INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE SIX MONTHS ENDED
 
June 30, 2010 (UNAUDITED)
 

 

MANAGEMENT’S COMMENTS ON
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements of the Company have been prepared by and are the
responsibility of the Company’s management.

 

 

 
Suite 1805, 925 West Georgia Street, Vancouver, B.C. Canada V6C 3L2
Phone: 604.688.3033 | Fax: 604.639.8873 | Toll Free: 1.866.529.2807 | Email: info@firstmajestic.com
www.firstmajestic.com



FIRST MAJESTIC SILVER CORP.
INTERIM CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2010 AND DECEMBER 31, 2009
(Unaudited, expressed in Canadian dollars)

    June 30, 2010     December 31, 2009  
  $    $   
             
ASSETS    
CURRENT ASSETS            
Cash and cash equivalents   15,850,386     5,889,793  
Accounts receivable   2,396,683     2,174,848  
Other receivables (Note 4)   6,755,514     6,624,200  
Inventories (Note 5)   5,801,058     3,812,460  
Prepaid expenses and other (Note 6)   2,250,495     1,467,759  
    33,054,136     19,969,060  
MINING INTERESTS (Note 7)            
    Producing properties   62,032,205     57,144,477  
    Exploration properties   112,052,069     109,255,696  
    Plant and equipment   67,783,258     60,388,530  
    241,867,532     226,788,703  
CORPORATE OFFICE EQUIPMENT (Note 7)   521,173     409,281  
DEPOSITS ON LONG-TERM ASSETS (Note 10)   1,971,597     4,306,419  
    277,414,438     251,473,463  
             
LIABILITIES    
CURRENT LIABILITIES            
Accounts payable and accrued liabilities   14,917,025     11,202,381  
Unearned revenue on silver bullion sales   22,857     158,147  
Current portion of debt facilities (Note 9)   2,045,440     1,546,612  
Current portion of capital lease obligations (Note 14)   1,372,510     2,139,352  
Income and other taxes payable   264,457     117,844  
    18,622,289     15,164,336  
FUTURE INCOME TAXES   31,968,744     28,417,011  
CAPITAL LEASE OBLIGATIONS (Note 14)   368,761     668,284  
LONG-TERM PORTION OF DEBT FACILITIES (Note 9)   2,881,015     3,213,487  
OTHER LONG TERM LIABILITIES (Note 16)   774,970     753,657  
ASSET RETIREMENT OBLIGATIONS (Note 15)   4,660,588     4,336,088  
    59,276,367     52,552,863  
             
SHAREHOLDERS' EQUITY    
SHARE CAPITAL (Note 11(a))   245,178,244     244,241,006  
SHARE CAPITAL TO BE ISSUED (Note 11(d))   276,495     276,495  
CONTRIBUTED SURPLUS   28,931,617     27,808,671  
ACCUMULATED OTHER COMPREHENSIVE LOSS   (34,984,538 )   (40,238,914 )
DEFICIT   (21,263,747 )   (33,166,658 )
    218,138,071     198,920,600  
    277,414,438     251,473,463  

CONTINUING OPERATIONS (Note 1)
CONTINGENT LIABILITIES (Note 17)
COMMITMENTS (Note 18)
SUBSEQUENT EVENTS (Note 21)

APPROVED BY THE BOARD OF DIRECTORS

Keith Neumeyer (signed)     Director   Douglas Penrose (signed)     Director

The accompanying notes are an integral part of these consolidated financial statements



FIRST MAJESTIC SILVER CORP.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009
(Unaudited, expressed in Canadian dollars, except share amounts)

    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
  $    $    $    $   
                         
Revenues (Note 12)   28,963,285     13,024,877     47,180,899     27,411,749  
                         
Cost of sales   13,434,747     9,459,868     22,408,604     17,758,681  
Depletion, depreciation and amortization   2,380,032     1,772,464     4,178,023     3,201,598  
Accretion of reclamation obligation (Note 15)   94,201     117,171     187,921     233,210  
Mine operating earnings   13,054,305     1,675,374     20,406,351     6,218,260  
                         
General and administrative   2,406,842     2,114,312     4,393,465     3,932,315  
Stock-based compensation   643,964     800,808     1,344,143     1,697,548  
    3,050,806     2,915,120     5,737,608     5,629,863  
                         
Operating income (loss)   10,003,499     (1,239,746 )   14,668,743     588,397  
                         
Interest and other expenses   (683,210 )   (404,765 )   (1,245,649 )   (764,971 )
Investment and other income   635,082     222,173     621,933     512,017  
Foreign exchange gain (loss)   344,075     840,958     416,100     (111,908 )
Income (loss) before taxes   10,299,446     (581,380 )   14,461,127     223,535  
                         
Income tax expense - current   45,411     113,532     63,972     171,582  
Income tax expense (recovery) - future   1,366,919     (1,731,328 )   2,494,244     (1,924,160 )
    1,412,330     (1,617,796 )   2,558,216     (1,752,578 )
                         
NET INCOME FOR THE PERIOD   8,887,116     1,036,416     11,902,911     1,976,113  
                         
EARNINGS PER COMMON SHARE                        
       BASIC $  0.10   $  0.01   $  0.13   $  0.02  
       DILUTED $  0.09   $  0.01   $  0.13   $  0.02  
                         
WEIGHTED AVERAGE SHARES OUTSTANDING                        
       BASIC   92,804,715     82,341,636     92,758,113     79,387,259  
       DILUTED   95,076,336     99,426,674     94,421,176     96,472,297  

The accompanying notes are an integral part of these consolidated financial statements



FIRST MAJESTIC SILVER CORP.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009
(Unaudited, expressed in Canadian dollars, except share amounts)

                            Accumulated                    
                            Other                    
                            Comprehensive           Total        
    Share Capital     Contributed      Income (Loss)            AOCI        
    Shares     Amount     To be issued     Surplus     ("AOCI") (1)   Deficit     and Deficit     Total  
        $    $    $    $    $    $    $   
                                                 
Balance at December 31, 2008   73,847,810     196,648,345     276,495     23,297,258     (23,216,390 )   (39,476,883 )   (62,693,273 )   157,528,825  
Net income   -     -     -     -     -     1,976,113     1,976,113     1,976,113  
Other comprehensive income:                                                
 Translation adjustment   -     -     -     -     124,630     -     124,630     124,630  
 Unrealized gain on marketable securities   -     -     -     -     750     -     750     750  
Total comprehensive income                                       2,101,493     2,101,493  
Shares issued for:                                                
 Exercise of options   6,250     7,938     -     -     -     -     -     7,938  
 Public offering, net of issue costs (Note 11(a)(i))   8,487,576     18,837,183     -     848,758     -     -     -     19,685,941  
Stock option expense, net of deferred compensation   -     -     -     1,697,548     -     -     -     1,697,548  
Transfer of contributed surplus upon exercise of stock options   -     2,950     -     (2,950 )   -     -     -     -  
Balance at June 30, 2009   82,341,636     215,496,416     276,495     25,840,614     (23,091,010 )   (37,500,770 )   (60,591,780 )   181,021,745  
                                                 
Balance at December 31, 2009   92,648,744     244,241,006     276,495     27,808,671     (40,238,914 )   (33,166,658 )   (73,405,572 )   198,920,600  
Net income   -     -     -     -     -     11,902,911     11,902,911     11,902,911  
Other comprehensive income:                                                
 Translation adjustment   -     -     -     -     5,146,526     -     5,146,526     5,146,526  
 Unrealized gain on marketable securities   -     -     -     -     107,850     -     107,850     107,850  
Total comprehensive income                                       17,157,287     17,157,287  
Shares issued for:                                                
 Exercise of options   277,500     622,436     -     -     -     -     -     622,436  
 Exercise of warrants   25,000     82,500     -     -     -     -     -     82,500  
Stock option expense during the period   -     -     -     1,355,248     -     -     -     1,355,248  
Transfer of contributed surplus upon exercise of stock options and warrants   -     232,302     -     (232,302 )   -     -     -     -  
Balance at June 30, 2010   92,951,244     245,178,244     276,495     28,931,617     (34,984,538 )   (21,263,747 )   (56,248,285 )   218,138,071  

(1)

AOCI consists of the cumulative translation adjustment on self sustaining subsidiaries which primarily affects the mining interests, except for the unrealized gain on marketable securities classified as "available for sale".

The accompanying notes are an integral part of these consolidated financial statements



FIRST MAJESTIC SILVER CORP.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009
(Unaudited, expressed in Canadian dollars)

    Three Months Ended June 30     Six Months Ended June 30  
    2010     2009     2010     2009  
  $    $    $    $   
OPERATING ACTIVITIES                        
Net income for the period   8,887,116     1,036,416     11,902,911     1,976,113  
Adjustment for items not affecting cash                        
 Depletion, depreciation and amortization   2,380,032     1,772,464     4,178,023     3,201,598  
 Stock-based compensation   643,964     800,808     1,344,143     1,697,548  
 Accretion of reclamation obligation   94,201     117,171     187,921     233,210  
 Other income from derivative financial instruments   (634,501 )   (212,380 )   (646,810 )   (479,197 )
 Loss (gain) on sale of marketable securities   (15,969 )   -     24,501     -  
 Future income tax provision (recovery)   1,366,919     (1,731,481 )   2,494,244     (1,949,967 )
 Unrealized foreign exchange loss (gain) and other   505,866     (1,310,042 )   52,117     (1,004,365 )
                         
    13,227,628     472,956     19,537,050     3,674,940  
Net change in non-cash working capital items                        
 Decrease (increase) in accounts receivable and other receivables   (637,300 )   (662,399 )   (218,943 )   (266,919 )
 Decrease (Increase) in inventories   (1,912,605 )   2,192,939     (1,988,599 )   1,656,806  
 Decrease (increase) in prepaid expenses and other   (122,081 )   (1,722,418 )   (393,220 )   (2,202,403 )
 Increase (decrease) in accounts payable and accrued liabilities   1,963,958     (496,077 )   1,459,600     (2,834,288 )
 Decrease in unearned revenue   (105,632 )   (336,122 )   (135,290 )   (68,250 )
 Increase (decrease) in taxes payable   88,689     (14,851 )   146,613     (172,875 )
 Decrease in vendor liability on mineral property   -     (370,521 )   -     (721,081 )
                         
    12,502,657     (936,493 )   18,407,211     (934,070 )
                         
INVESTING ACTIVITIES                        
Additions to plant and equipment (net of accruals)   (3,034,609 )   (5,888,016 )   (4,388,141 )   (7,473,675 )
Expenditures on mineral property interests (net of accruals)   (2,580,792 )   (3,174,554 )   (5,990,412 )   (5,022,028 )
Realized gain on derivative financial instruments   1,076,805     -     646,810     -  
Proceeds from sale of marketable securities   38,641     -     68,171     -  
Net proceeds from pre-commercial operation   -     -     2,101,124     -  
Decrease (increase) of deposits on long term assets   (33,839 )   380,708     (498,170 )   -  
Investment in marketable securities   -     -     (25,000 )   -  
Decrease in silver futures contract deposits   -     281,335     -     969,628  
Increase in restricted cash securitizing vendor liability   -     -     -     (545,522 )
                         
    (4,533,794 )   (8,400,527 )   (8,085,618 )   (12,071,597 )
                         
FINANCING ACTIVITIES                        
Issuance of common shares and warrants, net of issue costs   530,438     (19,798 )   704,938     19,693,879  
Payment of capital lease obligations   (493,887 )   (678,606 )   (1,153,455 )   (1,061,074 )
Prepayment facility, net of repayments   (249,326 )   -     498,828     -  
Payment of debt facilities   (432,152 )   -     (432,152 )   -  
                         
    (644,927 )   (698,404 )   (381,841 )   18,632,805  
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   7,323,936     (10,035,424 )   9,939,752     5,627,138  
EFFECT OF EXCHANGE RATE CHANGES ON CASH HELD IN FOREIGN CURRENCY   48,112     5,891     20,841     6,145  
CASH AND CASH EQUIVALENTS - BEGINNING OF THE PERIOD   8,478,338     33,086,939     5,889,793     17,424,123  
                         
CASH AND CASH EQUIVALENTS - END OF PERIOD   15,850,386     23,057,406     15,850,386     23,057,406  
                         
CASH AND CASH EQUIVALENTS IS COMPRISED OF:                        
Cash   10,824,836     8,487,949     10,824,836     8,487,949  
Short term deposits   5,025,550     83,698     5,025,550     83,698  
Restricted cash   -     14,485,759     -     14,485,759  
                         
    15,850,386     23,057,406     15,850,386     23,057,406  
                         
Interest paid   163,890     233,402     408,051     275,770  
Income taxes paid   32,055     -     322,870     -  
                         
NON-CASH FINANCING AND INVESTING ACTIVITIES (NOTE 19)                        

The accompanying notes are an integral part of these consolidated financial statements



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

1. DESCRIPTION OF BUSINESS AND CONTINUING OPERATIONS

First Majestic Silver Corp. (the “Company” or “First Majestic”) is in the business of production, development, exploration, and acquisition of mineral properties with a focus on silver in Mexico. The Company’s shares and warrants trade on the Toronto Stock Exchange under the symbols “FR” and “FR.WT.B”, respectively.

These consolidated financial statements have been prepared on the going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is dependent on the price of silver in global commodity markets, and on maintaining profitable operations or obtaining sufficient funds from alternative sources as required to augment operations and for ongoing capital developments. If the Company were unable to continue as a going concern, material adjustments may be required to the carrying value of assets and liabilities and the balance sheet classifications used.

2. BASIS OF PRESENTATION

The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles (“GAAP”). These interim financial statements do not contain all the information required by GAAP for annual financial statements and should be read in conjunction with the Company’s latest audited consolidated financial statements for the year ended December 31, 2009.

The consolidated financial statements include the accounts of the Company and its direct wholly-owned subsidiaries: Corporación First Majestic, S.A. de C.V. (“CFM”), First Silver Reserve Inc. (“First Silver”) and Normabec Mining Resources Ltd. (“Normabec”) as well as its indirect wholly-owned subsidiaries: First Majestic Plata, S.A. de C.V. (“First Majestic Plata”), Minera El Pilon, S.A. de C.V. (“El Pilon”), Minera La Encantada, S.A. de C.V. (“La Encantada”), Majestic Services S.A. de C.V. (“Majestic Services”), Minera Real Bonanza, S.A. de C.V. (“MRB”) and Servicios Minero-Metalurgicos e Industriales, S.A. de C.V. (“Servicios”). First Silver underwent a wind up and distribution of its assets and liabilities to the Company in December 2007 but First Silver has not been dissolved for legal purposes pending the outcome of litigation described in Note 8. Intercompany balances and transactions are eliminated on consolidation.

3. SIGNIFICANT CHANGES IN ACCOUNTING POLICIES

Change in Accounting Policy and Future Accounting Pronouncements

Business Combinations, Consolidations and Non-controlling interests

The CICA has approved new Handbook Section 1582, “Business Combinations”, Section 1601 “Consolidations” and Section 1602 “Non-controlling Interests” to harmonize with International Financial Reporting Standards (“IFRS”). These new sections will be effective for years beginning on or after January 1, 2011, with early adoption permitted. Section 1582 specifies a number of changes including: an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. The Company has adopted these new standards for the period ended June 30, 2010 and it has not had a material impact on the Company.

International Financial Reporting Standards (“IFRS”)

In 2006, the Canadian Accounting Standards Board (“AcSB”) published a strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines convergence of Canadian GAAP with IFRS over an expected five-year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for public companies to commence using IFRS, replacing Canada’s own GAAP. The transition date is January 1, 2011, and relates to interim and annual financial statements on or after January 1, 2011. The transition will require the restatement for comparative purposes of amounts reported by the Company for all reporting periods beginning after January 1, 2010.

 
Notes Page 1



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

4. OTHER RECEIVABLES

Details of the components of other receivables are as follows:

    June 30, 2010     December 31, 2009  
  $    $   
Value added taxes recoverable   2,045,641     4,066,074  
Other taxes and value added taxes on accounts payable   4,200,517     2,072,442  
Loan receivable from supplier   316,677     478,824  
Interest receivable and other   192,679     6,860  
    6,755,514     6,624,200  

5. INVENTORIES

Inventories consist of the following:

    June 30, 2010     December 31, 2009  
  $    $   
Silver coins and bullion including in process shipments   522,692     273,262  
Finished product - doré and concentrates   430,990     343,990  
Ore in process   1,026,003     463,549  
Stockpile   853,884     387,836  
Materials and supplies   2,967,489     2,343,823  
    5,801,058     3,812,460  

The amounts of inventory recognized as expenses during the period are equivalent to the cost of sales for the respective periods.

6. PREPAID EXPENSES AND OTHER

Details of prepaid expenses and other are as follows:

    June 30, 2010     December 31, 2009  
  $    $   
Prepayments to suppliers and contractors   1,514,311     865,298  
Deposits   250,627     215,036  
Marketable securities   485,557     387,425  
    2,250,495     1,467,759  

 
Notes Page 2



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

7. MINING INTERESTS AND PLANT AND EQUIPMENT

Mining interests and plant and equipment, net of accumulated depreciation, depletion and amortization, are as follows:

    June 30, 2010     December 31, 2009  
          Accumulated                 Accumulated        
          Depreciation,                 Depreciation,        
          Depletion and     Net Book           Depletion and     Net Book  
    Cost     Amortization     Value     Cost     Amortization     Value  
  $    $    $    $    $    $   
Mining properties   192,959,326     18,875,052     174,084,274     183,585,673     17,185,500     166,400,173  
Plant and equipment   78,886,829     11,103,571     67,783,258     69,026,387     8,637,857     60,388,530  
    271,846,155     29,978,623     241,867,532     252,612,060     25,823,357     226,788,703  

A summary of the net book value of mining properties is as follows:

    June 30, 2010     December 31, 2009  
          Accumulated                 Accumulated        
          Depletion                 Depletion        
          and     Net Book           and     Net Book  
    Cost     Amortization     Value     Cost     Amortization     Value  
MEXICO $    $    $    $    $    $   
                                     
Producing properties                                    
La Encantada (a)   15,148,790     3,040,538     12,108,252     13,055,900     2,886,830     10,169,070  
La Parrilla (b)   25,232,160     3,480,989     21,751,171     22,371,850     3,009,041     19,362,809  
San Martin (c)   40,526,307     12,353,525     28,172,782     38,902,227     11,289,629     27,612,598  
    80,907,257     18,875,052     62,032,205     74,329,977     17,185,500     57,144,477  
Exploration properties                                    
La Encantada (a)   2,679,019     -     2,679,019     2,467,451     -     2,467,451  
La Parrilla (b)   7,886,775     -     7,886,775     7,625,168     -     7,625,168  
San Martin (c)   68,705,647     -     68,705,647     65,931,244     -     65,931,244  
Del Toro (d)   12,290,066     -     12,290,066     11,855,627     -     11,855,627  
Real de Catorce (e)   20,490,562     -     20,490,562     21,376,206     -     21,376,206  
    112,052,069     -     112,052,069     109,255,696     -     109,255,696  
    192,959,326     18,875,052     174,084,274     183,585,673     17,185,500     166,400,173  

 
Notes Page 3



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

(1)  
7. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

A summary of plant and equipment is as follows:

    June 30, 2010     December 31, 2009  
          Accumulated     Net Book           Accumulated     Net Book  
    Cost     Depreciation     Value     Cost     Depreciation     Value  
  $    $    $    $    $    $   
La Encantada Silver Mine   49,929,614     3,093,139     46,836,475     42,001,694     1,954,699     40,046,995  
La Parrilla Silver Mine   18,089,330     4,655,955     13,433,375     17,228,300     3,792,818     13,435,482  
San Martin Silver Mine   10,822,899     3,347,154     7,475,745     9,751,407     2,889,290     6,862,117  
Real de Catorce Silver Project   44,986     7,323     37,663     44,986     1,050     43,936  
Used in Mining Operations   78,886,829     11,103,571     67,783,258     69,026,387     8,637,857     60,388,530  
Corporate office equipment   989,307     468,134     521,173     767,782     358,501     409,281  
    79,876,136     11,571,705     68,304,431     69,794,169     8,996,358     60,797,811  

Details of plant and equipment and corporate office equipment by specific assets are as follows:

    June 30, 2010     December 31, 2009  
          Accumulated     Net Book           Accumulated     Net Book  
    Cost     Depreciation     Value     Cost     Depreciation     Value  
   $    $   $    $    $    $   
Land   2,288,811     -     2,288,811     2,279,494     -     2,279,494  
Automobile   600,723     247,428     353,295     401,056     204,920     196,136  
Buildings   10,666,721     825,005     9,841,716     5,918,355     578,177     5,340,178  
Machinery and equipment   61,483,133     9,296,977     52,186,156     26,154,678     7,311,470     18,843,208  
Computer equipment   886,972     387,689     499,283     560,018     279,783     280,235  
Office equipment   623,764     618,173     5,591     577,215     460,070     117,145  
Leasehold improvements   320,304     196,433     123,871     320,304     161,938     158,366  
Construction in progress (1)(2)   3,005,708     -     3,005,708     33,583,049     -     33,583,049  
    79,876,136     11,571,705     68,304,431     69,794,169     8,996,358     60,797,811  

(1)

Construction in progress includes $633,902 relating to La Encantada, $442,456 relating to La Parrilla and $1,929,350 relating to San Martin (December 31, 2009 - $31,283,949 relating to La Encantada, $535,604 relating to La Parrilla and $1,763,496 relating to San Martin).

   
(2)

On April 1, 2010, the La Encantada mill expansion project achieved commercial stage of production. Prior to April 1, 2010, the net amount of revenues less production costs of $2,770,596 (December 31, 2009 - $496,371) in connection with the sale of 316,680 silver equivalent ounces (December 31, 2009 – 54,277 silver equivalent ounces) of precipitates during the pre- operating period from November 19, 2009 to March 31, 2010 were offset to construction in progress. The net proceeds on the sale of silver precipitates for the quarter ended March 31, 2010 was $2,274,225, relating to 262,403 pre-commercial ounces of silver produced in the quarter ended March 31, 2010.


 
Notes Page 4



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

7. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)
   
(a) La Encantada Silver Mine, Coahuila State

The La Encantada Silver Mine is a producing underground mine located in Northern Mexico accessible via a 1.5 hour flight from Torreon, Coahuila. The mine is comprised of 4,076 hectares of mining rights and surface land ownership of 1,343 hectares. The closest town, Muzquiz, is 225 km away via a combination of paved and unpaved road. The La Encantada Silver Mine consists of a 3,500 tonnes per day cyanidation plant, a 1,000 tonnes per day flotation plant, an airstrip, and a village with 180 houses as well as administrative offices. The Company owns 100% of the La Encantada Silver Mine. On April 1, 2010, the mill expansion project achieved commercial stage production and all revenues and costs from that date are recorded in the mine operating earnings. During the six month period ended June 30, 2010, $8.3 million in expenditures were capitalized at La Encantada in connection with the mill expansion project.

(b) La Parrilla Silver Mine, Durango State

The La Parrilla Silver Mine is a system of connected underground producing mines consisting of the La Rosa/Rosarios/La Blanca, the San Marcos Mine and the Quebradillas Mine. La Parrilla is located approximately 65 km southeast of the city of Durango, in the State of Durango, Mexico. Located at the mine are: mining equipment, a 425 tonnes per day cyanidation plant, a 425 tonnes per day flotation plant and mining concessions covering an area of 53,000 hectares of which the Company owns 100 hectares of surface rights. The Company owns 100% of the La Parrilla Silver Mine.

There is a net smelter royalty (“NSR”) agreement of 1.5% of sales revenue associated with the Quebradillas Mine, with a maximum payable of US$2.5 million. The Company has an option to purchase the NSR at any time for an amount of US$2.0 million. For the six month period ended June 30, 2010, the Company paid US$65,131 (six month ended June 30, 2009 - US$64,846) relating to royalties. The sum of royalties paid under the Quebradillas NSR is presently US$269,495.

(c) San Martin Silver Mine, Jalisco State

The San Martin Silver Mine is a producing underground mine located adjacent to the town of San Martin de Bolaños in Northern Jalisco State, Mexico. The mine is comprised of approximately 7,840 hectares of mineral rights, approximately 1,300 hectares of surface rights surrounding the mine, and another 104 hectares of surface rights where the 900 tonnes per day cyanidation mill, flotation circuit, mine buildings and administrative offices are located. The Company owns 100% of the San Martin Silver Mine.

(d) Del Toro Silver Mine, Zacatecas State

The Del Toro Silver Mine is located 60 km to the southeast of the Company’s La Parrilla Silver Mine and consists of 392 contiguous hectares of mining claims and 100 hectares of surface rights covering the area surrounding the San Juan mine. The Del Toro Silver Mine consolidates two old silver mines, the San Juan and Perseverancia mines, which are approximately one kilometre apart. The Company owns 100% of the San Juan and Perseverancia mines. The US$225,000 option payments due in 2010, of which US$62,500 was paid in June 2010, relate to a new land acquisition of 50 hectares. All other option payments have been made.

 
Notes Page 5



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

7. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)
   
(e) Real de Catorce Silver Project, San Luis Potosi State

The Real de Catorce Silver Project is located 25 km west of the town of Matehuala in San Luis Potosi State, Mexico. The Real de Catorce property consists of 22 mining concessions covering 6,327 hectares. The Company owns 100% of the Real de Catorce Silver Project. Upon commencement of commercial production on the property, the Company has agreed to pay an amount of US$200,000 to a previous owner. The property is subject to a 3% net smelter return royalty, of which 1.75% may be acquired in increments of 0.25% for a price of US$250,000 per increment for the first five years from the date of the first payment and at a price of US$300,000 per increment for the following five years.

In addition, the Company has agreed to acquire the surface rights forming part of the property, including the buildings located thereon and covering the location of the previous mining operations, in consideration for a single payment of US$1.0 million to be made in December 2010.

The Company has also agreed to make a payment of US$200,000 on December 10, 2010 for all technical and geological information collected over the area. Such payment is not related to the acquisition of the mining concessions or the surface rights and buildings agreement.

(f) Future Mineral Property Options

Future mineral property options are due as follows:

    US$  
Del Toro Silver Mine (d)   162,500  
Real de Catorce Silver Project (e)   1,200,000  
Total Future Option Payments   1,362,500  

8. VENDOR LIABILITY AND INTEREST AND RESTRICTED CASH

In May 2006, First Majestic acquired control of First Silver Reserve Inc. (“First Silver”) for $53.4 million. The purchase price was payable in three instalments (50%, 25% and 25%) to the then majority interest shareholder of First Silver (the “Majority Shareholder”). The first instalment was paid upon closing on May 30, 2006. The second instalment was paid on May 30, 2007. The third and final instalment of $13.3 million due on May 30, 2008 was withheld by the Company.

In November 2007, an action was commenced by the Company and its acquired subsidiary First Silver against the Majority Shareholder (the “Defendant”) who was previously a director, President and Chief Executive Officer of First Silver. The Company and First Silver allege in their action that, while holding the positions of director, President and Chief Executive Officer, the Majority Shareholder engaged in a course of deceitful and dishonest conduct in breach of his fiduciary and statutory duties owed to First Silver, which resulted in the Majority Shareholder acquiring a mine which was First Silver’s right to acquire. Management believes that there are substantial grounds to this claim, however, the outcome of this litigation is not presently determinable. At the present time, the trial is scheduled to commence in the Supreme Court of British Columbia on February 21, 2011.

 
Notes Page 6



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

8. VENDOR LIABILITY AND INTEREST AND RESTRICTED CASH (continued)

In March 2008, the Defendant filed a Counterclaim against the Company for unpaid amounts and interest of $14.9 million, and this action was secured by a $14.5 million Letter of Credit posted in Court by First Majestic. The Company recorded these amounts as Restricted Cash as at March 31, 2009. In July 2009, an Order was granted by the Court, with the consent of all parties, under which the Defendant obtained a judgment in the amount of $14.9 million. The Company agreed to pay out $14.3 million from the posted Letter of Credit to the Defendant’s lawyer’s trust account (the “Trust Funds”) in partial payment of the Judgment. The remaining funds from the Letter of Credit were paid out to the Company. The Consent Order requires that the Trust Funds be held in trust pending the outcome of the Company’s action. If the trial has not commenced by June 30, 2011, the Trust Funds can be released to the Defendant, unless otherwise ordered by the court. These funds would be accessible to the Company in the event of a favourable outcome to the litigation.

9.

DEBT FACILITIES

   
(a)

Pre-Payment Facility

In August 2009, a subsidiary of the parent company entered into an agreement for a six-month pre-payment facility for advances on the sale of lead in its concentrate production. Under the terms of the agreement, $1.6 million (US$1.5 million) was advanced against the Company’s lead concentrate production from the La Parrilla Silver Mine for a period of six months. Interest accrues at an annualized floating rate of one-month LIBOR plus 5%. Interest is payable monthly and the principal amount is repayable based on the volume of lead concentrate shipped with minimum monthly instalments of US$250,000 required. The repayment of the credit facility is guaranteed by the parent company.

On February 28, 2010, this agreement was amended to provide an additional six-month pre-payment facility of up to $1.6 million (US$1.5 million). A total of $1.6 million (US$1.5 million) was drawn on this pre-payment facility. As at June 30, 2010, after delivering monthly quotas of lead concentrates and payments of interest charges, the Company had a remaining balance payable on the pre-payment facility of $627,681 (US$591,817).

(b) FIFOMI Loan Facilities

In October 2009, the Company entered into an agreement with the Mexican Mining Development Trust - Fideicomiso de Fomento Minero (FIFOMI) for two loan facilities, a capital asset loan and a working capital loan, totalling 53.8 million Mexican pesos (CAD$4.3 million). Funds from these loans were used for the completion of the 3,500 tonnes per day cyanidation plant at the La Encantada Silver Mine and for working capital purposes. The capital asset loan, for up to 47.1 million Mexican pesos (CAD$3.7 million), bears interest at the Mexican interbank rate plus 7.51% per annum and is repayable over a 60-month period. The working capital loan, for up to 6.7 million Mexican pesos (CAD$0.6 million), bears interest at the Mexican interbank rate plus 7.31% per annum and is a 90-day revolving loan. The loans are secured against real property, land, buildings, facilities, machinery and equipment at the La Encantada Silver Mine. At June 30, 2010, the balance owing was 52.0 million Mexican pesos (CAD$4.3 million) of which 17.2 million Mexican pesos (CAD$2.0 million) was classified as current.

The following is a summary of the debt facilities as at June 30, 2010:

 
Notes Page 7



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

  $CAD  
Pre-payment Facility   627,681  
FIFOMI Loan Facilities   4,298,774  
    4,926,455  
Less: current portion   (2,045,440 )
Long-term Portion of Debt Facilities   2,881,015  

 
Notes Page 8



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

10. DEPOSITS ON LONG-TERM ASSETS

Deposits consist of advance payments made to property vendors, drilling service providers, and equipment vendors, which are categorized as long-term in nature, in amounts as follows:

    June 30, 2010     December 31, 2009  
  $    $   
Deposit on services   2,396     -  
Deposit on equipment for La Encantada   496,212     2,876,717  
Deposit on equipment for La Parrilla   1,472,989     1,429,702  
    1,971,597     4,306,419  

11. SHARE CAPITAL
   
(a) Authorized – unlimited number of common shares without par value

  Issued   Six Months Ended June 30, 2010     Year Ended December 31, 2009  
      Shares   $      Shares   $   
  Balance - beginning of the period   92,648,744     244,241,006     73,847,810     196,648,345  
  Issued during the period                        
  For cash:                        
   Exercise of options   277,500     622,436     36,250     68,838  
   Exercise of warrants   25,000     82,500     50,000     165,000  
   Public offering of units (i)   -     -     8,487,576     18,840,890  
   Private placements (ii)   -     -     4,167,478     9,051,069  
  For debt settlements (iii)   -     -     1,191,852     2,741,260  
  For Normabec acquisition (iv)   -     -     4,867,778     16,696,479  
  Transfer of contributed surplus for stock options and warrants exercised   -     232,302     -     29,125  
  Balance - end of the period   92,951,244     245,178,244     92,648,744     244,241,006  

(i)

On March 5, 2009, the Company completed a public offering with a syndicate of underwriters who purchased 8,487,576 units at an issue price of $2.50 per unit for net proceeds to the Company of $19,689,648, of which $18,840,890 was allocated to the common shares and $848,758 was allocated to the warrants. Each unit consisted of one common share in the capital of the Company and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to acquire one common share at a price of $3.50 expiring on March 5, 2011.

   

(ii)

In August and September 2009, the Company completed non-brokered private placements consisting of an aggregate of 4,167,478 units at a price of $2.30 per unit for net proceeds to the Company of $9,440,069, of which $9,051,069 was allocated to the common shares and $389,000 was allocated to the warrants. Each unit consisted of one common share and one-half of one common share purchase warrant, with each full warrant entitling the holder to purchase one additional common share of the Company at an exercise price of $3.30 per share for a period of two years after closing. A total of 1,749,500 warrants expire on August 20, 2011, and 334,239 warrants expire on September 16, 2011. Finders’ fees in the amount of $101,016 and 50,000 warrants were paid regarding a portion of these private placements. The finder’s warrants are exercisable at a price of $3.30 per share and expire on August 20, 2011.


 
Notes Page 9



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

11. SHARE CAPITAL (continued)

(iii)

In August and September 2009, the Company settled certain current liabilities amounting to $2,741,260 by the issuance of 1,191,852 common shares of the Company at a value of $2.30 per share.

 

(iv)

On November 13, 2009, the Company issued 4,867,778 common shares at a value of $3.43 per share in connection with the acquisition of Normabec.

 

(b) Stock Options

Under the terms of the Company’s Stock Option Plan, the maximum number of shares reserved for issuance under the Plan is 10% of the issued shares on a rolling basis. Options may be exercisable over periods of up to five years as determined by the board of directors of the Company and the exercise price shall not be less than the closing price of the shares on the day preceding the award date, subject to regulatory approval. All stock options are subject to vesting with 25% vesting upon issuance and 25% vesting each six months thereafter.

The changes in stock options outstanding for the periods ended June 30, 2010 and December 31, 2009 are as follows:

    Six Months Ended June 30, 2010     Year Ended December 31, 2009  
          Weighted                 Weighted        
          Average     Weighted           Average     Weighted  
    Number of     Exercise Price     Average     Number of     Exercise Price     Average  
    Shares     ($)     Remaining Life     Shares     ($)     Remaining Life  
                                     
Balance, beginning of the period   8,603,750     3.50     2.4 years     6,862,500     3.84     2.8 years  
Granted   460,000     3.77     3.0 years     2,842,500     2.88     3.6 years  
Exercised   (277,500 )   2.24     1.6 years     (36,250 )   1.90     2.5 years  
Forfeited or expired   (428,750 )   4.80     0.5 years     (1,065,000 )   4.11     0.7 years  
Balance, end of the period   8,357,500     3.23     2.1 years     8,603,750     3.50     2.4 years  

 
Notes Page 10



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

11. SHARE CAPITAL (continued)
   
(b) Stock Options (continued)

The following table summarizes both the stock options outstanding and those that are exercisable at June 30, 2010:

Price Options Options    
$ Outstanding Exercisable   Expiry Dates
4.17 100,000 100,000   August 8, 2010
3.72 30,000 30,000   September 24, 2010
3.98 20,000 20,000   October 17, 2010
4.45 495,000 495,000   October 30, 2010
4.34 25,000 25,000   November 1, 2010
4.34 200,000 200,000   December 5, 2010
4.42 50,000 50,000   February 20, 2011
4.65 100,000 100,000   March 25, 2011
4.19 20,000 20,000   April 26, 2011
4.02 100,000 100,000   May 15, 2011
4.30 450,000 450,000   June 19, 2011
4.67 90,000 90,000   July 4, 2011
4.15 275,000 275,000   July 28, 2011
3.62 495,000 495,000   August 28, 2011
1.60 100,000 100,000   October 8, 2011
1.27 100,000 100,000   October 17, 2011
4.32 245,000 245,000   December 6, 2011
4.41 400,000 400,000   December 22, 2011
5.00 155,000 155,000   February 7, 2012
2.03 635,000 476,250   May 7, 2012
4.65 25,000 25,000   June 20, 2012
2.62 60,000 30,000   September 16, 2012
2.96 25,000 12,500   October 28, 2012
4.34 925,000 925,000   December 5, 2012
3.52 540,000 270,000   December 7, 2012
3.70 522,500 261,250   December 15, 2012
3.56 200,000 50,000   February 2, 2013
3.15 25,000 6,250   March 19, 2013
3.98 100,000 25,000   May 13, 2013
4.64 75,000 18,750   June 2, 2013
3.94 10,000 2,500   June 3, 2013
4.47 50,000 12,500   June 28, 2013
3.62 100,000 100,000   August 28, 2013
1.44 240,000 240,000   November 10, 2013
1.56 550,000 550,000   December 17, 2013
2.03 462,500 346,875   May 7, 2014
2.32 12,500 9,375   June 15, 2014
3.70 350,000 175,000   December 15, 2014
         
  8,357,500 6,986,250    

During the six months ended June 30, 2010, the Company granted stock options to an officer and several employees to purchase 460,000 shares (six months ended June 30, 2009 – 1,275,000 shares) of the Company. Pursuant to the Company’s policy of accounting for the fair value of stock-based compensation over the applicable vesting period, the fair value of stock options granted during the six month period was $680,000 of which $252,486 was expensed in the current period and $427,514 was deferred and will be amortized over the remaining vesting period of the stock options.

 
Notes Page 11



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

11. SHARE CAPITAL (continued)
   
(b) Stock Options (continued)

The weighted average fair value of each stock option granted during the past six months was $1.43 (2009 - $1.14) . The fair value of stock options is estimated using the Black-Scholes Option Pricing Model with the following assumptions:

  Six Months Ended Six Months Ended
  June 30, 2010 June 30, 2009
Risk-free interest rate 1.4% 0.9%
Es timated volatility 82.6% 80.3%
Expected life 1.4 years 2.4 years
Expected dividend yield 0% 0%

Option pricing models require the use of estimates and assumptions including the expected volatility of share prices. Changes in the underlying assumptions can materially affect the fair value estimates, therefore, existing models do not necessarily provide an accurate measure of the actual fair value of the Company’s stock options.

(c) Share Purchase Warrants

The changes in share purchase warrants for the six months ended June 30, 2010, and the year ended December 31, 2009, are as follows:

    Six Months Ended June 30, 2010     Year Ended December 31, 2009  
          Weighted                 Weighted        
          Average     Weighted           Average     Weighted  
    Number of     Exercise Price     Average Term to     Number of     Exercise Price     Average Term to  
    Warrants     ($)     Expiry     Warrants     ($)     Expiry  
Balance, beginning of the period   11,357,465     5.04     0.8 years     5,078,791     6.99     1.2 years  
Issued   -     -     -     6,638,492     3.66     2.1 years  
Exercised   (25,000 )   3.30     1.6 years     (50,000 )   3.30     1.7 years  
Cancelled or expired   (5,029,938 )   7.06     -     (309,818 )   7.69     -  
Balance, end of the period   6,302,527     3.43     0.8 years     11,357,465     5.04     0.8 years  

(i)

On March 5, 2009, the Company issued 4,243,788 warrants exercisable at a price of $3.50 per share for a period of two years. The warrants were detachable warrants issued in connection with the 8,487,576 unit offering. The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 1.5%, market sector volatility of 35.0%, expected life of 2 years, and expected dividend yield of 0%) and as a result $848,758 was credited to contributed surplus.

   

(ii)

On August 20, 2009, the Company issued 1,799,500 warrants exercisable at a price of $3.30 per share exercisable for a period of two years. The warrants were issued in connection with a non-brokered private placement of 3,499,000 units. The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 1.15%, market adjusted volatility of 38.5%, expected life of 2 years, and expected dividend yield of 0%) and as a result $328,047 was credited to contributed surplus.

   

(iii)

On September 16, 2009, the Company issued 334,239 warrants exercisable at a price of $3.30 per share exercisable for a period of two years. The warrants were issued in connection with a non-brokered private placement of 668,478 units.


 
Notes Page 12



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 1.15%, market adjusted volatility of 38.5%, expected life of 2 years, and expected dividend yield of 0%) and as a result $60,953 was credited to contributed surplus.

 
Notes Page 13



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

11. SHARE CAPITAL (continued)
   
(c) Share Purchase Warrants (continued)

(iv)

On November 13, 2009, in connection with the acquisition of Normabec, the Company issued 118,527 warrants exercisable at a price of $9.11 per share expiring on December 13, 2009, and 142,438 warrants exercisable at a price of $9.11 per share expiring on January 2, 2010. The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 1.26%, volatility of 67%, expected life of 0.1 year, and expected dividend yield of 0%). No value was credited to contributed surplus. These warrants expired unexercised.

The following table summarizes the share purchase warrants outstanding at June 30, 2010:

Exercise Price   Warrants        
$   Outstanding     Expiry Dates  
3.50   4,243,788     March 5, 2011  
3.30   1,724,500     August 20, 2011  
3.30   334,239     September 16, 2011  
    6,302,527        

(d) Share Capital to be Issued

On June 5, 2006, pursuant to the acquisition of First Silver Reserve Inc., First Majestic and First Silver entered into a business combination agreement whereby First Majestic agreed to acquire the remaining 36.25% minority interest in First Silver. At June 30, 2010, prior shareholders of First Silver had not yet exchanged 114,254 shares of First Silver, exchangeable for 57,127 shares of First Majestic, resulting in a remaining value of shares to be issued of $276,495.

Any certificate formerly representing First Silver shares not duly surrendered on or prior to September 14, 2012 shall cease to represent a claim or interest of any kind or nature, including a claim for dividends or other distributions against First Majestic or First Silver by any former First Silver shareholder. After such date, all First Majestic shares to which the former First Silver shareholder was entitled shall be deemed to have been cancelled.

12. REVENUES

Details of the components of net revenue are as follows:

    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
  $    $    $    $   
Combined revenue - silver doré bars, concentrates, coins and ingots   32,841,120     18,003,518     57,012,365     35,467,655  
Less: intercompany eliminations   (1,041,738 )   (2,223,922 )   (3,277,271 )   (2,223,922 )
Consolidated gross revenue   31,799,382     15,779,596     53,735,094     33,243,733  
Less: refining, smelting, net of intercompany eliminations   (1,887,793 )   (2,165,720 )   (4,624,310 )   (4,706,462 )
Less: metal deductions, net of intercompany eliminations   (948,304 )   (588,999 )   (1,929,885 )   (1,125,522 )
Net revenue   28,963,285     13,024,877     47,180,899     27,411,749  

The La Encantada mill expansion project achieved commercial stage of production on April 1, 2010. Sales incurred during the pre-operating period were recorded as a reduction of capital costs and are excluded from sales revenue. As a result, sales of $4,718,618 (2009 - $nil) in connection with the sale of 262,403 silver equivalent ounces of precipitates during the quarter ended March 31, 2010 were excluded from the above table.

 
Notes Page 14



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

13. SEGMENTED INFORMATION

The Company has three operating segments located in Mexico, one retail market segment in Canada and one corporate segment with locations in Canada and Mexico. The San Martin operations consist of the San Martin Silver Mine, the San Martin property and the Jalisco Group of Properties. The La Parrilla operations consist of the La Parrilla Silver Mine, the Del Toro Silver Mine, the La Parrilla properties and the Del Toro properties. The La Encantada operations consist of the La Encantada Silver Mine and the La Encantada property.

These reportable operating segments are summarized in the table below:

  Three Months Ended June 30, 2010  
                            Corporate and        
    San Martin     La Parrilla     La Encantada           Other        
    operations     operations     operations     Coin Sales     Eliminations     Total  
  $    $    $    $    $    $   
Revenue   5,511,981     7,100,001     15,633,775     1,648,899     (931,371 )   28,963,285  
Cost of sales   3,201,270     3,010,188     6,529,912     1,322,626     (629,249 )   13,434,747  
Depletion, depreciation and amortization, and accretion of ARO   623,700     596,002     1,254,531     -     -     2,474,233  
Mine operating earnings (loss)   1,687,011     3,493,811     7,849,332     326,273     (302,122 )   13,054,305  
General and administrative   -     -     -     -     2,406,842     2,406,842  
Stock-based compensation   -     -     -     -     643,964     643,964  
Interest expense (income)   274,906     2,536,640     1,349,205     -     (3,187,114 )   973,637  
Other expense (income) and foreign                                 -  
 exchange   (127,735 )   (276,609 )   438,660     -     (1,303,900 )   (1,269,584 )
Income tax expense (recovery)   268,181     116,836     779,191     -     248,122     1,412,330  
Net income (loss)   1,271,659     1,116,944     5,282,276     326,273     889,964     8,887,116  
Capital expenditures   774,169     1,134,124     4,092,667     -     211,851     6,212,811  
Total assets   109,125,407     64,068,493     72,640,351     -     31,580,187     277,414,438  

    Three Months Ended June 30, 2009  
                            Corporate and        
    San Martin     La Parrilla     La Encantada           Other        
    operations     operations     operations     Coin Sales     Eliminations     Total  
  $    $    $    $    $    $   
Revenue   5,128,241     5,206,431     2,678,133     1,807,629     (1,795,557 )   13,024,877  
Cost of sales   3,326,950     3,436,485     2,588,633     1,779,193     (1,671,393 )   9,459,868  
Depletion, depreciation and amortization, and accretion of ARO   701,235     775,918     412,482     -     -     1,889,635  
Mine operating earnings (loss)   1,100,056     994,028     (322,982 )   28,436     (124,164 )   1,675,374  
General and administrative   -     -     -     -     2,114,312     2,114,312  
Stock-based compensation   -     -     -     -     800,808     800,808  
Interest expense (income)   45,143     66,600     52,526     -     178,537     342,806  
Other expense (income) and foreign                                    
 exchange   (118,373 )   (670,022 )   (470,142 )   -     257,365     (1,001,172 )
Income tax (recovery) expense   121,398     (58,486 )   (599,696 )   -     (1,081,012 )   (1,617,796 )
Net income (loss)   1,051,888     1,655,936     694,330     28,436     (2,394,174 )   1,036,416  
Capital expenditures   874,235     1,903,461     6,419,379     -     131,485     9,328,560  
Total assets   118,788,430     62,249,122     49,559,957     -     22,489,594     253,087,103  

 
Notes Page 15



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

13. SEGMENTED INFORMATION (continued)

    Six Months Ended June 30, 2010  
                            Corporate and        
    San Martin     La Parrilla     La Encantada           Other        
    operations     operations     operations     Coin Sales     Eliminations     Total  
  $    $    $    $    $    $   
Revenue   11,075,267     13,264,360     22,785,023     2,981,520     (2,925,271 )   47,180,899  
Cost of sales   6,027,591     6,121,862     9,908,028     2,584,332     (2,233,209 )   22,408,604  
Depletion, depreciation and amortization, and accretion of ARO   1,464,069     1,244,560     1,657,315     -     -     4,365,944  
Mine operating earnings (loss)   3,583,607     5,897,938     11,219,680     397,188     (692,062 )   20,406,351  
General and administrative   -     -     -     -     4,393,465     4,393,465  
Stock-based compensation   -     -     -     -     1,344,143     1,344,143  
Interest expense (income)   658,602     5,166,802     2,884,029           (7,463,784 )   1,245,649  
Other expense (income) and foreign                                    
 exchange   426,904     83,221     (202,596 )   -     (1,345,562 )   (1,038,033 )
Income tax expense (recovery)   441,655     (15,954 )   1,761,414     -     371,101     2,558,216  
Net income (loss)   2,056,446     663,869     6,776,833     397,188     2,008,575     11,902,911  
Capital expenditures   1,394,479     2,495,169     8,725,362     -     318,486     12,933,496  
Total assets   109,125,407     64,068,493     72,640,351     -     31,580,187     277,414,438  

    Six Months Ended June 30, 2009  
                            Corporate and        
    San Martin     La Parrilla     La Encantada           Other        
    operations     operations     operations     Coin Sales     Eliminations     Total  
  $    $    $    $    $    $   
Revenue   9,584,207     9,142,290     8,126,458     3,002,081     (2,443,287 )   27,411,749  
Cost of sales   6,060,176     6,137,789     5,072,929     2,863,170     (2,375,383 )   17,758,681  
Depletion, depreciation and amortization, and accretion of ARO   1,205,822     1,391,556     837,430     -     -     3,434,808  
Mine operating earnings (loss)   2,318,209     1,612,945     2,216,099     138,911     (67,904 )   6,218,260  
General and administrative   -     -     -     -     3,932,315     3,932,315  
Stock-based compensation   -     -     -     -     1,697,548     1,697,548  
Interest expense (income)   79,204     121,972     104,561     -     383,393     689,130  
Other expense (income) and foreign                                    
 exchange   141,199     (377,899 )   (241,457 )   -     153,889     (324,268 )
Income tax expense (recovery)   (53,295 )   (105,744 )   (25,659 )   -     (1,567,880 )   (1,752,578 )
Net income (loss)   2,151,101     1,974,616     2,378,654     138,911     (4,667,169 )   1,976,113  
Capital expenditures   1,567,128     3,789,716     12,342,385     -     146,301     17,845,530  
Total assets   118,788,430     62,249,122     49,559,957     -     22,489,594     253,087,103  

 
Notes Page 16



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

14. CAPITAL LEASE OBLIGATIONS

In 2007 and 2008, the Company completed lease financings for $14.1 million (US$11.2 million) of mining equipment. The Company paid 50% prior to the arrival of the equipment, and financed the remaining 50% in quarterly payments over a period of 24 months at 9% interest over the term of the lease. In March 2009, the Company refinanced the balance of $3.6 million (US$2.9 million) to be paid over 24 monthly payments commencing in February 2009 with interest payable at 9% on the outstanding principal balance, secured by a guarantee from the parent company.

In January 2009, the Company completed additional lease financing arrangements with an equipment vendor, committing the Company to payments of $2.6 million (US$2.0 million) over a period of 36 months with monthly payments of $48,460 (US$38,420) consisting of principal plus 12.5% interest on outstanding balances, plus an additional 12 monthly lease payments of $43,640 (US$34,600) consisting of principal only.

The following is a schedule of future minimum lease payments under the capital leases as at June 30, 2010:

    June 30, 2010     December 31, 2009  
  $    $   
2010 Gross lease payments   1,031,969     2,235,960  
2011 Gross lease payments   690,615     684,364  
2012 Gross lease payments   140,581     139,309  
    1,863,165     3,059,633  
Less: interest   (121,894 )   (251,997 )
Total payments, net of interest   1,741,271     2,807,636  
Less: current portion   (1,372,510 )   (2,139,352 )
Capital Lease Obligation - long term portion   368,761     668,284  

15. ASSET RETIREMENT OBLIGATIONS

    Six Months Ended     Year Ended  
    June 30, 2010     December 31, 2009  
  $    $   
Balance, beginning of the period   4,336,088     5,304,369  
Effect of change in estimates   -     (877,834 )
Interest accretion   187,921     445,090  
Effect of translation of foreign currencies   136,579     (535,537 )
Balance, end of the period   4,660,588     4,336,088  

Asset retirement obligations allocated by mineral properties are as follows:

    Anticipated     June 30, 2010     December 31, 2009  
    Date   $    $   
La Encantada Silver Mine   2020     1,951,506     1,815,518  
La Parrilla Silver Mine   2025     1,073,070     998,293  
San Martin Silver Mine   2019     1,636,012     1,522,277  
Balance, end of the period         4,660,588     4,336,088  

 
Notes Page 17



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

15. ASSET RETIREMENT OBLIGATIONS (continued)

During the year ended December 31, 2009, the Company reassessed its reclamation obligations at each of its mines based on updated mine life estimates, rehabilitation and closure plans. The total undiscounted amount of estimated cash flows required to settle the Company’s estimated obligations is $6.1 million, which has been discounted using a credit adjusted risk free rate of 8.5%, of which $1.7 million of the reclamation obligation relates to the La Parrilla Silver Mine, $2.0 million of the obligation relates to the San Martin Silver Mine, and $2.5 million relates to the La Encantada Silver Mine. The present value of the reclamation liabilities may be subject to change based on management’s current estimates, changes in the remediation technology or changes to the applicable laws and regulations. Such changes will be recorded in the accounts of the Company as they occur.

16. OTHER LONG TERM LIABILITIES

In 1992, El Pilon entered into a contract with a Mexican bank, whereby the bank committed to advance cash to El Pilon in exchange for silver to be delivered in future instalments. The bank failed to advance the fully agreed amount, and El Pilon therefore refused to deliver the silver. El Pilon sued the bank for breach of contract. The Company believes it will retain the advance received from the bank, but the ultimate outcome is uncertain. The aggregate potential liability including interest and penalties amounts to $774,970 (December 31, 2009 - $753,657).

17. CONTINGENT LIABILITIES

Due to the size, complexity and nature of the Company’s operations, various legal and tax matters arise in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, these matters will not have a material effect on the consolidated financial statements of the Company.

18. COMMITMENTS

The Company is obligated to make certain mining property option payments as described in Note 7, in connection with the acquisition of its mineral property interests.

The Company has office lease commitments of $116,880 per annum in 2010 through 2011 and $29,220 in 2012. Additional annual operating costs are estimated at $101,110 per year ($8,426 per month) over the term of the lease. The Company provided a deposit of one month of rent equaling $20,151.

As at June 30, 2010, the Company is committed to construction contracts of approximately $0.1 million (US$0.1 million) (December 31, 2009 - $2.1 million or US$2.0 million) relating to the completion of the smelting furnaces installation project at La Encantada, which is expected to be completed in the third quarter of 2010.

As a result of the acquisition of Normabec, the Company is committed to make a US$1.0 million payment in December 2010 to acquire surface rights forming part of the Real de Catorce Project. It is also committed to make a payment of US$200,000 in December 2010 for technical and geological information collected over the Real de Catorce area.

The Company is committed to making severance payments in the amount of approximately $2.0 million, (December 31, 2009 - $1.9 million), subject to certain adjustments, to four officers in the event of a change of control of the Company.

 
Notes Page 18



FIRST MAJESTIC SILVER CORP.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)

19. NON-CASH FINANCING AND INVESTING ACTIVITIES

    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
  $    $    $    $   
                         
NON-CASH FINANCING AND INVESTING ACTIVITIES:                        
Fair value of warrants upon completion of public offering   -     -     -     848,758  
Transfer of contributed surplus upon exercise of stock options and warrants   189,126     -     232,302     2,950  
Assets acquired by capital lease   -     -     -     2,259,380  

20. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the classifications used in the current year’s presentation.

21. SUBSEQUENT EVENTS

Subsequent to June 30, 2010:

(a)

A total of 37,500 options with exercise prices ranging from $3.62 to $4.67 were cancelled;

   
(b)

A total of 100,000 options with an exercise price of $4.17 expired unexercised;

   
(c)

A total of 100,000 options were granted with an exercise price of $4.04 and an expiry date of August 9, 2013.


 
Notes Page 19