AS GREAT AS OUR PEOPLE 2014 ANNUAL REPORT

Transcription

1 AS GREAT AS OUR PEOPLE 2014 ANNUAL REPORT

2 OUR CONFIDENCE IN THE FUTURE IS BASED ON THE GREATNESS OF OUR PEOPLE, IN THEIR ABILITY TO INNOVATE AND GIVE THE BEST OF THEMSELVES, ESPECIALLY IN THE FACE OF ADVERSITY. CONTENTS Business Model Financial Highlights COMPANY PROFILE Peñoles, founded in 1887, 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 the leader in metallic bismuth in the Americas; the leading Latin American producer of refined gold and lead, and among the main refined zinc and sodium sulfate producers worldwide. Peñoles shares have traded on the Mexican Stock Exchange since 1968 under the ticker PE&OLES. MISSION AND VISION The Company s mission is to add value to non-renewable natural resources in a sustainable manner. The Company s vision is to be the most recognized Mexican company in its sector worldwide, for its global focus, the quality of its processes, the excellence of its people and the ethical leading of its business. Peñoles seeks to: Provide our shareholders with the best long-term investment option, with growth and profitability. Form strategic partnerships with our clients, offering integral solutions and inspiring trust to conduct business over the long term. Become a strategic link in the value chain, establishing long-term and mutually beneficial relations with suppliers. Create a workplace that engenders pride and dignity, because it offers opportunities for development, respect and recognition to our employees, in a safe environment and teamwork. Be a socially responsible company, respectful of the natural environment while promoting self-development in the communities where we operate. Our conduct is guided by the values of Confidence, Responsibility, Integrity and Loyalty (CRIL). Letter to Shareholders Letter to the Board of Directors Review of Operations Exploration Mining Metals Chemicals Energy and Technology Our People Corporate Governance Management 71 Peñoles is part of Grupo BAL, a privately held diversified group of independent Mexican companies that includes: Grupo Palacio de Hierro (department stores); Grupo Nacional Provincial (insurance); Profuturo GNP (individual retirement funds); Valores Mexicanos Casa de Bolsa (financial services); Crédito Afianzador (bonding); Instituto Tecnológico Autónomo de México (education); and agribusinesses. Board of Directors Management Discussion and Analysis Report of the Audit and Corporate Governance Committee Shareholder Information Consolidated Financial Statements and Notes

3 01 CORPORATE STRUCTURE Industrias Peñoles, S.A.B. de C.V. Fresnillo plc (1) Minas Peñoles Química Magna Infraestructura Peñoles 75% 100% 100% 100% Minera Fresnillo (100%) Minera Penmont (100%) Minera Mexicana La Ciénega (100%) Minera Saucito (100%) Comercializadora de Metales Fresnillo (100%) Exploraciones Mineras Parreña (100%) (1) Fresnillo plc is listed on the London Stock Exchange (LSE) since 2008, and has its own management, administrative structure and corporate governance body (more information at Minera Bismark (100%) Minera Madero (100%) Minera Maple (Naica) (100%) Minera Tizapa (51%) Cía. Minera Sabinas (100%) Cía. Minera La Parreña (Milpillas) (100%) Minera Roble (Velardeña) (100%) Exploraciones Mineras Peñoles (100%) Minera Peñoles del Perú (100%) Minera Peñoles de Chile (100%) Metalúrgica Met-Mex Peñoles (100%) Magnelec (Química del Rey) (100%) Fertirey (100%) Aguas, Servicios e Inversiones de México (ASIM) (50%) Fuerza Eólica del Istmo (100%) Termoeléctrica Peñoles (100%) Tecnología y Servicios de Agua (TECSA) (51%) Bal Holdings (100%) Línea Coahuila-Durango (50%) Servicios Administrativos Peñoles (100%) Illustrates the main subsidiaries. EXPLORATION Personnel: 825 Investment in 2014: US$216.3 million MINING Personnel: 6,667 Investment in 2014: US$592.5 million METALS Personnel: 2,386 Investment in 2014: US$46.3 million CHEMICALS Personnel: 707 Investment in 2014: US$31.6 million MAIN EXPLORATION PROJECTS MEXICO PEÑOLES Rey de Plata (Guerrero): polymetallic, under construction, investment US$268.0 million Estimated startup: 2017 Los Humos (Sonora): copper, advanced exploration FRESNILLO PLC San Julián (Chihuahua): silver-gold, under development. Estimated startup: 2015 Orysivo, Juanicipio, Centauro Deep: advanced exploration INTERNATIONAL Racaycocha (Peru): copper-molybdenum Chile and Peru: gold and copper, continuous exploration PROVEN AND PROBABLE RESERVES Gold: 10.0 million ounces Silver: million ounces Lead: 1,689.3 thousand tons Zinc: 5,426.7 thousand tons Copper: 431,627.7 tons KEY MINES PEÑOLES Velardeña: Mexico s second largest zinc mine Madero, Tizapa and Bismark: among the five largest Mexico s zinc mines Naica: Mexico s second largest lead mine FRESNILLO PLC Fresnillo: largest primary silver mine worldwide Herradura: one of Mexico s largest gold mines MAIN OPERATIONS AND ANNUAL CAPACITIES Lead Smelter: 180,000 tons/lead bullion Lead-Silver Refinery: 180,000 tons/lead: 118 million ounces/silver 1.9 million ounces/gold 1,440 tons/bismuth Electrolytic Zinc Refinery: 240,000 tons/zinc OPERATIONS Met-Mex: one of the largest metallurgical complexes and the top refined silver producer worldwide Aleazin: zinc alloys Bermejillo: by-products PRODUCTS AND ANNUAL CAPACITIES Sodium sulfate: 780,000 tons Magnesium oxide: 100,000 tons Magnesium sulfate: 34,000 tons Ammonium sulfate: 260,000 tons OPERATIONS Química del Rey: largest sodium sulfate plant in the Americas and the Western Hemisphere Fertirey: ammonium sulfate plant Industrias Magnelec

4 02 OPERATIONS LOCATION PERU CHILE 5 Night view. Bismark unit, Chihuahua. MINING OPERATIONS BASE METALS 1 Bismark 2 Naica 3 Sabinas 4 Velardeña 5 Tizapa 6 Francisco I. Madero 7 Milpillas PRECIOUS METALS 8 La Herradura 9 La Ciénega 10 Fresnillo 11 Soledad-Dipolos (1) 12 Saucito and Saucito II 13 Noche Buena 14 San Ramón (1) Operations in this unit are suspended. METALLURGICAL OPERATIONS 1 Met-Mex 2 Bermejillo 3 Aleazin CHEMICAL OPERATIONS 1 Magnelec (Química del Rey) 2 Fertirey 3 Industrias Magnelec DEVELOPMENT PROJECTS 1 San Julián 2 Rey de Plata INFRASTRUCTURE 1 Línea Coahuila-Durango 2 TECSA/ASIM 3 Termoeléctrica Peñoles 4 Termimar 5 Fuerza Eólica del Istmo OFFICES 1 Exploration 2 Corporate EXPLORATION ACTIVITIES SOUTH AMERICA 1 Peru 2 Chile Note: Commercial Offices in Matamoros (Tamaulipas, Mexico), Connecticut (United States) and Sao Paulo (Brazil).

5 03 BUSINESS MODEL Our vertically integrated operations comprise a polymetallic portfolio from exploration through production of refined metals and additional value-added products. We focus on being a low cost producer and make continuous investments in exploration, capacity expansion and operational efficiency throughout the business cycle. This strategy, combined with our sustainable development initiatives, talented personnel, a healthy capital structure and strong corporate governance practices distinguishes Peñoles and enables us to add long-term value for our shareholders. THE COMPLETE METALS VALUE CHAIN Corporate Governance Exploration Location, study, analysis and development of non-ferrous mineral deposits in Mexico and Latin America (Peru and Chile). Key to permanence and long-term growth. Permanent portfolio of projects and prospects in various stages of development. Continuous investment across economic and metal price cycles. Mines Exploitation and benefication of minerals with metallic contents of gold, silver, lead, zinc and copper. Replenishment and increase of reserves. Operational excellence, cost control. Metals - Chemicals Smelting and refining non-ferrous metals. High purity refined metals. By-products. Inorganic chemical products. Marketing High quality and purity products. Integrated solutions for our clients: quality, service, value-added products. Strategic partner in the value chain. Diversification of products and markets. Infrastructure, Technology & Innovation Sustainability

6 04 FINANCIAL HIGHLIGHTS % Var. Net sales (1) 61,555,607 66,550, Gross profit 16,071,811 18,464, Exploration expenses 2,879,181 3,498, EBITDA (2) (3) 15,082,400 16,243, Operating profit (3) 8,545,978 10,748, Controlling interest in net income 1,199,128 4,760, Capital expenditures 9,084,928 10,905, Cash and investments (4) 15,596,703 19,720, Property, plant and equipment, net 53,788,912 46,481, Total assets 98,452,629 93,027, Total long-term debt (5) 22,312,405 19,806, Total liabilities 42,509,932 37,618, Total stockholders equity 55,942,697 55,409, Shares outstanding at year-end 397,475, ,475,747 - Earnings per share Dividends per share (6) Share price at year-end Note: Figures as of December 31, 2014 and 2013 in thousands of Mexican pesos, with the exception of figures per share expressed in pesos. (1) Includes hedging results. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Does not include other income, expense and impairment loss. (4) Includes cash, cash equivalents and short term investments. (5) In 2014 includes short-term debt maturity of $1,913,340. (6) Dividend of $1.90 per share paid on May 26, Electrolysis area. Milpillas unit, Sonora.

7 05 FINANCIAL HIGHLIGHTS VENTAS UAFIDA INVERSION ACTIVOS FIJOS SALES* (millions of US dollars) EBITDA (millions of US dollars) CAPITAL 0 EXPENDITURES (millions of US dollars) , , , , , , , , * Not including hedging results 4, , % vs % vs % vs 2013 DEUDA TOTAL / CAPITALIZACION TOTAL UAFIDA / INTERESES 10% 20% 30% 40% % of sales UAFIDA / DEUDA TOTAL TOTAL 0 DEBT / TOTAL 10 CAPITALIZATION (%) EBITDA 0 / 10 INTERESTS (times) EBITDA 0 / TOTAL 1 DEBT (times) VALOR DE CAPITALIZACION MARKET 0 CAPITALIZATION (millions of US dollars) METALES PRECIOSOS ORO PLATA PRECIOUS METALS PRICE INDICES (December 2010 = 100) 200 BASE METALS PRICE INDICES (December 2010 = 100) 140 METALES BASE PLOMO ZINC COBRE , , , , % vs , Gold Silver Lead Zinc Copper

8 06 FINANCIAL HIGHLIGHTS ventas por producto Product SALES $61,555.6 (%) 32.6 Gold 31.9 Silver 11.7 Zinc 6.5 Lead 5.4 Copper 5.3 Concentrates 2.2 Sodium Sulfate 1.0 Magnesium Oxide 0.5 Ammonium Sulfate 2.9 Others ventas por mercado Geographic SALES $61,555.6 (%) 19.1 Mexico 80.9 International ventas por exportacion EXPORT SALES $49,821.8 by region (%) 89.3 United States 2.3 Europe (11 countries) 1.4 South America (8 countries) 7.0 Others (16 countries) ventas totales minas SALES $34,892.1 MINES* (%) 36.8 Silver 29.3 Gold 18.7 Zinc 9.5 Copper 5.7 Lead ventas totales metales SALES $51,699.9 METALS* (%) 39.4 Gold 36.2 Silver 13.3 Zinc 7.6 Lead 3.5 Others ventas totales quimicos SALES $2,725.6 CHEMICALS (%) 46.8 Sodium Sulfate 26.5 Magnesium Oxide 17.8 Ammonium sulfate 5.1 Magnesium Sulfate 3.8 Others *Treatment charges / deductions not included *Bal Holdings is not included estructura del costo de produccion COST OF PRODUCTION $27,377.8 Structure (%) 23.9 Depreciation 18.2 Freights & Contractors 16.1 Energy 13.7 Operating materials 13.1 Labor 10.8 Maintenance & Repairs 2.1 Raw materials 2.1 Others Note: Figures expressed in millions of pesos.

9 07 FINANCIAL HIGHLIGHTS KEY METALS AND MAIN USES* usos oro GOLD (%) 74.5 Jewelry 12.7 Medals and coins 8.8 Electronics 2.9 Industrial 1.1 Dentistry Source: GFMS Gold Survey 2014 usos plata usos plomo SILVER (%) 54.3 Industrial 23.0 Jewelry and silverware 22.7 Medals and coins LEAD (%) 80.9 Batteries 19.1 Others The Bismark unit is among the five largest zinc mines in the country. usos zinc Source: World Silver Survey 2014 ZINC (%) 59.0 Galvanizing 14.0 Die-casting alloys 11.0 Brass semis & castings 9.0 Oxides & chemicals 6.0 Semi-manufactured products 1.0 Others Source: Wood Mackenzie, 4Q-2014 Global Zinc Long Term Outlook usos cobre Source: Wood Mackenzie, 4Q-2014 Global Lead Long Term Outlook COPPER (%) 30.0 Construction 28.0 Consumer products 19.0 Electronics 12.0 Transportation 11.0 Industrial machinery Source: Wood Mackenzie, 4Q-2014 Global Copper Long Term Outlook PEÑOLES SPECIFICATIONS Silver: Gold: Lead: Zinc: 99.99% purity (minimum) 99.99% purity (minimum) 99.97% purity (minimum) % purity (minimum) Special High Grade % purity (minimum) High Grade % purity (minimum) Prime Western * Note: Financial investment demand is not included. Copper: 99.99% purity (minimum) Grade A cathodes

10 08 FINANCIAL HIGHLIGHTS PRICES Cotizaciones METALES (Carta Director General) ORO GOLD 0 (LONDON) (US$/ounce) Cotizaciones METALES (Carta Director General) PLATA SILVER 0 (COMEX) (US$/ounce) , , , , Cotizaciones METALES (Carta Director General) PLOMO 1, % vs Cotizaciones METALES (Carta Director General) ZINC % vs 2013 LEAD 0(LME) (US /pound) ZINC 0 (LME 20SHG) (US /pound) % vs 2013 Cotizaciones METALES (Carta Director General) COBRE % vs 2013 COPPER 0 (LME) (US /pound) Silver ingot. Met-Mex Refinery, Coahuila % vs

11 09 INDUSTRIAS PEÑOLES, S.A.B. DE C.V. ANNUAL REPORT OF THE BOARD OF DIRECTORS to the Shareholders Meeting, corresponding to fiscal year Dear shareholders: As Chairman of the Board of Directors of Industrias Peñoles, S.A.B. de C.V., and on behalf of the Board, I present you this report based on an analysis of the information provided by the Chief Executive Officer in his Annual Report on the company s performance, the financial and operating results obtained in 2014, and key developments in the period, as well as a report on the main activities of the Board of Directors. As had been expected, 2014 was a year of great challenges, as economic conditions were adverse. Precious metal prices saw a sharp decline and reached their lowest levels of the past four years: within our industrial metals portfolio, only zinc had a moderate price increase.

12 10 LETTER TO SHAREHOLDERS Along with the unfavorable international metals market, the domestic industry has had to face the pressures generated by a rise in energy costs when in contrast, international prices are declining, difficulties arising from organized crime activity, conflicts linked to insecurity in land ownership, and of course, the new mining rights. The company will pay $500.2 million pesos (hereafter million ) in mining rights surface, special and extraordinary corresponding to 2014, representing 41.7% of net income. In terms of fuel, high overhead costs are being paid for diesel, the main input for open pit mines, compared to the international price. Clearly, the domestic mining industry has lost much of its competitiveness. With more than a century of history, Peñoles has successfully weathered many difficulties and has overcome great challenges. The consistency of our strategy of prudent investment and long-term organic growth is essential to addressing the inherent cyclicality of the industry in a changing environment. We recognize, however, that our greatness lies in our people, whose talent, effort and dedication empower us to face difficult circumstances. The context of 2014 required us to take particular care of liquidity; for that reason we put special focus on controlling costs and expenses and rationalizing our investments. Thus, with a view beyond the annual cycle, we carefully allocated capital resources to sustain and achieve operational productivity, develop strategic projects and acquisitions, as well as to vital exploration, technological development, sustainability, training, safety and community development activities. Among our growth projects, a highlight was the completion of construction of the new sodium sulfate plant at Química del Rey, in the state of Coahuila, which will expand production capacity by 150,000 tons per year and will enable us to consolidate leadership in the domestic market for this product. The investment was $571.9 million, equivalent to $43 million dollars (hereafter US$ million ). At Fresnillo plc, the new dynamic leaching plant to increase gold recovery from the Herradura mine in Sonora started up operations, as did Saucito II, a silver-gold mine in the state of Zacatecas. Investment in these projects totaled $1,596.0 million (US$120 million) and $3,125.5 million (US$235 million), respectively. At the Rey de Plata project, a polymetallic mine in the state of Guerrero whose total investment will be $3,564.4 million (US$268 million), development and infrastructure work continued and critical equipment was received. Operations are expected to commence in 2017 for the production of zinc, silver, copper and gold. Construction also advanced according to schedule at Fresnillo plc s San Julián gold-silver mine, in the state of Chihuahua, where operations will start up in Fresnillo plc s financial position enabled it to acquire the 44% stake held by Newmont USA, Ltd. in the Penmont joint venture, which includes the Herradura, Soledad-Dipolos and Noche Buena gold mines in the state of Sonora, as well as advanced exploration projects. Through this US$450 million transaction, Penmont became 100% Fresnillo plc owned. The change strengthens its position and improves its outlook for sustained growth in gold production. As such, investments in fixed assets and exploration totaled $11,964.1 million (16.9% less than in the prior year); while this amount was lower due to difficult circumstances, it was sufficient for the disciplined execution of projects and the proper maintenance of operations, and was in line with our vision of sustained long-term growth.

13 11 LETTER TO SHAREHOLDERS At Peñoles we seek to establish harmonious and mutually beneficial relationships with the communities where we operate, and want to ensure a proactive approach. Therefore our community investment is also a priority: we continued and will continue to actively support community development through the creation of good jobs, construction of schools, roads and infrastructure, and promotion of sports, health and recreational activities. Investment in social support this year was $104.7 million. In exploration activities, important findings were made in the portfolio of projects located in Mexico and South America. At the Los Humos copper project (Sonora), and the Racaycocha copper-molybdenum project (Peru), resource estimates were conducted, and in the latter, surrounding concessions were acquired, expanding the potential of the project. Work on areas surrounding the Velardeña zinc mine (Durango) and the Milpillas copper mine (Sonora) helped identify resources with the potential to increase reserves for these operating units. Fresnillo plc obtained important findings that increased resources at San Ramón (Durango), Cardones (Guanajuato) and Pilarica (Peru), and encouraging results at Herradura (Sonora). The performance of mining operations in 2014 was solid. Production of metal contents in the mines exceeded the previous year, with the exception of gold whose volume was slightly lower due to the stoppage of operations at Soledad-Dipolos and the temporary suspension at Herradura, which resumed its activities at the end of the first quarter of the year. This decline was partially offset by higher volumes at Noche Buena and Saucito. A new annual silver production record was set of 54.4 million ounces, thanks to higher volumes processed at Saucito and Herradura, and better ore grades at Sabinas. Lead production increased due to higher volumes and better ore grades and recoveries at Velardeña and Saucito, while zinc production had the most growth, driven by Velardeña, which in just over a year since starting up, is producing above its original design capacity. As for copper, production rose due to better ore grade and recovery at Milpillas. In the metallurgical operations, production volume of refined silver rose due to better ore grades in the concentrates and materials received, while gold rose slightly due to higher content of rich materials; lead volume was lower due to a decline in contents in the concentrates treated, and zinc increased with the higher volume of concentrates received and better ore grades. Production volume of sodium sulfate was similar to the previous year; however, lower demand from the domestic market due the economic situation affected sales of this product. Nonetheless, among the other chemicals, certain varieties of magnesium oxide registered new production and sales records. Similarly, magnesium sulfate also attained a new production and sales record thanks to increased demand in the agricultural market. In addition, we advanced our strategy of self-sufficiency in electricity generated from renewable sources. A 25-year energy supply agreement was signed with the Portuguese company Electricidad de Portugal Renovables (EDPR), for the development of a wind farm with 180 MW of installed capacity to be built in 2016 in the state of Coahuila. This will ensure the supply of clean energy generated by this park at very competitive costs.

14 12 LETTER TO SHAREHOLDERS After a thorough analysis, the Executive Committee approved the project to expand refined zinc production capacity by 100,000 tons per year at the metallurgical complex in Torreón, Coahuila. This project, expected for 2017, will have new technology and require an investment of $4,309.2 (US$324 million), and will consolidate our position as the leading Latin American producer of refined zinc. As for financial results, expressed in millions, gross sales in 2014, excluding hedging results, totaled $61,022.0, a change of -6.7% compared to This situation was primarily due to lower metal prices, with the exception of zinc, which was partially offset by the higher average exchange rate of the peso against the dollar. Results from metal price and exchange rate hedging were lower, totaling $ Gross profit was $16,071.8 (-13.0%), EBITDA was $15,082.4 and operating income totaled $8,546.0 (7.1% and 20.5% lower, respectively). Net income for 2014 was $1,199.1 (-74.8%), and $755.2 in dividends were declared in The debt to EBITDA ratio was 1.4 times at year end, with sufficient cash to cover operational, strategic and financial needs for the medium term. Thanks to efforts to control costs and expenses, and despite lower sales and inflation for several of our inputs, EBITDA margin on sales remained stable (24.5%) compared to the previous year (24.4%). However, due to certain differences in the interpretation of tax provisions, the Metalúrgica Met-Mex-Peñoles subsidiary recorded an extraordinary expense of $1,106.8, after signing a conclusive agreement with the Tax Administration Service through the Office of Taxpayer Defense (PRODECON, for its Spanish acronym), which terminated the tax audits for the years Because our people are our most important asset, we remain committed to promoting their development in an atmosphere of respect, recognition and in a safe environment. We have continued, and will not cease, to strengthen training and safety programs for our employees and contractors. Furthermore, we have added the ethical performance of our businesses to our Vision, and we are strengthening the culture of ethics and living these values throughout the entire organization. The Board of Directors has adhered to sound corporate governance practices. To perform its functions, the Board is supported by the committees recommended in the Code of Best Corporate Practices. The Board met four times in The following are among the topics discussed and approved at those meetings: reinforcement of workplace safety and environmental programs; labor-management relations; the metals hedging program; review of the 2014 budget; the basis of the 2015 budget; finalizing contracts for the supply of electricity; and policies for the acquisition and sale of company stock. Pursuant to the provisions of the Securities Market Law, the Audit and Corporate Governance Committee prepared its Annual Report, which is presented to this Shareholders Meeting. The Financial Statements from which comments herein are derived, as well as the main accounting policies and criteria used in the preparation of the financial information, were audited by the external auditors and included in the Annual Report. The company s Financial Statements were prepared in accordance with International Financial Reporting Standards, issued by the International Accounting Standards Board.

15 13 LETTER TO SHAREHOLDERS Submitted herein for the consideration of this Shareholders Meeting is a report on the main accounting policies and criteria that serve as the basis of preparation for the Financial Statements, and which include, among others: the basis of presentation, consolidation, significant accounting policies and new accounting pronouncements, which were audited by the external auditors and made part of this Report. In the opinion of the Board of Directors, the Report presented to this Shareholders Meeting by the Chief Executive Officer reasonably reflects the financial position and results of the company, as well as the key developments of the business during In accordance with policies, the performance of senior executives is evaluated annually. The Nomination, Evaluation and Compensation Committee must authorize any increase in salary and benefits. Salary increases are made annually and bonuses are determined based on the results of performance evaluations. The remuneration package of senior executives is comprised of a base salary and legal and other benefits common to the industry domestically. In 2015, in the face of new challenges and the expectation that difficult market conditions will continue, we must work harder to remain competitive, increase productivity and control costs. We remain firmly committed to maintaining sound, prudent management practices. Our confidence in the future is based on the greatness of our people, in their ability to innovate and give the best of themselves, especially in the face of adversity: I thank them for their dedication and hard work. I would also like to thank the members of the Board of Directors for their commitment and valuable contributions, and you, dear shareholders, for continuing to place your confidence in us. Alberto Baillères Chairman of the Board of Directors

16 14 LETTER TO THE BOARD OF DIRECTORS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. REPORT ON THE COMPANY S PERFORMANCE PRESENTED BY THE CHIEF EXECUTIVE OFFICER to the Board of Directors corresponding to fiscal year Mr. Chairman, Ladies and Gentlemen members of the Board of Directors: As Chief Executive Officer of Industrias Peñoles, S.A.B. de C.V., and in accordance with the provisions of the Securities Market Law, I hereby submit for your consideration the Annual Report corresponding to the company s performance and results in the 2014 fiscal year, as well as the Financial Statements and their accompanying notes, which include the principal policies and criteria for accounting and reporting that were used in the preparation of the financial report presented herein. Without a doubt, 2014 was a very challenging year for Peñoles. The macroeconomic environment was difficult and extremely volatile, which negatively affected the prices for most of the metals we produce. Prices for gold and silver, which represent more than half of our revenues, saw sharp declines of 10.3% and 20.1%, respectively, compared to the previous year. This was due, initially, to the withdrawal of the US Federal Reserve s monetary stimulus program following signs of recovery in that economy, which resulted in the strengthening of the dollar against major currencies. This raised expectations for an increase in interest rates, lessening the attractiveness of precious metals as a safe haven investment.

17 15 LETTER TO THE BOARD OF DIRECTORS In contrast, there was a deceleration in the economy of China, the world s largest consumer of metals. Furthermore, expectations of growth in Europe were adjusted downward, and fears emerged in the financial markets of a possible recession on the continent. Among industrial metals, zinc was the only one whose price rose (13.2% on average), due to lower inventories and the closure of several mining operations. The price of lead was relatively stable (-2.2%), supported by continued demand from the automotive industry, while the average price of copper declined (6.4%) due to the economic deceleration and reduced dynamism of the construction industry in China, along with an increase in the global supply. In addition, new rights for the mining sector were implemented in Mexico while problems of insecurity continued. The negative effect of lower metal prices was partially mitigated by the weakening of the Mexican peso against the dollar (4.2% on average), which benefited the portion of our production costs denominated in pesos (approximately 50% of those costs). However, we continued to face increases above the rate of inflation in several of our key inputs. By mandate of the Board of Directors, in the difficult environment of 2014 we redoubled efforts to contain costs, reduce expenses and cut non-priority investments, as well as to optimize the use of working capital, without affecting employment or the development of strategic projects. We focused on maintaining operational discipline and increasing the productivity and efficiency of operations, showing solid performance. Following are the operating highlights of Investment in exploration totaled $2,879.2 million pesos (hereafter million ), including our Fresnillo plc subsidiary, a figure 17.7% lower than in the previous year. Resources were selectively allocated to projects and prospects with the greatest potential, as well as to replenishing and increasing reserves at operating mines. Exploratory drilling took place at 34 projects in Mexico and South America, as well as geological and geophysical analyses at several additional prospects. At Los Humos disseminated copper-molybdenum project in Sonora, intensive sampling for metallurgical analysis was conducted in order to provide certainty to the quantified mineral resources, and drilling extended into surrounding areas. Detailled drilling will take place in 2015 in order to determine if sufficient mineral resources exist to make a mine project feasible. At La Industria project, adjacent to the Velardeña zinc mine in Durango, drilling activities intersected attractive sectors to generate reserves that could be added to the mining unit. Close to the Milpillas copper mine in Sonora, drilling identified an expansion of deep ore bodies with an estimated potential of 6 to 12 million tons of additional mineral, which could become an important contribution to reserves at this mining unit. A quantification of resources will be conducted in the first half of At the Racaycocha copper-molybdenum project in Peru, resources were quantified and the results were endorsed by a recognized external auditor. Geotechnical drilling took place to support the design of a possible pit, as well as technical engineering and geo-hydrological studies. An important advance, which increases the potential of the project, was the acquisition of 14,000 hectares in neighboring concessions.

18 16 LETTER TO THE BOARD OF DIRECTORS At Fresnillo plc, exploration activities resulted in mineralized intersections at Centauro Deep (Sonora), Orisyvo (Chihuahua) and Pilarica (Peru), and additional drilling equipment was provided to the gold and silver exploration programs at Bellavista and Tajitos (Herradura Corridor in Sonora), Rodeo (Durango), Fresnillo (Zacatecas) and Guanajuato (Guanajuato). The company also exercised its option to acquire 100% of the Candameña goldsilver project (Chihuahua), in which it has invested US$16 million since In the mining operations, the total volume of mineral milled and deposited was 53.6 million tons, 12.2% more than in the prior year, due to the resumption of activities at Herradura at the end of the first quarter of 2014; also contributing were the higher volumes processed at Noche Buena and Velardeña, which offset the lack of production at Soledad-Dipolos, whose operations have been suspended since mid Notably, Velardeña exceeded design capacity, rising from 7,000 to 8,000 tons per day milled. The production of gold contents was 2.3% lower due to the lack of production at Soledad-Dipolos, which was nearly offset by higher volumes at Noche Buena and Saucito. A new annual record was set in the production of silver contents, with 54.4 million ounces (4.3% above last year), mainly due to higher volumes treated and better ore grades at Saucito and Sabinas, as well as the increase in volumes deposited at Herradura. Lead production of 79.8 thousand tons was 4.8% higher, due to contributions from Saucito and Velardeña, with higher ore grades, recoveries and volumes treated. Zinc content notably increased (24.1%), to thousand tons, mainly due to good performance at Velardeña, with higher volumes treated and better ore grades. The copper cathodes produced by the Milpillas unit increased 14.2% thanks to higher volumes deposited on the leaching pads, which registered an annual record, as well as better ore grades and recoveries. In addition, copper contained in concentrates surpassed the previous year by 5.2% due to higher volumes of mineral at Bismark and Velardeña, and better recoveries at the latter. The Naica mine suffered a flood contingency in early 2015, and to date mining operations are suspended at this unit. Every effort is being made and all technical, material and human resources needed are being allocated to try and recover the mine and restore operations as soon as possible, without ever exposing workers and contractors. It should be noted that because safety procedures were followed, there were no human incidents resulting from this situation. Among the investments made, of particular note was the acquisition of mechanized equipment for the interior of the mines as part of strengthening safety in the operations. At Velardeña an expert system was installed to optimize recoveries. Mining works and infrastructure development also continued in order to access deep ore bodies at Madero, and it remained an average two years of preparation in the mines. The construction of the Rey de Plata polymetallic mine in the state of Guerrero progressed as planned, with the development of mining works and preparation of infrastructure for the necessary facilities at the surface. This mining unit will have a beneficiation plant capable of milling and processing 1.3 million tons of mineral per year, producing lead, zinc and copper concentrates. The investment will be $3,564.4 million (US$268 million) and start up is expected for the first quarter of 2017.

19 17 LETTER TO THE BOARD OF DIRECTORS At our Fresnillo plc subsidiary, the dynamic leaching plant at Herradura started up operations, which will increase gold production. In addition, construction was successfully completed and operations started up at the Saucito II silver project in Zacatecas, and development continued at the new San Julián silver and gold mining unit in Chihuahua, which is expected to start operations in the fourth quarter of In metals, production of refined gold and silver at the Met- Mex metallurgical complex was 1.5% and 5.4% higher, respectively, compared to the previous year. There were higher inputs of materials rich in gold from third party remitters, which mitigated the lower volume of dorés from our own mines, while silver production was driven by better ore grades in the concentrates received. Lead production was 2.2% lower, due to lower ore grades in the concentrates received and the lower volume treated in the Smelter, while zinc production rose 1.6%, due to higher volume and better ore grades in the concentrates received at the electrolytic zinc plant. In the chemicals business, sodium sulfate production almost equaled that of the previous year. In addition, construction of the plant II was successfully completed, which will increase production capacity by 150,000 tons of sodium sulfate annually, enabling us to satisfy the needs of the domestic market and to grow exports. Magnesium sulfate, used as a fertilizer, generated extraordinary volumes of production and sales for the second consecutive year, with good demand from the agricultural sector. Magnesium oxide had mixed results, with annual production records in hydroxide and electrical grade, while refractory grade recorded lower production volume, as part of the strategy to diversify into higher margin products. Moreover, we continue taking firm steps in our permanent commitment to sustainability and cost reduction, and in our strategy of energy self-sufficiency using renewable sources. In this regard, we entered into a 25-year supply agreement with the Portuguese company Electricidad de Portugal Renovables (EDPR) to provide the operations with the energy generated by a wind farm that will be developed in the state of Coahuila, at a very competitive cost. This project will have 180 MW of installed capacity and will become operational in Among our initiatives regarding electricity, self-supplied power feeding the operations was 84.8%, less than the 89.3% in the previous year due to increased demand from the startup of the dynamic leaching plant at Herradura, a full year of operations at Velardeña, and the construction of Saucito II. The average unit cost of these sources was US 7.57 per kwh, 26.0% less than the rate we would have paid to the Federal Electricity Commission, generating savings of US$69.2 million in operating costs for the year. In financial results, gross sales, excluding hedging results, decreased 6.7% from 2013, to $61,022.0 million. Hedging transactions on metal prices and exchange rates, which are used to reduce EBITDA volatility, generated a profit of $533.6 million, 53.9% lower than the year ago figure. Following its acquisition of 44% of the Penmont joint venture, our Fresnillo plc subsidiary initiated a partial hedging program to protect the value of its investment, limited to the portion that was acquired. As a result, net sales (including hedging results) totaled $61,555.6, a variation of -7.5% from the previous year.

20 18 LETTER TO THE BOARD OF DIRECTORS The cost of sales was $45,483.8 million, 5.4% lower, in large measure because of the lower cost of metal purchased due to a decrease in gold and silver prices, as well as lower volumes of lead and zinc mineral purchased from third parties to supplement intake at the metallurgical complex. Production costs increased, on the one hand because of increases for various inputs, and on the other, because of higher operating levels, especially mining. Operating expenses were 2.5% lower, primarily in exploration. EBITDA of $15,082.4 million and operating income of $8,546.0 million declined 7.1% and 20.5%, respectively. An extraordinary expense of $1,106.8 million was recorded with the signing of a conclusive agreement by the Met- Mex-Peñoles subsidiary with the Tax Administration Service to the Office of the Taxpayer Advocate (PRODECON for its Spanish acronym), due to differences in the interpretation of certain tax provisions, mainly on the matter of Value Added Tax; this agreement terminated the tax audits of In addition, higher financial expenses were incurred given the full year of interest payments to holders of Fresnillo plc bonds (US$800 million), which were issued in November At Peñoles, we know that our most valuable resource is our people. Thus their health and wellbeing are our priority. We remain committed to, and will never cease, strengthening a culture of safety through ongoing training and increased supervision of the operating units. Labor negotiations with the various unions were held in a cordial and respectful manner and in an atmosphere of mutual cooperation. This contributed to the continuity of our operating units and promoted a productive labor environment. Furthermore, we have made important progress in the human resources strategy to attract, retain and develop personnel with the most talent and potential. Since the implementation of the strategic plan, we know that having the right people for growth is a key element in making Peñoles as great as its people. That is why, as part of our efforts to promote ethical conduct and living our values, we started conducting workshops on these topics throughout the organization. I would like to extend my appreciation for the trust, invaluable support and clear direction provided by the Chairman, members of the Board of Directors and Executive Committee members. I also thank our employees for their tremendous efforts, dedication and commitment in the face of the difficulties we overcame in 2014, and the prospect of greater challenges ahead. I am certain they will continue to give the best of themselves. Net income for the year of $1,199.1 million was 74.8% lower than in the previous year. Fernando Alanís Ortega Chief Executive Officer

21 19 Consistency in our strategy of prudent investment and long-term organic growth is essential to addressing the inherent cyclicality of the industry in a changing environment. AN AGREEMENT WAS SIGNED WHEREBY WE WILL RECEIVE THE ENERGY TO BE PRODUCED BY A WIND FARM IN COAHUILA, WITH 180 MW OF INSTALLED CAPACITY INVESTMENTS IN FIXED ASSETS AND EXPLORATION TOTALED $11,964.1 MILLION CONSTRUCTION WAS COMPLETED AT THE SODIUM SULFATE PLANT II, WHICH INCREASED PRODUCTION CAPACITY BY 150 THOUSAND TONS TOTAL VOLUME OF MINERAL MILLED AND DEPOSITED WAS 53.6 MILLION TONS, 12.2% MORE THAN IN 2013 EBITDA TOTALED $15,082.4 million, WITH A MARGIN OF 24.5% OVER SALES, STABLE IN RELATION TO 2013 AN ANNUAL RECORD WAS SET IN THE PRODUCTION OF SILVER CONTENTS AT 54.4 MILLION OUNCES INVESTMENT IN SOCIAL SUPPORT WAS $104.7 MILLION IN THE YEAR

22 20 REVIEW OF OPERATIONS IN THE DIFFICULT ENVIRONMENT OF 2014, WE FOCUSED ON MAINTAINING DISCIPLINE AND INCREASING THE PRODUCTIVITY AND EFFICIENCY OF THE OPERATIONS, WHICH HAD SOLID PERFORMANCE.

23 21 REVIEW OF OPERATIONS / INVESTMENT INVESTMENTS (millions of US dollars) Main allocation EXPLORATION In operating mines and in portfolio projects at different stages of development MINES Amortizable mine works, construction of projects, new tailings dams and various fixed assets METALS CHEMICALS Elimination of interferences for zinc expansion, replacement of fixed assets, several constructions and building improvements. Construction of the plant to expand production capacity of sodium sulfate. Replacements and improvement of furnaces ENERGY Various components and replacement parts at Fuerza Eólica del Istmo OTHERS TOTAL ,128.5 Access ramps into the Rey de Plata polymetallic mine, Guerrero, currently under construction.

24 22 REVIEW OF OPERATIONS / EXPLORATION Exploration at La Industria. Around the Velardeña unit, Durango. EXPLORATION The exploration of proprietary projects plays a key role in the growth strategy of Peñoles; therefore we continuously invest in these activities, with the aim of identifying opportunities that will allow us to develop new mines in Mexico, Peru and Chile, primarily. We have a team of highly specialized geologists engaged in the exploration, detection and evaluation of mining projects, as well as the analysis of third party owned, early stage development projects that may be of interest to Peñoles. In the last five years Peñoles has invested a total of US$1,117.1 million, resources that have provided us with a large portfolio of prospects and projects in various stages of development. Due to the significant drop in prices for most metals in 2014, investment in exploration (including operating mines) was US$216.3 million, 21.3% below the previous year. This investment, however, was sufficient, selective and directed at the projects with the greatest potential, in line with the goals set out in our strategic plan. The Peñoles and Fresnillo exploration teams drilled 76,300 meters on ten projects located in Mexico, Peru and Chile. In addition, geological work and assessments were performed in 42 potential areas, in preparation for subsequent stages of direct exploration.

25 23 REVIEW OF OPERATIONS / EXPLORATION LA INDUSTRIA (POLYMETALLIC) Location: Cuencamé, Durango 2014 investment: US$2.3 million At this lead, zinc and silver project adjacent to the new Velardeña mine, 14,670 meters were drilled, defining attractive vein sectors for generating mineral reserves that could complement production at Velardeña. Others Continuous exploration remains a pillar of our organic growth strategy. The results of the main projects were as follows: LOS HUMOS (COPPER) Location: Caborca, Sonora 2014 investment: US$2.8 million In Los Humos disseminated copper project, a total of 8,250 meters of drilling took place. Metallurgical analyses are currently underway based on a thorough sampling of the areas initially drilled and quantified, whose results will be determinant in defining the mineral resources. Drilling was also conducted in five surrounding areas where geophysical and geochemical studies indicated the possibility of finding new ore bodies. In 2015, detailed drilling is expected to take place in these areas in order to consolidate sufficient mineral resources to determine the feasibility of a new mining project. Adjoining the Milpillas copper mine in Sonora, 16,650 meters were drilled, which identified an expansion of deep ore bodies with an estimated potential of 6 to 12 million tons of mineral that could be an important contribution to the reserves of the mine. Depending on the extent of the new ore body, a quantification of resources is expected to take place in Detailed exploration and drilling work was conducted at the San Juan de Guadalupe, Palmira, Aporo, Leon and La Dicha prospects in Mexico, with the aim of identifying mineralized copper and polymetallic zones that would justify the creation of new mining projects. Surveying was reinforced and work intensified on potential bands, in order to maintain and grow the portfolio of prospects in support of generating new mining projects in the future. International exploration At the Racaycocha copper-molybdenum project in Peru, 7,590 meters of geotechnical drilling took place to support the design of a possible pit, as well as various geo-hydrological and engineering studies. Moreover, mineral resources were quantified with the results submitted to an external audit that certified the quality of the processes used and the reliability of the results. An important advance in the consolidation of this project was the acquisition of neighboring concessions from the Canadian company Duran Ventures, which included El Águila project (copper-molybdenum), and other small owners, increasing the potential areas for exploration. Thus, the Racaycocha project today includes concessions covering 28,000 hectares of land fertile for exploration, always within the framework of harmonious relations and collaboration with the communities.

26 24 REVIEW OF OPERATIONS / EXPLORATION Attractive mineralized sectors intersected at La Industria, Durango. In Chile, 7,920 meters were drilled at La Laguna and Nicolé copper projects, where results merit follow up. Geological and geophysical work began at the Llancahue copper prospect, under an exploration contract with Coro Mining Company with a purchase option. In addition, an intense campaign of surveying and evaluation of more than 40,000 hectares of concessions in this country is underway. Fresnillo plc Fresnillo plc s exploration programs continued in the Herradura (Sonora), Fresnillo (Zacatecas) and Ciénega (Durango) districts. Drilling was also conducted at Rodeo (Durango), where boreholes increased the area of gold oxide mineralization, and in Guanajuato, where economic silver ore grades intersected. Additional mineralized intersections were identified at Centauro Deep (Sonora), Orisyvo (Chihuahua) and Pilarica (Peru). Moreover, Fresnillo exercised its option to acquire 100% of the Candameña gold-silver project in Chihuahua, given the consistency of results from exploration activities underway since Drilling activities resumed on this open pit project.

27 25 REVIEW OF OPERATIONS / EXPLORATION Exploration is strategic for replenishing and increasing reserves for the mines in operation. Tizapa mine, State of Mexico.

28 26 REVIEW OF OPERATIONS / MINING MINING PRODUCTION Producciones MINAS ORO Producciones MINAS PLATA GOLD (thousands of ounces) SILVER (millions of ounces) Producciones MINAS PLOMO % vs Producciones MINAS ZINC % vs 2013 LEAD (thousands of tons) ZINC (thousands of tons) % vs % vs 2013 Producciones MINAS COBRE Producciones MINAS COBRE CATODICO COPPER* (thousands of tons) COPPER 0 CATHODES (thousands of tons) Mineral production was higher for most metal contents *Does not include copper cathodes % vs % vs 2013

29 27 REVIEW OF OPERATIONS / MINING MINING FINANCIAL HIGHLIGHTS Net sales 26,220 38,555 39,288 30,294 29,848 Gross profit 16,086 24,950 22,236 12,305 10,283 % of sales 61.3% 64.7% 56.6% 40.6% 34.5% EBITDA 12,769 25,607 21,270 11,955 11,323 % of sales 48.7% 66.4% 54.1% 39.5% 37.9% Operating profit 14,685 22,406 16,856 7,447 5,824 % of sales 56.0% 58.1% 42.9% 24.6% 19.5% Note: Unaudited figures expressed in millions of pesos. Figures represent the sum of the separate financial statements of the operating companies in the Mining Division without corporate fees. The Velardeña unit, in Durango, is the second largest producer of zinc nationwide.

30 28 REVIEW OF OPERATIONS / MINING CONTRIBUTION BY MINE TOTAL PRODUCTION PARTICIPACION POR MINA ORO 633,359 GOLD ounces (%) 41.9 Herradura 20.4 Noche Buena 17.1 Ciénega 9.0 Saucito 5.6 Fresnillo 4.9 Tizapa 1.1 Others Herradura 41.9% Noche Buena 20.4% Ciénega 17.1% Saucito 9.0% Fresnillo 5.6% Tizapa 4.9% Velardeña 0.9% Naica 0.1% Bismark 0.0% Madero 0.0% Sabinas 0.0% Milpillas 0.0% Soledad & Dipolos 0.0% PARTICIPACION POR MINA PLATA 54.4 SILVER million ounces (%) 36.9 Fresnillo 28.3 Saucito 10.0 Tizapa 8.5 Sabinas 7.5 Ciénega 3.4 Naica 1.6 Madero 3.8 Others Fresnillo Saucito Tizapa Sabinas Ciénega Naica Madero Velardeña Herradura Bismark Noche Buena Milpillas Soledad & Dipolos PARTICIPACION POR MINA PLOMO 79,758 LEAD tons (%) 24.7 Naica 17.4 Fresnillo 14.7 Madero 12.5 Saucito 9.1 Tizapa 9.1 Sabinas 5.9 Ciénega 5.2 Velardeña 1.4 Bismark Naica 24.7% Fresnillo 17.4% Madero 14.7% Saucito 12.5% Tizapa 9.1% Sabinas 9.1% Ciénega 5.9% Velardeña 5.2% Bismark 1.3% Herradura 0.0% Milpillas 0.0% Soledad & Dipolos 0.0% Noche Buena 0.0% PARTICIPACION POR MINA ZINC 265,712 ZINC tons (%) 31.6 Velardeña 16.0 Madero 15.4 Tizapa 14.3 Bismark 5.8 Naica 5.7 Fresnillo 4.9 Sabinas 4.0 Saucito 2.3 Others Velardeña 31.6% Madero 16.0% Tizapa 15.4% Bismark 14.3% Naica 5.8% Fresnillo 5.7% Sabinas 4.9% Saucito 4.0% Ciénega 2.3% Herradura 0.0% Milpillas 0.0% Soledad & Dipolos 0.0% Noche Buena 0.0% Control room. Sabinas unit, Zacatecas. PARTICIPACION POR MINA COBRE 37,331 COPPER tons (%) 69.8 Milpillas 16.7 Sabinas 5.3 Bismark 4.2 Velardeña 2.1 Tizapa 1.9 Madero Milpillas 69.8% Sabinas 16.7% Bismark 5.3% Velardeña 4.2% Tizapa 2.1% Madero 1.8% Ciénega 0.0% Herradura 0.0% Fresnillo 0.0% * Copper cathodes 26,051 tons Naica 0.0% Soledad & Dipolos 0.0% Saucito 0.0% Noche Buena 0.0%

31 29 REVIEW OF OPERATIONS / MINING Peñoles directly operates seven underground mines in Mexico that produce zinc, lead and copper concentrates, and copper cathodes. Our mines position us as the country s leading producer of zinc contents and the second largest in lead. In addition, we consolidate the results of Fresnillo plc, a subsidiary in which we maintain a 75% equity stake, and which has three underground mines and three open pit mines that produce mainly gold and silver concentrates, doré, precipitates and other materials. The mining operations had solid performance in 2014, and as a result, production of most metals increased compared to The volumes of ore milled and deposited totaled 13.3 and 40.3 million tons, 10.5% and 12.8% higher, respectively, than in the previous year. Production of metal contents in 2014 and their variation with respect to 2013 (including 100% of the production of Fresnillo plc) was as follows: Gold: 633,359 ounces (-2.3%) Silver: 54.4 million ounces (+4.3%), record Lead: 79,758 tons (+4.8%) Zinc: 265,712 tons (+24.1%) Copper: 11,280 tons (+5.2%) Copper cathodes: 26,051 tons (+14.2%) The decline in gold production was due to the stoppage of operations at the Soledad-Dipolos mine in mid-2013 and the temporary suspension of the explosives permit at Herradura due to a communal conflict that halted operations at this mine in the second half of 2013, and where operations resumed in late March The higher volume of ore processed at Noche Buena and Saucito helped offset the lack of production at Soledad-Dipolos. A NEW ANNUAL RECORD WAS SET IN SILVER PRODUCTION THANKS TO HIGHER VOLUMES TREATED AND BETTER ORE GRADES AT SAUCITO AND SABINAS, AND TO A LESSER EXTENT, THE CONTRIBUTION OF THE VELARDEÑA, HERRADURA AND NOCHE BUENA UNITS, WHERE HIGHER VOLUMES OF ORE WERE PROCESSED, WITH BETTER ORE GRADES AND RECOVERIES. The increase in lead production came mainly from Saucito and Velardeña due to higher volumes processed, and better ore grades and recoveries, followed by Madero with higher ore grades and metallurgical recovery. Zinc volume increased significantly, driven by higher volumes milled and better ore grade at Velardeña, which reached capacity after one year of operation and even exceeded milling expectations. The increase of copper contents in concentrates was due to greater production at Velardeña, Madero and Bismark, while copper cathodes produced at Milpillas had a very favorable change due to better ore grades in the rich solution, which shortened the recovery period, as well as higher volumes deposited on the leaching pads.

32 30 REVIEW OF OPERATIONS / MINING Mine interior. Velardeña, Durango. Highlights from the mining units VELARDEÑA (zinc) Ownership: 100% Peñoles In operation since May 2013 Location: Cuencamé, Durango Installed capacity: 1.9 million tons milled/year PRODUCTION Contents % Var. Ore milled (kton) 2,003 1, Gold (oz) 5,443 1, Silver (koz) Lead (ton) 4,144 1, Zinc (ton) 83,968 41, Copper (ton) 1, Velardeña completed its first year of operation in May It is Peñoles largest zinc mine and the second largest at the national level; thanks to Velardeña, the state of Durango rose from seventh to third place nationally in the production of zinc. This mining unit had very favorable performance during the year, as it surpassed design capacity in milling and processing, increasing from 7,000 to 8,000 tons per day, which contributed, along with better ore grades, to higher production of all metal contents. Recoveries were also higher for silver, lead and copper. Among the investments made, of particular note was the construction of a new tailings dam at an investment of US$10 million, which will have capacity to store seven years of tailings. Studies were undertaken on freeboard construction for the current dam to increase capacity by three years. In addition, US$830,000 was invested to incorporate the expert system in the milling and flotation operations of the concentrator plant in order to optimize metallurgical recoveries, and an additional US$370,000 in a traffic control system for the ore hauling operations. kton = thousands of metric tons, oz = ounces, koz = thousand ounces, ton = metric tons. Moreover, we implemented the LabWare LIMS management system at the unit s laboratory, which increases the accuracy of the chemical analyses of mineral samples.

33 31 REVIEW OF OPERATIONS / MINING Night view. Tizapa unit, State of Mexico. TIZAPA (polymetallic: zinc-lead-copper-silver-gold) Ownership: 51% Peñoles, 39% Dowa Mining and 10% Sumitomo Corporation In operation since 1994 Location: Zacazonapan, State of Mexico Installed capacity: 800 thousand tons milled/year PRODUCTION Contents % Var. Ore milled (kton) Gold (oz) 31,311 34, Silver (koz) 5,442 5, Lead (ton) 7,283 7, Zinc (ton) 40,978 38, Copper (ton) TIZAPA CELEBRATED ITS TWENTIETH ANNIVERSARY AND THREE CONSECUTIVE YEARS OF BREAKING RECORDS IN PRODUCTION, MILLING AND PROCESSING MINERAL, THANKS TO THE DEDICATION AND EFFORTS OF ITS PEOPLE AS WELL AS INVESTMENTS MADE IN EQUIPMENT AND TECHNOLOGY. The higher volumes contributed to the growth in production of silver and zinc metal contents, along with improved recoveries. This was not the case for gold, lead and copper, whose production was lower due to lower ore grades in the mineral processed. In February, the new metallurgical laboratory started up operations at this unit, as part of a program to modernize the laboratories at all the mines. Also, a diesel maintenance workshop started up inside the mine in August, to increase the availability and utilization of equipment.

34 32 REVIEW OF OPERATIONS / MINING MADERO IS ONE OF THE LARGEST ZINC MINES IN MEXICO. THE VOLUME OF ORE MILLED WAS LOWER THAN IN THE PREVIOUS YEAR DUE TO THE HARDNESS OF MINERAL COMING FROM THE STOPES BEING EXPLOITED AT THE START OF THE PERIOD. IN LIGHT OF THIS SITUATION, SEVERAL ACTIONS WERE TAKEN, THE MOST IMPORTANT OF WHICH WAS AN INCREASE IN THE SIZE OF THE BALLS IN THE SAG MILL, WHICH HELPED INCREASE THE RATE OF MILLING FROM 7,000 TO 7,350 TONS PER DAY. Panorama. Madero unit, Zacatecas. FRANCISCO I. MADERO (zinc) Ownership: 100% Peñoles In operation since 2001 Location: Morelos, Zacatecas Installed capacity: 2.7 million tons milled/year PRODUCTION Contents % Var. Ore milled (kton) 2,237 2, Silver (koz) 880 1, Lead (ton) 11,731 10, Zinc (ton) 42,485 43, Copper (ton) The lower volume of ore processed negatively affected the production of silver contents, as did lower ore grade and recovery. In contrast, production of lead, zinc and copper offset the shortfall in volume with better grades and metallurgical recoveries. In 2014 development continued on the Madero Deep project, which will allow access to thirteen million tons of proven mineral reserves with higher ore grades of silver and zinc, thus ensuring operational continuity. Work was conducted on infrastructure for ventilation, pumping and backfilling for three new deep ore bodies, with a total advance of 995 meters on the three main ramps. Construction of the No. 2 tailings dam was also completed in its first phase (cell 1), with storage capacity for five years and an investment of US$4.6 million. The full project comprises four cells to deposit tailings from approximately thirteen years of operation. In addition, the third phase of extraction via DPM mining method (Double Post Mining) was initiated, which is safer and more efficient; 11,816 tons were extracted using this system.

35 33 REVIEW OF OPERATIONS / MINING Naica is the second largest lead mine in Mexico. In 2014 the production of metal contents was affected by the lower volume of ore milled and processed, as well as lower ore grades. In September we began to exploit the SE Mantle with high zinc content, in which a ventilation shaft was built to decrease the ambient temperature. A strategic project inside the mine is New Naica. On January 1, 2015 there was an extraordinary flow of water from the geohydrological structure in which the mineral deposit is located, which caused significant partial flooding of the mine, without any human impact whatsoever in this incident. The Company is making every effort to control the situation and access the levels of mine infrastructure that were affected; in the meanwhile, production in this mining unit is suspended. Jumbo operation. Naica unit, Chihuahua. The high operating costs and low grades of the current mineral make the economic contribution of Naica to Peñoles results marginal, while the exploitation of new resources and reserves identified in the area called New Naica is not achieved. NAICA (polymetallic: lead-zinc-copper-silver) Ownership: 100% Peñoles In operation since 1951, under Peñoles control since 1964 Location: Saucillo, Chihuahua Installed capacity: 950 thousand tons milled/year PRODUCTION Contents % Var. Ore milled (kton) Silver (koz) 1,855 2, Lead (ton) 19,694 21, Zinc (ton) 15,399 16, Mine interior. Madero unit, Zacatecas.

36 34 REVIEW OF OPERATIONS / MINING Night view. Sabinas unit, Zacatecas. SABINAS (polymetallic: zinc-lead-silver-copper) Ownership: 100% Peñoles In operation under Peñoles control since 1995 Location: Sombrerete, Zacatecas Installed capacity: 1.2 million tons milled/year PRODUCTION Contents % Var. Ore milled (kton) 1,199 1, Silver (koz) 4,648 3, Lead (ton) 7,283 8, Zinc (ton) 13,112 15, Copper (ton) 6,252 6, The milling and beneficiation plant at Sabinas worked at full capacity. An additional 8,530 tons of mineral with high silver and lead ore grades were extracted from the mine and did not go through the concentrator plant, which contributed to the notable increase in the production of silver contents and partially offset the lower lead ore grade in the mineral processed. The zinc and copper contents in concentrates were lower due to lower ore grades. THIS UNIT ALSO STARTED UP THE OPERATION OF A NEW METALLURGICAL LABORATORY AND IMPLEMENTED THE LABORATORY MANAGEMENT AND ADMINISTRATION SYSTEM. Construction was also completed on a surface workshop for contractors haul trucks, which will reduce traffic and environmental risks from transferring that equipment to Sombrerete for repair.

37 35 REVIEW OF OPERATIONS / MINING BISMARK (zinc and copper) Ownership: 100% Peñoles In operation since 1992 Location: Ascensión, Chihuahua Installed capacity: 800 thousand tons milled/year PRODUCTION Contents % Var. Ore milled (kton) Silver (koz) Lead (ton) 1, Zinc (ton) 38,071 33, Copper (ton) 1,981 1, Bismark is among the five largest zinc mines in the country. The mineral milled and treated in the period exceeded the previous year, resulting in higher production of all metal contents, helping offset lower ore grades for lead, zinc and copper. Silver and lead were driven by better metallurgical recoveries. The Felipe Ángeles shaft was fortified in the year by attaching steel plates to the structure to prevent rock fall. As part of the 10-year electrification project for the mine, a transformer was installed in the main substation with 12 MVA (megavolts) capacity, which replaced the previous 5 MVA transformer. We also completed the seven-hectare expansion project of the tailings dam, which increased the storage capacity of tailings by three years. The possibility of a further expansion to increase the life of the dam to fifteen years is under study. Other investments to develop the interior of the mine were construction of a pumping station and conditioning of the diesel workshop. Crushing station inside the mine. Bismark unit, Chihuahua.

38 36 REVIEW OF OPERATIONS / MINING MILPILLAS (copper cathodes) Ownership: 100% Peñoles In operations since 2005 Location: Santa Cruz, Sonora Installed capacity: 45 thousand tons copper cathodes/year PRODUCTION % Var. Ore deposited (kton) 2,400 2, Copper cathodes (ton) 26,051 22, Milpillas set a new annual record of mineral deposited on the leaching pads, thanks to the efforts of the personnel who generated more areas for exploitation. Copper cathode production grew due to greater control in the leaching pads, which helped increase the grade and flow of the pregnant leach solution (PLS) to the electrolysis plant. Major maintenance performed included the change from bearings to winch production at the Milpillas Shaft, which lasted seven days. Furthermore, as part of improving working conditions, construction was completed on a ventilation shaft inside the mine, reaching the surface at a length of 272 meters. To prepare a wider area for mineral deposit, work began on the 40,000 m 2 expansion of the liner base on leaching pad B and the relocation of the main irrigation pipe. Shipment of copper cathodes. Milpillas unit, Sonora. In addition, preparatory work was conducted for the installation of an alternating primary crusher in the mine, whose total investment will be US$6.4 million.

39 37 REVIEW OF OPERATIONS / MINING Reserves In 2014, 119,802 meters of exploratory drilling took place in the seven mines operated by Peñoles, with the aim of ensuring the tonnage and ore grades of the blocks scheduled for short- and medium-term production. For greater certainty, reserves and resources were calculated under the International Joint Ore Reserves Committee code (JORC version 2012). The reserves and resources estimate yielded an average of 15 and 34 years of life for the operations, respectively (compared to 14 and 23 last year). The mineral resources and reserves were estimated with conservative prices for all metals, lower than those used in the 2013 calculation. As a result, reserves decreased in most of the mines. At Bismark some inaccessible pillars and blocks were eliminated, as well as blocks with marginal ore grades; at Sabinas there were losses in the veins because some blocks did not have economic results; at Tizapa a topographic adjustment was made; at Madero downward adjustments were made to ore grades, although the identification of additional reserves at Madero Deep partially offset that decline; meanwhile, reserves at Milpillas declined when considering lower copper prices. The units with increases in reserves were Naica, being polymetallic, and Velardeña, due to exploration findings at the Santa María ore body and the NW projection of the North Antares Body. At December 31, 2014 metal contents in Peñoles proven and probable reserves, including those of Fresnillo plc, and their variation versus the prior year, were as follows: Gold: 10.0 million ounces (+80.0%) Silver: million ounces (-9.9%) Lead: 1,689.3 thousand tons (-9.4%) Zinc: 5,426.7 thousand tons (-1.8%) Copper: 431,627.7 tons (-14.4%) Conservative prices were used to calculate reserves and resources, lower than in the previous year.

40 38 REVIEW OF OPERATIONS / MINING Efficiency and productivity Preparatory work in the year was performed at the seven mines operated by Peñoles to ensure continuity of production. An average rate of two years of preparation was maintained. This work involved 119,820 meters of diamond drilling to locate and delineate the ore bodies, 64,500 meters of development in mining works to access these bodies, and 9,500 meters of Robbins boreholes. This resulted in an increase of the minable area from 149,000 to 187,000 m 2 and a total of 105 stopes available for exploitation at year-end (compared to 95 at the end of 2013). At Peñoles we foster a culture of teamwork and promote the generation of projects to create value. Thus, 46 projects were undertaken at the mining operations among which the following stood out (using Six Sigma Methodology -6S- or Teamwork Tools-HTE): Tizapa: Zinc recovery: contents production increased in the year by 2,248 tons (6S). Minable area: resulting on the addition of two production stopes in the mine (HTE). Water consumption: 3% decrease in the consumption of fresh water (HTE). Bismark: Costs: generated savings of 6% in the unit cost (US$/ton) of 71 vs. 78 plan (6S). Zinc grade: achieved an increase in zinc content from 52.30% to 52.92% (6S). Sabinas: Impurities: a decrease of 28.74% in the cost of treatment charges because of penalty deductions compared to 2013 (6S). Direct Shipment: increased production by 2,722 tons of high grade silver ore (HTE). Madero: Milling: expanded the pace of milling from 7,000 to 7,350 tons per day (6S). Total suspended solids: reduced suspended solids from 250 to 150 mg/l (HTE). Flotation cells at the beneficiation plant. Sabinas unit, Zacatecas. Milpillas: Ore grade control: maintained copper grades above budget in the second half of 2014 (HTE).

41 39 REVIEW OF OPERATIONS / MINING In addition, to strengthen the mining works and thus ensure the safety of personnel, 62,870 m 3 of concrete was placed on the floor and 986,050 anchors were installed (15.2% and 11.4% more than in previous year, respectively). Equivalent pounds of zinc (1) were 2.8% higher than in the previous year, rising from to million, driven by higher sales of this metal at Velardeña and Bismark and the higher price of zinc. EQUIVALENT POUNDS OF ZINC (millions) Mining unit % Var. Velardeña Tizapa Madero Naica Sabinas Bismark Metallurgical laboratory. Sabinas unit, Zacatecas. Equivalent pounds of copper (2) at Milpillas were 56.6 million, 9.1% higher than in the previous year due to greater volumes sold, which offset the lower copper price. The cost per ton milled was lower in four of the seven units; Velardeña had the greatest savings due to the higher volume of mineral processed and the lower cost of electricity, due to its incorporation to our energy selfsufficiency scheme. Cash costs (3) increased in mines with lower equivalent pounds sold. This increase also reflected higher treatment charges for zinc concentrates. COST INDICATORS Cost per ton milled (US$) Cash cost (US /lb) Mining unit % Var % Var. Velardeña Tizapa Madero Naica Sabinas Bismark Milpillas (1) Equivalent pounds of zinc: total gross sales / average price of zinc. (2) Equivalent pounds of copper: total gross sales / average copper price. (3) Cash cost = [Cost of sales (cost of production without depreciation and PTU + - change in inventories) + sales expenses (treatment charges, freight and penalties)] / equivalent pounds of zinc or copper.

42 40 REVIEW OF OPERATIONS / MINING Fresnillo plc Fresnillo plc, a subsidiary in which Peñoles maintains a 75% equity stake and which is listed separately on the London Stock Exchange, operates six mines in Mexico that mainly produce precious metals (gold and silver). Of particularly note is Fresnillo (Zacatecas), the world s largest primary silver mine, and Herradura (Sonora), the country s second largest gold mine. In October Fresnillo plc acquired the 44% minority interest in Penmont (owner of the Herradura, Soledad-Dipolos and Noche Buena mines, among other assets and exploration projects) from Newmont USA, Ltd., thereby consolidating 100% of production, assets and results of this subsidiary. PRODUCTION* Contents % Var. Milled and deposited ore (kton) 43,414 38, Gold (oz) 595, , Silver (koz) 40,352 38, Silver (koz) Silverstream 4,648 3, Lead (ton) 28,591 25, Zinc (ton) 31,700 24, * All figures include 100% of production from the Fresnillo plc mines, including the Penmont mines (Herradura, Soledad-Dipolos and Noche Buena) as well as Fresnillo, Saucito and Ciénega. The production of gold contents was lower than in the previous year as a result of the stoppage at Soledad-Dipolos in mid-2013, lower ore grade at Ciénega, and the temporary stoppage at Herradura due to a suspension of the explosives permit (operations at this unit resumed in late March 2014). These factors were partially offset by higher volumes deposited at Noche Buena and a greater contribution from Saucito. The production of silver contents grew due to the higher volume of mineral treated at Saucito, which processed additional material from the development of Saucito II, as well as higher volumes treated at Ciénega and increased production from the Silverstream (4). Zinc and lead by-products from the Fresnillo plc mines also exceeded volumes from the previous year. In the case of zinc this was due to higher grades and recoveries of mineral processed at Saucito, as well as higher volumes and metallurgical recoveries at Ciénega. Lead, meanwhile, increased due to higher volume and better ore grade at Saucito. In terms of growth projects, the dynamic leaching plant at Herradura started up operations in March, which will increase annual gold production by 50,000 ounces on average. In addition, the Saucito II project started up in the last quarter of the year, and will produce an average of 8.4 million ounces of silver and 35,000 ounces of gold per year, at an investment of US$235 million. Furthermore, the construction of the San Julián silver-gold mine in Chihuahua progressed according to plan with the development of the plant infrastructure, preparatory mining works and the start of construction on the tailings dam and dynamic leaching plant. This project will require an investment of US$515 million and will begin operations in the fourth quarter of The expected annual production is 10.3 million ounces of silver and 44,000 ounces of gold once operating at full capacity. (4) Under the Silverstream contract, Fresnillo plc is entitled to receive all the proceeds (before treatment and refining charges) less US$2.00 per ounce (US$5.00 per ounce as of 2013) of payable silver produced by Sabinas.

43 41 REVIEW OF OPERATIONS / MINING MINING OPERATIONS PRODUCTION AND RESERVES Average Ore Grades in Reserves Ore processed (Metric tons) Total Reserves (000 tons) December 2014 Mine Participation % Gold (g/ton) Silver (g/ton) Lead (%) Zinc (%) Copper (%) PRECIOUS METALS Underground Minera Fresnillo (1)(4) 75 2,703,395 2,625,511 31,828 26, La Ciénega (1)(4) 75 1,242,168 1,341,569 14,708 15, Saucito (1)(4) 75 1,181,737 1,534,579 10,419 9, Open pit La Herradura (1)(2)(4) 75 14,363,315 22,305,133 59, , Soledad-Dipolos (1)(2)(4) 75 6,701,841-21,130 37, Noche Buena (1)(2)(3)(4) 75 12,283,709 15,607,230 35,800 63, BASE METALS Underground Naica (5)(6) , ,677 13,536 13, Sabinas (5)(6) 100 1,184,112 1,199,000 13,155 13, Bismark (5)(6) , ,550 6,142 5, Tizapa (5)(6) , ,929 10,873 10, Francisco I. Madero (5)(6) 100 2,293,286 2,236,582 47,225 42, Velardeña (5)(6) 100 1,159,645 2,002,864 29,938 32, Milpillas (5)(6) 100 2,377,565 2,400,001 24,041 19, (1) As of December 31, 2014; proven and probable reserves in metric tons, on a 100% basis. Audited figures. (2) In 2013 mineral reserves reflect the Fresnillo plc s attributable 56% ownership of these operations. (3) Approximately 4.6% of the reserves are contained in mineral claims owned by a Fresnillo plc s wholly owned subsidiary. (4) Determination of 2014 reserves is based on the following metal prices: Gold US$1, per ounce, Silver US$18.00 per ounce, Lead US$0.95 per pound and Zinc US$0.95 per pound. (5) As of December 31, 2014 proven and probable reserves in thousands of metric tons, on a 100% basis. (6) Determination of 2014 reserves is based on the following metal prices: Gold US$1, per ounce, Silver US$18.00 per ounce, Lead US$0.95 per pound, Zinc US$0.95 per pound and Copper US$3.00 per pound.

44 42 REVIEW OF OPERATIONS / MINING Nighttime panorama. Milpillas unit, Sonora.

45 43 REVIEW OF OPERATIONS / METALS METALS PRODUCTION Producciones METALES ORO GOLD (thousands of ounces) Producciones METALES PLATA SILVER (millions of ounces) , , , , Producciones METALES PLOMO 1, % vs Producciones METALES ZINC % vs 2013 LEAD (thousands of tons) ZINC (thousands of tons) % vs % vs 2013 Producciones METALES BISMUTO Producciones METALES BULLION BISMUTH (tons) LEAD 0BULLION (thousands of tons) Zinc ingot shipping area. Met-Mex, Coahuila % vs % vs 2013

46 44 REVIEW OF OPERATIONS / METALS METALS FINANCIAL HIGHLIGHTS Net sales 54,974 86,023 85,378 55,308 52,235 Gross profit 3,627 6,286 5,164 3,341 4,124 % of sales 6.6% 7.3% 6.0% 6.0% 7.9% EBITDA 3,704 6,591 5,483 3,618 4,376 % of sales 6.7% 7.7% 6.4% 6.5% 8.4% Operating profit 3,272 5,897 4,759 2,891 3,518 % of sales 6.0% 6.9% 5.6% 5.2% 6.7% Note: Unaudited figures expressed in millions of pesos. Figures represent the sum of the separate financial statements of the operating companies in the Metals Division without corporate fees. Loading bullion at Met-Mex.

47 45 REVIEW OF OPERATIONS / METALS The main facilities of our metallurgical complex, one of the largest and most important in the world, are located in Torreón, Coahuila, where they produce primarily refined gold, silver, lead, zinc and bismuth from mineral concentrates and other materials. The Aleazin plant in Ramos Arizpe, Coahuila, manufactures zinc alloys. While at the Bermejillo plant, in Durango, certain by-products are processed to produce copper sulfate, zinc sulfate and antimony trioxide. These together comprise the company Metalúrgica Met-Mex Peñoles (Met-Mex). Globally, Met-Mex positions us as the world s largest producer of refined silver and the Latin American leader in the production of primary refined gold and lead, in addition to our position as the largest domestic producer of refined zinc. Met-Mex has two primary circuits: The lead-silver circuit, comprising the Lead Smelter, where lead-silver concentrates are processed to produce lead bullion, and the Lead-Silver Refinery, which receives both the lead bullion and dorés, precipitates and other materials rich in metal contents to produce refined gold, silver, lead and bismuth. The zinc circuit, where concentrates are treated by an electrolytic process to produce refined zinc in different qualities and presentations Production and performance Production of refined metals, and their variation from the previous year, was as follows: Gold: 1,197,935 ounces (+1.5%) Silver: 74.8 million ounces (+5.4%) Lead: 118,490 tons (-2.2%) Zinc: 228,790 tons (+1.6%) Performance in the metallurgical business was reasonable despite the various operational and market challenges that arose during the year, such as the suspension of mining operations of some remitters and lower treatment charges for lead. TO OPTIMIZE THE USE OF FINANCIAL RESOURCES AND MAKE MORE EFFICIENT USE OF WORKING CAPITAL, CONCENTRATES AND VARIOUS SECONDARY MATERIALS IN PROCESS WERE SOLD. The production of refined gold and silver increased due to higher volumes of dorés received at the Lead-Silver Refinery from our own mines and those of third parties, which offset lower metal contents in concentrates treated at the Lead Smelter. The lower production of refined lead was due to lower ore grades and lower volumes of concentrates treated at the Lead Smelter. In contrast, refined zinc production increased due to greater volumes of concentrates and higher contents in the concentrates treated at the Electrolytic Zinc Plant.

48 46 REVIEW OF OPERATIONS / METALS LEAD-SILVER CIRCUIT Volumes received (ton) % Var. Concentrates (Smelter) 311, , Direct materials (Refinery) 2,249 2, Total raw material 313, , Peñoles* 212, , % of total Third parties 101, , % of total SHARE OF CONTENTS IN THE RAW MATERIAL (%) Gold Silver Lead Peñoles* Third parties AS FOR BY-PRODUCTS PROCESSED AT THE BERMEJILLO PLANT, FOR THE SECOND CONSECUTIVE YEAR NEW RECORDS WERE SET IN THE PRODUCTION OF COPPER SULFATE, ANTIMONY TRIOXIDE AND LEAD/ ANTIMONY ALLOYS. In the lead-silver circuit, treatment revenues in terms of dollar per ton were lower (-16.2%) due to the decrease in base treatment charges for lead concentrates worldwide, and lower revenues from refining silver. At the same time, unit production costs decreased (-3.3%), mainly in the area of energy, due to the lower price of metallurgical coke (a critical input for the Smelter) and lower costs for contractors, maintenance and repairs. These factors helped to offset the effect of lower treatment revenues, although margins in the lead-silver business were lower compared to the previous year. * Includes Fresnillo plc In 2014 concentrates were purchased from new remitters to offset the shortfall in production of some mining companies and thus to ensure sufficient supply of raw material for the Lead Smelter. Total tonnage treated was 357,000 tons (3.9% below the prior year), with most of that volume coming from our own mines. In line with the inventory reduction strategy, 10,018 tons of lead concentrates were sold, and the year closed with inventory of 20,000 tons. As for the quality of concentrates, there was lower lead content in the mixtures that entered the production process, which, combined with the lower volume treated, resulted in production of 132,815 tons of bullion (3.9% less than in 2013). Additional volumes of materials rich in gold and silver were purchased from third parties to supply the Lead-Silver Refinery, under suitable and profitable conditions for the business. Certifications for gold and silver produced by Met-Mex allow them to be traded on international markets.

49 47 REVIEW OF OPERATIONS / METALS Following are some of the notable investments and projects in the lead-silver business aimed at improving operational productivity and efficiency, as well as from our Vision 2020 growth strategy: Acquisition of critical equipment for the Acid 3 plant, which included replacement of the sulfuric acid storage tank and the addition of an ammonium sulfate absorber, with an investment of US$3.8 million. Replacement of internal mechanical elements and ten trolleys in the sinter area. Mechanized production of granulated fine silver in the Lead- Silver Refinery. Installation of gas absorbers in the bismuth plant, and construction of three recovery stalls with total filtration. Began the replacement of the rotary furnace for bismuth, and the ventilation Terrel system for the furnaces. ZINC CIRCUIT Concentrates received (ton) % Var. Total 512, , Peñoles* 386, , % of total Third parties 126, , % of total SHARE OF CONTENTS IN THE CONCENTRATES (%) Zinc Peñoles* 73.7 Third parties 26.3 * Includes Fresnillo plc Molten gold. Met-Mex Refinery, Coahuila.

50 48 REVIEW OF OPERATIONS / METALS The volume of zinc concentrates received from our own mines rose primarily due to the increased supply from Velardeña, which helped guarantee the supply of raw materials and compensated for the decline in volumes from third parties. We acquired 20,773 tons of zinc oxides. The tonnage treated was 482 thousand tons, 2.1% higher than the previous year. Moreover, the profit margin in the zinc circuit improved relative to 2013, registering higher revenue per ton treated (+8.6% in dollar terms) due to higher base treatment charges, which offset the increase in the unit costs of production (+2.0%) resulting from the higher cost of operating materials, raw materials and electricity. The main investments in fixed assets and notable projects to improve efficiency and productivity in the zinc circuit were: Construction of a new containment area for copper and cobalt cements. Automation at Aleazin in both the 10 kg ingot casting for zinc-aluminum-magnesium alloys and copper (zamak), and in product identification. Various replacements, such as of heat exchangers, two reactors and an overhead crane, among others. Two projects in the water treatment plant: first, a pumping system to use residual water in the solvent extraction area, and second, recovery of condensates, which will help improve the balance of water in the unit. Also as part of our Vision 2020 growth strategy, the Executive Committee approved the construction of a project to expand production capacity of refined zinc by 100,000 tons per year via direct leaching process, with an investment of US$324 million. Several preparatory activities were undertaken to that end, such as clearing the site where the plant will be built and the replacement of a 20 tons/hour bath furnace for one with triple capacity at Aleazin, among others. Marketing and business development In the year we obtained Good Delivery recertification from the London Bullion Market Association (LBMA) and the Dubai Multi Commodities Centre (DMCC), for the high quality and purity of the gold and silver we produce, allowing these products to continue to be traded in international markets. To attain these recertifications, and as part of our commitment to business ethics, an audit was performed by a recognized external auditor certifying that our entire supply chain for the production of these refined metals is free of ethical and legal conflicts. Our commercial area faced difficult conditions due to the economic situation in several of our markets. Nonetheless, the search for diversification and better profitability of our products continued. Sales volumes grew in the domestic market for most metals except gold and silver, which were mainly sold to the export market. We also increased the supply of special zinc alloys for the galvanizing industry to meet the needs of our clients, and tracked the expansion projects at plants producing galvanized steel sheets for the automotive industry, where growth is expected.

51 49 REVIEW OF OPERATIONS / METALS Melting and casting, Electrolytic Zinc Plant. Met-Mex, Coahuila. In line with our commitment to administrative excellence, external audits were performed on both the sales collection process and the new Customer Information System, both without major observations. During the year the promotion of the use of zinc continued. Remediation and anti-corrosion protection projects were undertaken on our own mining equipment (scoop trams) and on the overhead crane in the furnace area of the Smelter using thermal spraying technology, with the aim of prolonging the life of the equipment. The Jewelry Fashion Information Center celebrated its fifteenth year. Since its inception it has been dedicated to promoting the use of silver in jewelry and fostering innovative designs that can compete globally. Over the course of the years it has trained 38,116 people and businesses through workshops, seminars and conferences; it has also supported 276 designers, 99 projects and has organized a total of 66 events, which have been instrumental in the launch of 18 new designers and brands. Due to these achievements the Center was recognized as unique in its kind by the Silver Promotion Services program of the Silver Institute. During the year the Center launched the 2015 trends Geography of a Moment through social networks, with broad success and reach. The strategic alliance with Tane also continued, to promote the use of silver in jewelry and metalwork including support for their technical needs with expertise from the Silver Institute.

52 50 REVIEW OF OPERATIONS / METALS Panorama. Metalúrgica Met-Mex, Coahuila.

53 51 REVIEW OF OPERATIONS / CHEMICALS Producciones QUIMICOS SULFATO SODIO CHEMICALS PRODUCTION Producciones QUIMICOS OXIDO MAGNESIO Producciones QUIMICOS SULFATO MAGNESIO Producciones QUIMICOS SULFATO AMONIO 0SODIUM SULFATE (thousands of tons) 0MAGNESIUM 20 OXIDE* (thousands of tons) 0 MAGNESIUM 10 SULFATE (thousands of tons) 0 AMMONIUM 50 SULFATE* (thousands of tons) % vs % vs 2013 * Includes refractory, caustic, electric, electrofused and hydroxide grades % vs * Maquila (multure) not included % vs 2013 Dawn. Magnelec (Química del Rey), Coahuila.

54 52 REVIEW OF OPERATIONS / CHEMICALS CHEMICALS FINANCIAL HIGHLIGHTS Net sales 1,819 1,931 2,644 2,627 2,699 Gross profit , % of sales 44.1% 44.0% 40.8% 37.8% 36.0% EBITDA % of sales 35.6% 35.7% 33.8% 32.4% 30.3% Operating profit % of sales 30.1% 27.7% 27.9% 27.2% 24.7% Note: Unaudited figures expressed in millions of pesos. Figures represent the sum of the separate financial statements of the operating companies in the Chemicals Division without corporate fees. Magnesium oxide bags. Química del Rey, Coahuila.

55 53 REVIEW OF OPERATIONS / CHEMICALS The Chemical Division exploits natural brine deposits and mineral salts extracted from the subsoil through hydraulic mining, to produce a variety of inorganic chemicals. These operations strengthen our vertical integration, increase our revenues and help diversify our products and markets Production and performance The main product of this Division is sodium sulfate, which is produced at the Química del Rey facilities located in Ocampo, Coahuila. This raw material is used in the manufacture of detergents, glass and paper, and as a color dyeing supplement by the textile industry. Construction of Plant II was successfully completed in the fourth quarter of the year, expanding production capacity by 150,000 tons to a total 780,000 tons of sodium sulfate per year. This strategic growth project, an investment of US$43.0 million, will enable us to meet domestic demand and grow our exports. WITH THE EXPANSION COMPLETED, QUÍMICA DEL REY (MAGNELEC), BECAME THE LEADING PRODUCER OF SODIUM SULFATE IN THE AMERICAS AND THE LARGEST IN THE WESTERN HEMISPHERE, AND ROSE FROM FOURTH TO THIRD IN THE WORLD IN TERMS OF INSTALLED CAPACITY. Annual production of sodium sulfate was 637,140 tons, marginally lower than in the previous year (-0.7%), while volume sold was 4.2% lower due to a temporary contraction in domestic demand, which recovered towards the end of the period. Other notable investments in the sodium sulfate plant included: Replacement of a section of Shell in the No. 2 rotary kiln, to ensure continuity and increase the efficiency of the operating process. Restoration of the No. 1 rotary kiln with the aim of having a permanent operating alternative. Upgrading the motor control centers, which will increase the safety of personnel and the operation of strategic equipment. Restructuring of the electrical facilities given the growth of the operations due to construction of the new plant. The price in dollars per ton of sodium sulfate remained stable; however, the unit cost of production was higher, mainly due to an increase in the price of natural gas, a key component of production costs. Additionally, there were gas supply problems arising from a low-pressure pipeline from Petróleos Mexicanos, thus fuel oil was used (which is more expensive) in order to maintain business continuity. This affected the gross margin for this product, which contracted by 5.9% in comparison to the previous year. Another important product is magnesium oxide, which is produced from residual brine and dolomite from La Esmeralda mine in Sierra Mojada, Coahuila. This material is manufactured in different grades, the main ones being: refractory, used for the manufacture of bricks that line high temperature kilns in the steel and cement industries; caustic, used in the production of animal feed and fertilizer; hydroxide, used as a flame retardant; and electrical, which is used as insulation and for the manufacture of heating elements in household appliances.

56 54 REVIEW OF OPERATIONS / CHEMICALS Notwithstanding difficult market conditions, some chemicals set new production and sales records. Magnesium oxide had mixed results, due to contrasting economic conditions in our various markets. We implemented a production and sales strategy focused on maximizing on the overall the profitability of the business. New annual production records were set in magnesium hydroxide and electrical grades, while volume was lower in the refractory grade. Given the above, production and sales volumes of the main grades registered marginal variations of -0.6% and +0.8%, respectively, compared with the year prior. Gross margin in dollar terms remained stable, despite higher operating costs arising from the increase in energy (electricity and natural gas). In addition, as a result of the commercial efforts, there were unprecedented sales volumes in milled specialties and electric grade. In both cases, the addition of new customers, applications and markets were notable. Magnesium sulfate, also known as Epsom Salt, is used as a fertilizer, in the tanning industry, in chemical processing, and in the manufacture of detergents. In 2014, this product registered production and sales records for the second consecutive year. Commercial efforts helped expand the regional coverage and customer base, despite strong competition in the market from imported products. We also began the manufacture and sale of a new granular monohydrate product to diversify our offering to the agricultural market. Ammonium sulfate is a value-added product that is made from the sulfuric acid generated in the sulfur collecting process in the Lead Smelter. It is produced at the Fertirey plant, adjacent to the Met-Mex metallurgical complex in Torreón. Used as fertilizer, this product faced strong competition due to the entry of imported fertilizers, which put downward pressure on sales prices. As a consequence, production volumes and sales were lower than in the previous year. The following are among the improvement projects and initiatives to increase efficiency and productivity at the chemical operations: Implementation of an Asset Performance Management project with the counsel of an external consultant. Development of five operating projects using Six Sigma methodology, which have optimized the main consumption indicators for processes at the Química del Rey plant.

57 55 REVIEW OF OPERATIONS / CHEMICALS Plant II, which increases the production capacity of sodium sulfate. Química del Rey, Coahuila.

58 56 ENERGY AND TECHNOLOGY WE CONTINUE TAKING FIRM STEPS TOWARDS SELF-SUFFICIENCY IN ELECTRICITY FROM RENEWABLE SOURCES.

59 57 ENERGY AND TECHNOLOGY Fuerza Eólica del Istmo, Oaxaca. ENERGY Energy self-sufficiency is a priority in Peñoles business strategy, as electricity is critical to our operations and represents an important component of our operating costs. Because of this, several years ago we undertook the search for and development of our own sources of electricity to provide us with a steady and reliable supply at low cost. Furthermore, given the startup of new operations and the expansion of existing ones, an additional challenge is to increase the portfolio of energy sources in order to maintain a high level of self-sufficiency. In 2014 we took an important step in this direction by signing a 25-year supply agreement with the Portuguese company Electricidad de Portugal Renovables (EDPR) for the design, financing, construction and commissioning, in 2016, of a wind farm with installed capacity of megawatts (MW) in Coahuila, which will supply the clean energy it produces at very competitive costs.

60 58 ENERGY AND TECHNOLOGY Internal cogeneration stations: a turbogenerator at the Electrolytic Zinc Plant in Torreón with 7 MW capacity which uses the excess steam in the roasting area, as well as a steam-electricity cogeneration process with 6.2 MW capacity at Química del Rey. In 2014 the consumption of electricity of the Company and its subsidiaries (including Fresnillo plc) represented an annual average demand of 308 MW, 7.7% higher than in the previous year, which was attributable to the startup of the dynamic leaching plant at Herradura and the Saucito II mining unit, as well as a full year of production at Velardeña (which started up in May 2013). Maximum demand reached 370 MW of electrical power (14.5% higher than peak demand recorded in 2013). The electricity required to supply these needs came from the following sources: Termoeléctrica Peñoles, in San Luis Potosí, completed ten years of operation. Our current self-supply scheme consists of the following sources: Termoeléctrica Peñoles (TEP), located in Tamuín, San Luis Potosí, with capacity to generate 230 MW, which is owned and operated by third parties. A power supply agreement expiring in 2027 governs the supply to our operations. Fuerza Eólica del Istmo (FEI), a wind farm located in La Ventosa region (municipality of El Espinal, Oaxaca), has 80 MW of installed capacity in 32 wind turbines and demonstrates our commitment to sustainability and environmental stewardship. From TEP, 77.2%; FEI, 4.5%; and 3.1% from internal cogeneration, for a total of 84.8% supplied by our own sources. The remaining 15.2% was purchased from the Federal Electricity Commission (the national utility, CFE for its Spanish acronym). The percentage of electrical self-sufficiency was lower than in 2013 because virtually all the increase in demand from our operations was supplied by power from the CFE. The average unit cost of the energy consumed was US 7.57 per kwh, 4.7% higher than the previous year due to inflation in operating and maintenance costs pursuant to the provisions of the power supply agreements with TEP and FEI, as well as new water usage rights and the imposition of an environmental tax on fossil fuels applicable to TEP that affected the rate charged to the Company. There was also greater CFE consumption. Notwithstanding the above, electrical self-sufficiency resulted in savings of US$69.2 million in our operating costs, a benefit of 26.0% of the rate that would have been paid to CFE for all of our electricity consumption. TEP completed ten years of operations in During this period the electricity purchased from this plant has generated a total savings of US$613 million for the Company.

61 59 ENERGY AND TECHNOLOGY FEI generated 28 MW on average, slightly below the previous year due to lower mechanical availability of the wind turbines. To increase the efficiency and productivity of the park, the services of a new operator were contracted and the first major preventive maintenance of the facilities was carried out. In line with our Vision 2020 growth strategy we estimate that demand for electricity will grow to 480 MW in 2017 and 580 MW by To supply these requirements, beyond the important progress that the agreement with EDPR represents, we will continue to explore clean energy sources including wind, solar photovoltaic and the efficient cogeneration of steam and electricity. The Group is also a major consumer of diesel for mobile equipment and off-road trucks. Given the large price differential between natural gas and diesel, various initiatives are being explored to replace diesel consumption in the mining units. Energy Reform In 2014 the laws comprising Energy Reform in Mexico were approved, representing a very significant change in the environment both in the electricity sector and in terms of petroleum-derived fuels. PEÑOLES, THROUGH ITS ENERGY COMMITTEE, IS CAREFULLY EXAMINING THE RULES OF THE NEW WHOLESALE ELECTRICITY MARKET TO IDENTIFY OPPORTUNITIES THAT COULD ADVANCE THE GOAL OF OBTAINING COMPETITIVE ENERGY OVER THE LONG TERM. Major maintenance was carried out at all the wind farm facilities.

62 60 ENERGY AND TECHNOLOGY As for the technical support provided to the mining operations, of particular note was the support for the Milpillas unit to accelerate the recovery of copper in the leaching process, as well as design adaptations to the beneficiation plants at Sabinas in order to improve the lead recovery and increase the grade of zinc in concentrates. Technical research and development strengthens our processes and improves our products. TECHNOLOGY AND INNOVATION The Center for Technical Research and Development (CIDT) located in Torreón, Coahuila, has a specialized team of researchers who support the Company s growth projects and prospects, help optimize processes in our operations, and collaborate in the development of new products and applications. Following is some of their notable work in 2014: MINERAL PROCESSES The CIDT team conducted tests on mineral samples from six mine exploration projects. Additionally, they performed the metallurgical evaluation on various Company prospects and provided technical assistance to improve recoveries and grades of the concentrates from the operating mines. As for projects, the CIDT performed flotation tests to optimize the metallurgical recovery and further experimentation on core samples from Racaycocha to define the parameters for grinding. Flotation tests were also conducted for El Águila project (acquired during the year), results from the copper sulfate flotation tests at Los Humos project were reported; and various metallurgical analyses were undertaken for three Fresnillo plc projects. METALLURGICAL PROCESSES During the year, of particular note were the pilot tests undertaken for a hydro-metallurgical process to treat copper by-products from the Met-Mex operations, to separate them and achieve a high degree of recovery of the metal contained in these materials. As the results were promising, an economic evaluation to implement this process will take place in CIDT also concluded a simulator that predicts the behavior of different materials in the sintering stage of the Lead Smelter, which will support decision-making on the metallurgical composition of the mixtures to be processed in the future. CHEMICAL PROCESSES The CIDT joined a multidisciplinary team with the aim of improving the performance of magnesium hydroxide in flame retardant applications. The results were favorable and a new product was developed that was validated by our clients. The critical variables and specifications of the process were defined in order to maintain consistency in the quality of this product. Significant progress was also made in the development of brine evaporation processes, with low operating costs, to support the consistency of the salt concentration in these brines and ensure operational continuity.

63 61 OUR PEOPLE HAVING EXCELLENT PEOPLE WHO FULLY LIVE OUR ORGANIZATIONAL VALUES IS A FUNDAMENTAL PILLAR IN OUR GROWTH STRATEGY.

64 62 OUR PEOPLE This system consists of five processes: Selection of new personnel For this process we have various schemes such as the apprenticeships; internship programs and Engineers in Training; support for students in the Earth Sciences through scholarships; and agreements with various universities in the country. Performance evaluation Through this process, employees results are evaluated to measure achievement of established objectives and expected behaviors according to our Organizational Skills, forming the basis for determining salary increases, recognition for achievements and training programs to meet the identified areas of opportunity. For the sixth consecutive year, performance evaluations were conducted for 100% of personnel. Our greatest asset at Peñoles is the people who work in the Organization. Therefore, the objective of our human resources strategy is to be the best employment choice for all our personnel. Committed to this goal, we have utilized the Talent Development System since 2009, whose processes we have enhanced year after year to select, develop and retain personnel with the best performance and highest potential. Having people of excellence, as manifested in our Vision, who live the Peñoles Values fully and daily, is a cornerstone of our 2020 Growth strategy. Compensation It is very important that Peñoles has an objective and competitive compensation system, based on salaries in line with the market scale, the level of responsibility of the position, and the individual performance of the employee. In addition to salary, full-time employees have a benefits package that is superior to the requirements of labor regulations, which includes a savings fund, medical expense benefits, pension plan, vacations and seniority premiums. Training Training programs and activities are established in line with job skills, seniority, performance and potential of employees. Development and retention Through this scheme we promote the development of personnel with the best performance and potential.

65 63 OUR PEOPLE 2014 Highlights For the sixth consecutive year, performance evaluations were conducted for 100% of personnel. In order to monitor progress on a timely basis and thus obtain an objective evaluation at the end of the period, feedback from immediate supervisors was promoted through the use of Performance Notes, whose usage increased by 90% over the previous year. Also, 197 employees were promoted through internal publication of vacancies, while internal staff filled 69% of the available vacancies. IN OUR TRAINING PROGRAM, WE PROVIDED AN AVERAGE OF 94 HOURS OF TRAINING PER EMPLOYEE IN VARIOUS TOPICS SUCH AS INDUCTION INTO THE COMPANY, HUMAN RIGHTS, HEALTH AND SAFETY AND ANTI-CORRUPTION, AMONG OTHERS. INVESTMENT IN INTERNAL AND EXTERNAL TRAINING TOTALED $59.7 MILLION. Succession plans have been defined for 100% of the 376 key positions, whose potential candidates for replacement were identified based on performance and potential. In line with this, 121 career plans were defined for executive and non-executive employees, to prepare them to hold key positions in the short and medium term. Moreover, for the second consecutive year the Gold Program took place by which recognition was given to 39 employees for their outstanding performance and high potential. Additionally, financial recognition was awarded for outstanding and high performance, with a bonus of fifteen to sixty days of salary, to 153 employees who exceeded performance expectations or completed their undergraduate or postgraduate studies. Based on the personnel needs identified for 2020, this year we accepted 427 interns and 156 professionals training in careers related to the profiles required by the Company. In 2014 the Employee Satisfaction Survey was once again conducted by the Great Place to Work Institute Mexico, with participation of 92% of personnel. The average rating of the Peñoles companies was 69 of 70 points needed to achieve certification, a 7.8% improvement compared to the survey conducted in 2012 with the same institute and methodology. It should be noted that there was a 20% improvement in the 2014 rating with respect to 2012 in the case of unionized employees, and 8.8% among non-unionized personnel. Eight Peñoles companies achieved the Great Place to Work certification awarded by the institute, five more than in the previous survey. At the end of 2014, Peñoles and its subsidiaries (including Fresnillo plc) had 11,395 employees, excluding associated companies. Remuneration (including entitlements and benefits) totaled $4,935.2 million. The labor force was comprised as follows: 90.3% men and 9.7% women. 66.2% unionized and 33.8% non-unionized. 94.8% full time and 5.2% part time. 13.4% between 18 and 24 years old; 64.7% between 25 and 44; and 21.9% over % at executive level.

66 64 OUR PEOPLE As great as our people. Bismark unit, Chihuahua. At Peñoles we respect the right to freedom of association and collective bargaining. We maintain frank and open relations with unions and focus our efforts on productivity. Labor negotiations with the various unions with whom our business units have signed collective agreements were conducted in a framework of respect and cooperation. There were no work stoppages or strikes, allowing for continuity in our operations. On matters of health and safety we maintain a culture of prevention as an integral part of our risk management. We do not yield on our goal of zero accidents and zero new occupational diseases. In 2014 we continued to intensify safety programs and activities through ongoing training, accident investigation, operational discipline and conducting corporate safety audits (internal and external). We conduct medical examinations for our employees and gynecological exams for female employees, as well as vaccinations and check-ups. All operating units have medical staff who conduct workplace health activities, with a preventive approach to occupational illnesses and managing those already existing through assessment and monitoring of all exposed workers. Each business unit has a Joint Commission for Health and Safety in which all personnel are represented, which conducts periodic inspections of processes to improve conditions on those issues. With the support and involvement of one of the unions with whom we work, and the support of the Secretariat of Labor and Social Welfare, in 2014 we implemented a certification program for personnel belonging to the Joint Commission, and today we have several certified employees. Our goal is that all personnel assigned to a Joint Commission for Safety and Health be certified, which will unquestionably improve the level and quality of the commissions review processes. In addition, all mining units also have refuges and first aid brigades.

67 65 OUR PEOPLE Joint efforts between corporate and operational areas continued in matters of health and safety to improve the following indicators. OCCUPATIONAL AND CHRONIC DEGENERATIVE DISEASES INDICATORS (1) No. of cases Type Silicosis Hearing loss Elevated blood lead level Accident after-effects As most of these diseases are preventable, we continue to strengthen healthcare actions for employees by applying stricter protocols, in line with the risk factors existing in each of the Group s companies. While we intensified our programs and actions to strengthen the safety culture in 2014, we deeply regret the death of two employees in our operations as a result of workplace accidents. We recognize that we still have way to go, and will continue to strengthen efforts to improve our safety indices and achieve the goal of operating with zero accidents. SAFETY INDICATORS (1) No. of cases Type Fatal accidents Lost time accidents Non-lost time accidents Days lost 23,611 18,514 12,758 Accident rate Days lost index (1) Includes unionized an non-unionized personnel and contractors, of both Peñoles and Fresnillo plc. Great Place to Work Mexico conducted the workplace environment survey. Eight companies were certified Great Place to Work.

68 66 CORPORATE GOVERNANCE WE STRENGTHENED OUR VISION BY ADDING THE ISSUE OF ETHICS, AND BEGAN TRAINING AIMED AT PROMOTING ETHICS AND INTEGRITY THROUGHOUT THE ORGANIZATION.

69 67 CORPORATE GOVERNANCE Our commitment as a socially responsible company with a strengthened Vision: To be the most recognized Mexican company in its sector worldwide, for its global focus, the quality of its processes, the excellence of its people and the ethical leading of its business motivates us to uphold our conviction to prevent and combat criminal behaviors that seriously affect organizations and society in general. Therefore, in order to continue fostering a culture based on our institutional values (CRIL) and provide greater certainty, transparency and confidence to our shareholders, in 2014 we continued the implementation process of the Compliance Program (hereafter the Program ) initiated in 2013, which consists of six key elements: Reporting and investigation Monitoring and auditing Ethics and values Program Commitment from Senior Management Risk assessment Compliance Monitoring Program 1. Ethical culture and commitment of Senior Management This is the most important element, as we genuinely believe that the success and permanence of our Company is due to the excellence of its people. If each person lives the Organizational Values in their daily actions and fulfills their responsibility of doing the right thing, risk exposure will be minimized and the importance of controls will lessen as factor in measuring the effectiveness of internal control and corporate governance. In 2014 the Corporate Ethics and Values Committee began its work, replacing the Honor Commission as the body responsible for promoting ethical conduct among our personnel, monitoring compliance with the objectives of the Program, and reviewing unethical conduct cases received through the Peñoles Play Fair confidential and anonymous whistleblowing line. This Committee, comprised of members of the Management Team, met three times during the year. Furthermore, the Compliance Officer began his oversight activities derived from the Program, and starting in the second half of 2014, an Ethics and Compliance Coordinator was appointed to be responsible for its implementation. A highlight this year was the training of employees in different divisions of the Group, as part of an initiative called Promoting ethics and integrity at Peñoles. Training and communication Policies, procedures and controls 2. Risk assessment As priority was given in 2014 to disseminating the Promoting ethics and integrity at Peñoles initiative, coupled with the actions focused on compliance with the Anti-Money Laundering Act of Mexico, the risk assessment originally made in 2013 will be updated in 2015.

70 68 CORPORATE GOVERNANCE 3. Appropriate procedures and implementation of controls This element ensures we have the procedures that allow for an effective control system. In 2014 we continued to strengthen due diligence processes (knowledge and verification of third parties), with a primary focus on the critical areas of the Company that have contact with third parties (such as Raw Material Procurement; Marketing; and Engineering & Construction, among others). In turn, procedures were published for Receiving, reviewing and following up on reports of unethical conduct; Donations; Government relations; and the procedure and guide for compliance with the Anti-Money Laundering Act of Mexico. We maintained the Good Delivery certificate issued by the London Bullion Market Association, which accredits the high quality and purity of gold and silver bars in a process that includes compliance with standards such as respect for human rights, combating money laundering and terrorist financing, and having a responsible supply chain that avoids sourcing from areas of conflict or risk. 4. Training and Communication The training program called Promoting ethics and integrity at Peñoles started in the second half of the year, aimed at all employees. This initiative was conducted through workshops aiming to foster commitment to Peñoles stronger vision, reinforce the behaviors and values expected of all personnel, provide useful tools for sound decision-making (Behavioral Compass) and to disseminate the new Compliance function. To date, more than 2,000 employees have been trained, led by a group of facilitators trained by the Ethics and Compliance, Internal Audit and Human Resources areas, in conjunction with a prestigious international consulting firm. These facilitators will gradually assume guidance roles regarding ethical issues in our various business units, and under coordination of the Compliance area, will be part of Your Ethical Network. Moreover, as support for the Compliance function and in order to generate a basic concept of identity that links employees expected behaviors with the institutional initiatives that strengthen ethics and corporate values (CRIL), an internal communication campaign was launched, To be a Peñolero is... which included in-person dissemination at all the business units of both our values and pride of belonging to Peñoles; reinforcing through multiple internal channels ( , posters, intranet) our stronger Vision and the importance of always doing the right thing; developing activities that involved the active participation of all personnel; distributing printed materials that were delivered to our employees during ethics workshops; and disseminating throughout the Organization testimonies of employees recognized for their ethical behavior. 5. Reporting and investigation This element continued the process of improving our system of review, response and resolution to reports of unethical conduct received through the Peñoles Play Fair whistleblowing line. Internal communication campaign to promote ethics and values. 6. Monitoring and auditing With advice from a prestigious international consulting firm, a range of recommendations was developed for identifying various possible situations that pose risks of fraud, money laundering and corruption, in order to detect, investigate and correct them. Actions were also recommended for incorporating ethics and integrity in all our business processes.

71 69 CORPORATE GOVERNANCE CORPORATE GOVERNANCE STRUCTURE and key responsibilities Board of Directors SECRETARY Regularly review management on the Company s economic, operational, product, social, environmental, human development and safety, including the related risks and opportunities. 15 Proprietary Board Members and their respective alternates Vision and strategy Policies and guidelines Monitor the execution of the businesses Approve the budget and financial results Management, administration and execution of the business CHIEF EXECUTIVE OFFICER AND MANAGEMENT TEAM Executive Committee 7 Directors elected by the Board from among its members Reviews, approves and monitors the operational and strategic development Recommends changes to the corporate strategy and businesses Audit and Corporate Governance Committee 3 Independent Board Members Reviews compliance with internal control policies and accounting guidelines Monitors systems of Internal Control and Audit Evaluates the performance of the external auditor Finance and Planning Committee 7 Board Members, several financial experts Reviews financial policies and projections Evaluates investment projects and Company s financing Nomination, Evaluation and Compensations Committee 3 Board Members Reviews the organizational structure Validates the skills and experience of the Board and recommends their compensation Evaluates the performance of senior executives Defines the overall compensation policy and succession plans The Board met four times during the 2014 fiscal year. All sessions had a notably high quorum of attendance: 100% of Board Members were present at three of those meetings, and 94% at one. In 2014 total remuneration for senior management was $115.1 million. The Annual General Shareholders Meeting held on April 24, 2014 authorized $8.8 million for remuneration of Directors.

72 70 Training workshop in the framework of the Promoting ethics and integrity at Peñoles initiative.

73 71 MANAGEMENT SENIOR EXECUTIVES Fernando Alanís Ortega ceo 9 13 MINING 15 Armando Sánchez López vice president 5 Francisco Mireles Huerta operations vice president METALS AND CHEMICALS 11 Rafael Rebollar González vice president Javier Hernández Gallegos operations vice president Arturo Vaca Durán energy and technology vice president Manuel Medina Pegram commercial vice president ENGINEERING AND CONSTRUCTION Enrique Cortés Pérez vice president FINANCE Leopoldo Alarcón Ruíz vice president ADMINISTRATIVE SERVICES Emilio Fandiño Margalef vice president EXPLORATION Javier García Fons vice president WATER BUSINESS Ramón Vila Sánchez vice president HUMAN RESOURCES Augusto Sánchez Marroquín vice president 1 2 LAW Sergio Rodríguez Molleda vice president INTERNAL CONTROL Rodolfo Gómez Maturano vice president ASSISTANT VICE PRESIDENTS MINING Nicolás Figueroa Tapia services Roberto González Rodríguez northern mining operations Francisco Javier Berumen Muro southern mining operations METALS AND CHEMICALS Ricardo Benavides Pérez technology Leopoldo López Rodríguez community relations Alejandro Fernández Ramírez chemicals marketing Juan Manuel Martínez González metals marketing Luis Lauro Rodríguez González technical Óscar Luévano Ovalle raw material ENGINEERING AND CONSTRUCTION Ricardo Alanís Ramírez plant engineering and construction Luis Humberto Vázquez San Miguel engineering FINANCE Ignacio Delfín Hierro treasury and financing Juan Francisco Corona Martínez financial planning ADMINISTRATIVE SERVICES Daniel Barragán Cantú procurement Alfonso Carreño Ortega tax planning Pablo Alvarado Vargas it Martín Arreola Coronel comptroller HUMAN RESOURCES Humberto Aguiar Gómez labor relations LAW Francisco Siliceo Curiel institutional relations INTERNAL CONTROL María Nancy Acosta Jáuregui internal control NEW PROJECTS Daniel Torres Guerrero new projects STRATEGIC PLANNING José von Bertrab Saracho strategic planning ENVIRONMENT, SAFETY AND HEALTH Camilo Valdez Ábrego corporate ecology, safety and occupational health Structure as of December 31, 2014.

74 72 BOARD OF DIRECTORS CHAIRMAN ALBERTO BAILLÈRES G. DIRECTORS ALTERNATE DIRECTORS Alberto Baillères G. (1) (2) (3) (8) Ma. Teresa Baillères de H. (7) Max Michel S. (4) (5) Norberto Domínguez A. (5) Juan Bordes A. (1) (2) (3) (7) Gabriel Kuri L. (7) Fernando Senderos M. (5) Tomás Lozano M. Arturo Fernández P. (1) (2) (3) (7) Eduardo Silva P. (7) Rafael Mac Gregor A. (1) (3) (7) Luis Aguilar y Bell (5) Raúl Baillères G. (7) Luis M. Murillo P. (7) Alejandro Baillères G. (7) José María Blanco A. (7) José A. Fernández C. (5) Francisco Javier Fernández C. (5) Andreas Raczynski Von O. (1) (3) (7) Alejandro Paredes H. (7) Juan Pablo Baillères G. (7) Mauricio A. García B. (7) Juan Francisco Beckmann V. (5) Raúl Obregón del C. Jaime Lomelín G. (1) (3) (7) Sergio Fernando Alanís O. (7) Fernando Solana M. (5) Ernesto Vega V. (5) Octavio Figueroa G. (1) (3) (7) Alejandro Hernández D. (7) SECRETARY Sergio Rodríguez Molleda (4) (5) (4) (5) (1) Executive Committee (2) Nomination, Evaluation and Compensations Committee (3) Finance and Planning Committee (4) Audit and Corporate Governance Committee (5) Independent Director * A Director who performs his duties free from conflicts of interest and without being subject to personal, patrimonial or economic interests, and furthermore, a person who is excluded from restrictions provided by Article 26 of the Securities Market Law. (6) Shareholder Director * A Director who has a 1% (one percent) direct interest or more in the equity capital of the Company. (7) Related Director * A Director not being deemed as Independent or Shareholder Director. Among others, Related Directors are those whom: Serve as officers at some level of the Company and its subsidiaries, as well as officers at any level of the companies comprising the Grupo BAL consortium. Have kinship to the fourth degree with other Directors, as well as the spouses and non-spouses a concubinage relationship. (8) Shareholder and Related Director * A Director who besides being Related, also has a 1% direct interest or more in the equity capital of the Company. * Pursuant to the Corporate Policy wich defines the qualification or category of Directors. In accordance with the recommendations of the Corporate Governance Code, the Board of Directors created an Audit and Corporate Governance Committee made up of Independent Directors to review accounting policies and criteria, as well as internal control systems, and to function in coordination with the External Auditors. In addition, the Board appointed Directors to make up the Nomination, Evaluation and Compensations Committee -wich reviewed organizational structure and policies on compensations- and the Finance and Planning Committee, whose responsibility was to examine financial policies and projections and evaluate investment projects in order to ensure that they were consistent with the Company s strategic plan and with its sources of financing. The Committees met regularly and reported to the Board on their activities; their reports and recommendations were attached to the minutes of the Board meetings. The profile of Directors is available on our website

75 73 Panorama. Velardeña unit, Durango.

76 74 MANAGEMENT DISCUSSION AND ANALYSIS This management discussion and analysis of the results of Industrias Peñoles, S.A.B. de C.V. and Subsidiaries ( Peñoles or the Company ) in fiscal year 2014 is based on the financial statements prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In accordance with IAS 21, the functional currency must be identified for each one of the consolidated entities based on the currency in the principal economic environment in which the entity operates. For all subsidiaries, with the exception of certain non-operating companies and certain companies that provide services, the functional currency is the U.S. dollar and the reporting currency is the Mexican peso on which this analysis is based. It is recommended that this section be read in conjunction with the consolidated financial statements and their accompanying notes. Peñoles is a publicly traded company whose shares have been listed on the Mexican Stock Exchange (BMV) since 1968 under the ticker symbol: PE&OLES. Peñoles operates principally in the following sectors: Exploration Mining Metals (smelting and refining) Inorganic chemicals PRICES AND MACROECONOMIC VARIABLES: The main variables that had an important impact on the results of Peñoles were: 1. Metals prices: lower average prices in 2014 in terms of dollars for silver (-20.1%), gold (-10.3%), lead (-2.2%) and copper (-6.4%). Higher average prices for zinc (+13.2%). 2. Treatment charges: in terms of dollars, average base treatment charges for lead concentrates declined by 8.8% while those for zinc concentrates increased by 4.0%. 3. Exchange rate (peso-dollar): % Change Year-end Average Consumer inflation rate (%): Annual Average The average annual price index for the basket of supplies purchased by Peñoles was 7.65%, that is to say, 357 basis points above the National Consumer Price Index (NCPI). CONSOLIDATED RESULTS: Revenues in 2014 declined in comparison to the previous year due in large measure to lower prices for the majority of the metals produced and sold by the Company. This was offset in part principally by higher sales volumes of silver, lead and concentrates, as well as by the higher average exchange rate of the peso versus the U.S. dollar.

77 75 MANAGEMENT DISCUSSION AND ANALYSIS The Company intensified its efforts in the area of controlling costs, expenses and low-priority investments. The cost of sales decreased due to lower cost of metals sold attributable to the reduced volumes of materials purchased from third party remitters and lower metals prices. Production costs increased, however, on the one hand because of the higher level of operations due to a complete year of activity at Velardeña, the resumption of operations at Herradura and the startup of the dynamic leaching plant, as well as the Saucito II project that started up in the last quarter of the year. On the other hand, prices for a number of critical operating inputs experienced increases above the consumer inflation rate. In comparison to the previous year, results were affected by a number of items such as higher interest expense on debt outstanding, an unrealized exchange rate loss (due to the strength of the dollar against the Mexican peso) and a larger provision for deferred taxes in addition to some extraordinary expenses. Due to the foregoing factors, the financial results of Peñoles (and their changes compared to 2013) were as follows: net sales $61,555.6 (-7.5%), gross profit $16,071.8 (-13.0%), EBITDA $15,082.4 (-7.1%), operating income $8,546.0 (-20.5%) and controlling interest in net income $1,199.1 (-74.8%). INCOME STATEMENT: Net Sales registered $61,555.6, of which 80.9% was destined for export markets. The decline in revenues of $4,995.2 (-7.5%) can be explained as follows: A variation of -$8,518.9 due to lower prices for metals, principally silver, gold and copper. A higher average exchange rate of the peso versus the dollar of +$2, Higher sales volume +$2,177.8, principally of concentrates, silver and lead that was partially offset by lower volumes of gold and zinc. The foregoing was accompanied by a lower result from hedging transactions, forwards and options on metals prices and exchange rates that recorded a profit of $533.6 during the period, lower (-$623.9) in comparison with a profit of $1,157.5 from these activities in A variation of -$210.8 from the sale of other products and services. In dollar terms, net sales totaled US$4,617.6 million and were composed of invoiced sales of US$4,577.3 million and hedging profits of US$40.3 million. The cost of sales was $45,483.8 and -$2,603.0 (-5.4%) lower as the result of: Higher production costs in $3,792.5 (+16.1%) due to the increased level of operations, principally at mines, as well as the inflation experienced in the price of various cost components. Among the items that showed the most significant changes in the year, the following stand out: Depreciation, Amortization and Depletion (+$1,041.5, +19.0%) due to the effects of converting the functional currency (dollar) to the reporting currency (peso) for fixed assets subject to depreciation and the resumption of operations at Herradura. Energy (+$732.3, +19.9%) due to greater consumption of electric energy obtained principally from the Federal Electricity Commission (CFE) at rates higher than those for electricity from own sources. There were also adjustments in the rates on sources that are part of our selfsupply program. On the other hand, the consumption of diesel fuel was higher due to the resumption of production at Herradura. These items and other fuels such as gas experienced price increases above the inflation rate. Contractors (+$653.0, +16.2%) due to increased development work, particularly at mines. Operating materials (+$460.1, +14.0%), principally for explosives and blasting caps, tires and steel balls and rods for milling. Inventory transfers (+$374.9, +43.8%).

78 76 MANAGEMENT DISCUSSION AND ANALYSIS Maintenance and repairs (+$334.2, +12.7%) for mechanical repair materials, spare parts and manual labor related to these activities. Labor (+$108.9, +3.1%) attributable to increased wages, benefits and training partially offset by a lower employee s profit sharing. Lower cost of metal, -$5,675.7 (-19.7%), due in large measure to lower prices for metals as well as reduced purchases of materials with metallic contents from third parties. An impairment loss of $230.0 was recognized in this area on silver inventories, which totaled $341.0 in fiscal year Lower revenue from treatment charges, -$465.6 (-10.4%), that are recorded as a credit to the cost of sales, due to lower volumes of mineral concentrates and other materials purchased for refining in addition to lower treatment charges for lead concentrates, silver refining and delivery. These were partially offset by higher charges for treating zinc concentrates. Inventory changes -$1, For the foregoing reasons, the gross profit of $16,071.8 was $2,392.2 (-13.0%) lower than the prior year while the gross profit margin on net sales of 26.1%, was unfavorable in comparison with the margin of 27.7% registered in Operating expenses (without including other expense and income) of $7,525.8, were -$189.9 million (-2.5%) lower than in 2013 due to: EBITDA of $15,082.4 displayed a variation of -$1,160.8 (-7.1%); the EBITDA margin on sales was 24.5%. Similarly, operating profit fell (-20.5%) from $10,748.3 to $8,546.0 and the Company reported an operating margin on sales of 13.9%. Other (income) expense, net of $1,748.1 was unfavorable in comparison with $409.9 the year before. The variation of $1,338.2 was composed of: (i) Higher expenses, $1,524.2, principally from the recognition of non-recoverable VAT in the Metalúrgica Met-Mex Peñoles, S.A. de C.V. subsidiary of $1,106.8 in addition to losses on the sale and disposal of fixed assets and the sale of concentrates. (ii) Higher income, $186.0, from the sale of materials and waste products as well as the proceeds from investments held for sale that were partially offset by lower income from royalties and insurance claims. An impairment loss on the value of properties, plant and equipment of $300.3 was recognized in response to future cash flow expectations at the Madero and Milpillas mining units. The loss was derived from a valuation based on the assumptions approved by the management of the Company. Net financial expense (income) of $1,100.8 was unfavorable compared with $486.0 the previous year and was composed of: Lower exploration and geological expenses (-$619.4, -17.7%). These investments were made in a selective manner in the portfolio of projects and prospects targeting those with better prospect and higher potential. Financial income of $332.9 was below the level of $465.2 in 2013, above all because a gain was recorded in the previous year from hedging interest rates. Higher selling expenses (+$254.3, +20.0%), principally because of the higher cost of both maritime and land freight as well as the new extraordinary mining tax on mining (0.5% on sales of gold and silver). Higher administrative and general expenses (+$175.2, +6.0%), principally attributable to higher wages and benefits as well as the payment of fees. Financial expense of $1,433.7 was greater than the figure of $951.1 registered in the previous fiscal period, largely due to the fact that interest was paid for a full year on US$800 million bonds of Fresnillo plc that were issued in November 2013.

79 77 MANAGEMENT DISCUSSION AND ANALYSIS There was a net exchange rate loss of $640.1 whereas there was gain of $184.8 in the prior fiscal year. This account originates in the conversion of assets and liabilities in currencies other than the U.S. dollar, including the Mexican peso, at the exchange rate in effect on the date of the balance sheet. The equity interest in net income of associates registered a profit of $23.1 that was lower than the figure of $102.2 in 2013 due to the results obtained by the companies in which Peñoles maintains an equity interest between 20% and 50% of the voting shares and exercises significant influence without having control. The provision for income taxes of $3,067.3 was lower than the provision of $3,387.1 in the last fiscal year. While the resulting provision for income taxes was lower, the sharp appreciation of the U.S. dollar produced a significant increase in the charge for deferred taxes. The effect of this exchange rate differential led to a difference between the accounting value (denominated in dollars) and the tax value (denominated in Mexican pesos) for certain assets and liabilities that impacted both the deferred tax on income as well as the deferred special tax for mining companies. Consolidated net income for the period totaled $1,712.5 (-$4,231.2) of which $1,199.1 was attributed to the controlling equity interest and $513.4 to noncontrolling interest. The net margin on sales for the controlling interest was 1.9% and unfavorable in relation to the margin of 7.2% obtained in STATEMENT OF CASH FLOW: At the close of December 2014, Peñoles had cash and cash equivalents of $11,254.9 that represented a decrease of $8,465.3 with respect to 2013 (including $2,277.9 from conversion effects). The most important items are commented upon below: 1. Net cash flows from operating activities of +$10, This caption is composed of items related directly to operations, excluding accounts that have no impact on cash, and includes changes in working capital as well as income taxes and the employee s profit sharing. 2. Net cash flows from investment activities of -$12,962.8 that consist of: a) Acquisition of property, plant and equipment of -$9,084.9, principally for the following operating units: Company / Unit Millions of pesos Main application Fresnillo plc $5,865.1 Mining works. Dynamic leaching plant Herradura. Leaching pads. Construction and/or development at projects: Saucito II, San Julián and Centauro Deep. Interior mine equipment. Heavy mobile equipment. Fixed assets at beneficiation plants. Met-Mex $615.9 Confinement of copper and cobalt cements. Elimination of interferences in the zinc plant. Automation projects. Pumping system in the water treatment plant. Machinery and equipment. Various replacements. Minera Capela (Rey de Plata) $625.3 Construction of the polymetallic mine. Mining works, fixed assets and infrastructure.

80 78 MANAGEMENT DISCUSSION AND ANALYSIS Company / Unit Millions of pesos Main application Magnelec (Química del Rey) $402.1 Sodium sulfate expansion project. Modernization of control centers. Rebuilding of electrical facilities. Naica $275.7 Mining works. New Naica project. Heavy interior mine equipment. Pumping equipment. Milpillas $216.4 Expansion projects at leaching pads. Irrigation infrastructure. Interior mine ventilation shaft. Velardeña $213.2 Mining works. Tailing dam. Expert system in concentrating plant. Sabinas $198.5 Construction of metallurgical laboratory. Surface workshop. b) Short-term investments -$4, c) Dividends received from associates +$43.0. d) Income from the sale of property, plant and equipment +$52.7. e) Loans received/granted and interest +$ f) Investment in shares of associates and other items -$28.9. g) Proceeds from investments held for sale +$ Net cash flows from financing activities -$8,327.3, composed of: a) Acquisition of non-controlling interest -$6,039.1, of 44% interest in Penmont consortium by the Fresnillo plc subsidiary from Newmont USA. b) Capital contributions from non-controlling interest of +$57.5. c) Dividends paid to shareholders of the controlling interest of -$ d) Dividends paid to shareholders of non-controlling interest of -$476.6, mainly to shareholders of Fresnillo plc and Minera Tizapa. e) Interest paid and other items -$1, Francisco I. Madero $159.7 Mining works. Tailings dam. Madero Deep project. Tizapa $125.7 Construction of metallurgical laboratory. Diesel workshop. Bismark $67.1 Reinforcement of Felipe Ángeles shaft. Electrical infrastructure. Tailings dam. Pumping station. Diesel workshop. Fuerza Eólica del Istmo $17.6 Various major maintenance components.

81 79 FINANCIAL HIGHLIGHTS MILLIONS OF MEXICAN PESOS Net sales (1) 65, , , , ,555.6 Gross profit 19, , , , ,071.8 Exploration expenses 1, , , , ,879.2 EBITDA (2) (3) 18, , , , ,082.4 Operating income (3) 15, , , , ,546.0 Financial and exchange income/expense, net 1, ,740.9 Controlling interest in net Income 7, , , , ,199.1 Capital expenditures 6, , , , ,084.9 Dividends paid to majority shareholders 8, , , , Cash and investments (4) 12, , , , ,596.7 Property, plant and equipment, net 27, , , , ,788.9 Total assets 60, , , , ,452.6 Total short and long-term debt 7, , , , ,312.4 Deferred taxes 7, , , , ,159.4 Total liabilities 24, , , , ,509.9 Total shareholders equity 36, , , , ,942.7 MILLIONS OF US DOLLARS * 2013* 2014* Net sales (1) 5, , , , ,617.6 Gross profit 1, , , , ,185.8 Exploration expenses EBITDA (2) (3) 1, , , , ,110.4 Operating income (3) 1, , , Financial and exchange income/expense, net Controlling interest in net income , Capital expenditures Dividends paid to majority shareholders Cash and investments (4) 1, , , ,059.7 Property, plant and equipment, net 2, , , , ,654.6 Total assets 4, , , , ,692.8 Total short and long-term debt , ,516.0 Deferred taxes Total liabilities 1, , , , ,888.3 Total shareholders equity 2, , , , ,804.5 * Unaudited figures. Figures prepared in accordance to International Financial Reporting Standards (IFRS). (1) Includes hedging results. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Does not include other income, expense and impairment loss. (4) Includes cash, cash equivalents and short-term investments.

82 80 PRODUCTION AND SALES VOLUME PRODUCTION (000): Product Unit Metal contents (Mining operations) Gold Oz Silver Oz. 50, , , , ,425.5 Lead Ton Zinc Ton Copper Ton Cathodic copper Ton Refined metals and other materials Gold Oz. 1, , , , ,197.9 Silver Oz. 103, , , , ,793.8 Lead Ton Zinc Ton Copper Ton Cadmium Ton Bismuth Ton Lead bullion Ton Chemicals Sodium sulfate Ton Magnesium oxide (*) Ton Ammonium sulfate Ton Magnesium sulfate Ton SALES (000): Product Unit Gold Oz. 1, , , , ,193.8 Silver Oz. 101, , , , ,018.2 Lead Ton Zinc Ton Sodium sulfate Ton Magnesium oxide (*) Ton Ammonium sulfate Ton Magnesium sulfate Ton Silver concentrates Ton Lead-Silver concentrates Ton Zinc concentrates Ton Copper concentrates Ton (*) Includes refractory, caustic, electric, electrofused and hydroxide grades.

83 81 REPORT OF THE AUDIT AND CORPORATE GOVERNANCE COMMITTEE OF INDUSTRIAS PEÑOLES, S.A.B. DE C.V. Mexico City, February 16, 2015 Board of Directors Industrias Peñoles, S.A.B. de C.V. Dear Board members: On behalf of the Audit and Corporate Governance Committee of Industrias Peñoles, S.A.B. de C.V. (the Company ) and in my capacity as President of the Committee, I have the pleasure to submit the annual report corresponding to the 2014 fiscal year, in accordance with Article 43 of the Securities Market Law. The Committee approved the Internal Auditor s audit plan and reviewed his reports about the significant internal control items that arose during the execution of his annual audit plan, as well as those that were rectified during the year and those still unresolved. Similarly, the Committee analyzed the internal control items reported by the Company s External Auditor, and was informed about compliance with the Code of Conduct and complaints received through the anonymous whistleblower mechanism for reporting improper actions. The Committee analyzed the Company s consolidated and individual financial statements prepared by management, as well as the External Auditors opinion that was included in their report with no qualifications about the financial statements corresponding to the 2014 fiscal year. Based on that information and in accordance with Article 42, section II, subsection e) of the Securities Market Law, the Committee s opinion about the content of the Report from the Chief Executive Officer ( CEO ) is that: (i) all accounting policies and criteria applied by the Company in the preparation of the financial information, as included in the corresponding report and reflected in the accompanying notes to the audited financial statements, are adequate and sufficient, taking in consideration the Company s specific circumstances; (ii) these accounting policies and criteria have been consistently applied within the information submitted by the Company s CEO; and (iii) as a result of sections i and ii above, the information submitted by the CEO reasonably reflects the financial position and results of the Company. As such, the Committee recommends the Board of Directors approve the consolidated and individual financial statements corresponding to the 2014 fiscal year, as well as the accounting policies and criteria applied by the Company in the preparation of financial information.

84 82 REPORT OF THE AUDIT AND CORPORATE GOVERNANCE COMMITTEE The Committee evaluated the performance of the external audit firm that rendered the external audit services, other additional services, as well as the services rendered by the External Auditor leading the audit, ensuring that all those services met the requirements necessary for performing the tasks entrusted to them and that the additional services rendered by the firm achieved the recognized purposes. In accordance with the Certification issued by the Secretary of the Board of Directors, the Committee was informed that the resolutions from the Shareholders and from the Board of Directors corresponding to the 2014 fiscal year were duly executed and, moreover, that several proceedings of the Board of Directors ordinary meetings included resolutions regarding the transactions and activities in which the Board participated pursuant to the provisions of the Securities Market Law. Additionally, this Certification ascertains that during said fiscal year, the Board of Directors, except dispensation granted in the April 24, 2014 session and previously approved by this Committee on the April 10, 2014 session, did not grant waivers to Directors to take advantage of business opportunities for their own benefit or for that of third parties, related to the Company or to those entities controlled by it or in which the Company has a significant influence. The Nomination, Compensation and Evaluation Committee of the Company ( NCEC ) submitted a report to this Committee, by which the NCEC reported that during the 2014 fiscal year it analyzed the performance of the Executive Officers without any remarks, and that it examined the compensation and remuneration packages for the CEO and for the Executive Officers and that, in the NCEC s opinion, those packages are in compliance with the policy approved by the Board of Directors. According to information provided by management, the most significant transactions executed with related parties during the 2014 fiscal year correspond to, among others, the sale of metals, treatment fees, purchase of mineral concentrates, and collection of royalties, all executed with the Company s subsidiaries, as well as with other companies in the holding group to which the Company belongs, noting that such transactions were executed at market prices and that the Company obtained transfer pricing studies from external specialists for the majority of those transactions. On behalf of the Audit and Corporate Governance Committee, Mr. Max Michel Suberville Chairman of the Audit and Corporate Governance Committee Industrias Peñoles, S.A.B. de C.V. Furthermore, the Committee has no knowledge of any Shareholder, Director, Executive Officer, employee and, in general, any third party, who has expressed any observation whatsoever regarding the Company s accounting, internal controls and matters related to the internal or external audit, or of any claims received during the 2014 fiscal year related to wrongdoings in management.

85 83 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Corporativo BAL Calzada Legaria 549, Torre 2, Col. 10 de abril Mexico City, Mexico Tel.: + 52 (55) [email protected] STOCK EXCHANGE Mexican Stock Exchange (BMV): ticker PE&OLES AUDITOR Mancera, S.C. (Ernst & Young) SHARE AND DIVIDEND INQUIRIES Ignacio Delfín H. Assistant Vice President Treasury and Financing Tel.: +52 (55) [email protected] INVESTOR AND ANALYST INQUIRIES Leopoldo Alarcón R. CFO Tel.: +52 (55) [email protected] Celia Ortega C. Manager Investor Relations Tel.: +52 (55) [email protected] SHARE INFORMATION Share price (pesos): Close $ High $ Low $ Market capitalization at the end of the year: US$7,791.5 million Shares outstanding at December 31, 2014: 397,475,747 For more information regarding Fresnillo plc, please visit: FINANCIAL CALENDAR 2014 Annual Shareholders Meeting: April 21, Q 2015 results: April 30, Q 2015 results: July 28, Q 2015 results: October 28, Q 2015 results: February 29, 2016 VERSIÓN EN ESPAÑOL: Para obtener una versión en español de este informe, favor de contactar a: [email protected] Tel.: +52 (55) Molding, Aleazin. Ramos Arizpe, Coahuila.

86 INDUSTRIAS PEÑOLES, S.A.B. DE C.V. Y SUBSIDIARIAS Consolidated Financial Statements Years Ended December 31, 2014 and 2013 with Report of Independent Auditors 84

87 REPORT OF INDEPENDENT AUDITORS, TO THE SHAREHOLDERS OF INDUSTRIAS PEÑOLES, S.A.B. DE C.V. Audit report We have audited the accompanying consolidated financial statements of Industrias Peñoles, S.A.B. de C.V. and subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and cash flow statements for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements, in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Industrias Peñoles, S.A.B. de C.V. and subsidiaries as at December 31, 2014 and 2013, and their consolidated financial performance and cash flows for the years then ended in accordance with International Financial Reporting Standards. Our audit opinion and the accompanying financial statements and footnotes have been translated from the original Spanish version to English for convenience purposes only. Mancera, S.C. A Member Practice of Ernst & Young Global Américo de la Paz de la Garza Partner Torreon, Coahuila, Mexico February 16,

88 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in thousands of Mexican pesos) December 31 Note ASSETS CURRENT ASSETS: Cash and cash equivalents 7 Ps. 11,254,893 Ps. 19,720,182 Short-term investments 7 4,341,810 - Trade and other accounts receivable, net 8 5,847,703 6,489,989 Recoverable income tax 20 4,055,858 2,946,546 Other financial assets 9 522, ,591 Inventories 10 13,173,164 11,817,598 Prepaid expenses 178, ,079 Total current assets 39,373,962 41,787,985 Available-for-sale assets ,705 96,172 NON-CURRENT ASSETS: Other financial assets 9 309, ,912 Available-for-sale financial assets 11 1,404, ,730 Property, plant and equipment, net 12 53,788,912 46,481,144 Equity investments in associates 13 1,175,013 1,245,909 Deferred tax assets 20 1,938,830 1,908,365 Other assets 248, ,565 Total non-current assets 58,865,962 51,143,625 Total assets Ps. 98,452,629 Ps. 93,027,782 LIABILITIES AND EQUITY CURRENT LIABILITIES: Suppliers and other accounts payable 15 Ps. 5,383,856 Ps. 5,341,239 Other financial liabilities , ,474 Financial Debt 17 1,913,340 - Employee benefits , ,772 Taxes on profits , ,474 Total current liabilities 9,371,049 6,747,959 LONG-TERM LIABILITIES: Financial Debt 17 20,399,065 19,806,860 Employee benefits 18 1,215, ,301 Other financial liabilities , ,262 Taxes on profits 20 1,134,342 1,302,457 Provisions 19 3,635,148 3,106,381 Deferred tax liabilities 20 6,098,268 5,346,303 Total liabilities 42,509,932 37,618,523 EQUITY: Share capital 21 2,160,687 2,160,687 Retained earnings 39,365,034 39,155,071 Components of other comprehensive income 21 4,895, ,752 Equity attributable to equity holders of the parent 46,421,130 42,088,510 Non-controlling interests 3 9,521,567 13,320,749 Total equity 55,942,697 55,409,259 Total liabilities and equity Ps. 98,452,629 Ps. 93,027,782 The accompanying notes are an integral part of these financial statements. 86

89 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIAREAS CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of Mexican pesos) For the year ended December 31 Note Net sales 25 Ps. 61,555,607 Ps. 66,550,850 Cost of sales 26 45,483,796 48,086,836 GROSS PROFIT 16,071,811 18,464,014 Administrative expenses 27 3,118,499 2,943,312 Exploration service expenses 28 2,879,181 3,498,544 Selling expenses 29 1,528,154 1,273,880 Loss arising on impairment of property, plant and equipment , ,602 Other expenses 31 2,011, ,694 Other income 31 ( 263,798 ) ( 77,796 ) 9,574,253 8,934,236 OPERATING INCOME 6,497,558 9,529,778 Finance income 32 ( 332,936 ) ( 465,168 ) Finance expense 33 1,433, ,144 Foreign exchange loss/(gain), net 640,105 ( 184,797 ) Share of profit of associates 13 ( 23,108 ) ( 102,192 ) 1,717, ,987 PROFIT BEFORE INCOME TAX 4,779,786 9,330,791 Income tax 20 3,067,275 3,387,074 CONSOLIDATED NET INCOME Ps. 1,712,511 Ps. 5,943,717 Attributable to: EQUITY HOLDERS OF THE PARENT Ps. 1,199,128 Ps. 4,760,706 NON-CONTROLLING INTERESTS 3 513,383 1,183,011 Ps. 1,712,511 Ps. 5,943,717 EARNINGS PER SHARE (basic and diluted in Mexican pesos) 22 Ps Ps The accompanying notes are an integral part of these financial statements. 87

90 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands of Mexican pesos) For the year ended December 31 Note CONSOLIDATED NET INCOME Ps. 1,712,511 Ps. 5,943,717 COMPONENTS OF OTHER COMPREHENSIVE INCOME TO BE RECLASSIFIED TO PROFIT OR LOSS Unrealized (loss)/gain on valuation of hedges: (Income)/loss reclassified to earnings 37 ( 95,729 ) 79,035 Deferred income tax 20 28,719 ( 23,726 ) Unrealized (loss)/gain 37 ( 861,343 ) 369,566 Deferred income tax ,403 ( 110,870 ) Unrealized gain/(loss) on valuation of available-for sale financial assets: ( 669,950 ) 314,005 Unrealized gain/(loss) ,240 ( 892,709 ) Deferred income tax 20 ( 134,772 ) 249,959 Impairment reclassified to profit or loss 31 29,580 26,104 Deferred income tax ( 8,874 ) ( 7,309 ) 335,174 ( 623,955 ) Share in profit of associates 13 34,621 30,249 Translation adjustment 5,976, ,009 5,676,404 91,308 COMPONENTS OF OTHER COMPREHENSIVE LOSS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS Loss on revaluation of labor obligations: Actuarial loss 18 ( 227,192 ) ( 310,067 ) Deferred income tax 20 35,987 49,301 ( 191,205 ) ( 260,766 ) TOTAL COMPONENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) 5,485,199 ( 169,458 ) COMPREHENSIVE INCOME Ps. 7,197,710 Ps. 5,774,259 Attributable to: EQUITY HOLDERS OF THE PARENT Ps. 5,321,785 Ps. 4,700,673 NON-CONTROLLING INTERESTS 1,875,925 1,073,586 Ps. 7,197,710 Ps. 5,774,259 The accompanying notes are an integral part of these financial statements. 88

91 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in thousands of Mexican pesos) Retained earnings Share capital Legal reserve Undistributed earnings Net income for the year Total retained earnings Components of other comprehensive income Equity attributable to equity holders of the parent Non-controlling interests Total equity Balance at December 31, 2012 Ps. 2,160,687 Ps. 683,026 Ps. 27,853,337 Ps. 10,031,381 Ps. 38,567,744 Ps. 838,836 Ps. 41,567,267 Ps. 12,430,979 Ps. 53,998,246 Net income for the year 4,760,706 4,760,706 4,760,706 1,183,011 5,943,717 Components of other comprehensive income ( 60,033 ) ( 60,033 ) ( 109,425 ) ( 169,458 ) Comprehensive income 4,760,706 4,760,706 ( 60,033 ) 4,700,673 1,073,586 5,774,259 Shareholders resolutions: Appropriation of net income of prior year 10,031,381 ( 10,031,381 ) Contribution of non-controlling interest 4,253,870 4,253,870 Change in non-controlling interests, including Ps. 3,143,068 in share premiums (Note 3) 2,436,643 2,436,643 ( 6,051 ) 2,430,592 ( 2,430,592 ) - Dividend declared (Note 23) ( 6,610,022 ) ( 6,610,022 ) ( 6,610,022 ) ( 2,007,094 ) ( 8,617,116 ) Balance at December 31, ,160, ,026 33,711,339 4,760,706 39,155, ,752 42,088,510 13,320,749 55,409,259 Net income for the year 1,199,128 1,199,128 1,199, ,383 1,712,511 Components of other comprehensive income 4,122,657 4,122,657 1,362,542 5,485,199 Comprehensive income 1,199,128 1,199,128 4,122,657 5,321,785 1,875,925 7,197,710 Shareholders resolutions: Appropriation of net income of prior year 4,760,706 ( 4,760,706 ) Contribution of non-controlling interest 603, ,367 Acquisition of non-controlling interest (Note 3) ( 240,170 ) ( 240,170 ) ( 240,170 ) ( 5,798,933 ) ( 6,039,103 ) Dividend declared (Note 23) ( 748,995 ) ( 748,995 ) ( 748,995 ) ( 479,541 ) ( 1,228,536 ) Balance at December 31, 2014 Ps. 2,160,687 Ps. 683,026 Ps. 37,482,880 Ps. 1,199,128 Ps. 39,365,034 Ps. 4,895,409 Ps. 46,421,130 Ps. 9,521,567 Ps. 55,942,697 The accompanying notes are an integral part of these financial statements. 89

92 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of Mexican pesos) For the year ended December 31 Note OPERATING ACTIVITIES: Net cash flows from operating activities 34 Ps. 10,546,926 Ps. 12,859,752 INVESTING ACTIVITIES: Purchase of property, plant and equipment ( 9,084,928 ) ( 10,905,404 ) Short-term investments ( 4,341,810 ) - Purchase of intangible asset ( 5,538 ) ( 34,095 ) Proceeds from sale of property, plant and equipment 52,734 90,165 Loans extended ( 643 ) ( 37,857 ) Collection of loans 78, ,876 Dividends received from associates 43, ,963 Sale of available-for-sale investments 97,103 - Equity investments in associates ( 23,361 ) ( 168,554 ) Interest collected 222, ,052 Net cash flows used in investing activities ( 12,962,819 ) ( 10,334,854 ) FINANCING ACTIVITIES: Loans obtained - 4,751,221 Issue of unsecured bonds - 10,585,120 Transaction costs paid for the issue of structured notes ( certificados bursátiles ) - ( 144,647 ) Repayment of bank loans - ( 4,779,641 ) Cash dividends paid to equity holders of the parent ( 753,842 ) ( 6,596,107 ) Cash dividends paid to non-controlling interests ( 476,602 ) ( 2,028,677 ) Interest paid ( 1,036,859 ) ( 424,003 ) Interest rate hedges ( 78,414 ) ( 51,956 ) Contribution of non-controlling interest 57,515 4,253,870 Acquisition of non-controlling interest ( 6,039,103 ) - Net cash flows (used in)/from financing activities ( 8,327,305 ) 5,565,180 Net (decrease)/increase in cash and cash equivalents ( 10,743,198 ) 8,090,078 Effect of exchange rates on cash and cash equivalents 2,277, ,974 Cash and cash equivalents at beginning of year 19,720,182 11,482,130 Cash and cash equivalents at end of year Ps. 11,254,893 Ps. 19,720,182 The accompanying notes are an integral part of these financial statements. 90

93 CONSOLIDATED FINANCIAL STATEMENTS INDUSTRIAS PEÑOLES, S.A.B. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014 and Description of the Business Industrias Peñoles, S.A.B. de C.V. is a company incorporated under the Mexican Corporations Act and the Mexican Securities Trading Act as a publicly traded variable capital corporation listed in Bolsa Mexicana de Valores, S.A.B. de C.V. (the Mexican Stock Exchange). Its corporate offices are located in Mexico City at Calzada Legaria No. 549, Colonia 10 de Abril. Industrias Peñoles, S.A.B. de C.V. and its subsidiaries ( Grupo Peñoles or the Company ) are principally engaged in the exploration, extraction and sale of mineral concentrates and ore, as well as in the production and sale of nonferrous metals. On February 16, 2015, the accompanying consolidated financial statements and these notes were authorized by the Company s Chief Executive Officer, Finance Vice President, Administrative Services Vice President, and the Vice President of Legal Affairs, for their issue and subsequent approval by the Board of Directors. 2. Basis of Preparation The consolidated financial statements of Grupo Peñoles and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The consolidated financial statements are presented in Mexican pesos and all values are rounded to the nearest thousand, unless otherwise indicated. Amounts in U.S. dollars are expressed in thousands of U.S. dollars, except when otherwise indicated. The accompanying consolidated financial statements of Grupo Peñoles cover the following periods: Statements of financial position as at December 31, 2014 and Statements of income for the years ended December 31, 2014 and Statements of comprehensive income for the years ended December 31, 2014 and Statements of changes in equity and statements of cash flows for the years ended December 31, 2014 and The accompanying financial statements have been prepared on a historical cost basis, except for the following items that were stated at fair value at the date of the statement of financial position: Derivative financial instruments. Available-for-sale assets. Certain inventories. Certain balances of trade receivables and other accounts payable. Certain supplier balances for concentrate and mineral shippers. The preparation of the Company s consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Nevertheless, actual results could differ from these estimates. The areas involving a higher degree of judgment and complexity and areas where estimates and assumptions are significant to the financial statements are described in Note 4. 91

94 CONSOLIDATED FINANCIAL STATEMENTS 3. Consolidation The consolidated financial statements include the financial statements of Industrias Peñoles, S.A.B. de C.V. and those of its subsidiaries, which are prepared for the same reporting period and following the same accounting policies as those of the parent company. Subsidiaries Subsidiaries are understood to be those entities over which Grupo Peñoles has the power to govern the investee s operating and financial policies and obtain benefits from its activities, as of the date control is obtained and through the date control is lost. Control over investees classified as subsidiaries is analyzed based on the Company s power over the investee, its voting rights, its exposure, or rights, to variable returns from its involvement with the investee, and its ability to affect the amount of such returns through its power over the investee. The consolidated financial statements include all of the entities assets, liabilities, revenues, expenses and cash flows after eliminating intercompany balances and transactions. When the Company holds equity interest of less than 100% and, therefore, there are non-controlling interests in the net assets of the consolidated subsidiary, a separate non-controlling interests caption is included in the statement of financial position. Business combinations are accounted for using the acquisition method. Under this method, the assets acquired and liabilities assumed are recognized at fair value at the date of acquisition. The operating results of acquired businesses are recognized in the consolidated financial statements as of the effective acquisition date. The operating results of businesses sold during the year are included in the consolidated financial statements through the effective date the business was sold. A gain or loss on the sale of an acquired business, which is the difference between the income received from the sale, net of the related expenses, and the net assets attributable to the equity interest in the business at the date of sale, is recognized in the income statement. All intercompany balances and transactions, intra-group unrealized gains and losses, and dividends have been eliminated in consolidation. Associates Investments in associates are those in which Grupo Peñoles holds more than 20% of the issuer s voting shares, or over which it exercises significant influence but does not have control. Investments in associates are initially recognized at cost and later accounted for using the equity method, which consists of recognizing Grupo Peñoles share in the changes in the issuer s equity from net income or loss and components of other comprehensive income generated after the acquisition date. Dividends received from the associated company are subtracted from the valuation of the investment. The income statement reflects Grupo Peñoles share of the associate s net income or loss. In addition, the Group recognizes its share the associate s changes recognized directly in the equity of its associate in its statement of changes in equity under the caption that gave rise to such other comprehensive income. Gains and losses on transactions with associates are eliminated in the consolidated financial statements based on the equity interest held in each investee. 92

95 CONSOLIDATED FINANCIAL STATEMENTS Principal subsidiaries The principal subsidiaries are as follows: 100%-owned subsidiaries of the Company: % equity interest December Subsidiary Country Functional currency(1) Minas Peñoles, S.A. de C.V. Mexico USD Química Magna, S.A. de C.V. Mexico USD Metalúrgica Met-Mex Peñoles, S.A. de C.V. Mexico USD Magnelec, S.A. de C.V. Mexico USD Minera Bismark, S.A. de C.V. Mexico USD Compañía Minera Sabinas, S.A. de C.V. Mexico USD Compañía Minera La Parreña, S.A. de C.V. Mexico USD Servicios Administrativos Peñoles, S.A. de C.V. Mexico Peso Servicios Especializados Peñoles, S.A. de C.V. Mexico Peso Bal Holdings, Inc. USA (2) USD Fuerza Eólica, S.A. de C.V. Mexico Peso Fuerza Eólica del Istmo, S.A. de C.V. Mexico Peso (1) USD refers to the U.S. dollar; Peso refers to the Mexican peso. (2) United States of America. Subsidiaries with other non-controlling interests Subsidiary Country Primary activity Fresnillo plc England Holding company whose subsidiaries are primarily engaged in the extraction and processing of mineral concentrates containing mostly silver and gold. The subsidiary was incorporated under the laws of the United Kingdom and is publicly traded on the London Stock Exchange. The 75%-owned subsidiary. Minera Penmont, S. de R.L. de C.V. Mexico 56%-owned subsidiary of Fresnillo plc that is primarily engaged in the extraction and processing of mineral concentrates containing mostly gold. On October 6, 2014, Fresnillo plc acquired the remaining 44% stake in Newmont and as a result, it now owns 100% of the shares of this company. Minera Tizapa, S.A. de C.V. Mexico Primarily engaged in the extraction and processing of mineral concentrates and zinc and silver. 93

96 CONSOLIDATED FINANCIAL STATEMENTS An analysis of the Company s non-controlling interests in the net income and equity of its investees is as follows: Non-controlling interest in net income for the year Non-controlling interest in equity Subsidiary % % Fresnillo plc Ps. 114,635 Ps. 657,359 Ps. 8,659,481 Ps. 7,353,394 Minera Penmont , ,186-4,422,234 Minera Tizapa , , , ,227 Otras ( 8,306 ) 175,837 10, ,894 Ps. 513,383 Ps. 1,183,011 Ps. 9,521,567 Ps. 13,320,749 On May 3, 2013, Fresnillo plc issued 19,733,430 new ordinary shares with a par value of USD 0.50 each, bringing its total number of outstanding ordinary voting shares to 736,893,589, each with a par value of USD Prior to issuing these new shares, Fresnillo plc had a total of 717,160,159 ordinary voting shares and Industrias Peñoles, S.A.B. de C.V. held a total of 552,595,191 of these shares that represented, before the placement of the new shares, 77% of the share capital of Fresnillo plc. After the placement of the new shares, the Company s equity in Fresnillo plc is now 75% as of May 3, Consequently, adjustments in Grupo Peñoles equity interest in Fresnillo plc were determined, which were recognized directly in retained earnings. On October 6, 2014, through its subsidiary Fresnillo plc, the Group acquired the remaining 44% of the shares of Minera Penmont, S. de R.L. de C.V., Desarrollos Mineros Fresne, S. de R.L. de C.V, Proveedora de Equipos Fresne, S. de R.L. de C.V. and Minera Bermejal, S. de R.L. de C.V. (jointly referred to as Penmont) for USD 450,496, which includes all transaction costs. As a result of this transaction, Fresnillo plc now owns 100% of the shares of these companies. Grupo Peñoles recognized the transaction as a reduction in non-controlling interests. The calculation of the amount of non-controlling interests in these affiliates was based on figures at September 30, 2014 since there no significant transactions occurred between September 30, 2014 and the acquisition date. The effects of the changes in equity attributable to equity holders of the parent at December 31, 2014 is as follows: Amount Carrying amount of non-controlling interests acquired (44% of share capital at October 6, 2014) Ps. 5,718,876 Amount paid by Fresnillo plc for the acquisition of the non-controlling interest plus transaction costs 6,039,103 Excess amount paid recognized in equity of Fresnillo plc Ps. 320,227 Excess amount paid recognized in the equity of Grupo Peñoles under Equity attributable to equity holders of the parent Ps. 240,170 Excess amount recognized in non-controlling interests Ps. 80,057 94

97 CONSOLIDATED FINANCIAL STATEMENTS An analysis of the condensed financial information before eliminations at December 31, 2014 and for the year then ended of the subsidiaries with non-controlling interests (the amounts corresponding to Fresnillo plc include the amounts of its subsidiary Minera Penmont after eliminations) is as follows: Statement of financial position: Fresnillo plc Minera Penmont Minera Tizapa Financial assets: Current assets Ps. 18,579,429 Ps. - Ps. 1,227,654 Non-current assets 36,497,579-1,380,666 Total assets Ps. 55,077,008 Ps. - Ps. 2,608,320 Total liabilities Ps. 21,198,527 Ps. - Ps. 894,818 Equity 33,878,481-1,713,502 Total liabilities and equity Ps. 55,077,008 Ps. - Ps. 2,608,320 Dividends paid Ps. 1,134,765 Ps. - Ps. 399,998 Statement of comprehensive income: Fresnillo plc Minera Penmont (1) Minera Tizapa Sales Ps. 18,798,406 Ps. 4,809,750 Ps. 2,499,493 Operating income Ps. 3,605,137 Ps. 335,703 Ps. 803,341 Net income Ps. 1,442,079 Ps. 2,277 Ps. 473,747 Components of other comprehensive income/(loss) Ps. 170,992 Ps. ( 1,336 ) Ps. 141,326 Comprehensive income Ps. 1,613,071 Ps. 942 Ps. 615,073 Statement of cash flows: Fresnillo plc Minera Penmont (1) Minera Tizapa Net cash flows from operating activities Ps. 2,095,740 Ps. 392,738 Ps. 443,092 Net cash flows used in investing activities ( 8,486,597 ) ( 1,410,493 ) ( 545,666 ) Net cash flows (used in)/from financing activities ( 7,705,344 ) 1,139, ,910 Net (decrease)/increase in cash and cash equivalents ( 14,096,201 ) 121, ,336 Cash and cash equivalents at beginning of period 16,367, , ,307 Cash and cash equivalents at end of period Ps. 2,271,577 Ps. 234,287 Ps. 493,643 (1) The comprehensive income and cash flows correspond to the period from January 1 through September 30,

98 CONSOLIDATED FINANCIAL STATEMENTS 4. Significant Accounting Judgments, Estimates and Assumptions The computation of certain captions included in the financial statements requires the use of judgments, estimates and assumptions. These judgments, estimates and assumptions are based on management s best knowledge of the relevant facts and circumstances at the valuation date, and on its past experience; however, actual results could differ from the reported amounts in the financial statements. Also, any changes that may occur in the assumptions and estimates could have a significant impact on the Company s financial statements. Specific information on these judgments and estimates is disclosed in the description of the accounting policies and/or notes to the consolidated financial statements. A summary of the principal judgments and estimates used is shown below: a) Mineral reserves Grupo Peñoles applies judgments and makes estimates to compute its mineral reserves and resources. These judgments and estimates are formulated using recognized mining industry methodologies and standards and the respective computations are performed by qualified internal personnel and take into account the Company s past experience in similar matters. The reports supporting these estimates are prepared periodically. Grupo Peñoles reviews these estimates periodically with the support of recognized independent experts to obtain certification of its mineral reserves. There are a number of uncertainties inherent to estimating mineral reserves. Assumptions considered valid at the time the estimate is made may change significantly when new information becomes available. Changes in metal prices, exchange rates, production costs, metallurgical recovery provisions and discount rates could alter the value of a given mineral reserve and result in the need to restate such value. Mineral reserves are used to determine production units for purposes of calculating the depreciation of certain mining properties, as well as to calculate the decommissioning provision and to analyze the impairment of mining units. b) Impairment The book values of assets are tested for impairment when there are situations or changes in circumstances that indicate that the book value of a given asset is not recoverable. Whenever there are indicators of impairment, the book value of the asset is assessed to determine if it exceeds the recoverable amount of the asset and if the asset is therefore impaired. For this impairment evaluation, assets are grouped into cash generating units and the recoverable amount of the corresponding cash generating unit is computed as the present value of the future cash flows expected to be produced by the assets. When the recoverable amount of an asset is less than its net carrying amount, the difference is recognized as an impairment loss. Grupo Peñoles allocates its mining units and metallurgical plants to cash generating units comprised of the different mining units and estimates the projection periods for the cash flows to be generated by each unit. Subsequent changes in cash generating unit allocations or changes in the assumptions used to estimate cash flows or the discount rate could affect the recoverable amounts and therefore the reported carrying amounts of the respective assets. c) Property, plant and equipment Depreciation of property, plant and equipment, except for certain mining properties, is computed based on the useful lives of the assets. Useful lives are determined based on technical studies performed by specialized internal personnel with the assistance of independent specialists. The Company s useful lives are reviewed at least annually and such analyses consider the current condition of the assets and the estimate of the period during which they will generate economic benefits for the Company. Changes in these estimated useful lives could prospectively alter depreciation amounts and the carrying amounts of property, plant and equipment. d) Provision for asset decommissioning and rehabilitation The Company records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. Estimated rehabilitation costs include the costs of decommissioning and removing structures, rehabilitating mines and tailings dams and decommissioning the processing plant and operating facilities, as well as the cost incurred for rehabilitation, reclamation and re-vegetation of affected areas. 96

99 CONSOLIDATED FINANCIAL STATEMENTS Provisions for asset decommissioning and rehabilitation are recognized at present value at the time the obligation becomes known and provision amounts are calculated based on management s understanding of the related legal requirements and the Company s corporate social responsibility policies. Environmental costs are also estimated by the Company s own internal specialists with the support of studies performed by independent experts. Generally speaking, management applies its judgment and experience to estimate decommissioning and rehabilitation costs over the life of each mine. The costs incurred in future periods may be different from the amounts provided for. Also, the book value of the provision could eventually be affected by future changes in the applicable legislation and regulatory requirements, as well as changes to the estimated useful lives of the Company s mines or the discount rates. The assumptions used in computing the provisions for the mining unit decommissioning and rehabilitation costs are regularly reviewed based on internationally recognized standards, which require mine closure processes to be carried out following best practices and exacting standards. These international standards exceed the requirements and regulations established in Mexican legislation. The discount rate is also adjusted to reflect the obligations for ecological rehabilitation at their present value, based on current market interest rates. e) Retirement benefits Assumptions are used to compute the best estimate of the Company s employee retirement benefits. Assumptions, as well as the estimates they give rise to, are determined together with independent actuaries. The assumptions cover demographical hypothesis, discount rates, expected salary increases and estimated working lifetimes, among other areas. Although the assumptions used are considered appropriate based on current circumstances, future changes to the assumptions could affect the measurement of the liabilities for personnel benefits and the operating results of the period in which such changes occur. f) Mining project development Grupo Peñoles evaluates the status of its various mine development projects, which covers exploration to locate new mineral deposits, and the development and construction of new mining units through the startup of commercial exploitation of the mines. Grupo Peñoles makes judgments and prepares estimates to determine when a project has completed the mineral exploration phase and entered the development phase, and when it has finally reached the production and exploitation phase. The criteria and estimates used in this evaluation include the determination of a large enough mineral reserve to support the financial viability of a mining project, which represents the completion of the exploration phase and the beginning of the development stage, as well as the level of additional capital investment needed for the project, the amount of the investment already made in the project and the completion of the mine and processing plant testing periods, among other areas. Determining the completion of the different phases of a project has a significant impact on how development costs are accounted for, since during the exploration phase, these costs and expenses are recognized directly in the income statement, during the development stage they are capitalized, and once the production phase is authorized, development costs and expenses are no longer capitalized. See Note 5q. g) Contingencies Given their nature, contingencies are only resolved when one or more future events or uncertain facts not entirely under Grupo Peñoles control either occur or do not occur. The evaluation of the existence of contingencies requires significant judgment and the use of estimates regarding the outcome of future events. The Company evaluates the probability of losing its on-going litigations based on the estimates of its legal advisors and these evaluations are reassessed periodically. h) Subsidiaries with non-controlling interests For subsidiaries with non-controlling interests, the Company assesses different aspects of the investee to determine whether Grupo Peñoles has control over the investee and the power to direct its relevant activities, thus giving it the right to variable returns from its involvement with the investee. Significant judgment is required regarding certain aspects of this assessment, such as the holding of voting rights, the nature and organization of the investee, and the Company s ability to direct its relevant activities, among others. 97

100 CONSOLIDATED FINANCIAL STATEMENTS 5. Summary of Significant Accounting Policies A summary of the accounting policies used in the preparation of the financial statements is found below. These polices have been applied consistently in all of the periods presented in the accompanying financial statements. a) Foreign currency translation Functional currency and reporting currency The functional currency of each consolidated entity is determined based on the currency of the primary economic environment in which each entity operates. Except for certain subsidiaries that are currently not operating or are service providers, the functional currency of all of the entities of Grupo Peñoles is the U.S. dollar. The Company s reporting currency is the Mexican peso, since it is in fact the currency of the country in which the Company primarily operates, and is the currency used to report to the shareholders. Translation to the reporting currency The following methodology was used to translate the subsidiaries financial statements from their functional currency to the reporting currency at the reporting date: Monetary and non-monetary assets and liabilities are translated at the closing exchange rate of each reported statement of financial position date. Income, cost and expense items in the statement of income are translated using the average exchange rate of the period, unless such rates fluctuate significantly during the period, in which case the transactions are translated at the prevailing exchange rate on the transaction date. Equity accounts are translated at the historical exchange rates on the dates the capital contributions were made or the income was generated. Translation adjustments are recognized as a separate item in equity. Transactions in foreign currency Transactions in currencies other than the entity s functional currency are translated at the prevailing exchange rate at the date of the transaction. Foreign currency denominated monetary assets and liabilities are translated at the prevailing exchange rate at the latest statement of financial position date. Translation adjustments are carried directly to the statement of income. The exchange rates used in the preparation of the accompanying consolidated financial statements were as follows: Exchange rate at December Average exchange rate b) Cash and cash equivalents Cash and cash equivalents in the statement of financial position include cash in hand, cash in banks and highly liquid investments with maturities of less than three months, which are easily convertible into cash, have a low exposure to risk of changes in their value and the cash amount to be received can be reliably known. Short-term deposits bear interest at market rates. For purposes of the statement of cash flows, cash and cash equivalents consist of the cash and cash equivalents defined above, net of bank overdrafts pending collection. 98

101 CONSOLIDATED FINANCIAL STATEMENTS c) Financial assets Financial assets are recognized at the time Grupo Peñoles enters into the related agreement and are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. Financial assets are classified at the time of their initial recognition and their designation is reevaluated at each year-end closing. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Subsequent measurement of financial assets depends on their classification as described below: Loans and accounts receivable Loans and accounts receivables are non-derivative financial assets with fixed or determinable payments that are not traded on an active market. After their initial recognition, these financial assets are subsequently valued at amortized cost using the effective interest rate method, less impairment. The amortized cost is computed by taking into consideration any discount or premium on the acquisition and the fees and costs that are an integral part of the effective interest rate. The amortization is included as part of the finance income caption in profit or loss. Impairment losses are recognized in the statement of income. Investments held to maturity Financial assets with fixed or determinable payments and fixed maturities, excluding loans and accounts receivable, are classified as heldto-maturity when the Company has the positive intention and ability to hold them to maturity. These investments are measured at amortized cost using the effective interest rate (EIR) method. Financial assets at fair value through profit or loss Financial assets are classified as held for trading if they are acquired to be sold in the short-term. Derivative financial instruments are classified as held for trading unless they are designated as hedges. Held-for-trading financial assets are recognized at their fair value through profit or loss in the statement of financial position and changes in such value are recognized in the finance income or finance expense captions in the statement of income. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as such or that are not classified in any of the previously mentioned categories and do qualify as held-to-maturity investments. Available-for-sale financial assets represent investments with a quoted price in an active market and can therefore be reliably valued at their fair value. After initial measurement, available-for sale assets are valued at their fair value and the unrealized gains or losses are recognized as a separate item in equity. When the available-for-sale financial assets are sold and all of the risks and rewards have been transferred to the buyer, all previous fair value adjustments recognized directly in equity are reclassified to the income statement. d) Impairment of financial instruments Grupo Peñoles assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that this loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy and when observable data indicate that there is a measurable decrease in the estimated future cash flows. Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and the intention is to settle them on a net basis or to realize the asset and settle the liability simultaneously. 99

102 CONSOLIDATED FINANCIAL STATEMENTS Financial assets carried at amortized cost If there is objective evidence of an impairment loss, the amount of the loss is measured as the difference between the book value of the asset and the present value of expected future cash flows (excluding expected future credit losses that have not yet been incurred). The present value of expected future cash flows is discounted at the financial asset s original effective interest rate. The carrying amount of the asset is then reduced through a provision and the amount of the loss is recognized in the statement of income. The loans and the related provisions are written off when there is no realistic possibility of future recovery and all of the collateral guarantees have been realized or transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases due to an event that occurs after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the statement of income. Grupo Peñoles evaluates whether there is objective evidence of impairment in financial assets that are individually significant, or collectively for financial assets that are not individually significant, or if Grupo Peñoles determines there to be no objective evidence of impairment for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and they are collectively evaluated for impairment. Assets that are assessed individually for impairment and for which an impairment loss is or continues to be recognized are not included in the collective evaluation of impairment. Available-for-sale financial instruments If an available-for-sale asset is impaired, the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the income statement, is reclassified from comprehensive income or loss in equity to the income statement. For equity instruments classified as available-for-sale, if there is a significant or prolonged decline in their fair value to below acquisition cost, impairment is recognized directly in the income statement but subsequent reversals of impairment are not recognized in the income statement, but rather, in the statement of comprehensive income. Reversals of impairment losses on debt instruments are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in income. e) Derivative financial instruments Hedging instruments Grupo Peñoles uses hedging derivatives to reduce certain market risks related to changes in metal prices, energy costs, exchange rates, interest rates, and the value of its financial assets and liabilities. Grupo Peñoles transactions with derivatives are limited in volume and confined to risk management activities. The Company s senior management takes an active part in the analysis and monitoring of the design, performance and impact of the Company s hedging strategies and transactions with derivatives. Hedges are also designed to protect the value of expected mining-metallurgical-chemical production against the dynamic market conditions. All derivative financial instruments are recognized as financial assets and liabilities and stated at fair value. The Company documents, at inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. This documentation includes the identification of the derivative financial instrument, the item or transaction being hedged, the nature of the risk being hedged and the method that will be used to evaluate whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedges should be highly effective in neutralizing the effects of fluctuations in the fair value or cash flows and they are constantly evaluated to determine whether they are actually effective throughout the reporting periods to which they have been assigned. Hedges that meet the criteria are recognized as explained below. The fair value of options is separated from the instrument s intrinsic value and changes in the intrinsic value are designated as part of the hedging strategy, except for the time value, which is recognized directly in the operating results of the period. 100

103 CONSOLIDATED FINANCIAL STATEMENTS Cash flow hedges For derivatives that are designated and qualify as cash flow hedges (forwards and swaps), the gain or loss from the effective portion of changes in fair value is recorded as a separate component in equity and is carried to the income statement at the settlement date, as part of either the sales, cost of sales or finance income and expense caption. The ineffective portion of changes in the fair value of cash flow hedges is immediately recognized in the income statement. If the hedging instrument matures or is sold, terminated or exercised without being replaced or if its designation as a hedge is revoked, the cumulative gain or loss recognized directly in equity as of the effective date of the hedge remains in equity and is recognized when the forecasted transaction occurs. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss recognized in equity is immediately carried to profit or loss. Derivatives designated as hedges that are effective hedging instruments are classified based on the classification of the underlying item. The derivative instrument is divided into a short-term portion and a long-term portion only if the two portions can be determined reliably. Fair value hedges The Company s derivatives, which it acquires primarily as hedges for its metal inventories or firm purchase commitments, are designated as fair value hedges. Changes in the fair value of the Company s fair value hedges are recognized in profit or loss, along with the changes in the fair value of the item being hedged or attributable to the risk being hedged. The primary objective of the Company s fair value hedging strategy is to offset changes in the value of its metal inventories. Embedded derivatives The Company s financial and non-financial agreements are evaluated to determine whether they contain embedded derivatives. Embedded derivatives are separated from the host contract and are recorded at their fair value if the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract and the host contract is not for held for trading or is marked to fair value through profit or loss. Embedded derivatives are valued at fair value and changes in fair value are recognized in profit or loss. Embedded derivatives are remeasured only if there is a change in the terms of the contract that causes a significant change in the cash flows that otherwise would be required under the contract. f) Inventories Inventories are valued at the lower of either cost or net realizable value, as follows: Inventories of minerals, concentrates and doré are recognized at production cost, which includes direct costs and an appropriate portion of the fixed and variable general expenses, including depreciation and amortization incurred for the mineral extraction and concentration of the metals contained in such. Mineral concentrate and doré purchases are recognized at cost, plus direct purchasing expenses. Inventories of refined metals and production in process include the mine production costs and/or mineral and concentrate acquisition costs, plus the treating and refining costs, which are recognized in proportion to the percentage of completion of their transformation to refined metal. Inventories of metal by-products and free metals obtained from the treatment and refining process are recognized at their estimated realizable value. As indicated in Note 37, the Company s fair value hedges acquired to hedge the value of certain refined metal inventories or inventories under firm purchase commitments are recognized at fair value. Consequently, metal inventories being hedged are valued at their fair value and subsequent changes in fair value are recognized in the income statement, with this effect being offset by the effects of the fair value valuation of the derivative financial instruments. Costs are determined using the weighted average cost method. The net realizable value of inventories is their estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs. Operating materials and spare part inventories are recorded at weighted average cost less the impairment loss from slow-moving and obsolete inventories. A periodic review is performed to determine the impairment loss in inventory. 101

104 CONSOLIDATED FINANCIAL STATEMENTS g) Prepaid expenses Prepaid expenses are recognized at the time the expense is paid and based on the amount actually paid. Prepaid expenses are either capitalized or charged to earnings, depending on whether there is certainty that the purchased goods or services will generate future economic benefits. The Company periodically evaluates prepaid expenses to determine the probability that these assets will no longer generate future economic benefits and to assess their recoverability. Unrecoverable amounts are recognized in the income statement as impairment losses. h) Property, plant and equipment Property, plant and equipment is recognized at cost. The cost includes the purchase price and any other costs directly attributable to refurbishing and getting the asset ready for use. At January 1, 2010, the date of transition to IFRS, certain items of property, plant and equipment were valued at their fair value to be considered as their initial cost in conformity with IFRS 1, First-time Adoption. Depreciation and depletion are computed based on cost, less the residual value of the property, plant and equipment throughout their useful lives or the waiting period in which the benefits of their use will be received. Depreciation begins when the asset is available for use, on the following bases: Metallurgical, chemical and industrial plants are depreciated on a straight-line basis at annual rates determined on the basis of the useful lives of the related assets. Mining concessions and construction, pre-operating expenses, facilities and processing plants are depreciated based on a depletion factor calculated by dividing the tonnage of ore extracted during the year by the total mineral reserves of the mine where the asset is located, except when the useful life of an asset is less than the life of the mine, in which case they are depreciated on a straight-line basis. The useful lives of certain land at mining units are limited to the time over which the Company will obtain economic benefits from the mining units; this land is amortized over the same period. Other equipment is depreciated on a straight-line basis at an annual rate of 10%. Estimated useful lives are as follows: Year Mining properties 7 to 18 Metallurgical plants 6 to 8 Buildings and land 7 to 18 Other assets 5 to 6 Asset decommission and rehabilitation The present value of the initial estimate of the obligation to decommission and rehabilitate mining sites is included in the cost of the mining properties and any adjustments to such obligation resulting from changes in the estimated cash flows needed to cover the obligation at the end of the useful life of the mining unit are accounted for as additions or reductions to the property, plant and equipment. Mine properties, mine development and stripping costs Mine properties and mine development and stripping costs are recorded at cost less accumulated depletion and, when applicable, impairment losses. Purchases of mineral resources and mineral reserves are recognized as assets at cost or at fair value if they were acquired as part of a business combination. The initial cost of a mining property includes construction costs, all costs directly related to getting the property ready for operation and the initial estimated cost of the decommissioning provision. 102

105 CONSOLIDATED FINANCIAL STATEMENTS When an exploration prospect has entered the advanced exploration stage and there is sufficient evidence of probable economic mineral reserves, the costs associated with getting the mine ready for operations are capitalized as mine development costs. Income earned on the sale of metal from the minerals extracted in the development stage prior to commercial production is recognized as a reduction in mine property costs and development costs. At the beginning of production, capitalized costs and expenses are depreciated using the units-of-production method based on estimates of the related proved and probable mineral reserves. Costs directly and indirectly attributable to stripping activities for surface mines, which includes the removal of overburden and other waste to gain access to mineral ore deposits, are recognized as an asset for each identifiable ore body at the time improved access to the ore body is achieved and it is probable that the future economic benefit associated with the stripping activity will flow to the entity during the mine s production phase. When the stripping activity includes the removal of materials to improve access to the ore body and also includes mineral extraction activities so that the costs of the stripping activity asset and the inventory produced are not separately identifiable, production stripping costs are allocated between the inventory produced and the stripping activity asset by using an allocation basis that is based on a relevant production measure. This production measure shall be calculated for the identified component of the ore body, and shall be used as a benchmark to identify the extent to which the additional activity of creating a future benefit has taken place. After the initial recognition of a stripping asset, it is subsequently recognized in the statement of financial position at cost, less depreciation or amortization and any impairment loss. Depreciation of stripping costs is computed based on the mine s depletion rate, which is calculated by dividing the number of tons of extracted ore by the number of tons mineral reserves of each ore body associated with the stripping costs. Assets under construction Assets under construction include property, plant and equipment items. Once construction is complete, these assets are reclassified to property, plant and equipment and depreciation begins as of the date they are capitalized, which is when their period of use begins. Sale and retirement of assets Property, plant and equipment items are retired or sold when the Company no longer expects to receive future economic benefits from them. The gain or loss on the sale or retirement of an asset is computed as the difference between an asset s sale price and its net carrying amount, and is recognized in the income statement. Maintenance and repairs Repairs are capitalized if the related recognition criteria are met, while at the same time the book values of the parts being replaced are cancelled. All other expenses, including repairs and maintenance, are recognized in the income statement as they are incurred. Borrowing costs Borrowing costs directly related to the acquisition, construction or production of qualifying assets, which are assets requiring a substantial period to get them ready for use, are added to the cost of the assets throughout their construction phase and until such time as operation and/or exploitation of the asset begins. The interest obtained on temporary investments of borrowed funds that have yet to be used for the construction of the corresponding qualifying assets are deducted from the costs of capitalized loans. i) Intangible assets Intangible assets are recognized if, and only if, it is probable that the future economic benefit associated with the intangible asset will flow to the Company and the cost of the asset can be reliably measured. Intangible assets with finite useful lives are valued at cost less accumulated amortization and impairment losses. Amortization is recognized based on the estimated useful life of the intangible, on a straight-line basis. The Company has no intangible assets with indefinite useful lives. 103

106 CONSOLIDATED FINANCIAL STATEMENTS j) Impairment of non-financial assets The carrying amount of depreciated or amortized assets is tested for impairment when there are situations or changes in circumstances that indicate that the asset s carrying amount is not recoverable. At each reporting date, non-monetary assets are tested to determine whether there are indicators of impairment. If there are indicators of impairment, a review is conducted to determine whether the carrying amount exceeds the recoverable amount of the asset and it is impaired. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, and then the review is undertaken at the cash generating unit level. If the carrying amount of an asset or its cash generating unit exceeds the recoverable amount, an impairment loss is recognized by reducing the carrying amount of the asset in the statement of financial position to the asset s recoverable amount. Impairment losses are recognized in the statement of income. The recoverable amount of an asset is the higher of either its value in use or fair value less its sales cost. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to each asset. For an asset that does not generate cash flows independently from other assets or groups of assets, the recoverable amount is determined for the cash generating unit to which the asset belongs. Cash generating units are the smallest identifiable groups of assets that generate cash flow that is independent from the cash flow attributable to other assets or groups of assets. At each reporting date, an evaluation is performed to determine whether there are any changes in the circumstances and estimates that would mean that previously recognized impairment no longer exists or should be reversed. If so, the carrying amount of the asset is increased to the asset s recoverable amount and the effects of this reassessment are recognized in the income statement. The new carrying amount is limited to the carrying amount that would have been determined for the asset, net of any depreciation, if no impairment had been recognized in prior years. k) Financial liabilities Initial recognition and measurement Financial liabilities are classified as financial liabilities at fair value through profit or loss, loans and financial debt, or derivatives designated as hedging instruments in effective hedges. Grupo Peñoles determines the classification of its financial liabilities at the time of their initial recognition. All financial liabilities are initially recognized at their fair value and, for loans and financial debt, fair value includes directly attributable transaction costs. Financial liabilities include accounts payable to suppliers and other accounts payable, financial debt and loans, financial guarantee agreements and derivative financial instruments. Financial assets and financial liabilities are offset with the net amount reported in the consolidated statement of financial position if, and only if, (i) there is a currently enforceable legal right to offset the recognized amounts; and (ii) there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. Subsequent measurement of financial liabilities depends on their initial classification, as follows: Financial liabilities at fair value through profit or loss The Company has not designated any financial liabilities at fair value through profit or loss at the time of their initial recognition. Derivatives not designated as hedges are recognized at fair value through profit or loss. 104

107 CONSOLIDATED FINANCIAL STATEMENTS Financial debt and interest bearing loans After their initial recognition, loans and borrowings that bear interest are subsequently measured at their amortized cost using the effective interest rate method. Gains and losses are recognized in profit or loss at the time they are derecognized, as well as through the effective interest rate amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. Effective interest rate amortization is included as part of finance costs in the income statement. Fair value of financial instruments The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. These techniques may include using recent arm s-length market transactions; reference to the current fair value of another financial instrument that is substantially the same; discounted cash flow analysis or other valuation models. l) Provisions Provision for decommissioning and rehabilitation The Company records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. Estimated rehabilitation costs include the costs of decommissioning and removing structures, rehabilitating mines and tailings dams and decommissioning the processing plant and operating facilities, as well as the cost incurred for rehabilitation, reclamation and re-vegetation of affected areas. The obligation generally arises when the asset is installed or the ground / environment is disturbed at the production location. When the liability is initially recognized, the present value of the estimated cost is capitalized by increasing the carrying amount of the related mining assets, provided they give rise to a future economic benefit. Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect the time value of money and the risks specific to the liability. The periodic unwinding of the discount is recognized in the statement of income as a financial expense. Changes to estimated future costs are recognized in the statement of financial position by either increasing or decreasing the rehabilitation liability and asset to which it relates. For closed sites, changes to estimated costs are recognized immediately in the income statement. Decommissioning and rehabilitation assets are depreciated over the estimated production period of the mining unit where they are located. Depreciation is recognized in the income statement as part of production costs. Other provisions Provisions are recognized whenever the Company has a present obligation (legal o constructive) resulting from a past event, is probable the obligation will give rise to a future cash disbursement for its settlement, and the amount of the obligation can be reasonably estimated. If the effect of the time value of money is material, provision amounts are determined as the present value of the expected outflow of resources to settle the obligation. The provisions are discounted using a pre-tax rate that reflects the current market conditions at the date of the statement of financial position and, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. m) Dividends Dividends payable to the shareholders of Grupo Peñoles are recognized as a liability at the time they are declared and authorized, or when the shareholders delegate the authorization of the amount of a dividend to another body. Dividends payable to minority shareholders are recognized as a liability when they are declared by the shareholders or partners of the subsidiaries with minority shareholders or partners. 105

108 CONSOLIDATED FINANCIAL STATEMENTS n) Employee benefits Short-term direct employee benefits Liabilities for employee benefits are charged to the income statement on an accrual basis taking into account the wages and salaries that the entity expects to pay at the date of the statement of financial position, including the related taxes that will payable by Grupo Peñoles. Paid absences for vacations and vacation premiums are expensed as the benefits accrue. Defined benefit plan The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method based on the earnings of employees and their years of service. The actuarial valuation is prepared by an independent actuarial firm at each year end. The liability is recorded at present value using a discount rate that represents the yield at the reporting date on credit-rated bonds that have maturity dates approximating the terms of the Company s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The revaluation of liabilities related to defined benefit plans consist of actuarial gains and losses and the return on plan assets. Such actuarial gains and losses are recognized immediately in equity as components of other comprehensive income, and all expenses related to the defined benefit plans are charged to profit or loss of the period. Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits have already vested immediately following the introduction of, or changes to, a pension plan, the past service cost is recognized immediately. The defined benefit asset or liability comprises the present value of the defined benefit obligation less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. Seniority premiums In conformity with Mexican labor law, the Company is required to pay a premium equal to 12 days salary for each year of service to its outgoing employees who have rendered 15 or more years of service. The cost of benefits related to seniority premiums payable upon voluntary retirement of unionized employees is computed using the projected unit credit actuarial valuation method. Seniority premiums payable to non-unionized employees are funded through the defined benefit plan. Defined contribution plan The defined contribution plan is an employee retirement benefit plan to which Grupo Peñoles pays a fixed contribution but has no obligation to pay in any subsequent amounts. The Company s obligations in respect of contributions payable under the defined contribution pension plan are recognized in the income statement as employee benefit expenses at the time the contributions become payable. Contribution amounts are determined based on the employee s salary. Termination benefits Employee termination benefits for involuntary retirement or dismissal are charged to the income statement of the year in which such payments are made or whenever the Company s obligation to pay such amounts can be reliably demonstrated. Employee profit sharing In conformity with Mexican legislation, Grupo Peñoles must distribute the equivalent of 10% of its annual taxable income as employee profit sharing. This amount is recognized in the income statement. 106

109 CONSOLIDATED FINANCIAL STATEMENTS o) Taxes on profits Current income tax Assets and liabilities for current year income tax are measured based on the amount expected to be recovered from or paid to the tax authorities. Deferred income tax Deferred income tax is determined using the asset and liability method, based on the temporary differences between the book and tax values of assets and liabilities at the date of the financial statements. The tax rates and tax laws used to compute deferred income tax are those that are enacted or substantively enacted at the reporting date. Deferred tax liabilities are recognized on all temporary taxable differences, except: When the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit; and With regard to taxable temporary differences related to investments in subsidiaries, associated companies and joint ventures, when the controlling company, the investor or venturer may control the timing of the reversal of the temporary differences and it is probable that such temporary differences will not reverse in the near future. Deferred tax assets are recognized for all deductible temporary differences and for the amortization of unused tax credits and tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilized, except: When the deferred tax asset related to the temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, the deferred tax asset does not affect either the book income or taxable profit or loss. With regard to deductible temporary differences related to investments in subsidiaries, associates and joint ventures, deferred tax assets are recognized only to the extent that it is probable that such temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each reporting date and is reduced to the extent that it is unlikely that sufficient taxable income will be available to allow the deferred income tax assets to be realized either partially or in full. Deferred income tax assets and deferred income tax liabilities are offset, only if the Company has a legally enforceable right to do so and if the assets and liabilities derive from income tax corresponding to the same tax authority. Current-year and deferred income tax corresponding to other components of comprehensive income or loss recognized directly in equity is recognized directly in equity rather than in earnings. Special tax for mining companies Grupo Peñoles recognized deferred taxes resulting from the temporary differences between the book and tax values of its assets and liabilities related to the computation of the special tax for mining companies that shall take effect as of January 1, 2014, since this special tax is calculated on the basis of the Company s earnings, in conformity with applicable tax laws. See Note

110 CONSOLIDATED FINANCIAL STATEMENTS p) Revenue recognition Revenues are recognized to the extent that Grupo Peñoles is likely to receive economic benefits from the transaction and such benefit can be reliably measured. Revenues are valued at the fair value of the consideration received, excluding discounts, rebates and other taxes on sales. Revenues from the sale of products are recognized at the time the significant risks and rewards of ownership of the products sold are transferred to the customer, which generally occurs at the time ownership of the products is transferred to the customer and collection of the related accounts receivable is reasonably assured. Certain agreements, primarily for the sale of concentrates, include future spot price adjustments to be determined after shipment of the product, and adjustments based on final assay results of the metal in concentrate originally determined by Grupo Peñoles. The revenue from sales under these agreements is recognized at the time the risks and rewards of ownership of the concentrates are transferred to the buyer, using a provisional price and the most recently determined estimate of metal in concentrate (based on initial assay results). This inherent price risk is considered an embedded derivative, which is separated from the sales agreement (the host contract). The provisional price of the metal is reassessed at each reporting date through the end of the quotation period based on the forward sales price for the quotation period stipulated in the base agreement. The forward sales price of the metals can be reliably determined as long as such metals continue to be sold in international markets. The unrealized gain or loss on agreements with forward prices is recognized in the income statement. The subsequent adjustment to the initial estimate of metal in concentrate is also recognized in profit or loss after such estimate is determined based on final assay results, the conditions of the agreement have been met and the payment terms have been agreed on. Interest income is recognized as it accrues using the effective interest rate, which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. q) Mine exploration and development costs and expenses Exploration includes the search for mineral resources, the determination of the mine s technical feasibility, and the assessment of the commercial viability of identified resources. These costs and expenses are recognized in the following captions: Exploration expenses. The expenses incurred exploring for new deposits, including, among others, drilling, sample testing and previability studies, are recognized in the income statement at the time the mineral reserves of the specific project are economically recoverable. Also, expenses incurred to increase mineral reserves in areas near existing mines are recognized in the income statement. Assets under construction. Exploration costs incurred in the development of a mine through its start-up of operations are capitalized. These costs include the construction of mine infrastructure and work carried out prior to the start-up of operations of the mine. Mining properties. The costs incurred developing new areas of exploitation in mining units in operation are recognized as part of mining properties and are amortized over the period in which the benefits will be obtained. Cost of sales. Development expenses for deposits in operation for purposes of maintaining production volumes are recorded in the income statement as part of production costs. r) Leases A lease is classified as a financial lease when it transfers substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets acquired through financial leases are recorded at the inception of the lease at the lower of their fair value or the present value of minimum lease payments discounted using the interest rate implicit in the lease. Interest is charged to financing costs at a constant periodic rate over the depreciation term of the asset. Operating lease costs are recognized in the income statement based on the term of the lease. Service and supply agreements that meet the conditions established in IFRIC 4, Determining Whether an Arrangement Contains a Lease, are recognized as either financial or operating leases. 108

111 CONSOLIDATED FINANCIAL STATEMENTS s) Contingencies Contingent liabilities are disclosed except when the likelihood of loss is remote. Contingent assets are not recognized in the financial statements but are disclosed in the notes to the financial statements whenever the possibility of receiving economic benefits from the contingent asset is probable. t) New and amended standards and interpretations applicable to the Company The following accounting standards, interpretations to standards and improvements became effective as of January 1, 2014 and have been adopted by the Group to prepare the consolidated financial statements. IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 27 Separate Financial Statements (Amended) These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss as required under IFRS 9 or IAS 39. Also, these improvements set out the requirements for disclosing the reasons for considering an entity an investment entity, information regarding the entity s unconsolidated subsidiaries and the nature of the relationship and certain transactions carried out between the investment entity and its subsidiaries. These improvements became effective for annual periods beginning on or after January 1, These amendments had no impact on the Company s financial statements. IAS 32, Offsetting Financial Assets and Financial Liabilities (Amended). The amendments related to the offsetting of financial assets and liabilities and the corresponding disclosures clarify the existing offsetting requirements. Specifically, these amendments clarify the meaning of currently has a legally enforceable right to set-off and the simultaneous realization and settlement. These amendments had no impact on the Company s financial statements. IAS 36, Impairment of Assets (Amended). The overall effect of the amendments is to reduce the circumstances in which the recoverable amount of assets or cash-generating units is required to be disclosed, clarify the disclosures required, and to introduce an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. This amendment had no impact on the Company s financial statements. IAS 39, Financial Instruments: Recognition and Measurement (Amended) - These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. Novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations. This amendment had no impact on the Company s financial statements. IFRIC 21, Levies. IFRIC 21 provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and those where the timing and amount of the levy is certain. The Interpretation covers the accounting for outflows imposed on entities by governments (including government agencies and similar bodies) in accordance with laws and/or regulations. IFRIC 21 also provides guidance on the recognition of a levy liability where the liability is recognized progressively when the activity that triggers payment occurs over a period of time. For a levy that is triggered upon reaching a minimum threshold, the Interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC had no impact on the Group s consolidated financial statements. Annual Improvements cycle. In the annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13, Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus, for periods beginning at January 1, 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 had no impact on the Company s financial statements. 109

112 CONSOLIDATED FINANCIAL STATEMENTS The standards and interpretations, and their amendments, issued by the IASB but not yet effective up to the date of issue of the Company s financial statements are listed below. Grupo Peñoles intends to adopt these standards and interpretations when they become effective: IFRS 9, Financial Instruments: In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company is currently assessing the impact of adopting IFRS 9 and its plans for adopting the new standard on the required effective date. Annual improvements cycle: These improvements are effective from 1 July 2014 and are not expected to have a material impact on the Company s financial statements. They are: IFRS 3, Business Combinations (Amended).-The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable). IFRS 8, Operating Segments. An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are similar. Also, the reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. IAS 24, Related Party Disclosures. The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. Annual improvements Cycle: These improvements are effective from July 1, 2014 and are not expected to have a material impact on the Company. They include: IFRS 13, Fair Value Measurement. The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied no only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). IFRS 15, Revenue from Contracts with Customers. IFRS 15 was issued in May 2014 and establishes a model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2017 with early adoption permitted. The Company is currently assessing the impact of IFRS 15 and its plans for adopting the new standard on the required effective date. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization. The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenuebased method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Company given that the Company has not used a revenue-based method to depreciate its non-current assets. 110

113 CONSOLIDATED FINANCIAL STATEMENTS Annual Improvements cycle. These improvements are effective from January 1, 2016 and are not expected to have a material impact on the Company s financial statements. They include: IAS 19 Discount Rate: Regional Market Issue. The amendment to IAS 19 clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. This amendment must be applied prospectively. 6. Segments The Company s operations in the mining-metallurgical industry consist of the extraction and processing of minerals, and the smelting and refining of non-ferrous metals. The extraction and processing of minerals primarily produces lead, zinc and doré concentrates, which are treated and refined in a metallurgical complex to obtain refined metals. The metallurgical complex, known as Met-Mex, receives mineral concentrates and doré from related and independent mining companies to treat, process, and refine them to obtain finished products, primarily silver, gold, zinc and lead, for their subsequent sale. Based on the business activities described above, Grupo Peñoles has divided its operations into the following business segments: Precious metals This segment groups the mining units where silver and gold concentrates and doré are extracted and processed. Other activities related to this segment include prospecting and exploring new deposits, and developing mining units for future mining operations. The equity interest in the business units of this segment is held by the subsidiary Fresnillo plc, which is a company located in the United Kingdom whose shares are traded on the London Stock Exchange in England. Practically all of the concentrates and doré produced by this segment are sent to Met-Mex metallurgical complex. Base metals This segment groups mineral exploration, extraction and processing to obtain concentrates of zinc, lead and copper. Zinc and lead concentrates are sent to Met-Mex for treatment and refining primarily to obtain refined zinc and lead. The copper concentrates are sold to metallurgical companies abroad that are not related parties. This segment also includes an operation where copper ore is extracted and the copper is separated through the use of solvents and later refined through electrodepositation to obtain the highest-grade LME Grade-A copper cathode. Metallurgical The metallurgical business involves treating and refining the concentrates and dorés received from the precious metals and base metals business. The activities of this segment are performed in two main metallurgical plants: a) an electrode plant that produces zinc cathode; and b) the smelting-refining plant that primarily produces refined silver and gold (mostly presented in bars), as well as molded lead. The plants also process precious metal and base metals from non-related parties and this business represents approximately 45% of production. The refined metals, which are mostly silver, gold, lead and zinc, are sold in Mexico and abroad, primarily in the United States through the subsidiary Bal Holdings, as well as in Europe and South America. Other This segment consists primarily of the following operations: a) the production and sale of chemical products, primarily sodium sulfate; b) provision of services under government concessions related to water treatment and rail transportation (these businesses operate jointly with other entities); and c) entities that provide administrative and operating support activities. These operations do not meet the criterion for segment reporting under IFRS 8, Operating Segments. 111

114 CONSOLIDATED FINANCIAL STATEMENTS The financial performance of the different segments is measured by management using a net income/loss approach. An analysis of segment information at and for the year ended December 31, 2014 is as follows: Precious metal mines Base metal mines Metallurgical Others Eliminations Total Third-party sales Ps. ( 7) Ps. 3,440,232 Ps. 54,575,076 Ps. 3,006,689 Ps. - Ps. 61,021,990 Intra-group sales 18,846,330 7,560, ,232 4,084,868 ( 30,400,809 ) 533,617 Total sales 18,846,323 11,001,228 55,017,308 7,091,557 ( 30,400,809 ) 61,555,607 Cost of sales 11,829,979 7,788,883 50,533,147 2,012,009 ( 26,680,222 ) 45,483,796 Gross profit 7,016,344 3,212,345 4,484,161 5,079,548 ( 3,720,587 ) 16,071,811 Administrative expenses 896, ,481 2,499,359 2,933,842 ( 4,059,426 ) 3,118,499 Exploration expenses 2,246, ,301-87,126 ( 124,556 ) 2,879,181 Selling expenses 181, , , ,458 ( 58,137 ) 1,528,154 Impairment loss - 300, ,336 Other expenses, net 343,804 ( 265,215 ) 1,470,535 ( 1,236,394 ) 1,435,353 1,748,083 3,667,566 2,302,122 4,322,299 2,089,032 ( 2,806,766 ) 9,574,253 Operating income/(loss) Ps. 3,348,778 Ps. 910,223 Ps. 161,862 Ps. 2,990,516 Ps. ( 913,821 ) 6,497,558 Finance income ( 332,936 ) Finance expense ,433,711 Share of profit of associates ( 23,108 ) Foreign exchange loss, net ,105 1,717,772 Income before taxes on profits ,779,786 Income tax ,067,275 Net income Ps. 1,712,511 Segment assets Ps. 55,048,122 Ps. 23,475,359 Ps. 23,149,874 Ps. 72,005,096 Ps. ( 75,225,822 ) Ps. 98,452,629 Segment liabilities Ps. 21,198,528 Ps. 8,444,269 Ps. 8,718,833 Ps. 26,485,595 Ps. ( 22,337,293 ) Ps. 42,509,932 Depreciation Ps. 3,945,090 Ps. 1,554,218 Ps. 859,030 Ps. 197,196 Ps. ( 17,684 ) Ps. 6,537,850 Fixed asset investments Ps. 5,865,100 Ps. 2,080,824 Ps. 615,920 Ps. 523,084 Ps. - Ps. 9,084,928 Share of profit in associates Ps. - Ps. - Ps. - Ps. 931,900 Ps. 243,113 Ps. 1,175,

115 CONSOLIDATED FINANCIAL STATEMENTS An analysis of segment information at and for the year ended December 31, 2013 is as follows: Precious metal mines Base metal mines Metallurgical Others Eliminations Total Third-party sales Ps. - Ps. 3,804,902 Ps. 58,272,532 Ps. 3,315,878 Ps. - Ps. 65,393,312 Intra-group sales 20,583,742 5,905, ,799 ( 180,242 ) ( 25,706,897 ) 1,157,538 Total sales 20,583,742 9,710,038 58,828,331 3,135,636 ( 25,706,897 ) 66,550,850 Cost of sales 10,889,712 7,099,549 55,945,044 2,134,597 ( 27,982,066 ) 48,086,836 Gross profit 9,694,030 2,610,489 2,883,287 1,001,039 2,275,169 18,464,014 Administrative expenses 791, ,779 2,793,156 ( 1,273,075 ) ( 77,948 ) 2,943,312 Exploration expenses 2,644, , ,928 ( 175,201 ) 3,498,544 Selling expenses 88, , , ,854 ( 71,737 ) 1,273,880 Impairment loss - 808, ,602 Other expenses, net 30,671 ( 100,735 ) 234,049 ( 18,644,933 ) 18,890, ,898 3,555,048 3,012,445 3,354,009 ( 19,553,226 ) 18,565,960 8,934,236 Operating income/(loss) Ps. 6,138,982 Ps. ( 401,956 ) Ps. ( 470,722 ) Ps. 20,554,265 Ps. ( 16,290,791 ) 9,529,778 Finance income ( 465,168 ) Finance expense ,144 Share of profit of associates ( 102,192 ) Foreign exchange loss, net ( 184,797 ) 198,987 Income before taxes on profits ,330,791 Income tax ,387,074 Net income Ps. 5,943,717 Segment assets Ps. 53,568,414 Ps. 20,032,590 Ps. 25,427,054 Ps. 66,931,410 Ps. ( 72,931,686 ) Ps. 93,027,782 Segment liabilities Ps. 18,606,672 Ps. 6,917,455 Ps. 17,041,672 Ps. 30,142,043 Ps. ( 35,089,319 ) Ps. 37,618,523 Depreciation Ps. 3,058,630 Ps. 1,450,239 Ps. 822,282 Ps. 179,163 Ps. ( 15,366 ) Ps. 5,494,948 Fixed asset investments Ps. 7,358,011 Ps. 2,165,607 Ps. 810,714 Ps. 571,072 Ps. - Ps. 10,905,404 Share of profit in associates Ps. - Ps. - Ps. - Ps. 1,084,826 Ps. 161,083 Ps. 1,245,909 Information on revenues obtained in the ordinary course of business by geographical zone and product type is presented in Note 25. In 2014, two customers from the Metallurgical segment each individually exceeded 10% of the value of the Company s net sales and they jointly represent 34.10% of net sales for the year. In 2013, two customers from the Metallurgical segment each individually exceeded 10% of the value of the Company s net sales and they jointly represented 30.6% of net sales for the year. 113

116 CONSOLIDATED FINANCIAL STATEMENTS 7. Cash and Cash Equivalents An analysis of this caption at December 31, 2014 and 2013 is as follows: Cash in hand and in banks Ps. 216,033 Ps. 166,532 Liquid investments (1) 11,038,860 19,553,650 Short-term investments: 11,254,893 Ps. 19,720,182 Short-term deposits (2) Ps. 4,341,810 Ps. - (1) Liquid investments bear interest at market rates and have maturities of less than 30 days. (2) Short-term investments comprise deposits for fixed periods of no more than four months that bear interest at fixed rate, and early withdrawal is restricted. In 2013, the Company did not have any deposits of this kind. 8. Trade and Other Accounts Receivable An analysis of this caption at December 31, 2014 and 2013 is as follows: Trade receivables Ps. 2,503,746 Ps. 2,110,196 Related parties (Note 24) 127, ,332 Recoverable value added tax 2,588,209 3,657,550 Advances to suppliers 365, ,976 Loans to contractors 62, ,303 Other accounts receivable 419, ,054 6,066,394 6,888,411 Less: Allowance for doubtful accounts ( 156,116 ) ( 197,119 ) 5,910,278 6,691,292 Less: Non-current maturity: Loans to contractors (Note 9) ( 62,575 ) ( 201,303 ) Total trade and other current accounts receivable Ps. 5,847,703 Ps. 6,489,989 An analysis of the changes in the allowance for doubtful accounts for the years ended December 31, 2014 and 2013 is as follows: Opening balance Ps. 197,119 Ps. 209,555 Increase for the year 5,970 37,768 Charges ( 67,987 ) ( 51,045 ) Translation adjustment 21, Ending balance Ps. 156,116 Ps. 197,

117 CONSOLIDATED FINANCIAL STATEMENTS 9. Other Financial Assets An analysis of this caption for the years ended December 31, 2014 and 2013 is as follows: Hedging derivatives: Forwards and options Ps. 622,284 Ps. 634,599 Futures 60,339 30, , ,860 Less: Non-current maturity ( 160,542 ) ( 50,269 ) Other current financial assets Ps. 522,081 Ps. 614,591 Other non-current trade receivables (1) (Note 8) Ps. 62,575 Ps. 201,303 Other non-current financial assets 160,542 50,269 Guarantee deposits and other financial assets 86,756 60,340 Total other non-current financial assets Ps. 309,873 Ps. 311,912 (1) Consists of loans to contractors who supply or provide services to the mining units of Grupo Peñoles. These loans bear interest at market rates and have maturities of 2 to 4 years. 10. Inventories An analysis of this caption at December 31, 2014 and 2013 is as follows: Inventories stated at cost: Refined metals and ore concentrates (1) Ps. 8,872,948 Ps. 7,977,978 Raw materials and chemical products in process 683, ,999 Operating materials 2,145,811 1,988,779 11,702,503 10,525,756 Inventories valued at fair value: Refined metals 1,470,661 1,291,842 Inventories, net Ps. 13,173,164 Ps. 11,817,598 (1) Due to the reduced market prices of certain commodities (mostly silver), in 2014 and 2013 Grupo Peñoles recognized impairment losses of Ps. 229,966 and Ps. 341,045, respectively. 115

118 CONSOLIDATED FINANCIAL STATEMENTS 11. Available-for-sale Financial Assets An analysis of this caption for the years ended December 31, 2014 and 2013 is as follows: Equity investments in entities listed on the Canadian Stock Exchange (1): Cost or value assigned Ps. 820,112 Ps. 820,112 Increase in fair value 541,751 65,497 Subtotal 1,361, ,609 Equity investments in entities listed on the U.S. Stock Exchange: Cost or value assigned 28,735 28,735 Increase in fair value 14,372 41,386 Subtotal 43,107 70,121 Total Ps. 1,404,970 Ps. 955,730 An analysis of the changes in these equity investments for the years ended December 31, 2014 and 2013 is as follows: Opening balance Ps. 955,730 Ps. 1,848,439 Gain/(loss) transferred to equity 449,240 ( 892,709 ) Ending balance Ps. 1,404,970 Ps. 955,730 (1) At December 31, 2014, approximately 84% of the Company s available-for-sale equity investments corresponds to its 9,746,193 shares of Mag Silver, Corp., and its 6% holding in Endeavor, Inc., represented by 2,800,000 shares. These investments are in publicly traded mining companies listed on the Canadian Stock Exchange. As a result of the decrease in its Company equity investment in Silverbull Resources Inc., First Majestic Silver Corp. and Endeavor Silver Corp. in 2014, Grupo Peñoles recognized an impairment loss of Ps. 29,580 for these investments. 116

119 CONSOLIDATED FINANCIAL STATEMENTS 12. Property, Plant and Equipment Changes in property, plant and equipment for the year ended December 31, 2013 are as follows: Mining properties Metallurgical plants Buildings and land Other assets Assets under construction Total Investment: 2013 opening balance Ps. 31,459,814 Ps. 9,984,093 Ps. 9,718,772 Ps. 220,972 Ps. 7,581,227 Ps. 58,964,878 Purchases 5,995, , ,006 24,265 3,113,093 10,901,832 Capitalized interest 32, ,435 Retirements and disposals ( 321,901 ) ( 93,166 ) ( 89,976 ) ( 9,045 ) - ( 514,088 ) Transfers 3,576, ,851 - ( 4,173,198 ) - Translation adjustment 283,949 43,176 96,901 ( 11,388 ) 6, , ending balance 41,025,771 10,751,444 11,274, ,804 6,527,480 69,804,053 Depreciation, amortization, depletion and impairment: 2013 opening balance ( 11,689,929 ) ( 2,700,994 ) ( 2,753,133 ) ( 71,876 ) - ( 17,215,932 ) Depreciation for the period ( 3,883,783 ) ( 816,832 ) ( 867,597 ) ( 16,678 ) - ( 5,584,890 ) Impairment ( 774,240 ) - ( 34,362 ) - - ( 808,602 ) Retirements and disposals 314,741 31,372 7,981 4, ,840 Translation adjustment ( 63,127 ) ( 6,643 ) ( 6,924 ) 4,369 - ( 72,325 ) 2013 ending balance ( 16,096,338 ) ( 3,493,097 ) ( 3,654,035 ) ( 79,439 ) - ( 23,322,909 ) Net investment Ps. 24,929,433 Ps. 7,258,347 Ps. 7,620,519 Ps. 145,365 Ps. 6,527,480 Ps. 46,481,144 Changes in property, plant and equipment for the year ended December 31, 2014 are as follows: Mining properties Metallurgical plants Buildings and land Other assets Assets under construction Total Investment: 2014 opening balance Ps. 41,025,771 Ps. 10,751,444 Ps. 11,274,554 Ps. 224,804 Ps. 6,527,480 Ps. 69,804,053 Purchases 3,926, , ,782 61,307 4,377,558 10,182,574 Capitalized interest 15, ,123 90,474 Retirements and disposals (1) ( 1,094,345 ) ( 127,635 ) ( 182,484 ) ( 40,788 ) - ( 1,445,252 ) Transfers 1,675, , ,795 - ( 2,295,257 ) - Translation adjustment 5,289,904 1,377,745 1,525,217 12, ,202 8,349, ending balance 50,839,366 13,255,258 13,799, ,670 8,829,106 86,981,264 Depreciation, amortization, depletion and impairment: 2014 opening balance ( 16,096,338 ) ( 3,493,097 ) ( 3,654,035 ) ( 79,439 ) - ( 23,322,909 ) Depreciation for the period ( 4,899,143 ) ( 851,998 ) ( 1,012,508 ) ( 28,939 ) - ( 6,792,588 ) Impairment ( 202,679 ) - ( 97,657 ) - - ( 300,336 ) Retirements and disposals (1) 720,994 21,552 73,583 33, ,067 Translation adjustment ( 2,522,984 ) ( 521,825 ) ( 571,643 ) ( 10,134 ) - ( 3,626,586 ) 2014 ending balance ( 23,000,150 ) ( 4,845,368 ) ( 5,262,260 ) ( 84,574 ) - ( 33,192,352 ) Net investment Ps. 27,839,216 Ps. 8,409,890 Ps. 8,537,604 Ps. 173,096 Ps. 8,829,104 Ps. 53,788,912 (1) Includes Ps. 239,849 in asset retirements related to the Dipolos y Soledad mining unit. 117

120 CONSOLIDATED FINANCIAL STATEMENTS In 2014, Grupo Peñoles analyzed certain external indicators, namely the behavior of metal prices, as well as internal indicators that included an assessment of mineral reserves and economically recoverable resources in order to determine whether there are indicators of impairment in the value of its property, plant and equipment. The recoverable amount of property, plant and equipment is based on the continued value in use of cash generating units calculated by discounting the present value of future cash flows based on projections, forecasts and expectations that are approved by management. The discount rate that reflects the weighted average cost of capital and that was used to discount cash flows was 9.11% and 12.65% in 2014 and 2013, respectively. As a result, Grupo Peñoles recognized an impairment loss for 2014 and 2013 corresponding to the following cash generating units: Cash-generating unit: Madero mining unit Ps. 300,336 Ps. 266,909 Milpillas mining unit - 541,693 Total Ps. 300,336 Ps. 808,602 Assets under construction Construction in process includes investments in fixed assets and capitalized pre-operating expenses of Ps. 3,279,836 in 2014 (Ps. 2,046,939 in 2013) for the construction and development of the mining projects Juanicipio (State of Zacatecas), Rey de Plata (State of Guerrero), San Julian (State of Chihuahua), and Orizyvo (State of Chihuahua), where mostly doré, zinc and silver are exploited. The estimated remaining investment needed to conclude the silver, lead and zinc projects, as well as the construction of a metallurgical zinc plant, will total approximately USD 580,000 in 2015, and from 2016 to 2019 these investments are expected to total approximately USD 2,830,000. Commitments At December 31, 2014 and 2013, the Company has entered into several agreements with independent contractors related to the purchase of machinery and equipment, as well as for completion of the mining construction projects. The value of the agreements for the purchase of machinery and equipment is USD 285,997 and USD 250,676, respectively. 13. Equity Investments in Associates An analysis of investments in associates at December 31, 2014 and 2013 is as follows: Aerovics, S.A. de C.V. Ps. 678,439 Ps. 673,821 S.A. Sulquisa 408, ,706 Línea Coahuila Durango, S.A. de C.V. 87,581 93,810 Aguas, Servicios e Inversiones de México, S. de R.L. de C.V. - 89,572 Ps. 1,175,013 Ps. 1,245,

121 CONSOLIDATED FINANCIAL STATEMENTS An analysis of the changes in the investments in associates for the years ended December 31, 2014 and 2013 is as follows: Opening balance in associates Ps. 1,245,909 Ps. 1,312,049 Share of profit of associates 23, ,192 Increase in investments 23, ,554 Cash dividends received ( 43,011 ) ( 270,963 ) Reclassification to available-for-sale assets (Note 14) ( 108,975 ) ( 96,172 ) Translation adjustment 34,621 30,249 Ending balance in associates Ps. 1,175,013 Ps. 1,245,909 The associates in which the Company has invested are as follows: Aerovics, S.A. de C.V., which provides private air transportation services. S.A. Sulquisa, a Spanish company which produces and sells chemical products. Línea Coahuila Durango, S.A. de C.V., which provides rail transportation services through a concession granted to it by the Mexican Federal Government. Aguas, Servicios e Inversiones de México, S. de R.L. de C.V., which provides potable water and water treatment services. The condensed financial information of the associates at and for the year ended December 31, 2014 is as follows: % equity interest Total assets Total liabilities Equity Net Sales Net (loss) income Aerovics (1) Ps. 1,198,488 Ps. 23,702 Ps. 1,174,786 Ps. 176,378 Ps. ( 33,160 ) SA Sulquisa Ps. 1,207,587 Ps. 372,907 Ps. 834,680 Ps. 350,290 Ps. 45,027 Línea Coahuila Dgo Ps. 315,910 Ps. 140,748 Ps. 175,162 Ps. 638,051 Ps. 40,390 The condensed financial information of the associates at and for the year ended December 31, 2013 is as follow: % equity interest Total assets Total liabilities Equity Net Sales Net (loss) income Aerovics (1) Ps. 1,193,634 Ps. 26,845 Ps. 1,166,789 Ps. 166,463 Ps. ( 62,856 ) SA Sulquisa Ps. 1,192,048 Ps. 398,768 Ps. 793,280 Ps. 421,281 Ps. 47,686 Línea Coahuila Dgo Ps. 320,637 Ps. 133,017 Ps. 187,620 Ps. 606,243 Ps. 55,782 Aguas y Serv. e Inv Ps. 235,030 Ps. 59,399 Ps. 175,631 Ps. 168,713 Ps. 20,008 (1) 74% of these shares are non-voting. 119

122 CONSOLIDATED FINANCIAL STATEMENTS 14. Available-for-sale Assets An analysis of this caption is as follows: Tecnología y Servicios de Agua, S.A. de C.V. Ps. 103,730 Ps. - Bal-Ondeo, S. de R.L. de C.V ,172 Aguas, Servicios e Inversiones de México, S. de R.L. de C.V. 108,093 - Total Ps. 212,705 Ps. 96,172 As part of the corporate restructuring of the companies of Grupo Peñoles, in December 2013 the associate Bal-Ondeo, S. de R.L. de C.V. sold 49.9% of its equity interest in Desarrollos Hidráulicos de Cancún, S.A. de C.V. (DHC), which is engaged in providing public potable water, sewage, drainage and wastewater treatment services to the municipalities of Benito Juarez and Isla Mujeres in the State of Quintana Roo. As a result of this transaction, a plan has been established to sell off the shares owned by Bal-Ondeo, S. de R.L. de C.V. in DHC. This sale included the partial reimbursement of equity interest in the associated company back to Grupo Peñoles in the amount of Ps. 174,430. At December 31, 2013, the equity investment in Bal-Ondeo, S. de R.L. de C.V. is recognized in the statement of financial position as part of the caption Availablefor-sale assets. Also, as part of its business restructuring strategy, in June 2014, Grupo Peñoles decided to sell its shares in its subsidiary Tecnología y Servicios de Agua, S.A. de C.V. and its associate Aguas, Servicios e Inversiones de México, S. de R.L. de C.V., whose primary activity is to provide public potable water, water treatment and water drainage services in Mexico City. 15. Suppliers and Other Accounts Payable An analysis of this caption is as follows: Commercial suppliers Ps. 1,887,214 Ps. 1,550,519 Concentrate and mineral shippers 1,675,565 1,162,157 Related parties (Note 24) 335, ,098 Trade advances 248, ,016 Other accrued liabilities 1,237,409 1,258,449 Ps. 5,383,856 Ps. 5,341,

123 CONSOLIDATED FINANCIAL STATEMENTS 16. Other Financial Liabilities An analysis of this caption is as follows: Hedging derivatives: Forwards and options Ps. 933,498 Ps. 91,019 Financial instruments at fair value through profit or loss: Interest rate swaps (1) 595, ,717 Total other financial liabilities 1,528, ,736 Less: Non-current maturity ( 656,583 ) ( 519,262 ) Total other current financial liabilities Ps. 872,156 Ps. 223,474 (1) Corresponds to certain swaps contracted as cash flow hedges covering the interest rates of debt that was prepaid in 2010 and 2009 and that ceased to comply with the conditions for hedge accounting. As a result, the unrealized gains and losses on the hedges were reclassified to profit or loss. The following is an analysis of the fixed interest rate swaps whose hedge accounting was cancelled: Type of transaction Rate Amount hedged in USD Term in years Fixed rate swap (i) 4.70% 400, Fixed rate swap (i and iii) 4.69% 130, Fixed rate swap (ii) 2.16% 400, Fixed rate swap (ii and iii) 3.44% 130, Notes: (i) Through these instruments, Grupo Peñoles pays a fixed interest rate and receives a floating interest rate. The agreements mature on a quarterly basis. (ii) Through these fixed rate swaps contracted in September 2010, Grupo Peñoles receives a fixed interest rate and pays a floating interest rate. The purpose of these swaps is for the Company to fix its cash flows over the term of those swaps that the Company contracted to cover the prepaid debt and whose hedge accounting was reversed. (iii) The swap contracts for a total notional amount of USD 130,000 expire starting in

124 CONSOLIDATED FINANCIAL STATEMENTS 17. Financial Debt The Company s financial debt includes the following loans payable in U.S. dollars: In U.S. dollars: Structured notes ( certificados bursátiles ) PE&OLES 10D (1) USD 530,000 USD 530,000 Structured notes ( certificados bursátiles ) PE&OLES 12D (2) 195, ,520 Unsecured bonds issued by Fresnillo plc (3) 790, ,171 Total 1,515,994 1,514,691 Less: Current maturity 130,000 - Non-current financial debt denominated in U.S. dollars USD 1,385,994 USD 1,514,691 Mexican peso equivalent of total non-current financial debt Ps. 20,399,065 Ps. 19,806,860 Mexican peso equivalent of total current financial debt Ps. 1,913,340 Ps. - Long-term financial debt maturities starting in 2016 are as follows: In U.S. dollars 2020 USD 400, , ,025 USD 1,385,994 (1) Two placements of structured notes ( certificados bursátiles ) in U.S. dollars offered in Mexico on September 7, The placements are as follows: PE&OLES 10D of USD 130 million for a five-year term bearing variable interest payable monthly at the 30-day London Interbank Offered Rate (LIBOR) plus a premium of 1.78% and PE&OLES 10-2D of USD 400 million for a ten-year term bearing interest payable semi-annually at a 5.15% fixed rate. In both cases principal is payable at maturity (PE&OLES 10-2D may be prepaid as of the fifth year in exchange of a premium). The proceeds from these placements were primarily used for the prepayment of a syndicated loan, as well as to finance investments and working capital. These structured notes ( certificados bursátiles ) are guaranteed by nine subsidiaries of Grupo Peñoles and do not include financial covenants. Moody s Investors Service gave the instruments a long-term global rating of Baa2 and an Aa1.mx rating in Mexico with a stable outlook for both placements. Standard & Poor s (S&P) gave the placements a long-term global rating of BBB- and a mxaa+ rating in Mexico (CaVal) with a stable outlook for both placements. (2) Structured notes ( certificados bursátiles ) in U.S. dollars offered in Mexico on June 22, 2012 as part of the 2010 debt placement program that was increased to up to 15 billion Mexican pesos and/or the equivalent of such amount in U.S. dollars. The new debt placement of PE&OLES 12D of USD 200 million is for a 10-year term. Principal is payable at maturity (may be prepaid as of the fifth year in exchange of a premium) and the notes bear interest payable semi-annually at a 4.26% fixed rate. The proceeds from this placement were primarily used to refinance approximately half of the total investment of USD 203,000 of the Velardeña mining project, and approximately half of the investment a wind farm known as Fuerza Eólica del Istmo (Phases I and II). These structured notes ( certificados bursátiles ) are guaranteed by nine subsidiaries of Grupo Peñoles and do not include financial covenants. Moody s Investors Service gave these instruments a long-term global rating of Baa2 and an Aa1.mx rating in Mexico with a stable outlook. Standard & Poor s (S&P) gave the placements a long-term global rating of BBB and a mxaaa rating in Mexico (CaVal) with a stable outlook for both placements. (3) Unsecured bonds issued on November 7, 2013 by Fresnillo plc in the international market as a 144A/Reg-S offering. The bonds are for a ten-year term and bear quarterly net interest of 5.50%, with principal payable upon maturity. The proceeds from this placement will be used to meet the needs of the Company s current investment and development plans, as well as to fund future growth opportunities. Standard & Poor s and Moody s Investors Service gave the bonds ratings of BBB and Baa2, respectively. 122

125 CONSOLIDATED FINANCIAL STATEMENTS On June 2, 2011, S&P raised its global credit rating of this bond from BBB - to BBB and reaffirmed the debt s local credit rating of mxaa+, with a stable outlook given for both ratings. These credit rating events were reflected in the Company s PE&OLES 10D and PE&OLES 10-2D bond offerings. On May 31, 2012, S&P raised the debt rating of Industrias Peñoles, S.A.B. de C.V. in Mexico from mxaa+ to mxaaa and confirmed the global rating of BBB. These credit rating events were reflected in the Company s PE&OLES 10D and PE&OLES 10-2D bond offerings. 18. Employee Benefits Employee benefits An analysis of current employee benefit obligations is as follows: Employee profit sharing Ps. 478,432 Ps. 561,398 Wages and salaries payable 26,270 24,010 Vacations and vacation premiums payable 159, ,897 Social security dues and other provisions 138, ,467 Ps. 802,797 Ps. 873,772 Employee profit sharing was determined based on each subsidiary s taxable income. Retirement benefits Grupo Peñoles has a defined pension and benefit contribution plan for its non-unionized workers, which includes pension plans based on each worker s earnings and years of services provided by personnel hired through June 30, 2007, and a defined contribution component as of such date, based on periodic contributions made by both Grupo Peñoles and the employees. The plan is managed exclusively by a Technical Committee, which is comprised of three people that are appointed by Grupo Peñoles. Defined benefit component The defined benefit component of the plan refers to the worker salaries and the number of years of service provided through June 30, 2007, in accordance with the benefits generated through this date in respect of the pension granted. Benefits accrued through this date are restated for inflation based on the National Consumer Price Index through the date of the employee s retirement. Defined contribution component The defined contribution component of the plan consists of periodic contributions made by employees, as well as matched contributions made by the Company beginning on July 1, 2007, capped at 8% of the employee s annual salary. There is also a seniority premiums plan for voluntary separation for the Company s unionized workers. Death and disability benefits are covered through insurance policies. 123

126 CONSOLIDATED FINANCIAL STATEMENTS Recognition of employee benefits An analysis of the present actuarial value of these obligations recognized in the statement of financial position at December 31, 2014 and 2013 is as follows: Defined benefit obligation of active workers Ps. 1,560,834 Ps. 1,525,068 Defined benefit obligation of retired workers (1) 1,541,224 1,397,897 Funded defined benefit obligation 3,102,058 2,922,965 Unfunded defined benefit obligation (2) 469, ,930 3,571,525 3,322,895 Fair value of plan assets ( 2,356,048 ) ( 2,533,594 ) Employee benefits Ps. 1,215,477 Ps. 789,301 (1) This obligation is currently fully funded. (2) Corresponds primarily to seniority premiums for unionized personnel. An analysis of pension and seniority premiums charged to the income statement for the years ended December 31, 2014 and 2013 is as follows: Current year service cost Ps. 91,437 Ps. 65,540 Net interest 53,817 46,460 Benefits paid from the defined contribution component 139, ,233 Total Ps. 285,114 Ps. 224,233 An analysis of changes in the remeasurement of the defined benefit obligation recognized directly in equity is as follows: Actuarial losses Ps. ( 227,192 ) Ps. ( 310,067 ) 124

127 CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the actuarial value of the defined benefit obligation at December 31, 2014 and 2013 is as follows: Beginning balance of the defined benefit obligation Ps. 3,322,895 Ps. 3,143,420 Current year service cost 91,437 65,540 Interest cost 216, ,253 Actuarial loss from experience adjustments 135,054 16,004 Actuarial loss from adjustments in demographic assumptions 19,053 76,122 Benefits paid ( 213,849 ) ( 189,444 ) Ending balance of the defined benefit obligation Ps. 3,571,525 Ps. 3,322,895 At December 31, 2014 and 2013, a reconciliation of the actuarial value of the plan assets is as follows: Beginning balance of plan assets Ps. 2,533,594 Ps. 2,460,459 Expected return on plan assets 163, ,793 Actuarial loss from experience adjustments ( 73,085 ) ( 217,941 ) Plan contributions 9, ,540 Transfer of defined contribution component ( 67,047 ) - Benefits paid ( 210,022 ) ( 189,257 ) Ending balance of plan assets Ps. 2,356,048 Ps. 2,533,594 An analysis of plan assets is as follows: Debt instruments issued by Federal and state-owned entities Ps. 793,672 Ps. 1,045,149 Investment funds 1,315,918 1,257,822 Equity instruments (1) 246, ,623 Total plan assets Ps. 2,356,048 Ps. 2,533,594 (1) Approximately 52% of these equity instruments correspond to shares in Industrias Peñoles, S.A.B. de C.V. The financial instruments that comprise the plan assets consist of shares that are publicly traded in Mexico with local credit ratings of AAA and AA. At December 31, 2014, Grupo Peñoles expects to make a total contribution of Ps. 89,000 to the defined benefit plan in The most significant assumptions used in calculating the defined benefit obligation, plan assets and the net periodic benefit cost were as follows: Average discount rate to reflect present value 7.0% 7.0% The weighted average lifetime of the defined benefit obligation at December 31, 2014 is 18 years. 125

128 CONSOLIDATED FINANCIAL STATEMENTS The discount rate used to reflect the defined benefit obligations at present value, the projected salary increase and the working lifetime of employee were identified as significant actuarial assumptions. The computation of the defined benefit obligation may be sensitive to changes in any of these assumptions. The following changes in assumptions that affect the computation of the defined benefit obligation are considered to be reasonably possible: A 0.5% increase/decrease in the discount rate. A 0.5% increase/decrease in projected salary/benefit increases. A change of 1 year in the projected working lifetime. A sensitivity analysis showing the potential impact on the defined benefit obligation resulting from an increase/decrease in the assumptions at December 31, 2014 is as follows: Increase in assumption Decrease in assumption Effect % Effect % Discount rate +0.5% Ps. ( 143,469 ) (4.0%) Ps. 256, % Projected salary increase +0.5% Ps. 21, % Ps. ( 19,814 ) 0.6% The change in the liability resulting from a 1-year increase, plus the projected working lifetime of the employees, totals Ps. 63,179, which represents a change of approximately 1.8%. This sensitivity analysis is based on a change in the premise and assuming that all other assumptions will remain the same. 19. Provisions An analysis of provisions is as follows: Ecological rehabilitation Ps. 3,635,148 Ps. 3,106,381 Changes in provisions for the years ended December 31, 2014 and 2013 are as follows: Ecological rehabilitation Balance at January 1, 2013 Ps. 2,690,494 Increases for the year 233,045 Financial discount 182,678 Translation adjustment 164 Balance at December 31, ,106,381 Increases for the year 313,363 Financial discount 218,767 Translation adjustment ( 3,363 ) Balance at December 31, 2014 Ps. 3,635,

129 CONSOLIDATED FINANCIAL STATEMENTS Ecological rehabilitation This provision represents the present value of the future costs of decommissioning and rehabilitating mining as of their dates of depletion. These provisions have been created in conformity with the obligation established in the Mining Act and other applicable legal ordinances, as well as in accordance with the environmental and social responsibility policies of the Company. The assumptions used in computing the provisions for the mining unit decommissioning and rehabilitation costs were reviewed based on internationally recognized standards, which require mine closure processes to be carried out following best practices and exacting standards. These international standards exceed the requirements and regulations established in Mexican legislation and were reviewed and certified by independent expert advisors with ample international experience in mining unit rehabilitation matters. These assumptions include the use of internationally recognized standards adopted as part of the Company s sustainable development policies, which require mine closures to be carried out following best practices, which exceed the practices and standards established under Mexican regulations. These assumptions were assessed and certified by independent experts with ample international experience in mining unit rehabilitation matters. Other adjusted assumptions included the discount rate for reflecting the Company s ecological restoration obligations at their present value. The calculation of the provision includes a number of certain uncertainties related to cost estimates, including possible changes in the applicable legal environment and the Company s technical options for decommissioning and removing structures and reclaiming the affected areas of each mining unit, the estimated mineral levels and related inflation and discount rates at the time the costs are incurred. The changes in the aforementioned assumptions were recognized as an adjustment to the previously recognized decommissioning asset that will be amortized over the average remaining lives of the Company s mining units, which as of December 31, 2014, range from 10 to 48 years. The present value of the provision was computed using discount rates of 6.5% and 7.0% at December 31, 2014 and 2013, respectively Mexican Tax Reform, Income Tax and Flat-rate Business Tax Tax Environment Income Tax and Flat-rate Business Tax On December 11, 2013, the 2014 Mexican Tax Reform was published. This tax reform includes the introduction of a new Mexican Income Tax Law (MITL) and repeals the flat-rate business tax (FRBT). The new MITL establishes new requirements and limits regarding certain deductions, including restrictions on the deductibility of payroll-related expenses that are considered tax-exempt for employees, contributions to create or increase pension fund reserves, and payments related to social welfare benefits for employees. The new MITL also establishes that certain payments made to related parties shall not be deductible if they do not meet certain requirements. The Mexican Federal Internal Revenue Act for fiscal year 2013 established a corporate income tax rate of 30% for The new MITL became effective on January 1, 2014 and stipulates a 30% corporate income tax rate for 2014 and subsequent years. As a result of the repeal of the FRBT Law for fiscal years beginning on or after January 1, 2014, entities must cancel the FRBT credit balances they had through 2013 resulting from negative FRBT bases to be amortized (deductions that exceed revenues) and FRBT credits resulting from the deduction of certain assets, such as inventories and fixed assets. As of 2008 and through 2013, current-year FRBT is computed by applying the 17.5% rate to income determined on the basis of cash flows, net of authorized credits and is payable only to the extent it exceeds income tax for the same period. Tax consolidation Industrias Peñoles, S.A.B. de C.V. and its primary subsidiaries determined their income tax through 2013 on a consolidated basis in accordance with the tax laws in effect in Mexico through that year. However, as a result of the 2014 Mexican Tax Reform, beginning January 1, 2014 both Industrias Peñoles, S.A.B. de C.V. and all its subsidiaries shall compute their taxes on an individual basis. 127

130 CONSOLIDATED FINANCIAL STATEMENTS In 2010, the tax consolidation regime was substantially amended to establish a maximum tax consolidation income tax deferral period of five years and to require the recapture of the deferred income tax as of the sixth year and through the tenth year at the following rates: 25% in the sixth year and 25% in the seventh year, 20% in the eighth year, 15% in the ninth year and 15% in the tenth year. In view of the above, in 2010, the Company calculated the deferred income tax deferred from 1999 to 2004, and for 2011, 2012 and 2013, it determined the income tax that was deferred in fiscal years 2005, 2006 and 2007, respectively. In accordance with the new MITL that became effective on January 1, 2014, groups that were previously tax-consolidated at December 31, 2013 must deconsolidate and remit all the deferred income tax and asset tax that had not yet been remitted by each entity on an individual basis. As a result, Industrias Peñoles, S.A.B. de C.V., as the controlling company, must remit any income tax that it has remitted on a consolidated basis following a procedure for remitting deferred income tax similar to the one included in the changes in tax consolidation rules introduced in The 2014 Mexican Tax Reform establishes the following two periods in which taxpayers must remit previously deferred taxes as result of deconsolidation: i) a period of five years, over which the first 25% must be remitted by no later than May 31, 2014 and the remaining 75% to be remitted in four annual installments (25%, 20%, 15% and 15%) over the subsequent four years, and; ii) a period of ten years in conformity with the tax law in effect through The items that gave rise to deferred income tax from tax consolidation are as follows: a) Tax losses of the controlled companies carried forward in the computation of the consolidated tax result and that have not been carried forward individually by the controlled companies. b) Dividends distributed by controlled companies and that were not paid from the balances of their CUFIN and CUFINRE. c) Special consolidation benefits related to transactions carried out between consolidating entities. Industrias Peñoles, S.A.B. de C.V. has determined a tax deconsolidation effect at December 31, 2013 of income tax payable of Ps. 1,130,776, which is primarily the result of the recapture of the tax losses of its consolidated subsidiaries from between 2008 and Deferred income tax generated between 1999 and 2004, and from 2004 through 2007 shall continue to be remitted in accordance with rules in effect through At December 31, 2014 the tax payable is Ps. 219,705. Special taxes for mining companies Also, as a result of the 2014 Mexican Tax Reform, the section of the Federal Public Asset Usage Law (Ley Federal de Derechos) was amended to include, apart from the special taxes that mining companies had already been paying through 2013, the following additional taxes starting in 2014: a) An additional mining tax for mining companies that hold non-productive or idle mining concessions and that have not carried out any mining exploration or exploitation work in respect of the idle concession. b) A special mining tax for entities holding mining concessions and mining rights equal to 7.5% of their taxable income, minus the deductions authorized under the MITL, excluding deductions for investments, interest and annual inflation adjustments. c) An extraordinary mining tax for entities holding mining concessions and mining rights that sell gold, silver or platinum. This tax shall be equal to 0.5% of the net sales sale of such metals. These taxes are payable by mining companies annually and are to be remitted within the first three months of the year following the tax year in question. 128

131 CONSOLIDATED FINANCIAL STATEMENTS Recognition in the financial statements Deferred income tax for tax consolidation An analysis of payments to be made in future years corresponding to the remittance of income tax deferred from tax consolidation is as follows: Ps. - Ps. 309, , , , , ,984 96, and succeeding years 849, ,285 Total income tax from tax consolidation 1,350,481 1,608,307 Deferred tax on the reinvestment of earnings CUFINRE 3,566 3,624 Total income tax 1,354,047 1,611,931 Less: Current portion due (1) ( 219,705 ) ( 309,474 ) Total non-current portion of income tax Ps. 1,134,342 Ps. 1,302,457 (1) In 2013, this caption is comprised of Ps. 190,441 for the installment due in 2014 and the remaining Ps. 119,033 corresponds to income tax to be remitted as a result of tax deconsolidation. Changes in the deferred tax liability An analysis of the temporary differences giving rise to deferred income tax liabilities is as follows: Deferred income tax liabilities: Cash and cash equivalents Ps. 9,049 Ps. 11,161 Trade and other accounts receivable 161, ,080 Inventories 351,687 1,020,029 Property, plant and equipment 7,803,790 5,402,044 Other financial assets 195, ,711 Deferred income tax assets: Other financial liabilities ( 147,363 ) ( 168,505 ) Suppliers and other accounts payable ( 1,357,505 ) ( 569,128 ) Provisions ( 1,025,749 ) ( 931,914 ) Employee benefits ( 171,994 ) ( 125,499 ) Available tax loss carryforward ( 2,497,566 ) ( 2,236,167 ) Deferred income tax 3,321,243 2,803,812 Deferred special tax for mining companies 838, ,126 Deferred income tax liability, net (1) Ps. 4,159,438 Ps. 3,437,938 Shown in the statement of financial position: Deferred income tax asset Ps. 1,938,830 Ps. 1,908,365 Deferred income tax liability 6,098,268 5,346,303 Ps. 4,159,438 Ps. 3,437,938 (1) In 2013, Grupo Peñoles reclassified the presentation of its deferred income tax to recognize separately those subsidiaries with a deferred income tax asset. 129

132 CONSOLIDATED FINANCIAL STATEMENTS Income tax charged to earnings An analysis of taxes on profits charged to the income statement for the years ended December 31, 2014 and 2013 is as follows: Current year income tax Ps. 3,443,578 Ps. 3,962,875 Deferred income tax related to the creation and reversal of ( 644,161 ) ( 1,404,400 ) temporary differences Deferred income tax resulting from changes to the income tax rate - 219,516 Current year FRBT - ( 9,493 ) Income tax 2,799,417 2,768,498 Current year special tax for mining companies 88,960 - Deferred special tax for mining companies 178, ,576 Special tax for mining companies 267, ,576 Total taxes on profits charged to earnings Ps. 3,067,275 Ps. 3,387,074 A reconciliation of the statutory corporate income tax rate to the effective income tax rate recognized by the Company for financial reporting purposes is as follows: Income tax at statutory rate (30% in 2014 and 2013) Ps. 1,433,936 Ps. 2,799,237 Effects of inflation for tax purposes ( 421,222 ) ( 316,199 ) Non-deductible costs and expenses 500,895 87,803 Effect of foreign currency translation 1,233,190 ( 16,230 ) FRBT - ( 9,493 ) Unrecognized assets 71, ,088 Effect of change in tax rates - 219,516 Deferred special tax for mining companies ( 71,268 ) ( 185,572 ) Other items 52,300 86,348 Income tax Ps. 2,799,417 Ps. 2,768,498 Effective income tax rate 58.5% 29.7% Income tax recognized in other comprehensive income An analysis of deferred income tax recognized directly in equity for the years ended December 31, 2014 and 2013 is as follows: Unrealized (loss)/gain on valuation of available-for-sale financial assets Ps. ( 143,646 ) Ps. 242,650 Unrealized gain on valuation of employee benefits 35,987 65,096 Unrealized gain/(loss) on valuation of hedges 287,122 ( 134,596 ) Ps. 179,463 Ps. 173,

133 CONSOLIDATED FINANCIAL STATEMENTS 21. Equity and Components of Other Comprehensive Income Share capital The share capital of Industrias Peñoles S.A.B. de C.V. as of December 31, 2014 and 2013 is represented by common registered shares with no par value. Fixed minimum capital is represented by Class I shares and variable capital by Class II shares. An analysis is as follows: Shares Amount Share capital authorized and subscribed 413,264, ,264,747 Ps. 2,191,210 Ps. 2,191,210 Repurchased shares 15,789,000 15,789,000 30,523 30,523 Outstanding nominal share capital 397,475, ,475,747 Ps. 2,160,687 Ps. 2,160,687 As of December 31, 2014, the Company s nominal share capital consists of minimum fixed capital of Ps. 2,191,210 and variable capital, which may not exceed ten times the amount of fixed capital. Undistributed earnings Through December 31, 2013, dividends that the Company paid out of the Net taxed profits account (CUFIN) were not subject to the payment of income tax. There will be no changes to this account as a result of the 2014 Mexican Tax Reform and tax deconsolidation. Industrias Peñoles, S.A.B. de C.V. must maintain its individual CUFIN at December 31, 2013 and it must also create a separate CUFIN for profits generated as of January 1, Beginning January 1, 2014, dividends paid to foreign individuals and corporations from earnings generated as of January 1, 2014 shall be subject to an additional 10% withholding tax. Legal reserve The Company is required to appropriate at least 5% of the net income of each year to increase the legal reserve. This practice must be continued each year until the legal reserve reaches 20% of the value of the Company s share capital. At date, the Company has fully covered this percentage. This reserve may not be distributed, except in the form of stock dividends. Components of other comprehensive income Effect of unrealized gain or loss on valuation of hedges This includes the effective portion of the gain or loss on valuation of financial instruments classified as cash flow hedges, net of deferred income tax. The unrealized gain or loss is recycled to profit or loss at the time the hedged transaction occurs. Effect of unrealized gain or loss on available-for-sale financial assets This corresponds to the fair value changes in available-for-sale financial assets, net of deferred income tax. The corresponding gain or loss is transferred to profit or loss at the time the financial assets are sold or when the Company recognizes an impairment loss in the value of such assets. Cumulative translation adjustment This item represents the effects of translation from the functional currency to the reporting currency (Mexican peso). 131

134 CONSOLIDATED FINANCIAL STATEMENTS Effect of unrealized gain or loss on revaluation of labor obligations This item represents the actuarial gain or loss arising on changes in liabilities for retirement benefits due to changes made to the actuarial assumptions used to compute the liability. An analysis of the Company s components of other comprehensive income at December 31, 2014 and 2013 is as follows: Actuarial gains or losses on employee benefits Effect of unrealized gain or loss on valuation of hedges Effect of unrealized gain or loss on available-for-sale financial assets Translation adjustment Total Opening balance at January 1, 2013 Ps. ( 88,461 ) Ps. ( 52,091 ) Ps. 750,447 Ps. 228,941 Ps. 838,836 Comprehensive loss ( 263,870 ) 320,513 ( 481,477 ) 364,801 ( 60,033 ) Change in non-controlling interests 629 ( 1,325 ) ( 4,801 ) ( 554 ) ( 6,051 ) Balance at December 31, 2013 Ps. ( 351,702 ) Ps. 267,097 Ps. 264,169 Ps. 593,188 Ps. 772,752 Actuarial gains or losses on employee benefits Effect of unrealized gain or loss on valuation of hedges Effect of unrealized gain or loss on available-for-sale financial assets Translation adjustment Total Opening balance at January 1, 2014 Ps. ( 351,702 ) Ps. 267,097 Ps. 264,169 Ps. 593,188 Ps. 772,752 Comprehensive income ( 184,791 ) ( 629,673 ) 240,702 4,696,419 4,122,657 Balance at December 31, 2014 Ps. ( 536,493 ) Ps. ( 362,576 ) Ps. 504,871 Ps. 5,289,607 Ps. 4,895, Earnings per Share Earnings per share amounts are calculated by dividing the net income for the year attributable to ordinary shareholders of Grupo Peñoles by the weighted average number of ordinary shares outstanding during the year. Basic and diluted earnings per share are the same as there are no instruments that have a dilutive effect on earnings. An analysis of earnings per share at December 31, 2014 and 2013 is as follows: Net income (in thousands of Mexican pesos): Attributable to the shareholders of Grupo Peñoles Ps. 1,199,128 Ps. 4,760,706 Shares (number of shares in thousands): Weighted average number of ordinary shares 397, ,476 Earnings per share: Basic and diluted earnings per share (in Mexican pesos) Ps Ps

135 CONSOLIDATED FINANCIAL STATEMENTS 23. Dividends An analysis of dividends declared in 2014 is as follows: Mexican pesos per share 2014 Number of shares Amount Dividend declared at regular shareholders meeting held on April 24, 2014 Ps ,475,747 Ps. 755,204 Less: Coupons paid to subsidiaries 6,209 Total dividends paid Ps. 748,995 An analysis of dividends declared in 2013 is as follows: Mexican pesos per share 2013 Number of shares Amount Dividend declared at regular shareholders meeting held on April 10, 2013 (1) Ps ,475,747 Ps. 3,696,525 Dividend declared at Board of Directors meeting held on October 24, 2013 (1) Ps ,475,747 2,913,497 Total dividends declared Ps. 6,610,022 (1) At an ordinary shareholders meeting, the shareholders authorized the Board of Directors to declare dividends against the Company s retained earnings without the need for shareholder authorization. 133

136 CONSOLIDATED FINANCIAL STATEMENTS 24. Related Parties An analysis of balances due from and to unconsolidated related parties is as follows: Receivables: Sales: Dowa Mining Co. Ltd. Ps. 23,170 Ps. 18,044 Sumitomo, Corporation - 5,397 Grupo Palacio de Hierro, S.A.B. de C.V. 7,523 - Others 1, ,284 23,455 Loans: Inmobiliaria Industrial La Barra, S.A. 63,023 59,555 Minera Centauro, S.A. 30,459 31,029 Cía. Minera Trans-Río, S.A. de C.V. 1,021 1,021 94,503 91,605 Administrative services: Línea Coahuila-Durango, S.A. de C.V. 30 6,517 Bal-Ondeo S. de R.L. de C.V ,215 Dowa Mining Co. Ltd. - 49, ,272 Total Ps. 127,185 Ps. 172,332 Payable: Loans: Newmont USA Limited Ps. - Ps. 535,090 Current amounts: Termoeléctrica Peñoles, S. de R.L. de C.V. 186, ,811 Grupo Nacional Provincial, S.A.B. de C.V. 6,159 1,468 Altos Hornos de México, S.A.B. de C.V. 3,244 2,774 Sulquisa, S.A. 39,860 25,978 Bal-Ondeo S. de R.L. de C.V. 51,730 44,580 Línea Coahuila-Durango, S.A. de C.V. 2,338 3,249 Others 45, , ,008 Total Ps. 335,538 Ps. 789,

137 CONSOLIDATED FINANCIAL STATEMENTS Transactions with unconsolidated related entities during the periods ended December 31, 2014 and 2013 were as follows: Revenues: Sales of concentrates and refined metals: Dowa Mining, Co. Ltd. Ps. 666,837 Ps. 375,964 Sumitomo, Corporation 840, ,744 1,507,234 1,120,708 Interest: Inmobiliaria Industrial La Barra, S.A. 4,715 4,671 Minera Centauro, S.A. 2,320 2,323 Bal-Ondeo, S. de R.L. de C.V. - 15,480 7,035 22,474 Electricity: Grupo Palacio de Hierro, S.A.B. de C.V. 42,488 - Grupo Nacional Provincial, S.A.B. de C.V. 7,359 - Instituto Tecnológico Autónomo de México 1,782-51,629 - Ps. 1,565,898 Ps. 1,143,182 Expenses: Electricity: Termoeléctrica Peñoles, S. de R.L. de C.V. Ps. 1,880,756 Ps. 1,742,405 Fees: Servicios Corporativos Bal, S.A. de C.V. (1) 633, ,895 Técnica Administrativa Bal, S.A. de C.V. (1) Bal-Ondeo, S. de R.L. de C.V. 89,340 93, , ,155 Insurance and bonds: Grupo Nacional Provincial, S.A.B. de C.V. (1) 359, ,475 Otros 5,329 6, , ,084 Air transportation: Aerovics, S.A. de C.V. (1) 95,146 68,785 Royalties: Dowa Mining Co. Ltd 122, ,686 Sumitomo, Corporation 31,153 41, , ,730 Others 177, ,358 Ps. 3,395,532 Ps. 3,270,517 (1) Entities under the common control of Grupo Bal and composed of independent Mexican companies, including Grupo Palacio de Hierro, S.A.B. de C.V.; Grupo Nacional Provincial, S.A.B. de C.V. and Valores Mexicanos Casa de Bolsa, S.A. de C.V. 135

138 CONSOLIDATED FINANCIAL STATEMENTS Grupo Peñoles grants the following benefits to key management personnel, which include its Steering Committee members and the paid members of its Board of Directors: Short-term benefits: Compensation and other short-term benefits Ps. 155,740 Ps. 140,915 Long-term benefits: Retirement benefits Ps. 194,965 Ps. 170, Product Sales An analysis of sales by product type is as follows: Silver Ps. 19,659,866 Ps. 23,136,135 Gold 20,096,790 21,999,449 Zinc 7,189,330 6,411,297 Lead 3,972,151 3,816,361 Ore concentrates 3,288,165 2,829,811 Copper 3,343,150 3,768,778 Sodium sulfate 1,335,856 1,341,150 Other products 2,670,299 3,247,869 Ps. 61,555,607 Ps. 66,550,850 An analysis of sales by geographical area is as follows: Domestic sales Ps. 11,733,853 Ps. 9,802,693 US 44,488,249 48,840,009 Europe 1,168,963 3,972,984 South America 717,817 1,494,101 Others 3,446,725 2,441,063 Ps. 61,555,607 Ps. 66,550,

139 CONSOLIDATED FINANCIAL STATEMENTS 26. Cost of Sales An analysis of cost of sales for the years ended December 31, 2014 and 2013 is as follows: Personnel expenses (Note 30) Ps. 3,595,649 Ps. 3,486,733 Energy 4,412,985 3,680,688 Operating materials 3,738,048 3,277,941 Maintenance and repairs 2,957,923 2,623,683 Depreciation and amortization 6,536,423 5,494,948 Transfer of by-products ( 1,456,250 ) ( 1,503,197 ) Contractors 4,678,183 4,025,156 Others 1,940,214 1,852,641 Inventory adjustments ( 997,580 ) 2,631,505 Cost of sale of extraction and treatment 25,405,595 25,570,098 Cost of metals sold 20,078,201 22,516,738 Ps. 45,483,796 Ps. 48,086, Administrative Expenses An analysis of administrative expenses for the years ended December 31, 2014 and 2013 is as follows: Personnel expenses (Note 30) Ps. 1,296,760 Ps. 1,146,002 Fees 1,045, ,098 Travel expenses 188, ,583 Information technology expenses 271, ,690 Fees, associations and others 316, ,939 Total administrative expenses Ps. 3,118,499 Ps. 2,943, Exploration Expenses An analysis of exploration expenses for the years ended December 31, 2014 and 2013 is as follows: Personnel expenses (Note 30) Ps. 95,170 Ps. 118,388 Contractors 1,992,156 2,499,504 Taxes and duties 307, ,654 Operating materials 21,671 79,654 Fees, assays and others 462, ,344 Total exploration expenses Ps. 2,879,181 Ps. 3,498,

140 CONSOLIDATED FINANCIAL STATEMENTS An analysis of liabilities associated with the exploration and evaluation of mineral resources at December 31, 2014 and 2013is as follows: Total exploration liabilities Ps. 67,266 Ps. 85,917 An analysis of cash flows used in operating activities related to the exploration and evaluation of mineral resources for the years ended December 31, 2014 and 2013 is as follows: Cash flows used in operating activities Ps. ( 1,662,093 ) Ps. ( 2,089,645 ) 29. Selling Expenses An analysis of selling expenses for the years ended December 31, 2014 and 2013 is as follows: Freight and transfers Ps. 1,083,007 Ps. 942,220 Royalties 162, ,900 Handling 34,073 31,458 Extraordinary mining tax 96,665 - Other expenses 151, ,302 Total selling expenses Ps. 1,528,154 Ps. 1,273, Personnel Expenses An analysis of personnel expenses for the years ended December 31, 2014 and 2013 is as follows: Salaries and wages Ps. 2,642,197 Ps. 2,475,242 Employee profit sharing 473, ,809 Employee benefits at retirement 134, ,226 Social security contributions 704, ,570 Social welfare and other benefits 1,032,176 1,139,276 Total personnel expenses Ps. 4,987,579 Ps. 4,751,123 An analysis of personnel expenses based on their function is as follows: Cost of sales Ps. 3,595,649 Ps. 3,486,733 Administrative expenses 1,296,760 1,146,002 Exploration expenses 95, ,388 Total personnel expenses Ps. 4,987,579 Ps. 4,751,

141 CONSOLIDATED FINANCIAL STATEMENTS In 2014 and 2013, the Company s average number of employees is as follows: Number of non-union workers 3,856 3,809 Number of unionized workers 7,539 7,331 Total 11,395 11, Other (Income) Expenses An analysis of other income for the years ended December 31, 2013 and 2012 is as follows: Rental income Ps. ( 17,955 ) Ps. ( 9,607 ) Income from royalties ( 19,098 ) ( 39,434 ) Sales of materials and scrap ( 174,106 ) ( 13,157 ) Loss on sale of available-for-sale investments ( 52,639 ) - Insurance claims - ( 15,598 ) Other income Ps. ( 263,798 ) Ps. ( 77,796 ) An analysis of other expenses for the years ended December 31, 2014 and 2013 is as follows: Donations Ps. 63,738 Ps. 119,456 Rehabilitation expenses for closed mining units 35,109 43,401 Loss on sale and retirement of fixed assets 335,836 71,807 Impairment in the value of available-for-sale financial assets 29,580 26,104 Losses from accidents 24,588 - Unrecoverable value added tax (1) 1,106,815 - Loss on the sale of concentrates and other 416, ,926 Other expenses Ps. 2,011,881 Ps. 487,694 (1) In December 2014, the subsidiary Metalúrgica Met-Mex Peñoles, S.A. de C.V. reached an agreement with the Mexican tax authority for the subsidiary to pay a tax debt of Ps. 1,100 as a result of certain differences in the interpretation of Mexican tax laws, specifically with respect to the Value Added Tax Law. As a result of this agreement the subsidiary s audit process for fiscal years 2009 to 2012 is deemed concluded. 139

142 CONSOLIDATED FINANCIAL STATEMENTS 32. Finance Income An analysis of finance income is as follows: Interest income on cash equivalents and other investments Ps. 84,716 Ps. 95,027 Interest income from trade receivables and other 187, ,914 Adjustment due to ineffectiveness and time value of derivative financial instruments designated as cash flow hedges 60,493 50,867 Interest rate hedges and others - 99,360 Ps. 332,936 Ps. 465, Finance Expense An analysis of finance expenses is as follows: Interest arising on financial debt Ps. 977,534 Ps. 468,412 Discount of liability provisions 218, ,678 Discount of defined benefit obligation 53,817 46,460 Interest rate hedges and others 183, ,594 Ps. 1,433,711 Ps. 951,

143 CONSOLIDATED FINANCIAL STATEMENTS 34. Statements of Cash Flows A reconciliation of consolidated net income and cash flows provided by operating activities for the years ended December 31, 2014 and 2013 is as follows: Consolidated net income Ps. 1,712,511 Ps. 5,943,717 Items not affecting cash flows: Depreciation, amortization and depletion 6,537,850 5,494,948 Share of profit of associates ( 23,108 ) ( 102,192 ) Income taxes 3,067,275 3,387,074 Unrecoverable VAT from prior years 1,106,815 - Provisions and allowances 162, ,073 Deferred employee profit sharing 473, ,809 Foreign exchange loss 433, ,691 Loss on sale and retirement of fixed assets 335,836 71,807 Impairment in the value of property, plant and equipment 300, ,602 Impairment in the value of available-for-sale financial assets 29,580 26,104 Interest collected ( 94,200 ) ( 128,052 ) Interest expense 1,105, ,995 Derivative financial instruments ( 161,896 ) ( 245,387 ) Other 40,436 47,479 Subtotal 15,027,229 16,898,668 Trade and other accounts receivable ( 1,051,938 ) 1,366,837 Inventories 110,416 1,785,833 Suppliers and other accounts payable 633,303 ( 410,842 ) Contributions to retirement benefits plan ( 9,490 ) ( 315,540 ) Income tax and flat-rate business tax paid ( 3,602,003 ) ( 5,432,179 ) Employee profit sharing paid ( 560,591 ) ( 1,033,025 ) Net cash flows from operating activities Ps. 10,546,926 Ps. 12,859, Contingencies and Subsequent Events At December 31, 2014 and 2013, the Company had the following contingencies: a) The Agrarian Court judge that the respective case issued a court order related to the lawsuit regarding the 1,824 hectares that Minera Penmont ( Penmont ) handed over to the Agrarian Court in July Through this court order, the judge demanded that Penmont must return the land that the company occupied back to its original state. Penmont performed operations on approximately 300 hectares of the 1,824 hectares. Penmont believes that this order is excessive since the judge s demands were not part of the final agrarian court ruling, and also because Penmont conducted its mining activities in accordance with mining concessions and environmental permits that were legally granted at the time. Penmont has filed an appeal with a Federal court against the court order in question and is currently waiting for a ruling regarding on its appeal from that court. The plaintiffs also filed other lawsuits against Penmont regarding land usage agreements entered into with Penmont and involving plots of land outside of the abovementioned 1,824 hectares of land. However, Penmont does not carry out any significant mining activities on this land, nor does Penmont have any significant geological interest in the land. In addition, Penmont does not consider these plots of land to have any strategic value for it. There are a number of lawsuits and counterclaims that have been filed between the parties, including appeals and legal complaints. There is uncertainty regarding what the outcomes and final rulings of these cases will be. 141

144 CONSOLIDATED FINANCIAL STATEMENTS b) On January 1, 2015, there was considerable water infiltration in the mining facilities located at the Naica mine (subsidiary Minera Maple, S.A. de C.V.), and due to the volume of the infiltration, the bilge pump system in place in the mine was unable to remove the water. As a result, there was a flood in the mine that led to the temporary shutdown of mining activities in the mine. Based on the information available at the date of issue of the financial statements, since the groundwater level is now stable, the bilge pumps have been turned back on and additional bilge pumps have been installed in an effort to get the mine back up and running again. The mine is expected to be back on line around the second quarter of The Group s management is in the process of assessing the situation and estimating the impact of the damage to the equipment and mining facilities resulting from this accident. c) Grupo Peñoles is subject to various laws and regulations which, if not observed, could give rise to penalties. d) The Company is liable for any omitted taxes determined as a result of a review of its taxes by the tax authorities. 36. Commitments Commitments for the purchase of mineral products As of December 31, 2014 and 2013, the Company has entered into various agreements with third parties to purchase different mineral products in order to optimize productive operations and operate plants at their full capacity. The purchase agreements are for a total of approximately USD 3,741,000 and USD 4,172,000, respectively. These contracts may be canceled upon prior notice without penalties for either party. Leases Grupo Peñoles entered into an agreement to acquire, through one of its subsidiaries, electricity from a 230 megawatt power plant. The agreement is considered an operating lease and consists of the payment of a variable amount for the electric power received. For the years ended December 31, 2014 and 2013, the expense for the electricity power received from the plant is as follows: Rent paid (1) Ps. 1,880,756 Ps. 1,742,405 (1) In addition to the electric power supply agreement, the Company entered into a business trust agreement for the operation and maintenance of a power plant under the self-supply permit granted to Termoeléctrica Peñoles, S. de R. L. de C.V. (TEP). This agreement is valid until To guarantee these purchase commitments, the developers/operators of the plant were extended a sale option (put) so that, in the highly unlikely event the subsidiaries do not meet their obligations, the developers/operators may demand Grupo Peñoles to buy TEP at a price equivalent to the present value of the remaining payments scheduled for the subsidiaries under the agreement. The estimated annual cost for electricity consumption (230 megawatts) for 2015 is USD 117,

145 CONSOLIDATED FINANCIAL STATEMENTS 37. Financial Instruments Analysis by category An analysis of financial instruments by category at December 31, 2014 is as follows: Cash and accounts receivable At fair value through profit or loss Available for sale Hedging derivatives Financial assets: Cash and cash equivalents Ps. 11,254,893 Ps. - Ps. - Ps. - Short-term investments 4,341, Trade and other accounts receivable 3,342,997 ( 21,295 ) - - Other financial assets 309, ,623 Available-for-sale financial assets - - 1,404,970 - Ps. 19,249,572 Ps. ( 21,295 ) Ps. 1,404,970 Ps. 682,623 At fair value through profit or loss At amortized cost Hedging derivatives Financial liabilities: Financial debt Ps. - Ps. 22,312,405 Ps. - Suppliers and other accounts payable ( 10,070 ) 4,164,798 - Other financial liabilities 595, ,498 Ps. 585,171 Ps. 26,477,203 Ps. 933,498 An analysis of financial instruments by category at December 31, 2013 is as follows: Cash and accounts receivable At fair value through profit or loss Available for sale Hedging derivatives Financial assets: Cash and cash equivalents Ps. 19,720,182 Ps. - Ps. - Ps. - Trade and other accounts receivable 3,020,912 3, Other financial assets 261, ,860 Available-for-sale financial assets ,730 - Ps. 23,002,737 Ps. 3,711 Ps. 955,730 Ps. 664,860 At fair value through profit or loss At amortized cost Hedging derivatives Financial liabilities: Financial debt Ps. - Ps. 19,806,860 Ps. - Suppliers and other accounts payable 389 4,082,401 - Other financial liabilities 651,717-91,019 Ps. 652,106 Ps. 23,889,261 Ps. 91,

146 CONSOLIDATED FINANCIAL STATEMENTS Fair value of financial instruments and fair value hierarchy An analysis of the Company s fair value financial instruments at December 31, 2014 and 2013 is as follows: Carrying value December 31, 2014 December 31, 2013 Fair value Carrying value Financial assets: Cash and cash equivalents Ps. 11,254,893 Ps. 11,254,893 Ps. 19,720,182 Ps. 19,720,182 Short-term investments: 4,341,810 4,341, Trade and other accounts receivable 3,321,702 3,321,702 3,024,623 3,024,623 Other financial assets 992, , , ,503 Available-for-sale financial assets 1,404,970 1,404, , ,730 Fair value Ps. 21,315,870 Ps. 21,315,870 Ps. 24,627,038 Ps. 24,627,038 Financial liabilities: Financial debt Ps. 22,312,405 Ps. 22,695,598 Ps. 19,806,860 Ps. 19,717,508 Suppliers and other accounts payable 4,154,728 4,154,728 4,082,790 4,082,790 Other financial liabilities 1,528,739 1,528, , ,736 Ps. 27,995,872 Ps. 28,379,065 Ps. 24,632,386 Ps. 24,543,034 The following analysis shows the fair value of the financial instruments measured using three classifications: Level 1: quoted prices in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: unobservable inputs for the asset or liability. December 31, 2014 Level 1 Level 2 Level 3 Total Trade and other accounts receivable: Embedded derivatives Ps. - Ps. ( 21,295 ) Ps. - Ps. ( 21,295 ) Other financial assets: Forwards and options - 622, ,284 Futures 60, ,339 Available-for-sale financial assets 1,404, ,404,970 Ps. 1,465,309 Ps. 600,989 Ps. - Ps. 2,066,

147 CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014 Level 1 Level 2 Level 3 Total Suppliers and other accounts payable: Embedded derivatives Ps. - Ps. ( 10,070 ) Ps. - Ps. ( 10,070 ) Other financial liabilities: Forwards and options - 925, ,185 Swaps - 595, ,241 Futures 8, ,313 Ps. 8,313 Ps. 1,510,356 Ps. - Ps. 1,518,669 December 31, 2013 Level 1 Level 2 Level 3 Total Trade and other accounts receivable: Embedded derivatives Ps. - Ps. 3,711 Ps. - Ps. 3,711 Other financial assets: Forwards and options - 634, ,599 Futures 30, ,261 Available-for-sale financial assets 955, ,730 Ps. 985,991 Ps. 638,310 Ps. - Ps. 1,624,301 December 31, 2013 Level 1 Level 2 Level 3 Total Suppliers and other accounts payable: Embedded derivatives Ps. - Ps. 389 Ps. - Ps. 389 Other financial liabilities: Forwards and options - 70,252-70,252 Swaps - 651, ,717 Futures 20, ,767 Ps. 20,767 Ps. 722,358 Ps. - Ps. 743,125 Hedging instruments Grupo Peñoles contracts derivatives with various financial institutions to reduce its exposure to changes in the variables and pricing of its transactions. This risk consists of the risk associated with fluctuations in the prices of produced or processed metals and energy, as well as the exchange rates and interest rates associated with the Company s financial and business transactions. To minimize its counterparty credit risk, Grupo Peñoles has entered into agreements only with well-known and financially strong financial institutions. Grupo Peñoles does not expect any of its counterparties to default on their obligations and thus does not consider it necessary to create any reserves for counterparty risk. 145

148 CONSOLIDATED FINANCIAL STATEMENTS Cash-flow hedges An analysis of the fair value of derivatives that qualify as cash flow hedges recognized directly in equity as an unrealized (loss) gain is as follows: Fair value Hedge protection program: Metal prices (a) Gold Ps. 143,854 Ps. 132,196 Silver 286, ,865 Lead 29,839 ( 75 ) Zinc 104,140 ( 6,288 ) Copper 18,081 ( 4,118 ) 582, ,580 Foreign currency (b) U.S. dollars ( 956,081 ) ( 15,919 ) Swedish kronor ( 6,138 ) ( 80 ) Euros ( 2,665 ) 4,860 ( 964,884 ) ( 11,139 ) Financial interest rate (c) Financial debt ( 56,323 ) ( 111,776 ) Energy (d) Natural gas - 14,834 Fair value Ps. ( 439,103 ) Ps. 457,

149 CONSOLIDATED FINANCIAL STATEMENTS a) Metal price hedging program Grupo Peñoles values its transactions based on the international market prices listed on the London Metal Exchange (for base metals) and the London Bullion Market Association (for precious metals). As a result, the income of Grupo Peñoles may be affected by variances in the above-mentioned market prices and for this purpose, the Company establishes hedge programs based on its budgeted production using derivative financial instruments, such as forwards and put and call options. At December 31, 2014, Grupo Peñoles has entered into the following contracts that commit a portion of its production from 2015 to 2019: Silver Gold Zinc Lead Copper Price USD/ ounce (1) Volume thousand of ounces Price USD/ ounce Volume ounces Price USD/ton Volume tons Price USD/ton Volume tons Price USD/ton Volume tons Forward purchases , ,209 9, Forward sales , ,311 23, Put purchases ,720 1,103 1,657 2,130 80,521 2,102 8,379 6,868 1,710 Call sales ,720 1,454 1,657 2,480 80,521 2,420 8,379 7,300 1,710 Note: (1) The prices in the above table reflect the weighted average sale or purchase price of forwards and the weighted average strike price of put and call options. b) Foreign currency hedging program Based on the budget established for this purpose, the Company sells U.S. dollars through derivative financial instruments, such as forwards and put and call options, in order to acquire currencies other than the functional currency, thus eliminating the risk of exchange rate variances. As of December 31, 2014, Grupo Peñoles has established the following derivative transactions that hedge a portion of future obligations (2015) denominated in Mexican pesos: Type of transaction Amount USD Exchange rate forward (1) MXP/USD Forward dollar sales 464, Forward dollar purchases 35, Put options 359, Call options 359, (1) Weighted average of the agreed transactions. 147

150 CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2014, the Company has the following derivative contracts to hedge a portion of its fixed asset acquisitions denominated in euros (EUR) and Swedish kronor (SEK): Type of transaction Amount EUR Exchange rate forward (1) USD/EUR Forward purchases 2, Type of transaction Amount SEK Exchange rate forward (1) SEK/USD Forward purchases 45, (1) Weighted average of the agreed transactions. c) Interest rate hedging program The objective of this program is to use swaps to stabilize the financial cost of the loans obtained in U.S. dollars and/or Mexican pesos. An analysis is as follows: Type of transaction Rate Amount hedged in USD Term in years Fixed rate swap (1) 4.69% 130, Note: (1) Transaction to hedge structured note ( certificados bursátiles ) PE&OLES 10D debt placement. The fair value of financial instruments classified as cash flow hedges, net of deferred income tax charged to equity, is as follows: Fair value measurement of financial instruments Ps. ( 439,103 ) Ps. 457,499 Ineffectiveness and effect of time value of options excluded from hedges ( 131,186 ) ( 70,693 ) Deferred income tax 171,102 ( 116,043 ) Fair value net of deferred income tax recognized directly in equity Ps. ( 399,187 ) Ps. 270,763 Changes in the unrealized loss on valuations of hedges for the years ended December 31, 2014 and 2013 are as follows: Balance at beginning of the year Ps. 270,763 Ps. ( 43,242 ) (Income)/loss reclassified to profit or loss (Note 32) ( 95,729 ) 79,035 Deferred income tax 28,719 ( 23,726 ) Unrealized (loss)/gain ( 861,343 ) 369,566 Deferred income tax 258,403 ( 110,870 ) Unrealized (loss)/gain net of deferred income tax at the end of the year Ps. ( 399,187 ) Ps. 270,

151 CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2014, derivative contracts consist of forecast transactions that the Company expects to carry out between 2016 and An analysis of the anticipated reclassification (in years) from equity to profit or loss is as follows: 1 2 or more Total Unrealized losses Ps. ( 364,689 ) Ps. ( 34,498 ) Ps. ( 399,187 ) Fair value hedges Unrealized gain/(loss) on fair value hedges at December and 2013 are as follows: Unrealized gain/(loss) Ps. 58,565 Ps. ( 8,608 ) The following analysis shows the gains and losses on the Company s hedging instruments and the loss attributable to the risk being hedged: Effect of derivative Hedged item Effect of derivative Hedged item Gain/(loss) Ps. 52,922 Ps. 31,917 Ps. ( 16,825 ) Ps. 62,554 A summary of the financial instruments contracted at December 31, 2014 as part of the fair value hedging strategy of Grupo Peñoles is as follows: Metal price hedging program Grupo Peñoles values its transactions based on the international market prices listed on the London Metal Exchange (for base metals) and the London Bullion Market Association (for precious metals). As a result, the income of Grupo Peñoles may be affected by variances in the above-mentioned market prices and for this purpose, the Company establishes hedge programs based on its budgeted sales using derivative financial instruments, such as forwards and put and call options. At December 31, 2014, the Company has entered into the following contracts that commit a portion of its sales transactions for 2015: Silver Gold Zinc Lead Copper Price USD/ ounce (1) Volume thousand of ounces Price USD/ ounce Volume ounces Price USD/ton Volume tons Price USD/ton Volume tons Price USD/ton Volume tons Forward sales ,785 1, ,286 39,353 2,050 3,800 6,685 2,896 Forward purchases ,205 18,557 2,035 2,850 6,770 2,456 Call sales Note: (1) The prices in the above table reflect the weighted average sale or purchase price of forwards and the weighted average strike price of put and call options. Derivatives are valued using valuation approaches and methodologies (such as Black and Scholes, discounted cash flows, etc.) applicable to the specific type of derivative instrument. 149

152 CONSOLIDATED FINANCIAL STATEMENTS 38. Financial Risk Management The principal financial instruments of Grupo Peñoles comprise financial assets and financial liabilities. The Company s principal financial liabilities, other than derivatives, comprise accounts payable, financial debt and debentures. The main purpose of these financial instruments is to manage short-term cash flows and secure financing for the Company s capital expenditure program. Grupo Peñoles has various financial assets, such as accounts receivable and cash and short-term cash deposits, which arise directly from its operations. Grupo Peñoles is exposed to the following risks associated with its use of financial instruments: a) Market risk, which includes foreign currency risks, commodity price risk (precious metals and base metals), equity instrument pricing and interest rate risks b) Credit risks c) Liquidity risks Grupo Peñoles manages its exposure to key financial risks in accordance with the Company s financial risk management policy. The objective of the policy is to support the delivery of the Company s financial targets while protecting future financial security. The main risks that could adversely affect the Company s financial assets, liabilities or future cash flows are market risks. Management reviews and agrees policies for managing each of these risks which are summarized below. The Company s senior management oversees the management of financial risks. The Company s management is supported by a financial risk committee that advises on financial risks and the appropriate governance framework for proper financial risk identification, measurement and management. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the Company s policy that no trading in derivatives for speculative purposes shall be undertaken. The Board of Directors reviews and agrees on policies for managing each of these risks, which are summarized below. a) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: metal price risk, interest rate risk and currency risk. Financial instruments affected by market risk include loans and borrowings, deposits, accounts receivable, accounts payable, accrued liabilities, and derivative financial instruments. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates on the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant. The analyses exclude the impact of movements in market variables on the carrying amount of pension and other post-retirement obligations and provisions. The following assumptions have been made in calculating the sensitivity analyses: The statement of financial position sensitivity relates to derivatives and Mexican peso denominated accounts receivables. The sensitivity of the relevant profit before tax item is the effect of the assumed changes in respective market risks. This is based on the financial assets and financial liabilities held at December 31, 2014 and The impact on equity is the same as the impact on profit before tax. 150

153 CONSOLIDATED FINANCIAL STATEMENTS Commodity price risk Due to the nature of its business and economic environment, the Company uses hedging derivatives to reduce the variability in its cash flows and operating margins arising from various factors, such as: Price fluctuations: of the metals it produces (silver, gold, zinc, lead and copper) of the supplies and raw materials it consumes and/or processes (mineral concentrates, natural gas, etc.) The following chart shows the sensitivity of changes in commodity prices, with all other variables held constant, and the impact of these changes on the Company s equity income before taxes. These changes in commodity prices were estimated based on the volatility in the historical prices of the last two years. Increase by 10%-20% December 31, 2014 Increase by 15%-35% December 31, 2013 Net income or loss Equity Net income or loss Equity Financial assets: Trade and other accounts receivable Ps. 414,322 Ps. - Ps. 178,426 Ps. - Financial liabilities: Suppliers and other accounts payable ( 66,741 ) - ( 231,331 ) - Derivative financial instruments ( 1,856,778 ) ( 498,774 ) ( 1,176,213 ) ( 142,839 ) Ps. ( 1,509,197 ) Ps. ( 498,774 ) Ps. ( 1,229,118 ) Ps. ( 142,839 ) Decrease by 10%-20% December 31, 2014 Decrease by 15%-35% December 31, 2013 Net income or loss Equity Net income or loss Equity Financial assets: Trade and other accounts receivable Ps. ( 179,384 ) Ps. - Ps. ( 168,630 ) Ps. - Financial liabilities: Suppliers and other accounts payable 62, ,750 - Derivative financial instruments 948,190 1,483,869 21,811 1,253,609 Ps. 831,334 Ps. 1,483,869 Ps. 30,931 Ps. 1,253,

154 CONSOLIDATED FINANCIAL STATEMENTS Risk of fluctuations in the prices of equity instruments Grupo Peñoles is exposed to the risk of fluctuations in the prices of equity instruments, represented by shares of companies listed primarily in the Canadian Stock Exchange. Equity investments are classified in the statement of financial position as available-for-sale financial assets. The following table demonstrates the sensitivity of available-for-sale financial assets to a reasonably possible change in the market price of equity instruments. The impact on equity corresponds to the recognition of the unrealized gain (loss) on valuation and on the income statement, as a possible recognition of impairment of the financial instrument. This sensitivity analysis carried out based on the volatility in the historical prices of the last two years is as follows: December 31, 2014 December 31, 2013 Net income or loss Equity Net income or loss Equity Increase 40% - (30% in 2013) Ps. - Ps. 561,988 Ps. - Ps. 286,719 Decrease 40% - (30% in 2013) Ps. ( 37,727 ) Ps. ( 524,258 ) Ps. - Ps. ( 286,719 ) Interest rate risk The Company s exposure to the risk of changes in market interest rates relates to the Company s financial assets and liabilities with floating interest rates. Grupo Peñoles manages its interest rate risk by having a balanced portfolio of fixed and variable rate (LIBOR) loans and borrowings. The Company s policy is to keep its borrowings at fixed rates of interest by entering into swaps to hedge its loans with floating interest rates. At December 31, 2013, the Company s financial debt through structured notes ( certificados bursátiles ) is USD 1,514,691, with no maturities to occur during Approximately 91% of the debt bears interest at fixed rates and the remaining 9% of the debt bears interest at floating rates. The following table shows the sensitivity of the Company s financial assets and liabilities to a reasonably possible change in the interest rates applied on a complete year basis as of the statement of financial position date, with all other variables held constant. December 31, 2014 December 31, 2013 Net income or loss Equity Net income or loss Equity 25 basis point increase (10 in 2013) Ps. 34,042 Ps. 12 Ps. 18,241 Ps basis point decrease (10 in 2013) Ps. ( 13,617) Ps. ( 5 ) Ps. ( 18,241 ) Ps. ( 9 ) Foreign currency risk Grupo Peñoles manages its foreign currency risk by contracting derivatives. The main foreign currency to which the Company is exposed (other than the U.S. dollar, which is its functional currency) is the Mexican peso, which is the currency of a significant portion of the Company s operating costs and investments, as well as equity investments denominated in other currencies such as the euro and Swedish krona. The Company s Board of Directors has appointed a Hedging Committee to establish the strategies and limits for matching receipts in U.S. dollars and costs incurred in Mexican pesos through hedge agreements (derivatives). 152

155 CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2014, the sensitivity of the Company s financial assets and liabilities denominated in foreign currencies, expressed in the reporting currency, is as follows: Denominated in pesos Other currencies Total Financial assets: Cash and cash equivalents Ps. 1,415,732 Ps. - Ps. 1,415,732 Trade and other accounts receivable 722,049 1, ,926 Financial liabilities: Suppliers and other accounts payable ( 702,140 ) ( 32,579 ) ( 734,719 ) Ps. 1,435,641 Ps. ( 30,702 ) Ps. 1,404,939 At December 31, 2013, the sensitivity of the Company s financial assets and liabilities denominated in foreign currencies, expressed in the reporting currency, is as follows: Denominated in pesos Other currencies Total Financial assets: Cash and cash equivalents Ps. 634,540 Ps. - Ps. 634,540 Trade and other accounts receivable 653,471 3, ,749 Financial liabilities: Suppliers and other accounts payable ( 643,346 ) ( 115,634 ) ( 758,980 ) Ps. 644,665 Ps. ( 112,356 ) Ps. 532,309 The following table demonstrates the sensitivity of the Company s financial assets and liabilities to a reasonably possible change in the Mexican peso / U.S. dollar exchange rate and the effect on the Company s income before taxes, based on the foreign currency risk exposure maintained at December 31, 2014 and 2013 and the Company s derivatives whose underlyings are the peso-to-dollar exchange rate (assuming that all other variable are held constant): December 31, 2014 December 31, 2013 Net income or loss Equity Net income or loss Equity Increase 15% - Mexican peso (5% in 2013) Ps. ( 228,015 ) Ps. ( 1,312,696 ) Ps. ( 239,767 ) Ps. ( 190,767 ) Decrease 5% - Mexican pesos (10% in 2013) Ps. 59,935 Ps. 540,316 Ps. 62,321 Ps. 956,

156 CONSOLIDATED FINANCIAL STATEMENTS Grupo Peñoles is exposed to the risk of fluctuations in the exchange rates of the euro and Swedish krona to the U.S. dollar, since a portion of its fixed asset acquisitions are made in these currencies. The following table shows the sensitivity of the financial assets and liabilities to potential fluctuations in the exchange rates of euro and Swedish krona and the U.S. dollar, expressed in the reporting currency: December 31, 2014 December 31, 2013 Net income or loss Equity Net income or loss Equity Increase 5% - euro (5% in 2013) Ps. 2,205 Ps. - Ps. 2,769 Ps. - Decrease 10% - euro (5% in 2013) Ps. ( 4,410 ) Ps. - Ps. ( 2,769 ) Ps. - December 31, 2014 December 31, 2013 Net income or loss Equity Net income or loss Equity Increase 15% - Swedish Krona (5% in 2013) Ps. ( 8,153 ) Ps. - Ps. ( 962 ) Ps. - Decrease 10% - Swedish Krona (5% in 2013) Ps. 9,064 Ps. - Ps. 1,044 Ps. - b) Liquidity risk Liquidity risk is the risk of not being able to meet its financial liabilities and obligations when they come due. Grupo Peñoles has established a treasury policy to manage its liquidity risk, which primarily includes maintaining a balance between short-, medium- and long-term funds, borrowing facilities available and access to other financing. The Company conducts on-going debt maturity profile analyses of its financial assets and liabilities and constantly monitors its projected cash flows. An analysis of the borrowing facilities available at December 31, 2014 and 2013 is as follows: Credit limit Amount drawn down Undrawn line of credit Credit limit Amount drawn down Undrawn line of credit A-3 USD 40,000 - USD 40,000 USD 600,000 - USD 600,000 A-2 1,290,000-1,290, , ,864 A-1 170, , , ,000 Total USD 1,500,000 - USD 1,500,000 USD 1,405,864 - USD 1,405,864 Grupo Peñoles has available lines of credit that are rolled over annually and bear no fees to maintain them. 154

157 CONSOLIDATED FINANCIAL STATEMENTS The table below summarizes the maturity profile of the Company s financial liabilities based on contractual undiscounted payments. As of December 31, 2014: Maturities Amount 1 year 2 years 3 years Thereafter Non-derivative financial instruments: Financial debt Ps. 31,431,541 Ps. 3,047,633 Ps. 1,109,547 Ps. 1,109,547 Ps. 26,164,814 Suppliers and other accounts payable 4,154,728 4,154, Other financial liabilities: Hedging instruments 933, ,111 88,929 3, ,166 Fair value derivative financial instruments with changes recognized in earnings 595, , , ,448 94,109 Ps. 37,115,008 Ps. 8,074,511 Ps. 1,375,121 Ps. 1,282,287 Ps. 26,383,089 As of December 31, 2013: Maturities Amount 1 year 2 years 3 years Thereafter Non-derivative financial instruments: Financial debt Ps. 28,945,040 Ps. 1,018,948 Ps. 2,707,843 Ps. 985,799 Ps. 24,232,450 Suppliers and other accounts payable 4,060,659 4,060, Other financial liabilities: Hedging instruments 91,019 88,457 2, Fair value derivative financial instruments with changes recognized in earnings 651, , , , ,964 Ps. 33,748,435 Ps. 5,302,795 Ps. 2,844,587 Ps. 1,140,639 Ps. 24,460,414 c) Credit risk The Company s credit risk arises as part of its ordinary course of business. There is credit risk in all the Company s financial assets, which include cash and cash equivalents, trade accounts receivable and other accounts receivable, as well as available-for-sale securities and the acquired rights over derivative financial instruments. The Company only carries out transactions with well-known and solvent financial counterparties. It is the Company s policy that all customers who wish to trade on credit terms will be subject to credit verification procedures, which include an assessment of credit rating, short-term liquidity and financial position. The Company obtains collateral as security from its customers to mitigate the risk of financial losses due to default. In addition, receivables balances are monitored on an ongoing basis with the result that the Group s exposure to bad debts is not significant. Regarding the credit risk related to other financial assets, primarily cash and investments and derivative assets, the Group s exposure relates to potential counterparty default. The Company s maximum exposure is equal to the book value of these instruments, securities or transactions. The Company limits its counterparty credit risk on these assets by dealing only with financial institutions with strong credit ratings. 155

158 CONSOLIDATED FINANCIAL STATEMENTS Cash and cash equivalents and short-term investments An analysis of the credit ratings of financial institutions with which the Company maintains cash and cash equivalents is as follows: Cash and cash equivalents A-2 Ps. 281,708 Ps. 5,882,103 A-1 753,630 13,066,672 A- 1,261, ,112 F2 2,290,577 - BBB+ - 30,000 mxa ,900 - mxa-1 5,931,354 2,295 Ps. 11,254,893 Ps. 19,720,182 Short-term investments mxa-1+ Ps. 4,341,810 Ps. - Trade and other accounts receivable An analysis of trade receivables aging is as follows: As of December 31, 2014: Not impaired Not yet payable From 1 to 30 days From 31 to 60 days More than 60 days Impairment Trade receivables Ps. 2,308,824 Ps. 68,301 Ps. 4,370 Ps. 122,252 Ps. 72,752 Related parties 127, Other accounts receivable 687, ,364 83,364 Ps. 3,123,067 Ps. 68,301 Ps. 4,370 Ps. 205,616 Ps. 156,

159 CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2013: Not impaired Not yet payable From 1 to 30 days From 31 to 60 days More than 60 days Impairment Trade receivables Ps. 1,982,980 Ps. 31,379 Ps. 7,132 Ps. 88,639 Ps. 71,389 Related parties 172, Other accounts receivable 677, , ,730 Ps. 2,832,531 Ps. 31,379 Ps. 7,132 Ps. 214,369 Ps. 197,119 Other financial assets The credit risk of other financial assets consists primarily of loans extended to contractors to finance acquisitions of machinery to allow the contractors to maintain the level of service they provide at the mining units. Company policy is to keep the acquired machinery as collateral, which is stored in the facilities of Grupo Peñoles. Also, Company policy is to partially credit its payments due for services received against the financing balance. Capital management The Company manages its capital structure in a way that ensures its survival as a going concern, maintains investor confidence and the confidence of the financial markets, and sustains the future development of its medium- and long-term projects in order to maximize shareholder return. To ensure that it maintains a strong credit rating and healthy capital ratios, the Company aims to maintain a capital structure with an adequate debt to capital ratio. Management believes that such optimum capital structure is reflected in the equity shown in the consolidated statement of financial position, excluding non-controlling interests. Grupo Peñoles has no capital requirements or restrictions that might affect its capital management capacity. The Company has met its legal obligation to create a legal reserve equal to 20% of the value of its share capital. The legal reserve at December 31, 2014 and 2013 is Ps. 683,026, respectively. See Note 21. * * * * 157

160 CORPORATE HEADQUARTERS Corporativo BAL Calzada Legaria 549, Torre 2 Col. 10 de abril Mexico City Mexico Tel.: + 52 (55) DISCLAIMER This Annual Report contains certain forward-looking information relating to Industrias Peñoles, S.A.B. de C.V. and its subsidiaries (Peñoles or the Company) that is based on assumptions made by its management. Such information, as well as the statements with respect to future events and expectations are subject to certain risks, uncertainties and factors that could cause the actual results, performance or achievements of the Company to be materially different at any time. Such factors include changes in general economic, governmental policy and/or business conditions nationally and globally, as well as changes in interest rates, inflation rates, exchange rates, mining performance in general, metal demand and quotations, and raw material and fuel prices, among others. Due to these risks and factors, actual results may vary materially from the estimates described herein, for which reason Peñoles does not assume any obligation with respect to such variations or to information provided by official sources.