---

Exhibits 99.3



Consolidated Financial Statements

DECEMBER 31, 2009 AND 2008(IN UNITED STATES DOLLARS, UNLESS OTHERWISE STATED)

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|                                 |                         
|-------------------------------- | ------------------------
|KPMG LLP                         |                         
|Chartered Accountants            |                         
|Suite 1500 Purdys Wharf Tower I |                         
|1959 Upper Water Street          | Telephone (902) 492-6000
|Halifax NS B3J 3N2               | Telefax (902) 429-1307  
|Canada                           | www.kpmg.ca             
|                                 |                         

AUDITORS' REPORT

To the Shareholders of Gammon Gold Inc.

We have audited the consolidated balance sheets of Gammon
Gold Inc. (the "Company") as at December 31, 2009 and 2008 and the consolidated
statements of operations and comprehensive income, cash flows and shareholders
equity for each of the years in the two year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with Canadian generally
accepted auditing standards and in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as at December 31, 2009 and 2008 and the results of its operations and its cash
flows for each of the years in the two period ended December 31, 2009 in
accordance with Canadian generally accepted accounting principles.

/s/ KPMG LLP

Chartered Accountants

Halifax, Canada
March 29, 2010



| | KPMG LLP is a Canadian limited liability partnership and a member firm of
    
    the KPMG network of independent member firms affiliated with KPMG 
    International Cooperative (:KPMG International), a Swiss entity. KPMG
    
    Canada provides services to KPMG LLP | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

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Consolidated Balance Sheets
(in thousands of
      United States Dollars)



|                                                               |   |          |   |   |          |  
|-------------------------------------------------------------- | - | -------- | - | - | -------- | -
|                                                               |   |          |   |   |          |  
|At December 31                                                 |   |          |   |   |          |  
|                                                               |   | 2009     |   |   | 2008     |  
|                                                               |   |          |   |   |          |  
|ASSETS                                                         |   |          |   |   |          |  
|Current                                                        |   |          |   |   |          |  
|Cash and cash equivalents                                      | $ | 128,977  |   | $ | 3,258    |  
|Receivables                                                    |   |          |   |   |          |  
|Commodity taxes                                                |   | 10,598   |   |   | 8,762    |  
|Trade / other                                                  |   | 1,974    |   |   | 4,932    |  
|Current portion of future income tax
      asset (Note 10)     |   | 4,210    |   |   | 1,385    |  
|Inventories (Note 4)                                           |   | 71,682   |   |   | 60,128   |  
|Prepaids and deposits                                          |   | 2,680    |   |   | 2,389    |  
|                                                               |   | 220,121  |   |   | 80,854   |  
|                                                               |   |          |   |   |          |  
|Deposits on property, plant and equipment                      |   | 4,861    |   |   | 4,930    |  
|Other long-term assets (Note 2 (q))                            |   | 3,847    |   |   | 4,653    |  
|Long-term ore stockpiles (Note 4)                              |   | -        |   |   | 2,201    |  
|Mining interests and property, plant and equipment (Note 5)    |   | 628,740  |   |   | 597,126  |  
|Goodwill                                                       |   | 106,799  |   |   | 106,799  |  
|                                                               |   |          |   |   |          |  
|                                                               | $ | 964,368  |   | $ | 796,563  |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|LIABILITIES                                                    |   |          |   |   |          |  
|Current                                                        |   |          |   |   |          |  
|Payables and accruals                                          | $ | 37,019   |   | $ | 30,457   |  
|Current portion of future income tax
      liability (Note 10) |   | -        |   |   | 836      |  
|Current portion of capital leases and                          |   |          |   |   |          |  
|other long-term
      obligations (Notes 6 and 7)              |   | 5,161    |   |   | 30,861   |  
|                                                               |   | 42,180   |   |   | 62,154   |  
|                                                               |   |          |   |   |          |  
|Long-term debt and capital leases (Note 6)                     |   | 32,431   |   |   | 7,991    |  
|Other long-term obligations (Note 7)                           |   | 5,051    |   |   | 4,677    |  
|Asset retirement obligations (Note 8)                          |   | 5,958    |   |   | 3,622    |  
|Employee future benefits (Note 9)                              |   | 1,635    |   |   | 1,659    |  
|Future income tax liability (Note 10)                          |   | 98,896   |   |   | 77,850   |  
|                                                               |   | 186,151  |   |   | 157,953  |  
|SHAREHOLDERS EQUITY (Note 11)                                 |   |          |   |   |          |  
|Capital stock                                                  |   | 866,716  |   |   | 719,426  |  
|Contributed surplus                                            |   | 23,873   |   |   | 33,288   |  
|Deficit                                                        |   | (118,806 | ) |   | (120,538 | )
|Accumulated other comprehensive income                         |   | 6,434    |   |   | 6,434    |  
|                                                               |   | 778,217  |   |   | 638,610  |  
|                                                               |   |          |   |   |          |  
|                                                               | $ | 964,368  |   | $ | 796,563  |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|Commitments and contingencies (Note 12)                        |   |          |   |   |          |  
|Subsequent events (Note 19)                                    |   |          |   |   |          |  

|Signed on behalf of the Board: | Signed              |  | Signed              
|------------------------------ | --------------------- |  | ----------------------
|                               | René Marion, Director |  | Ronald Smith, Director





|See accompanying notes to the consolidated financial
      statements. | 1
|---------------------------------------------------------------------- | -

---



Consolidated Statements of Operations and
Comprehensive Income

(in thousands of United States Dollars except per share data)



|                                                             |   |             |   |   |             |  
|------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
|                                                             |   |             |   |   |             |  
|For
      the years ended December 31                        |   |             |   |   |             |  
|                                                             |   | 2009        |   |   | 2008        |  
|                                                             |   |             |   |   |             |  
|Revenue from mining operations                               | $ | 206,801     |   | $ | 212,522     |  
|                                                             |   |             |   |   |             |  
|Expenses                                                     |   |             |   |   |             |  
|Production costs, excluding
      amortization and depletion |   | 96,504      |   |   | 127,651     |  
|Refining costs                                               |   | 2,855       |   |   | 1,662       |  
|General and administrative costs                             |   | 37,054      |   |   | 29,945      |  
|Amortization, depletion and accretion                        |   | 42,954      |   |   | 40,380      |  
|                                                             |   | 179,367     |   |   | 199,638     |  
|                                                             |   |             |   |   |             |  
|Earnings before other items                                  |   | 27,434      |   |   | 12,884      |  
|                                                             |   |             |   |   |             |  
|Interest on long-term debt                                   |   | (3,314      | ) |   | (1,936      | )
|Foreign exchange (loss) / gain                               |   | (11,369     | ) |   | 18,942      |  
|Interest and other income                                    |   | 633         |   |   | 410         |  
|                                                             |   | (14,050     | ) |   | 17,416      |  
|                                                             |   |             |   |   |             |  
|Earnings before income taxes                                 |   | 13,384      |   |   | 30,300      |  
|                                                             |   |             |   |   |             |  
|Future income tax expense / (recovery) (Note 10)             |   | 6,611       |   |   | (10,738     | )
|Current tax expense                                          |   | 5,041       |   |   | 1,044       |  
|                                                             |   | 11,652      |   |   | (9,694      | )
|                                                             |   |             |   |   |             |  
|Net earnings and comprehensive income                        | $ | 1,732       |   | $ | 39,994      |  
|                                                             |   |             |   |   |             |  
|                                                             |   |             |   |   |             |  
|                                                             |   |             |   |   |             |  
|Earnings per share (Note 13)                                 |   |             |   |   |             |  
|Basic                                                        | $ | 0.01        |   | $ | 0.34        |  
|Diluted                                                      | $ | 0.01        |   | $ | 0.33        |  
|                                                             |   |             |   |   |             |  
|                                                             |   |             |   |   |             |  
|Weighted average shares outstanding (Note 13)                |   |             |   |   |             |  
|Basic                                                        |   | 125,688,993 |   |   | 119,110,568 |  
|Diluted                                                      |   | 126,592,185 |   |   | 120,812,872 |  
|                                                             |   |             |   |   |             |  
|                                                             |   |             |   |   |             |  





|See accompanying notes to the consolidated financial
      statements. | 2
|---------------------------------------------------------------------- | -

---



Consolidated Statements of Cash Flows(in thousands of
      United States Dollars)



|                                                                         |   |         |   |   |         |  
|------------------------------------------------------------------------ | - | ------- | - | - | ------- | -
|                                                                         |   |         |   |   |         |  
|For the years
      ended December 31                                    |   | 2009    |   |   | 2008    |  
|                                                                         |   |         |   |   |         |  
|                                                                         |   |         |   |   |         |  
|OPERATING ACTIVITIES                                                     |   |         |   |   |         |  
|Net earnings                                                             | $ | 1,732   |   | $ | 39,994  |  
|Payment on other long-term obligations                                   |   | (727    | ) |   | -       |  
|Items not affecting cash (Note 14)                                       |   | 72,139  |   |   | 8,790   |  
|Change in non-cash operating working
      capital (Note 14)             |   | 5,074   |   |   | 7,149   |  
|                                                                         |   | 78,218  |   |   | 55,933  |  
|                                                                         |   |         |   |   |         |  
|INVESTING ACTIVITIES                                                     |   |         |   |   |         |  
|(Increase) / decrease in deposits on
      property, plant and equipment |   | (601    | ) |   | 465     |  
|Expenditures on mining interests and
      property, plant & equipment   |   | (76,861 | ) |   | (66,841 | )
|                                                                         |   | (77,462 | ) |   | (66,376 | )
|                                                                         |   |         |   |   |         |  
|FINANCING ACTIVITIES                                                     |   |         |   |   |         |  
|Repayment of capital lease obligations                                   |   | (7,464  | ) |   | (2,551  | )
|Proceeds from sale-leaseback
      transactions                          |   | 17,201  |   |   | -       |  
|Proceeds from long-term debt                                             |   | 11,500  |   |   | 13,880  |  
|Repayment of long-term debt                                              |   | (22,563 | ) |   | (8,109  | )
|Financing fees on long-term debt                                         |   | (1,200  | ) |   | -       |  
|Net proceeds from issuance of common
      shares                        |   | 108,132 |   |   | -       |  
|Proceeds from exercise of stock options                                  |   | 19,357  |   |   | 6,772   |  
|                                                                         |   | 124,963 |   |   | 9,992   |  
|                                                                         |   |         |   |   |         |  
|Net increase / (decrease) in cash and cash equivalents                   |   | 125,719 |   |   | (451    | )
|                                                                         |   |         |   |   |         |  
|Cash and cash equivalents, beginning of year                             |   | 3,258   |   |   | 3,709   |  
|                                                                         |   |         |   |   |         |  
|Cash and cash equivalents, end of year                                   | $ | 128,977 |   | $ | 3,258   |  
|                                                                         |   |         |   |   |         |  
|                                                                         |   |         |   |   |         |  
|Cash and cash equivalents is comprised of the following:                 |   |         |   |   |         |  
|                                                                         |   |         |   |   |         |  
|Cash                                                                     | $ | 93,249  |   | $ | 3,258   |  
|Short-term investments                                                   |   | 35,728  |   |   | -       |  
|                                                                         | $ | 128,977 |   | $ | 3,258   |  
|                                                                         |   |         |   |   |         |  
|                                                                         |   |         |   |   |         |  



|See accompanying notes to the consolidated financial
      statements. | 3
|---------------------------------------------------------------------- | -

---



Consolidated Statements of Shareholders Equity

 (in
thousands of United States Dollars)







|                                                         |   |          |   |   |          |  
|-------------------------------------------------------- | - | -------- | - | - | -------- | -
|For the years
      ended December 31                    |   | 2009     |   |   | 2008     |  
|                                                         |   |          |   |   |          |  
|Capital stock                                            |   |          |   |   |          |  
|Balance, beginning of year                               | $ | 719,426  |   | $ | 699,512  |  
|For cash pursuant to exercise of stock
      options     |   | 19,357   |   |   | 6,772    |  
|Fair value of share-based compensation                   |   | 19,709   |   |   | 13,142   |  
|Shares issued through employee share
      purchase plan |   | 92       |   |   | -        |  
|Shares issued through equity offering                    |   | 115,042  |   |   | -        |  
|Share issuance costs                                     |   | (6,910   | ) |   | -        |  
|Balance, end of year                                     | $ | 866,716  |   | $ | 719,426  |  
|                                                         |   |          |   |   |          |  
|                                                         |   |          |   |   |          |  
|Contributed surplus                                      |   |          |   |   |          |  
|Balance, beginning of year                               | $ | 33,288   |   | $ | 42,373   |  
|Fair value of share-based compensation                   |   | (19,709  | ) |   | (13,142  | )
|Forfeitures of stock options                             |   | (150     | ) |   | (429     | )
|Share-based compensation                                 |   | 10,444   |   |   | 4,486    |  
|Balance, end of year                                     | $ | 23,873   |   | $ | 33,288   |  
|                                                         |   |          |   |   |          |  
|                                                         |   |          |   |   |          |  
|Deficit                                                  |   |          |   |   |          |  
|Balance, beginning of year                               | $ | (120,538 | ) | $ | (160,532 | )
|Net earnings                                             |   | 1,732    |   |   | 39,994   |  
|Balance, end of year                                     |   | (118,806 | ) |   | (120,538 | )
|Accumulated other comprehensive income                   |   | 6,434    |   |   | 6,434    |  
|                                                         |   |          |   |   |          |  
|Total deficit and accumulated other comprehensive income | $ | (112,372 | ) | $ | (114,104 | )
|                                                         |   |          |   |   |          |  
|                                                         |   |          |   |   |          |  
|                                                         |   |          |   |   |          |  
|Total shareholders equity                               | $ | 778,217  |   | $ | 638,610  |  
|                                                         |   |          |   |   |          |  
|                                                         |   |          |   |   |          |  



|See accompanying notes to the consolidated financial
    statements. | 4
|-------------------------------------------------------------------- | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


1.

Nature of operations

Gammon Gold Inc. (the Company) is a publicly traded company
engaged in the mining, development, exploration and acquisition of resource
properties. The Companys common shares are listed on the Toronto Stock Exchange
(TSX: GAM), the New York Stock Exchange (NYSE: GRS) and the Berlin Stock
Exchange (BSX: GL7).


2.

Summary of significant accounting
policies

(a)

Basis of presentation

The consolidated financial statements have been prepared by the
Company in accordance with Canadian generally accepted accounting principles,
using the following significant accounting policies. These financial statements
are prepared in United States dollars, unless otherwise indicated.

(b)

Consolidation

These consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Gammon Lake Resources (NS)
Incorporated, Gammon Lake de Mexico S.A. de C.V., Gammon Lake Resources (USA)
Inc., Gammon Lake Holdings Inc., Mexgold Resources Inc., Compania Minera El Cubo
S.A. de C.V., and Metales Interamericanos S.A de C.V. All significant
intercompany balances and transactions have been eliminated on consolidation.

(c)

Foreign currency translation

The functional currency of the Companys operations is the
United States dollar (US dollar). Non-US dollar balances are translated into
US dollars as follows: monetary assets and liabilities are translated to US
dollars at the period-end exchange rate; non-monetary assets and liabilities are
translated at the rate prevailing at the time of the transaction; and revenue
and expense transactions are translated using average exchange rates, except for
expenses that relate to non-monetary assets and liabilities, which are
translated at the same historical exchange rate as the related asset or
liability. Translation gains or losses are recognized in earnings in the period
in which they occur.

(d)

Use of estimates

The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts for assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
significant areas requiring the use of management estimates and assumptions
relate to mineral reserves that are the basis for future cash flow estimates
utilized in impairment calculations; depletion and amortization calculations;
estimates of recoverable gold and other minerals in current and long-term
stockpile and leach pad inventories; estimates of fair value for certain
reporting units and asset impairment; write-downs of inventory to net realizable
value; post-employment, post-retirement and other employee future benefits;
valuation allowances for future income tax assets; asset retirement obligations;
reserves for contingencies and litigation; and the fair value and accounting
treatment of financial instruments. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results could differ
from those estimates.

(e)

Revenue recognition

Revenue from the sale of gold, silver, and doré bars is
recognized when persuasive evidence of a sale arrangement exists, the risks and
rewards of ownership passes to the purchaser including title risk, the selling
price is fixed or determinable, and collectability is reasonably assured. Sales
of the doré bars are recorded at estimated values, and are further adjusted
based upon final quality assessment and quotations. Interest revenue is
recognized on an accrual basis.

(f)

Cash and cash equivalents

The Company considers deposits in banks, certificates of
deposits, and short-term investments with original maturities of three months or
less from the acquisition date as cash and cash equivalents.



| | 5
| | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


(g)

Inventories

Supplies inventory

Supplies inventory consists of mining supplies and consumables
used in the operation of the mines, and is valued at the lower of average cost
and net realizable value.

Current and long-term ore stockpiles inventory

Stockpiles represent ore that has been mined and is available
for further processing. Stockpiles are measured by estimating the number of
tonnes added and removed from the stockpile, the number of contained ounces
(based on assay data) and the estimated metallurgical recovery rates (based on
the expected processing method). Stockpile ore tonnages are verified by periodic
surveys. Costs are allocated to stockpiles based on the current mining cost per
tonne incurred up to the point of stockpiling the ore, including applicable
overhead, depletion and amortization relating to mining operations, and are
removed at the average cost per tonne. Ore stockpiles inventory is measured at
the lower of cost and net realizable value.

Ore in process inventory

The recovery of gold and silver is achieved through milling and
heap leaching processes. Costs are added to ore on leach pads and in the mill
based on current mining costs, including applicable overhead, depletion and
amortization relating to mining operations. Costs are removed from ore on leach
pads and in the mill as ounces are recovered, based on the average cost per
ounce of gold and silver in ore in process inventory. Ore in process inventory
is measured at the lower of cost and net realizable value.

Finished goods inventory

Finished goods inventory consists of gold, silver, and doré
bars, and is valued at the lower of cost and net realizable value.

For all ore inventories,net realizable value is
calculated as the difference between the estimated future metal revenue based on
prevailing and long-term metal prices and estimated costs to complete production
into a saleable form.

(h)

Mining interests and
depletion

The carrying value of mining interests represents the
accumulated costs to date related to the acquisition, exploration and
development of the Companys mineral properties. Production stage mining
interests are amortized over the life of the mine using the unit-of-production
method based on estimated proven and probable reserves of the mine and the
portion of mineralization expected to be classified as reserves, or on a
straight-line basis over the term of the lease. The Company determines the
portion of mineralization expected to be classified as reserves by considering
the degree of confidence in the economic extraction of the resource, which is
affected by long-term metal price assumptions, cut-off grade assumptions, and
drilling results. These assessments are made on a mine-by-mine basis.

The expected useful lives used in amortization and depletion
calculations are determined based on the facts and circumstances associated with
the mining interest. Any changes in estimates of useful lives are accounted for
prospectively from the date of the change.

Mining costs associated with stripping activities in an open
pit mine are capitalized if they represent a betterment to the mineral property
in that access is gained to sources of reserves that will be produced in future
periods that would otherwise not have been accessible. Capitalized stripping
costs are amortized over the life of the deposit benefiting from the stripping
using the unit-of-production method based on estimated proven and probable
reserves of the mine and the portion of mineralization expected to be classified
as reserves.

(i)

Property, plant and equipment and
amortization

Property, plant and equipment are recorded at cost.
Amortization is calculated on the straight-line basis over the estimated useful
lives of the assets, which do not exceed the related estimated life of mine, as
follows:

|Equipment under capital lease | 4-9 years  | Vehicles               | 4 years   
|----------------------------- | ---------- | ---------------------- | ----------
|Heavy equipment               | 4-9 years  | Buildings              | 10 years  
|Other equipment               | 6-9 years  | Office equipment       | 3-10 years
|Processing plant              | 6-10 years | Leasehold improvements | 3 years   



| | 6
| | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)




(j)

Impairment of long-lived assets

The Company assesses the impairment of long-lived assets, which
consist primarily of mining interests and property, plant and equipment,
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. An impairment loss will be recognized if the
carrying amount of a long-lived asset is not recoverable. The carrying amount of
a long-lived asset is not recoverable if the carrying amount exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual
disposition. The impairment loss to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair value.

Annually, or when events or circumstances indicate that the
carrying amount may not be recoverable, the Company reviews the carrying value
of its mining interests and exploration properties. The recoverability of the
book value of each property is assessed for indicators of impairment such as
adverse changes to the estimated recoverable ounces of gold and silver,
estimated future commodity prices, and estimated expected future operating
costs, capital expenditures and reclamation expenditures. If it is determined
that the deferred costs related to a property are not recoverable over its
productive life, those costs will be written down to fair value as a charge to
operations in the period in which the determination is made. The amounts at
which mining interests and the related deferred costs are recorded do not
necessarily reflect present or future values.

(k)

Goodwill and goodwill impairment

Acquisitions of businesses are accounted for using the purchase
method whereby assets and liabilities acquired are recorded at their fair values
as of the date of acquisition and any excess of the purchase price over such
fair value is recorded as goodwill. Goodwill is identified and allocated to
reporting units by preparing estimates of the fair value of each reporting unit
and comparing this amount to the fair value of assets and liabilities in the
reporting unit.

The Company evaluates, on an annual basis, the carrying amount
of goodwill to determine whether current events and circumstances indicate that
such carrying amount may no longer be recoverable. To accomplish this, the
Company compares the fair value of its reporting units to their carrying
amounts. Fair value is calculated as an appropriate multiple of projected future
net earnings. If the carrying amount exceeds the fair value, the Company
compares the implied fair value of the reporting units goodwill to its carrying
amount, and any excess of the carrying amount over the fair value is charged to
operations. Assumptions underlying fair value estimates are subject to
significant risks and uncertainties.

(l)

Asset retirement obligations

The Companys mining and exploration activities are subject to
various governmental laws and regulations relating to the protection of the
environment. These environmental regulations are continually changing, and the
Company intends to make future expenditures to comply with such laws and
regulations. The Company is required to record a liability and corresponding
asset, for the estimated present value of future cash flows associated with site
closure and reclamation when the liability is incurred and a reasonable estimate
of the fair value can be made. The present value of future cash flows is
determined using the credit adjusted risk free rate. These asset retirement
costs are amortized over the life of the related assets on a straight-line
basis. At the end of each period, the liability is increased to reflect the
passage of time and changes in the estimated future cash flows underlying any
initial fair value measurements.

(m)

Share-based compensation

The Company uses the fair value method of accounting for
employee share-based compensation and other share-based payments made in
exchange for goods and services. Under this method, the Company recognizes a
compensation expense for all awards made to employees, based on the fair value
of the options on the date of grant, which is determined by using an option
pricing model. The fair value of employee options is expensed over the vesting
period of the options. The fair value of awards granted to non-employees is
remeasured at the earlier of each financial reporting or vesting date, and any
adjustment is charged or credited to income upon remeasurement. The Companys
stock option plan is described in Note 11.

(n)

Income taxes

Income taxes are calculated using the asset and liability
method. Under this method, current income taxes are recognized for the estimated
income taxes payable for the current period. Future income tax assets and
liabilities are determined based on the difference between the financial
reporting and tax basis of assets and liabilities and on unclaimed losses
carried forward. Future income tax assets and liabilities are measured using the
enacted or substantively enacted tax rates that will be in effect when the
differences are expected to reverse or when unclaimed losses are expected to be
utilized. A valuation allowance is recognized to the extent that the
recoverability of future income tax assets is not considered to be more likely
than not.



| | 7
| | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)




(o)

Earnings per common share

Earnings per common share is calculated based on the weighted
average number of common shares outstanding for the period. Diluted earnings per
common share considers the potential exercise of all outstanding options using
the treasury stock method. This method assumes that proceeds received from the
exercise of the in-the-money stock options and warrants are used to repurchase
shares at the average market price for the year.

(p)

Employee future benefits

The Company has defined benefit plans that provide benefits to
certain of its employees. The cost of the accrued benefit liability for benefits
earned by employees is actuarially determined using the projected benefit method
prorated on service and managements best estimate of salary escalation and
retirement ages.

Actuarial gains and losses arise from changes in actuarial
assumptions used to determine the accrued benefit liability. The excess of the
net actuarial gain and loss over 10% of the greater of the accrued benefit
liability and the fair value of plan assets is amortized over the average
remaining service period of active employees.

(q)

Other long-term assets

Included in other long-term assets are the costs of an
eight-year consultancy agreement with a third party, whereby the Company will
receive assistance with strategic planning, business development, procurement
and authorization of land, employer-employee relations, community and government
relations, and environmental relations. Amortization of the contract cost is
calculated on a straight-line basis over the term of the agreement. See Note 7
for further details on the related obligation.

(r)

Financial instruments

The Companys financial instruments are classified as
follows:

|Asset / Liability                                     |  | Classification              |  | Measurement   
|----------------------------------------------------- |  | --------------------------- |  | --------------
|Cash and cash equivalents                             |  | Held-for-trading            |  | Fair value    
|Receivables                                           |  | Loans and receivables       |  | Amortized cost
|Payables and accruals and other long-term obligations |  | Other financial liabilities |  | Amortized cost
|Long-term debt and capital leases                     |  | Other financial liabilities |  | Amortized cost

Transaction costs other than those related to financial
instruments classified as held-for-trading, which are expensed as incurred, are
added to the fair value of the financial asset or financial liability on initial
recognition and amortized using the effective interest rate method.

Fair values are based on quoted market prices where available
from active markets, otherwise fair values are estimated using a variety of
valuation techniques and models.

All derivative instruments, including embedded derivatives, are
recorded on the balance sheet at fair value unless exempted from derivative
treatment as a normal purchase and sale. All changes in fair value are recorded
in earnings unless they are designated in a valid hedging relationship (Note
2(s)), in which case the changes in fair value are recorded in other
comprehensive income. There were no embedded derivatives for the years ended
December 31, 2009 and 2008.

(s)

Hedges

Hedging relationships that meet documentation requirements, and
can be proven to be effective both at the inception and over the term of the
relationship qualify for hedge accounting. Specifically, in a cash flow hedge,
the effective portion of the change in the fair value of hedging derivatives is
recorded in other comprehensive income and reclassified to earnings in the
period in which the hedged item is realized. Any ineffective portion of the
change in fair value of hedging derivatives is recognized in net earnings in the
reporting period. Where documentation and effectiveness requirements are not
met, the derivatives are classified as held for trading and the change in fair
value is recognized in earnings in the reporting period.

Fair value hedges and the related hedged items are recognized
on the balance sheet at fair value with any changes in fair value recognized in
net income. To the extent the fair value hedge is effective, the changes in fair
value of the hedge and the hedged item will offset each other.



| | 8
| | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)




(t)

Recent accounting pronouncements

The following is an overview of recent accounting
pronouncements that the Company will be required to adopt in future years:

(i)

Section 1582, Business Combinations, Section 1601,
Consolidated Financial Statements and Section 1602, Non-controlling Interests

In January 2009, the CICA issued Section 1582, Business
Combinations, Section 1601, Consolidated Financial Statements, and
Section 1602, Non-controlling Interestswhich replace Section 1581,
Business Combinations and Section 1600, Consolidated Financial
Statements. Section 1582 establishes standards for the accounting for
business combinations that is equivalent to the business combination accounting
standard under International Financial Reporting Standards (IFRS). This
standard was amended to require additional use of fair value measurements,
recognition of additional assets and liabilities, and increased disclosure.
Adopting this standard is expected to have a material effect on how future
business combinations are accounted for. Section 1582 is applicable for business
combinations with acquisition dates on or after January 1, 2011. Early adoption
of this section is permitted. Section 1601, together with Section 1602,
establishes standards for the preparation of consolidated financial statements.
Section 1601 is applicable for the Companys interim and annual consolidated
financial statements for fiscal years beginning on or after January 1, 2011.
Early adoption of this section is permitted. If the Company chooses to early
adopt any one of these sections, the other two sections must also be adopted at
the same time.

(ii)

International Financial Reporting Standards

In 2006, the Canadian Accounting Standards Board ("AcSB")
published a new strategic plan that will significantly affect financial
reporting requirements for Canadian companies. The AcSB strategic plan outlines
the convergence of Canadian GAAP with IFRS over an expected five year
transitional period. In February of 2009, the AcSB announced that 2011 is the
changeover date for publicly accountable enterprises to use IFRS. The date is
for interim and annual financial statements relating to fiscal years beginning
on or after January 1, 2011. The transition date of January 1, 2011 will require
the restatement for comparative purposes of amounts reported by the Company for
the year ended December 31, 2010. While the Company has begun assessing the
adoption of IFRS for 2011, the financial reporting impact of the transition to
IFRS cannot be reasonably estimated at this time.


3.

Changes in accounting policies

(i)

Section 3862, Financial Instruments  Disclosures

The Company adopted the amended Section 3862, Financial
Instruments  Disclosures, which includes additional disclosure requirements
regarding fair value measurements for financial instruments and liquidity risk.
These amendments require a three level hierarchy that reflects the significance
of the inputs used in making the fair value measurements, and were effective for
fiscal years ending after September 30, 2009. These disclosures are included
within Note 16.

(ii)

EIC-174, Mining Exploration Costs

Effective March 27, 2009, the Company adopted EIC 174,
Mining Exploration Costs. This abstract provides additional guidance on
determining when exploration costs related to mining properties can be
capitalized as well as clarification on impairment indicators for exploration
costs that have previously been capitalized. This abstract did not have any
effect on the Companys financial results.

(iii)

Section 3064, Goodwill and Intangible Assets

Effective January 1, 2009, the Company adopted Section 3064,
Goodwill and Intangible Assets, which replaced existing Section 3062,
Goodwill and Other Intangible Assets. This new section establishes
standards for the recognition of internally developed intangible assets. The
standards for the recognition and impairment testing of goodwill are carried
forward unchanged. This new standard did not have any effect on the Companys
financial results.

(iv)

EIC-173, Credit Risk and the Fair Value of Financial Assets
and Financial Liabilities

Effective January 1, 2009, the Company adopted EIC-173,
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities. This abstract requires that credit risk be taken into account
in determining the fair value of financial instruments and financial
liabilities, including derivative instruments. This new standard did not have
any effect on the Companys financial results.




| | 9
| | -

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


4.

Inventories

|                               |   | December 31 |   |        | December 31 | 
|------------------------------ | - | ----------- | - | ------ | ----------- | 
|                               |   | 2009        |   |        | 2008        | 
|Supplies                       | $ | 15,847      | $ | 14,073 |            
|Ore stockpiles                 |   | 627         |   | 3,534  |            
|Ore in process                 |   | 53,199      |   | 43,832 |            
|Finished goods                 |   | 2,009       |   | 890    |            
|                               |   | 71,682      |   | 62,329 |            
|Less: Long-term ore stockpiles |   | -           |   | (2,201 | )          
|                               | $ | 71,682      | $ | 60,128 |            

During the year, the Company recognized $1,791 of inventory net
realizable value adjustments as an expense (2008 - $8,318). As a result of the
increase in expected future commodity prices, the Company recognized net
realizable value adjustment reversals during the year, which had the effect of
decreasing expenses by $428 (2008 - $3,278), for an overall net realizable value
adjustment expense of $1,363 during 2009 (2008 - $5,040).


5.

Mining interests and property, plant
and equipment

|                               |   |         |  |   | December 31, 2009 |  |   |          |  |   | December 31, 2008 | 
|------------------------------ | - | ------- |  | - | ----------------- |  | - | -------- |  | - | ----------------- | 
|                               |   |         |  |   | Accumulated       |  |   | Net Book |  |   |                   | 
|                               |   | Cost    |  |   | Amortization      |  |   | Value    |  |   | Cost              | 
|Mining interests:              |   |         |  |   |                   |  |   |          |  |   |                   | 
|Producing properties           | $ | 386,394 |  | $ | 78,402            |  | $ | 307,992  |  | $ | 334,896           | 
|Exploration properties         |   | 126,517 |  |   | -                 |  |   | 126,517  |  |   | 119,400           | 
|                               |   | 512,911 |  |   | 78,402            |  |   | 434,509  |  |   | 454,296           | 
|Property, plant and equipment: |   |         |  |   |                   |  |   |          |  |   |                   | 
|Processing plant               |   | 101,662 |  |   | 37,667            |  |   | 63,995   |  |   | 95,183            | 
|Heavy equipment                |   | 54,318  |  |   | 24,620            |  |   | 29,698   |  |   | 70,913            | 
|Other equipment                |   | 50,957  |  |   | 6,895             |  |   | 44,062   |  |   | 41,515            | 
|Buildings                      |   | 24,350  |  |   | 5,135             |  |   | 19,215   |  |   | 22,524            | 
|Office equipment               |   | 6,469   |  |   | 4,234             |  |   | 2,235    |  |   | 5,621             | 
|Vehicles                       |   | 3,404   |  |   | 2,698             |  |   | 706      |  |   | 3,303             | 
|Equipment under capital lease  |   | 22,591  |  |   | 2,202             |  |   | 20,389   |  |   | 9,165             | 
|Major spare parts              |   | 13,185  |  |   | 2,430             |  |   | 10,755   |  |   | 6,439             | 
|Construction in progress       |   | 3,176   |  |   | -                 |  |   | 3,176    |  |   | 12,793            | 
|                               |   | 280,112 |  |   | 85,881            |  |   | 194,231  |  |   | 267,456           | 
|Total                          | $ | 793,023 |  | $ | 164,283           |  | $ | 628,740  |  | $ | 721,752           | 

The following table summarizes the movements in capitalized
stripping costs:

|                            |   | December 31 |   |   | December 31 | 
|--------------------------- | - | ----------- | - | - | ----------- | 
|                            |   | 2009        |   |   | 2008        | 
|Balance, beginning of year  | $ | 7,352       |   | $ | -           | 
|Stripping costs capitalized |   | 22,614      |   |   | 7,352       | 
|Depletion                   |   | (657        | ) |   | -           | 
|Balance, end of year        | $ | 29,309      |   | $ | 7,352       | 

The Company capitalizes interest attributable to the
acquisition or construction of qualifying assets. During the year, $434 of
interest associated with capital projects was capitalized (2008 - $219).



|. | 10
|- | --

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


6.

Long-term debt and capital leases

|                                                                 |  |                              |       |   | December 31 |        |   | December 31 | 
|---------------------------------------------------------------- |  | ---------------------------- | ----- | - | ----------- | ------ | - | ----------- | 
|                                                                 |  |                              |       |   | 2009        |        |   | 2008        | 
|(a)                                                              |  | Revolving credit facility    |       | $ | 25,242      |        | $ | 6,855       | 
|(a)                                                              |  | Non-revolving term loan      |       |   | -           |        |   | 29,582      | 
|(b)                                                              |  | Capital leases for equipment |       |   | 11,539      |        |   | 1,910       | 
|(c)                                                              |  | Other long-term debt         |       |   | 48          |        |   | 105         | 
|                                                                 |  |                              |       |   | 36,829      |        |   | 38,452      | 
|Less: Current portion of long-term debt and
      capital leases |  |                              | 4,398 |   |             | 30,461 |  
|                                                                 |  |                              |       | $ | 32,431      |        | $ | 7,991       | 

The estimated future minimum debt and lease payments under all
facilities are as follows:

2010
    $
    4,3982011
    $
    30,7532012
    $
    2,816


|(a) | On November 5, 2009, the Companys credit facility was
      restructured and replaced with a $30,000 revolving line of credit with the
      Bank of Nova Scotia. The agreement included an option to increase the
      facility to $50,000 under similar terms and conditions, provided that the
      Bank of Nova Scotias exposure did not exceed $30,000. On December 31,
      2009, the Company signed an agreement with Société Générale to increase
      the total revolving credit facility to $50,000, with the exposure divided
      equally between the two lenders. The facility matures on November 5, 2011
      and may be extended upon mutual agreement by all parties. No payments
      under the facility are due until the maturity date. Interest is payable at
      LIBOR + 3.75% to 4.25% depending on the leverage ratio of the
    Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The credit facility contains various covenants that
      include an interest coverage ratio of at least 3:1, a leverage ratio of no
      more than 3:1, a tangible net worth of at least $491,500 plus 50% of
      positive net income earned for each quarter subsequent to September 30th,
      2009, and proven and probable reserves cannot be less than 2,000,000
      ounces. The facility is secured by a first-ranking lien on all present and
      future assets, property and undertaking of the Company.                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | As at December 31, 2009, the Company had drawn $26,380
      under the revolving facility and had issued a $1,000 letter of credit
      against the facility. The Company is in compliance with all covenants at
      December 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) | The Company is obligated under various capital leases for
      equipment, all of which expire by the end of 2012. During the year, the
      Company entered into two transactions whereby several pieces of equipment
      were sold and subsequently leased back. These transactions resulted in an
      increase in capital lease obligations of $11,991, an increase in property,
      plant and equipment of $710, and deferred gains on sale of $585. The
      latter are included in other long-term obligations and will be amortized
      over the 36 month term of each lease. All capital lease agreements provide
      that the Company can purchase the leased equipment at the end of the lease
      term for a nominal amount. Interest payable on the various leases range
      from a fixed rate of 7.38% to 11.05%.                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(c) | The Company is obligated under certain other agreements
      maturing in 2010. These loans are non-interest bearing, with quarterly
      payments of approximately $15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   




7.

Other long-term obligations

Other long-term obligations includes deferred gains from
sale-leaseback transactions, obligations arising from the Companys long-term
incentive plan, and the obligation associated with the eight-year consultancy
agreement described in Note 2(q). The consultancy agreement obligation is
non-interest bearing, and has been recorded at fair value using a discount rate
of 7%. As of December 31, 2009, the total balance outstanding was $4,372
(current portion - $763).




| | 11
| | --

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


8.

Asset retirement obligations

The Companys asset retirement obligations consist of
reclamation costs for the Ocampo and El Cubo mines. The present value of the
obligation is currently estimated at $5,958 (2008  $3,622), reflecting payments
that will commence in 9 - 10 years. Significant reclamation activities include
land rehabilitation, demolition of buildings and mine facilities, ongoing care
and maintenance and other costs.

The undiscounted value of the reclamation costs liability is
$11,847 (2008  $13,298). The credit adjusted risk-free rate used in estimating
the obligation is 8%, and the inflation rate used is $5.0% (2008  5.4%).
Changes to the reclamation and closure cost obligation balance during the year
were as follows:

|                                                |   | December 31 |  |   | December 31 |  
|----------------------------------------------- | - | ----------- |  | - | ----------- | -
|                                                |   | 2009        |  |   | 2008        |  
|Asset retirement obligations, beginning of year | $ | 3,622       |  | $ | 2,991       |  
|Foreign exchange adjustment                     |   | 284         |  |   | (620        | )
|Obligations incurred                            |   | 33          |  |   | 803         |  
|Accretion expense                               |   | 316         |  |   | 190         |  
|Revisions in estimates                          |   | 1,703       |  |   | 258         |  
|Asset retirement obligations, end of year       | $ | 5,958       |  | $ | 3,622       |  




9.

Employee future benefits

The Company has two defined benefit plans that provide employee
future benefits, other than pensions, to certain of its employees in Mexico.

The Company accrues for employee future benefits for contract
workers and employees in Mexico paid through an employment services company or
by its subsidiaries. These benefits consist of a one-time payment equivalent to
12 days wages for each year of service (at the employees most recent salary,
but not to exceed twice the legal minimum wage), payable to all employees with
15 or more years of service, as well as to certain employees terminated
involuntarily prior to the vesting of their seniority premium benefit. Under
Mexican Labour Law, the Company also provides statutorily mandated severance
benefits to its employees terminated under certain circumstances. Such benefits
consist of a one-time payment of three months wages plus 20 days wages for
each year of service payable upon involuntary termination without just
cause.

All plans are unfunded. An actuarial valuation was performed
for all plans as at December 31, 2009.

Information about the Companys benefit plans, in aggregate, is
as follows:

|                               |   | December 31 |   |   | December 31 |  
|------------------------------ | - | ----------- | - | - | ----------- | -
|                               |   | 2009        |   |   | 2008        |  
|Accrued benefit obligation:    |   |             |   |   |             |  
|Balance, beginning of year     | $ | 2,331       |   | $ | 4,172       |  
|Foreign exchange adjustment    |   | 132         |   |   | (879        | )
|Service cost                   |   | 328         |   |   | 462         |  
|Interest cost                  |   | 190         |   |   | 227         |  
|Benefits paid                  |   | (569        | ) |   | (213        | )
|Early settlements              |   | -           |   |   | (1,527      | )
|Curtailments                   |   | (102        | ) |   | -           |  
|Actuarial loss                 |   | 1,102       |   |   | 89          |  
|Deficit                        |   | 3,412       |   |   | 2,331       |  
|Unamortized past service costs |   | (430        | ) |   | (429        | )
|Unamortized actuarial gain     |   | (1,347      | ) |   | (243        | )
|Accrued benefit liability      | $ | 1,635       |   | $ | 1,659       |  



12

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


Employee future benefit expense recognized during the year was
as follows:

|                                                                                                     |   | December 31
    
    2009 |   |   | December 31
    2008 | 
|---------------------------------------------------------------------------------------------------- | - | ------------------------- | - | - | -------------------- | 
|                                                                                                     |   |                           |   |   |                      | 
|Service cost                                                                                         | $ | 328                       |   | $ | 462                 
|Interest cost                                                                                        |   | 190                       |   |   | 227                 
|Actuarial loss                                                                                       |   | 13                        |   |   | 38                  
|Curtailment gain                                                                                     |   | (102                      | ) |   | -                   
|Past service costs                                                                                   |   | 24                        |   |   | (260)               
|                                                                                                     |   | 453                       |   |   | 467                 
|Difference between costs arising in the period and costs
    recognized in the period in respect of: |   |                           |   |   |                     
|Actuarial gains                                                                                      |   | -                         |   |   | 72                  
|Net expense for the year                                                                             | $ | 453                       |   | $ | 539                 
|                                                                                                     |   |                           |   |   |                     
|Significant assumptions used:                                                                        |   |                           |   |   |                     
|Discount rate                                                                                        |   | 9.00%                     |   |   | 8.04%               
|Rate of compensation increase                                                                        |   | 5.56%                     |   |   | 5.22%               




10.

Income taxes

The following table reconciles the expected income tax payable
/ (recovery) at the statutory income tax rate to the amounts recognized in the
consolidated statements of operations for the years ended December 31, 2009 and
2008.

|                                                   |   | December 31 |   |   | December 31 |  
|-------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                   |   | 2009        |   |   | 2008        |  
|Net earnings before income taxes                   | $ | 13,384      |   | $ | 30,300      |  
|Income tax rate                                    |   | 35.00%      |   |   | 35.50%      |  
|                                                   |   |             |   |   |             |  
|Expected income tax expense based on above rates   |   | 4,684       |   |   | 10,756      |  
|Effect of lower tax rates in foreign jurisdictions |   | (1,330      | ) |   | (4,819      | )
|Non-deductible stock option expense                |   | 2,351       |   |   | 1,441       |  
|Permanent differences                              |   | 6,394       |   |   | 302         |  
|Change in Mexican statutory income tax regime      |   | 718         |   |   | -           |  
|Valuation allowance                                |   | (1,165      | ) |   | (17,374     | )
|Provision for income taxes                         | $ | 11,652      |   | $ | (9,694      | )

The following reflects future income tax liabilities at
December 31, 2009 and 2008:

|                                                                    |   | December 31 |   |   | December 31 |  
|------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                    |   | 2009        |   |   | 2008        |  
|Accounting value of mineral properties in excess of tax
      value | $ | 100,052     |   | $ | 85,340      |  
|Accounting value of inventories in excess of tax value              |   | 15,364      |   |   | 11,311      |  
|Deductible share issue costs                                        |   | (2,865      | ) |   | (1,871      | )
|Future employee benefits                                            |   | (458        | ) |   | (436        | )
|Unrealized foreign exchange (losses) / gains                        |   | (2,608      | ) |   | 1,938       |  
|Other                                                               |   | (2,796      | ) |   | (2,146      | )
|Non-capital losses carried forward                                  |   | (58,253     | ) |   | (64,251     | )
|                                                                    |   | 48,436      |   |   | 29,885      |  
|Valuation allowance                                                 |   | 46,250      |   |   | 47,416      |  
|Future income tax liabilities recognized                            | $ | 94,686      |   | $ | 77,301      |  

| | 13
| | --

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


|                                               |   |             |   |   |             |  
|---------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                               |   |             |   |   |             |  
|                                               |   | December 31 |   |   | December 31 |  
|                                               |   | 2009        |   |   | 2008        |  
|Current portion of future income tax asset     | $ | (4,210      | ) | $ | (1,385      | )
|Current portion of future income tax liability |   | -           |   |   | 836         |  
|Future income tax liability                    |   | 98,896      |   |   | 77,850      |  
|Net future income tax liability recognized     | $ | 94,686      |   | $ | 77,301      |  

The Company has tax loss carryforwards expiring in the
following years:

|     |   | Canada |  |   | Mexico  |  |   | Total   | 
|---- | - | ------ |  | - | ------- |  | - | ------- | 
|2012 |   | -      |  |   | 1,018   |  |   | 1,018   | 
|2013 |   | 5,197  |  |   | 1,821   |  |   | 7,018   | 
|2014 |   | 5,865  |  |   | 1,730   |  |   | 7,595   | 
|2015 |   | 3,907  |  |   | 17,487  |  |   | 21,394  | 
|2016 |   | -      |  |   | 45,567  |  |   | 45,567  | 
|2017 |   | -      |  |   | 50,813  |  |   | 50,813  | 
|2018 |   | -      |  |   | 15,274  |  |   | 15,274  | 
|2025 |   | 1,516  |  |   | -       |  |   | 1,516   | 
|2026 |   | 6,419  |  |   | -       |  |   | 6,419   | 
|2027 |   | 17,725 |  |   | -       |  |   | 17,725  | 
|2028 |   | 3,814  |  |   | -       |  |   | 3,814  
|2029 |   | 14,074 |  |   | -       |  |   | 14,074 
|     |   |        |  |   |         |  |   |        
|     | $ | 58,517 |  | $ | 133,710 |  | $ | 192,227
|     |   |        |  |   |         |  |   |         | 
|     |   |        |  |   |         |  |   |         | 

11.

Shareholders equity

(a) Capital stock

Authorized:

Unlimited number of common shares.

Unlimited number of non-cumulative, dividends to be determined
by the Board of Directors not to exceed 12%, non-participating, non-voting,
Class A preferred shares, redeemable at their paid-in value.

Unlimited number of non-cumulative, dividends to be determined
by the Board of Directors not to exceed 13%, non-participating, non-voting,
Class B preferred shares, redeemable at their paid-in value.

Issued and outstanding:

|                                                                    |  | Number of           |  |   | Ascribed | 
|------------------------------------------------------------------- |  | ------------------- |  | - | -------- | 
|                                                                    |  | Common
      Shares |  |   | Value    | 
|Balance, December 31, 2007                                          |  | 117,432,363         |  | $ | 699,512  | 
|For cash pursuant to exercise of share purchase options             |  | 2,558,405           |  |   | 6,772    | 
|Fair value of options exercised                                     |  | -                   |  |   | 12,694   | 
|Fair value of shares issued:                                        |  | 50,000              |  |   | 448      | 
|                                                                    |  |                     |  |   |          | 
|                                                                    |  |                     |  |   |          | 
|Balance, December 31, 2008                                          |  | 120,040,768         |  | $ | 719,426  | 
|                                                                    |  |                     |  |   |          | 
|For cash pursuant to exercise of share purchase options             |  | 3,785,460           |  |   | 19,357   | 
|Fair value of options exercised                                     |  | -                   |  |   | 16,000   | 
|Fair value of shares issued                                         |  | 594,022             |  |   | 3,709    | 
|Shares issued through equity offering (net of issuance
      costs) |  | 12,926,000          |  |   | 108,132  | 
|Shares issued through employee share purchase plan                  |  | 11,302              |  |   | 92       | 
|                                                                    |  |                     |  |   |          | 
|Balance, December 31, 2009                                          |  | 137,357,552         |  | $ | 866,716  | 

| | 14
| | --

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


(b) Stock options (in Canadian dollars)

The Company has a stock option plan under which options to
purchase common shares of the Company may be granted to directors, senior
officers, employees and service providers of the Company. The aggregate number
of common shares that may be reserved for issuance under the plan is 25,000,000.
The maximum number of common shares that may be reserved for issuance to any one
person under the plan is 5% of the shares outstanding at the time of grant (on a
non-diluted basis), less the aggregate number of shares reserved for issuance to
such person under any other option to purchase shares from treasury granted as a
compensation or incentive mechanism. Stock options are generally exercisable for
a maximum period of five to seven years from the grant date, and have vesting
periods as determined by the Companys Board of Directors.

The fair value of the options granted was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

|                                       |   | December 31 |  |   | December 31 | 
|-------------------------------------- | - | ----------- |  | - | ----------- | 
|                                       |   | 2009        |  |   | 2008        | 
|Dividend yield                         |   | 0%          |  |   | 0%          | 
|Expected volatility                    |   | 64.26%      |  |   | 53.35%      | 
|Risk free interest rate                |   | 2.28%       |  |   | 3.45%       | 
|Expected life                          |   | 6.93 years  |  |   | 6.13 years  | 
|Weighted average grant date fair value | $ | 5.43        |  | $ | 5.23        | 

|                                 |  | December 31, 2009 |   |   | December 31, 2008 | 
|-------------------------------- |  | ----------------- | - | - | ----------------- | 
|                                 |  |                   |   |   | Weighted          | 
|                                 |  | Shares            |   |   | Average Price     | 
|Outstanding, beginning of year   |  | 8,550,093         |   | $ | 7.85              | 
|Granted                          |  | 840,000           |   | $ | 6.99              | 
|Expired / forfeited              |  | (289,333          | ) | $ | 9.81              | 
|Exercised                        |  | (3,785,460        | ) | $ | 6.04              | 
|Outstanding, end of year         |  | 5,315,300         |   | $ | 8.91              | 
|Options exercisable, end of year |  | 3,602,550         |   | $ | 9.24              | 

During the year ended December 31, 2009, employees,
consultants, officers and directors of the Company exercised 3,785,460 (2008 
2,558,405) options for total proceeds of $22,856 (2008 - $6,893). Set forth
below is a summary of the outstanding options to purchase common shares as at
December 31, 2009:

|                      |  |             |  |   |                  |  |  | Options outstanding |  |  |             |  |   | Options exercisable | 
|--------------------- |  | ----------- |  | - | ---------------- |  |  | ------------------- |  |  | ----------- |  | - | ------------------- | 
|                      |  | Number      |  |   | Weighted average |  |  |                     |  |  | Number      |  |   | Weighted average    | 
|Option Price          |  | outstanding |  |   | exercise price   |  |  | Average life (yrs)  |  |  | exercisable |  |   | exercise price      | 
|$ 5.01 - 6.00         |  | 332,290     |  | $ | 5.43             |  |  | 0.65                |  |  | 332,290     |  | $ | 5.43                | 
|$ 6.01 - 6.50         |  | 1,352,200   |  | $ | 6.22             |  |  | 1.99                |  |  | 845,950     |  | $ | 6.15                | 
|$ 6.51 - 7.00         |  | 708,450     |  | $ | 6.77             |  |  | 5.10                |  |  | 506,700     |  | $ | 6.83                | 
|$ 7.01 - 9.00         |  | 270,000     |  | $ | 8.18             |  |  | 4.75                |  |  | 37,500      |  | $ | 8.20                | 
|$ 9.01 - 9.50         |  | 742,000     |  | $ | 9.30             |  |  | 2.22                |  |  | 467,500     |  | $ | 9.25                | 
|$ 9.51 - 10.00        |  | 643,250     |  | $ | 9.93             |  |  | 5.00                |  |  | 195,500     |  | $ | 9.94                | 
|$ 10.01 - 10.50       |  | 75,500      |  | $ | 10.49            |  |  | 1.45                |  |  | 75,500      |  | $ | 10.49               | 
|$ 10.51 - 11.00       |  | 808,277     |  | $ | 10.64            |  |  | 2.77                |  |  | 783,277     |  | $ | 10.64               | 
|$ 11.01 - 18.00       |  | 50,000      |  | $ | 13.00            |  |  | 2.54                |  |  | 25,000      |  | $ | 13.00               | 
|$
      18.01 - 21.00 |  | 333,333     |  | $ | 20.35            |  |  | 2.25                |  |  | 333,333     |  | $ | 20.35               | 
|Total                 |  | 5,315,300   |  |   |                  |  |  |                     |  |  | 3,602,550   |  |   |                     | 

| | 15
| | --

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


(c) Employee share purchase plan

During the third quarter of 2009, the Company established an Employee Share Purchase Plan which enables employees to purchase Company shares through payroll deduction. Employees can contribute up to 10% of their annual base salary, and the Company
will match 75% of the employees contributions. The common shares are purchased based on the volume weighted average closing price of the last five days prior to the end of the quarter. During the year, the Company contributed $81 to this
plan.

(d) Share-based compensation

In 2008, the Company awarded share-based compensation to certain employees in lieu of a cash bonus. The shares awarded were valued at the volume weighted average trading price of the Companys shares for the five days prior to the award, and
vest over an eighteen-month period. The employees were, or will be, issued the number of shares equivalent to the bonus value using the grant date price. The amount of compensation expense recorded in 2009 with respect to share-based compensation
was $1,670, which included $816 relating to taxes paid by the Company on behalf of these employees (2008 - $5,587, $2,341 for taxes).


12.

Commitments and contingencies

Option and joint venture agreements

(a) Minera Fuerte Mayo, S.A. de C.V. (Fuerte Mayo) / Compania Minera Brenda, S.A. de C.V. (Brenda)

As a result of an agreement dated February 21, 2003 in which the Company acquired the remaining 40% of the title and interest in a group of claims located in the municipality of Ocampo from Brenda, the Company agreed to pay 8% of net profits
attributable to the development of the mining claims and their concessions up to a maximum of $2,000.

During the year ended December 31, 2008, a contract addendum was signed which eliminated the clause containing the percentage of profits payable up to a maximum of $2,000, and instead the Company agreed to pay Brenda a total of $2,000 for
the group of claims. The Company had previously paid $1,205 as at December 31, 2008, and during 2009 the Company paid a further $795, resulting in no balance payable at December 31, 2009.

(b) Compania Minera Global, S.A. de C.V. (Global)

On July 17, 2000, the Company entered into an agreement with Global for consulting services to assist in the negotiations of an agreement with Minerales de Soyopa, S.A. de C.V. (Soyopa) to secure the right to acquire the then remaining
fifty-one percent (51%) interest in the Ocampo property. As part of the consideration for the successful negotiation and execution of the agreement between the Company and Soyopa, the Company agreed that if it should subsequently sell the lands,
claims and concessions described in the agreements, the Company shall be required to pay Global $1,000. The lands, claims and concessions have not been sold.

(c) Compania Minera Las Torres, S.A. de C.V. (Las Torres)

On September 7, 2004, a subsidiary of the Company entered into a mining lease agreement with Las Torres to acquire the right to explore, develop and mine the Las Torres Gold-Silver property located in Guanajuato State, Mexico for a five year period.
On September 4, 2009, the Company negotiated an extension of this agreement for an additional three year period. Under the terms of the agreement, the annual rent payments total $720 per year. In addition, the Company is required to pay a 3.5%
net smelter return on all gold and silver sales equal to or above $350.00 per gold ounce and $5.50 per silver ounce, with a minimum annual royalty of $240.  The royalty decreases to a 3.0% net smelter return for sales of gold and silver
at or below $300.00 per gold ounce and $5.00 per silver ounce.

In addition, the Company is required to pay $20.00 per gold equivalent ounce for each ounce processed at the Las Torres mill from existing El Cubo claims.  This payment, combined with the annual rent and minimum royalty payment discussed above
must total a minimum of $2,000 per year. In connection with the agreement, the Company has issued a letter of credit in the amount of $1,000 to Las Torres.

16

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


Pursuant to the mining lease agreement with Las Torres, minimum
annual lease, processing and royalty payment commitments for successive years
approximate:

|     |   | Total    | 
|---- | - | -------- | 
|     |   | Payments | 
|2010 | $ | 1,379    | 
|2011 |   | 2,000    | 
|2012 |   | 2,000    | 
|     | $ | 5,379    | 

Other contingencies

In March 2008, the Company was named as a defendant in a claim
filed by Ed J. McKenna. The plaintiff was seeking, among other things, an order
certifying the action as a class proceeding and $75 million in special and
general damages and $5 million in punitive damages on behalf of the class. In
July 2008, the claim was amended to, among other things, assert new claims and
increase the damages sought from $80 million to $160 million. Management is of
the opinion that the claim is without merit, and that a strong defence exists
against the claim. Therefore, no provision for loss has been reflected in the
accounts of the Company.

The Company is involved in legal proceedings arising in the
ordinary course of its business. In the opinion of management, the ultimate
liability with respect to these actions will not materially affect the Companys
financial position, results of operations or cash flows.

Other commitments

At December 31, 2009, the Company has purchase commitments in
the amount of approximately $0.9 million (2008 - $2.8 million) related to
acquisitions of equipment. The equipment is expected to be delivered during the
first half of 2010.

13.

Earnings per
share

Basic earnings per share is calculated based on the weighted
average number of shares outstanding during the year ended December 31, 2009 of
125,688,993 (December 31, 2008  119,110,568). Diluted earnings per share is
based on the assumption that options under the stock option plan have been
exercised on the later of the beginning of the year and the date granted. As of
December 31, 2009, 2,652,360 stock options (December 31, 2008  3,275,433) were
excluded from the computation of diluted earnings per share because their effect
would have been anti-dilutive.

14.

Supplemental
cash flow information

|                                                   |   | December 31 |   |   | December 31 |  
|-------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                   |   | 2009        |   |   | 2008        |  
|Items not affecting cash:                          |   |             |   |   |             |  
|Amortization, depletion and accretion              | $ | 43,018      |   | $ | 40,369      |  
|Amortization of transaction costs                  |   | 1,006       |   |   | 55          |  
|Unrealized foreign exchange loss /
      (gain)    |   | 11,667      |   |   | (23,747     | )
|Share-based compensation, net of
      forfeitures |   | 7,646       |   |   | 4,250       |  
|Employee future benefits                           |   | (160        | ) |   | (1,019      | )
|Future income tax expense / (recovery)             |   | 6,611       |   |   | (10,738     | )
|Other long-term obligations                        |   | 1,451       |   |   | (606        | )
|Other long-term assets                             |   | 807         |   |   | 226         |  
|Other non-cash items                               |   | 93          |   |   | -           |  
|                                                   | $ | 72,139      |   | $ | 8,790       |  

17

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


|                                                |   |             |   |   |             |  
|----------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                |   |             |   |   |             |  
|                                                |   | December 31 |   |   | December 31 |  
|                                                |   | 2009        |   |   | 2008        |  
|Change in non-cash operating working capital:   |   |             |   |   |             |  
|Receivables                                     | $ | 1,865       |   | $ | (6,155      | )
|Prepaids and deposits                           |   | (702        | ) |   | (582        | )
|Inventories                                     |   | (2,565      | ) |   | (8,229      | )
|Payables and accruals                           |   | 6,476       |   |   | 22,115      |  
|                                                | $ | 5,074       |   | $ | 7,149       |  
|Supplemental information:                       |   |             |   |   |             |  
|Interest paid                                   | $ | 2,762       |   | $ | 2,527       |  
|Taxes paid                                      | $ | 1,364       |   | $ | 2,882       |  
|                                                |   |             |   |   |             |  
|Non-cash transactions:                          |   |             |   |   |             |  
|Acquisition of assets under capital
      lease | $ | 17,092      |   | $ | 860         |  
|                                                |   |             |   |   |             |  
|                                                |   |             |   |   |             |  

15.

Related party transactions

The Company had the following related party transactions, which
were in the normal course of operations and measured at fair value:

|    |                                |   | December 31 |  |   | December 31 | 
|--- | ------------------------------ | - | ----------- |  | - | ----------- | 
|    |                                |   | 2009        |  |   | 2008        | 
|(a) | Production costs  labour      | $ | 25,797      |  | $ | 33,762      | 
|(a) | Mining interests  labour      |   | 4,876       |  |   | 1,167       | 
|(b) | Production costs  consumables |   | 11,255      |  |   | 14,655      | 
|(c) | Capital assets                 |   | -           |  |   | 94          | 
|    |                                | $ | 41,928      |  | $ | 49,678      | 

(a)

The Company paid a
third party company related to a former director for the provision of workers in
the Mexican operations at cost plus 8-10%. Effective October 1, 2009 the related
contracts were re-negotiated, and as a result workers are now provided at cost
plus 6-8%.

(b)

The Company paid
two third party companies related to a former director for the provision of
lime, lubricant and fuel. The prices of lubricant and fuel are regulated in
Mexico.

(c)

The Company paid a
former director, or a third party company related to a former director, for the
provision and construction of production and support facilities and mineral
properties.

In September 2009, the Company announced the resignations of
the two members of the Board of Directors involved in the above transactions. As
a result, effective the date of their resignations, the above are no longer
considered related party transactions.

As at December 31, 2009, the Company had included $Nil (2008 -
$1,922) in payables and accruals and $Nil (2008 - $1,022) in prepaids and
deposits, representing amounts owing or paid to these related parties.


16.

Financial instruments and risk management

The Companys financial instruments consist of cash and cash
equivalents, receivables, payables and accruals, long-term debt, obligations
under capital leases and assets and liabilities arising from the use of
derivative financial instruments. Unless otherwise noted, it is managements
opinion that the Company is not exposed to significant interest or credit risks
arising from these financial instruments. Some of the Companys receivables and
payables are denominated in Mexican pesos or Canadian dollars. Balances are
translated at the period end rate in accordance with the Companys accounting
policy as set out in Note 2(c) to these annual consolidated financial
statements.

18

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


The Company does not have any derivative financial instruments
outstanding as at December 31, 2009.

Fair values of financial instruments

The Company estimates that the fair value of its cash and cash
equivalents, receivables, payables and accruals approximate the carrying value
of the assets and liabilities due to the relatively short-term nature of these
instruments. Long-term debt and lease obligations are measured at amortized cost
using the effective interest method and there were no material differences
between this amount and fair value at December 31, 2009. The Companys fair
value estimates for derivative contracts are based on quoted market prices for
comparable contracts. These estimates represent the amount that the Company
would have received from (or paid to) a counterparty to settle the contract at
the balance sheet date.

CICA Handbook Section 3862, Financial Instruments 
Disclosures, establishes a valuation hierarchy based on whether the inputs to
valuation techniques are observable or unobservable. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect
the Companys own assumptions. The two types of inputs have created the
following fair value hierarchy:

- Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities.
- Level 2 inputs are quoted prices in markets that are not
active, quoted prices for similar assets or liabilities in active markets,
inputs other than quoted prices that are observable for the asset or liability,
or inputs that are derived principally from or corroborated by observable market
data or other means.
- Level 3 inputs are unobservable (supported by little or no
market activity).

The fair value hierarchy gives the highest priority to Level 1
inputs and the lowest priority to Level 3 inputs.

The Company does not have any material financial assets or
liabilities measured at fair value on a recurring basis as at December 31, 2009.

Risks

In the normal course of operations, the Company is exposed to
commodity price, interest rate, foreign currency exchange rate, credit and
liquidity risks. The Company has developed a risk management process to
identify, analyze, and assess these risks, and has formed a Risk Committee to
monitor these risks. The Board of Directors has overall responsibility for the
oversight of the Companys risk management framework, and receives regular
reports from the Risk Committee.

Commodity price risk

The profitability of the Companys mining operations will be
significantly affected by changes in the market prices for gold and silver. Gold
and silver prices fluctuate on a daily basis and are affected by numerous
factors beyond the Companys control. The supply and demand for gold and silver,
the level of interest rates, the rate of inflation, investment decisions by
large holders of gold and silver, including governmental reserves, and the
stability of exchange rates can all cause significant fluctuations in gold and
silver prices. Such external economic factors are in turn influenced by changes
in international investment patterns and monetary systems, and political
developments. From time to time, the Company will enter into zero cost collars
or other financial instruments to manage short term commodity price
fluctuations. At December 31, 2009, the Company did not have any
commodity-related financial instruments outstanding.

Interest rate risk

The Company is exposed to interest rate risk on its variable
rate debt. The Company has not entered into any agreements to hedge against
unfavourable changes in interest rates. If interest rates had been 50 basis
points higher during the year ended December 31, 2009, equity and net earnings
would have decreased by $162, arising mainly as a result of higher interest
rates on variable borrowings. This analysis assumes that other variables remain
constant (a 50 basis points decrease in interest rates would have had the equal
but opposite effect).

Foreign currency exchange rate risk

All metal sales revenues for the Company are denominated in US
dollars (USD). The Company is primarily exposed to currency fluctuations
relative to the US dollar on expenditures that are denominated in Canadian
dollars (CAD) and Mexican pesos (MXN). These potential currency fluctuations
could have a significant impact on production costs and thereby, the
profitability of the Company. The Company is also exposed to the impact of
currency fluctuations on its monetary assets and liabilities.

19

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


At December 31, 2009, the Companys balance sheet exposure to
foreign currency exchange rate risk in Canadian dollars and Mexican pesos was as
follows:

|                                  |   | CAD     |   |   | MXN      |  
|--------------------------------- | - | ------- | - | - | -------- | -
|Cash and cash equivalents         | $ | 1,358   |   | $ | 429,827  |  
|Receivables                       |   | 1,239   |   |   | 135,539  |  
|Payables and accruals             |   | (5,067  | ) |   | (204,310 | )
|Long-term debt and capital leases |   | (216    | ) |   | -        |  
|Future income tax liabilities     |   | (67,146 | ) |   | (398,790 | )
|Net balance sheet exposure        | $ | (69,832 | ) | $ | (37,734  | )

A 10% weakening / (strengthening) of these currencies against
the US dollar at December 31st would have increased / (decreased) equity and net
earnings by the amounts shown below. This analysis assumes that other variables,
in particular interest rates, remain constant.

|                                |   | Equity /
      earnings | 
|------------------------------- | - | ----------------------- | 
|Translation of net CAD exposure | $ | 6,067                   | 
|Translation of net MXN exposure |   | 263                     | 

During 2009, the Company entered into and exercised option
contracts to hedge against the risk of an increase in the value of the Mexican
peso versus the United States dollar. The Company had the right to purchase
Mexican pesos amounting to $6,000 USD at a strike price of 14 pesos to 1 US
dollar. These currency hedges were accounted for as cash flow hedges of salary
and benefit costs denominated in Mexican pesos and settled at various dates
between July 1, 2009 and December 31, 2009. Upon exercise of the options, the
cumulative gain or loss within AOCI was reclassified to inventory to be
recognized in income at the same time as the related production cost. Options
exercised during 2009, after considering the premiums paid, resulted in an
increase to inventories of $34.

Credit risk

Credit risk relates to receivables and other contracts, and
arises from the possibility that any counterparty to an instrument fails to
perform. For cash and cash equivalents and receivables, the Companys credit
risk is limited to the carrying amount on the balance sheet. The Company manages
credit risk by transacting with highly-rated counterparties and establishing a
limit on contingent exposure for each counterparty based on the counterpartys
credit rating. Exposure on receivables is limited as the Company sells its
products to a small number of organizations, on which the historical level of
defaults is minimal.

Liquidity risk

Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities that are
settled by delivering cash or another financial asset. The Company manages this
risk through regular monitoring of its cash flow requirements to support ongoing
operations and expansionary plans. The Company ensures that there are sufficient
committed loan facilities to meet its business requirements, taking into account
anticipated cash flows from operations and holdings of cash and cash
equivalents.

The following are the contractual maturities of financial
liabilities, including interest payments:

|                                  |   | Carrying |  |   | Contractual |  |   | Less than |  |   | 6 - 12 |  |   | 1 - 2  |  |   | 2  5 |  |   | More than | 
|--------------------------------- | - | -------- |  | - | ----------- |  | - | --------- |  | - | ------ |  | - | ------ |  | - | ----- |  | - | --------- | 
|                                  |   | amount   |  |   | cash flows  |  |   | 6 months  |  |   | months |  |   | years  |  |   | years |  |   | 5 years   | 
|Payables and accruals             | $ | 37,019   |  | $ | 37,019      |  | $ | 37,019    |  | $ | -      |  | $ | -      |  | $ | -     |  | $ | -         | 
|Long-term debt and capital leases |   | 36,829   |  |   | 39,505      |  |   | 2,691     |  |   | 2,669  |  |   | 31,231 |  |   | 2,914 |  |   | -         | 
|Employee future benefits          |   | 1,635    |  |   | 1,877       |  |   | 43        |  |   | 44     |  |   | 85     |  |   | 422   |  |   | 1,283     | 
|Other long-term obligations       |   | 4,372    |  |   | 5,343       |  |   | 763       |  |   | -      |  |   | 763    |  |   | 2,290 |  |   | 1,527     | 
|                                  |   |          |  |   |             |  |   |           |  |   |        |  |   |        |  |   |       |  |   |           | 
|                                  | $ | 79,855   |  | $ | 83,744      |  | $ | 40,516    |  | $ | 2,713  |  | $ | 32,079 |  | $ | 5,626 |  | $ | 2,810     | 
|                                  |   |          |  |   |             |  |   |           |  |   |        |  |   |        |  |   |       |  |   |           | 
|                                  |   |          |  |   |             |  |   |           |  |   |        |  |   |        |  |   |       |  |   |           | 

20

---

Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)




17.

Capital management

The primary objective of managing the Companys capital is to
ensure that there is sufficient available capital to support the funding
requirements of the Company, including capital expenditures, in a way that
optimizes the cost of capital and shareholder returns, and ensures that the
Company remains in a sound financial position. There were no changes to the
Companys overall capital management approach during the current year.

The capital of the Company consists of items included in
Shareholders equity and debt obligations. The Company manages and makes
adjustments to the capital structure as opportunities arise in the market place,
as and when borrowings mature, or when funding is required. This may take the
form of raising equity or debt.

The Company monitors capital through the gross debt to total
equity ratio, and targets a ratio of less than 25%. As at December 31, 2009, the
ratio of gross debt to total equity was 4.73% (December 31, 2008  6.02%),
calculated as follows:

|                                  |   | December 31 |  |   | December 31 | 
|--------------------------------- | - | ----------- |  | - | ----------- | 
|                                  |   | 2009        |  |   | 2008        | 
|Current portion of long-term debt | $ | 4,398       |  | $ | 30,461      | 
|Long-term debt                    |   | 32,431      |  |   | 7,991       | 
|Gross debt                        |   | 36,829      |  |   | 38,452      | 
|Shareholders equity              | $ | 778,217     |  | $ | 638,610     | 
|Gross debt / Shareholders equity |   | 4.73%       |  |   | 6.02%       | 




18.

Segmented information

Information is reported on a mine by mine basis, and therefore
the Companys operating segments are represented by the individual mines and the
corporate operations. Revenue in both mining segments is derived from the sale
of gold and silver.

The following are the operating results by segment:

|                                                                                 |   |         |  |   |         |   |   | December 31, 2009 |  
|-------------------------------------------------------------------------------- | - | ------- |  | - | ------- | - | - | ----------------- | -
|                                                                                 |   | Ocampo  |  |   | El Cubo |   |   | Corporate         |  
|Revenue from mining operations                                                   | $ | 162,579 |  | $ | 44,222  |   | $ | -                 |  
|Production costs                                                                 |   | 66,988  |  |   | 29,516  |   |   | -                 |  
|Refining costs                                                                   |   | 2,232   |  |   | 623     |   |   | -                 |  
|General and administrative                                                       |   | 8,258   |  |   | 2,447   |   |   | 26,349            |  
|Amortization and depletion                                                       |   | 30,861  |  |   | 11,963  |   |   | 130               |  
|                                                                                 |   | 108,339 |  |   | 44,549  |   |   | 26,479            |  
|Earnings / (loss) before other items                                             | $ | 54,240  |  | $ | (327    | ) | $ | (26,479           | )
|                                                                                 |   |         |  |   |         |   |   |                   |  
|Expenditures related to mining interests and
      property, plant and equipment | $ | 68,048  |  | $ | 8,407   |   | $ | 406               |  
|                                                                                 |   |         |  |   |         |   |   |                   |  
|Total assets                                                                     | $ | 474,748 |  | $ | 386,719 |   | $ | 102,901           |  

21

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Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)




|                                                                                 |   |         |  |   |         |  |   | December 31, 2008 |  
|-------------------------------------------------------------------------------- | - | ------- |  | - | ------- |  | - | ----------------- | -
|                                                                                 |   | Ocampo  |  |   | El Cubo |  |   | Corporate         |  
|Revenue from mining operations                                                   | $ | 154,313 |  | $ | 58,209  |  | $ | -                 |  
|Production costs                                                                 |   | 86,026  |  |   | 41,625  |  |   | -                 |  
|Refining costs                                                                   |   | 1,156   |  |   | 506     |  |   | -                 |  
|General and administrative                                                       |   | 8,983   |  |   | 2,092   |  |   | 18,870            |  
|Amortization and depletion                                                       |   | 26,267  |  |   | 13,967  |  |   | 146               |  
|                                                                                 |   | 122,432 |  |   | 58,190  |  |   | 19,016            |  
|Earnings / (loss) before other
      items                                       | $ | 31,881  |  | $ | 19      |  | $ | (19,016           | )
|                                                                                 |   |         |  |   |         |  |   |                   |  
|Expenditures related to mining
      interests and property, plant and equipment | $ | 50,419  |  | $ | 16,237  |  | $ | 185               |  
|                                                                                 |   |         |  |   |         |  |   |                   |  
|Total assets                                                                     | $ | 411,510 |  | $ | 383,929 |  | $ | 1,124             |  

All goodwill included on the balance sheet relates to the El
Cubo operating segment.

The Company sells all gold and silver produced to two
customers. The Company is not economically dependent on these customers for the
sale of its product because gold and silver can be sold through numerous
commodity market traders worldwide.

19.

Subsequent events

On March 16, 2010, the Ontario Superior Court of Justice
certified the proposed class action commenced by Ed J. McKenna in 2008 in
respect of investors who purchased securities through underwriters in Canada
under the Companys April 2007 prospectus. Certification is a procedural step in
the litigation and no determination has been made of the merits of the claim.
Management continues to be of the opinion that the claim is without merit, and
that a strong defence exists against the claim.

On March 23, 2010, the Company announced that it had entered
into purchase option agreements on a group of properties called the Mezquite
Project in Zacatecas State, Mexico. The option agreements include a series of
option payments that total $1.4 million over a three year period.

20.

Comparative figures

Certain of the comparative figures for December 31, 2008 have
been reclassified to conform with the financial statement presentation adopted
for December 31, 2009.

22

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