EFFICIENCY ANNUAL REPORT grupo México s.a.b. de c.v. edificio parque reforma

Transcription

1 ANNUAL REPORT 2011 grupo México s.a.b. de c.v. edificio parque reforma EFFICIENCY campos elíseos 400 col. lomas de chapultepec c.p méxico, d.f. tel.: 52 (55) INFORME ANUAL GRUPO MÉXICO 02

2 HIGHLIGHTS 02 LETTER TO INVESTORS 05 GRUPO MÉXICO SALES FIGURES 12 MINING DIVISION 18 GEOGRAPHIC MINE LOCATION 20 COPPER 22 MOLYBDENUM 28 ZINC 30 PRECIOUS METALS 32 PROJECTS AND INVESTMENTS 40 EXPLORATIONS 48 HEALTH AND SAFETY 56 ENVIRONMENTAL ACTIONS AND OUR COMMUNITIES 58 SUCCESS STORY CANANEA 66 TRANSPORTATION DIVISION 72 GEOGRAPHIC LOCATION OF THE PRINCIPAL ROUTES 75 FERROSUR 78 INTERMODAL 79 PACÍFICO TRANSPORTATION LTD 80 ITM 81 INFRASTRUCTURE DIVISION 84 GEOGRAPHIC LOCATION OF THE INFRASTRUCTURE DIVISION 87 GRUPO MÉXICO FOUNDATION 96 FINANCIAL ANALYSIS AND DISCUSSION 104 CORPORATE STRUCTURE 127 BOARD OF DIRECTORS 134 Jaime Espino. Truck trainer. Buenavista del Cobre, Sonora. 02 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 03

3 GRUPO MÉXICO Highlights Real Var. % * 2011* 2011 / 2010 Real Var. % * 2011* 2011 / 2010 Sales Volumes ** Copper (tons) 505, , , , Zinc (tons) 100, ,103 93,964 90,663 (4) Silver (thousands of ounces) 15,000 18,474 19,584 17,411 (11) Gold (ounces) 47,229 63,491 69,690 60,748 (13) Molybdenum (tons) 16,510 18,590 20,508 18,632 (9) Stock Information *** Total Shares Outstanding (thousands) 7,610,000 7,785,000 7,785,000 7,785,000 - EBITDA per Share Cash Flow per Share Earnings per Share Book Value Average Prices (dollars) Copper (COMEX) (pound) Zinc (LME) (pound) Silver (COMEX) (pound) Gold (LF) (pound) , , Molybdenum (MW DEALER OXIDE) (pound) (2) Railroad Division Statistics Net tons/km (millions of tons) 40,186 39,205 52,117 52,182 (-) Cars loaded (thousands of units) , , Balance Sheet (millions of dollars) Current Assets 3,068 4,405 6,003 5,566 (7) Fixed Assets 4,862 6,655 7,370 7,862 7 Total Assets 8,788 12,462 14,598 15,201 4 Bank Debt 1,688 3,418 4,096 3,801 (7) Total Liabilities 3,160 5,888 7,113 6,464 (9) Total Equity Capital 5,628 6,574 7,485 8, Financial Ratios Operating Margin 41% 35% 41% 44% 7 Operating Margin plus Depreciation 48% 44% 47% 50% 6 Current Assets to Current Liabilities (times) Total Liabilities to Total Assets 36% 47% 49% 43% (12) Debt/Capital+Debt 23% 34% 35% 30% (14) EBITDA/Interests (times) Employees 18,928 23,002 25,891 26,989 4 Annual Inflation Mexico 7% 4% 4% 4% - United States 0% 3% 1% 3% 200 Peru 7% 0% 2% 5% 150 Exchange Rate at Year End Mexico (peso/dollar) Peru (sol/dollar) (4) Earnings (millions of dollars) Total Sales 6,033 4,827 8,338 10, Cost of Sales 2,958 2,574 4,226 5, Taxes Assessed , Operating Profit plus Depreciation 2,904 2,115 3,921 5, Net Profit 1, ,627 2, Average Exchange Rate Mexico (peso/dollar) (2) Peru (sol/dollar) (3) Cash Flow (millions of dollars) From Operations 2,096 1,394 3,072 2,946 (4) Dividends paid (1,344) (199) (793) (1,464) 85 Taxes Paid , Applied to Financing Activities (854) 1, (489) (208) Total Cash Flow (102) 2,361 2, (64) Allocated to Investments (804) (2,980) (916) (1,779) 94 Cash flow after investments (906) (619) 1,815 (786) (143) Expressed according to US GAAP * Proforma financial statements, including Ferrosur. ** Throughout this report all tons are metric and all ounces are troy. *** Referring to 7,785,000,000 shares. 02 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 03

4 LETTER TO INVESTORS Despite the economic adversity and uncertainty that haunted economic and political processes around the world, 2011 was a very positive year for Grupo México. For Grupo México investors, 2011 was a year that saw record breaking sales of US$ billion (a 25% increase), operating cash flow (EBITDA) of US$5.192 billion (32% higher), and net earnings of US$2.439 billion (a 52% increase). Overall, this year could be considered the best in the Company s history. Nothing about this positive outcome has been easy. The economic data did not reflect the fundamental realities of copper production and demand, subjecting prices to volatility. This situation led us to experience copper prices above US$4.50 per pound, then a few months later, below US$3.20 per pound. However, on average, copper prices were US$4.01 per pound. Copper prices were influenced more by global economic uncertainty, deficit concerns among some European countries, and unemployment in the US than by the fundamental aspects of supply and demand, which even today remain solid and sustain average copper prices. Despite this environment, our efforts made in production and in mitigating the pace at which costs are rising explain, in large part, the excellent results reported by the Company s Mining Division. In light of the above, we were able to invest a record amount in our Companies of US$1.217 billion, almost double the investment made in 2010 and more than half the net profit for the year. Of this, US$715 million was invested in the Mining Division; US$355 million in the Transportation Division, double the figure for 2010, and US$147 million in the Infrastructure Division. In addition, the Company paid out US$1.464 billion in dividends, an 85% increase over Over the past 5 years, Grupo México has reinforced its commitment to its shareholders by paying out US$5.235 billion in dividends. Haulage Truck. Buenavista del Cobre, Sonora. ANNUAL REPORT GRUPO MÉXICO 05

5 The Mining Division represented 83% of total Company sales, with our mines in Mexico contributing 42%, those in Peru 36%, and those in the United States 22% to this figure. The Transportation Division contributed 16% and the Infrastructure Division the remainder. Copper production by our Mining Division, represented by Americas Mining Corporation, increased 12.3% over 2010 to reach nearly 800,000 tons. The principal reason was the return of the Buenavista del Cobre mine in Cananea, Sonora to full operation. As a result, production of anodes, cathodes, and copper rod increased benefiting sales with a higher premium. In 2011, the Company purchased over 70,000 tons of copper from third parties to stabilize the refineries in Peru, the United States, and in Mexico. Zinc and silver production was slightly lower than that for 2010, due to flooding at the Santa Eulalia mine. The Mining Division reported sales of over US$8.655 billion, despite the drop in prices in the second half of the year. Costs have risen in parallel to increased energy consumption, materials, and equipment, and also increased taxes. Despite these cost pressures, Grupo México maintained its position as a global leader in low cost copper production (excluding byproducts) the cost of copper in 2011 was US$0.74 per pound. At Grupo México, we know there is little we can do about metals prices, which are set by the international market. However, the Company can do more to streamline and modernize its operations, to keep cost increases low and above all, during the good years, maintain a high level of investment so as to generate more production and better identify our reserves. To this effect, US$1.746 billion will be invested in this Division in The most significant projects for the Mining Division in the near future are: the expansion of Buenavista del Cobre to increase production in the next 4 years from the current 180,000 tons to 488,000 tons of copper content. The expansion of Toquepala and Cuajone, which jointly will generate an additional 125,000 tons in the next 3 to 4 years. The completion of these and other projects means that by 2017, Grupo México will be producing over 1.4 million metric tons of copper. The new Tia Maria project in Peru is awaiting a new decision from the Peruvian government on the environmental impact assessment, which now considers the UN s comments and additional requests made by the Peruvian government. Our Transportation Division, represented by Infraestructura y Transportes México (ITM) increased its sales 14%, to reach a record US$1.626 billion. EBITDA for ITM increased 6.2% to US$465 million, in spite of an 11% hike in fuel prices and various phenomena that affected industry, such as the tsunami in Japan, which had an effect on the automotive sector, the effects of hurricanes and constant trouble on certain routes involving criminal activity and undocumented migrants. We are developing a plan for collaboration with the federal and local authorities and investing in technology and security for freight transportation. The intermodal segment has maintained its growth pace transporting over 250,000 containers, a 15% increase over For 2012, we expect faster freight transportation times due to investment in improving the lines and sidings and the purchase of 58 new locomotives. The Transportation Division operates over 10,000 kilometers of track, twice that of our principal competitor, with 40% more locomotives, and nearly 5 times more cars 06 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 07

6 for transporting freight. The challenge of modernizing our lines, some dating back to the late 1800s, is great. We are now on a mission to meet this challenge seeing it as a mechanism to compensate rising costs, increase speed, and improve transportation times, and to maintain our railroad Company as the most competitive in the country. We have an investment budget of US$231 million for this Division in For the Transportation Division, the acquisition of locomotives and significant disbursements to improve or modernize the rail lines will lead to better freight transportation times, greater volumes, and increased sales for the Company. The Company now has 770 modern and efficient locomotives. The completion of the Grijalva River deviation tunnels was a major event for our Infrastructure Division. The Tunnels are now in operation helping to prevent flooding in Tabasco, optimizing the use of the area s hydroelectric power generating system. This was a highly complex and difficult project because of the geological factors in the region. Also in 2011, we were awarded a concession to construct and operate the highway between Leon and Salamanca in Mexico, which our Construction Company (México Constructora Industrial and México Compañía Constructora) will be responsible for, representing an investment of nearly US$400 million. In addition, Compañía Perforadora México purchased two twin Jack Up Friede & Goldman Super M2 ocean platforms to drill for hydrocarbons in shallow waters for the state Company PEMEX. Both platforms are equipped with the latest technology and built in the United Arab Emirates. This purchase represents an investment of approximately US$370 million. Also noteworthy is the construction of two self-supply 250 megawatt combined cycle power plants in the state of Sonora, representing an investment of US$540 million. The first plant is on schedule to start operations during the fourth quarter of 2013, the second in mid We have an investment budget of US$636 million for the Infrastructure Division in Grupo México and its companies hold total debt of US$3.800 billion, 7% less than the debt reported in As the Company holds a consolidated cash balance of US$2.230 billion at December 2011, Grupo México s net debt is US$1.570 billion. In terms of the EBITDA generated in 2011, the Company s leverage is 0.75x, one of the lowest in the industry. The debt profile has no significant maturities until 2020 at which time US$400 million will be due. Grupo México is a company with a solid capital structure, which allows it to take advantage of growth opportunities that generate value for its shareholders. Standard and Poor s upgraded its ratings for Grupo México, Americas Mining Corporation, Southern Copper Corporation, and Minera México from BBB- to BBB. In the middle of a wave of uncertainty in terms of country and Company debt, this is particularly good news. Also, Grupo México was selected by the Mexican Stock Exchange (BMV) to be included in their first index of Sustainable Companies ; Minera México, SCC mining Company in Mexico, was recognized by the Mexican Confederation of Industrial Chambers (CONCAMIN) for its corporate ethics and values, for the second consecutive year the Company received ESR distinction as a Socially Responsible Company. It has required constant and intense efforts for Grupo México and its companies to continue to meet the most demanding international standards. 08 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 09

7 The Company also met its social, environmental, and community support responsibilities. The initiatives undertaken and results of this work by each company in the Group and Fundación Grupo México are detailed in our 2011 Sustainable Development Report, while this report mentions just some of our outstanding social and environmental projects this year. The first of these is the decisive action to change the relationship the Company has with the city of Cananea, with its new union, and with the local community. This change is based on a long range program that touches the most important fibers of the city: health, with the construction of a new second level hospital; urban infrastructure, with paving and support for the repair of the clean water network; entertainment, with the construction of a full service shopping center, sports, and also a new hotel. A total of US$30 million has been spent on the project this year. This great effort, carried out primarily in 2011, is deserving of the recognition it has received in Sonora and throughout the country. In June, Buenavista del Cobre received the Premio a la Filantropía Sonora (Sonora Philanthropy Award) in the businesses category. improvements in education, health, nutrition, and livestock productive development. A Nutrition Program was started in this same province to help in changing behaviors in terms of health and eating habits in the community. In the Transportation Division, the Tarahumara and Mayo indigenous communities in the states of Chihuahua and Sinaloa, respectively, were benefited by the railroads with free passenger and cargo service to their communities. Free passage was also given to representatives of the church serving these communities providing, among others, healthcare services and helping special needs children. Despite market uncertainties, 2011 was a very encouraging year for Grupo México s investors. Everyone that works for the companies of Grupo México has contributed to presenting our investors with a good report and, even more importantly, a more attractive outlook for 2012 and for years to come. In Peru, livestock and farming technification projects continue to be developed and put into action with producers in the regions where we operate. The Huaytire comprehensive development program in the province of Candarave includes GERMÁN LARREA MOTA VELASCO Chairman of the Board 10 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 11

8 RECORD HIGH RESULTS CONSISTENCY $ BILLION IN SALES, A NEW RECORD 01.GRUPO MÉXICO SALES FIGURES SALES GRUPO MÉXICO SALES INCREASED 25% OVER LAST YEAR Oscar Rodríguez Rodríguez Copper Rod Sales Manager. Corporate Offices, Mexico. 12 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 13

9 US$ BILLION IN CONSOLIDATED SALES FOR GRUPO MÉXICO, A NEW RECORD. GRUPO MÉXICO SALES FIGURES Sales Product Volume in tons Thousands of dollars Var.% Var.% Copper 701, , ,270,932 6,888, Zinc 93,964 90,663 (4) 212, ,993 (1) Silver (thousands of ounces) 19,584 17,411 (11) 384, , Molybdenum 20,508 18,632 (9) 683, ,040 (20) Gold (ounces) 69,690 60,748 (13) 83,431 95, Lead 21,775 16,225 (25) 46,979 44,114 (6) Sulfuric Acid 1,462,001 1,887, , , Infrastructure Services and others 150, , Railroad Transportation 1, , * 1,427,408 1,626, ,443 Total Sales 8,338,275 10,442, ,338 * (Cars loaded thousands of units) ,078 6,033 4, Copper maintained good prices during the first half of the year, but as was the case for most commodities, prices fell during the second half of the year due to low expectations for demand, principally because of the effect of the European debt crisis, and also lower outlooks for global economic growth. TOTAL SALES (MILLIONS OF DOLLARS) Despite this environment, Grupo México s consolidated net sales for 2011 reached a record high of US$ billion, a 25% increase over the US$8.338 reported for US$1.408 BILLION PAID IN TAXES BY GRUPO MÉXICO IN 2011 This increase is attributed to greater production by Buenavista del Cobre, improved copper, silver, and zinc prices, and also the 14% growth in sales reported by the Transportation Division, due to increased revenue mainly from the energy, minerals, and intermodal segments. The cost of sales was US$5.105 billion, a 21% increase over 2010, due mainly to mine maintenance, increased energy and diesel costs, and higher rights of track usage expenses for the railroad. Panoramic view of Buenavista del Cobre, Sonora. 14 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 15

10 SALES SHARE BY PRODUCT 2011 SALES SHARE BY PRODUCT Perforadora México. Poza Rica, Veracruz. 1. Copper 66% 1. Copper 63% 2. Zinc 2% 2. Zinc 3% China s demand for copper is expected to continue to be relatively strong due to the investments needed in the power, household appliance, automotive, telecommunications, and housing sectors. The lower inflation in China could result in a used vis-à-vis the increase in number of tons transported. Ferromex increased its diesel consumption from 87 million liters to 92.2 million liters. All things considered, Ferromex s sales were 12.2% higher than in 2010 ($1.311 billion compared 3. Transportation 16% 4. Gold 1% 5. Silver 6% 6. Sulfuric Acid 2% 7. Molybdenum 5% 8. Others 2% 3. Transportation 17% 4. Gold 1% 5. Silver 5% 6. Sulfuric Acid 1% 7. Molybdenum 8% 8. Others 2% more relaxed monetary policy, which would make more credit to $1.168 billion in 2010). Ferrosur also increased its sales available and, consequently, increase demand for copper. compared to 2010, by 16.1%. The Transportation Division reported a 14% growth in sales to reach US$1.626 billion. For Ferromex, the figure for freight Mexico Compañía Constructora completed work in 2011 for more than US$111 million and is expected to develop projects SALES SHARE BY REGION 2011 SALES SHARE BY REGION 2010 transported is significant: 45 million tons, 0.6% below in 2012 for over US$300 million, in the construction of both Ferrosur posted a new record for freight transported, growing 5.1% to 7.2 million tons. A 14% increase in the highways and Grupo México industrial plants in Sonora number of cars loaded for Ferromex and 10.4% for Ferrosur, Meanwhile, Compañía Perforadora México closed 2011 with shows us that the broadness of the operations continues to sales of US$112.6 million, EBITDA of US$27.0 million, and a be very dynamic. Costs for the Transportation Division increased 18% from a net profit of US$14.7 million. Sales increased 59% this year, compared to 2010, mainly as a result of the contract awarded to the Company for the Sonora Platform in March 2011 and the little over US$950 million to more than US$1.118 billion. This is largely due to higher fuel prices and greater volumes of diesel significant improvement in the productivity of the land operation for the Tertiary Oil Gulf Project. 1. Mexico 29% 2. Europe 13% 3. Asia 7% 1. Mexico 27% 2. Europe 13% 3. Asia 7% 4. Latin America 14% 4. Latin America 18% 5. United States 37% 5. United States 35% 16 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 17

11 WORLD CLASS MINES DEDICATION US$8.655 BILLION IN SALES FOR THE MINING DIVISION, A RECORD HIGH 02.MINING DIVISION - AMERICAS MINING CORPORATION MINING DIVISION COPPER ACCOUNTED FOR 80% OF GRUPO MÉXICO SALES Dulce Gálvez Truck Operator. Buenavista del Cobre, Sonora. 18 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 19

12 GEOGRAPHIC MINE LOCATION Grupo méxico PHOENIX ray SILVER BELL AMARILLO HAYDEN MISSION Minera México AGUA PRIETA BUENAVISTA DEL COBRE BUENAVISTA LA CARIDAD EL ARCO PILARES SANTA EULALIA NUEVA ROSITA SANTA BÁRBARA SAN MARTÍN Chalchiuites MINES: SMELTERS, REFINERIES & OTHER PLANTS: SMELTERS, REFINERIES & OTHER PLANTS: MEXICANA DE COBRE La Caridad, Sonora MEXICANA DE COBRE La Caridad, Sonora Copper, Molybdenum, Gold & Silver Copper Smelter Copper Electrolyte Refinery Copper SX/EW Plant Sulfuric Acid Plant Copper Rod Plant Precious Metals, Selenium, Tellurium Plant ILO Copper Smelter Sulfuric Acid Plant Copper Electrolyte Refinery Precious Metals Plant BUENAVISTA DEL COBRE Cananea, Sonora charcas san luis potosí Copper, Gold & Silver ANGANGUEO MEXICO, CITY Agua Prieta, Sonora TAXCO INDUSTRIAL MINERA MÉXICO Charcas, San Luis Potosí Silver, Copper, Lead & Zinc San Martín, Zacatecas Silver, Lead, Zinc & Copper Santa Eulalia, Chihuahua asarco BUENAVISTA DEL COBRE Cananea, Sonora MINES: Copper SX/EW Plants Silver, Lead & Zinc Gold, Silver, Copper, Lead & Zinc Sulfuric Acid Plant Zinc Electrolyte Refinery, Cadmium Gold, Silver, Lead & Zinc Coke Plant Taxco, Guerrero Nueva Rosita, Coahuila Coal & coke TANTAHUATAY Lime Plant INDUSTRIAL MINERA MÉXICO San Luis Potosí, San Luis Potosí Santa Bárbara, Chihuahua Nueva Rosita, Coahuila SPCC LOS CHANCAS CATANAVE Silver Bell, Arizona Copper Ray, Arizona Gold, Silver & Copper CUAJONE Hayden, Arizona Copper and Sulfuric Acid Smelter Copper, Silver, Molybdenum & Gold TÍA MARÍA ILO CUAJONE TOQUEPALA Gold, Silver, Copper & Molybdenum SMELTERS, REFINERY & OTHER PLANTS: TOQUEPALA LIMA Mission, Arizona: MINES: Copper, Silver, Molybdenum & Gold CHAUCHA TOQUEPALA Copper SX/EW Plant Ray, Arizona Copper SX/EW Plant Amarillo, Texas Copper Refinery, Precious Metals Nickel, Selenium, Tellurium Copper Rod Plant Cake Plant PRINCIPAL EXPLORATION OR DEVELOPMENT PROJECTS: El Arco, Baja California G E O G R A P HIC MI N E LOCAT IO N LEGEND Copper & Gold Anguangueo, Michoacán Gold, Silver, Lead, Zinc & Copper Buenavista,Sonora Silver, Copper, Zinc & Molybdenum MINES Chalchihuites,Zacatecas PLANTS Pilares, Sonora CORPORATE OFFICES OFFICES EXPLORATIONS Silver, Copper & Zinc Copper, Gold & Silver Los Chancas, Apurimac Copper, Molybdenum & Gold Catanave, Arica Silver & Gold Chaucha,Guayaquil Copper & Molybdenum 20 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 21

13 US$8.655 BILLION IN SALES FOR THE MINING DIVISION IN Copper Prices and Inventories Dollar cents / pound Thousands of Metric Tons MINING DIVISION COMEX N.Y. Prices 688 COMEX N.Y. Inventories + LME London The Mining Division of Grupo México is represented by its subsidiary Americas Mining Corporation ( AMC ), whose principal subsidiaries are 200 Southern Copper Corporation ( SCC ) in Mexico and Peru, and Asarco in the United States. The sum of both companies hold the world s largest SX/EWs Concentrators Primary mined copper (Concentrators + SX/EWs) (thousands of tons) copper reserves. SCC trades on the New York and Lima stock exchanges. Its stockholders, directly or through subsidiaries, are: GMéxico (80.9%) and other stockholders (19.1%). The Company has mines, metallurgic plants, and exploration projects in Peru, Mexico, the United States, Argentina, Chile, and Ecuador. Asarco was reincorporated into Grupo México on December 9, 2009 and operates three mines, a smelter, and copper cathode and ore processing plants in Arizona, copper and precious metals refineries, and also a copper rod plant in Texas % OF THE MINING DIVISION S SALES WERE COPPER COPPER Copper accounted for 80% of the Mining Division s sales in Despite variances in copper prices, due to global economic uncertainty, the metal achieved an average price of US$4.01 per pound, 17% higher than the 2010 average of US$3.43. Grupo México sales improved considerably thanks to SMELTED COPPER (THOUSANDS OF TONS) SX/EWs Refineries Refined Copper (Refineries + SX/EWs) (thousands of tons) prices and increased production in GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 23

14 PRIMARY MINED COPPER PRODUCTION AND RESERVES 2011 Production Reserves Ore Copper Ore Copper Processed Content Content Grade Years in operation thousands of tons Millions of tons % Mexico Concentrator: La Caridad 33, , Buenavista del Cobre 22, , Underground Mines 2, a 16 Subtotal 58, , Copper rod plant. Mexicana de Cobre, Sonora. SX/EWs: La Caridad 32, Buenavista del Cobre 47, , Subtotal 79, , Consolidated copper production was 772,562 tons in 2011, which represents a 12.3% increase over the 687,980 tons produced in This increase was principally the result of the restart of production at Buenavista del Cobre, which has been operating at full capacity since April. Cathode and rod production at the Company s facilities in La Caridad, Mexico; Ilo, Peru; and in Hayden, Arizona and Amarillo, Texas reported similar increases. Smelter production in 2011 was 712,000 tons, while refineries produced 774,300 tons. There are 71.5 million tons of copper reserves, equal to 69 years of mine life. Cash Cost The operating cash cost per pound of copper, excluding byproducts was US$1.81, compared to US$1.63 per pound in The operating cash cost per pound of copper, net of byproducts, was US$0.74 per pound this year, positioning the Company as a global industry leader in efficiency and low cost. Peru Concentrator: Cuajone 28, , Toquepala 21, , Subtotal 50, , SX/EWs: * Cuajone 3, Toquepala 47, , Subtotal 50, , United States Concentrator: Mission 14, Ray 15, Subtotal 29, SX/EWs: Ray 27, Silver Bell 7, Subtotal 35, Total Concentrators 138, , Total SX/EWs 165, , Total 304, , * Solutions with leached copper from Cuajone are sent to the SX/EW Plant at Toquepala ** Reserves are valued at US$2.97 per pound of copper, except for Asarco, which are valued at US$ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 25

15 SMELTED COPPER PRODUCTION 2011 Thousands of tons Mexico La Caridad Peru Ilo United States Hayden Total Production of copper cathodes or plates. REFINED COPPER PRODUCTION 2011 Thousands of tons Mexico La Caridad Refinery SX/EWs 86.2 Subtotal Peru Ilo Refinery SX/EWs 35.3 Subtotal United States Amarillo Refinery SX/EWs 59.7 Subtotal Total SEMI-MANUFACTURED COPPER PRODUCTION 2011 Thousands of tons Wire Rod Mexico La Caridad United States Amarillo Total Cake United States Amarillo 10.7 Total GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 27

16 MOLYBDENUM MINING PRODUCTION AND RESERVES 2011 Ore Molybdenum Ore Reserves Production Processed Content millions of Grade Thousands of tons tons % Mines Mexico La Caridad 33, , Panoramic view of La Caridad, Sonora. Peru Toquepala 21, , Cuajone 28, , Subtotal 50, ,732.5 Total 83, ,034.6 MOLYBDENUM Average molybdenum prices saw a slight drop in 2011 to US$15.33 from US$15.61 in 2010, representing a 1.8% decrease. Molybdenum sales were US$544 million in 2011, a decrease of 20.4% year Molybdenum Prices over year. Molybdenum production was 9.5% lower, due to lower ore grades at our Peruvian mines. Sales translated into ton volume were 18,632 tons compared to the 20,508 dollars/pound tons sold in MW Dealer Oxide Prices PRIMARY MINED MOLYBDENUM (THOUSANDS OF TONS) Molybdenum reserves at La Caridad, Toquepala, and Cuajone are billion tons of ore, with an average grade of 0.024% and equal to 69 years of mine life at the current rate of production. 28 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 29

17 REFINED ZINC PRODUCTION Thousands of tons Refineries Mexico San Luis Potosí 90.9 Zinc Prices and Inventories LME London Prices Dollar cents / pound Thousands of Metric Tons LME London Inventories PRIMARY MINED ZINC (THOUSANDS OF TONS) ZINC Zinc sales in 2011 were US$209.9 million, which compared to the US$212.4 million sold in 2010, were 1.2% lower. The ton volume sold was 4% under that for 2010 and also production of metallic zinc was 4.4% lower than the previous year at 90,900 tons, due PRIMARY MINED ZINC PRODUCTION AND RESERVES 2011 Ore Zinc Ore Reserves Production Processed Content Millions of Grade Years in Thousands of tons Tons % Operation 25 mainly to the lack of production at the Santa Eulalia mine, which is still being cleared after suffering flooding in Operations are expected to restart in the second quarter of Mines Mexico Charcas 1, Santa Bárbara 1, REFINED ZINC (THOUSANDS OF TONS) Zinc reserves total 47.5 million tons with an average grade of 2.77%, considering the following mines: Charcas, Santa Bárbara, San Martín, and Santa Eulalia, equal to 17 years. San Martín Santa Eulalia Total 2, GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 31

18 Panoramic view of the Santa Bárbara mine, Chihuahua. 57% increase in silver sales over 2010 PRECIOUS METALS Silver Silver sales increased from US$384.9 million in 2010 to US$605.8 million this year, representing a 57% increase. This was a great year for silver with US$1,568.6 per ounce, the average price for gold in 2011, 28.1% higher. average prices of US$35.18 per ounce, a 74.3% increase over the previous year, when prices were US$20.18 per ounce. The reduced production of primary mined silver (4.6%) is attributed to flooding at the Santa Eulalia mine in Chihuahua. Refined silver production increased from to million ounces, PRIMARY MINED SILVER (MILLIONS OF OUNCES) REFINED SILVER (MILLIONS OF OUNCES) representing a 20% increase over GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 33

19 Silver Prices and Inventories COMEX N.Y. Prices COMEX N.Y. Inventories Dollars/Ounces Millions of Troy Ounces Production of silver ingots at La Caridad, Sonora Gold was a good year for gold as prices for this metal increased 28.1% 0 compared to 2010 to an average US$1, per ounce PRIMARY MINED GOLD (THOUSANDS OF OUNCES) Primary mined gold production was 36,111 ounces, a 110% increase over Refined gold production increased to 62,038 ounces, which was lower than that for 2010 due to a decrease in purchases of byproducts containing gold. Sales increased 15% to US$95.7 million this year due to higher gold prices. The mines that produce gold are: La Caridad, Buenavista del Cobre, Charcas, Santa Bárbara, Santa Eulalia, Toquepala, and Cuajone. Gold Prices and Inventories 2, Dollars/Ounce 1, , , , , , , , , , , , , , Thousands of Troy Ounces LONDON CLOSING Prices 10 There are currently billion tons in reserves for both these metals. COMEX N.Y. Inventories REFINED GOLD (THOUSANDS OF OUNCES) 34 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 35

20 SILVER AND GOLD MINE PRODUCTION AND RESERVES 2011 SMELTER PRODUCTION OF SILVER AND GOLD 2011 Gold Ounces Silver Content Silver Ore ounces Reserves Production Millions of Grade Gold Silver Tons grs/ton La Caridad 43,079 8,827,841 Ilo 14,479 4,646,454 Hayden 12,927 3,731,548 Total 70,485 17,205,843 Mines Concentrates: Mexico La Caridad 6,833 1,775,528 4, Buenavista del Cobre 15,367 1,464,300 5, Underground Mines 6,286 5,866, Subtotal 28,486 9,106,149 9,605.7 Peru Toquepala 2,808 1,707,066 3, Cuajone 4,817 1,917,520 2, Subtotal 7,625 3,624,586 5,732.5 REFINERY PRODUCTION OF SILVER AND GOLD 2011 Ounces Gold Silver Refineries La Caridad 32,024 6,913,428 San Luis Potosí 2,082 2,524,358 Ilo 11,674 3,152,236 Amarillo 16,258 3,258,882 Total 62,038 15,848,904 United States Mission - 1,301, Ray - 448, Subtotal - 1,750, Total 36,111 14,480,800 16, GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 37

21 Mine Production Summary* Distribution 2011 Tons ** Copper Concentrates 2,369,759 2,093,685 1,683,646 1,643,178 1,918,281 Copper Content in Concentrates 591, , , , ,207 Copper Content SX/EWs (Cathodic) 181, ,288 64,249 70,203 93,975 Total Mine Copper Content 772, , , , ,182 Smelter Copper Content 712, , , , ,110 Refinery Copper 593, , , , ,740 Refined Copper (Refineries + SX/EWs) 774, , , , ,715 Refined copper made into Wire Rod 282, ,825 62,852 76,283 96,607 Refined copper made into Cake 10,747 9, Zinc Concentrates 151, , , , ,762 Zinc Content in Concentrates 83,807 99, , , ,013 Refinery Zinc 90,869 95,072 98,688 95,420 90,766 Lead Concentrates 34,719 36,514 40,406 38,312 39,130 Lead Content in Concentrates 18,817 20,240 22,492 20,445 19,382 Gold Content in Concentrates (ounces) 36,111 17,204 15,073 14,948 22,602 Refinery Gold (ounces) 62,038 65,392 41,552 26,323 26,995 Silver Content in Concentrates (ounces) 14,481 15,242 13,326 12,316 15,229 Refinery Silver (ounces) 15,849 13,173 10,010 7,357 6,197 Molybdenum Content in Concentrates 18,570 20,519 18,687 16,390 16,208 Coal 238, , , ,814 97,446 Coke 84,428 72,933 72,016 70,317 63,455 Sulfuric Acid 2,538,040 2,039,729 1,761,682 1,698,905 1,610,717 Cadmium Arsenic Trioxide Lime 130,862 96,520 63,360 86, ,754 Production of zinc ingots at the Zinc Electrolyte Plant, San Luis Potosi. * Figures in metric tons except where indicated ** Includes Asarco production December 10-31, GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 39

22 CONSTANT GROWTH PLANNING US $2.613 BILLION IN TOTAL INVESTMENT EXPECTED IN PROJECTS AND INVESTMENTS PROJECTS & INVESTMENTS US$1.746 BILLION WILL BE INVESTED IN THE MINING DIVISION IN 2012 Ing. James Stewart General Supervisor. Ray, Arizona. 40 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 41

23 US$1.217 BILLION IN TOTAL CAPITAL EXPENDITURES IN 2011 PROJECTS AND INVESTMENTS We are committed to the ongoing growth of our Company. In 2012 we will continue with our investment plan, budgeting US$1.746 billion for investments in the Mining Division. US$1.507 billion has been allocated THE 5 YEAR INVESTMENT PLAN WILL INCREASE COPPER PRODUCTION TO 1.4 MILLION TONS, MAKING US THE WORLD S THIRD LARGEST PRODUCER. for Southern Copper and US$239 million for Asarco, which includes approximately US$1.045 billion for our investment program in Mexico. These investments are part of our five year capital expenditure plan, which will increase production of copper, molybdenum, gold, and silver. Construction of the Quebalix Plant at Buenavista del Cobre, Sonora. PROJECTS SX/EW III plant at Buenavista spreading system that will improve SX/EW copper production contract. Environmental permits will be obtained shortly and After obtaining the necessary environmental permits, construction of the by increasing recovery and reducing the time required to extract we expect to start construction in the first quarter of 2012, with plant is underway. All the equipment originally purchased for the Tia Ma- copper from mineral. The project reports 88% completion and production beginning in the second quarter of The project ria project will be used for this SX/EW III plant. This project will increase this facility is expected to start operations in the third quarter of has a total budget cost of US$38.2 million, with US$1.2 million the annual SX/EW plant capacity from 88,000 to 120,000 tons. The new The project has a total budgeted cost of US$70 million, expended through December 31, US$715 MILLION IN CAPITAL EXPENDITURES IN THE MINING DIVISION ALONE plant is expected to start operations in the second half of The project has a total budget cost of US$444 million. Crusher and conveyor system at Buenavista with US$48.7 million expended through December 31, Molybdenum plant at Buenavista The first of Buenavista s two molybdenum plants (2,000 ton New Concentrator at Buenavista Work continues on the new Buenavista concentrator, with a milling capacity of 100,000 tons per day. The basic and de- Associated with the SX/EW III project, we are also building a Quebalix fa- annual capacity) is in the equipment purchasing stage, under tailed engineering are moving forward as scheduled and we cility at Buenavista. This investment consists of a crusher, conveyor, and an engineering, procurement, construction, and management have received the environmental permits necessary. We are 42 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 43

24 Panoramic view of Buenavista del Cobre, Sonora. evaluating several supplier proposals for the main equipment and purchase orders for crushers, primary and secondary ball mills, and motors have been placed. The new concentrator will have an estimated annual production capacity of 188,000 tons of copper and is expected to start operations in The total budget cost of this project is US$1.384 billion. As part of this new concentrator, a second molybdenum plant will add 2,600 tons to the previously mentioned capacity. The required infrastructure for these projects, including power, water, roads, shops, laboratories, townsites, etc., is considered in the master plan. A preliminary study has been delivered and we are working to have these projects aligned. Angangueo The Board of Directors also approved an expenditure of US$131 million for the development of the Angangueo mine. This site in Michoacan, Mexico, is a polymetallic deposit with an annual production potential of 36,000 tons of copper concentrate, 4.5 million ounces of silver, and 41,000 tons of zinc. In 2012, we expect to start the underground development and the construction of a 2,000 tons per day concentrator. The project is scheduled to begin production in the second half of Toquepala concentrator expansion for the project was presented to the Ministry of Energy and Mines (MINEM) in July As part of the approval process for the EIA, a public hearing was held in September We are awaiting the necessary approvals to move forward with the project. Project completion is scheduled for the first quarter of Cuajone concentrator expansion Through December 31, 2011, we have invested US$80.2 million in the Cuajone expansion project. As a first stage of the expansion plans, the project includes a variable cutoff grade methodology that will increase copper and molybdenum production. When finished, the project is expected to increase annual copper production by 22,000 tons. The completion of the project is scheduled for third quarter of Pilares The Board of Directors approved the continuation of the viability studies and the purchase of land for the development of the Pilares mine and the expansion of the concentrator at La Caridad. In 2008, we acquired 100% ownership of Pilares, with the intention of operating it as an open pit facility. Through December 31, 2011, we have invested US$199 million in the Toquepala expansion, mainly on mine equipment, which is being used for the initial stripping of the project. The scope of the project has been defined as an increase in milling capacity to 120,000 tons per day, which is expected to increase annual production by 100,000 tons of copper and 3,100 tons of molybdenum. The Environmental Impact Assessment (EIA) Tailings disposal at Quebrada Honda This project will increase the height of the existing Quebrada Honda dam to impound future tailings from the Toquepala and Cuajone mills and will extend the expected life of this tailings facility by 25 years. The first stage of the tailings disposal project has been completed and the construction of the drainage system for the lateral dam started in June 2010, has also been finished. 44 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 45

25 Panoramic view of Cuajone, Peru. The project has a total budgeted cost of US$66.0 million with US$47.7 million expended through December 31, Tantahuatay The Tantahuatay mine is located in Cajamarca, in northern Peru. Production started in August 2011 and the mine produced 46,200 ounces of gold and 260,100 ounces of silver in Tantahuatay is expected to have an average annual production of 90,000 ounces of gold and 425,000 ounces of silver for five years. We hold a 44.2% interest in this project. Tia Maria We have initiated a new Environmental Impact Assessment (EIA) for the project, taking into account the concerns brought forward by the community, the new guidelines given by the Peruvian government, and the comments received from the UN body contracted by Peru s Ministry of Energy and Mines for this purpose. We are confident this initiative will allow us to obtain approval for the development of the 120,000 ton annual copper production project. As a result, we have rescheduled the project start up to the beginning of Meanwhile, all the equipment already purchased is being reassigned to our operations at Buenavista, Toquepala, and Cuajone. Mission Expansion At Asarco, the Mission expansion project will increase the annual production capacity of the concentrator from its current 66,000 tons per year to 77,500 tons copper content. This project represents a total investment of US$60 million, which is expected to be completed in the second quarter of In addition, studies have begun for the refurbishment and reopening of the molybdenum plant at Mission. The plant will have a production capacity of 544 tons of molybdenum, represents an investment of US$5 million, and is expected to start operations in the first quarter of These investment projects play an important role in our 5 year expansion program, the goal of which is to increase the copper production capacity of the Mining Division from 800,000 to 1.4 million tons and molybdenum production from 18,570 to 26,800 tons. 46 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 47

26 EXPLORATIONS We are engaged in ongoing extensive exploration to locate additional ore bodies in Mexico, Peru, the United States, Argentina, Ecuador, and Chile. We invested US$50.3 million in exploration programs in Currently in Peru we hold direct control of 145,064 hectares of mining rights. In Mexico, we currently hold 176,250 hectares of exploration concessions. We also hold 21,068 hectares, 35,958 hectares, and 2,544 hectares of exploration concessions in Argentina, Chile, and Ecuador, respectively. MExico In addition to exploratory drilling programs at existing mines, we are currently conducting exploration to locate mineral deposits at various other sites in Mexico. The following are some of our more significant exploration projects: El Arco The El Arco site is a copper deposit located in the state of Baja California in Mexico. Exploration work at the site indicates approximately billion tons of mineralized sulfide material with an average copper content of 0.5% and grams of gold per ton and 290 million tons of copper oxide with a copper grade of 0.35%. In 2010, a deep drilling program of 1,214 meters indicates approximately 390 million tons of mineralized material with a copper content of 0.62% below the current pit limits. We continue to work on the infrastructure studies necessary for the viability of the project, including the feasibility study, already completed. Toquepala, Peru. 48 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 49

27 Panoramic view of Toquepala, Peru. Chalchihuites Pilares PerU Chalchihuites is located in the state of Zacatecas and is a replacement deposit with mixed oxides and sulfides of lead, copper, zinc, and silver. A drilling program in the late 1990s defined 16 million tons of mineralized material containing 95 grams of silver, 0.36% lead, 0.69% copper, and 3.08% zinc per ton. In 2011, 9,386 meters were drilled. This drilling identified additional resources of at least 7,000,000 tons grading 0.97% g/t silver, 0.41% lead, 0.52% copper, and 2.53% zinc at the recently acquired Cronos and Guantes concessions. During 2012, we plan to continue with drilling and conduct the final metallurgic testing. We expect to complete the prefeasibility study by the end of In 2008, we bought Freeport-McMoran s 49% interest in Minera Pilares, S.A. de C.V. ( Pilares ), giving us 100% ownership of Pilares. Pilares is located in the state of Sonora, ten kilometers from the town of Nacozari de García and six straight line kilometers from our La Caridad mine. In 2011, 3,840 meters were drilled. With the data obtained, Mintec made a new calculation of the reserves indicating 52.3 million tons with a copper content of 0.78%. The planning for the integration of this pit with the La Caridad pit will be completed in We are developing an ongoing extensive exploration program to locate additional ore bodies in Peru and are also conducting exploration in the areas of our current mining operations. We invested US$37.5 million in exploration programs in Los Chancas The Los Chancas project, located in the department of Apurimac in southern Peru, is a copper and molybdenum porphyry deposit. As a result of the prefeasibility studies and after the preliminary design of the pit, estimates show 355 million tons of mineralized material with a copper content of 0.62%, molybdenum content of 0.05%, and grams of gold per ton. During 2011, we completed the prefeasibility study and plan to conduct a feasibility study for the project in GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 51

28 UNITED STATES In addition to the exploratory drilling programs at Asarco s existing mines, exploration is ongoing to locate additional ore deposits in the United States. Chilito, Arizona Chilito is a copper porphyry located in Gila County, Arizona along the south side of the Dripping Springs range about 6.4 kilometers northeast of the Asarco smelter in Hayden, Arizona. Asarco acquired the deposit with the purchase of the Ray mine in Asarco controls approximately 70% of the deposit while Freeport controls the remaining 30%. Drilling indicates the Chilito deposit has two mineralized zones, one shallow, near surface hosted in the porphyry, dolerite and sedimentary units, and a deeper zone (around 457 meters below the surface) hosted in the dolerite. The firm Independent Mining Consultants prepared a new calculation of reserves in 2010 that includes the upper zone and just touches the top of the deeper zone (the bottom of the block model has an elevation of 610 meters). The model indicates that at a cutoff grade of 0.25% there are approximately 190 million tons grading 0.374% copper. In 2011, a total of 14,300 meters were drilled to support the calculation of the reserves and to provide new information on the deeper mineralized zone. A slope stability study has been completed and column leach testing continues. Copper Butte, Arizona The Greater Copper Butte area, located about eight kilometers west-southwest of Ray in Pinal County, Arizona, consists of three prospects, Copper Butte, Buckeye, and Pioneer Alabama, all of which have been explored at various times for copper by different companies since Copper oxide and copper silicate ores were discovered and mined in small amounts at Copper Butte. After Asarco acquired Ray, a small amount of exploration and resource modeling continued until Using a cutoff grade of 0.2% copper, 73 million tons grading 0.74% total copper with a stripping ratio of less than 2:1 was estimated at Copper Butte; using the same cutoff Mission Mine, Arizona. Asarco. 52 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 53

29 grade, 39 million tons grading 0.385% total copper with a stripping ratio of 3.1:1 were estimated at Buckeye. Both properties have additional exploration potential and both seem amenable to heap leaching and SX/EW recovery. Pioneer-Alabama needs further work to identify reserves. Porphyry exploration, Nevada Santa Marta Located in the Atacama region, Santa Marta is being explored for a copper and molybdenum porphyry. During 2011 and 2010, we diamond drilled 2,837 meters and 3,318 meters, respectively, with promising results. Exploration will continue in 2012, with a diamond drilling program of 4,000 meters. An exploration program has been underway in Nevada for porphyry copper deposits over the last three years. Several old districts have been examined and two have been selected for drill testing. One property is located near Reno, Nevada. The second prospect is called Quartz Mountain and is located near Gabbs in Nye County. Airborne and ground geophysics have been run across the property as well as detailed geologic mapping and sampling. A total of 2,700 meters were drilled in 2011, the results of which were inconclusive. A 1,000 meter drilling program is planned for 2012 to continue the search for a porphyry deposit. The property has the potential to host over 90 million tons grading 0.5% copper or greater. Chile Ticnamar El Salado El Salado is a copper-gold prospect located in the Atacama region in northern Chile. During 2011, we evaluated the information available for the prospect to plan the work to be done in the next stage. For 2012, we plan a diamond drilling program of 5,000 meters and metallurgical testing. Ecuador We started exploration activities in Ecuador in For 2012, we expect to begin exploration work on the Chaucha prospect, located to the south of Guayaquil. The mineralization is characteristic of a copper-molybdenum porphyry system. In 2012, we are planning 10,000 meters of diamond drilling to evaluate the deposit. The Ticnamar prospect, located in northern Chile, has been explored as a deposit with copper-molybdenum porphyritic veins. In 2011, a diamond drilling program of 1,124 meters was completed. For 2012, we plan to continue exploration with a diamond drilling program of 3,000 meters. Catanave Argentina We started exploration activities in Argentina during the last quarter of We plan to carry out exploration in the south of Argentina, where mineralization for porphyry copper, epithermal gold and silver, and polymetallic skarns are expected. Located in northern Chile (Arica), Catanave belongs to a mineralized epithermal system of gold and silver. In 2010, the environmental impact assessment was approved and during 2011, 2,189 meters of diamond drilling were completed. This prospect has good possibilities and for 2012 we plan to continue exploration with a diamond drilling program of 3,000 metros. 54 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 55

30 US$34.6 MILLION INVESTED IN HEALTH AND SAFETY PROGRAMS HEALTH AND SAFETY US$29.8 Participants in the Corporate Forum on Safety Cells. MILLION INVESTED IN SAFETY Recognitions Health and Safety Week CONFERENCES, TALKS, WORKSHOPS, SAFETY FAIR, EXCLUSIVE EVENTS, AND EXHIBITION OF WORK OFFERED DURING HEALTH AND SAFETY WEEK OHSAS Certifications In 2011, thirteen of fourteen SCC units are OHSAS 18001:2007 certified. Cámara Minera de México (Mexican Mining Chamber) 11th Underground Mine Rescue Squad and First Aid Competition. The Santa Bárbara unit participated in the 11th National Mine Rescue Squad Competition 2011 taking Second Place in the Benchman Biopack Biomarine category. A Health and Safety Week was held September 5-9 at all plants and units, for the first time simultaneously and included the Company s regional offices in Hermosillo and corporate offices in Mexico City. The activities held during the event included: conferences, talks, workshops, health and safety fair, sports events, exhibition of work carried out at the Company s Community Centers, orientation in different preventive aspects Buenavista del Cobre is the only unit that is still in the process of aligning of health and safety, and activities for the families of our with this international Occupational Health and Safety standard, because of President s Award employees and the general public. its recent restart of operations. This award is given by the President of Minera México to the Mine Safety Award Corporate Forum on Safety Cells unit that has the lowest accident rate during the year. The 2011 US$4.8 MILLION INVESTED IN HEALTH Minera México held a Corporate Forum on Safety Cells, November at the Company s offices in Mexico City. Un ionized personnel at all units were invited to participate. award was given to the Nueva Rosita plant for its achievement of ZERO accidents. This is the second year that Nueva Rosita has received this award. In Peru, at the most important specialized meeting on Mine Safety, the Mine Safety Institute (ISEM) gave Southern Copper Peru the Mine Safety Award in the category Smelters and Refineries. Participants presented proposals to reduce the probability of the occurrence of work-related risks. 56 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 57

31 BENEFIT & GROWTH SUPPORT US $112.5 MILLION INVESTED 04.ENVIRONMENTAL ACTIONS AND OUR COMMUNITIES ENVIRONMENTAL ACTIONS & OUR COMMUNITIES GRUPO MÉXICO JOINS THE MEXICAN STOCK EXCHANGE IPC SUSTAINABILITY INDEX Olivia Rangel Nursery technician, IMMSA Didactic Nursery. 58 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 59

32 US$112.5 MILLION INVESTED IN ENVIRONMENTAL ACTIONS AND OUR COMMUNITIES ENVIRONMENTAL ACTIONS AND OUR COMMUNITIES REPRESENTING AN INVESTMENT OF US$304,000 THE 10 TOWER SOLAR PANEL POWER PROJECT WAS COMPLETED AT THE CORPORATE EXPLORATIONS OFFICES IN HERMOSILLO, SONORA. MExico Closing of the Copper Plant in San Luis Potosi Grupo México joins the Mexican Stock Exchange IPC Sustainability Index Soil remediation project, San Luis Potosi. Tree production Tree production at our nurseries in Charcas, Guaymas, San Luis In December, the Mexican Stock Exchange (BMV) presented Potosi, and Nacozari was 1,734,000 trees, to keep us on top In March, the Company announced to the Department of the Environment Grupo México as one of the 23 highest rated issuers demonstrat- among Mexican mining companies in terms of this activity. and Natural Resources (SEMARNAT) the definitive closing of the Copper ing excellence in environmental performance, social responsi- Plant the Company has been operating since Representing an bility, and corporate governance, to be included in the new IPC Renewable Energy Projects: Generating power through investment of US$12.6 million, Minera México has started the first phase of Sustainability Index. In terms of environmental performance, the solar panels and heating water with thermosolar systems. the project, which consists of the closure of the facilities, the quantification key parameters analyzed are: water efficiency, water discharges, and identification of residuals, authorization for impounding, comprehensive air emissions, responsible handling of hazardous and non-haz- The 10 tower solar panel electrical power project at the corporate 3.28% handling of hazardous waste, dismantling, and clean up. The second phase of the project will include soil remediation to prepare the site for residential, commercial, and recreational zoning in accordance with the San Luis Potosi ardous waste. Grupo México is honored to be included in the Mexican Stock explorations offices in Hermosillo, Sonora has been completed. The system follows the sun as it crosses the sky (heliotrope) and will generate more than 210,000 Kwh of power annually, sufficient INCREASE IN TREE PRODUCTION AT OUR NURSERIES. state Urban Development and Ecological Ordering Plans. The neighboring communities will benefit from the closing of the plant with the development Exchange s first sustainability index as it solidifies the Company s commitment to social responsibility, environmental sustain- to power 120 homes. This project is the largest and most advanced of its kind not only in the state of Sonora but in all of Mexico, and of green spaces, gardens, schools, and shopping centers. The budgeted ability, and corporate governance. will stop the release of 118 tons of CO2 into the atmosphere. investment for the whole project will be US$30.8 million. 60 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 61

33 Solar panels at the Explorations Offices in Hermosillo, Sonora. Emergency Response Brigade. Mexicana de Cobre, Sonora. Thanks to the ideal conditions for solar energy present in Mexi- Sonora. The corresponding resources obtained are donated to and metallurgic operations in Peru. These environmental Plan, as of January 2010 the Company is obliged to provide co and given the characteristics of the state of Sonora, Cananea the Red Cross in Esqueda, Sonora. audits include various environmental related aspects of our guarantees to ensure there are sufficient funds available to meet is an excellent choice for the installation of a solar powered wa- operations and also compliance with the commitments estab- the obligation to remove assets. ter heating system, because of its feasibility given the existing Environmental Cooperation Program lished in environmental management documents, such as the conditions and being environmentally friendly by not releasing Environmental Impact Assessments (EIA) and Mine Closure Response plans for spills of hazardous materials contaminants. The total surface area for warming for the six ther- Mexicana de Cobre received recognition from the Department Plans. These audits also include compliance with the Maxi- mosolar projects at Buenavista is 270 m2 and together they can of the Environment and Natural Resources (SEMARNAT) and mum Limits Permitted for dumping liquids and atmospheric In compliance with our Response Plans for spills of hazardous store up to 27,305 liters of hot water, equal to 600 showers. the Mexican Employers Association (COPARMEX) for having emissions and compliance with Environmental Quality Stan- materials, land and sea drills were held at our operating units, participated in the 3rd National Waste Recycling Competition in dards in the urban areas near our facilities. The proper han- simulating hypothetical spill situations, in which our brigade The system will generate more than 464,000 KWh of power the category Special Waste Handling with its project Reciclaje dling of the solid waste produced by our operations is also personnel participated to develop their skills and abilities so annually. Considering the system will replace gas heaters, this que Salva Vidas (Recycling that Saves Lives). verified. The Company is continually working to remain in as to be able to respond efficiently, safely, and environmen- will stop 127 tons of CO2 emissions from being released into good standing with the Peruvian environmental laws and tally in the event of any spill involving hazardous materials. the atmosphere. PerU regulations applicable. These drills were led by specialist consulting firms and 42 of our brigade personnel received certification as a result. In PET Recycling Company operations are subject to Peru s environmental Peruvian law requires mining companies to set out their addition, similar courses were organized for Community or- laws and regulations. The Peruvian government, through the obligations for future closures and remediation. In compliance ganizations and representatives and which comprise the Local For the third year in a row, Minera México was recognized as the Ministry of the Environment (MINAM), conducts annual en- with this law, the Ministry of Energy and Mines (MINEM) has Action Plans and Systems for contingencies involving hazard- non-bottler Company that recycles the most PET in the state of vironmental audits and inspections on the Company s mine approved the Company s Closure Plans. As part of the Closure ous materials. 62 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 63

34 Control of atmospheric emissions In the area of atmospheric emissions control, a control system has been implemented to increase the recovery of particulate matter in the gases from the hygiene system of the Isa furnace building, resulting in efficient handling exceeding that required to meet the Maximum Limits Permitted as set by the corresponding authorities. Environmental Impact Assessment for the Toquepala Concentrator Expansion In compliance with current legislation, the Environmental Impact Assessment for the Toquepala Concentrator Expansion project has been submitted to the Ministry of Energy and Mines. This project will increase the processing capacity of the concentrator from 60,000 metric tons per day (mtpd) to 120,000 mtpd, without needing to use additional sources of freshwater by reusing water recovered from the tailings and employing water efficiency technology. The Environmental Impact Assessment is currently under review. SOCIAL RESPONSIBILITY MExico Community Development Center, San Luis Potosi. Sonora Philanthropy Award Community Centers Governor Guillermo Padrés Elías himself delivered the Sonora Philanthropy Award to Buenavista del Cobre, for the Company s contribution, as a member of the private sector, to improving the community, promoting values including solidarity, responsibility, and social commitment for the development of the state of Sonora. The purpose of the award is to promote social commitment and joint efforts through community action programs directed at improving the community and serving others, to recognize and disseminate the experiences of the institutions, companies, and people involved in this work, and to encourage reflection on specific social problems, to reinforce working together and developing a culture of altruism for the benefit of all Sonora.. During 2011, 85 federal, state, and municipal institutions, and also various charity organizations, participated in a wide range of social programs held at the Community Development Centers. There were 280 community days, 31 meetings with citizen councils and neighborhood organizations to listen to the main problems present in the community, 570 awareness campaigns for programmed activities, 105 meetings with institutions engaged in social programs, and 61 roundtables; 112 productive courses were offered, training 1,720 people over 15 years of age, to consolidate the productive potential of 420 cases that led to commercialization projects; 105 consults were provided on topics such as profiling and incubating productive projects. Mine operations. Toquepala, Peru. 64 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 65

35 Young people from Grupo Encuentro. Remodeling of Cananea General Hospital, Sonora. Success story. Cananea With the goal of creating a new relationship with the community of Cananea and to offer social benefits to the area, in 2008 Grupo México started to work with the community promoting values, strengthening the social weave, and encouraging unity. The Company wanted to be more involved with the community and that is how the project Participemos por Cananea (Let s Help Cananea) was born, a program that offers improvements in educational infrastructure, social infrastructure, and social development. These projects are approved by the Cananea Community Committee, a body formed by volunteers from the community, leaders from different walks of life, and who are responsible for overseeing, approving, and reviewing the proper execution of the projects. The Cananea Community Committee is a plural and transparent body that lends credibility to the assignment and follow-up of the resources provided by Grupo México. Grupo México has invested US$1.7 million in these projects. During 2011, support was given to 40 school infrastructure projects, 5 service institution support projects, 25 social development and strengthening projects for the Casa Encuentro Community Center. Directly, the Company has dedicated nearly 700,000 service hours to these social projects. It is estimated that more than 28,000 users1 have benefited from the various supports given to the social and educational infrastructure. We are also interested in measuring the effect of these programs. The data drawn from studies conducted is periodically entered into a virtual database, which then produces a Social Impact Table, which can be consulted (in Spanish) online at Commitments The Sonora state government, the federal government, and the Company signed a list of commitments to be undertaken in benefit of the community and resources were committed to improve infrastructure, education, health, and an expansion plan for the Buenavista del Cobre mine. With these investments, the state of Sonora, and the region, but mainly the community of Cananea, will benefit from the grassroots transformation. The commitments signed involve aspects such as social and urban infrastructure, medical services, and education, and include: Paving: Streets near the mine have been paved to provide employees with better access to their workplace. We also improved the access road to the Industrial Park. Wells: Water wells have been drilled and completed to help solve the water supply problem in the city. Medical services: The Cananea General Hospital received improvements and remodeling. A new sewer system was built, electrical problems were repaired, water tanks installed, heating and air conditioning units supplied, pipes repaired, and also civil and finishing works in general. Construction on a new second level hospital will begin in 2012, which will be operated by the Sonora State Social Security Institute and will provide quality healthcare to Company employees. This project will involve the participation of the federal government, the state, and the Company. 1 Total number of direct beneficiaries estimated for each institution supported through infrastructure projects (for example, students and teachers at remodeled schools). 66 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 67

36 Donations: Donation of a vehicle to Comité Particular de Caridad I.A.P. to launch the program Camino a la Vida (Path to Life), which consists of providing comfort to patients who need to be transferred from Cananea to Hermosillo and Nogales to receive dialysis and cancer treatments and for women who require mammogram screening. Participemos por Cananea: With 58,096 man hours dedicated to the projects of the Participemos por Cananea program, 156 institutions have received our support in educational infrastructure and social development. The benefits are reflected in donations of equipment, furnishings, and the remodeling of schools and institutions. Grupo Encuentro, through cultural, educational, and recreational activities, has helped to achieve our closer involvement in the community. Library: The Cananea Library was equipped with new computers and printers to offer its 3,000 monthly users a better service. PerU Asociación Civil Ayuda del Cobre During 2011, the contribution Southern Peru made to Asociación Civil Ayuda del Cobre increased to nearly US$4.8 million. This investment was allocated to health programs, primary education and educational support programs, technical training programs, and improvements to schools, and also nutritional programs for children under 5 and pregnant women, and to basic infrastructure with improvement projects for sanitation works, access roads, power, and water. Huaytire Comprehensive Development Program Candarave Nutrition Program This program consists of various actions aimed at changing health related behaviors and aspects, such as eating habits, hygiene, and order in families with children under 3 years of age, nursing mothers, and pregnant women in the province of Candarave, which will contribute to improving the nutritional health of these groups to favorably impact the nutritional levels of the community and the local governments. There have been 830 direct beneficiaries of the project, 414 children under five and 416 mothers. This program represents and investment of US$1.28 million. Scholarships: Fundación Grupo México and Fundación Bécalos have given out 120 academic scholarships to teachers and students in Sports facilities: Construction of a baseball diamond and basketball court at the Instituto Tecnológico de Cananea. Entertainment Center: 22 hectares of land have been purchased on which construction has started for a Shopping Center that will have movie theaters, various shops and stores, and a food court, and there will also be recreational areas, a soccer field, basketball courts, a baseball diamond, a jogging track, gymnasium, covered pool, and a hotel. The Huaytire Comprehensive Development Program in the province of Candarave has been in operation since 2007 with its principal areas of interest being livestock production development, education, health and nutrition, and the transformation and commercialization of the products the region produces. The main results for this program for 2011 are: the implementation of 30 eco-kitchens that will improve the quality of life for the community of Huaytire, preventing eye and lung diseases caused by breathing in smoke, the donation of school supplies and uniforms for 123 students in the community of Huaytire, helping to improve the education conditions at all three school levels. Technical Training Program This program was developed in the province of Jorge Basadre and consists of offering training to the community in 7 education related areas. The courses offered are: Front loader operator, computers, boiler operator, and welder. A second module of courses is currently being offered. A total of 4,380 class hours were given in 2011, benefiting more than 20 communities. Museum: A mining museum will be housed in the Entertainment Center. Artisan workshop: Construction and operation of a training center for trades and handcrafts using copper. Development of providers: There has been an important development of providers in the area thanks to the opening of the mine and the refurbishment works, providers who have offered their services with the sale of parts, various repairs, equipment maintenance, etc. 68 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 69

37 UNITED STATES We are involved with United Way in Tucson, Arizona and Amarillo, Texas United Way is a non-profit organization. Its operation is based on the voluntary participation of the private and business sector to support the development and sustainable wellbeing of the communities most in need in Tucson, Arizona and Amarillo, Texas. Through their contributions, Asarco and its employees demonstrate their commitment to the children of the communities where we operate, supporting them with Family Literacy Programs, which help the participating children complete their education. A Development Program called Ready to Learn has also been implemented, which provides Parents and Guardians with the tools necessary to enrich the development stages of their children. With welfare reform, there is greater government support for childcare improving the quality of and access to childcare programs for low income working families. Arizona and the western United States. Asarco owns this center, which is located near the Mission mine to the south of Tucson, Arizona, and is open to the public. The center can be visited online at: San Miguel High School students support program Asarco is involved in the internship program offered at San Miguel High School. Asarco provides participant students with job experience and training to help develop their work-related skills. The student employees start by performing different clerical tasks such as filing and data entry, then they are given greater responsibility depending on their aptitudes. The student employees learn skills and gain experience from working in a professional environment. They work in teams to fill entry level positions at companies and organizations throughout the metropolitan area of Tucson, Arizona, learning the skills necessary to be successful in a professional career and they earn money to help with the cost of their high school education. Support for local schools with transportation to the Mineral Discovery Center Asarco recognizes the importance of educating our children and students about the Mining Industry and offers students at schools in southern Arizona free transportation to the Mineral Discovery Center, which communicates the importance of the Mining Industry in the area, educating students and teachers on the Earth Sciences and preservation of the mining history of Sports Centers Recognizing the importance of encouraging physical and sporting activities, Asarco, together with the Professional Basketball League, supported Sports Centers for the children of our employees at the Ray complex and the Hayden Smelter in Arizona to get involved in these activities and to also promote the wellbeing of the mining community and the health of our employees and their families. Huaytire Livestock Development Program. Candarave, Peru. 70 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 71

38 EXTENSIVE NATIONAL COVERAGE EXPANSION 81% COVERAGE IN MEXICO 05.TRANSPORTATION DIVISION TRANSPORTATION DIVISION ITM SALES TOTALED US$1.626 BILLION AND INCREASED 13.5% Clemente Tovar Certified Locomotive Operator. Roundhouse, Guadalajara. 72 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 73

39 16.1% INCREASE IN FERROSUR SALES GEOGRAPHIC LOCATION PRINCIPAL ROUTES albuquerque san diego phoenix TRANSPORTATION DIVISION calexico mexicali nogales tucson ciudad juárez el paso sierra blanca san angelo jct ft.worth dallas FERROMEX CONNECTS TO FIVE BORDER POINTS WITH THE UNITED STATES AND REACHES FOUR PORTS ON THE PACIFIC OCEAN AND TWO ON THE GULF OF MEXICO. The Transportation Division of Grupo México is represented by its subsidiary Infraestructura y Transportes México, S.A. de C.V. ( ITM ), whose principal subsidiaries are Grupo Ferroviario Mexicano, S.A. de C.V. ( GFM ), Ferrocarril Mexicano, S.A. de C.V. ( Ferromex ), Intermodal México, S.A. de C.V., and Texas Pacífico, LP, Inc. Ferromex is the largest railroad Company with the most extensive coverage in Mexico. Ferromex b.hill hermosillo guaymas to polobampo presidio ojinaga durango chihuahua escalón torreón mazatlán piedras negras cd. frontera aguascalientes alpine saltillo felipe pescador eagle pass san luis potosí corpus christi monterrey pto.altamira tampico houston iowa new orleans progreso operates a network of 8,111 kilometers of track covering approximately 71% of Mexico. Its lines connect to five border points with the United States, guadalajara huehuetoca viborillas veracruz four ports on the Pacific Coast and two on the Gulf of Mexico. Ferromex is controlled by GMéxico 55.5%, Union Pacific 26%, and Grupo Carso- manzanillo colima Mexico City coatzacoalcos Sinca Inbursa 18.5%. On November 24, 2005, Grupo México incorporated 12% Ferrosur through Infraestructura y Transportes Ferroviarios, S.A. de C.V. ( ITF ). Ferrosur operates a track network of 1,813 kilometers covering the central and southeastern part of the country, serving principally the LEGEND salina cruz INCREASE IN FERROMEX SALES states of Tlaxcala, Puebla, Veracruz, and Oaxaca, and has access to the ports of Veracruz and Coatzacoalcos on the Gulf of Mexico. Ferrosur is GRUPO MÉXICO RAILROAD LINES TRACK USAGE RIGHTS controlled by Grupo México, holding 74.99%, with Grupo Carso-Sinca TP Inbursa holding the remaining 25.01%. UP BNSF UNION PACIFIC BNSF 74 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 75

40 Loading fuel. Ferromex locomotive. Container platform. Ferromex Ferromex sales in 2011 were US$1.311 billion, a 12.2% connection and terminal services, car leasing, police and secu- Since it began operations, Ferromex has implemented new In April 2011, Ferromex successfully placed 10 year notes increase over the US$1.168 billion reported for This rity services, locomotive leasing, maintenance, and exchange operating practices and made significant capital expenditures to for $1.5 billion pesos in the Mexican financial market. These increase was largely the result of a favorable mix of rates and rate fluctuations. reduce costs in the long term and improve operating efficiency. resources were allocated primarily to finance the purchase of 44 traffics, including international traffics billed in US dollars. new locomotives, for a total fleet of 595 locomotives, with which EBITDA for 2011 was US$358.8 million (equivalent to 27.4% of Capital Expenditures (capex) Ferromex can meet its volume of traffics and improve efficiency The volume transported during 2011 decreased 0.6%, trans- sales), representing a (2.1%) decrease compared to and reliability as the new locomotives are less aggressive to porting billion net tons/kilometer, compared to the Ferromex offers its customers efficient and reliable service, the track and perform better on curves, reducing the release of billion transported in The sectors that experi- Ferromex focuses on different market niches in the agricultural, competing favorably with the trucking industry. In 2011, contaminants and providing better fuel performance. enced the greatest variation were: intermodal 21%, chemicals industrial, mineral, automotive, chemical, metals, cement, Ferromex invested a total of US$284.3 million in new equipment and fertilizers 7%, energy 5%, industrial (16%), and agricul- energy, and intermodal segments. The transportation of and infrastructure to improve the efficiency and reliability Capital expenditures of US$180.0 million are planned for 2012, ture (5%). products and materials in bulk, especially over long distances, of its railroad system, increasing the capacity of its network. which includes the completion of sidings to increase track is more effective and efficient by train than by truck. Ferromex Significant investments include the purchase of locomotives capacity and speeds on our lines. The operating cost in 2011 was US$912.9 million, 18.3% above has implemented a commercial strategy based on three actions: and railcars, crossdocking terminals and distribution centers that for This increase is explained by the additional freight a) retaining its current customer base, b) increased sales with to transfer freight from truck to train for customers that require volume, an 11.0% increase in the price of diesel, increases in current customers, and c) seeking out new customers. door to door service. 76 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 77

41 New ecological locomotive, Ferrosur. New ecological locomotive, Ferrosur. Ferrosur Ferrosur Merger On November 24, 2005, Grupo México announced that its subsidiary ITM had acquired outright ownership of the Company Ferrosur from Grupo Condumex-Sinca Inbursa Ferrosur sales in 2011 were US$307.6 million, 16.1% higher than the US$265.1 million reported for The volume transported in 2011 increased 5.1%, transporting billion net tons/kilometer, compared to billion net tons/kilometer in The operating cost for 2011 was US$211.9 million, 12.9% above that for This increase is due mainly to the greater volume of freight and increased diesel prices. The cumulative EBITDA at December 31, 2011 was US$87.6 million, compared to US$65.5 million for Net earnings were US$38.4 million in 2011, 66.7% higher than that reached in Capital Expenditures (capex) During 2011, Ferrosur invested US$63.1 million to increase its track capacity and improve operating efficiency. These investments included the purchase of 14 new locomotives and investments in network infrastructure. ITM received a favorable final decision on the ITM-Ferrosur merger in On March 25, 2011, the First Collegiate Court on Administrative Matters in Mexico City (TFJFA) found to dismiss the appeal filed by the Federal Competition Bureau (CFC) against the decision of the Federal Court of Justice on Tax and Administrative Matters (TFJFA) in favor of ITM, which approved the ITM-Ferrosur merger. Consequently the acquisition of Ferrosur by ITM has received final approval as no further recourse may be admitted against the decision. Ferrosur s financial information is consolidated with Grupo México as of this year. Intermodal México Intermodal México celebrated its tenth anniversary this year with a 34% increase in sales year over year, improving its operating margin and its EBITDA. Sales were US$30 million. The Company has broad geographic coverage, providing value added services to Ferromex and Ferrosur users. Capital expenditures of US$48 million are planned for 2012 to improve infrastructure and operating costs. New business like Fuel Oil Transfer for Petróleos Mexicanos (PEMEX) and integral solutions for customers in the automotive industry supported by the IT platform 78 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 79

42 developed for our customers, recognize Intermodal México as a solid Company so that users of the railroad for transporting freight consider Intermodal México their right hand for these services. Pacífico Transportation LTD Thanks to the discovery of oil and gas deposits in the area where the Texas Pacífico line is situated, the demand for railroad traffic has increased significantly, transporting sand for well and crude oil drilling. The US$30 million investment made in improving the line means the Company can take advantage of opportunities with new customers that will quadruple traffic over the next two years, helping in the development of the area. The development of the service on this line will give the Company strategic opportunities to connect to the Ferromex network at Fort Worth, Texas. ITM Environmental Actions To minimize its impact on the environment, in 2011 the Transportation Division gave special attention to the control and prevention of spills, energy efficiency, and to reducing greenhouse gas emissions. Certifications Five Ferrosur maintenance shops and the Puebla fueling zone were recertified in Environmental Quality this year. Ferromex maintains its Clean Industry certification for the Locomotive Maintenance Shop and its Environmental Quality certification for the car repair shop in Guadalajara. Energy and climate change Various initiatives were implemented in 2011 to use energy from renewable sources and to improve energy efficiency to successfully reduce greenhouse gas emissions. Fuel Consumption The acquisition of new ecological locomotives combined with an awareness campaign aimed at train personnel resulted in a 16.4% saving in fuel consumption by our locomotives that have AESS systems installed. Old and new bridge over the Colorado River. Ballinger, Texas. 80 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 81

43 Chepe tourist train. Roundhouse in Guadalajara, Jalisco. Waste handling and spills As a result of improvements made to locomotive maintenance processes, we generated 21% less hazardous waste in 2011 than the previous year. Efficiency in the use of cleaning materials was promoted to prevent saturation with hydrocarbons. Used oil is sent to authorized cement plants to be used as an alternative fuel, while other waste is sent to an authorized incinerator. Biodiversity In 2011, hectares with desert type vegetation were cleared to make way for various sidings projects in different states. This clearing principally affected: mesquites, cacti, acacias, and other species, totaling 38,089 plants affected. 2,558 plants were rescued and replanted outside the right of way. Also, to compensate for the plants affected that could not be transplanted, 38,148 mesquite and cacti plants were planted. Community Responsibility Ferrocarril Chihuahua Pacífico (Chepe), which provides tourist passenger service from Chihuahua to Los Mochis in Sinaloa. This route passes through the heart of the breathtaking Copper Canyons, where the Tarahumara and Mayo indigenous communities have their home. In support of these two communities, members of the Tarahumara and Mayo communities in the states of Chihuahua and Sinaloa, respectively, and also low income residents, received a special rate to travel on the passenger train. Free passage was given to priests, nuns, and missionaries engaged in social action in these areas. Also, goods and materials were transported for these communities free of charge. This program offered special rates to 70,691 passengers this year and free passage to 75 priests, nuns, and missionaries who, due to their work in the community, travel continually and are often accompanied by indigenous who are ill or children needing special attention. In 1994, when Ferromex obtained the concession to operate the railroad freight transportation service, the Company was also awarded the concession on the 82 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 83

44 PROJECTS EXPERIENCE 75 YEARS THINKING BIG 06.INFRASTRUCTURE DIVISION INFRASTRUCTURE DIVISION US$636 MILLION WILL BE INVESTED IN THE INFRASTRUCTURE DIVISION IN 2012 Miguel Angel Monsiváis Operator. 84 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 85

45 GEOGRAPHIC LOCATION INFRASTRUCTURE DIVISION US$224 MILLION IN SALES FOR THE INFRASTRUCTURE DIVISION INFRASTRUCTURE DIVISION NACOZARI, SONORA SONORA HERMOSILLO HISTORY AND EXPERIENCE HAVE GIVEN US THE OPPORTUNITY TO PARTICIPATE IN ALMOST ALL LARGE INVESTMENTS MADE IN THE INFRASTRUCTURE SECTOR The Infrastructure Division of Grupo México is represented by its subsidiaries México Proyectos y Desarrollos, S.A. de C.V. ( MPD ), México Constructora Industrial, S.A. de C.V. ( MCI ), México Compañía Constructora, S.A. de C.V.( MCC ), Servicios de Ingeniería Consutec, S.A. de C.V. ( Consutec ), México Generadora de Energía S.de R.L. ( MGE ), and Compañía Perforadora México, S.A.P.I. de C.V., which are wholly SAN LUIS POTOSÍ owned by Grupo México. MPD, MCI, and MCC are active in engineering, procurement, and infrastructure construction projects. Perforadora México offers oil and water drilling services and related value added services such LEON GUADALAJARA Mexico City POZA RICA CD. DEL CARMEN as cementation engineering and directional or slanted drilling. Consutec engages in integral industrial and infrastructure project engineering activities. México Generadora de Energía is a recently created Company JUCHITÁN, OAXACA VILLAHERMOSA TUXTLA GUTIÉRREZ that develops power generating and renewable energy projects. US$111 México Compañía Constructora LEGEND MILLION IN SALES FOR MÉXICO COMPAÑÍA CONSTRUCTORA IN 2011 In 2011, México Compañía Constructora celebrated 75 years of operation supporting Mexico s infrastructure. Its beginnings in the construction sector date back to 1936 and the Company s value added has been its strength in demonstrating its ability to execute projects. PEMSA MCI CONSUTEC MGE 86 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 87

46 Edge maintenance work on the Tailings Dam. Buenavista del Cobre, Sonora. The history and experience of the Construction Company have afforded us the opportunity to participate in almost all large investments made in the infrastructure sector in canal and irrigation projects, railroad and hydroelectric projects, warehousing and derivatives, oil and gas, thermoelectric plants, and highway projects. Minera Dolores. Construction of the Chabacán dam in Madera, Chihuahua. Construction on the El Chabacán storage dam in the state of Chihuahua has been completed. México Compañía Constructora reported sales of US$111.3 million, EBITDA of US$15.1 million, and its costs and expenses at US$96.5 million for Major Projects Ferromex. Construction and refurbishment of eight railroad sidings in the states of Zacatecas, Guanajuato, Jalisco, and Colima. Improvement works are also ongoing on the track infrastructure of the railroad lines in the states of Colima and Sonora. Federal Power Commission (CFE). Construction of two 14x14 meter deviation tunnels, 1,135 m in length, now in operation helping to prevent flooding in Tabasco and optimizing the use of the Grijalva River hydroelectric power generating system. Inaugurated by President Felipe Calderón Hinojosa, México Constructora Industrial has completed delivery of the Deviation Tunnels on the Grijalva River to the Federal Power Commission. Railroad improvement and expansion projects were delivered at the end of Buenavista del Cobre. Overall refurbishment of the mine facility, civil works projects for the cementations of the Quebalix III and Crusher Building at the site, maintenance work on the edges of the Tailings Dam and the Dam at the Old Concentrator, and the dismantling of the Smelter and old Concentrator. 88 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 89

47 Mexicana de Cobre. Construction of the outside borders of Tailings Dam number 7, manufacturing and installation of new cribs for the Concentrator s primary mills, assignment of engineering personnel, assignment of maintenance and operating personnel for heavy machinery, and street paving inside the Lime Plant at Agua Prieta, Sonora. Industrial Minera México. Work on the San Luis Potosi Bicentenary Park is complete and personnel are now being assigned to dismantle the Arsenic and Copper Plant in San Luis Potosi and to the Exploration Projects in Charcas, San Luis Potosi. The Department of Transport and Communications (SCT) awarded México Constructora Industrial a 30 year concession to build and operate the Salamanca - León Highway in the state of Guanajuato, which will contribute to the growth of the region. Constructora México will continue to participate in tenders for the construction and operation of highways, hydroelectric dams, railroad lines, and other important infrastructure projects. Environmental Actions México Compañía Constructora, with the collaboration of the Selva Ocote Biosphere Reserve, member of the Mexican Commission for Natural Protected Areas (CONANP) in state of Chiapas, and the Save the Mountain Rural Production Preservation, undertook a commitment for the reforestation and revegetation of the reserve. Thirty-five hectares have been reforested after being destroyed by forest fires in the community of La Florida in Cintalapa de Figueroa, which lies in the buffer zone of the reserve, to compensate for the areas affected by the construction activities for the Contingencia Río Grijalva, Túneles de Conducción-Desastres Naturales, Estado de Chiapas project (Grijalva River Contigency Project, Deviation Tunnels- Natural Disasters, Chiapas) and to meet compliance with the requirements set by the Department of the Environment and Natural Resources (SEMARNAT). Generator Plant, La Caridad. 90 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 91

48 Transporting the Chihuahua platform, Dubai-Gulf of Campeche, Mexico. More than 45,000 native plants of different species were planted, including cedar (cedrela odorata), cocoite (giiricidiam sepium), maculis (tabebuia rosea), mahogany (carapa guianensis), guanacaste (enterolobium ciclocarpum), guash (leucaena leucocephala (Lamark), jolotzin (heliocarpus mexicanus (Turcz) Sprague). A nursery was set up for this program with a production capacity of 550,000 plants. This nursery was also used to produce species for areas destroyed by fire in the state of Chiapas. Compañía Perforadora México ( La México ) Compañía Perforadora México closed 2011 with sales of US$112.6 million, EBITDA of US$27.0 million, and a net profit of US$14.7 million. Sales increased 59% this year, compared to 2010, principally as a result of the contract the Company was awarded for the Sonora Platform in March 2011 and significant improvements made to the productivity of the land operation for the Tertiary Oil Gulf project. Ocean Drilling Sonora Platform The Sonora Platform received a full mechanical overhaul and remodeling of its living area in The platform has been under a daily rental contract since March 24, 2011 and engages in shallow water drilling in the state of Campeche. New Chihuahua and Zacatecas platforms In December 2011, the purchase of two 300 foot Friede & Goldman Jack Up platforms was finalized, with a drilling capacity of up to 30,000 feet below the seabed. The first platform, known as Chihuahua, started its mobilization from the Arab Emirate of Sharjah the last week of February and is scheduled to arrive at the oil port of Dos Bocas in the state of Tabasco on April 15, with operations starting in June, The second platform, Zacatecas, is scheduled to be completed June 30, to then be transported between July and August and start operations in September Land Drilling Productivity this year increased over 60%, which had a significant impact on the Company s results. The Tertiary Oil Gulf Project has a contract expiring after GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 93

49 Drilling services Cementations The cementations division started a new contract in October, expiring December We are currently working on the addendums for certain products that La México provides in its cementations segment. These activities will result in increased revenue for this Division. Since August 2011, the Company has provided service, both land and sea, to third parties holding comprehensive contracts with PEMEX. Slanted drilling In 2011, we completed projects for PEMEX under a 3 year contract. Transporting the Chihuahua platform, Dubai-Gulf of Campeche, Mexico. We are participating in tenders that will be awarded during the first half of This division also provides land services to third parties and is analyzing opportunities to start operations overseas. Drilling fluids In 1998, Grupo México built a pipeline connecting Douglas, Arizona with the national pipeline and construction of a 3km offshoot is underway to connect the power plants. This division focuses on offering services under our comprehensive Tertiary Oil Gulf land drilling contract. México Generadora de Energía (MGE) MGE is developing a 50 MW Wind Power Project in the state of Oaxaca, which is currently in its engineering and processing stage. This project represents an estimated investment of US$118 million and will supply power to some Grupo México facilities and to other potential buyers. México Generadora de Energía is building two 250 MW Combined Cycle Power Plants to the north of Nacozari, Sonora, representing a total investment of US$540 million of which US$144.5 million has been spent as of year close. Plant I reports 46% completion and Plant II 12% completion at December 31, These plants are scheduled to be completed in the fourth quarter of 2013 and the second quarter of 2014, respectively, and will supply power to the mines and plants in Sonora and their expansions. México Proyectos y Desarrollos is conducting the engineering for 6 mini 98 MW hydroelectric dams in the states of Puebla, Sonora, and Sinaloa. Renewable energies that will reduce greenhouse gas emissions. The power produced by these dams will be used to supply new medium scale mining projects. 94 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 95

50 TANGIBLE RESULTS COMMITMENT 14,724 PEOPLE BENEFITED THANKS TO OUR PROGRAMS 07.GRUPO MÉXICO FOUNDATION GRUPO MÉXICO FOUNDATION THE GRUPO MÉXICO FOUNDATION IS ACTIVE IN NINE STATES IN MEXICO Juan Ramírez Beneficiary of Grupo México Foundation s Social Programs. 96 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 97

51 14,724 PEOPLE BENEFITED through the development of three programs GRUPO MÉXICO FOUNDATION GRUPO MÉXICO FOUNDATION IS ACTIVE IN THE STATES OF: SONORA, MORELOS, SAN LUIS POTOSI, JALISCO, NUEVO LEÓN, CHIAPAS, TAMAULIPAS, ESTADO DE MÉXICO, CHIHUAHUA, AND MEXICO CITY. Cultural and Social Programs Revenues from sales of the book Kakaw were matched and donated to Casa Hogar Auxilio in the state of Chiapas to complete general remodeling projects. This shelter houses minor aged girls at risk and living in poverty. 1,023 STUDENT AND TEACHER SCHOLARSHIPS GIVEN BY THE GRUPO MÉXICO FOUNDATION El Cuernito A.C. was another organization supported by the Grupo México Foundation. The dining room and kitchen at the daycare center were remodeled improving the food service the organization provides to children under 6 years of age.. The second Musical Composition Contest was held with a railroad theme Sinfonía Vapor (Steam Symphony) in which the Grupo México Foundation participated giving financial support for teachers and students of symphonic and chamber music. Working with the community. 98 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 99

52 Reforestation in Huixquilucan, Estado de México, with the participation of Grupo México employees. Michou y Mau Foundation. Organization supported. Support for other institutions In collaboration with Cinemex we held various red carpet events and movie premieres. The funds raised from these events were donated to various NGOs. In terms of health services, we helped finance cochlear implants, kidney transplants, cancer treatments for the underprivileged, medications for children with immunological disorders, and physiotherapy for children needing muscularskeletal strengthening. In the area of education, we were able to finance materials for schools with underprivileged special needs children, a training workshop for 60 young people rescued from the street, and a documentary on breast cancer prevention was distributed. In addition, we helped finance the work of women with small businesses in the Mixteca region in Oaxaca. Through 1,687 Cinemex theaters, we raised awareness for different organizations with cineminuto commercial spots to promote the work of participating organizations and also offering moviegoers the opportunity to seek out the help that perhaps they ve been looking for. Consequently, Cinemex theaters were in high demand during The organizations involved have taken up the task of finding synergies to be able to produce quality cineminutos. Through this project, the Grupo México Foundation has been able to join companies, advertising agencies, creative minds, directors, and producers under a single purpose: to help and promote a social message. This year we supported 8 organizations with 4-week spots each, showing a total 5,850 messages, reaching nearly 14 million moviegoers. In this same area, the Grupo México Foundation was a finalist for the Caracol de Plata award given for excellence in social messaging, with the cineminuto Nuestros Niños (Our Children), an organization that provides comprehensive care to children under 6 years of age. In June, we collaborated on the highly successful 2nd Cinemex Run to benefit the Michou y Mau Foundation to transport child burn victims and provide follow-up care. A total 4,000 runners participated. Simultaneously, a fundraising campaign was held through the concession stands at movie theaters in Mexico City and metropolitan area to raise money for this same cause. Various fundraising campaigns have been held at theaters to raise money for different organizations: Fundación Ale. The funds raised helped to finance 5 kidney transplants. 100 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 101

53 Thanks to the sale of stickers for the En Nuestras Manos Foundation, money was raised to create a Stylist Shop, which will be inaugurated soon at the Centro de Atención Integral para la Profesionalización del Empleo (CAI). The Grupo México Foundation sponsored and inaugurated the Centro Educativo Ambiental Desierto de los Leones. This center offers courses on environmental related topics to approximately 4,000 students each year. As a member of the Group Unidos por Ellos, the Grupo México Foundation doubled the amount raised nationally to support victims of Hurricane Alex. Delivery was made on 101 homes in the state of Tamaulipas and 114 in the state of Nuevo León. Education and Environmental Programs In collaboration with Fundación Televisa and the Bécalos program, we gave out 476 scholarships for academic excellence in the state of Sonora. During 2012, our students will start the second of their three year scholarships. In 2011, thanks to this same collaboration, 547 scholarships were given to teachers as part of the Formando Formadores program. A donation was given to the Red Cross in Esqueda, Sonora for their work with special needs people. In San Luis Potosi, 26,510 trees were donated to the project Vías Verdes, which has a direct impact on nine communities. 150 Grupo México employees participated in the reforestation of one hectare in Huixquilucan, Estado de México, planting 2,000 trees. Through the freight transportation services that Ferromex offers, we supported different organizations by transporting 842 tons of goods for 6 different Tarahumara communities in the state of Chihuahua. A donation of equipment and learning materials was made to Preparatoria Enrique Esqueda in the state of Sonora, which has 180 students enrolled in its high school diploma program. Thanks to the supplement Equilibrio, which reaches 43,000 Reforma newspaper subscribers, we can communicate and create awareness for issues such as sustainability and the environment. Tree Production. 102 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 103

54 CONSOLIDATED RESULTS SOLID 25% INCREASE IN CONSOLIDATED SALES 08.FINANCIAL ANALYSIS AND DISCUSSION FINANCIAL ANALYSIS AND DISCUSSION CONSOLIDATED SALES REACHED A RECORD HIGH US$ BILLION Julio Valencia Tractor operator. Buenavista del Cobre, Sonora. 104 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 105

55 FINANCIAL ANALYSIS AND DISCUSSION STOCK EXCHANGE LISTING This analysis and discussion presents a review of the consolidated financial results for Grupo México, S.A.B. de C.V. and subsidiaries ( GMéxico or the Company ) (BMV: GMEXICOB). The audited financial results for the twelve months ended December 31, 2011 are compared with Grupo México is a holding company, whose main activities are in the miningmetallurgic industry, and include the exploration, exploitation, and benefit of metallic and non-metallic minerals, and freight and multimodal railroad services, and also infrastructure projects. All figures in this report were prepared according to US GAAP and are expressed in US dollars ($), except where indicated otherwise, and at December 31, All percentage variances are expressed in real terms. The conversion from Mexican pesos to US dollars is included for reference purposes only, applying the exchange rate set by the Bank of Mexico for settling obligations, which was pesos per dollar on December 31, This report may contain forward-looking statements and such statements are to be interpreted as estimates prepared by the Company in good faith. These forwardlooking statements reflect the opinions of Company Management based on currently available information. Actual results are subject to future and uncertain events that may have a material impact on the actual performance of the Company. Grupo México is a publicly traded company, whose shares have been quoted on the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV) since 1978, under the listing code: GMEXICOB. Grupo México is represented by 7,785,000,000 common series B shares, fully subscribed and paid. At December 31, 2011, the Company has 7,785,000,000 common series B shares outstanding. SCC shares are traded on the New York Stock Exchange (NYSE) and the Lima Stock Exchange (BVL) under the listing code SCCO on both exchanges. PRINCIPAL MINE PRODUCTS Copper is the third most used metal in the world and an important component in creating infrastructure worldwide. Copper has exceptional chemical and physical properties, with high electrical conductivity and resistance to corrosion, and also has excellent malleability and ductility, making it an ideal material for field applications in electricity, telecommunications, computers, cell phones, construction, transportation, and industrial machinery. Copper is also an important material for non-electrical applications, such as plumbing and roofing, and when alloyed with zinc forms bronze, and is also used in consumer and household products. Copper is used in fungicides and various other chemical products. 106 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 107

56 Molybdenum is used to give greater resistance to steel alloys, steel tools, to soften tungsten alloys, is resistant to corrosion, and is used as a catalyst in the oil and gas industry to remove sulfur. It is also used in fertilizers, dyes, paints, and reagents. Silver is used for photographic, electrical, and electronic products, and to a lesser degree, in welding alloys, jewelry, coins, silverwork, and catalysts. Zinc is used primarily to galvanize steel and iron to protect these from corrosion. It is also used to make molds, in batteries, and in sheets for architectonic purposes. METALS PRICES During 2011, most metals prices experienced high volatility as a result of global economic uncertainty, particularly the European crisis, economic recovery in the US, and lower expectations for global growth. However, copper prices posted an average US$4.01 per pound, a 16% increase over 2010, due principally to a shortfall between global production and consumption of copper, and also meteorological factors, strikes, lower ore grades, delays in the startup of projects, and China s demand for infrastructure projects. Prices for our products depend mainly on supply and demand and are set by the New York Commodities Exchange (COMEX) and the London Metals Exchange (LME), the two most important exchanges in the world. Molybdenum prices are set using the publications Metals Week Dealer Oxide and Platts Metals Week. Our contract prices also reflect the premiums negotiated, shipping costs, and other factors. The following table shows the average annual metals prices for 2011 and Zinc production. Zinc Electrolyte Refinery. Copper Copper LME Comex Molybdenum Zinc Lead Silver Gold Metals Prices: ($/lb) ($/lb) ($/lb) ($/lb) ($/lb) ($/oz) ($/oz) 1T , T , T , T , Average , T , T , T , T , Average , Variance: 4T11 vs. 4T % -13.7% -16.7% -18.8% -18.3% 19.7% 23.0% Variance: Year 2011 vs % 16.4% -3.6% -0.2% 10.2% 74.1% 27.9% 108 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 109

57 CONSOLIDATED RESULTS Consolidated net sales for Grupo México in 2011 reach a record high US$ billion, compared to US$8.338 billion in This 25% growth is attributed principally to increased production with the restart of the Buenavista mine, which has been operating at maximum capacity since April. During the first half of the year we witnessed highs in metals prices and growths in the Transportation Division, principally due to increased exportations of consumer goods and freight transportation nationally. Sales for the Transportation Division reached US$1.626 billion for 2011, a 14% increase over 2010, setting a new record for ITM; representing 16% of total revenue, while the Mining Division represented 83% of Grupo México s total revenue. The cost of sale for 2011 was US$5.105 billion, a 21% increase over 2010, due mainly to mine maintenance, the reincorporation of Buenavista del Cobre, higher energy and fuel costs, and increased rights of track usage expenses. Although the prices for our principal supplies and materials may experience variances that are beyond our control, the Company will continue strict efforts to reduce costs, optimize processes, and increase productivity; and will also continue its disciplined approach to consumption and expense, which has allowed the Company to maintain its position as one of the best low cost leading copper producers in terms of cost per pound produced. As a result, the operating profit reached US$4.607 billion in 2011, 36% higher than 2010; while the EBITDA operating flow reported a record high US$5.192 billion, 32% higher than 2010, placing the EBITDA margin at 50% in 2011, an improvement over the 47% reported for The majority consolidated net profit for 2011 reached a record high US$2.472 billion, a 52% increase over 2010, representing a total equivalent to 24% of sales. INVESTMENT IN FIXED ASSETS Grupo México s consolidated investment program at December 31, 2011, reached a record high US$1.217 billion, compared to the US$651 million invested in 2010, of which US$715 million was allocated to the Mining Division to increase production and improve margins with cost savings. A record amount was also invested in the Transportation Division, US$355 million, which was used to improve the railroad infrastructure, construct new sidings, and increase the fleet of locomotives. During 2011, 58 locomotives were purchased for a total fleet of 770 locomotives, resulting in increased speeds and fuel savings. Investments of US$147 million were made in the Infrastructure Division, principally for the construction of two 250 megawatt self-supply combined cycle power plants, ensuring the Mining Division s power consumption at a more competitive cost. The total investment for this project is estimated at US$540 million. The first 250 megawatt plant is scheduled to start operations in 4Q13 and the second plant in 2Q14. Container yard. Torreón, Coahuila. 110 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 111

58 Thickeners at the La Caridad Concentrator, Sonora. STOCK DIVIDENDS During 2011, Grupo México paid out a total of $18,012 billion pesos in dividends. The following table shows the per share dividend amounts paid out for each quarter over the last two years, and also their equivalent when the dividend payment was made with new shares. The Board of Directors sets the dividend amounts considering the current capital expenditure program and the future cash flow our operations are expected to generate quarterly. STOCK REPURCHASE FUND During 2011, Grupo México purchased 20 million treasury shares for $722.4 million. This repurchase was carried out under the $2.240 billion peso program approved by the Ordinary General Shareholders Meeting. The repurchase program was activated to take advantage of low GMéxico stock prices and considering this to offer a better return than cash positions, creating greater value for Company shareholders. CONSOLIDATED NET DEBT At December 31, 2011, the total consolidated debt of Grupo México was US$3.801 billion, which taking into account a cash and banks balance of US$2.232 billion, represents net debt of US$1.570 billion, maintaining a manageable long term amortization schedule. On April 15, 2011, Ferromex placed 10 year notes for $1.5 billion pesos at a fixed rate of 8.88%. These resources were allocated to finance the purchase of 44 new locomotives MX$/share Date of Payment First Quarter 0.40 May 5, 2011 Second Quarter 0.45 August 19, 2011 Third Quarter* 0.49 November 14, 2011 Fourth Quarter 0.40 February 20, MX$/share Date of Payment First Quarter 0.17 May 17, 2010 Second Quarter 0.17 September 10, 2010 Third Quarter 0.25 November 25, 2010 Fourth Quarter 0.30 February 18, 2011 (*) A stock dividend payment was approved in 3Q11 at one share per 389 shares. 112 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 113

59 COMFORTABLE DEBT MATURITY DERIVATIVE INSTRUMENTS The total consolidated debt of Grupo México has an amortization schedule that Grupo México uses derivative instruments to manage its exposure to market risks does not present a difficult financial burden for the Company. The average debt due to variances in international metals prices, energy costs, interest rates, and amortizations per year between 2012 and 2010 will be US$165 million, with US$400 exchange rates. Through its two divisions, Mining and Transportation, Grupo million maturing in 2020 being the most significant. The maturity schedule for the México engaged the following derivative instruments: debt is as follows: Mining Division. The subsidiaries AMC, SCC, and Asarco engaged hedging to: a) 1,400.0 protect prices on a portion of their copper sales; b) fix the energy rates for part of their production costs, and c) protect part of their operating costs in the face of an 1,000.0 $ $ appreciation of the Mexican peso against the US dollar $285.3 $251.0 $ $ $422.7 $282.8 In 2011 AMC, taking advantage of volatility in the peso/dollar exchange rate and low interest rates, engaged a Cross Currency Interest Rate Swap to convert the whole of AMC s debt listed in pesos at a floating rate maturing in December 2014, to dollars at a fixed rate. The total amount of the debt was $8.399 billion pesos, with the swap negotiated at an exchange rate of $13.60, the debt is equal to US$618 million as of September 30, The loan rate was the 28d TIIE + 425bps (~9.05%), which was exchanged for a fixed dollar rate of 5.90%. DEBT MATURITY Transportation Division. The subsidiary GFM engaged an interest rate derivative to cover a bank loan. STOCK PERFORMANCE GMéxico continues to be one of the most important shares for the Mexican Stock Exchange. In 2011, it was the second most traded share and fourth in terms of market capitalization. GFM holds an interest rate derivative for a US$47.9 million loan, which reports an unfavorable valuation as of December 31, 2011 and 2010 of US$2.1 million and US$1.9 million, respectively. 114 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 115

60 credit profile Moody s Standard & Poor s Fitch Ratings Grupo México International Rating - BBB BBB Americas Mining Corporation International Rating - BBB BBB Southern Copper Corporation International Rating Baa2 BBB BBB US$1 billion Bonos Baa2 BBB BBB Local Rating - - BBB Minera México Local Rating - - BBB International Rating Baa2 BBB BBB Secured Bond Baa2 - BBB Ferromex Long term Local Rating - MXAA AA+(Mex) International Rating - - BBB Tripper. Crusher and Conveyor System. Buenavista, Sonora. On January 26, 2012, the ratings firm S&P upgraded its ratings for Grupo México, Americas Mining Corporation, Southern Copper Corporation, and Minera México from BBB- to BBB. The improved rating is attributable to the Company s low cost structure, geographical diversification, our position as the fifth largest copper producer globally, vertical integration, long life reserves, and also our solid financial position. 116 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 117

61 FINANCIAL HIGHLIGHTS FOR AMERICAS MINING CORPORATION January - December Variance (Thousands of Dollars) US$000 % Copper Sold (TM) 790, ,708 88, Sales 8,654,639 6,803,189 1,851, Cost of Sales 3,886,032 3,182, , Operating Income 4,266,806 3,102,062 1,164, EBITDA 4,722,775 3,512,389 1,210, EBITDA Margin (%) 54.6% 51.6% Net Earnings 2,347,381 1,475, , Investments / Capex 714, , , Water quality analysis. Hayden, Arizona. GRUPO MÉXICO JOINS THE IPC SUSTAINABILITY INDEX On December 8, 2011, Grupo México obtained one of the highest ratings as a Sustainable Company according to the methodology of the Mexican Stock Exchange (BMV), and was chosen to be included in the BMV s new IPC Sustainability Index. This selection recognizes compliance with the adoption of strict sustainability criteria, policies, and systems. The 70 most traded companies were analyzed to develop the IPC Sustainability Index, meeting the criteria for evaluation based on corporate governance, environmental issues, and social responsibility. Two research providers conducted the evaluation, the British firm EIRIS (Empowering Responsible Investment) and Universidad Anáhuac del Sur in Mexico. The companies included in the Index were compared using the average rating EIRIS publishes evaluating over 3,000 companies worldwide. Grupo México is proud to be included in the BMV s first sustainability index, reaffirming our commitment to social responsibility, environmental sustainability, and corporate governance. SUMMARY OF OPERATIONS BY BUSINESS UNIT MINING DIVISION AMERICAS MINING CORPORATION The Mining Division of Grupo México is represented by its subsidiary Americas Mining Corporation ( AMC ), whose principal subsidiaries are Southern Copper Corporation ( SCC ) in Mexico and Peru, and Asarco in the United States. SCC trades on the New York and Lima stock exchanges. Its stockholders, directly or through subsidiaries, are: GMéxico (80.9%) and other stockholders (19.1%). The Company operates mines, metallurgic plants, and exploration projects in Peru, Mexico, the United States, Argentina, Ecuador, and Chile. Asarco was reincorporated into GMéxico on December 9, Asarco has 3 mines and 1 smelting plant in Arizona and 1 refinery in Texas. In October 2011, Grupo México s Board of Directors, after consulting with the SCC Independent Committee, decided to maintain the value Asarco represents for its subsidiary Americas Mining Corporation and withdrew its offer to combine Asarco s operations with SCC. AMC, as a holding company in GMéxico s Mining Division that consolidates the operations of SCC and Asarco, will explore alternative strategies to create value through its two subsidiaries, which may include the placement of AMC stock on the capital markets to ensure future sources of financing and structural adjustments to consolidate as a leading mining group. 118 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 119

62 Cash Costs MINE PRODUCTION & SALES Mining Division January - December Variance % Copper (t.m.) Production 772, ,980 84, Sales 790, ,708 88, Molybdenum* Zinc* Silver Gold* (t.m.) Production 18,570 20,519 (1,949) (9.5) Sales 18,632 20,508 (1,876) (9.1) (t.m.) Production 83,807 99,194 (15,387) (15.5) Sales 90,663 93,964 (3,300) (3.5) (Miles oz) Production 14,481 15,242 (761) (5.0) Sales 17,411 19,584 (2,173) (11.1) (Oz) Production 36,111 17,204 18, Sales 60,748 69,690 (8,942) (12.8) *Asarco does not produce this mineral An indicator we use, and which is common in the mining industry, to measure performance is the cash cost per pound of copper produced. Our cash cost is a measure that is not found in GAAP as it has no standardized significance and cannot be compared with similar measures provided by other companies. We have defined our per pound cash cost as the cost of production plus overhead, charges for treatment and refining, and costs of sale; less revenues from byproducts and sales premiums, divided by the total pounds of copper produced. Our cash cost calculation credits the sale of byproducts, principally molybdenum, zinc, and silver, and premiums on the market prices we obtain on copper sales, against our costs. We calculate our revenues from byproducts in this manner as our principal business is the production and sale of copper. We believe the investor community sees Americas Mining Corporation as a copper company and it is valued, largely, by its capacity to produce copper at a reasonable cost. We also include premiums on copper sales as a credit as these amounts are higher than published copper prices. The consolidated Americas Mining Corporation cash cost per pound of copper, net of byproducts, increased from US$0.587 per pound of copper in 2010 to US$0.739 per pound of copper in Despite the increase in costs, Americas Mining Corporation is still an industry leader in low cost. Sulfuric Acid (t.m.) Production 2,538,040 2,039, , Sales 1,887,525 1,462, , GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 121

63 TRANSPORTATION DIVISION } Infraestructura y Transportes México (ITM) Financial Highlights for Infraestructura y Transportes México (ITM) January - December Variance (Thousands of Dollars) US$000 % SCC ASARCO AMC Consolidated operating cash cost Vol. Transported (million tons / km) 52,182 52, Sales 1,626,012 1,432, , Cost of Sales 1,117, , , Operating Profit 321, ,815 8, EBITDA 464, ,320 27, EBITDA Margin (%) 28.6% 30.5% Net Earnings 156, ,179 (49,280) (23.9) Profit Margin (%) 9.6% 14.4% Investments - (Capex) 354, , , RESOURCES, TRANSPORTATION DIVISION Item Ferromex Ferrosur Total Track Network (km) 8,111 1,813 9,924 Locomotives Cars 13,961 4,841 18,802 Employees 7,917 1,998 9,915 Productivity (millions of TKN / worker) EBITDA for 2011 was US$464.5 million (equivalent to 28.6% of sales), representing a 6.2% growth over ITM focuses on different market niches in the agriculture, industrial, mineral, automotive, chemical, iron and steel products, Power shovel. Cuajone, Peru. 122 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 123

64 , , TON-KM CARS Año CARS NET TON KILOMETERS (MILLIONS) RAIL FREIGHT - ITM cement, energy, and intermodal segments. The transportation of products and materials in bulk, particularly over long distances, is more effective and efficient by train than by truck. 7 ITM Sales by Segment Diversification Agricultural 25% 2. Diesel surcharge 13% 3. Minerals 9% 4. Industrial 9% 5. Automotive 9% 6. Chemicals 8% 7. Energy 6% 8. Steel 6% 9. Intermodal 6% 10. Cement 4% 11. Car-Hire 2% 12. Others 3% Grain hopper. 124 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 125

65 corporate structure GMEXICO Mining Division Americas Mining Corporation (AMC) 100% Transportation Division Infrastructure and Transport, Mexico (ITM) 74.9% Infrastructure Division Mexico Projects and Development 100% 25.1% Southern Copper Corporation Asarco Infraestructura y Transportes Ferroviarios Grupo Ferroviario Mexicano 80.9% 100% 100% 74% 26% Mexico Division Peru Division 100% 100% Among the world s largest producers of Cu, Mo, Ag & Zn. Ferrosur Ferromex 100% 100% The largest & most profitable railroad company in Mexico (55% market share). PEMSA México Compañía Constructora México Generadora de Energía 100% 100% 100% 75 years experience in infrastructure & construction projects. Leachable material conveyor belt. Toquepala, Peru. ANNUAL REPORT GRUPO MÉXICO 127

66 , ,114 5,629 6,574 7, FIXED ASSETS (MILLIONS OF DOLLARS) EQUITY CAPITAL (MILLIONS OF DOLLARS) PER SHARE EARNINGS (DOLLARS) CURRENT ASSETS CURRENT LIABILITIES CURRENT ASSETS AND LIABILITIES (MILLIONS OF DOLLARS) OPERATING PROFIT PER SHARE (DOLLARS) 128 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 129

67 ,598 15, ,114 9,745 5,629 8,788 6,574 12,462 7,485 8, EQUITY CAPITAL TOTAL ASSETS BOOK VALUE PER SHARE (DOLLARS) EBITDA / INTERESTS (TIMES) EQUITY CAPTIAL AND TOTAL ASSETS (MILLIONS OF DOLLARS) ,888 7,485 7,113 8,737 6, ,992 11,581 12, ,114 3,632 5,629 3,160 6, ,067 8,181 1,688 7,317 3,418 4,096 3, % EQUITY CAPITAL TOTAL LIABILITIES DEBT EQUITY CAPITAL + DEBT EQUITY CAPITAL AND TOTAL LIABILITIES (MILLIONS OF DOLLARS) DEBT / EQUITY CAPITAL + DEBT (MILLIONS OF DOLLARS) 130 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 131

68 ,000 3,000 2,665 3,418 4,096 2,998 3,801 2, ,000 1,000 2,067 1,688 1,760 1,162 2,256 1,098 1, EBITDA PER SHARE (DOLLARS) 0-1, Total Debt Cash and Banks Net Debt Net Debt (millions of dollars) CASH FLOW PER SHARE (DOLLARS) 132 GRUPO MÉXICO ANNUAL REPORT New Caterpillar Equipment, Buenavista del Cobre. ANNUAL REPORT GRUPO MÉXICO 133

69 BOARD OF DIRECTORS Grupo México Southern Copper Corporation Members of the Board of Directors Germán Larrea Mota Velasco Chairman Executive Officers Germán Larrea Mota Velasco Chairman Genaro Larrea Mota Velasco Vice-Chairman Executive Officers Emilio Carrillo Gamboa Alfredo Casar Pérez Xavier García de Quevedo Topete Oscar González Rocha Daniel Muñiz Quintanilla Luis Castelazo Morales Enrique Castillo Sánchez Mejorada Oscar González Rocha Executive President Xavier García de Quevedo Executive President Genaro Guerrero Díaz-Mercado Chief Financial Officer Remigio Martínez Muller Vice-President, Explorations Emilio Carrillo Gamboa Alfredo Casar Pérez Valentín Diez Morodo Xavier García de Quevedo Oscar González Rocha Claudio X. González Prudencio López Martínez Juan Rebolledo Gout Vice-President, International Relations Daniel Muñiz Quintanilla Chief Financial and Administrative Officer Alberto de la Parra Zavala General Counsel Rafael Ríos García Chief Safety Officer Luis Miguel Palomino Bonilla Gilberto Perezalonso Cifuentes Juan Rebolledo Gout Carlos Ruiz Sacristán Alberto de la Parra Zavala Vidal Muhech Dip Vice-President, Projects Raúl Jacob Ruisánchez Comptroller José de los Heros U. Vice-President, Sales Antonio Madero Bracho Fernando Ruiz Sahagún Agustín Santamarina Asarco LLC, Inc. Executive Officers Rolando Vega Saenz Alberto de la Parra Zavala Secretary Oscar González Rocha Executive President Christian Lippert Helguera Alternate Secretary Manuel Ramos Rada Chief Operations Officer Oscar González Barrón Chief Financial Officer Alberto de la Parra Zavala Secretary to the Board Jorge Lazalde Psihas General Counsel 134 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 135

70 Ferrocarril Mexicano, S.A. de C.V. Members of the Board of Directors Germán Larrea Mota Velasco Chairman Executive Officers Alfredo Casar Pérez Jaime Corredor Esnaola Xavier García de Quevedo Topete Robert M. Knight Jr. Agustín Santamarina Vázquez James R. Young Rogelio Vélez López de la Cerda Albred Anthony Chacón Alfredo Casar Pérez Executive President Rogelio Vélez López de la Cerda Chief Executive Officer Lorenzo Reyes Retana Márquez Padilla Chief Operations Officer Terrence Mc. Dermott Vice-President, Sales Octavio Ornelas Esquinca Chief Financial and Administrative Officer Alberto de la Parra Zavala Alternate Secretary Christian Lippert Helguera Secretary Ferrosur, S.A. de C.V. Intermodal México, S.A. de C.V. México Proyectos y Desarrollos, S.A. de C.V. Alfredo Casar Pérez Executive President Rogelio Vélez López de la Cerda Chief Executive Officer Hilario Gabilondo Picollo Chief Executive Officer Xavier García de Quevedo Executive President Federico Schroeder Contreras Chief Executive Officer, Ingeniería y Construcción Julio Larrea Mena Chief Executive Officer, México Compañía Constructora Industrial Ricardo Arce Castellanos Chief Executive Officer, Perforadora México José Luis Berjón Chief Executive Officer, Consutec DESIGN: DESIGN CENTER TM 136 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 137

71 Grupo México, S. A. B. de C. V. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2011 and 2010 and Independent Auditors Report Dated March 30, 2012 Grupo México, S. A. B. de C. V. and Subsidiaries Independent Auditors Report and Consolidated Financial Statements for 2011 and 2010 Independent Auditors Report 02 Consolidated Balance Sheets 04 Consolidated Statements of Income 05 Consolidated Statements of Stockholders Equity 06 Consolidated Statements of Cash Flows 08 Notes to Consolidated Financial Statements 10 ANNUAL REPORT GRUPO MÉXICO 1

72 Independent Auditors Report to the Board of Directors and Stockholders of Grupo México, S. A. B. de C. V. and Subsidiaries We have audited the accompanying consolidated balance sheets of Grupo México, S. A. B. de C. V. and subsidiaries (the Company ) as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Grupo México, S. A. B. de C. V. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations, stockholders equity and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Galaz, Yamazaki, Ruiz Urquiza, S. C. Member of Deloitte Touche Tohmatsu Limited C. P. C. Luis Javier Fernández Barragán March 30, GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 3

73 Grupo México, S. A. B. de C. V. and Subsidiaries Consolidated Balance Sheets As of December 31, 2011 and 2010 (In thousands of U.S. dollars) Grupo México, S. A. B. de C. V. and Subsidiaries Consolidated Statements of Income For the years ended December 31, 2011 and 2010 (In thousands of U.S. dollars, except for income per share amounts) Assets Current assets: Cash and cash equivalents $ 2,229,281 $ 2,999,623 Restricted cash 190, ,483 Short-term investments 523,572 80,496 Trade accounts receivables 963, ,507 Other accounts receivable 294, ,693 Inventories Net 1,092, ,253 Prepaid expenses and other 94,531 19,138 Deferred income tax 332, ,514 Total current assets 5,720,776 5,931,707 Restricted cash 36,344 38,010 Property, plant and equipment Net 7,642,150 6,920,125 Concession titles Net 219,666 79,806 Investments in shares of associated companies, other unconsolidated subsidiaries and other investments 663, ,845 Leachable material Net 167,953 65,222 Other intangible assets Net 224, ,446 Deferred income tax 1,056, ,740 Other assets 169, ,653 Total assets $ 15,901,204 $ 15,137,554 Liabilities and Stockholders Equity Current liabilities: Bank loan and current portion of long-term debt $ 286,874 $ 262,002 Accounts payable and accrued liabilities 841, ,254 Due to related parties 8, ,488 Income tax payable 191, ,854 Employees statutory profit sharing 262, ,622 Derivative financial instruments 15, ,004 Total current liabilities 1,605,643 2,035,224 Long-term debt 3,514,545 3,695,195 Labor liabilities 527, ,855 Deferred income tax 945, ,063 Non current tax payable 229, ,932 Other liabilities and reserves 339, ,519 Total liabilities 7,162,497 7,649, Income: Net sales $ 8,654,639 $ 6,803,190 Service revenue 1,718,429 1,279,852 10,373,068 8,083,042 Costs and operating expenses: Cost of sales (exclusive of depreciation, amortization and depletion) 5,023,556 4,017,172 Administrative expenses 172, ,155 Depreciation, amortization and depletion 500, ,473 Exploration 38,386 38,240 5,735,374 4,788,040 Income from operations 4,637,694 3,295,002 Interest expense 358, ,939 Capitalized interest (5,851) (7,462) Interest income (28,975) (109,789) Foreign exchange (income) loss (18,413) 33,688 Loss on derivative instruments 1,509 2, , ,262 Income before income taxes 4,330,428 3,065,740 Income taxes 1,302,094 1,030,892 Equity in the results of associated companies and other unconsolidated subsidiaries 11,127 27,453 Consolidated net income 3,039,461 2,062,301 Less: net income attributable to noncontrolling interest (567,798) (451,786) Net income attributable to Grupo México, S. A. B. de C. V. $ 2,471,663 $ 1,610,515 Net earnings - basic and diluted income per share. $ 0.32 $ 0.21 Dividends paid $ 0.13 $ 0.06 Weighted average shares outstanding ( 000) 7,785,000 7,785,000 Stockholders equity: Stockholders equity of Grupo México, S. A. B. de C. V. Common stock (shares authorized and issued: 2011 and 2010, 7,785,000,000, respectively) 2,003,496 2,003,496 Reserve for shares purchase 243, ,306 Additional paid-in capital 9,043 9,043 Treasury stock (547,518) (344,646) Accumulated other comprehensive loss (233,002) (291,955) Retained earnings 5,782,353 4,347,524 Stockholders equity of Grupo México, S. A. B. de C. V. 7,257,678 5,966,768 Noncontrolling interest 1,481,029 1,520,998 Total stockholders equity 8,738,707 7,487,766 Total liabilities and stockholders equity $ 15,901,204 $ 15,137,554 See the accompanying notes to these consolidated financial statements. See the accompanying notes to these consolidated financial statements. 4 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 5

74 Grupo México, S. A. B. de C. V. and Subsidiaries Consolidated Statements of Stockholders Equity For the years ended December 31, 2011 and 2010 (In thousands of U.S. dollars) Accumulated Stockholders Outstanding Reserve Additional other equity of Grupo shares Common for shares paid-in Treasury comprehensive Retained Mexico, SAB Non controlling in thousands stock purchase capital stock loss earnings de CV interest Total Balances as of December 31, 2009 $ 7,785,000 $ 2,003,496 $ 369,050 $ 9,043 $ (346,049) $ (127,862) $ 3,180,909 $ 5,088,587 $ 1,485,035 $ 6,573,622 Treasury stock - - (125,744) , Dividends paid (453,560) (453,560) (311,600) (765,160) Acquisition of non controlling interest (116,084) (116,084) (75,914) (191,998) Decrease in treasury stock , ,403-1,403 Comprehensive result: Consolidated net income ,610,515 1,610, ,786 2,062,301 Unrealized loss on hedge derivative instruments net of income tax of $71, (206,491) - (206,491) (25,107) (231,598) Cumulative translation adjustment ,398-42,398 (3,202) 39, (164,093) 1,610,515 1,446, ,477 1,869,899 Balances as of December 31, ,785,000 2,003, ,306 9,043 (344,646) (291,955) 4,347,524 5,966,768 1,520,998 7,487,766 Repurchase of shares (20,000) (3,270) (44,751) - (9,385) - - (57,406) - (57,406) Dividends paid - (988,813) (988,813) (476,905) (1,465,718) Dividends paid in shares 20,000 3,270 44, (48,021) Increase treasury stock (193,487) - - (193,487) - (193,487) Comprehensive result: Consolidated net income ,471,663 2,471, ,798 3,039,461 Unrealized gain on hedge derivative instruments net of income tax of $67, , ,428 25, ,452 Cumulative translation adjustment (237,475) - (237,475) (155,886) (393,361) ,953 2,471,663 2,530, ,822 2,967,552 Balances as of December 31, 2011 $ 7,785,000 $ 2,003,496 $ 243,306 $ 9,043 $ (547,518) $ (233,002) $ 5,782,353 $ 7,257,678 $ 1,481,029 $ 8,738,707 See the accompanying notes to these consolidated financial statements. 6 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 7

75 Grupo México, S. A. B. de C. V. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2011 and 2010 (In thousands of U. S. dollars) Operating: Consolidated net income $ 3,039,461 $ 2,062,301 Charges (credits) not requiring (providing) resources: Seniority premiums and compensation for retirement (7,214) (11,661) Equity in the results of associated companies and other unconsolidated subsidiaries (11,127) (27,453) Depreciation, amortization and depletion 500, ,473 (Gain) loss cumulative translation adjustment (70,253) 54,194 Deferred income tax and employees statutory profit sharing 37,519 98,494 (Gain) loss on sale of property (878) 2,372 Other (16,147) 5,092 3,471,849 2,666,812 Changes in operating assets and liabilities: Accounts receivable 5,373 (338,983) Inventories (204,941) (85,932) Accounts payable, accrued liabilities and other liabilities (336,799) 1,013,850 Net cash provided by operations (536,367) 588,935 Investing: Additions to property and equipment (1,216,763) (603,629) Other investment acquisitions (163,347) (343,948) Sale of property 12,575 8,671 Restricted cash 20,005 (14,132) Sale of marketable securities (443,076) (124,704) Net cash used in investing activities (1,790,606) (1,077,742) Financing: Proceeds from notes payable 191,682 1,500,148 Debt repaid (350,916) (1,026,696) Dividends paid to controlling and noncontrolling stockholders (1,465,718) (765,160) (Increase) decrease in treasury stock (308,432) 1,403 Net cash used in financing activities (1,933,384) (290,305) (Decrease) increase in cash and cash equivalents (788,508) 1,887,700 Effect of exchange rate changes on cash and cash equivalents 18,166 (50,041) (770,342) 1,837,659 Cash and cash equivalents at beginning of year 2,999,623 1,161,964 Cash and cash equivalents at end of year $ 2,229,281 $ 2,999,623 RSupplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 286,288 $ 394,112 Income taxes $ 1,219,405 $ 676,314 Employees statutory profit sharing $ 249,046 $ 158,270 Non cash Ferrosur consolidation disclosure Net Ferrosur equity $ 327,256 $ - See the accompanying notes to these consolidated financial statements. 8 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 9

76 Grupo México, S. A. B. de C. V. and Subsidiaries Notes to Consolidated Financial Statements For the years ended December 31, 2011 and 2010 (In millions of U.S. dollars) 1. Nature of business, basis of presentation and foreign currency financial statements Nature of business - The operating companies that comprise Grupo México, S. A. B. de C. V. and subsidiaries (collectively the Company or GMEXICO) are in the metallurgical mining, freight railway and infraestructure services industries. They engage in the exploration, mining and processing of metallic and nonmetallic minerals, the mining of coal, provide multi-use and freight railway services and provide infraestructure services. The Company s mining operations are contained through its wholly owned subsidiary Americas Mining Corporation ( AMC ), which in turn is parent company of Southern Copper Corporation ( SCC ) and Asarco Inc. ( Asarco ). SCC and subsidiaries comprise an integrated producer of copper and other minerals, which operates mining, smelting and refining facilities in Peru and Mexico. SCC and subsidiaries conduct their Peruvian operations through a registered branch ( the Branch ). The Branch is not a corporation separate from SCC. The Company s Mexican operations are conducted through Minera México, S. A. de C. V. and subsidiaries ( MM ). The Branch produces copper and other minerals through the operation of two mining facilities, a smelting facility, a solvent extraction/electro winning (SX/EW) facility and a refining facility, all located in southern Peru. MM and its subsidiaries produce copper in Mexico through the operation of two major open-pit mines, three solvent extraction/electro winning (SX-EW) facilities, two smelting facilities and a refining facility, one precious metals refining facility and one copper wire facility. MM s operations also include five underground mining facilities producing lead, zinc and copper concentrates, a zinc refining facility, a coal mine and a coke plant. with guidance set forth in Accounting Standards Codification ( ASC ) Topic 805, Business Combinations, it is necessary to have the Federal Antitrust Commission s final authorization before the Company can consolidate Ferrosur. On November 8, 2006, the Federal Antitrust Commission denied the acquisition of Ferrosur by ITF. As a result, ITM and ITF initiated a legal proceeding to revoke the above mentioned ruled proposed by the Federal Tax and Administrative Justice Court. Because of the aforementioned circumstances and as long as the said authorization remains pending, until march 31, 2011 the investments in Ferrosur was accounted for using the equity method in GMEXICO s consolidated financial statements. Beginning April, 2011 the Company consolidated the Ferrosur financial statements due to the authorization granted by the First Collegiate Circuit Court in Administrative Matters. See more comments in Note 8. ITM, through its wholly owned subsidiary, GFM, was formed to participate in the privatization of the Mexican Railway System. The main subsidiary of GFM is Ferromex, which is engaged in providing freight and multi-modal railroad services and related activities, including land transportation, storage and other complementary railroad transportation services. The Mexican Federal Government granted Ferromex a 50-year concession (exclusive for 30 years) to operate the branches known as North- Pacific and the Ojinaga-Topolobampo Short Line. The concession is renewable, subject to certain conditions, for a similar period. In addition, the Mexican Federal Government also sold certain fixed assets and the materials necessary to operate Ferromex, plus 25% of the shares of Ferrocarril y Terminal del Valle de México, S. A. de C. V. ( FTVM ), the entity responsible for operating the México City Terminal. In August 1999, Ferromex obtained the rights to operate the Nogales -Nacozari Short Line concession for 30 years, renewable for a period not exceeding 50 years, beginning on September 1, GFM accounts for this 25% investment in FTVM under the equity method. In addition, ITM through its subsidiary Ferrosur operates the Southeast Railroad track concession granted by the government. Asarco produces copper through its operation of three major open-pit mines, two smelting facilities, one of which is currently on standby, two solvent extraction/electro winning (SX-EW) facilities and a refining facility. Operations in the United States of America ( U. S. ) also include a lead smelter facility. The operations under MM, ITM, GFM and Infraestructure and their respective subsidiaries are collectively referred to as the Mexican Operations. The operations under the Branch are collectively referred to as the Peruvian Operations. Asarco s operations are referred to as the American Operations. The Company s railway system operations are carried out by Infraestructura y Transportes México, S. A. de C. V. ( ITM ), in which GMEXICO owns 75%. The remaining 25% of ITM is owned by Sinca Inbursa, S. A. B. de C. V. and Grupo Carso, S. A. B. de C. V.. ITM owns 74% of Grupo Ferroviario Mexicano, S. A. de C. V. ( GFM ), which, owns a 100% of Ferrocarril Mexicano, S. A. de C. V. ( Ferromex ). The remaining 26% of GFM is owned by Union Pacific. The infraestructure sector operations are realized by Mexico Proyectos y Desarrollos, S. A. de C. V. ( MPD ), which owns 100% of the capital stock of Mexico Compañía Constructora, S. A. de C. V. ( MCC ) and Mexico Constructora Industrial, S. A. de C. V. ( MCI ), and by Compañía Perforadora México, S. A. P. I. de C. V. ( PEMSA ), in which on January 28, 2010, GMEXICO acquired the remaining 80% of PEMSA s capital stock. On November 24, 2005, the Company reported that ITM, through its recently incorporated subsidiary, Infraestructura y Transportes Ferroviarios, S. A. de C. V. ( ITF ), acquired 99.99% of the capital stock of Ferrosur, S. A. de C. V. ( Ferrosur ) from Sinca Inbursa, S. A. de C. V. ( Sinca ) and Grupo Condumex, S. A. de C. V. ( GCondumex ). In accordance Controladora de Infraestructura Petrolera México, S. A. de C. V. ( CIPM ) was incorporated in CIPM, the main purpose of the company will be promote, establish, organize, browse, purchase and take equity or equity of all kinds of companies or civil associations or companies. 10 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 11

77 PEMSA s main operation is oil well drilling and providing related integral maintenance services. To date, PEMSA has provided services to Pemex for more than 50 years, and owns land and sea drilling platforms. Additional services provided by PEMSA include cementation engineering, directional drilling. PEMSA also participates in drilling water wells for mining industry companies in Mexico. This investment is part of GMEXICO s strategy to increase its participation in the infraestructure industry and expand its catalog in engineering and construction services. MCI and MCC provide direct or indirect construction and engineering services for public and private infraestructure projects, including hydroelectric and storage dams, highways, thermoelectric plants, railroad projects, mining projects, manufacturing plants, petrochemical plants and housing projects. Significant Events - b. Consolidation principles - The accompanying financial statements include the consolidation of the financial statements of GMEXICO (as parent and holding company) and those of its subsidiaries, over which the Company exercises control. These consolidated financial statements were prepared under accounting principles generally accepted in the United States of America ( U. S. GAAP ). The Company s direct consolidated subsidiaries are shown below: Company Ownership Ownership Activity Percentage Percentage i. SCC share exchange - On July 22, 2010, SCC received a non-binding proposal from AMC, offering to effect a share Americas Mining Corporation (AMC) 100% 100% Exploration and extraction of minerals exchange in which all stockholders of SCC would receive common shares of AMC in exchange for each share of SCC. Under this proposal, AMC stock would be registered and listed on the New York, Mexico and the Lima Stock Exchanges. Once the listing and registration of the Company shares are completed, SCC s shares would be delisted from the exchanges. In October 2011, AMC announced, in light of discussions with a committee of is independent directors, that it had withdrawn the proposed transaction to combine AMC and SCC. Infraestructura y Transportes Mexico, S. A. Freight and multimodal railway de C. V. (ITM) 74.9% 74.9% services Compañía Perforadora Mexico, Drilling and maintenance of oil wells S. A. P. I. de C. V. (PEMSA) 100% 100% As a result of the repurchase of shares of SCC s common stock Grupo Mexico s direct and indirect ownership was 80% as of December 31,2010 and increased to 80.9% at December 31, México Proyectos y Desarrollos, S. A. Public and private infraestructure and de C. V. (MPD) 100% 100% construction AMC and several directors of SCC are named defendants in the Lemon Bay litigation disclosed in Class actions in note 23 Contingencies. SCC has also been named as a nominal defendant. All defendants have appealed the judgment issued on December 29, Grupo México Servicios, S. A. de C. V. Administrative and personnel services (GMS) 100% 100% ii. Acquisition of PEMSA - In February 2010, the Company acquired from the principal shareholder of GMEXICO the remaining 80% of the equity at $192 subsequent to the respective approval obtained from the authorities. The acquisition of the noncontrolling interest in 2010 resulted in a deficit of $116 which was recorded in retained earnings. Controladora de Infraestructura Petrolera México, S. A. de C. V. (CIPM) * 100% - Public and private infraestructure and construction (*) CIPM was incorporated on December 13, No operations were performed as of December 31, Basis of presentation: All significant intercompany transactions and balances have been eliminated in consolidation. a. Comparability - As mentioned in Note 1, the Ferrosur acquisition was approved in April As of the approval date, the acquired subsidiary financial statements are consolidated in GMEXICO financial statements. Consequently, the consolidated statements of income of 2010 and the first quarter of 2011 do not include Ferrosur s results while from April through December 2011 such results are included. This situation affects the comparability of the 2011 and 2010 consolidated statements of income. The permanent investments in the entities in which control is held are consolidated in these financial statements because they grant the power to govern the entity s financial and operational policies. The investments over which the Company does not have significant control are recognized by the equity method. 12 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 13

78 c. Foreign currency financial statements - In accordance with local laws, the Peruvian branch keeps its accounting books in Peruvian nuevos soles; and MM and ITM and infraestructure division in Mexican pesos. In the mining division, the functional currency is the U. S. dollar, therefore, foreign currency assets and liabilities are remeasured into U. S. dollars at current exchange rates except for non-monetary items such as inventory, property, plant and equipment, intangible assets, other assets and stockholders equity which are remeasured at historical exchange rates. Revenues and expenses are generally translated at actual exchange rates in effect during the period, except for those items related to balance sheet amounts that are remeasured at historical exchange rates. Gains and losses from foreign currency remeasurement are included in earnings of the period. The gains and (losses) resulting from foreign currency transactions are included in Cost of sales (exclusive of depreciation, amortization and depletion). The functional currency of ITM, ITF and construction companies is the Mexican peso. Therefore, these entities use the current rate translation method to translate its financial statements in to U. S. dollars. The current rate method requires the translation of all assets and liabilities using the year-end exchange rate and the capital stock continues to be translated at historical exchange rates. The components of the statements of operations, including foreign exchange gains and losses recorded in Mexican pesos as a result of fluctuations in the rate of exchange between the Mexican pesos and the U. S. dollars, are translated at the average exchange rate for the period. The effect of the exchange rate on the translation is reflected as a component of accumulated other comprehensive loss within stockholders equity. The gains and (losses) from foreign currency transactions are shown in the consolidated statements of income. The consolidated financial statements should not be construed as representations that Mexican pesos had been, could have been or may be converted in the future into U. S. dollars at such rates or any other rates. Relevant exchange rates used in the preparation of these consolidated financial statements were as follows: d. Use of estimates - The preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: ore reserves that are the basis for future cash flow estimates and amortization calculations; environmental, reclamation, closure and retirement obligations; estimates of recoverable copper in mill and leach stockpiles; asset impairments (including estimates of future cash flows); bad debts; inventory obsolescence; deferred and current income tax; valuation allowances for deferred tax assets; reserves for contingencies and litigation; and fair value of financial instruments. The Company bases its estimates on the historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. e. Reclassifications - Certain amounts in the consolidated financial statements as of and for the year ended December 31, 2010 have been reclassified in order to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, Such reclassifications applied to correct departures from U. S. GAAP are immaterial. 3. Significant accounting policies: A summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements follows: a. Revenue recognition - Substantially all of the Company s copper is sold under annual or other longer-term contracts. Revenue is recognized when title passes to the customer. The passing of title is based on terms of the contract, generally upon shipment. Copper revenue is determined based on the monthly average of prevailing commodity prices according to the terms of the contracts. The Company provides allowances for doubtful accounts based upon historical bad debt, claims experience and periodic evaluation of specific customer accounts Mexican pesos (Ps) per one U. S. dollar: Current exchange rate at December 31 Ps Ps Weighted average exchange rate for the year ended Ps Ps Peruvian nuevos soles (Pns) per one U. S. dollar: Current exchange rate at December 31 Pns Pns Weighted average exchange rate for the year ended Pns Pns For certain of the Company s sales of copper and molybdenum products, customer contracts allow for pricing based on a month subsequent to shipping, in most cases within the following three months and occasionally in some cases a few additional months. In such cases, revenue is recorded at a provisional price at the time of shipment. The provisionally priced copper sales are adjusted to reflect forward in the London Metal Exchange ( LME ) or in the Commodities Exchange in New York ( COMEX ) copper prices at the end of each month until a final adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract. In the case of molybdenum sales, for which there are no published forward prices, the provisionally priced sales are adjusted to reflect the market prices at the end of each month until a final adjustment is made to the price of the shipments upon settlement with customers pursuant to the terms of the contract. 14 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 15

79 These provisional pricing arrangements are accounted for separately from the contract as an embedded derivative instrument under ASC Derivatives and Hedging embedded derivatives (in prior literature SFAS 133 Accounting for Derivative Instruments and Hedging Activities ). The Company sells copper in concentrate, rod, anode, cathode, blister and refined form at industry standard commercial terms. Net sales include the invoiced value and corresponding fair value adjustment of the related forward contract of copper, zinc, silver, molybdenum, acid and other metals. ITM and subsidiaries recognize revenue as transportation services in the period services are rendered as the shipment moves from origin. PEMSA, MCC and MCI recognize revenues based on the percentage of completion method, in which revenue is recognized according to the cumulative costs incurred as a percentage of total estimated costs required to finish the project. If the most recent cost estimate exceeds the total revenue contracted, a loss is recorded to income of the period b. Shipping and handling fees and costs - Amounts billed to customers for shipping and handling, are classified as sales. Amounts incurred for shipping and handling are included in cost of sales (exclusive of depreciation, amortization and depletion). c. Cash and cash equivalents - Cash and cash equivalents consist mainly of bank deposits in checking accounts and short-term investments with maturities less than three months. Cash is stated at nominal value and cash equivalents are valued at fair value d. Restricted cash - Consists of cash in the custody of Asarco and AMC for which the use in whole or in part is restricted for specific purposes pursuant to binding agreements. The restricted cash, including both current and longterm balances at December, 31, 2011 and 2010, were $226.8 and $248.5, respectively. The carrying value of these investments approximates fair value and is classified as Level 1 inputs in the fair value hierarchy. f. Inventories - Metal inventories, consisting of work- in-process and finished goods, are carried at the lower of average cost or market. Costs incurred in the production of metal inventories exclude general and administrative costs. Work-in-process inventories represent materials that are in the process of being converted into a saleable product. Conversion processes vary depending on the nature of the copper ore and the specific mining operation. For sulfide ores, processing includes milling and concentrating and results in the production of copper and molybdenum concentrates. Molybdenum in-process inventory includes the cost of molybdenum concentrates and the costs incurred to convert those concentrates into various high-purity molybdenum chemicals or metallurgical products. Finished goods include saleable products (e.g., copper concentrates, copper anodes, blister copper, copper cathodes, copper rod, molybdenum concentrates and other metallurgical products). Supplies inventories are carried at average cost less a reserve for obsolescence. Inventories consist primarily of rails, railroad ties and other materials for maintenance of property and equipment, as well as diesel fuel used in providing railroad services. Inventories are stated at the lower of cost or realizable value, using average cost method. Also, the cost of sales is recognized at historical cost of the purchased inventories during 2011 and Values thus determined do not exceed their market value. The allowance for obsolete inventory is considered sufficient to absorb losses on these concepts, which is determined according to studies by the administration of ITM. g. Property, plant and equipment - Property, plant, mining, railway and drilling equipment are recorded at acquisition cost, net of accumulated depreciation and amortization. Cost includes major expenditures for improvements and replacements, which extend the useful lives or increase capacity and interest costs associated with significant capital additions. Maintenance, repairs, normal development costs at existing mines and gains or losses on assets retired or sold are reflected in earnings as incurred. e. Short-term investments - The Company accounts for short-term investments in accordance with ASC Investments Debt and Equity Securities Recognition (in prior literature SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). The Company determines the appropriate classification of all short-term investments as held-to-maturity, available-for-sale or trading at the time of purchase and re-evaluates such classifications as of each balance sheet date. Unrealized gains and losses on available-for-sale investments, net of taxes, are reported as a component of accumulated other comprehensive income (loss) in stockholders equity, unless such income (loss) is deemed to be other than temporary. At the end of 2011 and 2010, the Company does not hold any held-to-maturity investments. Buildings and equipment are depreciated on the straight-line method over their estimated lives ranging from 5 to 40 years or the estimated life of the mine if shorter. The Mexican railway operation uses the straight-line method based on the estimated useful lives of the assets ranging from 4 to 50 years. h. Mine development - Mine development includes primarily the cost of acquiring land rights to an exploitable ore body, pre-production stripping costs at new mines that are commercially exploitable, costs associated with bringing new mi- 16 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 17

80 neral properties into production, and removal of overburden to prepare unique and identifiable areas outside the current mining area for such future production. Mine development costs are amortized on a unit of production basis over the remaining life of the mines. There is a diversity of practices in the mining industry in the treatment of drilling and other related costs to delineate new ore reserves. The Company follows the practices delineated in the next two paragraphs in its treatment of drilling and related costs. Drilling and other associated costs incurred in the Company s efforts to delineate new resources, whether near-mine or Greenfield are expensed as incurred. These costs are classified as mineral exploration costs. Once the Company determines through feasibility studies that proven and probable reserves exist and that the drilling and other associated costs embody a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflow, then the costs are classified as mine development costs. These mine development costs incurred prospectively to develop the property are capitalized as incurred, until the commencement of production, and are amortized using the units of production method over estimated life of the ore body. During the production stage, drilling and other related costs incurred to maintain production are included in production cost in the period in which they are incurred. Drilling and other related costs incurred in the Company s efforts to delineate a major expansion of reserves at an existing production property are expensed as incurred. Once the Company determines through feasibility studies that proven and probable incremental reserves exist and that the drilling and other associated costs embody a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflow, then the costs are classified as mine development costs. These incremental mine development costs are capitalized as incurred, until the commencement of production and amortized using the units of production method over the estimated life of the ore body. A major expansion of reserves is one that increases total reserves at a property by approximately 10%. For the years ended December 31, 2011 and 2010 the Company did not capitalize any drilling and related costs. The net balance of capitalized mine development costs at December 31, 2011 and 2010 were $39.8 and $42.1, respectively. i. Value Beyond Proven and Probable Ore Reserves - Included as a component of property on the consolidated balance sheets at December 31, 2011 and 2010, are values for ore bodies beyond proven and probable reserves ( VBPP ). VBPP is attributable to (i) mineralized material, which includes measured and indicated amounts that the Company believes could be brought into production with the modification of existing permits and should market conditions and technical assessments warrant, (ii) inferred mineral resources, and (iii) exploration potential. Mineralized material is a mineralized body that has been delineated by appropriately spaced drilling and/or underground sampling to support reported tonnage and average grade of minerals. Such a deposit does not qualify as proven and probable reserves until legal and economic feasibility are confirmed based upon a comprehensive evaluation of development costs, unit costs, grades, recoveries, and other material factors. Inferred mineral resources are those parts of a mineral resource for which the overall tonnages, grades, and mineral contents can be estimated with a reasonable level of confidence based on geological evidence and apparent geological and grade continuity after applying economic parameters. An inferred mineral resource has a lower level of confidence than that applying to an indicated mineral resource.exploration potential is the estimated value of potential mineral deposits that the Company has the legal right to access. Carrying amounts assigned to VBPP are not charged to expense until the asset becomes associated with additional proven and probable reserves and they are produced or the asset is determined to be impaired. Transfers from VBPP to provien reserves are recorded at the carrying value. Additions to proven and probable reserves for properties with VBPP will carry with them the value assigned to VBPP at the date the Company acquired Asarco. j. Capitalization of railway improvements and maintenance - Railway improvements and maintenance are capitalized in the caption Rails and structures, when the components of more than 20% of a track section are changed. The capitalized items are depreciated at an average rate between 3.3% and 6.6%. When maintenance or repairs do not require changing the components of more than 20% of one section of a track, the cost is expensed as incurred. k. Capitalization of overhauls - Regular maintenance and repair costs are expensed as incurred. The costs of a locomotive overhauls, which extend the useful life, are capitalized and amortized over a term ranging from 4 to 10 years, depending on the type of overhaul. l. Concession titles - Concessions titles are recorded at their adjudication cost. Amortization is calculated using the straight-line method, based on the remaining estimated useful life of the fixed assets under concession, which was an average of 30.3 years (as determined by independent experts), as of the date the concessions were granted. m. Asset retirement obligations (reclamation and remediation costs) - The fair value of a liability for asset retirement obligations is recognized in the period in which the liability is incurred. The liability is measured at fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying value of the related long-lived assets and depreciated over the asset s useful life. n. Intangible assets - Intangible assets include primarily the excess amount paid over the book value for investment shares of the Branch and mining and engineering development studies. Intangible assets are carried at its acquisition cost net of accumulated amortization and are amortized principally on a unit of production basis over the estimating remaining life of the mines. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. o. Debt issuance costs - Debt issuance costs, which are included in other assets, are amortized using the interest method over the term of the related debt. 18 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 19

81 p. Ore reserves - The Company periodically reevaluates estimates of its ore reserves, which represent the Company s estimate as to the amount of unmined copper remaining in its existing mine locations that can be produced and sold at a profit. Such estimates are based on engineering evaluations derived from samples of drill holes and other openings, combined with assumptions about copper market prices and production costs at each of the respective mines. The Company updates its estimate of ore reserves at the beginning of each year. In this calculation the Company uses current metal prices which are defined as the average metal price over the preceding three years. The current price per pound of copper, as defined, was $3.26 U. S. dollars and $2.97 U. S. dollars at the end of 2011 and 2010, respectively. The ore reserve estimates are used to determine the amortization of mine development and intangible assets. q, Leachable material and capitalized mine stripping - In prior years the Company capitalized the production cost of leachable material with low copper content at the Buenavista mine in Mexico, Ray and Silver Bell in US. In 2011, the Company extended this practice of recognizing inventories for costs associated with leaching activities at the La Caridad mine in Mexico and the Toquepala mine in Peru in order to conform to evolving mine production plans at these mines. As a result of changing market conditions and mining processes, mineral extraction through leaching has become integral to the mining operations carried out at our mines. The Company has also completed engineering studies at these mines, which the Company believes adequately support its estimate of recoverable mineral content contained in the leach dumps. Accordingly, the process and sale of mineral content in leaching dumps is reasonably assured and the costs associated with leaching activities at such mines are now recognized as inventories. As the production cycle of the leaching process is significantly longer than the conventional process of concentrating, smelting and electrolytic refining, the Company includes on its balance sheet, current leach inventory (included in work-in-process inventories) and long-term leach inventory. The cost attributed to the leach material is charged to cost of sales generally over a five-year period (the average estimated recovery period based on the historical recovery percentages of each mine). r. Exploration - Tangible and intangible costs incurred in the search for mineral properties are charged against earnings when incurred. s. Income taxes - Provisions for income tax are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in each jurisdiction in which the deferred tax assets and liabilities are expected to be realized and settled as prescribed in ASC Topic 740 Income Taxes. As changes in tax laws or rates are enacted in each jurisdiction, deferred tax assets and liabilities are adjusted in income in the period that the change is enacted. Deferred income tax assets are reduced by a valuation allowance to the amount of benefits that, in the Company s opinion, are more likely than not to be realized. The Company classifies income tax-related interest and penalties as income taxes in the consolidated financial statements. The Company s operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the U. S. and other tax jurisdictions based on the estimate of whether, and the extent to which, additional taxes will be due. The Company follows the guidance of ASC 740 Income tax (FIN 48 Uncertain tax positions in prior literature) to record these liabilities. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company s current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. t. Derivative financial instruments - The Company utilizes certain types of derivative financial instruments to enhance its ability to manage risks that exist as part of its ongoing business operations and to enhance its return on Company s assets. Derivative contracts are reflected as assets or liabilities in the consolidated balance sheet at their fair value. The estimated fair value of the derivatives is based on market and/or dealer quotations and in certain cases valuation modeling. From time to time, the Company has entered into copper swap contracts to protect a fixed copper price for portions of its metal sales, hedging contracts to fix power prices for a portion of its production costs, interest rate swap agreements to hedge the interest rate risk exposure on certain of its bank obligations with variable interest rates, currency swap arrangements to ensure Mexican peso/u. S. dollar conversion rates. Gains and losses related to copper and zinc hedges are included in net sales, gain and losses related to power costs are included in cost of sales, all other gains and losses on derivative contracts are included in Gain (loss) on derivative instruments in the consolidated statement of income. The Company assesses the effectiveness of the derivative contracts periodically using either regression analysis or the dollar offset approach, both retrospectively and prospectively, to determine whether the hedging instruments have been highly effective in offsetting changes in fair value of the hedged items. The hedge derivative positions meet the 80%-125% of effectiveness required. For hedging relationships in which the Company applies the critical-terms-match method, the Company performs periodic quantitative assessments to confirm that the relationship was highly effective and that the ineffectiveness is de minimis. 20 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 21

82 The Company does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation or if it anticipates a future activity that is likely to occur and will result in exposure to market risks and the Company intends to offset or mitigate such risks. The Company does not enter into any derivative financial instruments for speculative purposes. The Company s derivatives programs include strategies that both qualify and do not qualify for hedge accounting treatment under the Codification topic for Derivatives and Hedging. Unrealized gains (losses) on cash flow derivatives that meet the requirements of hedge accounting are included in other comprehensive income in the consolidated balance sheet until settlement. u. Asset impairments - The Company evaluates its long-term mining, railway and drilling assets when events or changes in economic circumstances indicate that the carrying amount of such assets may not be recoverable. These evaluations in case of mining segment are based on business plans that are prepared using a time horizon that is reflective of the Company s expectations of metal prices over its business cycle. The Company is currently using a long-term average copper price of $3.00 dollars per pound of copper and an average molybdenum price of $14.74 dollars per pound, reflective of the current price environment, for the impairment tests. The results of its impairment tests using these long-term copper and molybdenum prices show no impairment in the carrying value of their assets. by the Company in entities over which it has no control that are accounted for using the cost method, joint control, or significant influence, are initially recorded at acquisition cost and adjusted to its fair value if such investments have readily determinable fair values. w. Other comprehensive income - Comprehensive income represents changes in equity during a period, except those resulting from investments by owners and distributions to owners. During the fiscal years ended December 31, 2011 and 2010, the components of other comprehensive loss were the unrealized gain (loss) on cash flow hedge derivative instruments, the unrecognized gain (loss) on employee benefit obligations, the unrealized gain on equity securities and cumulative translation adjustment (CTA). Unrecognized pension Unrealized loss on Accumulated other costs and CTA derivative instruments comprehensive loss Balance, January 1, 2010 $ (127.8) $ - $ (127.8) Change during period 42.4 (206.5) (164.1) In recent years the Company s assumptions for long-term average prices resulted in stricter evaluations for impairment analysis than would the higher three year average prices for copper and molybdenum. Should this situation reverse in the future with three year average prices below the long-term price assumption, the Company would assess the need to use the three year average prices in its evaluations. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life to measure whether the assets are recoverable and measures any impairment by reference to fair value. Balance, December 31, 2010 (85.4) (206.5) (291.9) Change during period (237.5) Balance, December 31, 2011 $ (322.9) $ 89.9 $ (233.0) Related to the Tia Maria project and based on the current developments of the project the Company has performed an impairment analysis of the project assets and has concluded that no impairment exists as of December 31, x. Adoption of new accounting principle - During 2011 the Company adopted the following Accounting Standards Updates ( ASU ) and ASC s issued by the Financial Accounting Standard Board ( FASB ). v. Investment in shares of associated companies, non-consolidated subsidiaries and other investments- Investments in shares of associated companies are valued according to the equity method. Under this method, the acquisition costs are initially recognized based on the net fair value of the entities identifiable assets and liabilities as of the date of acquisition. Such value is subsequently adjusted for the portion related both to comprehensive income (loss) of the associated company and the distribution of earnings or capital reimbursements thereof. The equity in income of associates and non-consolidated subsidiaries is included in earnings. Comprehensive income attributable to associates and non-consolidated subsidiaries is included in other presented comprehensive income. Permanent investments made ASU : In June 2011, the FASB issued ASU Presentation of Comprehensive Income an amendment of ASC topic 220 Comprehensive Income to provide new guidance for the reporting of comprehensive income. Under this ASU, to increase the prominence of items reported in other comprehensive income which shall be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The first statement should present total net income and its components followed by a second statement that should present total other comprehensive income, its components and the total of comprehensive income. This ASU also eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders equity. The 22 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 23

83 ASU is effective for fiscal years, and interim periods, beginning after December 15, 2011 with early adoption permitted. The Company will adopt this ASU in ASU No : In January 2010, the FASB issued ASU No Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, an update of ASC Subtopic Fair Value Measurements and Disclosures - Overall. 4. Short-term investment The balance of short-term investments was as follows: With the adoption of this ASU in 2011, the Company has expanded its financial instruments disclosures to include those related to purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. ASU No : On December 16, 2011, the FASB issued ASU No Disclosures about Offsetting Assets and Liabilities an amendment of ASC topic 210 Balance Sheet. The objective of this ASU is to improve disclosures about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U. S. GAAP and those entities that prepare their financial statements on the basis of IFRS. Trading securities $ $ 66.9 Weighted average interest rate 1.37% 1.14% Available for sale $ 8.9 $ 13.6 Weighted average interest rate 0.58% 1.01% Total $ $ 80.5 Trading securities: Consist of bonds issued by public companies. Each financial instrument is independent of the others. The Company has the intention to sell these bonds in the short-term. Available-for-sale investments consist of securities issued by public companies. Each security is independent of the others and, as of December 31, 2011, included corporate bonds and asset and mortgage backed obligations. As of December 31, 2011 and 2010, gross unrealized gains and losses on available-for-sale securities were not material. This ASU is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Related to these investments the Company earned interest, which was recorded as interest income in the consolidated statement of earnings. Also the Company redeemed some of these securities and recognized gains (losses) due to changes in fair value, which were recorded as other income (expense) in the statement of income. ASU : In connection with ASU , on December 23, 2011, the FASB issued ASU Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No an amendment of ASC topic 220 Comprehensive Income to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering this matter, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU The ASU is effective for fiscal years, and interim periods, beginning after December 15, As of December 31, contractual maturities of debt securities classified as available-for-sale are as follows: One year or less $ 2.1 $ 76.1 Maturing after one year through five years Maturing after five years through ten years Due after ten years Total debt securities $ 8.9 $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 25

84 The following table summarized the activity of these investments: As of December 31, 2011 and 2010, work in-process includes $92.0 and $84.4, of leaching costs capitalized As of December, 31, 2011 total leaching costs capitalized as long-term inventory of leacheable material amanted to $ Leacheable material recognized as cost of sales amounted to $153.5 and $150.5 in 2011 and 2010, respectively. Trading: Interest earned $ 6.0 $ 2.6 Unrealized loss Property, plant and equipment Available for sale Interest earned $ 0.1 $ 0.2 Investment redeemed Inventories Metals and minerals: Finished goods $ $ Work-in-process Materials and Supplies Inventories - Net $ 1,092.5 $ Inventory, long-term: Leachable material Long-term $ $ Buildings and equipment $ 7,906.3 $ 7,696.6 Locomotives and freight cars Rails and structures Train yards and terminals Value beyond proven and probable reserves Other railway equipment Rig , ,618.7 Less - Accumulated depreciation, amortization and depletion (5,138.6) (4,661.6) 5, ,957.1 Land, other than mineral 1, Construction in progress 1, Property, plant and equipment - Net $ 7,642.2 $ 6,920.2 Depreciation and depletiation expense for the years ended December 31, 2011 and 2010 amounted to $500.7 and $483.4, respectively. 26 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 27

85 7. Concession titles Concessions are comprised of the following: Equity in the results from the year ended Investment at December 31, December 31, North-Pacific railroad track $ $ Southeast railroad track Nogales-Nacozari short railroad track Ojinaga-Topolobampo short railroad track South-Oaxaca short railroad track Overhauls Accumulated amortization (99.3) (57.7) Concession titles - Net $ $ 79.8 Associated companies % Ferrosur 75 $ - $ $ - $ 24.0 FTVM TTX Company Minera Coimolache Other Investments $ $ $ 6.2 $ 27.4 In December 2007 Ferromex purchased 100 shares of TTX Company, the main activity of this company is to provide equipment to drive its partners, mainly Class I railroads of North America. Amortization charged to 2011 and 2010 income amounted to $8.7 and $4.4, respectively. During 2011, the Company purchased 44.24% of Minera Coimolache equity, the main activity of this company is the extraction and sales of ore principally in Peru. The value of the North-Pacific Railway concession title was determined by deducting the value of the tangible assets received from the price paid for the Ferromex shares, net of the liability arising from the capital lease of 24 locomotives that Ferrocarriles Nacionales de México ( FNM ) had entered into with Arrendadora Internacional, S. A. de C. V. (settled in 2001). Ferromex is entitled to use, and has the obligation to maintain in good condition, the rights of way, railroad tracks, buildings and maintenance facilities, title to those assets and facilities; however, lies with the Federal Mexican Government and all rights over those assets must be returned to the Federal Mexican Government upon termination of the concession term. 8. Investments in associated companies, other non-consolidated subsidiaries and other investments The acquisition of Ferrosur was accounted on November 24, 2005 using the purchase method, pursuant to the provisions of SFAS No. 141 Business combinations, issued by FASB. These provisions establish that when applying the purchase method, the cost of the acquired entity is compared to the assigned amounts (fair value) of assets acquired and liabilities assumed. The allocated fair values were determined by means of independent appraisals, public information on market prices and management s estimations. As a consequence of the application of this method, the Company recorded $57.8 excess in cost of the acquired entity over the net of the amounts allocated to assets acquired and liabilities assumed (goodwill). As mentioned in Note 1 the investment in Ferrosur was accounted for by the equity method due to the uncertainty about the result of the legal procedure in process from COFECO so the goodwill was presented in the balance sheet at December 31, 2010 as part of equity investments. Investments in associated companies and other non-consolidated subsidiaries The investments in associated companies and other non-consolidated subsidiaries were as follows: As of December 31, 2011 and 2010, Ferrosur is the only subsidiary of ITF and it is mainly engaged in providing freight multimodal railroad services and auxiliary services, as well as any activity that directly supports and is related to this purpose, including any other supplementary activities to railroad transportation services. 28 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 29

86 The Mexican Federal Government awarded Ferrosur a 50-year concession to operate the Southeast Railroad Track (exclusive for 30 years), renewable for a similar period, subject to certain conditions. The Mexican Federal Government also sold certain fixed assets and the materials necessary to operate the railroad, plus 25% of FTVM shares. In addition, in December 2005, Ferrosur obtained the rights to operate the Oaxaca-South short line concession for 30 years, renewable for a period not exceeding 50 years, beginning on December 1, Ferrosur has the right to use and the obligation to maintain in good conditions the trackage rights, railways, buildings and maintenance facilities, as well as the ferryboat terminal. Ownership of those assets and facilities is retained by the Mexican Federal Government and all of the rights over those assets will revert to the Mexican Federal Government at the end of the concessions. On March 25, 2011, the First Collegiate Circuit Court in Administrative Matters dismissed the reconsideration action filed by the COFECO against the judgment of the Federal Tax and Administrative Justice Court (TFJFA by its Spanish acronym) where approved Ferrosur concentration with ITM; therefore on April 1, 2011; the findings of fact and conclusions of this judgment were published. The High Court issued a ruling on April 4, 2011, acknowledging receipt of the judgment rendered by the First Collegiate Court. This matter is closed. The COFECO has not yet complied with the executory judgment; since it has not yet issued the certificate documenting that the concentration is not objected. Beginning April 2011 the Company decided to consolidate the Ferrosur financial statements. Revenues and earnings of Ferrosur since the date of consolidation in April 2011 were $231.3 and $28.1, respectively. The pro forma revenues and consolidated net income as though the consolidation of Ferrosur had occurred at the beginning of each respective period are as follows: 9. Other intangible assets Mining concessions $ $ Mine engineering and development studies Software Accumulated amortization (41.6) (39.5) Goodwill Intangible assets $ $ Amortization expense on intangible assets was $2.1 for the year ended December 31, 2011 and The estimated aggregate amortization expense for intangibles is $11.9 for the years 2012 through 2016 for an average expected annual expense of approximately $2.4 per year during this period. 10. Maintenance agreements Pro form revenue $ 10,488.9 $ 8,348.4 Consolidated net income 3, ,085.0 Ferromex has executed a maintenance and repairs agreements with Lámparas General Electric, S. de R. L. de C. V. ( Lamparas ), GE Transportation Systems México, S. A. de C. V. ( GETS ), Alstom Mexicana, S. A. de C. V. ( ALS- TOM ), and EMD Locomotive Company de México, S. A. de C. V. ( EMDL ) to provide repair and maintenance services, as well as the major repairs of some locomotives, as follows: Other investments Number of Terms of the agreement locomotives included Initial date Expiration date The Company s share in these investments, and their acquisition cost, are as follows: Company Share in 2011 Share in 2010 Acquisition cost 2011 Acquisition cost 2010 Grupo Aeroportuario del Pacífico S. A. B. de C. V % 15.90% $ $ Supplier: Lamparas 253 February 2006 February 2012 GETS 160 May 1999 December 2026 ALSTOM 50* February 2010 February 2015 EMDL 98 June 2006 June 2026 Total 561 (*) Minimum number of locomotives; the number can be increased depending on the needs of strength. 30 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 31

87 Ferromex is entitled to cancel some of the maintenance agreements, in which case, it would assume the respective cost of early termination. Regarding to the Lamparas agreement that will expire in February 2012, Ferromex is under renewal process, effective in March The GETS agreement for 160 locomotives includes two separate fleets (AC-4400 and ES-4400AC); the AC-4400 agreement, expiring in June 2024, provides that Ferromex cannot cancel the agreement until July 1, 2009 and a penalty would have to be paid ranging from $2.0 in 2009 to $0.13 in June As regards to the 100 ES-4400AC (EVO) locomotives, the agreement states that Ferromex shall only cancel it as of 2010 paying a penalty from $2.7 in the year 2010 to $0.17 in The ALSTOM agreement with expiration in February 2015 includes early termination, for which Ferromex would have to pay the inventory cost, as well as termination of labor contracts to Alstom staff AMC $ $ SCC 2, ,704.0 GFM/ITM MM PEMSA Total notes payable 3, ,957.2 Less - Current portion (286.9) (262.0) Long-term debt $ 3,514.5 $ 3,695.2 The EMDL agreement shall only be terminated in advance as of July 1, If Ferromex decides to conclude the contract between July 1, 2015 and June 30, 2016, Ferromex must pay an equivalent quantity to 15 months of average billing, amount which shall be reduced in a month per year. The maturities of notes payable as of December 31, 2011 were as follows: Maintenance and repairs - With respect to the locomotive s maintenance and repair work, pursuant to the agreements; Ferromex must make monthly payments based on certain fees that include mainly preventive and corrective maintenance. These fees are recorded as maintenance expense in results of operations at the time such services are received. At December 31, 2011 and 2010, Ferromex paid $57.0 and $52.3, respectively. Overhauls - Overhauls are capitalized to property and equipment as incurred. Year Principal due * 2012 $ Thereafter 2, Bank loans and long-term debt $ 3,826.8 At December 31, 2011 and 2010, the Company was in compliance with the guarantees and restrictions established by the debt agreements which include financial covenants and restrictions on contracting additional debt and on certain capital expenditures, the consolidated debt was as follows: 32 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 33

88 Long-term debt Mining segment: The bonds, referred above as Yankee bonds, contain a covenant requiring MM to maintain a ratio of EBITDA to interest expense of not less than 2.5 to 1.0 as such terms are defined by the facility. At December 31, 2011, MM is in compliance with this covenant. AMC Syndicated credit with quarterly repayments from 2010 up to at interest rate of LIBOR plus 3.5 points to 6.5 points. $ $ The Mitsui credit agreement is collateralized by pledges of receivables on 31,000 tons of copper per year. The Mitsui agreement requires AMC to maintain a minimum stockholders equity of $750 and a specific ratio of debt to equity. Reduction of Grupo Mexico s direct or indirect voting interest in the Company to less than a majority would constitute an event of default under the Mitsui agreement. At December 31, 2011, the Company is in compliance with these covenants. SCC 6.375% 5.375% 6.750% 7.500% 2.02% Notes due 2015 ($200 face amount, less unamortized discount of $0.6 and $0.7 at December 31, 2011 and 2010, respectively) Notes due 2020 ($400 face amount, less unamortized discount of $1.9 and $2.0 at December 31,2011 and 2010, respectively) Notes due 2040 ($1,100 face amount, less unamortized discount of $8.0 and $8.1 at December 31,2011 and 2010, respectively) 1, ,091.9 Notes due 2035 ($1,000 face amount, less unamortized discount of $14.9 and $15.2 at December 31, 2011 and 2010, respectively) Mitsui credit agreement due 2013 (Japanese LIBOR rate plus 1.25% (1.71% at December 31, 2010)) In July 2005 the SCC issued $ % Notes due 2015 at a discount of $1.1 and $ % Notes due 2035, at a discount of $5.3. The notes are senior unsecured obligations of SCC. SCC capitalized $8.8 of costs associated with this facility and its unamortized balance is included in Other assets, non-current on the consolidated balance sheet. The net proceeds from the issuance and sale of the notes were principally used to repay outstanding indebtedness of SCC and the balance was used for general corporate purposes. SCC filed a registration statement on Form S-4 with respect to these notes in October In January 2006 SCC completed an exchange offer for $200, 6.375% Notes due 2015 and $600, 7.5% Notes due In the exchange offer, $197.4 of the 6.375% old notes due 2015 were tendered in exchange for an equivalent amount of new notes and an aggregate of $590.5 of the 7.5% old notes due 2035 were tendered in exchange for an equivalent amount of new notes. The indentures relating to the notes contain certain covenants, including limitations on liens, limitations on sale and leaseback transactions, rights of the holders of the notes upon the occurrence of a change of control triggering event, limitations on subsidiary indebtedness and limitations on consolidations, mergers, sales or conveyances. Certain of these covenants cease to be applicable before the notes mature if the issuer obtains an investment grade rating. At December 31, 2011 SCC is in compliance with these covenants. At December 31, 2011, the securities had an investment grade rating, see Changes in Credit Risk Rating below. MM 9.250% Yankee Bonds - Series "B" due Total debt 3, ,596.9 Less - Current portion (194.9) (219.1) Long-term debt $ 3,105.4 $ 3,377.8 Total debt maturities do not include the debt discount valuation account of $25.4. On May 9, 2006, SCC issued an additional $ % notes due These notes are in addition to the $600 of existing 7.5% notes due 2035 that were issued in July The current transaction was issued at a spread of +240 basis points over the 30-year U. S. Treasury bond. The original issue in July 2005 was issued at a spread of +315 basis points over the 30-year U. S. Treasury bond. The notes were issued at a discount of $10.8. SCC capitalized $3.2 of cost associated with this facility and its unamortized balance is included in non-current Other assets, net on the consolidated balance sheet. SCC used proceeds from the May 2006 issuance for its expansion programs. The notes issued in July 2005 and the new notes issued in May 2006 are treated as a single series of notes under the indenture, including for purposes of covenants, waivers and amendments. SCC has registered these notes under the Securities Act of 1933, as amended. 34 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 35

89 On April 16, 2010, the Company issued $1.5 billion in fixed-rate unsecured notes with a discount of $10.3, which is being amortized over the term of the related debt. Net proceeds will be used for general corporate purposes, including the financing of the SCC s capital expenditure program. The $1.5 billion fixed-rate senior unsecured notes were issued in two tranches, $400 due in 2020 at an annual interest rate of 5.375% and $1.1 billion due in 2040 at an annual interest rate of 6.75%. SCC has registered these notes under the Securities Act of 1933, as amended. Interest on the notes will be paid semi-annually in arrears. The notes will constitute SCC s general unsecured obligations and the series of notes will rank pari passu with each other and will rank pari passu in right of payment with all of the SCC s other existing and future unsecured and unsubordinated indebtedness. Also, related to these notes SCC has deferred $8.2 of costs associated with the issuance of this facility, which its unamortized balance is included in Other assets non-current in the consolidated balance sheet and is being amortized as interest expense over the life of the loans. In connection with the transaction, on April 16, 2010, SCC entered into a base indenture with Wells Fargo Bank, National Association, as trustee, as well as a first supplemental indenture and a second supplemental indenture which provide for the issuance, and set forth the terms of, the two tranches of notes described above. The indentures contain covenants that limit SCC s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all SCC s assets. If SCC experiences a Change of Control Triggering Event (as defined in the indentures governing the notes), SCC must offer to repurchase the notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. A Change of Control Trigger Event also includes a rating decline, that is, if the rating of the notes, by at least one of the rating agencies shall be decreased by one or more gradations. SCC may issue additional debt from time to time pursuant to the base indenture. business risk profile, supported by the Company s low cash cost structure, geographic diversity, position as the world s sixth largest copper producer, vertical integration and long-life reserves. On December 9, 2009, AMC contracted a syndicated credit for $1,500 with BBVA Bancomer, S. A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer acting as broker. The credit is divided into three tranches; Tranche A for $385.7, generating interest at the LIBOR rate plus a margin of between 3.5 and 6.0 points, with quarterly repayments from 2011 up to 2012, which may be fully or partially pre-paid at any time; Tranche B for a Mexican peso amount equivalent to $850, and; Tranche C for $134.3 and a Mexican peso amount equivalent to $130. Tranches B and C generate interest at the LIBOR rate plus a margin of between 4.0 and 6.5 points for US dollars, and the TIIE (Interbank Interest Rate) plus a margin of between 4.0 and 6.5 points for Mexican pesos. Both tranches require quarterly repayments from 2011 until Tranches A and C cannot be prepaid before the maturity of tranche A. In June 2011, AMC prepaid in-full the tranches A and B and its accrued interest. During 2010, Asarco prepaid in full a $280.0 secured note with Asbestos Personal Injury Settelment Trust related to past environmental liabilities. The note term included annual interest of 6% and quarterly installment payments with a final maturity of December Aggregate maturities of the outstanding borrowings at December 31, 2011, are as follows: Year Principal due 2012 $ Thereafter 2,551.1 Changes in Credit Risk Rating: 3,325.7 On April 1, 2010, Moody s investor service upgraded to Baa2 from Baa3 SCC s senior unsecured ratings and the rating on its Yankee bonds. Also on April 5, 2010, Fitch and Standard & Poor s ( S&P ) ratings services assigned ratings of BBB and BBB-, respectively, to the new notes issued. At the same time, these credit rating agencies confirmed their long-term corporate credit rating of SCC ( Baa2, BBB and BBB- for Moody s, Fitch and S&P, respectively). On January 26, 2012, S&P raised its long-term corporate credit rating of the Company to BBB from BBB-. Also S&P raised its ratings of the Company s senior notes to BBB from BBB-. S&P noted that this rating reflects its assessment of a satisfactory At December 31, 2011 and 2010, other assets included $5.2 and $5.3, respectively, held in escrow accounts as required by the Mitsui s loan agreement. The funds are released from escrow as scheduled loan repayments are made. At December 31, 2011 and 2010, the balance of capitalized debt issuance costs was $18.8 and $19.3, respectively. Amortization charged to interest expense was $0.5 and $0.4 in 2011 and 2010, respectively. 36 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 37

90 Railway segment: December 31, Loan from BNP PARIBAS (BNP) and Export-Import Bank (EXIM) with maturities every three months up to July 25, 2013, subject to an interests at the LIBOR rate for three months plus 0.09% (1) $ 8.1 $ 12.8 Loan from HSBC Bank PLC and Export Development Canada ( EDC ), with maturities every six months up to November 26, 2014, subject to an interest at the LIBOR rate for six months plus 0.08% (2) Loan from HSBC México, S. A. Commercial Bank (HSBC) with maturities every six months up to November 26, 2014, subject to an interest at the LIBOR rate for six months plus 0.40% (2) Syndicated loan from various banks managed by CITIBANK, N. A., secured by ITM comprised of the following tranches: I. Ps$364,570 thousands subject to 28-day TIIE interest rate plus 0.575%, with quarterly amortizations, through June 6, 2013 (7) II. $25.0 subject LIBOR interest rate plus 0.55% with quarterly amortizations through June 7, 2010, amounted $11.5 subject LIBOR interest rate plus 0.55% with at three-month through December 31, 2013 (7) Debt securities ( certificados bursátiles ) (8) Current portion of long-term debt (82.5) (32.9) Long-term debt $ $ Loan from CREDIT AGRICOLE CIB (before CALYON) - and EXIM with maturities every three months up to June 15, 2016, subject to an interests at the LIBOR rate for three months without spread (3) Loan from CREDIT AGRICOLE CIB (before CALYON) - for with maturities every three months up to June 15, 2016, subject to an interests at the LIBOR rate for three months plus 0.40% to 0.50% (3) Loan from HSBC México, S. A. Commercial Bank (HSBC), subject to an interest at a the LIBOR monthly rate plus 1.5%, with maturity expire on February 1, 2012 (4) Long-term debt contracts in Mexican pesos: Loan from BANAMEX and EXIMBANK with maturities every three months up to September 15, 2015, subject to an interest at the fixed rate of 8.18% (5) Loan from BANAMEX with maturities every three months up to March 15, 2014, subject to interest at the fixed rate of 8.25% (5) Loan from IXE BANK, whit maturities every three months up to August 31, 2013 subject to an interest at 91-days TIIE rate plus 1.35% (6) Debt matures as follows: Maturity 2012 $ and thereafter $ (1) In order to secure the loans from BNP and EXIM on December 30, 2004 and on January 27, 2005, an irrevocable trust guarantee was set up, with Banco Nacional de México, S. A. (BANAMEX) as the trustee, GFM as the trustor, EXIM as the trust beneficiary in the first instance and BNP as trust beneficiary in the second instance, for which GFM pledged the rights of 25 acquired locomotives that gave rise to these loans, as well as the titles and interest on the guarantees provided to the trustee. 38 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 39

91 (2) Loans from HSBC BANK PCL - EDC and HSBC BANK MEXICO, respectively contracted for the purchase of 15 SD70ACe locomotives, which are pledged for these loans. (3) Loans from CREDIT AGRICOLE CIB (before CALYON) - EXIM and CREDIT AGRICOLE CIB (before CALYON), respectively contracted for the purchase of 40 locomotives, which are pledged for these loans. (4) Loans with HSBC - HSBC EXIM and direct, contract for the purchase of 23 locomotives, which remained in collateral for these loans. (5) Loans from BANAMEX - EXIMBANK and direct loan from BANAMEX, hired to settle in advance the bridge loan from BANAMEX, used for the purchase of 60 locomotives, which are pledged for such loans. In the loans mentioned above Ferromex signed as guarantor. The loans and the debt paper establish certain covenants for GFM, which as of December 31, 2011 had been fulfilled. The average annual rates for the years ended on December 31, 2011 and 2010 were: 6-month LIBOR: 0.51% and 0.59%, 3-month LIBOR of 0.34% and 0.34% and TIIE for 28 days 3.33% and 4.91%, respectively. Infraestructure segment: PEMSA Bank loan with IXE, S. A., with maturity on April 5, 2011, bears interest at a rate equal to monthly LIBOR plus 3.5% $ 9.5 $ 10.0 (6) Loan from IXE BANK hired by Ferrosur to refinancing liabilities and working capital. (7) June 2007 Ferrosur derivative transaction held a fixed interest rate of 8.51% at 6 years. On September 29, 2006 Ferrosur held a derivative transaction exchange rate and interest rate to 7 years, making the obligation of $25.0 to $274.9 thousand pesos, generating monthly interest at the TIIE % days. (8) On November 13, 2007, the Mexican Securities and Exchange Commission (CNBV), authorized Ferromex to enter into a new program to issue debt paper in the aggregate amount of Ps. 5,000 million pesos (nominal value), during a period of four years. Ferromex has issued debt paper under these programs with the following features and whose balances are as follows: Date of Maturity December 31 Issuance Transaction Date Annual Rate (%) FERROMX -07 Nov 16, 2007 Nov 7, 2014 TIIE 28 days +0.34% $ 71.5 $ 80.9 FERROMX Nov 16, 2007 Oct 28, 2022 Fixed rate of 9.03% FERROMX Apr 15, 2011 Apri 2, 2021 Fixed rate of 8.88% Asset retirement obligation The Company accounting for reclamation and remediation obligations requires management to make estimates, unique to each mining operation, relating to the future costs anticipated to complete reclamation and remediation work that is required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. The Company maintains an estimated asset retirement obligation for its mining properties mainly in Peru, as required by the Peruvian Mine Closure Law. In accordance with the requirements of this law the Company submitted plans to the Peruvian Ministry of Energy and Mines ( MEM ). As part of the closure plans, commencing in January 2010 the Company is required to provide annual guarantees of $2.6 over a 34 year period to furnish the funds for the asset retirement obligation. In the near-term future the Company has pledged the value of its Lima office complex as support for this obligation. The accepted value of the Lima office building, for this purpose, is $17. The closure cost recognized for this liability includes the cost, as outlined in its closure plans, of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the three units. In 2010, the closure plan for the new Ilo marine trestle was added to the asset retirement obligation. The following table summarizes the asset retirement obligation activity for the two years ended December 31, 2011 and 2010: $ $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 41

92 Related party balances and transactions Balance as of January 1 $ 72.1 $ 60.3 Changes in estimates Additions Closure payments (0.5) - Accretion expense Balance as of December 31, $ 77.2 $ Employees statutory profit sharing The Company s operations in Peru and Mexico are subject to statutory workers participation. In Peru, the provision for workers participation is calculated at 8% of pre-tax earnings. The current portion of this participation, which is accrued during the year, is based on Peruvian Branch s taxable income and is distributed to workers following determination of final results for the year. The annual amount payable to an individual worker is capped at the worker s salary for an 18 month period. Amounts determined in excess of the 18 months of worker s salary is no longer made as a payment to the worker and is levied first for the benefit of the Fondo Nacional de Capacitacion Laboral y de Promocion del Empleo (National Workers Training and Employment Promotion Fund) until this entity receives from all employers in its region an amount equivalent to 2,200 Peru taxable units (approximately $2.9 in 2011). Any remaining excess is levied as payment for the benefit of the regional governments. These levies fund worker training, employment promotion, road infraestructure and other government programs. December 31, Due to related parties Empresarios Industriales de México, S. A. de C. V. $ - $ TTX Company Ferrocarril y Terminal Valle de México S. A. de C. V México Transportes Aéreos, S. A. de C. V Ferrosur, S. A. de C. V Other $ 8.3 $ The Company has entered into certain transactions in the ordinary course of business with parties that are controlling shareholders or their affiliates. These transactions include the lease of office space, air transportation and construction services and products and services relating to mining and refining. The Company lends and borrows funds among affiliates for acquisitions and other corporate purposes. These financial transactions bear interest and are subject to review and approval by senior management, as are all related party transactions. It is the Company s policy that the Audit Committee of the Board of Directors shall review all related party transactions. The Company is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Audit Committee. The deferred employees statutory profit sharing - Mexican law requires companies to pay their employees 10% of taxable profit each year. The profit sharing arrangement has deferred tax consequences to the extent that basis differences exist between financial reporting and income tax reporting. Prior years losses are not deductible in calculating profit sharing. Profit sharing expense is deductible in arriving at taxable income. The provision for workers participation is included in Cost of sales (exclusive of depreciation, amortization and depletion) and Administrative expenses in the consolidated statement of income. For the years ended December 31, 2011 and 2010, workers participation expense was $276.7 and $234.4, respectively. The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including aviation and real estate. The Company engages in certain transactions in the ordinary course of business with other entities controlled by the Larrea family relating to the lease of office space and air transportation. In connection with this, SCC paid fees for maintenance services and sale of vehicles provided by Mexico Compañia de Productos Automotrices, S. A. de C. V., a company controlled by the Larrea family and which is currently in liquidation. Additionally, in 2007, SCC s Mexican subsidiaries provided guaranties for two loans obtained by MexTransport, a company controlled by the Larrea family, from Bank of Nova Scotia in Mexico. One of these loans has been repaid and the remaining loan requires semi-annual repayments. Conditions and balance as of December 31, 2011 are as follows: 42 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 43

93 Loan open Mexican Operations Original loan balance $ 8.5 Maturity August 2013 Interest rate Libor % Remaining balance at December 31, 2011 $ 2.6 MexTransport provides aviation services to SCC s Mexican operations. The guaranty provided to MexTransport is backed up by the transport services provided by MexTransport to SCC s Mexican subsidiaries. If MexTransport defaults on the loan, SCC s subsidiaries would have to satisfy the guaranty and repay to the bank the remaining balance plus interest. SCC pays fees to MexTransport for aviation services. MM/Defined Benefit Pension Plans - MM has established for its salaried employees a defined contribution benefit pension plan. This plan is in addition to benefits granted by the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social IMSS ). Under this plan, MM will make yearly matching contributions equaling 3% of participating employee s base salary. Related to this, MM recorded a contribution expense of $1.0 and $0.9 in 2011 and 2010, respectively. The defined contribution plan liability was $1.4 and $1.8 in 2011 and 2010, respectively. MM has established for its union employees a non-contributory defined benefit pension plan. This plan is in addition to benefits granted by IMSS. SCC purchased publicity services from Cadena Mexicana de Exhibicion S. A. de C. V., a subsidiary of Grupo Cinemex, a company controlled by the Larrea family. SCC purchased industrial materials from Higher Technology S. A. C., and paid fees for maintenance services provided by Servicios y Fabricaciones Mecanicas S. A. C. Mrs. Carlos Gonzalez, the son of SCC s Chief Executive Officer, has a proprietary interest in these companies. The components of net periodic benefit costs calculated in accordance with ASC 715 Compensation retirement benefits (in prior literature SFAS No. 87 Employers Accounting for Pensions ), using December 31 as a measurement date, consist of the following: SCC purchased industrial material from Sempertrans France Belting Technology, in which Mr. Alejandro Gonzalez is employed as a sales representative. Also, SCC purchased industrial material from PIGOBA, S. A. de C. V., a company in which Mr. Alejandro Gonzalez has a proprietary interest. Mr. Alejandro Gonzalez is the son of SCC s Chief Executive Officer. SCC purchased industrial material and services from Breaker, S. A. de C. V., a company in which Mr. Jorge Gonzalez, son-inlaw of SCC s Chief Executive Officer, has a proprietary interest. Service cost $ 0.9 $ 2.1 Interest cost Expected return on plan assets (2.8) (3.0) Amortization of transition assets, net (0.1) - Amortization of net actuarial loss (1.3) (1.0) Amortization of prior services cost Settlement /curtailment(*) - (19.0) 15. Benefit plans Net periodic benefit cost $ (2.7) $ (19.1) Mining segment AMC has two noncontributory defined benefit pension plans covering former salaried employees in the U. S. and certain former employees in Peru. Also, AMC also has a postretirement health care plan. Net periodic benefit costs and other disclosures related to the Peruvian defined benefit pension and postretirement health care plans are not material. The change in benefit obligation and plan assets for the years 2011 and 2010 are as follows: 44 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 45

94 ASC 715 amounts recognized in accumulated other comprehensive income consists of: Change in benefit obligation: Projected benefit obligation at beginning of year $ 12.7 $ 32.5 Service cost Interest cost Loss gain, net (0.4) (0.6) Benefits paid (0.9) (0.9) Settlement /curtailment(*) - (23.7) Inflation adjustment (1.3) Net loss (gain) $ (7.0) $ (11.2) Transition asset - (0.1) Total (net of income tax of $4.7 and $7.6, respectively) $ (7.0) $ (11.3) Projected benefit obligation at end of year $ 11.6 $ 12.7 The following table summarizes the changes in accumulated other comprehensive income for the years ended December 31, 2011 and 2010, respectively related to MM s defined benefit pension plan, net of income tax: (*) Included in the 2010 settlement/curtailment amount is a payment of $11.9 severance to Buenavista workers who accepted the Company s buyout offer Change in plan assets: Fair value of plan assets at beginning of year $ 46.3 $ 38.8 Actual return on plan assets (1.1) 6.9 Employee contribution (0.5) (0.6) Benefits paid (0.2) (0.9) Currency exchange rate adjustment (5.4) Reconciliation of accumulated other comprehensive income: Accumulated other comprehensive income at beginning of plan year $ (11.3) $ (6.1) Prior services cost amortized during the year - (0.1) Net loss amortized during the year Net loss (gain) occurring during the year 2.2 (2.7) Settlement / curtailment - (2.8) Currency exchange rate changes 1.3 (0.2) Fair value of plan assets at end of year $ 39.1 $ 46.3 Net adjustment to accumulated other comprehensive income 4.3 (5.2) Funded status $ 27.5 $ 33.6 Accumulated other comprehensive income at end of plan year $ (7.0) $ (11.3) ASC 715 amounts recognized in the statement of financial position consists of: The following table summarizes the amounts in accumulative other comprehensive income amortized and recognized as a component of net periodic benefit cost, net of income tax: Non current assets $ 27.5 $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 47

95 Amortization of net losses $ 0.8 $ 0.6 Amortization of prior services cost - (0.1) Total amortization expenses $ 0.8 $ 0.5 The assumptions used to determine the pension obligation and seniority premiums as of year-end and net cost in the ensuing year were: Weighted average discount rate 7.5% 7.5% Expected long-term rate of return on plan asset 7.5% 7.5% Rate of increase in future compensation level 4.5% 4.0% These rates are based on Mexican pesos as pension plan payments will be paid in México. The benefits expected to be paid in each of the next five years, and thereafter, are as follows: MM s policy for determining asset mix targets includes periodic consultation with recognized third party investment consultants. The expected long-term rate of return on plan assets is updated periodically, taking into consideration assets allocations, historical returns and the current economic environment. The fair value of plan assets is impacted by general market conditions. If actual returns on plan assets vary from the expected returns, actual results could differ. The plan assets are managed by three financial institutions, SCOTIABANK INVERLAT S. A., BANCO SANTANDER and IXE BANCO, S. A. 26% of the funds is invested in Mexican government securities, including treasury certificates and development bonds of the Mexican government. The remaining 74% is invested in common shares of Grupo Mexico. The plan assets are invested without restriction in active markets and are accessible when required and are therefore considered as level 1, in accordance with ASC 820. The following table represents the asset mix of the investment portfolio: Asset category: Equity securities 74% 71% Treasury bills 26% 29% 100% 100% Year Expected Benefit Payments MM/Post-retirement health care plan $ 7.3 The components of net period benefit costs are as follows: to Total $ 12.7 The amount of contributions that MM expects to pay to the plan during 2012 is $7.3, which includes $3.4 of pending payments to former Buenavista workers Interest cost $ 3.2 $ 4.3 Service cost Amortization of net loss Amortization of transition obligation Amortization of prior service cost (10.0) - Net periodic post-retirement benefit costs $ (5.5) $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 49

96 The change in benefit obligation and a reconciliation of funded status are as follows: The following table summarizes the changes in accumulated other comprehensive income for the years ended December 31, 2011 and 2010, respectively, related to the MM post-retirement health care plan, net of income tax: Change in benefit obligation: Projected benefit obligation at beginning of year $ 49.7 $ 53.0 Service cost Interest cost Amendments (24.2) - Actuarial loss (3.3) (11.1) Benefits paid (1.3) - Currency exchange rate adjustment (5.7) 3.1 Projected benefit obligation at end of year $ 18.4 $ 49.7 Funded status $ (18.4) $ (49.7) Reconciliation of accumulated other comprehensive income: Accumulated other comprehensive income at beginning of plan year $ 8.2 $ 15.5 Amortization of net gain - (0.1) Amortization of transition obligation (0.8) (0.9) Amortization of prior service cost Prior services credit (14.5) - Net gain occurring during the year (2.0) (6.7) Currency exchange rate changes (0.9) 0.4 Net adjustment to accumulated other comprehensive income (12.2) (7.3) Accumulated other comprehensive income (loss) at end of plan year $ (4.0) $ 8.2 ASC-715 amounts recognized in the statement of financial position consist of: The following table summarizes the amounts in accumulated other comprehensive income (loss) amortized and recognized as a component of net periodic benefit cost, net of income tax: Non current liabilities $ (18.4) $ (49.7) ASC-715 amounts recognized in accumulated other comprehensive income consists of: Amortization of transaction obligation $ 0.8 $ 0.9 Amortization of prior service credit (6.0) - Amortization of net losses Total amortization (income) expenses $ (5.2) $ Net loss (gain) $ (4.0) $ (2.3) Transition obligation Total (net of income tax of ($2.7) and $5.5, respectively) $ (4.0) $ 8.2 Discount rates used in the calculation of other post-retirement benefits and costs as of December 31, 2011 and 2010 were 7.5%. The benefits expected to be paid in each of the next five years, and thereafter, are as follows: 50 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 51

97 Expected Year Benefit Payments 2012 $ to Total $ 21.0 For measurement purposes, a 4.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2011 and remains at that level thereafter. An increase in other benefit cost trend rates have a significant effect on the amount of the reported obligations as well as component cost of the other benefit plan. One percentage-point change in assumed other benefits cost trend rates would have the following effects: the Company s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic postretirement cost in the same periods will be recognized as a component of other comprehensive income. These amounts will be subsequently recognized as a component of net periodic postretirement cost on the same basis as the amounts recognized in accumulated other comprehensive income. Pension Plans The Company maintains two noncontributory defined benefit pension plans covering substantially all its employees. Benefits for salaried plans are based on salary and years of service. Hourly plans are based on negotiated benefits and years of service. Pension costs are determined annually with the assistance of independent actuaries. The Company s funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional tax deductible amounts as may be advisable under the circumstances. Benefit accruals under the Salaried Plan were frozen effective April 30, As amended, anyone who has not yet become a participant as of that date will be excluded, and current participants will not accrue any credited service after April 30, 2011 for purposes of determining retirement benefits; however, participants will continue to accrue credited service for purposes of vesting and for eligibility for early retirement under the Plan. This amendment resulted in a one-time curtailment gain of $8.6 recognized in income. Plan assets are invested principally in commingled stock funds, mutual funds, and securities issued by the U. S. government. Supplemental Executive Retirement Plan ( SERP ) One Percentage Point Increase Decrease Effect on total service and interest cost components $ 1.5 $ 1.2 Effect on the post-retirement benefit obligation $ 20.2 $ 16.8 In 2011, the Company recorded a liability related to a SERP benefit for certain of its executives. All assumptions used to calculate the liability match the December 31, 2011 salaried plans noted above. As such, unrealized gains and losses that will arise in subsequent periods, as calculated by the actuaries, will be recognized as a component of other comprehensive income until such amounts are realized. The total present value of the SERP liability recorded as of December 31, 2011 was $1,518, and is in addition to the Salaried Plan as presented below. American Operations Asarco - Pension Plans of defined benefits Pension and Postretirement Plans The Company recognizes the funded status (i.e., the difference between the fair value of plan assets and benefit obligations) of its defined benefit postretirement plans in the balance sheet, with corresponding adjustments to accumulated other comprehensive income, net of tax. These amounts are recognized as net periodic postretirement cost in accordance with The measurement dates used to determine benefit obligations were December 31, 2011 and 2010, and are based on census data provided as of the beginning of the years of such plans. No events have occurred that would have a significant impact on those calculations and measurements. Postretirement Benefits Contributory postretirement health care coverage under the Company s health plans is provided to substantially all U. S. retirees not eligible for Medicare. A cost-sharing Medicare supplement plan is available for retired salaried employees, and life insurance coverage is provided to substantially all retirees. The plans are unfunded but exist as general corporate obligations. The postretirement health care plans have a December 31st year end. 52 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 53

98 The measurement dates used to determine benefit obligations were December 31, 2011 and 2010, and are based on census data provided as of the beginning of the fiscal years of such plans. No events have occurred that would have a significant impact on those calculations and measurements. Change in Projected Benefit Obligation Period ended December 31, 2010 Pension Pension Post-retire Post-retire Benefits Benefits Health Care Health Care Salaried Hourly Salaried Hourly Total Changes to the Company s benefit plans as of December 31, 2011 and 2010, are reflected as follows: Change in Projected Benefit Pension Post-retire Post-retire Obligation Period ended December 31, 2011 Benefits Salaried Pension Benefits Hourly Health Care Salaried Health Care Hourly Total Beginning of the period $ $ $ 40.0 $ $ Service cost Interest cost Actuarial (gain)/loss (4.8) Administrative expenses paid (1.1) (1.6) - - (2.7) Benefits paid (12.5) (12.6) (1.6) (7.2) (33.9) Benefit Obligation at December 31 $ $ $ 36.4 $ $ Beginning of the period $ $ $ 41.8 $ $ Service cost Interest cost Actuarial (gain)/loss 3.4 (2.2) (3.5) Administrative Expenses Paid (0.6) (0.9) - - (1.5) Benefits paid (11.4) (11.4) (1.4) (3.9) (28.1) Benefit Obligation at December 31 $ $ $ 40.0 $ $ Accumulated Benefit Obligation $ $ Change in Plan Assets Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2010 Salaried Hourly Salaried Hourly Total Accumulated Benefit Obligation $ $ Change in Plan Assets Pension Pension Post-retire Post-retire Period ended December 31, 2011 Benefits Salaried Benefits Hourly Health Care Salaried Health Care Hourly Total Beginning of the period $ $ $ - $ - $ Actual return on plan assets (3.6) (4.5) - - (8.1) Employer contributions Benefits paid (12.5) (12.6) (1.6) (7.2) (33.9) Administrative expenses (1.1) (1.6) - - (2.7) Fair Value of Plan Assets at December 31 $ $ $ - $ - $ Beginning of the period $ $ $ - $ - $ Actual return on plan assets Employer contributions Benefits paid (11.4) (11.4) (1.4) (3.9) (28.1) Administrative expenses (0.7) (1.1) - - (1.8) Fair Value of Plan Assets at December 31 $ $ $ - $ - $ Funded Status at December 31 $ (64.5) $ (63.6) $ (40.0) $ (291.4) $ - Amounts recognized in the accompanying consolidated balance sheets consisted of the following: Funded Status at December 31 $ (72.2) $ (85.9) $ (36.4) $ (327.2) 54 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 55

99 Period ended December 31, 2011 Pension Benefits Salaried Pension Benefits Hourly Post-retire Health Care Salaried Post-retire Health Care Hourly Current liabilities $ - $ - $ (2.3) $ (9.2) $ (11.5) Non-current liabilities (71.9) (86.0) (34.3) (317.8) (510.0) Amounts recorded in accumulated other comprehensive income consisted of the following: Pension Pension Post-retire Post-retire Period ended December 31, Benefits Benefits Health Care Health Care 2011 Salaried Hourly Salaried Hourly Total Net amount recognized $ (71.9) $ (86.0) $ (36.6) $ (327.0) $ (521.5) Pension Post-retire Post-retire Period ended December 31, 2010 Benefits Salaried Pension Benefits Hourly Health Care Salaried Health Care Hourly Beginning balance $ (8.3) $ (16.5) $ (4.1) $ 25.1 $ (3.8) Amortization of net gain Net gain / (loss) (4.8) Net amount recorded $ 21.7 $ 24.6 $ (8.2) $ 42.2 $ 80.3 Current liabilities $ - $ - $ (2.8) $ (9.6) $ (12.4) Non-current liabilities (64.4) (63.6) (37.4) (281.7) (447.1) Net amount recognized $ (64.4) $ (63.6) $ (40.2) $ (291.3) $ (459.5) Amounts recognized in other comprehensive income during the periods consisted of the following: Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2010 Salaried Hourly Salaried Hourly Total Beginning balance $ (5.4) $ (6.5) $ (0.8) $ (5.1) $ (17.8) Amortization of net gain Net gain / (loss) (2.9) (10.0) (3.5) Period ended December 31, 2011 Pension Pension Post-retire Post-retire Benefits Benefits Health Care Health Care Salaried Hourly Salaried Hourly Total Net amount recorded $ (8.3) $ (16.5) $ (4.1) $ 25.1 $ (3.8) The components of net periodic benefit cost for the periods ended are as follows: Net loss $ 30.0 $ 41.1 $ (4.0) $ 17.1 $ 84.2 Net amount recognized $ 30.0 $ 41.1 $ (4.0) $ 17.1 $ 84.2 Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2010 Salaried Hourly Salaried Hourly Total Net loss $ (2.9) $ (10.0) $ (3.3) $ 30.2 $ 14.0 Net amount recognized $ (2.9) $ (10.0) $ (3.3) $ 30.2 $ 14.0 Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2011 Salaried Hourly Salaried Hourly Total Service cost $ 1.7 $ 5.7 $ 1.1 $ 11.7 $ 20.2 Interest cost Expected return on plan assets (11.3) (13.8) - - (25.1) Recognized actuarial gain (8.3) - (0.7) - (9.0) Total net periodic benefit cost $ (6.8) $ 5.0 $ 2.1 $ 25.9 $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 57

100 Period ended December 31, 2010 Pension Pension Post-retire Post-retire Benefits Benefits Health Care Health Care Salaried Hourly Salaried Hourly Total Period ended December 31, 2011 Pension Pension Post-retire Post-retire Benefits Benefits Health Care Health Care Salaried Hourly Salaried Hourly Service cost $ 3.9 $ 5.5 $ 1.2 $ 10.2 $ 20.8 Interest cost Expected return on plan assets (10.5) (12.5) - - (23.0) Recognized actuarial gain - - (0.2) - (0.2) Discount rate 5.70% 5.70% 5.45% 5.65% Expected return on assets 8.00% 8.00% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A Total net periodic benefit cost $ 4.6 $ 5.9 $ 2.9 $ 24.6 $ 38.0 The actuarial assumptions used to determine end of period benefit obligations were as follows: Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2011 Salaried Hourly Salaried Hourly Discount rate 5.00% 5.00% 4.85% 4.60% Expected return on assets 7.75% 7.75% N/A N/A Rate of compensation increase N/A 4.00 N/A N/A Pension Pension Post-retire Post-retire Period ended Benefits Benefits Health Care Health Care December 31, 2010 Salaried Hourly Salaried Hourly Discount rate 5.75% 5.75% 5.35% 5.85% Expected return on assets 8.25% 8.25% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A Plan Assets The Company s investment policy is to actively manage certain asset classes where potential exists to outperform the broader market while maintaining acceptable risk levels inherent in specific benchmarks used to measure performance for each asset class. To develop an expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class as well as the target asset allocation of the pension portfolio. Period ended December 31, 2010 Pension Pension Post-retire Post-retire Benefits Benefits Health Care Health Care Salaried Hourly Salaried Hourly The Company s policy for determining asset allocation targets includes periodic consultation with recognized third-party investment consultants. The fair value of plan assets is affected by general market conditions. If actual returns on plan assets vary from the expected returns, actual results could differ. Discount rate 5.70% 5.70% 5.45% 5.60% Expected return on assets 8.00% 8.00% N/A N/A Rate of compensation increase 4.00% 4.00% N/A N/A The allocations as of December 31, 2011 and 2010 were as follows: Weighted-average assumptions used to determine net period benefit costs were as follows: 58 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 59

101 Asset allocation and fair value hierarchy 2011 Level 1 Level 2 Level Assumed Health Care Cost Trend Rates at December Salaried Hourly US equity composite $ % 2% - $ 89.7 International equity composite Emerging markets composite Fixed income composite Hedge fund composite REIT's composite Cash composite Health care trend assumed for next year 8.50% 8.50% Ultimate health care cost trend rate 4.90% 4.90% Year that the rate reaches the ultimate trend rate Cash Inflows and Outflows - The Company contributed approximately $39.3 and $23.6 to the pension plans in 2011 and 2010, respectively, and expects to contribute approximately $31.8 to the combined pension plans in Total asset allocation $ $ Investments in commingled composite funds are recorded at fair value based on the net asset value of the fund as provided by the fund manager or general partner. Investments in these funds are specific to asset allocation strategies. The classifications include both direct investments in debt and equity securities as well as investments in privately held entities that manage an underlying portfolio of marketable debt and equity securities. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act ) was reflected as of December 31, 2011 and 2010, assuming that the Company will continue to provide a prescription drug benefit to retirees that is at least actuarially equivalent to Medicare Part D. The benefit payments listed in the following table are shown net of the expected Medicare Part D subsidy. The Company projects benefit payments to be paid by the combined plans as follows: For the year ended December 31, 2011, the health care cost trend rate assumptions have a significant effect on the amounts for postretirement health care costs and obligations, as show in the following table: Salaried Hourly 1% increase $ 0.5 $ 6.9 1% decrease (0.4) (5.3) Effect on postretirement benefit obligation 1% increase $ 3.4 $ % decrease (3.0) (47.1) Pension Benefits Postretirement Health Care 2012 $ 27.5 $ $ $ For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care is assumed for 2011 for both salaried and hourly plans. The rates are assumed to decrease until reaching 4.9% in Employee Savings Plan - The Company maintains employee savings plans for salaried and hourly employees that permit employees to make contributions by payroll deductions pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions up to 6% of compensation for its employees. As of April 30, 2011, in conjunction with the Salaried 60 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 61

102 Pension Plan freeze, the Company increased the matching contributions for employees who were active participants in the salaried plan, from 3% to 6% of compensation. In connection with the required match, the Company s contributions, for both the salaried and hourly plans, charged against earnings were $3.6 and $1.6 in 2011 and 2010, respectively. Copper Basin 401(k) Plan - Copper Basin also maintains a defined contribution plan that permits eligible employees to make contributions by payroll deductions pursuant to Section 401(k) of the Internal Revenue Code, which includes a matching Company contribution up to 6% of compensation. The contributions charged against earnings in 2011 and 2010 were $0.12 and $0.10, respectively. Railway segment ITM - Defined Benefit Pension Plans During 2011, Board of directors approved two dividends in accordance with the resolutions taken in the Ordinary Stockholders Meeting held on April 29, 2010 which amounted to $458.1 paid as follows: in February 18, 2011, a dividend was paid equal to 0.30 peso cents per share amounting $194.0 and other equivalent to 0.40 peso cents per share, amounting $264.1 paid in May 5, 2011, both allocated in retained earnings. During 2011, Board of directors approved two dividends in accordance with the resolutions taken in the Ordinary Stockholders Meeting held on April 29, 2011 which amounted to $530.7 paid as follows: In August 19, 2011, a dividend was paid equal to 0.45 peso cents per share amounting $300.5, other equivalent to 0.40 peso cents per share, amounting $230.2 paid in November 1, 2011, both allocated in retained earnings. During 2011, Board of directors approved a dividend in shares in accordance with the resolutions taken in the Ordinary Stockholders Meeting held on April 29, 2011 equivalent to one share per each 389 current shares, amounting $48.02 In ITM and subsidiaries the liabilities and costs pertaining to the seniority premiums, which employees are entitled after 15 years of service are recognized on the basis of actuarial studies performed by independent experts. ITM has also established plans to cover dismissal indemnities on the basis of actuarial studies, performed by independent experts. At 2011 and 2010 labor liabilities were immaterial Corporate Services Grupo México Servicios, S. A. de C. V. (GMS, direct subsidiary of GMEXICO) provides various professional services to its affiliates. Currently GMS has 73 executives and as of December 31, 2011 and 2010 the labor liabilities were immaterial. 16. Stockholders equity Common stock: At December 31, 2011 and 2010, the Company s paid common and outstanding stock consists 7,785,000,000, fully paid and subscribed shares, corresponding to fixed capital Series B, Class I shares. Variable capital is limited to ten times the amount of the minimum fixed capital. Series B consists of ordinary voting stock representing 100% of all Class I and Class II voting stock. At least 51% of the shares comprising this Series must be subscribed by private individuals or companies considered to be Mexican investors, as established by the Ley General de Sociedades Mercantiles. Pursuant Ordinary Stockholders Meeting held on April 29, 2011, the stockholders agreed to repurchase ownshares until Ps.2, 240 million pesos (243.3 million dollars). As of December 31, 2011, the shares repurchased amounting Ps million pesos (57.4 million dollars), which Ps. 112 million pesos (9.3 million dollars) was granted to the trust of Employee Stock Purchase Plan and appied in the treasury stock account. During 2010, Board of directors approved two dividends in accordance with the resolutions taken in the Ordinary Stockholders Meeting held on April 29, 2010 which amounted to $260.7 paid as follows: in September 10, 2010, a dividend was paid equal to 0.17 peso cents per share amounting $103.6 and other equivalent to 0.25 peso cents per share, amounting $157.1 paid in November 12, In addition, the stockholders agreed to decrease the reserve for shares purchase to Ps.2, 240 million pesos ($243.3 million dollars), the reduction was applied to retained earnings. During 2010, Board of directors approved two dividends in accordance with the resolutions taken in the Ordinary Stockholders Meeting held on April 30, 2009, which amounted to $192.9 paid as follows: a 0.14 peso cents per share dividend paid in March 12, 2010, amounting $84.3 and other equivalent to a 0.17 peso cents per share dividend amounting $108.6 paid on May 17, On January 28, 2010, the Company acquired the noncontrolling interest of PEMSA for $ With this transaction, the Company owns 100% of PEMSAs equity. Since the purchase price exceeded the carrying amount of the investment, the Company reduced retained earnings by $ Dividends paid are not subject to income tax if the dividends come from the Net Tax Profit Account (CUFIN, for its acronym in Spanish). Any dividends paid in excess of this account are subject to a tax equivalent to 38.89%. The tax is payable by 62 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 63

103 the Company and may be credited against its income tax in the same year or in the following two years. Dividends paid from previously taxed profits are not subject to tax withholding or additional tax payment. In the event of a capital reduction, any excess of stockholders equity over capital contributions, the latter restated in accordance with the provisions of the Income Tax Law, is accorded the same tax treatment as dividends. Directors Stock Award Plan - SCC established a stock award compensation plan for certain directors who are not compensated as employees of the Company. Under this plan, participants will receive 1,200 shares of common stock upon election and 1,200 additional shares following each annual meeting of stockholders thereafter 600,000 shares of the Company s common stock have been reserved for this plan. The fair value of the award is measured each year at the date of the grant. At December 31, 2011 and 2010, the CUFIN amounted to $3,228.3 and $2,782.3, respectively. Appropriated Retained Earnings - As of December 31, 2011, the Company s management set aside $2.0 billion of unremitted earnings of its Mexican subsidiary MM, as appropriated retained earnings. It is the Company s intention to indefinitely invest these funds in Mexico. These amounts are earmarked for the Company s Mexican expansion program. Treasury Stock - Included in treasury stock are shares of the Company and SCC s common stock carried at cost. Activity in treasury stock was as follows: Reserve for purchase of shares - In April 2005, the Company established a reserve of $201.7 for the repurchase of shares, of which $10 will be included in the SCC s Treasury Stock for future sales to its employees. During 2011 and 2010, the Company purchased own shares for 44,751 and 125,744, respectively. In 2011, a dividend was declared of 48. Employee Stock Purchase Plan - During 2007 and 2010, the Company offered to eligible employees a stock purchase plan (the Employee Stock Purchase Plan ) through a trust that acquires shares of the Company s stock for sale to its employees, employees of subsidiaries, and certain affiliated companies. The purchase price is established at the approximate fair market value on the grant date. Every two years employees will be able to acquire title to 50% of the shares paid in the previous two years. The employees will pay for shares purchased through monthly payroll deductions over the eight year period of the plan. At the end of the eight year period, the Company will grant the participant a bonus of 1 share for every 10 shares purchased by the employee. GMEXICO common shares Balance as of January 1 $ 345 $ 346 Other activity, including received dividends, interest and currency translation effect Net 202 (1) Balance as of December 31 $ 547 $ 345 At December 31, 2011 and 2010, treasury stock holds 43,616,086 shares and 34,596,086 shares of SCC s common stock, respectively with a cost of $734.1 and $461.0, respectively. The shares of SCC s common stock held in treasury are used for general corporate purposes. If the Company pays dividends on shares during the eight year period, the participants will be entitled to receive the dividend in cash for all shares that have been fully purchased and paid as of the date that the dividend is paid. If the participant has only partially paid for shares, the entitled dividends will be used to reduce the remaining liability owed for purchased shares. In the case of voluntary resignation of the employee, the Company will pay to the employee the fair market sales price at the date of resignation of the fully paid shares, net of costs and taxes. When the fair market sales value of the shares is higher than the purchase price, the Company will apply a deduction over the amount to be paid to the employee based on the following schedule: If the resignation occurs during: % Deducted On July 28, 2011, the Board of Directors approved an increase of the SCC share repurchase program from $500 to $1.0 billion. These shares will be available for general corporate purposes. SCC may purchase additional shares from time to time, based on market conditions and other factors. This repurchase program has no expiration date and may be modified or discontinued at any time. The shares of SCC are used for general corporate purposes, including, among others, for awards under the Directors Stock Award Plan. GMEXICO s shares are used to grant awards under both the Employee Stock Purchase Plan and the Executive Stock Purchase Plan. 1 st year after the grant date 90% 2nd year after the grant date 80% 3rd year after the grant date 70% 4th year after the grant date 60% 5th year after the grant date 50% 6th year after the grant date 40% 7th year after the grant date 20% 64 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 65

104 In the case of involuntary termination of the employee, the Company will pay to the employee the difference between the fair market value of the shares at the date of termination of employment and the purchase price. When the fair market value of the shares is higher than the purchase price, the Company will apply a deduction over the amount to be paid to the employee based on the following schedule. If the termination occurs during: % Deducted 1 st year after the grant date 100% 2nd year after the grant date 95% 3rd year after the grant date 90% 4th year after the grant date 80% 5th year after the grant date 70% 6th year after the grant date 60% 7th year after the grant date 50% Unit weighted average Shares grant date fair value Outstanding shares at January 1, ,556, Granted - Exercised - Forfeited (635,932) 1.16 Outstanding shares at December 31, ,920, Granted - Exercised (3,402,855) 1.16 Forfeited (247,497) 1.16 Outstanding shares at December 31, ,270, In case of retirement or death of the employee, the Company will render the buyer or his legal beneficiary, fair market value as of the date of retirement or death of the shares effectively paid, net of costs and taxes. For each of the years ended December 31, 2011 and 2010, the stock based compensation expense under the Employee Stock Purchase Plan was $2.1. As of December 31, 2011, there was $6.4 of unrecognized compensation expense under this plan, which is expected to be recognized over the remaining three year period. The following table presents the stock award activity of the Employee Stock Purchase Plan for the years ended December 31, 2011 and 2010: Executive Stock Purchase Plan - The Company also offers a stock purchase plan for certain members of its executive management and the executive management of its subsidiaries and certain affiliated companies. Under this plan, participants will receive incentive cash bonuses which are used to purchase shares of the Company which are deposited in a trust. 17. Income tax, asset tax and flat tax The components of the provision (benefit) for each jurisdiction for current and deferred income tax in 2011 and 2010 were as follows: 66 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 67

105 For the year ended December México U. S. Peru Total AMC files income tax returns in three jurisdictions, Peru, Mexico and the United States. For the years presented above the statutory income tax rates for Peru and the United States were 30% and 35%, respectively. The statutory income tax rate for Mexico was 30% in 2011 and Income tax: Current $ $ $ $ 1,408.3 Deferred (39.7) 44.3 (110.8) (106.2) Total provision for income tax $ $ $ $ 1,302.1 The Company has chosen to use the U. S. income tax rate of 35% for this tax rate reconciliation because most of the distributable retained earnings relate to AMC, a U. S. company. Peruvian income tax provision is the largest component of tax the expense for each of the two years presented. For all of the years presented, both AMC and the Company filed separate tax returns in their respective tax jurisdictions. Although the tax rules and regulations imposed in the separate tax jurisdictions may vary significantly, similar permanent items exist, such as items which are nondeductible or nontaxable. Some permanent differences relate specifically to AMC, such as the allowance in the U. S. for percentage depletion. For the year ended December México U. S. Peru Total Income tax: Current $ $ 12.2 $ $ Deferred (8.2) 66.9 Total provision for income tax $ $ 55.0 $ $ 1,030.9 The reconciliation of the statutory income tax rate to the effective tax rate is as follows: Expected tax 35.0% 35.0% Effect of income taxed at a rate other than the statutory rate (0.5) (0.4) Depletion (5.6) (5.7) Dividends Permanent differences Peru tax on net income deemed distributed Decrease in valuation allowance (3.3) - Difference in foreign tax base Decrease in unrecognized tax benefits for uncertain tax positions Other 0.1 (1.0) Effective income tax rate 30.1% 33.6% Temporary differences and carryforwards that gave rise to deferred tax liabilities, assets and related valuation allowances were as follows: Assets: Inventories $ $ Minimun tax credits Posterior benefit obligations Pension obligations Capitalized exploration expenses Foreign tax credit carryforward General business credit carryforward Reserves Tax loss carryforwards Capital loss carryforward Valuation allowance (57.5) (81.3) Hedging losses Effect on U. S. tax Peruvian deferred tax liabilities Other Total deferred tax assets 1,388.9 $ 1,372.7 Liabilities: Property and equipment $ (689.2) (755.3) Investments (57.0) (46.0) Deferred charges (35.3) (25.0) Retained earnings (85.4) (20.0) Mexican tax consolidated dividends (32.6) (32.7) Other (45.8) (8.5) Total deferred tax liabilities (945.3) (887.5) Total net deferred tax assets $ $ GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 69

106 The Company and Mexican Subsidiaries/Mexico In 2009, Mexico enacted new tax laws, which, among other things, impose restrictions on certain benefits of tax consolidation and temporarily increased the statutory tax rate. Under the previous tax consolidation rules, Mexican companies were allowed to indefinitely defer taxes assessed on dividends in excess of tax-basis retained earnings accounts that are distributed among entities of a consolidated tax group, and the offsetting net operating losses (NOL s) incurred by one entity against the profits of another entity, until the occurrence of certain events, such as the dissolution of the tax consolidation regime. The new law, which applies retroactively to qualifying dividends paid and the net operating losses since 1999, eliminates the indefinite deferral period and requires payment of the tax beginning in the sixth year following the dividend. The new law applies retroactively and reduced the NOL carryforward period from ten years to five years. The total liability affected by these amendments is $ This amount includes an additional liability of $22.6 recognized in 2009 and recorded as income tax expense in the consolidated statement of income; the balance of the liability $84.0 has been recorded as a deferred tax charge in prior years. In March 2011 and in June 2010, the Mexican mining company made tax payments of 125 mexican pesos and 121 mexican pesos (approximately $9.3 and $10), respectively in accordance with the changes in the law. In subsequent years these taxes will continue to be paid in March. The SCC has provided a deferred tax liability of $91.6 as of December 31, 2011 for the U. S. income tax effects of $951 of foreign earnings that may potentially be repatriated in the future by MM. At December 31, 2011, there were $778.2 of foreign tax credit available for carryback or carryforward. These credits have limited carryback and carryforward periods and can only be used to reduce U.S. income tax on foreign earnings included in the annual U.S. consolidated income tax return. At December 31, 2011 there were $63.4 of minimum tax credits available for carryforward. A valuation allowance again $50.9 of the minimum tax credits exists because the Company does not expect to be able to utilize a portion of credits due to separate company limitations. There were no other material U.S. tax credits at December 31, Peruvian Tax Matters- AMC obtains income tax credits in Peru for value-added taxes paid in connection with the purchase of capital equipment and other goods and services, employed in its operations and records these credits as a prepaid expense. Under current Peruvian law, AMC is entitled to use the credits against its Peruvian income tax liability or to receive a refund. The carrying value of these Peruvian tax credits approximates their net realizable value. Special Mining tax - The mexican statutory income tax rate increased to 30% from 2010 through 2012, will decrease to 29% in 2013, and to 28% in 2014 and thereafter. Mexican companies are subject to a dual tax system comprised of regular income tax and a corporate flat tax that was enacted in The rate under the corporate flat tax law is 17.5%. Mexican companies pay the greater of the corporate flat tax or regular income tax and determine its deferred income taxes based on the tax regime it expects to be subject to in the future. Based on earnings projections, the Company believes it will be subject to regular income tax for the foreseeable future and has calculated its temporary differences and deferred taxes based on the regular income tax law. AMC, Asarco and SCC/U. S. and PERU In September 2011, the Peruvian government enacted a new tax for the mining industry. This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for the first 10% of operating income margin and for each additional 5% of operating income margin is increased by an additional rate of 0.4% until 85% of operating income margin is reached. In the last quarter of 2011 AMC made provisions of $16.4 por this tax. This provision is included as income tax in the consolidated statement of income. Mexican Tax Matters In 2009, Mexico enacted new rules related to the income tax law, which, among other things, impose restrictions on certain benefits of tax consolidation and temporarily increased the statutory tax rate. U. S. Tax Matters As of December 31, 2010, SCC had unused U. S. net capital losses carryover of $30.0 which expired unutilized in SCC had a full valuation allowance on the capital loss carryforwards. As of December 31, 2011, SCC considers its ownership of the stock of MM to be essentially permanent in duration. The excess of the amount for financial reporting over the tax basis of the investment in this stock is estimated to be at least $2.9 billion. Under the previous tax consolidation rules, Mexican companies were allowed to indefinitely defer taxes assessed on dividends in excess of tax-basis retained earnings accounts that are distributed among entities of a consolidated tax group, and the offsetting net operating losses (NOL s) incurred by one entity against the profits of another entity, until the occurrence of certain events, such as the dissolution of the tax consolidation regime. The new law, which applies retroactively to qualifying dividends paid and the net operating losses since 1999, eliminates the indefinite deferral period and requires payment of the tax beginning in the sixth year following the dividend. The new law applies retroactively and reduced the NOL carryforward period from ten years to five years. The total liability affected by these amendments is $ This amount includes an addi- 70 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 71

107 tional liability of $22.6 recognized in 2009 and recorded as income tax expense in the consolidated statement of earnings; the balance of the liability $84 has been recorded as a deferred tax charge in prior years. In March 2011 and in June 2010, the Mexican parent company made tax payments of 125 million pesos and 121 million pesos (approximately $9.3 million dollares and $10 million dollares), respectively in accordance with the changes in the law. In subsequent years these taxes will continue to be paid in March. The Mexican statutory income tax rate increased to 30% from 2010 through 2012, will decrease to 29% in 2013, and to 28% in 2014 and thereafter. Management does not expect that any of the open years will result in a cash payment within the upcoming twelve months ending December 31, AMC s reasonable expectations about future resolutions of uncertain items did not materially change during the year ended December 31, In the second quarter of 2011, AMC reached agreement with the IRS and settled tax years 2005, 2006, and 2007 relating solely to separate tax returns filed by its subsidiary, Southern Copper Corporation. The following tax years remain open to examination and adjustment by the Company s three major tax jurisdictions: Mexican companies are subject to a dual tax system comprised of regular income tax and a corporate flat tax that was enacted in The rate under the corporate flat tax law is 17.5%. Mexican companies pay the greater of the corporate flat tax or regular income tax and determine its deferred income taxes based on the tax regime it expects to be subject to in the future. Based on earnings projections, the Company believes it will be subject to regular income tax for the foreseeable future and has calculated its temporary differences and deferred taxes based on the regular income tax law. Accounting for Uncertainty in Income Taxes- Peru: U.S.: Mexico: 2008 up to 2011 (years 1997 through 2006 have been examined by the Peruvian tax authority and the issues raised are being contested; no new issues can be raised for these years. Year 2007 is being examined since December 2011) 2008 and all future years 2004 and all future years The total amount of unrecognized tax benefits in 2011 and 2010, were as follows: In the fourth quarter of 2011, the IRS commenced its U.S. federal income tax audit of the Company for the years 2008 through At December 31, 2011, both the Company and its subsidiaries as ITM report no unrecognized tax benefits. This condition is evaluated periodically. Unrecognized tax benefits, opening balance $ $ Gross (decrease) increases tax positions in prior periods (0.1) 1.5 Gross increases current-period tax positions Increase (decrease) related to settlements with taxing authorities Unrecognized tax benefits, ending balance $ $ The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $106.3 at December 31, 2011 and $28.4 at December 31, These amounts relate entirely to U.S. income tax matters. AMC has no unrecognized Peruvian or Mexican tax benefits. As of December 31, 2011, AMC s liability for uncertain tax positions included $20.3 for accrued interest and penalties. At December 31, 2010, AMC s liability for uncertain tax positions included no amount for accrued interest and penalties. 18. Business segments: The Company s segments are organized using the management approach by industry and geographical region, resulting in five primary reportable segments: MM, the Branch, Asarco, ITM and Infraestructure. The MM (open pit and underground operations) produce copper, with production of by-products of molybdenum, silver and other material, the Branch and Asarco include integrated copper extraction, smelting and refining operations, produce copper, with production of by-products of molybdenum, silver and other material, mainly in Peru and the U. S., respectively. The corporate and other amounts originate from corporate activities performed in the U. S. ITM carries out railway transportation activities through its main subsidiary GFM mainly in México. Infraestructure activities are mainly performed by MCI and PEMSA which main operations are infraestructure services and oil well drilling, respectively. Information by segments is shown in the same format used by the Company s management to evaluate each business. An operating segment is defined as a component of the Company dedicated to business activities from which the Company generates income and incurs costs and expenses, with respect to which information for decision-making is prepared and in 72 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 73

108 respect of which the Company s management evaluates the allocation of resources periodically. The accounting policies of the segments are described in the summary of significant accounting policies. The Company assesses the performance by segment based on the operating income or (loss) before these expenses. The most significant data by business segment in 2011 and 2010 were as follows: Corporate Corporate MM The Branch Asarco ITM Infraestructure and other Total MM The Branch Asarco ITM Infraestructure and other Total Sales of product and services $ 3,563 $ 3,187 $ 1,904 $ 1,544 $ 175 $ - $ 10,373 Income from operations $ 2,087 $ 1,539 $ 654 $ 303 $ 28 $ 27 $ 4,638 Administrative expenses $ 51 $ 54 $ 14 $ 68 $ 16 $ (30) $ 173 Depreciation and amortization $ 146 $ 142 $ 87 $ 112 $ 14 $ - $ 501 Comprehensive financing result $ (1) $ (172) $ 11 $ (37) $ (63) $ (45) $ (307) Net income (loss) $ 1,446 $ 454 $ 448 $ 157 $ 21 $ (54) $ 2,472 Total assets, not including investment in shares of associated companies $ 4,222 $ 3,768 $ 4,058 $ 2,184 $ 217 $ 788 $ 15,237 Total liabilities $ 647 $ 3,380 $ 1,631 $ 772 $ 123 $ 609 $ 7,162 Net investment in property, plant and equipment $ 2,216 $ 2,204 $ 1,580 $ 1,394 $ 100 $ 148 $ 7,642 Capital expenditures $ (407) $ (206) $ (108) $ (355) $ (147) $ 6 $ (1,217) Sales of product and services $ 1,985 $ 3,164 $ 1,654 $ 1,173 $ 107 $ - $ 8,083 Income from operations $ 892 $ 1,712 $ 498 $ 269 $ (16) $ (60) $ 3,295 Administrative expenses $ 58 $ 63 $ 43 $ 13 $ 20 $ 52 $ 249 Depreciation and amortization $ 143 $ 137 $ 108 $ 83 $ 12 $ - $ 483 Comprehensive financing result $ (3) $ (150) $ (169) $ 23 $ - $ 70 $ (229) Net income (loss) $ 592 $ 650 $ 233 $ 204 $ (39) $ (30) $ 1,610 Total assets, not including investment in shares of associated companies $ 3,248 $ 4,868 $ 4,246 $ 1,800 $ 186 $ 64 $ 14,412 Total liabilities $ 689 $ 3,529 $ 2,633 $ 553 $ 118 $ 128 $ 7,650 Net investment in property, plant and equipment $ 1,880 $ 2,215 $ 1,614 $ 1,107 $ 104 $ - $ 6,920 Capital expenditures $ (141) $ (268) $ (46) $ (132) $ (17) $ - $ (604) 74 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 75

109 The Company made direct sales to customers and rendered railway transportation services in the following areas: 19. Derivative instruments: 2011 Country MM The Branch Asarco ITM Infraestructure Total U. S. $ 1,269 $ - $ 1,905 $ $ $ 3,174 México 1, , ,753 Europe 250 1,042 1,292 Peru China and Asia Latin America, except Mexico and Peru ,215 Derivative instruments AMC As part of its risk management policy, AMC occasionally uses derivative instruments to (i) safeguard the corporate assets; (ii) insure the value of its future revenue stream, and (iii) lessen the impact of unforeseen market swings of its sales revenues. To comply with these objectives AMC, from time to time, enters into commodities prices derivatives, interest rate derivative, exchange rate derivative and other instruments. AMC does not enter into derivative contracts unless it anticipates a future activity that is likely to occur that will result in exposing AMC to market risk. Copper swaps: From time to time AMC has entered into derivative contracts to protect a fixed copper or zinc price for a portion of its metal sales. Grand total $ 3,563 $ 3,187 $ 1,905 $ 1,544 $ 174 $ 10,373 Country MM The Branch Asarco ITM Infraestructure Total 2010 In 2011 and 2010, AMC entered into copper swaps and zero cost collar derivative contracts to reduce price volatility and to protect its sales value as shown below. These transactions meet the requirements of hedge accounting. The realized gains and losses from these derivatives were recorded in net sales on the consolidated statement of earnings and included in operating activities on the consolidated statement of cash flows. The following table summarized the copper derivative activity related to copper sales transactions realized in 2011 and 2010: U. S. $ 573 $ 708 $ 1,654 $ - $ - $ 2,935 México , ,152 Europe ,067 Peru China and Asia Latin America, except Mexico and Peru ,117 Derivative instruments - (42) (42) Grand total $ 1,985 $ 3,164 $ 1,654 $ 1,173 $ 107 $ 8, Copper swap contracts $ (13.5) $ 66.7 Copper collar call option contracts Realized gain (loss) on copper derivatives $ (13.5) $ 69.7 In addition, AMC has a hedge program to protect the sales value of a portion of its copper production for the first quarter of The hedge instruments are based on LME copper prices. AMC performed statistical analysis on the difference between 76 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 77

110 the average monthly copper price on the LME and the COMEX exchanges and determined that the correlation coefficient is greater than Based on this analysis AMC considers that the LME underlying price matches its sales priced at COMEX prices. These cash flow hedge relationships qualify as critical matched terms hedge relationships and as a result have no ineffectiveness. AMC performs periodic quantitative assessments to confirm that the relationship was highly effective and that the ineffectiveness was de minimis. Asarco has designed the following cash flow hedges as hedging instruments: the call option portion established a maximum price per pound. The primary objective of these contracts is to set a minimum price, and the secondary objective is to retain market upside. All of the contracts remained unsettled as of December 31, 2010, accordingly, there were no realized gains and losses reported in earnings for the year ended December 31, In addition, the Company did not have any significant gains or losses during the year ended December 31, 2010, resulting from hedge ineffectiveness. However, substantially all of the contracts were settled during 2011 and accordingly, the Company realized a loss in earnings of $2.7 for the year ended December 31, The Company estimates that approximately $7.7 in net losses that are currently reported in accumulated other comprehensive income will be reclassified into earnings during At the end of 2011 AMC held copper derivative contracts to protect a portion of its copper sales for 2011 and the first quarter 2012, as follows: Copper collar put option contracts Other current assets $ 7.7 $ 10.6 Copper collar put option contracts Other assets and deferred costs Commodity swap contracts Derivative liabilities - (117.9) Copper collar call option contracts Derivative liabilities (0.1) (73.3) Copper collar call option contracts Other liabilities and reserves - (4.7) $ 7.6 $ (181.8) Asarco s copper swaps: 1 st Quarter Zero cost collar contracts: Pounds (in millions) Average LME cap price $ 3.6 $ 5.18 Average LME floor price $ 2.2 $ 3.50 Estimate % of copper sales covered % At December 31, 2010, the Company held copper swap contracts for 212 pounds at an average price of $3.81 per pound valued at $118 with maturities through December These hedge transactions are intended to reduce short-term price volatility in earnings and cash flows associated with anticipated product sales. All of the contracts were unsettled as of December 31, 2010, accordingly, there were no realized gains and losses reported in earnings for the year ended December 31, In addition, the Company did not have any significant gains or losses during the year ended December 31, 2010, resulting from hedge ineffectiveness. However, all of the contracts were settled during 2011 and accordingly, the Company realized a loss in earnings of $72.7 for the year ended December 31, Asarco s copper collar: Realized gain on copper derivatives $ 13.5 $ - 1 st Quarter Swap contracts: Pounds (in millions) Weighted average COMEX price $ 3.4 $ - At December 31, 2010, the Company held zero-cost copper collar contracts for 251 pounds capped at an average price of $4.77 per pound (call option) with an average floor price of $3.18 per pound (put option) valued at $78 with maturities through March At December 31, 2011, the Company held zero-cost copper collar contracts for 39.7 pounds capped at an average price of $5.22 per pound (call option) with an average floor price of $3.50 per pound (put option) valued at $7.7, with maturities through March The copper collar contracts consist of the simultaneous purchase of an annual put option and the sale of an annual call option. The put option portion of this hedge effectively ensured a minimum price per pound while Unrealized gain recognized in other comprehensive income (net of income taxes of $3.5) $ - $ 5.4 The Company expects to reclassify into earnings during the first quarter of 2012 the unrealized gain included in accumulated other comprehensive loss of approximately $5.4 (net of income taxes) at the time the underlying hedged transactions are 78 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 79

111 realized. However, changes in copper prices in that period could increase or decrease the amount of the gain to be reclassified Location of Amount of into earnings. At the end of 2011 Asarco held copper derivative contracts to protect a portion of its copper sales for 2011 and the first quarter 2012, as follows: Derivatives Designated as Hedging Instruments Loss Recognized in Income on Derivative Loss Recognized in Income on Derivative st Quarter Zero cost collar contracts: Pounds (in millions) Average LME cap price $ 5.22 $ - Average LME floor price $ 3.50 $ - Estimate % of copper sales covered - - Copper collar call option contracts Revenue $ (2.7) $ - Commodity swap contracts Revenue (72.7) - Total $ (75.4) $ - Asarco had similar contracts that were not designated as hedging instruments which were settled as of December 31, A summary of the amount of loss recognized in income in 2010 is as follows: Realized gain on copper derivatives $ 2.7 $ 7.7 The amount of gains or losses reported in accumulated other comprehensive income for derivative financial instruments of Asarco as of December 31, 2011 and 2010 is as follow: Location of Amount of Loss Recognized Loss Recognized Derivatives Not Designated as Hedging in Income on in Income on Instruments Derivative Derivative 2010 Gain or (Loss) in Accumulated Cash Flow Hedging Relationships Other Comprehensive Income Copper collar put option contracts $ 7.7 $ 14.2 Copper collar call option contracts (0.1) (78.1) Commodity swap contracts - (117.9) Total $ 7.6 $ (181.8) Copper collar call option contracts Revenue $ (2.9) Commodity swap contracts Revenue (24.8) Total $ (27.7) Transactions under these metal price protection programs are accounted for as cash flow hedges under ASC Derivatives and Hedging-Cash Flow Hedges as they meet the requirements for this treatment and are adjusted to fair market value based on the metal prices as of the last day of the respective reporting period with the gain or loss recorded in other comprehensive income until settlement, at which time the gain or loss is reclassified to net sales in the consolidated statements of earnings. A summary of the amount of loss recognized in income on derivatives qualified as hedge accounting of Asarco, for the years ended December 31, 2011 and 2010 is as follows: AMC s Cross Currency Swap and Interest Rate 80 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 81

112 On September 9, 2011, AMC contracted with HSBC and Morgan Stanley an interest rate (IR) and cross currency swap (CCS) with the purpose of managing interest and exchange rate risk on its outstanding with syndicated credit with BBVA Bancomer, S. A. Institución de Banca Mutiple, Grupo Financiero BBVA Bancomer acting as broker, on liabilities denominated in Mexican Pesos, with notional of MXP $8,398.8 (US 617.7). The IR change the profile of interest payments from TIIE (Interbank interest rates) plus a margin between 4.0 and 6.5 points to fixed rate % the CCS result in a fixed exchange rate of MXP $ per one US dollar. To hedge the payment of principal and interest of loan denominated in that currency by the amount of MXP $8, Derivates have the same expiration date as the liabilities covered. The fair value of the IR and CCS at December 31, 2011 was $15.7 and recognized as liability. Ferrosur s Cross Currency Swaps and Interest Rate Ferrosur used the following methods and assumptions to determine the fair value of financial instruments: 20. Financial instruments Subtopic of ASC Fair value measurement and disclosures Overall establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under Subtopic are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Inputs that are observable, either directly or indirectly, but do not qualify as Level 1 inputs. (i.e., quoted prices for similar assets or liabilities). On September 29, 2006, Ferrosur entered into two Cross Currency Swaps (CCS) on liabilities denominated in dollars with notional amounts of $25.0 each, which expire on June 6, 2011 and 2013, respectively. The CCS result in a fixed exchange rate of $ per one US dollar, to hedge the payment of principal and interest of both loans, denominated in that currency by the amount of $25.0 each. The CCS also changes the profile of interest payments from 3-month LIBOR +.45% and.55% to a 28-day TIIE rate +.61% and.71%. Derivatives have the same expiration date as the liabilities covered. The CCS, which expires on June 6, 2013, began with quarterly payments from June 7, Tthe remaining balance at December 31, 2011 is $11.5. Although the CCS represent an effective hedge from an economic standpoint, for accounting purposes, from 2010, such instruments were classified as trading derivatives with the related fair value recognized in net comprehensive financing costs. The fair value of the CCS at December 31, 2011 and 2010 was $32.6 and $53.6 millions mexican pesos, respectively. On June 6, 2007, the Company contracted two IRS, which pay fixed interest rates and receive variable interest rates. One of those swaps whose notional amount totals was $789.9 millon mexican pesos, matures on a quarterly basis from June 7, 2010 until June 6, 2013, as of December 31, 2011 the remaining balance of $364.5 and the other IRS with a notional amount of $564.2 mexican pesos due on June 6, 2011 (in both cases the notional amount expiration dates coincide with the risk positions). During 2011, the Company paid the IRS interest rates 8.51% and 8.37%, respectively, and received a weighted average interest rate of 5.396% and 5.376%. The difference was recorded in comprehensive finance cost, in addition to the variable rate of the loan covered. The IRS fair values at December 31, 2011 and 2010 were recognized as liabilities of $9.3 and $28.9 million mexican pesos, respectively. In 2011, comprehensive income within stockholders equity was decreased by ($8.5 mexican pesos), being recognized again as interest accrued in comprehensive financing cost and deferred income taxes of $2.5 mexican pesos. The credits listed establish certain restrictions and obligations, which at December 31, 2011 and 2010 have been met. Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable (other than accounts receivable associated with provisionally priced sales) and accounts payable approximate fair value due to their short maturities. Consequently, such financial instruments are not included in the following table that provides information about the carrying amounts and estimated fair values of other financial instruments that are not measured at fair value in the consolidated balance sheet as of December 31, 2011: Balance at December 31, 2011 Carrying Value Fair Value Liabilities - Long-term debt (*) $ 3,826.8 $ 2, Balance at December 31, 2010 Carrying Value Fair Value Liabilities - Long-term debt (*) $ 3,983.2 $ 3,983.2 (*) Long-term debt is carried at amortized cost and its estimated fair value is based on quoted market prices classified as Level 1 in the fair value hierarchy. The Mitsui loan is based on the present value of the cash flow discounted at 10%, which is AMC s weighted average cost of capital. 82 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 83

113 Fair values of assets and liabilities measured at fair value on a recurring basis were calculated as of December 31, 2011 and 2010, are as follows: Balance at December 31, Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs 2011 (Level 1) (Level 2) (Level 3) Assets: Short-term investments: -Trading securities $ 1,034.7 $ 1,034.7 $ - $ - -Available for sale debt securities: Corporate bonds Asset backed obligations Mortgage backed securities Accounts receivable: - Derivatives - Classified as flow hedges: Zero Cost Collar Accounts receivable: -Derivatives - Not classified as hedges: Provisionally priced sales: Copper Molybdenum Copper collar put option Liabilities: Other current liabilities: -Liability derivatives - Classified as cash flow hedges: Swap Zero cost collar (15.7) - (15.7) - Balance at December 31, Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs 2010 (Level 1) (Level 2) (Level 3) Assets: Short-term investments: -Trading securities $ $ $ 0.8 $ - -Available for sale debt securities: Corporate bonds Asset backed obligations Mortgage backed securities Accounts receivable: -Derivatives - Not classified as hedges: Provisionally priced sales: Copper Molybdenum Copper collar put option Liabilities: Other current liabilities: -Liability derivatives - Classified as cash flow hedges: Swap (244.2) - (244.2) - Zero cost collar (150.8) - (150.8) - Total $ 96.8 $ $ (371.9) $ 1.2 Certain short-term trading securities investments are classified as Level 1 because they are valued using quoted prices of the same securities. Total $ 1,402.5 $ 1,394.3 $ 8.2 $ - The Company s short-term available-for-sale investments are classified as Level 2 because they are valued using quoted prices for similar investments. The Company classifies investments within Level 3 of the valuation hierarchy in certain cases 84 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 85

114 where there is limited activity or less observable inputs to the valuation. Investments classified within Level 3 as of December 31, 2010, include mortgage-backed securities. These investments are valued by the fund s management advisor taking into consideration different factors and methodologies considered appropriate in the circumstance. Factors can include the following or a combination of the following observed transactions, broker quotes, cash flow analysis, vendor prices and other factors, as appropriate. Derivatives are valued using financial models that use as their basis readily observable market inputs, such as time value, forward interest rates, volatility factors, and current and forward market prices for foreign exchange rates and a set of probabilities. The Company generally classifies these instruments within Level 2 of the valuation hierarchy. Such derivatives at December 31, 2011 and December 31, 2010, include copper swaps and zero cost collars. AMC operates four open-pit copper mines, five underground poly-metallic mines, two smelters and eight refineries in Peru and Mexico and substantially all of its assets are located in these countries. There can be no assurances that AMC s operations and assets that are subject to the jurisdiction of the governments of Peru and Mexico will not be adversely affected by future actions of such governments. Much of AMC s products are exported from Peru and Mexico to customers principally in the United States, Europe, Asia and South America. Financial instruments, which potentially subject AMC to a concentration of credit risk, consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. AMC invests or maintains available cash with various banks, principally in the United States, Mexico, Europe and Peru, or in commercial papers of highly-rated companies. As part of its cash management process, SCC regularly monitors the relative credit standing of these institutions. At December 31, 2011, SCC had invested its cash and cash equivalents as follows: The Company s accounts receivables associated with provisionally priced copper sales are valued using quoted market prices based on the forward price on the London Metal Exchange (LME) or on the Commodities Exchange (COMEX) in New York. Such value is classified within Level 1 of the fair value hierarchy. Molybdenum prices are established by reference to the publication Platt s Metals Week and are considered Level 1 in the fair value hierarchy. The table below sets forth a summary of changes in the fair value of the Company s Level 3 short-term investments (corporate bond, asset backed obligations, and mortgage backed securities), for the years ended on December 31, 2011 and Country % of total cash % invested in one institution United States 86.9% 25.2% Peru 9.1% 84.3% Mexico 4.0% 96.1% During the normal course of business, AMC provides credit to its customers. Although the receivables resulting from these transactions are not collateralized, AMC has not experienced significant problems with the collection of receivables. Balance at beginning of period $ 1.2 $ 3.1 Purchase, sales, issuance and settlements (net) - (1.3) Transfers in/out of Level 3 (1.2) (0.6) Balance at end of period $ - $ 1.2 AMC is exposed to credit loss in cases where the financial institutions with which it has entered into derivative transactions (commodity, foreign exchange and currency/interest rate swaps) are unable to pay when they owe funds as a result of protection agreements with them. To minimize the risk of such losses, the Company only uses highly-rated financial institutions that meet certain requirements. The Company also periodically reviews the creditworthiness of these institutions to ensure that they are maintaining their ratings. The Company does not anticipate that any of the financial institutions will default on their obligations. The total amount of unrealized loss for the period was included in other income (expense) in the consolidated statement of income for December 31, 2011 and 2010, respectively. Mining Division largest customers as percentage of accounts receivable and total sales were as follows: Concentration of risk Accounts receivable trade as of December 31 Five largest customers 43.9% 49.1% Largest customer 35.8% 16.3% 86 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 87

115 Total sales in year Five largest customers 73.7% 29.6% Largest customer 55.3% 9.9% 22. Commitments Mining segment Peruvian and Mexican Operation Power purchase agreement In 1997, SCC sold its Ilo power plant, to an independent power company, Enersur, S. A. ( Enersur ). In connection with the sale, a power purchase agreement was also completed under which the Company agreed to purchase all of its power needs for its Peruvian operations from Enersur for twenty years, commencing in October to maintain a three year period unless either party decides to terminate the agreement. The sale price of the molybdenum concentrates is based on the monthly average of the high and low Metals Week Dealer Oxide quotation. The roasting charge deduction is agreed based on international market terms. Under the terms of a sales contract with Molymex, S. A. de C. V., MM is required to supply at least the 85% of its molybdenum concentrates production from 2012 through The sale price of the molybdenum concentrate is based on the monthly average of the high and low Metals Week Dealer Oxide quotation. The roasting charge deduction is negotiated based on international market terms. American Operations: Asarco has entered into several lease agreements, substantially all for mining equipment, and has options to purchase that equipment. The options are at fixed prices prior to expiration of the leases and at fair market value upon expiration. The leases have been accounted for as operating leases. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year in the aggregate at December 31, 2011, are as follows: The Company signed in 2009 a Memorandum of Understanding ( MOU ) with Enersur regarding its power supply agreement. The MOU contains new economic terms that the Company believes better reflect current economic conditions in the power industry and in Peru. The new economic conditions agreed to in the MOU have been applied by Enersur to its invoices to the Company since May Additionally, the MOU includes an option for providing power for the Tia Maria project. During 2010 and 2011, the Company continued its negotiation with Enersur. However, due to the delay at the Tia Maria project the final agreement was put on hold. Period ended December $ Long-Term Sales Contracts Total $ 15.1 Under the terms of a sales contract with Mitsui & Co. Ltd. ( Mitsui ), the Company is required to supply Mitsui with 48,000 tons of copper cathodes annually through If the shipment destination is Asia, the pricing of the cathodes is based upon the LME monthly average settlement price. However, if the destination of shipments is the United States, the pricing of the cathodes is based upon the COMEX monthly average settlement price. In either case a producer premium will be included which is agreed upon annually based on world market terms. 90,000 tons related to a prior contract (period ) will be supplied as follows: 48,000 in 2014 and 42,000 in Total rental expenses was $46.2 and $69.2 for the years ended December 31, 2011 and 2010, respectively, and is included in costs of revenue in the consolidated statements of income. Included in total rental expenses are land royalty payments for $32.9 and $58.5 for the years ended December 31, 2011 and 2010, respectively. Asarco guarantees 100% of an operating lease of SBM, which is 75% owned by the Company. For the years ended December 31, 2011 and 2010, $6.5 and $6.2, respectively, are related to the SBM lease. Under the terms of a sales contract with Molibdenos y Metales, S. A., SPCC Peru Branch is required to supply 23,300 tons of molybdenum concentrates from 2012 through This contract may be extended for one more calendar year during each Letters of Credit, Surety Bonds and Guarantees During 2010 Asarco canceled its $5.0 standby letters of credit with Chase Bank, therefore as of December 31, 2011 and 2010, the amounts outstanding were $0. Asarco had outstanding surety bonds 88 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 89

116 totaling $15.5 and $15.2 at December 31, 2011 and 2010, respectively. These bonds are primarily associated with reclamation and permit obligations of $12.2 and $12.3 and other miscellaneous bonds of $3.1 and $2.9 as of December 31, 2011 and 2010, respectively. The underlying liabilities associated with the above-referenced financial assurances are reflected in the consolidated balance sheets as environmental remediation obligations. At December 31, 2011 and 2010, Asarco had a guarantee outstanding for 100% of an operating lease at SBM, of which 75% is owned by Asarco. The guarantee by Asarco was a requirement by the lessor as part of the lease agreement with SBM. The lease has a remaining term of 1-1/2 years at December 31, The maximum potential amount of future payments under the guarantee is approximately $8.3 at December 31, Payment would be required if SBM defaults on its lease obligations. Railway segment Commitments for minimum payments under lease agreements for the following years are as follows: Total $ Thereafter 95.1 Ferromex s operations are subject to Mexican federal and state laws, and to regulations related to environmental protection. Under these laws, guidelines have been issued concerning air, soil and water pollution, and studies have been carried out concerning environmental impact, noise control and hazardous residues. The Environment and Natural Resources Ministry (SEMARNAT for its acronym in Spanish) may impose administrative and criminal sanctions against companies that breach environmental laws and it has authority to partially or entirely close any facilities that fail to comply with such regulations. As of December 31, 2011, there are 3 administrative processes were opened before the Procuraduría Federal de Protección al Ambiente (PROFEPA), related to product s spills by railway accidents in which it hopes that lower economic sanctions could be imposed to Ferromex because the impacted soils sanitation was fulfilled. Regarding that none of these events had relevance or impact in the consolidated financial statements. All events related liberation of products to environment by railway accidents, which its cost be superior to fifty thousand dollars, these events are protected by coverages of assurance by environmental damages. Under the terms of the concession, the Mexican Federal Government has the right to receive payments from Ferromex equal to 0.5% of the gross revenue during the first 15 years of the concession and 1.25% during the remaining years of the concession. In the years ended on December 31, 2011 and 2010, such payments $8.0 and $5.79, respectively. As part the concession agreements, the Port Authority of Coatzacoalcos (APICOA) is entitled to receive from Transgolfo Terminal, S. A. de C. V. (subsidiary) a monthly fee per square meter of surface terminal. In the year December 31, 2011, the amount of these payments totaled $476. Ferromex leases the building where its main offices are located, the lease agreement is for ten years beginning from April 1, In addition, Ferromex leases certain equipment, such as hoppers, boxcars, flatcars and tanker cars. Total $ In January 1998, Ferromex entered into a fuel purchase agreement with PEMEX, under which Ferromex is required to purchase, at market value, a minimum of 19,575 cubic meters and a maximum of 38,650 cubic meters of diesel per month, although this limit may be exceeded, without any repercussion, in conformity to the modifying agreement which became effective since May 18, At the same time, in the modifying agreement which became effective from June 29, 2007, the purchase agreement has effect during four years and its validity will be extended for two years, and at the end of this two years period it will be renewed every year. Ferromex entered into a fuel purchase agreement with PEMEX, under which Ferromex is required to purchase, at market value, a minimum of 19,575 meters and a maximum cubic 38,650 meters cubic of diesel per month, although this limit may be exceeded, without any repercussions, according to the contract of sale of first-hand petroleum products for consumption concluded between PEMEX Refining and Ferromex which took effect from September 15, The contract is valid for four years renewable for an additional two years and therafter renewed each year. On January 5, 2001, Ferrosur entered into a contract with PEMEX refining for own consumption, which establishes a contractual volume in relation to any month that PEMEX refinery is forced to sell and Ferrosur to buy and indicating a maximum contract amount and a minimum contract volume by center assigned shipper, (volume 2,075 cubic meters (m3) minimum and maximum volume 10,500 m3 in total) that contract is effective from the date above and continues in force for an indefinite term until terminated by either party at the end of any month upon notice to the other party with at least three months in advance. On June 29, 2007 amended the contract and is valid for four years, after which written request may be made to extend for a term of two years and won it, for another year and so on for each year. 90 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 91

117 ITM is the guarantor of Ferrosur on: a. Syndicated loan with several banks operated on June 6, 2006 by CITIBANK, N. A., consists of the following segments: - $364.5 thousand Mexican pesos which bears interest at a rate of TIIE 28 days 0.575% with quarterly amortizations from June 6, 2010, until June 6, $11.5 thousand Mexican pesos bearing interest at Libor plus 0.55% three months, with quarterly amortizations from June 6, 2010, until June 6, b. Additionally Ferrosur uses the following methods and assumptions to determine the fair value of financial instruments: On September 29, 2006, Ferrosur hired two Cross Currency Swaps (CCS) on liabilities denominated in dollars with notional amount of $25.0 who conquered and settled on June 6, 2011 and $11.5, which expires on June 13, The CCS fix an exchange rate of $ per dollar, to cover the payment of principal and interest on two loans, denominated in that currency for the amount of $25.0 (liquidated in 2011) and $11.539, the CCS also change profile of interest payments of US-rate 3-month LIBOR % and 0.55% at a 28-day TIIE % and 0.71%. The derivatives have the same expiration date of the liabilities covered. On June 6, 2007 Ferrosur contracted two interest rate hedges (IRS) for its acronym in English Interest Rate Swap, through which pay fixed interest rates and receives variable interest rates. One of the swaps whose notional amount is $364.5 expires on June 6, 2013, and the other with a notional amount of $564.2 expired and was settled on June 6, 2011 (in both cases both the notional amount and maturity dates coincide with the risk positions.) During 2011, ITM paid Ferrosur interest rates 8.51% and 8.37%. The credits listed establish certain restrictions and obligations, which at December 31, 2011 and 2010 have been met. impact on nearby streams, reforestation programs to stabilize the surface of the tailings dams and the implementation of scrubbing technology in the mines to reduce dust emissions. Company s operations in Peru are subject to applicable Peruvian environmental laws and regulations. The Peruvian government through the environmental ministry conducts annual audits of Company s Peruvian mining and metallurgical operations. Through these environmental audits, matters related to environmental commitments, compliance with legal requirements, atmospheric emissions, and effluent monitoring are reviewed. The Company believes that it is in material compliance with applicable Peruvian environmental laws and regulations. Peruvian law requires that companies in the mining industry provide for future closure and remediation. In accordance with the requirements of this law the Company s closure plans were approved by MINEM. As part of the closure plans, the Company is providing guarantees to ensure that sufficient funds will be available for the asset retirement obligation. See Note 12, Asset retirement obligation, for further discussion of this matter. Company s operations in Mexico are subject to applicable Mexican federal, state and municipal environmental laws, to Mexican official standards, and to regulations for the protection of the environment, including regulations relating to water supply, water quality, air quality, noise levels and hazardous and solid waste. The principal legislation applicable to Company s Mexican operations is the Federal General Law of Ecological Balance and Environmental Protection ( General Law ), which is enforced by the Federal Bureau of Environmental Protection ( PROFE- PA ). PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and official standards. PROFEPA may initiate administrative proceedings against companies that violate environmental laws, which in the most extreme cases may result in the temporary or permanent closing of non-complying facilities, the revocation of operating licenses and/or other sanctions or fines. Also, according to the Federal Criminal Code, PROFEPA must inform corresponding authorities regarding environmental noncompliance. 23. Contingencies Mexican environmental regulations have become increasingly stringent in recent years, and this trend is likely to continue and has been influenced by the environmental treaty entered into by Mexico, United States and Canada in connection with NAFTA in Mining Segment Environmental matters Peruvian and Mexican Operation The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico. The Company s environmental programs include, among other features, water recovery systems to conserve water and minimize In relation the aforementioned, on January 28, 2011, Article 180 of the General Law was amended. This amendment, gives an individual or entity the ability to contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue that the harm may be caused. As a result of the amendment, more legal actions supported or sponsored by non-governmental groups, interested in halting projects, and not necessarily in protecting the rights of affected communities may be filed against companies operating in all industrial sectors, including the mining sector. 92 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 93

118 In addition, on August 30, 2011, amendments to the Civil Federal Procedures Code ( CFPC ) were published in the Official Gazette wich have already entered into force. These amendments establish three categories of collective actions, by means of which 30 or more people claiming injury derived from environmental, consumer protection, financial services and economic competition issues will be considered to be sufficient in order to have a legitimate interest to seek through a civil procedure restitution or economic compensation or suspension of the activities from which the alleged injury derived. The amendments to the CFPC may result in more litigation, with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm. On December 5, 2011, the Senate Chamber approved the Environmental Liability Federal Law which establishes general guidelines in order to determine which environmental actions will be considered to cause environmental harm that will give rise to administrative responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be established. This initiative has been turned to lower chamber for discussion and voting. The law will be in force once approved by the lower chamber and signed by the President. FIn March 2010, the Company announced to the Mexican federal environmental authorities the closure of the copper smelter plant at San Luis Potosi. The Company has initiated a program for plant demolition and soil remediation with a budget of $35.7, of which the Company has spent $22.5 through December 31, The program is expected to be completed by the end of The Company expects to remediate the site and promote an urban development to generate a net gain on the disposal of the property. The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other laws and regulations. The Company also believes that continued compliance with environmental laws of Mexico and Peru will not have a material adverse effect on the Company s business, properties, result of operations, financial condition or prospects and will not result in material capital expenditures. Hayden - The Environmental Protection Agency ( EPA ) notified Asarco that it was considering listing certain areas surrounding Asarco s Hayden Smelter in Hayden, Arizona, on the Federal Superfund s National Priorities List ( NPL ). The basis of the listing was ostensibly that emissions from the smelter have contributed to elevated levels of metals in soil. Asarco, the EPA, and the Arizona Department of Environmental Quality ( ADEQ ) entered into negotiations to address environmental conditions at the Hayden site without resorting to such a listing. The parties participated in extensive negotiations regarding the scope of actions to be taken at the Hayden site, which resulted in an agreement regarding cleanup of the site. Pursuant thereto, Asarco has begun work on certain residential yards that the EPA deems to be a high priority. As required to Secure its Obligations Under The approved settlement agreement, Asarco established and funded a $15.0 trust on July 3, The funds in the Hayden site trust are to be used to pay for (I) required cleanup of the residential areas surrounding the smelter and (II) to pay for additional investigative work at the Hayden site to identify any releases of hazardous substances if any such releases are not otherwise being addressed under any other regulatory program for cleanup. Under the settlement agreement, Asarco s liability for cleanup of the residential areas is limited to $13.5, while there is no cap on Asarco s liability for the cost of the required investigation activities of on-site remediation. The residential cleanup is substantially complete and management believes the funds in the Hayden site trust are adequate to cover any further investigative activities. The amounts reserved on the Company s consolidated balance sheets as of December 31, 2011 and 2010, were $6.7 and $8.1, respectively. On November 10, 2011 the EPA issued Asarco a Finding of Violation ( FOV ) stating it believed the Hayden smelter was a major source of Hazardous Air Pollutants ( HAP s ). In December, 2011, AMC met with the EPA, ADEQ and the State Attorney General s Office to consider possible resolutions to the FOV. Asarco discussed the progress of an anode ventilation project at the smelter and evaluations of additional smelter upgrades to comply with the newly implemented sulfur dioxide regulations. Asarco belives that this upgrade together with the anode ventilation project will reduce HAPs emissions to a verifiable degree sufficient to resolve the FOV. Further discussions and negotiations are expected to continue with the EPA and Department of Justice on this matter. Environmental remediation United States operations In connection with the matters referred to below, AMC is working with federal and state agencies to resolve environmental issues. Asarco accrues for losses when such losses are deemed probable and reasonably estimable. Such accruals are adjusted as new information comes to Asarco s attention or circumstances change. These environmental liabilities are not discounted to present value. Recoveries of environmental remediation and related costs from insurance carriers and other parties are recorded as assets when realized. Remedial action is being undertaken by Asarco at, and in some instances nearby, some of the following sites: Rosemont Mining Property Avoidance Action - In 2007, Asarco filed a complaint to avoid the transfer of certain of its property located in Pima County, Arizona, to Rosemont Ranch, LLC ( Rosemont ). Asarco sold the property for $4.2 to certain defendants while Asarco was insolvent, and certain defendants then sold the property less than one year later to other defendants for approximately $20.0. The property contains substantial proven and probable mineral reserves. On January 15, 2009, the parties executed a term sheet compromising and setting Asarco s claims in the lawsuit. In February 2009, the settlement was approved by the Bankruptcy Court and the initial payment of $1.3 was made to Asarco on March 16, Additionally, the agreement calls for $9.0 over eight years, payable from profits, if any, of production at the Rosemont project and subject to an option ( Buy-Back Option ), which, if exercised, would require Augusta Resources Corporation ( Augusta ) (the current owner) to pay Asarco the net present value of such payments in cash calculated using an 18% 94 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 95

119 discount rate. For 2009, the parties agreed that the option exercise price would be $2.6. In October 2010, Augusta resources exercised the Buy-Back Option and paid the Company $2.7 to satisfy its obligation in full under the settlement agreement. The amount was recorded in other income (expense) in the consolidated statements of income. After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the Branch (the 2000 appeal), the Peruvian Supreme Court annulled the proceedings noting that the civil courts lacked jurisdiction and that the matter had to be decided by a labor court. Litigation matters Peruvian operations In October 2007, in a separate proceeding initiated by the plaintiffs, the Peruvian Constitutional Court nullified the September 19, 2001 Peruvian Supreme Court decision and ordered the Supreme Court to decide again on the merits of the case accepting or denying the Branch s 2000 appeal. Garcia Ataucuri and Others against the Company ( SCC s Peruvian Branch, Branch or Peruvian Branch ): In April 1996, the Branch was served with a complaint filed in Peru by Mr. Garcia Ataucuri and approximately 900 former employees seeking the delivery of a substantial number of its labor shares (acciones laborales) plus dividends on such shares, to be issued to each former employee in proportion to their time of employment with SCC s Peruvian Branch. The labor share litigation is based on claims of former employees for ownership of a portion of labor shares that the plaintiffs state that the Branch did not issue during the 1970s until 1979 under a former Peruvian mandated profit sharing system. In 1971, the Peruvian government enacted legislation providing that mining workers would have a 10% participation in the pretax profits of their employing enterprises. This participation was distributed 40% in cash and 60% in an equity interest of the enterprise. In 1978 the equity portion, which was originally delivered to the mining industry organization, was set at 5.5% of pre-tax profits and was delivered mainly in the form of labor shares to individual workers. The cash portion was set at 4.0% of pre-tax earnings and continued to be delivered to individual employees also in proportion to their time of employment at the Branch. In 1992 the workers participation was set at 8%, with 100% payable in cash and the equity participation was eliminated from the law. In relation to the issuance of labor shares by the Branch in Peru, the Branch is a defendant in the following lawsuits: 1) Mr. Garcia Ataucuri seeks delivery, to himself and each of the approximately 900 former employees of the Peruvian Branch, of the 3,876,380, old soles or 38,763, labor shares (acciones laborales), as required by Decree Law (a former profit sharing law), to be issued proportionally to each former employee in accordance with the time of employment of such employee with SCC s Branch in Peru, plus dividends on such shares. The 38,763, labor shares sought in the complaint, with a face value of old soles each, represent 100% of the labor shares issued by the Branch during the 1970s until 1979 for all of its employees during that period. The plaintiffs do not represent 100% of SCC s eligible employees during that period. It should be noted that the lawsuit refers to a prior Peruvian currency called sol de oro or old soles, which was later change to the inti, and then into todays nuevo sol. One billion of old soles are equivalent to today s one nuevo sol. In May 2009, the Supreme Court rejected the 2000 appeal of the Branch affirming the adverse decision of the appellate civil court and lower civil court. While the Supreme Court has ordered SCC s Peruvian Branch to deliver the labor shares and dividends, it has clearly stated that SCC s Peruvian Branch may prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former employees in accordance with the profit sharing law then in effect, an assertion which SCC s Peruvian Branch continues to make. None of the resolutions state the manner by which SPCC must comply with the delivery of such labor shares or make a liquidation of the amount to be paid for past dividends and interest. On June 9, 2009, SCC s Peruvian Branch filed a proceeding of relief before a civil court in Peru seeking the nullity of the 2009 Supreme Court decision and in a separate proceeding a request for a precautionary measure. The civil court rendered a favorable decision on the nullity and the precautionary measure, suspending the enforcement of the Supreme Court decision, for the reasons indicated above and other reasons. In February 2012, the Branch was notified that the civil court had reversed its decision regarding the nullity. The precautionary measure is still in effect. The Peruvian Branch has appealed the unfavorable decision before the superior court. In view of this, and the recent civil court decision, SCC s Peruvian Branch continues to analyze the manner in which the Supreme Court decision may be enforced and what financial impact, if any, said decision may have. 2) In addition there are filed against SCC s Branch the following lawsuits which seek the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and dividends: Cornejo Flores and others v. SCC s Peruvian Branch (filed May 10, 2006); Alejandro Zapata Mamani and others v. SCC s Peruvian Branch (filed June 27, 2008); Arenas Rodriguez and others, represented by Mr. Cornejo Flores, v. SCC s Peruvian Branch (filed January 2009); Eduardo Chujutalli v. SCC s Peruvian Branch (filed May 2011); Edgardo García Ataucuri, in representation of 216 of SCC s Peruvian Branch former workers, v. SCC s Peruvian Branch (filed May 2011); Silvestre Macedo Condori v. SCC s Peruvian Branch (filed June 2011); Juan Guillermo Oporto Carpio v. SCC s Peruvian Branch (filed August 2011); Rene Mercado Caballero v. SCC s Peruvian Branch (filed November 2011) and Enrique Salazar Alvarez and others v. SCC s Peruvian Branch (filed December 2011). SCC s Branch has answered the complaints and denied the validity of the claims. 96 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 97

120 SCC s Peruvian Branch asserts that the labor shares were distributed to the former employees in accordance with the profit sharing law then in effect. The Peruvian Branch has not made a provision for these lawsuits because it believes that it has meritorious defenses to the claims asserted in the complaints. Additionally the amount of this contingency cannot be reasonably estimated by management at this time. as the owner of the Virgen Maria concession. SCC s Branch has answered the complaint and denied the validity of the claim. As of December 31, 2011, this case remains open with no further developments. SCC asserts that the lawsuits are without merit and is vigorously defending against these lawsuits. 3) Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria): Mexican Operations In August 2010, a lawsuit was filed against SCC s Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession Virgen Maria, which forms part of the Tia Maria project. SMRL Virgen Maria sold this mining concession in July 2003 to Excomet (see above noted case). The plaintiff alleges that the sale of the mining concession Virgen Maria to Excomet is null and void because the persons who attended the shareholders meeting of SMRL Virgen Maria, at which the purchase was agreed upon, were not the real owners of the shares. The plaintiff is also pursuing the nullity of all the subsequent acts regarding the mining property (acquisition of the shares of Excomet by SCC s Branch, noted above, and the sale of the concession to SCC s Branch by Excomet). On October, 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations. The plaintiff has appealed this decision before the superior court. At December 31, 2011, resolution of the appeal was pending. Pasta de Conchos Accident: On February 19, 2010, three widows of miners, who perished in the 2006 Pasta de Conchos accident, filed a complaint for damages in the United States District Court for the District of Arizona against the defendants, Grupo Mexico, AMC and SCC. The plaintiffs allege that the defendants purported failure to maintain a safe working environment at the mine amounted to a violation of several laws and treaties. The Company considers that the court does not have subject-matter jurisdiction over the plaintiffs claims and will defend itself vigorously. On April 13, 2010, the Company filed a motion to dismiss the plaintiffs complaint. On March 29, 2011, the District Court for the District of Arizona dismissed the case for lack of subject-matter jurisdiction. On April 5, 2011, the plaintiffs filed a notice of appeal in this case. At March 30, 2012, resolution of the appeal was pending. United States operations 4) Exploraciones de Concesiones Metalicas S. A. C.: Disputed Claims Reserve ( DCR ) In August 2009, a lawsuit was filed against SCC s Branch by the former stockholders of Excomet. The plaintiffs allege that the acquisition of Excomet s shares by the Branch is null and void because the $2 million purchase price paid by the Branch for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch. In 2005, the Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the plaintiffs, which were all of the stockholders of Excomet, approved the transaction in a general stockholders meeting. Excomet was at the time owner of a mining concession which forms part of the Tia Maria project. In October 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations. The plaintiff has appealed this decision before the superior court. At December 31, 2011, resolution of the appeal was pending. 5) Omar Nunez Melgar: In May 2011, Mr. Omar Nunez Melgar commenced a lawsuit against the Peruvian Mining and Metallurgical Institute and the MINEM challenging the denial of Mr. Nunez s concession request that conflicted with SCC s Branch s Virgen Maria concession, which forms part of the Tia Maria concession. SCC s Branch has been made a party to the proceedings Management had identified certain bankruptcy claims at December 31, 2009, that requires Asarco to settle in cash. These contingent liabilities are related to the following: Administrative claims of labor unions, medical plan administration fees, and other miscellaneous items Certain enhancement claims by legal firms, consulting firms, and other professionals participating in the bankruptcy proceedings Substantial contribution claims, by previous officers, board members, and plan participants The full face value of claims remaining in the DCR on December 31, 2011 is approximately $31.1. Management believes the likelihood of any of these claims prevailing at face value is remote and will not have a material adverse effect on Asarco s financial position, results of operations, or cash flows because the Parent s Plan Administrator ( PPA ) has reserved cash in the DCR for future payments of these unsettled administrative general unsecured claims and any successful remaining administrative claims listed above. On December 31, 2011 and 2010, the DCR restricted cash balances were $129.9 and $139.1, respectively. In addition to the assets recorded as restricted cash, Asarco has recorded associated liabilities in the 98 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 99

121 amounts of $25.3 and $31.7 at December 31, 2011 and 2010, respectively. The liability amounts represent management s best estimate to ultimately settle and pay these contingent claims at the full allowed amount. Any residual cash in the DCR will be returned to Asarco, and any deficiency will be funded by Asarco. Management believes the amount is sufficient to pay the disputed claims in full and will not have a material adverse effect on Asarco s consolidated financial position, results of operations, or cash flows. Labor matters In recent years the Company has experienced a number of strikes or other labor disruptions that have had an adverse impact on its operations and operating results. Peruvian Operations Approximately 61% of the 4,159 Company s Peruvian workers were unionized at December 31, 2011, represented by eight separate unions. Three of these unions, one at each major production area, represent the majority of the Company s workers. In September 2010, the Company reached a collective bargaining agreement with these three unions which will expire on August 31, This agreement includes, among other things, a 5% annual salary increase and a signing bonus of approximately for each of the workers (approximately 2,000). In addition, this agreement provides a productivity bonus program for the departments that reach certain goals. In addition, there are five smaller unions, representing the balance of the workers. Collective bargaining agreements with these unions will expire in November The Company expects that negotiations with the eight unions will likely continue throughout the first quarter of There were no strikes during 2011 and Mexican operations now operating the facility at full capacity. In 2011, the Company completed all repairs to the Buenavista mine at a total cost of $212.8, of this $131.7 were capitalized and $81.1 were charged to operating cost. On June 6, 2011, the Confederation of Mexican Workers ( CTM ) was awarded the collective bargaining agreement of the Buenavista del Cobre s union by the Federal Board of Conciliation and Arbitration. CTM now represents around 780 workers of this mine. Additionally, the San Martin and Taxco mines have been on strike since July On December 10, 2009, a federal court confirmed the legality of the San Martin strike. In order to recover the control of the San Martin mine and resume operations, on January 27, 2011, the Company filed a court petition requesting that the court establish the Company s responsibility for the strike and that it define the termination payment for each unionized worker. The court denied the petition alleging that according to Federal labor law, the union was the legitimate party to file the petition. On appeal by the Company, on May 13, 2011, the Mexican federal tribunal accepted the petition of the Company. In July 2011, the union appealed the favorable court decision before the Supreme Court. At March 30, 2012, resolution of the appeal was pending. In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, the Company commenced litigation seeking to terminate the labor relationship with workers of the Taxco mine (including the related collective bargaining agreement). On September 1, 2010, the federal labor court issued a ruling approving the termination of the collective bargaining agreement and all the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. The ruling was based upon the resistance of the mining union to allow the Company to search for reserves at the Taxco mine. If sustained, this ruling will also have the effect of terminating the protracted strike at the Taxco unit. The mining union appealed the labor court ruling before a federal court. In September 2011, the federal court accepted the union s appeal and requested that the federal labor court review the procedure and to take into account all the evidence to issue a new resolution. On January 3, 2012, the federal labor court again issued a new resolution, approving the termination of the collective bargaining agreement and all the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine. On January 25, 2012, the mining union appealed the resolution before the federal court. The resolution of the appeal is expected to be issued within the next months. Approximately 75% of the Company s 7,975 Mexican workers were unionized at December 31, 2011, represented by three separate unions. Under Mexican law, the terms of employment for unionized workers is set forth in collective bargaining agreements. Mexican companies negotiate the salary provisions of collective bargaining agreements with the labor unions annually and negotiate other benefits every two years. The Company conducts negotiations separately at each mining complex and each processing plant. In recent years the Buenavista mine experienced several labor stoppages. The latest labor stoppage started in July 2007 and finished in June The Company began the rehabilitation of the Buenavista mine during the second half of 2010 and is Other legal matters Class actions: Three purported class action derivative lawsuits were filed in the Delaware Court of Chancery (New Castle County) late in December 2004 and early January 2005 relating to the proposed merger transaction between the Company and Minera Mexico, S. A. de C. V. (the Transaction ), which was completed effective April 1, On January 31, 2005, the three actions - Lemon Bay, LLP v. AMC, et al., Civil Action No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al., and Southern Peru Copper 100 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 101

122 Corporation et al., Civil Action No. 969-N, and James Sousa v. Southern Peru Copper Corporation, et al., Civil Action No. 978-N were consolidated into one action, captioned. In re Southern Peru Copper Corporation Shareholder Derivative Litigation, Consol. Civil Action No. 961-N; the complaint filed by Lemon Bay was designated as the operative complaint in the consolidated lawsuit. The consolidated action purports to be brought on behalf of AMCand its common stockholders; the defendants in the consolidated action are AMC, German Larrea Mota-Velasco, Genaro Larrea Mota-Velasco, Oscar Gonzalez Rocha, Emilio Carrillo Gamboa, Jaime Fernando Collazo Gonzalez, Xavier Garcia de Quevedo Topete, Armando Ortega Gomez and Juan Rebolledo Gout (together, the AMC Defendants ), Carlos Ruiz Sacristan, Harold S. Handelsman, Gilberto Perezalonso Cifuentes, and Luis Miguel Palomino Bonilla (together, the Special Committee Defendants ). The consolidated complaint alleges, among other things, that the Transaction was the result of breaches of fiduciary duties by the Company s directors and was not entirely fair to the Company and its minority stockholders. On December 21, 2010, the Court dismissed the Special Committee Defendants from the action. October 14, 2011, the Court issued an opinion on this action finding that SCC had paid AMC too much stock consideration in the Transaction. The Court issued a revised final order and judgment on December 29, The Court decided that the AMC Defendants were jointly and severally liable for damages in the amount of $1,347 plus $684.6 of pre-judgment interest. Post-judgment interest continues to accrue from October 15, The Court decided that the award is payable by AMC with cash, or with the return of a number of shares of SCC equal in value to award, or by SCC cancelling an equivalent number of shares owned by AMC, or by any combination thereof, so long as the total is equivalent to the amount of the judgment plus accrued post-judgment interest. The Court also awarded attorneys fees and expenses in the amount of $304.7, or 15% of the judgment, plus post-judgment interest, payable by SCC out of the award and not from existing SCC s cash. On January 20, 2012, the AMC defendants appealed the Court s decisions. On the same date, SCC appealed the Court s decision related to the award of attorneys fees and expenses. The consolidated complaint alleges, among other things, that the transaction is the result of breaches committed by the directors of the Company of its fiduciary duties, and that is not entirely fair to the Company or to its minority shareholders. On December 21, 2010, the Court dismissed the Plaintiffs of the Special Committee of demand. certain former directors, AMC and Grupo Mexico as defendants. Two of the actions also name Asarco as a defendant. The actions purport to be brought on behalf of the Company s common stockholders. The complaints allege, among other things, that the proposed transaction would result in breaches of fiduciary duties by the defendants and is not entirely fair to the Company and its minority stockholders. The complaints seek, among other things, a preliminary and permanent injunction to enjoin the transaction, the award of damages to the plaintiffs and the class, and such other relief that the court deems equitable, including interest, attorneys and experts fees and costs. On January 25, 2011, the Oklahoma Firefighters and Sheet Metal Workers plaintiffs filed an amended and joint motion to consolidate and have Firefighters counsel appointed lead counsel. Plaintiffs also moved to stay the Martin and Griffin actions. The Sheet Metal plaintiffs have withdrawn their prior motion to consolidate in connection with the new motion. Oral argument on all plaintiffs motions and cross-motions to stay or consolidate and appoint lead counsel is pending. The Firefighters plaintiffs also moved for leave to file an amended complaint to add or supplement factual allegations concerning the summary judgment ruling in the Lemon Bay action described above. On April 1, 2011, the plaintiffs motion was granted. The defendants believe that these lawsuits are without merit and are defending against the actions. On October 28, 2011, AMC announced that it had withdrawn the proposed transaction to combine AMC and Southern Copper. The Company is involved in various other legal proceedings incidental to its operations, but the Company does not believe that decisions adverse to it in any such proceedings, individually or in the aggregate, would have a material effect on its financial position or results of operations. Additionally, the Company does not believe that the outcome of the purported class action derivative lawsuits would have a material adverse effect on its financial position or results of operations. While the defendants, including Grupo Mexico and its affiliates, believe that the claims in the purported class action derivative lawsuits are without merit, the Company cannot assure you that these or future claims, if successful, will not have an adverse effect on Grupo Mexico, AMC or the Company. United States Operations Oklahoma Firefighters Pension & Retirement System et al. v. SCC: Four purported class action derivative lawsuits have been filed in the Delaware Court of Chancery (Oklahoma Firefighters Pension & Retirement System et al. v. SCC et al., Gary Martin et al. v. SCC et al., Thomas Griffin et al. v. SCC et al., and Sheet Metal Workers Pension Plan of Northern California et al. v. SCC et al.) from August 2010 to October 2010 relating to the proposed combination of the Company with AMC, the parent company of Asarco. The complaints name SCC, its current and Asarco is a defendant in lawsuits in Arizona, the earliest of which commenced in 1975, involving the United States, Native Americans, and other Arizona water users. These suits seek damages for usage and alleged contamination of ground water. The lawsuits could affect Asarco s use of water at its Ray Complex, Mission Complex, and other Arizona operations. Asarco is also involved in multiple suits and claims against it arising from such matters as workers compensation claims and employment-related claims, among other matters. Management has analyzed the issues and has accrued approximately $2.8 and $1.8 to settle these additional litigation matters as of December 31, 2011 and 2010, respectively. 102 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 103

123 Other commitments Mining royalty charge The Company s Peruvian operations have been subject to a 1% to 3% mining royalty charge based on sales and calculated on the value of the concentrates and SXEW copper produced at the Toquepala and Cuajone mines. The Company made provisions for this charge in 2011 and 2010 of $52.5 and $65.5, respectively. In September 2011, the Peruvian Congress approved an amendment to the mining royalty charge. The new mining royalty charge is based on operating income margins with graduated rates ranging from 1% to 12%, with a minimum royalty charge assessed at 1% of net sales. If the operating income margin is 10% or less, the royalty charge is 1% and for each 5% increment in the operating income margin, the royalty charge rate increases by 0.75%, up to a maximum of 12%. In the last quarter of 2011, we made provisions of $19.3 for this charge. These provisions are included in Cost of sales (exclusive of depreciation, amortization and depletion) in the condensed consolidated statement of earnings. The Company has legal and valid title to the Tía Maria mining concessions and the over-lapping surface land in the area. None of above noted activities have in any way challenged, revoked, impaired or annulled the Company s legal rights to the Tia Maria mining concessions and/or the over-lapping surface land titles acquired in the past. All the Company s property rights on these areas are in full force. However, in view of the suspension of this project, the Company has reviewed the carrying value of this asset to ascertain whether impairment exists. Total spending on the project, through December 31, 2011, is $ As the project is currently suspended, some of the equipment is being used at the Company s mining operations at Toquepala and Cuajone. Should the Tia Maria project not be restarted, the Company is confident that the project equipment will continue to be used productively, through reassignment to other mine locations operated by the Company. While the Company may incur additional costs due to the delay, it believes that an impairment loss, if any, will not be material. Railway segment Negotiations being conducted with another Mexican railroad company Tia Maria Tia Maria, a Peruvian investment project of over $1.0 billion, was suspended by governmental action in April 2011 in light of protests and disruptions carried out by a small group of activists who alleged, among other things, that the project would result in severe environmental contamination and the diversion of agricultural water resources. While the Company continues high level negotiations with the Peruvian government, the Company has begun the preparation of a new EIA study. For this purpose, the Company proposes to stop the appeal process of the original EIA submitted to the MINEM in 2011 and to expedite the preparation of the new EIA that will address the issues and questions raised during the previous EIA approval process and provide the required technical answers. The Company considers that this new EIA process will alleviate all the concerns previously raised by the Tia Maria project s neighboring communities, provide them with an independent source of information and reaffirm the validity of the Company s assessment of the project. The Company is owed net receivables by Kansas City Southern México, S. A. de C. V. (KCSM) formerly TFM, S. A. de C. V. (TFM) accrued from 1998 to 2011 and negotiations are currently being conducted to determine the amounts receivable by segment (interline services and trackage and haulage rights) that are not properly defined in the concession titles. As of December 31, 2011 and 2010, net receivables were recorded in the amounts of $20.1 and $25.4, respectively. At December 31, 2011 Ferromex considers that these amounts have been properly assessed and therefore no additional contingencies have been recorded in order to take into account any contingent positive or negative results ensuing from the negotiations and legal proceedings specified below. Legal actions and administrative proceedings Ferromex is involved in various legal actions deriving from its normal operations. In regard to these actions, Ferromex and its legal counsel are of the opinion that regardless of their outcome when taken as a whole, they would have no material adverse effect on the Company s financial condition or on the results of its operations. The main legal actions in which the Ferromex is involved are the following: The Company is confident that this initiative will have a positive effect on its stakeholders and will allow the Company to obtain the approval for the development of the 120,000 ton annual production copper project. As a consequence, the project start-up is now rescheduled to While the new EIA is in process, some of the equipment purchased for Tia Maria is being assigned to our operations at Toquepala, Cuajone and Buenavista. a. Ordinary commercial actions against KCSM. Ferromex filed three actions against KCSM, requesting the Court s determination on the amounts to be paid as consideration for trackage rights, and interline traffic and interconnection services. At present these actions were settled as follows: 104 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 105

124 i. For the period running from February 19, 1998 to August 31, 2001, the amounts claimed at the time action was filed (nominal value) were for a total of Ps792.7 million and $20.6. After being processed at all court levels, Ferromex was denied constitutional relief under a writ of amparo, and although it s right to sue again was safeguarded, it was ordered to pay legal costs and expenses. Both parties filed various appeal actions. On June 17, 2009 the trial Court and the Fifth Chamber in Civil Matters were notified of the judgment by which Ferromex was ordered to pay legal costs and expenses in an approximate amount of $6,292. The total amount actually paid was the amount of $6.3 and is included in the entry for sundry expenses at December 31, By rulings dated May 18, 2010, published in the Judicial Bulletin on May 19, which were effective as of the 20th of the said month and year, issued in various appellate proceedings (1344/01/28, /29, /30, /31 and /32) the destruction of the appellate dossiers was ordered to take place after giving notice to the Court Chamber that a final an unappealable judgment had been rendered and the case closed. KCSM filed a brief dated May 27, 2010 by which it designated legal professionals for service of process purposes and a ruling on this brief was issued on June 2, No other procedural action has taken place since then. Notwithstanding the foregoing, and since due to the judgment rendered on February 3, 2005, Ferromex s right to sue again was safeguarded, it should be underscored that Ferromex is still entitled to recover the relevant amounts and therefore, at present, the draft of the new complaint to be filed is under review. ii. For the period running from September 1 to December 31, 2001, during which the sum claimed (at nominal value) amounts to a total of Ps21.0 million. After several actions were filed and remedies were sought by both parties, a final and conclusive judgment was rendered that found partially in favor of Ferromex. Nevertheless, both parties filed for appeal, the appeals were dismissed and the final judgment upheld. Both parties filed for constitutional relief under a direct amparo action. Ferromex was granted relief while relief was denied to KCSM. The amparo was granted to Ferromex in order for defendant to be sentenced to pay the legal costs and expenses incurred both at the trial and appellate levels, and therefore, by a ruling issued on November 4, 2009, the amparo judgment became final and conclusive, upholding the judgment rendered at the trial level in full but sentencing defendant to pay legal costs and expenses at both jurisdictional levels. Finally, by ruling issued on January 26, 2010, it was determined not to grant KCSM constitutional relief, and ordered that the case be sent to archives and finally closed. On August 12, 2010 a motion was filed claiming the settlement of the amount of interest accrued. On September 3, 2010, the trial Court issued a judgment and approved the proposal for the settlement of interest filed by Ferromex and KCSM was ordered to pay Ps8.0 million. On September 14, 2010, Ferromex filed an additional motion claiming settlement of default interest accrued from August 13, 2010 to September 9, On October 12, 2010, the trial Court issued an interlocutory judgment to resolve on the matter and approved the proposal for the settlement of interest filed by Ferromex. KCSM appealed this interlocutory judgment. With a brief filed on October 29, 2010, KCSM submitted to the Court a deposit voucher in an amount of Ps8.1 million, thus complying with judgments rendered on September 3, and October 12, 2010, settling the full amount KCSM was adjudged to pay by way of interest. Ferromex filed a brief dated November 4, 2010 acknowledging payment by KCSM. The original of the deposit voucher was delivered to the Ferromex on November 18, This matter has been settled and closed. iii. On September 19, 2006, Ferromex filed an ordinary commercial action against KCSM, seeking that accounts be rendered for the period running from January 2002 to December 2004, and claiming payment for the resulting amounts. As a result of this action both parties filed various legal remedies, as follows: Ferromex filed an appeal for rehearing against the ruling that admitted KCSM s cross-appeal; in August 2009, the Chamber granted Ferromex s appeal for rehearing and dismissed KCSM s cross-appeal filed against the ruling ordering discontinuance. By a ruling issued on December 11, 2009, The Second Collegiate Court in Civil Matters of the First Circuit granted Ferromex constitutional relief under a writ of amparo against the ruling that illegally ordered discontinuance of the action at the trial level. By a ruling issued on February 10, 2010, Ferromex filed a motion to charge KCSM for failure to respond to the motion under which KCSM was notified that Ferromex had petitioned for non-admission of the evidence submitted by KCSM. On the 24th of that same month, KCSM appealed the ruling issued on the motion. By a brief filed on March 2, 2010, Ferromex petitioned for the Court to admit closing arguments and on March 24, both Ferromex and KCSM submitted their briefs containing their closing arguments. By a judgment issued on May 12, 2010, the Court found in favor of KCSM and released it from making any payment on the amounts claimed by Ferromex. By a ruling dated May 31, 2010, the appeal filed by Ferromex against the judgment rendered at the trial level was admitted and process was served upon KCSM to reply within a term of 3 work days. KCSM filed its brief dated June 7, 2010 in response to Ferromex s bill of exceptions in the appeal proceeding. On June 10, 2010 the Court ruled that KCSM had submitted its answer to the exceptions and ordered that the appeal be remitted to the First Chamber in Civil Matters of the Superior Court of Justice of the Federal District for processing. By judgment rendered on October 7, 2010, the First Chamber admitted the appeal filed by Ferromex and overturned the May 12, 2010 judgment of the trial Court, ordering KCSM to render the accounts as sought by Ferromex. On November , KCSM filed for constitutional relief, under a direct amparo action against the judgment rendered on October 7, This action was brought before the jurisdiction of the Second Collegiate Court in Civil Matters of the First Circuit under case file D. C. 780/2010. On December 13, 2010 the action reached the sentencing stage. A final, executory judgment was rendered on April 7, 2011 and KCSM was granted constitutional relief in the amparo, and thus the First Chamber in Civil Matters was ordered to overturn the judgment rendered on October 7, 2010 and render judgment in substitution thereof adhering to the specified guidelines. By judgment rendered on May 9, 2011 the First Chamber in Civil Matters acted on the executory judgment dated April 7, 2011 and upheld the final judgment rendered on May 12, 2010 y the Ninth Court in case 754/2006 and ordered Ferromex to pay legal costs and expenses at both jurisdictional levels. On June 1, 2011 Ferromex brought a new direct amparo action for constitutional relief against this judgment with the Second Collegiate Court in Civil Matters of the First Circuit, under case file D. C. 414/2011. By an executory judgment issued on July 14, 2011, the afore mentioned Court resolved to deny Ferromex this relief, and thus the judgment which releases KCSM and orders Ferromex to pay legal costs and expenses became final and conclusive. b. Actions for annulment against several official communications issued by the Ministry of Communications and Transportation (SCT) on trackage rights, and interconnection and terminal services. Currently three of these actions are being 106 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 107

125 processed before the Federal Court of Administrative and Fiscal Justice (Spanish acronym TFJFA), the Supreme Court of Justice, the Collegiate Courts and the SCT. The Company is awaiting for rulings be issued on these actions. c. Action for annulment filed by KCSM. - Amendment to the FERROMEX Title to Concession. On October 18, 2006, the SCT published in the Official Gazette of the Federation the Amendment to the FERROMEX Title to the Concession of Ferrocarril Pacífico Norte (former name of Ferromex). KCSM objected to this amendment and filed an action for its annulment. The parties, after litigating this matter at the various jurisdictional levels, decided to both file, on February 22, 2010, briefs to abandon action as a result of the agreement they had reached. The case was addressed by the Court at a session held on August 4, 2010, and the Chamber en banc, ruled for dismissal and non-suit as a result of the voluntary discontinuance of the parties. d. Inquiry into Monopolistic Practices IO By means of official communication No. DGIPMAR- CI dated January 14, 2008, the Federal Commission of Economic Competition (COFECO) requested that Ferrocarril Mexicano, S. A. de C. V. and other companies submit sundry information, which Ferromex submitted on February 28, COFECO served Notices of Probable Responsibility to the companies which had participated in the stock acquisitions reported by Infraestructura y Transportes México, S. A. de C. V. (ITM) and Infraestructura y Transportes Ferroviarios, S. A. de C. V. (ITF) from November 2005 onwards. In November 2008 the stage for the offering of evidence in response to the Notice of Probable Responsibility came to a close and both KCSM and the companies against whom action was filed were granted a term to submit their arguments. On November 26 arguments were filed with COFECO. On January 22, 2009, a ruling was issued in this inquiry proceeding. On January 30, 2009, COFECO notified Ferromex of its ruling finding that the Company together with other companies were responsible for monopolistic practices and imposed monetary sanctions, the one imposed on Ferromex amounting to Ps82.2 million and GFM amounted to Ps0.7 million. The entities subject to this inquiry appealed for reconsideration. Ferromex, KCSM and COFECO have all continued with different legal actions. By ruling issued on June 9, 2009, COFECO decided to uphold its ruling of January 22, This decision was challenged by an amparo action (Case File 887/2009). The Federal Court of Fiscal and Administrative Justice remanded a certified copy of the ruling issued in administrative proceeding no. 3825/ , in which ITM and ITF are plaintiffs, by which the challenged ruling was annulled, that is to say, it is to be understood that COFECO has no objection in regard to the mergers carried out by plaintiffs. On September 28, 2010 the processing of the amparo action began. On December 17, 2010 the judgment at the trial level was published that was rendered by the Sixth District Court in Administrative matters dismissing the amparo action. On December 28, 2010, a motion for review was filed against this decision. Acting on a ruling issued on July 12, 2011, published on the 13th of this same month, the Thirteenth Collegiate court took cognizance of the review motion filed under case file RA (262/2011. By a ruling issued on 2011 the case was turned over to Mr. José Ángel Mandujano Gordillo as drafting judge. On August 23, 2011 Mr. Guillermo Fajardo was designated to act as drafting court clerk. The review and study of the case has not yet started. e. Federal Administrative Action, Case file 3825/ , ITM and ITF acting as plaintiffs, the former holding 74% of Ferromex s outstanding stock through GFM. Plaintiffs challenged by means of this action the resolution dated November 8, 2006 by which the COFECO board acting en banc in respect of case file RA reviewed under a joinder of actions, ruled on motions for reconsideration filed by ITM and ITF, upholding the resolution not to authorize the concentrations dated June 22, 2006, rendered in case file CNT reviewed under joinder of actions, and the resolution contained in official communication dated November 16, 2006, by which the COFECO board, acting en banc, tried to clarify the manner in which the resolution rendered in case file RA was voted. On February 2, 2007, an action for annulment was filed with the TFJFA and the case was assigned to the Fifth Regional Metropolitan Chamber. The action was admitted to be heard by a ruling issued on June 4, 2007 and the matter was assigned to the High Chamber for it to consider whether or not to exercise its authority to assert its jurisdiction. The High Chamber decided to exercise this authority over the matter in question. The action was resolved at its session held on May 12, 2010, and concluded that under the Federal Law of Economic Competition, the COFECO had to find that the acquisition of Ferrosur by ITM and ITF should be authorized, that is, it was to be considered that the COFECO had no objection to this transaction. This finding was notified to all parties involved. On November 29, 2010 ITM and ITF were given notice that the authority had filed an action for reconsideration against the May 12 judgment. On February 1, 2011 the action for reconsideration filed by COFECO was turned over to the First Collegiate Circuit Court in Administrative Matters under case file R. F. 68/2011. On March 25, 2011 the action was dismissed and therefore the May 12 ruling issued by the High Court was upheld. On April 1, 2011, the findings of fact and conclusions of this judgment were published. The High Court issued a ruling on April 4, 2011, acknowledging receipt of the judgment rendered by the First Collegiate Court. This matter is closed. The COFECO has not yet complied with the executory judgment, since it has not yet issued the certificate documenting that the concentration is not objected. f. Indirect Litigation. These are actions in which Ferromex is a codefendant by virtue of labor actions filed against Ferrocarriles Nacionales de México (FNM), which due to their particular characteristics cannot be quantified. Nevertheless any financial impact they may have has to be absorbed by the entity in charge of the liquidation of FNM or by the Federal Government, under terms previously agreed upon. g. Direct Litigation. These are labor-related actions filed against Ferromex and/ o Ferrosur as defendant. The amount of the entry recorded would have to be settled in the event the actions are lost and should there be no possibility of 108 GRUPO MÉXICO ANNUAL REPORT ANNUAL REPORT GRUPO MÉXICO 109

126 reaching a settlement. The amounts of the indemnities paid during 2011 and 2010 on labor-related actions were $4.8 and $0.3, respectively. As of December 31, 2011 and 2011, Ferromex considers that it has adequately assessed its accounts payable and its receivables and therefore it has not provided for an additional estimate to cover any potential positive or negative differentials arising as a result of the negotiations and legal actions described above. 24. Subsequent events The Company evaluated subsequent events after December 31, 2011, and through March 30, 2012, the date these consolidated financial statements were available for issuance, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these consolidated financial statements. i. In January 26, 2012, the Bankruptcy Court entered judgment in favor of the Company in the net amount of $82.75 related to a claim against Sterlite (USA), Inc., and Sterlite Industries (India) Ltd., (collectively, Sterlite ) for breach of an asset purchase agreement to acquire assets of the Company. The $82.75 the Company was awarded includes $ in interest damages, $30 in additional professional fees, less $50 representing a letter of credit Sterlite posted as security, which was previously drawn by the Company in November The judgment is open for appeal to seek reconsideration. The Company has not recorded a gain in the consolidated financial statements as of and for the year ended December 31, 2011, related to this judgment. ii. On January 26, 2012, the Grupo Mexico Board of Directors authorized a dividend of $0.40 cents per share to be paid on February 20, GRUPO MÉXICO ANNUAL REPORT