Mexican Market Profile Mining

Mexican Market Profile Mining March 31, 2007 Mexico City Prepared for: Ontario Ministry of Economic Development and Trade By: GAES Consultancy, SA de CV

Executive Summary Mexico is an economic leader in Latin America and a member of 12 Free Trade Agreements, and is one of the most important trading economies in the world. The main region of economic trade and Foreign Direct Investment (FDI) in Mexico lies in Mexico City. The Federal District is Mexico s largest and most important commercial market which generates 22% of the total GNP and receives a total of 41.7% of Mexico s FDI. There are many benefits to doing business with Mexico, including the National Mining Development Plan, the North America Free Trade Agreement, specialized sector concessions and promotion programs, Mexican mining legislation, and a proven interest in Canadian goods. Mexico is renowned for being the single largest producer of silver (17% of world production), celestite (38%) and bismuth (29%) i, but is also one of the world s largest producers of numerous minerals and base metals. Mexico remains significantly unexplored and recent geological surveys suggest that two thirds of the country possesses mineral deposits at least as significant as those of the currently operating mines. In addition, new exploration models have revived exploration activity in districts long considered defined and/or exhausted. Currently, the mining industry is in the middle of a price boom globally, with gold and silver prices at near record highs. The major industry players in Mexico are voicing confidence that this boom will continue for at least two more years, and are planning significant expansion projects on this basis. In 2007, an estimated $5.7 trillion will be invested in mining exploration globally, with 20% of that focused on Latin America. Between 2005 and 2006 in Mexico, there were twelve projects with a combined investment total of more than $1.3 million. The investments for the metallurgical mining sector at the closing of 2005 were $912.9 million an increase of 56% from 2004. The director of the Mexican Chamber for Mining (Camimex), Sergia Almazan, recently stated that, if the prices of metals continue high in the upcoming year, Mexico can expect to have exploration investments of over a billion dollars in 2007. In 2006, Mexico imported a total of US$7.4 billion from Canada, a market share of 2.88% and an increase 19.66% over 2005. The top three imported products, as in years previous, were vehicles (excluding railway), machinery and electrical machinery. There are 209 foreign mining companies currently exploring in Mexico, of which 75% are Canadian. 24 of the companies are from Ontario. In addition, there are 105 registered Mexican mining companies producing in the country. There are several ways in which to distribute mining products in Mexico, including direct sales, sales representatives, importers and distributors. The major players in the Mexican mining industry are Industriales Peñoles, Grupo Mexico, Empresas Frisco and Luismin/Goldcorp. There are also numerous major sector promotional opportunities, including upcoming trade shows and sector publications, as well as a large number of industrial chambers and government bodies directly related to the industry. 2

Table of Contents EXECUTIVE SUMMARY...2 1 BACKGROUND...5 Mexico General Information...5 Mexico Fact Sheet...6 Mexico City Statistics...7 2 WHY MEXICO?...8 National Mining Development Plan...8 The North America Free Trade Agreement (NAFTA)...8 Concessions...9 The Maquiladora Program...9 Sectoral Promotion Programs...9 Proven Interest in Canadian Goods...10 Mining Legislation...10 Environmental Pressures...11 Mining Safety in Mexico...11 3 MARKET OVERVIEW: MINING...13 International Economic Overview...13 Behaviour of International Markets...13 Introduction to the Mining Industry in Mexico...13 Main Mining Producing States in Mexico...14 Major Areas of Production...14 Silver...14 Lead and Zinc...15 Copper and Molybdenum...15 Gold...15 Oil...16 Coal...16 4 CANADA-MEXICO TRADE OVERVIEW...17 Canada-Mexico Investment...17 Canada-Mexico Trade by Province...17 Trade between NAFTA Partners...17 5 THE MEXICAN IMPORT MARKET...18 Imports from Canada to Mexico (Machinery)...20 6 SPECIFIC MINING OPPORTUNITIES IN MEXICO...21 Exploration...21 General Call for Proposals...22 Investment...23 Joint Venture/Partnership...26 7 COMPETITION...29 Ontario Mining Investment in Mexico...29 Exploration Mining Projects by Ontario Companies in Mexico 2006...29 Local Manufacturers...30 General Description of Distribution Channel...31 Direct Sales...31 Sales Representatives and Agents...31 Distributors...31 Importers...32 8 KEY PLAYERS IN THE MINING INDUSTRY...33 Industrias Peñoles...33 Grupo Industrial Minera México...35 Empresas Frisco...37 Luismin, SA de CV/Goldcorp Inc...38 9 SELECTED DISTRIBUTORS IN CENTRAL MEXICO...39 10 MAJOR SECTOR PROMOTIONAL OPPORTUNITIES...42 2007 Trade Shows...42 11 SELECTED SPECIALIZED CONTACTS IN KEY SECTORS...44 Mexican Government...44 Mexican chambers and associations...45 3

12 REFERENCE...47 13 FOOTNOTES...49 4

1 Background Mexico General Information Mexico has a stable free market economy that recently entered the trillion dollar class ii, due in part to strong Central Bank policies maintaining inflation at historical lows and maintenance of international reserve levels iii. Over the past few years, Mexico has been able to position itself as the eighth most important trading economy in the world. In Latin America, Mexico is the single most influential trading economy accounting iv for 44% of total exports and 49% of total imports for the region. Since the economic liberalization policy was put in place in 1994, Mexico has signed 12 Free Trade Agreements which have helped to drive its trade activity into a higher level of global competitiveness and to create a pro-initiative economy. 2006 was a banner year for Mexico, with a more than 4.8% growth in the economy the fastest economic growth for the country in six years due mainly to higher oil and tax revenue. Wholesale and retail figures continued to rise steadily, and the consumer confidence index gained an additional 0.5% v. The booming economy last year generated more than 950,000 new permanent jobs, with the average unemployment rate remaining unchanged. The Mexican Stock Market (Bolsa Mexicana de Valores, BMV) had another outstanding year, with the exchange s Index of Prices and Quotations closing out the year at an all-time high of 26,448.32; the year s gain was 8,845.61 points, 48.56% above the January 1, 2006 mark. As of January 2007, the nation s international reserves were close to $80 billion vi. Foreign Direct Investment (FDI) into Mexico rose 6.4% in 2006 to $18.94 billion vii. Inflation rose slightly to 4.05% after 2005 s notable low of 3.3%, but remains well within range of 2006 projected estimates. There was a slowdown in the Mexican economy in the last three months of 2006, attributed primarily to a slowdown in exports to the country s principal customer, the United States viii, and 2007 key target figures. However, economic analysts point to the dramatic 5.9% increase in the nation s construction sector, increased consumer spending and burgeoning export relationships with Canada, Argentina and Peru as evidence of continued future economic stability. Projections for 2007 include an annual increase of 3.6% in GDP ix. In fact, the decline in Mexico s economic reliance on the United States is evidence of significant trade opportunities between Mexico and other countries. According to a recent 2007 report by KPMG and the Economist Intelligence Unit (published in Poder y Negocios, January 16, 2007), there exists the perception that countries like Mexico offer a greater return on investments than markets like China and India. With the new federal government of Felipe Calderon pledging a significant investment in the country s infrastructure x, Mexico has positioned itself as a strong manufacturing platform with a high return on automotive, white line and construction materials. 5

Mexico Fact Sheet Mexico is the 11 th largest country in the world according to population, with 107.5 million residents and an annual population growth of 1.16% as of June 2006 xi. Slightly less than three times the geographic size of Texas, the land spans from high tropical mountains to desert. General Description xii Name: United Mexican States Type: Representative Federal Democratic Republic Capital City: Mexico City Official Language: Spanish Weight & measures: Metric Time: Most of Mexico is on Central Standard Time (1 hour behind Ontario) Currency: C$1 = 9.47603 MX Pesos (February 22, 2007) States: 31 states and one Federal District Demographic & Labour Indicators as of March 2007 Estimated total population: 107.5 million Estimated average population growth rate 2000-2005: 1.16% annually Country s average population density (people per square kilometre): 54 Labour force: 38.09 million Unemployment rate: 3.2% Average life expectancy male / female: 72.63 / 78.33 Literacy: 92.2% Economic Indicators Annual growth (GDP real growth rate, 2006): 4.5% GDP (purchasing power parity, 2006): US$1.134 trillion GDP (per capita, 2006): US$10,600 Inflation (consumer prices, 2006): 3.4% Total Imports (2006): US$253.1 billion Total Exports (2006): US$248.8 billion Foreign Direct Investment (2005): US$18.84 billion Political Data Executive Branch: The President of the Republic is elected by direct suffrage every six years. Current President Felipe Calderón Hinojosa was elected in July 2006. Legislative Branch: Chamber of Deputies (500 members) & Chamber of Senators (128) Judicial Branch: Supreme Court of Justice (11 magistrates) Main Political Parties: PRI: Partido Revolucionario Institucional PAN: Partido Acción Nacional PRD: Partido Revolución Democrática PVEM: Partido Verde Ecologista 6

Mexico City Statistics Mexico City, the Federal District or Distrito Federal, is the country s political, economical, financial, commercial, industrial and cultural centre. Although it is smaller in area than any other state in the country, it is by far Mexico s largest and most important commercial market. Nearly 8.5% of the country s population lives in the metropolitan area, and it ranks as the third largest city in the world (preceded by Tokyo, Japan and Sao Paulo, Brasil) xiii. Almost 51% of the country s total domestic migration either arrives into or leaves from the Metropolitan Zone of Mexico City, which reflects its influence nationwide. The metropolitan zones of Monterrey, Guadalajara, Puebla and the State of Mexico follow the Federal District in importance. Mexico City generates a significant 22% (MXP $1.67 million) of the total GNP and receives an impressive 41.7% of Mexico s total foreign direct investment xiv. By September 2005, 14,002 foreign capital companies were established in the Federal District. Table 1.1 shows the main federal entities that receive FDI capital in Mexico, and confirms importance of the Federal District. In addition, there are 36,633 manufacturing companies established in the country. These represent 6.5% of the total companies located in Mexico xv. Table 1.1: Major Mexican States for Foreign Investment Foreign Direct Investment: Federal Entity 2000-2004; USD Million Year Total Baja California Mexico City Guanajuato Jalisco State of Mexico Nuevo León 2000 17,174.6 972.6 8,261.4 73.0 1,162.5 467.7 2,389.7 2001 27,735.1 854.3 20,448.4 229.7 427.1 781.8 1,836.5 2002 17,121.4 926.8 10,991.5 133.4 216.5 698.9 1,492.8 2003 12,750.6 715.3 7,569.7 236.7 241.6 634.9 1,161.5 2004 17,909.7 944.3 12,197.2 24.9 390.9 724.9 886.8 Source: Secretary of Economics, General Division of Foreign Investment 7

2 Why Mexico? National Mining Development Plan Originally released in 2002 and currently being updated for release later in 2007, the National Mining Development Plan for Mexico focuses on strategic measures and guidelines designed to encourage and attract national and foreign explorers and producers to invest and conduct geological exploration work in areas where rich geological mineral deposits exist. There are four main challenges to having a competitive mining sector in Mexico. These challenges include: Technology Productivity Justice Balanced Regional Development The four objectives to face these challenges are: Create the adequate atmosphere that will enable incoming investment, both national and foreign. Diminish the risk and the cost of any exploration activities as well as the discovery of new mineral deposits. Improve the production capability of small and medium companies, as well as the social mining associations, in order to generate new jobs, infrastructure and income. Increase our mineral commodity market, its added value and the intregration of the industry with strategic and precursory sectors. The plan establishes the following strategies to aid in reaching the proposed objectives: Improve the legal and normative system. Achieve an efficient and transparent administration. Promote national and foreign investment. Provide basic geological information for any exploration activities. Grant technical and financial support to viable and profitable projects. Support social mining associations. Fortify the productive chain. The mining sector in Mexico therefore needs and is actively seeking strong capital investments from both national and foreign investors in order to remain as an international competitor. The North America Free Trade Agreement (NAFTA) In January 1994, Mexico joined Canada and the United States in the North American Free Trade Agreement, to phase out all tariffs over a 15-year period. Since its implementation in 1994, tariffs have been eliminated on 84.5% of all non-oil and nonagricultural Mexican exports to the United States and 79% of exports to Canada. The current duty free temporary import programs were eliminated as of January 1, 2001 for trade between Mexico, United States and Canada. 8

As of June 2007, less than 1% of products are subject to tariffs and, by 2008, there will be no tariffs on products traded by the three countries. Mexico's tariffs are based on the Harmonised Tariff System (HTS). Most duties are ad valorem, assessed on the freight on board (FOB) or cost, insurance and freight (CIF) value or at specific rates whichever is greater. Mexico s free trade agreement with the USA and Canada means that Canadian mining equipment suppliers have a tariff advantage over equivalent mining equipment imports from countries without free trade agreements, who typically face a tariff of between 10 and 20 per cent xvi. Concessions The Mexican Government has introduced a range of concessions to encourage the mining sector: Mexico's 15 per cent value added tax has been eliminated in all stages of gold commercialisation Mining companies are exempt from the country's asset tax for the first five years Mining companies are eligible for credits on the Special Tax on Production and Services when acquiring diesel fuel for use in vehicles Additional incentives for the mining sector have included tax regulations adjusted to international standards, access to capital sources through lines of credit, and more efficient processing of exploration and development claims xvii. The Maquiladora Program As of January 1, 2001, Mexico started applying new rules to the temporary imports of goods and services used by maquiladora plants in Mexico, as provided in the Decree that Establishes amendments for the Promotion and Operation of the Export Maquiladora Program (December 31, 2000). Reforms to the maquiladora program respond to Mexico s commitments under Article 303 of the NAFTA, which regulates duty drawback programs that refund or waive customs duties on materials used for the manufacture of goods subsequently exported to a NAFTA party. Under NAFTA, Mexico agreed to allow duty free temporary imports of inputs only if the input complies with the rule of origin when it is imported from another NAFTA country or if the final product is exported to a non-nafta country. Sectoral Promotion Programs Sectoral Promotion Programs are generally aimed at offering corporations competitive tariff conditions to acquire inputs and machinery, to prevent affecting their export operations. Sectoral Promotion Programs comprise four basic elements: Users of each program; End products to be produced by them; Inputs and machinery that may be imported by users of each; and Customs duties from 0% to 5% for final importation of inputs and machinery listed in each program. Such inputs and machinery do not include products 9

used in construction and infrastructure for water, light and telephone utilities as well as for large refining and energy supply work projects. Sectoral Promotion Programs yield significant benefits to user industries, such as: Grant producers certainty on tariff levels to be paid by them on their imports as of year 2001. Maintain competitiveness of manufacturing companies in Mexico that produce for exports and domestic markets. Promote the development of domestic and regional suppliers. In order to comply with Article 303 of the NAFTA, Mexico created 20 sectoral promotion programs for the following industries: electrical; electronics; furniture; toys; footwear; metals and minerals; machinery and equipment; photography; agricultural machinery; chemicals; rubber and plastics; steel; pharmaceuticals and medical equipment; transportation equipment (cars not included); paper and cardboard; wood; leather and leather products; automobiles and auto parts, and textiles and apparel. xviii Proven Interest in Canadian Goods According to Canadian Ministry of Finance, as of November 2006, Mexico became Canada s fourth largest export market after the United States, the United Kingdom and Japan with a total value of $6.7 billion over first eleven months of 2006. This number represents a growth of 553% and 21% over the January/November export values for 1993 (pre-nafta) and 2005 respectively xix. Strengthened by the positive national presence of such successful Canadian companies as Bombadier, these numbers are evidence of the strength of Canada s reputation within Mexico. During past trade missions organized by the Ontario Ministry of Economic Development and Trade, involved Mexican companies commented on the perceived highly quality of Canadian service and products. Mining Legislation Mexico s mining industry is represented by the Consejo de Recursos Minerales (Mineral Resources Council). The current Mining Law was enacted by Mexico s Congress in 1992 and published in the Diario Oficial de la Federacion (Official Federal Gazette) of June 26 of that year. Some of its articles were amended by congressional decree published in the Diario Oficial de la Federacion of December 24, 1996. Its current regulations, which superseded those of 1993, were published in the Diario Oficial de la Federacion on February 15, 1999. The Mexican government approved a restructuring of the Mining Law in 2005 to deregulate the sector and empower the Mexican Geological Service. The last major change to this legislation took place in 1992. There is a stable legal framework in the mining industry that facilitates business. Under the Mexican constitution, minerals are part of the national patrimony. The exploration, exploitation and beneficiation of the minerals will have preference over any other use for the land. Except for hydrocarbons, radioactive materials and salt, the law permits up to 100 percent private ownership in equity exploration, development and production of mineral substances. 10

Exploration concessions are granted for six years and are not renewable. There are no limits for the mining concession surfaces. Production concessions are awarded for 50 years and are renewable for a similar period xx. Mexican mining law offers the following advantages: It allows direct foreign investment with up to 100% ownership of the capital stock. It allows private sector participation in minerals previously considered as exclusive for the government (sulphur, phosphorus, potassium, iron ore and coal). The general guidelines issued by the concession granting bidding of nonincorporated assignations are established. The concept of economic counterproposal is added. Timing and authority s answers to the canceling of concessions, or substitutions obtained in a bidding, are established, and the same applies to cases when the bidding was declared deserted xxi. Environmental Pressures The international mining sector has been under increased pressure in recent years to address issues surrounding sustainable development and the environment. On March 29 th, 2007, Canadian mining representatives and advocacy groups, including Ottawa-based MiningWatch Canada, announced an accord that would create the first independent mining ombudsman as well as sketch out environmental and social standards for projects in the developing world. The report calls upon governments to withdraw diplomatic support and tax breaks to any companies failing to uphold these standards. xxii As 75% of the foreign companies currently invested in mining in Mexico are Canadian, this new accord promises significant environmental reforms. Under Mexican mining law, concessionaires must comply with federal environmental regulations, which generally require that mining activities be subject to an environmental impact statement authorisation. In order to avoid the need to file an environmental impact statement for all exploration activities, Official Mexican Norm NOM-120-ECOL-1997 on Specifications of Environmental Protection for Direct Exploration Mining Activities was published in the Diario Oficial de la Federacion of November 19, 1998, setting forth certain thresholds that if not exceeded make the filing of an impact statement unnecessary. In the absence of extraordinary circumstances, an environmental impact statement authorisation can usually be obtained in from six to 12 months from its being filed. Mining Safety in Mexico Mexico is still battling the effects of historical incompetence with regards to mining safety a reputation that returned to the spotlight after an explosion at major domestic producer Grupo Mexico s Pasta de Conchos mine on February 19 th, 2006, which claimed the lives of 65 miners. This reputation is not altogether deserved today, and further research and due diligence with regards to the issue of mining safety should be undertaken by Canadian companies interested in doing business in Mexico. The International Labour Organisation (ILO) considers mining, especially coal mining, to be one of the most dangerous types of work. Each year over 15,000 miners are killed in accidents worldwide xxiii. Many of these deaths, in Mexico and throughout the 11

world, are the result of negligence on the part of the respective mining companies and lax inspection processes. In addition to the established mining companies, Mexico has hundreds of pocitos or little holes : tiny mining outposts that can produce up to 30 tons of coal per day with no more than 20 workers and a history of bypassing federal safety standards. These tiny mines are often no more than holes in the ground, with no ventilation, no communications sytems and no standards for removing highly combustible coal dust. Pocito coal continues to be purchased by the Mexico government for two major power plants near the Texas border xxiv. However, while Mexico does continue to be home to numerous mines with insufficient safety procedures and infrastructure in place, it is important to note that companies like Industrias Peñoles, the largest silver producer in the world, operates world-class mines in complete cooperation with safety standards. In addition, as a direct response to the February 2006 explosion, the current federal government under President Felipe Calderón, along with the Energy Commission of the Chamber of Representatives of the Mexican Congress of the Union, are in the process of implementing a number of strict safety reforms for the mining industry in Mexico. For more information on these reforms, please see the Decree that Reforms the Regulations of Law that Regulates Constitutional Article 27 on Matters of Petroleum, as well as the Mining Law. 12

3 Market Overview: Mining International Economic Overview Global output rose by 4.4% in 2005, led by China (9.3%), India (7.6%), and Russia (5.9%). The 14 other successor nations of the USSR and the other old Warsaw Pact nations again experienced widely divergent growth rates; the three Baltic nations continued as strong performers, in the 7% range of growth. Growth results posted by the major industrial countries varied from no gain for Italy to a strong gain by the United States (3.4%). The developing nations also varied in their growth results, with many countries facing population increases that erode gains in output. The opening of war in March 2003 between a US-led coalition and Iraq added new uncertainties to global economic prospects. The complex political difficulties and the high economic cost of the conflict in Iraq continue to be major global problems going into 2007. According the CIA World Factbook, the GDP of the world grew by an estimated 5.1% in 2006 to Gross World Product of US$65 trillion. Much of this can be attributed to increased military spending and appropriation of the investment opportunities in Iraq on the part of the United States xxv. Behaviour of International Markets 2001 to 2006 are being referred to as a bubble period for the precious metals and oil markets: values have risen so high and so quickly during this period that many speculators are fearing the inevitable popping of the bubble. From September 2005 onwards, the price of silver has risen fairly steeply, being initially around $7 per troy ounce but reaching $14 per ounce for first time by late April of 2006. The monthly average price of silver was $12.61 per oz. during April 2006, and the spot price was around $14.40 per oz. on May 10, 2006 xxvi. Gold has jumped in price from US$272.15 in 2000 to $513.00 in 2005 and continues to increase today xxvii. Representatives from several Mexican mining companies, such as world s largest silver producer Industriales Peñoles, however, are confident that these numbers will hold for several years yet and are announcing extensive expansion plans over the next five years based on steady world market prices. (For more information on opportunities and specific expansion plans, please see Sections 6 and 8 of this report.) Introduction to the Mining Industry in Mexico Mexico is renowned for being the single largest producer of silver (17% of world production), celestite (38%) and bismuth (29%) xxviii, but is also one of the world s largest producers of such minerals and base metals as: gold, soda ash, fluoride, zinc, lead, copper, salt, arsenic, barite, molybdenum, cadmium, manganese, gypsum, wallostonite, feldspar and sulfur. Deposits are high-grade and amendable to low-cost underground and surface mining xxix. Mexico remains significantly unexplored and recent geological surveys suggest that two thirds of the country possesses mineral deposits at least as significant as those of the currently operating mines. In addition, new exploration models have revived 13

exploration activity in districts long considered defined and/or exhausted xxx. Entirely new ore zones have been discovered in historic districts such as Guanajuato (1968), Fresnillo (1976), Bolaños (1985), Dolores (1996), San Martin-Sabinas (1996), Concepcion del Oro (1996, 2001), and Tayoltita (1992, 1997). Entirely new districts have been found such as La Cienega (1989), San Sebastian-Saladillo (1996), and Platosa (2001) in Durango. Districts such as San Martin, Santa Barbara, Charcas and Fresnillo have been proven to be exploitable at rates of up to 7,500 tons per day, an increase of over 700% from their mid-1970s production levels. In 2007, an estimated $5.7 trillion will be invested in mining exploration globally, with 20% of that focused on Latin America. Between 2005 and 2006 in Mexico, there were twelve projects with a combined investment total of more than $1.3 million. The investments for the metallurgical mining sector at the closing of 2005 were $912.9 million an increase of 56% from 2004. The director of the Mexican Chamber for Mining (Camimex), Sergia Almazan, recently stated that, if the prices of metals continue high in the upcoming year, Mexico can expect to have exploration investments of over a billion dollars in 2007. In 2005 the value of Mexican mining production rose to $4.22 billion, representing 1.6% of GDP. 84% of production was generated by large mining companies and 13% by mid-sized companies. According to the Mexican Social Security Institution, the mining industry employed 266,000 people in 2005 xxxi. Mining has a 500 year mining history and the industry represent a significant part of the national and local economies. Main Mining Producing States in Mexico (From Right to Left, Top to Bottom:) Sonora Chihuahua Coahuila Durango Zacatecas San Luis Potosí Major Areas of Production Silver The Mexican Silver Belt, La Faja de Plata, is the world's most productive silver district with well over 10 billion ounces of silver production and between 63 and 75 million ounces of accompanying gold production. Many of the major mines in the belt, including Pachuca, Guanajuato, Zacatecas, Fresnillo, Tayoltita, Santa Eulalia, Parral- Santa Barbara-San Francisco del Oro, and Charcas have been in nearly continuous production since the 16th century and the first four of this list have produced over a billion ounces of silver each. The belt currently produces about 100 million ounces a year from a combination of epithermal vein and carbonate replacement deposits (CRDs) with production grades ranging from 5 to 30 oz per ton silver (plus substantial copper, zinc and lead co-production) at mining rates of a few hundred to 7500 tons per day. xxxii 14

Table 3.1 Top Global Silver Producers Top Global Silver Producers, in millions of ounces Rank Company Country 2004 2005 2006 (est.) 1 BHP Billiton Australia 49.7 53.8 38.4 2 Indust. Peñoles Mexico 44.5 47.4 44.9 3 KGHM Polska Poland 43.2 40.0 40.2 4 Grupo Mexico Mexico 19.4 18.5 15.4 5 Kazakhmys Kazakhstan 17.7 20.5 21.4 6 Barrick Gold Canada 17.3 12.5 10.0 Source: Bryant Blake, Silver Production, October 23, 2006 Lead and Zinc xxxiii As of 2006, Mexico is the fifth largest producer of lead and zinc in the world. In 2005, over 418,000 tons of zinc and over 156,000 tons of lead were produced in this country. Chihuaha and Zacatecas produce the most lead and zinc, hosting mines like Santa Barbara and San Francisco del Oro. The largest individual producers in Mexico are the Charcas mine in San Luis Potosi and the Franciso I. Madera mine in the state of Zacatecas. The Bismark underground mine is a major producer in the state of Chihuahua. Industrias Peñoles and Grupo Mexico are major players in this sector as well. Copper and Molybdenum In 2004, Mexico was ranked as the world s 11 th largest producer of copper. In 2005, copper production was reported at 368,000 tons, marking a 4.6% increase from the previous year. The majority of copper mined in the country comes from the Mexican copper belt, located in the western part of the country stretching from the northern state of Baja California Norte through Sonora, Sinaloa and western Chihuaha toward Chiapas. The highest producing copper operations, the Cananea and La Caridad mines, are located in the state of Sonora. Other major mines include Sabinas and Zan Martin (Zacatecas), Santa Barbara and San Francisco del Oro (Chihuahua) and Charcas (San Luis Potosi). Peñoles began operation of the Milpillas underground copper mine in 2006. Gold The majority of gold production comes from mines where gold is obtained as a coproduct (silver and copper-gold mines) and by-product (polymetallic deposits). Sonora, Durango and Chihuahua produce the majority. The country s largest gold mine is La Herrradura, located in the Gulf of Cortez, which produced 5.7 tons of gold in 2005, followed by La Cienega, located in Durango. In 2005, Mexico produced 31.5 tons of gold, representing a 28.8% increase over the previous year. Due to the completion and commencement of commercial production of 15

several projects in 2006, final numbers for that year are expected to be see an significant increase. Among the companies that play a significant role in gold production are Industrias Peñoles, Luismin and Dowa Mining. Oil The Mexican constitution provides that all of the hydrocarbon resources are owned by the nation. The country is a major non-opec producer; state-owned company PEMEX ranks 5 th among the world s largest oil companies, producing an average of 3.78 million barrels per day in 2005. The oil sector generates over 10% of the country s export earnings and one-third of government revenues. Most of the production comes from the Gulf of Campeche, located off the south-eastern coast of the country. Coal Mexico s recoverable coal reserves stand at 1.3 billion short tons, with the majority of the resources located in the state of Coahuila. The country s coal production covers 50% of its needs, with the balance being imported. 16

4 Canada-Mexico Trade Overview Canada-Mexico Investment Canada s foreign direct investment in Mexico from 1994 to September 2006 reached US$5.7 billion, placing Canada as the fifth largest investor in Mexico. Mexico City is undoubtedly the preferred investment destination for Canadian companies. In Mexico there are 1,727 Canadian companies, of which more than 500 are established in Mexico City. Other important locations for Canadian companies are: Baja California Sur, Quintana Roo, Jalisco, Sonora, Nuevo León, Estado de México, Baja California Norte, Chihuahua, and Yucatán. Canada-Mexico Trade by Province Table 4.1: Canada-Mexico Trade by Province Canada-Mexico Trade by province, January-November 2006 Province Ontario Quebec Alberta Population 2005 (Estimate) Total Trade by province (share %) Export to Mexico Import from Mexico 38.9% 71.6% 49.7% 77.6% 23.5% 11.0% 17.4% 9.3% 10.1% 6.7% 14.3% 4.6% Total Trade by province $ 11,725,237.3 $ 1,801,657.5 $ 1,091,542.1 (thousands of $US) Export $ 1,738,578.4 $ 607,433.0 $ 502,247.9 Import $ 9,986,658.9 $ 1,194,224.5 $ 589,294.1 Source: The Ministry of the Economy with data from Statistics Canada Trade between NAFTA Partners Since the introduction of the NAFTA, trilateral trade between the three partners from 1993 to 2006 (Jan- Nov) has grown more than 194% and trade between Mexico and Canada has increased 2.5%. As a result of NAFTA, Mexican imports from Canada have increased significantly: more than 348% in the last 10 years. Table 4.2: NAFTA Trilateral Trade NAFTA Trilateral Trade (Jan- Nov 93-06) Total Trilateral Trade (US Million) Canada - US Trade (share %) Mexico - US Mexico - Canada NAFTA Trilateral Trade Growth Jan- Nov 93/06 1993 2006 $213,156 $634,156 69.2 % 58.6 % 29.4% 38.9 % 1.4% 2.5 % 194 % Source: The NAFTA Office of Mexico in Canada 17

5 The Mexican Import Market Mexico s top two manufacturing imports from the world were machinery and electrical machinery, and in 2006 the total amount imported was US $96.3 billion. Over the last several years, Mexico has been importing more industrial machinery from the world, including mining machinery and equipment such as: Coal or rock cutters, self-propelled and not self-propelled Construction and mining equipment Pneumatic hand tool parts Pile-drivers and pile-extractors Boring or sinking machinery Tamping or compacting machinery Scrapers Chain and part saws Drills, saws, hand-held, with self-contained electric motor Tools for working in the hand, pneumatic rotary type, hydraulics or whit selfcontained electric motor Drilling equipment Rotary and/or percussion drillers Mechanically operated rotating drilling equipment Trench diggers, hydraulic scoop retro-excavators Excavators, hydraulic front loaders Rotation and/or percussion drills As shown in the Table 35.1, in 2006 Mexico imported a total of US $39.8 billion in machinery and US$0.66 million for machinery to extract or perforate minerals and pneumatic, hydraulic and motor machinery. There are several export opportunities for Canadian producers of mining machinery, including machinery and equipment to extract or to perforate land, mineral and for pneumatics, hydraulic and motor machinery. Table 5.1: Mexican Imports for Selected Products from the World 2004-06 Mexican Imports for machinery to extract or perforate minerals and pneumatic, hydraulic and motor machinery (World) (US $billion) HS Codes/ Products 2004 2005 2006 84 Machinery 33.73 35.93 39.88 8430 Machinery to extract or perforate land and minerals 0.11 0.16 0.24 8467 Pneumatic, hydraulic and motor machinery 0.31 0.37 0.42 Source: World Trade Atlas, Bancomext Origin of Imports (Machinery) In 2006, the US was the main supplier for Mexican imports of pneumatic, hydraulic and motor machinery, with a participation of 52.9%. The US was followed by China, as the second most important exporter of this type of machinery to the Mexican market, sharing 17.9% of the total import market. 18

Chart 5.1: Main Provider Countries for pneumatic, hydraulic and motor machinery (8467 - world) Ireland, 0.9% Germany, 2.8% Sweden, 3.7% Brazil, 5.6% Others, 5.0% Japan, 5.7% Taiwan, 5.7% US, 52.9% China, 17.9% Source: World Trade Atlas, Bancomext Chart 5.2: Main Provider Countries for machinery to extract or perforate minerals (8430 - world) UK, 2.0% Austria, 1.8% Cuba, 2.2% Germany, 4.0% Canada, 4.1% Italy, 4.2% France, 4.3% Sweden, 6.4% US, 63.7% Source: World Trade Atlas, Bancomext Mexico s main import supplier of machinery to extract or perforate minerals was again the US, with a participation of 63.7% of the total Mexican import market. In this case, Canada has a participation of 4.1% and is the fifth importer in importance, preceded by Sweden, France and Italy. 19

Imports from Canada to Mexico (Machinery) Amongst the principal mining products that Mexico acquires from Canada are: boring or sinking machinery, drilling equipment, rotary and/or percussion drillers, mechanically operated rotating drilling equipment, drills for rock, drills and saws. Table 5.2: Mexican Imports for Selected Products from the Canada 2004-06 Mexican Imports for devices to extract or perforate minerals and pneumatic, hydraulic and motor Machinery (Canada) (US $billion) HS Codes/ Products 2004 2005 2006 84 Machinery 0.65 0.75 0.87 8430 Machinery to extract or to perforate land and minerals 0.06 0.07 0.10 8467 Pneumatic, hydraulic and motor machinery 0.02 0.02 0.02 Source: World Trade Atlas, Bancomext As shown in Table 3.6, Mexico imported US $871 million of machinery from Canada and US$12 million for machinery to extract or perforate minerals and pneumatic, hydraulic and motor machinery. Mexico has been increasingly importing more machinery from Canada over the past three years. 20

6 Specific Mining Opportunities in Mexico The following are companies actively seeking foreign investment, suppliers and/or participation for projects currently in development in Mexico. The opportunities have been placed in the single most appropriate category but are not limited to that category. Exploration Cabullona Concession: Exploitation Owner: Alejandro Angel Agustin Loera and Chavez Manzo Company: N/A State: Sonora Municipality: Agua Prieta Product: Copper Opportunity: The owners of the Cabullona property are looking for a junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization and Acces, Geology Information, Mineralization, Developments, Photos and Maps Cerro Minitas Concession: Exploration and Exploitation Owner: Sr. Jaime Muguiro Peña Company: N/A State: Durango Municipality: Guadalupe Victoria Product: Gold and silver Opportunity: The owner of property is looking for junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization and Access, Geology information, Mine Developments, Mineralization, Reserves, Photos and Maps Cristo Jesus Concession: Exploration Owner: Martín Reyes Chávez Company: N/A State: Sinaloa Municipality: San Ignacio Product: Gold and silver Opportunity: The owners of Cristo Jesus are interested in finding a partner who can lead a detailed exploration program to assess the project s potential. Info Available: Location and Access, Geology Information, Mineral Deposits, Mineral Developments, Reserves, Photos and Maps La Yesca Concession: Exploration Owner: Irma Adriana Urrieta Gonzalez Company: N/A State: Nayarit Municipality: La Yesca Product: Gold and silver 21

Opportunity: The owner of the Xora property is looking for junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization and Access, Geology information, History, Mineralization, Reserves, Photos and Maps San Jose Concession: Exploration Owner: Guillermo Rodriguez Jara Company: N/A State: Sonora Municipality: Trincheras Product: Gold and silver Opportunity: Dra. Teresita Armida Ayala Soto is looking for junior exploration company to finance and direct an exploration program to evaluate the real potential of the project. Info Available: Localization and Access, Infrastructure, Mineral History, Regional Geology, Geology and Mineralization, Mining Works, Mineral Potential, Photos and Maps. San Juan Nepomuceno Concession: Exploitation Owner: Mr. Vicente Arreguin Vega Company: N/A State: Querétaro Municipality: Cadereyta Product: Gold, silver, lead, zinc and mercury Opportunity: The owner of the San Juan Nepomuceno property is looking for a junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization and Access, Geology Information, Mineralization, Mine Developments, Reserves, Photos and Maps Santa Maria del Oro Concession: Exploitation Owner: Ing. Ramón Farias Company: Anfaza, S.A. de C.V. State: Guadalajara Municipality: Jalisco Product: Gold and silver Opportunity: The good infrastructure conditions, geological location and high density of mineralized structures detected within the district make this mine very attractive for modern technology exploration purposes. Info Available: Location and Access, Geology Information, Ore Deposit, Mining System, Previous Mining Works, Photos and Maps. General Call for Proposals Copalquin Concession: Exploration Owner: N/A Company: Cía Minera Copalquín, S.A. de C.V. State: Durango Municipality: Tamazula Product: Silver and gold 22

Opportunity: The properties are open to be optioned for exploration, but Minera Copalquin Company is open to any kind of proposals. Info Available: Location and Access, Geology Information, Ore Deposit, Reserves, Previous Mining Works, Photos and Maps Investment Cobriza Concession: Exploitation Owner: Dr Ricardo Montaño Company: N/A State: Durango Municipality: San Dimas Product: Silver, gold, lead, zinc and copper Opportunity: The owners of these two projects are searching for investment capital or a strategic alliance that could provide with the necessary resources to conduct a detailed exploration program in order to assess its geological potential, as well as, determining the project s reserve base. Info Available: Localization and Access, Geology Information, Mining Developments, Photos and Maps Comanja 1 Concession: Exploitation Owner: Ing. Rubén Ortiz Díaz Infante Company: Ingeniería Analítica y Minera, S.A. de C.V. State: Northeast of the City of Leon, Guanajuato State and State of Jalisco Municipality: Lagos de Moreno Product: Zinc, lead, copper, silver and gold Opportunity: Mr. Diaz is looking for an investor partner who can boost an exploratory program that includes geophysical and geochemical surveys in order to evaluate the claim. Info Available: Location and Access, Physiography, Geology Information, Recent Deposits, Mine Works, Photos and Maps Huicicilila Concession: Exploitation Owner: Ramón Farías García Company: Grupo ANFAZA, S.A. de C.V. State: Nayarit Municipality: Compostela Product: Gold and silver Opportunity: Grupo ANFAZA is looking for an investment partnership to participate in the exploration stage of the project. Info Available: Location and Access, Geology Information, Ore Deposits, Reserves, Previous Mining Works, Photos and Maps La Cilica Concession: Exploration Owner: Mr. Ramón Díaz Chinchillas Company: N/A State: Distrito Federal Municipality: Urique Product: Silver, gold, copper, lead and zinc 23

Opportunity: Mr. Diaz is looking for an investor to boost geophysical and geochemical exploratory work to evaluate the potential of the mine. Info Available: Location and Access, Geology information, Type of Rocks, Minerals Deposits, Potential, Mine Works, Photos and Maps La Delfina Concession: Exploitation Owner: N/A Company: Minas Unidas del Sur S.A. de C.V. State: Guerrero Municipality: N/A Product: Silver, lead and zinc Opportunity: Minas Unidas del Sur is looking for a partner in order to develop an exploration program that can confirm the real extension of ore deposit. Info Available: Location & Access, Geology Information, Ore Deposits, Mineral Developments, Reserves, Mineral System, Photos and Maps La Dura Concession: Exploitation Owner: Miguel Ángel Matas Martínez Company: Compañía Minera El Alizal, S.A. de C.V. State: Durango Municipality: Tamazula Product: Gold and silver Opportunity: Looking for investment partner. Option agreements to explore the property. Info Available: Location and Access, Geology Information, Mineral Deposit, Reserves, Previous Mining Works, Photos and Maps La Esperanza Concession: Exploration Owner: Mr. Manuel Quijada Figueroa Company: Golden Bear Resources, S.A. de C.V. State: Sonora Municipality: Bacanora Product: Silver, copper, gold, zinc, cobalt, nickel and lanthanum Opportunity: The owners of the La Esperanza project are interested in finding an investor who is willing to commit and underake a formal exploration program through an option Agreement that will lead to the sale of the project. Info Available: Localization and Access, Infrastructure, Physiography, Geology Information, Alteration Mineralization, Photos and Maps. La Goldcona Concession: Exploitation Owner: Legally held under purchase option to Golden Bear Resources, S.A. de C.V. Company: Golden Bear Resources, S.A. de C.V. State: Sonora Municipality: Alamos Product: Gold and silver Opportunity: Golden Bear Resources is looking for an investor to participate in financing an exploration program to upgrade the resource estimation to proven and probable reserves and eventually to fully develop the project to a low scale commercial production. 24

Info Available: Location and Access, Infrastructure, Mining History, Geology Information, Deposit Type, Mineralization, Alteration, Exploration, Resources, Photos and Maps. Real de Belem Concession: Exploitation Owner: N/A Company: Cía Minera Dorosa, S.A. de C.V (MD) State: Mexico City Municipality: N/A Product: Gold and silver Opportunity: Minera Dorosa is 95 % controlled by a single shareholder and has the rights over the mining claim. MD introduced the access infrastructure, electrical power, water supply and has acquired mining equipment and 200 ton day processing equipment. MD is now looking for a partner to invest US $1.4 million to install the plant and start operations. MD accounts with Federal environmental and explosive permits. Eventually MD plans to sell the entire project. Info Available: Location and Access, Geology information, Ore Deposits, Reserves, Previous Mining Works, Exploitation Method, Photos and Maps. Pinguico Concession: Exploration Owner: Mrs Maria Ascención Canchola Company: N/A State: Guanajuato Municipality: Guanajuato Product: Gold and silver Opportunity: The owners of the Pinguico project are seeking investors in order to carry out a detailed exploration program that could assess and conclude the area s potential. Info Available: Localization and Access, Geology Information, Mining Development, Mineralization, Reserves, Photos and Maps. Tatalayo Concession: Exploration Owner: Mr. José Santiago Juarez Martinez Company: N/A State: Guanajuato Municipality: Guanajuato Product: Gold and silver Opportunity: The owners of the Tatalayo project are seeking investors in order to carry out a detailed exploration program that could assess and conclude the areas potential. Info Available: Localization and Access, Geology Information, Mine Developments, Mineralization, Photos and Maps Trinidad Concession: Exploration Owner: Mr. Alejandro Loera Chavez Company: N/A State: Baja California Sur Municipality: San José del Cabo Product: Copper and molybdenum 25

Opportunity: The owner of the Trinidad property is looking for a junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization & Access, Geology information, Ore Deposits, Photos and Maps. Xichú Concession: Exploitation Owner: Mr. Carlos Natividad Martínez Sánchez Company: N/A State: Guanajuato Municipality: Xichú Product: Gold and silver Opportunity: The owner of the Xichu property is looking for a junior mining company to perform a detailed exploration program in order to assess its potential. Info Available: Localization and Access, Geology Information, Mineralization, Mine Developments, Photos and Maps Joint Venture/Partnership Agau Concession: Exploitation Owner: Minera Nafta SA de CV Company: Miranda Mining State: North of Acapulco and west of Tierra Colorada Municipality: N/A Product: Silver and gold Opportunity: Miranda Mining is looking for a joint venture partner to implement an exploration that must include the dewatering and rehabilitation of the mine and sampling the ld mining works. Also a diamond drilling program must be conducted to explore the continuity of mineralization at depth. Info Available: Location and Access, Geology Information, Mineral Deposit, Previous Mining Works, Photos and Maps La Verde Concession: Exploitation Owner: Aurelio Ríos Nuñez, Manuel Coronel Beltrán and Ciro Mesa Chaidez Company: N/A State: Sinaloa Municipality: Cosalá Product: Gold and silver Opportunity: The owners of the concession are looking for an investor in order to formalize a joint venture agreement and carry on a systematic exploration program to evaluate the mineral potential of the area. Info Available: Location and Access, Geology Information, Ore Deposits, Mining Works, Reserves, Photos and Maps. Las Bermejas Concession: Exploitation Owner: Mr. Xavier Banderas Valencia Company: Compañía Industrial de Michoacán State: Michoacán Municipality: Huetamo Product: Gold 26

Opportunity: CMIM is looking for a partnership to invest in the exploration activities in order to increase the reserves base and extract them for further economic benefit. This investment will allow the company to obtain a credit line for the acquisition of process plant. Furthermore, the company is interested in selling the whole investment project to national or international investors. Info Available: Location and Access, Geology Information, Ore Deposits, Reserves, Previous Mining Works, Photos and Maps. Las Minas Concession: Exploration Owner: Mr. Andrés Arellano Company: N/A State: Sinaloa Municipality: San Ignacio Product: Gold, silver, copper and molybdenum Opportunity: The owners of Las Minas and La Esperanza claims are interested in looking for a partner to develop and carried out a detailed exploration program in the zone. Info Available: Location and Access, Geology Information, Mining History, Reserves, Photos and Maps Providencia Concession: Exploitation Owner: Mr. Rubén Ortíz Díaz Infante Company: N/A State: Guanajuato Municipality: San Felipe Product: Silver and gold Opportunity: Mr. Díaz is convinced the district has received very limited exploration. The work done during its 43 years of activity put in evidence the most obvious structures and was mainly oriented to exploitation. The typical Mexican vein system similar to La Providencia operated with the technology available at the beginning of the 20th century and used to have an operation life much longer then 43 years. Mr. Díaz is looking for a partner that can contribute the capital, the technology and the knowledge to implement this exploration program and confirm the similarities between Guanajuato and La Providencia Mining Districts. Info Available: Location and Access, Geology Information, Ore Deposits, Historic Production, Mining Works, Photos and Maps. San Andres Concession: Exploitation Owner: Cristina Quintero de Vela Company: Minera San Andrés de la Sierra, S.A. de C.V. State: Durango Municipality: Santiago Papasquiaro Product: Silver, gold, lead, zinc and copper Opportunity: Minera San Andrés de la Sierra is interested in formalizing a joint venture with a junior exploration company that can finance and carry out a complete exploration program in the mining district in order to reactivate it. Info Available: Location and Access, Mine History, Geology information, Mineral Ore, Minerology, Reserves, Photos and Maps. 27

Santa Elena Concession: Exploitation Owner: Mr. Pedro Trellez Serna y Socios Company: N/A State: Sonora Municipality: Banamichi Product: Gold and silver Opportunity: The owners of the Santa Elena project are interested in a partner who can lead a detailed exploration program in order to assess the project s potential. Info Available: Localization and Access, Geology Information, Mining History, Reserves, Photos and Maps. Tres Ocotes Concession: Exploration Owner: Mr. Albino Beltrán Rojas Company: Minera Tres Ocotes, S.A. de C.V. State: Oaxaca Municipality: Villa de Silacayoapan Product: Silver, lead, zinc and gold Opportunity: Mr. Beltrán is interested in formalizing a joint-venture agreement with a junior exploration company to carry out a complete exploration program of the Legado 1 vein, in order to bring the project to production. Integral joint exploration program or eventually option the property. Info Available: Location and access, Mining History, Geology Information, Ore Deposits, Mineralogy, Resources, Photos and Maps. 28

7 Competition Ontario Mining Investment in Mexico There are 209 foreign mining companies exploring in Mexico,of which 75% are Canadian companies and 24 are from Ontario. In addition, there are 105 registered Mexican mining companies producing in Mexico. Exploration Mining Projects by Ontario Companies in Mexico 2006 Ontario Mining Company Exploration Mining Projects State Agnico-Eagle Mines Ltd Pinos Altos Chihuahua Amerix Precious Metals Corp. Santo Domingo Jalisco Aquiline Resources Inc La Jojoba and Santa Lucia Sonora Au Martinique Silver Inc Bautista and El Socorro Jalisco Columbia Metals Corp Ltd El Carmen, El Compa, La Joroba, Lluvia de Oro PII Colorado, Silica Sonora Excellon Resources Inc. La Platosa/ Saltillera Durango Frontera Copper Corp Cerro Chato Sonora Geoinformatics Exploration Inc Macmillan Gold Corp San Juan/ Tabisco Anna, Jicarilla and Mar/ Cerro de Oro and Santa Olaya/ Chino Gordo, El Zafiro, Palmira and Tetasiari/ Cucharas and El Oro/ La Violeta/ El Socorro, Fiebre de Oro, Mina Bautista, Realito and Yerbabuena Sonora Nayarit Gold Inc Orion Nayarit Noranda Inc Northwestern Mineral Ventures Pacific Comox Resources Ltd El Pilar/ San Diego Picachos/ Tango Mabel Durango, Zacatecas, Sinaloa, Nayarit Sonora Jalisco Michoacán, Sonora Durango, Sinaloa Sonora Queenston Mining Inc Sierra Almoloya Chihuahua RNC Gold Inc Picachos/ Tango Durango, Sinaloa Seafield Resources Ltd La Silla Sinaloa Sierra Minerals Inc Silver Dragon Resources Inc Pueblo Nuevo and Rodeo/ San Martín Tierra Blanca Durango, Sinaloa Durango Sparton Resources Inc Sierra Rosario Sinaloa 29

Stingray Resources Inc Delta I, El Indio, Elephant 8, Pelonachi Chihuahua Stroud Resources Ltd Santo Domingo Jalisco Valdez Gold Inc Los Jarros Chihuahua Virgin Metals Inc Los Verdes Sonora Zaruma Resources Inc San Antonio/ Luz de Cobre Sonora Local Manufacturers For Canadian suppliers interested in exporting to Mexico, most local competitors may also turn out to be potential customers. Some potential clients are described below: Aire Comprimido Para La Mineria, SA de CV Manufacturer of drilling equipment. Aispell Productos Mineros, SA de CV Manufacturer of instrumentation for mining and construction industries. Comercializadora Minera del Norte, SA de CV Manufacturer of abrasion resistant surfaces for the mining industry. Componentes Mineros, SA de CV Manufacturer of mining equipment and flotation cells. Core-Dril Internacional, SA de CV Manufacturer of drill tools and implements, hydraulic rock breakers, pneumatic tools, rock drills, and air compressors. Distributes internationally. Expopartes, SA de CV Manufacturer of oil drilling tools, gags and inserts. Distributes to the United States primarily. Fabricas de Implementos Mineros, SA de CV Manufacturer of impregnated, coated, covered or laminated textiles suitable for industrial use. Grupo Coss y Orozco, SA de CV Manufacturer of conveyor belts, and mine and plant infrastructure equipment. Industrias Cabrera, SA de CV Manufacturer of friction disks. International distribution. Ingenieria Dibujo y Geologia, SA de CV Manufacturer of various supplies for the mining industry, including cutters, waterproof logbooks, specialized clothing, and GPS systems. Maquinaria Intercontinental del Noreste, SA de CV Manufacturer of arms and blades for driving machines, concrete and mortar mixers, rotary converters and transference cars. National distribution. 30

Maquinaria y Mantenimiento, SA Manufacturer of grinders, hammer mills, hoisting machines, masonry saws, etc. Distributes to Central America. Materials y Equipo Petrolero, SA de CV Manufacturer of parts for drilling machines. Mexico Water Management Consultants The Mexican branch of an international company specializing in the development, management and environmental protection of water resources, particular related to the mining industry. Motores Variadores Reductores, SA de CV Manufacturer of track mining machinery, including rolling stock and electrical mechanical traffic signals. Distributes primarily to the United States. Refacciones Neumaticas La Paz, SA de CV Manufacturer of spare parts, springs and pulleys for mining industry. Distributes to Peru and the United States. General Description of Distribution Channel There are several major distribution channels through which to distribute mining products in Mexico, including direct sales, sales representatives, importers and distributors: Direct Sales Mexico s mining industry can be split into three categories: large domestic producers (including Industrias Peñoles, Grupo Industrial Minera Mexico, Empresas Frisco and Luismin); small domestic producers, and foreign firms. The vast majority of mining activity in Mexico is performed by domestic producers. Domestic mining companies purchase directly from national and international suppliers, and there is a proven interest in Canadian mining products. However it is important to recognize that, given the size and purchasing power of the large domestic producers, companies such as Grupo Mexico command extremely competitive rates from their suppliers. Sales Representatives and Agents These intermediaries work under commission plans, selling the mining products and even offering post-sales services and work as a link between manufacturers and suppliers. The commission depends on variables such as the type of product and the order s size. The mark-up of the agents generally varies between 1% and 8% of the total sale value and no stock is kept. Most of the agents are established in Monterrey, Central Mexico, Guadalajara, State of Mexico, and Mexico City. Distributors Distributors are generally supplied by importers and most of them are located near the industries. Unlike sales representatives and agents, distributors generally have a large 31

store. Their profit margin is approximately 5% to 10%, which is often the discount they are allowed by importers. Importers Intermediaries are very important in the mining industry, as their share of direct trade/sourcing is lower. An importer is the link between the manufacturer and the end user, they know local markets thoroughly and have very good network in Mexico. Their activities are increasingly focused on additional services around the product itself (quality assurance, sourcing and transfer of knowledge, stock keeping, and fast delivery). Most importers have built up strong relationships with end users and are sometimes regarded as the preferred house supplier. An importer is able to provide important services to its clients such as after-sales service, advice, and stock holding. As a rule of thumb, importers must mark up their landed cost price within 15% to 35% in order to be able to sell a product and sometimes can double their commission as warehouse distributors. 32

8 Key Players in the Mining Industry Industrias Peñoles Contact: Ing. Daniel Barragan Cantu Position: Corporate Procurement Manager Address: Calz. Manuel Gómez Marín 444 Col. Torreón Residencial Torreón, Coahuila C.P. 27250 Phone: (871) 729 3357 Fax: (871) 729 3398 Email: daniel.barragan@penoles.com.mx Website: www.penoles.com.mx President: Jaime Lomelín Guillén Establishment: 1887 Mines: Sonora La Herradura (gold) Chihuahua Bismark (zinc) and Naica (lead, zinc) Durango La Ciénega (gold) Zacatecas Sabinas (zinc), Fresnillo (silver) and Francisco I. Madera (zinc) Guanajuato - Tizapa (zinc) Metal-Chemical: Coahuila Química del Rey, Fertirey and Met-Mex Profile: Peñoles is a mining group with integrated operations in smelting and refining nonferrous metals, and producing chemicals. Peñoles is the world s top producer of refined silver, metallic bismuth and sodium sulfate, the leading Latin American producer of refined gold, lead and zinc. They are one of the largest exporters in Mexico s private sector, with the following significant mining productions: Fresnillo the world s richest silver mine La Ciénega Mexico s richest gold mine La Herradura Mexico s largest gold mine Naica Largest lead producing mine in Mexico Francisco I. Madera Mexico s largest zinc mine Met-Mex the world s fourth largest mellurgical complex, and the largest producer of refined silver and metallic bismuth Química del Rey the world s largest sodium sulphate producing plant Peñoles is part of Grupo BAL, a privately held diversified group of independent Mexican companies that includes: Grupo Palacio de Hierro (department stores); Grupo Nacional Provincial (insurance); Profuturo GNP (individual retirement funds); Valores Mexicanos-Casa de Bolsa (financial services); Crédito Afianzador (bonding); and various agribusinesses. 33

Peñoles 2006 Production Volumes 1Q 2Q 3Q 4Q Total Mining: Ore Milled 2,057 2,093 2,095 1,993 8,238 Gold (Oz) 94,845 95,681 99,153 90,734 380,413 Silver (Oz) 12,056,818 12,666,526 11,747,046 10,446,647 46,917,037 Lead (MT) 16,550 16,706 15,120 13,665 62,041 Zinc (MT) 53,163 54,123 47,730 50,688 205,704 Copper (MT) 3,233 2,890 4,379 3,205 13,707 Metals: Gold (Oz) 349,800 427,959 414,005 375,133 1,566,897 Silver (Oz) 24,300,593 25,411,883 24,571,849 25,029,390 99,313,714 Lead (MT) 36,640 36,915 34,521 31,487 139,563 Zinc (MT) 53,349 61,534 64,246 56,515 235,644 Copper (MT) 2,545 2,208 2,010 2,427 9,190 Cadmium (MT) 231 260 261 241 993 Bismuth (MT) 246 324 304 312 1,186 Bullion (MT) 41,867 42,177 34,493 35,503 154,040 Chemicals: Sodium 150,000 151,000 155,500 155,500 612,000 Sulfate (MT) Magnesium 16,430 23,297 19,402 23,316 82,445 Oxide (MT) Ammonium 52,918 53,535 45,596 41,192 193,241 Sulfate (MT) Current and Upcoming Projects for Industrias Peñoles: Chief Executive Jaime Lomelin, speaking at the Reuters Latin American Investment Summit in Mexico City, said the company had no plans to expand through acquisitions but was increasing its exploration budget to $80 million in 2007 from $60 million in 2006. Peñoles will see output rise gradually for the next few years, then jump by about 10 million ounces in 2010 or 2011 as new projects start up. Fresnillo is considered the world's richest silver deposit, and Peñoles is investing heavily in new projects in the zone. Peñoles is also investing about $200 million to expand the zinc capacity at its mammoth Metmex multi-metal refinery to 320,000 tonnes from its current 240,000 tonnes over eight years. xxxiv Industrias Peñoles, as part of a joint venture of MAG Silver Corporation, continue a diamond drill program on the Juanicipio Joint Venture, Zacatecas State, started in 2005. The exploration Joint Venture covers MAG's wholly-owned 8,302 hectare Juanicipio Property in Zacatecas, Mexico and Peñoles can earn a 56% interest on the property by expending US$5,000,000 over the four year period. 34

Purchasing of Goods & Services (2004) for Industrias Peñoles: Quantity POs Items USD Millons Materials Handling Equipment 5,069 20,393 43.2 Chemicals 916 1,084 38.5 Fuel 441 424 37.9 Drilling Equipment 1,584 7,582 14.4 Pumping Equipment 2,755 5,458 12.0 Non-Ferrous Metals 106 156 10.6 Electrical Equipment 913 1,859 10.4 Piping & Fittings 2,064 6,740 10.3 Measurement Instruments Control 1,919 4,189 9.2 Steel 1,672 3,465 8.8 Explosives 726 2,848 8.2 Grinding Balls 64 113 7.8 Electrical Appliances 3,409 9,667 6.7 Source: Industrias Peñoles presentation, March 17, 2005 Grupo Industrial Minera México Contact: Ing. Manuel Tellez Piña Position: Corporate Procurement Manager Address: Av. Insurgentes Sur, 3 rd Floor Col. Roma Sur México, D.F. C.P. 06760 Phone: (52 55) 5264 0929 Fax: (52 55) 5574 8465 Email: mtellezp@mm.gmexico.com Website: www.gmexico.com President: Lic. German Larrea Mota Velasco Establishment: 1978 Employees: 21,000 in 7 countries Mines: Sonora Cananea (copper, silver, gold) and La Caridad (copper, molybdenum) Coahuila Santa Barbara (zinc, lead, copper, silver) and Rosita (coal) Zacatecas Charcas (zinc, lead, copper, silver) and San Martin (zinc, lead, copper, silver) Taxco Taxco Refineries: Sonora La Caridad complex San Luis Potosi Major Prospects: El Arco Buenavista Bolaños Anganueo Foreign Mines: Cuajone and Toquepala in Peru El Salado, Sierra Aspera, Cartanave and Esperanza in Chile Ray, Silver Bell, Mission, Coy, Immel and Young in the US 35

Foreign Refineries:Hayden, Globe and Amarillo in the US Complejo Ilo in Peru Grupo Mexico Profile: Grupo Mexico is a holding company of mining and transportation operations which are performed through two subsidiaries: the Americas Mining Corporation (AMC), a subholding company which groups mining operations in Mexico and Peru, and Infraestructura y Transportes Mexico, S.A. de C.V. (ITM), a sub-holding company that groups activities in freight transportation, logistics and multi-modal services. Mining subdivisions of AMC include: Minera Mexico (MM) is the largest mining company in Mexico, and produces copper, zinc, silver, gold and molybdenum. Southern Copper Corporation (SCC) is the second largest mining company in the world in terms of copper reserves, listed in New York and Peru. ASARCO (United States) Through Americas Mining Corporation (AMC), Grupo Mexico ranks as the world s third largest copper producer, second in molybdenum, fourth largest producer of silver and eight largest producer of zinc. It also ranks as the world s second largest company and first among companies publicly listed in stock markets in terms of copper ore reserves. Consolidated annual production includes 950,000 tons of refined copper, 155,000 tons of zinc, 25 million oz of silver, as well as significant amounts of gold, molybdenum and other by-products, with total annual sales of almost US$4 billion. Source: Grupo Mexico Overview and Highlights Presentation 2004 Current and Upcoming Projects for Grupo Mexico: Grupo Mexico is publicly presenting investment plans in new copper mining projects that would begin in 2007 and grow their production steadily over coming years. The company expects to "significantly" raise its copper output in 2007 as mine expansions come on line in Peru but warned of slower profit growth after dramatic increases earlier in 2006. 36