(All figures in millions of constant pesos)

• Average prices on metals between January and June 2006 were higher than in the first half of 2005: zinc +113.7%, silver +54.9%, gold +38.3% and lead +19.2%.
• The volume of metal content and refined metals produced were both higher than in the first half of 2005, as was the volume of refined metal sold.Production of refined gold reached 777,760 ounces and refined silver reached 49.7 million ounces, a record for a half-year period. In addition, quarterly production levels--427,960 ounces of refined gold and 25.4 million ounces of refined silver--were quarterly records as well .
• In the first half of the year, operating income was +145.0% higher than in the same half of last year, net income rose +137.4%, EBITDA +100.4% and Gross income +75.4%. All of these mark records in the company's history.
• Similarly, in the second quarter of 2006, operating income was Ps1,899.9, +233.0% higher than in the same quarter of 2005, while net income of Ps963.2 was +202.4% higher, EBITDA was Ps2,216.9, up +154.5%, and gross income was Ps2,797.7, rising +113.6%,

1.- EXECUTIVE SUMMARY

In the first half of 2006, billed sales (not including metals and exchange-rate hedging results) totaled Ps18,054.9, rising +78.5% over the same period of the previous year. In dollar terms, this is equivalent to US$1,653.3 million, the highest in any six-month period in the company's history.

In addition, gross income totaled Ps4,756.2, an increase of +75.5%, EBITDA was Ps3,717.6, up +100.4% andoperating income came to Ps3,112.4, an increase of 145.0%.Net income was Ps2,102.2, comparing favorably (+137.4%) against the Ps885.3 reported in the same period of 2005. In dollar terms, gross income was US$436.5 million,EBITDA US$341.2 million and operating income US$285.5 million, all of them half-year records.

These positive results were due to:

(i) Higher average quotations on the metals the company mines, processes and sells, as follows: zinc +113.7%, silver +54.9%, gold +38.3% and lead +19.2%;
(ii) Higher metal content produced in the mining business, particularly at Fresnillo and Ciénega ;
(iii) Higher volume processed and sold in the metals business (production of gold and silver reached a quarterly record);
(iv) A higher volume of magnesium sulfate and ammonium sulfate produced and sold in the Industrial Chemicals Division;
(v) Higher revenues from third-party treatment fees (+Ps477.8);
(vi) A lower average unit cost on electricity (-2.7%);
(vii) Higher extraordinary revenues due to the sale of the Pinos Altos gold project (Ps948.1); while in 2005, the company reported revenues on the sale of the Mezcala gold project (Ps565.9); and
(viii) Lower minority interest, because in 2005, Newmont Gold (EUA) took 44% of the proceeds from the Mezcala sale.

The positive factors listed above offset the adverse effects of the following:

(a) The peso's strength against the dollar--in the first half of 2006, the averageexchange rate was Ps10.87 vs. Ps11.08 in the same period of 2005;
(b) Higher average unit costs of natural gas (+12.6%) and metallurgical coke (+3.6%);
(c) The peso's devaluation against the dollar toward the end of the period translated into net foreign-exchange losses of Ps127.7, compared to a net foreign-exchange gain of Ps57.4 in the same period of 2005 (a change of Ps185.51); and
(d) Higher income tax and employee profit-sharing provisions (+Ps736.9) because of better results and extraordinary earnings on the sale of Pinos Altos.

Another negative aspect in this period was the expiration of hedge contracts (futures and options), which brought a loss of Ps964.5, mainly because of a sharp rise in metals quotations.These hedges were taken out in earlier years to protect the company's profit margins in the event of volatility.In any case, because a greater proportion of the company's sales were not hedged, the rise in metals prices meant higher revenues on the unhedged portion.

Owing to higher personnel costs, increased fuel costs (natural gas, diesel and metallurgic coke), a rise in some raw materials costs like ammonia, and greater operating costs (steel, explosives and reactives), production costs rose +13.5%. Also, because of an increase in purchases of metal from third parties at the Met-Mex metallurgical complex in order to maximize capacity utilization, and higher prices on metals in general, the cost of goods sold rose +67.1%. However, higher metals prices also meant an increase in third-party treatment fees because of its impact on the price scale, and this offset some of the effects of those cost increases.

The following table sums up the above information:

(*) Includes the results of metals and exchange-rate hedging.

The results were favored by strong operating performance in the group's various businesses, as follows:

In the mining business, production of metallic content was higher than in the same period of last year:
(i) Gold +9,324 ounces (+5.1%) thanks to a capacity expansion at LaCiénega that started up in March 2005;
(ii) Silver +2.2 million ounces (+9.6%) primarily at Fresnillo, due to higher volume of milling resulting from a stabilization of the capacity expansion that went on line at the end of 20004, and higher grade; and
(iii) Lead +3,306 metric tons (+11.0%) due to higher milling and grade at Naica and Fresnillo.

The metals business produced more refined metals than in the same six months of 2005, as follows:
(i) Gold +269,005 ounces (+52.9%) due to higher entries of content-rich materials at the lead-silver refinery, and a reduction in inventories;
(ii) Silver +6.2 million ounces (+14.2%) due to higher entries of content-rich materials at the lead-silver refinery;
(iii) Lead +3,258 metric tons (+4.6%) due to higher entries of content-rich materials at the lead-silver refinery; and
(iv) Zinc +8,587 metric tons (+8.1%) due to operating continuity.

In the second quarter of 2006, Industrias Peñoles concluded the process of renegotiating and funding a new private placement of US$377.0 million among institutional investors in the United States. The proceeds of the placement were used to restructure part of the long-term debt called "Structured Silver Payable Notes", maturing in 2012, as well as to finance future growth projects for the company.Accordingly, at the close of this quarter Peñoles' total debt amounted to US$728.3 million, most of it long-term, as detailed below:

(i) US$155.0 million to build theMilpillas copper project, at an interest rate pegged to the Libor with add-on rate of between 92.5 and 175 basis points during the life of the credit (payments begin in 2006 and end in 2014).
(ii) A new placement of US$377.0 million composed of:
---a) US$266.0 million at a rate of 6.55%, with principal payments beginning in 2014 and ending in 2018 2018;
---b) US$76.0 million at a rate of 8.39% through June 2009 and 6.55% in subsequent quarters, with principal payments from 2014 to 2018;
---c) US$35.0 million at a rate of 6.65%, with principal payments from 2015 through 2021.
(iii) US$116.9 million at a rate of 8.39% originally placed in 1997, with principal payments beginning in 2006 and ending in 2012.

In the first half of 2006, the cash flow from net results totaled Ps1,619.7, compared to Ps1,341.6 in the same period of the previous year. Among the main uses of cash were:
(i) A Ps1,965.2 increase in working capital, specifically (i) an increase in client accounts receivable due to higher prices on all metals (accounts receivable turnover dropped by 3 days compared to December 2005); and (ii) increased inventories, primarily because of the entry materials rich in precious metal content, and an increase in zinc concentrates.
(ii) Investment of Ps1,446.8 in property, plants and equipment, specifically the conclusion of the Milpillas project and the replacement of equipment and projects at Mex-Mex, Fresnillo and Penmont.
(iii) Payment ofa Ps860.9 dividend to shareholders ofIndustrias Peñoles and minority shareholders.

Construction of the Milpillas copper project in Sonora is now complete.In the second quarter, load testing was performed on equipment and processes, and the first commercial production is expected by late July 2006.This mine will turn out 55,000 metric tons of fine copper per year, on average, in the form of cathodes.Total direct investment in the project was US$217.8 million.

The results of this latest quarter were substantially higher than in the second quarter of 2005.Sales--excluding the results of metals and foreign-exchange hedges--totaledPs10,895.8, an increase of +116.9%,Gross income was Ps2,797.7, up +113.6%,EBITDA was Ps2,216.9, up +154.6%,operating income was Ps1,899.9, up +232.9% and net income was Ps963.2, an increase of +202.4%. These results can be attributed primarily to higher metal prices, higher volumes of metallic content produced in the mining business, and an increase in refined metals produced and sold by the metals business.

Comparing the results of the second quarter of 2006 against those of the first quarter of this year, sales--not including the results of metals and exchange-rate hedging--were up by +52.2%, gross income by +42.8%,EBITDA by +47.7% andoperating income by +56.7%. These results were influenced by a higher average exchange rate, higher metals quotations (except for lead), higher metal content of silver produced in the mining business, and increase in the amount of refined metal produced in the metals business, and a higher sales volume of refined metals.

For net income, the reduction of -15.4% was the result of an extraordinary revenue in the first quarter, from the sale of the Pinos Altos project, as well as increase in net foreign-exchange losses caused by the peso's devaluation against the dollar at the close of the period.

2.- ECONOMIC ENVIRONMENT AND METALS PRICES

Highlights of the quarter:

Gold:average quotations rose +13.3% from the first to the second quarter of the year.Gold reached a 24-year high because of the euro's strength against the dollar, geopolitical tension over Iran, interest among metals funds, a rise in some commodities prices, and the possibility that the Chinese central bank would diversifypart of its gold reserves.

Silver: average quotations were +26.0% higher than in the preceding quarter, reaching a 22-year peak thanks to the launch of the silver ETF (Exchange Traded Fund) in April, the euro's strength against the dollar, and its correlation with gold prices.

Lead:average prices in the quarter were down -11.4% against the first quarter, dragged down by inventory movements in some LME vaults.

Zinc: average quotations rose +46.8% over the immediately preceding quarter, benefiting from strikes that stopped production at the La Caridad and San Martin mines, Grupo Mexico's shutdown of a zinc plant, a steep drop in inventories in recent months, the influence of copper prices, interest among metals funds, and expectations of higher demand for industrial metals in China

3.- OPERATING RESULTS: PRODUCTION VOLUME

Mining Division (metal content in concentrates and other materials):
* Change 2Q06 vs. 2Q05 YTD:
- Lead (+11.0%): Due to higher grades and ore milled at Fresnillo and Naica, as well as higher recovery at Tizapa.
- Silver (+9.6%): Due to a higher volume of ore milled and grade at Fresnillo and Naica and a higher volume of ore milled at Ciénega.
- Gold (+5.1%): Due to a higher volume of ore milled at Ciénega due to the expansion concluded in March 2005 and higher grade and recovery and a greater amount of ore milled at Fresnillo.

* Change 2Q06 vs. 2Q05:
- Lead (+9.1%): Due to a higher volume of ore milled, grade and recovery at Fresnillo and Naica.
- Gold (+6.6%): Due to a higher volume of ore milled and recovery at Ciénega.
- Silver (+6.4%): Due to a higher volume of ore milled, recovery and grade at Fresnillo, Naica and Tizapa.

* Change 2Q06 vs. 1Q06:
- Silver (+5.1%): Due to a higher volume of ore milled and grade at Fresnillo and due to a higher volume of ore milled and recovery at Tizapa.

Metals division (production of refined metal):
* Change 2Q06 vs. 2Q05 YTD:
- Gold (+52.9%): higher entries of semi-processed materials from third parties at the lead-silver refinery, and a reduction in inventories in process.
- Silver (+14.2%): higher direct entries of content-rich concentrates at both the foundry and the refinery.
- Zinc (+8.1%): Due to operating continuities and the comparison against a year-earlier period in which there were problems with electrical energy supply.
- Lead (+4.6%): higher content in the concentrates delivered to the foundry plant.
- Magnesium sulfate (+55.2%): higher production via reaction, and a better position in the domestic market.
- Ammonium sulfate (+6.5%): reduction of acid inventories and greater amount of solution received.

* Change 2Q06 vs. 2Q05:
- Gold (+67.1%): higher entries of semi-processed materials from third parties at the lead-silver refinery.
- Silver (+17.9%): higher receipts of content in concentrates from third parties at the lead foundry and the lead-silver refinery.
- Lead (+9.3%): higher receipt of content in concentrates from third parties at the lead foundry and the lead-silver refinery.
- Zinc (+31.9): Due to operating continuities and the comparison against a year-earlier period in which there were problems with electrical energy supply.
- Magnesium sulfate (+22.1%): a better position in the domestic market.
- Ammonium sulfate (+2.4%): due to a reduction in acid inventories.

* Change 2Q06 vs. 1Q06:

- Gold (+22.3%): higher entries of content from third parties to the lead-silver refinery.
- Silver: (+4.6%): higher entry of content in concentrates received by the lead foundry.
- Zinc (+15.3%): higher entries of content in concentrates from the group's own mines to the zinc refinery.
- Magnesium oxide (+41.8%): higher production due to an adjustment to the sale program, product availability and higher shipments to clients.
- Magnesium sulfate (+28.0%): due to higher production via reaction and an increase in production to meet demand for the product

.

4.- FINANCIAL RESULTS.

A) Comparison of results, 2Q06 YTD vs. 2Q05 YTD:

(*) Includes revenues from metals and exchange-rate hedging.

The following were the principal changes in the period:

Higher net sales, +Ps7,000.1 (+69.3%), a rise from Ps10,090.2 to Ps17,090.3. The increase breaks down as follows:
a) Higher sales volume, +Ps2,754.6 due to higher sales of gold, silver, lead, zinc and magnesium sulfate, and more concentrates sold to third parties by the Mining Division;
b) Higher prices +Ps4,851.0 on almost all of the products sold;
c) Higher losses from metals and exchange-rate hedging -Ps940.5;
d) Lower average exchange rate -Ps166.0 (Ps10.8732 vs Ps11.0822 per dollar); and
e) Effects of restatement of last year's figures in constant pesos of June 30, 2006 and other concepts, +Ps501.0.

In dollar terms, net sales were equivalent to US$1,565.7 million, breaking down into US$1,653.3 million in bill sales and hedging losses of US$87.6 million.

The cost of goods sold rose by +Ps4,954.4 (+67.1%) because of:
a) Higher production costs +Ps434.8 (+13.5%) caused by an increased cost of operating materials for the mining division, fuel (higher unit costs on coke and diesel), increased consumption and unit costs of natural gas and higher consumption of electrical energy), preventive maintenance to extend the useful life of equipment, and a rise in personnel costs;
b) Higher metals costs--net of treatment fees-- +Ps4,309.7 primarily due to higher prices and a greater volume of metal purchased from third parties, which offset the impact of a lower exchange rate, and
c) Inventory movements, consolidation and restatement effects, +Ps209.9.

Because of the rise in net sales (+Ps7,000.1) and the less pronounced increase in the cost of goods sold (+Ps4,954.4),gross income rose to Ps4,756.2, higher by +Ps2,045.8 (+75.5%), so the gross margin (as a percentage of sales) was 27.8 percent.

Operating expenses –excluding depreciation- totaled Ps1,038.7, a increase of +Ps183.1 (+21.4%) resulting from:
a) Higher Prospecting expenses +Ps37.1 primarily due to increased activity at the Fresnillo,Herradura, Sabinas, Tizapa and Francisco I. Madero mining zones, and an increase in regional prospecting in Mexico; and
b) Higher SG&A expenses +Ps146.0.

Because the increase in gross income (+Ps2,045.8) was greater than the rise in operating expenses (+Ps183.1),EBITDA rose to Ps3,717.6. an increase of +Ps1,862.7 (+100.4%), and theEBITDA margin (as a percentage of sales) was 21.8 percent .

Total financing cost was Ps256.9, higher than the Ps195.7 reported in 2005; the change breaks down as follows:
a) Net foreign-exchange losses of Ps127.7, compared to a gain of Ps57.4 in the year-earlier period. In 2006, the peso depreciated 6.41% against the dollar, compared to an appreciation of 3.75% in 2005;
b) Lower Net monetary position losses +Ps20.0; and
c) Lower Net interest expenses -Ps9.4.

The other expenses (revenues) line showed a net benefit of Ps849.3 compared to Ps458.0in the preceding year.The 2006 gain was due primarily to the sale of the Pinos Altos project to Agnico Eagle, while the 2005 income was generated by the sale of the Mezcala gold project in Guerrero to Goldcorp-WheatonRiver.

Income tax and profit-sharing (net) totaled Ps1,329.5, an increase of +Ps736.9 from the same period of last year.The change was due to pretax income of Ps3,704.7 in 2006, compared to a profit of Ps1,667.1 in 2005.

Equity in the earnings of associate companies declined in this period, primarily because of the recognition of losses in the companies in which Peñoles owns a minority stake, totaling Ps157.5, compared to a profit of Ps26.4 in the first half of 2005.

The minority interest line shows a gain of Ps115.5 in 2006, compared to a Ps215.6 profit in 2005.The drop on this line was due mainly to weaker operating results from the mining company El Bermejal, offset in part by better results from Tizapa and Penmont.


B) Comparison of results for 2Q06 vs. 2Q05:

(*) Includes revenues from metals and exchange-rate hedging.

The following were the principal changes in the period:

Net sales came to Ps10,180.4, rising +Ps5,167.8 (+103.1%) for the following reasons:
a) Higher volume, +Ps2,320.2 primarily of gold, silver, zinc and concentrates, sold by the mining division to third parties;
b) Higher prices +Ps2,993.7 on most of the products sold;
c) Higher average exchange rate (Ps11.1626 vs Ps10.9823 per dollar) +Ps71.2;
d) Higher metals and FX-hedging losses, -Ps706.9; and
e) Effects of restatement in constant pesos of the current quarter and others+Ps489.6.

In dollar terms, net sales were equivalent to US$912.8 million, breaking down into billed sales of (US$976.9 million and hedging losses of US$64.1 million.

The cost of goods sold increased +Ps3,679.5 due to:
a) Higher Production costs +Ps284.3 (+17.3%) resulting from an increase in the cost of operating material, gas and electrical energy, contractors working on developments in the mining business, preventive maintenance of equipment inside the mines, and personnel costs relating to hirings at Milpillas.
b) Higher metals costs--net of treatment fees-- +Ps3,320.0 due to higher prices, a greater volume of metal purchased from third parties, and a rise in the exchange rate; and
c) Inventory movements, consolidation and restatement effects, +Ps75.2.

Because the increase in net sales (+Ps5,167.8) was greater than the rise in the cost of goods sold (+Ps3,679.5),gross income advanced +Ps1,488.3 and thegross margin (as a percentage of sales) rose to 27.5 percent.

Operating expenses-–excluding depreciation--totaled Ps580.7, higher by +Ps142.0 because of:
a) Higher Prospecting expenses +Ps35.8 primarily at the Fresnillo andHerradura mines;
b) Higher SG&A expenses +Ps106.2.

Because of the rise in Gross income (+Ps1,488.3), some of which was taken up by the rise in operating expenses (+Ps142.0),EBITDA rose to Ps2,216.9, an increase of +Ps1,346.3 (+154.6%), and the EBITDA margin was 21.8 percent.

Due to the increase in EBITDA (+Ps1,346.3), offset partially by a rise in depreciation (+Ps16.9), operating income grew by +Ps1,329.3, to 18.7% of sales.

Total financing cost for this period was Ps227.1, comparing poorly against the 2Q05 cost of Ps14.1.The +Ps213.0 rise in financing costs was the result of:
a) Net monetary losses of +Ps15.6 primarily because of a lower inflation index, compared to a net benefit from monetary position effect in 2005, +Ps5.7;
b) Net foreign-exchange losses of Ps119.6, compared to a 2005 gain of Ps53.0, meaning a deterioration of -Ps172.6; and
c) Higher Net interest expenses +Ps19.1.

The other expenses (revenues) line showed an expenses of Ps19.9, down from Ps70.6 in the second quarter of last year.

Income tax and profit-sharing (net) totaled Ps615.9, an increase of +Ps431.6 over the same period of last year, because 2Q06 earnings were Ps1,652.9 compared to Ps486.0 in 2Q05.

Losses from equity in the earnings of associate companies were Ps4.1, a deterioration of -Ps36.0 from the profit reported one year earlier, due primarily to the entry of lower results from companies in which Peñoles owns a minority stake.

Minority interest was a benefit of Ps69.7, compared to the 2Q05 gain of Ps15.1.


C) Comparison of results 2Q06 vs. 1Q06:

(*) Includes revenues from metals and exchange-rate hedging.

Net sales came to Ps10,180.4, rising +Ps3,270.4 (+47.3%), influenced by the following:
a) Higher sales volume of gold, silver, zinc, magnesium oxide and ammonium sulfate, Ps1,313.2;
b) Higher prices +Ps1,532.8 on most of the products sold;
c) Higher average exchange rate +Ps356.5 (Ps11.1626 vs. Ps10.5839 per dollar);
d) Higher losses from futures and options trading (hedges) in metals and the exchange rate, -Ps466.2;
e) Effects of restating figures in constant pesos of the current quarter, +Ps534.1.

The cost of goods sold rose by +Ps2,431.3, the result of an increase in both the cost and volume of metals purchased (+Ps2,489.7), an increase in shipping and contractor costs, operating materials and personnel costs; offset in part by a lower cost of raw materials and increased revenues from concentrate treatment fees, un turn the result of a higher price scale and greater entries from third parties.

The rise in net sales(+Ps3,270.4) was greater than the growth in the cost of goods sold (+Ps2,431.3), so gross income increased +Ps839.1 and the gross margin (as a percentage of sales) came to 27.5 percent.

Operating expenses –excluding depreciation- totaled Ps580.7, an increase of +Ps122.8 due to:
a) Higher prospecting expenses +Ps53.5, primarily the result of increased prospecting activities at Fresnillo,Herradura, Sabinas and Tizapa.
b) Higher SG&A expenses, +Ps69.3.

Because of the rise in gross income (+Ps839.1); offset in part by an increase in operating expenses (+Ps122.8),EBITDA went from Ps1,500.6 to Ps2,216.9, an increase of +Ps716.3, andthe EBITDA margin (as a percentage of sales) was 21.8 percent.

Total financing cost in the quarter was Ps227.1, compared to a cost of Ps29.7in the previous quarter.The change of +Ps197.4 breaks down as follows:
a) Higher Net interest expenses due to +Ps36.6;
b) A rise of +Ps111.6 net foreign-exchange losses-- Ps119.6 in the second quarter, compared to Ps8.0 in the first; and
c) Net monetary position losses of Ps15.6, compared to a benefit of Ps33.5in the quarter immediately preceding it.

Other expenses (revenues) were an expenses of Ps19.9, compared to a revenue of Ps869.2 in the previous quarter, because of the sale of the Pinos Altos project to Agnico Eagle.

The income tax and profit-sharing provision line contained a charge of Ps615.9 compared to Ps713.6in the previous quarter.The decline in this charge in the second quarter (-Ps97.7) was the result of a drop in pretax income: Ps1,652.9 in 2Q06 vs. Ps2,051.9 in 1Q06.

Equity in the earnings of associate companies was a loss of Ps4.1, due to the recognition of results from companies in which Peñoles owns a minority stake.

Minority interest resulted in a profit of Ps69.7 compared to Ps45.9 in the first quarter, fueled by better results from Tizapa and Penmont.

5.- PROJECTS

Construction of the Milpillas copper project in Sonora has been completed.In the second quarter, load testing was performed on equipment and processes, and the first commercial production is expected to come out in late July 2006.This mine will produce 55,000 metric tons of fine copper per year in the form of cathodes. Direct investment in this project totaled US$217.8 million.