(Figures in millions of constant pesos)

•In fiscal year 2006, net income rose +133.5% over 2005, operating income gained +127.9%, gross income +67.5%, and EBITDA +91.0%. All of these are record levels in the company's history.
•Peñoles set a record for the production of gold content (380,408 ounces) and copper (12,234 tonnes) from its mines.
•In our metallurgical complex we reached record production levels of refined gold (1.6 million ounces), silver (99.3 million ounces) and zinc (239,379 tonnes).


1.- EXECUTIVE SUMMARY

In the fiscal year ended December 31, 2006, Peñoles turned in record results.Billed sales--not including metals and exchange-rate hedging results--came to Ps39,860.5, rising +78.6% over 2005; gross income was Ps9,822.5, a rise of +67.5%; EBITDA was Ps7,568.6, up +91.0%; operating income was Ps6,222.9, rising +127.9%, and net income totaled Ps4,113.2, an increase of +133.5%.

In dollar terms, billed sales were also a record of US$3,566.4 million, +84.1% higher than in the previous year.

The following are the operating market factors that most influenced the company's results:
(i) Average prices of gold (US$604.34 per ounce), silver (US$11.54 per ounce), lead (US$0.5850 per pound) and zinc (US$1.4856 per pound) were higher than in 2005, as follows: gold +35.8%, silver +57.7%, lead +32.1% and zinc +137.0%;
(ii) Higher sales volume of gold +39.9%, silver +10.8% and zinc +2.1%;
(iii) Higher revenues from treating an increased volume of concentrates from third parties, with higher treatment fees resulting from a rise in scales and prices;
(iv) Extraordinary revenues from the sale of the Pinos Altos gold project for Ps976.8 million; compared to the Ps483.6 million earned on the sale of the Mezcala project the year before.

These positive aspects offset the negative impact of the peso's strength against the dollar (which affects the company's results because close to 95% of its revenues are pegged to the dollar, while 75% of our projection costs are denominated in this currency).In 2006 the average exchange rate was Ps10.8994 per dollar, unchanged against 2005, although there was a slight devaluation of 1.5% toward the end of the year.

In addition, expirations of our metals hedges generated an opportunity cost of Ps2,656.3 (vs. Ps206.4 in 2005), primarily because of a sharp rise in metal quotations.The expired contracts were taken out in earlier years to guarantee the company's future margins. However, because more of our mining production was unhedged, the company has benefited from higher metals prices on the rest of its volume.

The cost of goods sold rose +68.5%, due to:
(a) The higher cost of metal content in concentrates and other materials purchased form third parties and fed into the Met-Mex metallurgical complex;
(b) Higher production costs, due to the increased cost of contractors, operating materials, maintenance and major repairs, personnel costs and energy. This cost increase was tied into a higher volume produced, as well as higher unit costs on materials necessary to our operations.Internal inflation for Peñoles, which is calculated based on the basic basket of its main raw materials, was 13.7%, much higher than the rise in the National Consumer Price Index in the same period (4.05%).

At the same time, however higher metals prices improved the fees Peñoles charges for treating concentrates, because of its impact on the price scale, which partly offset the above-mentioned cost increases.

Our investment in prospecting rose +25.3% last year, to a record of US$62.7 million. This money was used in replacing and expanding the reserves of our mines in operation, and the discovery of new deposits in both Mexico and South America, which have yielded encouraging results.

The Fresnillo mine in Zacatecas continues to strengthen its position as the largest silver district in the world. Within this district, we moved ahead on the development of the El Saucito project, where the shaft reached 235 meters in depth and the ramp a length of 1,485 meters, which allowed us to explore this deposit. Also in this district, we began prospecting in the Juanicipio project, with excellent results.

Total financing cost was Ps36.8 higher, due to:

1) A higher net financial loss, which rose by Ps122.0, due primarily to commissions relating to the refinancing of Industrias Peñoles long-term debt current at the start of the year, at longer terms and lower rates.

2)Net foreign exchange loss was Ps86.9 higher, because of the peso's devaluation against the dollar. At the close of the period, the exchange rate was Ps10.8755 per dollar, compared to Ps10.7109 at the close of 2005. Although this year-end devaluation was only 1.5%, it contrasts sharply with the revaluation of 4.92% reported in 2005.

3) Higher net monetary position gains, an increase of Ps172.1 due to higher inflation (4.05%, vs. 3.33% in 2005).

With the increase in financial results and extraordinary revenues from the sale of Pinos Altos, the income tax and profit-sharing provisions also rose, up +Ps1,334.4.Additionally, Peñoles recognized a loss of Ps73.9 in the companies in which it owns a minority stake, vs. a profit of Ps61.1 the year before.

The following table sums up these results:

	2006 2005 % change     Net Sales $ 37,204.2 $ 22,108.3 + 68.3     Gross earnings 9,822.5 5,864.2 + 67.5     EBITDA 7,568.6 3,962.2 +91.0     Operating income 6,222.9 2,730.9 +127.9     Total financing cost 183.8 147.0 +25.0     Other Expenses (Income) (824.9) (460.2) +79.3     Net income 4,113.2 1,761.6 +133.5

As for the operating results, compared to the same period of the preceding year, our remarks are as follows:

In the Mining Business, we produced a record content of gold (380,408 ounces) thanks to the first complete year of operation at full capacity at La Ciénega, following its expansion in 2005.We also turned out a record content of copper (12,234 tonnes) because we placed a priority on exploitation of this metal in order to maximize its value in a climate of high prices.

Production of silver (46.9 million ounces), lead (62,041 tonnes) and zinc (205,704 tonnes) were stable against 2005. This was due to programmed shutdowns at Fresnillo, to modernize the general shaft, and at Sabinas, to install a new lead-copper separation circuit.

Construction of the Milpillas copper project in Sonora was concluded in 2006 and began production in August 2006, after an investment of US$242.4 million in its construction and initial working capital.During the first five months of the startup period, our efforts have focused on detecting and eliminating failures in the processes inherent to this stage, and optimizing our mining plan to take advantage of high copper prices and the characteristics found within the mine. Once the mine and the solvent and electrodeposition plants reach their full capacity, the mine should turn out 55,000 tonnes a year of fine copper (LME Grade A - the highest quality) on average.

In the Metals Business, thanks to higher entries of concentrates and semi-processed materials rich in metallic content, we set production records for refined gold (1.6 million ounces), refined silver (99.3 million ounces) and refined zinc (239,379 tonnes); production of refined lead (139,563 tonnes) remained stable.

At the close of the period, Peñoles reported a total debt of US$673.0 million. This debt was made up primarily of the following long-term portions:

(i) US$107.1 million from a private placement in 1997 at a fixed rate of 8.39%.
(ii) US$377.0 million from a restructuring of debt at an average rate of 6.70%.
(iii) US$150.0 million from a loan obtained at the end of 2004 to build theMilpillas copper project, at an average rate of 6.29%.

In 2006, the flow of cash from operations totaled Ps2,650.6, +47.1% higher than in 2006. Among the main uses of these resources were:
(i) A Ps2,789.9 increase in working capital, primarily:
(a) An increase in client accounts receivable (Ps1,671.0) due to higher sales volume and prices on all metals .
(b) An increase in inventories (Ps1,941.8) due to higher metals prices and the entry of materials rich in precious metal content and zinc concentrates.

Note that portfolio and inventory turnover (in terms of days) were virtually unchanged from the previous year, so Peñoles can be considered to maintain an appropriate level of control over these variables.

(c) This was offset partially by a rise in suppliers (Ps678.7).
(ii) Investment in property, plant and equipment totaling Ps2,822.7, including conclusion of the Milpillas project, replacement of equipment and projects, primarily at Fresnillo, Met-Mex, Penmont, Sabinas, Tizapa and Química del Rey .
(iii) Payment of Ps889.8 in dividends to shareholders and minority partners of Industrias Peñoles.

At the close of 2006 our total work force--including employees and collaborators--was 7,619 individuals, 559 more than in 2005. The increase was due to the startup of operations at Milpillas, a rise in production at La Herradura, Francisco I. Madero, La Ciénaga and Naica, the startup the treatment plant for high-silver-content zinc concentrates (Met-Mex) and the new special milling plant (Química del Rey) .

In 2006, we also carried out the following strategic projects:
* At La Ciénega, we continued building the new tailings dam.
* At Sabinas, we completed the lead-copper separation circuit.
* At La Herradura, we finished building the 5th leaching yard and began the sixth.
* At Mex-Mex, we finished the treatment plant for high-silver-content zinc concentrates, which were formerly exported.We also completed the ventilation project at the new lead refinery plant in the lead-silver refinery. We are continuing testing of the pilot submerged combustion furnace for the treatment of coppery slag, which will replace the reverberating furnaces, and for smoking the zinc from the slag produced by the lead foundry.
* At Química del Rey, we started up a special milling plant for magnesium oxide and began expansions for manufacturing flame retardants based on magnesium hydroxide.

2.- ECONOMIC ENVIRONMENT AND METALS PRICES

	4Q05 2Q06 3Q06 4Q06     Inflation (%):     In the period 1.59 (0.18) 1.50 1.55     12 months 3.33 3.23 3.79 4.05     Exchange rate (pesos/dollar):     Close 10.7109 11.3973 11.0502 10.8755     Average 10.7138 11.1626 10.9637 10.8874

	Quotations Gold ( US$/Oz) Silver ( US$/Oz) Lead ( US$/lb) Zinc ( US$/lb)     1st. quarter 2005 427.23 6.99 44.40 59.73     2nd. quarter 2005 427.25 7.16 44.75 57.75     3rd. quarter 20065 439.49 7.07 40.44 58.82     4th. quarter 2005 485.55 8.06 47.59 74.41     Average 2005 444.88 7.32 44.29 62.68     1st. quarter 2006 553.989 9.70 56.33 101.70     2nd. quarter 2006 627.40 12.22 49.91 149.33     3rd. quarter 2006 621.50 11.65 53.96 152.56     4th. quarter 2006 614.47 12.59 73.80 190.67     Average 2006 604.34 11.54 58.50 148.56     %Chge. 4Q2006 vs 4Q20045 +26.5 +56.2 +55.1 +156.3     %Chge. 4Q2006 vs 3Q2006 -1.1 +8.1 +36.8 +25.0     %Chge. 4Q2006A vs 4Q2005A +35.8 +57.7 +32.1 +137.0

Quarterly highlights:

Gold: Average quotations dropped by -1.1% in the quarter, compared to the third quarter of the year, but still hit a 25-year peak due to the euro's strength against the dollar, geopolitical tensions (Iran, Israel, Lebanon and North Korea), interest among funds, a 7% increase in Chinese consumption of this metal, and higher demand in Dubai in connection with the Diwali and Ramadan festivals .

Silver: Average quotations rose +8.1% from the third to the fourth quarter. Silver hit its highest point in many years due to the launch of the Silver ETF (Exchange Traded Fund) in April, the euro's strength against the dollar, crude oil prices, strong physical demand, and correlation with gold quotations .

Lead: Average quarterly prices of this metal rose +36.8% against the previous quarter.Prices benefited from interest among funds, movements in LME inventories, and the possible contamination of China's Yellow River due to operations at the Zhuzhouel Refinery .

Zinc: The average price of this metal rose +25.0% from the preceding quarter, driven by dwindling inventories, interest among funds, strikes at Grupo Mexico's mines, difficulties at the Red Dog mining company in sending zinc concentrates to its refinery, and expectations of a rising production deficit, as some producers like Teck Cominco cut back estimated output due to technical problems, and reports from China of a rise in investment in fixed assets .

3.- OPERATING RESULTS

		Production Volume
	4Q05 3Q06 4Q06     Mining Division:     Ore milled (Mton) 2,117 2,095 1,993     Stacked deposited (a) (Mton) 1,772 2,188 2,639     Gold (kg) 3,137 3,084 2,822     Silver (ton) 380.1 365.4 324.9     Lead (ton) 16,378 15,120 13,665     Zinc (ton) 54,416 47,730 50,688     (a) La Herradura: open-pit mine.     Metals & Chemicals Division:     Gold (kg) 10,329 12,877 11,688     Silver (ton) 780.5 764.3 778.5     Lead (ton) 37,320 34,521 31,487     Zinc (ton) 64,181 64,246 56,515     Sodium sulfate (ton) 152,000 155,500 155,500     Magnesium oxide (ton) 21,090 19,402 23,316     Ammonium sulfate (ton) 51,627 45,595 41,192     Magnesium sulfate (ton) 7,200 9,600 4,700

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

*Change 4Q06 vs 4Q05 (12 months):
- Gold (+1.1%): Due to higher ore milled at La Ciénega and Tizapa and higher grade at Fresnillo.
- Silver (-1.1%): Lower grade and recovery at Fresnillo and la Ciénega and lower grade and milled ore at Sabinas.
- Zinc (-2.8%): Lower grade at Ciénega and Bismark, lower milled ore and grade at Madero and lower grade and recovery at the Sabinas plant.

*Change 4Q06 vs. 4Q05:
- Zinc (-6.8%): Lower grade at Bismark, lower milled ore and grade at La Ciénega and lower milled ore, grade and recovery at Sabinas and Fresnillo.
- Gold (-10.0%): Lower recovery in solution treated at the Merrill Crowe plant at La Herradura, lower grade and milled ore at Fresnillo and la Ciénega.
- Silver (-14.5%): Lower milled ore at Fresnillo, lower grade, recovery and milled ore at La Ciénega and Sabinas, and lower grade and recovery en Bismark.
- Lead (-16.6%): lower grade en la Ciénega, lower milled ore and grade en Fresnillo, lower grade and recovery en Sabinas and Lower milled ore at Naica.

*Change 4Q06 vs. 3Q06:
- Zinc (+7.3%): higher grade and recovery en Bismark, higher grade en Naica and higher grade and milled ore at Madero.
- Gold (+7.3%): Lower recovery in solution treated at the Merrill Crowe plant at La Herradura, lower milled ore and grade en Fresnillo and lower recovery and grade en Naica.
- Lead (+7.3%): lower grade en la Ciénega, Naica, Madero and Tizapa and lower milled ore and grade en Fresnillo.
- Silver (+7.3%): Lower milled ore at Fresnillo, lower grade en Naica and la Ciénega, lower grade and recovery en Bismark and Tizapa, lower recovery and Lower milled ore at Sabinas, and lower recovery en Madero.

Metals and Chemicals Division (production of refined metal):

*Change 4Q06 vs 4Q05 (12 months):
- Gold (+38.8%): higher entries of semi-processed materials from third parties at the lead-silver refinery, and reduction of inventories in process.
- Silver (+8.7%): higher direct entries of content-rich concentrates at the lead-silver refinery, and reduction of inventories in process.
- Zinc (+3.0%): higher entries of content-rich concentrates from third parties at the zinc refinery, and operating continuity.In 2005 this division had some problems with electrical energy supply .
- Lead (-2.1%): lower receipts of lead bullion.
- Magnesium sulfate (+18.3%): higher production via reaction, and better position on the domestic market.
- Ammonium sulfate (+5.7%): reduction of acid inventories and higher receipts of solution.
- Magnesium oxide (-3.9%): plant difficulties and adjustment to the national sales program.

*Change 4Q06 vs. 4Q05:
- Gold (+13.0%): higher entries of semi-processed materials from third parties at the lead-silver refinery.
- Zinc (-11.6%): plant difficulties and an early start of maintenance scheduled for April 2007.
- Lead (-15.6): lower receipts of content-rich concentrates at the lead foundry.
- Magnesium oxide (+10.6%): the increase followed a reduction in production in 4Q05 in keeping with company sales plan.
- Ammonium sulfate (-20.2): lower availability of sulfuric acid.
- Magnesium sulfate (-34.7%): lower production because inventories were sufficient, and the winter season lowered levels of brine solution at the dams.

*Change 4Q06 vs. 3Q06:
- Lead (-8.8%): lower entries of content in concentrates from proprietary and outside mines to the lead foundry.
- Gold (-9.4%): delays in entries of concentrates to the lead-silver refinery.
- Zinc (-13.7%): fewer plant difficulties and an earlier start to the shutdown programmed for April 2007.
- Magnesium oxide (+20.2%): adjustment to sales plan and greater operating continuity.
- Ammonium sulfate (-9.7%): lower inventories of sulfuric acid at the lead foundry.
- Magnesium sulfate (-51.0%): production was advanced in immediately preceding quarter, and brine solution was low at the dams due to the cold winter season.

4.- FINANCIAL RESULTS

A) Comparison of cumulative results, 4Q06 vs. 4Q05:

	(Millions of pesos) 4CQ05 4CQ04 Chge. ($) % Chge.     Net sales (*) $ 37,204.2 $ 22,108.3 15,095.9 68.3     Gross income 9,822.5 5,864.2 3,958.4 67.5     Gross margin 26.4 % 26.5 %     EBITDA 7,568.6 3,962.2 3,606.4 91.0     EBITDA margin 20.3 % 17.9 %     Operating income   6,222.9 2,730.9 3,491.9 127.9     Operating margin   16.7 % 12.4 %     Net income   4,113.2 1,761.6 2,351.6 133.5     Net margin 11.1 % 8.0 %

(*) Includes revenues from metal and exchange-rate hedges.

The following is an analysis of the main changes:
The +Ps15,094.9 (+68.3%) rise in net sales, from Ps22,108.3 to Ps37,204.2, is due to the following:
a) Higher sales volume, +Ps4,493.3 due to higher sales of gold, silver, zinc, and ammonium sulfate, as well as concentrates in the mining division sold to third parties;
b) Higher prices, Ps11,581.4, on practically all of the products sold;
c) Higher losses from metal and exchange-rate hedges, -Ps2,449.8;
d) Higher average exchange rate, +Ps2.8 (Ps10.8994 per dollar vs. Ps10.8978 per dollar; and
e) Effect of restating previous year's figures in constant pesos as of December 31, 2006, and other items, Ps1,468.2 ;

In dollar terms, net sales totaled US$3,328.8 million, made up of record (billed) sales of US$3,566.4 million and hedging losses of US$237.7 million.

The higher cost of goods sold (+Ps11,137.6, or +68.6%), was the result of:
a) higher production costs, +Ps1,005.5 (+14.4%) due to a rise in the cost of contractors for footing and anchoring in the Mining Business, operating materials due to higher prices on reactives used in preventive maintenance to prolong the useful life of equipment; and higher personnel costs;
b) Higher cost of metal--net of treatment fees--+Ps9,765.7, primarily due to higher prices and volume of metals purchased from third parties; and
c) Inventorymovements, consolidation and restatement effects, +Ps366.4.

Because of the rise in net sales (+Ps15,095.9) and the less pronounced increase in the cost of goods sold (+Ps11,137.6), gross income came to Ps9,822.5, an increase of +Ps3,958.4 (+67.5%) and the gross margin (in proportion to sales) was 26.4 percent .

Operating expenses--excluding depreciation--totaled Ps2,253.9 an increase of +Ps351.9 (+18.5%) due to:
a) Higher prospecting expenses, +Ps141.0 primarily due to increased activity at Fresnillo, La Herradura and La Ciénega, and wider regional exploration in Mexico in general; and
b) An increase in SG&A expenses, +Ps210.9.

Because the rise in gross income (+Ps3,958.4), more than offset the increase in operating expenses (+Ps351.9), EBITDA totaled Ps7,568.6, an increase of +Ps3,606.4 (+91.0%), bringing the EBITDA Margin (in proportion to sales) to 20.3 percent .

Total financing cost was Ps183.8, Ps36.8 more than in 2005, for the following reasons:
a) Net foreign-exchange loss of Ps24.9, compared to a 2005 gain of Ps62.1. En 2006 the peso depreciated by 1.54% against the dollar, compared to an appreciation of 4.92% in 2005;
b) Higher net monetary gains, +Ps172.1 due to greater inflation in January-December 2006 vs.2005; and
c) An increase of +Ps122.0 in net interest expense.

The other expenses (income) line showed a net income of Ps824.9, compared to a net income of Ps460.2 the year before. The 2006 gain was due primarily to the sale of the Pinos Altos project to Agnico Eagle.In 2005, the income came from the sale of the Mezcala gold project in Guerrero to Goldcorp-WheatonRiver.

Income tax and profit sharing provisions (net) showed a charge of Ps2,450.7, Ps1,334.4 higher than the previous period, due to the entry of pretax earnings of Ps6,863.9 in 2006, compared to only Ps3,044.1 in 2005.

Equity in the earnings of associates declined, primarily because of the recognition of losses in the companies in which Peñoles owns a minority stake (-Ps73.9), compared to profits of Ps61.1 in January-December 2005.

The minority interest line shows a gain in 2006, of Ps226.3, compared to Ps227.3 in 2005.The lower income was due primarily to the recognition of the Mezcala project in El Bermejal in 2005, while the results at Penmont in Tizapa in 2006 were greater.


B) Comparison of results from 4Q06 to 3Q06:

	(Millions of pesos) 4Q06 3Q06 Chge. ($) % Chge.     Net sales (*) $ 10,358.9 $ 6,368.6 3,990.3 +162.7     Gross income 2,445.4 1,742.6 702.8 + 40.3     Gross margin 23.6 % 27.4 %     EBITDA 1,916.4 1,187.9 728.5 + 61.3     EBITDA margin 18.5 % 18.7 %     Operating income   1,556.0 979.5 576.5 + 58.9     Operating margin   15.0 % 15.4 %     Net income   946.5 577.4 369.2 + 63.9     Net Margin 9.1 % 9.1 %

(*) Includes metal and exchange-rate hedge results.

The main changes are discussed below:

Net sales totaled Ps10,358.9, rising +Ps3,990.3 (+62.7%), due to the following factors:
a) Higher sales volume, Ps1,232.3, primarily of gold, silver, copper and concentrates sold by the Mining Division to third parties;
b) Another +Ps3,254.4 gain was due to higher prices on most of the products sold .
c) +Ps75.6 from a higher average exchange rate (Ps10.8874 vs. Ps10.7138 per dollar);
d) -Ps817.1 from higher losses on metals and exchange-rate hedges;
e) +Ps245.1 from the effects of restating results in constant pesos of the current quarter and other effects.

In dollar terms, net sales came to US$903.7 million, composed of US$989.00 in billed sales and -US$85.3 million in hedging losses.

The cost of goods sold rose Ps3,287.5, due to the following elements:
a) Higher production costs, +Ps330.3 (+17.8%) due to the higher cost of operating material in the Mining Business, due primarily to prices of reactives, a rise in the cost of contractors for footing and anchoring, preventive maintenance to prolong the useful life of equipment inside the mine, and higher personnel costs due to hirings at Milpillas;
b) Higher cost of metal--net of treatment fees--+Ps2,636.8, due to higher prices and volume of metals purchased from third parties and a higher average exchange rate.
c) Inventorymovements, consolidation and restatement effects, +Ps320.4.

Because the +Ps3,990.3 rise in net sales exceeded the +Ps3,287.5 increase in the cost of goods sold, gross income gained +Ps702.8, and the gross margin was 23.6 percent of sales.

Operating expenses--excluding depreciation--were Ps529.0, down by -Ps25.7 due to:
a) Higher prospecting expenses, +Ps70.1, primarily at the Fresnillo and La Herradura mines; and
b) Lower SG&A expense, -Ps95.8.

Due to higher gross income (+Ps702.8) and lower operating expenses (-Ps25.7), EBITDA was Ps1,916.4, an increase of +Ps728.5 (+61.3%), and the EBITDA margin was 18.5 percent.

The rise in EBITDA (+Ps728.5) in turn caused operating income to rise by +Ps576.5, reaching 15.0% of sales.

In the period in question, total financing cost was Ps18.2, comparing positively against a loss of Ps42.5 in the fourth quarter of 2005.The change breaks down as follows:
a) Net monetary position gains of Ps151.0, primarily due to higher inflation, compared to net monetary gains of Ps32.7 in 2005, a favorable change of Ps118.3;
b) Net foreign-exchange gains of Ps46.5, compared to a 2005 loss of Ps2.1, which means a positive change of Ps48.6; and
c) Higher net interest expense, +Ps106.1.

The other expenses (revenues) line showed a charge of Ps45.0, compared to Ps61.8 in the fourth quarter of the previous year.

Net income tax and profit-sharing provisions showed a charge of Ps517.4, up by +Ps186.9 over the same period of 2005, because of pretaxincome of Ps1,529.3 in the fourth quarter of 2006, compared to a lesser amount of Ps875.2 in the same quarter of 2005.

Losses from equity in the results of unconsolidated associates totaled Ps24.4, a change of Ps48.3 from the income reported one year earlier, due primarily to the recognition of weaker results by companies in which Peñoles owns a minority stake.

The minority interest line showed a gain of Ps41.0 compared to a loss of Ps8.7 in the year-earlier quarter.

C) Comparison of 4Q06 vs. 3Q06:

	(Millions of pesos) 4Q06 3Q06 Chge. ($) % Chge.     Net sales (*) $ 10,358.9 $ 9,650.7 708.2 7.3     Gross income 2,445.4 2,590.6 -145.3 -5.6     Gross margin 23.6 % 26.8 %     EBITDA 1,916.4 1,984.7 -68.3 -3.4     EBITDA margin 18.5 % 20.6 %     Operating income   1,556.0 1,607.6 -51.6 -3.2     Operating margin   15.0 % 16.7 %     Net income   946.5 1,049.4 -102.9 -9.8     Net Margin 9.1 % 10.9 %

(*) Includes metal and exchange-rate hedge results.

Net sales came to Ps10,358.9, rising Ps708.2 (+7.3%). The increase breaks down as follows:

a) -Ps425.8 from lower volume, primarily of gold, zinc, lead, magnesium oxide and ammonium sulfate;
b) +Ps954.7 due to higher prices on silver, lead, and zinc;
c) -Ps64.2 from a lower average exchange rate (Ps10.8874 vs. Ps10.9637 per dollar;
d) -Ps235.6 from an increase in losses on derivative trading (futures and options on metals and the exchange rate); and
e) -Ps479.1 from the effects of restating results in constant pesos of the current quarter.

The cost of goods sold was Ps853.5 higher, because the cost of purchase metal rose amid higher quotations on silver, lead and zinc, combined with an increase in project and development contractors, maintenance of equipment within the mine, and higher royalties.

The Ps708.2 increase in net sales was less than the Ps853.5 rise in the cost of goods sold, so gross income declined by -Ps145.3, and the gross margin (in proportion to sales) was 23.6 percent.

Operating expenses--not including depreciation charges--totaled Ps529.0, a decline of -Ps77.0, due to:
a) Higher prospecting expenses, +Ps30.6, primarily because of a more intense pace of activity at Fresnillo and La Herradura;
b) A decline of -Ps107.6 in SG&A expenses.

Because the decline in gross income (-Ps145.3) exceeded the reduction in operating expenses (-Ps77.0), EBITDA went from Ps1,984.7 to Ps1,916.4, a drop of -Ps68.3, and the EBITDA margin was 18.5 percent of sales.

Total financing cost was -Ps18.2 for the quarter, compared to a cost of -Ps59.9 in the preceding quarter.The Ps41.6 change breaks down into the following components:
a) +Ps66.7 from higher net interest expense;
b) A change of Ps13.0 in net foreign-exchange results--foreign-exchange gains of Ps46.5 in this quarter, compared to Ps59.5 in the preceding quarter; and
c) H Net monetary position gains of Ps151.0, compared to earnings of Ps113.0 from the immediately preceding quarter, meaning a favorable change of Ps37.9.

The other expenses (revenues) line contained a charge of Ps45.0, compared to Ps67.9 in the preceding quarter.

On the income-tax and profit-sharing provision line the result was a charge of Ps517.4 compared to Ps593.1 in the previous quarter.The lower charge this quarter (-Ps75.7) is due to a drop in pretax earnings of Ps1,529.3, compared to Ps1,599.5 in the previous quarter.

Equity in the earnings of unconsolidated affiliates declined, primarily because of the recognition of Ps24.4 in losses in the companies in which Peñoles owns a minority stake, compared to a profit of Ps112.1 in the immediately preceding quarter.

Minority interest brought a profit of Ps41.0, compared to income of Ps69.0 in the preceding quarter, due to lower results from Penmont and Tizapa.

5.- PROJECTS.

Construction of the Milpillas copper project in Sonora was completed in 2006, and it began production in August 2006, after an investment of US$242.4 million in its construction and initial working capital. During the first five months of the startup period, efforts focused on detecting and eliminating failures in the processes inherent to this phase, and optimizing the mining plan to take advantage of high copper prices and characteristics found within the mine. Once the mine and the solvent extraction and electrodeposition plant reaches capacity, this mine will turn out an annual average of 55,000 tonnes of fine copper a year (LME Grade A - the highest quality).

The following strategic projects were carried out in 2006:

* At La Ciénaga, we continued work on building the new tailings dam.

* At Sabinas, we concluded the lead-copper separation circuit.

* At Met-Mex we completed the project for treating zinc with high silver content, which was formally exported. We also finished work on the ventilation project at the new lead refinery plant within the lead-silver refinery. We are continuing testing of the pilot submerged combustion furnace for the treatment of coppery slag, which will replace the reverberating furnaces, and for smoking the zinc from the slag produced by the lead foundry.

* At Química del Rey, we started up a special milling plant for magnesium oxide and began expansions for manufacturing flame retardants based on magnesium hydroxide.