**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 20-F**

 
| **Annual Report Pursuant to Section 15(d)  of the Securities Exchange Act of 1934** |
|-------------------------------------------------------------------------------------|
|                                                                                |
| **For  the Fiscal Year Ended December 31, 2002**                                    |
|                                                                                |
| **Commission  File Number  333-08430-03**                                      |

 

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| **MEXICANA DE CANANEA, S.A. DE C.V.**                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                                                                                                                   |
|                                                                                                                                                                      |
| **MEXICAN CANANEA 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 200  Col. Roma Sur  06760 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 Section 12(g) of the Act:                                                                                          |
|                                                                                                                                                                      |
| **None**                                                                                                                                                                  |
|                                                                                                                                                                      |
| Securities for  which there is a reporting obligation pursuant to Section 15(d) of the Act:                                                                               |
|                                                                                                                                                                      |
| **Guarantees of 8.25% Series A Guaranteed Senior  Notes due 2008 and  9.25% Series B Guaranteed Senior Notes due 2028  issued by Grupo Minero México, S.A. de C.V.** |

 

**Indicatethe number of outstanding shares of each of the Issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:**

 

**Shares ofcommon stock - 201,798,896 Series A Shares**

 

**Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days:**

 

**Yes  ****ý  No  ****o**

 

**Indicateby check mark which financial statement item the registrant has elected tofollow:**

 

**Item17  ****o  Item 18  ****ý**

 

The registrant is a subsidiary of Grupo Minero México,S.A. de C.V. The registrant is filing this form using the reduced disclosureformat provided for in Instruction I to Form 10-K. See Explanatory 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.                                                                          | 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  Cananea, S.A. de C.V. (As Restated) |

 

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**EXPLANATORYNOTE**

 

We are Mexicana de Cananea, S.A. de C.V. and arerequired to file an annual report on Form 20-F pursuant to Section 15(d) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule15d-1 thereunder because we are a guarantor of the 8.25% Series A GuaranteedSenior Notes due 2008 (the “Series A Notes”) and the 9.25% Series B GuaranteedSenior Notes due 2028 (the “Series B Notes” and, together with the Series ANotes, the “Notes”) of Grupo Minero México, S.A. de C.V. (“Grupo Minero”),which were issued and sold pursuant to a registration statement on Form F-1under the Securities Act of 1933, as amended (the “Act”) (Commission File No.333-8430). Grupo Minero owns 98.49% of our capital stock, and the balance wasacquired by the Mexican National Mine Workers Union in 1990 in connection withour privatization.

 

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

 

We have omitted certain information required by Form20-F from this annual report on the basis of Instruction I to Form 10-K underthe Exchange Act, which permits a company wholly-owned by another company thatis a reporting company under the Exchange Act to file an abbreviated annualreport in accordance with the no-action letter issued by the staff of theSecurities and Exchange Commission (the “Commission”) on October 28, 1999.

 

Our securities with respect to which there is areporting obligation under Section 15(d) of the Exchange Act consist only ofguarantees of the Notes of Grupo Minero and cannot be held or tradedseparately. We have accordingly omitted responses to items 10 and 14, which callfor information concerning the securities that is inapplicable to theguarantees of the Notes. Information responsive to these items can be found inthe annual report on Form 20-F of Grupo Minero.

 

1

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**PRESENTATIONOF INFORMATION**

 

We are a corporation (*sociedad anónima de capital variable*)organized under the laws of the United Mexican States (“Mexico”) and presentour financial statements in Mexican pesos and in accordance with accountingprinciples generally accepted in Mexico (“Mexican GAAP”). Mexican GAAP providesfor the recognition of certain effects of inflation by restating nonmonetaryassets and liabilities using the Mexican National Consumer Price Index (the“NCPI”), restating the components of stockholders’ equity using the NCPI andrecording gains or losses in purchasing power from holding monetary liabilitiesor assets. Mexican GAAP also requires restatement of financial statements topesos of purchasing power as of the date of the most recent balance sheetpresented. All data in the financial statements included in this Annual Report,the selected financial information derived therefrom and other financialinformation included in this Annual Report have been restated to pesos ofpurchasing power as of December 31, 2002, except as otherwise indicated.

 

Mexican GAAP differs in certain significant respectsfrom accounting principles generally accepted in the United States of America(“U.S. GAAP”). For a discussion of certain significant differences betweenMexican GAAP and U.S. GAAP as they relate to us, together with a reconciliationof net (loss) income and stockholders’ equity to U.S. GAAP, see Note 16 to ouraudited consolidated financial statements as of December 31, 2001 and 2002 andfor the years ended December 31, 2000, 2001 and 2002 (together with the notesthereto, the “Financial Statements”). The effect of price-level restatementunder Mexican GAAP has not been reversed in the reconciliation to U.S. GAAP.See Note 16 to the Financial Statements set forth in Annex F hereto.

 

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

 

This Annual Report contains translations of certainpeso amounts into U.S. dollars at specified rates solely for the convenience ofthe reader. These translations should not be construed as representations thatthe peso amounts actually represent such U.S. dollar amounts or could beconverted into U.S. dollars at the rate indicated or any other rate. Unlessotherwise indicated, such U.S. dollar amounts have been translated from pesosat an exchange rate of Ps. 10.3125 to US$ 1.00, the exchange rate as ofDecember 31, 2002 published by *Banco de México* (the “Mexican CentralBank”). On December 31, 2002, the difference between the exchange ratepublished by the Mexican Central Bank and the noon buying rate in New York Cityfor cable transfers in pesos as certified for customs purposes by the FederalReserve Bank of New York (the “noon buying rate”) of Ps. 10.5608 to US$ 1.00was not material. On June 23, 2003, the noon buying rate was Ps. 10.4745 perUS$ 1.00.

 

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

 

 

**FORWARDLOOKING STATEMENTS**

 

We may from time to time make written or oralforward-looking statements in our periodic reports to the Commission on Forms20-F and 6-K, in our annual report to shareholders, in offering circulars andprospectuses, in press releases and other written materials, and in oralstatements made by any of our officers, directors or employees to analysts,institutional investors, representatives of the media and others.  These statements appear in a number ofplaces in this Annual Report and include statements regarding our currentintent, belief or expectations or those of our officers with respect to trendsaffecting our financial condition or results of operations. When used in thisAnnual Report, the words “anticipate”, “believe,” “estimate,” “expect,”“intend,” “plan” and “project” and similar expressions, as they relate to ourmanagement or us are intended to identify such forward-looking statements.  Such forward-looking statements are notguarantees of future performance and involve risks and uncertainties, andactual results may differ materially from those in the forward-lookingstatements as a result of various factors. The information contained in this Annual Report, including, withoutlimitation, the information under Item 4. “Information on the Company” and Item5. “Operating and Financial Review and Prospects,” identifies important factorsthat could cause such differences. 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 torelease publicly the result of any revisions to these forward-lookingstatements, which may be made to reflect events or circumstances after the datehereof, including, without limitation, changes in our business strategy orplanned capital expenditures, or to reflect the occurrence of unanticipatedevents.

 

2

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**PART I**

 

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

 

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

 

Our external auditors are Galaz, Yamazaki, RuízUrquiza, S.C. (“Galaz”), the Mexican national practice of Deloitte ToucheTohmatsu (“DTT”). Prior to June 10, 2002, our external auditors were Ruiz,Urquiza y Cía., S.C. (“Ruiz Urquiza”), a former member firm of AndersenWorldwide, which was subject to the quality control procedures of ArthurAndersen LLP required for foreign associated firms that are embodied in therequirements of the Securities and Exchange Commission Practice Section of theAmerican Institute of Certified Public Accountants. Subsequent to June 9, 2002,Ruiz Urquiza was subject to the quality control procedures of Deloitte &Touche LLP. The change in external auditors resulted from the integration ofthe partners and personnel of Ruíz Urquiza with DTT’s prior Mexican nationalpractice, Galaz, Gomez Morfín, Chavero, Yamazaki, S.C

 

**ITEM 2.****                                                     OFFER****STATISTICS AND EXPECTED TIMETABLE**

 

Not applicable.

 

**ITEM 3.****                                                     KEY****INFORMATION**

 

We have omitted portions of this item on the basis ofInstruction I(2)(a) to Form 10-K.  SeeExplanatory Note.

 

**SELECTEDOPERATING DATA**

 

The following table presents selected production andother operating data for our subsidiaries and us. The data includes productionsold to the other operating units 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)  |   | 103,890                                                   |   | 84,477 |   | 103,475 |   | 94,551 |   | 88,435 |   |
| Ore  milled (metric tons in thousands)      |   | 22,056                                                    |   | 20,955 |   | 23,371 |   | 20,507 |   | 19,026 |   |
| Ore  grade (average % copper for period)    |   | 0.58                                                      |   | 0.50 |   | 0.52 |   | 0.50 |   | 0.57 |   |
| Leach  ore (metric tons in thousands)       |   | 31,356                                                    |   | 22,147 |   | 30,671 |   | 33,774 |   | 31,876 |   |
| Waste  (metric tons in thousands)           |   | 50,481                                                    |   | 41,375 |   | 49,433 |   | 40,270 |   | 37,533 |   |
| Stripping  ratio(1)                         |   | 3.71                                                      |   | 3.03 |   | 3.43 |   | 3.61 |   | 3.65 |   |
| Copper  concentrate production              |   | 385,621                                                   |   | 329,302 |   | 379,640 |   | 314,354 |   | 323,351 |   |
| Metal  contained in concentrate production: |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper                                      |   | 105,882                                                   |   | 84,610 |   | 97,451 |   | 82,198 |   | 86,641 |   |
| Silver                                      |   | 30                                                        |   | 30 |   | 40 |   | 31 |   | 25 |   |
| Gold  (kilograms)                           |   | 407                                                       |   | 331 |   | 376 |   | 300 |   | 234 |   |
| Smelter(2)and SX-EW(3) production:          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Copper  blister                             |   | 49,592                                                    |   | — |   | — |   | — |   | — |   |
| Copper  cathodes                            |   | 28,064                                                    |   | 28,729 |   | 33,788 |   | 39,952 |   | 50,041 |   |

 

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(1)                                  Strippingratio is the ratio of waste plus leachable ore to ore mined in the materialmoved in an open pit operation.

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

(3)                                  Productionat the Cananea SX-EW facility includes copper scrap production.  SX-EW is a procedure involving a combinationof extraction and electrowinning.

 

3

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**ITEM4.****                                                     INFORMATION****ON THE COMPANY**

 

We have abbreviated our response to this item on thebasis of Instruction I(2)(d) to Form 10-K. See Explanatory Note.

 

 

**HISTORYAND DEVELOPMENT OF THE COMPANY**

 

We are Mexicana de Cananea, S.A. de C.V. (and togetherwith our subsidiaries, the “Cananea Unit”), a subsidiary of Grupo Minero, aMexican corporation.  Grupo Minero owns98.49% of our capital stock and the balance was acquired by the MexicanNational Mine Workers Union in connection with our privatization in 1990. OnDecember 29, 1997, Grupo Minero acquired approximately 15.35% of our capitalstock previously owned by a minority investor. We were initially acquired byMexicana de Cobre, S.A. de C.V. from the Mexican government in 1990.

 

 

**BUSINESSOVERVIEW**

 

*Introduction*

 

The Cananea Unit operates a major open-pit copper minein northwestern Mexico at Cananea and is engaged primarily in the business ofexploring, mining and processing copper. The Cananea copper mine is one of thelargest copper ore deposits in exploitation in the world. The Cananea Unit isengaged in the production of copper concentrates and copper cathodes. Itoperates the Cananea mining complex, which includes an open-pit mine, aconcentrator and two solvent extraction and electrowinning (“SX-EW”) plants.

 

For the year ended December 31, 2002, the Cananea Unitaccounted for 13.6% and 6.0% of Grupo Minero’s consolidated net sales andoperating loss, respectively, and, as of December 31, 2002, the Cananea Unitaccounted for 23.1% of Grupo Minero’s total assets.

 

*MetalsPrices*

 

Our products are internationally tradedcommodities.  Prices are established onthe Commodity Exchange, Inc. (“Comex”) in New York and the London MetalExchange (“LME”), two of the most important metal exchanges. These exchangesbroadly reflect the worldwide balance of supply and demand of metals.  The profitability of our operations isdependent on, and our financial performance is significantly affected by, theinternational market prices for the metals we produce, especially for copperand silver.  Metals prices havehistorically been subject to wide fluctuations and are affected by numerousfactors beyond our control.  Thesefactors, which affect each commodity to varying degrees, include internationaleconomic and political conditions, levels of supply and demand, theavailability and cost of substitutes, inventory levels maintained by producersand others and, to a lesser degree, inventory carrying costs and currencyexchange rates.  In addition, the marketprices of certain metals have on occasion been subject to rapid short-termchanges due to speculative activities. Copper prices have been in a general downward trend since mid-1997.  In recent years, the market price of copper,our principal product, has remained weak and we do not expect a materialimprovement in the near term.

 

4

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The following table sets forth high, low and averagespot prices according to Comex in U.S. dollars for copper for the periodsindicated.

 
|               |   | **High**             |   | **Low** |   | **Partial  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)                                  ThroughJune 23, 2003.

 

The low level of copper prices resulted in lower netsales, operating income and net income in 2002 than might otherwise have beenthe case.  The trend of low copperprices has continued during the first half of 2003, although there was a slightfirming in copper prices during the first quarter of 2003. See Item 5.“Operating and Financial Review and Prospects.” If low prices continue or fallfurther, these effects will persist or be magnified. In the event of asubstantial and sustained further decline in prices, we might, under certainadverse market conditions, consider curtailing or modifying certain of ourmining and processing operations.

 

 

**ORGANIZATIONALSTRUCTURE**

 

The Cananea Unit is a part of the business conductedby Grupo Minero through its subsidiaries. The Cananea Unit’s extraction,concentrating and SX-EW operations are essentially independent from GrupoMinero and its other subsidiaries, but in other respects its business andoperations are integrated with Grupo Minero and its other subsidiaries insignificant ways. In particular:  (a)the Cananea smelter was closed in 1999 following a strike that began in late1998, and most of the concentrates produced at Cananea are now smelted by Mexicanade Cobre, S.A. de C.V. (“Mexcobre” and together with its subsidiaries, the“Mexcobre Unit”), another subsidiary of Grupo Minero; (b) the Cananea Unitrelies on services provided by Grupo Minero and its other subsidiaries forsales and many administrative functions; (c) Grupo Minero and its subsidiariesfile taxes on a consolidated basis with Minera México, S.A. de C.V. (“MineraMéxico”), which owns 98.85% of the stock of Grupo Minero; and (d) the financesand treasury operations of Grupo Minero and its subsidiaries are managedjointly.

 

On May 28, 2003, Grupo Minero and Minera México heldextraordinary shareholders’ meetings approving the merger of Grupo Minero withand into Minera México.  Between GrupoMinero and Minera México, the merger is effective as of June 1, 2003. Theexecuted resolutions and accompanying merger agreement were registered on July2, 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.

 

5

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**PROPERTY,PLANTS AND EQUIPMENT**

 

*Introduction*

 

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

 

Our headquarters and sales office are in Mexico Cityand we also have a domestic purchasing office in Hermosillo, Sonora.

 

*Geology*

 

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

 

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

 

*MiningOperations*

 

Cananea uses a conventional open-pit mining method. Inrecent years the Cananea Unit has invested in equipment to improve strippingcapacity and has undertaken accelerated removal of the substantial excessoverburden from the mine. An average of 282,719, 259,755 and 242,288 metrictons of material per day were mined in 2000, 2001 and 2002, respectively. Theaverage copper content of the ore mined in 2002 was approximately 0.565% and in2001 was 0.501%. The stripping ratio (i.e. the ratio of waste materials plusleachable ore to ore mined) in 2002 was approximately 0.74 to 1.0. Miningequipment includes 11 rotary drills, five 360-ton trucks, seven 260-ton trucks,20 240-ton trucks and 26 170-ton trucks, one 70-cubic yard shovel, one 54-cubicyard shovel, two 40-cubic yard shovels, one 36-cubic yard shovel and five30-cubic yard shovels.

 

*ConcentratingOperations*

 

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

 

6

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*NewCrushing System*

 

The Cananea Unit’s leachable ore crushing system forlow-grade ore was built during 1997. This system improves the metallurgicalrecoveries and reduces the operating cost. We completed construction of a newcrushing system at the Cananea Unit in 1999, at cost of approximately US$ 38.5 million.See “—Capital Expenditures.”

 

*SX-EWFacilities*

 

The Cananea Unit operates a leaching facility and twoSX-EW plants. All copper ore with a grade lower than the mill cut-off grade(0.4%), but higher than 0.15% copper, is delivered to the leaching dumps. Acycle of leaching and resting occurs for approximately five years to achieve a56% recovery. In November 2001, we completed the first phase of the expansionof one of the SX-EW facilities. The Cananea Unit currently maintains 4.2million cubic meters of pregnant leach solution in the old Cananea pit with aconcentration of approximately 1.0 grams of copper per liter. The SX-EWfacilities have a total capacity of 54,750 metric tons of copper cathodes peryear. In 2000, 2001 and 2002 copper cathode production was 33,788, 39,952, and50,041 metric tons, respectively. In July 1998, the SX-EW facilities at Cananeareceived ISO 9002 certification from the International Standards Organization.

 

The following table sets forth the capacity,production and utilization information for the Cananea Unit’s mining,concentrating, smelting and refining facilities in 2002.

 

 

**MEXICANADE CANANEA, S.A. DE C.V.**

**MINESAND PLANTS CAPACITY UTILIZATION IN 2002**

 
| **Facility**      |   | **Product** |   | **Capacity(1)** |   | **Production(1)** |   | **Capacity  Utilization** |   |
|-------------------|--------|-------------|--------|-----------------|--------|-------------------|--------|---------------------------|--------|
| Mine/Concentrator |   | Milling ore |   | 29,200,000      |   | 19,033,000        |   | 65                        | %      |
| SX-EW  Plant      |   | Cathodes    |   | 54,750          |   | 50,041            |   | 91                        | %      |

 

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(1)                                  Metrictons per annum.

 

*Reserves*

 

Grupo Minero has estimates of ore reserves preparedwith respect to each of its units as of January 1 of each year. The ore reserveestimates set forth below have been prepared by us in conjunction with GrupoMinero’s engineering staff using evaluation methods generally used in theinternational mining industry, including standard methods of mapping, drilling,sampling, assaying and modeling. The reserves may not conform to geological,metallurgical or other expectations, and the volume and grade of ore recoveredmay be below the expected levels. Lower market prices, increased productioncosts, reduced recovery rates and other factors may render proven and probablereserves uneconomic to exploit and result in revision of reserve data from timeto time. Reserve data are not indicative of future results of operations.

 

The terms “dilution,” “probable reserves,” “provenreserves,” “reserve,” “total leaching recovery,” “total metal recoverable,” and“total mill recovery,” which are used in the following tables, are defined asfollows:

 

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

 

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

 

7

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

 

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

 

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

 

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

 

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

 

The following table sets forth estimated reserve dataof the Cananea Unit as of January 1, 2003, prepared by our Department ofMining, Planning and Control under the supervision of Grupo Minero’s Directorof Mining, Planning and Control.

 

**Ore Reserves**

**(Estimated as of January 1, 2003)**

 
|                                                |   | **Ore**                          |   | **Copper**                                                    |   |
|-----------------------------------------------------|--------|----------------------------------|--------|---------------------------------------------------------------|--------|
|                                                |   | **(Thousands  of metric  tons)** |   | **(Average  grade  percentage, unless  otherwise indicated)** |   |
|                                                |   |                             |   |                                                          |   |
| Mill  ore:                                          |   |                             |   |                                                          |   |
| Proven                                              |   | 2,260,400                        |   | 0.58                                                          |   |
| Probable                                            |   | 603,500                          |   | 0.55                                                          |   |
| Total                                               |   | 2,863,900                        |   | 0.58                                                          |   |
| Total  mill recovery                                |   | —                           |   | 81                                                            | %      |
| Total  metal recoverable (thousands of Metric tons) |   | —                           |   | 13,363                                                        |   |
| Leach  ore:                                         |   |                             |   |                                                          |   |
| Proven                                              |   | 1,935,300                        |   | 0.22                                                          |   |
| Probable                                            |   | 381,200                          |   | 0.21                                                          |   |
| Total                                               |   | 2,316,500                        |   | 0.22                                                          |   |
| Total  leaching recovery                            |   | —                           |   | 50                                                            | %      |
| Total  metal recoverable (thousands of metric tons) |   | —                           |   | 2,551                                                         |   |

 

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

 

**ITEM5.****                                                     OPERATING****AND FINANCIAL REVIEW AND PROSPECTS**

 

We have abbreviated our response to this item on thebasis of Instruction I(2)(a) to Form 10-K. See Explanatory Note.

 

The following discussion should be read in conjunctionwith the Financial Statements included elsewhere in this Annual Report. TheFinancial Statements have been prepared in accordance with Mexican GAAP, whichdiffers in certain significant respects from U.S. GAAP. Note 16 to theFinancial Statements provides a description of the principal differencesbetween Mexican GAAP and U.S. GAAP, as they relate to us, and a reconciliationto U.S. GAAP of stockholders’ equity as of December 31, 2001 and 2002 and netincome (loss) for the years ended December 31, 2000, 2001 and 2002.

 

8

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In accordance with Mexican GAAP rules on price-levelrestatement of financial statements, the Financial Statements included in thisAnnual Report recognize certain effects of inflation. In addition, theFinancial Statements and, unless otherwise specified, the other financial dataincluded in this Annual Report are restated in constant pesos as of December31, 2002. The effects of price-level restatement in accordance with MexicanGAAP have not been reversed in the reconciliation to U.S. GAAP. See Note 16 tothe Financial Statements.

 

Grupo Minero, our parent company, was unable to complywith certain of its debt covenants and was in default under certain paymentobligations during 2001 and 2002.  GrupoMinero began renegotiating the terms of its indebtedness in the fourth quarterof 2001 and in December 2001, Grupo Minero executed a term sheet with certainof its creditors in which the terms of the restructured debt were described.  On April 29, 2003, Grupo Minero entered intoa series of definitive agreements restructuring the terms of itsindebtedness.  The most significant ofthese agreements (the “Common Agreement”) was executed by and among GrupoMinero, us, as guarantor of Grupo Minero’s obligations, Minera México, asguarantor of Grupo Minero’s obligations, several of Grupo Minero’ssubsidiaries, as guarantors of Grupo Minero’s obligations, holders of GrupoMinero’s secured export notes (the “SEN Holders”), several of the banks (the“Bank Lenders”) with which Grupo Minero had previously entered into creditarrangements, HSBC Bank, as collateral agent and distributor of the funds ofthe SEN Holders, Bank of America, as administrative agent of the Bank Lenders,and The Bank of New York, as trustee of Grupo Minero’s secured exportnotes.  The definitive agreementsexecuted in connection with the restructuring of Grupo Minero’s indebtedness,including the Common Agreement, restructure the terms and payment obligationsof Grupo Minero’s previously defaulted financial indebtedness and serve to cureand/or waive previous defaults related thereto.   These definitive agreements also provide that we will guarantee,along with Minera México and certain of Grupo Minero’s other subsidiaries,Grupo Minero’s obligations thereunder, which, together with the Notes, comprisesubstantially all of Grupo Minero’s financial indebtedness.  At December 31, 2002, Grupo Minero’s totaloutstanding indebtedness was approximately Ps. 12,821.7 million.

 

**Restatementof Previously Reported U.S. GAAP Financial Information**

 

Subsequent to the issuance of our 2001 financialstatements, management determined that push-down accounting adjustments relatedto Grupo Minero’s acquisition of us had not been properly reported in our U.S.GAAP financial information as presented in Note 16 to the financial statementsincluded in Item 18.  As a result, thefollowing U.S. GAAP financial information has been restated from the amountspreviously reported to reflect 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.                          | 9,215,162  |             | Ps.    | 9,318,737                    |   | Ps. | 8,793,712 |   | Ps. | 8,918,042 |   | Ps. | 8,406,705 |   | *Ps.* | *8,551,790* | * * |
|                                            |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Stockholders’ equity                       |   | Ps.                          | 5,608,976  |             | Ps.    | 5,712,551                    |   | Ps. | 6,668,042 |   | Ps. | 6,792,372 |   | Ps. | 7,309,622 |   | Ps | 7,454,707 |   |
|                                            |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| For the year ended December 31:                 |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Depreciation expense                            |   | Ps.                          | —     |             | Ps.    | 20,755                       |   | Ps. | — |   | Ps. | 20,755 |   | Ps. | — |   | Ps. | 20,755 |   |
| (Loss) income before income taxes               |   | Ps.                          | (1,887,940 | )                | Ps.    | (1,908,694                   | )      | Ps. | 189,971 |   | Ps. | 169,220 |   | Ps. | (527,883 | ) | Ps. | (548,638 | ) |
| Net (loss) income                               |   | Ps.                          | (1,024,003 | )                | Ps.    | (1,044,757                   | )      | Ps. | (612,533 | ) | Ps. | (633,287 | ) | Ps. | (575,835 | ) | Ps. | (596,590 | ) |
|                                            |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Basic and diluted (loss) income per  share |   | Ps.                          | (5.07      | )                | Ps.    | (5.17                        | )      | Ps. | (3.03 | ) | Ps. | (3.13 | ) | Ps. | (2.85 | ) | Ps. | (2.96 | ) |
|                                                 |        |                              |            |                  |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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**CriticalAccounting Policies and Estimates**

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in Mexico requiresus to make estimates and assumptions that affect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates and assumptions are based on historical experience and various otherfactors that are believed to be reasonable under the circumstances.  Actual results could differ materially fromthese estimates under different assumptions or conditions.

 

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

 

*Orereserves*

 

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

 

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

 

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

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

 

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

 

10

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*CapitalizedExpenditures*

 

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

 

For each of our existing production stage open-pitmines, mine engineers have calculated a life-of-mine stripping ratio, whichrepresents our estimate of the total amount of waste to be incurred divided bythe estimated total proven and probable reserve at each such mine.  The mine stripping ratios are used todetermine the amount of mine production costs to be charged againstearnings.  In periods when the actualratio of waste to mineral ore extracted exceeds the life-of-mine strippingratios, we capitalize production costs associated with mining operations inproportion to the excess waste mined. Such capitalized costs are included in net capitalized mine stripping,and are amortized using the units of production method.  Copper resources contained in piles ofleachable materials that have been extracted from the mines are not included inthe 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 understand that the SEC is currently evaluatingmethods for accounting for mine stripping costs.  In addition, we are aware that in recent public comments, the SEChas expressed unfavorable views towards our method of accounting for minestripping costs, which is also shared by others within the industry.  However, we believe that our method of accountingfor mine stripping costs, which effectively results in the smoothing ofproduction costs over the lives of our mines, accurately reflects the resultsand operations of our mining operations and also facilitates improved matchingof revenues and related expenses.

 

During 2002, 2001 and 2000, actual stripping ratioswere higher than the life-of-mine stripping ratios for our mines, whichresulted in the capitalization of mine costs associated with the additionalwaste mined.  If we were to haveexpensed all production costs associated with its mining operations asincurred, net operating costs expenses would have increased by Ps. 70.6million, Ps. 104.0 million and Ps. 450.5 million, for the years endedDecember 31, 2002, 2001 and 2000, respectively.

 

Estimated life-of-mine stripping ratios for each ofthe Mexcananea Unit mines for the years ended December 31, 2002, 2001 and2000, were as follows:

 
|   |   | **Life-of-Mine  Stripping Ratio  for Mexcananea Unit** |   |
|--------|--------|--------------------------------------------------------|--------|
| 2002   |   | 0.56                                                   |   |
| 2001   |   | 0.56                                                   |   |
| 2000   |   | 0.59                                                   |   |

 

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

 

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

 

*Employeebenefit obligations*

 

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

 

11

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

 

We are accruing a liability that at present value willcover the projected benefit obligations owed to our employees at theirrespective estimated retirement dates. Payments are charged to results in the period in which they are made.Our plan assets related to voluntary employee departures and seniority premiumsconsist of investments in Mexican government treasury certificates (40%) andvarious equity securities of large Mexican companies (60%).

 

*Revenuerecognition*

 

Most of our copper is sold as refined metal underannual contracts or on a spot sale basis. The balance of our copper productionis sold in the form of concentrate under contracts of one to three years induration. Silver and gold are sold under monthly contracts or in spot sales.

 

Beginning in 2000, revenue from sales of copper concentrateis recorded in the month the product is delivered to customers based on pricesas provided in the sales contracts. When the price is subject to adjustment for changes in market pricesbetween the time of shipment to customers and the settlement date, since wehave substantially completed our obligations under the sales contract and titlehas passed to the customer, revenue is recognized based on market pricesprevailing at the shipment date, and the final price is determined within threemonths of shipment.  Revenue withrespect to these sales is adjusted in the period of settlement to reflect finalpricing and in periods prior to settlement to reflect any decline in marketprices that may occur between shipment and settlement.

 

 

**RESULTSOF OPERATIONS FOR 2002 AND 2001**

 

We reported an operating income of Ps. 44.4 million in2002, compared to an operating loss of Ps. 155.5 million in 2001. The increasein operating income was primarily due to higher sales volumes of copper.

 

We reported net income of Ps. 26.9 million in 2002,compared to net loss of Ps. 163.9 million in 2001. The increase in net incomewas primarily due to the increase in operating income and decrease in netcomprehensive financing cost.

 

*Netsales*

 

Net sales in 2002 were Ps. 2,347.7 million, 25.0%higher than net sales in 2001, which were Ps. 1,878.1 million. This increasewas primarily due to higher sales volumes of copper, which increased by 25,814metric tons from 2001 to 2002.

 

12

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*Cost ofsales*

 

Cost of sales in 2002 was Ps. 1,805.7 million, 13.6%higher than in 2001, due primarily to decrease in stripping cost capitalizedand maintenance materials purchases. In 2001, cost of sales was Ps. 1,590.0million.  Cost of sales as a percentageof net sales decreased from 84.7% in 2001 to 76.9% in 2002.

 

*Administrativeexpenses*

 

Administrative expenses in 2002 were Ps. 85.4 million,10.2% lower than in 2001.  In 2001administrative expenses were Ps. 95.1 million. The main reason for this decreasewas a reduction in the amount charged by Servicios de Apoyo Administrativos,S.A. de C.V., our affiliate provider of administrative services.

 

*Depreciationand amortization*

 

Depreciation and amortization expense in 2002 was Ps.412.3 million, 18.3% higher than in 2001. Depreciation and amortization expensein 2001 was Ps. 348.5 million.  Thisincrease was due primarily to an increase in fixed assets as a result of ourinvestments during the year.

 

*Netcomprehensive financing cost*

 

Net comprehensive financing cost represents the neteffect of interest expense, interest income, foreign exchange gain or loss andgain or loss on net monetary position, which arises from the affect ofinflation on the average net balance of monetary assets. The net comprehensivefinancing cost has been affected by (i) the level of our current liabilities;(ii) the rate of inflation; and (iii) the rate of devaluation.

 

Net comprehensive financing cost resulted in anexpense of Ps. 77.1 million in 2002, compared to income of Ps. 4.6 million in2001. The change from 2001 to 2002 was due primarily to the 12.5% depreciationof the peso against the U.S. dollar, which resulted in a Ps. 96.0 millionexchange loss on our dollar-denominated assets, and a gain on monetary positionof Ps. 56.0 million due to higher inflation.

 

*Otherincome (expense), net*

 

Other income, net was Ps. 5.8 million in 2002,compared to an expense Ps. 23.6 million in 2001. Other expense, net in 2001 wasattributable primarily to losses on the sale of used equipment.

 

*Incometaxes*

 

Our tax returns and those of our subsidiaries areconsolidated and filed at the level of Minera México. Each year we and each ofour subsidiaries pays to Minera México the amount of tax, if any, eachsubsidiary or we would have paid had they or we filed a separate tax return. Inthe event Minera México reduces its consolidated tax liability through the useof tax loss carryforwards or other tax benefits with respect to us or any ofour subsidiaries, Minera México is obligated to reimburse us or such subsidiaryfor such tax benefit at the time such benefit would otherwise have reduced thetax payable by us or our subsidiary. At December 31, 2002, we had tax losscarryforwards amounting to Ps. 3,330.1 million, all of which had been applied toreduce the income taxes of Minera México.

 

Through 2001, the income tax rate was 35% with theobligation to pay this tax each year, at a rate of 30% and the option ofdeferring payment of the remaining 5% until profits are distributed. The newtax law enacted January 1, 2002, eliminated the option to defer the 5% portionof the income tax payment and reduces the 35% tax rate by one percentage pointeach year until reaching 32% in 2005. The deduction for employee statutoryprofit-sharing (PTU) and the obligation to withhold taxes on dividends paid toindividuals or foreign residents was also eliminated.

 

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

 

13

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The aggregate effective rate of income tax was 200% in2002, compared to 6.0% in 2001. The difference between the aggregate effectiverate of income tax of 2002 and 2001 was primarily due to the decline in ourdeferred taxes resulting from a decrease in the statutory income tax rate.

 

As of December 31, 2002, we have tax losscarryforwards and recoverable assets taxes in the amounts of  Ps. 1,210.1 million and Ps. 320.6 million,respectively, that we believe do not have a high probability of being realized.Accordingly, a valuation allowance of Ps. 744.2 million has been recorded.

 

**ITEM 6.****                                                     SENIOR****MANAGEMENT AND EMPLOYEES**

 

We have omitted this item on the basis of InstructionI(2)(c) to Form 10-K. See Explanatory Note.

 

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

 

We have omitted this item on the basis of InstructionI(2)(c) to Form 10-K.  See ExplanatoryNote.

 

**ITEM8.****                                                     FINANCIAL****INFORMATION**

 

 

**CONSOLIDATEDFINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION**

 

*ConsolidatedFinancial Statements*

 

See our Consolidated Financial Statements at Annex F(as restated).

 

*LegalProceedings*

 

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

 

**ITEM 9.****                                                     THE****OFFER AND LISTING**

 

The Notes are not traded on any organized market.

 

**ITEM10.****                                              ADDITIONALINFORMATION**

 

We have omitted this item because the securities forwhich there is a reporting obligation under Section 15(d) of the Exchange Actconsist exclusively of guarantees of securities of Grupo Minero, our parentcompany.  See Explanatory Note.

 

**ITEM11.****                                              QUANTITATIVE****AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

Our current business activities do not require theissuance of debt, so our market risk exposure is related mainly to foreignexchange and commodity price movements.

 

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

 

14

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*ForeignExchange Risk*

 

Although all of our sales are priced and invoiced inU.S. dollars, a substantial portion of our cost of sales (approximately 63% in2002) is denominated in pesos. Accordingly, when inflation in Mexico increaseswithout a corresponding devaluation of the peso, as it did in 2000, 2001 and2002, our operating income is negatively affected.  Nevertheless, when inflation in Mexico is lower than thedevaluation of the peso, our operating income is positively affected. We havesignificant liabilities and assets denominated in U.S. dollars thereforeexposing us to foreign exchange losses when the peso declines in value againstthe U.S. dollar.

 

*CommodityPrice Risk*

 

Our exposure to commodity price fluctuations relatesprimarily to copper and silver, as well as other industrial and precious metalswe produce. Our selling prices depend principally upon market prices formetals, especially copper and, to a lesser extent, silver. Such prices canfluctuate widely and are beyond our control. Since the metals we produce cangenerally be sold at prevailing market prices, our results of operations arehighly sensitive to such prices. See Item 4. “Information on the Company—MetalsPrices.”

 

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

 
| **Inventory of Metals** |   | **Total  (Tons)** |   | **Fair Value  (Millions of constant pesos as of  December 31, 2002)** |   |
|-------------------------|--------|-------------------|--------|-----------------------------------------------------------------------|--------|
| Copper                  |   | 2,218             |   | Ps.                                                                   | 35.1   |   |
|                         |        |                   |        |                                                                       |        |  |

 

*SensitivityAnalysis*

 

We have net financial assets denominated in U.S.dollars, and consequently, a hypothetical and instantaneous 10% devaluation ofthe peso against the U.S. dollar would have resulted in an estimated foreignexchange loss of approximately Ps. 79.6 million, reflecting the increased valuein pesos of our foreign currency denominated assets.

 

**ITEM12.****                                              DESCRIPTION****OF SECURITIES OTHER THAN EQUITY SECURITIES**

 

Not applicable.

 

**PART II**

 

**ITEM 13.****                                              DEFAULTS****, DIVIDENDARREARAGES AND DELINQUENCIES**

 

None.

 

 

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

 

We have omitted this item because the securities forwhich there is a reporting obligation under Section 15(d) of the Exchange Actconsist exclusively of guarantees of securities of Grupo Minero, our parentcompany.  See Explanatory Note.

 

**ITEM15.****                                              CONTROLS****AND PROCEDURES**

 

(a)                                  Withinthe 90 days prior to the filing date of this annual report, we carried out anevaluation under the supervision and with the participation of our management,including our (i) President and General Director and (ii) Finance Director, ofthe effectiveness of the design and operation of our disclosure controls andprocedures.

 

15

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Based upon and as of the date of our evaluation, our (i) President andGeneral Director and (ii) Finance Director concluded that our disclosurecontrols and procedures were adequate and designed to ensure that materialinformation relating to us and our consolidated subsidiaries as required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported as and when required.

 

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

 

**ITEM16.****                                             **[**RESERVED**]

 

**PART III**

 

**ITEM17.****                                              FINANCIAL****STATEMENTS**

 

Not applicable.

 

**ITEM18.****                                              FINANCIAL****STATEMENTS**

 

Our ConsolidatedFinancial Statements are included in this Annual Report beginning at page 1 ofAnnex F and include:

 
| Independent Auditors’  Report                                                                                     |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                          |
|                                                                                                                   |
| Consolidated  Statements of Income (Loss) for the years ended December 31, 2002, 2001 and  2000                        |
|                                                                                                                   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2002, 2001 and 2000 |
|                                                                                                                   |
| Consolidated  Statements of Changes in Financial Position for the years ended December 31,  2002, 2001 and 2000        |
|                                                                                                                   |
| Notes to  Consolidated Financial Statements                                                                            |

 

**ITEM19.****                                              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.               |

 

16

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**SIGNATURES**

 

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

 
|                                  | MEXICANA DE CANANEA,  S.A. DE C.V. |
|---------------------------------------|------------------------------------|
|                                  |                               |
|                                  |                               |
|                                  | By:                      | /s/  Daniel  Tellechea Salida |   |
|                                  |                               | 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 |                               |

 

----

 

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

 

I, Xavier García deQuevedo Topete, President and General Director of Mexicana de Cananea, S.A. deC.V., certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Mexicana de Cananea, S.A. deC.V.;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

----

 

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

 

I, Jesus Eduardo GonzálezFélix, Finance Director of Mexicana de Cananea, S.A. de C.V. certify that:

 

1.                                       Ihave reviewed this annual report on Form 20-F of Mexicana de Cananea, S.A. deC.V.;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

----

 

**ANNEX F**

 

**FINANCIALSTATEMENTS OF MEXICANA DE CANANEA S.A. DE C.V.**

 

----

 

**INDEX**

** **

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

** **

**CONSOLIDATEDFINANCIAL STATEMENTS**

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

 

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Stockholders of

 

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

 

We have audited the accompanying consolidated balancesheet of Mexicana de Cananea, S.A. de C.V. and Subsidiaries (Mexicancorporations collectively referred to as the “Company”) as of December 31,2002, and the related consolidated statements of operations, changes instockholders’ equity and changes in financial position for the year then ended,all expressed in thousands of Mexican pesos of purchasing power as of December31, 2002.  These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Mexicana deCananea, S.A. de C.V. and Subsidiaries as of December 31, 2002, and the resultsof their operations, changes in their stockholders’ equity and the changes intheir financial position for the year then ended in conformity with accountingprinciples generally accepted in Mexico.

 

Accounting principles generally accepted in Mexicovary in certain significant respects from accounting principles generallyaccepted in the United States of America. The application of the latter wouldhave affected the determination of net income for the year ended December 31,2002 and the determination of stockholders’ equity as of that date to theextent summarized in Note 16.

 

Our audit also comprehended the translation of Mexicanpeso amounts into U.S. dollar amounts and, in our opinion, such translation hasbeen made in conformity with the basis stated in Note 2. Such U.S. dollaramounts are presented solely for the convenience of readers.

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

 

 

 

Mexico City, Mexico

June 13, 2003

 

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Stockholders of

 

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

 

We have audited the accompanying consolidated balancesheets of Mexicana de Cananea, S.A. de C.V. and Subsidiaries (Mexicancorporations collectively referred to as the “Company”) as of December 31,2001, and the related consolidated statements of operations, changes instockholders’ equity and changes in financial position for the years endedDecember 31, 2001 and 2000, all expressed in thousands of Mexican pesos ofpurchasing power as of December 31, 2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Mexicana de Cananea, S.A. de C.V. and Subsidiaries as of December31, 2001, and the results of their operations and the changes in theirfinancial position for the years ended December 31, 2001 and 2000, inconformity with accounting principles generally accepted in Mexico.

 

In 2000, the Company adopted the regulations ofrevised Bulletin D-4, “Accounting for Income and Asset Taxes and EmployeeProfit Sharing”. The initial effect of adopting this bulletin was to record thedeferred income tax effects based on the cumulative effect of temporary differencesas of January 1, 2000 as a long-term liability, directly charging stockholders’equity in the new initial effect of deferred income taxes account for 672,166thousand Mexican pesos. Also, the provision for income taxes of 2000 increasedby 75,935 thousand Mexican pesos due to the deferred effects of the year.

 

F-2

----

 

Accounting practices used by the Company in preparingthe accompanying consolidated financial statements conform with accountingprinciples generally accepted in Mexico but do not conform with accountingprinciples generally accepted in the United States of America (U.S. GAAP).  A description of these differences and areconciliation of consolidated net income (loss) and stockholders’ equity toU.S. GAAP as permitted by Form 20-F, which allows omission of the requirementto quantify, in the U.S. GAAP reconciliation, the differences attributable tothe effects of comprehensive inflation adjustments recorded locally, are setforth in Note 16. As discussed in Note 16, the 2001 and 2000 U.S. GAAPreconciliations have been restated.

 

Ruiz, Urquiza y Cía., S.C.(A member firm of Andersen Worldwide until April 9, 2002)

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

 

C.P.C. Jorge I. Peralta Alvarez

 

Mexico City, MexicoJune 14, 2002(except with respect to the restatement to constant Mexican pesosand the restatement of the U.S. GAAP reconciliations presented in Note 16,as to which the date is June 13, 2003)

 

F-3

----

 

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS****AS OF DECEMBER 31, 2002 AND 2001****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($))**

 
|                                                                                                                      |   | **Convenience  Translation  (Note 2)  2002** |    | **2002**   |   | **2001**   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|------------|--------|------------|--------|
| **A**  **S**  **S**  **E**  **T**  **S**                                                         |   |                                         |    |       |   |       |   |
| CURRENT  ASSETS:                                                                                                          |   |                                         |    |       |   |       |   |
| Cash  and temporary investments (Note 5)                                                                                  |   | $                                            | 13,845  |       | Ps.    | 142,775    |   | Ps. | 18,713 |   |
| Cash  retained in collateral account (Note 1)                                                                             |   | —                                       |    | —     |   | 13,869     |   |
| Notes  and accounts receivable-                                                                                           |   |                                         |    |       |   |       |   |
| Trade,  net of allowances for doubtful accounts of Ps.1,414 and Ps.1,556 as of  December 31, 2002 and 2001, respectively. |   | 2,597                                        |    | 26,786     |   | 22,032     |   |
| Recoverable  taxes                                                                                                        |   | 16,485                                       |    | 170,004    |   | 61,272     |   |
| Due  from affiliated companies (Note 12)                                                                                  |   | 7,890                                        |    | 81,362     |   | 57,154     |   |
| Other                                                                                                                     |   | 3,793                                        |    | 39,113     |   | 8,510      |   |
|                                                                                                                      |   | 30,765                                       |    | 317,265    |   | 148,968    |   |
| Inventories  (Note 6)                                                                                                     |   | 30,449                                       |    | 314,009    |   | 339,978    |   |
| Total  current assets                                                                                                     |   | 75,059                                       |    | 774,049    |   | 521,528    |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| PROPERTY,  PLANT AND EQUIPMENT (Note 7)                                                                                   |   | 696,791                                      |    | 7,185,655  |   | 7,434,791  |   |
| INVESTMENTS  IN SHARES OF ASSOCIATED COMPANIES                                                                            |   | 74                                           |    | 766        |   | 800        |   |
| DEFERRED  CHARGES (Note 8)                                                                                                |   | 160,277                                      |    | 1,652,851  |   | 1,291,537  |   |
| Total  assets                                                                                                             |   | $                                            | 932,201 |       | Ps.    | 9,613,321  |   | Ps. | 9,248,656 |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                            |   |                                         |    |       |   |       |   |
| CURRENT  LIABILITIES:                                                                                                     |   |                                         |    |       |   |       |   |
| Accounts  payable to suppliers                                                                                            |   | $                                            | 29,798  |       | Ps.    | 307,291    |   | Ps. | 130,533 |   |
| Accounts  payable and accrued liabilities                                                                                 |   | 70,326                                       |    | 725,236    |   | 559,041    |   |
| Due  to affiliated companies (Note 12)                                                                                    |   | 46,700                                       |    | 481,597    |   | 442,777    |   |
| Taxes  payable                                                                                                            |   | 1,471                                        |    | 15,169     |   | 12,172     |   |
| Total  current liabilities                                                                                                |   | 148,295                                      |    | 1,529,293  |   | 1,144,523  |   |
| LIABILITY  FOR PENSION, SENIORITY PREMIUM  AND  MEDICAL SERVICE OBLIGATIONS (Note 9)                                 |   | 20,176                                       |    | 208,066    |   | 184,098    |   |
| DEFERRED  INCOME TAXES (Note 13)                                                                                          |   | 68,212                                       |    | 703,431    |   | 767,349    |   |
| Total  liabilities                                                                                                        |   | 236,683                                      |    | 2,440,790  |   | 2,095,970  |   |
|                                                                                                                      |   |                                         |    |       |   |       |   |
| STOCKHOLDERS’  EQUITY (Note 10):                                                                                     |   |                                         |    |       |   |       |   |
| Capital  stock                                                                                                            |   | 828,907                                      |    | 8,548,103  |   | 8,548,103  |   |
| Retained  earnings                                                                                                        |   | 65,587                                       |    | 676,364    |   | 649,470    |   |
| Accumulated  other comprehensive loss                                                                                     |   | (130,081                                     | )       | (1,341,457 | )      | (1,334,408 | )      |
| Initial  effect of deferred income taxes                                                                                  |   | (68,895                                      | )       | (710,479   | )      | (710,479   | )      |
| Total  stockholders’ equity                                                                                          |   | 695,518                                      |    | 7,172,531  |   | 7,152,686  |   |
| Total  liabilities and stockholders’ equity                                                                          |   | $                                            | 932,201 |       | Ps.    | 9,613,321  |   | Ps. | 9,248,656 |   |
|                                                                                                                           |        |                                              |         |            |        |            |        |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-4

----

 

**MEXICANADE CANANEA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000EXPRESSED IN CONSTANT MEXICAN PESOSAS OF DECEMBER 31, 2002(Stated in thousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($),except per share and share data)**

 
|                                                                             |   | **Convenience  Translation  (Note 2)  2002** |    | **2002**  |   | **2001**  |   | **2000**  |      |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|---------|-----------|--------|-----------|--------|-----------|-----------|
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| NET  SALES                                                                       |   | $                                            | 227,657 |      | Ps.    | 2,347,723 |   | Ps.       | 1,878,083 |   | Ps. | 2,630,655 |   |
| COST  OF SALES                                                                   |   | 175,093                                      |    | 1,805,652 |   | 1,589,993 |   | 1,981,093 |      |
| Gross  profit                                                                    |   | 52,564                                       |    | 542,071   |   | 288,090   |   | 649,562   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| OPERATING  EXPENSES:                                                             |   |                                         |    |      |   |      |   |      |      |
| Administrative  expenses from operations                                         |   | 8,281                                        |    | 85,394    |   | 95,063    |   | 93,422    |      |
| Depreciation,  amortization and depletion                                        |   | 39,981                                       |    | 412,309   |   | 348,564   |   | 307,902   |      |
| Income  (loss) from operations                                                   |   | 4,302                                        |    | 44,368    |   | (155,537  | )      | 248,238   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| NET  COMPREHENSIVE  FINANCING COST  (INCOME):                               |   |                                         |    |      |   |      |   |      |      |
| Interest  expense                                                                |   | 3,655                                        |    | 37,700    |   | 46,825    |   | 12,776    |      |
| Interest  income                                                                 |   | (60                                          | )       | (623      | )      | (1,188    | )      | (2,078    | )         |
| Foreign  exchange loss (gain), net                                               |   | 9,309                                        |    | 96,006    |   | (30,919   | )      | 7,981     |      |
| Monetary  position gain                                                          |   | (5,432                                       | )       | (56,024   | )      | (19,330   | )      | (13,813   | )         |
|                                                                             |   | 7,472                                        |    | 77,059    |   | (4,612    | )      | 4,866     |      |
| OTHER  (INCOME) EXPENSES, net                                               |   | (562                                         | )       | (5,797    | )      | 23,551    |   | 9,890     |      |
| (Loss)  income  before income tax as and  employee statutory profit-sharing |   | (2,608                                       | )       | (26,894   | )      | (174,476  | )      | 233,482   |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| INCOME  TAXES (Note 13)                                                          |   | (5,216                                       | )       | (53,788   | )      | (10,551   | )      | 99,666    |      |
|                                                                             |   |                                         |    |      |   |      |   |      |      |
| Consolidated  net income (loss)                                                  |   | $                                            | 2,608   |      | Ps.    | 26,894    |   | Ps.       | (163,925  | ) | Ps. | 133,816 |   |
| Earnings  (loss) per share                                                       |   | $                                            | 0.01    |      | Ps.    | 0.13      |   | Ps.       | (0.81     | ) | Ps. | 0.66 |   |
| Weighted  average number of shares outstanding (in thousands)                    |   | 201,798                                      |    | 201,798   |   | 201,798   |   | 201,798   |      |
|                                                                                  |        |                                              |         |           |        |           |        |           |           |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-5

----

 

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

 

**CONSOLIDATEDSTATEMENTS OF CHANGES****INSTOCKHOLDERS’ EQUITY****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANTS MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ( $ )**

 
|                                                   |   |               |      |            |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Loss** |    | **Initial  Effect of  Deferred  Income  Taxes** |   | **Total  Stockholders’  Equity** |   |
|--------------------------------------------------------|--------|--------------------|-----------|-----------------|--------|------------------------|--------|---------------------------------------------|---------|-------------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   |               |      |            |   |                   |   |                                        |    |
|                                                   |   |               |      |            |   |                   |   |                                        |    |
|                                                   |   | **Capital  Stock** |      |            |   |                   |   |
|                                                   |   | **Nominal**        |      | **Restatement** |   |                   |   |                                        |    |
|                                                   |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| BALANCES  AT JANUARY 1, 2000                           |   | Ps.                | 2,017,989 |            | Ps.    | 6,530,114              |   | Ps.                                         | 679,579 |                                            | Ps.    | (1,300,237                            | )      | Ps. | (710,479 | ) | Ps. | 7,216,966 |   |
| Comprehensive  income:                                 |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net income                               |   | —             |      | —          |   | 133,816                |   | —                                      |    | —                                          |   | 133,816                               |   |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (7,942                                      | )       | —                                          |   | (7,942                                | )      |
| Total  comprehensive income                            |   |               |      |            |   |                   |   |                                        |    |                                            |   | 125,874                               |   |
| BALANCES  AT DECEMBER 31, 2000                         |   | 2,017,989          |      | 6,530,114       |   | 813,395                |   | (1,308,179                                  | )       | (710,479                                        | )      | 7,342,840                             |   |
| Comprehensive  loss:                                   |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net loss                                 |   | —             |      | —          |   | (163,925               | )      | —                                      |    | —                                          |   | (163,925                              | )      |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (5,618                                      | )       | —                                          |   | (5,618                                | )      |
| Additional  liability for employee benefit obligations |   | —             |      | —          |   | —                 |   | (20,611                                     | )       | —                                          |   | (20,611                               | )      |
| Total  comprehensive loss                              |   |               |      |            |   |                   |   |                                        |    |                                            |   | (190,154                              | )      |
| BALANCES  AT DECEMBER 31, 2001                         |   | 2,017,989          |      | 6,530,114       |   | 649,470                |   | (1,334,408                                  | )       | (710,479                                        | )      | 7,152,686                             |   |
| Comprehensive  income:                                 |   |               |      |            |   |                   |   |                                        |    |                                            |   |                                  |   |
| Consolidated  net income                               |   | —             |      | —          |   | 26,894                 |   | —                                      |    | —                                          |   | 26,894                                |   |
| Cumulative  effect of restatement                      |   | —             |      | —          |   | —                 |   | (6,615                                      | )       | —                                          |   | (6,615                                | )      |
| Additional  liability for employee benefit obligations |   | —             |      | —          |   | —                 |   | (434                                        | )       | —                                          |   | (434                                  | )      |
| Total  comprehensive income                            |   |               |      |            |   |                   |   |                                        |    |                                            |   | 19,845                                |   |
| BALANCES  AT DECEMBER 31, 2002                         |   | Ps.                | 2,017,989 |            | Ps.    | 6,530,114              |   | Ps.                                         | 676,364 |                                            | Ps.    | (1,341,457                            | )      | Ps. | (710,479 | ) | Ps. | 7,172,531 |   |
|                                                        |        |                    |           |                 |        |                        |        |                                             |         |                                                 |        |                                       |        |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-6

----

 

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

 

**CONSOLIDATED STATEMENTS OF CHANGES INFINANCIAL****POSITION****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($))**

 
|                                                                                  |   | **Convenience  Translation  (Note 2)  2002** |   | **2002** |   | **2001** |   | **2000**   |     |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|----------|--------|------------|----------|
| OPERATING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Consolidated  net income (loss)                                                       |   | $                                            | 2,608  |     | Ps.    | 26,894   |   | Ps.        | (163,925 | ) | Ps. | 133,816 |   |
| Items  that did not require (generate) resources-                                     |   |                                         |   |     |   |     |   |       |     |
| Provision  for voluntary retirement, pension, seniority Premiums and medical services |   | 2,324                                        |   | 23,969   |   | 4,592    |   | 20,826     |     |
| Depreciation                                                                          |   | 29,337                                       |   | 302,539  |   | 282,018  |   | 295,357    |     |
| Amortization  and depletion of deferred charges                                       |   | 10,644                                       |   | 109,770  |   | 66,546   |   | 12,546     |     |
| Loss  (gain) on sale of property, plant and equipment                                 |   | (14                                          | )      | (144     | )      | 19,586   |   | 5,621      |     |
| Deferred  income taxes                                                                |   | (5,638                                       | )      | (58,147  | )      | (10,551  | )      | 80,263     |     |
|                                                                                  |   | 39,261                                       |   | 404,881  |   | 198,266  |   | 548,429    |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| Changes  in current assets and liabilities:                                           |   |                                         |   |     |   |     |   |       |     |
| (Increase)  decrease in assets-                                                       |   |                                         |   |     |   |     |   |       |     |
| Notes  and accounts receivable                                                        |   | (16,320                                      | )      | (168,297 | )      | 19,032   |   | 294,327    |     |
| Inventories                                                                           |   | 1,299                                        |   | 13,398   |   | 9,531    |   | 12,795     |     |
| Increase  (decrease) in liabilities-                                                  |   |                                         |   |     |   |     |   |       |     |
| Accounts  payable and accrued liabilities                                             |   | 33,218                                       |   | 342,560  |   | 169,892  |   | 237,496    |     |
| Due  to affiliated companies                                                          |   | 3,765                                        |   | 38,820   |   | 131,515  |   | (9,382     | )        |
| Taxes  payable                                                                        |   | 329                                          |   | 3,391    |   | (3,338   | )      | (58,846    | )        |
| Net  resources generated by operating activities.                                     |   | 61,552                                       |   | 634,753  |   | 524,898  |   | 1,024,819  |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| FINANCING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Cash  retained in collateral account                                                  |   | 1,345                                        |   | 13,869   |   | (13,869  | )      | —     |     |
| Due to Mexicana de Cobre, S.A. de C.V.                                                |   | —                                       |   | —   |   | 305,770  |   | —     |     |
| Net  resources generated by financing activities                                      |   | 1,345                                        |   | 13,869   |   | 291,901  |   | —     |     |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| INVESTING  ACTIVITIES:                                                                |   |                                         |   |     |   |     |   |       |     |
| Additions  to property and equipment                                                  |   | (7,423                                       | )      | (47,961  | )      | (315,424 | )      | (550,911   | )        |
| Proceeds  from sale of property and equipment                                         |   | 23                                           |   | 236      |   | 17,758   |   | 28,814     |     |
| Net  increase in deferred charges                                                     |   | (46,238                                      | )      | (476,835 | )      | (504,908 | )      | (507,687   | )        |
| Net  resources used in investing activities                                           |   | (50,867                                      | )      | (524,560 | )      | (802,574 | )      | (1,029,784 | )        |
|                                                                                  |   |                                         |   |     |   |     |   |       |     |
| Increase  (decrease) in cash and temporary investments                                |   | 12,030                                       |   | 124,062  |   | 14,228   |   | (4,965     | )        |
| Cash  and temporary investments at beginning of year                                  |   | 1,814                                        |   | 18,713   |   | 4,485    |   | 9,450      |     |
| Cash  and temporary investments at end of year                                        |   | $                                            | 13,844 |     | Ps.    | 142,775  |   | Ps.        | 18,713   |   | Ps. | 4,485 |   |
|                                                                                       |        |                                              |        |          |        |          |        |            |          |  |  |  |  |  |  |  |

 

The accompanyingnotes are part of these consolidated financial statements.

 

F-7

----

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS****FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000****EXPRESSED IN CONSTANT MEXICAN PESOS****AS OF DECEMBER 31, 2002****(Stated in thousands of Mexican pesos (Ps.)and thousands of U.S. dollars ($), except per share data)**

 

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

 

Mexicana de Cananea, S.A. de C.V. and Subsidiaries(collectively the “Company”) is a 98.49% owned subsidiary of Grupo MineroMéxico, S.A. de C.V. (“GMM”). The Company is engaged primarily in the businessof exploring, mining and processing copper.

 

**Impactof metal prices on the Company’s operation**

 

During 2002, the Company continued to implementdifferent measures at its mining operations to counteract unfavorableconditions in the metals market. Economic growth in the U.S. and othercountries worldwide did not meet expectations. Metals prices, especiallycopper, remained at their lowest levels in years and were subject to a highdegree of volatility despite sustained demand from China. After dropping in2001, in 2002, the average market price of copper fell by an additional1.2%  over the prior year. The Companyconsolidated operating and administrative activities by closing down orreducing certain operations, selling off excess assets, and suspending certainpurchases from third parties as deemed necessary. The workforce has also beenreduced and programs have been implemented to increase productivity.

 

**Renegotiationof GMM’s long-term debt and compliance with restrictions**

 

Under pressure due to low metals prices and theresulting drop in liquidity during the past few years, GMM was obligated torestructure its debt as a result of its failure to make scheduled payments andits noncompliance with certain financial covenants required by its debtagreements. In April 2003, GMM successfully restructured its indebtedness witha number of institutional investors, banking institutions and agencies. Thisrestructuring has resulted in greater financial and operating flexibility andallows GMM’s management to focus on increasing the productivity andprofitability of mining-metallurgical units, despite the adverse marketconditions currently faced by the industry. GMM now has a better financialstructure to allow improvement of its daily transactions to offset the currentcycle of low metal prices.

 

The restructuring of indebtedness by GMM in the amountof U.S.$880.9 million with respect to the holders of its subsidiaries’ securedexport notes and to the banking syndicate headed by Bank of America occurred onApril 29, 2003 with the signing of definitive documentation.. Thisrestructuring process consisted of:

 

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

 

b.              The contribution ofnew capital of U.S.$110 million by Grupo México, S.A. de C.V. (“GMEXICO”) andAmericas Mining Company, Inc. (“AMC”) to GMM, that was received on April 29,2003, supporting the Company’s mining operations, and;

 

F-8

----

 

c.               The release offunds that were generated by export sales retained as collateral by the holdersof “Secured Export Notes”, which are shown on the accompanying balance sheetunder the heading of “Cash retained in collateral accounts”.

 

In addition, as a result of the restructuring,Mexicana de Cananea, S.A. de C.V. is a guarantor of substantially all of GMM’sfinancial indebtedness.

 

**Capitalizationof leachable material**

 

From 1999 to 2001, the Company conducted majordrilling studies and metallurgic testing to better locate copper deposits andalso to obtain greater yields. According to these studies, the Company determined that its mine haslarge quantities of material known as chalcocite, which render benefits whenprocessed through the hydrometallurgic process know as leaching.  In order to begin exploiting such leachablematerials, during 2001, the Company accumulated large quantities of leachablematerial in sites known as leaching dumps, from which copper is extractedthrough a process of irrigation, filtering and electrolysis.  According to these studies, copper can alsobe recovered through the leaching process over approximately five to eightyears.  The amortization of the costsincurred in processing the leachable material, which are capitalized once suchmaterials are removed from the mine, is based on the actual depletion of eachof the leaching dumps.  As of December31, 2002 and 2001, the gross amount capitalized for this activity wasPs.919,126 and Ps.532,020, respectively. Prior to 2001, such leachable materials were considered to be wastematerials and therefore figured into the determination of stripping ratios,which are used to determine capitalized stripping costs.  The implementation of processing leachablematerials in 2001 resulted in a net reduction in cost of sales as recorded inthe statements of operations of Ps.141,316 in 2002 and  Ps.169,080 in 2001, as compared to what suchamounts would have been if the Company did not implement such procedures.

 

**2. BASISOF PRESENTATION:**

 

The accompanyingconsolidated financial statements of the Company are prepared in accordancewith the accounting principles generally accepted in Mexico (“Mexican GAAP”),which differ in certain significant respects from those applicable in theUnited States of America (“U.S. GAAP”). A description of these differences andtheir effects on net income (loss) and stockholders equity is set forth in Note16 (as restated).

 

The preparation of the financial statements inconformity with Mexican GAAP, along with the reconciliation to U.S. GAAP,requires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and the accompanying notes.While these estimates and assumptions are based on management’s best knowledgeof current events, actual results may differ.

 

The financial statements are stated in Mexican pesos.The translation of Mexican pesos into U.S. dollars is included solely for theconvenience of the reader, using the exchange rate published by Banco de Méxicoas of December 31, 2002 of Ps.10.3125 to U.S. $1.00. The conveniencetranslations should not be construed as a representation that the Mexican pesoamounts have been, could have been, or could in the future be, converted intoU.S. dollars at this or any other rate of exchange.

 

**3. BASISOF CONSOLIDATION:**

 

The accompanying consolidated financial statementsinclude the financial statements of Mexcananea and the following subsidiarycompanies.  All significant intercompanybalances and transaction have been eliminated in the consolidation.

 

|                                               |   | **Percentage  of Ownership  as of  December 31,****2002** |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                               |   |                                                      |   |
| Hospital del Ronquillo, S. de R.L. de C.V          |   | 100.00                                                    | %      |
| Proyecciones Urbanísticas, S. de R.L. de C.V. |   | 100.00                                                    | %      |
| Minera Cumobabi, S.A. de C.V.                      |   | 99.99                                                     | %      |

 

F-9

----

 

**4.SIGNIFICANT ACCOUNTING POLICIES:**

 

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

 

Effective January 1, 2001, the Company adoptedBulletin C-2, “Financial Instruments”.  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.

 

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

 

The Company restates all of its financial statementsin terms of the purchasing power of the Mexican pesos as of the end of thelatest period, thereby comprehensively recognizing the effects of inflation.Consequently, all financial statement amounts are comparable, both for thecurrent and the prior year, since all are stated in terms of Mexican pesos ofthe same purchasing power. Accordingly, the financial statements of the prioryear have been restated in terms of Mexican pesos of the latest period andtheir amounts presented herein differ from those originally reported in termsof Mexican pesos of the corresponding year.

 

The factors used to restate the 2001 and 2000financial statements in terms of the purchasing power of the Mexican currencyas of December 31, 2002 are 1.057 and 1.1035, respectively.

 

The consolidated financial statements have beenrestated as follows:

 

•*                                          Balancesheets:*

 

Primary metal inventoriesare stated at current international metal market quotations at year-end, lessthe restated cost of completing the processing cycle to obtain the finishedproduct.  Other inventory items arestated at their replacement cost through the application of production cost,without exceeding their net realizable value.

 

Property and equipmentare restated by applying a factor derived from the NCPI. Depreciation ofrestated assets is calculated based on the estimated useful life of each assetusing the straight-line method.

 

The investment in sharesof associated companies is accounted for under the equity method, based on theMexican GAAP financial statements of such companies, restated by a factorderived from the NCPI.

 

Stockholders’ equity andother nonmonetary items are restated using a factor derived from the NCPIcumulative from the date of contribution or generation.

 

•*                                          Statementsof operations:*

 

Revenues and expensesthat are associated with a monetary item (cash, trade receivables, liabilities,etc.) are restated from the month in which they arise through year-end, basedon factors derived from the NCPI.

 

Cost of sales of primarymetals and other inventories is restated based on the replacement cost ofproducts consumed, and restated through year-end based on factors derived fromthe month in which they arise through year-end.

 

Depreciation iscalculated based on the estimated useful lives of the NCPI restated assets.Depreciation is commenced when the related assets are placed in service.

 

The gain or loss onmonetary position, which represents the erosion of the purchasing power ofmonetary items caused by inflation, is determined by applying to net monetary assets or liabilities at thebeginning of each month, the factor of inflation derived from the NCPI and isrestated through year end with the corresponding factor. Gains arise frommaintaining an average net monetary liability position.

 

F-10

----

 

•                                          *In the otherfinancial statements:*

 

The statements of changesin financial position presents the changes in constant Mexican pesos, accordingto the financial position at prior year-end, restated to Mexican pesos of themost recent year end.

 

The gain or lossresulting from inflation presented in the statement of changes in stockholders’equity is comprised mainly of the income or loss resulting from holdingnonmonetary assets, which represents the change in the specific price level ofthese assets and its effect on results of operations compared to the change inthe NCPI.

 

**Temporaryinvestments**

 

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

 

**Impairmentof long-lived assets**

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Assetsare determined impaired when the estimated future undiscounted cash flowsexpected to result from the use of the asset are less than the carrying valueof the asset.  The Company measures animpairment loss as the difference between the carrying value of the asset andits fair value.  No impairment charges were recorded during the years ended December 31,2002, 2001 and 2000.

 

**Deferredcharges**

 

•*                                          Strippingcosts*

 

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

 

The Company’s policyresults in the smoothing of stripping costs over the life of the mine and, inview of the Company, better facilitates the matching of mine production costsover the life of the mine with the mine’s revenues.

 

When there is asignificant change to established mineral reserves, the estimated level ofstripping costs is adjusted to reflect this change.

 

•*                                          Leachablematerial*

 

The Company capitalizesthe cost of materials with low copper content extracted during the miningprocess which are accumulated in areas known as leaching dumps.  The amortization of the capitalized cost isdetermined based on the actual depletion of each of the leaching dumps, whichaverages  from 5 to 8 years.

 

•*                                          Minedevelopment costs*

 

Exploration costsincurred before the start of operations of a site are expensed as incurred, exceptfor expenditures on specific properties where the presence of proven andprobable mineral resources have been confirmed, in which case, the expendituresare capitalized as mine development costs. Mine development costs are amortized on a straight-line basis over theestimated useful lives of the corresponding proven ore reserves.

 

F-11

----

 

•*                                          Capitalizationof overhaul*

 

Regular maintenance andrepairs are expensed as incurred. The cost of an engine overhaul is capitalizedand amortized over a term ranging between two and four years, depending on thetype of overhaul.

 

**Hedgingactivities**

 

Derivative instruments may be used to manage exposureto market risk from changes in commodity prices (metal and energy products),interest rates or the value of the Company’s assets and liabilities. Derivativeinstruments, which are designated as hedges, must be deemed effective atreducing the risk associated with the exposure being hedged and must bedesignated as a hedge at the inception of the contract.

 

The Company’s derivative transactions are restrictedto risk control, and as of December 31, 2002 and 2001 there are no outstandinghedging derivatives. The Company does not maintain or issue financial instrumentsfor speculative purposes. Decisions with respect to each transaction and to theoverall hedging policies are made by an Executive Risk Committee. The objectiveof this committee, which is currently comprised of the Chairman of the Board ofDirectors, the Director of Management and Finance and the Assistant Director ofRisk Management, is to ensure that the risks and benefits have beenappropriately assessed.

 

The Company may enter into swap and optiontransactions or a combination of both to reduce the risk of purchase or salesprice fluctuations. For instance, for the purpose of protecting metal prices,the Company may purchase put options or create synthetic put options to reduceor eliminate the risk of metal price declines below the option strike price ona portion of its anticipated future production. The cost of the options isamortized using the straight-line method over the period in which the optionscan be exercised. Gains or losses deriving from the sale or exercise of theoptions, after deducting the acquisition expenses not amortized, are recognizedin the results of the period in which the guaranteed production or inputs are,respectively, sold or purchased.  TheCompany also uses futures contracts for hedging the effect of changes in theprices relative to a portion of the assets that are sold or purchased.

 

Gains or losses that result from these transactionsare deferred through their realization date. As a result, derivative instrumentsheld by the Company are closely related with the prices and amounts of realasset positions, and the notional amounts and expiration dates of thederivative instruments cannot exceed those of the actual underlying transactions.Under these circumstances, for accounting purposes, derivatives are classifiedas hedging transactions.

 

**Swap andfutures agreements**

 

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

 

Interest rate swaps are used to limit the effect ofinterest rate increases on any floating rate debt. The differential to be paidor received as interest rates change is recorded in interest expense in thestatement of income. Fuel swaps limit the effect of the increases in fuel prices.The differential paid or received as changes in the price of fuel occur isrecorded as part of cost of sales. Foreign currency swaps limit the effect of exchange rate changes onfuture cash flow obligations denominated in foreign currencies. The differentialto be paid or received as exchange rates change is included as part of the costof the asset for which the swap was obtained. As of December 31, 2002 and 2001, there were no outstanding swap orfuture agreements.

 

**Employeebenefit obligations**

 

In accordance with Mexican Labor Law and the Company’scollective bargaining agreements, a liability results from voluntaryseparations of employees who have worked for a company for a required number ofyears. In addition, in accordance with the Federal Labor Law, companies haveobligations resulting from indemnities and seniority premiums payable toemployees terminated under certain circumstances.

 

The Company records the liabilities from senioritypremiums as they accrue, in accordance with actuarial computations based on theprojected unit credit method, using real interest rates.

 

F-12

----

 

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

 

When there is a significant reduction in personnel dueto the restructuring of the labor force or the closing of a plant, thecorresponding indemnity costs, net of the corresponding reduction in theprojected benefit obligation and the related items to be amortized, are chargedto results.

 

Accordingly, a liability is being accrued, which atpresent value will cover the obligation for benefits projected to the estimatedretirement date of the Company’s employees. Indemnity payments are charged to results in the period in which theyare made.

 

The Company plan assets related to voluntaryseparations and seniority premiums consist of investments in Mexican governmenttreasury certificates (40%) and various equity securities of large Mexicancompanies (60%).  The market value ofsecurities of Mexican companies is to varying degrees volatile and may beaffected by economic and market conditions in other emerging market countries.

 

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

 

The Company determines and records its income tax, taxon assets and employee profit sharing in accordance with the tax legislationand revised Bulletin D-4, “Tratamiento Contable del Impuesto sobre la Renta,del Impuesto al Activo y la Participación de los Trabajadores en las Utilidades”(Accounting for Income Tax, Tax on Assets and Employee Profit Sharing), whichrequires that deferred tax assets and liabilities be recorded for all temporarydifferences between the accounting and tax bases of assets and liabilities.

 

The balance of deferred income tax and deferred tax onassets is determined using the liability method, which takes into account alltemporary differences between the accounting and tax bases of assets andliabilities.  Deferred employee profitsharing is calculated considering only those temporary differences that arisefrom the reconciliation between the accounting (loss) income for the year andthe basis for employee profit sharing that are expected to reverse within adefined period.

 

The balance of deferred taxes is comprised of monetaryand non-monetary items, based on the temporary differences from which it isderived.  The balance is classified as anon-current, regardless of when the temporary differences are expected toreverse.

 

The deferred tax provision for the year to be includedin the results of operations is determined by comparing the deferred taxbalance at end of the year to the balance at the beginning of the year,excluding from both balances any temporary differences that are recordeddirectly in stockholders’ equity.  Thedeferred taxes related to such temporary differences are recorded in the samestockholder’s equity account.  Theinitial effect of the application of this new bulletin as of January 1, 2000was recorded in stockholder’s equity in the initial effect of deferred incometaxes account.

 

**Revenuerecognition**

 

Most of the Company’s copper is sold as refined metalunder annual contracts or on a spot sale basis. The balance of the Company’scopper production is sold in the form of concentrates under contracts withterms of one to three years.

 

Revenue from sales of copper concentrate is recordedin the month the product is delivered to customers based on prices determinedin accordance with terms of the related sales contracts.  For those sales of copper  products wherein customers are given theoption to select a monthly average provided by the London Metal Exchange(“LME”) or the Commodity Exchange, Inc. (“COMEX”) price ranging between one andthree months subsequent to shipment, revenue is recorded at a provisional priceat the time of shipment, based on LME or COMEX spot prices for coppersales.  The provisionally priced sales are adjusted to reflect spot pricesat the end of each month until a final adjustment is made to the price of theshipments upon settlement with customers pursuant to the terms of the contract.

 

**Netcomprehensive financing cost (income)**

 

The net comprehensive financing cost (income) includesall financial revenues and expenses, such as interest, exchange gains or lossesand gains or losses on monetary position as earned or incurred.

 

F-13

----

 

Transactions in currencies other than the Mexican pesoare recorded at the exchange rate as of the date of the transaction, and theassets and liabilities in foreign currency are adjusted to the exchange rate asof the most recent year-end, affecting income as part of the integral result offinancing.

 

**Earnings(loss) per share**

 

Earnings (loss) per share have been computed for eachperiod by dividing income (loss) of the majority interest, by the weightedaverage number of shares outstanding.

 

**Comprehensiveincome (loss)**

 

Comprehensive income (loss) is comprised of theconsolidated net income (loss) for the period plus any gains or losses thataccording to specific regulations are presented directly in stockholders’equity, such as the gain or loss from holding nonmonetary assets and theadditional liability for employee benefit obligations.

 

**5. CASHAND TEMPORARY INVESTMENTS:**

 

Cash and temporary investments are comprised asfollows:

 
|                  |   | **2002** |    | **2001** |   |
|-----------------------|--------|----------|---------|----------|--------|
|                  |   |     |    |     |   |
| Cash                  |   | Ps.      | 142,775 |     | Ps.    | 6,453 |   |
| Temporary investments |   | —   |    | 12,260   |   |
|                  |   | Ps.      | 142,775 |     | Ps.    | 18,713 |   |

 

**6.INVENTORIES:**

 

Inventories were as follows:

 
|                             |   | **2002** |    | **2001** |   |
|----------------------------------|--------|----------|---------|----------|--------|
|                             |   |     |    |     |   |
| Materials and supplies           |   | Ps.      | 306,220 |     | Ps.    | 356,092 |   |
| Finished cathodes                |   | 12,352   |    | 2,366    |   |
| Blister copper in process        |   | 567      |    | 497      |   |
| Merchandise in transit           |   | 11,351   |    | 3,425    |   |
| Advances to suppliers            |   | 10,678   |    | 10,841   |   |
|                             |   | 341,168  |    | 373,221  |   |
|                             |   |     |    |     |   |
| Less- Allowance for obsolescence |   | (27,159  | )       | (33,243  | )      |
|                             |   | Ps.      | 314,009 |     | Ps.    | 339,978 |   |

 

**7.PROPERTY, PLANT AND EQUIPMENT:**

 

Property and equipment were as follows:

 
|                           |   | **2002**   |      | **2001**   |   |
|--------------------------------|--------|------------|-----------|------------|--------|
|                           |   |       |      |       |   |
| Processing equipment           |   | Ps.        | 5,215,229 |       | Ps.    | 5,001,810 |   |
| Mobile equipment               |   | 3,722,074  |      | 3,746,212  |   |
| Buildings and improvements     |   | 2,751,393  |      | 2,695,750  |   |
| Infrastructure                 |   | 568,846    |      | 593,981    |   |
| Automobiles and trucks         |   | 89,003     |      | 92,392     |   |
|                           |   | 12,346,545 |      | 12,130,145 |   |
| Less- Accumulated depreciation |   | (5,627,147 | )         | (5,254,585 | )      |
|                           |   | 6,719,398  |      | 6,876,560  |   |
| Construction-in-progress       |   | 269,851    |      | 362,827    |   |
| Land                           |   | 196,406    |      | 196,404    |   |
|                           |   | Ps.        | 7,185,655 |       | Ps.    | 7,434,791 |   |

 

F-14

----

 

The average annual depreciation rates were as follows:

 
|                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Processing equipment      |   | 4.73     | %      | 2.98     | %      | 3.13     | %      |
| Mobile equipment          |   | 3.83     | %      | 4.37     | %      | 4.47     | %      |
| Building and improvements |   | 3.15     | %      | 2.11     | %      | 2.12     | %      |
| Infrastructure            |   | 2.25     | %      | 2.23     | %      | 2.28     | %      |
| Automobiles and trucks    |   | 6.51     | %      | 6.69     | %      | 7.15     | %      |

 

**8.DEFERRED CHARGES:**

 

Deferred charges were as follows:

 
|                                            |   | **2002**  |      | **2001**  |   |
|-------------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                            |   |      |      |      |   |
| Stripping costs                                 |   | Ps.       | 671,307   |      | Ps.    | 578,279 |   |
| Lixiviable material                             |   | 919,126   |      | 532,020   |   |
| Mine development costs                          |   | 181,499   |      | 198,984   |   |
| Intangible asset arising from employee benefits |   | 40,686    |      | 46,412    |   |
| Preoperating expenses                           |   | 6,135     |      | 18,565    |   |
|                                            |   | 1,818,753 |      | 1,374,260 |   |
|                                            |   |      |      |      |   |
| Less- Accumulated amortization and depletion    |   | (165,902  | )         | (82,723   | )      |
|                                            |   | Ps.       | 1,652,851 |      | Ps.    | 1,291,537 |   |

 

During the years ended December 31, 2002, 2001 and2000, the application of deferred stripping accounting resulted in a decreasein cost of sales reported in the statements of operations of Ps.70,575,Ps.103,969, and Ps.450,497, respectively. Deferred stripping costs will not befully amortized until the cessation of operations of the mines currentlyoperated by the Company.

 

Based on the amortization costs incurred in the mostrecent three years related to the intangibe assets subject to amortization, theCompany estimates that amortization costs for such intangible assets willamount to Ps. 63,000 in each of the following five years.

 

**9.EMPLOYEE RETIREMENT BENEFITS:**

 

The employee benefit obligation relates to voluntaryretirements, seniority premiums and medical services at retirement.  The amount resulting from the actuarialcalculations prepared by external actuaries is being funded using the projectedunit credit method.  Below is abreakdown of this obligation as of December 31, 2002 and 2001:

 
|                               |   | **2002**                         |    | **2001**                            |   |
|------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|
|                               |   | **Seniority  Premiums  Reserve** |    | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   |
|                               |   |                             |    |                                |   |   |   |   |   |   |   |   |   |
| Projected benefit obligation (PBO) |   | Ps.                              | 121,093 |                                | Ps.    | 499,082 |   | Ps. | 620,175 |   | Ps. | 121,580 |   | Ps. | 491,133 |   | Ps. | 612,713 |   |
| Unamortized transition liability   |   | (6,100                           | )       | (294,719                            | )      | (300,819 | ) | (7,066 | ) | (309,455 | ) | (316,521 | ) |
| Past service cost to be amortized  |   | (34,610                          | )       | —                              |   | (34,610 | ) | (39,344 | ) | — |   | (39,344 | ) |
| Variances in assumptions           |   | (23,384                          | )       | (115,027                            | )      | (138,411 | ) | (23,750 | ) | (116,023 | ) | (139,773 | ) |
| Additional liability               |   | 61,731                           |    | —                              |   | 61,731 |   | 67,023 |   | — |   | 67,023 |   |
| Net projected liability            |   | Ps.                              | 118,730 |                                | Ps.    | 89,336 |   | Ps. | 208,066 |   | Ps. | 118,443 |   | Ps. | 65,655 |   | Ps. | 184,098 |   |

 

As of December 31, 2002 and 2001, the establishedreserve for voluntary retirement and seniority premiums amounted to Ps.173,780and Ps.150,293, respectively, and exceeds the accumulated benefit obligation(equivalent to the PBO without projecting the salaries to the date ofretirement)  by Ps.390 and Ps.27,respectively.

 

F-15

----

 

The cost of employee benefits for each year were asfollows:

 
|                                      |   | **2002**                         |   | **2001**                            |   | **2000**  |   |
|-------------------------------------------|--------|----------------------------------|--------|-------------------------------------|--------|-----------|--------|
|                                      |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **PostretirementMedical  Services** |   | **Total** |   |
|                                      |   |                             |   |                                |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost for the year                 |   | Ps.                              | 7,737  |                                | Ps.    | 4,702     |   | Ps. | 12,439 |   | Ps. | 6,869 |   | Ps. | 3,890 |   | Ps. | 10,759 |   | Ps. | 6,459 |   | Ps. | 4,050 |   | Ps. | 10,509 |   |
| Amortization of transition  liability     |   | 966                              |   | 14,736                              |   | 15,702    |   | 966 |   | 14,736 |   | 15,702 |   | 966 |   | 14,736 |   | 15,702 |   |
| Amortization of past service  cost        |   | 4,735                            |   | —                              |   | 4,735     |   | 4,735 |   | — |   | 4,735 |   | 4,735 |   | — |   | 4,735 |   |
| Amortization of variances in  assumptions |   | 1,077                            |   | 3,346                               |   | 4,423     |   | (7 | ) | — |   | (7 | ) | — |   | — |   | — |   |
| Financial cost for the year               |   | 3,391                            |   | 23,646                              |   | 27,037    |   | 3,016 |   | 19,802 |   | 22,818 |   | 2,783 |   | 19,280 |   | 22,063 |   |
| Effect for employee reduction             |   | (270                             | )      | —                              |   | (270      | )      | — |   | — |   | — |   | — |   | — |   | — |   |
| Net cost for the year                     |   | Ps.                              | 17,636 |                                | Ps.    | 46,430    |   | Ps. | 64,066 |   | Ps. | 15,579 |   | Ps. | 38,428 |   | Ps. | 54,007 |   | Ps. | 14,943 |   | Ps. | 38,066 |   | Ps. | 53,009 |   |

 

The real interest rates used in the actuarialprojections are:

 
|                          |   | **2002**                         |   | **2001**                              |   | **2000**                         |   |
|-------------------------------|--------|----------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|
|                          |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   |
|                          |   |                             |   |                                  |   |                             |   |   |   |   |   |   |   |
| Interest rate                 |   | 5.00                             | %      | 5.00                                  | %      | 5.00                             | %      | 5.00 | % | 5.0 | % | 5.0 | % |
| Salary increase rate          |   | 1.50                             | %      | —                                |   | 1.50                             | %      | — |   | 1.50 | % | — |   |
| Medical expense increase rate |   | —                           |   | 1.30                                  | %      | —                           |   | 1.30 | % | — |   | 1.30 | % |

 

The changes in projected benefit obligation were asfollows:

 
|                   |   | **2002**                         |    | **2001**                              |   |
|------------------------|--------|----------------------------------|---------|---------------------------------------|--------|
|                   |   | **Seniority  Premiums  Reserve** |    | **Postretirement  Medical  Services** |   | **Total** |   | **Seniority  Premiums  Reserve** |   | **Postretirement  Medical  Services** |   | **Total** |   |
|                   |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Beginning balance      |   | Ps.                              | 51,420  |                                  | Ps.    | 65,655 |   | Ps. | 117,075 |   | Ps. | 48,304 |   | Ps. | 59,643 |   | Ps. | 107,947 |   |
| Provision for the year |   | 17,636                           |    | 46,430                                |   | 64,066 |   | 15,579 |   | 38,428 |   | 54,007 |   |
| Payments               |   | (12,057                          | )       | (22,749                               | )      | (34,806 | ) | (12,463 | ) | (32,416 | ) | (44,879 | ) |
| Subtotal               |   | 56,999                           |    | 89,336                                |   | 146,335 |   | 51,420 |   | 65,655 |   | 117,075 |   |
|                   |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Additional liability-  |   |                             |    |                                  |   |   |   |   |   |   |   |   |   |
| Charge to capital      |   | 21,045                           |    | —                                |   | 21,045 |   | 20,611 |   | — |   | 20,611 |   |
| Deferred charges       |   | 40,686                           |    | —                                |   | 40,686 |   | 46,412 |   | — |   | 46,412 |   |
| Ending balance         |   | Ps.                              | 118,730 |                                  | Ps.    | 89,336 |   | Ps. | 208,066 |   | Ps. | 118,443 |   | Ps. | 65,655 |   | Ps. | 184,098 |   |

 

The amortization period for unamortized items is asfollows:

 
|                   |   | **Remaining  Years**       |   |
|------------------------|--------|----------------------------|--------|
|                   |   | **Non-UnionizedEmployees** |   | **UnionizedEmployees** |   | **Medical  Services** |   |
|                   |   |                       |   |   |   |   |   |
| Transition liability   |   | 12.68                      |   | 6.31 |   | 20.00 |   |
| Past services costs    |   | —                     |   | 7.31 |   | — |   |
| Changes in assumptions |   | 14.20                      |   | 9.20 |   | 20.00 |   |

 

F-16

----

 

**10.STOCKHOLDERS’ EQUITY:**

 

**Capitalstock**

 

At December 31, 2002 and 2001, the capital stockconsisted of 201,798,896 common shares fully subscribed and paid with a parvalue of ten Mexican pesos each, of which 171,005,65 shares correspond toSeries “A” and 30,793,831 shares correspond to Series “B”.  The fixed minimum capital shares consist of10,000 fixed common nominatives shares, of which 7,880 shares are Series “A”and 2,120 are Series “B”.

 

Stockholders’ equity, except for restated paid-incapital and tax retained earnings, will be subject a 35% dividend tax.Beginning January 1, 2003, such rate will be reduced by one percentage pointeach year until reaching 32% in 2005. Any income taxes paid on suchdistribution on or after January 1, 2002, may be credited against future incometax payable by the Company in the three fiscal years following the fiscal yearof such payment.

 

Based on the 2003 tax reform, tax paid on thedistribution of stockholders’ equity, as discussed in the preceding paragraph,can only be credited against income tax for the year in which taxes are paid ondividends, and in the immediately following two fiscal years.

 

**Retainedearnings**

 

As of 2002, the withholding tax on dividends iseliminated.  In addition, if earningsfor which no corporate tax has been paid are distributed, the tax must be paidupon distribution of the dividends. Consequently, the Company must keep a record of earnings subject to eachtax rate.  As of December 31, 2002,earnings for which corporate taxes have been paid amounted to approximatelyPs.2,031,547.

 

The annual net income of the Company and eachsubsidiary is subject to the legal requirement that 5% thereof be transferredto a legal reserve each year until the reserve equals 20% of capitalstock.  At December 31, 2002 and 2001,the nominal amount of this reserve amounted to Ps.57,976 and is included inretained earnings.  This reserve may notbe distributed to the stockholders during the existence of the Company, exceptin the form of stock dividends.

 

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

 

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

 
|                                    |   | **2002** |     | **2001** |   |
|-----------------------------------------|--------|----------|----------|----------|--------|
|                                    |   |     |     |     |   |
| Current assets                          |   | $        | 107,326  |     | $      | 7,899 |   |
| Current liabilities                     |   | (151,454 | )        | (84,909  | )      |
| Net foreign currency liability position |   | $        | (44,128  | )        | $      | (77,010 | ) |
|                                    |   |     |     |     |   |
| Equivalent in Mexican  pesos            |   | Ps.      | (455,070 | )        | Ps.    | (794,166 | ) |
|                                         |        |          |          |          |        |  |  |  |  |

 

The main transactions during 2002, 2001 and 2000 in aforeign currency, not including transactions within the group, since they wereeliminated in consolidation, expressed in thousands of U.S. dollars, were asfollows:

 
|                                 |   | **2002** |    | **2001** |   | **2000** |   |
|--------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                 |   |     |    |     |   |     |   |
| Sales                                |   | $        | 236,405 |     | $      | 187,107  |   | $ | 55,670 |   |
| Import of fixed assets and materials |   | $        | 30,396  |     | $      | 38,645   |   | $ | 86,531 |   |
| Interest expense                     |   | $        | 31      |     | $      | 29       |   | $ | 33 |   |
| Interest income                      |   | $        | 23      |     | $      | 580      |   | $ | 75 |   |
| Technical assistance expense         |   | $        | —  |     | $      | 708      |   | $ | 787 |   |
| Administrative services              |   | $        | —  |     | $      | 264      |   | $ | — |   |

 

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

 

F-17

----

 

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

 

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

 

**12.BALANCES AND TRANSACTION WITH RELATED PARTIES:**

 

Balances with the Company’s holding companies andaffiliated companies that are under common control of Grupo Mexico, S.A. deC.V. (parent company of GMM) are as follows:

 
|                                                                  |   | **2002** |    | **2001** |   |
|-----------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Accounts receivable-                                                  |   |     |    |     |   |
| Grupo México, S.A. de  C.V.                                      |   | Ps.      | 28,748  |     | Ps.    | — |   |
| Industrial Minera  México, S.A. de C.V.                          |   | 17,692   |    | —   |   |
| Grupo Minero México,  S.A. de C.V.                               |   | 15,510   |    | —   |   |
| Asarco, Inc. (affiliated company)                                     |   | 11,813   |    | 11,315   |   |
| Servicios de Apoyo  Administrativo, S.A. de C.V.                      |   | 3,789    |    | —   |   |
| Minera Mexico  Internacional, Inc.                                    |   | 3,619    |    | 21,823   |   |
| Minerales Metálicos del  Norte, S.A. de C.V.                     |   | 175      |    | —   |   |
| Southern Peru Cooper, Corporation                                     |   | 16       |    | 17       |   |
| Minera México, S.A. de  C.V.                                     |   | —   |    | 23,999   |   |
|                                                                  |   | Ps.      | 81,362  |     | Ps.    | 57,154 |   |
| Accounts payable-                                                     |   |     |    |     |   |
| Mexicana de Cobre, S.A.  de C.V.                                      |   | Ps.      | 428,695 |     | Ps.    | 410,093 |   |
| Ferrocarril Mexicano,  S.A. de C.V.                                   |   | 26,482   |    | 19,604   |   |
| México Transportes  Aéreos, S.A. de C.V.                    |   | 25,780   |    | 9,495    |   |
| Servicios de Apoyo  Administrativo, S.A. de C.V. (affiliated company) |   | —   |    | 2,991    |   |
| Western Copper Suppliers, Inc. (affiliated company)                   |   | 640      |    | 484      |   |
| Industrial Minera  México, S.A. de C.V. (affiliated company)     |   | —   |    | 101      |   |
| Other                                                                 |   | —   |    | 9        |   |
|                                                                  |   | Ps.      | 481,597 |     | Ps.    | 442,777 |   |
|                                                                       |        |          |         |          |        |  |  |  |  |

 

The most significant transactions with related partieswere as follows:

 
|                                       |   | **2002** |      | **2001** |   | **2000**  |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
| Revenues-                                  |   |     |      |     |   |      |   |
| Sales                                      |   | Ps.      | 1,088,406 |     | Ps.    | 1,078,656 |   | Ps. | 1,021,056 |   |
| Rent and other services                    |   | Ps.      | 1,089     |     | Ps.    | 3,781     |   | Ps. | 1,202 |   |
| Administrative services                    |   | Ps.      | 4,164     |     | Ps.    | 1,038     |   | Ps. | 4,595 |   |
| Expenses-                                  |   |     |      |     |   |      |   |
| Purchases of goods other than fixed assets |   | Ps.      | 301,547   |     | Ps.    | 177,850   |   | Ps. | 332,757 |   |
| Rent and other services                    |   | Ps.      | 83,791    |     | Ps.    | 20,828    |   | Ps. | 92,463 |   |
| Administrative services                    |   | Ps.      | 66,727    |     | Ps.    | 61,951    |   | Ps. | 73,633 |   |
| Freight                                    |   | Ps.      | 34,921    |     | Ps.    | 29,247    |   | Ps. | 38,535 |   |
| Commissions                                |   | Ps.      | 1,440     |     | Ps.    | 2,665     |   | Ps. | 1,589 |   |
| Interest                                   |   | Ps.      | —    |     | Ps.    | 38,796    |   | Ps. | — |   |

 

**13. TAXENVIRONMENT:**

 

**Incomeand asset tax regulations**

 

The principal items which affect the determination oftaxable income are the differences between purchases and cost of sales, andrecognition of the effects of inflation on depreciation, monetary assets andliabilities through the inflationary component, which differs for book and taxpurposes.

 

F-18

----

 

Through December 31, 2001, the relevant Mexican incometax (“ISR”) rate was 35% with the obligation to pay 30% currently and theoption of deferring payment of the remaining 5% until profits aredistributed.  The new tax law enactedJanuary 1, 2002, eliminated the option to defer the 5% portion of the incometax payment and reduces the 35% tax rate by one percentage point each yearuntil reaching 32% in 2005.  Thededuction for employee statutory profit-sharing (PTU) and the obligation towithhold taxes on dividends paid to individuals or foreign residents was alsoeliminated.

 

The relevant Mexican asset tax (“IMPAC”) is calculatedby applying 1.8% to the Company’s asset position, as defined in the law, and ispayable only to the extent that it exceeds ISR payable for the same period. Ifin any year IMPAC exceeds the ISR payable, the IMPAC payment for such excessmay be reduced by the amount by which ISR exceeded IMPAC in the three precedingyears and any required payment of IMPAC is creditable against the excess of ISRover IMPAC of the following ten years.

 

Income taxes, asset taxes and employee profit sharinghave been determined on the basis of the taxable income of each individualcompany. The tax returns of the Company and its subsidiaries has beenconsolidated and filed at the level of the parent company of GMM, MineraMéxico, S.A. de C.V. ( “MM”). Each year the Company and each of itssubsidiaries pay to MM the amount of tax, if any, it would have paid had itfiled a separate tax return. In the event MM reduces its consolidated taxliability through the use of tax loss carryforwards or other tax benefits ofthe Company or any of its subsidiaries, MM is obligated to reimburse theCompany or such subsidiary for such tax benefit at the time that it otherwisewould have reduced the tax payable by the Company or such subsidiary.

 

The income for purposes of PTU does not consider theinflationary component or the unrealized exchange gains or losses.  Depreciation is based on historical ratherthan restated values. The PTU rate is 10% of income for PTU purposes.

 

**Provisionfor income taxes**

 

The income tax is as follows:

 
|                                                   |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                   |   |     | ** ** |     | ** ** |     | ** ** |
| Current                                                |   | Ps.      | 4,359      |     | Ps.        | —   |       | Ps. | 19,404 |   |
| Deferred                                               |   | (12,429  | )          | (10,551  | )          | 80,262   |       |
|                                                   |   | (8,070   | )          | (10,551  | )          | 99,666   |       |
| Effect of change in statutory tax rate on deferred ISR |   | (45,718  | )          | —   |       | —   |       |
|                                                   |   | Ps.      | (53,788    | )        | Ps.        | (10,551  | )          | Ps. | 99,666 |   |

 

In accordance with Mexican GAAP, the following itemsrepresent the principal differences between Mexican income tax computed at thestatutory tax rate and the Company’s provision for income tax in each year.

 
|                                                 |   | **2002** |    | **2001** |   | **2000** |   |
|------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Income taxes at statutory rate  without unusual item |   | Ps.      | (9,413  | )        | 35.0   | %        | Ps.    | (61,066 | ) | 35.0 | % | Ps. | 81,719 |   | 35.0 | % |
| Increase (decrease) due to:                          |   |     |    |     |   |     |   |   |   |   |   |   |   |
| Results from monetary position                       |   | (19,608  | )       | 72.9     | %      | (6,765   | )      | 3.9 | % | (4,833 | ) | (2.0 | )% |
| Inflationary component, net                          |   | 20,413   |    | (75.9    | )%     | 12,532   |   | (7.2 | )% | 5,573 |   | 2.4 | % |
| Non-deductible items                                 |   | 538      |    | (2.0     | )%     | 18,538   |   | (10.6 | )% | 23,403 |   | 10.0 | % |
| Effect of deferred ISR from the tax rate reduction   |   | (45,718  | )       | 170.0    | %      | —   |   | — |   | — |   | — |   |
| Other                                                |   | —   |    | —   |   | 26,208   |   | (15.1 | )% | (6,196 | ) | (2.7 | )% |
| Tax at effective tax rate                            |   | Ps.      | (53,788 | )        | 200.0  | %        | Ps.    | (10,551 | ) | 6.0 | % | Ps. | 99,666 |   | 42.7 | % |

 

F-19

----

 

**Deferred taxes**

 

The tax effect of thetemporary differences that generated a deferred tax liability in accordancewith Bulletin D-4 is as follows:

 
|                                                                        |   | **2002**       |    | **2001**         |   |
|-----------------------------------------------------------------------------|--------|----------------|---------|------------------|--------|
|                                                                        |   | **Mexcananea** |    | **Subsidiaries** |   | **Total** |   | **Mexcananea** |   | **Subsidiaries** |   | **Total** |   |
|                                                                        |   |           |    |             |   |   |   |   |   |   |   |   |   |
| Trade                                                                       |   | Ps.            | (452    | )                | Ps.    | (99 | ) | Ps. | (551 | ) | Ps. | (544 | ) | Ps. | (72 | ) | Ps. | (616 | ) |
| Inventories                                                                 |   | 97,264         |    | 305              |   | 97,569 |   | 119,197 |   | 241 |   | 119,438 |   |
| Prepaid expenses                                                            |   | 4              |    | —           |   | 4 |   | — |   | — |   | — |   |
| Property, plant and equipment                                               |   | 991,434        |    | 71,950           |   | 1,063,384 |   | 1,153,930 |   | 72,401 |   | 1,226,331 |   |
| Deferred charges                                                            |   | 522,818        |    | —           |   | 522,818 |   | 435,729 |   | — |   | 435,729 |   |
| Accounts payable and accrued liabilities                                    |   | (102,589       | )       | —           |   | (102,589 | ) | (111,041 | ) | — |   | (111,041 | ) |
| Affiliated companies                                                        |   | (7,267         | )       | —           |   | (7,267 | ) | — |   | — |   | — |   |
| Pension, seniority premium reserve and medical service  liabilities         |   | (53,414        | )       | (161             | )      | (53,575 | ) | (40,840 | ) | (149 | ) | (40,989 | ) |
| Tax loss carryforwards                                                      |   | (1,139,462     | )       | (9,651           | )      | (1,149,113 | ) | (1,185,911 | ) | (7,125 | ) | (1,193,036 | ) |
| Recoverable asset taxes                                                     |   | (411,351       | )       | (55              | )      | (411,406 | ) | (411,220 | ) | (54 | ) | (411,274 | ) |
|                                                                        |   | (103,015       | )       | 62,289           |   | (40,726 | ) | (40,700 | ) | 65,242 |   | 24,542 |   |
| Valuation allowance for tax loss carryforwards and  recoverable asset taxes |   | 741,458        |    | 2,699            |   | 744,157 |   | 742,807 |   | — |   | 742,807 |   |
| Total                                                                       |   | Ps.            | 638,443 |             | Ps.    | 64,988 |   | Ps. | 703,431 |   | Ps. | 702,107 |   | Ps. | 65,242 |   | Ps. | 767,349 |   |

 

At December 31, 2002, the Company had tax losscarryforwards pending amortization and recoverable asset taxes of Ps.1,210,052and Ps.320,639, respectively, that the Company’s management believes do nothave a high probability of being realized. Accordingly, a valuation allowanceof Ps.744,157 has been recorded.

 

**Tax losscarryforwards and recoverable asset taxes**

 

At December 31, 2002, the Company has tax losscarryforwards for income tax purposes and recoverable asset taxes which will beindexed for inflation through the year in which they are applied or recovered,in the following restated amounts: 

 
| **Expiration Date** |   | **Tax Loss  Carryforwards** |      | **Recoverable  Asset Taxes** |   |
|---------------------|--------|-----------------------------|-----------|------------------------------|--------|
|                |   |                        |      |                         |   |
| 2003                |   | Ps.                         | 1,271     |                         | Ps.    | 102,345 |   |
| 2004                |   | 1,439,354                   |      | 63,312                       |   |
| 2005                |   | 3,060                       |      | 124,990                      |   |
| 2006                |   | 3,585                       |      | 25,710                       |   |
| 2007                |   | 292,585                     |      | 21                           |   |
| 2008                |   | 667,896                     |      | 4,300                        |   |
| 2009                |   | 916,230                     |      | 65,003                       |   |
| 2010                |   | 4,393                       |      | 25,725                       |   |
| 2011                |   | 1,748                       |      | —                       |   |
|                |   | Ps.                         | 3,330,122 |                         | Ps.    | 411,406 |   |

 

**14. GUARANTEESGRANTED:**

 

The Company, is guarantor of its holding company, GMM,with respect to GMM’s Secured Export Notes (with an initial aggregateoutstanding amount of $600 million) and GMM’s Series A Guaranteed Senior Notesand Series B Guaranteed Senior Notes. According to the terms of therestructuring, the proceeds of the Company’s export sales are pledged ascollateral.  Such proceeds must bedeposited in a collateral account with the agent bank (The Chase ManhattanBank). The Company may immediately make use of these proceeds provided thatthere is no event of default.  Inaddition, in the event of default, the Company shall maintain a bank accountguaranteeing payment of principal and interest during the three monthsfollowing the time that the collateral collection accounts are used to servicedebt.

 

F-20

----

 

The Company is also guarantor of GMM’s obligationswith respect to the following indebtedness:

 

•                                          Syndicatedloans with Bank of America for $130 and $82.4 million granted on October 6,1998 and February 6, 2001, respectively. Also the loan letters established withthe same bank on June 9, 2000 are guaranteed.

 

•                                          Equipmentloan with the Export Development Corporation for $49.9 million granted on November18, 1996.

 

•                                          Equipmentloan with the Export Development Corporation for $75 million granted on June15, 1998.

 

•                                          Currentaccount loan with the Banco Nacional de Comercio Exterior, S.N.C. for $50million granted on August 10, 2001.

 

•                                          Exportloan with Société Genérale on August 11, 1996 for $21.3 million

 

•                                          Loanagreement with The Bank of Nova Scotia for $100 million granted on August 30,2001.

 

**15.CONTINGENCIES:**

 

The Company is involved invarious legal proceedings incidental to its operations, but it does not believe that the final resolution ofany such proceedings will, individually or in the aggregate, have a materialadverse effect on its financial position,results of operations or cash flows.

 

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

 

The consolidated financial statements of the Companyare presented on the basis of Mexican GAAP. Certain accounting practicesapplied by the Company that conform with Mexican GAAP do not conform with U.S.GAAP.

 

This note presents a reconciliation of net income (loss)and total stockholders’ equity as presented under Mexican GAAP to U.S. GAAP.However, this reconciliation to U.S. GAAP does not include the 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 MexicanGAAP and U.S. GAAP are described below, together with an explanation, whereappropriate, of the method used in the determination of the adjustments thataffect net income (loss) and total stockholders’ equity.

 

F-21

----

 

**Restatement**

 

Subsequent to the issuance of the Company’s 2001financial statements, management determined that push-down accountingadjustments related to the Company ́s acquisition by GMM had not been properlyreported in the Company’s U.S. GAAP financial information.  Push-down accounting is not required underMexican GAAP.  As a result, thefollowing U.S. GAAP  financialinformation has been restated from the amounts previously reported to reflectsuch push-down accounting adjustments:

 
|                                       |   | **2001**                     |       | **2000**         |   | **1999**                     |   |
|--------------------------------------------|--------|------------------------------|------------|------------------|--------|------------------------------|--------|
|                                       |   | **As  Previously  Reported** |       | **As  Restated** |   | **As  Previously  Reported** |   | **As  Restated** |   | **As  Previously  Reported** |   | **As  Restated** |   |
|                                       |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| At  December 31:                           |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Total  assets                              |   | Ps.                          | 9,215,162  |             | Ps.    | 9,346,578                    |   | Ps. | 8,793,712 |   | Ps. | 8,945,883 |   | Ps. | 8,406,705 |   | Ps. | 8,579,631 |   |
| Stockholders’  equity                 |   | Ps.                          | 5,608,976  |             | Ps.    | 5,740,392                    |   | Ps. | 6,668,042 |   | Ps. | 6,820,213 |   | Ps. | 7,309,622 |   | Ps. | 7,482,548 |   |
|                                       |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| For  the year ended December 31:           |   |                         |       |             |   |                         |   |   |   |   |   |   |   |
| Goodwill  amortization                     |   | Ps.                          | —     |             | Ps.    | 20,755                       |   | Ps. | — |   | Ps. | 20,755 |   | Ps. | — |   | Ps. | 20,755 |   |
| (Loss)  income before income taxes         |   | Ps.                          | (1,887,939 | )                | Ps.    | (1,908,694                   | )      | Ps. | 189,975 |   | Ps. | 169,220 |   | Ps. | (527,883 | ) | Ps. | (548,638 | ) |
| Net  loss                                  |   | Ps.                          | (1,024,002 | )                | Ps.    | (1,044,757                   | )      | Ps. | (612,532 | ) | Ps. | (633,287 | ) | Ps. | (575,835 | ) | Ps. | (596,590 | ) |
| Basic  and diluted (loss) income per share |   | Ps.                          | (5.07      | )                | Ps.    | (5.17                        | )      | Ps. | (3.03 | ) | Ps. | (3.13 | ) | Ps. | (2.85 | ) | Ps. | (2.96 | ) |

 

**Cashflow information**

 

Under Mexican GAAP, the Company presents consolidatedstatements of changes in financial position in accordance with Bulletin B-12,which specifies the appropriate presentation of the statement of changes infinancial position when the financial statements have been restated in constantMexican pesos (in accordance with the third amendment to Bulletin B-10).Bulletin B-12 identifies the generation and application of resourcesrepresenting differences between beginning and ending financial statementbalances in constant Mexican pesos. Bulletin B-12 also requires that monetaryand foreign exchange gains and losses be treated as cash items in thedetermination of resources provided by operations.

 

The changes in the consolidated financial statementbalances included in this statement constitute cash flow activity stated inconstant Mexican pesos (including monetary and unrealized foreign exchangegains and losses on short-term liabilities, which are considered cash gains andlosses in the constant Mexican peso financial statements).

 

In accordance with Mexican GAAP, the reduction incurrent and long-term debt due to restatement in constant Mexican pesos andunrealized exchange gains and losses on short-term liabilities are presented inthe consolidated statements of changes in financial position as a resource usedby financing activities and the gain from monetary position is presented as acomponent of operating activities.  SFASNo. 95, “Statement of Cash Flows”, does not provide guidance with respect toinflation adjusted financial statements.

 

The following are statements of cash flows, inaccordance with U.S. GAAP, excluding the effects of inflation:

 

F-22

----

 
|                                                                                      |   | **2002** |    | **2001**          |   | **2000**          |   |
|-------------------------------------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                                                      |   |     |    | **(As Restated)** |   | **(As Restated)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Consolidated net income (loss)                                                            |   | Ps.      | 23,603  |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |
| Effects of inflation                                                                      |   | 53,105   |    | 16,605            |   | 18,734            |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities- |   |     |    |              |   |              |   |
| Provision for pension, seniority premiums and medical  services obligations               |   | 18,962   |    | (583              | )      | 26,745            |   |
| Depreciation                                                                              |   | 302,539  |    | 282,018           |   | 307,903           |   |
| Amortization and depletion of deferred charges                                            |   | 109,770  |    | 66,546            |   | 12,546            |   |
| Amortization of goodwill                                                                  |   | —   |    | 20,755            |   | 20,755            |   |
| Loss (gain) on sale of property and equipment                                             |   | (144     | )       | 19,586            |   | 5,621             |   |
| Deferred income taxes                                                                     |   | (10,713  | )       | 875,435           |   | 886,763           |   |
| Capitalized stripping cost                                                                |   | (70,575  | )       | (103,969          | )      | (450,497          | )      |
|                                                                                      |   | 426,547  |    | 131,636           |   | 195,283           |   |
| Changes in operating assets and liabilities:                                              |   |     |    |              |   |              |   |
| Notes and accounts receivable                                                             |   | (168,297 | )       | 19,032            |   | 294,327           |   |
| Inventories                                                                               |   | 66,503   |    | 26,136            |   | 18,843            |   |
| Accounts payable and accrued liabilities                                                  |   | 342,560  |    | 169,892           |   | 237,496           |   |
| Unrealized exchange (gain) loss                                                           |   | 123,349  |    | (18,158           | )      | 11,522            |   |
| Due to affiliated companies                                                               |   | (84,529  | )       | 149,673           |   | (20,904           | )      |
| Taxes payable                                                                             |   | 3,391    |    | (3,338            | )      | (58,846           | )      |
| Net cash provided by operating activities                                                 |   | 709,524  |    | 474,873           |   | 77,721            |   |
|                                                                                      |   |     |    |              |   |              |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Cash retained in collateral accounts                                                      |   | 13,869   |    | (13,869           | )      | —            |   |
| Due to Mexicana de  Cobre, S.A. de C.V.                                                   |   | —   |    | 305,770           |   | —            |   |
| Net cash provided by financing activities                                                 |   | 13,869   |    | 291,901           |   | —            |   |
|                                                                                      |   |     |    |              |   |              |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |     |    |              |   |              |   |
| Additions to property and equipment                                                       |   | (47,961  | )       | (315,424          | )      | (550,767          | )      |
| Net increase in deferred charges, except capitalized  stripping                           |   | (551,606 | )       | (454,880          | )      | (160,733          | )      |
| Proceeds from sale of property and equipment                                              |   | 236      |    | 17,758            |   | 28,814            |   |
| Net cash used in investing activities                                                     |   | (599,331 | )       | (752,546          | )      | (682,686          | )      |
|                                                                                      |   |     |    |              |   |              |   |
| Increase (decrease) in cash and cash equivalents                                          |   | 124,062  |    | 14,228            |   | (4,965            | )      |
| Cash and cash equivalents at beginning of year                                            |   | 18,713   |    | 4,485             |   | 9,450             |   |
| Cash and cash equivalents at end of year                                                  |   | Ps.      | 142,775 |              | Ps.    | 18,713            |   | Ps. | 4,485 |   |

 

**Deferredincome taxes and employee profit sharing**

 

As explained in Note 4, beginning in 2000 underMexican GAAP the revised Bulletin D-4 became effective.  The Company follows SFAS No. 109,“Accounting for Income Taxes”, for U.S. GAAP purposes, which differs fromMexican GAAP as follows:

 

•                                          UnderMexican GAAP deferred taxes are classified as non-current, while under U.S.GAAP the classification is based on the classification of the related asset orliability.

 

•                                          UnderMexican GAAP the effects of inflation on the deferred tax balance generated bymonetary items are recognized in the result on monetary position.  Under U.S. GAAP the deferred tax balance isclassified as a non-monetary item.

 

•                                          UnderMexican GAAP deferred employee profit sharing is calculated considering onlythose temporary differences that arise during the year and which are expectedto reverse within a defined period, while under U.S. GAAP the same liabilitymethod as used for deferred income taxes is applied.  Also, for U.S. GAAP purposes, employee profit sharing must beclassified as an operating expense.

 

Since employee profit sharing is calculated based ontaxable income after certain adjustments and is subject to the futureconsequences of temporary differences in the same manner as income taxes,deferred employee profit sharing, which is not recorded under Mexican GAAP,must be included in the reconciliation of Mexican to U.S. GAAP.

 

F-23

----

 

The tax effect of temporary differences that generateddeferred tax liabilities (assets) under SFAS No. 109 are as follows:

 
|                                                            |   | **2002**            |    | **2001**              |   |
|-----------------------------------------------------------------|--------|---------------------|---------|-----------------------|--------|
|                                                            |   | **Income****Taxes** |    | **Profit****Sharing** |   | **Income****Taxes** |   | **Profit****Sharing** |   |
| Current-                                                        |   |                |    |                  |   |   |   |   |   |
| Inventories                                                     |   | Ps.                 | 106,767 |                  | Ps.    | 31,402 |   | Ps. | 119,438 |   | Ps. | 34,125 |   |
| Non-deductible reserves                                         |   | (118,584            | )       | (34,878               | )      | (112,457 | ) | (32,131 | ) |
| Unrealized exchange gain (loss)                                 |   | —              |    | 11,654                |   | — |   | 527 |   |
|                                                            |   | (11,817             | )       | 8,178                 |   | 6,981 |   | 2,521 |   |
| Long-term-                                                      |   |                |    |                  |   |   |   |   |   |
| Property, plant and equipment                                   |   | 1,090,923           |    | 524,371               |   | 1,226,331 |   | 532,916 |   |
| Deferred charges                                                |   | 548,137             |    | 161,217               |   | 435,729 |   | 124,493 |   |
| Tax loss carryforwards                                          |   | (1,158,891          | )       | —                |   | (1,193,036 | ) | — |   |
| Asset taxes                                                     |   | (411,406            | )       | —                |   | (411,273 | ) | (11,483 | ) |
| Accumulated pension plan cost                                   |   | (70,743             | )       | (20,807               | )      | — |   | — |   |
|                                                            |   | (1,980              | )       | 664,781               |   | 57,751 |   | 645,926 |   |
| Valuation allowance for tax  loss carryforwards and asset taxes |   | 744,157             |    | —                |   | 1,604,309 |   | — |   |
|                                                            |   | 742,177             |    | 644,781               |   | 1,662,060 |   | 645,926 |   |
| Total                                                           |   | Ps.                 | 730,360 |                  | Ps.    | 672,959 |   | Ps. | 1,669,041 |   | Ps. | 648,447 |   |

 

For U.S. GAAP purposes, deferred tax assets arereduced by a valuation allowance if it is more likely than not that someportion or all of the deferred tax assets will not be realized.

 

The components of the income tax and profit sharingexpense for the years ended December 31, 2002, 2001 and 2000 are as follows:

 
|                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                           |   |     |   |     |   |     |   |
| Deferred-                      |   |     |   |     |   |     |   |
| Income taxes                   |   | 833,341  |   | (93,773  | )      | 576,200  |   |
| Profit sharing                 |   | 26,098   |   | 11,498   |   | 84,257   |   |
|                           |   | 894,439  |   | (82,275  | )      | 660,458  |   |
| Change in valuation allowance- |   |     |   |     |   |     |   |
| Income taxes                   |   | (860,152 | )      | 957,710  |   | 226,306  |   |
|                           |   |     |   |     |   |     |   |
|                           |   | Ps.      | 34,287 |     | Ps.    | 875,435  |   | Ps. | 886,764 |   |
|                                |        |          |        |          |        |          |        |  |  |  |

 

**Goodwill**

 

Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) SFAS No. 142, “*Goodwill andOther Intangible Assets*,” which requires that goodwill andintangible assets with indefinite lives no longer be amortized, but insteadtested for impairment at least annually and written-down with a charge tooperations when the carrying amount exceeds the estimated fair value.  The cost of intangible assets with determinableuseful lives continues to be amortized over the useful lives of the assets. Inconnection with the transition provisions for adopting this standard, theCompany performed a transitional impairment test and found no impairment andreviewed the classification of its intangible assets.  The most recent test, which was conducted in December 2002,revealed no impairment of goodwill.

 

F-24

----

 

A reconciliation of previously reported U.S. GAAP –basis net (loss) income to the amounts adjusted to exclude goodwill, net of therelated income tax effect, is as follows:

 
|                                    |   | **2002** |   | **2001** |   | **2000**   |   |
|-----------------------------------------|--------|----------|--------|----------|--------|------------|--------|
|                                    |   |     |   |     |   |       |   |
| Reported majority net (loss)  income    |   | Ps.      | 23,603 |     | Ps.    | (1,044,757 | )      | Ps. | (633,287 | ) |
| Add: Goodwill amortization, net  of tax |   | —   |   | 20,755   |   | 20,755     |   |
| Adjusted majority net (loss)  income    |   | Ps.      | 23,603 |     | Ps.    | (1,024,002 | )      | Ps. | (612,532 | ) |

 

Basic and diluted U.S. GAAP per share amounts are asfollows:

 
|                                   |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                   |   |     |   |     |   |     |   |
| Reported net (loss) income             |   | Ps.      | 0.12   |     | Ps.    | (5.17    | )      | Ps. | (3.13 | ) |
| Add: Goodwill amortization, net of tax |   | —   |   | 0.10     |   | 0.10     |   |
| Adjusted net (loss) income             |   | Ps.      | 0.12   |     | Ps.    | (5.07    | )      | Ps. | (3.03 | ) |

 

The changes in the carrying amount of goodwill for theyears ended December 31, 2002, 2001 and 2000 are as follows:

 
| Balance as of January 1, 2000   |   | Ps.     | 165,840 |   |
|---------------------------------|--------|---------|---------|--------|
| Goodwill acquired               |   | —  |    |
| Amortization                    |   | (20,755 | )       |
| Balance as of December 31, 2000 |   | 145,085 |    |
| Goodwill acquired               |   | —  |    |
| Amortization                    |   | (20,755 | )       |
| Balance as of December 31, 2001 |   | 124,330 |    |
| Goodwill acquired               |   | —  |    |
| Balance as of December 31, 2002 |   | Ps.     | 124,330 |   |

 

Under Mexican GAAP,goodwill continues to be amortized over its estimated useful life.

 

**Cost ofpension plans and other employee benefits**

 

The Company has prepared a study of pension costsunder Mexican GAAP (see Notes 4 and 9). Under Mexican GAAP, the requirement torecord liabilities for employee benefits using actuarial computations issubstantially the same as required by SFAS No. 87, “Employers’ Accounting forPensions”, except for the initial year of application, which generates a differencein unamortized prior service costs and in the amortization expense.

 

The Company provides health care benefits for theretired and active employees as well as their family members through asubsidiary of Mexcananea (Hospital del Ronquillo, S. de R.L. de C.V.).

 

The Company applies SFAS No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits”, which requiresadditional disclosures.  Although theCompany’s measurement or recognition of pensions and postretirement benefitobligations does not change under SFAS No. 132, the following additionaldisclosure regarding such plans are required.

 
|                                       |   | **Pension Benefits** |    | **Other Postretirement  Benefits** |   |
|--------------------------------------------|--------|----------------------|---------|------------------------------------|--------|
|                                       |   | **2002**             |    | **2001**                           |   | **2002** |   | **2001** |   |
| **Change in projected benefit obligation** |   |                 |    |                               |   |   |   |   |   |
| Benefit obligation at beginning of year    |   | Ps.                  | 121,095 |                               | Ps.    | 130,190 |   | Ps. | 491,133 |   | Ps. | 412,291 |   |
| Service cost                               |   | 7,291                |    | 6,851                              |   | 4,448 |   | 3,888 |   |
| Interest cost                              |   | 3,200                |    | 3,015                              |   | 22,371 |   | 19,805 |   |
| Actuarial loss (gain), net                 |   | 827                  |    | (6,793                             | )      | 2,651 |   | 87,567 |   |
| Benefits paid                              |   | (11,768              | )       | (12,168                            | )      | (21,521 | ) | (32,418 | ) |
| Benefit obligation at end of year          |   | Ps.                  | 120,645 |                               | Ps.    | 121,095 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |

 

F-25

----

 
|                                                               |   | **Pension Benefits** |    | **Other Postretirement  Benefits** |   |
|--------------------------------------------------------------------|--------|----------------------|---------|------------------------------------|--------|
|                                                               |   | **2002**             |    | **2001**                           |   | **2002** |   | **2001** |   |
| **Reconciliation  of funded status**                               |   |                 |    |                               |   |   |   |   |   |
| Funded status                                                      |   | Ps.                  | 121,093 |                               | Ps.    | 121,095 |   | Ps. | 499,082 |   | Ps. | 491,133 |   |
| Unrecognized net actuarial loss                                    |   | (21,436              | )       | (21,603                            | )      | (115,027 | ) | (116,024 | ) |
| Unrecognized transition asset, net                                 |   | (4,227               | )       | (4,754                             | )      | (294,719 | ) | (309,455 | ) |
| Unrecognized prior service costs                                   |   | (45,559              | )       | (45,559                            | )      | — |   | — |   |
| Additional minimum liability                                       |   | 69,067               |    | 68,999                             |   | — |   | — |   |
| Accrued benefit cost, net, under U.S. GAAP                         |   | 118,937              |    | 118,178                            |   | 89,336 |   | 65,654 |   |
| Accrued benefit cost, net, under Mexican GAAP                      |   | 118,730              |    | 118,443                            |   | 89,336 |   | 65,654 |   |
| Additional benefit (cost) that must be recognized  under U.S. GAAP |   | Ps.                  | 207     |                               | Ps.    | (265 | ) | Ps. | — |   | Ps. | — |   |

 
|                                                               |   | **Pension Benefits** |   | **Other Postretirement  Benefits** |   |
|--------------------------------------------------------------------|--------|----------------------|--------|------------------------------------|--------|
|                                                               |   | **2002**             |   | **2001**                           |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| **Components of net periodic benefit cost**                        |   |                 |   |                               |   |   |   |   |   |   |   |   |   |
| Service cost                                                       |   | Ps.                  | 7,751  |                               | Ps.    | 6,851 |   | Ps. | 6,383 |   | Ps. | 4,702 |   | Ps. | 3,888 |   | Ps. | 4,662 |   |
| Interest cost                                                      |   | 3,405                |   | 3,015                              |   | 11,160 |   | 23,647 |   | 19,804 |   | 2,014 |   |
| Amortization of transition  obligations, net                       |   | 1,472                |   | 556                                |   | 339 |   | 18,081 |   | 14,736 |   | 491 |   |
| Recognized net actuarial loss                                      |   | —               |   | (21                                | )      | 2,985 |   | — |   | — |   | 1,190 |   |
| Inflation adjustment                                               |   | —               |   |                               |   |   |   | — |   | — |   |   |   |
| Net periodic benefit cost  under U.S. GAAP                         |   | 12,629               |   | 10,401                             |   | 20,867 |   | 46,430 |   | 38,428 |   | 8,357 |   |
| Net periodic benefit cost  under Mexican GAAP                      |   | 17,636               |   | 15,578                             |   | 14,942 |   | 46,430 |   | 38,428 |   | 9,581 |   |
| Additional benefit (cost) that  must be recognized under U.S. GAAP |   | Ps.                  | (5,007 | )                                  | Ps.    | (5,177 | ) | Ps. | 5,925 |   | Ps. | — |   | Ps. | — |   | Ps. | (1,224 | ) |

 
| **Weighted-average assumptions as of  December 31,** |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                 |   |     |   |     |   |     |   |
| Discount rate                                        |   | 5.00     | %      | 5.00     | %      | 5.00     | %      |
| Rate of compensation increase                        |   | 1.50     | %      | 1.50     | %      | 1.50     | %      |
| Medical expenses increase rate                       |   | 1.30     | %      | 1.30     | %      | 1.30     | %      |

 

A one-percentage-point change in assumed other benefitcost trend rates for the postretirement benefit plan would have the followingeffects:

 
|                                                     |   | **1% Point****Increase** |       | **1% Point****Decrease** |       |
|----------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                     |   |                     | ** ** |                     | ** ** |
| Effect on total of service and  interest cost components |   | Ps.                      | 34,348     |                     | Ps.        | 26,822 |   |
| Effect on the post-retirement  benefit obligation        |   | Ps.                      | 556,906    |                     | Ps.        | 445,724 |   |

 

As of December 31, 2002 and 2001 the accumulatedbenefit obligation amounted to Ps.173,351 and Ps.145,730.

 

**Capitalizedinterest**

 

Under Mexican GAAP, a company is not required to, butmay, capitalize interest incurred on assets under construction. The amount tobe capitalized in Mexico is based upon the “comprehensive financial cost”(i.e., the net of the sum of interest expense, foreign exchange gains andlosses and the gain or loss from monetary position).  The Company has elected not to capitalize any comprehensivefinancial costs under Mexican GAAP.

 

Under U.S. GAAP, interest expense on all debt, and netof the gain on monetary position applicable to Mexican peso denominated debt,must be considered an additional cost of constructed assets and is depreciatedover the lives of the related assets. Exchange gains and losses on foreigncurrency-denominated debt may not be capitalized.

 

F-26

----

 

**Employeeprofit sharing**

 

Mexican law requires the payment to employees of 10%of the Company’s taxable income, excluding certain adjustments for inflation.These amounts are treated as compensation expense and are reflected afterincome tax, in the appropriate captions in the statement of operations.

 

Under U.S. GAAP, employee profit sharing must bereflected as an operating expense in the statements of operations.

 

**Majorcustomers**

 

The Company had significant sales to three differentcustomers in the last three years. Sales to these customers accounted for 41%, 26% and 14% of total netsales in 2002, 74%, 19% and 3% of total net sales in 2001 and 25%, 13% and 9%of total net sales in 2000.

 

**Segmentinformation**

 

The Company had net sales to customers from thefollowing regions as follows:

 
|            |   | **2002** |      | **2001** |   | **2000**  |   |
|-----------------|--------|----------|-----------|----------|--------|-----------|--------|
|            |   |     |      |     |   |      |   |
| Mexico          |   | Ps.      | 2,237,576 |     | Ps.    | 1,437,482 |   | Ps. | 2,099,741 |   |
| United States   |   | 107,772  |      | 440,601  |   | 513,024   |   |
| Latin America   |   | —   |      | —   |   | 17,891    |   |
| Total net sales |   | Ps.      | 2,345,348 |     | Ps.    | 1,878,083 |   | Ps. | 2,630,656 |   |

 

**Start-upcosts**

 

Under U.S. GAAP, AICPA Statement of Position 98-5,“Reporting on the Costs of Start-up Activities”, requires that certain costssuch as organization, training and pre-feasibility expenses incurred in thestart-up phase of a project be expensed as incurred.

 

In accordance with Mexican GAAP, start-up costs aredeferred and amortized at the commencement of operations, despite the inherentuncertainty regarding their future recoverability.  However, if the project is abandoned and the start-up costs incurredto date become unrecoverable, such costs are be expensed immediately.  Amortization of deferred costs is amortizedon a straight-line basis over the term in which the benefit is expected to berealized.

 

**Environmentalliabilities**

 

Under U.S. GAAP companies must comply with EITF 93-5,“Accounting for Environmental Liabilities”, and EITF 90-8, “Capitalization ofCosts to Treat Environmental Contamination”. These pronouncements require companies to disclose and/or accrue on aundiscounted basis any reclamation and remediation costs that are expected tobe incurred. The Company has properly accrued for all known environmentalmatters at the balance sheet date for U.S. GAAP purposes.

 

**Financialinstruments**

 

Under Mexican GAAP Bulletin C-2 went into effect in2001 and requires the recognition of all derivative financial instruments onthe balance sheet as either assets or liabilities.  Additionally, certain, but not all, derivative financialinstruments and the related hedged items must be adjusted to their marketvalue, with all such adjustments recorded in the income statement, regardlessof the nature of the financial instrument.

 

Under U.S. GAAP, SFAS No. 133 went into effect in 2001and requires the adjustment of all financial instruments to market value, withsuch adjustments recorded:

 

•                  In the determination of net income orloss for fair value hedges (fixed to variable )

•                  In other comprehensive income forcash flow hedges (variable to fixed)

 

At December 31, 2002 and 2001, the Company has notoutstanding derivative financial instruments.

 

F-27

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**Reconciliationof Mexican GAAP to U.S. GAAP**

 

Net income (loss) and stockholders’ equity, adjustedto take into account the significant differences between Mexican GAAP and U.S.GAAP, except for the comprehensive effects of price-level changes, are asfollows:

 
|                                                                                             |   | **2002** |   | **2001**          |   | **2000**          |   |
|--------------------------------------------------------------------------------------------------|--------|----------|--------|-------------------|--------|-------------------|--------|
|                                                                                             |   |     |   | **(As Restated)** |   | **(As Restated)** |   |
| NET INCOME (LOSS):                                                                               |   |     |   |              |   |              |   |
| Net income (loss) under  Mexican GAAP                                                            |   | Ps.      | 26,894 |              | Ps.    | (163,925          | )      | Ps. | 133,818 |   |
| U.S. GAAP adjustments:                                                                           |   |     |   |              |   |              |   |
| Deferred income taxes under  U.S. GAAP                                                           |   | 36,811   |   | (863,937          | )      | (802,506          | )      |
| Deferred employee profit  sharing liability                                                      |   | (26,098  | )      | (11,498           | )      | (84,257           | )      |
| Deferred income taxes under  Mexican GAAP                                                        |   | (58,147  | )      | (10,551           | )      | 99,667            |   |
| Amortization of goodwill                                                                         |   | —   |   | (20,755           | )      | (20,755           | )      |
| Pension plan cost                                                                                |   | 5,007    |   | 5,177             |   | (5,924            | )      |
| Start-up-costs                                                                                   |   | —   |   | (5,494            | )      | (2,012            | )      |
| Reversal of amortization of  preoperating expenses                                               |   | 28,680   |   | 1,061             |   | 950               |   |
| Effects of inflation accounting  on U.S. GAAP adjustments and monetary gain on labor liabilities |   | 10,456   |   | 25,164            |   | 47,732            |   |
|                                                                                             |   | (3,291   | )      | (880,832          | )      | (767,105          | )      |
| Net income (loss) under U.S.  GAAP                                                               |   | Ps.      | 23,603 |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |

 
|                                          |   | **2002** |      | **2001**          |   |
|-----------------------------------------------|--------|----------|-----------|-------------------|--------|
|                                          |   |     |      | **(As Restated)** |   |
| STOCKHOLDERS’ EQUITY:                    |   |     |      |              |   |
| Stockholders’ equity under  Mexican GAAP |   | Ps.      | 7,172,531 |              | Ps.    | 7,152,686 |   |
| U.S. GAAP adjustments:                        |   |     |      |              |   |
| Deferred income taxes under  U.S. GAAP        |   | (730,760 | )         | (1,628,851        | )      |
| Deferred employee profit  sharing             |   | (672,959 | )         | (648,448          | )      |
| Deferred income taxes under  Mexican GAAP     |   | 703,431  |      | 767,349           |   |
| Amortization of goodwill                      |   | 124,330  |      | 124,330           |   |
| Start-up-costs                                |   | (4,814   | )         | (33,494           | )      |
| Accumulated pension plan cost                 |   | (211     | )         | (266              | )      |
|                                          |   | (580,983 | )         | (1,419,380        | )      |
| Stockholders’ equity under U.S.  GAAP    |   | Ps.      | 6,591,548 |              | Ps.    | 5,733,306 |   |

 

The changes in stockholders’ equity under U.S. GAAPfor the years ended December 31, 2002, 2001 and 2000 are as follows:

 
|                                                                                     |   | **Capital  Stock** |      | **Additional****Paid-  in Capital  (As Restated)** |   | **Retained****Earnings  (As Restated)** |   | **Accumulated****OtherComprehensiveIncome** |    | **Total****Stockholders’Equity(As Restated)** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|-----------|----------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------|---------|----------------------------------------------------|--------|
| Stockholders’ equity under U.S.  GAAP at December 31, 1999 (as previously reported) |   | Ps.                | 8,548,102 |                                               | Ps.    | —                                  |   | Ps.                                         | (29,502 | )                                                  | Ps.    | (1,208,978 | ) | Ps. | 7,309,622 |   |
| Prior period adjustment -  Recognition of push-down accounting                           |   | —             |      | 214,436                                            |   | (41,510                                 | )      | —                                      |    | 172,926                                            |   |
| Stockholders’ equity under U.S.  GAAP at December 31, 1999 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (71,012                                 | )      | (1,208,978                                  | )       | 7,482,548                                          |   |
| Net loss                                                                                 |   | —             |      | —                                             |   | (633,287                                | )      | —                                      |    | (633,287                                           | )      |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | (14,812                                     | )       | (14,812                                            | )      |
| Additional minimum, liability  and restatement of accrued benefit                        |   |               |      |                                               |   | —                                  |   | (14,236                                     | )       | (14,236                                            | )      |
| Comprehensive loss                                                                       |   | —             |      | —                                             |   | —                                  |   | —                                      |    | (662,335                                           | )      |
| Stockholders’ equity under U.S.  GAAP at December 31, 2000 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (704,299                                | )      | (1,238,026                                  | )       | 6,820,213                                          |   |
| Net loss                                                                                 |   | —             |      | —                                             |   | (1,044,757                              | )      | —                                      |    | (1,044,757                                         | )      |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | (28,043                                     | )       | (28,043                                            | )      |
| Additional minimum liability  and restatement of accrued benefit                         |   | —             |      | —                                             |   | —                                  |   | (7,021                                      | )       | (7,021                                             | )      |
| Comprehensive loss                                                                       |   | —             |      | —                                             |   | —                                  |   | —                                      |    | (1,079,821                                         | )      |
| Stockholders’ equity under U.S.  GAAP at December 31, 2001 (as restated)            |   | 8,548,102          |      | 214,436                                            |   | (1,749,056                              | )      | (1,273,090                                  | )       | 5,740,392                                          |   |
| Net income                                                                               |   | —             |      | —                                             |   | 23,603                                  |   | —                                      |    | 23,603                                             |   |
| Cumulative restatement effect                                                            |   | —             |      | —                                             |   | —                                  |   | 838,687                                     |    | 838,687                                            |   |
| Additional minimum liability  and  restatement of accrued benefit                   |   | —             |      | —                                             |   | —                                  |   | (4,048                                      | )       | (4,048                                             | )      |
| Comprehensive income                                                                     |   | —             |      | —                                             |   | —                                  |   | —                                      |    | 858,242                                            |   |
| Stockholders’ equity under U.S.  GAAP at December 31, 2002                          |   | Ps.8,548,102       |      | Ps.214,436                                         |   | Ps.(1,725,453                           | )      | Ps.(438,451                                 | )       | Ps.6,598,634                                       |   |
|                                                                                          |        |                    |           |                                                    |        |                                         |        |                                             |         |                                                    |        |  |  |  |  |  |

 

F-28

----

 

**Reclassificationof balance sheets and statements of operations**

 

With regard to the consolidated balance sheets andstatements of operations, the following significant captions determined underU.S. GAAP would have been as follows:

 
|                      |   | **2002** |      | **2001**          |   |
|---------------------------|--------|----------|-----------|-------------------|--------|
|                      |   |     |      | **(As Restated)** |   |
| Balance sheets:           |   |     |      |              |   |
| Current assets            |   | Ps.      | 774,049   |              | Ps.    | 521,528 |   |
| Total assets              |   | Ps.      | 9,739,923 |              | Ps.    | 9,346,578 |   |
| Current liabilities       |   | Ps.      | 1,537,471 |              | Ps.    | 1,153,945 |   |
| Total liabilities         |   | Ps.      | 3,141,289 |              | Ps.    | 3,606,186 |   |
| Stockholders’ equity |   | Ps.      | 6,598,634 |              | Ps.    | 5,740,392 |   |

 
|                                                            |   | **2002** |    | **2001**          |   | **2000**          |   |
|-----------------------------------------------------------------|--------|----------|---------|-------------------|--------|-------------------|--------|
|                                                            |   |     |    | **(As Restated)** |   | **(As Restated)** |   |
| Statements of operations:                                       |   |     |    |              |   |              |   |
| Operating income (loss)                                         |   | Ps.      | 65,459  |              | Ps.    | (187,046          | )      | Ps. | 136,240 |   |
| Income taxes                                                    |   | Ps.      | (32,452 | )                 | Ps.    | (863,937          | )      | Ps. | 802,507 |   |
| Consolidated net (loss) income                                  |   | Ps.      | 23,603  |              | Ps.    | (1,044,757        | )      | Ps. | (633,287 | ) |
| Weighted average common shares  outstanding,  in thousands |   | 201,798  |    | 201,798           |   | 201,798           |   |
| Net (loss) income per share  under U.S. GAAP                    |   | Ps.      | 0.12    |              | Ps.    | (5.17             | )      | Ps. | (3.13 | ) |

 

**17.FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:**

 

**MexicanGAAP**

** **

In December 2001, the Mexican Institute of PublicAccountants (MIPA) issued the new Bulletin C-9, “ Liabilities, Provisions,Contingent Assets and Liabilities and Commitments “ (“C-9”), whose provisionsare mandatory for years beginning as of January, 2003, although earlyapplication is recommended. C-9 replaces the provisions of the former BulletinsC-9 “Liabilities” and C-12, “Contingencies and Commitments”, and establishes,among others, greater accuracy in items related to provisions, accumulatedobligations and contingent liabilities, and new regulations related toaccounting recognition of provisions, the use of present value, and theredemption of obligations when taking place early or substituted by a newissue.

 

F-29

----

 

In January 2002, the MIPA issued new Bulletin C-8, “Intangible Assets “ (“C-8”) with the same effective date and recommendationestablished for Bulletin C-9. C-8 replaces the former Bulletin C-8,“Intangibles”, and establishes, among others, that the development costs of aproject should be capitalized if they comply with the criteria established fortheir recognition as assets; any preoperating costs incurred as of the date ofapplication of this Bulletin should be recorded as a cost for the period.  The unamortized balance of capitalizedpreoperating costs in accordance with the former Bulletin C-8 will be amortizedin accordance with the terms of such Bulletin. To reduce as much as possible the remnant that constitutes “goodwill” inthe case of business acquisitions, the intangible items to be identified andquantified are provided.

 

In March 2003, the MIPA issued Bulletin C-15,“Impairment in the Value of Long-Lived Assets and Their Disposal”, (C-15),whose application is mandatory for financial statements of periods beginning onor after January 1, 2004, although early application is encouraged. C-15establishes, among others, new principles for the calculation and recognitionof impairment losses for long-lived assets and their reversal.  It also provides examples of indicators ofpossible impairment in the carrying amount of tangible and intangiblelong-lived assets in use, including goodwill. The calculation of such lossrequires the determination of the recoverable value, which is now defined asthe greater of the net selling price of a cash-generating unit and its value inuse, which is the present value of discounted future net cash flows. Theaccounting principles issued prior to this new Bulletin used future net cashflows, without requiring the discounting of such cash flows.

 

The Company has not fully assessed the effects ofadopting these new accounting principles on its financial position and resultsof operations.

 

**U.S.GAAP**

 

During 2001, the FASB issued the initiated followingguidance:

 

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations”, which is effective for all business combinations initiated afterJune 30, 2001.  SFAS No. 141 requiresall business combinations to be accounted for using the purchase method.  The adoption of this new standard did nothave a material impact on the Company’s financial position or results ofoperations.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwilland Other Intangible Assets”, which was effective for the Company beginning in2002.  With the adoption of SFAS No.142, goodwill is no longer subject to amortization over its estimated usefullife, but rather it will be subject to at least an annual assessment forimpairment by applying a fair-value-based test.  Additionally, negative goodwill is recognized as an extraordinarygain at the time of the business combination.

 

In June 2001, the FASB issued SFAS No. 143 “Accountingfor Asset Retirement Obligations”, which was effective for the Companybeginning in 2003.  The Company plans toadopt this new standard in 2003.  SFASNo. 143 addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  It applies to legalobligations associated with the retirement of long-lived assets and the associatedasset retirement costs.  It applies tolegal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and/or the normaloperation of a long-lived asset, except for certain obligations oflessees.  This SFAS requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The Company is currently evaluating theeffect that this new standard will have on its financial position, results ofoperations and cash flows.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  The Company adopted this standard in2002.  SFAS No. 144 supersedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of”.  SFAS No. 144also expands the scope of discontinued operations to a component of an entityand eliminates the exception to consolidation for a temporarily controlledsubsidiary.  The adoption of thisstandard did not have a material impact on the Company’s financial position andresults of operations.

 

During 2002, the FASB issued the following guidance:

 

In June 2002, the FASB issued SFAS No. 146,"Accounting for Costs Associated with “Exit or Disposal Activities”, whichwill be required to be effective for exit or disposal activities that areinitiated after December 31,2002. This statement addresses financial accountingand reporting for cost associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)”. The Companyadopted the provisions of SFAS No. 146 on January 1, 2003, which did not have amaterial effect on the Company’s financial statements.

 

F-30

----

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 requires that the 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 the disclosurerequirements are effective for financial statement periods ending afterDecember 15, 2002.  The Company does notexpect the adoption of FIN 45 will have a material impact on its financialposition, results of operations or cash flows.

 

During 2003, the FASB issued the following guidance:

 

In January 2003, the FASB issued FASB InterpretationNo. 46 “Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements”, 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 financial supportfrom other parties.  FIN 46 is effectiveimmediately for all companies that hold a variable interest in a variableinterest entity created after January 31, 2003.  For a variable interest held by the Company in a variableinterest entity created before February 1, 2003, the Company will apply theprovisions of FIN 46 no later than the end of the first annual reporting periodbeginning after June 15, 2003*.*The Company does not expect that theadoption of FIN 46 will have a material impact on its financial position,results of operations or cash flows.

 

In April 2003, the FASB issued SFAS No. 149“Amendments of Statement 133 on Derivative Instruments and Hedging Activities”,which amends and clarifies financial accounting and reporting for 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, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”.  SFAS No. 150 aims to eliminatediversity in practice by requiring that the following three types of financialinstruments be reported as liabilities by their issuers:

 

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

 

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

 

•                  Certainfinancial instruments that include an obligation that  (1) the issuer may or must settle by issuing a variable number ofits equity shares and (2) has a “monetary value” at inception that (a) isfixed, (b) is tied to a market index or other benchmark (something other thanthe fair value of the issuer’s equity shares), or (c) varies inversely with thefair value of the equity shares, for example, a written put option.

 

Until now, these types of instruments have beenvariously reported by their issuers as liabilities, as part of equity, orbetween the liabilities and equity sections (sometimes referred to as“mezzanine” reporting) of the balance sheet. The provisions of SFAS 150 are effective for financial instruments forthe first fiscal period beginning after December 15, 2003. The Company does notexpect that the adoption of SFAS No. 150 will have a material impact on itsfinancial position, results of operations or cash flows.

 

F-31

 

----

 

**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               |

 

 

32

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