MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

Forward-Looking Statements

Certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “forecast”, “project”, ”intend”, ”believe”, ”anticipate”, “outlook” and other similar words, or statements that certain events or conditions “may” or “will” occur. Forward-looking statements are based on the opinions and estimates of management at the dates the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include the inherent risks involved in the mining, exploration and development of mineral properties, the uncertainties involved in interpreting drilling results and other geological data, fluctuating metal prices, the possibility of project cost overruns or unanticipated costs and expenses, uncertainties related to the availability of and costs of financing needed in the future and other factors described in the Company’s Annual Information Form under the heading “Risk Factors”. The Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change. The reader is cautioned not to place undue reliance on forward-looking statements.

PRELIMINARY INFORMATION

First Majestic Silver Corp. (“First Majestic” or “the Company”) is in the business of producing, developing, exploring and acquiring 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”, “FR.WT.A” and “FR.WT.B”, respectively. The common shares are also quoted on the OTCQX in the U.S. under the symbol “FRMSF” and on the Frankfurt, Berlin, Munich and Stuttgart Stock Exchanges under the symbol “FMV”. Silver producing operations of the Company are carried out through three operating mines: the La Encantada, La Parrilla, and San Martin Silver Mines.

The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2009. Additional information on the Company, including the Company’s Annual Information Form, is also available on SEDAR at www.sedar.com.

This MD&A relates to the consolidated operations of the Company and its wholly owned direct 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 which it is involved as the plaintiff, described herein in the Liquidity section.

QUALIFIED PERSONS

Unless otherwise indicated, Leonel Lopez, C.P.G., P.G. of Pincock Allen & Holt is the Qualified Person for the Company and has reviewed the technical information herein. National Instrument 43-101 technical reports regarding the La Parrilla Silver Mine, the La Encantada Silver Mine, the San Martin Silver Mine and the Del Toro Silver Mine can be found on the Company’s website at www.firstmajestic.com or on SEDAR at www.sedar.com.

All financial information in this MD&A is prepared in accordance with Canadian GAAP, and all dollar amounts are expressed in Canadian dollars unless otherwise indicated. All information contained in this MD&A is current as of March 19, 2010, unless otherwise stated.

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2009 ANNUAL AND Q4 FINANCIAL PERFORMANCE AND HIGHLIGHTS

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The subsidiaries, mines, mills and properties in Mexico are as follows:

Certain financial results in this MD&A, regarding operations and cash costs are presented in the Mine Operating Results table below to conform with industry peer company presentation standards, which are generally presented in U.S. dollars. U.S. dollar results are translated using the U.S. dollar rates on the dates which the transactions occurred.

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MINING OPERATING RESULTS

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MINING OPERATING RESULTS

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RECONCILIATION OF COST OF SALES TO CASH COSTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

Note 1 – The table above does not include 68,026 silver equivalent ounces of pre-commercial production from the La Encantada mill expansion project.

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RECONCILIATION OF COST OF SALES TO CASH COSTS
FOR THE QUARTER ENDED DECEMBER 31, 2009 AND 2008

Note 1 – The table above does not include 68,026 silver equivalent ounces of pre-commercial production from the La Encantada mill expansion project.

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Note 1 - The inventory reconciliation above consists of silver coins, bullion, doré, concentrates, ore in process and stockpile but excludes materials and supplies. The tables above do not include 68,026 silver equivalent ounces of pre-commercial production from the La Encantada mill expansion project.

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Note 1 - Net of intercompany eliminations of $1,326,953 for the fourth quarter ended December 31, 2009 and $4,547,713 for the year ended December 31, 2009.

REVIEW OF MINING OPERATING RESULTS

The total silver production for the fourth quarter of 2009 consisted of 1,249,568 ounces of silver equivalent representing an increase of 15% compared to 1,089,481 ounces of silver equivalent produced in the third quarter of 2009 and an increase of 18% compared to 1,056,219 ounces of silver equivalent produced in fourth quarter of 2008.

Silver production in the fourth quarter of 2009 was 1,103,840 ounces, representing an increase of 18% compared to the third quarter of 2009 and an increase of 19% compared to 930,120 ounces of silver produced in the fourth quarter of 2008. In the fourth quarter of 2009, 1,574,819 pounds of lead were produced, representing a decrease of 7% compared to the third quarter of 2009 and a decrease of 25% compared to the fourth quarter of 2008. Gold produced in the fourth quarter of 2009 was 701 ounces, representing a decrease of 4% compared to the third quarter of 2009 and an increase of 74% compared to the fourth quarter of 2008.

The ore processed during the fourth quarter of 2009 at the Company’s three operating silver mines: the La Encantada Silver Mine, the La Parrilla Silver Mine and the San Martin Silver Mine; amounted to 251,258 tonnes which is an increase of 17% from the third quarter of 2009 and an increase of 17% compared to the fourth quarter of 2008.

The average silver head grade in the fourth quarter of 2009 for the three mines increased to 235 grams per tonne (“g/t”) silver compared to 205 g/t silver in the third quarter of 2009 and 207 g/t in the fourth quarter of 2008.

Total combined recoveries of silver at the Company’s three mills has remained relatively constant at 65% in the fourth quarter of 2009 compared to 66% in the third quarter of 2009 and 65% in the fourth quarter of 2008.

A total of 5,266 metres of underground development was completed in the fourth quarter of 2009 compared to 6,597 metres completed in the third quarter of 2009. This program is important as it provides access to new areas within the different mines and prepares the mines for continuing growth of silver production.

A total of 1,031 metres of diamond drilling was completed in the fourth quarter of 2009 compared to 1,017 metres drilled in the third quarter of 2009. Total annual drilling was scaled back from 61,440 metres in 2008 to 7,459 metres in 2009 as the Company reduced its exploration expenditures in late 2008 after having achieved a target level of Reserves and Resources in late 2008.

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MINE UPDATES

La Encantada Silver Mine, Coahuila, Mexico

The La Encantada Silver Mine is a producing underground mine located in Northern Mexico in Coahuila State approximately a 1.5 hour flight from Torreon and comprises 4,076 hectares of mining rights and surface land ownership of 1,343 hectares. The closest towns, Muzquiz and Boquillas del Cármen, are 225 kilometres away and 45 kilometres away, respectively, via unpaved road. The La Encantada Silver Mine consists of an almost completed 3,500 tpd cyanidation plant, a 1,000 tpd flotation plant, all related facilities and infrastructure, including a mining camp with 180 houses, administrative offices, and a private airstrip. The Company owns 100% of the La Encantada Silver Mine.

During the fourth quarter of 2009, the new 3,500 tonne-per-day (“tpd”) mill was inaugurated and the ramp up process began. Management anticipates by the beginning of the second quarter of 2010, this new plant will achieve commercial production with full capacity anticipated being achieved near the end of Q2 2010. At full capacity, the new La Encantada cyanidation operation is expected to produce an additional four million ounces of silver in doré form annually. The mine is currently producing silver in precipitate form pending the installation of induction furnaces which are anticipated to be delivered in Q2 of 2010. To date, the Company has spent approximately $36.4 million (US$34.6 million) on the new cyanidation plant, or $33.7 million (US$32.0) million after adjusting for pre-operating revenues and expenses.

Also, during the quarter, the flotation circuit at La Encantada was renovated with the installation of new flotation cells. The flota-tion circuit produces two products: a silver rich concentrate and a lead rich concentrate. The lead rich concentrate is presently being sold through an off-take agreement, whereas the silver concentrate is being introduced into the cyanidation circuit to enrich the silver content of the silver precipitates.

Fresh ore from the underground mine is being processed at a rate of 850 tpd, after which the silver concentrate is piped to the cyanidation process where it is mixed, one part fresh ore to three parts tailings from the old tailings pond, at a rate of 2,650 tpd, with an average grade of 146 g/t silver. The anticipated average grade of the mixed fresh ore and old tailings is expected to be 180 g/t.

Tonnes milled in the fourth quarter of 2009 increased to 104,864 tonnes compared to 68,481 tonnes in the third quarter of 2009, an increase of 53%. The average head grade was 305 g/t in the fourth quarter of 2009, representing an increase of 19% when compared to 256 g/t in the third quarter of 2009 and an increase of 9% when compared to the 281 g/t in the fourth quarter of 2008. Silver recovery in the fourth quarter of 2009 was 51% which is comparable with the 48% achieved in the third quarter of 2009 but represents a decrease of 13% when compared to the 59% achieved in the fourth quarter of 2008. The low recoveries resulted from high manganese content in the ore from the Azul y Oro and Buenos Aires areas, combined with old flotation cells which were replaced in early December in an attempt to increase the recoveries. The lower recoveries in 2009 resulted in higher cash costs per ounce in 2009 relative to 2008.

A total of 435,845 equivalent ounces of silver were produced during the fourth quarter of 2009, which represents an increase of 47% compared to 296,690 equivalent ounces of silver produced in third quarter of 2009 but represents a decrease of 10% when compared to the 484,053 equivalent ounces of silver produced in the fourth quarter of 2008. Silver production consisted of 399,810 ounces of silver, representing an increase of 49% compared with the 268,973 ounces produced in the third quarter of 2009 and a decrease of 7% compared with the 427,753 ounces produced in the fourth quarter of 2008. Lead production for the fourth quarter of 2009 was 536,801 pounds which was comparable to the 536,454 pounds produced in the third quarter of 2009 but decreased by 658,756 pounds or 55% compared to the 1,195,557 pounds of lead produced in the fourth quarter of 2008.

Underground mine development consisted of 2,251 metres completed in the fourth quarter of 2009 compared to 3,637 metres of development completed in the third quarter of 2009, representing a decrease of 38%. This program focused on improving haulage and logistics for ore and waste that is transported by trucks out of the mine from several targets including the San Javier/ Milagros Breccias, Azul y Oro including the new Buenos Aires areas and a new developed area between the 660 and the Ojuelas ore bodies. The purpose of the ongoing underground development program is to prepare for increased production levels in 2010, to confirm additional Reserves and Resources, and for exploration and exploitation purposes going forward. No diamond drilling exploration was completed at La Encantada in the fourth quarter of 2009.

La Parrilla Silver Mine, Durango, Mexico

The La Parrilla Silver Mine is a group of producing underground operations consisting of the La Rosa/Rosarios/La Blanca mines which are connected through underground workings including the San Marcos and the Quebradillas mines, located approximately 65 kilometres southeast of the city of Durango, Mexico. La Parrilla includes an 850 tpd mill consisting of two parallel 425 tpd cyanidation and flotation circuits, buildings, offices and infrastructure and mining concessions covering an area of 53,000 hectares of which the Company leases 100 hectares of surface rights. The Company owns 100% of the La Parrilla Silver Mine.

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Tonnes milled at La Parrilla were 75,475 tonnes in the fourth quarter of 2009, representing an increase of 3% when compared with the 72,988 tonnes milled in the third quarter of 2009 and an increase of 14% when compared with the 66,395 tonnes milled in the fourth quarter of 2008. The average head grade increased slightly to 222 g/t from 218 g/t in the third quarter of 2009 and from 206 g/t in the fourth quarter of 2008. Recoveries of silver remained relatively consistent at 73% in the fourth quarter of 2009, compared to 74% in the third quarter of 2009, but represented a slight increase when compared to the 70% achieved in the fourth quarter of 2008.

Total silver production increased slightly to 469,318 equivalent ounces of silver in the fourth quarter of 2009. This is comparable to the 464,134 ounces of silver equivalent produced in the third quarter of 2009 but represents an increase of 30% when compared to the 359,851 ounces of silver equivalent produced in the fourth quarter of 2008. The composition of the silver equivalent production in the fourth quarter of 2009 included 395,761 ounces of silver, 151 ounces of gold and 1,038,018 pounds of lead. This compares with 378,680 ounces of silver, 123 ounces of gold, 1,153,900 pounds of lead and 8,913 pounds of zinc produced in the third quarter of 2009 and 305,685 ounces of silver, 297 ounces of gold, 897,031 pounds of lead and 24,414 pounds of zinc in the fourth quarter of 2008.

A total of 2,047 metres of underground development was completed in the fourth quarter of 2009, compared to 1,941 metres in the third quarter of 2009. A total of 114 metres of diamond drilling was completed in the fourth quarter of 2009 compared to 530 metres in third quarter of 2009.

During 2009, a significant focus of the development at La Parrilla was reaching the lower levels of the La Rosa/Rosarios vein. During the year, the 8th and 9th levels were developed, allowing the mine to increase the Proven and Probable Reserves and improve the quality of the resources that are located in these areas. At the Quebradillas mine, the development work was focused on reaching a high volume ore body that is being prepared for production in the first half of 2010.

San Martin Silver Mine, Jalisco, Mexico

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 comprises approximately 7,840 hectares of mineral rights, approximately 1,300 hectares of surface land rights surrounding the mine and another 104 hectares of surface land rights where the 1,000 tpd cyanidation mill and 500 tpd flotation circuit, mine buildings and offices are located. The Company owns 100% of the San Martin Silver Mine. The mill has historically produced 100% doré bars and continues to do so. In early 2008, a 500 tpd flotation circuit was nearly completed to take advantage of the large sulphide resource at this mine, however, due to low base metal prices and high costs of smelting concentrates, the circuit is currently in care and maintenance pending further capital investment.

During the quarter, additional development was completed in a new area at the San Martin mine, referred to as the San Pedro area, which is located at the footwall of the Zuloaga vein, allowing higher ore grades and additional tonnage to be fed to the mill. Prior to accessing the San Pedro area, the San Martin mine was feeding various backfill areas while the higher grade San Pedro area was being developed.

Tonnes milled at the San Martin mine were 70,919 tonnes in the fourth quarter of 2009, representing a slight decrease of 4% when compared to the 73,990 tonnes milled in the third quarter of 2009 and a slight increase of 2% when compared to the 69,771 tonnes milled in the fourth quarter of 2008. The average head grade was 184 g/t in the fourth quarter of 2009, representing an increase of 27% when compared to the 145 g/t in the third quarter of 2009 and an increase of 48% when compared to the 124 g/t in the fourth quarter of 2008.

Recoveries of silver in the fourth quarter of 2009 decreased to 73%, from 84% achieved in the third quarter of 2009, however this was a slight increase from the 71% achieved in the fourth quarter of 2008. Total production of 344,405 ounces of silver equivalent in the fourth quarter of 2009 was 5% higher than the 328,657 equivalent ounces of silver produced in the third quarter of 2009 and 62% higher than the 212,315 equivalent ounces of silver produced in the fourth quarter of 2008. The equivalent ounces of silver in the fourth quarter of 2009 consisted of 308,269 ounces of silver and 545 ounces of gold. This compares to 288,343 ounces of silver and 609 ounces of gold produced in the third quarter of 2009 and 196,681 ounces of silver, 106 ounces of gold and 1,399 pounds of lead produced in the fourth quarter of 2008.

During the fourth quarter of 2009, a total of 917 metres of diamond drilling was completed. This compares to 486 metres drilled in the third quarter of 2009. In addition, a total of 968 metres of underground development was completed, representing a slight decrease compared to the 1,020 metres completed in the third quarter of 2009.

Del Toro Silver Mine, Zacatecas, Mexico

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 plus an additional 100 hectares of surface rights covering the area surrounding the San Juan mine. The Del Toro operation represents the consolidation of two old silver mines, the Perseverancia and San Juan mines, which are approximately 1 kilometre apart.

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The Del Toro Silver Mine is an advanced stage development project that has undergone an aggressive drilling program since 2005 to explore the various areas of interest within the Del Toro property holdings.

All necessary permits for the construction of a 1,000 tpd flotation mill were granted in Q4 2009 and Q1 2010 by the Mexican authorities. No immediate plans are in place to commence construction, however the Company anticipates a final decision to proceed later in 2010.

Real de Catorce Silver Project, San Luis Potosi, Mexico

The Real de Catorce Silver Project was acquired on November 13, 2009, through the share acquisition of Normabec. The Real de Catorce mine 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, with historical production of 230 million ounces between 1773 and 1990. As a result of the acquisition of Normabec, the Company owns 100% of the Real de Catorce Silver Project. In 2010, the Company plans to reconfirm the existing geologic information and to start planning its future activities in this very large and promising silver mining district.

EXPLORATION PROPERTY UPDATES

Jalisco Group of Properties, Jalisco, Mexico

The Company acquired a group of mining claims totalling 5,131 hectares located in various mining districts located in Jalisco State, Mexico. During 2008, surface geology and mapping began with the purpose of defining future drill targets; however, exploration has been discontinued as the Company focuses its capital investment on other higher priority projects.

Cuitaboca Silver Project, Sinaloa, Mexico

During the year ended December 31, 2009, and after the acquisition of the Real de Catorce Silver Project, management elected not to proceed with the acquisition of the Cuitaboca Silver Project. Accordingly, the investment totalling $2,589,824 was written off at year end.

SELECTED ANNUAL INFORMATION

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RESULTS OF OPERATIONS

Three Months ended December 31, 2009 compared to Three Months ended December 31, 2008.

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Year ended December 31, 2009 compared to Year ended December 31, 2008.

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SUMMARY OF QUARTERLY RESULTS

The following table presents selected financial information for each of the last eight quarters.

Notes:

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Revenues Per Canadian GAAP (expressed in CDN$)

As required by Canadian GAAP, revenues are presented as the net sum of invoiced revenues for delivered shipments of silver doré bars, and silver concentrates, including metal by-products of gold, lead and zinc, after having deducted refining and smelting charges and metal deductions, and intercompany shipments of coins, ingots and bullion products. The following analysis provides the gross revenues prior to refining and smelting charges and metal deductions, and shows deducted smelting and refining charges to arrive at the net reportable revenue for the period per Canadian GAAP. Gross revenues are deducted by shipped ounces of equivalent silver to calculate the average realized price per ounce of silver sold.

At December 31, 2009, the La Encantada mill expansion project had not achieved a commercial stage of production, therefore sales receipts of $944,468 in connection with the sale of 54,277 silver equivalent ounces of precipitates during the pre-operating period was not recorded as a sales revenues but instead was recorded as a reduction of capital in the construction in progress account.

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LIQUIDITY

At December 31, 2009, the Company had working capital of $4.8 million and cash and cash equivalents of $5.9 million compared to a working capital deficiency of $1.0 million and cash and cash equivalents of $17.4 million at December 31, 2008. Working capital increased as a result of $6.7 million from operating activities, a $19.6 million reduction of current liabilities (which includes $2,741,260 settled through the issuance of shares as further described below) offset by a $14.3 million reduction in restricted cash related to the vendor liability.

On July 16, 2009, the Company removed a $14.3 million vendor liability from its balance sheet pursuant to a consent order whereby the vendor liability and interest relating to the acquisition of First Silver were mitigated by the Company providing $14.3 million to the defendant vendor, to be held in trust pending the outcome of litigation by the Company against the defendant vendor. As these funds are retained in a Canadian lawyer’s trust account pending the outcome of actions by First Majestic against the defendant vendor, management believes that these funds would become accessible to the Company in the event of a favourable outcome from the Company’s litigation against the defendant vendor.

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

During the year ended December 31, 2009, the Company raised a total of $35.3 million through a combination of debt and equity. New funds consisted of $29.4 million in equities, $4.3 million in a Mexican government sponsored development loan, as well as $1.6 million from the pre-sale of lead concentrates from the La Parrilla mine. This compares to $41.6 million raised in the year ended December 31, 2008.

In October 2009, the Company entered into an agreement for two loan facilities totaling $53.8 million Mexican pesos (CAD$4.3 million) from the Mexican Mining Development Trust - Fideicomiso de Fomento Minero (FIFOMI). Funds from this loan will be used for the completion of the new 3,500 tpd 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% 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% 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.

In August 2009, the 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. Subsequent to December 31, 2009, the debt was fully repaid and this agreement was amended and restated to provide an additional six-month prepayment facility of up to $1.6 million (US$1.5 million).

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. Finder’s fee in the amount of $101,016 and 50,000 warrants were paid in respect to 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. The net proceeds of the offering are being used for general working capital purposes.

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 additional common share at a price of $3.50 until March 5, 2011. The Company is using $15.5 million of the net proceeds of the offering for mill construction and mine improvements at the La Encantada Silver Mine and the remainder for general working capital. The underwriters had an option, exercisable up until 30 days following closing of the offering, to purchase up to an additional 1,273,136 common shares at a price of $2.40 per share and up to an additional 636,568 warrants at a price of $0.20 per warrant. The underwriters did not exercise their option to purchase the option shares or warrants. During the year ended December 31, 2009, the Company also received $68,838 pursuant to the exercise of 36,250 stock options and $165,000 pursuant to the exercise of 50,000 warrants.

During the year ended December 31, 2009, the Company invested $14.0 million (December 31, 2008 - $24.5 million) on the acquisition, exploration and development of its mineral properties and a further $19.4 million (December 31, 2008 - $14.9 million) on plant and equipment. In late 2008, after having achieved 300 million ounces of total Reserves and Resources, the Company took actions to reduce its rate of expenditure on exploration and development.

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The Company has expended approximately US$32 million over the past 18 months on its new processing plant at La Encantada, which is expected to increase capacity to 3,500 tonnes per day and to add approximately 4 million ounces of production per year for the Company.

Funds surplus to the Company’s short-term operating needs are invested in highly liquid short-term investments with maturities of three months or less. The funds are not exposed to liquidity risk and there are no restrictions on the ability of the Company to use these funds to meet its obligations. The Company has no exposure to and has not invested in any asset backed commercial paper securities.

2010 OUTLOOK

This section of the MD&A provides management’s production and costs forecasts for 2010. These are forward-looking estimates and subject to the cautionary note regarding the risks associated with forward looking statements at the beginning of this MD&A.

Silver production at La Encantada Silver Mine consists of a 1,000 tpd flotation circuit which is currently producing a lead concentrate, as well as a 3,500 tpd cyanidation circuit which is producing a silver precipitate. As the new cyanidation circuit is presently in the pre-production phase, all revenues and operating costs are being treated as capital costs. Though the Company is monitoring the content of silver credited against the capital costs, these ounces of silver are not yet being considered in the calculation of cash costs, silver recoveries and silver grades for production purposes.

The new cyanidation circuit is expected to ramp up gradually during Q1 and into Q2 of 2010 as the La Encantada plant increases production to capacity at 3,500 tpd. Though management expects commercial production to be reached at the beginning of Q2, full production is not anticipated until near the end of Q2. Given the uncertainty in the timing of commercial production and the impact of this uncertainty on the Company’s scale of production, it would be premature to establish detailed expectations of production, cost and operating parameters for the 2010 year. At such time as management has established that commercial production has been achieved and production parameters have stabilized, the topic of detailed expectations will be addressed. In the interim, management is anticipating that production will reach approximately 6 million ounces of silver equivalents in 2010.

Cash costs are expected to remain consistent with past historical results for 2009. Smelting and refining charges are expected to decrease in 2010 due to a shift in the mix of production toward lower cost doré versus concentrates.

Sales of coins, ingots and bullion will continue in 2010 and is expected to reach approximately 10% of all silver sales for the year. These sales result in approximately a 5-10% increase in selling price over normal quoted selling prices in any quarter. Additional information on the Company’s silver coins, ingots and bullion, including how to place an order, may be found on the Company’s website at www.firstmajestic.com.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2009, the Company had no material off-balance sheet arrangements such as guarantee contracts, contingent interest in assets transferred to an entity, derivative instruments obligations or any obligations that generate financing, liquidity, market or credit risk to the Company, other than those disclosed in this MD&A and the consolidated financial statements and the related notes.

RELATED PARTY TRANSACTIONS

During the year ended December 31, 2009, the Company:

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Amounts paid to related parties were incurred in the normal course of business and measured at the exchange amount, which is the amount agreed upon by the transacting parties and on terms and conditions similar to non-related parties.

PROPOSED TRANSACTIONS

Other than as disclosed herein, the board of directors of the Company is not aware of any proposed transactions involving any proposed assets, businesses, business acquisitions or dispositions which may have an effect on the financial condition, results of operations and cash flows.

MANAGEMENT OF CAPITAL RISK

The Company’s objective when managing capital is to maintain its ability to continue as a going concern while at the same time maximizing growth of its business and providing returns on its shareholders’ investments. The Company’s overall strategy with respect to capital risk management remains unchanged from the year ended December 31, 2008.

The Company’s capital structure consists of debt facilities and shareholders’ equity, comprising of issued capital, share capital to be issued, contributed surplus, retained earnings (deficit) and accumulated other comprehensive loss.

In order to facilitate the management of its capital requirements, the Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Company’s Board of Directors.

The Company’s investment policy is to invest its cash in highly liquid short term interest bearing investments with maturities of 90 days or less, selected with regards to the expected timing of expenditures from continuing operations. The Company expects that the capital resources available to it will be sufficient to carry out its development plans and operations for at least the next twelve months, provided there are no materially adverse developments with commodity prices during this period.

FINANCIAL INSTRUMENTS AND RISKS

The Company thoroughly examines the various financial instruments and risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, currency risk, commodity price risk, and interest rate risk. Where material, these risks are reviewed and monitored by the Board of Directors.

Credit Risk
Credit risk is the risk of financial loss if a customer or counterparty fails to meet its contractual obligations. The Company’s credit risk relates primarily to trade receivables in the ordinary course of business and value added tax and other receivables. The Company sells and receives payment upon delivery of its silver doré and by-products primarily through one international organization. Additionally, silver concentrates and related base metal by-products are sold primarily through one international organization with a good credit rating. Payments of receivables are scheduled, routine and received within sixty days of submission; therefore, the balance of overdue trade receivables owed to the Company in the ordinary course of business is not significant. The Company has a Mexican value added tax receivable of $6.0 million as at December 31, 2009, a significant portion which is past due. The Company is proceeding through a lengthy and slow review process with Mexican tax authorities, but the Company expects to fully recover these amounts.

The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum exposure to credit risk. The Company believes it is not exposed to significant credit risk and overall, the Company’s credit risk has not changed significantly from the prior year.

Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they arise. The Company has in place a planning and budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and to support its expansion plans. As at December 31, 2009, the Company had a loan facility with the Mexican Mining Development Trust - Fideicomiso de Fomento Minero (“FIFOMI”) amounting to $4.3 million repayable over a five-year period. As at December 31, 2009, the Company has outstanding accounts payable and accrued liabilities of $11.3 million which are generally payable in 90 days or less.

Although, the Company does not have a history of operating profits, the Company believes it has sufficient cash on hand to meet operating requirements as they arise for at least the next twelve months.

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The Company’s liabilities have contractual maturities which are summarized below:

Currency Risk
Financial instruments that impact the Company’s net earnings or other comprehensive income due to currency fluctuations include Mexican peso denominated cash and cash equivalents, accounts receivable, investments in mining interests, accounts payable and loans payable. The sensitivity of the Company’s net earnings and other comprehensive income due to changes in the exchange rate between the Mexican peso and the Canadian dollar is included in the table below.

Commodity Price Risk
Commodity price risk is the risk that movements in the spot price of silver will have a direct and immediate impact on the Company’s income or the value of its related financial instruments. The Company also derives by-product revenue from the sale of gold and lead. The Company’s sales are directly dependent on commodity prices that have shown volatility and are beyond the Company’s control.

The Company does not use other derivative instruments to hedge its commodity price risk.

Interest Rate Risk
The Company is exposed to interest rate risk on its short term investments. The Company monitors its exposure to interest rates and has not entered into any derivative contracts to manage this risk.

The Company’s interest bearing financial assets comprise of cash and cash equivalents which bear interest at a mixture of variable and fixed rates for pre-set periods of time. The Company’s interest bearing financial liabilities comprise a floating rate loan with FIFOMI and a floating rate operating line, plus fixed rate debt instruments and capital leases with terms to maturity ranging up to three years. The FIFOMI loans are floating at 7.51% and 7.31% over the Mexican Interbank Rate which is currently at 4.91%

The sensitivity analyses below have been determined based on the undernoted risks at December 31, 2009.

Fair Value Estimation
The Company’s financial instruments are comprised of cash and cash equivalents, marketable securities, accounts receivables, other receivables, derivative financial instruments, accounts payable and accrued liabilities, capital lease obligations, debt facilities and vendor liability.

Marketable securities and derivative instruments are carried at fair value. The fair values of accounts receivable, other receivables, accounts payable and accrued liabilities, unearned revenue, capital lease obligations and debt facilities approximate their carrying value due to the short term nature of these items. The fair value of the vendor liability and interest payable is not readily determinable due to the uncertainty with respect to the outcome of the litigation described in Note 10.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in Canada requires companies to establish accounting policies and to make estimates that affect both the amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.

All of the Company’s significant accounting policies and the estimates are included in Note 2 in the annual consolidated financial statements for the year ended December 31, 2009. While all of the significant accounting policies are important to the Company’s consolidated financial statements, the following accounting policies and the estimates have been identified as being critical:

• Carrying Values of Property, Plant and Equipment and Other Mineral Property Interests;
• Depletion and Depreciation of Property, Plant and Equipment;
• Asset Retirement Obligations and Reclamation Costs;
• Income Taxes; and
• Stock Based Compensation.

Carrying Values of Property, Plant and Equipment and Other Mineral Property Interests
The Company reviews and evaluates its mineral properties for impairment at least annually or when events and changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if the total estimated future undiscounted cash flows are less than the carrying amount of the assets. Estimated undiscounted future net cash flows for properties in which a mineral resource has been identified are calculated using estimated future production, commodity prices, operating and capital costs and reclamation and closure costs. Undiscounted future cash flows for exploration stage mineral properties are estimated by reference to the timing of exploration and/or development work, work programs proposed, the exploration results achieved to date and the likely proceeds receivable if the Company sold specific properties to third parties. If it is determined that the future net cash flows from a property are less than the carrying value, then an impairment loss is recorded to write down the property to fair value.

The Company completed an impairment review of its properties at December 31, 2009. The estimates used by management were subject to various risks and uncertainties. It is reasonably possible that changes in estimates could occur which may affect the expected recoverability of the Company’s investments in mining projects and other mineral property interests.

Depletion and Depreciation of Property, Plant and Equipment
Property, plant and equipment comprise one of the largest components of the Company’s assets and, as such, the amortization of these assets has a significant effect on the Company’s financial statements. On the commencement of commercial production, depletion of each mining property is provided on the unit-of-production basis using estimated reserves and resources expected to be converted to reserves as the depletion basis. The mining plant and equipment and other capital assets are depreciated, following the commencement of commercial production, over their expected economic lives using the unit-of-production method. Capital projects in progress are not depreciated until the capital asset has been put into operation.

The reserves are determined based on a professional evaluation using accepted international standards for the assessment of mineral reserves. The assessment involves the study of geological, geophysical and economic data and the reliance on a number of assumptions. The estimates of the reserves may change, based on additional knowledge gained subsequent to the initial assessment. This may include additional data available from continuing exploration, results from the reconciliation of actual mining production data against the original reserve estimates, or the impact of economic factors such as changes in the price of commodities or the cost of components of production. A change in the original estimate of reserves would result in a change in the rate of depletion and depreciation of the related mining assets or could result in impairment resulting in a write-down of the assets. There were no write-downs or impairment losses recorded at December 31, 2009, as a result of these impairment analyses at the Company’s operating mines. The write-down of the investment in the Cuitaboca Project was due to management’s determination not to proceed with this project, after the Real de Catorce Project had been acquired.

At December 31, 2009, the Company reallocated the following amounts from the non-depletable to depletable categories as a result of an internal assessment of reserves and resources:

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Asset Retirement Obligations and Reclamation Costs
The Company has obligations for site restoration and decommissioning related to its mining properties. The Company, using mine closure plans or other similar studies that outline the requirements planned to be carried out, estimates the future obligations from mine closure activities. Since the obligations are dependent on the laws and regulations of the country in which the mines operate, the requirements could change resulting from amendments in those laws and regulations relating to environmental protection and other legislation affecting resource companies.

The Company recognizes liabilities for statutory, contractual or legal obligations associated with the retirement of mining property, plant and equipment, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a liability for an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding asset retirement cost is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using either the unit-of-production method or the straight-line method, as appropriate. Following the initial recognition of the asset retirement obligation, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation.

As the estimate of obligations is based on future expectations, in the determination of closure provisions, management makes a number of assumptions and judgments. The liability is accreted over time to the amount ultimately payable through periodic charges to earnings. The undiscounted amount of estimated cash flows required to settle the Company’s estimated obligations is discounted using a credit adjusted risk free rate of 8.5% . The closure provisions are more uncertain the further into the future the mine closure activities are to be carried out. Actual costs incurred in future periods related to the disruption to date could differ materially from the discounted future value estimated by the Company at December 31, 2009.

Income Taxes
Future income tax assets and liabilities are computed based on differences between the carrying amounts of assets and liabilities on the balance sheet and their corresponding tax values, using the enacted or substantially enacted, as applicable, income tax rates at each balance sheet date. Future income tax assets also result from unused loss carry-forwards and other deductions. The valuation of future income tax assets is reviewed quarterly and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount.

The determination of the ability of the Company to utilize tax loss carry-forwards to offset future income tax payable requires management to exercise judgment and make assumptions about the future performance of the Company.

Management executed a corporate restructuring for tax purposes that became effective January 1, 2008, enabling it on a limited basis to consolidate its tax losses of certain subsidiaries against the taxable incomes of other subsidiaries. Co-incident with the tax consolidation, Mexico introduced an alternative minimum tax known as the IETU, effective January 1, 2008, to attempt to limit certain companies from avoiding paying taxes on their cash earnings in Mexico. Management has reviewed its IETU obligations and its consolidated tax position at December 31, 2009, and management assessed whether the Company is “more likely than not” to benefit from these tax losses prior to recording a benefit from the tax losses.

In December 2009, Mexico introduced tax consolidation reform tax rules which, effective January 2010, would require companies to begin the recapture of the benefits of tax consolidation within five years of receiving the benefit, and phased in over a five year period. First Majestic’s first tax deferral benefit from consolidation was realized in 2008, and as such the benefit of tax consolidation would be recaptured from 2013 to 2018. Numerous companies in Mexico are challenging the legality of these regressive tax reforms. It is unlikely that the outcome of these challenges will be determinable for several years.

Other changes in economic conditions, metal prices and other factors could result in revisions to the estimates of the benefits to be realized or the timing of utilizing the losses.

Stock-Based Compensation
The Company uses the Black-Scholes Option Pricing Model. Option pricing models require the input of subjective assumptions including the expected price volatility. Changes in the input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide an accurate single measure of the actual fair value of the Company’s stock options granted during the year.

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FUTURE ACCOUNTING CHANGES

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 not adopted these new standards for the year ended December 31, 2009.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)

In February 2008, the CICA announced that Canadian GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011. The Company will be required to begin reporting under IFRS for the quarter ending March 31, 2011, and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented.

The Company has developed an IFRS changeover plan which addresses the key areas such as accounting policies, financial reporting, disclosure controls and procedures, information systems, education and training and other business activities.

The Company commenced its IFRS conversion project during the second quarter of 2009 and has established a conversion plan and an IFRS project team. The IFRS conversion project is comprised of three phases: i) project planning, scoping and preliminary impact analysis; ii) detailed diagnostics and evaluation of financial impacts, selection of accounting policies, and design of operational and business processes; and iii) implementation and review.

The Company is in the second phase of its conversion plan and has completed a detailed analysis of the standards, including the evaluation of policy choices for those standards that may have an impact on its financial statements, business processes and systems.

Management is in the process of quantifying the expected material differences between lFRS and the current accounting treatment under Canadian GAAP. Differences with respect to recognition, measurement, presentation and disclosure of financial information are expected in key accounting areas. The Company cannot reasonably determine the full impact that adopting IFRS would have on its financial statements at this time. As a result, it is unable to quantify the impact of adopting IFRS on the financial statements as at December 31, 2009.

The Company is continuing to monitor developments in standards and interpretations of standards and industry practices. Due to anticipated changes to IFRS and International Accounting Standards prior to the adoption of IFRS, management’s plan is subject to change based on new facts and circumstances that arise after the date of this MD&A.

The following list, though not exhaustive, identifies some of the changes in key accounting policies due to the adoption of IFRS:

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Other important considerations during the IFRS transition are the following:

Internal control over financial reporting (“ICFR”) – for all accounting policy changes identified, the Company will assess the impact on the ICFR design and effectiveness implications and will ensure that all changes in accounting policies include the appropriate additional controls and procedures for future IFRS reporting requirements.

Disclosure controls and procedures (“DC&P”) – for all accounting policy changes identified an assessment of DC&P design and effectiveness implication will be analyzed to address any issues with respect to DC&P during IFRS transition.

INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s officers and management are also responsible for establishing and maintaining disclosure controls and procedures for the Company. These disclosure controls and procedures are designed to provide reasonable assurance that any information required to be disclosed by the Company under securities legislation is recorded, processed, summarized and reported within the applicable time periods and to ensure that required information is gathered and communicated to the Company’s management so that decisions can be made about timely disclosure of that information.

Management has been remediating internal controls during 2009 and in early 2010, and minimizing weaknesses in internal controls related to reconciliation processes and strengthening automated internal controls in accounting systems in Mexico and Canada. The risk of material error is mitigated by extensive management review of financial reports, account reconciliations and analyses in both Mexico and Canada, as well as monthly audit committee review of standards, and financial reports. Management is continuing to automate accounting systems between Mexico and Canada to lessen the reliance on substantive testing and detailed analyses. Significant progress on the remediation plan has been achieved during 2009 and early into 2010, and management expects the substantial remainder of its current plan to be completed by the end of the first quarter of 2010 with only minor remediation objectives continuing until the end of 2010.

Based upon the recent assessment of the effectiveness of the internal control over financial reporting and disclosure controls and procedures, including consideration of detailed analyses by supervisory personnel to mitigate any exposure or weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that there are weaknesses in Mexico, however these are compensated by head office supervisory controls and as a result management has concluded that there are no material unmitigated weaknesses, and the design and implementation of internal control over financial reporting and disclosure controls and procedures were effective as at December 31, 2009.

OTHER MD&A REQUIREMENTS

Additional information relating to the Company may be found on or in:

• SEDAR at www.sedar.com,
• the Company’s Annual Information Form,
• the Company’s audited consolidated financial statements for the year ended December 31, 2009.

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