                                                   |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Resources  provided by (used in) investing activities                                  |   | 2,405,123           |    | (1,720,198                                 | )      | (270,580                                       | )      | (1,164                            | )      | (600,005         | )      | (186,824         | )      |
|                                                                                   |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Decrease in cash  and temporary investments                                            |   | (594,339            | )       | 21,897                                     |   | 8,435                                          |   | (10,461                           | )      | (987             | )      | (575,455         | )      |
| Cash and  temporary investments at beginning of year                                   |   | 675,343             |    | 63,794                                     |   | 75,540                                         |   | 17,824                            |   | 987              |   | 833,490          |   |
|                                                                                   |   |                |    |                                       |   |                                           |   |                              |   |             |   |             |   |
| Cash and  temporary investments at end of year                                         |   | Ps.                 | 81,004  |                                       | Ps.    | 85,691                                         |   | Ps.                               | 83,975 |             | Ps.    | 7,363            |   | Ps. | — |   | Ps. | 258,035 |   |
|                                                                                        |        |                     |         |                                            |        |                                                |        |                                   |        |                  |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |

 

F-50

----

 

**GRUPO MINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

** **

**SUPPLEMENTALCONDENSED COMBINING RECONCILIATIONOF MEXICAN GAAP TO U.S. GAAP AS OF AND FOR THE YEAR ENDED DECEMBER 31,2002EXPRESSED IN THOUSANDS OF CONSTANT**

**MEXICANPESOS AS OF DECEMBER 31, 2002**

 
|                                                                                             |   | **Parent  Company** | ** ** | **Mostly  Owned  Guarantor  Subsidiaries** | ** ** | **Wholly  Owned  Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Net income (loss) of majority interest under Mexican GAAP**                                    |   | Ps.                 | (1,188,776 | )                                          | Ps.        | 433,122                                    |       | Ps.                               | (162,314   | )                | Ps.        | (54,702          | )          | Ps. | (216,106 | ) | Ps. | (1,188,776 | ) |
| U.S. GAAP adjustments:                                                                           |   |                |       |                                       |       |                                       |       |                              |       |             |       |             |       |
| Deferred income taxes under  U.S. GAAP                                                           |   | 271,074             |       | (118,399                                   | )          | 601,404                                    |       | —                            |       | —           |       | 754,079          |       |
| Deferred employee profit  sharing liability                                                      |   | —              |       | 71,059                                     |       | 81,257                                     |       | —                            |       | —           |       | 152,316          |       |
| Deferred income taxes under  Mexican GAAP                                                        |   | (165,595            | )          | (189,271                                   | )          | (254,563                                   | )          | —                            |       | —           |       | (609,429         | )          |
| Amortization of capitalized  interest                                                            |   | (8,131              | )          | —                                     |       | —                                     |       | —                            |       | —           |       | (8,131           | )          |
| Amortization of capitalized  exchange loss and gain on monetary position                         |   | 495                 |       | 5,514                                      |       | —                                     |       | —                            |       | —           |       | 6,009            |       |
| Capitalized interest                                                                             |   | 32,774              |       | —                                     |       | —                                     |       | —                            |       | —           |       | 32,774           |       |
| Amortization of negative  goodwill                                                               |   | —              |       | 754,061                                    |       | —                                     |       | —                            |       | —           |       | 754,061          |       |
| Pension plan cost                                                                                |   | —              |       | 4,167                                      |       | 1,197                                      |       | 282                               |       | —           |       | 5,646            |       |
| Reverse of amortization  of  preoperating  expenses                                    |   | —              |       | 26,680                                     |       | 180,344                                    |       | —                            |       | —           |       | 207,024          |       |
| Effects of inflation accounting  on U.S. GAAP adjustments and monetary gain on labor liabilities |   | (6,137              | )          | 24,452                                     |       | 5,763                                      |       | —                            |       | —           |       | 24,078           |       |
| Effects on minority  interest of U.S. GAAP adjustments                                           |   | 6,180               |       | —                                     |       | —                                     |       | —                            |       | —           |       | 6,180            |       |
| Participation in subsidiary  companies                                                           |   | 1,214,702           |       | —                                     |       | —                                     |       | —                            |       | (1,214,702       | )          | —           |       |
|                                                                                             |   | 1,345,362           |       | 578,263                                    |       | 615,402                                    |       | 282                               |       | (1,214,702       | )          | 1,345,362        | ** ** |
| **Net income  (loss) of majority interest under U.S. GAAP**                                      |   | Ps.                 | 156,586    |                                       | Ps.        | 1,011,385                                  |       | Ps.                               | 453,088    |             | Ps.        | (54,420          | )          | Ps. | (1,430,808 | ) | Ps. | 156,586 |   |
| Weighted average common  shares outstanding, in thousands                                        |   | 650,162             |       | —                                     | ** ** | —                                     | ** ** | —                            | ** ** | —           | ** ** | 650,162          | ** ** |
| Basic earnings per share under U.S. GAAP                                                         |   | Ps.                 | 0.24       |                                       | —     |                                       | —     |                              | —     |             | —     |             | Ps.        | 0.24 |   |
|                                                                                             |   |                | ** ** |                                       | ** ** |                                       | ** ** |                              | ** ** |             | ** ** |             | ** ** |
| **Majority stockholder’s equity under Mexican GAAP**                                        |   | Ps.                 | 8,209,102  |                                       | Ps.        | 28,496,434                                 |       | Ps.                               | 4,665,762  |             | Ps.        | 350,141          |       | Ps. | (33,512,337 | ) | Ps. | 8,209,102 |   |
| U.S. GAAP adjustments:                                                                           |   |                |       |                                       |       |                                       |       |                              |       |             |       |             |       |
| Deferred income taxes under  U.S. GAAP                                                           |   | 1,102,020           |       | (3,514,695                                 | )          | (1,365,268                                 | )          | —                            |       | —           |       | (3,777,943       | )          |
| Deferred employee profit  sharing                                                                |   | —              |       | (2,155,391                                 | )          | (445,035                                   | )          | —                            |       | —           |       | (2,600,426       | )          |
| Deferred income taxes under  Mexican GAAP                                                        |   | 2,390,924           |       | 3,139,532                                  |       | 1,351,163                                  |       | —                            |       | —           |       | 6,881,619        |       |
| Capitalized exchange loss  and gain on monetary position                                         |   | —              |       | (210,330                                   | )          | —                                     |       | —                            |       | —           |       | (210,330         | )          |
| Capitalized interest                                                                             |   | 202,651             |       | —                                     |       | —                                     |       | —                            |       | —           |       | 202,651          |       |
| Accumulated pension plan  cost                                                                   |   | —              |       | (557                                       | )          | 6,857                                      |       | 473                               |       | —           |       | 6,773            |       |
| Start-up costs, net of  amortization                                                             |   | —              |       | (4,814                                     | )          | —                                     |       | —                            |       | —           |       | (4,814           | )          |
| Negative goodwill  (previously amortized for Mexican GAAP purposes)                              |   | —              |       | (1,508,122                                 | )          | —                                     |       | —                            |       | —           |       | (1,508,122       | )          |
| Amortization of goodwill  under Mexican GAAP                                                     |   | —              |       | 20,755                                     |       | —                                     |       | —                            |       | —           |       | 20.755           |       |
| Investment in common stock  of a parent company                                                  |   | (415,964            | )          | —                                     |       | —                                     |       | —                            |       | —           |       | (415,964         | )          |
| Effects on minority  interest of U.S. GAAP adjustments                                           |   | 86,563              |       | —                                     |       | —                                     |       | —                            |       | —           |       | 86,563           |       |
| Effect of U.S. GAAP in  subsidiaries companies                                                   |   | (4,688,432          | )          | —                                     |       | —                                     |       | —                            |       | 4,688,432        |       | —           |       |
|                                                                                             |   | (1,322,238          | )          | (4,233,622                                 | )          | (452,283                                   | )          | 473                               |       | 4,688,432        |       | (1,322,238       | **)**      |
| Stockholder’s equity under U.S. GAAP                                                        |   | Ps.                 | 6,886,864  |                                       | Ps.        | 24,262,812                                 |       | Ps.                               | 4,213,479  |             | Ps.        | 350,614          |       | Ps. | (28,829,905 | ) | Ps. | 6,886,864 |   |

 

F-51

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING RECONCILIATIONOF MEXICAN GAAP TO U.S. GAAP AS OF AND FOR THE YEAR ENDED DECEMBER 31,2001EXPRESSED IN THOUSANDS OF CONSTANTMEXICAN PESOS AS OF DECEMBER 31, 2002**

 
|                                                                                             |   | **Parent  Company** |           | **Mostly  Owned  Guarantor  Subsidiaries (As  Restated)** |    | **Wholly  Owned  Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **     | **Eliminations  (As  Restated)** |    | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|--------|---------------------|----------------|-----------------------------------------------------------|---------|--------------------------------------------|------------|-----------------------------------|----------------|----------------------------------|---------|------------------|------------|
| **Net income (loss) of majority interest under Mexican GAAP**                                    |   | Ps.                 | (863,891       | )                                                         | Ps.     | (380,576                                   | )          | Ps.                               | (487,923       | )                                | Ps.     | 15,560           |       | Ps. | 852,939 |   | Ps. | (863,891 | ) |
| U.S. GAAP adjustments:                                                                           |   |                |           |                                                      |    |                                       |       |                              |           |                             |    |             |       |
| Deferred income taxes under  U.S. GAAP                                                           |   | 626,957             |           | (1,473,007                                                | )       | (987,407                                   | )          | 1,629                             |           | —                           |    | (1,831,828       | )          |
| Deferred employee profit  sharing liability                                                      |   | —              |           | 65,530                                                    |    | 94,988                                     |       | —                            |           | —                           |    | 160,518          |       |
| Deferred income taxes under  Mexican GAAP                                                        |   | (42,146             | )              | (111,742                                                  | )       | (243,566                                   | )          | (1,632                            | )              | —                           |    | (399,086         | )          |
| Amortization of capitalized  exchange loss and gain on monetary position                         |   | —              |           | 6,009                                                     |    | —                                     |       | —                            |           | —                           |    | 6,009            |       |
| Capitalized interest                                                                             |   | (5,358              | )              | —                                                    |    | —                                     |       | —                            |           | —                           |    | (5,358           | )          |
| Amortization of negative  goodwill                                                               |   | —              |           | 754,061                                                   |    | —                                     |       | —                            |           | —                           |    | 754,061          |       |
| Pension plan cost                                                                                |   | —              |           | 5,127                                                     |    | (124                                       | )          | 242                               |           | —                           |    | 5,245            |       |
| Start-up cost                                                                                    |   | —              |           | (4,433                                                    | )       | 288,488                                    |       | —                            |           | —                           |    | 284,055          |       |
| Effects of inflation  accounting on U.S. GAAP adjustments and monetary gain on labor liabilities |   | (18,940             | )              | 89,879                                                    |    | 25,329                                     |       | —                            |           | —                           |    | 96,268           |       |
| Effects on minority  interest of U.S. GAAP adjustments                                           |   | 33,105              |           | —                                                    |    | —                                     |       | —                            |           | —                           |    | 33,105           |       |
| Participation in subsidiary  companies                                                           |   | (1,490,628          | )              | —                                                    |    | —                                     |       | —                            |           | 1,490,628                        |    | —           |       |
|                                                                                             |   | (897,011            | )              | (668,576                                                  | )       | (822,292                                   | )          | 239                               |           | 1,490,628                        |    | (897,011         | **)**      |
| **Net income  (loss) of majority interest under U.S. GAAP**                                      |   | **Ps.**             | **(1,760,902** | **)**                                                     | **Ps.** | **(1,049,152**                             | **)**      | **Ps.**                           | **(1,310,215** | **)**                            | **Ps.** | **15,799**       | ** ** | **Ps.** | **2,343,567** | ** ** | **Ps.** | **(1,760,902** | **)** |
| Weighted average common  shares outstanding, in thousands                                        |   | 650,162             |           |                                                      |    |                                       |       |                              |           |                             |    | 650,162          |       |
| Basic earnings per share  under U.S. GAAP                                                        |   | Ps.                 | (2.71          | )                                                         |    |                                       |       |                              |           |                             |    |             | Ps.        | (2.71 | ) |
|                                                                                             |   |                |           |                                                      |    |                                       |       |                              |           |                             |    |             |       |
| **Majority stockholder’s equity under Mexican GAAP**                                        |   | Ps.                 | 22,684,646     |                                                      | Ps.     | 28,070,028                                 |       | Ps.                               | 4,842,318      |                             | Ps.     | 423,358          |       | Ps. | (33,335,704 | ) | Ps. | 22,684,646 |   |
| U.S. GAAP adjustments:                                                                           |   |                |           |                                                      |    |                                       |       |                              |           |                             |    |             |       |
| Deferred income taxes under  U.S. GAAP                                                           |   | 1,014,509           |           | (4,880,585                                                | )       | (2,659,681                                 | )          | —                            |           | —                           |    | (6,525,757       | )          |
| Deferred employee profit  sharing                                                                |   | —              |           | (2,227,724                                                | )       | (524,917                                   | )          | —                            |           | —                           |    | (2,752,641       | )          |
| Deferred income taxes under  Mexican GAAP                                                        |   | 2,782,510           |           | 3,342,355                                                 |    | 1,400,587                                  |       | —                            |           | —                           |    | 7,525,452        |       |
| Capitalized exchange loss  and gain on monetary position                                         |   | —              |           | (207,211                                                  | )       | —                                     |       | —                            |           | —                           |    | (207,211         | )          |
| Accumulated pension plan  cost                                                                   |   | —              |           | (182                                                      | )       | 20,742                                     |       | —                            |           | —                           |    | 20,560           |       |
| Capitalized interest                                                                             |   | 178,008             |           | —                                                    |    | —                                     |       | —                            |           | —                           |    | 178,008          |       |
| Negative goodwill  (previously amortized for Mexican GAAP purposes)                              |   | —              |           | (2,262,183                                                | )       | —                                     |       | —                            |           | —                           |    | (2,262,183       | )          |
| Start-up costs                                                                                   |   | —              |           | (33,494                                                   | )       | (178,344                                   | )          | —                            |           | —                           |    | (211,838         | )          |
| Gain on extinguishment of  debt                                                                  |   | —              |           | —                                                    |    | —                                     |       | —                            |           | —                           |    | —           |       |
| Investment in common stock  of parent company                                                    |   | (356,976            | )              | —                                                    |    | —                                     |       | —                            |           | —                           |    | (356,976         | )          |
| Effects on minority  interest of U.S. GAAP adjustments                                           |   | 111,335             |           | —                                                    |    | —                                     |       | —                            |           | —                           |    | 111,335          |       |
| Effect of U.S. GAAP in  subsidiaries companies                                                   |   | (8,210,637          | )              | —                                                    |    | —                                     |       | —                            |           | 8,210,637                        |    | —           |       |
|                                                                                             |   | (4,481,251          | )              | (6,269,024                                                | )       | (1,941,613                                 | )          | —                            |           | 8,210,637                        |    | (4,481,251       | **)**      |
|                                                                                             |   |                |           |                                                      |    |                                       |       |                              |           |                             |    |             |       |
| **Stockholder’s  equity under U.S. GAAP**                                                   |   | **Ps.**             | **18,203,395** | ** **                                                | **Ps.** | **21,801,004**                             | ** ** | **Ps.**                           | **2,900,705**  | ** **                       | **Ps.** | **423,358**      | ** ** | **Ps.** | **(25,125,067** | **)** | **Ps.** | **18,203,395** | ** ** |

 

F-52

----

 

**GRUPOMINERO MEXICO, S.A. DE C.V. AND SUBSIDIARIES**

 

**SUPPLEMENTAL CONDENSED COMBINING RECONCILIATIONOF MEXICAN GAAP TO U.S. GAAP FOR THE YEAR ENDED DECEMBER 31, 2000EXPRESSED IN TERMS OF THE PURCHASING POWEROF THE MEXICAN CURRENCY AS OF DECEMBER 31, 2002**

 
|                                                                                             |   | **Parent  Company** |        | **Mostly  Owned  Guarantor  Subsidiaries (As  Restated)** |    | **Wholly  Owned  Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations  (As  Restated)** |    | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|--------|---------------------|-------------|-----------------------------------------------------------|---------|--------------------------------------------|------------|-----------------------------------|--------------|----------------------------------|---------|------------------|------------|
| **Net income of majority interest under Mexican GAAP**                                           |   | Ps.                 | 258,478     |                                                      | Ps.     | 330,332                                    |       | Ps.                               | 15,610       |                             | Ps.     | (23,046          | )          | Ps. | (322,896 | ) | Ps. | 258,478 |   |
| U.S. GAAP adjustments:                                                                           |   |                |        |                                                      |    |                                       |       |                              |         |                             |    |             |       |
| Deferred income taxes under  U.S. GAAP                                                           |   | (93,290             | )           | (584,976                                                  | )       | (103,501                                   | )          | 1,202                             |         | —                           |    | (780,565         | )          |
| Deferred employee profit  sharing liability                                                      |   | —              |        | (44,285                                                   | )       | (186,737                                   | )          | —                            |         | —                           |    | (231,022         | )          |
| Deferred income taxes under  Mexican GAAP                                                        |   | (80,099             | )           | 309,152                                                   |    | (58,099                                    | )          | (1,202                            | )            | —                           |    | 169,752          |       |
| Amortization of capitalized  exchange loss and gain on monetary position                         |   | —              |        | 6,009                                                     |    | —                                     |       | —                            |         | —                           |    | 6,009            |       |
| Capitalized interest                                                                             |   | (7,321              | )           | —                                                    |    | —                                     |       | —                            |         | —                           |    | (7,321           | )          |
| Amortization of negative  goodwill                                                               |   | —              |        | 754,041                                                   |    | —                                     |       | —                            |         | —                           |    | 754,041          |       |
| Pension plan cost                                                                                |   | —              |        | (7,472                                                    | )       | 9,673                                      |       | —                            |         | —                           |    | 2,201            |       |
| Start-up cost                                                                                    |   | —              |        | (2,011                                                    | )       | (115,673                                   | )          | —                            |         | —                           |    | (117,684         | )          |
| Reversal of amortization of  preoperating expenses                                               |   | —              |        | 950                                                       |    | —                                     |       | —                            |         | —                           |    | 950              |       |
| Gain on extinguishment of  debt                                                                  |   | (138,243            | )           | —                                                    |    | —                                     |       | —                            |         | —                           |    | (138,243         | )          |
| Effects of inflation  accounting on U.S. GAAP adjustments and monetary gain on labor liabilities |   | —              |        | 174,494                                                   |    | 36,952                                     |       | —                            |         | —                           |    | 211,446          |       |
| Effects on minority  interest of U.S. GAAP adjustments                                           |   | (21,171             | )           | —                                                    |    | —                                     |       | —                            |         | —                           |    | (21,171          | )          |
| Participation in subsidiary  companies                                                           |   | 188,517             |        | —                                                    |    | —                                     |       | —                            |         | (188,517                         | )       | —           |       |
|                                                                                             |   | (151,607            | )           | 605,902                                                   |    | (417,385                                   | )          | —                            |         | (188,517                         | )       | (151,607         | **)**      |
| **Net income  (loss) of majority interest under U.S. GAAP**                                      |   | **Ps.**             | **106,871** | ** **                                                | **Ps.** | **936,234**                                | ** ** | **Ps.**                           | **(401,775** | **)**                            | **Ps.** | **(23,046**      | **)**      | **Ps.** | **(511,413** | **)** | **Ps.** | **106,871** | ** ** |
| Weighted average common shares outstanding, in thousands                                         |   | Ps.                 | 650,162     | ** **                                                |    |                                       |       |                              |         |                             |    |             | 650,162    |   |
| Basic earnings per share  under U.S. GAAP                                                        |   | Ps.                 | 0.16        |                                                      |    |                                       |       |                              |         |                             |    |             | Ps.        | 0.16 |   |

 

F-53

----

 

**ANNEX F-1**

** **

**FINANCIALSTATEMENTS OF MEXICANA DE COBRE, S.A. DE C.V.**

** **

----

 

**INDEX**

 

**MEXICANA DE COBRE, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDFINANCIAL STATEMENTS**

 
| Consolidated Financial Statements: |
|------------------------------------|
|                               | Independent  Auditor’s Report |
|                               | Consolidated  Balance Sheets for the Years Ended December 31, 2002 and 2001 |
|                               | Consolidated  Statements of Operations for the Years Ended December 31, 2002, 2001 and  2000 |
|                               | Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended December  31, 2002, 2001 and 2000 |
|                               | Consolidated  Statements of Changes in Financial Position for the Years Ended December 31,  2002, 2001 and 2000 |
|                               | Notes to Consolidated  Financial Statements |

 

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

Tothe Stockholders of

 

Mexicana de Cobre, S.A. de C.V.,

 

We have audited theaccompanying consolidated balance sheet of Mexicana de Cobre, S.A. de C.V. andSubsidiaries (Mexican corporations collectively referred to as the “Company”)as of December 31, 2002, and the related consolidated statements of operations,changes in stockholders’ equity and changes in financial position for the yearthen ended, all expressed in thousands of Mexican pesos of purchasing power asof December 31, 2002. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Mexicana de Cobre, S.A. de C.V. and Subsidiaries as ofDecember 31, 2002, and the results of their operations, changes in theirstockholders’ equity and changes in their financial position for the year thenended, in conformity with accounting principles generally accepted in Mexico.

 

Accounting principlesgenerally accepted in Mexico vary in certain significant respects fromaccounting principles generally accepted in the United States of America. Theapplication of the latter would have affected the determination of net incomefor the year ended December 31, 2002 and the determination of stockholders’equity as of that date to the extent summarized in Note 16.

 

Our audit alsocomprehended the translation of Mexican peso amounts into U.S. dollar amountsand, in our opinion, such translation has been made in conformity with the basisstated in Note 2. Such U.S. dollar amounts are presented solely for theconvenience of readers.

 
| /s/ Deloitte & Touche |
|---------------------------|
| Deloitte & Touche     |
|                      |
| Mexico City, Mexico       |
| June 13, 2003             |
|                      |

F-2

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

Tothe Stockholders of

 

Mexicana de Cobre, S.A. de C.V.,

 

We have audited theaccompanying consolidated balance sheets of Mexicana de Cobre, S.A. de C.V. andSubsidiaries (Mexican corporations collectively referred to as the “Company”)as of December 31, 2001, and the related consolidated statements of operations,changes in stockholders’ equity and changes in financial position for the yearsended December 31, 2001 and 2000, all expressed in thousands of Mexican pesosof purchasing power as of December 31, 2002. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by the Company’smanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Mexicana de Cobre, S.A. de C.V.and Subsidiaries as of December 31, 2001, and the results of their operationsand the changes in their financial position for the years ended December 31,2001 and 2000, in conformity with accounting principles generally accepted inMexico.

 

In 2000, the Companyadopted the regulations of revised Bulletin D-4, “Accounting for Income andAsset Taxes and Employee Profit Sharing”. The initial effect of adopting thisbulletin was to record the deferred income tax effects based on the cumulativeeffect of temporary differences as of January 1, 2000 as a long-term liability,directly charging stockholders’ equity in the new initial effect of deferredincome taxes account for 2,568,714 thousand Mexican pesos. Also, the provisionfor income taxes of 2000 increased by 209,485 thousand Mexican pesos due to thedeferred effects of the year.

 

As explained in Note 4,Bulletin C-2, “Financial Instruments”, became effective January 1, 2001.  This bulletin establishes the methodologyfor valuing and recording financial instruments and requires recognition ofcertain financial instruments on the balance sheet as either assets orliabilities at fair values, affecting the results of the period for anyvaluation adjustments of such instruments.

 

F-3

----

 

Accounting practices usedby the Company in preparing the accompanying consolidated financial statementsconform with accounting principles generally accepted in Mexico but do notconform with accounting principles generally accepted in the United States ofAmerica (U.S GAAP).  A description ofthese differences and a reconciliation of consolidated net income (loss) andstockholders’ equity to U.S. GAAP as permitted by Form 20-F, which allowsomission of the requirement to quantify, in the U.S. GAAP reconciliation, thedifferences attributable to the effects of comprehensive inflation adjustmentsrecorded locally, are set forth in Note 16. As discussed in Note 16, the 2001 and 2000 U.S. GAAP reconciliationshave been restated.

 

 

Ruiz, Urquiza yCía., S. C.

(A member firm of Andersen Worldwide until April 9,2002)

 
| /s/ Jorge I. Peralta Alvarez     |
|----------------------------------|
| C.P.C.  Jorge I. Peralta Alvarez |

 

 

Mexico City, Mexico

June 14, 2002 (except with respect to the restatementto constant Mexican pesos,and the restatement of the U.S. GAAP reconciliations presented in Note16,as to which the date isJune 13, 2003)

 

F-4

----

 

**MEXICANADE COBRE, S.A. DE C.V. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2002 AND 2001**

**EXPRESSED IN CONSTANT MEXICAN PESOS**

**AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) and thousands ofU.S. dollars ($))**

 
|                                                                                                                    |   | **Convenience  Translation  (Note 2)  2002** |      | **2002**    |   | **2001**    |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|-------------|--------|-------------|--------|
| **ASSETS**                                                                                                              |   |                                         |      |        |   |        |   |
| CURRENT ASSETS:                                                                                                         |   |                                         |      |        |   |        |   |
| Cash and temporary investments (Note 5)                                                                                 |   | $                                            | 5,036     |        | Ps.    | 51,938      |   | Ps. | 27,626 |   |
| Cash retained in collateral account (Note 1)                                                                            |   | 23,465                                       |      | 241,983     |   | 40,598      |   |
| Notes and accounts receivable-                                                                                          |   |                                         |      |        |   |        |   |
| Trade net of allowances for doubtful accounts of Ps.15,672  and Ps.5,503 as of December 31, 2002 and 2001, respectively |   | 27,838                                       |      | 287,083     |   | 139,712     |   |
| Recoverable taxes                                                                                                       |   | 18,610                                       |      | 191,918     |   | 117,579     |   |
| Due from affiliated companies (Note 12)                                                                                 |   | 443,019                                      |      | 4,568,632   |   | 2,346,581   |   |
| Other                                                                                                                   |   | 5,507                                        |      | 56,781      |   | 28,447      |   |
|                                                                                                                    |   | 494,973                                      |      | 5,104,414   |   | 2,632,319   |   |
| Inventories (Note 6)                                                                                                    |   | 101,036                                      |      | 1,041,930   |   | 1,229,974   |   |
| Total current assets                                                                                                    |   | 624,511                                      |      | 6,440,265   |   | 3,930,517   |   |
|                                                                                                                    |   |                                         |      |        |   |        |   |
| DUE FROM GRUPO MINERO MEXICO, S.A. DE C.V.  (Note 12)                                                              |   | 163,814                                      |      | 1,689,339   |   | 2,224,505   |   |
| DUE FROM GRUPO MEXICO,  S.A DE C.V. (Note 12)                                                                           |   | 13,668                                       |      | 140,955     |   | —      |   |
| DUE FROM MINERA MÉXICO,  S.A. DE C.V. (Note 12)                                                                    |   | 7,167                                        |      | 73,914      |   | 707,249     |   |
| PROPERTY AND EQUIPMENT (Note 7)                                                                                         |   | 1,584,791                                    |      | 16,343,153  |   | 17,321,065  |   |
| INVESTMENTS IN SHARES OF ASSOCIATED COMPANIES AND  UNCONSOLIDATED SUBSIDIARIES                                          |   | 151                                          |      | 1,554       |   | 1,554       |   |
| DEFERRED CHARGES (Note 8)                                                                                               |   | 23,768                                       |      | 245,112     |   | 233,029     |   |
| Total assets                                                                                                            |   | $                                            | 2,417,871 |        | Ps.    | 24,934,292  |   | Ps. | 24,417,919 |   |
|                                                                                                                    |   |                                         |      |        |   |        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                           |   |                                         |      |        |   |        |   |
| CURRENT LIABILITIES:                                                                                                    |   |                                         |      |        |   |        |   |
| Accounts payable and accrued liabilities                                                                                |   | $                                            | 49,520    |        | Ps.    | 510,674     |   | Ps. | 221,906 |   |
| Accounts payable to suppliers                                                                                           |   | 39,432                                       |      | 406,643     |   | 470,492     |   |
| Due to affiliated companies  (Note 12)                                                                                  |   | 22,074                                       |      | 227,635     |   | 150,489     |   |
| Taxes payable                                                                                                           |   | —                                       |      | —      |   | 7,999       |   |
| Employee profit sharing payable (Note 13)                                                                               |   | 82                                           |      | 848         |   | 41,597      |   |
| Total current liabilities                                                                                               |   | 111,108                                      |      | 1,145,800   |   | 892,483     |   |
| LIABILITY FOR PENSION AND SENIORITY PREMIUM (Note 9)                                                               |   | 2,781                                        |      | 28,677      |   | 28,772      |   |
| DEFERRED INCOME TAXES (Note 13)                                                                                         |   | 236,228                                      |      | 2,436,101   |   | 2,575,006   |   |
| Total liabilities                                                                                                       |   | 350,117                                      |      | 3,610,578   |   | 3,496,261   |   |
| STOCKHOLDERS’ EQUITY (Note 10):                                                                                    |   |                                         |      |        |   |        |   |
| Capital stock                                                                                                           |   | 821,685                                      |      | 8,473,623   |   | 8,473,623   |   |
| Additional paid-in capital                                                                                              |   | 1,060,239                                    |      | 10,933,723  |   | 10,933,723  |   |
| Retained earnings                                                                                                       |   | 1,472,685                                    |      | 15,187,074  |   | 14,780,846  |   |
| Accumulated other comprehensive  loss                                                                                   |   | (1,037,750                                   | )         | (10,701,803 | )      | (10,702,136 | )      |
| Initial effect of deferred income taxes                                                                                 |   | (249,087                                     | )         | (2,568,714  | )      | (2,568,714  | )      |
| Total majority stockholders’  equity                                                                               |   | 2,067,772                                    |      | 21,323,903  |   | 20,917,342  |   |
| Minority interest                                                                                                       |   | (18                                          | )         | (189        | )      | 4,316       |   |
| Total stockholders’ equity                                                                                         |   | 2,067,754                                    |      | 21,323,714  |   | 20,921,658  |   |
| Total liabilities and stockholders’ equity                                                                         |   | $                                            | 2,417,871 |        | Ps.    | 24,934,292  |   | Ps. | 24,417,919 |   |
|                                                                                                                         |        |                                              |           |             |        |             |        |  |  |  |  |  |  |

 

The accompanying notes are part of these consolidated financialstatements.

 

F-5

----

 

**MEXICANA DE COBRE, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANT MEXICAN PESOS**

**AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) and thousands ofU.S. dollars ($), except per share and share data)**

 
|                                                                     |   | **Convenience  Translation  (Note 2)  2002** |       | **2002**  |       | **2001**  |       | **2000**  |       |
|--------------------------------------------------------------------------|--------|----------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| NET SALES                                                                |   | $                                            | 413,667    |      | Ps.        | 4,265,948 |       | Ps.       | 5,662,634  |   | Ps. | 7,014,637 |   |
| COST OF SALES                                                            |   | 352,902                                      |       | 3,639,311 |       | 4,776,016 |       | 5,474,606 |       |
| Gross profit                                                             |   | 60,765                                       |       | 626,637   |       | 886,618   |       | 1,540,031 |       |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| OPERATING EXPENSES:                                                      |   |                                         |       |      |       |      |       |      |       |
| Administrative expenses from  operations                                 |   | 8,934                                        |       | 92,127    |       | 94,117    |       | 155,142   |       |
| Depreciation, amortization and depletion                                 |   | 93,374                                       |       | 962,919   |       | 975,508   |       | 944,150   |       |
|                                                                     |   | 102,308                                      |       | 1,055,046 |       | 1,069,625 |       | 1,099,292 |       |
| (Loss) income from operations                                            |   | (41,543                                      | )          | (428,409  | )          | (183,007  | )          | 440,739   |       |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| NET COMPREHENSIVE FINANCING  COST (INCOME):                              |   |                                         |       |      |       |      |       |      |       |
| Interest expense                                                         |   | 291                                          |       | 3,011     |       | 81,946    |       | 13,600    |       |
| Interest income                                                          |   | (27,467                                      | )          | (283,258  | )          | (375,657  | )          | (287,137  | )          |
| Foreign exchange (gain) loss,  net                                       |   | (68,402                                      | )          | (705,399  | )          | 217,220   |       | (26,172   | )          |
| Monetary position gain                                                   |   | 27,090                                       |       | 279,364   |       | 193,645   |       | 290,624   |       |
|                                                                     |   | (68,488                                      | )          | (706,282  | )          | 117,154   |       | (9,085    | )          |
| OTHER INCOME, net                                                        |   | 180                                          |       | 1,855     |       | 21,171    |       | 14,703    |       |
| Income (loss) before income  taxes and employee statutory profit-sharing |   | 27,125                                       |       | 279,728   |       | (278,990  | )          | 464,527   |       |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| INCOME TAXES (NOTE 13)                                                   |   | (12,715                                      | )          | (131,124  | )          | (101,192  | )          | 209,484   |       |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| EMPLOYEE STATUTORY PROFIT SHARING                                        |   | —                                       |       | —    |       | 38,853    |       | 58,527    |       |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| Consolidated net income (loss)                                           |   | $                                            | 39,840     |      | Ps.        | 410,852   |       | Ps.       | (216,651   | ) | Ps. | 196,516 |   |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| ALLOCATION OF CONSOLIDATED  NET INCOME (LOSS) :                          |   |                                         | ** ** |      | ** ** |      | ** ** |      | ** ** |
| Net income (loss) of the majority interest                               |   | $                                            | 39,392     |      | Ps.        | 406,228   |       | Ps.       | (216,651   | ) | Ps. | 196,516 | ** ** |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| Net income (loss) of the minority interest                               |   | 448                                          |       | 4,624     |       | —    |       | —    |       |
|                                                                     |   | $                                            | 39,840     |      | Ps.        | 410,852   |       | Ps.       | (216,651   | ) | Ps. | 196,516 |   |
|                                                                     |   |                                         |       |      |       |      |       |      |       |
| Earnings (loss) per share of the majority interest                       |   | $                                            | 0.04       |      | Ps.        | 0.39      |       | Ps.       | (0.21      | ) | Ps. | 0.19 |   |
| Weighted average number of shares outstanding (in thousands)             |   | 1,043,272                                    |       | 1,043,272 |       | 1,043,272 |       | 1,043,272 |       |
|                                                                          |        |                                              |            |           |            |           |            |           |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are partof these consolidated financial statements.

 

F-6

----

 

**MEXICANA DE COBRE, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANT MEXICAN PESOS**

**AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) and thousands ofU.S. dollars ($))**

 
|                                                    |   |            |       | **Additional  Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Loss** |       | **Initial  Effect of  Deferred  Income Taxes** |       | **Minority  Interest** |       | **Total  Stockholders’  Equity** |        |
|---------------------------------------------------------|--------|-----------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|---------------------------------------|-------------|
|                                                    |
| **Capital Stock**                                       |
| **Nominal**                                             |   | **Restatement** |
|                                                    |   |            | ** ** |                             | ** ** |                   | ** ** |                                        | ** ** |                                           | ** ** |                   | ** ** |                                  | ** **  |   | ** ** |
| BALANCES AT JANUARY 1, 2000                             |   | Ps.             | 716,159    |                             | Ps.        | 7,757,464              |       | Ps.                                         | 10,933,723 |                                           | Ps.        | 14,800,981             |       | Ps.                                   | (10,569,329 | ) | Ps. | (2,568,714 | ) | Ps. | 4,433 |   | Ps. | 21,074,717 |   |
| Comprehensive income:                                   |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| Consolidated net income                                 |   | —          |       | —                           |       | —                 |       | 196,516                                     |       | —                                         |       | —                 |       | —                                |        | 196,516 |   |
| Cumulative effect of  restatement                       |   | —          |       | —                           |       | —                 |       | —                                      |       | (137,114                                       | )          | —                 |       | (74                                   | )           | (137,188 | ) |
| Additional liability for  employee benefit obligations. |   | —          |       | —                           |       | —                 |       | —                                      |       | 4,691                                          |       | —                 |       | —                                |        | 4,691 |   |
| Total comprehensive income                              |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        | 64,019 |   |
|                                                    |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| BALANCES AT DECEMBER 31, 2000                           |   | 716,159         |       | 7,757,464                        |       | 10,933,723             |       | 14,997,497                                  |       | (10,701,752                                    | )          | (2,568,714             | )          | 4,359                                 |        | 21,138,736 |   |
| Comprehensive loss:                                     |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| Consolidated net loss                                   |   | —          |       | —                           |       | —                 |       | (216,651                                    | )          | —                                         |       | —                 |       | —                                |        | (216,651 | ) |
| Cumulative effect of  restatement                       |   | —          |       | —                           |       | —                 |       | —                                      |       | (199                                           | )          | —                 |       | (43                                   | )           | (242 | ) |
| Additional liability for  employee benefit obligations  |   | —          |       | —                           |       | —                 |       | —                                      |       | (185                                           | )          | —                 |       | —                                |        | (185 | ) |
| Total comprehensive loss                                |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        | (217,078 | ) |
|                                                    |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| BALANCES AT DECEMBER 31, 2001                           |   | 716,159         |       | 7,757,464                        |       | 10,933,723             |       | 14,780,846                                  |       | (10,702,136                                    | )          | (2,568,714             | )          | 4,316                                 |        | 20,921,658 |   |
| Comprehensive income:                                   |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| Consolidated net income                                 |   | —          |       | —                           |       | —                 |       | 406,228                                     |       | —                                         |       | —                 |       |                                  |        | 406,228 |   |
| Cumulative effect of  restatement                       |   | —          |       | —                           |       | —                 |       | —                                      |       | —                                         |       | —                 |       | (4,505                                | )           | (4,505 | ) |
| Additional liability for  employee benefit obligations  |   | —          |       | —                           |       | —                 |       | —                                      |       | 333                                            |       | —                 |       | —                                |        | 333 |   |
| Total comprehensive income                              |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        | 402,056 |   |
|                                                    |   |            |       |                             |       |                   |       |                                        |       |                                           |       |                   |       |                                  |        |   |   |
| BALANCES AT DECEMBER 31, 2002                           |   | Ps.             | 716,159    |                             | Ps.        | 7,757,464              |       | Ps.                                         | 10,933,723 |                                           | Ps.        | 15,187,074             |       | Ps.                                   | (10,701,803 | ) | Ps. | (2,568,714 | ) | Ps. | (189 | ) | Ps. | 21,323,714 |   |
|                                                         |        |                 |            |                                  |            |                        |            |                                             |            |                                                |            |                        |            |                                       |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are partof these consolidated financial statements.

 

F-7

----

 

**MEXICANA DE COBRE, S.A. DE C.V.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANT MEXICAN PESOS**

**AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) and thousands ofU.S. dollars ($))**

 
|                                                       |   | **Convenience  Translation****(Note 2)  2002** |   | **2002**   |   | **2001** |   | **2000**  |     |
|------------------------------------------------------------|--------|------------------------------------------------|--------|------------|--------|----------|--------|-----------|----------|
| OPERATING ACTIVITIES:                                      |   |                                           |   |       |   |     |   |      |     |
| Consolidated net income (loss)                             |   | $                                              | 39,392 |       | Ps.    | 406,228  |   | Ps.       | (216,651 | ) | Ps. | 196,516 |   |
| Items that did not require  (generate) resources-          |   |                                           |   |       |   |     |   |      |     |
| Provision for pension and  seniority premiums              |   | 215                                            |   | 2,213      |   | 1,968    |   | 4,660     |     |
| Depreciation, amortization and  depletion                  |   | 89,905                                         |   | 962,919    |   | 975,508  |   | 944,150   |     |
| Loss on sale of property and  equipments                   |   | 223                                            |   | 2,308      |   | 20,682   |   | 42,886    |     |
| Deferred income taxes                                      |   | (12,715                                        | )      | (131,124   | )      | (101,192 | )      | 209,484   |     |
|                                                       |   | 120,489                                        |   | 1,242,544  |   | 680,315  |   | 1,397,696 |     |
|                                                       |   |                                           |   |       |   |     |   |      |     |
| Changes in current assets and  liabilities                 |   |                                           |   |       |   |     |   |      |     |
| (Increase) decrease in assets-                             |   |                                           |   |       |   |     |   |      |     |
| Notes and accounts receivable                              |   | (24,247                                        | )      | (250,046   | )      | (982,126 | )      | (429,167  | )        |
| Inventories                                                |   | 17,937                                         |   | 184,980    |   | 405,891  |   | (158,379  | )        |
| Increase (decrease) in  liabilities-                       |   |                                           |   |       |   |     |   |      |     |
| Accounts payable and accrued  liabilities                  |   | 28,002                                         |   | 288,767    |   | 44,521   |   | 283,528   |     |
| Accounts payable to suppliers                              |   | (6,191                                         | )      | (63,849    | )      | 138,184  |   | —    |     |
| Due to affiliated companies                                |   | (207,991                                       | )      | (2,144,904 | )      | 57,202   |   | (338,941  | )        |
| Taxes payable                                              |   | (776                                           | )      | (7,999     | )      | (142,311 | )      | —    |     |
| Employee profit-sharing payable                            |   | (3,951                                         | )      | (40,749    | )      | (14,364  | )      | (32,210   | )        |
| Net resources (used in)  generated by operating activities |   | (76,728                                        | )      | (791,256   | )      | 187,312  |   | 722,527   |     |
|                                                       |   |                                           |   |       |   |     |   |      |     |
| FINANCING ACTIVITIES:                                      |   |                                           |   |       |   |     |   |      |     |
| Payments of long-term debt                                 |   | —                                         |   | —     |   | —   |   | (4,818    | )        |
| Effect of variation of debt in  constant pesos             |   | —                                         |   | —     |   | —   |   | (431      | )        |
| Cash retained in collateral account                        |   | (19,528                                        | )      | (201,385   | )      | (40,598  | )      | —    |     |
| Net resources used in financing  activities                |   | (19,528                                        | )      | (201,385   | )      | (40,598  | )      | (5,249    | )        |
|                                                       |   |                                           |   |       |   |     |   |      |     |
| INVESTING ACTIVITIES:                                      |   |                                           |   |       |   |     |   |      |     |
| Additions to property and equipment                        |   | 2,142                                          |   | 21,995     |   | (159,111 | )      | (294,922  | )        |
| Net increase in deferred  charges                          |   | (3,219                                         | )      | (33,205    | )      | (137,808 | )      | (116,833  | )        |
| Procedes from sale of property  and equipment              |   | 59                                             |   | 617        |   | 1,367    |   | 2,058     |     |
| Due from Grupo Minero México, S.A. de C.V.            |   | 51,894                                         |   | 535,166    |   | 118,592  |   | (283,760  | )        |
| Due from Grupo  México, S.A. de  C.V.            |   | (13,668                                        | )      | (140,955   | )      | —   |   | —    |     |
| Due from Minera México, S.A. de  C.V.                 |   | 61,414                                         |   | 633,335    |   | (23,333  | )      | 3,042     |     |
| Net resources generated by (used in) investing activities  |   | 98,614                                         |   | 1,016,953  |   | (200,293 | )      | (690,415  | )        |
|                                                       |   |                                           |   |       |   |     |   |      |     |
| Increase (decrease) in cash and  temporary investments     |   | 2,358                                          |   | 24,312     |   | (53,579  | )      | 26,863    |     |
| Cash and temporary investments at beginning of year        |   | 2,678                                          |   | 27,626     |   | 81,205   |   | 54,342    |     |
| Cash and temporary investments at end of year              |   | $                                              | 5,036  |       | Ps.    | 51,938   |   | Ps.       | 27,626   |   | Ps. | 81,205 |   |
|                                                            |        |                                                |        |            |        |          |        |           |          |  |  |  |  |  |  |  |

 

The accompanying notes are partof these consolidated financial statements.

 

F-8

----

 

**MEXICANA DE COBRE, S. A. DE C. V. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**FOR THE YEARSENDED DECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED INCONSTANT MEXICAN PESOS AS OF DECEMBER 31, 2002**

**(Stated in thousands of Mexican pesos (Ps.) and thousands ofU.S. dollars ($), except per share data)**

 

# **1. DESCRIPTION OF BUSINESS AND SIGNIFICANT EVENTS:**

# ** **

Mexicana de Cobre, S.A.de C.V. and Subsidiaries (collectively the “Company”) is a 96.43% ownedsubsidiary of Grupo Minero México, S.A de C.V. (“GMM”).  The Company is engaged primarily in thebusiness of exploring, mining and processing copper, gold and silver.

 

**Impact of metal prices onthe Company’s operations**

 

During 2002, the Companycontinued to implement different measures at its mining operations tocounteract the unfavorable conditions in the metals market. Economic growth inthe U.S. and other countries worldwide did not meet expectations. Metalsprices, especially copper, remained at their lowest levels in years and weresubject to a high degree of volatility despite sustained demand from China.After dropping in 2001, in 2002, the average market price of copper fell by anadditional 1.2%; zinc dropped by 12.2%; and lead fell by 5.1%, over the prioryear. Only precious metals prices improved; silver increased by 4.5% and goldby 14.4% over the prior year. The Company consolidated operating andadministrative activities by closing down or reducing certain operations,selling off excess assets, and suspending certain purchases from third partiesas deemed necessary. The workforce has also been reduced and programs have beenimplemented to increase productivity

 

**Renegotiation of GMM’s long-term debt and compliance withrestrictions**

 

Under pressure due to lowmetals prices and the resulting drop in liquidity during the past few years,GMM was obligated to restructure its debt as a result of its failure to makescheduled payments and its noncompliance with certain financial covenantscontained  in its debt agreements. InApril 2003, GMM successfully restructured its indebteness with a number ofinstitutional investors, banking institutions and agencies. This restructuringhas resulted in greater financial and operating flexibility and allows GMM’smanagement to focus on increasing the productivity and profitability ofmining-metallurgical units, despite the adverse market conditions currentlyfaced by the industry. GMM now has a better financial structure to allowimprovement of its daily transactions to offset the current cycle of low metalprices.

 

The restructuring ofindebtedness by GMM in the amount of $880.9 million with respect to the holdersof its subsidiaries’ secured export notes and to the banking syndicate headedby Bank of America occurred on April 29, 2003 with the signing of definitivedocumentation. This restructuring process consisted of:

 

a.                                       The modification of interest rates, guaranteesand loan payment periods;

 

b.                                      The contribution of new capital of $110 millionby Grupo México, S.A. de C.V. (“GMEXICO”) and Americas Mining Company, Inc.(“AMC”) to GMM, that was received on April 29, 2003, supporting the Company’smining operations, and

 

c.                                       The release of funds that were generated byexport sales retained as collateral by the holders of “Secured Export Notes”,which are shown on the accompanying balance sheet under the heading of “Cashretained in collateral accounts”.

 

Inaddition, as a result of the restructuring, Mexicana de Cobre, S.A. de C.V. isa guarantor of substantially all of GMM’s financial indebtedness.

 

F-9

----

 

**2. BASIS OF PRESENTATION:**

 

The accompanyingconsolidated financial statements of the Company are prepared in accordancewith the accounting principles generally accepted in Mexico (“Mexican GAAP”),which differ in certain significant respects from those applicable in theUnited States of America (“U.S. GAAP”). A description of these differences andtheir effects on net income (loss) and stockholders’ equity is set forth inNote 16 (as restated).

 

The preparation of thefinancial statements in conformity with Mexican GAAP, along with the reconciliationto U.S. GAAP, requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and theaccompanying notes. While these estimates and assumptions are based onmanagement’s best knowledge of current events, actual results may differ.

 

The financial statementsare stated in Mexican pesos. The translation of the Company pesos into U.S.dollars is included solely for the convenience of the reader, using theexchange rate published by Banco de México as of December 31, 2002 ofPs.10.3125 to U.S.$1.00. The convenience translation should not be construed asa representation that the Mexican peso amounts have been, could have been, orcould in the future be, converted into U.S. dollars at this or any other rateof exchange.

 

**3. BASIS OF CONSOLIDATION:**

 

The accompanyingconsolidated financial statements include the financial statements of Mexcobreand the following subsidiary companies. All significant intercompany balances and transactions have beeneliminated in the consolidation.

 
|                                                                                       |   | **Percentage of  Ownership  as of December****31, 2002** |   |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                                       |   |                                                     |   |
| •  Compañía Hotelera la Caridad, S.A. de  C.V.  (“CHC”) |   | 50.90                                                    | %      |
| •  Minera Pilares, S.A. de C.V. (“MP”)                                 |   | 51.00                                                    | %      |

 

**4. SIGNIFICANT ACCOUNTING POLICIES:**

** **

**Effects of in accounting principlesadopted during the periods presented**

 

EffectiveJanuary 1, 2001, the Company adopted Bulletin C-2, “FinancialInstruments”.  This Bulletin establishesthe methodology for valuing and recording financial instruments and requiresrecognition of certain financial instruments on the balance sheet as eitherassets or liabilities at fair values, affecting the results of the period forany valuation adjustments of such instruments.

** **

**Recognition of the effects of inflationin the financial statements**

 

The Company restates allof its financial statements in terms of the purchasing power of the Mexicanpesos as of the end of the latest period, thereby comprehensively recognizingthe effects of inflation. Accordingly, the financial statements of the prioryear have been restated in terms of Mexican pesos of the latest period andtheir amounts presented herein differ from those originally reported in termsof Mexican pesos of the corresponding year.

 

Thefactors used to restate the 2001 and 2000 financial statements in terms of thepurchasing power of the Mexican currency as of December 31, 2002 are 1.057 and1.1035, respectively.

 

F-10

----

 

Theconsolidated financial statements have been restated as follows:

 

•                                          *Balance sheets:*

 

Primary metal inventories are stated at current international metalmarket quotations at year-end, less the restated cost of completing theprocessing cycle to obtain the finished product.  Other inventory items are stated at their replacement costthrough the application of production cost, without exceeding their netrealizable value.

 

Property and equipment are restated by applying a factor derived fromthe NCPI. Depreciation of restated assets is calculated based on the estimateduseful life of each asset using the straight-line method.  The investment in shares of associatedcompanies and unconsolidated subsidiaries is accounted for under the equitymethod, based on the Mexican GAAP financial statements of such companies,restated by a factor derived fron the NCPI.

 

Stockholders’ equity and other nonmonetary items are restated using afactor derived from the NCPI cumulative from the date of contribution orgeneration.

 

•                                          *Statements of operations:*

 

Revenues and expenses that are associated with a monetary item (cash,trade receivables, liabilities, etc.) are restated from the month in which theyarise through year-end, based on factors derived from the NCPI.

 

Cost of sales of primary metals and other inventories is restated basedon the replacement cost of products consumed, and restated through year-endbased on factors derived from the month in which they arise through year-end.

 

Depreciation is calculated based on the estimated useful lives of theNCPI restated assets. Depreciation is commenced when the related assets areplaced in service.

 

The gain or loss on monetary position, which represents the erosion ofthe purchasing power of monetary items caused by inflation, is  determined by applying to net monetary assetsor liabilities at the beginning of each month, the factor of inflation derivedfrom the NCPI and is restated through year end with the corresponding factor.Gains arise from maintaining an average net monetary liability position.

 

•                                          *In the other financial statements:*

 

The statements of changes in financial position presents the changes inconstant Mexican pesos, according to the financial position at prior year-end,restated to Mexican pesos of the most recent year end.

 

The gain or loss resulting from inflation presented in the statement ofchanges in stockholders’ equity is comprised mainly of the income or lossresulting from holding nonmonetary assets, which represents the change in thespecific price level of these assets and its effect on results of operationscompared to the change in the NCPI.

 

**Temporaryinvestments**

 

Temporary investments are primarily short-term investment funds and bankdeposits, which are valued at market.

 

**Impairment oflong-lived assets**

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Assetsare determined impaired when the estimated future undiscounted cash flowsexpected to result from the use of the asset are less than the carrying valueof the asset.  The Company measures animpairment loss as the difference between the carrying value of the asset andits fair value. No impairment charges wererecorded during the years ended December 31, 2002, 2001 and 2000.

 

F-11

----

 

**Deferred charges**

 

•                                          *Stripping costs*

 

Stripping costs are costs associated with the removal of wastematerials after production has commenced. Over the life of the mine, strippingcosts are deferred in periods when the actual ratio of waste materials tomineral ore extracted is above the life-of-mine stripping ratio, whichrepresents the Company’s estimate of the total amount of waste to be incurreddivided by the estimated total proven and probable reserves.  In periodswhen the actual mine stripping ratio is below the life-of-mine stripping ratio,the Company reduces the net capitalized mine stripping asset proportionallywith a charge to amortization expense.  In addition, deferred minestripping costs are amortized using the units of production method based onproven and probable ore reserves.  Copper resources contained in piles oflixiviable materials that have been extracted from the mines are not includedin the determination of units of production amortization.

 

The Company’spolicy results in the smoothing of stripping costs over the life of the mineand, in view of the Company, better facilitatesthe matching of mine production costs over the life of the mine with the mine’srevenues.

 

When there is a significant change to established mineralreserves, the estimated level of stripping costs is adjusted to reflect thischange.

 

•                                          *Mine development costs*

 

Exploration costsincurred before the start of operations of a site are expensed as incurred, exceptfor expenditures on specific properties where the presence of proven and probable mineral resources have beenconfirmed, in which case, the expenditures are capitalized as mine developmentcosts.  Mine development costs areamortized on a straight-line basis over the estimated useful lives of the correspondingproven ore reserves.

 

 

**Hedgingactivities**

 

Derivativeinstruments may be used to manage exposure to market risk from changes incommodity prices (metal and energy products), interest rates or the value ofthe Company’s assets and liabilities. Derivative instruments, which aredesignated as hedges, must be deemed effective at reducing the risk associatedwith the exposure being hedged and must be designated as a hedge at theinception of the contract.

 

TheCompany’s derivative transactions during 2002 and 2001 were limited in volumeand restricted to risk control, and as of December 31, 2002 and 2001 there areno outstanding hedging derivatives. The Company does not maintain or issuefinancial instruments for speculative purposes. Decisions with respect to eachtransaction and to the overall hedging policies are made by an Executive RiskCommittee. The objective of this committee, which is currently comprised of theChairman of the Board of Directors, the Director of Management and Finance andthe Assistant Director of Risk Management, is to ensure that the risks andbenefits have been appropriately assessed.

 

The Company may enter into swap and optiontransactions or a combination of both to reduce the risk of purchase or salesprice fluctuations. For instance, for the purpose of protecting metal prices,the Company may purchase put options or create synthetic put options to reduceor eliminate the risk of metal price declines below the option strike price ona portion of its anticipated future production. The cost of the options isamortized using the straight-line method over the period in which the optionscan be exercised. Gains or losses deriving from the sale or exercise of theoptions, after deducting the acquisition expenses not amortized, are recognizedin the results of the period in which the guaranteed production or inputs are,respectively, sold or purchased.  TheCompany also uses futures contracts for hedging the effect of changes in theprices relative to a portion of the assets that are sold or purchased.

 

Gainsor losses that result from these transactions are deferred through theirrealization date. As a result, derivative instruments held by the Company areclosely related with the prices and amounts of real asset positions, and thenotional amounts and expiration dates of the derivative instruments cannotexceed those of the actual underlying transactions. Under these circumstances,for accounting purposes, derivatives are classified as hedging transactions.

 

F-12

----

 

**Swap****and****futures****agreements**

 

Swap and futures agreements are used primarily to fixthe price of fuel consumption for a determined period or to limit the cost ofdebt contracted at floating interest rates.

 

Interest rate swaps are used to limit the effect ofinterest rate increases on any floating rate debt. The differential to be paidor received as interest rates change is recorded in interest expense in thestatement of income. Fuel swaps limit the effect of the increases in fuelprices. The differential paid or received as changes in the price of fuel occuris recorded as part of cost of sales. Foreign currency swaps limit the effect of exchange rate changes onfuture cash flow obligations denominated in foreign currencies. Thedifferential to be paid or received as exchange rates change is included aspart of the cost of the asset for which the swap was obtained.  As of December 31, 2002 and 2001, there wereno outstanding swap or future agreements.

 

**Investment inshare of associated companies**

 

This item is accountedfor using the equity method and restated based on factors derived from theNCPI.

 

**Employee benefitobligations**

 

Inaccordance with Mexican Labor Law and the Company’s collective bargainingagreements, a liability results from voluntary separations of employees whohave worked for a company for a required number of years. In addition, inaccordance with the Federal Labor Law, companies have obligations resultingfrom indemnities and seniority premiums payable to employees terminated undercertain circumstances.

 

The Company records the liabilities from seniority premiums andvoluntary separations as they accrue, in accordance with actuarial computationsbased on the projected unit credit method, using real interest rates.

 

When there is a significant reduction in personnel dueto the restructuring of the labor force or the closing of a plant, thecorresponding indemnity costs, net of the corresponding reduction in the projectedbenefit obligation and the related items to be amortized, are charged toresults.

 

Accordingly, a liability is being accrued, which at present value willcover the obligation for benefits projected to the estimated retirement date ofthe Company’s employees.  Indemnitypayments are charged to results in the period in which they are made.

 

TheCompany plan assets related to voluntary separations and seniority premiumsconsist of investments in Mexican government treasury certificates (40%) andvarious equity securities of large Mexican companies (60%).  The market value of securities of Mexicancompanies is volatile to varying degrees, and may be affected by economic andmarket conditions in other emerging market countries.

 

**Incometax, tax on assets and employee profit sharing**

 

TheCompany determines and records its income tax, tax on assets and employeeprofit sharing in accordance with the tax legislation and revised Bulletin D-4,“Tratamiento Contable del Impuesto sobre la Renta, del Impuesto al Activo y laParticipación de los Trabajadores en las Utilidades” (Accounting for IncomeTax, Tax on Assets and Employee Profit Sharing), which requires that deferredtax assets and liabilities be recorded for all temporary differences betweenthe accounting and tax bases of assets and liabilities.

 

The balance of deferredincome tax and deferred tax on assets is determined using the liability method,which takes into account all temporary differences between the accounting andtax bases of assets and liabilities. Deferred employee profit sharing is calculated considering only thosetemporary differences that arise from the reconciliation between the accounting(loss) income for the year and the basis for employee profit sharing that areexpected to reverse within a defined period.

 

Thebalance of deferred taxes is comprised of monetary and non-monetary items,based on the temporary differences from which they are derived.  The balance is classified as a non-current,regardless of when the temporary differences are expected to reverse.

 

F-13

----

 

Thedeferred tax benefit or provision for the year to be included in the results ofoperations is determined by comparing the deferred tax balance at end of theyear to the balance at the beginning of the year, excluding any temporarydifferences that are recorded directly in stockholders’ equity.  The deferred taxes related to such temporarydifferences are recorded in the same stockholder’s equity account.  The initial effect of the application ofthis new bulletin as of January 1, 2000 was recorded in stockholder’s equity inthe initial effect of deferred income taxes account.

 

**Revenuerecognition**

 

Silver and gold are sold under monthly contracts or on a spot salebasis.  Most of the Company’s copper issold as refined metal under annual contracts or on a spot sale basis.  Thebalance of the Company’s copper production is sold in the form of concentratesunder contracts with terms of one to three years.

 

Revenue from sales of copperconcentrate is recorded in the month the product is delivered to customersbased on prices determined in accordance with terms of the related salescontracts.  For sales of copperproducts wherein customers are given the option to select a monthly averageprovided by the London Metal Exchange (“LME”) or the Commodity Exchange, Inc.(“COMEX”) price ranging between one and three months subsequent to shipment,revenue is recorded at a provisional price at the time of shipment, based onLME or COMEX spot prices for copper sales.  The provisionally priced salesare adjusted to reflect spot prices at the end of each month until a finaladjustment is made to the price of the shipments upon settlement with customerspursuant to the terms of the contract.

 

**Netcomprehensive financing cost (income)**

 

Thenet comprehensive financing cost includes all financial revenues and expenses,such as interest, exchange gains or losses and gains or losses on monetaryposition as earned or incurred.

 

Transactions in currenciesother than the Mexican peso are recorded at the exchange rate as of the date ofthe transaction, and the assets and liabilities in foreign currency areadjusted to the exchange rate as of the most recent year-end, affecting incomeas part of the integral result of financing.

 

**Earnings (loss)per share**

 

Earnings (loss) per sharehave been computed for each period by dividing income (loss) of the majorityinterest, by the weighted average number of shares outstanding.

 

**Comprehensiveincome (loss)**

 

Comprehensiveincome (loss) is comprised of the consolidated net income (loss) for the periodplus any gains or losses that according to Mexican GAAP are presented directlyin stockholders’ equity, such as the gain or loss from holding nonmonetaryassets and the additional liability for employee benefit obligations.

 

**5. CASH AND TEMPORARY INVESTMENTS:**

 

Cash and temporary investment are comprised asfollows:

 

|                  |   | **2002** |   | **2001** |   |
|-----------------------|--------|----------|--------|----------|--------|
| Cash                  |   | Ps.      | 50,686 |     | Ps.    | 9,459 |   |
| Temporary investments |   | 1,252    |   | 18,167   |   |
|                  |   | Ps.      | 51,938 |     | Ps.    | 27,626 |   |

 

F-14

----

 

**6. INVENTORIES:**

 

Inventorieswere as follows:

 

|                                                             |   | **2002**  |      | **2001**  |   |
|------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                                             |   |      |      |      |   |
| Materials and supplies                                           |   | Ps.       | 550,533   |      | Ps.    | 599,317 |   |
| Copper                                                           |   | 450,987   |      | 551,075   |   |
| Silver                                                           |   | 61,243    |      | 97,117    |   |
| Gold                                                             |   | 15,980    |      | 22,879    |   |
| Quicklime                                                        |   | 13,209    |      | 7,367     |   |
| Antimony                                                         |   | 2,527     |      | 958       |   |
| Molybdenum concentrates                                          |   | 1,083     |      | 324       |   |
| Other                                                            |   | 1,009     |      | 2,744     |   |
| Molybdenum trioxid                                               |   | 536       |      | 682       |   |
| Sulfuric acid                                                    |   | 278       |      | 10,982    |   |
| Advances to suppliers                                            |   | 3,332     |      | 4,415     |   |
| Merchandise in transit                                           |   | —    |      | 2,304     |   |
|                                                             |   | 1,100,717 |      | 1,300,164 |   |
| Less-                                                            |   |      |      |      |   |
| Restated cost of treatment pending refining or production  costs |   | (42,047   | )         | (62,507   | )      |
| Allowance for obsolescence                                       |   | (16,740   | )         | (7,683    | )      |
|                                                             |   |      |      |      |   |
|                                                             |   | Ps.       | 1,041,930 |      | Ps.    | 1,229,974 |   |

 

**7. PROPERTY AND EQUIPMENT:**

** **

Property and equipmentwere as follows:

 

|                           |   | **2002**    |       | **2001**    |   |
|--------------------------------|--------|-------------|------------|-------------|--------|
|                           |   |        |       |        |   |
| Buildings and improvements     |   | Ps.         | 7,116,871  |        | Ps.    | 6,607,337 |   |
| Automobiles and trucks         |   | 194,114     |       | 287,696     |   |
| Mobile equipment               |   | 2,829,688   |       | 3,545,244   |   |
| Processing equipment           |   | 17,001,754  |       | 16,699,723  |   |
|                           |   | 27,142,427  |       | 27,140,000  |   |
| Less- Accumulated depreciation |   | (11,239,578 | )          | (10,279,161 | )      |
|                           |   | 15,902,849  |       | 16,860,839  |   |
| Land                           |   | 178,185     |       | 178,185     |   |
| Construction-in-progress       |   | 262,119     |       | 282,041     |   |
|                           |   | Ps.         | 16,343,153 |        | Ps.    | 17,321,065 |   |

 

The average annualdepreciation rates were as follows:

** **

|                        |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
|                        |   |     |   |     |   |     |   |
| Buildings and  improvements |   | 3.31     | %      | 2.39     | %      | 2.13     | %      |
| Automobiles and  trucks     |   | 4.87     | %      | 5.84     | %      | 4.63     | %      |
| Mobile equipment            |   | 3.62     | %      | 4.13     | %      | 3.50     | %      |
| Processing  equipment       |   | 4.95     | %      | 5.45     | %      | 4.48     | %      |

 

F-15

----

 

**8. DEFERRED CHARGES**

 

Deferred charges were asfollows:

 

|                                             |   | **2002** |    | **2001** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
|                                             |   |     |    |     |   |
| Stripping costs                                  |   | Ps.      | 251,563 |     | Ps.    | 219,330 |   |
| Mine development costs                           |   | 43,975   |    | 45,944   |   |
| Overhauls                                        |   | 19,665   |    | 18,953   |   |
| Intangible assets arising from employee benefits |   | 940      |    | 1,012    |   |
|                                             |   | 316,143  |    | 285,239  |   |
| Less- Accumulated amortization                   |   | (71,031  | )       | (52,210  | )      |
|                                             |   | Ps.      | 245,112 |     | Ps.    | 233,029 |   |

 

During the years endedDecember 31, 2002, 2001 and 2000, the application of deferred strippingaccounting resulted in a decrease in cost of sales reported in the statementsof operations of Ps. 28,230, Ps.104,939 and Ps.121,933, respectively. Deferredstripping costs will not be fully amortized until the cessation of operationsof the mines currently operated by the Company.

# ** **

Based on the amortizationcosts incurred in the most recent three years related to intangible assetssubject to amortization, the Company estimates that amortization costs for suchintangible assets will amount to Ps. 31,052 in each of the following fiveyears.

 

**9. EMPLOYEE RETIREMENT BENEFITS:**

 

The employee benefitobligation relates to voluntary retirement and seniority premiums.  The amount resulting from the actuarialcalculations prepared by external actuaries is being funded using the projectedunit credit method.  Below is abreakdown of this obligation as of December 31, 2002 and 2001:

 

|                                |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |
| Projected  benefit obligation (PBO) |   | Ps.      | 27,363 |     | Ps.    | 27,286 |   |
| Unamortized  transition asset       |   | 313      |   | 366      |   |
| Variances  in assumptions           |   | (4,482   | )      | (4,768   | )      |
| Additional  liability               |   | 5,483    |   | 5,888    |   |
| Net projected  liability            |   | Ps.      | 28,677 |     | Ps.    | 28,772 |   |

 

At December 31, 2002 and 2001, established reservesamounted to Ps. 24,160 and Ps.22,189, respectively, and exceeded theaccumulated benefit obligation (equivalent to the PBO without projecting thesalaries to the date of retirement) by Ps.3,060 and Ps.3,169, respectively.

 

The cost of employeebenefits for each year were as follows:

 

|                                      |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                      |   |     |   |     |   |     |   |
| Service cost for  the year                |   | Ps.      | 2,331  |     | Ps.    | 2,183    |   | Ps. | 1,625 |   |
| Amortization  of  transition asset   |   | (53      | )      | (54      | )      | (53      | )      |
| Amortization of  variances in assumptions |   | 220      |   | 213      |   | 29       |   |
| Financial cost  for the year              |   | 959      |   | 1,245    |   | 1,037    |   |
| Effect of  employee reduction             |   | (816     | )      | —   |   | —   |   |
| Net cost for the  year                    |   | Ps.      | 2,641  |     | Ps.    | 3,587    |   | Ps. | 2,638 |   |

 

F-16

----

 

The real interest rates used in the actuarialprojections are:

 

|                  |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|
|                  |   |     |   |     |   |     |   |
| Interest rate         |   | 5.00     | %      | 5.00     | %      | 5.00     | %      |
| Salary increase  rate |   | 1.50     | %      | 1.50     | %      | 1.50     | %      |

 

The changes in projectedbenefit obligations were as follows:

 

|                                 |   | **2002** |   | **2001** |   |
|--------------------------------------|--------|----------|--------|----------|--------|
|                                 |   |     |   |     |   |
| Beginning  balance                   |   | Ps.      | 22,884 |     | Ps.    | 21,032 |   |
| Provision for  the year              |   | 2,641    |   | 3,587    |   |
| Payments                             |   | (2,331   | )      | (1,735   | )      |
|                                 |   | 23,194   |   | 22,884   |   |
|                                 |   |     |   |     |   |
| Additional  liability-               |   |     |   |     |   |
| Charge to  stockholders’ equity |   | 4,543    |   | 4,876    |   |
| Deferred charges                     |   | 940      |   | 1,012    |   |
| Ending balance                       |   | Ps.      | 28,677 |     | Ps.    | 28,722 |   |

 

The amortization periodfor unamortized items is as follows:

 

|                      |   | **Remaining  Years**         |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **Non-Unionized  Personnel** |   | **Unionized  Personnel** |   |
|                      |   |                         |   |   |   |
| Transition  assets        |   | 10.00                        |   | 13.10 |   |
| Variances in  assumptions |   | 17.70                        |   | 13.10 |   |

 

**10. STOCKHOLDERS’ EQUITY:**

** **

**Capital stock**

 

At December 31, 2002 and 2001, the common stockconsisted of 1,043,271,843 common nominative Class I (fixed portion), Series“A” shares without par value.

 

Stockholders’ equity, except for restated paid-incommon stock and tax retained earnings, will be subject to a 35% dividendtax.  Beginning January 1, 2003, suchrate will be reduced by one percentage point each year until reaching 32% in2005. Any income tax paid on such distribution on or after January 1, 2002, maybe credited against future income taxes payable by the Company in the threefiscal years following the fiscal year of such payment.

 

Based on the 2003 tax reform, tax paid on thedistribution of stockholders’ equity, as discussed in the preceding paragraph,can only be credited against income tax of the year in which taxes are paid ondividends, and in the immediately following two fiscal years.

 

**Retainedearnings**

 

As of 2002, the withholding tax on dividends is eliminated.  In addition, if earnings for which nocorporate tax has been paid are distributed, the tax must be paid upondistribution of the dividends. Consequently, the Company must keep a record of earnings subject to eachtax rate.  As of December 31, 2002,earnings for which corporate taxes have been paid amounted to approximatelyPs.1,554,110.

 

The annual net income ofthe Company and each subsidiary is subject to the legal requirement that 5%thereof be transferred to a legal reserve each year until the reserve equals20% of capital stock.  At December 31,2002 and 2001, the nominal amount of this reserve amounted to Ps.390,720 and isincluded in retained earnings.  Thisreserve may not be distributed to the stockholders during the existence of theCompany, except in the form of stock dividends.

 

F-17

----

 

**11. FOREIGN CURRENCY POSITION AND TRANSACTIONS:**

 

The consolidated foreigncurrency position, excluding inventories of primary metals, as of December 31,2002 and 2001, expressed in thousands of U.S. dollars, was as follows:

 

|                                 |   | **2002** |       | **2001** |       |
|--------------------------------------|--------|----------|------------|----------|------------|
| Assets-                              |   |     | ** ** |     | ** ** |
| Current                              |   | $        | 614,867    |     | $          | 213,700 |   |
| Non-current                          |   | 184,650  |       | 302,497  |       |
|                                 |   | 799,517  |       | 516,197  |       |
| Liabilities-                         |   |     |       |     |       |
| Current                              |   | 155,468  |       | 39,261   |       |
|                                 |   |     |       |     |       |
| Net foreign currency assets position |   | $        | 644,049    |     | $          | 476,936 |   |
|                                 |   |     |       |     |       |
| Equivalent in Mexican  pesos         |   | Ps.      | 6,641,755  |     | Ps.        | 4,918,403 |   |

 

The main transactionsduring 2002, 2001 and 2000 in a foreign currency, not including transactionswithin the group, since they were eliminated in consolidation, expressed inthousands of U.S. dollars, were as follows:

 

|                  |   | **2002** |       | **2001** |       | **2000** |       |
|-----------------------|--------|----------|------------|----------|------------|----------|------------|
|                  |   |     | ** ** |     | ** ** |     | ** ** |
| Sales                 |   | $        | 427,205    |     | $          | 577,777  |       | $ | 715,060 |   |
| Inventory purchases   |   | $        | 166,945    |     | $          | 95,036   |       | $ | 57,987 |   |
| Interest income       |   | $        | 28,929     |     | $          | 37,377   |       | $ | 333 |   |
| Freight               |   | $        | 6,080      |     | $          | 5,249    |       | $ | 6,216 |   |
| Interest expense      |   | $        | 150        |     | $          | 1,375    |       | $ | 15 |   |
| Commissions           |   | $        | 59         |     | $          | 430      |       | $ | 463 |   |
| Imported fixed assets |   | $        | 30         |     | $          | 10,228   |       | $ | 91,332 |   |
| Technical assistance  |   | $        | 29         |     | $          | 236      |       | $ | 632 |   |

 

Sales prices of almostall of the Company’s products are determined by international market quotationsin U.S. dollars.

 

At December 31, 2002,2001 and 2000, the Mexican peso/U.S. dollar exchange rates were Ps. 10.3125,Ps. 9.1692 and Ps. 9.5997, respectively, and the average rate during 2002 wasPs. 9.6589 per U.S. dollar.

 

As of June 13, 2003, thedate on which these financial statements were issued, the exchange rate was similar to that at December 31, 2002 andthe exchange rate was Ps.10.5775 Mexican pesos per U.S. dollar.

 

**12. BALANCES AND TRANSACTIONS WITH RELATED PARTIES:**

 

Balances with theCompany’s holding companies and affiliated companies that are under commoncontrol of Grupo Mexico, S.A. de C.V. (parent company of GMM) are as follows:

 

|                                                                  |   | **2002** |      | **2001** |   |
|-----------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Accounts  receivable-                                                 |   |     |      |     |   |
| Grupo Minero México, S.A. de C.V. (affiliated  company)          |   | Ps.      | 2,547,554 |     | Ps.    | 873,622 |   |
| Minera México, S.A. de C.V. (holding company)                    |   | 828,472  |      | 162,812  |   |
| Mexicana de Cananea, S.A. de C.V. (affiliated  company)               |   | 428,696  |      | 410,093  |   |
| Industrial Minera México, S.A. de C.V.  (affiliated company)     |   | 430,103  |      | 146,445  |   |
| Minera Mexico Internacional, Inc. (affiliated  company)               |   | 333,475  |      | 722,284  |   |
| Grupo  México, S.A. de C.V. (holding company)                    |   | —   |      | 30,707   |   |
| Other                                                                 |   | 332      |      | 618      |   |
|                                                                  |   | Ps.      | 4,568,632 |     | Ps.    | 2,346,581 |   |
|                                                                  |   |     |      |     |   |
| Accounts  payable-                                                    |   |     |      |     |   |
| Asarco, Inc. (affiliated company)                                     |   | Ps.      | 95,323    |     | Ps.    | 44,260 |   |
| Ferrocarril Mexicano, S.A. de C.V.  (affiliated company)              |   | 63,134   |      | 77,178   |   |
| Minerales Metálicos del Norte, S.A.  (affiliated company)        |   | 36,887   |      | 2,219    |   |
| México  Transportes Aereos, S.A. de C.V. (affiliated company)    |   | 24,582   |      | 11,615   |   |
| Servicios de Apoyo Administrativo, S.A. de  C.V. (affiliated company) |   | 7,382    |      | 6,863    |   |
| Western Copper Supplies, Inc. (affiliated company)                    |   | 327      |      | 346      |   |
| Southern Peru Copper Corporation (affiliated  company)                |   | —   |      | 8,008    |   |
|                                                                  |   | Ps.      | 227,635   |     | Ps.    | 150,489 |   |

 

F-18

----

 

As of December 31, 2002, the Company granted long-termfinancing to Grupo Minero México, S.A. de C.V., Grupo México, S.A. de C.V. andMinera México, S.A. de C.V. in the amounts of $163,815, $13,668 and $7,167,respectively. Interest is payable at a 5.50% rate.  The proceeds of this financing were used to acquire shares ofAsarco Inc.  As of December 31, 2002 and2001 are shown as long-term accounts receivable in the related balance sheets.

 

The most significanttransactions with related parties are as follows:

 

|                        |   | **2002** |      | **2001** |   |
|-----------------------------|--------|----------|-----------|----------|--------|
| Revenues-                   |   |     |      |     |   |
| Sales                       |   | Ps.      | 1,559,099 |     | Ps.    | 2,486,442 |   |
| In-bond processing          |   | Ps.      | 458,366   |     | Ps.    | 361,852 |   |
| Interest income             |   | Ps.      | 280,473   |     | Ps.    | 371,694 |   |
| Services                    |   | Ps.      | 10,658    |     | Ps.    | 74,142 |   |
| Other                       |   | Ps.      | 1,446     |     | Ps.    | 3,168 |   |
|                        |   |     |      |     |   |
| Expenses-                   |   |     |      |     |   |
| Purchases other than assets |   | Ps.      | 1,757,051 |     | Ps.    | 1,491,563 |   |
| Freight                     |   | Ps.      | 81,658    |     | Ps.    | 133,771 |   |
| Services                    |   | Ps.      | 73,958    |     | Ps.    | 141,586 |   |
| Rent                        |   | Ps.      | 16,561    |     | Ps.    | — |   |
| In-bond processing          |   | Ps.      | 5,691     |     | Ps.    | 58,897 |   |
| Other                       |   | Ps.      | 954       |     | Ps.    | 2,062 |   |
| Commissions                 |   | Ps.      | 272       |     | Ps.    | 3,596 |   |
| Purchases assets            |   | Ps.      | —    |     | Ps.    | 21,653 |   |

 

**13. TAX ENVIRONMENT:**

 

**Income and asset taxregulations**

 

The principal items thataffect the determination of taxable income are the differences betweenpurchases and cost of sales, and recognition of the effects of inflation ondepreciation, monetary assets and liabilities through the inflationarycomponent, which differs for book and tax purposes.

 

Through December 31,2001, the relevant Mexican income tax (“ISR”) rate was 35% with the obligationto pay 30% currently and the option of deferring payment of the remaining 5%until profits are distributed.  The newtax law enacted January 1, 2002, eliminated the option to defer the 5% portionof the income tax payment and reduces the 35% tax rate by one percentage pointeach year until reaching 32% in 2005. The deduction for employee statutory profit-sharing (PTU) and theobligation to withhold taxes on dividends paid to individuals or foreignresidents was also eliminated.

 

The relevant Mexicanasset tax (“IMPAC”) is calculated by applying 1.8% to the Company’s assetposition, as defined in the law, and is payable only to the extent that itexceeds ISR payable for the same period. If in any year IMPAC exceeds the ISRpayable,

 

F-19

----

 

the IMPAC payment for such excess may be reduced by the amount by whichISR exceeded IMPAC in the three preceding years and any required payment ofIMPAC is creditable against the excess of ISR over IMPAC of the following tenyears.

 

Income taxes, asset taxesand employee profit sharing have been determined on the basis of eachindividual company. The tax returns of the Company and its subsidiaries havebeen consolidated and filed at the level of the parent company of GMM, MineraMéxico, S.A. de C.V. (“MM”). Each year the Company and each of its subsidiariespay to MM the amount of tax, if any, it would have paid had it filed a separatetax return. In the event MM reduces its consolidated tax liability through theuse of tax loss carryforwards or other tax benefits of the Company or any ofits subsidiaries, MM is obligated to reimburse the Company or such subsidiaryfor such tax benefit at the time that it otherwise would have reduced the taxpayable by the Company or such subsidiary.

 

Income for purposes ofPTU does not consider the inflationary component or the unrealized exchangegains or losses.  Depreciation is basedon historical rather than restated values. The PTU rate is 10% of income forPTU purposes.

 

**Provision forincome taxes**

** **

Theincome tax is as follows:

** **
|                                                   |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                   |   |     | ** ** |     | ** ** |     | ** ** |
| Deferred                                               |   | Ps.      | 142,665    |     | Ps.        | (101,192 | )          | Ps. | 209,484 |   |
| Effect of change in statutory tax rate on deferred ISR |   | (273,789 | )          | —   |       | —   |       |
|                                                   |   | Ps.      | (131,124   | )        | Ps.        | (101,192 | )          | Ps. | 209,484 |   |

 

In accordance withMexican GAAP, the following items represent the principal differences betweenMexican income tax computed at the statutory tax rate and the Company’sprovision for income tax in each year:

 

|                                                |   | **2002** |     | **2001** |   | **2000** |   |
|-----------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
|                                                |   |     |     |     |   |     |   |   |   |   |   |   |   |
| Income taxes at statutory  rate                     |   | Ps.      | 97,905   |     | 35.0   | %        | Ps.    | (97,645 | ) | 35.0 | % | Ps. | 162,584 |   | 35.0 | % |
| Increase (decrease) due to:                         |   |     |     |     |   |     |   |   |   |   |   |   |   |
| Results from monetary  position                     |   | (97,777  | )        | (35.0    | )%     | 67,774   |   | (24.3 | )% | 101,718 |   | 21.9 | % |
| Inflationary component, net                         |   | 94,983   |     | 34.0     | %      | (66,085  | )      | 23.7 | % | (104,477 | ) | (22.5 | )% |
| Non-deductible items                                |   | 47,554   |     | 17.0     | %      | 16,389   |   | (5.9 | )% | 12,723 |   | 2.7 | % |
| Effect of deferred ISR from  the tax rate reduction |   | (273,789 | )        | (97.9    | )%     | —   |   | — |   | — |   | — |   |
| Other                                               |   | —   |     | —   |   | (21,625  | )      | 7.7 | % | (36,936 | ) | (8.0 | )% |
| Tax at effective tax rate                           |   | Ps.      | (131,124 | )        | (46.9  | )%       | Ps.    | (101,192 | ) | 36.2 | % | Ps. | 209,484 |   | 45.1 | % |

 

**Deferred taxes**

 

The tax effect of thetemporary differences that generated a deferred tax liability in accordancewith Bulletin D-4 is as follows:

 

|                                       |   | **2002**  |      | **2001**  |   |
|--------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                       |   |      |      |      |   |
| Allowance for doubtful accounts receivable |   | Ps.       | (5,485    | )         | Ps.    | (1,926 | ) |
| Inventories                                |   | 330,337   |      | 423,930   |   |
| Prepaid expenses                           |   | 163       |      | 173       |   |
| Property, plant   and equipment       |   | 2,589,278 |      | 2,707,212 |   |
| Deferred charges                           |   | 88,671    |      | 100,389   |   |
| Accounts payable and accrued liabilities   |   | (123,681  | )         | (33,969   | )      |
| Pension and seniority premium              |   | (9,176    | )         | (9,489    | )      |
| Tax loss carryforwards                     |   | (421,483  | )         | (598,791  | )      |
| Recoverable asset taxes                    |   | (12,523   | )         | (12,523   | )      |
|                                       |   | Ps.       | 2,436,101 |      | Ps.    | 2,575,006 |   |

 

F-20

----

 

**Tax losscarryforwards and recoverable asset taxes**

 

At December 31,2001, available tax loss carryforwards for income tax purposes and recoverableasset taxes, which will be indexed for inflation through the year in which theyare utilized, are as follows:

 

| **Expiration Date** |   | **Tax Loss  Carryforwards** |      | **Recoverable  Asset Taxes** |   |
|---------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                |   |                        |      |                         |   |
| 2003                |   | Ps.                         | —    |                         | Ps.    | 12,523 |   |
| 2007                |   | 375,255                     |      | —                       |   |
| 2009                |   | 719,355                     |      | —                       |   |
| 2011                |   | 202,265                     |      | —                       |   |
|                |   | Ps.                         | 1,296,875 |                         | Ps.    | 12,523 |   |

 

**14. GUARANTEES GRANTED:**

 

The Company, is guarantorof its holding company, GMM, with respect to GMM’s Secured Export Notes (withan initial aggregate outstanding amount of $600 million) and GMM’s Series AGuaranteed Senior Notes and Series B Guaranteed Senior Notes. According to theterms of the restructuring, the proceeds of the Company's export sales arepledged as collateral.  Such proceedsmust be deposited in a collateral account with the agent bank (The Chase ManhattanBank). The Company may immediately make use of these proceeds provided thatthere is no event of default.  Inaddition, in the event of default, the Company shall maintain a bank accountguaranteeing payment of principal and interest during the three monthsfollowing the time that the collateral collection accounts are used to servicedebt.

 

The Company is alsoguarantor of GMM with respect to the following indebtedness:

 

•             Syndicated loans withBank of America for $130 million and $82.4 million granted on October 6, 1998and February 6, 2001, respectively. Also the loan letters established with the same bank on June 9, 2000 areguaranteed.

 

•             Equipment loan withthe Export Development Corporation for $49.9 million granted on November 18,1996.

 

•             Equipment loan withthe Export Development Corporation granted on June 15, 1998 for $75 million.

 

•             Export loan withSociété Genérale on August 21, 1996 for $21.3 million.

 

•             Current account loanwith Banco Nacional de Comercio Exterior, S.N.C. for $50 million granted onAugust 10, 2001.

 

•             Loan agreement withThe Bank of Nova Scotia for US$100 million granted on August 30, 2001.

 

**15. CONTINGENCIES:**

 

***Legal Proceedings***

 

*Ejido*

 

In July 1991, the agricultural community of Pilares deNacozari Ejido (the “Ejido”) commenced an action (“Amparo”) in the firstfederal district court in Sonora, Mexico against the Ministry of AgrarianReform (the “Ministry”), alleging that the expropriation of approximately 1,500hectares of land on which certain of the Company’s facilities are currentlylocated, which land is adjacent to the land where the mine is located, wasimproper.  The Company was not named asa defendant in the Amparo, although it was included as an interested thirdparty due to its ownership of the land. The Company bought the land in question in 1976 from the Banco Nacionalde Obras y Servicios Publicos, which had previously acquired it as abeneficiary of the expropriation by the Ministry in 1973.

 

The claim alleged by the Ejido states that theMinistry failed to notify one of three representatives of the Ejido of theexpropriation.  In 1994, the Mexican DistrictCourt Judge of Hermosillo granted the Amparo ruling the expropriation by theMinistry 

 

F-21

----

 

legally void and in 1997 made a second ruling ordering the Ministry toreturn the land.  As a result of thesecond ruling, the Company filed an ancillary action alleging the impossibilityof returning the land.

 

There has been no final resolution of this matter, butthe Mexican District Court Judge of Hermosillo before whom this matter ispresently docketed has twice before issued a ruling stating that it isimpossible to return the land as a means of restitution.  A third and final ruling from the MexicanDistrict Court Judge of Hermosillo is expected soon.  The Company believes that if the Ejido requests indemnity insteadof a return of the land, its financial responsibility with respect to suchcompensation would not be material.

 

*Coremi Royalties*

 

When the Company originally received mining concessionsrelated to its “La Caridad” unit in 1970, it were forced to pay royalties tothe Council of Mineral Resources (“Coremi”). When the Mining Law came into effect in 1992, however, said obligationwas abrogated.  Coremi, the Mexican****Superintendentof Mining and the Mexican Secretary of Economy, however, has interpreted in adifferent way from the Company the inception of the Mining Law and, in 1995, theCompany and Coremi initiated a series of legal actions that are stillpending.  In August 2002, Coremi filedwith the Third Federal District Judge in Civil Matter, certain civilianactions, demanding from the Company the payment of royalties due since1997.  The Company answered and deniedCoremi’s claims in October 2002.  TheCompany believes that any such payment related to this matter would not bematerial.

 

*La Caridad - Mining Concessions*

 

Since 1995, the MexicanSuperintendent of Mining has requested proof from the Company that it satisfiedits obligation to pay certain “discovery bonuses” allegedly due in connectionwith the grant of 13 mining concessions at La Caridad.  If said proof is not provided, the MexicanSuperintendent of Mining has threatened to cancel the Company’sconcessions.  The Company has challengedthese demands by filing a writ before a hierarchically superior administrativebody, in which it state its “defenses” against the alleged claims and by filingan Amparo on May 2, 2003, with the Tenth District Federal Judge inAdministrative Matters.  The Companybelieves that its obligation to make the demanded payments was abrogated whenthe Mining Law came into effect in November 1992, that the MexicanSuperintendent of Mining confuses “bonuses” with “royalties” and that anyclaims related thereto are without merit.

 

The Company is involvedin various other legal proceedings incidental to its operations, but it doesnot believe that the final decisions in any such proceedings will, individuallyor in the aggregate, have a material adverse effect on its financial position,results of operations or cash flows.

 

**16. DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP:**

 

The consolidatedfinancial statements of the Company are presented on the basis of Mexican GAAP.Certain accounting practices applied by the Company that conform with MexicanGAAP do not conform with U.S. GAAP.

 

This note presents areconciliation of net income (loss) and total stockholders’ equity as presentedunder Mexican GAAP to U.S. GAAP. However, this reconciliation to U.S. GAAP doesnot include the reversal of the restatement of the financial statements torecognize the effects of inflation as required under Mexican GAAP BulletinB-10, “Recognition of the Effects of Inflation in the Financial Information”,as amended. The application of Bulletin B-10 represents a comprehensive measureof the effects of price level changes in the inflationary Mexican economy and,as such, is considered a more meaningful presentation than historicalcost-based financial reporting for both Mexican and U.S. accounting purposes.

 

The additional principaldifferences between Mexican GAAP and U.S. GAAP are described below, togetherwith an explanation, where appropriate, of the method used in the determinationof the adjustments that affect net income (loss) and total stockholders’equity.

** **

**Restatement**

 

Subsequent to theissuance of the Company’s 2001 financial statements, management determined thatpush-down accounting adjustments related to the Company ́s acquisition by GMMhad not been properly reported in the Company’s U.S. GAAP financialinformation.  Push-down accounting isnot required under Mexican GAAP.  As aresult, the following U.S. GAAP financial information has been restated fromthe amounts previously reported to reflect such push-down accountingadjustments:

 

F-22

----

 
|                                      |   | **2001**                      |       | **2000**         |   | **1999**                      |   |
|-------------------------------------------|--------|-------------------------------|------------|------------------|--------|-------------------------------|--------|
|                                      |   | **As  Previously   Reported** |       | **As  Restated** |   | **As  Previously   Reported** |   | **As  Restated** |   | **As  Previously   Reported** |   | **As  Restated** |   |
|                                      |   |                          |       |             |   |                          |   |   |   |   |   |   |   |
| At December 31:                           |   |                          |       |             |   |                          |   |   |   |   |   |   |   |
| Total assets                              |   | Ps.                           | 24,210,688 |             | Ps.    | 21,948,505                    |   | Ps. | 24,477,823 |   | Ps. | 21,461,579 |   | Ps. | 24,339,340 |   | Ps. | 20,569,036 |   |
| Stockholders’ equity                 |   | Ps.                           | 18,453,677 |             | Ps.    | 16,191,494                    |   | Ps. | 19,327,102 |   | Ps. | 16,310,858 |   | Ps. | 18,920,726 |   | Ps. | 15,150,422 |   |
|                                      |   |                          |       |             |   |                          |   |   |   |   |   |   |   |
| For the year ended December 31:           |   |                          |       |             |   |                          |   |   |   |   |   |   |   |
| Depreciation and amortization expense     |   | Ps.                           | 975,508    |             | Ps.    | 221,447                       |   | Ps. | 944,150 |   | Ps. | 190,089 |   | Ps. | 900,380 |   | Ps. | 146,319 |   |
| (Loss) income before income taxes         |   | Ps.                           | (1,385,605 | )                | Ps.    | (631,544                      | )      | Ps. | 945,576 |   | Ps. | 1,699,637 |   | Ps. | 976,643 |   | Ps. | 1,730,704 |   |
| Net (loss) income                         |   | Ps.                           | (778,648   | )                | Ps.    | (24,587                       | )      | Ps. | 751,480 |   | Ps. | 1,505,541 |   | Ps. | 632,753 |   | Ps. | 1,386,814 |   |
| Basic and diluted (loss) income per share |   | Ps.                           | (0.75      | )                | Ps.    | (0.02                         | )      | Ps. | 0.72 |   | Ps. | 1.44 |   | Ps. | 0.61 |   | Ps. | 1.33 |   |

 

**Cash flowinformation**

 

Under Mexican GAAP, theCompany presents consolidated statements of changes in financial position inaccordance with Bulletin B-12, which specifies the appropriate presentation ofthe statement of changes in financial position when the financial statements havebeen restated in constant Mexican pesos (in accordance with the third amendmentto Bulletin B-10). Bulletin B-12 identifies the generation and application ofresources representing differences between beginning and ending financialstatement balances in constant Mexican pesos. Bulletin B-12 also requires thatmonetary and foreign exchange gains and losses be treated as cash items in thedetermination of resources provided by operations.

 

The changes in theconsolidated financial statement balances included in this statement constitutecash flow activity stated in constant Mexican pesos (including monetary andunrealized foreign exchange gains and losses on short-term liabilities, whichare considered cash gains and losses in the constant Mexican peso financialstatements).

 

In accordance withMexican GAAP, the reduction in current and long-term debt due to restatement inconstant Mexican pesos and unrealized exchange gains and losses on short-termliabilities are presented in the consolidated statements of changes infinancial position as a resource used by financing activities and the gain frommonetary position is presented as a component of operating activities. SFAS No.95, “Statement of Cash Flows,” does not provide guidance with respect toinflation adjusted financial statements.

 

The following arestatements of cash flows, in accordance with U.S. GAAP, excluding the effects of inflation.

 
|                                                                                      |   | **2002**  |    | **2001**          |   | **2000**          |   |
|-------------------------------------------------------------------------------------------|--------|-----------|---------|-------------------|--------|-------------------|--------|
|                                                                                      |   |      |    | **(As Restated)** |   | **(As Restated)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |      |    |              |   |              |   |
| Consolidated net (loss) income                                                            |   | Ps.       | 987,782 |              | Ps.    | (24,587           | )      | Ps. | 1,505,541 |   |
| Effects of inflation                                                                      |   | 264,372   |    | 188,594           |   | 282,058           |   |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities- |   |      |    |              |   |              |   |
| Provision for pension and seniority premiums                                              |   | 2,213     |    | 1,968             |   | 4,660             |   |
| Depreciation, amortization and depletion                                                  |   | 208,858   |    | 221,447           |   | 190,089           |   |
| (Gain) loss on sale of property and equipment                                             |   | 2,308     |    | 20,682            |   | 42,886            |   |
| Unrealized exchange (gain) loss                                                           |   | (148,535  | )       | 231,135           |   | (1,836            | )      |
| Capitalized stripping cost                                                                |   | (28,230   | )       | (104,939          | )      | (121,933          | )      |
| Deferred income taxes and employee profit sharing                                         |   | 58,053    |    | 530,985           |   | (215,922          | )      |
|                                                                                      |   | 1,346,821 |    | 1,065,285         |   | 1,685,543         |   |
|                                                                                           |        |           |         |                   |        |                   |        |  |  |  |

 

F-23

----

 
|                                                               |   | **2002**   |   | **2001**          |   | **2000**          | ** ** |
|--------------------------------------------------------------------|--------|------------|--------|-------------------|--------|-------------------|------------|
|                                                               |   |       |   | **(As Restated)** |   | **(As Restated)** |       |
| Changes in operating assets and liabilities:                       |   |       |   |              |   |              |       |
| Notes and accounts receivable                                      |   | (250,046   | )      | (982,126          | )      | (429,168          | )          |
| Inventories                                                        |   | (79,392    | )      | 217,297           |   | (440,437          | )          |
| Accounts payable and accrued liabilities                           |   | 288,767    |   | 44,521            |   | 283,528           |       |
| Accounts payable suppliers                                         |   | (63,849    | )      | 138,184           |   | —            |       |
| Affiliated companies                                               |   | (1,996,369 | )      | (173,933          | )      | (337,105          | )          |
| Tax payable                                                        |   | (7,999     | )      | (142,311          | )      | —            |       |
| Employee profit-sharing payable                                    |   | (40,749    | )      | (14,364           | )      | (32,210           | )          |
| Net cash (used in) provided by operating activities                |   | (802,816   | )      | 152,553           |   | 730,151           |       |
|                                                               |   |       |   |              |   |              |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                              |   |       |   |              |   |              |       |
| Payments of long-term debt                                         |   | —     |   | —            |   | (4,818            | )          |
| Effect of variation of debt in constant pesos                      |   | —     |   | —            |   | (431              | )          |
| Cash retained in collateral account                                |   | (201,385   | )      | (40,598           | )      | —            |       |
| Net cash used in financing activities                              |   | (201,385   | )      | (40,598           | )      | (5,249            | )          |
|                                                               |   |       |   |              |   |              |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                              |   |       |   |              |   |              |       |
| Additions to property and equipment                                |   | 21,995     |   | (159,111          | )      | (294,922          | )          |
| Net increase in deferred charges, except for capitalized stripping |   | (21,645    | )      | (103,049          | )      | (122,457          | )          |
| Proceeds from sale of property and equipment                       |   | 617        |   | 1,367             |   | 2,058             |       |
| Due from Grupo Minero México,  S.A. de C.V.                   |   | 535,166    |   | 118,592           |   | (283,760          | )          |
| Due from Grupo México, S.A. de  C.V.                          |   | (140,955   | )      | —            |   | —            |       |
| Due from Minera México, S.A.  de C.V.                         |   | 633,335    |   | (23,333           | )      | 3,042             |       |
| Net cash provided by (used in) investing activities                |   | 1,028,513  |   | (165,534          | )      | (696,039          | )          |
|                                                               |   |       |   |              |   |              |       |
| Increase (decrease) in cash and cash equivalents                   |   | 24,312     |   | (53,579           | )      | 28,863            |       |
| Cash and cash equivalents at beginning of year                     |   | 27,626     |   | 81,205            |   | 54,342            |       |
| Cash and cash equivalents at end of year                           |   | Ps.        | 51,938 |              | Ps.    | 27,626            |       | Ps. | 81,205 |   |
|                                                               |   |       |   |              |   |              |       |
| Supplemental disclosure of cash flow information:                  |   |       |   |              |   |              |       |
| Cash paid for interest                                             |   | Ps.        | — |              | Ps.    | —            |       | Ps. | 10,875 |   |
| Cash paid for income and asset taxes                               |   | Ps.        | — |              | Ps.    | —            |       | Ps. | — |   |
| Cash paid for employee statutory profit sharing                    |   | Ps.        | 39,014 |              | Ps.    | 38,005            |       | Ps. | 77,119 |   |

 

**Deferred incometaxes and employee profit sharing**

 

As explained in Note 4,beginning in 2000 under Mexican GAAP the revised Bulletin D-4 becameeffective.  The Company follows SFAS No.109, “Accounting for Income Taxes” for U.S. GAAP purposes, which differs fromMexican GAAP as follows:

 

•             Under Mexican GAAPdeferred taxes are classified as non-current, while under U.S. GAAP theclassification is based on the period in which the temporarydifferences are expected to reverse.

 

•             Under Mexican GAAP,the effects of inflation on the deferred tax balance generated by monetary itemsare recognized in results under monetary position gain or loss.  Under U.S. GAAP the deferred tax balance isclassified as a non-monetary item.

 

•             Under Mexican GAAPdeferred employee profit sharing is calculated considering only those temporarydifferences that arise during the year and which are expected to reverse withina defined period, while under U.S. GAAP the same liability method as used fordeferred income taxes is applied.  Also,for U.S. GAAP purposes, employee profit sharing must be classified as anoperating expense.

 

Since employee profitsharing is calculated based on taxable income after certain adjustments and issubject to the future consequences of temporary differences in the same manneras income taxes, deferred employee profit sharing, which is not recorded underMexican GAAP, must be included in the reconciliation of Mexican to U.S. GAAP.

 

The tax effect of temporary differences that generateddeferred tax liabilities (assets) under SFAS No. 109 are as follows: 

 

F-24

----

 

|                                                                        |   | **2002**          |      | **2001**            |   |
|-----------------------------------------------------------------------------|--------|-------------------|-----------|---------------------|--------|
|                                                                        |   | **Income  Taxes** |      | **Profit  Sharing** |   | **Income  Taxes (As Restated)** |   | **Profit  Sharing (As Restated)** |   |
| Current:                                                                    |   |              |      |                |   |   |   |   |   |
| Inventories                                                                 |   | Ps.               | 351,157   |                | Ps.    | 103,282 |   | Ps. | 423,930 |   | Ps. | 121,123 |   |
| Non-deductible reserves                                                     |   | (125,476          | )         | (36,905             | )      | (35,156 | ) | (10,045 | ) |
| Unrealized exchange loss                                                    |   | —            |      | (39,969             | )      | — |   | (36,465 | ) |
| Net current liability                                                       |   | 225,681           |      | 26,408              |   | 388,774 |   | 74,613 |   |
| Non-current:                                                                |   |              |      |                |   |   |   |   |   |
| Property, plant and equipment                                               |   | 2,928,481         |      | 1,431,313           |   | 2,772,799 |   | 1,478,905 |   |
| Unamortized portion of negative goodwill applied to  property and equipment |   | (512,761          | )         | (150,812            | )      | (792,814 | ) | (226,218 | ) |
| Deferred charges                                                            |   | 93,771            |      | 27,580              |   | 100,389 |   | 28,683 |   |
| Pension and seniority premiums                                              |   | (9,750            | )         | (2,868              | )      | (10,228 | ) | (2,923 | ) |
| Tax loss carryforwards                                                      |   | (441,725          | )         | —              |   | (598,791 | ) | — |   |
| Asset tax credit carryforwards                                              |   | (12,523           | )         | —              |   | (12,523 | ) | — |   |
|                                                                        |   | 2,045,493         |      | 1,305,213           |   | 1,458,832 |   | 1,278,447 |   |
| Valuation allowance for tax loss carry forwards and  asset taxes            |   | 512,761           |      | 150,812             |   | 1,404,128 |   | 226,218 |   |
| Net non-current liability                                                   |   | 2,558,254         |      | 1,456,025           |   | 2,862,960 |   | 1,504,665 |   |
| Total                                                                       |   | Ps.               | 2,783,985 |                | Ps.    | 1,482,433 |   | Ps. | 3,251,734 |   | Ps. | 1,579,278 |   |

 

For U.S. GAAP purposes,deferred tax assets are reduced by a valuation allowance if it is more likelythan not that some portion or all of the deferred tax asset will not berealized.

 

The components of theincome tax and profit sharing expense for the years ended December 31, 2002,2001 and 2000 are as follows:

 

|                          |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Current-                      |   |     |   |     |   |     |   |
| Profit sharing                |   | Ps.      | — |     | Ps.    | 38,853   |   | Ps. | 58,527 |   |
|                          |   |     |   |     |   |     |   |
| Deferred-                     |   |     |   |     |   |     |   |
| Income tax                    |   | 766,524  |   | (688,343 | )      | (194,096 | )      |
| Profit sharing                |   | (97,157  | )      | 608,014  |   | (21,826  | )      |
|                          |   | 669,367  |   | (80,329  | )      | (215,922 | )      |
| Change in valuation allowance |   |     |   |     |   |     |   |
| Income tax                    |   | (611,314 | )      | 611,314  |   | —   |   |
|                          |   | Ps.      | 58,053 |     | Ps.    | 569,838  |   | Ps. | (157,395 | ) |

 

**NegativeGoodwill**

 

UnderBulletin B-8 of Mexican GAAP, any excess book value of a subsidiary over itspurchase price is recorded as a deferred credit and amortized against incomeover the period in which the new business is integrated, not to exceed fiveyears. For Mexican GAAP purposes, negative goodwill related to the 1989acquisitions has been fully amortized.

 

Under U.S. GAAP, negativegoodwill must be first allocated to proportionately reduce the values assignedto non-current assets (generally fixed assets).  For U.S. GAAP purposes, the benefit is recognized through reduceddepreciation over a period of 16 years.

** **

**Cost of pension plans and other employeebenefits**

 

The Company has prepareda study of pension costs under Mexican GAAP (see Notes 4 and 9). Under MexicanGAAP, the requirement to record liabilities for employee benefits usingactuarial computations is substantially the same as required by SFAS No. 87,“Employers’ Accounting for Pensions”, except for the initial year ofapplication, which generates a difference in unamortized prior service costsand in the amortization expense.

 

F-25

----

 

The Company has nopost-retirement health care insurance or other benefit plans, other than thepension plans referred to in Note 4 and 13. Therefore, SFAS No. 106,“Employers’ Accounting for Post-retirement Benefits other than Pensions”, andSFAS No. 112, “Employers’ Accounting for Post- employment Benefits”, would haveno effect on the Company’s financial statements.

 

The Company applies SFASNo. 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits”, which requires additional disclosures.  Although the Company’s measurement or recognition of pensions andother postretirement benefit obligations does not change under SFAS No. 132,the following additional disclosure regarding such plans are required.

 
|                                                    |   | **2002** |   | **2001** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|
| **Change  in projected benefit obligation**             |   |     |   |     |   |
|                                                    |   |     |   |     |   |
| Benefit obligation at  beginning of year                |   | Ps.      | 27,285 |     | Ps.    | 26,443 |   |
| Service cost                                            |   | 2,205    |   | 2,184    |   |
| Interest cost                                           |   | 907      |   | 1,244    |   |
| Actuarial loss, net                                     |   | (768     | )      | (2,389   | )      |
| Benefits paid                                           |   | (2,267   | )      | (197     | )      |
| Benefit obligation at end of year                       |   | Ps.      | 27,362 |     | Ps.    | 27,285 |   |
|                                                    |   |     |   |     |   |
| **Reconciliation  of funded status**                    |   |     |   |     |   |
| Funded status                                           |   | Ps.      | 27,362 |     | Ps.    | 27,285 |   |
| Unrecognized net actuarial  loss                        |   | (3,953   | )      | (3,735   | )      |
| Unrecognized transition  obligation                     |   | (68      | )      | (76      | )      |
| Additional minimum liability                            |   | 5,681    |   | 5,747    |   |
| Accrued benefit cost, net,  under U.S. GAAP             |   | 29,022   |   | 29,221   |   |
| Accrued benefit cost, net,  under Mexican GAAP          |   | 28,677   |   | 28,772   |   |
| Additional cost that must be  recognized under U.S GAAP |   | Ps.      | 345    |     | Ps.    | 449 |   |

 
| **Components of net periodic benefit  cost**             |   | **2002** |       | **2001** |       | **2000** |       |
|----------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                     |   |     | ** ** |     | ** ** |     | ** ** |
| Service cost                                             |   | Ps.      | 2,331      |     | Ps.        | 2,184    |       | Ps. | 1,319 |   |
| Interest cost                                            |   | 959      |       | 1,244    |       | 1,993    |       |
| Expected return on plan assets                           |   | —   |       | —   |       | 585      |       |
| Amortization of transition obligations, net              |   | 8        |       | 7        |       | 1        |       |
| Recognized net actuarial loss                            |   | 184      |       | 202      |       | 292      |       |
| Net periodic benefit cost under U.S. GAAP                |   | 3,482    |       | 3,637    |       | 4,190    |       |
| Net periodic benefit cost under Mexican GAAP             |   | 2,641    |       | 3,587    |       | 2,527    |       |
| Additional cost that must be recognized under U.S.  GAAP |   |     |       |     |       |     |       | Ps. | 1,663 |   |
|                                                          |        |          |            |          |            |          |            |  |  |  |  |

 
| **Weighted-average assumptions as of  December 31,** |   | **2002** |       | **2001** |       | **2000** |       |
|------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                 |   |     | ** ** |     | ** ** |     | ** ** |
| Discount rate                                        |   | 5.00     | %          | 5.00     | %          | 5.00     | %          |
| Rate of compensation increase                        |   | 1.50     | %          | 1.50     | %          | 1.50     | %          |

 

As of December 31, 2002 and 2001the accumulated benefit obligation amounted to Ps.24,160 and Ps.22,188,respectively.

 

F-26

----

 

**Minorityinterest**

 

Under Mexican GAAP,Bulletin B-8, minority interest in consolidated subsidiaries must be includedas a component of stockholders’ equity. Consequently, minority interest in theincome of such subsidiaries is not included in the determination of net income(loss) in the statement of operations under Mexican GAAP. Under U.S. GAAP, theminority interest in subsidiaries is shown below liabilities on the balance sheet,and is not part of stockholders’ equity and its share of the net results of theconsolidated subsidiaries is deducted before arriving at net income (loss).

** **

**Capitalizedinterest**

 

Under Mexican GAAP, acompany is not required to, but may, capitalize interest incurred on assetsunder construction. The amount to be capitalized in Mexico is based upon thecomprehensive financial cost (i.e., the sum of interest expense, foreignexchange gains and losses and the gain or loss from monetary position).  The Company has elected not to capitalizeany comprehensive financial cost under Mexican GAAP.

 

Under U.S. GAAP aproportional amount of interest costs on all debt, must be considered anadditional cost of constructed assets and depreciated over the lives of therelated assets. Exchange gains and losses on foreign currency-denominated debtmay not be capitalized.

** **

**Employee profitsharing**

 

Mexican law requires thepayment to employees of 10% of the Company’s taxable income, excluding certainadjustments for inflation. These amounts are treated as compensation expenseand are reflected after income tax, in the appropriate income statementcaptions in the statements of operations.

 

Under U.S. GAAP, employeeprofit sharing must be reflected as an operating expense in the statement ofoperations.

** **

**Major customers**

 

TheCompany had significant sales to three different customers in the last threeyears.  Sales to these customersaccounted for 37%, 14% and 6% of total net sales in 2002, 45%, 7%, and 7% oftotal net sales in 2001 and 11%, 9%, and 5% of total net sales in 2000.

 

**Segmentinformation**

 

The Company had net salesto customers from the following regions as follows:

 

|            |   | **2002**  |       | **2001**  |       | **2000**  |       |
|-----------------|--------|-----------|------------|-----------|------------|-----------|------------|
|            |   |      | ** ** |      | ** ** |      | ** ** |
| United States   |   | Ps.       | 1,828,982  |      | Ps.        | 3,408,819 |       | Ps. | 3,669,702 |   |
| Mexico          |   | 2,405,646 |       | 2,190,400 |       | 3,052,599 |       |
| Europe          |   | 31,320    |       | 63,416    |       | 287,558   |       |
| Latin America   |   | —    |       | —    |       | 4,778     | ** ** |
| Total net sales |   | Ps.       | 4,265,948  |      | Ps.        | 5,662,635 |       | Ps. | 7,014,637 |   |

 

**Start-up costs**

 

Under U.S. GAAP, AICPAStatement of Position 98-5, “Reporting on the Costs of Start-up Activities”,requires that certain costs such as organization, training and pre-feasibilityexpenses incurred in the start-up phase of a project be expensed as incurred.

 

In accordance withMexican GAAP, start-up costs are deferred and amortized at the commencement ofoperations, despite the inherent uncertainty regarding their futurerecoverability.  However, if the projectis abandoned and the start-up costs incurred to date become unrecoverable, suchcosts are expensed immediately. Amortization of deferred costs is amortized on a straight-line basisover the term in which the benefit is expected to be realized.

 

F-27

----

 

**Environmentalliabilities**

 

Under U.S. GAAP companiesmust comply with EITF 93-5, “Accounting for Environmental Liabilities”, andEITF 90-8, “Capitalization of Costs to Treat Environmental Contamination”.  These pronouncements require companies todisclose and/or accrue on a undiscounted basis any reclamation and remediationcosts that are expected to be incurred. The Company has properly accrued forall known environmental matters at the balance sheet date for U.S. GAAPpurposes.

 

**Financialinstruments**

 

Under Mexican GAAP,Bulletin C-2 went into effect in 2001 and requires the recognition of allderivative financial instruments on thebalance sheet as either assets or liabilities. Additionally, certain, but not all, derivative financial instruments andthe related hedged items must be adjusted to their market value, with all suchadjustments recorded in the income statement, regardless of the nature of thefinancial instrument.

 

Under U.S. GAAP, SFAS No.133 went into effect in 2001 and requires the recognition of all derivativefinancial instruments at fair value, with such adjustments recorded:

 

•            In thedetermination of net income or loss  forfair value hedges (fixed to variable)

•            In othercomprehensive income for qualifying cash flow hedges (variable to fixed)

 

At December 31, 2002 and2001, the Company did not have any outstanding derivative financialinstruments.

 

F-28

----

 

**Reconciliation of Mexican GAAP to U.S. GAAP**

 

Net income (loss) and stockholders’ equity,adjusted to take into account the significant differences between Mexican GAAPand U.S. GAAP, except for the comprehensive effects of price-level changes, areas follows: 

 

|                                                                                                    |   | **2002** |    | **2001**          |   | **2000**          |   |
|---------------------------------------------------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                                                                    |   |     |    | **(As Restated)** |   | **(As Restated)** |   |
| NET INCOME (LOSS):                                                                                      |   |     |    |              |   |              |   |
| Net income (loss) under Mexican  GAAP                                                                   |   | Ps.      | 406,228 |              | Ps.    | (216,651          | )      | Ps. | 196,516 |   |
| U.S. GAAP adjustments:                                                                                  |   |     |    |              |   |              |   |
| Deferred income taxes under U.S. GAAP                                                                   |   | (155,210 | )       | 77,029            |   | 194,096           |   |
| Deferred employee profit sharing liability                                                              |   | 97,157   |    | (608,014          | )      | 21,826            |   |
| Deferred income taxes under Mexican GAAP                                                                |   | (131,124 | )       | (101,192          | )      | 209,484           |   |
| Amortization of capitalized exchange loss and gain on  monetary position                                |   | 5,514    |    | 5,514             |   | 5,514             |   |
| Amortization of negative goodwill allocated to fixed  assets under U.S. GAAP.                           |   | 754,061  |    | 754,061           |   | 754,061           |   |
| Pension plan cost                                                                                       |   | (840     | )       | (50               | )      | (1,549            | )      |
| Effects of inflation accounting on U.S. GAAP  adjustments  and monetary gain on  labor liabilities |   | 11,996   |    | 64,716            |   | 125,593           |   |
|                                                                                                    |   | 581,554  |    | 192,064           |   | 1,309,025         |   |
| Net income (loss) under U.S. GAAP                                                                       |   | Ps.      | 987,782 |              | Ps.    | (24,587           | )      | Ps. | 1,505,541 |   |

 

|                                                                  |   | **2002**   |       | **2001**          |   |
|-----------------------------------------------------------------------|--------|------------|------------|-------------------|--------|
|                                                                  |   |       |       | **(As Restated)** |   |
| STOCKHOLDERS’ EQUITY:                                            |   |       |       |              |   |
| Stockholders’ equity under Mexican GAAP, less minority  interest |   | Ps.        | 21,323,903 |              | Ps.    | 20,917,342 |   |
| U.S. GAAP adjustments:                                                |   |       |       |              |   |
| Deferred income taxes under U.S. GAAP                                 |   | (2,783,935 | )          | (3,251,734        | )      |
| Deferred employee profit sharing                                      |   | (1,482,432 | )          | (1,579,277        | )      |
| Deferred income taxes under Mexican GAAP                              |   | 2,436,101  |       | 2,575,006         |   |
| Negative goodwill (previously amortized for Mexican  GAAP purposes)   |   | (1,508,122 | )          | (2,262,183        | )      |
| Capitalized exchange loss and gain on monetary position               |   | (210,330   | )          | (207,211          | )      |
| Accumulated pension plan cost                                         |   | (346       | )          | (449              | )      |
|                                                                  |   | (3,549,064 | )          | (4,725,848        | )      |
| Majority stockholders’ equity under U.S. GAAP                    |   | Ps.        | 17,774,839 |              | Ps.    | 16,191,494 |   |

 

Thechanges in stockholders’ equity under U.S. GAAP for the years endedDecember 31, 2002, 2001 and 2000 are as follows:

 
|                                                                                     |   | **Capital  Stock** |     | **Additional****Paid-  in Capital  (As Restated)** |   | **Retained  Earnings  (As Restated)** |   | **Accumulated  Other  Comprehensive****Loss** |       | **Total Majority  Stockholder’s****Equity  (As Restated)** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|----------|----------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------------------|------------|-----------------------------------------------------------------|--------|
|                                                                                     |   |               |     |                                               |   |                                  |   |                                          |       |                                                            |   |
| Stockholder’s equity under U.S. GAAP at December 31,  1999 (As previously reported) |   | Ps.                | 8,473,62 |                                               | Ps     | 10,933,715                            |   | Ps.                                           | 10,078,951 |                                                            | Ps.    | (10,565,563 | ) | Ps. | 18,920,726 |   |
| Prior period adjustment – recognition of push-down  accounting                      |   | —             |     | (10,933,715                                        | )      | 7,163,411                             |   | —                                        |       | (3,770,304                                                      | )      |
| Stockholder’s equity under U.S. GAAP at December 31,  1999 (as restated)            |   | 8,473,623          |     | —                                             |   | 17,242,362                            |   | (10,565,563                                   | )          | 15,150,422                                                      |   |
| Net income                                                                               |   | —             |     | —                                             |   | 1,505,541                             |   | —                                        |       | 1,505,541                                                       |   |
| Cumulative restatement effect                                                            |   | —             |     | —                                             |   | —                                |   | (352,195                                      | )          | (352,195                                                        | )      |
| Additional minimum liability and restatement of accrued  benefit                         |   | —             |     | —                                             |   | —                                |   | 7,090                                         |       | 7,090                                                           |   |
| Comprehensive income                                                                     |   |               |     |                                               |   |                                  |   |                                          |       | 1,160,436                                                       |   |
| Stockholder’s equity under U.S.GAAP at December 31,  2000 (as restated)             |   | 8,473,623          |     | —                                             |   | 18,747,903                            |   | (10,910,668                                   | )          | 16,310,858                                                      |   |
| Net income                                                                               |   | —             |     | —                                             |   | (24,587                               | )      | —                                        |       | (24,587                                                         | )      |
| Cumulative restatement effect                                                            |   | —             |     | —                                             |   | —                                |   | (94,547                                       | )          | (94,547                                                         | )      |
| Additional minimum liability and restatement of accrued  benefit                         |   | —             |     | —                                             |   | —                                |   | (230                                          | )          | (230                                                            | )      |
| Comprehensive income                                                                     |   |               |     |                                               |   |                                  |   |                                          |       | (119,364                                                        | )      |
| Stockholder’s equity under U.S. GAAP at December 31,  2001 (as restated)            |   | 8,473,623          |     | —                                             |   | 18,723,316                            |   | (11,005,445                                   | )          | 16,191,494                                                      |   |
|                                                                                          |        |                    |          |                                                    |        |                                       |        |                                               |            |                                                                 |        |  |  |  |  |  |

 

F-29

----

 
|                                                             |   | **Capital  Stock** |      | **Additional****Paid-  in Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive****Loss** |       | **Total Majority  Stockholder’s****Equity** |   |
|------------------------------------------------------------------|--------|--------------------|-----------|-------------------------------------|--------|------------------------|--------|-----------------------------------------------|------------|--------------------------------------------------|--------|
|                                                             |   |               |      |                                |   |                   |   |                                          |       |                                             |   |
| Net loss                                                         |   | —             |      | —                              |   | 987,782                |   | —                                        |       | 987,782                                          |   |
| Cumulative restatement effect                                    |   | —             |      | —                              |   | —                 |   | 595,489                                       |       | 595,489                                          |   |
| Additional minimum liability and restatement of accrued  benefit |   | —             |      | —                              |   | —                 |   | 74                                            |       | 74                                               |   |
| Comprehensive loss                                               |   |               |      |                                |   |                   |   |                                          |       | 1,583,345                                        |   |
| Stockholder’s equity under U.S. GAAP at December 31,  2002  |   | Ps.                | 8,473,623 |                                | Ps.    | —                 |   | Ps.                                           | 19,711,098 |                                             | Ps.    | (10,409,882 | ) | Ps. | 17,774,839 |   |
|                                                                  |        |                    |           |                                     |        |                        |        |                                               |            |                                                  |        |  |  |  |  |  |

 

**Reclassification of balance sheet andstatements of operations**

 

With regard to the consolidated balance sheetsand statements of operations, the following significant captions determinedunder U.S. GAAP would have been as follows:

 

 
|                                                      |   | **2002**  |       | **2001**          |   |              |   |
|-----------------------------------------------------------|--------|-----------|------------|-------------------|--------|-------------------|--------|
|                                                      |   |      |       | **(As Restated)** |   |              |   |
| Balance sheets:                                           |   |      |       |              |   |              |   |
| Current assets                                            |   | Ps.       | 6,440,265  |              | Ps.    | 3,930,519         |   |   |   |
| Total assets                                              |   | Ps.       | 24,723,962 |              | Ps.    | 21,948,505        |   |   |   |
| Current liabilities                                       |   | Ps.       | 1,397,889  |              | Ps.    | 967,099           |   |   |   |
| Total liabilities                                         |   | Ps.       | 6,949,123  |              | Ps.    | 8,019,028         |   |   |   |
| Stockholders’ equity                                 |   | Ps.       | 17,774,839 |              | Ps.    | 16,191,494        |   |   |   |
|                                                      |   |      |       |              |   |              |   |
|                                                      |   |      |       |              |   |              |   |
|                                                      |   | **2002**  |       | **2001**          |   | **2000**          |   |
|                                                      |   |      |       | **(As Restated)** |   | **(As Restated)** |   |
| Statements of operations:                                 |   |      |       |              |   |              |   |
| Operating income (loss)                                   |   | Ps.       | 1,080,639  |              | Ps.    | 619,652           |   | Ps. | 1,162,062 |   |
| Income taxes                                              |   | Ps.       | 155,210    |              | Ps.    | (606,957          | )      | Ps. | 194,096 |   |
| Consolidated net income (loss)                            |   | Ps.       | 987,782    |              | Ps.    | (24,587           | )      | Ps. | 1,505,541 |   |
| Weighted average common shares outstanding, in  thousands |   | 1,043,272 |       | 1,043,272         |   | 1,043,272         |   |
| Net income (loss) per share under U.S. GAAP               |   | Ps.       | 0.22       |              | Ps.    | (0.02             | )      | Ps. | 1.44 |   |
|                                                           |        |           |            |                   |        |                   |        |  |  |  |  |  |

 

**17. FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:**

** **

**MexicanGAAP**

** **

In December 2001, the Mexican Institute of PublicAccountants (MIPA) issued the new Bulletin C-9, “Liabilities, Provisions,Contingent Assets and Liabilities and Commitments” (“C-9”), whose provisionsare mandatory for years beginning as of January, 2003, although earlyapplication is recommended. C-9 replaces the provisions of the former BulletinsC-9 “Liabilities”, and C-12, “Contingencies and Commitments”, and establishes, amongothers, greater accuracy in items related to provisions, accumulatedobligations and contingent liabilities, and new regulations related toaccounting recognition of provisions, the use of present value, and theredemption of obligations when taking place early or substituted by a newissue.

 

In January 2002, the MIPA issued new Bulletin C-8,“Intangible Assets” (“C-8”) with the same effective date and recommendationestablished for Bulletin C-9. C-8 substitutes the former Bulletin   C-8, “Intangibles”, and establishes, amongothers, 

 

F-30

----

 

that the development costs of a project should be capitalized if theycomply with the criteria established for their recognition as assets; anypreoperating costs incurred as of the date of application of this Bulletinshould be recorded as a cost for the period. The unamortized balance of capitalized preoperating costs in accordancewith the former Bulletin C-8 will be amortized in accordance with the terms ofsuch Bulletin.  To reduce as much aspossible the remnant that constitutes “goodwill” in the case of businessacquisitions, the intangible items to be identified and quantified areprovided.

 

In March 2003, the MIPAissued Bulletin C-15, “Impairment in the Value of Long-Lived Assets and TheirDisposal” (C-15), whose application is mandatory for financial statements ofperiods beginning on or after January 1, 2004, although early application isencouraged. C-15 establishes, among others, new principles for the calculationand recognition of impairment losses for long-lived assets and theirreversal.  It also provides examples ofindicators of possible impairment in the carrying amount of tangible andintangible long-lived assets in use, including goodwill. The calculation ofsuch loss requires the determination of the recoverable value, which is nowdefined as the greater of the net selling price of a cash-generating unit andits value in use, which is the present value of discounted future net cashflows. The accounting principles issued prior to this new Bulletin used futurenet cash flows, without requiring the discounting of such cash flows.

 

The Company has not fullyassessed the effects of adopting these new accounting principles on itsfinancial position and results of operations.

 

**U.S.GAAP**

 

During 2001, the FASBissued the following guidance:

 

In June 2001, the FASBissued SFAS No. 141, “Business Combinations”, which is effective for allbusiness combinations initiated after June 30, 2001.  SFAS No. 141 requires all business combinations to be accountedfor using the purchase method.  Theadoption of this new standard did not have a material impact on the Company’sfinancial position or results of operations.

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets”, which waseffective for the Company beginning in 2002. With the adoption of SFAS No. 142, goodwill is no longer subject toamortization over its estimated useful life, but rather it will be subject toat least an annual assessment for impairment by applying a fair-value-basedtest.  Additionally, negative goodwillis recognized as an extraordinary gain at the time of the business combination.

 

In June 2001, the FASBissued SFAS No. 143 “Accounting for Asset Retirement Obligations”, which waseffective for the Company beginning in 2003. The Company plans to adopt this new standard in 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  It applies to legal obligations associatedwith the retirement of long-lived assets and the associated asset retirementcosts.  It applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and/or the normal operation of along-lived asset, except for certain obligations of lessees.  This SFAS requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The Company is currently evaluating theeffect that this new standard will have on its financial position, results ofoperations and cash flows.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”.  The Company adopted thisstandard in 2002.  SFAS No. 144 supersedesSFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of”. SFAS No. 144 also expands the scope ofdiscontinued operations presentation to a component of an entity and eliminatesthe exception to consolidation for a temporarily controlled subsidiary.  The adoption of this standard did not have amaterial impact on the Company’s financial position and results of operations.

 

During 2002, the FASBissued the following guidance:

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities”, which will be required to be effective for exit or disposalactivities that are initiated after December 31,2002. This statement addressesfinancial accounting and reporting for cost associated with exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”. The Company adopted the provisions of SFAS No. 146 on January1, 2003, which did not have a material effect on the Company’s financialstatements.

 

F-31

----

 

In November 2002, the FASBissued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”).  FIN 45 requiresthat the guarantor recognize, at the inception of certain guarantees, aliability for the fair value of the obligation undertaken in issuing suchguarantee.  FIN 45 also requiresadditional disclosure requirements about the guarantor’s obligations undercertain guarantees that it has issued. The initial recognition and measurement provisions of thisinterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002 and the disclosure requirements are effectivefor financial statement periods ending after December 15, 2002.  The Company does not expect the adoption ofFIN 45 will have a material impact on its financial position, results ofoperations or cash flows.

 

During 2003, the FASBissued the following guidance:

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”).  FIN 46 clarifiesthe application of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements”, to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  FIN 46 is effective immediately for all companies that hold avariable interest in a variable interest entity created after January 31,2003.  For a variable interest held bythe Company in a variable interest entity created before February 1, 2003, theCompany will apply the provisions of FIN 46 no later than the end of the firstannual reporting period beginning after June 15, 2003*.*The Company does notexpect that the adoption of FIN 46 will have a material impact on its financialposition, results of operations or cash flows.

 

In April 2003, the FASBissued SFAS No. 149 “Amendments of Statement 133 on Derivative Instruments andHedging Activities”, which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities”.  The changes in SFAS No. 149 improvefinancial reporting by requiring that contracts with comparable characteristicsbe accounted for similarly.  SFAS No.149 will be effective for contracts entered into or modified after June 30,2003, except as stated below, and for hedging relationships designated afterJune 30, 2003.  In addition, expect asstated below, all provisions of this Statement should be applied  prospectively.  The provisions of SFAS No. 149 that relate to SFAS No. 133implementation issues that have been effective for fiscal quarters that beganprior to June 15, 2003, should continue to be applied in accordance with theirrespective effective dates.  The Companydoes not anticipate that the adoption of SFAS No. 149 will have a materialimpact on the Company’s financial position, results of operations or cash flow.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristicsof both Liabilities and Equity”.  SFASNo. 150 aims to eliminate diversity in practice by requiring that the followingthree types of financial instruments be reported as liabilities by theirissuers:

 

•                  Mandatorilyredeemable instruments (i.e., instruments issued in the form of shares thatunconditionally obligate the issuer to redeem the shares for cash or bytransferring other assets)

 

•                  Forwardpurchase contracts, written put options, and other financial instruments not inthe form of shares that either obligate or may obligate the issuer to settleits obligation for cash or by transferring other assets

 

•                  Certainfinancial instruments that include an obligation that  (1) the issuer may or must settle by issuing a variable number ofits equity shares and (2) has a “monetary value” at inception that (a) isfixed, (b) is tied to a market index or other benchmark (something other thanthe fair value of the issuer’s equity shares), or (c) varies inversely with thefair value of the equity shares, for example, a written put option.

 

Until now, these types ofinstruments have been variously reported by their issuers as liabilities, aspart of equity, or between the liabilities and equity sections (sometimesreferred to as “mezzanine” reporting) of the balance sheet.  The provisions of SFAS No. 150 areeffective for financial instruments for the first fiscal period beginning afterDecember 15, 2003. The Company does not expect that the adoption of SFAS No.150 will have a material impact on its financial position, results ofoperations or cash flows.

 

F-32

----

 

**ANNEX F-2**

** **

**FINANCIALSTATEMENTS OF MEXICANA DE CANANEA, S.A. DE C.V.**

 

----

 

**INDEX**

** **

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

** **

**CONSOLIDATEDFINANCIAL STATEMENTS**

 
| Consolidated Financial  Statements:                                                                                    |
|------------------------------------------------------------------------------------------------------------------------|
| Independent Auditor’s  Report                                                                                     |
| Consolidated Balance Sheets  for the Years Ended December 31, 2002 and 2001                                       |
| Consolidated Statements  of Operations for the Years Ended December 31, 2002, 2001 and 2000                       |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended December  31, 2002, 2001 and 2000 |
| Consolidated  Statements of Changes in Financial Position for the Years Ended December 31,  2002, 2001 and 2000        |
| Notes to  Consolidated Financial Statements                                                                            |

 

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Stockholders of

 

Mexicana de Cananea, S.A. de C.V.,

 

We have audited the accompanying consolidated balancesheet of Mexicana de Cananea, S.A. de C.V. and Subsidiaries (Mexicancorporations collectively referred to as the “Company”) as of December 31,2002, and the related consolidated statements of operations, changes instockholders’ equity and changes in financial position for the year then ended,all expressed in thousands of Mexican pesos of purchasing power as of December31, 2002.  These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Mexicana deCananea, S.A. de C.V. and Subsidiaries as of December 31, 2002, and the resultsof their operations, changes in their stockholders’ equity and the changes intheir financial position for the year then ended in conformity with accountingprinciples generally accepted in Mexico.

 

Accounting principles generally accepted in Mexicovary in certain significant respects from accounting principles generallyaccepted in the United States of America. The application of the latter wouldhave affected the determination of net income for the year ended December 31,2002 and the determination of stockholders’ equity as of that date to theextent summarized in Note 16.

 

Our audit also comprehended the translation of Mexicanpeso amounts into U.S. dollar amounts and, in our opinion, such translation hasbeen made in conformity with the basis stated in Note 2. Such U.S. dollaramounts are presented solely for the convenience of readers.

 
| /s/ Deloitte & Touche |   |
|---------------------------|--------|
| Deloitte & Touche     |   |

 

 

 

Mexico City, Mexico

June 13, 2003

 

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Stockholders of

 

Mexicana de Cananea, S.A. de C.V.,

 

We have audited the accompanying consolidated balancesheets of Mexicana de Cananea, S.A. de C.V. and Subsidiaries (Mexicancorporations collectively referred to as the “Company”) as of December 31,2001, and the related consolidated statements of operations, changes instockholders’ equity and changes in financial position for the years endedDecember 31, 2001 and 2000, all expressed in thousands of Mexican pesos ofpurchasing power as of December 31, 2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Mexicana de Cananea, S.A. de C.V. and Subsidiaries as of December31, 2001, and the results of their operations and the changes in theirfinancial position for the years ended December 31, 2001 and 2000, inconformity with accounting principles generally accepted in Mexico.

 

In 2000, the Company adopted the regulations ofrevised Bulletin D-4, “Accounting for Income and Asset Taxes and EmployeeProfit Sharing”. The initial effect of adopting this bulletin was to record thedeferred income tax effects based on the cumulative effect of temporarydifferences as of January 1, 2000 as a long-term liability, directly chargingstockholders’ equity in the new initial effect of deferred income taxes accountfor 672,166 thousand Mexican pesos. Also, the provision for income taxes of2000 increased by 75,935 thousand Mexican pesos due to the deferred effects ofthe year.

 

F-2

----

 

Accounting practices used by the Company in preparingthe accompanying consolidated financial statements conform with accountingprinciples generally accepted in Mexico but do not conform with accounting principlesgenerally accepted in the United States of America (U.S. GAAP).  A description of these differences and areconciliation of consolidated net income (loss) and stockholders’ equity toU.S. GAAP as permitted by Form 20-F, which allows omission of the requirementto quantify, in the U.S. GAAP reconciliation, the differences attributable tothe effects of comprehensive inflation adjustments recorded locally, are setforth in Note 16. As discussed in Note 16, the 2001 and 2000 U.S. GAAPreconciliations have been restated.

 

Ruiz, Urquiza y Cía., S.C.(A member firm of Andersen Worldwide until April 9, 2002)

 
| /s/ Jorge I. Peralta Alvarez |   |
|------------------------------|--------|

 

C.P.C. Jorge I. Peralta Alvarez

 

Mexico City, MexicoJune 14, 2002(except with respect to the restatement to constant Mexican pesosand the restatement of the U.S. GAAP reconciliations presented in Note 16,as to which the date is June 13, 2003)

 

F-3

----

 

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS****AS OF DECEMBER 31, 2002 AND 2001****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($))**

 
|                                                                                                                      |   | **Convenience  Translation  (Note 2)  2002** |    | **2002**   |   | **2001**   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|------------|--------|------------|--------|
| **A**  **S**  **S**  **E**  **T**  **S**                                                         |   |                                         |    |       |   |       |   |
| CURRENT  ASSETS:                                                                                                          |   |                                         |    |       |   |       |   |
| Cash  and temporary investments (Note 5)                                                                                  |   | $                                            | 13,845  |       | Ps.    | 142,775    |   | Ps. | 18,713 |   |
| Cash  retained in collateral account (Note 1)                                                                             |   | —                                       |    | —     |   | 13,869     |   |
| Notes  and accounts receivable-                                                                                           |   |                                         |    |       |   |       |   |
| Trade,  net of allowances for doubtful accounts of Ps.1,414 and Ps.1,556 as of  December 31, 2002 and 2001, respectively. |   | 2,597                                        |    | 26,786     |   | 22,032     |   |
| Recoverable  taxes                                                                                                        |   | 16,485                                       |    | 170,004    |   | 61,272     |   |
| Due  from affiliated companies (Note 12)                                                                                  |   | 7,890                                        |    | 81,362     |   | 57,154     |   |
| Other                                                                                                                     |   | 3,793                                        |    | 39,113     |   | 8,510      |   |
|                                                                                                                      |   | 30,765                                       |    | 317,265    |   | 148,968    |   |
| Inventories  (Note 6)                                                                                                     |   | 30,449                                       |    | 314,009    |   | 339,978    |   |
| Total  current assets                                                                                                     |   | 75,059                                       |    | 774,049    |   | 521,528    |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| PROPERTY,  PLANT AND EQUIPMENT (Note 7)                                                                                   |   | 696,791                                      |    | 7,185,655  |   | 7,434,791  |   |
| INVESTMENTS  IN SHARES OF ASSOCIATED COMPANIES                                                                            |   | 74                                           |    | 766        |   | 800        |   |
| DEFERRED  CHARGES (Note 8)                                                                                                |   | 160,277                                      |    | 1,652,851  |   | 1,291,537  |   |
| Total  assets                                                                                                             |   | $                                            | 932,201 |       | Ps.    | 9,613,321  |   | Ps. | 9,248,656 |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                            |   |                                         |    |       |   |       |   |
| CURRENT  LIABILITIES:                                                                                                     |   |                                         |    |       |   |       |   |
| Accounts  payable to suppliers                                                                                            |   | $                                            | 29,798  |       | Ps.    | 307,291    |   | Ps. | 130,533 |   |
| Accounts  payable and accrued liabilities                                                                                 |   | 70,326                                       |    | 725,236    |   | 559,041    |   |
| Due  to affiliated companies (Note 12)                                                                                    |   | 46,700                                       |    | 481,597    |   | 442,777    |   |
| Taxes  payable                                                                                                            |   | 1,471                                        |    | 15,169     |   | 12,172     |   |
| Total  current liabilities                                                                                                |   | 148,295                                      |    | 1,529,293  |   | 1,144,523  |   |
| LIABILITY  FOR PENSION, SENIORITY PREMIUM  AND  MEDICAL SERVICE OBLIGATIONS (Note 9)                                 |   | 20,176                                       |    | 208,066    |   | 184,098    |   |
| DEFERRED  INCOME TAXES (Note 13)                                                                                          |   | 68,212                                       |    | 703,431    |   | 767,349    |   |
| Total  liabilities                                                                                                        |   | 236,683                                      |    | 2,440,790  |   | 2,095,970  |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| STOCKHOLDERS’  EQUITY (Note 10):                                                                                     |   |                                         |    |       |   |       |   |
| Capital  stock                                                                                                            |   | 828,907                                      |    | 8,548,103  |   | 8,548,103  |   |
| Retained  earnings                                                                                                        |   | 65,587                                       |    | 676,364    |   | 649,470    |   |
| Accumulated  other comprehensive loss                                                                                     |   | (130,081                                     | )       | (1,341,457 | )      | (1,334,408 | )      |
| Initial  effect of deferred income taxes                                                                                  |   | (68,895                                      | )       | (710,479   | )      | (710,479   | )      |
| Total  stockholders’ equity                                                                                          |   | 695,518                                      |    | 7,172,531  |   | 7,152,686  |   |
| Total  liabilities and stockholders’ equity                                                                          |   | $                                            | 932,201 |       | Ps.    | 9,613,321  |   | Ps. | 9,248,656 |   |
|                                                                                                                           |        |                                              |         |            |        |            |        |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-4

----

 

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000EXPRESSED IN CONSTANT MEXICAN PESOSAS OF DECEMBER 31, 2002(Stated in thousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($),except per share and share data)**

 
|                                                                             |   | **Convenience  Translation  (Note 2)  2002** |    | **2002**  |   | **2001**  |   | **2000**  |      |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|---------|-----------|--------|-----------|--------|-----------|-----------|
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| NET  SALES                                                                       |   | $                                            | 227,657 |      | Ps.    | 2,347,723 |   | Ps.       | 1,878,083 |   | Ps. | 2,630,655 |   |
| COST  OF SALES                                                                   |   | 175,093                                      |    | 1,805,652 |   | 1,589,993 |   | 1,981,093 |      |
| Gross  profit                                                                    |   | 52,564                                       |    | 542,071   |   | 288,090   |   | 649,562   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| OPERATING  EXPENSES:                                                             |   |                                         |    |      |   |      |   |      |      |
| Administrative  expenses from operations                                         |   | 8,281                                        |    | 85,394    |   | 95,063    |   | 93,422    |      |
| Depreciation,  amortization and depletion                                        |   | 39,981                                       |    | 412,309   |   | 348,564   |   | 307,902   |      |
| Income  (loss) from operations                                                   |   | 4,302                                        |    | 44,368    |   | (155,537  | )      | 248,238   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| NET  COMPREHENSIVE  FINANCING COST  (INCOME):                               |   |                                         |    |      |   |      |   |      |      |
| Interest  expense                                                                |   | 3,655                                        |    | 37,700    |   | 46,825    |   | 12,776    |      |
| Interest  income                                                                 |   | (60                                          | )       | (623      | )      | (1,188    | )      | (2,078    | )         |
| Foreign  exchange loss (gain), net                                               |   | 9,309                                        |    | 96,006    |   | (30,919   | )      | 7,981     |      |
| Monetary  position gain                                                          |   | (5,432                                       | )       | (56,024   | )      | (19,330   | )      | (13,813   | )         |
|                                                                             |   | 7,472                                        |    | 77,059    |   | (4,612    | )      | 4,866     |      |
| OTHER  (INCOME) EXPENSES, net                                               |   | (562                                         | )       | (5,797    | )      | 23,551    |   | 9,890     |      |
| (Loss)  income  before income tax as and  employee statutory profit-sharing |   | (2,608                                       | )       | (26,894   | )      | (174,476  | )      | 233,482   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| INCOME  TAXES (Note 13)                                                          |   | (5,216                                       | )       | (53,788   | )      | (10,551   | )      | 99,666    |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| Consolidated  net income (loss)                                                  |   | $                                            | 2,608   |      | Ps.    | 26,894    |   | Ps.       | (163,925  | ) | Ps. | 133,816 |   |
| Earnings  (loss) per share                                                       |   | $                                            | 0.01    |      | Ps.    | 0.13      |   | Ps.       | (0.81     | ) | Ps. | 0.66 |   |
| Weighted  average number of shares outstanding (in thousands)                    |   | 201,798                                      |    | 201,798   |   | 201,798   |   | 201,798   |      |
|                                                                                  |        |                                              |         |           |        |           |        |           |           |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-5

----

 

**MEXICANA DE CANANEA, S.A. DE C.V. ANDSUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANTS MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ( $ )**

 
|                                                   |   |               |      |            |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Loss** |    | **Initial  Effect of  Deferred  Income  Taxes** |   | **Total  Stockholders’  Equity** |   |
|--------------------------------------------------------|--------|--------------------|-----------|-----------------|--------|------------------------|--------|---------------------------------------------|---------|-------------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   |               |      |            |   |                   |   |                                        |    |
|                                                   |   |               |      |            |   |                   |   |                                        |    |
|                                                   |   | **Capital  Stock** |      |            |   |                   |   |
|                                                   |   | **Nominal**        |      | **Restatement** |   |                   |   |                                        |    |
|                                                   |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| BALANCES  AT JANUARY 1, 2000                           |   | Ps.                | 2,017,989 |            | Ps.    | 6,530,114              |   | Ps.                                         | 679,579 |                                            | Ps.    | (1,300,237                            | )      | Ps. | (710,479 | ) | Ps. | 7,216,966 |   |
| Comprehensive  income:                                 |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net income                               |   | —             |      | —          |   | 133,816                |   | —                                      |    | —                                          |   | 133,816                               |   |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (7,942                                      | )       | —                                          |   | (7,942                                | )      |
| Total  comprehensive income                            |   |               |      |            |   |                   |   |                                        |    |                                            |   | 125,874                               |   |
| BALANCES  AT DECEMBER 31, 2000                         |   | 2,017,989          |      | 6,530,114       |   | 813,395                |   | (1,308,179                                  | )       | (710,479                                        | )      | 7,342,840                             |   |
| Comprehensive  loss:                                   |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net loss                                 |   | —             |      | —          |   | (163,925               | )      | —                                      |    | —                                          |   | (163,925                              | )      |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (5,618                                      | )       | —                                          |   | (5,618                                | )      |
| Additional  liability for employee benefit obligations |   | —             |      | —          |   | —                 |   | (20,611                                     | )       | —                                          |   | (20,611                               | )      |
| Total  comprehensive loss                              |   |               |      |            |   |                   |   |                                        |    |                                            |   | (190,154                              | )      |
| BALANCES  AT DECEMBER 31, 2001                         |   | 2,017,989          |      | 6,530,114       |   | 649,470                |   | (1,334,408                                  | )       | (710,479                                        | )      | 7,152,686                             |   |
| Comprehensive  income:                                 |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net income                               |   | —             |      | —          |   | 26,894                 |   | —                                      |    | —                                          |   | 26,894                                |   |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (6,615                                      | )       | —                                          |   | (6,615                                | )      |
| Additional  liability for employee benefit obligations |   | —             |      | —          |   | —                 |   | (434                                        | )       | —                                          |   | (434                                  | )      |
| Total  comprehensive income                            |   |               |      |            |   |                   |   |                                        |    |                                            |   | 19,845                                |   |
| BALANCES  AT DECEMBER 31, 2002                         |   | Ps.                | 2,017,989 |            | Ps.    | 6,530,114              |   | Ps.                                         | 676,364 |                                            | Ps.    | (1,341,457                            | )      | Ps. | (710,479 | ) | Ps. | 7,172,531 |   |
|                                                        |        |                    |           |                 |        |                        |        |                                             |         |                                                 |        |                                       |        |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-6

----

 

**MEXICANA DE CANANEA, S.A. DE C.V. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES INFINANCIAL POSITION****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($))**

 
|                                                                                  |   | **Convenience  Translation  (Note 2)  2002** |   | **2002** |   | **2001** |   | **2000**   |     |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|----------|--------|------------|----------|
| OPERATING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Consolidated  net income (loss)                                                       |   | $                                            | 2,608  |     | Ps.    | 26,894   |   | Ps.        | (163,925 | ) | Ps. | 133,816 |   |
| Items  that did not require (generate) resources-                                     |   |                                         |   |     |   |     |   |       |     |
| Provision  for voluntary retirement, pension, seniority Premiums and medical services |   | 2,324                                        |   | 23,969   |   | 4,592    |   | 20,826     |     |
| Depreciation                                                                          |   | 29,337                                       |   | 302,539  |   | 282,018  |   | 295,357    |     |
| Amortization  and depletion of deferred charges                                       |   | 10,644                                       |   | 109,770  |   | 66,546   |   | 12,546     |     |
| Loss  (gain) on sale of property, plant and equipment                                 |   | (14                                          | )      | (144     | )      | 19,586   |   | 5,621      |     |
| Deferred  income taxes                                                                |   | (5,638                                       | )      | (58,147  | )      | (10,551  | )      | 80,263     |     |
|                                                                                  |   | 39,261                                       |   | 404,881  |   | 198,266  |   | 548,429    |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| Changes  in current assets and liabilities:                                           |   |                                         |   |     |   |     |   |       |     |
| (Increase)  decrease in assets-                                                       |   |                                         |   |     |   |     |   |       |     |
| Notes  and accounts receivable                                                        |   | (16,320                                      | )      | (168,297 | )      | 19,032   |   | 294,327    |     |
| Inventories                                                                           |   | 1,299                                        |   | 13,398   |   | 9,531    |   | 12,795     |     |
| Increase  (decrease) in liabilities-                                                  |   |                                         |   |     |   |     |   |       |     |
| Accounts  payable and accrued liabilities                                             |   | 33,218                                       |   | 342,560  |   | 169,892  |   | 237,496    |     |
| Due  to affiliated companies                                                          |   | 3,765                                        |   | 38,820   |   | 131,515  |   | (9,382     | )        |
| Taxes  payable                                                                        |   | 329                                          |   | 3,391    |   | (3,338   | )      | (58,846    | )        |
| Net  resources generated by operating activities.                                     |   | 61,552                                       |   | 634,753  |   | 524,898  |   | 1,024,819  |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| FINANCING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Cash  retained in collateral account                                                  |   | 1,345                                        |   | 13,869   |   | (13,869  | )      | —     |     |
| Due to Mexicana de Cobre, S.A. de C.V.                                                |   | —                                       |   | —   |   | 305,770  |   | —     |     |
| Net  resources generated by financing activities                                      |   | 1,345                                        |   | 13,869   |   | 291,901  |   | —     |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| INVESTING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Additions  to property and equipment                                                  |   | (7,423                                       | )      | (47,961  | )      | (315,424 | )      | (550,911   | )        |
| Proceeds  from sale of property and equipment                                         |   | 23                                           |   | 236      |   | 17,758   |   | 28,814     |     |
| Net  increase in deferred charges                                                     |   | (46,238                                      | )      | (476,835 | )      | (504,908 | )      | (507,687   | )        |
| Net  resources used in investing activities                                           |   | (50,867                                      | )      | (524,560 | )      | (802,574 | )      | (1,029,784 | )        |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| Increase  (decrease) in cash and temporary investments                                |   | 12,030                                       |   | 124,062  |   | 14,228   |   | (4,965     | )        |
| Cash  and temporary investments at beginning of year                                  |   | 1,814                                        |   | 18,713   |   | 4,485    |   | 9,450      |     |
| Cash  and temporary investments at end of year                                        |   | $                                            | 13,844 |     | Ps.    | 142,775  |   | Ps.        | 18,713   |   | Ps. | 4,485 |   |
|                                                                                       |        |                                              |        |          |        |          |        |            |          |  |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-7

----

 

**MEXICANA DE CANANEA, S. A. DE C. V.AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($), except per share data)**

 

**1. DESCRIPTIONOF BUSINESS AND SIGNIFICANT EVENTS:**

 

Mexicana de Cananea, S.A. de C.V. and Subsidiaries(collectively the “Company”) is a 98.49% owned subsidiary of Grupo MineroMéxico, S.A. de C.V. (“GMM”). The Company is engaged primarily in the businessof exploring, mining and processing copper.

 

**Impactof metal prices on the Company’s operation**

 

During 2002, the Company continued to implementdifferent measures at its mining operations to counteract unfavorableconditions in the metals market. Economic growth in the U.S. and othercountries worldwide did not meet expectations. Metals prices, especiallycopper, remained at their lowest levels in years and were subject to a highdegree of volatility despite sustained demand from China. After dropping in2001, in 2002, the average market price of copper fell by an additional1.2%  over the prior year. The Companyconsolidated operating and administrative activities by closing down orreducing certain operations, selling off excess assets, and suspending certainpurchases from third parties as deemed necessary. The workforce has also beenreduced and programs have been implemented to increase productivity.

 

**Renegotiationof GMM’s long-term debt and compliance with restrictions**

 

Under pressure due to low metals prices and theresulting drop in liquidity during the past few years, GMM was obligated torestructure its debt as a result of its failure to make scheduled payments andits noncompliance with certain financial covenants required by its debtagreements. In April 2003, GMM successfully restructured its indebtedness witha number of institutional investors, banking institutions and agencies. Thisrestructuring has resulted in greater financial and operating flexibility andallows GMM’s management to focus on increasing the productivity andprofitability of mining-metallurgical units, despite the adverse marketconditions currently faced by the industry. GMM now has a better financialstructure to allow improvement of its daily transactions to offset the currentcycle of low metal prices.

 

The restructuring of indebtedness by GMM in the amountof U.S.$880.9 million with respect to the holders of its subsidiaries’ securedexport notes and to the banking syndicate headed by Bank of America occurred onApril 29, 2003 with the signing of definitive documentation.. Thisrestructuring process consisted of:

 

a.               The modification ofinterest rates, guarantees and loan payment periods;

 

b.              The contribution ofnew capital of U.S.$110 million by Grupo México, S.A. de C.V. (“GMEXICO”) andAmericas Mining Company, Inc. (“AMC”) to GMM, that was received on April 29,2003, supporting the Company’s mining operations, and;

 

F-8

----

 

c.               The release offunds that were generated by export sales retained as collateral by the holdersof “Secured Export Notes”, which are shown on the accompanying balance sheetunder the heading of “Cash retained in collateral accounts”.

 

In addition, as a result of the restructuring,Mexicana de Cananea, S.A. de C.V. is a guarantor of substantially all of GMM’sfinancial indebtedness.

 

**Capitalizationof leachable material**

 

From 1999 to 2001, the Company conducted majordrilling studies and metallurgic testing to better locate copper deposits andalso to obtain greater yields. According to these studies, the Company determined that its mine haslarge quantities of material known as chalcocite, which render benefits whenprocessed through the hydrometallurgic process know as leaching.  In order to begin exploiting such leachablematerials, during 2001, the Company accumulated large quantities of leachablematerial in sites known as leaching dumps, from which copper is extractedthrough a process of irrigation, filtering and electrolysis.  According to these studies, copper can alsobe recovered through the leaching process over approximately five to eightyears.  The amortization of the costsincurred in processing the leachable material, which are capitalized once suchmaterials are removed from the mine, is based on the actual depletion of eachof the leaching dumps.  As of December31, 2002 and 2001, the gross amount capitalized for this activity wasPs.919,126 and Ps.532,020, respectively. Prior to 2001, such leachable materials were considered to be wastematerials and therefore figured into the determination of stripping ratios,which are used to determine capitalized stripping costs.  The implementation of processing leachablematerials in 2001 resulted in a net reduction in cost of sales as recorded inthe statements of operations of Ps.141,316 in 2002 and  Ps.169,080 in 2001, as compared to what suchamounts would have been if the Company did not implement such procedures.

 

**2. BASISOF PRESENTATION:**

 

The accompanyingconsolidated financial statements of the Company are prepared in accordancewith the accounting principles generally accepted in Mexico (“Mexican GAAP”),which differ in certain significant respects from those applicable in theUnited States of America (“U.S. GAAP”). A description of these differences andtheir effects on net income (loss) and stockholders equity is set forth in Note16 (as restated).

 

The preparation of the financial statements inconformity with Mexican GAAP, along with the reconciliation to U.S. GAAP,requires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and the accompanying notes.While these estimates and assumptions are based on management’s best knowledgeof current events, actual results may differ.

 

The financial statements are stated in Mexican pesos.The translation of Mexican pesos into U.S. dollars is included solely for theconvenience of the reader, using the exchange rate published by Banco de Méxicoas of December 31, 2002 of Ps.10.3125 to U.S. $1.00. The conveniencetranslations should not be construed as a representation that the Mexican pesoamounts have been, could have been, or could in the future be, converted intoU.S. dollars at this or any other rate of exchange.

 

**3. BASISOF CONSOLIDATION:**

 

The accompanying consolidated financial statementsinclude the financial statements of Mexcananea and the following subsidiarycompanies.  All significant intercompanybalances and transaction have been eliminated in the consolidation.

 

|                                               |   | **Percentage  of Ownership  as of  December 31,****2002** |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                               |   |                                                      |   |
| Hospital del Ronquillo, S. de R.L. de C.V          |   | 100.00                                                    | %      |
| Proyecciones Urbanísticas, S. de R.L. de C.V. |   | 100.00                                                    | %      |
| Minera Cumobabi, S.A. de C.V.                      |   | 99.99                                                     | %      |

 

F-9

----

 

**4.SIGNIFICANT ACCOUNTING POLICIES:**

 

**Effectsof in accounting principles adopted during the periods presented**

 

Effective January 1, 2001, the Company adoptedBulletin C-2, “Financial Instruments”. This Bulletin establishes the methodology for valuing and recording financialinstruments and requires recognition of certain financial instruments on thebalance sheet as either assets or liabilities at fair values, affecting theresults of the period for any valuation adjustments of such instruments.

 

**Recognitionof the effects of inflation in the financial statements**

 

The Company restates all of its financial statementsin terms of the purchasing power of the Mexican pesos as of the end of thelatest period, thereby comprehensively recognizing the effects of inflation. Consequently,all financial statement amounts are comparable, both for the current and theprior year, since all are stated in terms of Mexican pesos of the samepurchasing power. Accordingly, the financial statements of the prior year havebeen restated in terms of Mexican pesos of the latest period and their amountspresented herein differ from those originally reported in terms of Mexicanpesos of the corresponding year.

 

The factors used to restate the 2001 and 2000financial statements in terms of the purchasing power of the Mexican currencyas of December 31, 2002 are 1.057 and 1.1035, respectively.

 

The consolidated financial statements have beenrestated as follows:

 

•*                                          Balancesheets:*

 

Primary metal inventoriesare stated at current international metal market quotations at year-end, lessthe restated cost of completing the processing cycle to obtain the finishedproduct.  Other inventory items arestated at their replacement cost through the application of production cost,without exceeding their net realizable value.

 

Property and equipmentare restated by applying a factor derived from the NCPI. Depreciation ofrestated assets is calculated based on the estimated useful life of each assetusing the straight-line method.

 

The investment in sharesof associated companies is accounted for under the equity method, based on theMexican GAAP financial statements of such companies, restated by a factorderived from the NCPI.

 

Stockholders’ equity andother nonmonetary items are restated using a factor derived from the NCPIcumulative from the date of contribution or generation.

 

•*                                          Statementsof operations:*

 

Revenues and expensesthat are associated with a monetary item (cash, trade receivables, liabilities,etc.) are restated from the month in which they arise through year-end, basedon factors derived from the NCPI.

 

Cost of sales of primarymetals and other inventories is restated based on the replacement cost ofproducts consumed, and restated through year-end based on factors derived fromthe month in which they arise through year-end.

 

Depreciation iscalculated based on the estimated useful lives of the NCPI restated assets.Depreciation is commenced when the related assets are placed in service.

 

The gain or loss onmonetary position, which represents the erosion of the purchasing power ofmonetary items caused by inflation, is determined by applying to net monetary assets or liabilities at thebeginning of each month, the factor of inflation derived from the NCPI and isrestated through year end with the corresponding factor. Gains arise frommaintaining an average net monetary liability position.

 

F-10

----

 

•                                          *In the otherfinancial statements:*

 

The statements of changesin financial position presents the changes in constant Mexican pesos, accordingto the financial position at prior year-end, restated to Mexican pesos of themost recent year end.

 

The gain or lossresulting from inflation presented in the statement of changes in stockholders’equity is comprised mainly of the income or loss resulting from holdingnonmonetary assets, which represents the change in the specific price level ofthese assets and its effect on results of operations compared to the change inthe NCPI.

 

**Temporaryinvestments**

 

Temporary investments areprimarily short-term investment funds and bank deposits, which are valued atmarket.

 

**Impairmentof long-lived assets**

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Assetsare determined impaired when the estimated future undiscounted cash flowsexpected to result from the use of the asset are less than the carrying valueof the asset.  The Company measures animpairment loss as the difference between the carrying value of the asset andits fair value.  No impairment charges were recorded during the years ended December 31,2002, 2001 and 2000.

 

**Deferredcharges**

 

•*                                          Strippingcosts*

 

Stripping costs are costsassociated with the removal of waste materials after production has commenced.Over the life of the mine, stripping costs are deferred in periods when theactual ratio of waste materials to mineral ore extracted is above thelife-of-mine stripping ratio, which represents the Company’s estimate of thetotal amount of waste to be incurred divided by the estimated total proven andprobable reserves.  In periods when the actual mine stripping ratio isbelow the life-of-mine stripping ratio, the Company reduces the net capitalizedmine stripping asset proportionally with a charge to amortizationexpense.  In addition, deferred mine stripping costs are amortized usingthe units of production method based on proven and probable ore reserves. Copper resources contained in piles of lixiviable  materials that have been extracted from the mines are notincluded in the determination of units of production amortization.

 

The Company’s policyresults in the smoothing of stripping costs over the life of the mine and, inview of the Company, better facilitates the matching of mine production costsover the life of the mine with the mine’s revenues.

 

When there is asignificant change to established mineral reserves, the estimated level ofstripping costs is adjusted to reflect this change.

 

•*                                          Leachablematerial*

 

The Company capitalizesthe cost of materials with low copper content extracted during the miningprocess which are accumulated in areas known as leaching dumps.  The amortization of the capitalized cost isdetermined based on the actual depletion of each of the leaching dumps, whichaverages  from 5 to 8 years.

 

•*                                          Minedevelopment costs*

 

Exploration costsincurred before the start of operations of a site are expensed as incurred, exceptfor expenditures on specific properties where the presence of proven andprobable mineral resources have been confirmed, in which case, the expendituresare capitalized as mine development costs. Mine development costs are amortized on a straight-line basis over the estimateduseful lives of the corresponding proven ore reserves.

 

F-11

----

 

•*                                          Capitalizationof overhaul*

 

Regular maintenance andrepairs are expensed as incurred. The cost of an engine overhaul is capitalizedand amortized over a term ranging between two and four years, depending on thetype of overhaul.

 

**Hedgingactivities**

 

Derivative instruments may be used to manage exposureto market risk from changes in commodity prices (metal and energy products),interest rates or the value of the Company’s assets and liabilities. Derivativeinstruments, which are designated as hedges, must be deemed effective atreducing the risk associated with the exposure being hedged and must bedesignated as a hedge at the inception of the contract.

 

The Company’s derivative transactions are restrictedto risk control, and as of December 31, 2002 and 2001 there are no outstandinghedging derivatives. The Company does not maintain or issue financialinstruments for speculative purposes. Decisions with respect to each transactionand to the overall hedging policies are made by an Executive Risk Committee.The objective of this committee, which is currently comprised of the Chairmanof the Board of Directors, the Director of Management and Finance and theAssistant Director of Risk Management, is to ensure that the risks and benefitshave been appropriately assessed.

 

The Company may enter into swap and optiontransactions or a combination of both to reduce the risk of purchase or salesprice fluctuations. For instance, for the purpose of protecting metal prices,the Company may purchase put options or create synthetic put options to reduceor eliminate the risk of metal price declines below the option strike price ona portion of its anticipated future production. The cost of the options isamortized using the straight-line method over the period in which the optionscan be exercised. Gains or losses deriving from the sale or exercise of theoptions, after deducting the acquisition expenses not amortized, are recognizedin the results of the period in which the guaranteed production or inputs are,respectively, sold or purchased.  TheCompany also uses futures contracts for hedging the effect of changes in theprices relative to a portion of the assets that are sold or purchased.

 

Gains or losses that result from these transactionsare deferred through their realization date. As a result, derivative instrumentsheld by the Company are closely related with the prices and amounts of realasset positions, and the notional amounts and expiration dates of thederivative instruments cannot exceed those of the actual underlying transactions.Under these circumstances, for accounting purposes, derivatives are classifiedas hedging transactions.

 

**Swap andfutures agreements**

 

Swap and futures agreements are used primarily to fixthe price of fuel consumption for a determined period or to limit the cost ofdebt contracted at floating interest rates.

 

Interest rate swaps are used to limit the effect ofinterest rate increases on any floating rate debt. The differential to be paidor received as interest rates change is recorded in interest expense in thestatement of income. Fuel swaps limit the effect of the increases in fuelprices. The differential paid or received as changes in the price of fuel occuris recorded as part of cost of sales. Foreign currency swaps limit the effect of exchange rate changes onfuture cash flow obligations denominated in foreign currencies. Thedifferential to be paid or received as exchange rates change is included aspart of the cost of the asset for which the swap was obtained.  As of December 31, 2002 and 2001, there wereno outstanding swap or future agreements.

 

**Employeebenefit obligations**

 

In accordance with Mexican Labor Law and the Company’scollective bargaining agreements, a liability results from voluntaryseparations of employees who have worked for a company for a required number ofyears. In addition, in accordance with the Federal Labor Law, companies haveobligations resulting from indemnities and seniority premiums payable toemployees terminated under certain circumstances.

 

The Company records the liabilities from senioritypremiums as they accrue, in accordance with actuarial computations based on theprojected unit credit method, using real interest rates.

 

F-12

----

 

The Company provides medical and hospital services toall active and retired unionized employees and the members of their familiesthrough a subsidiary (Hospital del Ronquillo, S. de R.L. de C.V.). Mexcananearecorded the liability for post-retirement medical benefits in accordance withactuarial calculations based on the projected unit credit method, using realinterest rates.

 

When there is a significant reduction in personnel dueto the restructuring of the labor force or the closing of a plant, thecorresponding indemnity costs, net of the corresponding reduction in theprojected benefit obligation and the related items to be amortized, are chargedto results.

 

Accordingly, a liability is being accrued, which atpresent value will cover the obligation for benefits projected to the estimatedretirement date of the Company’s employees. Indemnity payments are charged to results in the period in which theyare made.

 

The Company plan assets related to voluntaryseparations and seniority premiums consist of investments in Mexican governmenttreasury certificates (40%) and various equity securities of large Mexicancompanies (60%).  The market value of securitiesof Mexican companies is to varying degrees volatile and may be affected byeconomic and market conditions in other emerging market countries.

 

**Incometax, tax on assets and employee profit sharing**

 

The Company determines and records its income tax, taxon assets and employee profit sharing in accordance with the tax legislationand revised Bulletin D-4, “Tratamiento Contable del Impuesto sobre la Renta,del Impuesto al Activo y la Participación de los Trabajadores en lasUtilidades” (Accounting for Income Tax, Tax on Assets and Employee ProfitSharing), which requires that deferred tax assets and liabilities be recordedfor all temporary differences between the accounting and tax bases of assetsand liabilities.

 

The balance of deferred income tax and deferred tax onassets is determined using the liability method, which takes into account alltemporary differences between the accounting and tax bases of assets andliabilities.  Deferred employee profitsharing is calculated considering only those temporary differences that arisefrom the reconciliation between the accounting (loss) income for the year andthe basis for employee profit sharing that are expected to reverse within adefined period.

 

The balance of deferred taxes is comprised of monetaryand non-monetary items, based on the temporary differences from which it isderived.  The balance is classified as anon-current, regardless of when the temporary differences are expected toreverse.

 

The deferred tax provision for the year to be includedin the results of operations is determined by comparing the deferred taxbalance at end of the year to the balance at the beginning of the year,excluding from both balances any temporary differences that are recordeddirectly in stockholders’ equity.  Thedeferred taxes related to such temporary differences are recorded in the samestockholder’s equity account.  Theinitial effect of the application of this new bulletin as of January 1, 2000was recorded in stockholder’s equity in the initial effect of deferred incometaxes account.

 

**Revenuerecognition**

 

Most of the Company’s copper is sold as refined metalunder annual contracts or on a spot sale basis. The balance of the Company’scopper production is sold in the form of concentrates under contracts withterms of one to three years.

 

Revenue from sales of copper concentrate is recordedin the month the product is delivered to customers based on prices determinedin accordance with terms of the related sales contracts.  For those sales of copper  products wherein customers are given theoption to select a monthly average provided by the London Metal Exchange(“LME”) or the Commodity Exchange, Inc. (“COMEX”) price ranging between one andthree months subsequent to shipment, revenue is recorded at a provisional priceat the time of shipment, based on LME or COMEX spot prices for coppersales.  The provisionally priced sales are adjusted to reflect spot pricesat the end of each month until a final adjustment is made to the price of theshipments upon settlement with customers pursuant to the terms of the contract.

 

**Netcomprehensive financing cost (income)**

 

The net comprehensive financing cost (income) includesall financial revenues and expenses, such as interest, exchange gains or lossesand gains or losses on monetary position as earned or incurred.

 

F-13

----

 

Transactions in currencies other than the Mexican pesoare recorded at the exchange rate as of the date of the transaction, and theassets and liabilities in foreign currency are adjusted to the exchange rate asof the most recent year-end, affecting income as part of the integral result offinancing.

 

**Earnings(loss) per share**

 

Earnings (loss) per share have been computed for eachperiod by dividing income (loss) of the majority interest, by the weightedaverage number of shares outstanding.

 

**Comprehensiveincome (loss)**

 

Comprehensive income (loss) is comprised of theconsolidated net income (loss) for the period plus any gains or losses thataccording to specific regulations are presented directly in stockholders’equity, such as the gain or loss from holding nonmonetary assets and theadditional liability for employee benefit obligations.

 

**5. CASHAND TEMPORARY INVESTMENTS:**

 

Cash and temporary investments are comprised asfollows:

 
|                  |   | **2002** |    | **2001** |   |
|-----------------------|--------|----------|---------|----------|--------|
|                  |   |     |    |     |   |
| Cash                  |   | Ps.      | 142,775 |     | Ps.    | 6,453 |   |
| Temporary investments |   | —   |    | 12,260   |   |
|                  |   | Ps.      | 142,775 |     | Ps.    | 18,713 |   |

 

**6.INVENTORIES:**

 

Inventories were as follows:

 
|                             |   | **2002** |    | **2001** |   |
|----------------------------------|--------|----------|---------|----------|--------|
|                             |   |     |    |     |   |
| Materials and supplies           |   | Ps.      | 306,220 |     | Ps.    | 356,092 |   |
| Finished cathodes                |   | 12,352   |    | 2,366    |   |
| Blister copper in process        |   | 567      |    | 497      |   |
| Merchandise in transit           |   | 11,351   |    | 3,425    |   |
| Advances to suppliers            |   | 10,678   |    | 10,841   |   |
|                             |   | 341,168  |    | 373,221  |   |
|                             |   |     |    |     |   |
| Less- Allowance for obsolescence |   | (27,159  | )       | (33,243  | )      |
|                             |   | Ps.      | 314,009 |     | Ps.    | 339,978 |   |

 

**7. PROPERTY,PLANT AND EQUIPMENT:**

 

Property and equipment were as follows:

 
|                           |   | **2002**   |      | **2001**   |   |
|--------------------------------|--------|------------|-----------|------------|--------|
|                           |   |       |      |       |   |
| Processing equipment           |   | Ps.        | 5,215,229 |       | Ps.    | 5,001,810 |   |
| Mobile equipment               |   | 3,722,074  |      | 3,746,212  |   |
| Buildings and improvements     |   | 2,751,393  |      | 2,695,750  |   |
| Infrastructure                 |   | 568,846    |      | 593,981    |   |
| Automobiles and trucks         |   | 89,003     |      | 92,392     |   |
|                           |   | 12,346,545 |      | 12,130,145 |   |
| Less- Accumulated depreciation |   | (5,627,147 | )         | (5,254,585 | )      |
|                           |   | 6,719,398  |      | 6,876,560  |   |
| Construction-in-progress       |   | 269,851    |      | 362,827    |   |
| Land                           |   | 196,406    |      | 196,404    |   |
|                           |   | Ps.        | 7,185,655 |       | Ps.    | 7,434,791 |   |

 

F-14

----

 

The average annual depreciation rates were as follows:

 
|                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Processing equipment      |   | 4.73     | %      | 2.98     | %      | 3.13     | %      |
| Mobile equipment          |   | 3.83     | %      | 4.37     | %      | 4.47     | %      |
| Building and improvements |   | 3.15     | %      | 2.11     | %      | 2.12     | %      |
| Infrastructure            |   | 2.25     | %      | 2.23     | %      | 2.28     | %      |
| Automobiles and trucks    |   | 6.51     | %      | 6.69     | %      | 7.15     | %      |

 

**8.DEFERRED CHARGES:**

 

Deferred charges were as follows:

 
|                                            |   | **2002**  |      | **2001**  |   |
|-------------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                            |   |      |      |      |   |
| Stripping costs                                 |   | Ps.       | 671,307   |      | Ps.    | 578,279 |   |
| Lixiviable material                             |   | 919,126   |      | 532,020   |   |
| Mine development costs                          |   | 181,499   |      | 198,984   |   |
| Intangible asset arising from employee benefits |   | 40,686    |      | 46,412    |   |
| Preoperating expenses                           |   | 6,135     |      | 18,565    |   |
|                                            |   | 1,818,753 |      | 1,374,260 |   |
|                                            |   |      |      |      |   |
| Less- Accumulated amortization and depletion    |   | (165,902  | )         | (82,723   | )      |
|                                            |   | Ps.       | 1,652,851 |      | Ps.    | 1,291,537 |   |

 

During the years ended December 31, 2002, 2001 and2000, the application of deferred stripping accounting resulted in a decreasein cost of sales reported in the statements of operations of Ps.70,575,Ps.103,969, and Ps.450,497, respectively. Deferred stripping costs will not befully amortized until the cessation of operations of the mines currentlyoperated by the Company.

 

Based on the amortization costs incurred in the mostrecent three years related to the intangibe assets subject to amortization, theCompany estimates that amortization costs for such intangible assets willamount to Ps. 63,000 in each of the following five years.

 

**9.EMPLOYEE RETIREMENT BENEFITS:**

 

The employee benefit obligation relates to voluntaryretirements, seniority premiums and medical services at retirement.  The amount resulting from the actuarialcalculations prepared by external actuaries is being funded using the projectedunit credit method.  Below is abreakdown of this obligation as of December 31, 2002 and 2001:

 
|                               |   | **2002**                         |    | **2001**                            |   |
|------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|
|                               |   | **Seniority  Premiums  Reserve** |    | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   |
|                               |   |                             |    |                                |   |   |   |   |   |   |   |   |   |
| Projected benefit obligation (PBO) |   | Ps.                              | 121,093 |                                | Ps.    | 499,082 |   | Ps. | 620,175 |   | Ps. | 121,580 |   | Ps. | 491,133 |   | Ps. | 612,713 |   |
| Unamortized transition liability   |   | (6,100                           | )       | (294,719                            | )      | (300,819 | ) | (7,066 | ) | (309,455 | ) | (316,521 | ) |
| Past service cost to be amortized  |   | (34,610                          | )       | —                              |   | (34,610 | ) | (39,344 | ) | — |   | (39,344 | ) |
| Variances in assumptions           |   | (23,384                          | )       | (115,027                            | )      | (138,411 | ) | (23,750 | ) | (116,023 | ) | (139,773 | ) |
| Additional liability               |   | 61,731                           |    | —                              |   | 61,731 |   | 67,023 |   | — |   | 67,023 |   |
| Net projected liability            |   | Ps.                              | 118,730 |                                | Ps.    | 89,336 |   | Ps. | 208,066 |   | Ps. | 118,443 |   | Ps. | 65,655 |   | Ps. | 184,098 |   |

 

As of December 31, 2002 and 2001, the establishedreserve for voluntary retirement and seniority premiums amounted to Ps.173,780and Ps.150,293, respectively, and exceeds the accumulated benefit obligation(equivalent to the PBO without projecting the salaries to the date ofretirement)  by Ps.390 and Ps.27,respectively.

 

F-15

----

 

The cost of employee benefits for each year were asfollows:

 
|                                      |   | **2002**                         |   | **2001**                            |   | **2000**  |   |
|-------------------------------------------|--------|----------------------------------|--------|-------------------------------------|--------|-----------|--------|
|                                      |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   |
|                                      |   |                             |   |                                |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost for the year                 |   | Ps.                              | 7,737  |                                | Ps.    | 4,702     |   | Ps. | 12,439 |   | Ps. | 6,869 |   | Ps. | 3,890 |   | Ps. | 10,759 |   | Ps. | 6,459 |   | Ps. | 4,050 |   | Ps. | 10,509 |   |
| Amortization of transition  liability     |   | 966                              |   | 14,736                              |   | 15,702    |   | 966 |   | 14,736 |   | 15,702 |   | 966 |   | 14,736 |   | 15,702 |   |
| Amortization of past service  cost        |   | 4,735                            |   | —                              |   | 4,735     |   | 4,735 |   | — |   | 4,735 |   | 4,735 |   | — |   | 4,735 |   |
| Amortization of variances in  assumptions |   | 1,077                            |   | 3,346                               |   | 4,423     |   | (7 | ) | — |   | (7 | ) | — |   | — |   | — |   |
| Financial cost for the year               |   | 3,391                            |   | 23,646                              |   | 27,037    |   | 3,016 |   | 19,802 |   | 22,818 |   | 2,783 |   | 19,280 |   | 22,063 |   |
| Effect for employee reduction             |   | (270                             | )      | —                              |   | (270      | )      | — |   | — |   | — |   | — |   | — |   | — |   |
| Net cost for the year                     |   | Ps.                              | 17,636 |                                | Ps.    | 46,430    |   | Ps. | 64,066 |   | Ps. | 15,579 |   | Ps. | 38,428 |   | Ps. | 54,007 |   | Ps. | 14,943 |   | Ps. | 38,066 |   | Ps. | 53,009 |   |

 

The real interest rates used in the actuarialprojections are:

 
|                          |   | **2002**                         |   | **2001**                              |   | **2000**                         |   |
|-------------------------------|--------|----------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|
|                          |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   |
|                          |   |                             |   |                                  |   |                             |   |   |   |   |   |   |   |
| Interest rate                 |   | 5.00                             | %      | 5.00                                  | %      | 5.00                             | %      | 5.00 | % | 5.0 | % | 5.0 | % |
| Salary increase rate          |   | 1.50                             | %      | —                                |   | 1.50                             | %      | — |   | 1.50 | % | — |   |
| Medical expense increase rate |   | —                           |   | 1.30                                  | %      | —                           |   | 1.30 | % | — |   | 1.30 | % |

 

The changes in projected benefit obligation were as follows:

 
|                   |   | **2002**                         |    | **2001**                              |   |
|------------------------|--------|----------------------------------|---------|---------------------------------------|--------|
|                   |   | **Seniority  Premiums  Reserve** |    | **Postretirement  Medical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   |
|                   |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Beginning balance      |   | Ps.                              | 51,420  |                                  | Ps.    | 65,655 |   | Ps. | 117,075 |   | Ps. | 48,304 |   | Ps. | 59,643 |   | Ps. | 107,947 |   |
| Provision for the year |   | 17,636                           |    | 46,430                                |   | 64,066 |   | 15,579 |   | 38,428 |   | 54,007 |   |
| Payments               |   | (12,057                          | )       | (22,749                               | )      | (34,806 | ) | (12,463 | ) | (32,416 | ) | (44,879 | ) |
| Subtotal               |   | 56,999                           |    | 89,336                                |   | 146,335 |   | 51,420 |   | 65,655 |   | 117,075 |   |
|                   |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Additional liability-  |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Charge to capital      |   | 21,045                           |    | —                                |   | 21,045 |   | 20,611 |   | — |   | 20,611 |   |
| Deferred charges       |   | 40,686                           |    | —                                |   | 40,686 |   | 46,412 |   | — |   | 46,412 |   |
| Ending balance         |   | Ps.                              | 118,730 |                                  | Ps.    | 89,336 |   | Ps. | 208,066 |   | Ps. | 118,443 |   | Ps. | 65,655 |   | Ps. | 184,098 |   |

 

The amortization period for unamortized items is asfollows:

 
|                   |   | **Remaining  Years**       |   |
|------------------------|--------|----------------------------|--------|
|                   |   | **Non-UnionizedEmployees** |   | **UnionizedEmployees** |   | **Medical  Services** |   |
|                   |   |                       |   |   |   |   |   |
| Transition liability   |   | 12.68                      |   | 6.31 |   | 20.00 |   |
| Past services costs    |   | —                     |   | 7.31 |   | — |   |
| Changes in assumptions |   | 14.20                      |   | 9.20 |   | 20.00 |   |

 

F-16

----

 

**10.STOCKHOLDERS’ EQUITY:**

 

**Capitalstock**

 

At December 31, 2002 and 2001, the capital stockconsisted of 201,798,896 common shares fully subscribed and paid with a parvalue of ten Mexican pesos each, of which 171,005,65 shares correspond toSeries “A” and 30,793,831 shares correspond to Series “B”.  The fixed minimum capital shares consist of10,000 fixed common nominatives shares, of which 7,880 shares are Series “A”and 2,120 are Series “B”.

 

Stockholders’ equity, except for restated paid-incapital and tax retained earnings, will be subject a 35% dividend tax.Beginning January 1, 2003, such rate will be reduced by one percentage pointeach year until reaching 32% in 2005. Any income taxes paid on suchdistribution on or after January 1, 2002, may be credited against future incometax payable by the Company in the three fiscal years following the fiscal yearof such payment.

 

Based on the 2003 tax reform, tax paid on thedistribution of stockholders’ equity, as discussed in the preceding paragraph,can only be credited against income tax for the year in which taxes are paid ondividends, and in the immediately following two fiscal years.

 

**Retainedearnings**

 

As of 2002, the withholding tax on dividends iseliminated.  In addition, if earningsfor which no corporate tax has been paid are distributed, the tax must be paidupon distribution of the dividends. Consequently, the Company must keep a record of earnings subject to eachtax rate.  As of December 31, 2002,earnings for which corporate taxes have been paid amounted to approximatelyPs.2,031,547.

 

The annual net income of the Company and eachsubsidiary is subject to the legal requirement that 5% thereof be transferredto a legal reserve each year until the reserve equals 20% of capitalstock.  At December 31, 2002 and 2001,the nominal amount of this reserve amounted to Ps.57,976 and is included in retainedearnings.  This reserve may not bedistributed to the stockholders during the existence of the Company, except inthe form of stock dividends.

 

**11.FOREIGN CURRENCY POSITION AND TRANSACTIONS:**

 

The consolidated foreign currency position, excludinginventories of primary metals, as of December 31, 2002 and 2001, expressed inthousands of U.S. dollars, was as follows:

 
|                                    |   | **2002** |     | **2001** |   |
|-----------------------------------------|--------|----------|----------|----------|--------|
|                                    |   |     |     |     |   |
| Current assets                          |   | $        | 107,326  |     | $      | 7,899 |   |
| Current liabilities                     |   | (151,454 | )        | (84,909  | )      |
| Net foreign currency liability position |   | $        | (44,128  | )        | $      | (77,010 | ) |
|                                    |   |     |     |     |   |
| Equivalent in Mexican  pesos            |   | Ps.      | (455,070 | )        | Ps.    | (794,166 | ) |
|                                         |        |          |          |          |        |  |  |  |  |

 

The main transactions during 2002, 2001 and 2000 in aforeign currency, not including transactions within the group, since they wereeliminated in consolidation, expressed in thousands of U.S. dollars, were asfollows:

 
|                                 |   | **2002** |    | **2001** |   | **2000** |   |
|--------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                 |   |     |    |     |   |     |   |
| Sales                                |   | $        | 236,405 |     | $      | 187,107  |   | $ | 55,670 |   |
| Import of fixed assets and materials |   | $        | 30,396  |     | $      | 38,645   |   | $ | 86,531 |   |
| Interest expense                     |   | $        | 31      |     | $      | 29       |   | $ | 33 |   |
| Interest income                      |   | $        | 23      |     | $      | 580      |   | $ | 75 |   |
| Technical assistance expense         |   | $        | —  |     | $      | 708      |   | $ | 787 |   |
| Administrative services              |   | $        | —  |     | $      | 264      |   | $ | — |   |

 

Sales prices of almost all of the Company’s productsare determined by international market quotations in U.S. dollars.

 

F-17

----

 

At December 31, 2002, 2001 and 2000, the Mexicanpeso/U.S. dollar exchange rates were Ps.10.3125, Ps.9.1692, and Ps.9.5997,respectively, and the average rate during 2002 was Ps.9.6589 per U.S. dollar.

 

As of June 13, 2003, the date on which these financialstatements were issued, the unaudited foreign exchange position was similar tothat at December 31, 2002, and the exchange rate was Ps.10.5775 Mexican pesosper U.S. dollar.

 

**12.BALANCES AND TRANSACTION WITH RELATED PARTIES:**

 

Balances with the Company’s holding companies andaffiliated companies that are under common control of Grupo Mexico, S.A. deC.V. (parent company of GMM) are as follows:

 
|                                                                  |   | **2002** |    | **2001** |   |
|-----------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Accounts receivable-                                                  |   |     |    |     |   |
| Grupo México, S.A. de  C.V.                                      |   | Ps.      | 28,748  |     | Ps.    | — |   |
| Industrial Minera  México, S.A. de C.V.                          |   | 17,692   |    | —   |   |
| Grupo Minero México,  S.A. de C.V.                               |   | 15,510   |    | —   |   |
| Asarco, Inc. (affiliated company)                                     |   | 11,813   |    | 11,315   |   |
| Servicios de Apoyo  Administrativo, S.A. de C.V.                      |   | 3,789    |    | —   |   |
| Minera Mexico  Internacional, Inc.                                    |   | 3,619    |    | 21,823   |   |
| Minerales Metálicos del  Norte, S.A. de C.V.                     |   | 175      |    | —   |   |
| Southern Peru Cooper, Corporation                                     |   | 16       |    | 17       |   |
| Minera México, S.A. de  C.V.                                     |   | —   |    | 23,999   |   |
|                                                                  |   | Ps.      | 81,362  |     | Ps.    | 57,154 |   |
| Accounts payable-                                                     |   |     |    |     |   |
| Mexicana de Cobre, S.A.  de C.V.                                      |   | Ps.      | 428,695 |     | Ps.    | 410,093 |   |
| Ferrocarril Mexicano,  S.A. de C.V.                                   |   | 26,482   |    | 19,604   |   |
| México Transportes  Aéreos, S.A. de C.V.                    |   | 25,780   |    | 9,495    |   |
| Servicios de Apoyo  Administrativo, S.A. de C.V. (affiliated company) |   | —   |    | 2,991    |   |
| Western Copper Suppliers, Inc. (affiliated company)                   |   | 640      |    | 484      |   |
| Industrial Minera  México, S.A. de C.V. (affiliated company)     |   | —   |    | 101      |   |
| Other                                                                 |   | —   |    | 9        |   |
|                                                                  |   | Ps.      | 481,597 |     | Ps.    | 442,777 |   |
|                                                                       |        |          |         |          |        |  |  |  |  |

 

The most significant transactions with related partieswere as follows:

 
|                                       |   | **2002** |      | **2001** |   | **2000**  |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
| Revenues-                                  |   |     |      |     |   |      |   |
| Sales                                      |   | Ps.      | 1,088,406 |     | Ps.    | 1,078,656 |   | Ps. | 1,021,056 |   |
| Rent and other services                    |   | Ps.      | 1,089     |     | Ps.    | 3,781     |   | Ps. | 1,202 |   |
| Administrative services                    |   | Ps.      | 4,164     |     | Ps.    | 1,038     |   | Ps. | 4,595 |   |
| Expenses-                                  |   |     |      |     |   |      |   |
| Purchases of goods other than fixed assets |   | Ps.      | 301,547   |     | Ps.    | 177,850   |   | Ps. | 332,757 |   |
| Rent and other services                    |   | Ps.      | 83,791    |     | Ps.    | 20,828    |   | Ps. | 92,463 |   |
| Administrative services                    |   | Ps.      | 66,727    |     | Ps.    | 61,951    |   | Ps. | 73,633 |   |
| Freight                                    |   | Ps.      | 34,921    |     | Ps.    | 29,247    |   | Ps. | 38,535 |   |
| Commissions                                |   | Ps.      | 1,440     |     | Ps.    | 2,665     |   | Ps. | 1,589 |   |
| Interest                                   |   | Ps.      | —    |     | Ps.    | 38,796    |   | Ps. | — |   |

 

**13. TAXENVIRONMENT:**

 

**Incomeand asset tax regulations**

 

The principal items which affect the determination oftaxable income are the differences between purchases and cost of sales, andrecognition of the effects of inflation on depreciation, monetary assets andliabilities through the inflationary component, which differs for book and taxpurposes.

 

F-18

----

 

Through December 31, 2001, the relevant Mexican incometax (“ISR”) rate was 35% with the obligation to pay 30% currently and theoption of deferring payment of the remaining 5% until profits aredistributed.  The new tax law enactedJanuary 1, 2002, eliminated the option to defer the 5% portion of the incometax payment and reduces the 35% tax rate by one percentage point each yearuntil reaching 32% in 2005.  Thededuction for employee statutory profit-sharing (PTU) and the obligation towithhold taxes on dividends paid to individuals or foreign residents was alsoeliminated.

 

The relevant Mexican asset tax (“IMPAC”) is calculatedby applying 1.8% to the Company’s asset position, as defined in the law, and ispayable only to the extent that it exceeds ISR payable for the same period. Ifin any year IMPAC exceeds the ISR payable, the IMPAC payment for such excessmay be reduced by the amount by which ISR exceeded IMPAC in the three precedingyears and any required payment of IMPAC is creditable against the excess of ISRover IMPAC of the following ten years.

 

Income taxes, asset taxes and employee profit sharinghave been determined on the basis of the taxable income of each individualcompany. The tax returns of the Company and its subsidiaries has beenconsolidated and filed at the level of the parent company of GMM, MineraMéxico, S.A. de C.V. ( “MM”). Each year the Company and each of itssubsidiaries pay to MM the amount of tax, if any, it would have paid had itfiled a separate tax return. In the event MM reduces its consolidated taxliability through the use of tax loss carryforwards or other tax benefits ofthe Company or any of its subsidiaries, MM is obligated to reimburse theCompany or such subsidiary for such tax benefit at the time that it otherwisewould have reduced the tax payable by the Company or such subsidiary.

 

The income for purposes of PTU does not consider theinflationary component or the unrealized exchange gains or losses.  Depreciation is based on historical ratherthan restated values. The PTU rate is 10% of income for PTU purposes.

 

**Provisionfor income taxes**

 

The income tax is as follows:

 
|                                                   |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                   |   |     | ** ** |     | ** ** |     | ** ** |
| Current                                                |   | Ps.      | 4,359      |     | Ps.        | —   |       | Ps. | 19,404 |   |
| Deferred                                               |   | (12,429  | )          | (10,551  | )          | 80,262   |       |
|                                                   |   | (8,070   | )          | (10,551  | )          | 99,666   |       |
| Effect of change in statutory tax rate on deferred ISR |   | (45,718  | )          | —   |       | —   |       |
|                                                   |   | Ps.      | (53,788    | )        | Ps.        | (10,551  | )          | Ps. | 99,666 |   |

 

In accordance with Mexican GAAP, the following itemsrepresent the principal differences between Mexican income tax computed at thestatutory tax rate and the Company’s provision for income tax in each year.

 
|                                                 |   | **2002** |    | **2001** |   | **2000** |   |
|------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Income taxes at statutory rate  without unusual item |   | Ps.      | (9,413  | )        | 35.0   | %        | Ps.    | (61,066 | ) | 35.0 | % | Ps. | 81,719 |   | 35.0 | % |
| Increase (decrease) due to:                          |   |     |    |     |   |     |   |   |   |   |   |   |   |
| Results from monetary position                       |   | (19,608  | )       | 72.9     | %      | (6,765   | )      | 3.9 | % | (4,833 | ) | (2.0 | )% |
| Inflationary component, net                          |   | 20,413   |    | (75.9    | )%     | 12,532   |   | (7.2 | )% | 5,573 |   | 2.4 | % |
| Non-deductible items                                 |   | 538      |    | (2.0     | )%     | 18,538   |   | (10.6 | )% | 23,403 |   | 10.0 | % |
| Effect of deferred ISR from the tax rate reduction   |   | (45,718  | )       | 170.0    | %      | —   |   | — |   | — |   | — |   |
| Other                                                |   | —   |    | —   |   | 26,208   |   | (15.1 | )% | (6,196 | ) | (2.7 | )% |
| Tax at effective tax rate                            |   | Ps.      | (53,788 | )        | 200.0  | %        | Ps.    | (10,551 | ) | 6.0 | % | Ps. | 99,666 |   | 42.7 | % |

 

F-19

----

 

**Deferred taxes**

 

The tax effect of the temporarydifferences that generated a deferred tax liability in accordance with BulletinD-4 is as follows:

 
|                                                                        |   | **2002**       |    | **2001**         |   |
|-----------------------------------------------------------------------------|--------|----------------|---------|------------------|--------|
|                                                                        |   | **Mexcananea** |    | **Subsidiaries** |   | **Total** |   | **Mexcananea** |   | **Subsidiaries** |   | **Total** |   |
|                                                                        |   |           |    |             |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   | Ps.            | (452    | )                | Ps.    | (99 | ) | Ps. | (551 | ) | Ps. | (544 | ) | Ps. | (72 | ) | Ps. | (616 | ) |
| Inventories                                                                 |   | 97,264         |    | 305              |   | 97,569 |   | 119,197 |   | 241 |   | 119,438 |   |
| Prepaid expenses                                                            |   | 4              |    | —           |   | 4 |   | — |   | — |   | — |   |
| Property, plant and equipment                                               |   | 991,434        |    | 71,950           |   | 1,063,384 |   | 1,153,930 |   | 72,401 |   | 1,226,331 |   |
| Deferred charges                                                            |   | 522,818        |    | —           |   | 522,818 |   | 435,729 |   | — |   | 435,729 |   |
| Accounts payable and accrued liabilities                                    |   | (102,589       | )       | —           |   | (102,589 | ) | (111,041 | ) | — |   | (111,041 | ) |
| Affiliated companies                                                        |   | (7,267         | )       | —           |   | (7,267 | ) | — |   | — |   | — |   |
| Pension, seniority premium reserve and medical service  liabilities         |   | (53,414        | )       | (161             | )      | (53,575 | ) | (40,840 | ) | (149 | ) | (40,989 | ) |
| Tax loss carryforwards                                                      |   | (1,139,462     | )       | (9,651           | )      | (1,149,113 | ) | (1,185,911 | ) | (7,125 | ) | (1,193,036 | ) |
| Recoverable asset taxes                                                     |   | (411,351       | )       | (55              | )      | (411,406 | ) | (411,220 | ) | (54 | ) | (411,274 | ) |
|                                                                        |   | (103,015       | )       | 62,289           |   | (40,726 | ) | (40,700 | ) | 65,242 |   | 24,542 |   |
| Valuation allowance for tax loss carryforwards and  recoverable asset taxes |   | 741,458        |    | 2,699            |   | 744,157 |   | 742,807 |   | — |   | 742,807 |   |
| Total                                                                       |   | Ps.            | 638,443 |             | Ps.    | 64,988 |   | Ps. | 703,431 |   | Ps. | 702,107 |   | Ps. | 65,242 |   | Ps. | 767,349 |   |

 

At December 31, 2002, the Company had tax losscarryforwards pending amortization and recoverable asset taxes of Ps.1,210,052and Ps.320,639, respectively, that the Company’s management believes do nothave a high probability of being realized. Accordingly, a valuation allowanceof Ps.744,157 has been recorded.

 

**Tax losscarryforwards and recoverable asset taxes**

 

At December 31, 2002, the Company has tax losscarryforwards for income tax purposes and recoverable asset taxes which will beindexed for inflation through the year in which they are applied or recovered,in the following restated amounts: 

 
| **Expiration Date** |   | **Tax Loss  Carryforwards** |      | **Recoverable  Asset Taxes** |   |
|---------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                |   |                        |      |                         |   |
| 2003                |   | Ps.                         | 1,271     |                         | Ps.    | 102,345 |   |
| 2004                |   | 1,439,354                   |      | 63,312                       |   |
| 2005                |   | 3,060                       |      | 124,990                      |   |
| 2006                |   | 3,585                       |      | 25,710                       |   |
| 2007                |   | 292,585                     |      | 21                           |   |
| 2008                |   | 667,896                     |      | 4,300                        |   |
| 2009                |   | 916,230                     |      | 65,003                       |   |
| 2010                |   | 4,393                       |      | 25,725                       |   |
| 2011                |   | 1,748                       |      | —                       |   |
|                |   | Ps.                         | 3,330,122 |                         | Ps.    | 411,406 |   |

 

**14.GUARANTEES GRANTED:**

 

The Company, is guarantor of its holding company, GMM,with respect to GMM’s Secured Export Notes (with an initial aggregateoutstanding amount of $600 million) and GMM’s Series A Guaranteed Senior Notesand Series B Guaranteed Senior Notes. According to the terms of therestructuring, the proceeds of the Company’s export sales are pledged ascollateral.  Such proceeds must bedeposited in a collateral account with the agent bank (The Chase ManhattanBank). The Company may immediately make use of these proceeds provided thatthere is no event of default.  Inaddition, in the event of default, the Company shall maintain a bank accountguaranteeing payment of principal and interest during the three monthsfollowing the time that the collateral collection accounts are used to servicedebt.

 

F-20

----

 

The Company is also guarantor of GMM’s obligationswith respect to the following indebtedness:

 

•                                          Syndicatedloans with Bank of America for $130 and $82.4 million granted on October 6,1998 and February 6, 2001, respectively. Also the loan letters established withthe same bank on June 9, 2000 are guaranteed.

 

•                                          Equipmentloan with the Export Development Corporation for $49.9 million granted on November18, 1996.

 

•                                          Equipmentloan with the Export Development Corporation for $75 million granted on June15, 1998.

 

•                                          Currentaccount loan with the Banco Nacional de Comercio Exterior, S.N.C. for $50million granted on August 10, 2001.

 

•                                          Exportloan with Société Genérale on August 11, 1996 for $21.3 million

 

•                                          Loanagreement with The Bank of Nova Scotia for $100 million granted on August 30,2001.

 

**15.CONTINGENCIES:**

 

The Company is involved invarious legal proceedings incidental to its operations, but it does not believe that the final resolution ofany such proceedings will, individually or in the aggregate, have a materialadverse effect on its financial position,results of operations or cash flows.

 

**16.DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP:**

 

The consolidated financial statements of the Companyare presented on the basis of Mexican GAAP. Certain accounting practicesapplied by the Company that conform with Mexican GAAP do not conform with U.S.GAAP.

 

This note presents a reconciliation of net income(loss) and total stockholders’ equity as presented under Mexican GAAP to U.S.GAAP. However, this reconciliation to U.S. GAAP does not include the reversalof the restatement of the financial statements to recognize the effects ofinflation as required under Mexican GAAP Bulletin B-10, “Recognition of theEffects of Inflation in the Financial Information”, as amended. The applicationof Bulletin B-10 represents a comprehensive measure of the effects of pricelevel changes in the inflationary Mexican economy and, as such, is considered amore meaningful presentation than historical cost-based financial reporting forboth Mexican and U.S. accounting purposes.

 

The additional principal differences between MexicanGAAP and U.S. GAAP are described below, together with an explanation, whereappropriate, of the method used in the determination of the adjustments thataffect net income (loss) and total stockholders’ equity.

 

F-21

----

 

**Restatement**

 

Subsequent to the issuance of the Company’s 2001financial statements, management determined that push-down accountingadjustments related to the Company ́s acquisition by GMM had not been properlyreported in the Company’s U.S. GAAP financial information.  Push-down accounting is not required underMexican GAAP.  As a result, thefollowing U.S. GAAP  financialinformation has been restated from the amounts previously reported to reflectsuch push-down accounting adjustments:

 
|                                       |   | **2001**                     |       | **2000**         |   | **1999**                     |   |
|--------------------------------------------|--------|------------------------------|------------|------------------|--------|------------------------------|--------|
|                                       |   | **As  Previously  Reported** |       | **As  Restated** |   | **As  Previously  Reported** |   | **As  Restated** |   | **As  Previously  Reported** |   | **As Restated** |   |
|                                       |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| At  December 31:                           |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Total  assets                              |   | Ps.                          | 9,215,162  |             | Ps.    | 9,346,578                    |   | Ps. | 8,793,712 |   | Ps. | 8,945,883 |   | Ps. | 8,406,705 |   | Ps. | 8,579,631 |   |
| Stockholders’  equity                 |   | Ps.                          | 5,608,976  |             | Ps.    | 5,740,392                    |   | Ps. | 6,668,042 |   | Ps. | 6,820,213 |   | Ps. | 7,309,622 |   | Ps. | 7,482,548 |   |
|                                       |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| For  the year ended December 31:           |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Goodwill  amortization                     |   | Ps.                          | —     |             | Ps.    | 20,755                       |   | Ps. | — |   | Ps. | 20,755 |   | Ps. | — |   | Ps. | 20,755 |   |
| (Loss)  income before income taxes         |   | Ps.                          | (1,887,939 | )                | Ps.    | (1,908,694                   | )      | Ps. | 189,975 |   | Ps. | 169,220 |   | Ps. | (527,883 | ) | Ps. | (548,638 | ) |
| Net  loss                                  |   | Ps.                          | (1,024,002 | )                | Ps.    | (1,044,757                   | )      | Ps. | (612,532 | ) | Ps. | (633,287 | ) | Ps. | (575,835 | ) | Ps. | (596,590 | ) |
| Basic  and diluted (loss) income per share |   | Ps.                          | (5.07      | )                | Ps.    | (5.17                        | )      | Ps. | (3.03 | ) | Ps. | (3.13 | ) | Ps. | (2.85 | ) | Ps. | (2.96 | ) |

 

**Cashflow information**

 

Under Mexican GAAP, the Company presents consolidatedstatements of changes in financial position in accordance with Bulletin B-12,which specifies the appropriate presentation of the statement of changes infinancial position when the financial statements have been restated in constantMexican pesos (in accordance with the third amendment to Bulletin B-10).Bulletin B-12 identifies the generation and application of resourcesrepresenting differences between beginning and ending financial statementbalances in constant Mexican pesos. Bulletin B-12 also requires that monetaryand foreign exchange gains and losses be treated as cash items in thedetermination of resources provided by operations.

 

The changes in the consolidated financial statementbalances included in this statement constitute cash flow activity stated inconstant Mexican pesos (including monetary and unrealized foreign exchangegains and losses on short-term liabilities, which are considered cash gains andlosses in the constant Mexican peso financial statements).

 

In accordance with Mexican GAAP, the reduction incurrent and long-term debt due to restatement in constant Mexican pesos andunrealized exchange gains and losses on short-term liabilities are presented inthe consolidated statements of changes in financial position as a resource usedby financing activities and the gain from monetary position is presented as acomponent of operating activities.  SFASNo. 95, “Statement of Cash Flows”, does not provide guidance with respect toinflation adjusted financial statements.

 

The following are statements of cash flows, inaccordance with U.S. GAAP, excluding the effects of inflation:

 

F-22

----

 
|                                                                                      |   | **2002** |    | **2001**          |   | **2000**          |   |
|-------------------------------------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                                                      |   |     |    | **(As Restated)** |   | **(As Restated)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Consolidated net income (loss)                                                            |   | Ps.      | 23,603  |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |
| Effects of inflation                                                                      |   | 53,105   |    | 16,605            |   | 18,734            |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities- |   |     |    |              |   |              |   |
| Provision for pension, seniority premiums and medical  services obligations               |   | 18,962   |    | (583              | )      | 26,745            |   |
| Depreciation                                                                              |   | 302,539  |    | 282,018           |   | 307,903           |   |
| Amortization and depletion of deferred charges                                            |   | 109,770  |    | 66,546            |   | 12,546            |   |
| Amortization of goodwill                                                                  |   | —   |    | 20,755            |   | 20,755            |   |
| Loss (gain) on sale of property and equipment                                             |   | (144     | )       | 19,586            |   | 5,621             |   |
| Deferred income taxes                                                                     |   | (10,713  | )       | 875,435           |   | 886,763           |   |
| Capitalized stripping cost                                                                |   | (70,575  | )       | (103,969          | )      | (450,497          | )      |
|                                                                                      |   | 426,547  |    | 131,636           |   | 195,283           |   |
| Changes in operating assets and liabilities:                                              |   |     |    |              |   |              |   |
| Notes and accounts receivable                                                             |   | (168,297 | )       | 19,032            |   | 294,327           |   |
| Inventories                                                                               |   | 66,503   |    | 26,136            |   | 18,843            |   |
| Accounts payable and accrued liabilities                                                  |   | 342,560  |    | 169,892           |   | 237,496           |   |
| Unrealized exchange (gain) loss                                                           |   | 123,349  |    | (18,158           | )      | 11,522            |   |
| Due to affiliated companies                                                               |   | (84,529  | )       | 149,673           |   | (20,904           | )      |
| Taxes payable                                                                             |   | 3,391    |    | (3,338            | )      | (58,846           | )      |
| Net cash provided by operating activities                                                 |   | 709,524  |    | 474,873           |   | 77,721            |   |
|                                                                                      |   |     |    |              |   |              |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Cash retained in collateral accounts                                                      |   | 13,869   |    | (13,869           | )      | —            |   |
| Due to Mexicana de  Cobre, S.A. de C.V.                                                   |   | —   |    | 305,770           |   | —            |   |
| Net cash provided by financing activities                                                 |   | 13,869   |    | 291,901           |   | —            |   |
|                                                                                      |   |     |    |              |   |              |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Additions to property and equipment                                                       |   | (47,961  | )       | (315,424          | )      | (550,767          | )      |
| Net increase in deferred charges, except capitalized  stripping                           |   | (551,606 | )       | (454,880          | )      | (160,733          | )      |
| Proceeds from sale of property and equipment                                              |   | 236      |    | 17,758            |   | 28,814            |   |
| Net cash used in investing activities                                                     |   | (599,331 | )       | (752,546          | )      | (682,686          | )      |
|                                                                                      |   |     |    |              |   |              |   |
| Increase (decrease) in cash and cash equivalents                                          |   | 124,062  |    | 14,228            |   | (4,965            | )      |
| Cash and cash equivalents at beginning of year                                            |   | 18,713   |    | 4,485             |   | 9,450             |   |
| Cash and cash equivalents at end of year                                                  |   | Ps.      | 142,775 |              | Ps.    | 18,713            |   | Ps. | 4,485 |   |

 

**Deferredincome taxes and employee profit sharing**

 

As explained in Note 4, beginning in 2000 underMexican GAAP the revised Bulletin D-4 became effective.  The Company follows SFAS No. 109,“Accounting for Income Taxes”, for U.S. GAAP purposes, which differs fromMexican GAAP as follows:

 

•                                          UnderMexican GAAP deferred taxes are classified as non-current, while under U.S.GAAP the classification is based on the classification of the related asset orliability.

 

•                                          UnderMexican GAAP the effects of inflation on the deferred tax balance generated bymonetary items are recognized in the result on monetary position.  Under U.S. GAAP the deferred tax balance isclassified as a non-monetary item.

 

•                                          UnderMexican GAAP deferred employee profit sharing is calculated considering onlythose temporary differences that arise during the year and which are expectedto reverse within a defined period, while under U.S. GAAP the same liabilitymethod as used for deferred income taxes is applied.  Also, for U.S. GAAP purposes, employee profit sharing must beclassified as an operating expense.

 

Since employee profit sharing is calculated based ontaxable income after certain adjustments and is subject to the futureconsequences of temporary differences in the same manner as income taxes,deferred employee profit sharing, which is not recorded under Mexican GAAP,must be included in the reconciliation of Mexican to U.S. GAAP.

 

F-23

----

 

The tax effect of temporary differences that generateddeferred tax liabilities (assets) under SFAS No. 109 are as follows:

 
|                                                            |   | **2002**            |    | **2001**              |   |
|-----------------------------------------------------------------|--------|---------------------|---------|-----------------------|--------|
|                                                            |   | **Income****Taxes** |    | **Profit****Sharing** |   | **Income****Taxes** |   | **Profit****Sharing** |   |
| Current-                                                        |   |                |    |                  |   |   |   |   |   |
| Inventories                                                     |   | Ps.                 | 106,767 |                  | Ps.    | 31,402 |   | Ps. | 119,438 |   | Ps. | 34,125 |   |
| Non-deductible reserves                                         |   | (118,584            | )       | (34,878               | )      | (112,457 | ) | (32,131 | ) |
| Unrealized exchange gain (loss)                                 |   | —              |    | 11,654                |   | — |   | 527 |   |
|                                                            |   | (11,817             | )       | 8,178                 |   | 6,981 |   | 2,521 |   |
| Long-term-                                                      |   |                |    |                  |   |   |   |   |   |
| Property, plant and equipment                                   |   | 1,090,923           |    | 524,371               |   | 1,226,331 |   | 532,916 |   |
| Deferred charges                                                |   | 548,137             |    | 161,217               |   | 435,729 |   | 124,493 |   |
| Tax loss carryforwards                                          |   | (1,158,891          | )       | —                |   | (1,193,036 | ) | — |   |
| Asset taxes                                                     |   | (411,406            | )       | —                |   | (411,273 | ) | (11,483 | ) |
| Accumulated pension plan cost                                   |   | (70,743             | )       | (20,807               | )      | — |   | — |   |
|                                                            |   | (1,980              | )       | 664,781               |   | 57,751 |   | 645,926 |   |
| Valuation allowance for tax  loss carryforwards and asset taxes |   | 744,157             |    | —                |   | 1,604,309 |   | — |   |
|                                                            |   | 742,177             |    | 644,781               |   | 1,662,060 |   | 645,926 |   |
| Total                                                           |   | Ps.                 | 730,360 |                  | Ps.    | 672,959 |   | Ps. | 1,669,041 |   | Ps. | 648,447 |   |

 

For U.S. GAAP purposes, deferred tax assets arereduced by a valuation allowance if it is more likely than not that someportion or all of the deferred tax assets will not be realized.

 

The components of the income tax and profit sharingexpense for the years ended December 31, 2002, 2001 and 2000 are as follows:

 
|                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                           |   |     |   |     |   |     |   |
| Deferred-                      |   |     |   |     |   |     |   |
| Income taxes                   |   | 833,341  |   | (93,773  | )      | 576,200  |   |
| Profit sharing                 |   | 26,098   |   | 11,498   |   | 84,257   |   |
|                           |   | 894,439  |   | (82,275  | )      | 660,458  |   |
| Change in valuation allowance- |   |     |   |     |   |     |   |
| Income taxes                   |   | (860,152 | )      | 957,710  |   | 226,306  |   |
|                           |   |     |   |     |   |     |   |
|                           |   | Ps.      | 34,287 |     | Ps.    | 875,435  |   | Ps. | 886,764 |   |
|                                |        |          |        |          |        |          |        |  |  |  |

 

**Goodwill**

 

Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) SFAS No. 142, “*Goodwill andOther Intangible Assets*,” which requires that goodwill andintangible assets with indefinite lives no longer be amortized, but insteadtested for impairment at least annually and written-down with a charge tooperations when the carrying amount exceeds the estimated fair value.  The cost of intangible assets withdeterminable useful lives continues to be amortized over the useful lives ofthe assets. In connection with the transition provisions for adopting thisstandard, the Company performed a transitional impairment test and found noimpairment and reviewed the classification of its intangible assets.  The most recent test, which was conducted inDecember 2002, revealed no impairment of goodwill.

 

F-24

----

 

A reconciliation of previously reported U.S. GAAP –basis net (loss) income to the amounts adjusted to exclude goodwill, net of therelated income tax effect, is as follows:

 
|                                    |   | **2002** |   | **2001** |   | **2000**   |   |
|-----------------------------------------|--------|----------|--------|----------|--------|------------|--------|
|                                    |   |     |   |     |   |       |   |
| Reported majority net (loss)  income    |   | Ps.      | 23,603 |     | Ps.    | (1,044,757 | )      | Ps. | (633,287 | ) |
| Add: Goodwill amortization, net  of tax |   | —   |   | 20,755   |   | 20,755     |   |
| Adjusted majority net (loss)  income    |   | Ps.      | 23,603 |     | Ps.    | (1,024,002 | )      | Ps. | (612,532 | ) |

 

Basic and diluted U.S. GAAP per share amounts are asfollows:

 
|                                   |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                   |   |     |   |     |   |     |   |
| Reported net (loss) income             |   | Ps.      | 0.12   |     | Ps.    | (5.17    | )      | Ps. | (3.13 | ) |
| Add: Goodwill amortization, net of tax |   | —   |   | 0.10     |   | 0.10     |   |
| Adjusted net (loss) income             |   | Ps.      | 0.12   |     | Ps.    | (5.07    | )      | Ps. | (3.03 | ) |

 

The changes in the carrying amount of goodwill for theyears ended December 31, 2002, 2001 and 2000 are as follows:

 
| Balance as of January 1, 2000   |   | Ps.     | 165,840 |   |
|---------------------------------|--------|---------|---------|--------|
| Goodwill acquired               |   | —  |    |
| Amortization                    |   | (20,755 | )       |
| Balance as of December 31, 2000 |   | 145,085 |    |
| Goodwill acquired               |   | —  |    |
| Amortization                    |   | (20,755 | )       |
| Balance as of December 31, 2001 |   | 124,330 |    |
| Goodwill acquired               |   | —  |    |
| Balance as of December 31, 2002 |   | Ps.     | 124,330 |   |

 

Under Mexican GAAP,goodwill continues to be amortized over its estimated useful life.

 

**Cost ofpension plans and other employee benefits**

 

The Company has prepared a study of pension costsunder Mexican GAAP (see Notes 4 and 9). Under Mexican GAAP, the requirement torecord liabilities for employee benefits using actuarial computations issubstantially the same as required by SFAS No. 87, “Employers’ Accounting forPensions”, except for the initial year of application, which generates adifference in unamortized prior service costs and in the amortization expense.

 

The Company provides health care benefits for theretired and active employees as well as their family members through asubsidiary of Mexcananea (Hospital del Ronquillo, S. de R.L. de C.V.).

 

The Company applies SFAS No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits”, which requiresadditional disclosures.  Although theCompany’s measurement or recognition of pensions and postretirement benefitobligations does not change under SFAS No. 132, the following additional disclosureregarding such plans are required.

 
|                                       |   | **Pension Benefits** |    | **Other Postretirement  Benefits** |   |
|--------------------------------------------|--------|----------------------|---------|------------------------------------|--------|
|                                       |   | **2002**             |    | **2001**                           |   | **2002** |   | **2001** |   |
| **Change in projected benefit obligation** |   |                 |    |                               |   |   |   |   |   |
| Benefit obligation at beginning of year    |   | Ps.                  | 121,095 |                               | Ps.    | 130,190 |   | Ps. | 491,133 |   | Ps. | 412,291 |   |
| Service cost                               |   | 7,291                |    | 6,851                              |   | 4,448 |   | 3,888 |   |
| Interest cost                              |   | 3,200                |    | 3,015                              |   | 22,371 |   | 19,805 |   |
| Actuarial loss (gain), net                 |   | 827                  |    | (6,793                             | )      | 2,651 |   | 87,567 |   |
| Benefits paid                              |   | (11,768              | )       | (12,168                            | )      | (21,521 | ) | (32,418 | ) |
| Benefit obligation at end of year          |   | Ps.                  | 120,645 |                               | Ps.    | 121,095 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |

 

F-25

----

 
|                                                               |   | **Pension Benefits** |    | **Other Postretirement  Benefits** |   |
|--------------------------------------------------------------------|--------|----------------------|---------|------------------------------------|--------|
|                                                               |   | **2002**             |    | **2001**                           |   | **2002** |   | **2001** |   |
| **Reconciliation  of funded status**                               |   |                 |    |                               |   |   |   |   |   |
| Funded status                                                      |   | Ps.                  | 121,093 |                               | Ps.    | 121,095 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |
| Unrecognized net actuarial loss                                    |   | (21,436              | )       | (21,603                            | )      | (115,027 | ) | (116,024 | ) |
| Unrecognized transition asset, net                                 |   | (4,227               | )       | (4,754                             | )      | (294,719 | ) | (309,455 | ) |
| Unrecognized prior service costs                                   |   | (45,559              | )       | (45,559                            | )      | — |   | — |   |
| Additional minimum liability                                       |   | 69,067               |    | 68,999                             |   | — |   | — |   |
| Accrued benefit cost, net, under U.S. GAAP                         |   | 118,937              |    | 118,178                            |   | 89,336 |   | 65,654 |   |
| Accrued benefit cost, net, under Mexican GAAP                      |   | 118,730              |    | 118,443                            |   | 89,336 |   | 65,654 |   |
| Additional benefit (cost) that must be recognized  under U.S. GAAP |   | Ps.                  | 207     |                               | Ps.    | (265 | ) | Ps. | — |   | Ps. | — |   |

 
|                                                               |   | **Pension Benefits** |   | **Other Postretirement  Benefits** |   |
|--------------------------------------------------------------------|--------|----------------------|--------|------------------------------------|--------|
|                                                               |   | **2002**             |   | **2001**                           |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| **Components of net periodic benefit cost**                        |   |                 |   |                               |   |   |   |   |   |   |   |   |   |
| Service cost                                                       |   | Ps.                  | 7,751  |                               | Ps.    | 6,851 |   | Ps. | 6,383 |   | Ps. | 4,702 |   | Ps. | 3,888 |   | Ps. | 4,662 |   |
| Interest cost                                                      |   | 3,405                |   | 3,015                              |   | 11,160 |   | 23,647 |   | 19,804 |   | 2,014 |   |
| Amortization of transition  obligations, net                       |   | 1,472                |   | 556                                |   | 339 |   | 18,081 |   | 14,736 |   | 491 |   |
| Recognized net actuarial loss                                      |   | —               |   | (21                                | )      | 2,985 |   | — |   | — |   | 1,190 |   |
| Inflation adjustment                                               |   | —               |   |                               |   |   |   | — |   | — |   |   |   |
| Net periodic benefit cost  under U.S. GAAP                         |   | 12,629               |   | 10,401                             |   | 20,867 |   | 46,430 |   | 38,428 |   | 8,357 |   |
| Net periodic benefit cost  under Mexican GAAP                      |   | 17,636               |   | 15,578                             |   | 14,942 |   | 46,430 |   | 38,428 |   | 9,581 |   |
| Additional benefit (cost) that  must be recognized under U.S. GAAP |   | Ps.                  | (5,007 | )                                  | Ps.    | (5,177 | ) | Ps. | 5,925 |   | Ps. | — |   | Ps. | — |   | Ps. | (1,224 | ) |

 
| **Weighted-average assumptions as of  December 31,** |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                 |   |     |   |     |   |     |   |
| Discount rate                                        |   | 5.00     | %      | 5.00     | %      | 5.00     | %      |
| Rate of compensation increase                        |   | 1.50     | %      | 1.50     | %      | 1.50     | %      |
| Medical expenses increase rate                       |   | 1.30     | %      | 1.30     | %      | 1.30     | %      |

 

A one-percentage-point change in assumed other benefitcost trend rates for the postretirement benefit plan would have the followingeffects:

 
|                                                     |   | **1% Point****Increase** |       | **1% Point****Decrease** |       |
|----------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                     |   |                     | ** ** |                     | ** ** |
| Effect on total of service and  interest cost components |   | Ps.                      | 34,348     |                     | Ps.        | 26,822 |   |
| Effect on the post-retirement  benefit obligation        |   | Ps.                      | 556,906    |                     | Ps.        | 445,724 |   |

 

As of December 31, 2002 and 2001 the accumulatedbenefit obligation amounted to Ps.173,351 and Ps.145,730.

 

**Capitalizedinterest**

 

Under Mexican GAAP, a company is not required to, butmay, capitalize interest incurred on assets under construction. The amount tobe capitalized in Mexico is based upon the “comprehensive financial cost”(i.e., the net of the sum of interest expense, foreign exchange gains andlosses and the gain or loss from monetary position).  The Company has elected not to capitalize any comprehensivefinancial costs under Mexican GAAP.

 

Under U.S. GAAP, interest expense on all debt, and netof the gain on monetary position applicable to Mexican peso denominated debt,must be considered an additional cost of constructed assets and is depreciatedover the lives of the related assets. Exchange gains and losses on foreigncurrency-denominated debt may not be capitalized.

 

F-26

----

 

**Employeeprofit sharing**

 

Mexican law requires the payment to employees of 10%of the Company’s taxable income, excluding certain adjustments for inflation.These amounts are treated as compensation expense and are reflected afterincome tax, in the appropriate captions in the statement of operations.

 

Under U.S. GAAP, employee profit sharing must bereflected as an operating expense in the statements of operations.

 

**Majorcustomers**

 

The Company had significant sales to three differentcustomers in the last three years. Sales to these customers accounted for 41%, 26% and 14% of total netsales in 2002, 74%, 19% and 3% of total net sales in 2001 and 25%, 13% and 9%of total net sales in 2000.

 

**Segmentinformation**

 

The Company had net sales to customers from thefollowing regions as follows:

 
|            |   | **2002** |      | **2001** |   | **2000**  |   |
|-----------------|--------|----------|-----------|----------|--------|-----------|--------|
|            |   |     |      |     |   |      |   |
| Mexico          |   | Ps.      | 2,237,576 |     | Ps.    | 1,437,482 |   | Ps. | 2,099,741 |   |
| United States   |   | 107,772  |      | 440,601  |   | 513,024   |   |
| Latin America   |   | —   |      | —   |   | 17,891    |   |
| Total net sales |   | Ps.      | 2,345,348 |     | Ps.    | 1,878,083 |   | Ps. | 2,630,656 |   |

 

**Start-upcosts**

 

Under U.S. GAAP, AICPA Statement of Position 98-5,“Reporting on the Costs of Start-up Activities”, requires that certain costssuch as organization, training and pre-feasibility expenses incurred in thestart-up phase of a project be expensed as incurred.

 

In accordance with Mexican GAAP, start-up costs aredeferred and amortized at the commencement of operations, despite the inherentuncertainty regarding their future recoverability.  However, if the project is abandoned and the start-up costsincurred to date become unrecoverable, such costs are be expensed immediately.  Amortization of deferred costs is amortizedon a straight-line basis over the term in which the benefit is expected to berealized.

 

**Environmentalliabilities**

 

Under U.S. GAAP companies must comply with EITF 93-5,“Accounting for Environmental Liabilities”, and EITF 90-8, “Capitalization ofCosts to Treat Environmental Contamination”. These pronouncements require companies to disclose and/or accrue on aundiscounted basis any reclamation and remediation costs that are expected tobe incurred. The Company has properly accrued for all known environmentalmatters at the balance sheet date for U.S. GAAP purposes.

 

**Financialinstruments**

 

Under Mexican GAAP Bulletin C-2 went into effect in2001 and requires the recognition of all derivative financial instruments onthe balance sheet as either assets or liabilities.  Additionally, certain, but not all, derivative financialinstruments and the related hedged items must be adjusted to their marketvalue, with all such adjustments recorded in the income statement, regardlessof the nature of the financial instrument.

 

Under U.S. GAAP, SFAS No. 133 went into effect in 2001and requires the adjustment of all financial instruments to market value, withsuch adjustments recorded:

 

•                  In the determination of net income orloss for fair value hedges (fixed to variable )

•                  In other comprehensive income forcash flow hedges (variable to fixed)

 

At December 31, 2002 and 2001, the Company has notoutstanding derivative financial instruments.

 

F-27

----

 

**Reconciliationof Mexican GAAP to U.S. GAAP**

 

Net income (loss) and stockholders’ equity, adjustedto take into account the significant differences between Mexican GAAP and U.S.GAAP, except for the comprehensive effects of price-level changes, are asfollows:

 
|                                                                                             |   | **2002** |   | **2001**          |   | **2000**          |   |
|--------------------------------------------------------------------------------------------------|--------|----------|--------|-------------------|--------|-------------------|--------|
|                                                                                             |   |     |   | **(As Restated)** |   | **(As Restated)** |   |
| NET INCOME (LOSS):                                                                               |   |     |   |              |   |              |   |
| Net income (loss) under  Mexican GAAP                                                            |   | Ps.      | 26,894 |              | Ps.    | (163,925          | )      | Ps. | 133,818 |   |
| U.S. GAAP adjustments:                                                                           |   |     |   |              |   |              |   |
| Deferred income taxes under  U.S. GAAP                                                           |   | 36,811   |   | (863,937          | )      | (802,506          | )      |
| Deferred employee profit  sharing liability                                                      |   | (26,098  | )      | (11,498           | )      | (84,257           | )      |
| Deferred income taxes under  Mexican GAAP                                                        |   | (58,147  | )      | (10,551           | )      | 99,667            |   |
| Amortization of goodwill                                                                         |   | —   |   | (20,755           | )      | (20,755           | )      |
| Pension plan cost                                                                                |   | 5,007    |   | 5,177             |   | (5,924            | )      |
| Start-up-costs                                                                                   |   | —   |   | (5,494            | )      | (2,012            | )      |
| Reversal of amortization of  preoperating expenses                                               |   | 28,680   |   | 1,061             |   | 950               |   |
| Effects of inflation accounting  on U.S. GAAP adjustments and monetary gain on labor liabilities |   | 10,456   |   | 25,164            |   | 47,732            |   |
|                                                                                             |   | (3,291   | )      | (880,832          | )      | (767,105          | )      |
| Net income (loss) under U.S.  GAAP                                                               |   | Ps.      | 23,603 |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |

 
|                                          |   | **2002** |      | **2001**          |   |
|-----------------------------------------------|--------|----------|-----------|-------------------|--------|
|                                          |   |     |      | **(As Restated)** |   |
| STOCKHOLDERS’ EQUITY:                    |   |     |      |              |   |
| Stockholders’ equity under  Mexican GAAP |   | Ps.      | 7,172,531 |              | Ps.    | 7,152,686 |   |
| U.S. GAAP adjustments:                        |   |     |      |              |   |
| Deferred income taxes under  U.S. GAAP        |   | (730,760 | )         | (1,628,851        | )      |
| Deferred employee profit  sharing             |   | (672,959 | )         | (648,448          | )      |
| Deferred income taxes under  Mexican GAAP     |   | 703,431  |      | 767,349           |   |
| Amortization of goodwill                      |   | 124,330  |      | 124,330           |   |
| Start-up-costs                                |   | (4,814   | )         | (33,494           | )      |
| Accumulated pension plan cost                 |   | (211     | )         | (266              | )      |
|                                          |   | (580,983 | )         | (1,419,380        | )      |
| Stockholders’ equity under U.S.  GAAP    |   | Ps.      | 6,591,548 |              | Ps.    | 5,733,306 |   |

 

The changes in stockholders’ equity under U.S. GAAP forthe years ended December 31, 2002, 2001 and 2000 are as follows:

 
|                                                                                     |   | **Capital  Stock** |      | **Additional****Paid-  in Capital  (As Restated)** |   | **Retained****Earnings  (As Restated)** |   | **Accumulated****OtherComprehensiveIncome** |    | **Total****Stockholders’Equity(As Restated)** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|-----------|----------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------|---------|----------------------------------------------------|--------|
| Stockholders’ equity under U.S.  GAAP at December 31, 1999 (as previously reported) |   | Ps.                | 8,548,102 |                                               | Ps.    | —                                  |   | Ps.                                         | (29,502 | )                                                  | Ps.    | (1,208,978 | ) | Ps. | 7,309,622 |   |
| Prior period adjustment -  Recognition of push-down accounting                           |   | —             |      | 214,436                                            |   | (41,510                                 | )      | —                                      |    | 172,926                                            |   |
| Stockholders’ equity under U.S.  GAAP at December 31, 1999 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (71,012                                 | )      | (1,208,978                                  | )       | 7,482,548                                          |   |
| Net loss                                                                                 |   | —             |      | —                                             |   | (633,287                                | )      | —                                      |    | (633,287                                           | )      |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | (14,812                                     | )       | (14,812                                            | )      |
| Additional minimum, liability  and restatement of accrued benefit                        |   |               |      |                                               |   | —                                  |   | (14,236                                     | )       | (14,236                                            | )      |
| Comprehensive loss                                                                       |   | —             |      | —                                             |   | —                                  |   | —                                      |    | (662,335                                           | )      |
| Stockholders’ equity under U.S.  GAAP at December 31, 2000 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (704,299                                | )      | (1,238,026                                  | )       | 6,820,213                                          |   |
| Net loss                                                                                 |   | —             |      | —                                             |   | (1,044,757                              | )      | —                                      |    | (1,044,757                                         | )      |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | (28,043                                     | )       | (28,043                                            | )      |
| Additional minimum liability  and restatement of accrued benefit                         |   | —             |      | —                                             |   | —                                  |   | (7,021                                      | )       | (7,021                                             | )      |
| Comprehensive loss                                                                       |   | —             |      | —                                             |   | —                                  |   | —                                      |    | (1,079,821                                         | )      |
| Stockholders’ equity under U.S.  GAAP at December 31, 2001 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (1,749,056                              | )      | (1,273,090                                  | )       | 5,740,392                                          |   |
| Net income                                                                               |   | —             |      | —                                             |   | 23,603                                  |   | —                                      |    | 23,603                                             |   |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | 838,687                                     |    | 838,687                                            |   |
| Additional minimum liability  and  restatement of accrued benefit                   |   | —             |      | —                                             |   | —                                  |   | (4,048                                      | )       | (4,048                                             | )      |
| Comprehensive income                                                                     |   | —             |      | —                                             |   | —                                  |   | —                                      |    | 858,242                                            |   |
| Stockholders’ equity under U.S.  GAAP at December 31, 2002                          |   | Ps.8,548,102       |      | Ps.214,436                                         |   | Ps.(1,725,453                           | )      | Ps.(438,451                                 | )       | Ps.6,598,634                                       |   |
|                                                                                          |        |                    |           |                                                    |        |                                         |        |                                             |         |                                                    |        |  |  |  |  |  |

 

F-28

----

 

**Reclassificationof balance sheets and statements of operations**

 

With regard to the consolidated balance sheets andstatements of operations, the following significant captions determined under U.S.GAAP would have been as follows:

 
|                      |   | **2002** |      | **2001**          |   |
|---------------------------|--------|----------|-----------|-------------------|--------|
|                      |   |     |      | **(As Restated)** |   |
| Balance sheets:           |   |     |      |              |   |
| Current assets            |   | Ps.      | 774,049   |              | Ps.    | 521,528 |   |
| Total assets              |   | Ps.      | 9,739,923 |              | Ps.    | 9,346,578 |   |
| Current liabilities       |   | Ps.      | 1,537,471 |              | Ps.    | 1,153,945 |   |
| Total liabilities         |   | Ps.      | 3,141,289 |              | Ps.    | 3,606,186 |   |
| Stockholders’ equity |   | Ps.      | 6,598,634 |              | Ps.    | 5,740,392 |   |

 
|                                                            |   | **2002** |    | **2001**          |   | **2000**          |   |
|-----------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                            |   |     |    | **(As Restated)** |   | **(As Restated)** |   |
| Statements of operations:                                       |   |     |    |              |   |              |   |
| Operating income (loss)                                         |   | Ps.      | 65,459  |              | Ps.    | (187,046          | )      | Ps. | 136,240 |   |
| Income taxes                                                    |   | Ps.      | (32,452 | )                 | Ps.    | (863,937          | )      | Ps. | 802,507 |   |
| Consolidated net (loss) income                                  |   | Ps.      | 23,603  |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |
| Weighted average common shares  outstanding,  in thousands |   | 201,798  |    | 201,798           |   | 201,798           |   |
| Net (loss) income per share under  U.S. GAAP                    |   | Ps.      | 0.12    |              | Ps.    | (5.17             | )      | Ps. | (3.13 | ) |

 

**17.FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:**

 

**MexicanGAAP**

** **

In December 2001, the Mexican Institute of PublicAccountants (MIPA) issued the new Bulletin C-9, “ Liabilities, Provisions,Contingent Assets and Liabilities and Commitments “ (“C-9”), whose provisionsare mandatory for years beginning as of January, 2003, although earlyapplication is recommended. C-9 replaces the provisions of the former BulletinsC-9 “Liabilities” and C-12, “Contingencies and Commitments”, and establishes,among others, greater accuracy in items related to provisions, accumulatedobligations and contingent liabilities, and new regulations related toaccounting recognition of provisions, the use of present value, and theredemption of obligations when taking place early or substituted by a newissue.

 

F-29

----

 

In January 2002, the MIPA issued new Bulletin C-8, “Intangible Assets “ (“C-8”) with the same effective date and recommendationestablished for Bulletin C-9. C-8 replaces the former Bulletin C-8,“Intangibles”, and establishes, among others, that the development costs of aproject should be capitalized if they comply with the criteria established fortheir recognition as assets; any preoperating costs incurred as of the date ofapplication of this Bulletin should be recorded as a cost for the period.  The unamortized balance of capitalizedpreoperating costs in accordance with the former Bulletin C-8 will be amortizedin accordance with the terms of such Bulletin. To reduce as much as possible the remnant that constitutes “goodwill” inthe case of business acquisitions, the intangible items to be identified andquantified are provided.

 

In March 2003, the MIPA issued Bulletin C-15,“Impairment in the Value of Long-Lived Assets and Their Disposal”, (C-15),whose application is mandatory for financial statements of periods beginning onor after January 1, 2004, although early application is encouraged. C-15establishes, among others, new principles for the calculation and recognitionof impairment losses for long-lived assets and their reversal.  It also provides examples of indicators ofpossible impairment in the carrying amount of tangible and intangiblelong-lived assets in use, including goodwill. The calculation of such lossrequires the determination of the recoverable value, which is now defined asthe greater of the net selling price of a cash-generating unit and its value inuse, which is the present value of discounted future net cash flows. Theaccounting principles issued prior to this new Bulletin used future net cashflows, without requiring the discounting of such cash flows.

 

The Company has not fully assessed the effects ofadopting these new accounting principles on its financial position and resultsof operations.

 

**U.S.GAAP**

 

During 2001, the FASB issued the initiated followingguidance:

 

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations”, which is effective for all business combinations initiated afterJune 30, 2001.  SFAS No. 141 requiresall business combinations to be accounted for using the purchase method.  The adoption of this new standard did nothave a material impact on the Company’s financial position or results ofoperations.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwilland Other Intangible Assets”, which was effective for the Company beginning in2002.  With the adoption of SFAS No.142, goodwill is no longer subject to amortization over its estimated usefullife, but rather it will be subject to at least an annual assessment forimpairment by applying a fair-value-based test.  Additionally, negative goodwill is recognized as an extraordinarygain at the time of the business combination.

 

In June 2001, the FASB issued SFAS No. 143 “Accountingfor Asset Retirement Obligations”, which was effective for the Companybeginning in 2003.  The Company plans toadopt this new standard in 2003.  SFASNo. 143 addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  It applies to legalobligations associated with the retirement of long-lived assets and theassociated asset retirement costs.  Itapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and/or thenormal operation of a long-lived asset, except for certain obligations oflessees.  This SFAS requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The Company is currently evaluating theeffect that this new standard will have on its financial position, results ofoperations and cash flows.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  The Company adopted this standard in2002.  SFAS No. 144 supersedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of”.  SFAS No. 144also expands the scope of discontinued operations to a component of an entityand eliminates the exception to consolidation for a temporarily controlledsubsidiary.  The adoption of thisstandard did not have a material impact on the Company’s financial position andresults of operations.

 

During 2002, the FASB issued the following guidance:

 

In June 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with “Exit or Disposal Activities”, whichwill be required to be effective for exit or disposal activities that areinitiated after December 31,2002. This statement addresses financial accountingand reporting for cost associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exit anActivity (including Certain Costs Incurred in a Restructuring)”. The Companyadopted the provisions of SFAS No. 146 on January 1, 2003, which did not have amaterial effect on the Company’s financial statements.

 

F-30

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In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 requires that the guarantor recognize,at the inception of certain guarantees, a liability for the fair value of theobligation undertaken in issuing such guarantee.  FIN 45 also requires additional disclosure requirements about theguarantor’s obligations under certain guarantees that it has issued.  The initial recognition and measurementprovisions of this interpretation are applicable on a prospective basis toguarantees issued or modified after December 31, 2002 and the disclosurerequirements are effective for financial statement periods ending afterDecember 15, 2002.  The Company does notexpect the adoption of FIN 45 will have a material impact on its financialposition, results of operations or cash flows.

 

During 2003, the FASB issued the following guidance:

 

In January 2003, the FASB issued FASB InterpretationNo. 46 “Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certainentities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.  FIN 46 iseffective immediately for all companies that hold a variable interest in avariable interest entity created after January 31, 2003.  For a variable interest held by the Companyin a variable interest entity created before February 1, 2003, the Company willapply the provisions of FIN 46 no later than the end of the first annualreporting period beginning after June 15, 2003*.*The Company does notexpect that the adoption of FIN 46 will have a material impact on its financialposition, results of operations or cash flows.

 

In April 2003, the FASB issued SFAS No. 149“Amendments of Statement 133 on Derivative Instruments and Hedging Activities”,which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133 “Accounting forDerivative Instruments and Hedging Activities”.  The changes in SFAS No. 149 improve financial reporting byrequiring that contracts with comparable characteristics be accounted for similarly.  SFAS No. 149 will be effective for contractsentered into or modified after June 30, 2003, except as stated below, and forhedging relationships designated after June 30, 2003.  In addition, expect as stated below, all provisions of thisStatement should be applied prospectively.  The provisions ofSFAS No. 149 that relate to SFAS No. 133 implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003, shouldcontinue to be applied in accordance with their respective effectivedates.  The Company does not anticipatethat the adoption of SFAS No. 149 will have a material impact on the Company’sfinancial position, results of operations or cash flow.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”.  SFAS No. 150 aims to eliminatediversity in practice by requiring that the following three types of financialinstruments be reported as liabilities by their issuers:

 

•                  Mandatorilyredeemable instruments (i.e., instruments issued in the form of shares thatunconditionally obligate the issuer to redeem the shares for cash or bytransferring other assets)

 

•                  Forwardpurchase contracts, written put options, and other financial instruments not inthe form of shares that either obligate or may obligate the issuer to settleits obligation for cash or by transferring other assets

 

•                  Certainfinancial instruments that include an obligation that  (1) the issuer may or must settle by issuing a variable number ofits equity shares and (2) has a “monetary value” at inception that (a) isfixed, (b) is tied to a market index or other benchmark (something other thanthe fair value of the issuer’s equity shares), or (c) varies inversely with thefair value of the equity shares, for example, a written put option.

 

Until now, these types of instruments have beenvariously reported by their issuers as liabilities, as part of equity, orbetween the liabilities and equity sections (sometimes referred to as“mezzanine” reporting) of the balance sheet. The provisions of SFAS 150 are effective for financial instruments forthe first fiscal period beginning after December 15, 2003. The Company does notexpect that the adoption of SFAS No. 150 will have a material impact on itsfinancial position, results of operations or cash flows.

 

F-31

 

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**INDEX TO EXHIBITS**

 
| **Exhibit** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(a)        |   | Merger Agreement, dated  May 28, 2003 among Minera México and Grupo Minero México (Translation from  Spanish into English).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(b)        |   | Common Agreement, dated  April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera México, S.A. de C.V., Industrial Minera México, S.A. de C.V., Minera  México Internacional, Inc., Mexicana  de Cobre, S.A. de C.V., Minerales Metálicos del Norte, S.A., Mexicana de  Cananea, S.A. de C.V., Mexicana del Arco, S.A. de C.V., Minerales y Minas  Mexicanas, S.A. de C.V., Compañía de Terrrenos e Inversiones de San Luis  Potosí, Sociedad Civil por Acciones S.A., México Compañía Inmobiliaria, S.A.,  Proyecciones Urbanisticas S. de R.L. C.V., Bank of America N.A., as  administrative agent to the bank holders, HSBC Bank USA, as shared payment  agent and collateral agent, HSBC Bank, USA, as SEN collateral agent, The  Bank of New York, as trustee for Grupo Mexico Export Master Trust No. 1, as  SEN Trustee. |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(c)        |   | Amended and Restated  Trust Indenture, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., as  issuer of the Borrower Notes, The Bank of New York, as trustee of Grupo  Mexico Export Master Trust No. 1, as issuer of the Secured Notes and HSBC  Bank USA, as SEN collateral agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(d)        |   | SEN Security Agreement,  dated as of April 29, 2003, among Grupo Minero México, S.A. de C.V., as  borrower, The Bank of New York, as trustee of Grupo México Export Master  Trust No. 1, as SEN Trustee, Minera México, S.A. de C.V., Industrial Minera  México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V., Minerales  Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V., Mexicana del  Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V., Compañía de  Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por Acciones S.A.,  México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas S. de R.L.  C.V., as guarantors and HSBC Bank USA, as SEN collateral agent.                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(e)        |   | U.S. Security  Agreement, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera  México, S.A. de C.V., Industrial  Minera México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V.,  Minerales Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V.,  Mexicana del Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V.,  Compañía de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por  Acciones S.A., México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas  S. de R.L. C.V., HSBC Bank USA, as shared payment agent and collateral agent,  and HSBC Bank, USA, acting in its individual capacity.                                                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(f)        |   | Mexican Security Trust Agreement, dated April 29, 2003, among Grupo  Minero México, S.A. de C.V., Industrial Minera México, S.A. de C.V., Mexicana  de Cobre, S.A. de C.V., Minerales Metálicos del Norte, S.A., Mexicana de  Cananea, S.A. de C.V., Mexicana del Arco, S.A. de C.V., Minerales y Minas  Mexicanas, S.A. de C.V., Americas Mining Corporation, Minera México, S.A. de  C.V., Compañía de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil  por Acciones S.A. and México Compañía Inmobiliaria, S.A., collectively, as  grantors, and GE Capital Bank, S.A., Institucion de Banca Múltiple and  Capital Grupo Financiero, as trustees.                                                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(g)        |   | Amended and Restated  Credit Agreement, dated April 29, 2003, among Grupo Minero México, S.A. de C.V., Minera  México, S.A. de C.V., Industrial  Minera México, S.A. de C.V., Minera México Internacional, Inc., Mexicana de Cobre, S.A. de C.V.,  Minerales Metálicos del Norte, S.A., Mexicana de Cananea, S.A. de C.V.,  Mexicana del Arco, S.A. de C.V., Minerales y Minas Mexicanas, S.A. de C.V., Compañía  de Terrrenos e Inversiones de San Luis Potosí, Sociedad Civil por Acciones  S.A., México Compañía Inmobiliaria, S.A., Proyecciones Urbanisticas S. de  R.L. C.V., certain financial institutions as Bank Holders, and Bank of  America N.A., as administrative agent.                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4(h)        |   | Credit Agreement dated  as of February 6, 2001 among Grupo Minero México, S.A. de C.V., (as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

----

 
|   |   | borrower), Mexicana de Cobre S.A. de C.V., Industrial Minera México, S.A.  de C.V., Mexicana de Cananea, S.A. de C.V., Minerales Metálicos del Norte,  S.A. and Minerales y Minas Mexicanas, S.A. de C.V. (as guarantors), Bank of  America, N.A. (as lender) and the Export-Import Bank of the United States in  relation to a credit of US$21, 445,054 to finance the purchase of foreign  capital goods.*                                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4(i)   |   | Facility Agreement  dated as of February 6, 2001 among Grupo Minero México, S.A. de C.V., (as borrower), Mexicana de  Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V., Mexicana de  Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. and Minerales y  Minas Mexicanas, S.A. de C.V. (as guarantors), Bank of America, N.A. (as  lender) and the Export-Import Bank of the United States in relation to a  facility of US$49,878,640 to finance the purchase of foreign captial goods,  equipment and spare parts.**                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4(j)   |   | Down Payment Financing  Agreement dated February 6, 2001 among Grupo Minero México, S.A. de C.V., (as borrower),  Mexicana de Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V.,  Mexicana de Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. and  Minerales y Minas Mexicanas, S.A. de C.V. (as guarantors), Bank of America,  N.A. (as lender) in relation to a loan of US$11 million to refinance the down  payment portion of the purchase price paid for certain capital goods, equipment  and replacements.***                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4(k)   |   | Line of Credit  Agreement dated August 10, 2001 among Grupo Minero México, S.A. de C.V., (as borrower),  Mexicana de Cobre S.A. de C.V., Industrial Minera México, S.A. de C.V.,  Mexicana de Cananea, S.A. de C.V., Minerales Metálicos del Norte, S.A. (as  guarantors) and Banco Nacional de Comercio Exterior, S.N.C. in relation to a  facility of US$50 million to finance working capital needs (Translation from  Spanish into English).****                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4(l)   |   | Credit Agreement dated  August 30, 2001 among Grupo Minero México, S.A. de C.V., (as borrower), Grupo  México S.A. de C.V. (parent guarantor), Mexicana de Cobre S.A. de C.V.,  Industrial Minera México, S.A. de C.V., Mexicana de Cananea, S.A. de C.V.,  Minerales Metálicos del Norte, S.A., Minera México Internacional, Inc. (as  subsidiary guarantors), the lending institutions that become parties to the  agreement, and the Bank of Nova Scotia as administrative agent and sole lead  manager in relation to a credit of US$100 million to refinance previous  indebtedness and finance capital expenditures and working capital needs.***** |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 8.     |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 12(a)  |   | Certification of the  President and General Director of the Registrant pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 12(b)  |   | Certification of the  Finance Director of the Registrant pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| *     |   | Previously filed and  incorporated by reference to exhibit 4(c) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **    |   | Previously filed and  incorporated by reference to exhibit 4(d) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ***   |   | Previously filed and  incorporated by reference to exhibit 4(e) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ****  |   | Previously filed and  incorporated by reference to exhibit 4(f) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |
| ***** |   | Previously filed and  incorporated by reference to exhibit 4(g) to Grupo Minero México S.A. de  C.V.’s Annual Report on Form 20-F, filed on July 15, 2002. |

 

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