2010-03-01

INDUSTRIAS PEÑOLES S.A.B DE C.V.
REPORT OF RESULTS FOR FOURTH QUARTER 2009.

Full Report 4Q09 (Spanish)

México D.F., March 1^st, 2010 – Industrias Peñoles S.A.B de C.V. (“Peñoles” or the “Company”) (BMV ticker symbol: PE&OLES), a mining group with integrated operations in the smelting and refining of non-ferrous metals and the production of chemicals, reports its consolidated results for the fourth quarter of 2009 (4Q09).

§ On the last quarter, prices of all metals that Industrias Peñoles, S.A.B. de C.V. produces and sells were significantly higher compared to 3Q09, touching their highest levels of the year: zinc +25.7%, silver +19.1%, lead +18.9%, gold +14.7 % and copper +13.5%.

§ The rally on prices, along with the continuing normal operations of all divisions of the Company, boosted the quarter results to record levels: Gross Profit ($5,772.0 millon), EBITDA ($4,885.5), Operating Profit ($4,264.7).

§ Strong results of 4Q09 considerably favored the annual results of the Company. As a result of the foregoing, Gross Profit, EBITDA and Operating Profit of 2009 reached record highs and had increases of +13.5%, +16.7% y +13.3%, respectively.  Additionally, excluding the extraordinary gain of 2008 Fresnillo’s IPO, $4,876.1 million net of tax, Net Income for 2009 also yielded a record of $5,198.3.   

EXECUTIVE SUMMARY

Lower prices for the majority of the metals produced and sold by the Company and lower sales volumes for refined silver, gold and lead had a negative impact on Peñoles’s net sales. Nevertheless, the strategic decision to reduce purchases of direct materials for the Lead-Silver Refinery, combined with lower unit costs for certain key operating supplies, strict control of costs and expenses, and an ongoing focus on increasing productivity through continuous improvements to the operation, allowed Industrias Peñoles to register record levels of Gross Profit, EBITDA and Operating Profit of $13,857.6, $10,437.8 and $8,090.2, respectively. In addition, excluding the extraordinary gain of $4,876.1 (net of income taxes) recorded in 2008 results on the sale of shares of the Fresnillo plc subsidiary, Net Income of the holding company in 2009 is a record $5,198.3.

These results reflect Peñoles’s efforts and ability to manage and make the most out of adverse external factors to overcome the 65-day strike at the Lead-Silver Refinery, which took place during February and March 2009, along with the lower metal prices for most of the metals the Company produces and sells.

I. FINANCIAL RESULTS

This section provides a review of the consolidated financial performance of Industrias Peñoles, S.A.B. de C.V. and its Subsidiaries (“Peñoles”) and it is done based on the company’s reporting currency. Mexican FRS B-15, “Foreign Currency Translation,” went into effect in 2008 and requires entities to specify their currency of record, their functional currency and their reporting currency. In the case of Peñoles, the Mexican peso was defined as both the recording and reporting currency, and the U.S. dollar as the functional currency. Performance for 2009 is compared to 2008 in millions of pesos (reporting currency), unless otherwise indicated.

FINANCIAL HIGHLIGHTS
	3Q09	2Q09	% Change
Gross Sales	46,260.2	54,361.3	-14.9
Net Sales (*)	44,813.0	53,030.8	-15.5
Gross Profit	13,857.6	12,212.4	13.5
EBITDA	10,437.8	8,944.2	16.7
Operating Income	8,090.2	7,143.4	13.3
Integral cost of financing	97.5	1,313.8	-92.6
Net Income	5,198.3	6,764.3	-23.2

(*) Including results of metals and exchange rate hedging.

INCOME STATEMENT:

Net sales totaled $44,813.0, of which 74.2% were exports. The decrease of ‑$8,217.8 (-15.5%) is explained as follows:

§ Lower sales volume, -$14,563.1, mainly of gold, silver and lead due to the 65-day strike at the Lead-Silver Refinery and to the decision to reduce purchases of direct materials from third parties which are processed at the Lead-Silver Refinery to produce and sell refined metal;

§ Lower prices, -$558.8, of all metals except gold;

§ Higher average exchange rate, +$7,797.2 ($13.5157 vs. $11.1362 per dollar in 2008); and

§ Other products and services, -$776.4.

These factors were followed by:

§ A larger opportunity cost on hedging transactions, metals and exchange rates forwards and options, of +$116.7.

In U.S. dollar terms, sales showed a decrease of -30.9% to USD$3,340.9 million; this figure is comprised of invoiced sales equivalent to USD$3,448.6 million and hedging losses of USD$107.7 million.

The cost of sales decreased -$9,863.0 (-24.2%) to $30,955.3 due to:

§ Production cost remained stable and increased by only +2.4% (+$243.9), due to the reduction in unit costs of certain key inputs and a strict control of costs and expenses, which combined, partially offset certain factors such as the higher exchange rate and inflation recorded in the basket of inputs purchased by Peñoles. The following items had the greatest variations during the year:

§ Operating materials: Higher charge (+8.8%), mainly for such items as tires, steel balls and bars, hoses, cement and drill bits;

§ Higher labor expenses (+6.6%), due to increased wages, benefits and productivity bonuses; and

§ Maintenance:  Higher charge (+5.9%), for electric materials and mechanical pieces in both mining and metallurgical operations.

Partially offset by:

• Raw materials: Lower charge (-18.8%), mainly due to the lower cost of ammonia used in the chemical operations to produce ammonium sulfate and which offset higher production volumes and;

§ Lower energy costs (-1.0%), mainly due to lower prices for natural gas and pet-coke.

§ Lower cost of metal, -$10,832.7, due to the following factors: lower volume of metals purchased from third parties, particularly of direct materials for the Lead-Silver Refinery, and lower prices for all metals except gold;

§ Higher revenue from treatment charges, +$568.2, although base treatment charges for lead and zinc concentrates fell compared to the previous year, the base for the price escalator fell as well. This factor, added to higher zinc and lead prices in the second half of the year and greater recoveries achieved in the metallurgical complex, offset the reduction in base treatment charges and increased  revenues in the year, and

§ Consolidation effects, inventory movements and others, +$1,294.0.

Additionally in 2009 cost of sales includes an opportunity cost of –USD$17.8 million which resulted from natural gas hedging transactions.

Given the aforementioned factors, gross profit of $13,857.6 increased +$1,645.2 (+13.5%) as a result of the lower cost of sales, -$9,863.0, which largely offset the  -$8,217.8 decrease in sales; meanwhile, the gross profit margin as a percentage of sales rose from 23.0% in 2008 to 30.9% in 2009.

Operating expenses of $5,767.4 increased +$698.4 million (+13.8%) with respect to the previous year due to:

§ Higher employee profit sharing (+$14.9);

§ HigherMayores general and administrative expenses (+$265.2) mainly in labor costs, professional fees, communications and IT and;

§ Higher depreciation, amortization and depletion (+$546.9) as the result of investments in fixed assets;

Partially offset by:

§ Lower exploration and geological expenses (-$128.6). The resources invested in exploration were assigned mainly to Fresnillo plc’s mines and projects and the Tizapa, Milpillas, Sabinas and Francisco I. Madero mines along with the industrial metals projects Velardeña, Rey de Plata and Racaycocha.

As a result, EBITDA of $10,437.8 increased +$1,493.7 (+16.7%), due to the higher gross profit that was partially offset by the increase in operating expenses. The EBITDA margin as a percentage of sales of 23.3% in 2009 is +6.4 percentage points above the figure recorded in 2008. Similarly, Operating profit rose from $7,143.4 to $8,090.2, an increase of +13.3%.

The integral cost of financing of $97.5 compares favorably with $1,313.8 recorded in the previous year and includes:

§ Financial expense, net of $351.9 that compares unfavorably with $135.6 in 2008. This figure is derived from interest on bank loans partially offset by returns on investments as well as the recognition of the valuation of the interest rates derivative financial instruments trading position that was generated following the Company’s prepayment of debt in the third quarter of 2009 and which was equivalent to USD$150.0 million.

§ Exchange rate gain, net of $254.4 that compares favorably with the net exchange rate loss of $1,178.2 recorded in the previous year. Both figures result from the adoption of the U.S. dollar as the functional currency and the Mexican peso as the recording and reporting currency in accordance with the Mexican FRS B-15 and are generated from our assets in Sterling pounds and the net of assets and liabilities in Mexican pesos.

§ Other (income) expenses, net consists of:

(i) The write-down of assets recorded a charge of $16.2, mainly as the result of the valuation of fixed assets and other permanent investments. This is a non-cash item that does not have an impact on cash flow.

(ii) Other (income) expenses, net, an expense of $293.6 mainly from a loss in sale of concentrates and a loss in sale of fixed assets.

The equity interest in net income of associated companies was -$11.0 and compares unfavorably with the profit of $37.0 in 2008, and was derived from the results in the companies in which Peñoles has a non-controlling interest.

The provision for income taxes shows a charge of $706.7 compared to $5,075.6 in 2008. This variation is derived from a profit before taxes that was +$4,795.1 higher in 2008, mainly due to the profit on the sale of shares of the Fresnillo plc subsidiary recorded in that period. In addition in 2009, the Company recorded a fiscal stimulus because it returned funds to the country. These funds were applied and will continue to be applied to investments and the repayment of obligations in accordance with the decree and applicable regulations.

The non-controlling interest line shows a gain of $1,766.9 vs. $627.0 a year earlier. The greater gain in 2009 was due mainly to the interest of non-controlling shareholders in Fresnillo plc, a subsidiary that reported better results as a consequence of higher gold prices, higher production volumes and sales of sliver and gold contents, and the efficiency of its operations.

Controlling interest for the year totaled $5,198.3 compared to $6,764.3 the previous year. Excluding the extraordinary gain on the sale of shares of the Fresnillo plc subsidiary recorded in the previous year ($4,876.1 net of income taxes), this figure is +175.3% higher than the 2008 figure.

STATEMENT OF CASH FLOW:

At the end of December 2009, Peñoles had cash and short-term investments of $11,942.7 which represented a decrease of -$2,798.6 compared to year-end 2008.

The main concepts are described as follows:

1) Net cash flows from operating activities of +$8,744.0, including all concepts related directly to the operation, working capital, income taxes and employee profit sharing.

2) Net cash flows from investment activities of -$5,013.5, mainly composed of the following:

a) Acquisition of property, plant and equipment, of -$4,956.1, mainly for:

Company/Unit	Millions of Pesos	Main Application
Fresnillo plc	$3,356.9	Mining development works Sewage treatment plant Pumping stations Shaft deepening Portable power substations Concentration equipment Heavy mobile equipment
Met-Mex	$468.6	Machinery and equipment Environmental control equipment
Fuerza Eólica	$281.6	Wind turbines Civil and electrical development
Tizapa	$168.1	Expansion project: Reagent room Warehouse SAG Mill Flotation cells Synchronous electric motor Flotation cell tanks Conveyor belts
Milpillas	$154.6	Mine ventilation and backfill projects Emergency ponds Stacking conveyor for the leaching pads Centrifugal pump Excavator Ramp deepening
Sabinas	$97.2	Mining development works Crusher Electrical substation Heavy in-mine equipment Extraction ventilator
Naica	$94.8	Mining development works Intelligent systems for the milling, flotation and filtration areas Pump infrastructure Long-hole drilling equipment Heavy in-mine equipment
Velardeña	$87.3	Exploration Ramps, drifts and crosscuts In-mine equipment
Francisco I. Madero	$77.3	Mining development works Long-hole drilling equipment Equipment for optimization of electricity consumption Ventilator
Bismark	$49.5	Pumping station Heavy in-mine equipment Equipment for the beneficiation plant, slurry analyzer

3) Net cash flows from financing activities of -$6,529.0, composed mainly of:

a) Short-term and long-term loans of +$556.7 million consisting mainly of short-term loans to finance working capital.

b) Repayment of short and long-term loans of -$3,148.9.

Company Millions of Pesos

         Industrias Peñoles                      2,517.0                 

         Milpillas                                        278.8                      

         Bal Ondeo                                    353.1

c) Controlling interest dividends of -$3,443.2

d) Non-controlling interest dividends of -$288.2 paid to shareholders of Fresnillo plc.

II. PRICES AND MACROECONOMIC VARIABLES:

The main variables that had an important impact on the results of Peñoles were:

	2009	2008
Inflation rate (%)
Full year	3.57	6.53
Exchange rate (peso/US dollar)
Year-end	13.0587	13.5383
Average	13.5157	11.1362

	Gold	Silver	Lead	Zinc	Copper
	(US$/Oz)	(US$/Oz)	(US$cts/lb)	(Us$cts/lb)	(Us$cts/lb)
1Q’08	926.78	17.62	131.49	110.22	353.62
2Q’08	895.95	17.17	104.64	95.86	382.96
3Q’08	869.58	14.92	86.74	80.30	348.35
4Q’08	794.52	10.15	56.46	53.75	177.12
Average 2008	871.71	14.97	94.83	85.03	315.51
1Q’09	908.71	12.63	52.50	53.16	155.51
2Q’09	921.51	13.75	68.00	66.82	211.51
3Q'09	960.06	14.76	87.44	79.90	265.76
4Q'09	1,101.64	17.57	103.99	100.41	301.57
Average 2009	972.98	14.68	77.98	75.07	233.59
%Var.'09 vs '08	11.6	-2.0	-17.8	-11.7	-26.0

Gold: In 2009 this metal stood out positively, beyond recovering the ground it lost in the last quarter of 2008, gold reached new record highs, exceeding USD$1,225 per ounce.  The average annual price was 11.6% higher than in 2008.  This good performance was driven by several factors, within the main are the demand from investors due to risk aversion against other financial assets, the dollar weakness and economic instability worldwide. 

Silver: The price of silver, which had fallen significantly in the last quarter of 2008, recovered over the course of 2009 due to investor demand.  Nonetheless, the average price remained 2.0% lower than in 2008.

Lead: The slowdown in industrial activity, particularly in the automotive sector, had a negative impact on the price of lead.  Over the course of the year there was a slight recovery, particularly when inventories began to decline as a result of a rebound in demand from China, and when some mines and refineries were forced to suspend operations due to low prices or environmental issues.  Despite these factors, there was a 17.8% decline in the average price of lead in 2009 compared to the previous year.

Zinc: This metal was negatively impacted by the economic crisis, particularly the collapse of the construction and automotive industries.  It recovered some ground during the year due to demand from China and early signs of recovery in the US; however, the average price in 2009 was 11.7% lower than in 2008.

Copper: As with zinc and lead, copper recovered part of the ground lost in 2008 thanks to global demand, a weak dollar and an decrease in mining production.  However in 2009 the average copper price was 26.0% lower than in 2008.

III OPERATING RESULTS:

Here are the main factors that drove operating results in 4Q09:

MINING OPERATIONS:

PRODUCTION VOLUME
	2009	2008	%Var. '09vs '08
Milled Ore (M tons)	8,800	8,461	4.0
Ore Mined (*) (M tons)	17,303	15,013	15.3
Gold (Kg)	12,957	11,897	8.9
Silver (kg)	1,545,157	1,432,521	7.8
Lead (tons)	64,382	61,296	5.0
Zinc  (tons)	185,435	182,855	1.4
Copper (tons)	13,892	12,913	7.6
Copper Cathodes (tons)	20,345	14,307	42.2

 (*) Herradura (open pit mine) and Milpillas.

In 2009, production of metal contents significantly exceeded last year's levels. Gold production reached a new record (+8.9%) due to higher production at Herradura, at our subsidiary Fresnillo plc, and at Tizapa, where recoveries were better. The +7.8% rise in silver production reflected better ore grades as a result of exploration efforts and more selective mining. Similarly, the +5.0% increase in lead production reflected better ore grades and greater recoveries, while copper production reached a new record due to better operating continuity at Milpillas (+42-2%).  Zinc production remained stable.

A number of projects were undertaken in 2009 to enhance operational efficiency and reduce unit consumption, including:  improving recoveries at beneficiation plants, optimizing energy usage, streamlining development of new ore bodies, implementing long-hole mining systems, new or more efficient pumping stations inside mines and better ventilation systems. As a result, we successfully reduced cash costs at all our mines, and one of them, Tizapa, placed in the lowest quartile of cash costs among international mines of its type.

METALLURGICAL OPERATIONS:

PRODUCTION VOLUME
	2009	2008	%Var. '09vs '08
Gold (kg)	25,878	56,261	-54.0
Silver (kg)	2,364,469	3,678,474	-35.7
Lead (ton)	113,772	141,394	-19.5
Zinc  (ton)	236,698	225,230	+5.1

In the early months of 2009 there was a 65-day strike at the Lead-Silver Refinery that temporarily disrupted our production of refined gold, silver and lead.  Although the strike was related to factors outside the Company, it was favorably resolved for both parties. The impact on the Company’s results was material. We made some strategic adjustments to counter this challenge, with both immediate and long-term benefits.

Another strategic decision made during 2009 was to reduce purchases of rich materials from third parties, which we had previously purchased to maximize installed capacity at the Lead-Silver Refinery and to increase our production and sale of refined gold and silver. However, this business generated low margins and required significant financial resources. After the strike, contracts for the purchase of these materials were selectively and more favorably renegotiated.

These factors, and especially the strike that paralyzed operations at the Lead-Silver Refinery for 65 days, led to a decline in refined gold and silver production. While lead volume was also impacted by the strike, once the operation was stabilized average monthly production levels were similarly to those in the prior year.

The production of refined zinc in 2009 rose +5.1% over the previous year. This was due to higher volumes of zinc oxides treated, which are purchased from third parties and are not required to pass through the roasting phase, leading to an increase in zinc recoveries from 92.3% to 94.5%, and greater productivity from the implementation of a new maintenance management system that aims to achieve greater availability of equipment through the adoption of best practices.

CHEMICAL OPERATIONS:

PRODUCTION VOLUME
	2009	2008	%Var. '09vs '08
Sodium Sulfate (tons)	606,000	618,000	-1.9
Magnesium Oxide (tons)	72,588	85,554	-15.2
Ammonium Sulfate (tons)	225,593	199,918	12.8
Magnesium Sulfate (tons)	34,700	43,100	-19.5

A significant number of industries that rely on our range of chemical products, such as the steel, cement and fertilizer industries, were impacted by the economic downturn in 2009. As a result, demand for some of our products contracted considerably, which impacted product prices and therefore production and performance of our operations.

Production and sales volume of sodium sulfate product in 2009 remained at virtually the same record levels achieved last year (-1.9% and -3.5%, respectively), while gross margin of this product increased considerably, thanks to an +8.5% increase in the sales prices and a -52.2% decline in the unit cost of natural gas. Additionally, we reduced inventory of this product by more than 35.0%.

Production volumes and total sales of magnesium oxide decreased -15.2% and -9.2%. However, we achieved record production of 17,295 tons in the caustic grade, which, by being a vertically integrated company, Peñoles used to neutralize residues at the Zinc Refinery at our metallurgical complex. The decline in costs for energy sources such as coke and fuel oil offset the -11.8% decline in product prices, and the gross margin increased nine percentage points in the year.

Production volumes in 2009 regarding magnesium sulfate declined -19.5% to match the decrease in demand. Sales fell -8.1% from the year prior, among other reasons because of an unusual weather-related agricultural season in Mexico.  Prices for this product remained stable however, and due to the range of initiatives to reduce costs, gross margin increased six percentage points in the year.

IV PROJECTS

Even in this most challenging year, our commitment to exploration remained firm. We focused on replenishing reserves at operating mines, advancing work at existing prospects and evaluating new growth opportunities to ensure we have a portfolio of projects in various stages of development.

In 2009 Peñoles’s exploration group drilled 65,000 meters at three advanced projects in Mexico and South America. We also conducted geological and geophysical work at 13 properties in preparation for the drilling phase of exploration, and evaluated possible third-party acquisitions. Total investment in the year was USD$67.7 million including exploration activities at Fresnillo plc. The main base metal projects include:

Velardeña (zinc)

We drilled 33,000 meters to define the ore bodies and explore new potential areas. As a result, an additional 10 million tons were add to mineral resources, which now total 37 million tons. Of these, 78.0% are measured and indicated, representing 2.4 million tons of zinc in situ. We are currently conducting engineering studies for a pre-feasibility analysis of a possible new mining operation. At least four new adjacent areas with potential will be explored in 2010.

Rey de Plata (polymetallic)

We drilled 25,000 meters in this deposit of massive sulfide mantles to define new ore bodies, and initiated a second stage of closed loop drilling to quantify the mineral resources. Although current data is still preliminary and insufficient to estimate total contents, the indicated values of zinc, lead, copper, gold and silver together suggest attractive ore grades. In 2010 the detailed drilling stage will be completed, which will provide a mineral resource estimate that will determine subsequent stages of the project.

Racaycocha (copper, gold)

We drilled 7,000 meters in 2009 to quantify the copper and gold porphyry deposit, which has potential to become an open pit mining operation. Current results indicate mixed mineralization in sulfides hosted in breccias and disseminated across a vast area whose boundaries have not yet been explored. In 2010 exploration will continue in order to reach an estimate of mineral resources.

Other projects

We conducted geological and geophysical work at our Naica, Milpillas and Francisco I. Madero operating mines and identified areas for future exploration and generation of new mineral reserves. Further drilling campaigns have been budgeted in 2010 for Milpillas and Francisco I. Madero.

ABOUT INDUSTRIAS PEÑOLES S.A.B DE C.V.

Peñoles was founded in 1887. It is a mining group with integrated operations in smelting and refining non-ferrous metals, and producing chemicals. Peñoles is the world’s top producer of refined silver and metallic bismuth. It is among the leading Latin American producers of refined gold, lead and zinc and is one of the main sodium sulfate producers worldwide.

The shares of Peñoles have been listed on the Mexican Stock Exchange since 1968 under the ticker symbol PE&OLES.