**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 20-F**

 

**AnnualReport Pursuant to 15(d)of the Securities Exchange Act of 1934**

 

**For the Fiscal Year Ended December 31, 2002**

** **

**Commission File Number 333-08340-01**

 

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**MEXICANA DE COBRE, S.A. DE C.V.**

(Exact name of Registrant as specified in its charter)**MEXICAN COPPER COMPANY**(Translation of Registrant’s name into English)

**United Mexican States**(Jurisdiction of incorporation or organization)

**c/o Grupo Minero México, S.A. de C.V.Baja California 200Col. Roma Sur06760 México, D.F.**(Address of principal executive offices)Securities registered or to be registered pursuant to Section 12(b) of the Act:**None****Securities registered or to be registered pursuant to Section12(g) of the Act:**None****Securities for which there is a reporting obligation pursuant toSection 15(d) of the Act:**Guarantees of 8.25% Series A Guaranteed SeniorNotes due 2008 and9.25% Series B Guaranteed Senior Notes due 2028issued by Grupo Minero México, S.A. de C.V.**

 

**Indicate the number of outstanding shares ofeach of the Issuer’s classes of capital or common stock as of the close of theperiod covered by the annual report:**

**Shares of common stock – 1,043,271,843 Class I Series A Shares**

** **

**Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days:**

 

Yes  ý  No  o

 

**Indicate by check mark which financialstatement item the registrant has elected to follow:**

 

Item 17  o  Item 18 ý

 

**The registrant is a subsidiary of GrupoMinero México, S.A. de C.V. The registrant is filing this form using thereduced disclosure format provided for in Instruction I to Form 10-K. SeeExplanatory Note.**

 

 

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**Table of Contents**

 
| EXPLANATORY  NOTE           |
|-----------------------------|
|                        |   |
| PRESENTATION OF INFORMATION |
|                        |   |
| FORWARD LOOKING STATEMENTS  |
|                        |   |
| PART I                      |
|                        |   |
| ITEM 1.                     | DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
|                        |   |
| ITEM 2.                     | OFFER STATISTICS AND EXPECTED TIMETABLE |
|                        |   |
| ITEM 3.                     | KEY INFORMATION |
|                        |   |
| ITEM  4.                    | INFORMATION ON THE COMPANY |
|                        |   |
| ITEM 5.                     | OPERATING AND FINANCIAL REVIEW AND  PROSPECTS |
|                        |   |
| ITEM 6.                     | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
|                        |   |
| ITEM 7.                     | MAJOR SHAREHOLDERS AND RELATED PARTY  TRANSACTIONS |
|                        |   |
| ITEM 8.                     | FINANCIAL INFORMATION |
|                        |   |
| ITEM 9.                     | THE OFFER AND LISTING |
|                        |   |
| ITEM 10.                    | ADDITIONAL INFORMATION |
|                        |   |
| ITEM 11.                    | QUANTITATIVE AND QUALITATIVE DISCLOSURE  ABOUT MARKET RISK |
|                        |   |
| 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 |
|                        |   |
| ITEM 15.                    | CONTROLS AND PROCEDURES |
|                        |   |
| ITEM 16.                    | [RESERVED] |
|                        |   |
| PART III                    |
|                        |   |
| ITEM 17.                    | FINANCIAL STATEMENTS |
|                        |   |
| ITEM 18.                    | FINANCIAL STATEMENTS |
|                        |   |
| ITEM 19.                    | EXHIBITS |
|                        |   |
| Annex F                     | Financial  Statements of Mexicana de Cobre, S.A. de C.V. (As Restated) |
|                             |  |  |

 

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**EXPLANATORYNOTE**

 

We areMexicana de Cobre, S.A. de C.V. and we are required to file an annual report onForm 20-F pursuant to Section 15(d) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), and Rule 15d-1 thereunder because we are aguarantor of 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”) of Grupo MineroMéxico, S.A. de C.V. (“Grupo Minero”), which were issued and sold pursuant to aregistration statement on Form F-1 under the Securities Act of 1933, as amended(the “Act”) (Commission File No. 333-8430). Grupo Minero owns 96.43% of ourcapital stock, and the balance was acquired by the Mexican National MineWorkers Union in 1988 in connection with the privatization of the registrant.

 

Grupo Minerohas filed an annual report on Form 20-F for the year ended December 31, 2002(Commission File No. 333-08430).

 

We haveomitted certain information required by Form 20-F from this Annual Report onthe basis of Instruction I to Form 10-K under the Exchange Act, which permits acompany wholly-owned by another company that is a reporting company under theExchange Act to file an abbreviated annual report in accordance with theno-action letter issued by the staff of the Securities and Exchange Commission(the “SEC”) on October 28, 1999.

 

Our securitieswith respect to which there is a reporting obligation under Section 15(d) ofthe Exchange Act consist only of guarantees of the Notes of Grupo Minero andcannot be held or traded separately. We have accordingly omitted responses toitems 10 and 14, which call for information concerning the securities that isinapplicable to the guarantees of the Notes. Information responsive to theseitems can be found in the annual report on Form 20-F of Grupo Minero.

 

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**PRESENTATIONOF INFORMATION**

 

We are acorporation (*sociedad anónima de capital variable*) organized under thelaws of the United Mexican States (“Mexico”) and present our financial statementsin Mexican pesos and in accordance with accounting principles generallyaccepted in México (“Mexican GAAP”). Mexican GAAP provides for the recognitionof certain effects of inflation by restating nonmonetary assets and liabilitiesusing the Mexican National Consumer Price Index (the “NCPI”), restating thecomponents of stockholders’ equity using the NCPI and recording gains or lossesin purchasing power from holding monetary liabilities or assets. Mexican GAAPalso requires restatement of financial statements to pesos of purchasing poweras of the date of the most recent balance sheet presented. All data in thefinancial statements included in this Annual Report, the selected financialinformation derived therefrom and other financial information included in thisAnnual Report have been restated to pesos of purchasing power as of December31, 2002, except as otherwise indicated.

 

Mexican GAAPdiffers in certain significant respects from accounting principles generallyaccepted 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 16 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”). The effect of price-level restatement under MexicanGAAP has not been reversed in the reconciliation to U.S. GAAP. See Note 16 tothe Financial Statements set forth in Annex F hereto.

 

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

 

This AnnualReport contains translations of certain peso amounts into U.S. dollars atspecified rates solely for the convenience of the reader. These translationsshould not be construed as representations that the peso amounts actuallyrepresent such U.S. dollar amounts or could be converted into U.S. dollars atthe rate indicated or any other rate. Unless otherwise indicated, such U.S.dollar amounts have been translated from pesos at an exchange rate of Ps.10.3125 to US$ 1.00, the exchange rate as of December 31, 2002 published byBanco de México (the “Mexican Central Bank”). On December 31, 2002, thedifference between the exchange rate published by the Mexican Central Bank andthe noon buying rate in New York City for cable transfers in pesos as certifiedfor customs purposes by the Federal Reserve Bank of New York (the “noon buyingrate”) of Ps. 10.5608 to US$1.00 was not material. On June 23, 2003, the noonbuying rate was Ps. 10.4745 per US$1.00.

 

Unlessotherwise indicated, all references herein to volumes of ore, concentrates andother metal products are expressed in metric tons.  One metric ton equals approximately 2,204.62 pounds.

 

**FORWARDLOOKING STATEMENTS**

 

We may fromtime to time make written or oral forward-looking statements in our periodicreports to the SEC on Forms 20-F and 6-K, in our annual report to shareholders,in offering circulars and prospectuses, in press releases and other writtenmaterials, and in oral statements made by any of our officers, directors oremployees to analysts, institutional investors, representatives of the mediaand others. These statements appear in a number of places in this Annual Reportand include statements regarding our current intent, belief or currentexpectations or those of our officers with respect to trends affecting ourfinancial condition or results of operations. Where used in this Annual Report, the words “anticipate”, “believe”,“estimate”, “expect”, “intend”, “plan”, and protect” and similar expressions,as they relate to us or our management are intended to identify suchforward-looking statements.  Suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and actual results may differ materially from those inthe forward-looking statements as a result of various factors. The informationcontained in this Annual Report, including, without limitation, the informationunder Item 4. “Information on the Company” and Item 5. “Operating and FinancialReview and Prospects,” identifies important factors that could cause suchdifferences. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date thereof.  We do not undertake any obligation to

 

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release publicly the result ofany revisions to these forward-looking statements, which may be made to reflectevents or circumstances after the date hereof, including, without limitation,changes in our business strategy or planned capital expenditures, or to reflectthe occurrence of unanticipated events.

 

# **PARTI**

#  

## **ITEM 1.****                                   DIRECTORS,SENIOR MANAGEMENT AND ADVISERS**

##  

Items 1. A and1.B are not applicable. Item 1.C, Auditors, is as follows:

 

Our external auditorsare Galaz, Yamazaki, Ruíz Urquiza, S.C. (“Galaz”), the Mexican nationalpractice of Deloitte Touche Tohmatsu (“DTT”). Prior to June 10, 2002, ourexternal auditors were Ruiz, Urquiza y Cía., S.C. (“Ruiz Urquiza”), a formermember firm of Andersen Worldwide, which was subject to the quality controlprocedures of Arthur Andersen LLP required for foreign associated firms thatare embodied in the requirements of the Securities and Exchange CommissionPractice Section of the American Institute of Certified Public Accountants.Subsequent to June 9, 2002, Ruiz Urquiza was subject to the quality controlprocedures of Deloitte & Touche LLP. The change in external auditorsresulted from the integration of the partners and personnel of Ruíz Urquizawith DTT’s prior Mexican national practice, Galaz, Gomez Morfín, Chavero,Yamazaki, S.C

 

## **ITEM 2.****                                   OFFERSTATISTICS AND EXPECTED TIMETABLE**

##  

Notapplicable.

 

## **ITEM 3.****                                   KEYINFORMATION**

##  

We haveomitted portions of this item on the basis of Instruction I(2)(a) to Form 10-K.  See Explanatory Note.

 

**SELECTED OPERATING DATA**

 

The followingtable presents selected production and other operating data for oursubsidiaries and us. The data includes production sold to the other operatingunits of Grupo Minero.

 
|                                       |   | **Year ended  December 31,**                              |   |
|--------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                       |   | **1998**                                                  |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                       |   | **(Volumes  in metric tons, unless otherwise indicated)** |   |
| 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 |   |
| Copper 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:(5)        |   |                                                      |   |   |   |   |   |   |   |   |   |
| 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:                       |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper cathodes                            |   | 226,569                                                   |   | 274,990 |   | 244,153 |   | 257,495 |   | 199,905 |   |
| Rod plant production:(3)                   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper rod                                 |   | 50,047                                                    |   | 98,615 |   | 130,611 |   | 129,562 |   | 97,485 |   |
| Precious metal refinery:(4)                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Refined silver                             |   | —                                                    |   | 66 |   | 244 |   | 206 |   | 212 |   |
| Refined gold (kilograms)                   |   | —                                                    |   | 379 |   | 1,312 |   | 1,177 |   | 742 |   |

 

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| (1) |   | Stripping  ratio is the ratio of waste plus leachable ore to ore mined in the material  moved in an open pit operation.                                                        |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Smelter  capacity was increased to 360,000 tons per year in June 1999 with the  addition of a new shaft furnace at the La Caridad Smelter.                                     |
| (3) |   | The rod  plant at La Caridad commenced operations in April 1998.                                                                                                               |
| (4) |   | The precious  metal refinery at La Caridad commenced operations in July 1999.                                                                                                  |
| (5) |   | The  production at the Mexcobre SX-EW facility includes copper scrap  production.  SX-EW is a procedure  involving a combination of solvent extraction and electrowinning |

 

**ITEM 4.****  INFORMATION ONTHE COMPANY**

##  

We haveabbreviated our response to this item on the basis of Instruction I(2)(d) toForm 10-K.  See Explanatory Note.

 

**HISTORY AND DEVELOPMENT OF THE COMPANY**

 

We areMexicana de Cobre, S.A. de C.V. (and together with our subsidiaries, the“Mexcobre Unit”), a subsidiary of Grupo Minero, a Mexican corporation. GrupoMinero owns 96.43% of our capital stock and the balance is owned by the MexicanMine Workers Union.

 

We wereestablished in 1968 pursuant to a concession from the Mexican authorities toexplore the La Caridad property.  Exploitationof the mine began in 1979, while we were under the joint control of NacionalFinanciera, S.N.C., a government development bank, 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 and construction delays associated witha new smelter, we were unable to meet our financial obligations.  In 1988, Fidenome transferred its shares inus to a trust in preparation for our financial restructuring and sale by theMexican government to the private sector. In November 1988, Grupo Minero acquired 91% of our shares through apublic auction for a purchase price of approximately US$ 680 million.

 

**BUSINESS OVERVIEW**

 

*Introduction*

 

The MexcobreUnit operates a major open-pit copper mine in northwestern México at La Caridadand is engaged primarily in the business of exploring, mining and processingcopper. The Mexcobre Unit is currently engaged in the production of copper rod,copper cathodes and copper anodes, with quantities of gold and silver,molybdenum and sulfuric acid.

 

The capacityof our low-cost smelter was expanded in 1999 from 330,000 to 360,000 metric tonsof copper per year. In addition, a new copper refinery was constructed at LaCaridad, which is operating at a capacity of 300,000 metric tons per year, anda copper rod plant was constructed as well. The construction of a preciousmetals refinery as part of the same complex was completed and began operatingin July 1999.

 

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For the yearended December 31, 2002, the Mexcobre Unit accounted for 59.4% and 58.3% ofGrupo Minero’s consolidated net sales and operating loss, respectively and, asof December 31, 2002, the Mexcobre Unit accounted for 59.8% of Grupo Minero’stotal assets.

 

*Metals Prices*

 

Our productsare internationally traded commodities. Prices are established on the Commodity Exchange, Inc. (“Comex”) in NewYork and the London Metal Exchange (“LME”), two of the most important metalexchanges. These exchanges broadly reflect the worldwide balance of supply anddemand of metals. The profitability of our operations is dependent on, and ourfinancial performance is significantly affected by, the international marketprices for the metals we produce, especially for copper and silver.  Metals prices have historically been subjectto wide fluctuations and are affected by numerous factors beyond our control.  These factors, which affect each commodityto varying 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.  Copper prices have been in a generaldownward trend since mid-1997.  Inrecent years, the market price of copper, our principal product, has remainedweak and we do not expect a material improvement in the near term.

 

The followingtable sets forth high, low and average spot prices according to Comex in U.S.dollars for copper for the periods indicated.

 
|               |   | **High**             |   | **Low** |   | **Period  Average** |   |
|--------------------|--------|----------------------|--------|---------|--------|---------------------|--------|
|               |   | **(US$ per  pound)** |   |
| 1996               |   | 1.30                 |   | 0.87    |   | 1.06                |   |
| 1997               |   | 1.22                 |   | 0.77    |   | 1.04                |   |
| 1998               |   | 0.86                 |   | 0.65    |   | 0.75                |   |
| 1999               |   | 0.85                 |   | 0.61    |   | 0.72                |   |
| 2000               |   | 0.93                 |   | 0.74    |   | 0.84                |   |
| 2001:              |   |                 |   |    |   |                |   |
| First quarter      |   | 0.87                 |   | 0.76    |   | 0.82                |   |
| Second quarter     |   | 0.80                 |   | 0.70    |   | 0.75                |   |
| Third quarter      |   | 0.71                 |   | 0.65    |   | 0.67                |   |
| Fourth quarter     |   | 0.72                 |   | 0.60    |   | 0.66                |   |
| Year               |   | 0.87                 |   | 0.60    |   | 0.73                |   |
| 2002:              |   |                 |   |    |   |                |   |
| First quarter      |   | 0.77                 |   | 0.65    |   | 0.72                |   |
| Second quarter     |   | 0.78                 |   | 0.71    |   | 0.74                |   |
| Third quarter      |   | 0.77                 |   | 0.66    |   | 0.69                |   |
| Fourth quarter     |   | 0.76                 |   | 0.66    |   | 0.71                |   |
| Year               |   | 0.78                 |   | 0.65    |   | 0.72                |   |
| 2003:              |   |                 |   |    |   |                |   |
| First quarter      |   | 0.80                 |   | 0.71    |   | 0.76                |   |
| Second quarter (1) |   | 0.79                 |   | 0.71    |   | 0.75                |   |

 

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(1)                 Through June 23,2003.

 

The low levelof copper prices resulted in lower net sales, operating income and net incomein 2002 than might otherwise have been the case.   This trend of low copper prices has continued during the firsthalf of 2003, although there was a slight firming of the price of copper duringthe first quarter of 2003. See Item 5. “Operating and Financial Review andProspects.” If low prices continue or fall further, these effects will persistor be magnified. In the event of a substantial and sustained further decline inprices, we might, under certain adverse market conditions, consider curtailingor modifying certain of our mining and processing operations.

 

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From time totime, we have entered into hedging transactions to provide partial protectionagainst future decreases in the market price of metals, and we may do so whenwe believe the market presents the right conditions. In 2002 and to date in2003, however, we have not entered into any material hedging transactions. SeeItem 11. “Quantitative and Qualitative Disclosures About Market Risk—CommodityPrice Risk.”

 

**ORGANIZATIONAL STRUCTURE**

 

The MexcobreUnit is a part of the business conducted by Grupo Minero through itssubsidiaries. The Mexcobre Unit’s extraction, concentrating and refiningoperations are essentially independent from Grupo Minero’s and its othersubsidiaries, but in other respects its business and operations are integratedwith Grupo Minero’s and its other subsidiaries in significant ways. In particular:(a) the Mexcobre Unit relies on services provided by Grupo Minero and its othersubsidiaries for sales and many administrative functions; (b) the Mexcobre unitsmelts most of the concentrates provided at Mexicana de Cananea, S.A. de C.V.(“Mexcananea” together with its subsidiaries, the “Cananea Unit”) after theclosing of Mexcananea’s smelter in 1999 as a result of a strike; (c) GrupoMinero and its subsidiaries file taxes on a consolidated basis with MineraMéxico, S.A. de C.V. (“Minera México”), which owns 98.85% of the stock of GrupoMinero; and (d) the finances and treasury operations of Grupo Minero and itssubsidiaries are managed jointly.

 

On May 28,2003, Grupo Minero and Minera México held extraordinary shareholders’ meetingsapproving the merger of Grupo Minero with and into Minera México.  Between Grupo Minero and Minera México, themerger 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.

 

**PROPERTY, PLANTS AND EQUIPMENT**

 

*Introduction*

 

The MexcobreUnit is currently engaged in the production of copper rod, copper cathodes andcopper anodes, with quantities of gold and silver, molybdenum and sulfuricacid. It operates the La Caridad mining complex, located in the State ofSonora, 22 kilometers southeast of the town of Nacozari de Garcia and 120kilometers south of the U.S.-Mexico border. It includes an open-pit mine,concentrator, smelter, refinery, rod plant, solvent extraction andelectrowinning (“SX-EW”) plant, lime plant and two sulfuric acid plants. Thesmelter and the sulfuric acid plants, as well as the new refineries and rodplant, are located 23 kilometers from the mine, and the lime plant is situated18 kilometers from the U.S. border. Access is by paved highway and by railroad.The concentrator began operations in June 1979, the molybdenum plant in June1982, the smelter in June 1986, the first sulfuric acid plant in July 1988 andthe SX-EW plant in July 1995; the second sulfuric acid plant began operating inJanuary 1997, the copper refinery in July 1997, the rod plant in April 1998 andthe precious metals refinery in July 1999. The total book value of the Mexcobreunit’s property and equipment was Ps. 16,343.2 million as of December 31, 2002(restated in accordance with Mexican GAAP).

 

Ourheadquarters and sales office are in Mexico City and we also have a domesticpurchasing office in Hermosillo, Sonora.

 

*Geology*

 

The La Caridaddeposit is a porphyry copper deposit typical of those in the Southern basin andrange province in the United States. The main rock types that predate themineralizing processes are, in chronological order, diorite, granodiorite,quartz monzonite and pegmatite. Breccia bodies are also present. Alteration andmine realization patterns at La Caridad are comparable to those of otherporphyry copper deposits in the southwestern United States. Minable coppermineralization is mainly chalcocite, covellite (in a secondary enrichmentblanket) and chalcopyrite.

 

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*Mining Operations*

 

The MexcobreUnit uses a conventional open-pit mining method. The ore body is situatedwithin a mountain top, which gives La Caridad the advantage of a relatively lowwaste-stripping ratio, natural pit drainage and relatively short haul distancesfor both ore and waste. The mining method involves drilling, blasting, loadingand haulage of waste, leach and ore to waste and leach dumps and to the primarycrushers. Drills, trucks and shovels are used in the mining process. The mine,which was originally designed to produce 72,000 metric tons of ore per day, hasbeen expanded to produce 90,000 metric tons of ore per day in order to keeppace with the expansion of the concentrator. An average of 91,005, 89,759 and 67,547metric tons per day of ore were mined in 2000, 2001 and 2002,respectively.  The average coppercontent of the ore mined was 0.491% in 2000, 0.525% in 2001 and 0.535% in 2002.The stripping ratio at the mine (i.e., the ratio of waste materials plus leachableore to ore mined) in 2002 was approximately 1.88 to 1. The mine plan calls foran ultimate pit covering an area six square kilometers. The final pit has beendesigned with 45o maximum slopes, forty 15-meter benches, and a minimum of sixmonths of exposed ore.  Mining equipmentincludes 18 170-ton, seven TITAN 200-ton and 13 240-ton diesel-electric trucks,four electric 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**.**

 

*Concentrating Operations*

 

Theconcentrator is the facility in which ore is processed to separate mineralsfrom the host rock.  The concentrator,which began operations in 1979, was designed to process 72,000 metric tons ofore 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 extractedfrom the mine is processed at the concentrator, which produces a copper-molybdenum concentrate. Concentration consists of crushing and grinding the oreand separating copper-molybdenum ores from waste material by flotation. Thecopper-molybdenum concentrate is further processed at the molybdenum plant intocopper concentrates and molybdenum concentrates. The copper concentrates aresent to the smelter and the molybdenum is exported. The molybdenum recoveryplant has a capacity of 2,000 metric tons per day of copper-molybdenumconcentrates. A lime plant was built in 1980 to produce lime from limestone foruse in the concentrating process. The lime plant has a capacity of 340 metrictons of finished product per day.

 

In 2000, 2001and 2002, the copper ore processed averaged 91,164, 90,025 and 67,789 metrictons per day, respectively, with an average grade of 0.491%, 0.525% and 0.535%copper, respectively, and of 0.0430%, 0.0399% and 0.0403% molybdenum,respectively. During the same periods, 462,196, 503,834 and 333,885 metric tonsof copper concentrates were produced, with average grades of 29.57%, 27.94% and27.53%, respectively. The copper recovery was 83.45% for 2000, 81.57% for 2001and 78.73% for 2002.

 

*Smelting Operations*

 

Copperconcentrates are carried by trucks from the concentrator to the smelter, wherethey are processed and cast into copper anodes of 99.7% purity to be sold torefineries.  Our flash smelter ofOutokumpu design became operational in 1986. The smelter’s initial capacity of180,000 metric tons per year was increased to 330,000 tons as of March 1997with the addition of an El Teniente converter, and was further increased to360,000 metric tons per year with the addition of a new shaft furnace in June1999.  Sulfur dioxide off-gasescollected from the flash furnaces and converters are processed into sulfuricacid at two sulfuric acid plants and sold to third parties.  The first sulfuric acid plant, which startedoperations in July 1988, has a capacity of 2,650 metric tons of sulfuric acidper day, and the second plant, which started operations in January 1997, has acapacity of 2,160 metric tons per day.

 

*Refining Operations*

 

The MexcobreUnit completed in July 1997 the construction of an electrolytic copper refineryat La Caridad. The refinery, which uses the permanent cathode technologydeveloped by the Canadian company Kidd

 

7

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Creek, reached its maximumcapacity of 300,000 metric tons per year in June 1999. The refinery consists ofan anode plant with an AISCO preparation machine, an electrolytic plant, a slimestreatment plant and a number of ancillary installations. The refinery isproducing Grade “A” copper cathode of 99.99% purity. Anodic slimes arerecovered from the refining process and sent to the slimes treatment plantwhere additional copper is extracted. The slimes are then filtered, packed andshipped to the La Caridad precious metals refinery to produce silver andgold.  Construction of this refinery wascompleted in July 1999, when operations commenced.

 

*Copper Rod Plant*

 

A rod plant atthe Mexcobre Unit was completed in April 1998 and reached its maximum annualoperating capacity of 150,000 metric tons by May 1999. The plant is producing 8mm copper rods with a purity of 99.99%.

 

*SX-EW Facilities*

 

Approximately186 million metric tons of leachable ore have been extracted from the LaCaridad open-pit mine with grades between 0.10% to 0.32% sulfide copper. Withan average grade of approximately 0.25% copper, this ore cannot be processedeconomically using the conventional smelting process and has been deposited inleaching dumps. In 1995, Mexcobre completed the construction of a SX-EWfacility at La Caridad, which has allowed processing of this ore and certainleach ore reserves that are unmined and has resulted in a reduction in ourproduction costs of copper. The facility has an annual production capacity of21,900 metric tons and has received ISO 9002 certification from theInternational Standards Organization.

 

The followingtable sets forth capacity, production and utilization information for the MexcobreUnit’s mining, concentrating, smelting and refining facilities in 2002.

 

**MEXICANA DE COBRE, S.A. DE C.V.MINES AND PLANTS CAPACITY UTILIZATION IN 2002**

 
| **Facility**          |   | **Product**     |   | **Capacity****(1)** |   | **Production****(1)** |   | **Capacity  Utilization** |   |
|-----------------------|--------|-----------------|--------|---------------------|--------|-----------------------|--------|---------------------------|--------|
| Mine / Concentrator   |   | Milling ore     |   | 32,400,000          |   | 21,828,000            |   | 67                        | %      |
| Molybdenum Plant      |   | Molybdenum  ore |   | 720,000             |   | 720,000               |   | 100                       | %      |
| Smelting              |   | Anodes          |   | 360,000             |   | 239,031               |   | 66                        | %      |
| Sulfuric Acid Plant   |   | Sulfuric  acid  |   | 1,565,520           |   | 703,801               |   | 45                        | %      |
| SX-EW Plant           |   | Cathodes        |   | 21,900              |   | 19,295                |   | 88                        | %      |
| Copper Refinery       |   | Cathodes        |   | 300,000             |   | 199,905               |   | 67                        | %      |
| Copper Rod Plant      |   | Wire rod        |   | 150,000             |   | 97,485                |   | 65                        | %      |
| Precious Metals Plant |   | Anode slimes    |   | 2,800               |   | 1,157                 |   | 41                        | %      |
| Lime Plant            |   | Lime            |   | 122,400             |   | 96,256                |   | 79                        | %      |

 

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(1) Metric tons per annum.

 

*Reserves*

 

Grupo Minerohas estimates of ore reserves prepared with respect to each of its units as ofJanuary 1 of each year. The ore reserve estimates set forth below have beenprepared by us in conjunction with Grupo Minero’s engineering staff usingevaluation methods generally used in the international mining industry,including standard methods of mapping, drilling, sampling, assaying andmodeling. The reserves may not conform to geological, metallurgical or otherexpectations, and the volume and grade of ore recovered may be below theexpected levels. Lower market prices, increased production costs, reducedrecovery rates and other factors may render proven and probable reservesuneconomic to exploit and result in revision of reserve data from time to time.Reserve data are not indicative of future results of operations.

 

8

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The terms“dilution,” “probable reserves,” “proven reserves,” “reserve,” “total leachingrecovery,” “total metal recoverable” and “total mill recovery,” which are usedin the following table, are defined as follows:

 

**Dilution (extractingloss)****-** The reduction in grade that results frominclusion of waste material from the foot wall and hanging wall into the veinduring exploitation of an underground mine.

 

**Probable reserves -**Reserves for which quantity and grade are computed from information similar tothat used for proven reserves but the sites for inspection, sampling andmeasurement are farther apart or are otherwise less adequately spaced. Thedegree of assurance, although lower than that for proven reserves, is highenough to assume continuity between points of observation.

 

**Proven reserves -**Reserves for which (a) quantity is computed from dimensions revealed inoutcrops, trenches, workings or drill holes; (b) grade and/or quality arecomputed from the results of detailed sampling; and (c) the sites forinspection, sampling and measurement are spaced so closely and the geologiccharacter is sufficiently defined that size, shape, depth and mineral contentof reserves are well established.

 

**Reserve -**That part of a mineral deposit, which could be economically and legallyextracted or produced at the time of the reserve determination.

 

**Total leachingrecovery -** The amount of metal recovered in theleaching process expressed as a percentage of the metal contained in the ore.

 

**Total metalrecoverable -** The amount of metal recoverable afterthe flotation process. The calculation of total metal recoverable takes accountof dilution and total mill recovery.

 

**Total mill recovery -**The amount of metal recovered in the concentrator expressed as a percentage ofthe metal contained in the ore.

 

The followingtable sets forth estimated reserve data of the Mexcobre Unit as of January 1,2003 prepared by our Department of Mining, Planning and Control under thesupervision of Grupo Minero’s Director of Mining, Planning and Control.

 

**Ore Reserves – Open Pit Mines(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                                                          |   | —         |   |

 

The abovereserve estimates take into account estimated dilution (extracting loss) byapplying to mine ore grades a factor derived from historical mine-concentratorgrade differences.

 

9

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## **ITEM 5.****                                   OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

##  

We haveabbreviated our response to this item on the basis of Instruction I(2)(a) toForm 10-K. See Explanatory Note.

 

The followingdiscussion should be read in conjunction with the Financial Statements includedelsewhere in this Annual Report. The Financial Statements have been prepared inaccordance with Mexican GAAP, which differs in certain significant respectsfrom U.S. GAAP. Note 16 to the Financial Statements provides a description ofthe principal differences between Mexican GAAP and U.S. GAAP, as they relate tous, and a reconciliation to U.S. GAAP of stockholders’ equity as of December31, 2001 and 2002 and net income (loss) for the years ended December 31, 2000,2001 and 2002.

 

In accordancewith Mexican GAAP rules on price-level restatement of financial statements, theFinancial Statements included in this Annual Report recognize certain effectsof 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 Note 16 to the Financial Statements.

 

Grupo Minero,our parent company, was unable to comply with certain of its debt covenants andwas in default under certain payment obligations during 2001 and 2002.  Grupo Minero began renegotiating the termsof its indebtedness in the fourth quarter of 2001 and in December 2001, GrupoMinero executed a term sheet with certain of its creditors in which the termsof the restructured debt were described. On April 29, 2003, Grupo Minero entered into a series of definitiveagreements restructuring the terms of its indebtedness.  The most significant of these agreements(the “Common Agreement”) was executed by and among Grupo Minero, us, asguarantor of Grupo Minero’s obligations, Minera México, as guarantor of GrupoMinero’s obligations, several of Grupo Minero’s subsidiaries, as guarantors ofGrupo Minero’s obligations, holders of Grupo Minero’s secured export notes (the“SEN Holders”), several of the banks (the “Bank Lenders”) with which GrupoMinero had previously entered into credit arrangements, HSBC Bank, as collateralagent and distributor of the funds of the SEN Holders, Bank of America, asadministrative agent of the Bank Lenders, and The Bank of New York, as trusteeof Grupo Minero’s secured export notes. The definitive agreements executed in connection with the restructuringof Grupo Minero’s indebtedness, including the Common Agreement, restructure theterms and payment obligations of Grupo Minero’s previously defaulted financialindebtedness and serve to cure and/or waive previous defaults related thereto.  These definitive agreements also providethat we will guarantee, along with Minera México and certain of Grupo Minero’sother subsidiaries, Grupo Minero’s obligations thereunder, which, together withthe Notes, comprise substantially all of Grupo Minero’s financialindebtedness.  At December 31, 2002,Grupo Minero’s total outstanding indebtedness was approximately Ps. 12,821.7million.

 

**Restatement ofPreviously Reported U.S. GAAP Financial Information**

 

Subsequent tothe issuance of our 2001 financial statements, management determined thatpush-down accounting adjustments related to Grupo Minero México’s acquisitionof us had not been properly reported in our U.S. GAAP financial information aspresented in Note 16 to the financial statements included in Item 18.  As a result, the following U.S. GAAPfinancial information has been restated from the amounts previously reported toreflect such 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.                          | 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 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 |   |
|                                                       |        |                              |            |                  |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Critical AccountingPolicies and Estimates**

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in Mexico requires us to make estimates andassumptions that affect reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimates andassumptions are based on historical experience and various other factors thatare believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

We believethat the following accounting policies are the most critical to ourconsolidated financial statements since these policies require significantjudgment or involve complex estimates that are important to the portrayal ofour financial condition and results of operations.

 

*Ore reserves*

 

Weperiodically reevaluate estimates of our ore reserves, which represent ourestimate as to the amount of unmined copper, zinc, lead, silver and goldremaining in existing mine locations that can be produced and sold at aprofit.  Such estimates are based onengineering evaluations derived from samples of drill holes and other openings,combined with assumptions about the applicable metals market prices andproduction costs.  We believe that themetals price assumptions used are consistent with average historical pricesover recent full economic and pricing cycles.

 

The reserveestimates have been adjusted for actual production since the most recentreserve declarations.  Many companiesdeclare their ore reserves on an annual basis. We believe that our estimates as to ore reserves closely approximate theore reserve quantities that would have been determined as of December 31,2002.  The reserve estimates have beencalculated as of January 1 on an annual basis.

 

We use orereserve estimates in determining, among other things, the recoverability oflong-lived assets, the amount of capitalized stripping and units of productionamortization of capitalized mine stripping. We believe this price reflects a valid price assumption over theremaining life of our mines, which is approximately 15 years.  We understand that the SEC has recentlyindicated that in calculating ore reserves, companies should use no more than athree-year historical average price. Price assumptions utilized by us in determining ore reserves and threeyear average market price data are as follows:

 
|       |   | **Price  Assumption Utilized in  Determining Ore Reserves**                                        |   | **Three Year  Average  Market Prices** |   |
|------------|--------|----------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|       |   | **(per pound  in U.S. Dollars, except for gold and silver, which are 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 |   |

 

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We believe theprice assumptions used to determine ore reserves are reasonable and appropriatefor the purpose of managing operations.

 

*Capitalized Expenditures*

 

Stripping costs:  In carrying out operations in open-pit mines, we are required toremove waste materials to access mineral deposits.  Because the concentration of mineral deposits is not evenlydistributed throughout the mines, there are periods during the life of the minewhere we mine more (or better quality) reserves as compared to waste removed,and periods during which we mine less (or lower quality) reserves as comparedto waste removed.

 

For each ofour existing production stage open-pit mines, mine engineers have calculated alife-of-mine stripping ratio, which represents our estimate of the total amountof waste to be incurred divided by the estimated total proven and probablereserve at each such mine.  The minestripping ratios are used to determine the amount of mine production costs tobe charged against earnings.  In periodswhen the actual ratio of waste to mineral ore extracted exceeds thelife-of-mine stripping ratios, we capitalize production costs associated withmining operations in proportion to the excess waste mined.  Such capitalized costs are included in netcapitalized mine stripping, and are amortized using the units of productionmethod.  Copper resources contained inpiles of leachable materials that have been extracted from the mines are notincluded in the determination of units of production amortization.  Conversely, in periods when the actual ratioof waste to mineral ore mined is less than the life-of-mine stripping ratios,we reduce the net capitalized mine stripping asset proportionally with a chargeof amortization expense.

 

We understandthat the SEC is currently evaluating methods for accounting for mine strippingcosts.  In addition, we are aware thatin recent public comments, the SEC has expressed unfavorable views towards ourmethod of accounting for mine stripping costs, which is also shared by otherswithin the industry.  However, webelieve that our method of accounting for mine stripping costs, whicheffectively results in the smoothing of production costs over the lives of ourmines, accurately reflects the results and operations of our mining operationsand also facilitates improved matching of revenues and related expenses.

 

During 2002,2001 and 2000, actual stripping ratios were higher than the life-of-minestripping ratios for our mines, which resulted in the capitalization of minecosts associated with the additional waste mined.  If we were to have expensed all production costs associated withits mining operations as incurred, net operating costs expenses would haveincreased by Ps. 28.2 million, Ps. 104.9 million and Ps. 121.9million, for the years ended December 31, 2002, 2001 and 2000,respectively.

 

Estimatedlife-of-mine stripping ratios for each of the Mexcobre Unit mines for the yearsended December 31, 2002, 2001 and 2000, were as follows:

 
|   |   | **Estimated  Life-of-Mine Stripping  Ratio for Mexcobre Unit** |   |
|--------|--------|----------------------------------------------------------------|--------|
| 2002   |   | 1.60                                                           |   |
| 2001   |   | 1.61                                                           |   |
| 2000   |   | 1.08                                                           |   |

 

Mine development costs: Exploration costsincurred before site operation are expensed as incurred, except forexpenditures related to specific properties where proven and probable mineralresources have been confirmed, in which case the expenditures are capitalizedas mine development costs. Capitalized mine development costs are amortized ona straight-line basis over the estimated useful lives of the correspondingproven metal reserves.

 

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*Employee benefit obligations*

 

In accordancewith Mexican Labor Law and our collective bargaining agreements, a liabilityresults from the voluntary departure of employees who have worked for a companyfor a minimum number of years. In addition, in accordance with the FederalLabor Law, companies have obligations resulting from indemnities and senioritypremiums payable to employees terminated under certain circumstances. We recordthe liabilities from voluntary employee departures, indemnities and senioritypremiums as they accrue, in accordance with actuarial computations.

 

When there isa significant reduction in personnel due to a restructuring of the labor forceor the closing of a plant, the corresponding costs, net of the correspondingreduction in projected benefit obligations and other related items, are chargedto results.

 

We areaccruing a liability that at present value will cover the projected benefitobligations owed to our employees at their respective estimated retirementdates.  Payments are charged to resultsin the period in which they are made. Our plan assets related to voluntaryemployee departures and seniority premiums consist of investments in Mexicangovernment treasury certificates (40%) and various equity securities of largeMexican companies (60%).

 

*Revenue recognition*

 

Most of ourcopper is sold as refined metal under annual contracts or on a spot sale basis.The balance of our copper production is sold in the form of concentrate undercontracts of one to three years in duration. Silver and gold are sold undermonthly contracts or in spot sales.

 

Beginning in2000, revenue from sales of copper concentrate is recorded in the month theproduct is delivered to customers based on prices as provided in the salescontracts.  When the price is subject toadjustment for changes in market prices between the time of shipment tocustomers and the settlement date, since we have substantially completed ourobligations under the sales contract and title has passed to the customer,revenue is recognized based on market prices prevailing at the shipment date,and the final price is determined within three months of shipment.  Revenue with respect to these sales isadjusted in the period of settlement to reflect final pricing and in periodsprior to settlement to reflect any decline in market prices that may occurbetween shipment and settlement. The cumulative effect of this change inaccounting for revenue recognition at January 1, 2000 was not significant.

 

**RESULTS OF OPERATIONS FOR 2002 AND 2001**

 

We reported anoperating loss of Ps. 428.4 million in 2002, compared to an operating loss ofPs. 183.0 million in 2001. The decrease was primarily due to lower salesvolumes.

 

We reported anet income of Ps. 406.2 million in 2002, compared to net loss of Ps. 216.7million in 2001. The increase in net income was primarily due to foreignexchange related gain.

 

*Net Sales*

 

Net sales in2002 were Ps. 4,265.9 million, 24.7% lower than net sales in 2001, which werePs. 5,662.6 million. This decrease was primarily due to a decline in coppervolume sales.

 

13

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*Cost of sales*

 

Cost of salesin 2002 was Ps. 3,639.3 million, 23.8% lower than in 2001, due primarily to adecrease in the amount of copper concentrates purchased and lower copper volumesales.  In 2001, cost of sales was Ps.4,776.0 million.  Cost of sales as apercentage of net sales increased from 84.3% in 2001 to 85.3% in 2002.

 

*Administrative expenses*

 

Administrativeexpenses in 2002 were Ps. 92.1 million, 2.1% lower than in 2001.  In 2001 administrative expenses were Ps.94.1 million.  The main reason for thisdecline was a reduction in the amount charged by Servicios de ApoyoAdministrativos, S.A. de C.V., our affiliate provider of administrativeservices.

 

*Depreciation and amortization*

 

Depreciationand amortization expense in 2002 was Ps. 962.9 million, 1.29% lower than in2001.  Depreciation and amortizationexpense in 2001 was Ps. 975.5 million.

 

*Net comprehensive financing cost*

 

Netcomprehensive financing cost represents the net effect of interest expense,interest income, foreign exchange gain or loss and gain or loss on net monetaryposition, which arises from the effect of inflation on the average net balanceof monetary assets. The net comprehensive financing cost has been affected by(i) the rates of return on short-term investments; (ii) the level of ourindebtedness; (iii) the level of our current liabilities; (iv) the rate ofinflation; and (v) the rate of devaluation.

 

Netcomprehensive financing cost resulted in income of Ps. 706.3 million in 2002,compared to an expense of Ps. 117.2 million in 2001. The change from 2001 to2002 was primarily due to recognition of Ps. 705.4 million of exchange gain in2002, compared to an exchange loss of Ps. 217.2 million in 2001.

 

*Other income, net*

 

Other income,net was Ps. 1.9 million in 2002, compared to Ps. 21.2 million in 2001, adecrease of 91.2%. This income in 2001 was primarily due to the sale of naturalgas excess to Enron.

 

*Income taxes*

 

Our taxreturns and those of our subsidiaries are consolidated and filed at the levelof Minera México. Each year we and each of our subsidiaries pays Minera Méxicothe amount of tax, if any, each subsidiary or we would have paid had they or wefiled a separate tax return. In the event Minera México reduces itsconsolidated tax liability through the use of tax loss carryforwards or othertax benefits with respect to us or any of our subsidiaries, Minera México isobligated to reimburse us or such subsidiary for such tax benefit at the timesuch benefit would otherwise have reduced the tax payable by us or suchsubsidiary. At December 31, 2002, we had tax loss carryforwards amounting toPs. 1,707.0 million, all of which had been applied to reduce the income taxesof Minera México.

 

Through 2001,the income tax rate was 35% with the obligation to pay this tax each year, at arate of 30% and the option of deferring payment of the remaining 5% untilprofits are distributed. The new tax law enacted January 1, 2002, eliminatedthe option to defer the 5% portion of the income tax payment and reduces the35% tax rate by one percentage point each year until 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.

 

We are subjectto income tax and to an alternative minimum corporate tax known as asset tax,which is currently assessed at 1.8% on the net average balances of certainassets and liabilities. Our subsidiaries and we are also required under Mexicanlaw to pay employees, in addition to their normal compensation and benefits,profit sharing in amounts based on the taxable income of the employing entity.

 

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The aggregateeffective rate of income tax was negative 46.9% in 2002, compared to 36.2% in2001. The difference between the aggregate effective rate of income tax of 2002and 2001 was primarily due to the decline in our deferred taxes resulting froma decrease in the statutory income tax rate.

 

As of December31, 2002, we made reserves related to tax loss carryforwards and recoverable assetstaxes, which will be indexed for inflation through the year in which they areutilized in the amounts of Ps. 1,707.0 million and Ps. 12.5 million,respectively.

 

## **ITEM 6.****                                   DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

##  

We haveomitted this item on the basis of Instruction I(2)(c) to Form 10-K. SeeExplanatory Note.

 

## **ITEM 7.****                                   MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

##  

We haveomitted this item on the basis of Instruction I(2)(c) to Form 10-K.  See Explanatory Note.

 

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

##  

**CONSOLIDATED STATEMENTS AND OTHER FINANCIALINFORMATION**

 

*Consolidated Financial Statements*

 

See ourConsolidated Financial Statements at Annex F (as restated).

 

*Legal Proceedings*

 

*Ejido*

 

In July 1991,the agricultural community of Pilares de Nacozari Ejido (the “Ejido”) commencedan action (“Amparo”) in the first federal district court in Sonora, Mexicoagainst the Ministry of Agrarian Reform (the “Ministry”), alleging that theexpropriation of approximately 1,500 hectares of land on which certain of ourfacilities are currently located, which land is adjacent to the land where themine is located, was improper.  We werenot named as a defendant in the Amparo, although we were included as aninterested third party due to our ownership of the land. We bought the land inquestion in 1976 from the Banco Nacional de Obras y Servicios Publicos, whichhad previously acquired it as a beneficiary of the expropriation by theMinistry in 1973.

 

The claimalleged by the Ejido states that the Ministry failed to notify one of threelegal representatives of the Ejido of the expropriation.  In 1994, the Mexican District Court Judge ofHermosillo granted the Amparo ruling the expropriation by the Ministry legallyvoid and in 1997 made a second ruling ordering the Ministry to return theland.  As a result of the second ruling,we filed an ancillary action alleging the impossibility of returning the land.

 

There has beenno final resolution of this matter, but the Mexican District Court Judge ofHermosillo before whom this matter is presently docketed has twice beforeissued a ruling stating that it is impossible to return the land as a means ofrestitution.  A third and final rulingfrom the Mexican District Court Judge of Hermosillo is expected soon.  We believe that if the Ejido requestsindemnity instead of a return of the land, our financial responsibility withrespect to such compensation would not be material.

 

*Coremi Royalties*

 

When we originally received mining concessions related to our “LaCaridad” unit in 1970, we were forced to pay royalties to the Council ofMineral Resources (“Coremi”).  When theMining Law came into effect in 1992, however, said obligation wasabrogated.  Coremi, the Mexican****Superintendentof Mining and the Mexican Secretary of Economy, however, have interpreted in adifferent way from us the inception of the Mining Law and, in 1995, Coremi andwe initiated series of legal actions that are still pending.  In August 2002, Coremi filed with the ThirdFederal District Judge in Civil Matter, certain civilian actions, demandingfrom us the payment of royalties due since 1997.  We answered and denied Coremi’s claims in October 2002.  We believe that any such payment related tothis matter would not be material to us.

 

15

----

 

*La Caridad - Mining Concessions*

 

Since 1995,the Mexican Superintendent of Mining has requested proof from us that wesatisfied our obligation to pay certain “discovery bonuses” allegedly due inconnection with the grant of 13 mining concessions at La Caridad.  If said proof is not provided, the MexicanSuperintendent of Mining has threatened to cancel our concessions.  We have challenged these demands by filing awrit before a hierarchically superior administrative body, in which we stateour “defenses” against the alleged claims and by filing an Amparo on May 2,2003, with the Tenth District Federal Judge in Administrative Matters.  We believe that our obligation to make thedemanded payments was abrogated when the Mining Law came into effect inNovember 1992, that the Mexican Superintendent of Mining confuses “bonuses”with “royalties” and that any claims related thereto are without merit.

 

We areinvolved in various other legal proceedings incidental to our operations, butwe do not believe that decisions in any such proceedings would, individually orin the aggregate, have a material adverse effect on our financial position andresults of operations.

 

## **ITEM 9.****                                   THEOFFER AND LISTING**

##  

The Notes arenot traded on any organized market.

 

## **ITEM 10.****                            ADDITIONAL INFORMATION**

##  

We haveomitted this item because the securities for which there is a reportingobligation under Section 15(d) of the Exchange Act consist exclusively ofguarantees of securities of Grupo Minero, our parent company.  See Explanatory Note.

 

## **ITEM 11.****                            QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

##  

In the normalcourse of business, we hold or issue financial instruments that expose us tofinancial risks involving fluctuations in currency exchange rates and interestrates. Also, commodity price movements affect our metal business. We may usederivative financial and commodity instruments to manage these risks. Allfinancial instruments held by us are for purposes other than trading.

 

*Foreign Exchange Risk*

 

Our exposureto market risk associated with changes in foreign currency exchange ratesrelates primarily to our liabilities, which are denominated in U.S.dollars.  However, we have a naturalhedge that mitigates much of our exposure in that all of our sales aredenominated in U.S. dollars.

 

Although allof our sales are priced and invoiced in U.S. dollars, a substantial portion ofour cost of sales (approximately 41% in 2002) 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. dollarstherefore exposing us to foreign exchange losses when the peso declines invalue against the U.S. dollar.

 

*Commodity Price Risk*

 

Our exposureto commodity price fluctuations relates primarily to copper, as well as otherindustrial and precious metals we produce. Our selling prices dependprincipally upon market prices for metals, especially copper and, to a lesserextent, silver. Such prices can fluctuate widely and are beyond our control.Since the metals

 

16

----

 

produced by us can generally besold at prevailing market prices, our results of operations are highlysensitive to such prices. See Item 4. “Information on the Company—MetalsPrices.”

 

From time totime we have entered into hedging transactions to provide partial protectionagainst future decreases in the market price of metals, and we may do so whenwe believe the market presents the right conditions. Our policy is to enterinto over-the-counter transactions with major international participants in thecommodities options and futures markets. Hedging transactions may take the formof put options that effectively establish a minimum price for our sale of aspecified volume of a metal, or they may take the form of swaps, forward salesor futures contracts that fix the price for a specified volume of a metal. Wemay also enter into combinations of transactions, with a view to establishingminimum prices for our metals products while preserving possible benefits to usif market prices increase. Our senior management committee, currentlyconsisting of the Executive President of Grupo México, the President of Financeand Administration of Grupo México and the manager of risk management,generally makes decisions on each transaction and on hedging policy centrallyto ensure that the risks and benefits have been appropriately evaluated.

 

Depending uponmarket conditions, we may utilize swap contracts to hedge against adversemovements in the price of metals we produce. For example, swap contracts aresometimes used to fix the selling price of copper when we enter into a supplycontract.

 

As of December31, 2001, we did not hold any derivative commodity instruments.

 

The tablebelow provides information about our inventory of metals that are sensitive tochanges in commodity prices. The table presents the fair value based on spotprices as of December 31, 2002.

 

| **Inventory of Metals** |   | **(Tons)** |   | **Fair Value  (Millions of constant pesos as of  December 31, 2002)** |   |
|-------------------------|--------|------------|--------|-----------------------------------------------------------------------|--------|
| Copper                  |   | 26,885     |   | Ps.                                                                   | 426.0  |   |
| Silver                  |   | 39.8       |   | 63.3                                                                  |   |
| Gold                    |   | .145       |   | 16.7                                                                  |   |
|                         |        |            |        |                                                                       |        |  |

 

*Sensitivity Analysis*

 

We have netfinancial assets denominated in U.S. dollars, and consequently, a hypotheticaland instantaneous 10% devaluation of the peso against the U.S. dollar wouldhave resulted in an estimated foreign exchange gain of approximately Ps. 246.8million, reflecting the increased value in pesos of our foreign currencydenominated assets.

 

## **ITEM 12.****                            DESCRIPTION OF SECURITIESOTHER THAN EQUITY SECURITIES**

##  

Notapplicable.

 

# **PART II**

#  

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

##  

None.

 

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

##  

We haveomitted this item because the securities for which there is a reportingobligation under Section 15(d) of the Exchange Act consist exclusively ofguarantees of securities of Grupo Minero, our parent company.  See Explanatory Note.

 

17

----

 

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

##  

### (a)            Within the 90 days prior to thefiling date of this annual report, we carried out an evaluation under thesupervision and with the participation of our management, including our (i)President and General Director and (ii) Finance Director, of the effectivenessof the design and operation of our disclosure controls and procedures.  Based upon and as of the date of ourevaluation, our (i) President and General Director and (ii) Finance Directorconcluded that our disclosure controls and procedures were adequate anddesigned 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)           There were no significant changes inour internal controls or, to our knowledge, in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

###  

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

##  

# **PART III**

 

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

##  

Notapplicable.

 

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

##  

Our Consolidated Financial Statements (asrestated) are included in this Annual Report beginning at page 1 of Annex F andinclude:

 

Independent Auditors’ Report

 

Consolidated Balance Sheets as of December 31, 2002 and 2001

 

ConsolidatedStatements of Income (Loss) for the years ended December 31, 2002, 2001 and2000

 

Consolidated Statements of Changes inStockholders’ 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 Consolidated Financial Statements

 

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

##  

| **Exhibit  Number** |   | **Document**                                                                                                                       |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| 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.               |

 

18

----

 

**SIGNATURES**

 

The registranthereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this AnnualReport on its behalf.

 
|                       | MEXICANA DE  COBRE, S.A. DE C.V. |
|----------------------------|----------------------------------|
|                       |                             |
|                       |                             |
|                       | By:                              |  /s/  Daniel Tellechea Salido |   |
|                       |                             | Name: Daniel  Tellechea Salido |
|                       |                             | Title:  President Finance and Administration |
|                       |                             |
|                       |                             |
|                       | By:                              |  /s/  Ernesto Duran Trinidad |   |
|                       |                             | Name:  Ernesto Duran Trinidad |
|                       |                             | Title:  Corporate Comptroller |
|                       |                             |   |
|                       |                             |   |
| Dated:  July 15, 2003 |                             |   |

 

19

----

 

**Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002**

 

I, Xavier García de QuevedoTopete, President and General Director of Mexicana de Cobre, S.A. de C.V.certify that:

 

1.             I have reviewed this annual report on Form 20-F ofMexicana de Cobre, S.A. de C.V.;

 

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflow of the registrant as of, and for, the periods presented in this annualreport;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

(a)           designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

(c)           presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

(a)           all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this annual report whether there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date: July  15, 2003 |   |
|----------------------|--------|
|                 |   |
|                 |   |
|                 | By:    | /s/ Xavier  García de Quevedo Topete |   |
|                 |   | Name: | Xavier  García de Quevedo Topete |
|                 |   | Title: | President  and General Director |
|                      |        |  |  |  |

 

20

----

 

**Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002**

 

I, Jesus Eduardo GonzálezFélix, President and General Director of Mexicana de Cobre, S.A. de C.V.certify that:

 

1.             I have reviewed this annual report on Form 20-F ofMexicana de Cobre, S.A. de C.V.;

 

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflow of the registrant as of, and for, the periods presented in this annualreport;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

(a)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

(c)           presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

(a)           all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this annual report whether there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date: July  15, 2003 |   |
|----------------------|--------|
|                 |   |
|                 |   |
|                 | By:    | /s/ Jesus  Eduardo González Félix |   |
|                 |   | Name: | Jesus  Eduardo González Félix |
|                 |   | Title: | Finance  Director |
|                      |        |  |  |  |

 

21

----

 

**ANNEXF**

 

FINANCIAL STATEMENTS OF MEXICANA DE COBRE S.A. DE C.V.

 

 

----

 

**INDEX**

 

**MEXICANA DE COBRE,S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL 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

 

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

 

We have audited the accompanying consolidated balance sheet of Mexicanade Cobre, S.A. de C.V. and Subsidiaries (Mexican corporations collectivelyreferred to as the “Company”) as of December 31, 2002, and the relatedconsolidated statements of operations, changes in stockholders’ equity andchanges in financial position for the year then ended, all expressed inthousands of Mexican pesos of purchasing power as of December 31, 2002.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand 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 includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Mexicana de Cobre, S.A. deC.V. and Subsidiaries as of December 31, 2002, and the results of theiroperations, changes in their stockholders’ equity and changes in theirfinancial position for the year then ended, in conformity with accountingprinciples generally accepted in Mexico.

 

Accounting principles generally accepted in Mexico vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America. The application of the latter would have affected thedetermination of net income for the year ended December 31, 2002 and thedetermination of stockholders’ equity as of that date to the extent summarizedin Note 16.

 

Our audit also comprehended the translation of Mexican peso amountsinto U.S. dollar amounts and, in our opinion, such translation has been made inconformity with the basis stated in Note 2. Such U.S. dollar amounts arepresented solely for the convenience of readers.

 
| /s/ Deloitte  & Touche |
|----------------------------|
| Deloitte & Touche      |
|                       |
| Mexico City, Mexico        |
| June 13,  2003             |
|                       |

F-2

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

 

To the Stockholders of

 

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

 

We have audited the accompanying consolidated balance sheets ofMexicana de Cobre, S.A. de C.V. and Subsidiaries (Mexican corporationscollectively referred to as the “Company”) as of December 31, 2001, and therelated consolidated statements of operations, changes in stockholders’ equityand changes in financial position for the years ended December 31, 2001 and2000, all expressed in thousands of Mexican pesos of purchasing power as ofDecember 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 audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand 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 includes assessing the accounting principles used andsignificant estimates made by the Company’s management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Mexicana deCobre, S.A. de C.V. and Subsidiaries as of December 31, 2001, and the resultsof their operations and the changes in their financial position for the yearsended December 31, 2001 and 2000, in conformity with accounting principlesgenerally accepted in Mexico.

 

In 2000, the Company adopted the regulations of revised Bulletin D-4,“Accounting for Income and Asset Taxes and Employee Profit Sharing”. Theinitial effect of adopting this bulletin was to record the deferred income taxeffects based on the cumulative effect of temporary differences as of January1, 2000 as a long-term liability, directly charging stockholders’ equity in thenew initial effect of deferred income taxes account for 2,568,714 thousandMexican pesos. Also, the provision for income taxes of 2000 increased by209,485 thousand Mexican pesos due to the deferred effects of the year.

 

As explained in Note 4, Bulletin C-2, “Financial Instruments”, becameeffective January 1, 2001.  Thisbulletin 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.

 

F-3

----

 

Accounting practices used by the Company in preparing the accompanyingconsolidated financial statements conform with accounting principles generallyaccepted in Mexico but do not conform with accounting principles generallyaccepted in the United States of America (U.S GAAP).  A description of these differences and a reconciliation ofconsolidated net income (loss) and stockholders’ equity to U.S. GAAP aspermitted by Form 20-F, which allows omission of the requirement to quantify,in the U.S. GAAP reconciliation, the differences attributable to the effects ofcomprehensive inflation adjustments recorded locally, are set forth in Note16.  As discussed in Note 16, the 2001and 2000 U.S. GAAP reconciliations have been restated.

 

 

Ruiz, Urquiza y Cía., S. C.

(A member firmof 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 restatement to 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

----

 

**MEXICANA DE COBRE, S.A. DE C.V. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OF DECEMBER 31,2002 AND 2001**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

**AS OF DECEMBER 31,2002**

**(Stated in thousandsof 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)                                                                                 |   | $                                            | 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 partof these consolidated financial statements.

 

F-5

----

 

**MEXICANA DE COBRE,S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDEDDECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

**AS OF DECEMBER 31,2002**

**(Stated in thousandsof Mexican pesos (Ps.) and thousands of U.S. dollars ($), except per share andshare 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 part of these consolidated financialstatements.

 

F-6

----

 

**MEXICANA DE COBRE,S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDEDDECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

**AS OF DECEMBER 31,2002**

**(Stated in thousandsof Mexican pesos (Ps.) and thousands of U.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 part of these consolidated financialstatements.

 

F-7

----

 

**MEXICANA DE COBRE, S.A. DE C.V. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARS ENDEDDECEMBER 31, 2002, 2001 AND 2000**

**EXPRESSED IN CONSTANTMEXICAN PESOS**

**AS OF DECEMBER 31,2002**

**(Stated in thousandsof Mexican pesos (Ps.) and thousands of U.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 part of these consolidated financialstatements.

 

F-8

----

 

**MEXICANA DE COBRE, S.A. DE C. V. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**EXPRESSED IN CONSTANT MEXICAN PESOS AS OFDECEMBER 31, 2002**

**(Stated in thousandsof Mexican pesos (Ps.) and thousands of U.S. dollars ($), except per sharedata)**

 

# **1.  DESCRIPTION OFBUSINESS AND SIGNIFICANT EVENTS:**

#  

Mexicana de Cobre, S.A. de C.V. and Subsidiaries (collectively the “Company”)is a 96.43% owned subsidiary 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 on the Company’s operations**

 

During 2002, the Company continued to implement different measures atits mining operations to counteract the unfavorable conditions in the metalsmarket. Economic growth in the U.S. and other countries worldwide did not meetexpectations. Metals prices, especially copper, remained at their lowest levelsin years and were subject to a high degree of volatility despite sustaineddemand from China. After dropping in 2001, in 2002, the average market price ofcopper fell by an additional 1.2%; zinc dropped by 12.2%; and lead fell by5.1%, over the prior year. Only precious metals prices improved; silverincreased by 4.5% and gold by 14.4% 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

 

**Renegotiation ofGMM’s long-term debt and compliance with restrictions**

 

Under pressure due to low metals prices and the resulting drop inliquidity during the past few years, GMM was obligated to restructure its debtas a result of its failure to make scheduled payments and its noncompliancewith certain financial covenants contained in its debt agreements. In April 2003, GMM successfully restructured itsindebteness with a number of institutional investors, banking institutions andagencies. This restructuring has resulted in greater financial and operatingflexibility and allows GMM’s management to focus on increasing the productivityand profitability 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 amount of $880.9million with respect to the holders of its subsidiaries’ secured export notesand to the banking syndicate headed by Bank of America occurred on April 29,2003 with the signing of definitive documentation. This restructuring processconsisted 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”.

 

In addition, as a result of therestructuring, Mexicana de Cobre, S.A. de C.V. is a guarantor of substantiallyall of GMM’s financial indebtedness.

 

F-9

----

 

**2.  BASIS OF PRESENTATION:**

 

The accompanying consolidated financial statements of the Company areprepared in accordance with the accounting principles generally accepted inMexico (“Mexican GAAP”), which differ in certain significant respects fromthose applicable in the United States of America (“U.S. GAAP”). A descriptionof these differences and their effects on net income (loss) and stockholders’equity is set forth in Note 16 (as restated).

 

The preparation of the financial statements in conformity with MexicanGAAP, along with the reconciliation to U.S. GAAP, requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and the accompanying notes. While these estimates andassumptions are based on management’s best knowledge of current events, actualresults may differ.

 

The financial statements are stated in Mexican pesos. The translationof the Company pesos into U.S. dollars is included solely for the convenienceof the reader, using the exchange rate published by Banco de México as ofDecember 31, 2002 of Ps.10.3125 to U.S.$1.00. The convenience translationshould not be construed as a representation that the Mexican peso amounts havebeen, could have been, or could in the future be, converted into U.S. dollarsat this or any other rate of exchange.

 

**3.  BASIS OF CONSOLIDATION:**

 

The accompanying consolidated financial statements include thefinancial statements of Mexcobre and the following subsidiary companies.  All significant intercompany balances andtransactions have been eliminated 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:**

** **

**Effectsof in accounting principles adopted during the periods presented**

 

Effective January 1, 2001, the Companyadopted Bulletin C-2, “Financial Instruments”. This Bulletin establishes the methodology for valuing andrecording financial instruments and requires recognition of certain financialinstruments on the balance sheet as either assets or liabilities at fairvalues, affecting the results of the period for any valuation adjustments ofsuch instruments.

** **

**Recognitionof the effects of inflation in the financial statements**

 

The Company restates all of its financial statements in terms of thepurchasing power of the Mexican pesos as of the end of the latest period,thereby comprehensively recognizing the effects of inflation. Accordingly, thefinancial statements of the prior year have been restated in terms of Mexicanpesos of the latest period and their amounts presented herein differ from thoseoriginally reported in terms of Mexican pesos 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.

 

F-10

----

 

The consolidated financial statements havebeen restated as follows:

 

•                                          *Balance sheets:*

 

Primary metal inventories arestated at current international metal market quotations at year-end, less therestated 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 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 inshares of associated companies and unconsolidated subsidiaries is accounted forunder the equity method, based on the Mexican GAAP financial statements of suchcompanies, restated by a factor derived fron the NCPI.

 

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.

 

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 monetaryposition, which represents the erosion of the purchasing power of monetaryitems 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.

 

•                                          *In the other financial statements:*

 

The statements of changes infinancial position presents the changes in constant Mexican pesos, according tothe financial position at prior year-end, restated to Mexican pesos of the mostrecent year end.

 

The gain or loss resulting frominflation presented in the statement of changes in stockholders’ equity iscomprised mainly of the income or loss resulting from holding nonmonetaryassets, which represents the change in the specific price level of these assetsand its effect on results of operations compared to the change in the NCPI.

 

**Temporary investments**

 

Temporary investments areprimarily short-term investment funds and bank deposits, which are valued atmarket.

 

**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.

 

F-11

----

 

**Deferredcharges**

 

•                                          *Stripping costs*

 

Stripping costsare costs associated with the removal of waste materials after production hascommenced. 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 lixiviable materials that have beenextracted from the mines are not included in the determination of units ofproduction amortization.

 

The Company’s policy results in the smoothingof stripping costs over the life of the mine and, in view of the Company,better facilitates the matching ofmine production costs over 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.

 

•                                          *Mine development costs*

 

Exploration costs incurred before the startof operations of a site are expensed as incurred, except for expenditures onspecific properties where the presenceof proven and probable mineral resources have been confirmed, in which case,the expenditures 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.

 

 

**Hedging activities**

 

Derivative instruments may be used to manageexposure to market risk from changes in commodity prices (metal and energyproducts), interest rates or the value of the Company’s assets and liabilities.Derivative instruments, which are designated as hedges, must be deemedeffective at reducing the risk associated with the exposure being hedged andmust be designated as a hedge at the inception of the contract.

 

The Company’s derivative transactions during2002 and 2001 were limited in volume and restricted to risk control, and as ofDecember 31, 2002 and 2001 there are no outstanding hedging derivatives. TheCompany does not maintain or issue financial instruments for speculativepurposes. Decisions with respect to each transaction and to the overall hedgingpolicies are made by an Executive Risk Committee. The objective of this committee,which is currently comprised of the Chairman of the Board of Directors, theDirector of Management and Finance and the Assistant Director of RiskManagement, is to ensure that the risks and benefits have been appropriately assessed.

 

The Companymay enter into swap and option transactions or a combination of both to reducethe risk of purchase or sales price fluctuations. For instance, for the purposeof protecting metal prices, the Company may purchase put options or createsynthetic put options to reduce or eliminate the risk of metal price declinesbelow the option strike price on a portion of its anticipated futureproduction. The cost of the options is amortized using the straight-line methodover the period in which the options can be exercised. Gains or losses derivingfrom the sale or exercise of the options, after deducting the acquisitionexpenses not amortized, are recognized in the results of the period in whichthe guaranteed production 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 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.

 

F-12

----

 

**Swap****and****futures****agreements**

 

Swap andfutures agreements are used primarily to fix the price of fuel consumption fora determined period or to limit the cost of debt contracted at floatinginterest rates.

 

Interest rateswaps are used to limit the effect of interest rate increases on any floatingrate debt. The differential to be paid or received as interest rates change isrecorded in interest expense in the statement of income. Fuel swaps limit theeffect of the increases in fuel prices. The differential paid or received aschanges in the price of fuel occur is recorded as part of cost of sales.  Foreign currency swaps limit the effect ofexchange rate changes on future cash flow obligations denominated in foreigncurrencies. The differential to be paid or received as exchange rates change isincluded as part 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 share of associated companies**

 

This item is accounted for using the equity method and restated basedon factors derived from the NCPI.

 

**Employee benefit obligations**

 

In accordance with Mexican Labor Law and theCompany’s collective 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 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.

 

When there isa significant reduction in personnel due to the restructuring of the laborforce or the closing of a plant, the corresponding indemnity costs, net of thecorresponding reduction in the projected benefit obligation and the relateditems to be amortized, are charged to results.

 

Accordingly, a liability isbeing accrued, 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 are 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 ofsecurities of Mexican companies is volatile to varying degrees, and may beaffected by economic and market conditions in other emerging market countries.

 

**Income tax, tax on assets andemployee profit sharing**

 

The Company determines and records its incometax, tax on assets and employee profit sharing in accordance with the taxlegislation and revised Bulletin D-4, “Tratamiento Contable del Impuesto sobrela 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 on assets is determinedusing the 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 definedperiod.

 

The balance of deferred taxes is comprised ofmonetary and non-monetary items, based on the temporary differences from whichthey are derived.  The balance isclassified as a non-current, regardless of when the temporary differences areexpected to reverse.

 

F-13

----

 

The deferred tax benefit or provision for theyear to be included in the results of operations is determined by comparing thedeferred tax balance at end of the year to the balance at the beginning of theyear, excluding any temporary differences that are recorded directly in stockholders’equity.  The deferred taxes related tosuch temporary differences are recorded in the same stockholder’s equityaccount.  The initial effect of theapplication of this new bulletin as of January 1, 2000 was recorded instockholder’s equity in the initial effect of deferred income taxes account.

 

**Revenue recognition**

 

Silver and gold are sold undermonthly contracts or on a spot sale basis. Most of the Company’s copper is sold as refined metal under annualcontracts or on a spot sale basis.  The balance of the Company’s copper production issold in the form of concentrates under contracts with terms of one to threeyears.

 

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.  Forsales of copper products wherein customers are given the option to select amonthly average provided by the London Metal Exchange (“LME”) or the CommodityExchange, Inc. (“COMEX”) price ranging between one and three months subsequentto shipment, revenue is recorded at a provisional price at the time ofshipment, based on LME or COMEX spot prices for copper sales.  Theprovisionally priced sales are adjusted to reflect spot prices at the end of eachmonth until a final adjustment is made to the price of the shipments uponsettlement with customers pursuant to the terms of the contract.

 

**Net comprehensive financing cost (income)**

 

The net comprehensive financing cost includesall financial revenues and expenses, such as interest, exchange gains or lossesand gains or losses on monetary 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 bydividing income (loss) of the majority interest, by the weighted average numberof shares outstanding.

 

**Comprehensive income (loss)**

 

Comprehensive income (loss) is comprised ofthe consolidated net income (loss) for the period plus any gains or losses thataccording to Mexican GAAP are presented directly in stockholders’ equity, suchas the gain or loss from holding nonmonetary assets and the additionalliability for employee benefit obligations.

 

**5.  CASH AND TEMPORARY INVESTMENTS:**

 

Cash andtemporary investment are comprised as follows:

 

|                   |   | **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:**

 

Inventories were 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 equipment were 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 annual depreciation 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 as follows:

 

|                                              |   | **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 ended December 31, 2002, 2001 and 2000, theapplication of deferred stripping accounting resulted in a decrease in cost ofsales reported in the statements of operations of Ps. 28,230, Ps.104,939 andPs.121,933, respectively. Deferred stripping costs will not be fully amortizeduntil the cessation of operations of the mines currently operated by theCompany.

# ** **

Based on the amortization costs incurred in the most recent three yearsrelated to intangible assets subject to amortization, the Company estimatesthat amortization costs for such intangible assets will amount to Ps. 31,052 ineach of the following five years.

 

**9.  EMPLOYEE RETIREMENT BENEFITS:**

 

The employee benefit obligation relates to voluntary retirement andseniority premiums.  The amountresulting from the actuarial calculations prepared by external actuaries isbeing funded using the projected unit credit method.  Below is a breakdown of this obligation as of December 31, 2002and 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 December31, 2002 and 2001, established reserves amounted to Ps. 24,160 and Ps.22,189,respectively, and exceeded the accumulated benefit obligation (equivalent tothe PBO without projecting the salaries to the date of retirement) by Ps.3,060and Ps.3,169, respectively.

 

The cost of employee benefits 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 realinterest rates used in the actuarial projections are:

 

|                 |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------|--------|----------|--------|----------|--------|----------|--------|
|                 |   |     |   |     |   |     |   |
| Interest rate        |   | 5.00     | %      | 5.00     | %      | 5.00     | %      |
| Salary increase rate |   | 1.50     | %      | 1.50     | %      | 1.50     | %      |

 

The changes in projected benefit 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 period for 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 December31, 2002 and 2001, the common stock consisted of 1,043,271,843 commonnominative Class I (fixed portion), Series “A” shares without par value.

 

Stockholders’ equity,except for restated paid-in common stock and tax retained earnings, will besubject to a 35% dividend tax. Beginning January 1, 2003, such rate will be reduced by one percentagepoint each year until reaching 32% in 2005. Any income tax paid on suchdistribution on or after January 1, 2002, may be credited against future incometaxes payable by the Company in the three fiscal years following the fiscalyear of such payment.

 

Based on the2003 tax reform, tax paid on the distribution of stockholders’ equity, asdiscussed in the preceding paragraph, can only be credited against income taxof the year in which taxes are paid on dividends, and in the immediatelyfollowing two fiscal years.

 

**Retained earnings**

 

As of 2002, the withholding taxon dividends is eliminated.  Inaddition, if earnings for which no corporate tax has been paid are distributed,the tax must be paid upon distribution of the dividends.  Consequently, the Company must keep a recordof earnings subject to each tax rate. As of December 31, 2002, earnings for which corporate taxes have beenpaid amounted to approximately Ps.1,554,110.

 

The annual net income of the Company and each subsidiary is subject tothe 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.390,720 and is included in retained earnings.  This reserve may not be distributed to thestockholders during the existence of the Company, except in the form of stockdividends.

 

F-17

----

 

**11.  FOREIGN CURRENCY POSITION AND TRANSACTIONS:**

 

The consolidated foreign currency position, excluding inventories ofprimary metals, as of December 31, 2002 and 2001, expressed in thousands ofU.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 transactions during 2002, 2001 and 2000 in a foreign currency,not including transactions within the group, since they were eliminated inconsolidation, expressed in thousands 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 almost all of the Company’s products are determined byinternational market quotations in U.S. dollars.

 

At December 31, 2002, 2001 and 2000, the Mexican peso/U.S. dollarexchange rates were Ps. 10.3125, Ps. 9.1692 and Ps. 9.5997, respectively, andthe average rate during 2002 was Ps. 9.6589 per U.S. dollar.

 

As of June 13, 2003, the date on which these financial statements wereissued, the exchange rate was similarto that at December 31, 2002 and the exchange rate was Ps.10.5775 Mexican pesosper U.S. dollar.

 

**12.  BALANCES AND TRANSACTIONS WITH RELATEDPARTIES:**

 

Balances with the Company’s holding companies and affiliated companiesthat are under common control of Grupo Mexico, S.A. de C.V. (parent company ofGMM) 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 December31, 2002, the Company granted long-term financing to Grupo Minero México, S.A.de C.V., Grupo México, S.A. de C.V. and Minera México, S.A. de C.V. in theamounts of $163,815, $13,668 and $7,167, respectively. Interest is payable at a5.50% rate.  The proceeds of thisfinancing were used to acquire shares of Asarco Inc.  As of December 31, 2002 and 2001 are shown as long-term accountsreceivable in the related balance sheets.

 

The most significant transactions 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 tax regulations**

 

The principal items that affect the determination of taxable income arethe differences between purchases and cost of sales, and recognition of theeffects of inflation on depreciation, monetary assets and liabilities throughthe inflationary component, which differs for book and tax purposes.

 

Through December 31, 2001, the relevant Mexican income tax (“ISR”) ratewas 35% with the obligation to pay 30% currently and the option of deferringpayment of the remaining 5% until profits are distributed.  The new tax law enacted January 1, 2002,eliminated the option to defer the 5% portion of the income tax payment andreduces the 35% tax rate by one percentage point each year until reaching 32% in2005.  The deduction for employee statutoryprofit-sharing (PTU) and the obligation to withhold taxes on dividends paid toindividuals or foreign residents was also eliminated.

 

The relevant Mexican asset tax (“IMPAC”) is calculated by applying 1.8%to the Company’s asset position, as defined in the law, and is payable only tothe extent that it exceeds ISR payable for the same period. If in any yearIMPAC exceeds the ISR payable,

 

F-19

----

 

the IMPAC payment for suchexcess may be reduced by the amount by which ISR exceeded IMPAC in the threepreceding years and any required payment of IMPAC is creditable against theexcess of ISR over IMPAC of the following ten years.

 

Income taxes, asset taxes and employee profit sharing have beendetermined on the basis of each individual company. The tax returns of theCompany and its subsidiaries have been consolidated and filed at the level ofthe parent company of GMM, Minera México, S.A. de C.V. (“MM”). Each year theCompany and each of its subsidiaries pay to MM the amount of tax, if any, itwould have paid had it filed a separate tax return. In the event MM reduces itsconsolidated tax liability through the use of tax loss carryforwards or othertax benefits of the Company or any of its subsidiaries, MM is obligated toreimburse the Company or such subsidiary for such tax benefit at the time thatit otherwise would have reduced the tax payable by the Company or suchsubsidiary.

 

Income for purposes of PTU does not consider the inflationary componentor the unrealized exchange gains or losses. Depreciation is based on historical rather than restated values. The PTUrate is 10% of income for PTU purposes.

 

**Provision for income taxes**

** **

The income 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 with Mexican GAAP, the following items represent theprincipal differences between Mexican income tax computed at the statutory taxrate and the Company’s provision 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 the temporary differences that generated a deferredtax liability in accordance with 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 loss carryforwards and recoverable assettaxes**

 

At December 31, 2001, available tax loss carryforwards for incometax purposes and recoverable asset taxes, which will be indexed for inflationthrough the year in which they are 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 guarantor of its holding company, GMM, with respect toGMM’s Secured Export Notes (with an initial aggregate outstanding amount of$600 million) and GMM’s Series A Guaranteed Senior Notes and Series BGuaranteed Senior Notes. According to the terms of the restructuring, theproceeds of the Company's export sales are pledged as collateral.  Such proceeds must be deposited in acollateral account with the agent bank (The Chase Manhattan Bank). The Companymay immediately make use of these proceeds provided that there is no event ofdefault.  In addition, in the event ofdefault, the Company shall maintain a bank account guaranteeing payment ofprincipal and interest during the three months following the time that thecollateral collection accounts are used to service debt.

 

The Company is also guarantor of GMM with respect to the followingindebtedness:

 

•             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 de Nacozari Ejido (the “Ejido”) commencedan action (“Amparo”) in the first federal district court in Sonora, Mexicoagainst the Ministry of Agrarian Reform (the “Ministry”), alleging that theexpropriation of approximately 1,500 hectares of land on which certain of theCompany’s facilities are currently located, which land is adjacent to the landwhere the mine is located, was improper. The Company was not named as a defendant in the Amparo, although it wasincluded as an interested third party due to its ownership of the land.  The Company bought the land in question in1976 from the Banco Nacional de Obras y Servicios Publicos, which hadpreviously acquired it as a beneficiary of the expropriation by the Ministry in1973.

 

The claimalleged by the Ejido states that the Ministry failed to notify one of three representativesof the Ejido of the expropriation.  In1994, the Mexican District Court Judge of Hermosillo granted the Amparo rulingthe expropriation by the Ministry 

 

F-21

----

 

legally void and in 1997 made asecond ruling ordering the Ministry to return the land.  As a result of the second ruling, theCompany filed an ancillary action alleging the impossibility of returning theland.

 

There has beenno final resolution of this matter, but the Mexican District Court Judge ofHermosillo before whom this matter is presently docketed has twice beforeissued a ruling stating that it is impossible to return the land as a means ofrestitution.  A third and final rulingfrom the Mexican District Court Judge of Hermosillo is expected soon.  The Company believes that if the Ejidorequests indemnity instead of a return of the land, its financial responsibilitywith respect to such compensation would not be material.

 

*Coremi Royalties*

 

When theCompany originally received mining concessions related to its “La Caridad” unitin 1970, it were forced to pay royalties to the Council of Mineral Resources(“Coremi”).  When the Mining Law cameinto effect in 1992, however, said obligation was abrogated.  Coremi, the Mexican****Superintendent of Mining andthe Mexican Secretary of Economy, however, has interpreted in a different wayfrom the Company the inception of the Mining Law and, in 1995, the Company andCoremi initiated a series of legal actions that are still pending.  In August 2002, Coremi filed with the ThirdFederal District Judge in Civil Matter, certain civilian actions, demandingfrom the Company the payment of royalties due since 1997.  The Company answered and denied Coremi’sclaims in October 2002.  The Companybelieves that any such payment related to this matter would not be material.

 

*La Caridad - Mining Concessions*

 

Since 1995, the Mexican Superintendent of Mining has requested prooffrom the Company that it satisfied its obligation to pay certain “discoverybonuses” allegedly due in connection with the grant of 13 mining concessions atLa Caridad.  If said proof is not provided,the Mexican Superintendent 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 involved in various other legal proceedings incidentalto its operations, but it does not believe that the final decisions in any suchproceedings will, individually or in the aggregate, have a material adverseeffect on its financial position, results of operations or cash flows.

 

**16.  DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP:**

 

The consolidated financial statements of the Company are presented onthe basis of Mexican GAAP. Certain accounting practices applied by the Companythat conform with Mexican GAAP do not conform with U.S. GAAP.

 

This note presents a reconciliation of net income (loss) and totalstockholders’ equity as presented under Mexican GAAP to U.S. GAAP. However,this reconciliation to U.S. GAAP does not include the reversal of therestatement of the financial statements to recognize the effects of inflationas required under Mexican GAAP Bulletin B-10, “Recognition of the Effects ofInflation in the Financial Information”, as amended. The application ofBulletin B-10 represents a comprehensive measure of the effects of price levelchanges in the inflationary Mexican economy and, as such, is considered a moremeaningful presentation than historical cost-based financial reporting for bothMexican and U.S. accounting purposes.

 

The additional principal differences between Mexican GAAP and U.S. GAAPare described below, together with an explanation, where appropriate, of themethod used in the determination of the adjustments that affect net income(loss) and total stockholders’ equity.

** **

**Restatement**

 

Subsequent to the issuance of the Company’s 2001 financial statements,management determined that push-down accounting adjustments related to theCompany ́s acquisition by GMM had not been properly reported in the Company’sU.S. GAAP financial information. Push-down accounting is not required under Mexican GAAP.  As a result, the following U.S. GAAPfinancial information has been restated from the amounts previously reported toreflect such push-down accounting adjustments:

 

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 flow information**

 

Under Mexican GAAP, the Company presents consolidated statements ofchanges in financial position in accordance with Bulletin B-12, which specifiesthe appropriate presentation of the statement of changes in financial positionwhen the financial statements have been restated in constant Mexican pesos (inaccordance with the third amendment to Bulletin B-10). Bulletin B-12 identifiesthe generation and application of resources representing differences betweenbeginning and ending financial statement balances in constant Mexican pesos.Bulletin B-12 also requires that monetary and foreign exchange gains and lossesbe treated as cash items in the determination of resources provided byoperations.

 

The changes in the consolidated financial statement balances includedin this statement constitute cash flow activity stated in constant Mexicanpesos (including monetary and unrealized foreign exchange gains and losses onshort-term liabilities, which are considered cash gains and losses in theconstant Mexican peso financial statements).

 

In accordance with Mexican GAAP, the reduction in current and long-termdebt due to restatement in constant Mexican pesos and unrealized exchange gainsand losses on short-term liabilities are presented in the consolidatedstatements of changes in financial position as a resource used by financingactivities and the gain from monetary position is presented as a component ofoperating activities. SFAS No. 95, “Statement of Cash Flows,” does not provideguidance with respect to inflation adjusted financial statements.

 

The following are statements of cash flows, in accordance with  U.S. GAAP, excluding the effects ofinflation.

 
|                                                                                      |   | **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 income taxes and employee profitsharing**

 

As explained in Note 4, beginning in 2000 under Mexican GAAP therevised Bulletin D-4 became effective. The Company follows SFAS No. 109, “Accounting for Income Taxes” for U.S.GAAP purposes, which differs from Mexican 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 temporary differences are expected toreverse.

 

•             Under Mexican GAAP,the effects of inflation on the deferred tax balance generated by monetaryitems are 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 profit sharing is calculated based on taxable incomeafter certain adjustments and is subject to the future consequences oftemporary differences in the same manner as income taxes, deferred employeeprofit sharing, which is not recorded under Mexican GAAP, must be included inthe reconciliation of Mexican to U.S. GAAP.

 

The tax effectof temporary differences that generated deferred tax liabilities (assets) underSFAS 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 valuationallowance if it is more likely than not that some portion or all of thedeferred tax asset will not be realized.

 

The components of the income tax and profit sharing expense for theyears 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 | ) |

 

**Negative Goodwill**

 

Under Bulletin B-8 of Mexican GAAP, anyexcess book value of a subsidiary over its purchase price is recorded as adeferred credit and amortized against income over the period in which the newbusiness is integrated, not to exceed five years. For Mexican GAAP purposes,negative goodwill related to the 1989 acquisitions has been fully amortized.

 

Under U.S. GAAP, negative goodwill must be first allocated toproportionately reduce the values assigned to non-current assets (generallyfixed assets).  For U.S. GAAP purposes,the benefit is recognized through reduced depreciation over a period of 16years.

** **

**Costof pension plans and other employee benefits**

 

The Company has prepared a study of pension costs under Mexican GAAP(see Notes 4 and 9). Under Mexican GAAP, the requirement to record liabilitiesfor employee benefits using actuarial computations is substantially the same asrequired by SFAS No. 87, “Employers’ Accounting for Pensions”, except for theinitial year of application, which generates a difference in unamortized priorservice costs and in the amortization expense.

 

F-25

----

 

The Company has no post-retirement health care insurance or otherbenefit plans, other than the pension plans referred to in Note 4 and 13.Therefore, SFAS No. 106, “Employers’ Accounting for Post-retirement Benefitsother than Pensions”, and SFAS No. 112, “Employers’ Accounting for Post-employment Benefits”, would have no effect on the Company’s financialstatements.

 

The Company applies SFAS No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits”, which requires additionaldisclosures.  Although the Company’smeasurement or recognition of pensions and other postretirement benefitobligations does not change under SFAS No. 132, the following additionaldisclosure 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 2001 the accumulated benefit obligationamounted to Ps.24,160 and Ps.22,188, respectively.

 

F-26

----

 

**Minority interest**

 

Under Mexican GAAP, Bulletin B-8, minority interest in consolidatedsubsidiaries must be included as a component of stockholders’ equity.Consequently, minority interest in the income of such subsidiaries is notincluded in the determination of net income (loss) in the statement ofoperations under Mexican GAAP. Under U.S. GAAP, the minority interest insubsidiaries is shown below liabilities on the balance sheet, and is not partof stockholders’ equity and its share of the net results of the consolidatedsubsidiaries is deducted before arriving at net income (loss).

** **

**Capitalized interest**

 

Under Mexican GAAP, a company is not required to, but may, capitalizeinterest incurred on assets under construction. The amount to be capitalized inMexico is based upon the comprehensive financial cost (i.e., the sum ofinterest expense, foreign exchange gains and losses and the gain or loss frommonetary position).  The Company haselected not to capitalize any comprehensive financial cost under Mexican GAAP.

 

Under U.S. GAAP a proportional amount of interest costs on all debt,must be considered an additional cost of constructed assets and depreciatedover the lives of the related assets. Exchange gains and losses on foreigncurrency-denominated debt may not be capitalized.

** **

**Employee profit sharing**

 

Mexican law requires the payment to employees of 10% of the Company’staxable income, excluding certain adjustments for inflation. These amounts aretreated as compensation expense and are reflected after income tax, in theappropriate income statement captions in the statements of operations.

 

Under U.S. GAAP, employee profit sharing must be reflected as anoperating expense in the statement of operations.

** **

**Major customers**

 

The Company had significant sales to threedifferent customers in the last three years. Sales to these customers accounted for 37%, 14% and 6% of total netsales in 2002, 45%, 7%, and 7% of total net sales in 2001 and 11%, 9%, and 5%of total net sales in 2000.

 

**Segment information**

 

The Company had net sales to customers from the following regions asfollows:

 

|            |   | **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, AICPA Statement of Position 98-5, “Reporting on theCosts of Start-up Activities”, requires that certain costs such asorganization, training and pre-feasibility expenses incurred in the start-upphase of a project be expensed as incurred.

 

In accordance with Mexican GAAP, start-up costs are deferred andamortized at the commencement of operations, despite the inherent uncertaintyregarding their future recoverability. However, if the project is abandoned and the start-up costs incurred todate become unrecoverable, such costs are expensed immediately.  Amortization of deferred costs is amortizedon a straight-line basis over the term in which the benefit is expected to berealized.

 

F-27

----

 

**Environmental liabilities**

 

Under U.S. GAAP companies must comply with EITF 93-5, “Accounting forEnvironmental Liabilities”, and EITF 90-8, “Capitalization of Costs to Treat EnvironmentalContamination”.  These pronouncementsrequire companies to disclose and/or accrue on a undiscounted basis anyreclamation and remediation costs that are expected to be incurred. The Companyhas properly accrued for all known environmental matters at the balance sheetdate for U.S. GAAP purposes.

 

**Financial instruments**

 

Under Mexican GAAP, Bulletin C-2 went into effect in 2001 and requiresthe recognition of all derivative financialinstruments on the balance sheet as either assets or liabilities.  Additionally, certain, but not all,derivative financial instruments and the related hedged items must be adjustedto their market value, with all such adjustments recorded in the incomestatement, regardless of the nature of the financial instrument.

 

Under U.S. GAAP, SFAS No. 133 went into effect in 2001 and requires therecognition of all derivative financial instruments at fair value, with suchadjustments recorded:

 

•            In the determinationof net income or loss  for fair valuehedges (fixed to variable)

•            In other comprehensiveincome for qualifying cash flow hedges (variable to fixed)

 

At December 31, 2002 and 2001, the Company did not have any outstandingderivative financial instruments.

 

F-28

----

 

**Reconciliation ofMexican GAAP to U.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**          |   |
|--------------------------------------------------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                                                                   |   |     |    | **(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 |   |

 

The changes in stockholders’ equityunder U.S. GAAP for the years ended December 31, 2002, 2001 and 2000 are asfollows:

 
|                                                                                     |   | **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 |   |
|                                                                  |        |                    |           |                                     |        |                        |        |                                               |            |                                                  |        |  |  |  |  |  |

 

**Reclassificationof balance sheet and statements 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**          |   |              |   |
|-----------------------------------------------------------|--------|-----------|------------|-------------------|--------|-------------------|--------|
|                                                      |   |      |       | **(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 ACCOUNTINGSTANDARDS:**

** **

**Mexican GAAP**

** **

In December2001, the Mexican Institute of Public Accountants (MIPA) issued the newBulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities andCommitments” (“C-9”), whose provisions are mandatory for years beginning as ofJanuary, 2003, although early application is recommended. C-9 replaces theprovisions of the former Bulletins C-9 “Liabilities”, and C-12, “Contingenciesand Commitments”, and establishes, among others, greater accuracy in itemsrelated to provisions, accumulated obligations and contingent liabilities, andnew regulations related to accounting recognition of provisions, the use ofpresent value, and the redemption of obligations when taking place early orsubstituted by a new issue.

 

In January2002, the MIPA issued new Bulletin C-8, “Intangible Assets” (“C-8”) with thesame effective date and recommendation established for Bulletin C-9. C-8substitutes the former Bulletin   C-8,“Intangibles”, and establishes, among others, 

 

F-30

----

 

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 Valueof Long-Lived Assets and Their Disposal” (C-15), whose application is mandatoryfor financial statements of periods beginning on or after January 1, 2004,although early application is encouraged. C-15 establishes, among others, newprinciples for the calculation and recognition of impairment losses forlong-lived assets and their reversal. It also provides examples of indicators of possible impairment in thecarrying amount of tangible and intangible long-lived assets in use, includinggoodwill. The calculation of such loss requires the determination of therecoverable value, which is now defined as the greater of the net selling priceof a cash-generating unit and its value in use, which is the present value ofdiscounted future net cash flows. The accounting principles issued prior tothis new Bulletin used future net cash flows, without requiring the discountingof such cash flows.

 

The Company has not fully assessed the effects of adopting these newaccounting principles on its financial position and results of operations.

 

**U.S. GAAP**

 

During 2001, the FASB issued the following guidance:

 

In June 2001, the FASB issued SFAS No. 141, “Business Combinations”,which is effective for all business combinations initiated after June 30,2001.  SFAS No. 141 requires allbusiness 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, “Goodwill and OtherIntangible Assets”, which was effective for the Company beginning in 2002.  With the adoption of SFAS No. 142, goodwillis no longer subject to amortization over its estimated useful life, but ratherit will be subject to at least an annual assessment for impairment by applyinga fair-value-based test.  Additionally,negative goodwill is recognized as an extraordinary gain at the time of thebusiness combination.

 

In June 2001, the FASB issued SFAS No. 143 “Accounting for AssetRetirement Obligations”, which was effective for the Company beginning in2003.  The Company plans to adopt thisnew 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 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 theImpairment or Disposal of Long-Lived Assets”. The Company adopted this standard in 2002.  SFAS No. 144 supersedes SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”.SFAS No. 144 also expands the scope of discontinued operations presentation toa component 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.

 

During 2002, the FASB issued the following guidance:

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities”, which will be required to beeffective for exit or disposal activities that are initiated after December31,2002. This statement addresses financial accounting and reporting for costassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)”. The Company adopted the provisions of SFASNo. 146 on January 1, 2003, which did not have a material effect on theCompany’s financial statements.

 

F-31

----

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 requires that the guarantorrecognize, at the inception of certain guarantees, a liability for the fairvalue of the obligation undertaken in issuing such guarantee.  FIN 45 also requires additional disclosurerequirements about the guarantor’s obligations under certain guarantees that ithas issued.  The initial recognition andmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002 and thedisclosure requirements are effective for financial statement periods endingafter December 15, 2002.  The Companydoes not expect the adoption of FIN 45 will have a material impact on itsfinancial position, results of operations or cash flows.

 

During 2003, the FASB issued the following guidance:

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements”, tocertain entities 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 Statement133 on Derivative Instruments and Hedging Activities”, which amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133 “Accounting for Derivative Instrumentsand Hedging Activities”.  The changes inSFAS No. 149 improve financial reporting by requiring that contracts withcomparable 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, “Accounting for CertainFinancial 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)

 

•                  Forward purchase contracts, written putoptions, and other financial instruments not in the form of shares that eitherobligate or may obligate the issuer to settle its obligation for cash or bytransferring other assets

 

•                  Certain financial instruments thatinclude an obligation that  (1) theissuer may or must settle 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 amarket index or other benchmark (something other than the fair value of theissuer’s equity shares), or (c) varies inversely with the fair value of theequity 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 to as “mezzanine” reporting) of the balancesheet.  The provisions of SFASNo. 150 are effective for financial instruments for the first fiscalperiod beginning after December 15, 2003. The Company does not expect that theadoption of SFAS No. 150 will have a material impact on its financial position,results of operations or cash flows.

 

F-32

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**INDEX TO EXHIBITS**

** **
| **Exhibit** |   |                                                                                                                              |   |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|        |   |                                                                                                                              |   |
| 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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