(Figures in millions of constant pesos)

• In the fourth quarter of 2003, Peñoles reported a record level of sales, Ps3,784.0 (US$336.4 million), +26.8% higher than in the year-earlier period.
• Gross earnings in the quarter were Ps875.5 was the highest of the last 13 quarters, rising +29.6% over the same period of last year.
• EBITDA and Operating income totaled Ps502.8 and Ps250.4 in the fourth quarter, respectively, and both reached an eleven-quarter high; compared to the fourth quarter of 2002, these increased by 40.3% and 217.8%, respectively.
• The fourth-quarter results confirm an upturn in profit and cash flow levels. * The company attained record production levels of refined silver and zinc, and sodium sulfate, in the fourth quarter.

1.- EXECUTIVE SUMMARY

In the fourth quarter of 2003, Industrias Peñoles reports a record level of sales, totaling Ps3,784.0 (US$336.4 million) (not including the results of metals and foreign-exchange hedging activity) rising +26.8% over the year-earlier quarter. Gross Income was Ps875.5, its highest level in the last 13 quarters, increasing +29.6%. EBITDA was Ps502.8 and Operating Income was Ps250.4, both reaching their highest point in 11 quarters, and increasing +40.3% and +217.8%, respectively. These results confirm the upturn in profit and cash flow levels that began in the first quarter of 2003.

These results were the product of operating efforts aimed at raising productivity levels, and favored by better metals quotations, as follows: gold averaged US$391.9 per ounce in the quarter, +21.5%; silver US$5.28 per ounce, +16.9%; lead US$0.2875 per pound, +45.8%; and zinc US$0.4219 per pound, +20.4%. In addition, a higher average exchange rate of Ps11.1887 per dollar, +10.1%, had a positive impact on revenues.

Comparing the results of the fourth quarter against those of the immediately preceding quarter, the numbers are substantially better: Sales were up by +19.8%, Gross Income by +24.4%, EBITDA by +36.1% and operating income by +117.7%.

On the operating side, in the fourth quarter operating problems at the lead foundry were totally resolved, as well as those relating to the supply of quality concentrates. Operating improvements were made to the process, so that now we can treat any type of concentrate while maintaining operating continuity. At the lead-silver refinery, operating problems relating to poor-quality refractory materials used in the furnaces were fully resolved. As a result, quarterly production of refined silver reached a new record (640,017 kilos). The zinc refinery operated efficiently and continuously, setting a new quarterly record for zinc production (58,197 Mtons).

Looking at the accrued financial results for all of 2003, gross income came to Ps2,808.2, EBITDA Ps1,446.7 and Operating Income Ps410.3, declining 2.1%, -8.9% and -16.6%, respectively, compared to 2002. The main reason for these reductions was the result of metals and exchange-rate hedging activity, which generated gains of about Ps1,672 between 1998 and 2002 (US$152mn). However, in 2003 they resulted in losses of Ps233.7, attributable to the following factors: (i) expiration when prices were higher than the hedge price, Ps162.8; (ii) premiums earned on the purchase of options to guarantee minimum sales prices, which allow the company to benefit from a possible recovery in prices in 2004, Ps55.0; and (iii) early expiration of some of the hedge positions coming due in later years, and which limited the potential benefit of possible price increases, Ps15.9.

In fact, gross earnings, EBITDA and Operating Income-not including the results of hedging activity in either year-rose +24.9%, +44.6%, and +818.7%, respectively. This reveals an improvement on the operating side due to the efficiency we have attained in our units, and better prices on metals than in 2002: gold +17.3%, silver +6.4%, lead +13.8% and zinc +6.3%, as well as a higher average exchange rater, +11.7%. This offset the adverse effects of a higher cost of electrical energy (+23.1% in peso terms) and natural gas (70.6% in peso terms) as well as lower unit treatment fees in dollar terms for lead concentrates (-9.9%) and zinc concentrates (-8.3%).

In addition to the results of our metals and exchange-rate hedging activity, another key factor in the fiscal-year net loss of Ps152.5, higher than the year-earlier loss of Ps115.9, was a book credit of Ps125.2 on the income tax and profit-sharing lines in 2002, stemming from the gradual reduction of the income tax rate from 35% to 32%. Without this, the net loss in 2003 would have been -33.7% less than the 2002 loss.

Resources generated in our operations in 2003 totaled Ps528.6, +62.0% higher than in the preceding year. In 2003, Peñoles paid out dividends of Ps105.6 and invested Ps919.8 in plant and equipment, increasing its bank liabilities by Ps373.2.

As the company announced earlier, due to the depletion of reserves, and after several years of profitable operation, the El Monte, La Encantada and Las Torres mines were shut down. This caused year-over-year reductions of -6.1%, -8.0%, -6.4% and -11.6% in production of gold, silver, lead and zinc content for the mines in 2003.

The lead foundry, lead-silver refinery and zinc plant all operated at higher levels than the year before, but the production of refined gold fell -9.2% and silver 1.9%, both compared to the previous year, due to a shortage of imported material with a high content of gold and silver. Production of refined lead and zinc rose +3.2% and +4.5% over the preceding year. Productivity in volume terms rose +16.7% in the gold mines, +17.7% in the silver mines, +18% for lead and 11.1% for zinc.

Productivity at the lead-silver foundry rose +8.7%, and at the zinc plant, +5.1%. At the sodium sulfate and magnesium oxide plant, productivity of these substances increased +16.8% and 50.8%, respectively.

The most important annual production records obtained in our operating units in 2003 were: silver at Fresnillo: 32.0 million ounces; gold at La Ciénega, 134,200 ounces, and gold at La Herradura, 155,850 ounces; refined zinc at Met-Mex, 218,457 metric tons; and sodium sulfate at Química del Rey, 586,100 metric tons.

The results of our exploration program have been successful, and during the year projects were approved that allowed us to take advantage of the favorable cycle in metals prices in 2004 and further on.

The number of company personnel as of the end of 2003, excluding those working in the water and railway businesses, was 6,539: 4,317 of them unionized and 2,222 non-unionized. Compared to 2002, the payroll was reduced by 860 persons, or 11.6%.

2.- ECONOMIC ENVIRONMENT AND METALS PRICES

	4Q03 3Q03 4Q02 4QA03 4QA02     Inflation in the period(%) 1.64 1.04 1.69 3.98 5.70     Exchange rate (pesos/dollar):       Close 11.2360 10.9272 10.3125     Average 11.1887 10.6969 10.1624 10.7873 9.6579     Devaluation-inflation exchange rate(%):     In the period +8.96 +12.8

	Gold ( US$/Oz) Silver ( US$/Oz) Lead ( US$cts/lb) Zinc ( US$cts/lb)     1st. quarter 2002 290.36 4.47 22.27 36.04     2nd. quarter 2002 312.78 4.73 20.63 35.45     3rd. quarter 2002 314.20 4.66 19.51 34.76     4th. quarter 2002 322.52 4.52 19.72 35.04     Average 2002 309.96 4.60 20.53 35.32     1st. quarter 2003 352.13 4.66 20.82 35.65     2nd. quarter 2003 346.74 4.59 20.70 35.09     3rd. quarter 2003 363.24 5.01 23.17 37.25     4th. quarter 2003 391.93 5.28 28.75 42.19     Average 2003 363.51 4.89 23.36 37.54     %Chge. 4Q003 vs 3Q003 +7.9 +5.4 +24.1 +13.3     %Chge. 4Q003 vs 4Q002 +21.5 +16.8 +45.8 +23.9     %Chge. 2003 vs 2002 +17.3 +6.4 +13.8 +6.3     Mining Division share of sales 21.4% 39.6% 7.0% 29.8%

The following sums up the conditions prevailing in the metals market in 2003:

Gold: This metal did well during the year, supported by weakness in the U.S. economy and in the dollar, an adverse geopolitical climate (U.S.-Iraqi war and its aftermath), the attack on the U.S. embassy in Liberia, and the reduction in hedging positions among major producers. The price of gold averaged US$363.51 per ounce during the year, +17.3% compared to 2002; in December 2003, it reached an average of US$406.95 per ounce, its highest level since early 1996.

Silver: This metal averaged US$4.89 per ounce in 2003, rising +6.4% over 2002. Silver prices were bolstered by the improvement in gold quotations, speculation among funds, and expectations of a jump in demand for industrial use, primarily for electronics. In December 2003, silver topped out at an average of US$5.65 per ounce, its highest point since early 1998. during the year it closely tracked the price of gold and industrial metals, and particularly

in the last quarter, when it got a boost from the strong performance of gold performance.

Lead: positive sentiment toward this metal was influenced since the start of the year by a study conducted by the International Lead and Zinc Study Group (ILZSG) pointing to an improvement in this metal's fundamentals and news of cutbacks in refined lead production by various producers, along with the shutdown of foundries, lower inventories and a worldwide shortage of concentrates. Lead averaged US$0.2336 per pound in the year, its highest annual qu

otation since 1998 (US$0.2398). In December it reached its highest point, US$0.3139 per pound.
Zinc: Like the rest of the industrial metals, zinc did well toward the end of the year. Over the course of 2003, its price was fueled by Chinese purchases, mutual funds, announced refinery shutdowns and encouraging economic data regarding construction and industrial production in the United States. The average quotation for the year was US$0.3754, +6.3% higher than in 2002. December also marked the peak month for zinc quotations, averaging US$.4435 per pound.

3.- OPERATING RESULTS

		Production Volume
	4Q02 4QA02 3Q03 4Q03 4QA03     Mining Division:       Ore milled (Mton) 2,124 7,984 1,798 1,838 7,549     Stacked deposited (a) (Mton) 2,082 8,208 2,165 1,996 8,319     Gold (kg) 2,738 11,380 2,607 2,656 10,687     Silver (ton) 409 1,638 369 370 1,506     Lead (ton) 23,210 86,818 19,511 19,131 81,266     Zinc (ton) 73,583 265,981 53,967 57,456 235,120     Copper (ton) 3,278 11,841 2,368 2,658 10,598     (a) La Herradura: open-pit mine.         Metals-Industrial Chemicals Division:             Gold (kg) 7,711 32,857 6,662 8,144 29,838     Silver (ton) 630 2,444 561 640 2,396     Lead (ton) 32,390 125,734 34,697 33,798 129,712     Zinc (ton) 53,450 209,043 55,945 58,197 218,457     Copper (ton) 2,256 7,924 2,116 2,224 7,685     Cadmium (ton) 193 796 247 247 884     Bismuth (ton) 280 1,103 270 266 1,054     Sodium sulfate (ton) 145,500 551,500 146,500 150,500 586,100     Magnesium oxide (ton) 11,312 40,194 14,639 16,670 53,885     Ammonium sulfate (ton) 50,480 218,681 44,473 47,216 171,785     Magnesium sulfate (ton) 4,180 22,580 6,600 6,850 27,100

Mining Division (metallic content in concentrates and other materials):

*Change 4Q03 vs. 4Q02:
-Gold (-3.0%): due mainly to lower production at Las Torres -due to the shutdown of operations-.
-Silver (-9.5): lower production at Las Torres and El Monte -both because of the shutdown of operations-, lower grade at Sabinas, and lower grade and recovery at Francisco I. Madero.
-Lead (-17.6): lower production at Naica and Francisco I. Madero due to lower grade.
-Zinc (-21.9): lower production at El Monte -shutdown of operations- and at Francisco I. Madero due to lower grade.

*Change 4Q03 vs. 3Q03:
-Gold, silver and lead: no significant change.
-Zinc (+6.5%): more ore milled at Bismark and higher grade at Sabinas.

*Change 2003 vs. 2002:
Compared to the preceding fiscal year, the mining division reported lower production of metallic gold content, which declined by 6.1% (-22,280 ounces) primarily because of lower production at Las Torres - shutdown of operations. Silver declined -8.1% (-4,236,600 ounces) as a result of lower production at Las Torres and El Monte - both due to a shutdown of operations- lower production from La Encantada -shutdown of operations in July 2002- lower grade at La Ciénega and lower milling at Tizapa. Lead and zinc production sank by -6.4% (-5,500 Mtons) and -11.6% (-30,861 Mtons), respectively, due to the closure of El Monte in 2002, and lower production at Bismark-development of works to access new production ramps-and at Tizapa - instability of the mine and personnel absenteeism.

With regard to production costs, the mining division kept up its focus on making operations more efficient and reducing concentrate treatment fees. This lowered production costs in the year as follows: at the gold mines, the cash cost was reduced by -6.0%; at the silver miens -2.4%, and at the zinc mines, -1.2%.

Metals (production of refined metal) and Industrial Chemicals Division:

*Change 4Q03 vs. 4Q02:
-Gold (+5.6%): higher metallic content received in semi-processed materials that come directly into the lead-silver refinery.
-Silver (+1.6%): higher metallic content received in semi-processed materials that come directly into the lead-silver refinery.
-Lead (+4.4%): operating continuity (more volume treated and higher production of bullion) and higher-content in concentrates received from third parties at the lead foundry.
-Zinc (+8.9%): due to operating continuity and the resolution of some problems that arose in 2002 stemming from high iron content in concentrates, combined with higher entries of metallic content to the refinery.
-Sodium sulfate (+3.4%): higher demand on both domestic and export markets (Latin America), primarily in the detergent industry.
-Magnesium oxide (+47.4%): higher demand for refractory-grade exports.
-Ammonium sulfate (-6.5%): production cuts to adjust for market demand and avoid excess
-Magnesium sulfate (+63.4%): continuing operations of centrifugal pumps and solution of some crystallization problems.

*Change 4Q03 vs. 3Q03:
-Gold (+22.3%): higher metallic content received in semi-processed materials that come directly into the lead-silver refinery and inventory reduction.
-Silver (+14.1%): inventory reduction.
-Lead (-2.6%): lower content in concentrates received at the lead foundry.
-Zinc (+4.0%): availability of concentrates, particularly imported.
-Sodium sulfate (+2.7%): greater operating continuity.
-Magnesium oxide (+13.9): greater production of refractory grade due to higher demand.
-Ammonium sulfate (+6.2%): greater availability of solution from Met-Mex, and higher sales to the primary market.
-Magnesium sulfate (+3.8%): greater operating continuity.

*Change 4QA03 vs. 4QA02:
In the case of the Metals and Inorganic Chemicals Division, production of gold and silver declined -9.2% (97,100 ounces) and -1.9% (1,531,000 ounces), respectively, due to lower metal content in the concentrates and materials received, and problems with impurity that affected the mixes fed into the lead foundry (now resolved), as well as problems with the quality of bricks in the lead-silver refinery furnaces (now replaced). Lead production rose +3.2% (+3,978 Mton) due to higher content in the concentrates received at the foundry, and zinc production increased +4.5% (+9,400 Mtons) due to higher receipts of concentrates. In the case of sodium sulfate, the +6.3% rise in production (+34,600 Mton) was the result of higher domestic demand, and the +34.1% rise in magnesium oxide (+13,691 Mton) is attributed to higher demand for exported refractory-grade.

In the case of the lead foundry, unit production costs rose +4.91% over the year-earlier period, since the shortage of concentrates obliged us to treat low-quality concentrates from outside sources, with a high content of impurities, affecting the mixes fed into the foundry. We have taken the measures necessary to resolve this problem with the complex metallurgy of the mixes, and in October we produced 16,000 metric tons of bullion, the highest volume on record since early 1998. At the zinc refinery, the lack of concentrates and the significant rise in the cost of electrical energy raised the unit cost of production by +4.9%.

4.- FINANCIAL RESULTS


A) Comparison of results 4Q03 vs.42Q02:

	(Millions of pesos) 4Q03 4Q02 Chge. ($) % Chge.     Net sales (*) $3,696.2 $2,985.1 711.1 23.8     Gross income 875.5 675.3 200.2 29.6     Gross margin 23.7% 22.6%     EBITDA 502.8 358.4 144.4 40.3     EBITDA margin 13.6% 12.0%     Operating income 250.4 78.8 171.6 217.8     Operating margin 6.8% 2.6%     Total Financing Cost 123.2 63.5 59.7 94.0   Net income 23.9 (179.6) 203.5 n/a      Net margin 0.6% -6.0%

(*) Includes metal and exchange-rate hedging gains.
The principal changes are discussed below:
Net sales (including hedging gains) of Ps3,696.2 were +Ps711.1 higher (+23.8%) breaking down as follows:
a) Higher prices, +Ps563.8 primarily on gold, silver, zinc, lead, and ammonium sulfate;
b) Higher average exchange rate in 2003 (Ps11.1887 vs Ps10.1624 per dollar) +Ps259.9;
c) Higher volume, +Ps54.9 mainly of zinc, ammonium sulfate, gold, and magnesium oxide, which made up for reductions in dolomite specialties (shutdown of operations at Dolorey)-and bismuth;
d) Lower gains from hedging in metals and the exchange rate -Ps89.7; and
e) Effect of restatement of 2002 results in constant pesos of the current quarter and others, -Ps77.8
In dollar terms, net sales were US$328.6 million (+16.8%) made up of sales of US$336.4 -a quarterly record- and metals and exchange-rate hedging losses of -US$7.8 million.
The cost of goods sold rose +Ps510.6 (+22.1%) due to the following factors:
a) Higher production costs +Ps73.4 mainly in the area of fuel -electrical energy, due to a higher unit cost and fuel oil as a substitute for natural gas-, raw materials -higher cost of ammonia- and operating materials and coke;
b) Higher metals costs -- net of treatment fees-- +Ps333.9 due to higher volume of silver, lead and zinc purchased from outside suppliers, a higher average price of gold, and a higher average exchange rate (Ps11.1887 vs Ps10.1624 per dollar); and;
c) Inventory movements, re-statement and consolidation effects, +Ps103.6.
As a result of the rise in Sales (+Ps711.1) and a less pronounced increase in the cost of good sold (+Ps510.9), Gross Earnings were up by -+Ps200.2 raising the gross margin (as a percentage of sales) from 22.6 to 23.7 percent.
Operating expenses -excluding the effect of depreciation- were Ps372.7, rising +Ps55.8, due to increased SG&A expense +Ps36.5 caused by higher charges for travel expenses, communication and information technology, and honoraria paid to consultants for the installation of software, and a greater personnel expense; and increased exploration expenses +Ps19.3 at La Ciénega and Fresnillo for studies to locate reserves, and regional exploration in Peru.
Mainly because of the rise in gross Income (+Ps200.2) and the increase in Operating expenses (+Ps55.8), EBITDA was Ps502.8, rising +Ps144.4 (+40.3%), and the EBITDA margin rose from 12.0 to 13.6 percent.
Lower depreciation charges, -Ps27.3, mainly because of the shutdown of mining units (El Monte, and Las Torres, due to exhaustion of ore reserves).
With EBITDA higher by +Ps144.4, and the -Ps27.3 change in depreciation charges, Operating Income rose +171.6, to Ps250.4 and the operating margin was 6.8 percent.
In the period in question, total Financing Cost came to Ps123.2, comparing poorly against the lower charge reported in 4Q02 (Ps63.5). This change (+Ps59.7) breaks down as follows:
a) A higher Foreign-exchange loss, +Ps44.9, due to a steeper depreciation of the peso (Ps0.3088 vs. Ps0.1458 per dollar in the same period of the preceding year);
b) Lower Monetary position benefit, -Ps17.2, due to a lower inflation index; and
c) Higher net interest expense, +Ps2.4.
The "other expenses" line shows a charge of Ps58.7, vs. Ps173.3 in the same period of the preceding year. This reduction (-Ps114.6) is linked mainly to an adjustment in asset value following the shutdown of the Las Torres and El Monte units in 2002, and an adjustment in the value of assets at Mex-Mex, La Negra and General Products Co. The expenses registered in this quarter are related mainly to non-productive expenses stemming from the closure of the El Monte and Las Torres mining units.
The income tax and profit-sharing charge of Ps41.1 is a negative turnaround from the -Ps43.1 credit reported in the same quarter of 2002, because in that year the company registered the effects of a gradual reduction in the income tax rate from 35% to 32%, and the effect of deferred taxes was calculated by applying the rate that corresponded to each year.
Equity in the results of Associates was Ps11.3, comparing well against the Ps21.1 loss reported one year earlier. This quarter's profit was the result of better performance by Peñoles' associate companies, like the Coahuila-Durango railway line.
The Minority Interest line showed a gain of Ps14.8, vs. Ps43.4 in the same period of the previous year. The decline was due to higher non-productive expenses at Rey de Plata and Dolorey, and higher exploration expenses at Minera Pecobre.

B) Comparison of results for 4Q03 vs. 3Q03:

	(Millions of pesos) 4Q03 3Q03 Chge. ($) % Chge.     Net sales (*) $3,696.2 $3,086.4 609.7 19.8     Gross income 875.5 703.8 171.7 24.4     Gross margin 23.7% 22.8%     EBITDA 502.8 369.3 133.5 36.1     EBITDA margin 13.6% 12.0%     Operating income 250.4 115.0 135.4 117.7     Operating margin 6.8% 3.7%     Total Financing Cost 123.2 217.0 (93.8) (43.2)   Net income 23.9 (109.0) 132.9 n/a      Net Margin 0.6% -3.5%

(*) Includes metal and exchange-rate hedging gains.

The main changes are discussed below:

Net sales (including hedging results) totaled Ps3,696.2, rising +Ps609.7 (+19.8%) for the following reasons:

a) Higher volume +Ps277.0 because of a great volume of gold and silver sold, making up for lower sales volume of lead, concentrates and zinc;
b) Higher prices, Ps259.9, mainly on zinc, gold, silver and lead;
c) Higher average exchange rate, +Ps128.0 (Ps11.1887 vs. Ps10.6969 per dollar);
d) Change in the results of hedging transactions (futures and options) on metals and the exchange rate, Ps51.0, and
e) Effect of restatement in constant pesos of the current quarter and others, -Ps4.2.

The +Ps437.9 increase in the Cost of Goods Sold (+18.4%) was due to:

a) Higher production costs, +Ps48.2, stemming from higher electricity costs, increased charges from shipping, contractors, maintenance and repair, and a rise in the cost of operating materials due to higher milling levels at the Mining Division;
b) Higher metals cost purchased from outside parties-net of treatment fees, +Ps346.1 due to higher prices on all the metals, a greater volume of purchases of silver, lead and zinc, and a higher average exchange rate (Ps11.1887 vs. Ps10.6969 per dollar); and
c) Inventory movements, restatement and consolidation effects, -Ps43.8.

The rise in sales (+Ps609.7) more than offset the increase in the Cost of goods sold (+Ps437.9), so the gross margin (as a percentage of Sales) went from 22.8% to 23.7%, and gross income rose +24.4% to Ps875.5.

Operating expenses -not including depreciation charges-totaled Ps372.7, rising +Ps38.2 as a result of:

a) Greater SG&A expense, +Ps22.6, due to higher fees paid (metal studies) and increased travel and computer expenses relating to the implementation of software and training courses; and
b) Higher exploration expenses, Ps15.6, primarily at Fresnillo and La Ciénega in connection with reserve location studies, and at Minera Pecobre due to regional exploration in northern Mexico.
Because of the rise in Gross Income (+Ps171.7), offset slightly by increased operating expenses (+Ps38.2), EBITDA went from Ps369.3 to Ps502.8, an increase of + Ps133.5, and the EBITDA margin, in proportion to sales, rose from 12.0 to 13.6 percent.

In this quarter, Total Financing Cost was Ps123.2, comparing poorly against the cost of Ps217.0 in the preceding quarter. The change of -Ps93.8 breaks down as follows:

a) A change of -Ps10.9 in interest expense;
b) A lower foreign-exchange loss of -Ps58.6 because the peso's depreciation against the dollar was Ps0.1376 less severe ( (Ps0.3088 vs Ps0.4464 per dollar); and
c) A greater monetary position benefit, +Ps24.3, due to a higher inflation index (1.64% vs. 1.04%).

The "other expenses" line showed a charge of Ps58.7, vs. Ps49.5 in the preceding quarter. The increase of +Ps9.2 was caused mainly by an adjustment in the value of assets of several companies and non-productive costs relating to the shutdown of the Las Torres mining unit.

In the income tax and profit-sharing provision, the company reports a charge of Ps41.1, compared to a credit of Ps41.0 in the preceding quarter. The charge in this quarter is due to higher pre-tax earnings, caused in turn by higher gross income and a lower total financing cost.

Equity in the Results of Associates was Ps11.3, rising slightly by +Ps0.6, due to the recognition of higher earnings among the companies in which Peñoles owns a minority stake.

The minority interest line shows a gain of Ps14.8, compared to Ps10.4 in the prior quarter. The increase was due mainly to better results from Minera Penmont (the La Herradura mine), resulting from higher gold prices and a higher average exchange rate.

C) Comparison of year-to-date results as 4Q03 vs. 4Q02:

	(Millions of pesos) 4QA03 4QA02 Chge. ($) % Chge.     Net sales (*) $12,856.8 $11,785.6 1,071.2 9.1     Gross income 2,808.2 2,868.5 (60.3) -2.1     Gross margin 21.8% 24.3%     EBITDA 1,446.7 1,593.9 (147.2) -9.2     EBITDA margin 11.3% 13.5%     Operating income 410.3 502.2 (91.9) -18.3     Operating margin 3.2% 4.3%     Total Financing Cost 531.6 647.4 (115.8) -17.9    Net income (152.5) (115.9) (36.6) 31.6     Net margin -1.2% -1.0%

(*) Includes metal and exchange-rate hedging gains.

The primary changes are discussed below:
Net sales (including the results of hedging activity) rose Ps1,071.2 (+9.1%), from Ps11,785.6 to Ps12,856.6. This improvement is attributed to the following factors:

a) Higher prices, +Ps1,134.0 primarily on gold, silver, zinc, lead and ammonium sulfate, which made up for reductions in sodium sulfate and magnesium oxide;
b) A higher average exchange rate +Ps1,130.0 (Ps10.7873 vs. Ps9.6579 per dollar);
c) Lower sales volume -Ps200.5 mainly of gold, silver, ammonium sulfate and bismuth, offset in part by higher volumes of zinc, magnesium oxide and sodium sulfate;
d) Effects of restating the 2002 results in pesos of the current fiscal year, -Ps326.5; and
e) Change in the results of derivatives trading (futures and options) on metals and the exchange rate, premiums on options purchased, and losses of Ps233.7 in 2003, vs. revenues of Ps432.1 in 2002 (-Ps665.8).

In dollar terms, net sales came to US$1,166.0 million (+1.9%), made up of record annual sales of US$1,1871.1 and hedging losses of US$21.0mn.

The +Ps1,131.5 (+12.7%) increase in the cost of goods sold is the result of:

a) Higher production costs, +Ps325.4 (+6.7%) due to an increased cost of electrical energy stemming from higher unit costs, (+13.0%), greater maintenance costs, primarily preventive (+4.9%) in order to extend the useful life of equipment, and an increased charge for operating materials, primarily at the Mining Division, like reactives and direct materials.

b) A rise in the cost of metal-net of treatment fees--,+Ps766.6 because of higher volumes of silver, zinc and lead purchased from outside parties, higher average prices on all the metals, and an higher average exchange rate; and
c) Inventory movements, consolidation and restatement effects, +Ps39.5.
Accordingly, and due to lower unit margins in some areas due to operating problems, Gross income was Ps2,808.2, lower by -Ps60.3, and the gross margin (as a percentage of sales) sank from 24.3 to 21.8 percent.
Operating expenses-not including depreciation-totaled Ps1,361.5, an increase of +Ps86.9 (+6.8%) because of:
a) An increase in the SG&A expense +Ps55.9, in the areas of travel, communications and computer expenses, in both cases relating to software and external consultants hired for implementation of the ERP PeopleSoft modules--, and higher professional fees; and
b) A +Ps31.0 rise in exploration expenses, primarily at Fresnillo and La Ciénega, to build up the reserves of ore they currently have, and increased regional exploration in Peru, along with precious metals and copper projects.

Due to the reduction in gross income (-Ps60.3) and the rise in operating expenses (+Ps86.9), EBITDA declined -Ps147.2 (-8.9%) to Ps1,446.7, and the EBITDA margin narrowed from 13.5 to 11.3 percent.
Total Financing Cost came to Ps531.6, better than the Ps642.6 cost reported in the preceding year. This change (-Ps111.0) is attributed to the following:

a) A -Ps161.9 drop in foreign-exchange losses because of the peso's depreciation was -Ps0.7533 less in the period (Ps0.9235 vs. Ps1.1702 per dollar); and

b) Lower interest expenses, -Ps27.3, due to the effects of capitalizing expansions in the Mining Division during the current fiscal year; offset by
c) A lower monetary position benefit, -P278.2, due mainly to a lower inflation index.

On the "other expenses" line, the report shows an amount of Ps136.8, compared to Ps211.3 in the preceding fiscal year, a decline of -Ps74.5. The 2003 charge was influenced by the shutdown of the Las Torres and El Monte mining units-due to the exhaustion of ore reserves-and an adjustment in the value of assets at Química del Mar and Minera Antares. The year-earlier charge was primarily the result of an adjustment in the value of assets at Rey de Plata and Dolorey, due to a shutdown of operations.

The 2003 credit on the income tax and profit-sharing lines (net), which totaled -Ps45.3, was -Ps125.2 lower than in the year-earlier period. In 2002, the credit amounted to -Ps170.5. This reduction is due to the recognition in 2002 of the effect of deferred taxes stemming from a change in tax law that gradually rolled back the income tax rate from 35% to 32%; the effects of deferred taxes in 2002 were calculated by applying the rate corresponding to each year.

The Minority Interest line shows a profit of Ps19.1, vs. a loss of Ps24.1 one year before. This improvement is attributed to better results from Minera Penmont (the La Herradura Unit), in turn because of higher gold prices and lower non-productive costs and the Rey de Plata mining company in 2003.

Among the primary sources of cash flow generation in the year are gross operating cash flow, short-term financing, short-term financing and dividends from associate companies. The leading uses of cash included property, plant and equipment; and an increase in working capital-primarily because of end-of-month sales that were collected in early January 2004-and dividend payments to shareholders of Industrias Peñoles.

5.- PROYECTOS

During the year, Peñoles continued work on priority projects, including: *Milpillas (copper mine/Sonora): work continued on deepening the access ramp (to date it has reached a depth of 3,026 meters) and deepening the extraction shaft (we have advanced 429 out of a total of 600 meters), as well as preparing the mine and detail engineering. We placed orders for the most important equipment, including the extraction winch, electrical substation, crushing section and extraction by solvent section, among others. During the year we crossed ore in the first level of the mine's development. The total investment in this project is estimated at US$203.0 million, and it is expected to begin operations in the second quarter of 2005, with a production capacity of 55,000 metric tons a year of cathode copper. To date, we have invested US$45.9mn, and it is 17% complete.

*Termoeléctrica Peñoles (TEP): This project is to build a dedicated power plant, developed by the French company Alstom and the U.S. firm Sithe. Investment in the project will total US$320.00 million, and work began on January 1, 2001. The project has a capacity of 230 MW of electrical power. Construction of this plant is complete, and calibration and functional testing has begun, with the net design capacity attained. Startup of commercial operation was originally programmed for August 2003, but was put off till February 2004, since functional testing revealed the need to re-design some equipment. This thermo-electric plant will guarantee the supply of electrical energy and reduce the volatility of energy costs per Kwh. Ownership of the plant will revert to Peñoles after 20 years.

*La Ciénega (gold/Durango): Construction of an extraction shaft to support the future growth of these operations and reduce extraction costs, increase productivity in the movement of personnel and equipment, and other improvements. At the close of the year, this project was 71.6% complete, and is slated for startup in the first quarter of 2004. Investment will total US$3.1mn at the conclusion of the project.

In 2003, construction and startup of the following projects began:

*Fresnillo: continuous mining (silver/Zacatecas): In September, we received and installed continuous mining equipment at level 695 of the mine. The equipment was made in Austria, and is in a three-month evaluation period. The continuous mine allows the mine to develop three times faster and more safely than traditional drilling equipment. If the results are satisfactory, investment in this equipment will total US$5.5mn.

Fresnillo (silver/Zacatecas): expansion of milling capacity from 4,500 to 7,000 metric tons a day, with an investment of US$22.8mn. The expansions are to conclude in the third quarter of 2004. This project will raise annual production from 27.2 to 42.3 million ounces, while reducing production costs by 4.7%. In addition, we began expanding the tailings dam, with an investment of US$2.3mn, which is expected to be completed in the first quarter of 2004.

La Herradura (gold/Sonora): additional expansion of capacity for the leaching yards, at an investment of US$2.5 million. This project is expected to start up in the fourth quarter of 2004.

Francisco I. Madero (zinc/Zacatecas) we began expanding capacity at the tailings dam in order to increase the storage capacity. Investment will total US$2.5 million and construction should be complete by the first quarter of 2004.

In the last quarter of the year, the following projects were approved:

*La Ciénega (gold/Durango): a 34.6% expansion of milling capacity, from 520,000 to 700,000 metric tons a year. This expansion will increase gold production from 134,200 to 141,700 ounces a year. It will require a total investment of US$14.4 million and the project is expected to start up in the second quarter of 2005.

*Sabinas (zinc/Zacatecas): expansion of milling capacity by 21.0%, from 950,000 to 1,150,000 metric tons of ore per year. This expansion will bring annual production up to 33,000 metric tons of zinc and 4.3 million ounces. It will require an investment of US$3.7 million and construction is expected to conclude in the third quarter of 2004.

6.- RECONOCIMIENTOS Y ACTIVIDADES ECOLOGICAS / AMBIENTALES

The following describes the environmental, safety, and communication programs we developed over the course of the year:

There were no environmental incidents during the year.

Emissions of So2 in the urban zone, and average annual blood levels of lead in the communities of the Torreón area have been clearly declining since 1999. They are currently below the limits established by the authorities.

For the second year in a row, La Herradura received the "Silver Helmet" award from the Mexican Mining Industry Chamber, for having the best safety performance in the open-cut category employing less than 500 persons. Química del Rey also received a "Silver Helmet" award, ranking first in the category of plants and foundries.

The Química del Rey, Tizapa and Naica units all received "Best Practices" recognition from the Mexican Center for Philanthropy and the Alliance for Social Business Responsibility in Mexico.

Química del Rey (a dolomite mine) obtained accreditation of self-management of safety and hygiene from the Ministry of Labor and Social Planning.

All our mining units (Fresnillo, Naica, Tizapa, La Herradura, La Ciénega, Bismark, Sabinas and Francisco and Madero) have a "Clean Industry" certificate from the Federal Environmental Protection Agency, as do the Bermejillo and Fertirey plants.

Currently, the following plants have obtained ISO-14001 certification: Fresnillo, La Ciénega, La Herradura, Tizapa, Naica, Sabinas, Met-Mex (lead foundry, lead-silver refinery) Aleazín, Bermejillo, Química del Rey, and Fertirey.

The National Institute of Forestry, Agriculture and Fishing Research included La Ciénega in the world network of model forest. In the second quarter of the year, activities began on restoring, improving and sustaining this forest.

Work began on salvaging and correcting closed mines at: Cuale, Sultepec, La Negra and Rey de Plata; in addition, work began on the La Torres and El Monte mines.

Met-Mex received the AMCO 2003 prize given by the Mexican Association of Community Organizations in recognition of its communication strategy in handling the environmental and health emergency crisis of early 1999.