(Figures in millions of constant pesos)

• Sales totaled Ps8,106.4, rising +29.0% over the first half of 2003.

• Operating income was up by +1,804.2%, EBITDA +144.8% and gross earnings +71.1% over the same half of last year.

• Net profits rose to Ps419.5, turning around from a loss of Ps68.5 in the first half of 2003.

• During the first half of the year, lead production was raised by +12.2%, silver +6.5% and refined zinc +3.2%.

1.- EXECUTIVE SUMMARY

In the first half of 2004, sales (billed) came to Ps8,106.4 (not including metals and exchange-rate hedging gains) rising +29.0% over the year-earlier period, an equivalent to US$723.7 million.

Showing a similar trend, gross earnings were Ps2,136.9, EBITDA was Ps1,429.6 and Operating Income was Ps868.9, rising significantly by +71.1%, +144.8% and +1,804.2%, respectively. Net earning totaled Ps419.5 compared to a loss of Ps68.5 in the first half of 2003.

These results were favorably influenced by: (a) higher lead quotations (US$0.3754 per pound, +80.4% higher than in the first half of 2003), silver (US$6.48 per ounce, +40.1%), zinc (US$0.4757 per pound, +34.5%) and gold (US$400.79 per ounce, +14.7%); (b) a higher average exchange rate (Ps11.1848 per dollar,+5.2%) which raised the level of sales in peso terms; and (c) higher sales volume of magnesium oxide (+62.2%), lead (+18.0%), silver (+7.6%), sodium sulfate (+5.4%) and zinc (+4.5%).

The company’s results were fueled by strong performance in the Metals-Chemicals Division.

The foundry and lead-silver refinery treaded a higher volume or material than in the first half of 2003, rising +15.6% and +12.5%, respectively. This resolved prior problems with operating control and the quality of the concentrates received in the lead-silver circuit due to a shortage of these materials. Although concentrates remain in short supply, our plants have made the necessary adjustments to great complex materials. This allowed us to raise our production of refined silver by +6.5% and refined lead by +12.2%.

As for the Zinc Refinery, a greater availability of concentrates allowed it to increase refined zinc production by +3.2%.In this quarter, changes were made in the process that allowed the refinery to expand production while reducing operating costs.

In addition, the treatment fees that Met-Mex receives were improved by an increase in the price scale, resulting form higher metals prices. This meant that revenues per metric ton at the foundry, the lead-silver refinery, an the zinc refinery, were increased by +15.9%, +5.6%, and +22.6%, respectively, improving the operating margins of these plants.

In the mining division, production of metallic lead content fell by –33.5% and zinc by –15.4%.These reductions can be attributed in part to the shutdown of operations at the El Monte mine in March 2003, which means it had no production at all in 2004; and lower production at Naica and Francisco I. Madero, due to lower grade.However, the grades are expected to improve at a pace with the preparation and exploitation of new zones.

Higher metal prices and efforts to improve productivity in the mining division pushed the gross margins of our gold mines up by +32.2%, the silver mine (Fresnillo) by +55.50%, and the zinc-lead mines by +239.7%.

April 30 of this year marked the official startup of commercial operations at the electrical energy plant, Termoeléctrica Peñoles, and it is now operating at 100% of its nameplate capacity. The plant can generate 230 MW of energy and will guarantee the supply of electricity Peñoles needs while lowering the cost per kwh.The plant is strategically important to Peñoles because electricity is one of the biggest components of its production costs.

Among the most important projects underway at present are the expansion of capacity at the Fresnillo mining unit (silver) from 32.0 to 43.7 million ounces a year (startup salted for the fourth quarter of 2004), Sabinas (zinc), from 27,171 to 32,000 metric tons per year (fourth quarter of 2004) and La Ciénaga (gold) from 132,200 to 176,600 ounces a year (second quarter of 2005). Construction of the Milpillas copper project is on schedule (fourth quarter of 2005) and the work is 30 percent complete at present. This mine will produce an average of 55,600 metric tons of fine copper per year.

2.- ECONOMIC ENVIRONMENT AND METALS PRICES

Highlights of the quarter:

Gold: the average price of gold in the quarter fell –3.7% compared to the first quarter of the year. From April to June, gold quotations were affected by an aggressive sell-off by funds, the publication of encouraging economic reports like employment in the United States, the dollar’s strength against the euro, and remarks by the Chairman of the U.S. Federal Reserve to the effect that his institution would do whatever it believed necessary to keep inflation under control.Among the factors that supported gold prices, on the other hand, were the report of a higher-than-expected trade deficit in the United States, various terrorist attacks in Iraq and Turkey, and fund participation.

Silver: During the second quarter, the average quotation for silver lost –6.8% from the first quarter. The decline was due to the dollar’s strength against the euro, strong sales for producers, a closeout of long positions by funds, and the negative movement in industrial metals.On the other hand, physical interest, the renewed appetite of funds for this market, and the absence of sellers, provide some support that slowed the downtrend in silver prices.

Lead: this metal has positive fundamentals which are supported by the ongoing decline of inventories.It has also benefited from the start of a strike at the Boliden-owned Tara mine, which produces 40,000 metric tons of this metal a year.

Zinc: In this period, zinc prices were stable thanks to the Tara mine strike (200,000 metric tons of zinc a year) and a drop in inventories.Despite the price decline, zinc has recovered in part because analysts are optimistic about this market, and believe the metal can be sustained by its supply and demand fundamentals.

3.- OPERATING RESULTS

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

*Change 2Q04 vs. 2Q03:
- Silver (-15.1%): shutdown of Las Torres, lower grade at Fresnillo, lower grade and milling at Naica and lower grade at Tizapa.
- Lead (-39.3%): lower grade and milling at Naica and lower grade at Francisco I. Madero.
- Zinc (-14.5%): lower grades and milling at Francisco I. Madero and Naica.

*Change 2Q04 vs. 1Q04:
- Lead(-13.4%): lower milling and grade at Naica.

* Change 2Q04 vs. 2Q03, YTD:
- Silver (-9.6%): shutdown of the Las Torres and El Monte units, and lower grade at Fresnillo, Sabinas and Francisco I. Madero.
- Lead (-6.9%): lower grade at Naica, Francisco I. Madero and Sabinas.
- Zinc (-15.4%): lower grade at Francisco I. Madero and Naica, and the shutdown of El Monte.

Metals Division (production of refined metal):

*Change 2Q04 vs. 2Q03:

- Gold (-14.2%): lower receipts of semi-processed material rich in content.
- Silver (+5.7%): higher incoming content in concentrates from third parties at the lead foundry
- Zinc (+4.2%): higher incoming content in concentrates from third parties at the zinc foundry.
- Sodium sulfate (+5.6%): higher demand on export markets.
- Magnesium oxide (+23.2%): to meet higher demand for refractory-grade and caustic grade.
- Ammonium sulfate (+55.0%): higher seasonal demand from the agricultural industry.
- Magnesium sulfate (+6.1%): better evaporation conditions at brine crystallization dams.

*Change 2Q04 vs. 1Q04:
- Gold (-11.6%): lower direct entries of semi-processed material rich in content of this metal.
- Silver (-9.2%): lower direct entries of material rich in content.
- Lead (-11.9%): change in electrical voltage, affecting operation of the fan in two furnaces.
- Zinc (-8.9%): testing of a new method of purification that showed some problems, and which has been returned to the traditional method.
- Magnesium oxide (+60.3%): to meet higher demand for refractory-grade and caustic grade.
- Magnesium sulfate (+6.8%): higher crystallization potential of brine.

* Change 2Q04 vs. 2Q03 YTD:
- Gold (-14.6%): lower direct entries of semi-processed materials at the refinery.
- Silver (+6.5%): higher entries of raw material, higher bullion production and continuity of operations.
- Lead (+12.2%): higher bullion production, inventory reduction, and continuity of operations.
- Magnesium oxide (+36.9%): higher demand for refractory-grade on both domestic and export markets, and higher demand for caustic grade on the domestic market.
- Magnesium sulfate (+10.6%)better evaporation conditions at the brine crystallization dams.
- Ammonium sulfate (+47.0%): higher demand from the agricultural industry.

4.- FINANCIAL RESULTS

A) Comparison of results 1H04 vs.1H03:

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

The principal changes are discussed below:

Net sales rose +Ps1,766.8 (+28.6%) from Ps6,173.0 to Ps7,939.8. The change breaks down as follows:
a) Higher prices +Ps1,639.5 for practically all the products sold;
b) Higher average exchange rate +Ps276.5(Ps11.1848 vs. Ps10.6318 per dollar);
c) Higher sales volume +Ps273.3 due to higher sales of silver, lead, zinc and magnesium oxide, as well as Mining Division sales to third parties, which made up for the drop in gold sales resulting from a lower availability of finished product;
d) An increase in losses from metals and exchange-rate hedging activities, -Ps55.7; and
e) Restatement of figures at constant pesos as of June 30, 2004 -Ps366.8.

In dollar terms, net sales came to US$708.8mn, made up of (billed) sales of US$723.7 and hedging losses of US$14.9mn.
The rise in the cost of goods sold, +Ps878.7 (+17.8%) was caused by:

a) Higher Production costs +Ps117.7 due to a rise in the cost of outside contractors (personnel working on capacity expansions in the Mining Division), fuel (higher unit cost of coke and diesel), higher raw materials costs at Fertirey (ammonia, the price of which is pegged to the price of natural gas) and higher costs on direct materials in the Mining Division;
b) Higher Costof metal--net of treatment fees- +Ps789.0 mainly due to higher prices, a higher exchange rate and an increased volume of metal purchased from outside parties; and
c) Inventory movements, consolidation and restatement, -Ps28.0.

As a result of the rise in net sales (+Ps1,766.8) and, to a lesser extent, in the Cost of goods sold (+Ps878.7), gross earnings totaled Ps2,136.9, rising +Ps888.1 (+71.1%), which raised the gross margin, as a percentage of sales, from 20.2 to 26.9 percent.

Operating expenses—excluding depreciation—totaled Ps707.3, rising +Ps42.4 (+6.4%) Due to:

a) A rise in exploration expenses, +Ps39.7, primarily the result of increased activity at Fresnillo, La Ciénaga and La Herradura; and

b) Higher Administrative and General Expenses, +Ps2.7.

As a result of the rise in Gross Income (+Ps88.1), which more than made up for the slight increase in operating expenses (+Ps42.4), EBITDA came to Ps1,429.6, rising by +Ps845.7 (+144.8%), which brought the EBITDA margin (in proportion to sales) to 18.0%, well above the 9.5% reported in the first half of 2003.

Total financing cost came to Ps165.0, which was Ps194.6 lower than in 2003.The -Ps29.6 change breaks down as follows:

a) A decline of -Ps31.9 in foreign-exchange losses, given that the peso devalued 1.56% in this period of 2004, compared to 1.63% in 2003, which affects the net liability position in dollars;
b) Higher interest expense, +Ps2.5; and
c) An increase in monetary position effect, +Ps0.2.

The “other expenses (proceeds)” line shows a charge of Ps10.9, compared to Ps29.1 the year before. The lower expense reported in 2004 was due primarily to the sale of shares in Minera Metalline, a company with which Peñoles had an agreement to explore a zinc deposit in Coahuila; a recovery of excess property tax; and revenues from a penalization of the operators of Termoeléctrica Peñoles in connection with the delayed startup.

Net income and profit-sharing provisions show a charge of Ps259.6, compared to a benefit of Ps46.2 in the same period of last year. The change is due to the level of pretax earnings this year—Ps693.00, compared to a loss of Ps178.0 in 2003.

Equity in the earnings of associates dropped by –Ps44.00, due mainly to lower earnings at the companies in which Peñoles has a minority stake.

The minority interest line shows a gain of Ps27.1, compared to a loss of P s6.2 in the year-earlier period. The benefit this year was due to better operating results for companies in which Peñoles has minority partners, mainly due to higher metal quotations and a higher average exchange rate.

B) Comparison of results for 2Q04 vs.2Q03:

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

The most important changes are discussed below:

Net sales were Ps3,871.5 rising +Ps891.2 (+29.9%) due to the following:

a) Higher prices +Ps724.3 on virtually all products sold;
b) Higher average exchange rate (Ps11.3772 vs. Ps10.4615 per dollar) +Ps285.1;
c) Higher sales volume +Ps84.6, primarily concentrates sold by the Mining Division to third parties;
d) A rise in metals and exchange-rate hedging losses, -Ps65.1; and
e) Effect of restatement of figures in constant pesos the current quarter, -Ps137.7.

In dollar terms, net sales amounted to USU$340.3mn, made up of (billed) sales of US$346.5 and currency hedge losses of US$6.2mn.
The Cost of goods sold increased by +Ps545.8 because of:
a) Higher Production costs +Ps44.7 (+3.4%), the result of increased costs of operating material at the Mining Division and a rise in the cost of gas, coke, shipping and outside contractors;
b) Higher Cost of metal--net of treatment fees- +Ps501.0 because of an increase in the price of metals purchased from outside parties, in turn due to higher quotations and an increase in the average exchange rate; and
c) Inventory movements, restatement and consolidation effects, +Ps0.1.

Because the+Ps891.2 increase in sales outpaced the +Ps545.8 increase in the cost of goods sold, gross earnings rose by +Ps345.4, raising the gross margin from 21.1 to 25.1 percent of sales.
Operating expenses excluding depreciation totaled Ps373.8, rising +Ps32.4 due to

a) An increase of +Ps31.2 in exploration expenses, primarily at La Ciénega, Fresnillo, and La Herradura, along with higher regional expenses; and
b) An increase of +Ps1.2 in administrative and general expenses.

The growth of gross income (+Ps345.4), offset in part by an increase in operating expenses (+Ps32.4), brought EBITDA to Ps599.5, which was an increase of +Ps313.0 (+109.2%), and the EBITDA margin grew from 9.6 to 15.5 percent of sales.

The growth in (EBITDA) (+Ps313.0) was offset partly by higher depreciation charges (+Ps13.5), which brought operating income to +Ps299.5, equivalent to 8.1% of sales.

In the second quarter of 2004, total financing cost was Ps159.8, compared to a benefit of Ps11.9 in the second quarter of 2003.The change (Ps171.7) breaks down as follows:
a) Lower interest expense (-Ps1.3);
b) A foreign-exchange loss of Ps77.7, compared to a gain ofPs98.2 in the second quarter of 2003 (a change of Ps175.9).The loss in the current quarter is due to the peso’s depreciation (Ps0.2576 per dollar), which affected the company’s net liability position in dollars; and
c) higher monetary position gains (+Ps2.9).

A charge of Ps30.0 is entered on the “other expenses” line, compared to Ps21.9 in the same quarter of last year. The 2Q04 charge stems from a contribution to the environmental emergency trust and recognition of a change in the book value of some properties, plant and equipment.

The income tax and profit-sharing provisions (net) line contains a charge of Ps60.3 rising +Ps53.0 due primarily to higher pretax income (+Ps119.8).

Equity in the results of associates was a positive Ps14.0, up +Ps5.7, chiefly due to increased earnings among the companies in which Peñoles owns a minority stake.

The Minority Interest line shows a slight profit of Ps0.4, compared to a loss of Ps13.1 in the same quarter of 2003. The second-quarter gain this year was brought by improved earnings by the water business (ASIM and Azurix), offset by higher non-productive expenses at the Rey de Plata mining unit.

C) Comparison of results for 2Q04 vs.1Q04:

The most important changes are discussed below:

Net sales (including hedging activity) totaled Ps3,871.5, dropping –Ps196.8 (-4.8%) due to the following factors:
a) Lower volume, -Ps160.5, because of a drop in sales volume of silver, z inc, lead and sodium sulfate;
b) Lower prices –Ps158.9, primarily on silver, gold, zinc and lead;
c) Effect of restating figures in constant pesos of the current quarter and others, -Ps22.5;
d) Change in the results of derivatives trading (futures and options) in metals and the exchange rate, +Ps25.3); and
e) A higher average exchange rate, +Ps119.8 (Ps11.3772 per dollar, vs. Ps10.9923 in 2Q03).

The Cost of goods sold dropped slightly by –Ps6.5, mainly because of a drop in the cost of metal purchased form outside parties, in turn caused by reduced metal quotations in comparison to the preceding quarter.

The (-Ps196.8) drop in sales drove the gross margin down from 28.6% to 25.1%, in proportion to sales, and gross earnings were –Ps190.3 lower, at Ps973.3.

Operating expenses excluding depreciation totaled Ps373.8, rising +Ps40.3 due to
a) An increase of +Ps25.1 in exploration expenses, primarily in reserves location studies at La Ciénega and Fresnillo, at Minera Pecobre due to regional exploration in northern Mexico and in South America; and
b) An increase of +Ps15.2 in administrative and general expenses, relating to higher professional fees (metal studies) and increased travel, communication and computer expenses, in connection with the installation of new software and training courses.

The drop in gross income (-Ps190.3), and the increase in operating expenses (+Ps40.3), reduced EBITDA from Ps830.0 to Ps599.5, a reduction of-Ps230.5, and the EBITDA margin narrowed from 20.4 to 15.5 percent of sales.

In the second quarter of 2004, total financing cost was Ps159.8, higher than the charge of Ps5.2 reported in the prior quarter.The +154.6 change is attributed to:

a) Lower interest expense (-Ps9.5);
b) A higher foreign-exchange loss of Ps109.8, due to the peso’s depreciation against the dollar, compared to an appreciation in the previous quarter (Ps0.2576 vs. –Ps0.2863 per dollar); and
c) Lower monetary position gains, -Ps54.3, due to a decline in inflation (0.03% vs. 1.57%).

A charge of Ps30.0 is presented on the “other expenses (proceeds)” line, compared to a gain Ps19.1 in the preceding quarter. The 2Q04 charge stems from a contribution to the environmental emergency trust and recognition of a change in the book value of some properties, plant and equipment.In the first quarter of the year,the proceeds were the result of the Minera Metalline stock sale (a company with which Peñoles had an agreement for exploration of a zinc deposit in Coahuila), recovery of excess property tax paid, and penalties fees received from the operators of the new thermoelectric plant due to the delayed startup.

The income tax and profit-sharing provisions (net) line contains a charge of Ps60.3 compare to Ps199.3 in the first quarter. The decline (-Ps139.0) was the result of lower pre-tax earnings caused by a drop in gross income and higher total financing costs.

Equity in the results of associates was a loss of Ps14.0, chiefly due to lower earnings among the companies in which Peñoles owns a minority stake.

The Minority Interest line shows a slight profit of Ps0.4, compared to Ps26.7 in the first quarter of the year. The decline was mainly the result of weaker results by the water business (ASIM and Azurix).

5.- PROJECTS

*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.As of April 30, 2004, this plant formally started up commercial operations, at is presently operating at 100% of its nameplate capacity.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. This project is slated for startup in the third quarter of 2004. Investment will total US$3.1mn at the conclusion of the project.

*Sabinas (zinc/Zacatecas): a 21.0% expansion of milling capacity, from 950,000 to 1,150,000 metric tons of ore per year. This expansion will allow the plant to turn out 32,000 metric tons of zinc a year, along with 4.3 million ounces of silver.The investment is estimated at US$3.7mn; construction should be complete by the fourth quarter of 2004.

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%.

La Herradura (gold/Sonora): in the fourth quarter of 2003, we began an additional expansion of capacity for the leaching yards, at an investment of US$2.5mnThis project is expected to start up operations in the fourth quarter of 2004.

*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$14.4mn 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$3.7mn and construction is expected to conclude in the third quarter of 2004.

Fresnillo (silver/Zacatecas): expansion of milling capacity from 4,500 to 7,000 metric tons of ore per day, with an investment of US$22.8mn. This expansion is expected to be complete by fourth quarter of 2004, and it will raise annual production from 32.0 to 43.7 million ounces of silver.

La Herradura (gold/Sonora): in the fourth quarter of 2003 an additional capacity expansion was begun at the leaching yards, which will require an investment of US$2.5mn by the time the project starts up in the fourth quarter of 2004.

Milpillas (copper mine/Sonora): work continued on deepening the access ramp (to date it has reached a depth of 3,513 meters) and deepening the extraction shaft (we have advanced 530 out of a total of 600 meters), as well as preparing the mine and detail engineering. The total investment in this project is estimated at US$203.0 million, and it is expected to begin operations in the fourth quarter of 2005, with a production capacity of 55,600 metric tons a year of cathode copper. To date, we have invested US$63.0mn, and it is 30% complete.

6.- SOCIAL AND ENVIRONMENTAL COMMITMENTS.

In 1999, a public trust was set up for a term of five years to serve the population exposed to lead in the city of Torreon, Coahuila. This trust expires at the end of the first quarter of 2004, and for this reason, Peñoles established a private trust fund of Ps12.0mn for the same population, to guarantee health care for a reduced number of children who still show high levels of lead in their blood (more than 10 micrograms per deciliter).

The Met-Mex metallurgical complex increased in the ventilation capacity for the lead foundry by 370,000 cubic meters per hour by acquiring a new sack house. This represents an 8.8% rise in the existing ventilation capacity of the complex.

As part of its SustainableForest project, Peñoles has completed a forest inventory of the 173 hectares around the La Ciénega mine reserved for this project.It has also produced 15,000 pine saplings and 250 apple trees in local greenhouses, and has provided fire prevention training to personnel at the mine and neighboring community land owners.The program also includes the delivery of the first three furnaces for producing coal from Encino trees.

All of Peñoles’ mining units and corporate offices held commemorative events to celebrate World Environment day on June 5. The celebrations included allegorical parades with community and local government participation, fishing tournaments in which the catch was subsequently released to populate new bodies of water, conferences on sustainable development, environmental education workshops, and a national ratio program highlighting Peñoles’ ongoing environmental programs (the Zone Verde program, hosted by Dr. LuisManuel Guerra, on Saturday, June 5, from 11 to 12:00 noon, broadcast from Fresnillo, Zacatecas).