UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 40-F

[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended ______________

Commission File Number ______________

FIRST MAJESTIC SILVER CORP.
(Exact name of registrant as specified in its charter)

British Columbia, Canada 1041 Not Applicable
(Province or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)    

Suite 1805 – 925 West Georgia Street
Vancouver, British Columbia V6C 3L2 Canada
(604) 688-3033
(Address and telephone number of Registrant’s principal executive offices)

  Copies to:
National Registered Agents, Inc. Stewart L. Muglich
1090 Vermont Avenue N.W. Clark Wilson LLP
Suite 910 800 – 885 West Georgia Street
Washington D.C. 20005 Vancouver, BC V6C 3H1
(202) 371-8090 (604) 891-7701
Name, address (including zip code)  
and telephone number (including  
area code) of agent for service in  
the United States  


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Securities to be registered pursuant to Section 12(b) of the Act:

Title of each class: Name of exchange on which registered:
   
Common Shares, no par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

For annual reports, indicate by check mark the information filed with this Form.

[   ] Annual information form             [   ] Audited annual financial statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Not Applicable

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “yes” is marked, please indicate the filing number assigned to the Registration in connection with such Rule.
[   ] Yes    [X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[   ] Yes    [X] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
[   ] Yes    [X] No


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DIFFERENCES IN UNITED STATES AND CANADIAN REPORTING PRACTICES

          First Majestic Silver Corp. (the “Registrant”) prepares its financial statements, which are filed with this report on Form 40-F in accordance with Canadian generally accepted accounting practices (“GAAP”), and are subject to Canadian auditing and auditor independence standards. They may not be comparable to financial statements of United States companies. The Registrant is permitted, under a multi-jurisdictional disclosure system adopted by the United States, to prepare this report in accordance with Canadian disclosure requirements, which are different from those of the United States. Significant differences between Canadian GAAP and United States GAAP as pertains to the Registrant for the years ended December 31, 2009, 2008 and 2007 are described in Exhibit 99.9 to this Registration Statement.

FORWARD-LOOKING STATEMENTS

          This Registration Statement and the Exhibits incorporated by reference into it contain “forward-looking statements.” Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, and other similar words, or statements that certain events or conditions “may” or “will” or “can” occur. Forward-looking statements are based on the opinions and estimates of management on the date 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 exploration, development, and mining 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 relating to the availability and costs of financing needed in the future, as well as those factors discussed in the section entitled “Description of the Business - Risk Factors” in the Annual Information Form of the Registrant filed as Exhibit 99.2 to this Registration Statement. Although the Registrant has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

          Forward-looking statements contained in the Exhibits incorporated by reference into this Registration Statement are made as of the respective dates set forth in such Exhibits and the Registrant disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

RESOURCE AND RESERVES ESTIMATES

          The terms “Mineral Reserve”, “Proven Mineral Reserve” and “Probable Mineral Reserve” are Canadian mining terms as defined in accordance with National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) CIM Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as may be amended from time to time by the CIM. These definitions differ from the definitions in the United States Securities and Exchange Commission (“SEC”) Industry Guide 7 (“SEC Industry Guide 7”) under the Securities Act of 1933. The definitions of proven and probable reserves used in NI 43-101 differ from the definitions in SEC Industry Guide 7. Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three year history average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.


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          In addition, the terms “Mineral Resource”, “Measured Mineral Resource”, “Indicated Mineral Resource” and “Inferred Mineral Resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and normally are not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.

          Accordingly, information contained in this report and the documents incorporated by reference herein containing descriptions of our mineral deposits may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.

DOCUMENTS FILED PURSUANT TO GENERAL INSTRUCTIONS

          In accordance with General Instruction B.(1) of Form 40-F, the Registrant hereby incorporates by reference Exhibits 99.1 through 99.8, Exhibits 99.10 through 99.129 and Exhibits 99.135 through 99.139, inclusive, as set forth in the Exhibit Index attached hereto.

          In accordance with General Instruction B.(2) of Form 40-F, the Registrant hereby makes reference to the sections entitled “Authorized Share Structure” on page 3 of the Notice of Articles of the Registrant filed as Exhibit 99.135 and on page 2 of the Notice of Articles of the Registrant filed as Exhibit 99.136, as set forth in the Exhibit Index attached hereto.

          In accordance with General Instruction C.(2) of Form 40-F, the Registrant hereby incorporates by reference (i) Exhibits 99.4 and 99.7, the Audited Consolidated Financial Statements of the Registrant for the years ended December 31, 2009, 2008 and 2007; (ii) Exhibits 99.3 and 99.6, Management’s Discussion and Analysis of Financial Condition and Results of Operation for the period ended December 31, 2009 and December 31, 2008, respectively; and (iii) Exhibit 99.9, Reconciliation to United States Generally Accepted Accounting Principles for years ended December 31, 2009, 2008 and 2007.


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          In accordance with General Instruction D.(9) of Form 40-F, the Registrant has filed written consents of certain experts named in the foregoing Exhibits as Exhibit 99.130 through Exhibit 99.134, inclusive, as set forth in the Exhibit Index attached hereto.

OFF-BALANCE SHEET ARRANGEMENTS

          The Registrant has no off-balance sheet arrangements.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

          The following table lists, as of December 31, 2009, information with respect to the Registrant’s known contractual obligations.

    Payment due by period
Contractual Obligations Total Less than
1 year
1-3 years 3-5 years More than 5
years
Long-Term Debt Obligations 4,309,159 1,095,672 1,676,605 1,536,882 -
Capital (Finance) Lease Obligations 2,807,636 2,139,352 668,284 - -
Metal Prepayment Obligation 450,940 450,940 - - -
Property Purchase Obligations 1,261,200 1,261,200 - - -
Construction Contract Obligations 2,071,102 2,071,102 - - -
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP of the primary financial statements – Asset Retirement Obligations 4,336,088 - - - 4,336,088

Total

15,236,125

7,018,266

2,344,889

1,536,882

4,336,088

UNDERTAKINGS

          The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

CONSENT TO SERVICE OF PROCESS

          Concurrently with the filing of this Registration Statement on Form 40-F, the Registrant will file with the Commission an Appointment of Agent for Service of Process and Undertaking on Form F-X.

          Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the Commission by amendment to Form F-X referencing the file number of the Registrant.


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SIGNATURES

          Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized.

Date: November 23, 2010

FIRST MAJESTIC SILVER CORP.

  By: /s/ Raymond Polman
    Name: Raymond Polman
    Title: Chief Financial Officer


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EXHIBIT INDEX

Annual Information

Exhibit

Description

   
99.1.

2009 Annual Report

   
99.2.

Annual Information Form for the year ended December 31, 2009

   
99.3.

Management’s discussion and analysis for the year and fourth quarter ended December 31, 2009

   
99.4.

Audited consolidated financial statements for the year ended December 31, 2009

   
99.5.

2008 Annual Report

   
99.6.

Management’s discussion and analysis for the year and the fourth quarter ended December 31, 2008

   
99.7.

Audited consolidated financial statements for the year ended December 31, 2008

   
99.8.

Annual Information Form for the year ended December 31, 2008

   
99.9.

Reconciliation to United States Generally Accepted Accounting Principles for the years ended December 31, 2009, 2008 and 2007

Quarterly Information

99.10.

Management’s Discussion and Analysis for the quarter ended September 30, 2010

   
99.11.

Interim consolidated financial statements for the nine months ended September 30, 2010 (unaudited)

   
99.12.

Management’s Discussion and Analysis for the quarter ended June 30, 2010

   
99.13.

Interim consolidated financial statements for the six months ended June 30, 2010 (unaudited)

   
99.14.

Management’s Discussion and Analysis for the quarter ended March 31, 2010

   
99.15.

Interim consolidated financial statements for the three months ended March 31, 2010 (unaudited)

   
99.16.

Management’s Discussion and Analysis for the quarter ended September 30, 2009

   
99.17.

Consolidated financial statements for the nine months ended September 30, 2009 (unaudited)



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99.18.

Management’s discussion and analysis for the quarter ended June 30, 2009

   
99.19.

Consolidated financial statements for the three months ended June 30, 2009 (unaudited)

   
99.20.

Management’s discussion and analysis for the quarter ended March 31, 2009

   
99.21.

Consolidated financial statements for the three months ended March 31, 2009 (unaudited)

Shareholder Meeting Materials

99.22.

Report of voting results of the annual general meeting of shareholders held May 27, 2010

   
99.23.

Form of Proxy for Annual General Meeting held May 27, 2010

   
99.24.

Management Information Circular for the Annual General Meeting of shareholders held on May 27, 2010

   
99.25.

Notice of Meeting for the Annual General Meeting of the shareholders held May 27, 2010

   
99.26.

Request for Printed Copies of Annual and Interim Financial Statements and MD&A April 1, 2010

   
99.27.

Voting Instruction Form for Annual Meeting held May 27, 2010

   
99.28.

Notice of Annual Meeting and Record Date held May 27, 2010

   
99.29.

Report of Voting Results for the annual general meeting of shareholders held May 28, 2009

   
99.30.

Form of Proxy for Annual General Meeting held May 28, 2009

   
99.31.

Management Information Circular for the Annual General Meeting of shareholders held May 28, 2009

   
99.32.

Notice of Annual General Meeting held May 28, 2009

   
99.33.

Request for Printed Copies of Annual and Interim Financial Statements and MD&A April 13, 2009

   
99.34.

Voting Instruction Form for Annual General Meeting held May 28, 2009

   
99.35.

Notice of Meeting and Record Date for Annual General Meeting held May 28, 2009



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Material Change Reports

99.36.

Material Change Report dated November 10, 2010

   
99.37.

Material Change Report dated November 9, 2010

   
99.38.

Material Change Report dated October 6, 2010

   
99.39.

Material Change Report dated August 16, 2010

   
99.40.

Material Change Report dated July 8, 2010

   
99.41.

Material Change Report dated May 13, 2010

   
99.42.

Material Change Report dated April 12, 2010

   
99.43.

Material Change Report dated April 8, 2010

   
99.44.

Material Change Report dated March 22, 2010

   
99.45.

Material Change Report dated November 26, 2009

   
99.46.

Material Change Report dated November 13, 2009

   
99.47.

Material Change Report dated November 12, 2009

   
99.48.

Material Change Report dated November 6, 2009

   
99.49.

Material Change Report dated October 13, 2009

   
99.50.

Material Change Report dated October 6, 2009

   
99.51.

Material Change Report dated September 18, 2009

   
99.52.

Material Change Report dated September 16, 2009

   
99.53.

Material Change Report dated September 14, 2009

   
99.54.

Material Change Report dated August 20, 2009

   
99.55.

Material Change Report dated August 14, 2009

   
99.56.

Material Change Report dated August 13, 2009

   
99.57.

Material Change Report dated August 12, 2009

   
99.58.

Material Change Report dated July 20, 2009



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99.59.

Material Change Report dated July 16, 2009

   
99.60.

Material Change Report dated May 14, 2009

   
99.61.

Material Change Report dated April 27, 2009

   
99.62.

Material Change Report dated March 31, 2009

   
99.63.

Material Change Report dated March 23, 2009

   
99.64.

Material Change Report dated March 17, 2009

   
99.65.

Material Change Report dated March 5, 2009

   
99.66.

Material Change Report dated February 26, 2009

   
99.67.

Material Change Report dated February 19, 2009

   
99.68.

Material Change Report dated February 18, 2009

   
99.69.

Material Change Report dated February 17, 2009

   
99.70.

Material Change Report dated January 20, 2009

   
99.71.

Material Change Report dated January 13, 2009

News Releases

99.72.

News Release dated November 10, 2010

   
99.73.

News Release dated November 9, 2010

   
99.74.

News Release dated October 6, 2010

   
99.75.

News Release dated August 16, 2010

   
99.76.

News Release dated July 8, 2010

   
99.77.

News Release dated May 13, 2010

   
99.78.

News Release dated April 22, 2010

   
99.79.

News Release dated April 13, 2010

   
99.80.

News Release dated April 12, 2010

   
99.81.

News Release dated April 8, 2010



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99.82. News Release dated March 24, 2010
   
99.83. News Release dated March 22, 2010
   
99.84. News Release dated January 11, 2010
   
99.85. News Release dated November 26, 2009
   
99.86. News Release dated November 13, 2009
   
99.87. News Release dated November 12, 2009
   
99.88. News Release dated November 6, 2009
   
99.89. News Release dated October 13, 2009
   
99.90. News Release dated October 6, 2009
   
99.91. News Release dated September 18, 2009
   
99.92. News Release dated September 16, 2009
   
99.93. News Release dated September 14, 2009
   
99.94. News Release dated August 20, 2009
   
99.95. News Release dated August 14, 2009
   
99.96. News Release dated August 13, 2009
   
99.97. News Release dated August 12, 2009
   
99.98. News Release dated July 20, 2009
   
99.99. News Release dated July 16, 2009
   
99.100. News Release dated May 14, 2009
   
99.101. News Release dated April 27, 2009
   
99.102. News Release dated March 31, 2009
   
99.103. News Release dated March 23, 2009
   
99.104. News Release dated March 17, 2009
   
99.105. News Release dated March 5, 2009
   
99.106. News Release dated February 26, 2009


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99.107. News Release dated February 19, 2009
   
99.108. News Release dated February 18, 2009
   
99.109. News Release dated February 17, 2009
   
99.110. News Release dated January 20, 2009
   
99.111. News Release dated January 13, 2009

Technical Reports

99.112. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.113. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.114. Amended & Restated Technical Report (NI 43-101) dated February 26, 2009
   
99.115. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.116. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.117. Amended & Restated Technical Report (NI 43-101) dated February 26, 2009
   
99.118. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.119. Certificate of Qualified Person (NI 43-101) dated February 26, 2009
   
99.120. Amended & Restated Technical Report (NI 43-101) dated February 26, 2009
   
99.121. Certificate of Qualified Person (NI 43-101) dated February 16, 2009
   
99.122. Certificate of Qualified Person (NI 43-101) dated February 16, 2009
   
99.123. Technical Report (NI43-101) dated February 16, 2009
   
99.124. Certificate of Qualified Person (NI 43-101) dated January 15, 2009
   
99.125. Certificate of Qualified Person (NI 43-101) dated January 15, 2009
   
99.126. Technical Report (NI 43-101) dated January 15, 2009
   
99.127. Certificate of Qualified Person (NI 43-101) dated January 12, 2009
   
99.128. Certificate of Qualified Person (NI 43-101) dated January 12, 2009
   
99.129. Amended and Restated Technical Report dated January 12, 2009 (NI 43-101)


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Consents

99.130. Consent of Auditors dated November 22, 2010
   
99.131. Consent of Qualified Person dated November 23, 2010
   
99.132. Consent of Qualified Person dated November 23, 2010
   
99.133. Consent of Qualified Person dated November 23, 2010
   
99.134. Consent of Qualified Person dated November 23, 2010

Constating Documents

99.135.

Notice of Articles dated January 17, 2005

   
99.136.

Notice of Articles dated November 22, 2006

   
99.137.

Notice of Change in Corporate Structure Pursuant to Section 4.9 of National Instrument 51-102 November 18, 2009

   
99.138.

Notice of Change in Corporate Structure Pursuant to Section 4.9 of National Instrument 51-102 January 9, 2010

Material Contracts

99.139. Arrangement Agreement dated September 11, 2009



 

FIRST MAJESTIC SILVER CORP.

2009 ANNUAL REPORT

TSX:FR

 

IT’S WHAT’S INSIDE THAT COUNTS

 



IT’S WHAT’S INSIDE THAT COUNTS

FIRST MAJESTIC IS A WORLD-CLASS SILVER PRODUCER FOCUSED ON THE ACQUISITION AND EXPANSION OF ADVANCED-STAGE SILVER PROJECTS IN MEXICO. WE ARE COMMITTED TO BUILDING SUSTAINABLE MINING OPERATIONS BASED ON SOUND SOCIAL AND ENVIRONMENTAL PRACTICES.  

 

Steadfastly driven to become one of North America’s top silver producers, First Majestic has had a remarkable year in 2009 highlighted by profitability, major improvements to its facilities, a strategic acquisition, and more industry recognition for its exemplary corporate citizenship.

 


TABLE OF CONTENTS

04

Letter to Shareholders

   
05

Highlights

   
06

Silver-Rich Mexico

   
07

Social Responsibility

   
09

Silver Uses, First Majestic Silver Bars & Bullion

   
10

Focus on Management

   
14

La Encantada Silver Mine

   
16

La Parrilla Silver Mine

   
18

San Martin Silver Mine

   
21

Del Toro Silver Mine & Real de Catorce Silver Project

   
22

First Majestic NI 43-101 reports

   
26

Financial Statements

   
53

Management’s Discussion & Analysis

   
79

Corporate Information

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 3


MESSAGE FROM THE
PRESIDENT & CEO

LETTER TO SHAREHOLDERS

2009 HAS BEEN A TREMENDOUSLY EXCITING YEAR for First Majestic. We continued to aggressively execute our strategy to become a senior silver producer through the development of our existing assets and through the acquisition of additional assets. This was realized by completing a major expansion at the La Encantada Silver Mine and by acquiring Normabec Mining Resources Ltd. the owner of the exciting Real de Catorce Silver Project.

Gross revenues were very strong at $71.5 million growing by over 27%. We also experienced an 18% increase in shipments resulting in net income of $6.3 million, compared to a net loss of $5.1 million in 2008. We also invested over $33 million into our existing assets and reduced our liabilities by over $20 million.

First Majestic’s largest operation, the La Encantada, has undergone a $33 million facelift with the addition of a new cyanidation plant. When fully operational in Q2, 2010, this upgrade will result in the La Encantada’s silver production to be in the form of silver Doré bars instead of concentrates. At full production, La Encantada will contribute over four million ounces of silver annually.

GROSS REVENUES REMAINED STRONG AND GREW BY 27.5%.

The other significant event in 2009 was the acquisition of the Real de Catorce Silver Project. This project added over 47 million ounces of silver to First Majestic’s asset base and, at the same time, has given the Company ownership of a 6000 hectare prolific silver district that is under explored and under developed.

At the Del Toro Silver Mine in Zacatecas, preparations are underway for our next major construction project. Breaking ground for the construction of our fourth operation is slated to begin in late 2010, with a planned opening in late 2011.

To the credit of our team in Mexico, First Majestic was recognized for the second year running for our commitment and dedication to operating a socially and environmentally responsible company. First Majestic received an award from the Mexican authorities for the 2nd consecutive year —the Socially Responsible Business Distinction Award for 2009.

First Majestic’s year ended on a very positive note, with the fourth quarter results being the strongest in our history. It is noteworthy that these results in 2009 can be primarily credited to the La Parrilla and San Martin operations as the La Encantada expansion project was commissioned in November and had not delivered significant production increases by year end.

We are confident that 2010 will be an even better year financially for First Majestic due to increases in production and profitability expected from the recent expansion at La Encantada.

Our top priority is to continue to increase the scale of operations and continually make ongoing improvements as necessary. This strategy has proven successful to date and is expected to drive profits higher and ultimately translate to increasing the value of the Company for the benefit of all shareholders.


Keith Neumeyer
President & CEO

4


MESSAGE FROM
THE
COO


THANKS TO THE HARD WORK of our dedicated team in Mexico, we are proud that La Parrilla and San Martin mines now have a significantly improved productivity and efficiency in their operations. La Encantada is in the final stage of its upgrade and is expected to be at full capacity in the second quarter of 2010.

WE ARE CONFIDENT OUR EFFORTS WILL GREATLY IMPROVE OUR RESULTS IN 2010

We are working daily to improve our performance in all key areas of operations: hitting our production targets with special focus on metallurgical recoveries, maintaining our cost levels, providing safe and environmentally sound operations, and modernizing our facilities with new equipment and technologies. We are confident our efforts will greatly improve our results in 2010, and we look forward to advancing our Del Toro and Real de Catorce projects.

Our success over the last five years is the result of an exceptionally hard-working team of people. I wish to thank our Board of Directors, the management team for their support of the operations, and our committed team of employees who have worked so diligently over the years. Our partners and consultants also deserve our gratitude for the tremendous support they have given our operations. To our exploration team, who discovered and upgraded our resources, and to our administrative team, I say thank you. With their ongoing effort and dedication, we can rely on them to continue to drive our growth for many years to come.

Ramon Davila, Ing
Chief Operating Officer

HIGHLIGHTS

RELENTLESS DRIVE TO BECOME ONE OF NORTH AMERICA’S LARGEST SILVER PRODUCERS
 

Gross revenue up 27.5% to $71.5M
Total production up 2.5% to 4,337,103 ounces of silver equivalents
Completed construction of $33 million upgrade at La Encantada
Continued focus on reduction of costs
Generated net income of $6.3 million (EPS of $0.08)
Invested over $33 million into existing properties
Acquired the Real de Catorce Silver Project
Company recognition for Distinction of Socially Responsible Business

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 5


WELCOME TO SILVER-RICH MEXICO

Mexico remains one of the world’s most attractive regions for mining and exploration. As one of the largest silver producing nations in the world, Mexico provides a strong mining culture, excellent geology, political stability, free trade agreements, a skilled workforce and efficient permitting regimes. Mexico is ranked in the 5th position – just below Australia, Canada, Chile and USA – as a low risk country, according to the 2009 study of the Behre Dolbear group’s “ranking countries for mining investment.”

A large number of free trade agreements further facilitate mining in Mexico, most importantly enabling 100% foreign direct investment (FDI). Interest rates and inflation have been well managed, and bureaucratic hurdles have been minimized.

First Majestic’s growth continues to be driven by acquisitions, continued development and exploration, and a firm commitment to the country.

 

6


COMMUNITY SUPPORT FROM THE GROUND UP

First Majestic is committed to the highest possible standard in corporate citizenship. We believe in supporting our communities from the ground up.

We take pride in making meaningful contributions to the communities we are active in wherever possible. We engage local workforces and stimulate well-being beyond our operations.

We are actively involved in improving and aiding in a variety of essential areas: healthcare services including supporting doctors, paramedics and ambulance services, supplying clean water to primary schools, paving of roads, providing funding for parks and recreation, upgrading of elementary and high schools, and assisting with agricultural subsidies and capital improvement projects.

In both 2008 & 2009, this commitment was recognized by the Centro Mexicano para la Filantropia with a Socially Responsibility Business Distinction award. This Distinction recognizes excellence in corporate ethics, quality of work, community citizenship, and environmental responsibility. We are particularly proud to have been recognized within the Mexican community two years running.

WE SUPPORT OUR LOCAL COMMUNITIES

In addition to the many things we do as a Company to assist the local populations, we also provide academic scholarships towards university degrees focused in geology and engineering, All of these efforts are simply reflections of the manner in which First Majestic operates.

First Majestic remains dedicated to maintaining a clean and safe work environment, and we continue to engage and work with our employees to provide the best training, tools, equipment and supervision on our worksites.


FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 7



THERE’S NO SUBSTITUTE FOR SILVER

8


SILVER

The diversity of silver uses in critical applications makes silver one of the most compelling investments today. As mankind becomes more reliant on technology, we become more reliant on silver. This trend seems to have no end in sight.

As an investment, the outlook for silver is expected to remain strong for many years. Silver has benefitted from being both an industrial metal and a cheap precious metal. Industrial metals have rallied strongly as the economic recovery has taken hold, while at the same time, precious metals have done well as investors and world banks have been divesting away from the US dollar. Jewellery demand has also been strong.

Given the diverse nature of silver demand, prices are expected to perform well. (Source: ScotiaMocatta, Silver Forecast 2010)

SOME OF THE KEY SILVER USES IN THE MARKET TODAY, ARE:

• Pharmaceuticals
• Anti-Bacterial Applications
• Electric Wiring
• Chemical Catalyst
• Reflectants
• Printed Circuitry
• Superconductors
• Electroplating
• Brazing & Soldering
• Coins & Bars for investment
• Photography (incl. X-Ray’s)
• Silverware & Jewellery
• Mirrors & Window Coatings
• Solar Energy
• Water Purification

FIRST MAJESTIC’S SILVER BARS & BULLION

FIRST MAJESTIC CONTINUES TO INNOVATE WITH THE INTRODUCTION OF AN ONLINE BULLION E-STORE

After many months of development, First Majestic recently launched our online E-store for the sale of our own silver coins and bars. Online sales now represent a significant portion of our sales.

This unique approach to selling our silver directly to investors gives First Majestic a new revenue source, higher than normal margins and more importantly, provides access for individuals who may otherwise find it difficult to source physical silver at reasonable prices. The company is pleased to continue to provide this opportunity for bullion investors, and are happy to hear that often these investors become shareholders.

First Majestic continues to strive to fill customer demand resulting in the introduction of a new 50 ounce free-poured bar to its product line. These innovative 50-ounce bars are hand-poured and marked the old-fashioned way, resulting in a rustic look that makes each bar a unique work of art.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 9


THE KEY TO OUR TREMENDOUS GROWTH HAS BEEN THE STRENGTH AND COMMITMENT OF OUR PEOPLE. IN JUST SEVEN SHORT YEARS, FIRST MAJESTIC HAS GROWN TO OVER $70 MILLION IN GROSS REVENUES, EMPLOYING OVER 1500 PEOPLE, WHICH INCLUDES ONE OF THE MOST RESPECTED OPERATIONAL TEAMS IN MEXICO.

COLLECTIVELY OUR TOP 40 EXECUTIVES HAVE OVER 600 YEARS OF MINING AND MANAGEMENT EXPERIENCE.

THE FIRST MAJESTIC TEAM OF ENERGETIC, TALENTED PEOPLE IN BOTH MEXICO AND CANADA ARE ALL FOCUSED ON ONE COMMON VISION-TO BE ONE OF THE LARGEST SILVER PRODUCERS IN NORTH AMERICA.


10


DRIVEN BY DEDICATED PROFESSIONALS


FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 11



OUR TEAM

VANCOUVER OFFICE

Raymond L. Polman, B.Sc (Econ), CA
CHIEF FINANCIAL OFFICER

Mr. Polman has over 25 years of public accountancy and corporate finance experience in the Canadian and US financial markets. Mr. Polman has a Bachelor of Science (Economics) Degree from the University of Victoria and is a member of the Institute of Chartered Accountants of British Columbia. Mr. Polman served as a CA with Deloitte & Touche, LLP, for eight years prior to leaving public practice and heading up Finance for Rescan Consulting. He has also served as a Chief Financial Officer for a group of junior and growth stage public companies in the high tech sector.

Connie Lillico, B.A.
CORPORATE SECRETARY

Ms. Lillico has worked in public company management and administration since 2000. She was previously the Corporate Secretary of several publicly traded mining and oil & gas companies for three years, prior to which she was a Paralegal with a publicly traded software company for two-and-a-half years. Ms. Lillico also worked in corporate and securities law as a Paralegal with a large national legal firm for eight years. She has a Bachelor of Arts degree from Simon Fraser University and a Paralegal certification from Capilano College.

MEXICO OFFICE

Francisco Garza, CP
VICE PRESIDENT OF FINANCE AND ADMINISTRATION

Mr. Garza is a Chartered Public Accountant with over 42 years of experience during which he held positions with Grupo Mexico, San Luis Corporación, and Silver Eagle. Previous positions held by Mr. Garza include CFO, VP of Finance and Administration, and President of Auto Parts Division in the San Luis Group (LUISMIN).

   
1.

Raymond L. Polman

2.

Connie Lillico

3.

Francisco Garza

   

12



Sergio Ramírez, Ing
OPERATIONS DIRECTOR

Mr. Ramírez is a mining engineer with over 42 years of experience. He spent over 32 years in several key positions within Grupo Mexico and prior to that with the Mexican Government. In his five years with First Majestic, Mr. Ramírez has held several senior management positions within our operations. Previous positions held by Mr. Ramírez, include: Chief of Engineering, Chief of Planning, Mine Superintendent, Assistant Mine Manager, Mine Manager and Operations Director.

Florentino Muñoz, Ing
EXPLORATION DIRECTOR

Mr. Muñoz is a Geological Engineer who holds a Masters Degree in Economic Geology. Mr Muñoz’s 36 years of experience includes positions with Grupo Mexico, Luismin and Exploraciones Geologicas de Occidente. Mr. Muñoz also worked as an independent consultant. Mr. Muñoz’s prior positions include Chief Geologist, Geology Superintendent, Chief of Petrography and Mineragraphy, and Regional Exploration Manager.

Mario Maldonado, Lic.
CORPORATE HUMAN RESOURCES MANAGER

Mr. Maldonado holds a Bachelor Degree in Industrial Administration and has over 32 years of experience working in Human Resources for various firms. Mr. Maldonado has held positions with Industrias Peñoles, Refrescos del Norte, Embotelladora Aga, Jugos del Valle, and Casas Geo. Some of Mr. Maldonado’s earlier positions include Chief of Organization Development and Corporate Manager of Human Resources.

Oscar Melgar, Ing
CORPORATE PURCHASING MANAGER

Mr. Melgar is a Mechanical Engineer who holds a Masters Degree in Metallurgy and has over 35 years of experience. Mr. Melgar has held positions with Movisa, Minera San Francisco del Oro, Industrias Peñoles, Minera Maple, Svedala-Metso, Weir Envirotech, and Gammon Lake. Previous positions held by Mr. Melgar include Design Engineer, Assistant Maintenance Superintendent, Maintenance Superintendent, Manager of Spare Parts, and Purchasing Manager.

 
   
4.

Sergio Ramírez

5.

Florentino Muñoz

6.

Mario Maldonado

7.

Oscar Melgar

   

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 13


LA ENCANTADA SILVER MINE, COAHUILA, MEXICO

MAJOR EXPANSION COMPLETED IN 2009 WILL DRAMATICALLY INCREASE PRODUCTION

LOCATION: COAHUILA, MÉXICO
100%
OWNERSHIP
96,250
MONTHLY CAPACITY (TONNES)
641
EMPLOYEES
1,446,660
2009 PRODUCTION (SILVER EQ. OZ.)
US$6.10
2009 DIRECT CASH COSTS PER OUNCE
US$10.20
2009 CASH COSTS PER OUNCE (ALL IN)
US$45.59
2009 TOTAL COSTS PER TONNE
3,500,000
2010 PROJECTED SILVER EQ. OZ. PRODUCTION
 

14



LA ENCANTADA SILVER MINE is First Majestic’s highest-grade mine and lowest-cost producer. It is located in the Coahuila State in Northern Mexico, easily accessible by road, and approximately an hour and half by plane from the city of Torreon. The mine site comprises of 4,076 hectares of mining rights and 1,343 hectares of surface land ownership. The closest city is Melchor Muzquiz.

The mine consists of a complete 3,500 tpd cyanidation plant and a 1,000 tpd flotation plant including all related facilities and infrastructure; a mining camp with 180 houses, administrative offices, laboratory, recreation centre, schools, church, general store and a private airstrip. First Majestic owns 100% of the La Encantada Silver Mine.

WE ARE CONVINCED THAT THE NEXT YEARS WILL BE A GREAT SUCCESS FOR ALL OF US AT FIRST MAJESTIC.

During 2009, a major expansion was completed at the La Encantada which resulted in the commissioning of a new 3500 tpd cyanidation plant. This new plant is currently in the ramp-up stage. Commercial production was achieved on April 1st, 2010 and full capacity is anticipated later in Q2 2010. The expansion is projected to add over 2.0 million ounces to the Company’s production in 2010, while bringing total production to over 4.0 million ounces in the form of Doré bars annually.

The positive results of exploration and development of the high-grade area within the mine, including completing the learning curve on the new cyanidation plant, will allow the La Encantada to be one of the leading producers of low-cost silver in Mexico. We are in the process of ramping up the new plant and the challenge is very exciting for all of us. We are convinced that the next years will be a great success for all of us at First Majestic.”

Miguel Riós, Ing
LA ENCANTADA GENERAL MANAGER

Mr. Riós is a Mining Engineer with more than 28 years of experience during which he has worked with several mining groups such as Peñoles and Pan American Silver (Plata Panamericana). His previous positions include Mine Foreman, Mine and Planning Superintendent, Mine Superintendent, and General Manager. Mr. Riós has been with First Majestic for five years and has been the manager at each of the Company’s operations. He is currently the General Manager of the La Encantada mine.

 

NI 43-101 CHART - see pg. 23

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 15


LA PARRILLA SILVER MINE, DURANGO, MEXICO

DISCOVERY AT LAS VACAS, UNDER DEVELOPMENT FOR PRODUCTION IN 2011

LOCATION: DURANGO, MEXICO
100%
OWNERSHIP
23,375
MONTHLY CAPACITY (TONNES)
423
EMPLOYEES
1,643,207
2009 PRODUCTION (SILVER EQ. OZ.)
US$4.26
2009 DIRECT CASH COSTS PER OUNCE
US$7.84
2009 CASH COSTS PER OUNCE (ALL IN)
US$38.60
2009 TOTAL COSTS PER TONNE
1,600,000
2010 PROJECTED SILVER EQ. OZ. PRODUCTION
 

16



LA PARRILLA was the first mine developed by First Majestic. It began commercial silver production in October 2004 and its operations have been scaled up continually from 180 tpd in early 2005 to the current capacity of 850 tpd. The La Parrilla Silver Mine is located approximately 75 km southeast of the city of Durango in Central Mexico. Excellent infrastructure exists in the area with the mine only 4 km away from a major highway. First Majestic owns 100% of the La Parrilla mine.

The plant processes both oxide and sulphide silver ores in two separate 425 tpd parallel circuits. Both Doré metal bars and flotation concentrates are being produced.

The Company’s mining claims surrounding the main mine and mill complex cover a very large, 53,249 hectare (131,558 acres) land package consisting of several known areas of mineralization, such as: the Los Rosarios, La Rosa and La Blanca/San Jose vein system (Rosarios System); San Marcos; Quebradillas; Las Vacas; San Nicolas; Las Animas, and numerous other targets for exploration along several known structures and projected intersections, such as Milagros, La Vibora and Sacramento.

During 2009, a key focus of the development program underway at La Parrilla was to reach 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 Quebradillas, the development work was focused on reaching a high-volume deeper ore body. This development proved successful, and the area is currently being prepared for production for 2010.

“La Parrilla is at a crucial stage due to the high mining potential both at the Rosarios System and at the Quebradillas mine, which will give us the opportunity to increase production in the near future. I feel very proud to work with a team of professionals that have a firm commitment with our Company. First Majestic has had a vision to acquire new projects with high potential, which has positioned the Company as one of the most important silver producers in Mexico. I am glad to be a part of it, and it is a privilege to work for First Majestic.”



Mario Valdez, Ing
LA PARRILLA GENERAL MANAGER

Mr. Valdez is a mining engineer with over 28 years of experience during which he has worked with several Mexican and Canadian mining companies such as Minera Autlan, Compañía Minera del Norte, Grupo Mexico, Baramin, Silver Eagle, Dia Bras, and Gammon Lake. Positions held include Mine Foreman, Chief of Engineering and Planning, Mine Superintendent, Mine Manager, Operations Manager, and Planning and Engineering Director.

 

NI 43-101 CHART - see pg. 22

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 17


SAN MARTIN SILVER MINE, JALISCO, MEXICO


SAN MARTIN CONTINUES TO PRODUCE SUBSTANTIAL OUNCES OF SILVER

LOCATION: JALISCO, MEXICO
100%
OWNERSHIP
26,125
MONTHLY CAPACITY (TONNES)
342
EMPLOYEES
1,247,236
PRODUCTION (SILVER EQ. OZ.)
US$6.71
2009 DIRECT CASH COSTS PER OUNCE
US$7.35
2009 CASH COSTS PER OUNCE (ALL IN)
US$28.06
2009 TOTAL COSTS PER TONNE
1,250,000
2010 PROJECTED SILVER EQ. OZ. PRODUCTION
 

18



SAN MARTIN SILVER MINE is located in the Bolanos river valley, a 250 km drive north of Guadalajara, adjacent to the town of San Martin de Bolaños, in Northern Jalisco State, Mexico. The mine and mill has been in continuous operation since 1983 and is a major contributor to the economy of the town of San Martin de Bolanos, which has a population of approximately 3,000 people.

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 950 tpd cyanidation mill and 500 tpd flotation circuit, mine buildings and offices are located. First Majestic has been focused on increasing its silver reserves/resources in Oxides while at the same time maintaining production at present levels. The mill has historically produced 100% Doré bars and continues to do so. First Majestic owns 100% of the San Martin Silver Mine.

A mill expansion program was launched in 2008 and completed in 2009 resulting in the current mill capacity. The upgrades included the construction and addition of a new thickener, new clarifiers and new filter presses. The expansion program also resulted in many improvements to the facilities, including the repair and reinforcing of the older leaching tanks and construction of spill containment systems.

During 2009, 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. This development program has enabled access to higher grade ores and additional tonnage of reserves. An underground drill program is currently underway that is completing short horizontal holes into the footwall and hanging way. This program was responsible for discovering the San Pedro area and is anticipated to discover other similar areas.

The potential for increasing the reserves and thus the life of the mine is great; we just began working in a new vein called La Esperanza in which we have very high expectations. The team that is working at the San Martin mine is excellent and we are working very hard to meet our targets.”


Alfredo Flores, Ing
SAN MARTIN GENERAL MANAGER

Mr. Flores is a mining engineer with over 31 years of experience during which he has worked with several different Mexican and Canadian mining companies such as Compañia Fresnillo, Industrias Peñoles, Luismin, and Excellon. Positions held include: Mine Foreman, Development Foreman, Assistant of Mine Superintendent, Mine Superintendent, Mine Manager, Operations Manager, and Regional Manager.

 

NI 43-101 CHART - see pg. 24

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 19



DEVELOPMENT PROJECTS

20



DEL TORO SILVER MINE, ZACATECAS, MEXICO

THE DEL TORO SILVER MINE is located 60 km southeast of the Company’s La Parrilla Silver Mine. The Del Toro operation represents the consolidation of two old silver mines: the Perseverancia and San Juan mines, which are approximately one kilometre apart.

Del Toro consists of mining rights that cover 393 hectares within 21 titled concessions plus an additional 100 hectares of surface rights covering the area surrounding the San Juan mine entrance. Access to the properties is through the nearby Interstate 45 highway and the state roads which connect the Chalchihuites Town and several country and trail roads. Local infrastructure, including electricity, water and telephones, and accommodations are excellent.

Exploration efforts at Del Toro have been highly successful in delineating a significant Resource base within a short period of time and at relatively low cost. 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, although the Company anticipates a final decision to proceed later in 2010.

 

NI 43-101 CHART - see pg. 25

     

REAL DE CATORCE SILVER PROJECT, SAN LUIS POTOSÍ, MEXICO

THE REAL DE CATORCE SILVER PROJECT is located approximately 25 km west of the town of Matehuala in the San Luis Potosí state of México, which lies about 259 km to the south of the industrial city of Saltillo and about 170 km north of the city of San Luis Potosí.

The Real de Catorce was acquired on November 13, 2009, with the all-share acquisition of Normabec Mining Resources. 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. First Majestic owns 100% of the Real de Catorce Silver Project.

In 2010, First Majestic plans to reconfirm the existing geological information and launch an aggressive drilling and exploration program in the latter half of the year.

 

NI 43-101 CHART - see pg. 25

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 21


LA PARRILLA SILVER MINE
NI 43-101 RESOURCES DATED SEPTEMBER 30, 2008

TOTAL PROVEN + PROBABLE MINERAL RESERVES (1,2,3,4,5)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (4)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Proven Reserves
(Oxides plus Sulphides)
288,468 302 1.36 0.93 2,797,487 3,064,952
Probable Reserves
(Oxides plus Sulphides)
217,060 287 1.45 1.12 2,002,158 2,182,002
Total Proven
Plus
Probable Reserves
505,528 295 1.40 1.01 4,799,645 5,246,954

TOTAL MEASURED + INDICATED RESOURCES

CATEGORY
TONNES
GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Measured Resources
(Oxides plus Sulphides)
2,195,448 264 2.59 4.54 18,637,618 22,806,628
Indicated Resources
(Oxides Plus Sulphides)
861,488 245 3.46 6.07 6,785,685 7,940,379
Total Measured Plus
Indicated Resources
(Oxides plus Sulphides)(6)
3,100,000 255 2.84 4.97 25,400,000 30,700,000

TOTAL INFERRED RESOURCES

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (4)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Total Inferred Resources
(Oxides Plus Sulphides) (6)
8,000,000 169 0.87 1.49 43,900,000 52,800,000

1.

Estimates by First Majestic reviewed by PAH. Estimates based on Minimum Mining Width >2.00m. No mine recovery included.

2.

Silver equivalent based on sales. Prices used for evaluation: Ag - $12/oz; Au - $708/oz; Pb - $0.75/lb; Zn - $0.75/lb.

3.

Oxides Ag equivalent includes gold credit based on sales. Au Credit = 6 g/tonne Ag.

4.

Sulphides Ag equivalent includes Pb credit = 47 g/tonne Ag. Zinc is considered at 70% met. Recovery = 30 g/tonne Ag.

5.

Cut-off grade estimated as 184 g/tonne Ag net of Au credit in oxide ores; and 246 g/tonne Ag net of Pb credit in sulphide ores. Zinc not considered in COG estimates.

6.

Rounded figures.

22


LA ENCANTADA SILVER MINE
NI 43-101 RESOURCES DATED SEPTEMBER 30, 2008

TOTAL PROVEN + PROBABLE MINERAL RESERVES (MINEABLE RESERVES) (4)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (5)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Proven Reserves 683,992 354 2.23 0.92 7,777,602 8,261,401
Probable Reserves 4,511,686 186 2.45 2.54 26,936,651 27,287,462
Total Proven + Probable
Reserves
5,195,677 208 2.42 2.33 34,714,253 35,548,863

TOTAL MEASURED + INDICATED RESOURCES (4)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (5)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Measured Resources 445,650 399 4.15 0.65 5,710,055 6,025,271
Indicated Resources
(6, 7, 8)
4,931,103 156 1.15 0.87 24,774,263 27,082,017
Total Measured + Indicated
Resources
5,376,753 176 1.40 0.85 30,484,318 33,107,288
Total Proven and Probable
Reserves plus Measured
and Indicated Resources
(9)
10,572,000 192 1.90 1.58 65,199,000 68,700,000

TOTAL INFERRED RESOURCES (1, 2, 3, 4)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (5)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Total Inferred Resources (5, 9) 2,557,000 220 1.00 1.00 18,226,765 20,034,145

1.

Cut Off Grade (COG) estimated as 250 g/tonne Ag only; and 228g/tonne Ag eqv net of Pb credit.

2.

Estimated Reserves are exclusive of Resources.

3.

Silver equivalent includes Pb credit, at prices US$12.00/oz-Ag, US$0.75/lb-Pb. Pb credit=22 g/tonne-Ag.

4.

Mining dilution is included at over 2.00m width. Estimates do not include mining recovery.

5.

Zinc is not recovered.

6.

Dump stockpile is considered as Measured Resource because the average grade is below COG -- 203 g/tonne Ag only and 186 g/tonne Ag eqv however with pre-screening may be processed.

7.

La Morena sulphide deposit requires additional metallurgical test work to prove its economic recovery. La Encantada mill does not have an operating zinc circuit at this time.

8.

Tailings are included within the Indicated Resources due to required additional test work and grade below Cut-off grade - 111 g/tonne Ag.

9.

Rounded figures

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 23


SAN MARTIN SILVER MINE
NI 43-101 RESOURCES DATED SEPTEMBER 30, 2008

TOTAL PROVEN + PROBABLE MINERAL RESERVES (MINEABLE RESERVES) (1, 2, 3, 4, 5)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (4)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Proven Reserves (Oxides) 527,373 273     4,636,211 4,805,765
Probable Reserves (Oxides) 243,091 276     2,154,571 2,232,727
Total Proven and Probable Reserves 770,464 274     6,790,782 7,038,492

TOTAL MEASURED + INDICATED RESOURCES (2, 3, 5)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (4)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Measured Resources
(Oxides)
122,404 233     915,774 955,128
Measured Resources
(Sulfides)
415,771 97 0.87 2.07 1,292,213 1,292,213
Indicated Resources
(Oxides)
294,361 288     2,729,201 2,823,840
Indicated Resources
(Sulfides)
670,684 116 0.94 1.64 2,498,639 2,498,639
Total Measured and
Indicated Resources
(Oxides plus Sulfides)
1,503,220 154 0.91 1.80 7,435,827 7,569,820
Proven and Probable
Reserves Plus Measured
and Indicated Resources
2,273,684 195 0.91 1.80 14,226,609 14,608,312

TOTAL INFERRED RESOURCES (2, 3, 5)

CATEGORY TONNES GRADE METAL CONTAINED
SILVER
G/TONNE
LEAD
%
ZINC (4)
%
SILVER ONLY
OZ.
SILVER (OZ.) INCLUDING
LEAD CREDIT
Total Inferred Resources (Oxides plus Sulfides) 8,200,000 185 1.40 1.60 48,900,000 50,037,365

1. Estimated Reserves are exclusive of Resources.
2. Cut Off estimates as 146 g/tonne Ag for oxides, and 87 g/tonne Ag for dump recovered; Ageq=Au/Pb credits= 10g/tonne Ag
3. Metal prices at $708/oz-Au, $12.00/oz - -Ag, $0.75/lb -Pb, $0.50/lb -Zn.
4. Mine dilution is included at a minimum mining width of 2.00m. Estimates do not include mining recovery.
5. Base metals, Lead and Zinc are not recovered due to low market prices.

To download the entire San Martin 43-101 Technical Report - Click here to view (PDF, 9.34 MB)

24


DEL TORO SILVER MINE
NI 43-101 RESOURCES ESTIMATE DATED JULY 31, 2008

CATEGORY TONNES GRADE CONTAINED SILVER EQV. OUNCES
SILVER
G/TONNE
LEAD
%
ZINC
%
Measured + Indicated - Oxides 728,444 194 2.45 2.71 2,947,000
Measured + Indicated - Sulphides 649,528 353 7.20 7.14 17,996,000
Total Measured + Indicated Resources 1,377,972 269 4.69 4.80 20,943,000
Total Inferred Resources 1,831,738 306 5.77 5.94 35,970,000

1.

Resource estimated “in situ”

2.

Price considerations $12.70/oz Ag, $0.90/lb-Pb and $0.85/lb-Zn.

3.

Mill recovery estimated: Oxides -- Ag 65%: Sulphides -- Ag 85%, Pb 85% and Zn 80%.

4.

Minimum mining width -- 2.00 m.

5.

Rounded figures.

REAL DE CATORCE SILVER PROJECT
NI 43-101 RESOURCES ESTIMATE DATED JULY 25, 2008
Update Resource Calculation November 10, 2008

CATEGORY TONNES
(6,7,8)
GRADE METAL CONTAINED (2,5) SILVER (OZ.)
SILVER
G/TONNE (3,4)
LEAD
%
ZINC
%
Measured Resources (oxides) 2,656,428 222 0.08 0.06 18,938,779
Indicated Resources (sulphides) 1,052,170 316 0.73 0.74 10,675,742
Measured in Tailings 1,403,233 90     4,075,305
Total Measured and Indicated Resources 5,111,831 205 0.27 0.25 33,689,826

TOTAL INFERRED RESOURCES

CATEGORY TONNES
(6,7,8)
GRADE METAL CONTAINED (2,5) SILVER (OZ.)
SILVER
G/TONNE (3,4)
LEAD
%
ZINC
%
Total Inferred Resources 1,854,963 220 0.22 0.17 13,097,701

1.

Estimated are exclusive of Resources.

2.

Metal contained is Silver only.

3.

Grade capping at 605 g/t Ag for oxides and 1500 g/t Ag for sulphides.

4.

Cut Off Grade (COG) estimated as 100 g/tonne Ag.

5.

Metal contained not include credits derived from the lead and zinc.

6.

Mining dilution is included at over 1.50 m width. Estimates do not include mining recovery.

7.

The datebase for resource estimate consist of diamond drilling (surface grid 50 x 50 m-underground) and surface channel sampling.

8.

Method; polygons maximum radius 50 m.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 25



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
info@firstmajestic.com
www.firstmajestic.com

 

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The consolidated financial statements of First Majestic Silver Corp. (the “Company”) are the responsibility of the Company’s management. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada and reflect management’s best estimates and judgment based on information currently available.

Management has developed and maintains a system of internal controls to ensure that the Company’s assets are safeguarded, transactions are authorized and properly recorded, and financial information is reliable.

The Board of Directors is responsible for ensuring management fulfills its responsibilities. The Audit Committee reviews the results of the audit and the annual consolidated financial statements prior to their submission to the Board of Directors for approval.

The consolidated financial statements have been audited by Deloitte & Touche LLP and their report outlines the scope of their examination and gives their opinion on the financial statements.

Keith Neumeyer Raymond Polman, CA
President & CEO Chief Financial Officer
March 19, 2010 March 19, 2010

26



Deloitte & Touche LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver, BC
Canada V7X 1P4
Tel: 604-669-4466
Fax: 604-685-0395
www.deloitte.ca


AUDITORS’ REPORT

To the Shareholders of
First Majestic Silver Corp.

We have audited the consolidated balance sheets of First Majestic Silver Corp. as at December 31, 2009 and 2008, and the consolidated statements of income (loss), shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.


Chartered Accountants
Vancouver, Canada
March 19, 2010

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 27



FIRST MAJESTIC SILVER CORP.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2009 AND 2008
(Expressed in Canadian dollars)

  2009   2008  
  $   $  
ASSETS    
CURRENT ASSETS        
Cash and cash equivalents (Note 5) 5,889,793   17,424,123  
Accounts receivable 2,174,848   2,116,325  
Other receivables (Note 6) 6,725,989   7,212,693  
Inventories (Note 7) 3,812,460   4,941,340  
Prepaid expenses and other (Note 8) 1,467,759   2,174,256  
  20,070,849   33,868,737  
MINING INTERESTS (Note 9)        
   Producing properties 57,144,477   49,933,735  
   Exploration properties 109,255,696   102,760,230  
   Plant and equipment 60,388,530   42,127,380  
  226,788,703   194,821,345  
CORPORATE OFFICE EQUIPMENT (Note 9) 409,281   483,050  
DEPOSITS ON LONG-TERM ASSETS (Note 12) 4,306,419   1,986,517  
  251,575,252   231,159,649  
         
LIABILITIES    
CURRENT LIABILITIES        
Accounts payable and accrued liabilities 11,304,170   17,339,624  
Unearned revenue on silver bullion sales 158,147   110,258  
Current portion of debt facilities (Note 11) 1,546,612   -  
Vendor liability and interest (Notes 5 and 10) -   13,940,237  
Vendor liability on mineral property -   1,372,973  
Current portion of capital lease obligations (Note 20) 2,139,352   1,584,477  
Income and other taxes payable 117,844   557,634  
  15,266,125   34,905,203  
FUTURE INCOME TAXES 28,417,011   30,690,087  
CAPITAL LEASE OBLIGATIONS (Note 20) 668,284   1,898,396  
LONG-TERM PORTION OF DEBT FACILITIES (Note 11) 3,213,487   -  
OTHER LONG TERM LIABILITIES (Note 19) 753,657   832,769  
ASSET RETIREMENT OBLIGATIONS (Note 21) 4,336,088   5,304,369  
  52,654,652   73,630,824  
         
SHAREHOLDERS' EQUITY    
SHARE CAPITAL (Note 14(a)) 244,241,006   196,648,345  
SHARE CAPITAL TO BE ISSUED (Note 14(d)) 276,495   276,495  
CONTRIBUTED SURPLUS 27,808,671   23,297,258  
ACCUMULATED OTHER COMPREHENSIVE LOSS (40,238,914 ) (23,216,390 )
DEFICIT (33,166,658 ) (39,476,883 )
  198,920,600   157,528,825  
  251,575,252   231,159,649  

CONTINUING OPERATIONS (Note 1)
CONTINGENT LIABILITIES (Note 22)
COMMITMENTS (Note 23)

  Director   Director

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

28



FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Expressed in Canadian dollars, except share amounts)

    2009     2008  
  $   $  
             
Revenues (Note 15)   59,510,669     44,324,887  
             
Cost of sales   34,351,853     30,419,415  
Amortization and depreciation   3,504,065     3,169,226  
Depletion   2,748,709     3,034,137  
Accretion of reclamation obligation (Note 21)   445,090     200,477  
Mine operating earnings   18,460,952     7,501,632  
             
General and administrative   8,089,087     7,549,079  
Stock-based compensation   3,302,780     3,680,111  
Write-down of mineral properties (Note 9 (f))   2,589,824     -  
    13,981,691     11,229,190  
             
Operating income (loss)   4,479,261     (3,727,558 )
             
Interest and other expenses   (2,101,862 )   (1,372,768 )
Investment and other income   1,129,527     1,180,742  
Impairment of marketable securities   (390,467 )   -  
Foreign exchange loss   (36,426 )   (3,144,654 )
Income (loss) before taxes   3,080,033     (7,064,238 )
             
Income tax expense - current   85,786     136,533  
Income tax (recovery) - future   (3,315,978 )   (2,055,987 )
Income tax recovery (Note 18)   (3,230,192 )   (1,919,454 )
             
NET INCOME (LOSS) FOR THE YEAR   6,310,225     (5,144,784 )
             
EARNINGS (LOSS) PER COMMON SHARE            
         BASIC $  0.08   $  (0.07 )
         DILUTED $  0.07   $  (0.07 )
             
WEIGHTED AVERAGE SHARES OUTSTANDING            
         BASIC   83,389,253     71,395,164  
         DILUTED   85,913,487     71,395,164  

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

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 29



FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(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, 2007   63,042,160   145,699,783   9,286,155   17,315,001   (15,186,207 ) (34,332,099 ) (49,518,306 ) 122,782,633  
Net loss   -   -   -   -   -   (5,144,784 ) (5,144,784 ) (5,144,784 )
Other comprehensive loss:                                  
 Translation adjustment   -   -   -   -   (7,616,671 ) -   (7,616,671 ) (7,616,671 )
 Unrealized loss on marketable securities   -   -   -   -   (413,512 ) -   (413,512 ) (413,512 )
Total comprehensive loss                           (13,174,967 ) (13,174,967 )
Shares issued for:                                  
 Exercise of options   436,650   1,398,566   -   -   -   -   -   1,398,566  
 Exercise of warrants   7,500   31,875   -   -   -   -   -   31,875  
 First Silver arrangement   1,861,500   9,009,660   (9,009,660 ) -   -   -   -   -  
 Public offering, net of issue costs (Note 14(a)(iv))   8,500,000   40,144,471   -   -   -   -   -   40,144,471  
Stock option expense, net of deferred compensation   -   -   -   3,609,247   -   -   -   3,609,247  
Warrants issued during the year   -   -   -   2,737,000   -   -   -   2,737,000  
Transfer of contributed surplus upon exercise of stock options   -   363,990   -   (363,990 ) -   -   -   -  
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   -   -   -   -   -   6,310,225   6,310,225   6,310,225  
Other comprehensive loss:                                  
 Translation adjustment   -   -   -   -   (17,411,904 ) -   (17,411,904 ) (17,411,904 )
 Impairment of marketable securities   -   -   -   -   390,467   -   390,467   390,467  
 Unrealized loss on marketable securities   -   -   -   -   (1,087 ) -   (1,087 ) (1,087 )
Total comprehensive loss                           (10,712,299 ) (10,712,299 )
Shares issued for:                                  
 Exercise of options   36,250   97,963   -   (29,125 ) -   -   -   68,838  
 Exercise of warrants   50,000   165,000   -   -   -   -   -   165,000  
 Public offering, net of issue costs (Note 14(a)(i))   8,487,576   18,840,890   -   848,758   -   -   -   19,689,648  
 Private placements, net of issue costs (Note 14(a )(i i))   4,167,478   9,051,069   -   389,000   -   -   -   9,440,069  
 Debt settlements (Note 14(a )(iii))   1,191,852   2,741,260   -   -   -   -   -   2,741,260  
 Acquisition of Normabec (Note 13)   4,867,778   16,696,479   -   -   -   -   -   16,696,479  
Stock option expense during the year   -   -   -   3,302,780   -   -   -   3,302,780  
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  

(1) AOCI consists of the cumulative translation adjustment on self sustaining subsidiaries which primarily affects the mining interests, except for the unrealized loss of $1,087 (2008 - unrealized loss of $391,000) on marketable securities classified as "available for sale".

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

30



FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Expressed in Canadian dollars)

  2009   2008  
  $   $  
OPERATING ACTIVITIES        
Net income (loss) for the year 6,310,225   (5,144,784 )
Adjustment for items not affecting cash        
 Depletion 2,748,709   3,034,137  
 Depreciation 3,504,065   3,169,226  
 Stock-based compensation 3,302,780   3,680,111  
 Accretion of reclamation obligation 445,090   200,477  
 Write-down of other assets -   240,000  
 Write-down of mineral property interests 2,589,824   -  
 Write-down of marketable securities 390,467   -  
 Future income taxes (3,315,978 ) (2,055,987 )
 Other income from derivative financial instruments (1,002,780 ) -  
 Unrealized foreign exchange loss and other 566,553   1,510,431  
  15,538,955   4,633,611  
Net change in non-cash working capital items        
 (Decrease) Increase in accounts receivable and other receivables (960,183 ) 1,517,537  
 Decrease (Increase) in inventories 365,964   (1,571,118 )
 Increase in prepaid expenses and other (1,144,849 ) (588,697 )
 (Decrease) Increase in accounts payable and accrued liabilities (5,813,014 ) 1,055,694  
 Increase in unearned revenue 47,889   110,258  
 Decrease in taxes receivable and payable (89,190 ) (369,312 )
 Increase in vendor liability and interest -   399,112  
 (Decrease) Increase in vendor liability on mineral property (1,242,543 ) 1,372,973  
  6,703,029   6,560,058  
INVESTING ACTIVITIES        
Expenditures on mineral property interests (net of accruals) (14,025,158 ) (24,485,036 )
Additions to plant and equipment (net of accruals) (19,365,209 ) (14,921,672 )
Increase in derivative financial instruments -   (127,153 )
Decrease (increase) in silver futures contract deposits 1,355,163   (363,278 )
Investment in marketable securities (300,000 ) -  
Increase in deposits on long term assets and other (2,508,617 ) (704,487 )
Acquisition of Normabec, less cash acquired (531,419 ) -  
  (35,375,240 ) (40,601,626 )
FINANCING ACTIVITIES        
Issuance of common shares and warrants, net of issue costs 29,363,555   41,574,912  
Payment of capital lease obligations (2,708,513 ) (2,551,752 )
Prepayment facility, net of repayments 415,632   -  
Payment of restricted cash into trust account (14,258,332 ) -  
Payment of short-term Arrangement liability -   (388,836 )
Proceeds from FIFOMI debt facility 4,309,159   -  
  17,121,501   38,634,324  
         
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,550,710 ) 4,592,756  
EFFECT OF EXCHANGE RATE ON CASH HELD IN FOREIGN CURRENCY 16,380   (3,816 )
CASH AND CASH EQUIVALENTS - BEGINNING OF THE YEAR 17,424,123   12,835,183  
         
         
CASH AND CASH EQUIVALENTS - END OF THE YEAR 5,889,793   17,424,123  
         
CASH AND CASH EQUIVALENTS IS COMPRISED OF:     -  
Cash 5,296,059   495,168  
Short-term deposits 593,734   2,988,718  
Restricted cash (Notes 5 and 10) -   13,940,237  
  5,889,793   17,424,123  
         
Interest paid 636,950   883,307  
Income taxes paid -   135,847  
NON-CASH FINANCING AND INVESTING ACTIVITIES (NOTE 24)        

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

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 31



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

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”, “FR.WT.A” 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. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles (“GAAP”).

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 10. Intercompany balances and transactions are eliminated on consolidation.

Variable Interest Entities (“VIEs”) as defined by the Accounting Standards Board in Accounting Guideline 15 “Consolidation of Variable Interest Entities” are entities in which equity investors do not have the characteristics of a “controlling financial interest” or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are subject to consolidation by the primary beneficiary who will absorb the majority of the entities expected losses and/or expected residual returns. The Company has determined that it has no VIEs.

Measurement Uncertainties

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant areas where management judgment is applied include, among others, the expected economic lives and the future operating results and net cash flows expected to result from exploitation of resource properties and related assets, the amount of proven and probable mineral reserves, accounting for income tax provisions, stock-based compensation, the determination of the fair value of assets acquired in business combinations and the amount of future site reclamation costs and asset retirement obligations. Actual results could differ from those reported.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and money market instruments with terms to maturity not exceeding 90 days at date of issue. The Company does not believe it is exposed to significant credit or interest rate risk although cash and cash equivalents are held in excess of federally insured limits with major financial institutions. In 2008, cash and cash equivalents included restricted cash of $13.9 million as described in Note 5.

Inventories

Silver coins and bullion, finished products of silver doré and silver concentrates, ore in process and stockpile (unprocessed ore) are valued at the lower of cost and net realizable value. Cost is determined as the average production cost of saleable silver and metal by-product. Materials and supplies are valued at the lower of cost and net replacement cost.

32



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Mineral Property Interests

Mineral property costs and exploration, development and field support costs directly relating to mineral properties are deferred until the property to which they directly relate is placed into production, sold, abandoned or subject to a condition of impairment. The deferred costs are amortized over the useful life of the ore body following commencement of production, or written off if the property is sold or abandoned. Administration costs and other exploration costs that do not relate to any specific property are expensed as incurred.

The acquisition, development and deferred exploration costs are depleted on a units-of-production basis over the estimated economic life of the ore body following commencement of production.

The Company reviews and evaluates its mining 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 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 carrying value of exploration stage mineral property interests represent costs incurred to date. The Company is in the process of exploring its other mineral property interests and has not yet determined whether they contain ore reserves that are economically recoverable. Accordingly, the recoverability of these capitalized costs is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete their exploration and development, and upon future profitable production.

Although the Company has taken steps to verify ownership and legal title to mineral properties in which it has an interest, according to the usual industry standards for the stage of mining, development and exploration of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects. Management is not aware of any such agreements, transfers or defects.

From time to time, the Company acquires or disposes of properties pursuant to the terms of option agreements. Options are exercisable entirely at the discretion of the optionee and, accordingly, are recorded as mineral property costs or recoveries when the payments are made or received.

Impairment of Long-Lived Assets

Long-lived assets are assessed for impairment at least annually, and when events and circumstances warrant. The carrying value of a long-lived asset is impaired when the carrying amount exceeds the estimated undiscounted net cash flow from use or disposal. In the event that a long-lived asset is determined to be impaired, the amount by which the carrying value exceeds its fair value is charged to earnings.

Asset Retirement Obligations and Reclamation Costs

Future costs to retire an asset including dismantling, remediation and ongoing treatment and monitoring of the site are recognized and recorded as a liability at fair value at the date the liability is incurred. The liability is accreted over time to the amount ultimately payable through periodic charges to earnings. Future site restoration costs are capitalized as part of the carrying value of the related mineral property at their initial value and amortized over the mineral property’s useful life based on a units-of-production method.

Translation of Foreign Currencies

(i) Foreign Currency Transactions

The currency of measurement for the Company’s Mexican operating subsidiaries is the Mexican peso. Transaction amounts denominated in foreign currencies (currencies other than the Mexican peso) are translated into Mexican pesos at exchange rates prevailing on the transaction dates. Carrying values of foreign currency denominated monetary assets and liabilities are translated into the currency of measurement at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities are translated at the exchange rates in effect at the time of acquisition or issue. Revenues and expenses are translated at the historical exchange rates in effect at the time of the transactions. Exchange gains and losses arising from the translation of these foreign currency denominated monetary assets and liabilities are included in operations.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 33



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

(ii) Subsidiary Financial Statements

The financial statements of Mexican self-sustaining subsidiaries that are measured in Mexican pesos are translated into Canadian dollars using the current rate method. Translation gains and losses related to current rate translation of non-monetary items as at the reporting date are included as an element of the exchange gains and losses and included as a separate component of accumulated other comprehensive income.

The financial statements of the Company’s integrated Mexican subsidiaries, MRB and Servicios, are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities in foreign currency of the subsidiary are translated at the exchange rate in effect at the balance sheet date, whereas other assets and liabilities are translated at the exchange rate in effect at the transaction date. Revenue and expenses in foreign currency are translated at the average rate in effect during the year, with the exception of revenue and expenses relating to non-monetary assets and liabilities, which are translated at the historical rate. Gains and losses are included in the earnings for the year.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax bases (temporary differences), using substantively enacted income tax rates. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation applied from the commencement of operations, calculated using the straight line method over the following useful lives not to exceed the life of mine:

Computer equipment 3 years straight-line
Automobile 5 years straight-line
Office equipment 5 years straight-line
Machinery and equipment 10 years straight-line
Buildings 20 years straight-line
Leasehold improvements 56 months straight-line

Construction in progress costs are not amortized until the related asset is complete, ready for use, and utilized in commercial production.

Revenue Recognition

Revenue from the sale of silver is recorded in the Company’s accounts when title transfers to the customer (which generally occurs on the date the shipment is delivered) when collection is reasonably assured, and when the price is reasonably determinable. Revenue is recorded in the statement of operations net of relevant smelting and refining treatment costs, and transportation costs paid to counterparties. Revenue from the sale of silver is subject to adjustment upon final settlement of estimated weights and assays. Silver metal prices are established upon delivery and do not require settlement changes. By-product revenues are included as a component of net sales revenues.

Unearned Revenue

Unearned revenue is recorded when cash has been received from customers prior to shipping of the related silver coins, ingots and bullion products.

Earnings or Loss Per Share

Basic earnings (loss) per share is computed by dividing the earnings (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on earnings per share. The dilutive effect of convertible securities is reflected in diluted earnings per share by application of the “if converted” method. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method.

34



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-based Compensation

The Company uses the fair value method for recording compensation for all awards made to directors, employees and non-employees including stock appreciation rights, direct awards of stock and stock-based awards that call for settlement in cash or other assets. The compensation expense is determined as the fair value of the option at the date of grant and is calculated using the Black-Scholes Option Pricing Model. The contributed surplus balance is reduced as the options are exercised and the amount initially recorded is transferred to share capital. The effect of forfeitures of stock-based compensation is recorded as an adjustment to stock-based compensation expense in the period the option is forfeited.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI represents changes in shareholders’ equity during a period arising from transactions other than changes related to transactions with owners. OCI includes unrealized gains and losses on financial assets classified as available-for-sale, changes in the fair value of the effective portion of derivative instruments included in cash flow hedges and currency translation adjustments on the Company’s net investment in self-sustaining foreign operations.

Cumulative changes in OCI are included in accumulated other comprehensive income (“AOCI”).

Financial Instruments – Recognition and Measurement and Hedges

Financial assets and liabilities, including derivatives, are recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. All financial instruments are required to be measured at fair value on initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other financial liabilities. Transaction costs are expensed as incurred for financial instruments classified as held-for-trading. For financial instruments classified as other than held-for-trading, transaction costs are added to the carrying amount of the financial asset or liability on initial recognition and amortized using the effective interest method.

Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in the consolidated statements of income (loss). Loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method. Available-for-sale financial assets are presented in prepaid expenses and other assets in the Company’s consolidated balance sheet and measured at fair value with unrealized gains and losses, including changes in foreign exchange rates, recognized in OCI. Other than temporary unrealized losses on available-for-sale, financial assets are recognized in the consolidated statements of income (loss). Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market are measured at cost.

The Company may periodically use foreign exchange and commodity contracts to manage exposure to fluctuations in foreign exchange rates and commodity prices. Derivative financial instruments are recorded on the Company’s balance sheet at their fair values with changes in fair values recorded in the results of operations during the period in which the change occurred.

Derivative instruments are recorded on the consolidated balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recognized in net income.

The Company has designated its financial assets and liabilities as follows:

•   Cash and cash equivalents Held-for-trading
•   Marketable securities Available-for-sale
•   Accounts receivable and other receivables Loans and receivables
•   Derivative financial instruments Held-for-trading
•   Accounts payable and accrued liabilities Other financial liabilities
•   Vendor liabilities Other financial liabilities
•   Debt facilities Other financial liabilities
•   Capital lease obligations Other financial liabilities

Comparative Figures

Certain comparative figures have been reclassified to conform to the classifications used in 2009.

 

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 35



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Changes in Accounting Policies

Goodwill and Intangible Assets

The CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”, which establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of internally developed intangible assets, including certain preproduction and start-up costs that do not meet the definition of an asset, and requires that these costs be expensed as incurred. The new standard is effective for the Company beginning January 1, 2009 and did not have a material impact on the Company. In regards to the start-up costs related to the ramp-up of the La Encantada mill expansion, Section 3061 “Property, Plant and Equipment” provides guidance for the capitalization of start-up costs which will be deferred until “commercial stage” production has been achieved.

Credit Risk and the Fair Value of Financial Assets and Liabilities

The Company adopted EIC-173, “Credit Risk and the Fair Value of Financial Assets and Liabilities”, which provides guidance on how to take into account an entity’s own credit risk and that of the counterparty when determining the fair value of financial assets and financial liabilities, including derivative instruments. Upon adoption of this EIC, there were no resulting material changes to the Company’s financial position or results of operations.

Mining Exploration Costs

The Company adopted EIC-174, “Mining Exploration Costs”, which provides guidance on how to account for mineral exploration costs as well as when and how to assess for impairment when such exploration costs are capitalized. Upon adoption of this EIC, there were no resulting material changes to the Company’s financial position or results of operations.

Financial Instruments – Disclosures

In June 2009, the CICA amended Handbook Section 3862, “Financial Instruments – Disclosures” to include additional disclosure requirements about fair value measurements of financial instruments and to enhance liquidity risk disclosure requirements for publicly accountable enterprises. The amendments are applicable for the Company’s annual consolidated financial statements for the year ended December 31, 2009. The Company has only one financial instrument to which this amendment applies and it considers its marketable securities to be “Level 1” of the fair value hierarchy. Level 1 uses unadjusted quoted prices in active markets.

Financial Instruments – Recognition and Measurement

In July 2009, the Company adopted the amendments made by the CICA to Handbook Section 3855, “Financial Instruments – Recognition and Measurement” to provide additional guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category, amend the definition of loans and receivables, amend the categories of financial assets into which debt instruments are required or permitted to be classified, amend the impairment guidance for held-to-maturity debt instruments and require reversal of impairment losses on available-for-sale debt instruments when conditions have changed. The additional guidance on assessment of embedded derivatives is applicable for reclassifications made on or after July 1, 2009. All other amendments are applicable as of January 1, 2009. The adoption of these amendments did not result in a material impact on the Company’s consolidated financial statements for the year ended December 31, 2009.

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

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.

The Company has commenced planning its transition to IFRS but the impact on our consolidated financial position and results of operations has not yet been determined. The Company is continuing its diagnosis and impact assessment of its current accounting policies systems and processes in order to identify differences between current Canadian GAAP and IFRS treatment. The Company will continue to monitor changes in IFRS during implementation process and intends to update the critical accounting policies and procedures to incorporate the changes required by converting to IFRS and the impact of these changes on its financial reporting.

36



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

3. 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 prior year ended December 31, 2008.

The Company’s capital structure consists of debt facilities and shareholders’ equity, comprising issued capital, share capital to be issued, contributed surplus, 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.

4. 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 byproducts 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.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 37



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

4. FINANCIAL INSTRUMENTS AND RISKS (continued)

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

          Payments Due By Period        
    Total     Less than     1- 3     4 - 5     After 5  
          1 year     years     years     years  
Capital Lease Obligations $  2,807,636   $  2,139,352   $  668,284   $  -   $  -  
FIFOMI Loan Facilities   4,309,159     1,095,672     1,676,605     1,536,882     -  
Trafigura Prepayment Facility   450,940     450,940     -     -     -  
Real de Catorce Payments (1)   1,261,200     1,261,200     -     -     -  
Purchase Obligations (2)   2,071,102     2,071,102     -     -     -  
Asset Retirement Obligations   4,336,088     -     -     -     4,336,088  
Accounts Payable and Accrued Liabilities   11,304,170     11,304,170     -     -     -  
  $  26,540,295   $  18,322,436   $  2,344,889   $  1,536,882   $  4,336,088  

(1)

Contract commitments to acquire surface rights and geological i nformation relating to the Real de Catorce Project.

   
(2)

Contract commitments for construction materials and equipment for the La Encantada Mill Expansion Project.

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 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 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.

    Reasonably possible changes  
    $US                    
    Denominated           Peso/$CDN     Market  
    Silver Commodity   $US /Peso     Exchange     interest  
    Price     Exchange Rate     Rate     rate  
Impact on Annual Operations +/- 10%     +/- 10%     +/- 10%     +/- 25 basis points
Net Income (1) $  217,485   $  423,771   $ 3,870   $  14,724  

(1)

These sensitivities are hypothetical and should be used with caution, favourable hypothetical changes in the assumptions result in an increased amount and unfavourable hypothetical changes in the assumptions result in a decreased amount of net income and/or other comprehensive income.

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, capital lease obligations and debt facilities.

38



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

4. FINANCIAL INSTRUMENTS AND RISKS (continued)

Marketable securities and derivative instruments are carried at fair value. The fair values of accounts receivable, other receivables, accounts payable and accrued liabilities and unearned revenue approximate their carrying value due to the short term nature of these items. The fair values of capital lease obligations and debt facilities approximate their carrying value due to the floating interest rate on 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.

5. RESTRICTED CASH

On July 22, 2008, the Company secured its outstanding vendor liability (Note 10) by entering into a Letter of Credit facility for $13,940,237, secured by cash and liquid short term investments. In addition, a further $545,522 was paid into the Supreme Court of British Columbia in January 2009 and the Letter of Credit increased to a total Restricted Cash balance of $14,485,759. On July 16, 2009, the Company agreed to a consent order whereby $14,258,332 was paid out of the Letter of Credit to the trust account of the lawyers of the previous Majority Shareholder of First Silver. The remaining $227,420 was paid out to the Company and the Letters of Credit were cancelled. The consent order requires that the $14,258,332 be held in trust by legal counsel to the vendor pending the outcome of the litigation. These funds would only become accessible to the Company in the event of a favourable outcome to the litigation.

6. OTHER RECEIVABLES

Details of the components of other receivables are as follows:

  2009   2008  
  $   $  
Value a dded taxes recoverable 6,030,775   6,109,943  
Other taxes recoverable 107,741   406,536  
Interest receivable 6,860   188,111  
Loans receivable from employees 101,789   67,240  
Loan receivable from s upplier 478,824   440,863  
  6,725,989   7,212,693  

7. INVENTORIES

Inventories consist of the following:

  2009   2008  
  $   $  
Silver coins and bullion including in process shipments 273,262   247,368  
Finished product - doré and concentrates 343,990   1,342,550  
Ore in process 463,549   196,169  
Stockpile 387,836   1,631,625  
Materials and s upplies 2,343,823   1,523,628  
  3,812,460   4,941,340  

8. PREPAID EXPENSES AND OTHER

Details of prepaid expenses and other are as follows:

  2009   2008  
  $   $  
Prepayments to suppliers and contractors 832,880   1,380,509  
Deposits 215,036   252,941  
Marketable s ecurities 387,425   50,375  
Derivative financial instruments -   490,431  
Prepaid mineral rights 32,418   -  
  1,467,759   2,174,256  

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 39



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

9. MINING INTERESTS AND PLANT AND EQUIPMENT

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

      2009           2008      
      Accumulated           Accumulated      
      depreciation           depreciation      
      and   Net Book       and   Net Book  
  Cost   depletion   Value   Cost   depletion   Value  
   $    $    $    $    $    $  
Mining properties 183,585,673   17,185,500   166,400,173   167,130,756   14,436,791   152,693,965  
Plant and equipment 69,026,387   8,637,857   60,388,530   48,271,432   6,144,052   42,127,380  
  252,612,060   25,823,357   226,788,703   215,402,188   20,580,843   194,821,345  

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

      2009           2008      
      Accumulated   Net Book       Accumulated   Net Book  
  Cost   Depletion   Value   Cost   Depletion   Value  
MEXICO                        
                         
Producing properties                        
La Encantada (a) 13,055,900   2,886,830   10,169,070   8,922,466   2,276,963   6,645,503  
La Parrilla (b) 22,371,850   3,009,041   19,362,809   18,644,777   2,038,223   16,606,554  
San Martin (c) 38,902,227   11,289,629   27,612,598   36,803,283   10,121,605   26,681,678  
  74,329,977   17,185,500   57,144,477   64,370,526   14,436,791   49,933,735  
Exploration properties                        
La Encantada (a) 2,467,451   -   2,467,451   2,858,043   -   2,858,043  
La Parrilla (b) 7,625,168   -   7,625,168   8,722,897   -   8,722,897  
San Martin (c) (1) 65,931,244   -   65,931,244   77,582,247   -   77,582,247  
Del Toro (d) 11,855,627   -   11,855,627   11,881,557   -   11,881,557  
Real de Catorce (e) 21,376,206   -   21,376,206   -   -   -  
Cuitaboca (f) -   -   -   1,715,486   -   1,715,486  
  109,255,696   -   109,255,696   102,760,230   -   102,760,230  
                         
  183,585,673   17,185,500   166,400,173   167,130,756   14,436,791   152,693,965  

(1)

This includes properties acquired from First Silver and held by Minera El Pilon. The properties are located in the San Martin de Bolaños region, as well as in Jalisco State (the Jalisco Group of Properties).

A summary of plant and equipment is as follows:

      2009           2008      
      Accumulated   Net Book       Accumulated   Net Book  
  Cost   Depreciation   Value   Cost   Depreciation   Value  
  $   $   $   $   $   $  
La Encantada Silver Mine 42,001,694   1,954,699   40,046,995   19,541,421   1,221,301   18,320,120  
La Parrilla Silver Mine 17,228,300   3,792,818   13,435,482   18,590,746   2,568,373   16,022,373  
San Martin Silver Mine 9,751,407   2,889,290   6,862,117   10,139,265   2,354,378   7,784,887  
Real de Catorce Silver Project 44,986   1,050   43,936   -   -   -  
Used in Mining Operations 69,026,387   8,637,857   60,388,530   48,271,432   6,144,052   42,127,380  
Corporate office equipment 767,782   358,501   409,281   712,525   229,475   483,050  
  69,794,169   8,996,358   60,797,811   48,983,957   6,373,527   42,610,430  

40



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

9. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

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

      2009           2008      
      Accumulated   Net Book       Accumulated   Net Book  
  Cost   Depreciation   Value   Cost   Depreciation   Value  
  $   $   $   $   $   $  
Land 2,279,494   -   2,279,494   2,302,273   -   2,302,273  
Automobile 401,056   204,920   196,136   427,817   140,703   287,114  
Buildings 5,918,355   578,177   5,340,178   6,250,748   399,982   5,850,766  
Machinery and equipment 26,154,678   7,311,470   18,843,208   27,744,171   5,053,326   22,690,845  
Computer equipment 560,018   279,783   280,235   566,511   239,162   327,349  
Office equipment 577,215   460,070   117,145   600,413   447,405   153,008  
Leasehold improvements 320,304   161,938   158,366   320,304   92,949   227,355  
Construction in progress (1)(2) 33,583,049   -   33,583,049   10,771,720   -   10,771,720  
  69,794,169   8,996,358   60,797,811   48,983,957   6,373,527   42,610,430  

(1)

Construction in progress includes $31,283,949 relating to La Encantada, $535,604 relating to La Parrilla and $1,763,496 relating to San Martin (2008 - $8,537,075 relating to La Encantada, $422,247 relating to La Parrilla and $1,812,398 relating to San Martin).

   
(2)

At December 31, 2009, the La Encantada Mill Expansion Project had not achieved a commercial stage of production, therefore the net amount of revenues less production costs of $496,371 in connection with the sale of 54,277 silver equivalent ounces of precipitates during the pre-operating period were offset to construction in progress

Mineral property options paid and future option payments in U.S. dollars are due as follows:

    Del Toro  
    Note 9(d)
    (US$)  
Paid as at December 31, 2009   5,987,500  
Payable in 2010   225,000  
Total Current and Future Option Payments   6,212,500  

(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 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 a 3,500 tonne 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. During the year ended December 31, 2009, $22.7 million in expenditures were incurred at La Encantada and classified as construction in progress at December 31, 2009 as the plant has not yet achieved commercial production levels.

(b) La Parrilla Silver Mine, Durango State

The La Parrilla Silver Mine is a system of connecting 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 kilometres southeast of the city of Durango, in Durango State Mexico. Located at the mine are: mining equipment, a 425 tonne-per-day cyanidation plant, a 425 tonne-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 agreement (“NSR”) of 1.5% of sales revenue from the Quebradillas Mine to a maximum of US$2,500,000 and an option to purchase the NSR at any time for US$2,000,000. For the year ended December 31, 2009, the Company paid US$135,363 (December 31, 2008 – US$69,000) relating to royalties.

(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 land rights surrounding the mine, and another 104 hectares of surface rights where the 950 tonne-per-day cyanidation mill, flotation circuit, mine buildings and offices are located. The Company owns 100% of the San Martin Silver Mine.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 41



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

9. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

(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 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 one kilometre apart. The Company owns 100% of the Perseverancia Silver Mine, the San Juan Silver Mine and the surrounding 293 hectare land package. The US$225,000 option payments due in 2010 relate to a new land acquisition of 50 hectares. All other option payments have been made.

(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$1,000,000 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) Cuitaboca Silver Project, Sinaloa State

During the year ended December 31, 2009, management elected not to proceed with the acquisition of the Cuitaboca Silver Project. Accordingly, the historical investment totalling $2,589,824 was written off during the year.

10. VENDOR LIABILITY AND INTEREST

In May 2006, First Majestic acquired control of First Silver Reserve Inc. (“First Silver”) for $53,365,519. The purchase price was payable to the shareholder of First Silver (the “Majority Shareholder”) in three instalments. The first instalment of $26,682,759, for 50% of the purchase price, was paid upon closing on May 30, 2006. An additional 25% instalment of $13,341,380 was paid on May 30, 2007, the first anniversary of the closing. The final 25% instalment of $13,341,380 was due on May 30, 2008, the second anniversary of the closing of the acquisition. Simple interest at 6% per annum was payable quarterly on the outstanding vendor balance.

In November 2007, an action was commenced by the Company and First Silver against the Majority Shareholder (the “Defendant”) who was previously a director, President & Chief Executive Officer of First Silver. The Company and First Silver allege 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.

On March 14, 2008, the Defendant filed a Counterclaim in the Action against the Company in which he claimed for unpaid amounts and interest arising out of the agreement between the Company and the Defendant under which the Company acquired the Defendant’s shares (approximately 24,649,200 shares) in First Silver. As of July 16, 2009, the claimed unpaid amount, together with interest calculated at the contractual interest rate of 6% amounted to $14,881,912. This amount was partly secured by a Letter of Credit posted in Court by First Majestic in the sum of $14,485,760.

On July 16, 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 $14,881,912. The Company agreed to pay out $14,258,332 from the Letter of Credit to the Defendant’s lawyer’s trust account (the “Trust Funds”) in partial payment of the Judgment. The remaining $227,420 from the Letter of Credit was paid out to the Company. The Consent Order requires, that the Trust Funds be held pending the outcome of the Action. If the trial has not commenced by June 30, 2011, the Trust Funds can be released on that date to the Defendant, unless otherwise ordered by the court. At the present time, the trial is scheduled to commence in the Supreme Court of British Columbia, Vancouver, British Columbia on February 21, 2011. The Consent Order does not affect the standing of the Company’s claims for relief against the Defendant in the Action. These funds would only become accessible to the Company in the event of a favourable outcome to the litigation.

42



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

11. DEBT FACILITIES

(a) Pre-Payment Facility

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. The repayment of the credit facility is guaranteed by the parent company. Subsequent to the year end, this agreement was amended and restated to provide an additional six-month prepayment 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 and as at December 31, 2009, after supplying monthly quotas of lead concentrates, the Company had a remaining balance payable of $450,940 (US$431,497) after by-product shipments and interest charges of $7,553 (US$7,228).

(b) FIFOMI Loan Facilities

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 these loans will be used for the completion of the 3,500 tonne-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.

A total of $53.8 million Mexican pesos was drawn down during 2009 and at December 31, 2009, the balance was $53.8 Mexican pesos (CAD$4.3 million) of which $1.1 million was classified as current.

          Payments Due By Period        
    Total     Less than     1-3     4-5     After 5  
          1 year     years     years     years  
FIFOMI Loan Facilities $  4,309,159   $  1,095,672   $  1,676,605   $  1,536,882   $  -  

12. 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:

  2009   2008  
  $   $  
Deposit on equipment at La Encantada 2,876,717   1,986,517  
Deposit on equipment at La Parrilla 1,429,702   -  
  4,306,419   1,986,517  

13. ACQUISITION OF NORMABEC MINING RESOURCES LTD.

On November 13, 2009, the Company completed a plan of arrangement (the “Arrangement”) to acquire all of the issued and outstanding shares of Normabec Mining Resources Ltd. (“Normabec”). Normabec’s primary asset is the Real de Catorce Project located 25 km west of the town of Matehuala in San Luis Potosi State, Mexico.

Concurrent with the completion of the Arrangement, the non-Mexican assets of Normabec were divested to a newly formed entity Brionor Resources Inc. (“Brionor”). Holders of Normabec shares received 0.060425 First Majestic shares and 0.25 Brionor shares for each Normabec common share.

The Company also purchased, via private placement, 2,115,195 common shares of Brionor for an aggregate purchase price of $300,000, representing a price per share of approximately $0.1418. These shares represented 9.9% of the total issued and outstanding shares of Brionor upon completion of the transaction at November 13, 2009. Brionor is a public company listed on the TSX Venture Exchange.

The acquisition of Normabec has been accounted for as an asset acquisition, with First Majestic identified as the acquirer, and with First Majestic recording the acquisition at its estimated fair value at the date of acquisition.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 43



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

13. ACQUISITION OF NORMABEC MINING RESOURCES LTD. (continued)

The allocation of the purchase price to the assets acquired and liabilities assumed is as follows:

Consideration:      
   Arrangement shares (4,652,778 at $3.43) $  15,959,029  
   Settlement of liabilities with cash and shares ($196,762 in cash and 215,000 shares at $3.43)   934,212  
   Other costs incurred relating to the acquisition of Norma bec   504,297  
  $  17,397,538  
Allocation of purchase price:      
   Net working capital $  154,914  
   Investments (First Gold Inc - 225,000 shares at $0.185 per s hare)   38,513  
   Property, plant and equipment   44,986  
   Mining rights   21,215,673  
   Future income taxes   (4,056,548 )
  $  17,397,538  

14. SHARE CAPITAL

(a) Authorized – unlimited number of common shares without par value

  Issued   Year ended December 31, 2009     Year ended December 31, 2008  
    Shares   $     Shares   $  
  Balance - beginning of the year   73,847,810     196,648,345     63,042,160     145,699,783  
  Issued during the year                        
  For cash:                        
   Exercise of options   36,250     68,838     436,650     1,398,566  
   Exercise of warrants   50,000     165,000     7,500     31,875  
   Public offering of units (i) (v)   8,487,576     18,840,890     8,500,000     40,144,471  
   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     -     -  
  For First Silver Arrangement   -     -     1,861,500     9,009,660  
Transfer of contributed surplus for stock options exercised - 29,125 - 363,990
  Balance - end of the year   92,648,744     244,241,006     73,847,810     196,648,345  

(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.

   
(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.

44



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

14. SHARE CAPITAL (continued)

(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 (see Note 13).

   
(v)

On March 25, 2008, the Company completed a public offering with a syndicate of underwriters who purchased 8,500,000 units at an issue price of $5.35 per unit for net proceeds to the Company of $42,881,471, of which $40,144,471 was allocated to the common shares, $2,380,000 was allocated to the warrants and $357,000 was allocated to the underwriter’s 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 $7.00 expiring on March 25, 2010. The underwriters had an option, exercisable up until 30 days following closing of the offering, to purchase up to an additional 1,275,000 common shares at a price of $5.07 per share and up to an additional 637,500 warrants at a price of $0.56 per warrant. The underwriters did not exercise their option to purchase any option shares, but did acquire the 637,500 warrants (see Note 14(c)).

(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 years ended December 31, 2009 and 2008 are as follows:

    Year Ended December 31, 2009     Year Ended December 31, 2008  
          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 year   6,862,500     3.84     2.78 years     5,892,500     4.04     2.75 years  
Granted   2,842,500     2.88     3.58 years     2,672,500     2.93     3.67 years  
Exercised   (36,250 )   1.90     2.47 years     (436,650 )   3.20     0.51 years  
Forfeited or expired   (1,065,000 )   4.11     0.73 years     (1,265,850 )   3.05     0.45 years  
Balance, end of the year   8,603,750     3.50     2.42 years     6,862,500     3.84     2.78 years  

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 45



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

14. SHARE CAPITAL (continued)

(b) Stock Options (continued)

The following table summarizes both the stock options outstanding and those that are exercisable at December 31, 2009:

Price   Options     Options        
$   Outstanding     Exercisable     Expiry Dates  
5.50   200,000     200,000     February 1, 2010  
4.64   75,000     75,000     June 1, 2010  
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   530,000     530,000     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   120,000     90,000     July 4, 2011  
4.15   300,000     225,000     July 28, 2011  
3.62   565,000     423,750     August 28, 2011  
1.60   200,000     150,000     October 8, 2011  
1.27   118,750     87,500     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   730,000     365,000     May 7, 2012  
4.65   25,000     25,000     June 20, 2012  
2.62   60,000     15,000     September 16, 2012  
2.96   25,000     6,250     October 28, 2012  
3.38   25,000     6,250     November 5, 2012  
4.34   925,000     925,000     December 5, 2012  
3.52   560,000     140,000     December 7, 2012  
3.70   535,000     133,750     December 15, 2012  
3.62   100,000     75,000     August 28, 2013  
1.44   240,000     180,000     November 10, 2013  
1.56   550,000     412,500     December 17, 2013  
2.03   462,500     231,250     May 7, 2014  
2.32   12,500     6,250     June 15, 2014  
3.70   350,000     87,500     December 15, 2014  
                   
    8,603,750     6,285,000        

During the year ended December 31, 2009, the Company granted stock options to directors, officers and employees to purchase 2,842,500 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 in 2009 was $3,991,000, of which $1,455,279 was expensed in the current year, $39,175 was exercised in the current year, and $2,496,546 will be deferred over the remaining vesting period of the stock options.

The weighted average fair value of each stock options granted during the year was $1.41 (2008 - $1.05) . Fair value of stock options is estimated using the Black-Scholes Option Pricing Model with the following weighted average assumptions:

  Year ended Year ended
  December 31, 2009 December 31, 2008
Risk-free interest rate 1.1% 2.4%
Es timated volatility 83.7% 64.9%
Expected life 2.2 years 2.35 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.

46



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

14. SHARE CAPITAL (continued)

(c) Share Purchase Warrants

The changes in share purchase warrants for the years ended December 31, 2009 and 2008 are as follows:

  Year ended December 31, 2009   Year ended December 31, 2008  
                         
      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 year 5,078,791   6.99   1.19 years   5,845,240   5.66   0.89 years  
Issued (i) (ii) (iii) (iv) (v) (vi) 6,638,492   3.66   2.12 years   4,887,500   7.00   2.00 years  
Exercised (50,000 ) 3.30   1.65 years   (7,500 ) 4.25   0.86 years  
Cancelled or expired (309,818 ) 7.69   0.00 years   (5,646,449 ) 5.62   0.00 years  
Balance, end of the year 11,357,465   5.04   0.84 years   5,078,791   6.99   1.19 years  

(i)

On March 5, 2009, the Company issued 4,243,788 warrants exercisable at a price of $3.50 per share exercisable 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 $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 $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. 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 $60,953 was credited to contributed surplus.

   
(iv)

On November 13, 2009, 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 in connection with the acquisition of Normabec (see Note 13). 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 years and expected dividend yield of 0%). No value was credited to contributed surplus.

   
(v)

On March 25, 2008, the Company issued 4,250,000 warrants exercisable at a price of $7.00 per share exercisable for a period of two years. The warrants were detachable warrants issued in connection with the 8.5 million unit offering. The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 2.74%, market sector volatility of 42%, expected life of 2 years and expected dividend yield of 0%) and $2,380,000 was credited to contributed surplus.

   
(vi)

On April 4, 2008, the Company issued 637,500 warrants exercisable at a price of $7.00 per share exercisable for a period of two years under the over-allotment option in connection with the March 25, 2008 public offering. Each warrant entitles the holder to acquire one additional common share at a price of $7.00 until March 25, 2010. The fair value of the warrants was estimated using the Black-Scholes Option Pricing Model (assumptions include a risk free rate of 2.74%, market sector volatility of 42%, expected life of 2 years and expected dividend yield of 0%) and $357,000 was credited to contributed surplus.

The following table summarizes the share purchase warrants outstanding at December 31, 2009:

Exercise Price   Warrants        
$   Outstanding     Expiry Dates  
9.11   142,438     January 2, 2010  
7.00   4,887,500     March 25, 2010  
3.50   4,243,788     March 5, 2011  
3.30   1,749,500     August 20, 2011  
3.30   334,239     September 16, 2011  
    11,357,465        

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 47



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

14. SHARE CAPITAL (continued)

(d) Share Capital to be Issued

On June 5, 2006, pursuant to the acquisition of First Silver Reserve Inc. and the San Martin mine, First Majestic and First Silver entered into a business combination agreement whereby First Majestic acquired the 36.25% remaining minority interest in securities of First Silver resulting in First Silver becoming a wholly owned subsidiary of First Majestic.

At December 31, 2009, the prior shareholders of First Silver had yet to exchange the remaining 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.

15. REVENUE

Details of the components of revenue are as follows:

  Years Ended December 31,  
  2009   2008  
  $   $  
Combined revenue - silver doré bars, concentrates, coins and ingots 76,596,113   56,994,724  
Less: intercompany eliminations (5,070,039 ) (892,265 )
Consolidated gross revenue 71,526,074   56,102,459  
Less: refining a nd s melting charges, net of intercompany eliminations (9,310,475 ) (9,895,208 )
Less: metal deductions, net of i ntercompany eliminations (2,704,930 ) (1,882,364 )
Net revenue 59,510,669   44,324,887  

At December 31, 2009, the La Encantada mill expansion project had not achieved a commercial stage of production, therefore cash 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 sales revenues and instead was recorded as a reduction of capital costs in construction in progress (Note 9).

16. RELATED PARTY TRANSACTIONS

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

a)

incurred $281,065 (2008 - $248,025) for management services provided by the President & CEO and/or a corporation controlled by the President & CEO of the Company pursuant to a consulting agreement.

   
b)

incurred $275,214 (2008 - $310,920) to a director and Chief Operating Officer for management and other services related to the mining operations of the Company in Mexico pursuant to a consulting agreement.

   
c)

incurred $1,317,437 (2008 - $8,010,843) to a mining services company sharing our premises in Durango Mexico. This related party provided management services and paid mining contractors who provided services at the Company’s mines in Mexico for the period January 1 to February 28, 2009. Of the fees incurred, $232,444 was unpaid as at December 31, 2009 (2008 - $3,122,130). This relationship was terminated in February 2009.

   
d)

incurred $nil (2008 - $7,365) to a director of the Company as finder’s fees upon the completion of certain option agreements relating to Del Toro.

   
e)

provided a loan of $nil (US$nil) (2008 – $36,540 or US$30,000) to a director of the Company. This loan was fully repaid in the year ended December 31, 2009.

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.

48



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

17. SEGMENTED INFORMATION

The Company considers that it has three operating segments located in Mexico, one retail market segment in Canada and one corporate segment with locations in Canada and Mexico. The El Pilon operations consist of the San Martin Silver Mine, the San Martin property and the Jalisco Group of Properties. The First Majestic Plata 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:

  Year ended December 31, 2009
                         
      First Majestic           Corporate      
  El Pilon   Plata   La Encantada       and Other      
  operations   operations   operations   Coin Sales   Eliminations   Total  
  $   $   $   $   $   $  
Revenue 20,122,274   22,377,951   16,789,464   5,132,099   (4,911,119 ) 59,510,669  
Cost of sales 11,592,357   11,923,081   10,523,284   4,860,844   (4,547,713 ) 34,351,853  
Amortiza tion, depreciation and accretion 925,383   1,957,005   1,066,767   -   -   3,949,155  
Depletion 1,168,024   970,818   609,867   -   -   2,748,709  
Mine operating earnings (loss) 6,436,510   7,527,047   4,589,546   271,255   (363,406 ) 18,460,952  
General and administrative -   -   -   -   8,089,087   8,089,087  
Stock-based compensation -   -   -   -   3,302,780   3,302,780  
Write-down of mineral properties 2,589,824   -   -   -   -   2,589,824  
Write-down of marketable securities -   -   -   -   (390,467 ) (390,467 )
Net interest, other income (expense) and foreign exchange (3,036,124 ) (2,392,401 ) (2,764,988 ) - 7,184,752 (1,008,761 )
Income tax expense (recovery) -   -   -   -   (3,230,192 ) (3,230,192 )
Net income (loss) 810,562   5,134,646   1,824,558   271,255   (1,730,796 ) 6,310,225  
Capital expenditures 3,256,314   6,688,038   28,672,840   -   180,088   38,797,280  
Total assets 103,853,548   60,345,812   62,550,666   651,642   24,173,584   251,575,252  

  Year ended December 31, 2008
                         
      First Majestic           Corporate      
  El Pilon   Plata   La Encantada       and Other      
  operations   operations   operations   Coin Sales   Eliminations   Total  
  $   $   $   $   $   $  
Revenue 11,707,631   15,983,118   17,145,790   380,613   (892,265 ) 44,324,887  
Cost of sales 10,083,947   12,219,616   8,613,007   377,170   (874,325 ) 30,419,415  
Amortization, depreciation and accretion 1,280,949   1,467,927   620,827   -   -   3,369,703  
Depletion 1,544,162   737,087   752,888   -   -   3,034,137  
Mine operating earnings (loss) (1,201,427 ) 1,558,488   7,159,068   3,443   (17,940 ) 7,501,632  
General and administrative -   -   -   -   7,549,079   7,549,079  
Stock-based compensation -   -   -   -   3,680,111   3,680,111  
Net interest, other income (expense) and foreign exchange (2,209,177 ) (2,883,908 ) (1,363,857 ) - 3,120,262 (3,336,680 )
Income tax (recovery) expense 27,030   (897,488 ) 87,976   -   (1,136,972 ) (1,919,454 )
Net income (loss) (3,437,634 ) (427,932 ) 5,707,235   3,443   (6,989,896 ) (5,144,784 )
Capital expenditures 12,003,673   19,636,692   16,299,105   -   173,844   48,113,314  
Total assets 118,741,809   58,033,744   33,087,571   247,368   21,049,157   231,159,649  

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 49



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

18. INCOME TAXES

The reconciliation of the income tax provision computed at statutory rates to the reported income tax provision is as follows:

    2009     2008  
  $   $  
Combined federal a nd provincial income tax rate   30.00%     31.00%  
             
Income tax benefit computed at Canadian statutory rates   (924,010 )   2,189,914  
Foreign tax rates different from s tatutory rates   8,602     (127,363 )
Impact of change in ta x rates on future income taxes   836,147     -  
Non-deductible expenses   (424,678 )   (2,106,551 )
Change in valuation allowance   1,493,871     2,032,710  
Foreign exchange   2,409,644     1,050,000  
Difference between statutory and a ctual tax rates   232,498     (27,375 )
Other   (401,882 )   (1,091,881 )
    3,230,192     1,919,454  

Significant components of the Company's future tax assets and liabilities, after applying enacted corporate income tax rates, are as follows:

    2009     2008  
  $   $  
Future income tax assets            
   Net tax losses carried forward   19,453,298     16,446,519  
   Other assets/liabilities   3,235,061     1,511,108  
   Share issue costs   1,707,129     1,684,688  
   Capital losses   530,986     529,968  
   Valuation allowance   (6,175,094 )   (6,886,775 )
Net future income tax assets   18,751,380     13,285,508  
Future income tax liabilities            
   Excess of carrying value of mineral property assets over tax value (47,168,391 ) (43,975,595 )
Future income tax liabilities, net   (28,417,011 )   (30,690,087 )

The Company has approximately $13.0 million (2008 - $17.8 million) of non-capital losses that may be available for future tax purposes and will expire in the following years:

2025 $ 3,748,753
2026 $ 6,298,941
2027 $ 2,967,115

The Company has capital losses available for deduction against future capital gains of $4.1 million (2008 - $4.1 million) that may be available for tax purposes in Canada. These capital losses may be carried forward indefinitely. Management believes that uncertainty exists regarding the realization of these future tax assets and therefore a valuation allowance has been recorded.

In addition, subject to certain restrictions, the Company has tax pools of approximately $64.5 million (2008 - $47.6 million) available to offset future taxable income in Mexico.

19. 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 $753,657 (2008-$832,769).

50



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

20. CAPITAL LEASE OBLIGATIONS

In 2007 and 2008, the Company entered into lease commitments with a mining equipment supplier for $14.1 million (US$11.2 million) of equipment to be delivered during 2007 and 2008. The Company committed to pay 35% within 30 days of entering into the leases, 15% on arrival of the equipment, and the remaining 50% in quarterly payments over a period of 24 months from delivery, financed at 9% interest over the term of the lease. On March 13, 2009, the Company executed a restructuring agreement for the balance of $3.6 million (US$2.9 million) payable to the equipment lease vendor, to be paid over 24 monthly payments commencing February 1, 2009 with interest payable at 9% on the outstanding principal balance, secured by a guarantee from the parent company.

On January 12, 2009, the Company executed two additional financing arrangements with an equipment vendor, committing the Company to total payments of approximately $2.6 million (US$2.0 million) representing the purchase price plus interest with terms of 36 monthly lease payments of $48,460 (US$38,420) consisting of principal plus 12.5% interest on outstanding balances and 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 December 31, 2009:

  $US   $CA  
2010 Gross lease payments   2,127,454     2,235,960  
2011 Gross lease payments   651,155     684,364  
2012 Gross lease payments   132,549     139,309  
    2,911,158     3,059,633  
Less: interest   (239,769 )   (251,997 )
Total payments, net of interest   2,671,389     2,807,636  
Less: current portion   (2,035,540 )   (2,139,352 )
Capital Lease Obligation   635,849     668,284  
 
21. ASSET RETIREMENT OBLIGATIONS        
         
  Year ended   Year ended  
  December 31, 2009   December 31, 2008  
  $   $  
Balance, beginning of the year 5,304,369   2,290,313  
Effect of change i n estimates (877,834 ) 2,979,726  
Interest accretion 445,090   200,477  
Effect of translation of foreign currencies (535,537 ) (166,147 )
Balance, end of the year 4,336,088   5,304,369  

Asset retirement obligations allocated by mineral properties are as follows:

    Anticipated     2009     2008  
    Date   $   $  
La Encantada Silver Mine   2020     1,815,518     1,865,674  
La Parrilla Silver Mine   2025     998,293     1,609,602  
San Martin Silver Mine   2019     1,522,277     1,829,093  
          4,336,088     5,304,369  

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.

22. 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.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 51



FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

23. COMMITMENTS

The Company is obligated to make certain mining property option payments as described in Note 9, 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 December 31, 2009, the Company is committed to construction contracts of approximately $2.1 million (US$2.0 million) (2008 - $5.9 million or US$4.9 million) relating to the La Encantada Project which is currently in the final stage of completion.

As a result of the acquisition of Normabec, the Company is committed to make a US$1 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 amounting to $1.9 million (2008 - $0.7 million) to four officers in the event of a change of control of the Company.

24. NON-CASH FINANCING AND INVESTING ACTIVITIES

    2009     2008  
  $   $  
             
NON-CASH FINANCING AND INVESTING ACTIVITIES:            
Fair value of warrants upon completion of public offering   848,758     2,737,000  
Fair value of warrants upon completion of private placements   389,000     -  
Issuance of shares for debt settlement   2,741,260     -  
Issuance of shares for acquisition of Normabec   16,696,479     -  
Issuance of shares for First Silver Arrangement   -     9,009,660  
Transfer of contributed surplus to common shares for options exercised   29,125     363,990  
Assets acquired by capital lease   2,259,380     1,621,135  

25. SUBSEQUENT EVENTS

Subsequent to December 31, 2009:

(a)

A total of 50,000 options were exercised for proceeds of $92,000;

   
(b)

On January 2, 2010, 142,438 warrants exercisable at a price of $9.11 per share expired unexercised;

   
(c)

On January 8, 2010, 25,000 warrants were exercised at a price of $3.30 per share;

   
(d)

On February 1, 2010, 200,000 options exercisable at a price of $5.50 per share expired unexercised;

   
(e)

On February 2, 2010, 200,000 options were granted at a price of $3.56 per share expiring on February 2, 2013;

   
(f)

On March 19, 2010, 25,000 options were granted at a price of $3.15 per share expiring on March 19, 2013.

52



FIRST MAJESTIC SILVER CORP.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

MANAGEMENT’S DISCUSSION AND ANALYSIS

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.

FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 53



FIRST MAJESTIC SILVER CORP.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

2009 ANNUAL AND Q4 FINANCIAL PERFORMANCE AND HIGHLIGHTS

  • Consolidated gross revenue (prior to smelting, refining and metal deductions) for the year ended 2009 was $71.5 million compared to $56.1 million in 2008, an increase of $15.4 million or 27.5%.

       
  • Consolidated gross revenue (prior to smelting, refining and metal deductions) for the quarter ended December 31, 2009 (Q4) was $21,436,456 or $18.71 (US$17.72) per ounce compared to $11,712,165 or $14.15 (US$11.67) per ounce for the quarter ended December 31, 2008 for an increase of $9,724,291, or 83%. The improvement in revenues in the fourth quarter of 2009 is attributable to a 38% increase in equivalent silver ounces sold and a 32% increase in the average gross revenue per ounce realized. These improvements resulted in net revenue for the fourth quarter increasing from $9,106,605 in 2008 to $18,374,117 in 2009, an increase of 102%.

       
  • In 2009 the Company shipped (sold) 4,233,703 ounces of silver equivalent at an average price of $16.89 per ounce (US$14.79) compared to 3,590,202 ounces in 2008 at an average price of $15.63 per ounce (US$14.66), representing an increase of 18% in shipments.

       
  • Total production for 2009 was 4,337,103 ounces of silver equivalents consisting of 3,797,520 ounces of silver, 2,670 ounces of gold, 6,587,074 pounds of lead and 8,913 pounds of zinc. This compares to the 4,229,998 ounces of silver equivalents produced in 2008, which consisted of 3,654,698 ounces of silver, 1,661 ounces of gold, 7,457,707 pounds of lead and 425,710 pounds of zinc.

       
  • Net sales revenue (after smelting and refining charges and metals deductions) for 2009 was $59.5 million, an increase of 34.3% compared to $44.3 million for 2008. Smelting and refining charges and metal deductions decreased to 17% of gross revenue in 2009 compared to 21% of gross revenue in 2008. Average smelting charges for doré in 2009 were US$0.48 per equivalent silver ounce whereas for concentrates they were US$3.96 per equivalent silver ounce.

       
  • The Company generated net income for 2009 of $6.3 million, or earnings per common share (EPS) of $0.08 compared to a net loss in 2008 of $5.1 million or a loss per common share of $(0.07). Net income for 2009 was after deducting non-cash stock-based compensation expense of $3.3 million, a write-down of mineral properties of $2.6 million, a write-down of marketable securities totalling $0.4 million and an income tax recovery of $3.2 million. Neglecting the effect of write-downs, earnings per share in 2009 would have been $0.11 per share (this is a non-GAAP measure).

       
  • Net income for the quarter ended December 31, 2009 was $2,492,488 or $0.03 per common share compared to a net loss of $5,538,906 or $(0.08) per common share in the quarter ended December 31, 2008, for an increase of $8,031,394.

     

  • Direct cash costs per ounce of silver for 2009 decreased to US$5.61 per ounce of silver, compared to US$5.87 per ounce of silver for 2008. During 2009, the Company’s operations achieved operational efficiencies resulting in reductions in production costs per tonne and cash costs per ounce.

       
  • Direct cash costs per ounce of silver for Q4 of 2009 decreased to US$5.69 per ounce of silver, compared to US$6.37 per ounce of silver for Q4 of 2008.

       
  • Mine operating earnings for 2009 increased by 146% to $18.5 million, an increase of $11.0 million, compared to mine operating earnings of $7.5 million for 2008, due to an increase in sales volume from 3.6 million ounces of silver equivalent in 2008 to 4.2 million ounces in 2009, combined with an increase in sales revenue per ounce from $15.63 (US$14.66) in 2008 to $16.89 (US$14.79) in 2009.

       
  • Mine operating earnings increased by 818% to $8,092,993 for the quarter ended December 31, 2009 from a mine operating loss of $1,126,697 for the same quarter in the prior year. This was primarily due to the increase in net revenue.

       
  • The Company had operating income of $4.5 million for 2009 compared to an operating loss of $3.7 million for 2008, an increase of $8.2 million or 220%.

       
  • Operating income increased by $5,758,869 or 152% to $1,971,450 for the quarter ended December 31, 2009, from an operating loss of $3,787,419 for the quarter ended December 31, 2008, due to the increase in mine operating earnings.

       
  • During the fourth quarter of 2009, the new cyanidation process plant at the La Encantada Silver Mine was commissioned and the ramp up process commenced. By the beginning of the second quarter of 2010, this new plant is expected to achieve commercial production levels, reaching full capacity of 3,500 tonnes-per-day and producing at an annualized rate of over four million ounces by Q2 of 2010. Total capitalized construction in progress at La Encantada at December 31, 2009 consisted of $31.3 million (US$29.8 million) with a further $2.9 million (US$2.7 million) advanced to contractors for equipment.

    54



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

  • 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 from equity issuances, $4.3 million from 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.

       
  • During the year ended December 31, 2009, the Company invested $14.0 million in its mineral properties and a further $19.4 million in additions to plant and equipment on a cash basis. This compares to $24.5 million invested in its mineral properties and a further $14.9 million in additions to plant and equipment in the year ended December 31, 2008.

       
  • During 2009, the Company reduced current liabilities by $19.6 million. This was achieved by (i) placing $14.3 million in a lawyers trust pending the outcome of the Company’s action against a previous majority owner of First Silver, (ii) settling certain other current liabilities amounting to $2.7 million by the issuance of 1,191,852 common shares, and (iii) through additional reductions of accounts payable and accrued liabilities by $2.6 million.

       
  • In November 2009, First Majestic acquired Normabec Mining Resources Ltd. (“Normabec”) in an all-share transaction by way of plan of arrangement (the “Arrangement”). First Majestic acquired Normabec in exchange for the issuance directly to Normabec’s shareholders of 0.060425 First Majestic shares and 0.25 shares of Brionor Resources Inc., a newly formed entity, for each Normabec common share outstanding. Normabec’s primary asset is the Real de Catorce Silver Project which is located in the northern portion of San Luís Potosí State, Mexico. The results of operations of Normabec were consolidated into the operations of the Company effective November 14, 2009.

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

    Subsidiaries Mine and Mill Exploration Properties
    First Majestic Plata, S.A. de C.V. La Parrilla Silver Mine
    Del Toro Silver Mine
    La Parrilla properties
    Del Toro properties
    Minera El Pilón, S.A. de C.V. San Martin Silver Mine San Martin property
    Jalisco Group of Properties
    Minera La Encantada, S.A. de C.V. La Encantada Silver Mine La Encantada property
    Minera Real Bonanza, S.A. de C.V. Real de Catorce Silver Project Real de Catorce property
    Majestic Services, S.A. de C.V. (a labour services company) (services for all of the above) (services for all of the above)
    Servicios Minero-Metalurgicos e Industriales, S.A. de C.V. (inactive services company) (inactive services company)
    Corporación First Majestic, S.A. de C.V. (holding company for First Majestic Plata, Minera El Pilon, Minera La Encantada and Majestic Services) (holding company for First Majestic Plata, Minera El Pilon, Minera La Encantada and Majestic Services) (holding company for First Majestic Plata, Minera El Pilon, Minera La Encantada and Majestic Services)

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 55



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    MINING OPERATING RESULTS

    Quarter Ended December 31, CONSOLIDATED FIRST MAJESTIC
    RESULTS
       Year to Date December 31,
    2009 2008 2009 2008
    251,258 215,646 Ore processed/tonnes milled (4) 887,638 758,338
    235 207 Average silver grade (g/tonne) 215 219
    65% 65% Recovery (%) 64% 68%
    1,103,840 930,120 Silver ounces produced (4) 3,797,520 3,654,698
    701 403 Gold ounces produced (4) 2,670 1,661
    48,576 31,650 Equivalent ounces from gold (4) 189,419 100,496
    1,574,819 2,093,988 Pounds of lead produced (4) 6,587,074 7,457,707
    97,152 93,239 Equivalent ounces from lead (4) 349,294 450,423
    - 24,413 Pounds of zinc produced (4) 8,913 425,710
    - 1,403 Equivalent ounces from zinc (4) 870 24,381
    1,249,568 1,056,219 Total production - ounces silver equivalent (4) 4,337,103 4,229,998
    1,145,562 827,845 Ounces of silver equivalents sold (1) (4) 4,233,703 3,590,202
    $8.61 $8.71 US cash cost per ounce (2) (3) $8.49 $8.94
    $5.69 $6.37 Direct US cash cost per ounce (2) (3) $5.61 $5.87
    5,266 5,845 Underground development (m) 21,390 27,890
    1,031 4,194 Diamond drilling (m) 7,459 61,440
    $42.01 $37.57 Total US production cost per tonne (3) $37.29 $43.08

    Quarter Ended December 31, LA ENCANTADA
    RESULTS
       Year to Date December 31,
    2009 2008 2009 2008
    104,864 79,480 Ore processed/tonnes milled (4) 318,382 257,960
    305 281 Average silver grade (g/tonne) 276 283
    51% 59% Recovery (%) 50% 62%
    399,810 427,753 Silver ounces produced (4) 1,317,080 1,442,566
    5 - Gold ounces produced (4) 5 -
    321 - Equivalent ounces from gold (4) 321 -
    536,801 1,195,557 Pounds of lead produced (4) 2,545,339 3,312,869
    35,714 56,299 Equivalent ounces from lead (4) 129,259 193,675
    435,845 484,053 Total production - ounces of silver equivalent (4) 1,446,660 1,636,242
    363,364 450,063 Ounces of silver equivalents sold (4) 1,371,337 1,529,301
    $10.80 $6.13 US cash cost per ounce (2) (3) $10.20 $8.21
    $6.83 $3.82 Direct US cash cost per ounce (2) (3) $6.10 $3.59
    2,251 3,075 Underground development (m) 10,214 8,463
    - 2,107 Diamond drilling (m) 2,397 8,048
    $54.32 $32.98 Total US production cost per tonne (3) $45.59 $45.93

    (1)

    Includes (8,822) ounces in the fourth quarter ended December 31, 2009 and (14,727) ounces in the year ended December 31, 2009 (after adjustments for intercompany eliminations) sold as coins, ingots and bullion from Canadian operations and minesite transfers.

    (2)

    The Company reports non-GAAP measures which include Direct Costs Per Tonne, Direct Cash Cost per ounce of payable silver (prior to smelting charge), and smelting charges per ounce of silver in order to manage and evaluate operating performance at each of the Company’s mines. These measures are widely used in the silver mining industry as a benchmark for performance, but do not have a standardized meaning, and are not GAAP measures. See Reconciliation to GAAP on page 9.

    (3)

    Direct Cash Costs do not include smelting; production costs per tonne include smelter charges.

    (4)

    At December 31, 2009, the La Encantada mill expansion project had not achieved a commercial stage of production, therefore the net margin of $496,371 in connection with the sale of 54,277 silver equivalent ounces of precipitates during the pre-operating period was recorded as a reduction of construction in progress during the year. The tables above include the production from the mill expansion , however average silver grade, recovery, US cash cost per ounce, direct cash cost per ounce and total US production cost per tonne are based on production excluding pre-commercial stage production of 68,026 silver equivalent ounces.

    56



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    MINING OPERATING RESULTS

    Quarter Ended December 31, LA PARRILLA
    RESULTS
       Year to Date December 31,
    2009 2008 2009 2008
    75,475 66,395 Ore processed/tonnes milled 277,917 246,166
    222 206 Average silver grade (g/tonne) 214 234
    73% 70% Recovery (%) 71% 70%
    395,761 305,685 Silver ounces produced 1,367,742 1,291,210
    151 297 Gold ounces produced 645 864
    12,119 15,899 Equivalent ounces from gold 54,560 47,139
    1,038,018 897,031 Pounds of lead produced 4,041,735 3,979,046
    61,438 36,864 Equivalent ounces from lead 220,035 245,056
    - 24,414 Pounds of zinc produced 8,913 24,414
    - 1,403 Equivalent ounces from zinc 870 1,403
    469,318 359,851 Total production - ounces of silver equivalent 1,643,207 1,584,808
    478,121 228,661 Ounces of silver equivalents sold 1,648,020 1,282,340
    $7.61 $10.21 US cash cost per ounce (2) (3) $7.84 $8.47
    $3.82 $6.68 Direct US cash cost per ounce (1) (2) $4.26 $5.39
    2,047 1,557 Underground development (m) 7,774 10,457
    114 668 Diamond drilling (m) 2,682 37,944
    $39.91 $47.01 Total US production cost per tonne (2) $38.60 $44.42

    Quarter Ended December 31, SAN MARTIN
    RESULTS
    Year to Date December 31,
    2009 2008 2009 2008
    70,919 69,771 Ore processed/tonnes milled 291,339 254,211
    184 124 Average silver grade (g/tonne) 157 141
    73% 71% Recovery (%) 76% 80%
    308,269 196,681 Silver ounces produced 1,112,698 920,921
    545 106 Gold ounces produced 2,020 797
    36,136 15,751 Equivalent ounces from gold 134,538 53,357
    - 1,399 Pounds of lead produced - 165,792
    - 75 Equivalent ounces from lead - 11,691
    - - Pounds of zinc produced - 401,297
    - - Equivalent ounces from zinc - 22,979
    344,405 212,315 Total production - ounces of silver equivalent 1,247,236 1,008,948
    312,899 149,121 Ounces of silver equivalents sold 1,229,073 778,561
    $7.53 $12.00 US cash cost per ounce (1) (2) $7.35 $10.74
    $6.85 $11.44 Direct US cash cost per ounce (1) (2) $6.71 $10.12
    968 1,214 Underground development (m) 3,402 8,971
    917 1,419 Diamond drilling (m) 2,380 15,448
    $32.73 $33.81 Total US production cost per tonne (2) $28.06 $38.90

    (1)

    The Company reports non-GAAP measures which include Direct Costs Per Tonne, Direct Cash Cost per ounce of payable silver (prior to smelting charge) and smelting charges per ounce of silver in order to manage and evaluate operating performance at each of the Company’s mines. These measures are widely used in the silver mining industry as a benchmark for performance, but do not have a standardized meaning, and are not GAAP measures. See Reconciliation to GAAP on page 9.

    (2)

    Direct Cash Costs do not include smelting; production costs per tonne include smelter charges.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 57



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

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


    For the Years Ended
    December 31, 2009 December 31, 2008
        San Martin La Parrilla La Encantada Total San Martin La Parrilla La Encantada Total
    COST OF SALES US$ 10,115,010 10,602,682 9,298,262 30,015,954 9,517,664 10,550,960 8,087,833 28,156,457
    ADD: THIRD PARTY SMELTING & REFINING US$ 715,834 4,897,387 5,126,869 10,740,090 571,209 3,977,917 6,667,136 11,216,262
    DEDUCT: BYPRODUCT CREDITS US$ (1,852,368) (4,121,098) (1,499,708) (7,473,174) (1,094,506) (4,339,639) (2,613,425) (8,047,570)
    ADD (DEDUCT): ROYALTIES US$ - (127,483) - (127,483) - (49,157) - (49,157)
    ADD (DEDUCT): PROFIT SHARING US$ - - (59,120) (59,120) - - - -
    INVENTORY CHANGES US$ (676,545) (160,757) (89,537) (926,839) 893,499 466,693 (293,719) 1,066,473
    OTHER US$ (125,755) (361,991) (31,393) (519,139) - 328,123 - 328,123
    TOTAL CASH COSTS (A) US$ 8,176,176 10,728,740 12,745,373 31,650,289 9,887,866 10,934,897 11,847,825 32,670,588
    DEDUCT: THIRD PARTY SMELTING US$ (715,834) (4,897,387) (5,126,869) (10,740,090) (571,209) (3,977,917) (6,667,136)  (11,216,262)
    DIRECT MINING EXPENSES CASH COST (B) US$ 7,460,342 5,831,353 7,618,504 20,910,199 9,316,657 6,956,980 5,180,689 21,454,326
                       
    TONNES PRODUCED (Note 1) TONNES 291,339 277,917 279,536 848,792 254,211 246,167 257,960 758,338
    OUNCES OF SILVER PRODUCED (C) (Note 1) OZ 1,112,698 1,367,742 1,249,377 3,729,817 920,921 1,291,211 1,442,566 3,654,699
    OUNCES OF SILVER EQ PRODUCED (Note 1) OZ EQ 134,538 275,465 129,257 539,260 88,027 302,203 199,626 589,856
    TOTAL OZ OF SILVER EQ PRODUCED (Note 1) OZ EQ 1,247,236 1,643,207 1,378,634 4,269,077 1,008,948 1,593,414 1,642,192 4,244,555
                       
    CASH COST PER OUNCE PRODUCED (A/C) US$/OZ 7.35 7.84 10.20 8.49 10.74 8.47 8.21 8.94
    SMELTING/REFINING/TRANSPORTATION COST PER OUNCE US$/OZ (0.64) (3.58) (4.10) (2.88) (0.62) (3.08) (4.62) (3.07)
    DIRECT MINING EXPENSES CASH COST (B/C) US$/OZ 6.71 4.26 6.10 5.61 10.12 5.39 3.59 5.87
                       
    MINING $/Tonne 11.62 13.88 14.08 13.17 17.88 18.20 11.03 15.65
    MILLING $/Tonne 13.22 15.67 9.98 12.96 12.93 21.30 7.16 13.69
    INDIRECT $/Tonne 5.82 4.76 6.95 5.84 9.88 5.43 11.14 8.86
    DIRECT CASH COST $/Tonne 30.66 34.31 31.01 31.97 40.69 44.93 29.33 38.20
    SELLING AND TRANSPORT COSTS $/Tonne 1.30 1.50 1.61 1.47 0.31 1.01 0.91 0.74
    SMELTING AND REFINING COSTS $/Tonne 2.46 17.62 18.34 12.65 2.25 16.16 25.85 14.79
    BY PRODUCT CREDITS $/Tonne (6.36) (14.83) (5.37) (8.80) (4.31) (17.63) (10.13) (10.61)
    DIRECT COST PER TONNE $/Tonne 28.06 38.60 45.59 37.29 38.90 44.42 45.93 43.08
                       
    MINING $/Oz. 3.04 2.82 3.15 3.00 4.94 3.47 1.97 3.25
    MILLING $/Oz. 3.46 3.19 2.23 2.95 3.57 4.06 1.28 2.84
    INDIRECT $/Oz. 1.52 0.97 1.55 1.33 2.73 1.04 1.99 1.84
    SELLING AND TRANSPORT COSTS $/Oz. 0.34 0.31 0.36 0.33 0.09 0.19 0.16 0.15
    SMELTING AND REFINING COSTS $/Oz. 0.64 3.58 4.10 2.88 0.62 3.08 4.62 3.07
    BY PRODUCT CREDITS $/Oz. (1.66) (3.01) (1.20) (2.00) (1.19) (3.36) (1.81) (2.20)
    CASH COST PER OUNCE $/Oz. 7.35 7.84 10.20 8.49 10.74 8.47 8.21 8.94
    SMELTING AND REFINING COSTS $/Oz. (0.64) (3.58) (4.10) (2.88) (0.62) (3.08) (4.62) (3.07)
    DIRECT CASH COST $/Oz. 6.71 4.26 6.10 5.61 10.12 5.39 3.59 5.87

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

    58



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

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


    For the Three Months Ended
    December 31, 2009 December 31, 2008
        San Martin La Parrilla La Encantada Total San Martin La Parrilla La Encantada Total
    COST OF SALES US$ 2,386,293 2,873,412 2,774,725 8,034,430 2,130,065 2,408,276 2,046,037 6,584,377
    ADD: THIRD PARTY SMELTING & REFINING US$ 209,716 1,499,186 1,319,294 3,028,196 110,772 1,080,074 988,885 2,179,732
    DEDUCT: BYPRODUCT CREDITS US$ (502,223) (1,313,641) (371,932) (2,187,796) (187,427) (673,849) (589,497) (1,450,773)
    ADD (DEDUCT): ROYALTIES US$ - (41,893) - (41,893) - - - -
    ADD (DEDUCT): PROFIT SHARING US$ 53,874 - - 53,874 - - - -
    INVENTORY CHANGES US$ 172,909 (4,217) (135,669) 33,023 305,899 (196,454) 176,063 285,508
    OTHER US$ 896 (288) - 608 - 503,377 - 503,377
    TOTAL CASH COSTS (A) US$ 2,321,465 3,012,559 3,586,418 8,920,442 2,359,309 3,121,425 2,621,488 8,102,221
    DEDUCT: THIRD PARTY SMELTING US$ (209,716) (1,499,186) (1,319,294) (3,028,196) (110,772) (1,080,074) (988,885) (2,179,732)
    DIRECT MINING CASH COSTS (B) US$ 2,111,749 1,513,373 2,267,124 5,892,246 2,248,537 2,041,351 1,632,603 5,922,489
                       
    TONNES PRODUCED (Note 1) TONNES 70,919 75,475 66,018 212,412 69,771 66,396 79,479 215,646
    OUNCES OF SILVER PRODUCED (C) (Note1) OZ 308,269 395,761 332,107 1,036,137 196,682 305,685 427,753 930,121
    OUNCES OF SILVER EQ PRODUCED (Note 1) OZ EQ 36,136 73,557 35,712 145,405 15,633 62,771 62,250 140,654
    TOTAL OZ OF SILVER EQ PRODUCED (Note 1) OZ EQ 344,405 469,318 367,819 1,181,542 212,315 368,456 490,003 1,070,774
                       
    CASH COST PER OUNCE PRODUCED (A/C) US$/OZ 7.53 7.61 10.80 8.61 12.00 10.21 6.13 8.71
    SMELTING/REFINING/TRANSPORTATION COST PER OUNCE US$/OZ (0.68) (3.79) (3.97) (2.92) (0.56) (3.53) (2.31) (2.34)
    DIRECT MINING EXPENSES CASH COST (B/C) US$/OZ 6.85 3.82 6.83 5.69 11.44 6.68 3.82 6.37
                       
    MINING $/Tonne 14.32 15.22 18.15 15.83 13.18 17.96 11.69 14.10
    MILLING $/Tonne 14.38 15.75 10.20 13.57 13.84 18.50 9.77 13.78
    INDIRECT $/Tonne 7.17 5.01 9.94 7.27 7.91 3.34 5.91 5.77
    DIRECT CASH COST $/Tonne 35.87 35.98 38.29 36.67 34.93 39.80 27.37 33.65
    SELLING AND TRANSPORT COSTS $/Tonne 0.98 1.47 1.68 1.38 (0.02) 1.09 0.58 0.54
    SMELTING AND REFINING COSTS $/Tonne 2.96 19.86 19.98 14.26 1.59 16.27 12.44 10.11
    BY PRODUCT CREDITS $/Tonne (7.08) (17.40) (5.63) (10.30) (2.69) (10.15) (7.42) (6.73)
    DIRECT COST PER TONNE $/Tonne 32.73 39.91 54.32 42.01 33.81 47.01 32.98 37.57
                       
    MINING $/Oz. 3.30 2.90 3.61 3.25 4.68 3.90 2.17 3.27
    MILLING $/Oz. 3.31 3.00 2.03 2.78 4.91 4.02 1.82 3.19
    INDIRECT $/Oz. 1.65 0.96 1.98 1.49 2.81 0.73 1.10 1.34
    SELLING AND TRANSPORT COSTS $/Oz. 0.23 0.28 0.33 0.28 (0.01) 0.24 0.11 0.13
    SMELTING AND REFINING COSTS $/Oz. 0.68 3.79 3.97 2.92 0.56 3.53 2.31 2.34
    BY PRODUCT CREDITS $/Oz. (1.63) (3.32) (1.12) (2.11) (0.95) (2.20) (1.38) (1.56)
    CASH COST PER OUNCE $/Oz. 7.53 7.61 10.80 8.61 12.00 10.21 6.13 8.71
    SMELTING AND REFINING COSTS $/Oz. (0.68) (3.79) (3.97) (2.92) (0.56) (3.53) (2.31) (2.34)
    DIRECT CASH COSTS $/Oz. 6.85 3.82 6.83 5.69 11.44 6.68 3.82 6.37

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

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 59



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

          Year to date December 31, 2009  
                 
    INVENTORY RECONCILIATION (See Note 1):   San Martin La Parrilla La Encantada Vancouver Total
    Opening stockpile inventory OZ EQ 147,932 193,165 88,555 - 429,652
    Reduction of stockpile OZ EQ (140,489) (76,626) (48,842) - (265,957)
    Ending stockpile inventory OZ EQ 7,443 116,539 39,713 - 163,695
                 
    Opening in process inventory OZ EQ 13,992 8,524 - - 22,516
    Inventory adjustments OZ EQ 7,249 13,997 50,077 - 71,323
    Ending in process inventory OZ EQ 21,241 22,521 50,077 - 93,839
                 
    Opening finished goods inventory OZ EQ 33,276 20,368 48,111 - 101,755
    Production - silver equivalent ounces OZ EQ 1,247,236 1,643,205 1,378,640 - 4,269,081
    Shipments - silver equivalent ounces OZ EQ (1,229,073) (1,648,020) (1,371,337) - (4,248,430)
    Inventory adjustments OZ EQ (26,190) (3,513) (55,414) - (85,117)
    Ending finished goods inventory OZ EQ 25,249 12,040 - - 37,289
                 
    Total ending inventory before transfers OZ EQ 343,581 151,100 89,790 - 584,471
    Opening inventory of coins, ingots and bullion OZ EQ - - - 42,453 42,453
    Transfers to coins, ingots and bullion inventory OZ EQ (289,648) - - 289,648 -
    Adjustment due to refining, smelting and other OZ EQ - - - (10,385) (10,385)
    Sales of coins, ingots and bullion OZ EQ - - - (284,836) (284,836)
    Total inventory, all stages and products OZ EQ 53,933 151,100 89,790 36,880 331,703
                 
    Value of ending inventory - (Note 1) CDN$ 369,158 461,781 364,436 273,262 1,468,637
    Value of ending inventory - Cdn$ per oz CDN$ 6.84 3.06 4.06 7.41 4.43
    Average exchange rate - Q4 2009   1.0563 1.0563 1.0563 1.0563 1.0563
    Value of ending inventory - US$ per oz US$ 6.48 2.89 3.84 7.01 4.19
                 
                 
          Three months ended December 31, 2009  
                 
    INVENTORY RECONCILIATION (See Note 1):   San Martin La Parrilla La Encantada Vancouver Total
    Opening stockpile inventory OZ EQ 12,535 88,367 33,499 - 134,401
    Increase of stockpile OZ EQ (5,092) 28,172 6,214 - 29,294
    Ending stockpile inventory OZ EQ 7,443 116,539 39,713 - 163,695
                 
    Opening in process inventory OZ EQ 13,370 11,661 - - 25,031
    Inventory adjustments OZ EQ 7,871 10,860 50,077 - 68,808
    Ending in process inventory OZ EQ 21,241 22,521 50,077 - 93,839
                 
    Opening finished goods inventory OZ EQ 6,867 36,125 44,292 - 87,284
    Production - silver equivalent ounces OZ EQ 344,405 469,318 367,820 - 1,181,543
    Shipments - silver equivalent ounces OZ EQ (312,899) (478,121) (363,364) - (1,154,384)
    Inventory adjustments OZ EQ (13,124) (15,282) (48,748) - (77,154)
    Ending finished goods inventory OZ EQ 25,249 12,040 - - 37,289
                 
    Total ending inventory before transfers OZ EQ 133,074 151,100 89,790 - 373,964
    Opening inventory of coins, ingots and bullion OZ EQ - - - 37,785 37,785
    Transfers to coins, ingots and bullion inventory OZ EQ (79,141) - - 79,141 -
    Adjustment due to refining, smelting and other OZ EQ - - - (4,785) (4,785)
    Sales of coins, ingots and bullion OZ EQ - - - (75,261) (75,261)
    Total inventory, all stages and products OZ EQ 53,933 151,100 89,790 36,880 331,703
                 
    Value of ending inventory - (Note 1) CDN$ 369,158 461,781 364,436 273,262 1,468,637
    Value of ending inventory - Cdn$ per oz CDN$ 6.84 3.06 4.06 7.41 4.43
    Average exchange rate - Q4 2009   1.0563 1.0563 1.0563 1.0563 1.0563
    Value of ending inventory - US$ per oz US$ 6.48 2.89 3.84 7.01 4.19

    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.

    60



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

          Year to Date December 31, 2009  
                 
    Cost of Sales Reconciliation   San Martin La Parrilla La Encantada Vancouver Total
    Cash Cost US$ 8,176,176 10,728,740 12,745,372 - 31,650,288
    Inventory changes US$ 676,545 160,757 89,537 - 926,839
    Byproduct credits US$ 1,852,368 4,121,098 1,499,708 - 7,473,174
    Smelting and refining US$ (715,834) (4,897,387) (5,126,869) - (10,740,090)
    Other US$ 125,755 489,474 90,514 - 705,743
    Cost of sales - Calculated US$ 10,115,010 10,602,682 9,298,262 - 30,015,954
    Average CDN/US Exchange Rate   0.87256 0.88926 0.88359 - 0.88182
    Booked Cost of Sales CDN$ 11,592,357 11,923,081 10,523,284 - 34,038,722
    Vancouver Cost of Sales (See Note 1) CDN$ - - - 313,131 313,131
    Total Cost of Sales as Reported CDN$ 11,592,357 11,923,081 10,523,284 313,131 34,351,853
                 
           Three months ended December 31, 2009  
                 
    Cost of Sales Reconciliation   San Martin La Parrilla La Encantada Vancouver Total
    Cash Cost US$ 2,321,465 3,012,558 3,586,418 - 8,920,441
    Inventory changes US$ (172,909) 4,217 135,669 - (33,023)
    Byproduct credits US$ 502,223 1,313,641 371,932 - 2,187,796
    Smelting and refining US$ (209,716) (1,499,186) (1,319,294) - (3,028,196)
    Other US$ (54,770) 42,182 - - (12,588)
    Cost of sales - Calculated US$ 2,386,293 2,873,412 2,774,725 - 8,034,430
    Average CDN/US Exchange Rate   0.92751 0.95452 0.94019 - 0.94142
    Booked Cost of Sales CDN$ 2,572,798 3,010,309 2,951,242 - 8,534,349
    Vancouver Cost of Sales (See Note 1) CDN$ - - - 4,436 4,436
    Total Cost of Sales as Reported CDN$ 2,572,798 3,010,309 2,951,242 4,436 8,538,785

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 61



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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.

    62



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 63



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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

      Year ended   Year ended   Year ended  
      December 31   December 31   December 31  
      2009   2008   2007  
      $   $   $  
    Revenue (1) 59,510,669   44,324,887   42,924,920  
    Mine operating earnings (2) 18,460,952   7,501,632   7,007,776  
    Net income (loss) (3) 6,310,225   (5,144,784 ) (7,230,122 )
    Earnings (loss) per share - basic 0.08   (0.07 ) (0.13 )
    Earnings (loss) per share - diluted 0.07   (0.07 ) (0.13 )
    Total assets (4) 251,575,252   231,159,649   185,002,851  
    Total long term liabilities 37,388,527   38,725,621   36,591,521  

    (1)

    During the year ended December 31, 2009, revenue increased by $15.2 million or 34% over 2008 due to increased production at all the mines, resulting in an 18% increase in the equivalent ounces of silver sold, reductions in smelting and refining charges and metal deductions that reduced these charges from 21% of gross revenue to 17% of gross revenue and a 7% increase in the average USD/CAD exchange rate. During the year ended December 31, 2008, revenues increased by $1.4 million over 2007 due to the ramping up of production at the La Parrilla and La Encantada Silver Mines.


     
  • La Parrilla Silver Mine – During the year ended December 31, 2009, a total 277,917 tonnes of ore were processed with an average head grade of 214 g/t of silver resulting in a total of 1,643,207 equivalent ounces of silver produced and 1,648,020 ounces of silver equivalent shipped. During the year ended December 31, 2008, a total of 246,166 tonnes of ore were processed with an average head grade of 234 g/t of silver resulting in a total of 1,584,808 equivalent ounces of silver produced and 1,282,340 ounces of silver equivalent shipped. During the year ended December 31, 2007, a total of 179,411 tonnes of ore were processed with an average head grade of 204 g/t of silver resulting in a total of 1,000,823 equivalent ounces of silver produced.

         
     
  • San Martin Silver Mine – During the year ended December 31, 2009, a total of 291,339 tonnes of ore were processed with an average head grade of 157 g/t of silver resulting in a total of 1,247,236 equivalent ounces of silver produced and 1,229,073 ounces of silver equivalents shipped. For the year ended December 31, 2008, a total of 254,211 tonnes of ore was processed with an average grade of 141 g/t of silver resulting in 1,008,948 ounces of silver equivalents produced, and 778,561 ounces of silver equivalents shipped. The San Martin mine and mill, over the twelve month period ended December 31, 2007, processed 239,796 tonnes of ore with an average grade of 171 g/t of silver resulting in 1,217,065 equivalent ounces of silver.

    64



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

  • La Encantada Silver Mine – During the year ended December 31, 2009, 318,382 tonnes of ore were processed with an average head grade of 276 g/t of silver resulting in a total of 1,446,660 equivalent ounces of silver produced and 1,371,337 ounces of silver equivalents shipped. During the year ended December 31, 2008, 1,636,242 equivalent ounces of silver were produced and 1,529,301 ounces of silver equivalent were shipped, compared to 1,366,377 equivalent ounces of silver produced and 1,272,810 equivalent ounces of silver shipped for the year 2007.

         
    (2)

    Mine operating earnings for the year ended December 31, 2009 increased by $11.0 million or 146% due to an increase of 643,501 equivalent silver ounces sold in 2009 compared to 2008. A $15.2 million increase in net revenue was partially off set by a $3.9 million increase in cost of sales. Mine operating earnings for the year ended December 31, 2008 was $7,501,632, an increase of 7% over the $7,007,776 of mine operating earnings for the year ended December 31, 2007 and is primarily due to the increase of 128,642 equivalent silver ounces sold in 2008 compared to 2007.

         
    (3)

    Net income or losses in these periods included non-cash stock based compensation expenses of $3,302,780 for the year ended December 31, 2009 compared to $3,680,111 for the year ended December 31, 2008 and $3,865,689 for the year ended December 31, 2007. During the year ended December 31, 2009, management elected not to proceed with the acquisition of the Cuitaboca Silver Project and accordingly, the investment totalling $2,589,824 was written off. Also during 2009, included in net income was a write-down of marketable securities in the amount of $390,467. There were no such write-downs during the years ended December 31, 2008 and 2007.

         

    There was a net income tax recovery of $3,230,192 in the year ended December 31, 2009 compared to an income tax recovery of $1,919,454 in the year ended December 31, 2008 and a tax expense of $1,384,647 in the year ended December 31, 2007, attributed primarily to increases in future income tax benefits as well as a reduction of non-allowable tax deductions in 2009 and 2008.

         
    (4)

    During the year ended December 31, 2009, the $20.4 million increase in total assets consisted primarily of approximately $18.3 million increase in plant and equipment and a $13.7 million increase in mining interests, net of depreciation, depletion and translation adjustments, both of which were offset by a $11.5 million reduction of cash. During the year ended December 31, 2008, the $46.2 million increase in total assets consisted primarily of approximately $4.6 million increase in cash and cash equivalents and $38.3 million on mining interests and plant and equipment, net of depletion, depreciation and translation adjustments.

         

    The Company has not paid any dividends since incorporation and it presently has no plans to pay dividends.

    RESULTS OF OPERATIONS

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

      For the Quarter Ended  
      December 31, 2009     December 31, 2008  
      $     $  
    Gross Revenue 21,436,456     11,712,165 (1)
    Net Revenue 18,374,117     9,106,605 (2)
    Cost of sales 8,538,785     8,294,803 (3)
    Amortization and depreciation 915,157     1,049,767  
    Depletion 720,702     825,185 (4)
    Accretion of reclamation obligation 106,480     63,547  
    Mine operating earnings 8,092,993     (1,126,697) (5)
    General and administrative 2,432,333     1,795,305 (6)
    Stock-based compensation 1,099,386     865,417 (7)
    Write-down of mineral properties 2,589,824     - (8)
      6,121,543     2,660,722  
    Operating income (loss) 1,971,450     (3,787,419) (9)
    Interest and other expenses (999,683)     (583,430) (10)
    Investment and other income 531,763     67,363 (11)
    Write-down of marketable securities (390,467)     - (12)
    Foreign exchange (loss) gain 523,141     (3,750,504) (13)
    Income (loss) before taxes 1,636,204     (8,053,990)  
    Income tax (recovery) - current (360,124)     17,742  
    Income tax (recovery) - future (496,160)     (2,532,826)  
    Income tax (recovery) expense (856,284)     (2,515,084) (14)
    NET INCOME (LOSS) FOR THE QUARTER 2,492,488     (5,538,906) (15)
    EARNINGS (LOSS) PER SHARE - BASIC 0.03     (0.08)  

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 65



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    1.

    Consolidated gross revenue (prior to smelting and refining and metal deductions) for the quarter ended December 31, 2009 was $21,436,456 or $18.71 (US$17.72) per ounce compared to $11,712,165 or $14.15 (US$11.67) per ounce for the quarter ended December 31, 2008 for an increase of $9,724,291, or 83%. The increase in the fourth quarter of 2009 is attributable to a 38% increase in equivalent silver ounces sold and a 32% increase in the average gross revenue per ounce realized.

      
    2.

    Net revenue for the three months ended December 31, 2009 increased by $9,267,512 or 102% to $18,374,117, from $9,106,605 in the fourth quarter of 2008, due to the same increases that affected consolidated gross revenue in the fourth quarter of 2009. In addition, lower smelting and refining charges per ounce contributed to the increase in net revenue in the fourth quarter of 2009.

      
    3.

    Cost of sales increased by $243,982 or 3%, to $8,538,785 in the fourth quarter of 2009 from $8,294,803 in the same quarter of 2008. This modest increase in cost of sales was accomplished while increasing the equivalent silver ounces sold by 38% from the quarter ended December 31, 2008. In the fourth quarter of 2009, the Company processed higher grade ore and achieved operational efficiencies including reductions in production costs per tonne and cash costs per ounce.

      
    4.

    Depletion decreased by $104,483 or 13%, to $720,702 in the fourth quarter of December 2009 from $825,185 in the same quarter of 2008, due to an increase in production from areas outside of reserves at the San Martin Silver Mine.

      
    5.

    Mine operating earnings increased by $9,219,690 or 818% to $8,092,993 for the quarter ended December 31, 2009 from a mine operating loss of $1,126,697 for the same quarter in the prior year. This is primarily due to the $9,267,512 increase in net revenue.

      
    6.

    General and administrative expenses increased by $637,028 or 35% compared to the prior year primarily due to increases in office and other expenses of $205,700, salaries and benefits of $152,636 and legal expenses of $116,199.

      
    7.

    Stock-based compensation increased by $233,969 or 27% due to a higher number of new option grants in the fourth quarter of 2009.

      
    8.

    During the quarter ended December 31, 2009, management elected not to proceed with the acquisition of the Cuitaboca Silver Project and accordingly, the investment totalling $2,589,824 was written off. There was no such write-down in the fourth quarter of 2008.

      
    9.

    Operating income increased by $5,758,869 or 152% to $1,971,450 for the quarter ended December 31, 2009, from an operating loss of $3,787,419 for the quarter ended December 31, 2008, due to the increase in mine operating earnings.

      
    10.

    During the quarter ended December 31, 2009, interest and other expenses included a one-time expense of $484,487 for legal and professional fees associated with a transaction that did not proceed. There was no such expense in the quarter ended December 31, 2008.

      
    11.

    During the quarter ended December 31, 2009, investment and other income included $445,920 for realized gains on silver futures while this gain was $81,307 in the quarter ended December 31, 2008.

      
    12.

    During the quarter ended December 31, 2009, management determined that the value of certain investments in marketable securities were permanently impaired and $390,467 of unrealized losses were written down. There was no such write-down in the fourth quarter of 2008.

      
    13.

    The Company experienced a foreign exchange gain of $523,141 in the quarter ended December 31, 2009 compared to a foreign exchange loss of $3,750,504 in the quarter ended December 31, 2008 due to the devaluation of net monetary assets denominated in U.S. dollars related to a weakening of the U.S. dollar compared to the Canadian dollar, and a weakening of the Mexican peso relative to the Canadian dollar.

      
    14.

    During the quarter ended December 31, 2009, the Company recorded an income tax recovery of $856,284 compared to a recovery of $2,515,084 in the quarter ended December 31, 2008, and this is attributed to the recovery of future income taxes arising from the reversal of temporary timing differences and additional tax loss carryforwards compared to 2008.

      
    15.

    As a result of the foregoing, net income for the quarter ended December 31, 2009 was $2,492,488 or $0.03 per common share compared to a net loss of $5,538,906 or $0.08 per common share in the quarter ended December 31, 2008, for an increase of $8,031,394.

    66



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

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

      For the Year Ended  
      December 31, 2009     December 31, 2008  
      $     $  
    Gross Revenue 71,526,075     56,102,459 (1)
    Net Revenue 59,510,669     44,324,887 (2)
    Cost of sales 34,351,853     30,419,415 (3)
    Amortization and depreciation 3,504,065     3,169,226 (4)
    Depletion 2,748,709     3,034,137 (5)
    Accretion of reclamation obligation 445,090     200,477 (6)
    Mine operating earnings 18,460,952     7,501,632  
    General and administrative 8,089,087     7,549,079 (7)
    Stock-based compensation 3,302,780     3,680,111 (8)
    Write-down mineral properties 2,589,824     - (9)
      13,981,691     11,229,190  
    Operating income 4,479,261     (3,727,558) (10)
    Interest and other expenses (2,101,862)     (1,372,768) (11)
    Investment and other income 1,129,527     1,180,742  
    Write-down marketable securities (390,467)     -  
    Foreign exchange loss (36,426)     (3,144,654) (12)
    Income (loss) before taxes 3,080,033     (7,064,238)  
    Income tax - current 85,786     136,533  
    Income tax (recovery) - future (3,315,978)     (2,055,987)  
    Income tax (recovery) expense (3,230,192)     (1,919,454) (13)
    NET INCOME (LOSS) FOR THE YEAR 6,310,225     (5,144,784) (14)
    EARNINGS (LOSS) PER SHARE - BASIC 0.08     (0.07)  

    1.

    Gross revenue (prior to smelting and refining and metal deductions) for the year ended December 31, 2009 was $71,526,075 compared to $56,102,459 for the year ended December 31, 2008 for an increase of $15.4 million or 27%. Contributing to this increase was an 18% increase in silver equivalent ounces sold, and a 8% increase in the average Canadian price per ounce of silver. Total equivalent ounces of silver sold for 2009, was 4,233,703 ounces whereas for 2008, the total equivalent ounces of silver sold was 3,590,202 ounces, for an increase of 643,501 equivalent ounces of silver. The average silver price realized in 2009 was $16.89 (US$14.79) while the average silver price realized in 2008 was $15.63 (US$14.66), due to a 7% increase in the average CAD/USD exchange rate for 2009, compared to 2008.

       
    2.

    Net revenue for the year ended December 31, 2009 increased by $15.2 million or 34%, from $44,324,887 in the year ended December 31, 2008 to $59,510,669 in the year ended December 31, 2009 due to the same increases that affected consolidated gross revenue in 2009. Net revenue in 2009 also included the incremental revenue of $454,719 from the sales of coins, ingots and bullion to consumers and individual retail investors over the Company’s website.

       
    3.

    Cost of sales increased by $3.9 million or 13% from $30.4 million to $34.4 million for the year ended December 31, 2009 due to the 18% increase in the equivalent ounces of silver sold.

       
    4.

    Amortization and depreciation increased by $334,839 or 11%, to $3,504,065 for the year ended December 31, 2009 from $3,169,226 for the year ended December 31, 2008, due to the higher amount of depreciable assets in the current year including assets acquired by capital lease in the fourth quarter of 2008 and in 2009.

       
    5.

    Depletion decreased by $285,428 or 9% to $2,748,709 in the year ended December 31, 2009 compared to $3,034,137 for the year ended December 31, 2008 and is primarily related to the San Martin mine as less tonnage was extracted from re- serves, and more tonnage was extracted from areas outside of reserves.

       
    6.

    Accretion of reclamation obligations increased by $244,613, from $200,477 in the year ended December 31, 2008 to $445,090 in the year ended December 31, 2009, due to the updated cost estimates for reclamation activities as determined in late 2008.

       
    7.

    General and administrative expenses increased by $540,008 or 7% primarily due to increases of $315,977 in legal expenses and $230,010 in salaries and benefits.

       
    8.

    Stock-based compensation decreased by $377,331 or 10% due to fewer new options granted and fewer options vesting in the year ended December 31, 2009.

       
    9.

    During the year ended December 31, 2009, management elected not to proceed with the acquisition of the Cuitaboca Silver Project and accordingly, the investment totalling $2,589,824 was written off. There was no such write-down in 2008.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 67



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    10.

    Operating income increased by $8,206,819 or 220%, from an operating loss of $3,727,558 for the year ended December 31, 2008 to operating income of $4,479,261 for the year ended December 31, 2009. This can be directly attributable to the $10,959,320 increase in mine operating earnings.

       
    11.

    Interest and other expenses increased by $729,094 or 53% to $2,101,862 in the year ended December 31, 2009 compared to $1,372,768 in the year ended December 31, 2008 due to a one-time expense of $484,487 for legal and professional fees associated with a transaction that did not proceed as well as additional interest on capital leases, interest on outstanding property payments relating to the Quebradillas Mine at La Parrilla, interest on debt facilities in place in 2009 and financing cost relating to advance payments on silver shipments. During the year ended December 31, 2009, interest and other expenses included a one-time expense of $484,487 for legal and professional fees associated with a transaction that did not proceed. There was no such expense in 2008.

       
    12.

    There was a foreign exchange loss of $36,426 for the year ended December 31, 2009, compared to a loss of $3,144,654 for the year ended December 31, 2008, due to the devaluation of net monetary assets denominated in U.S. dollars related to a weakening of the U.S. dollar compared to the Canadian dollar, and a weakening of the Mexican peso relative to the Canadian dollar.

       
    13.

    During the year ended December 31, 2009, the Company recorded an income tax recovery of $3,230,192 compared to $1,919,454 in the year ended December 31, 2008. This is attributed to the recovery of future income taxes arising from the reversal of temporary timing differences and additional tax loss carryforwards compared to 2008. Included in the current recovery is a Canadian dollar equivalent of $542,906 for the adjusted tax deductibility of energy expenses which has increased the tax loss carryforwards.

       
    14.

    As a result of the foregoing, net income for the year ended December 31, 2009 was $6,310,225 or $0.08 per common share (basic) compared to net loss of $5,144,784 or ($0.07) per common share for the year ended December 31, 2008, for an increase of $11.5 million.

    SUMMARY OF QUARTERLY RESULTS

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

          Net income Basic and diluted    
        Net sales (loss) after net income (loss) Stock based  
        revenues taxes per common share compensation (1)  
      Quarter $ $ $ $ Note
    Year ended December 31, 2009 Q4 18,374,117 2,492,488 0.03 1,099,386 2
      Q3 13,724,803 1,841,623 0.02 505,847 3
      Q2 13,024,877 1,036,416 0.01 800,808 4
      Q1 14,386,872 939,698 0.01 896,739 5
    Year ended December 31, 2008 Q4 9,106,605 (5,538,906) (0.08) 865,415 6
      Q3 10,817,211 (374,245) (0.01) 1,035,864  
      Q2 11,436,889 (296,956) 0.00 670,616 7
      Q1 12,964,182 1,065,323 0.02 1,108,216  

    Notes:

    (1)

    Stock-based Compensation - the net income (losses) are affected significantly by varying stock based compensation amounts in each quarter. Stock based compensation results from the issuance of stock options in any given period, as well as factors such as vesting and the volatility of the Company’s stock, and is a calculated amount based on the Black-Scholes Option Pricing Model of estimating the fair value of stock option issuances.

       
    (2)

    In the quarter ending December 31, 2009, net sales revenue increased due to increasing silver prices. The average gross revenue per ounce of silver realized increased to US$17.72 in the quarter ended December 31, 2009, compared to US$15.07 in the prior quarter ended September 30, 2009.

       
    (3)

    In the quarter ending September 30, 2009, net sales revenue increased due to rising prices. The average gross revenue per ounce of silver realized was US$15.07 in the quarter ended September 30, 2009, increasing from US$12.60 in the prior quarter ended June 30, 2009.

       
    (4)

    In the quarter ended June 30, 2009, net sales revenue decreased due to losses on final settlements for which provisional payments had already been received in the prior quarter.

       
    (5)

    In the quarter ended March 31, 2009, a stronger U.S. dollar compared to the Canadian dollar accounted for the increase of revenue. Although silver prices were lower in the first quarter of 2009, the average gross revenue per ounce sold was Cdn$17.52 (US$14.07) per ounce on a consolidated basis for the three-month period ended March 31, 2009. Also contributing to an increase in net sales is $1,194,452 from the sale of coins, ingots and bullion in the three months ended March 31, 2009.

    68



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    (6)

    In the quarter ended December 31, 2008, net sales revenue was negatively affected by declining silver prices and losses on final metal settlements, for which provisional payments had already been received. While the average gross revenue per ounce was US$14.66 for the year ended December 31, 2008, the average gross revenue per ounce for the fourth quarter of 2008 was US$11.67 per ounce. In addition, the strengthening U.S. dollar relative to the Mexican peso and Canadian dollar gave rise to a foreign exchange loss of $3.7 million relating to net U.S. monetary liabilities in the fourth quarter of 2008.

       
    (7)

    In the quarter ended June 30, 2008, the Company had a revision to its smelting charges imposed, resulting in an incremental charge and reduction of net sales of $1.9 million (US$1,852,830) in the quarter. Effective December 1, 2008, smelting and refining charges were reduced. In addition, in February 2009, the Company entered into two new smelting agreements which further reduced smelting charges for doré and concentrate.

    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.

      Quarter Ended
    December 31,
    Year to Date
    December 31,
    Revenue Analysis
    2009
    $
    2008
    $
    2009
    $
    2008
    $
    MEXICO        
    Gross revenues - silver dore bars and concentrates 21,939,708 12,223,817 71,464,014 56,614,111
    Less: refining and smelting charges (2,207,964) (2,233,050) (9,389,935) (9,895,208)
    Less: metal deductions (942,613) (372,510) (2,784,390) (1,882,364)
    Net revenue from silver dore and concentrates 18,789,131 9,618,257 59,289,689 44,836,539
    Equivalent ounces of silver sold 1,154,384 905,929 4,248,430 3,668,286
    Average gross revenue per ounce sold ($CDN) 19.01 13.49 16.82 15.43
    Average exchange rate in the period ($US/$CDN) 1.0562 1.2123 1.1420 1.0660
    Average gross revenue per ounce sold ($US) 17.99 11.13 14.73 14.48
    CANADA        
    Gross revenues - silver coins, ingots and bullion 1,473,358 380,613 5,132,099 380,613
    Equivalent ounces of silver sold, from Mexican production 74,989 24,607 284,564 24,607
    Average gross revenue per ounce sold ($CDN) 19.65 15.47 18.03 15.47
    Average exchange rate in the period ($US/$CDN) 1.0562 1.2123 1.1420 1.0660
    Average gross revenue per ounce sold ($US) 18.60 12.76 15.79 14.51
    CONSOLIDATED        
    Combined gross revenues - silver dore, concentrates, coins, ingots and bullion 23,413,066 12,604,430 76,596,113 56,994,724
    Less: intercompany eliminations (1,976,610) (892,265) (5,070,038) (892,265)
    Consolidated gross revenues - silver dore, concentrates, coins, ingots and bullion 21,436,456 11,712,165 71,526,075 56,102,459
    Less: refining and smelting charges, net of intercompany (2,163,845) (2,233,050) (9,310,475) (9,895,208)
    Less: metal deductions, net of intercompany (898,494) (372,510) (2,704,931) (1,882,364)
    Consolidated net revenue from silver dore, concentrates, coins, ingots and bullion 18,374,117 9,106,605 59,510,669 44,324,887
    Equivalent ounces of silver sold (after interco. eliminations) 1,145,562 827,845 4,233,703 3,590,202
    Average gross revenue per ounce sold ($CDN) 18.71 14.15 16.89 15.63
    Average exchange rate in the period ($CDN/$US) 1.0562 1.2123 1.1420 1.0660
    Average gross revenue per ounce sold ($US) 17.72 11.67 14.79 14.66
    Average market price of per ounce of silver per LBMA.ORG.UK ($US) 17.57 10.21 14.67 14.99

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 69



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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.

    70



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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:

    a)

    incurred $281,065 for the year ended December 31, 2009 and $67,784 for the quarter ended December 31, 2009 (year ended December 31, 2008 - $248,025; quarter ended December 31, 2008 - $50,666) for management services provided by the President & CEO and/or a corporation controlled by the President & CEO of the Company pursuant to a consulting agreement.

      
    b)

    incurred $275,214 for the year ended December 31, 2009 and $63,481 for the quarter ended December 31, 2009 (year ended December 31, 2008 - $310,920; quarter ended December 31, 2008 - $95,296) to a director and Chief Operating Officer for management and other services related to the mining operations of the Company in Mexico pursuant to a consulting agreement.

      
    c)

    incurred $1,317,437 of service fees during the year ended December 31, 2009 and $47,686 for the quarter ended December 31, 2009 (year ended December 31, 2008 - $8,010,843; quarter ended December 31, 2008 - $1,392,542) to a mining services company sharing our premises in Durango Mexico. This related party provided management services and paid mining contractors who provided services at the Company’s mines in Mexico for the period January 1 to February 28, 2009. Of the fees incurred, $232,444 was unpaid as at December 31, 2009 (December 31, 2008 - $3,122,130). This relationship was terminated in February 2009.

      
    d)

    incurred $nil for the year ended December 31, 2009 (year ended December 31, 2008 - $7,365) to a director of the Company as finder’s fees upon the completion of certain option agreements relating to Del Toro.

      
    e)

    provided a loan of $nil (US$nil) (2008 - $36,450 or US$30,000) to a director of the Company. This loan was fully repaid in the year ended December 31, 2009.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 71



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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.

    72



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

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

        Payments Due By Period  
        Total     Less than     1- 3     4 - 5     After 5  
              1 year     years     years     years  
    Capital Lease Obligations $ 2,807,636   $ 2,139,352   $ 668,284   $ -   $ -  
    FIFOMI Loan Facilities   4,309,159     1,095,672     1,676,605     1,536,882     -  
    Trafigura Prepayment Facility   450,940     450,940     -     -     -  
    Real de Catorce Payments (1)   1,261,200     1,261,200     -     -     -  
    Purchase Obligations (2)   2,071,102     2,071,102     -     -     -  
    Asset Retirement Obligations   4,336,088     -     -     -     4,336,088  
    Accounts Payable and Accrued Liabilities   11,304,170     11,304,170     -     -     -  
    Total Contractual Obligations $ 26,540,295   $ 18,322,436   $ 2,344,889   $ 1,536,882   $ 4,336,088  

    (1)

    Contract commitments to acquire surface rights and geological information relating to the Real de Catorce Project.

       
    (2)

    Contract commitments for construction materials and equipment for the La Encantada mill expansion project.

    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.

        Reasonably possible changes  
      $US                    
        Denominated   $US /Peso     Peso/$CDN     Market  
        Silver Commodity     Exchange     Exchange     interest  
        Price     Rate     Rate     Rate  
    Impact on Annual Operations   +/- 10%     +/- 10%     +/- 10%     +/- 25 basis points  
    Net Income (1) $  217,485   $  423,771   $  3,870   $  14,724  

    (1)

    These sensitivities are hypothetical and should be used with caution, favourable hypothetical changes in the assumptions result in an increased amount and unfavourable hypothetical changes in the assumptions result in a decreased amount of net income and/or other comprehensive income.

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 73



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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
    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:

    La Encantada Silver Mine $  960,327  
    La Parrilla Silver Mine   798,960  
    San Martin Silver Mine   3,002,349  
    Total transfer to depletable mineral property interests $  4,761,636  

    74



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 75



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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:

    76



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    Standards Difference from GAAP Potential Impact

    Presentation and disclosure

    IFRS requires significantly more disclosure than Canadian GAAP for certain standards. In addition, classification and presentation may be different for some balance sheet items.

    The increased disclosure requirements will cause the Com- pany to change financial reporting processes to ensure the appropriate data is collected. The Company is analyzing the impact of classification and presentation changes.

    First time Adoption of IFRS (IFRS 1)

    IFRS 1 provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective application of IFRS. With regards to the IFRS transition, the Company continues to analyze the optional exemp- tions available under IFRS 1.

    The adoption of certain exemptions will impact the January 1, 2010 opening balance sheet adjustments. The Company continues to assess the appropriateness of the accounting policies applied under IFRS both at the time of transition and following transition.

    Property, Plant and Equipment (IAS 16)

    IFRS requires all significant components of property, plant and equipment (“PPE”) to be amortized according to their individual useful lives as deter- mined in accordance with IFRS. IAS 16 permits the revaluation of PPE to fair value.

    Potentially material components within processing plants will have shorter useful lives than the entire plant, requiring increased amortization expenses.

    Impairment of Long-lived Assets (IAS 36)

    IFRS requires the assessment of asset impairment to be based on comparing the carrying amount to the recoverable amount using discounted cashflows while GAAP only requires discounting if the carrying value of assets exceeds the undiscounted cash flows. IFRS also requires the reversal of any previous asset impairments, excluding goodwill, where circumstances have changed. GAAP prohibits the reversal of impairment losses.

    The differences in methodology may result in asset impairments upon transition to IFRS. The Company is currently as sessing the potential impact on long-lived assets which may require further writedowns relating to impairments.

    Asset Retirement Obligations (IAS 37)

    Differences include the basis of estimation for un- discounted cashflows, the discount rate used, the frequency of liability remeasurement, and recognition of a liability when a constructive obligation exists.

    IFRS 1 provides an exemption which allows the Company to recognize reclamation and closure costs obligations, estimate costs of the related mining properties using risk free rates, and recalculating depreciation and depletion of assets at fair value as at January 1, 2010.

    Income Taxes (subject to adoption at transition of a revised IAS 12 standard)

    Recognition and measurement criteria for deferred tax assets and liabilities may differ.

    Deferred tax assets may be derecognized at transition. This standard is in-transition since IAS 12 was withdrawn in November 2009 and the AcSB will adopt the converged standard at changeover to IFRS. The Company is assessing the changes but the changes are not likely significant.

    Functional Currency (IAS 21)

    IAS 21 requires the Company to determine the translation differences in accordance with IFRS from the date on which a subsidiary was formed or acquired.

    IFRS 1 provides an exemption that allows a Company to reset its cumulative translation account to zero at the date of transition, with the balance being transferred to opening retained earnings.

    Business Combinations (IFRS 3)

    Under GAAP, the new HB section 1582 is effective January 1, 2011 to converge with IFRS and early adoption is permitted.

    Early adoption of HB section 1582 is permitted, and the Company plans to early adopt this section for the year ended December 31, 2010. IFRS 1 will allow IFRS rules for business combinations on a prospective basis rather than re-stating all business combinations.

    Leases (IAS 17)

    IFRS classifies leases as either financing or operating leases and classification depends on whether substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred from the lessor to the lessee, and is made at the inception of the lease. There are no quantitative thresholds similar to GAAP.

    The Company is developing internal indicators to assist in lease classification under IFRS.

    Borrowing Costs (IAS 23)

    IAS 23 does not allow the expensing of borrowing costs, to the extent they are directly attributable to acquisition, production and construction of a qualifying asset.

    IFRS 1 allows companies to capitalize borrowing costs relating to all qualifying assets prospectively on adoption.

    Stock-based Compensation (IFRS 2)

    Under Canadian GAAP, obligations for cash payments under stock-based compensation plans are accrued using the intrinsic method, compared to the fair value method under IFRS.

    While the carrying value of each reporting period will be different under IFRS, the cumulative expense recognized over the life of the instrument will be the same. The Company will adopt this change prospectively using the IFRS 1 exemption for share units that vest prior to January 1, 2010.

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 77



    FIRST MAJESTIC SILVER CORP.
     
    MANAGEMENT’S DISCUSSION AND ANALYSIS
    FOR THE YEAR AND THE FOURTH QUARTER ENDED DECEMBER 31, 2009

    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:

    78


            

    CORPORATE INFORMATION

    CORPORATE HEADQUARTERS STOCK TRANSFER AGENT
       
    Suite 1805 - 925 West Georgia Street Computershare Trust Company of Canada
    Vancouver, B.C. Canada V6C 3L2 510 Burrard Street, 3rd Floor
    Telephone 604.688.3033 Vancouver, B.C. Canada V6C 3B9
    Fax 604.639.8873 Telephone 604-661-9400
    Toll Free 1.866.529.2807 Fax 604-661-9401
    info@firstmajestic.com  
    www.firstmajestic.com LEGAL ADVISORS
       
    BOARD OF DIRECTORS AND OFFICERS McCullough O’Connor Irwin LLP
      Suite 2610, Oceanic Plaza
    Robert McCallum, B.Sc., P.Eng. 1,3 1066 West Hastings St.
    Chairman & Director Vancouver, B.C. Canada V6E 3X1
    Keith Neumeyer  
    President, Chief Executive Officer and Director INDEPENDENT AUDITORS
    Ramon Davila, Ing., M.Sc. Eng.  
    Chief Operating Officer and Director Deloitte & Touche LLP
    Raymond Polman, B.Sc. (Econ), CA P.O. Box 49279, Four Bentall Centre
    Chief Financial Officer 2800 – 1055 Dunsmuir Street
    Connie Lillico, B.A. Vancouver, B.C. Canada V7X 1P4
    Corporate Secretary  
    Douglas Penrose, CA1,3 ANNUAL GENERAL MEETING
    Director  
    Tony Pezzotti1,2 Date: Thursday, May 27, 2010
    Director Time: 10:00 am
    David A. Shaw, Ph.D2,3 Terminal City Club
    Director 837 West Hastings St.
    Robert (Bob) Young, P.Eng.2 Vancouver, B.C. Canada V6C 1B6
    Director  
      MARKET INFORMATION
    INVESTOR RELATIONS CONTACT  
      Trading Symbol: FR
    Investor relations Stock Exchange: TSX
    info@firstmajestic.com Frankfurt/Berlin: FMV, WKN: A0LHKJ
      OTCQX: FRMSF
    Jill Anne Arias  
    Executive Assistant & Corporate Relations  
       
    Telephone 604.688.3033  
    Toll Free 1.866.529.2807 (North America only)  

    1

    Audit committee

    2

    Human resources, compensation and nominating committee

    3

    Corporate governance committee

    FIRST MAJESTIC SILVER CORP. 2009 ANNUAL REPORT | 79


     

     

    www.firstmajestic.com

     

     



     

    ANNUAL INFORMATION FORM

    For the year ended December 31, 2009

    Date: March 29, 2010


    2

    TABLE OF CONTENTS

    PRELIMINARY NOTES 1
       Date of Information 1
       Financial Information 1
       Forward-looking Information 1
       Cautionary Notes to U.S. Investors Concerning Reserve and Resource Estimates 2
       Currency 2
    CORPORATE STRUCTURE 3
       Name, Address and Incorporation 3
       Intercorporate Relationships 3
    GENERAL DEVELOPMENT OF THE BUSINESS 4
       History 4
       Past Three Years 7
    DESCRIPTION OF BUSINESS 10
       General 10
       Risk Factors 10
       Mineral Projects 16
    DIVIDENDS 50
    CAPITAL STRUCTURE 51
       General Description of Capital Structure 51
    MARKET FOR SECURITIES 51
       Trading Price and Volume 51
    DIRECTORS AND OFFICERS 52
       Name, Occupation and Security Holding 52
       Audit Committee Mandate 54
       Composition of the Audit Committee 54
       Relevant Education and Experience 55
       Reliance on Certain Exemptions 55
       Audit Committee Oversight 55
       Pre-Approval Policy 55
       External Auditor Service Fees 56
       Cease Trade Orders, Bankruptcies, Penalties or Sanctions 56
       Conflicts of Interest 57
    LEGAL PROCEEDINGS AND REGULATORY ACTIONS 57
       Legal Proceedings 57
       Regulatory Actions 58
    INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 58
    TRANSFER AGENT AND REGISTRARS 59
    MATERIAL CONTRACTS 59
    INTERESTS OF EXPERTS 59
    ADDITIONAL INFORMATION 59


    - 1 -

    PRELIMINARY NOTES

    Date of Information

    Unless otherwise indicated, all information contained in this Annual Information Form (“AIF”) of First Majestic Silver Corp. (“First Majestic” or the “Company”) is as of March 29, 2010.

    Financial Information

    All financial information in this AIF is prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”).

    Forward-looking Information

    Certain statements contained in this AIF, and in certain documents incorporated by reference herein, constitute forward-looking statements. These statements relate to future events or the Company’s future performance, business prospects or opportunities. Forward-looking statements include, but are not limited to, statements with respect to commercial mining operations, anticipated mineral recoveries, protected quantities of future mineral production, interpretation of drill results, anticipated production rates and mine life, operating efficiencies, capital budgets, costs and expenditures and conversion of mineral resources to proven and probable mineral reserves, analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

    All statements other than statements of historical fact may be forward-looking statements. Statements concerning proven and probable mineral reserves and mineral resource estimates may also be deemed to constitute forward-looking statements to the extent that they involve estimates of the mineralization that will be encountered if the property is developed, and in the case of mineral resources or proven and probable mineral reserves, such statements reflect the conclusion based on certain assumptions that the mineral deposit can be economically exploited. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect, “forecast”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “outlook” and similar expressions) are not statements of historical fact and may be “forward-looking statements”. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this AIF should not be unduly relied upon. These statements speak only as of the date of this AIF or as of the date specified in the documents incorporated by reference into this AIF, as the case may be. The Company does not intend, and does not assume any obligation, to update these forward-looking statements. These forward-looking statements involve risks and uncertainties relating to, among other things, results of exploration and development activities, the Company’s historical experience with development-stage mining operations, uninsured risks, regulatory changes, defects in title, availability of materials and equipment, timeliness of government approvals, changes in commodity prices and, particularly, silver prices, actual operating and financial performance of facilities, equipment and processes relative to specifications and expectations and unanticipated environmental impacts on operations. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, risk factors incorporated by reference herein. See “Risk Factors”.


    - - 2 -

    Cautionary Notes to U.S. Investors Concerning Reserve and Resource Estimates

    The definitions of Proven and Probable Reserves used in National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) differ from the definitions in the United States Securities and Exchange Commission (“SEC”) Industry Guide 7. Under SEC Guide 7 standards, a “Final” or “Bankable” feasibility study is required to report reserves, the three year history average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.

    In addition, the terms “Mineral Resource”, “Measured Mineral Resource”, “Indicated Mineral Resource” and “Inferred Mineral Resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and normally are not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into Reserves. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.

    Accordingly, information contained in this AIF and the documents incorporated by reference herein containing descriptions of the Company’s mineral deposits may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.

    Currency

    All dollar amounts in this AIF are expressed in Canadian dollars unless otherwise indicated.


    - - 3 -

    CORPORATE STRUCTURE

    Name, Address and Incorporation

    First Majestic was incorporated under the Company Act (British Columbia) (the “Company Act”) on September 26, 1979 by registration of its Memorandum and Articles, under the name Brandy Resources Inc.

    On September 5, 1984, the Company changed its name to Vital Pacific Resources Ltd. and consolidated its share capital on a two for one basis.

    On May 26, 1987 the Company continued out of British Columbia and was continued as a federal company pursuant to the Canada Business Corporations Act.

    On August 27, 1987, the Company was extra provincially registered under the Company Act.

    On August 21, 1998, the Company continued out of Canada and was continued into the jurisdiction of the Commonwealth of the Bahamas under the Companies Act (Bahamas).

    On January 2, 2002, the Company continued out of the Commonwealth of the Bahamas under the Companies Act (Bahamas) and was continued to the Yukon Territory pursuant to the Business Corporations Act (Yukon). On January 3, 2002, the Company completed a consolidation of its share capital on a 1 new for 10 old basis and changed its name to First Majestic Resource Corp.

    On January 17, 2005, the Company continued out of the Yukon Territory and was continued to British Columbia pursuant to the Business Corporations Act (British Columbia).

    On November 22, 2006, the Company changed its name to First Majestic Silver Corp.

    The Company’s head office is located at Suite 1805 – 925 W. Georgia Street, Vancouver, British Columbia, Canada, V6C 3L2 and its registered office is located at #2610 – 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X1.

    The Company is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Quebec.

    Intercorporate Relationships

    The chart set out below illustrates the corporate structure of the Company and its material subsidiaries, the jurisdictions of incorporation, the percentage of voting securities held and their respective interests in various mineral projects and mining properties.


    - - 4 -


    GENERAL DEVELOPMENT OF THE BUSINESS

    History

    Since inception, First Majestic has been in the business of acquisition, development and exploration of mineral properties. During the fiscal year ended June 30, 2004, the Company became focused on the acquisition, development and exploration of mineral properties in México with an emphasis on silver projects.


    - - 5 -

    On January 12, 2004, the Company entered into an agreement to purchase the La Parrilla Silver Mine located approximately 65 kilometres south-east of the city of Durango, México. The purchase price of US$3 million (paid) included all properties, assets and equipment and all mining concessions consisting of 280 hectares. See “Mineral Projects – La Parrilla Silver Mine, México”. The La Parrilla Silver Mine was operated from 1956 to 1999 by the previous owners when it was put on a care and maintenance program in 1999 due to low silver prices. Total tonnage mined during that period is estimated at approximately 700,000 tonnes with an average grade of 300 grams per tonne (“g/t”) silver, 1.5% lead and 1.5% zinc.

    Between March 2004 and August 2005, the Company entered into a number of agreements to acquire mining concessions located in Chalchihuites, Zacatecas, México which are located approximately 45 kilometres southeast of the La Parrilla Silver Mine. During the period ended December 31, 2006 and the year ended June 30, 2006, the Company relinquished its options relating to certain of the Chalchihuites Group Properties and wrote off acquisition and exploration costs relating to those options totalling $688,766 and $384,930, respectively. The remaining properties are now referred to as the Del Toro Silver Mine. The Company paid an aggregate of US$5,825,000 over a four-year period to complete the remaining options.

    In December 2004, the Company entered into agreements for the purchase of the Candameña Mining District properties located in the Western Sierra Madre Mountain range between Hermosillo and Chihuahua in east central Sonora, México. On August 14, 2007, the Company entered into an agreement with Prospector Consolidated Resources Inc. (“Prospector”) whereby Prospector had the right to acquire 100% interest in the Company’s option to the Candameña Mining District property by paying $50,000 and issuing two million of its common shares to the Company. The Company received $50,000 in August 2007 and Prospector assumed all option commitments to the underlying property vendors effective August 2007. Prospector received regulatory approval and the Company received two million shares of Prospector in March 2008. See “Past Three Years” below.

    In September 2005, the Company acquired a 100% interest in the La Encarnación and San Ignacio Dos mining claims consisting of 16 hectares adjacent to the Company’s La Parrilla Silver Mine for consideration of $40,000 and 200,000 common shares of the Company.

    First Majestic entered into an irrevocable share purchase agreement dated for reference April 3, 2006 to purchase approximately 63% of the issued and outstanding shares of First Silver Reserve Inc. (“First Silver”) from the major shareholder of First Silver (the “Shareholder”). First Silver’s primary business was silver mining and the acquisition, exploration and development of mineral claims with a primary focus on silver properties in México. First Silver’s wholly owned subsidiary, El Pilon, is the sole owner of the San Martín Silver Mine in Jalisco State, México.

    First Majestic purchased 24,649,200 common shares of First Silver (the “Acquisition”) at a price of $2.165 per share for an aggregate purchase price of $53,365,519 payable to the Shareholder in three instalments.

    The first instalment of $26,682,759 represented 50% of the purchase price and was paid on closing of the Acquisition on May 30, 2006. A second instalment of $13,341,380, representing 25% of the purchase price, was paid on May 30, 2007. A final instalment of $13,341,380 was payable on May 30, 2008. An interest amount of 6% per annum was payable quarterly on the outstanding payment. Pending the outcome of the litigation referred to in the section entitled “Legal Proceedings” of this Annual Information Form, the Company has withheld payment of quarterly instalments of interest due on November 30, 2007, February 29, 2008 and May 30, 2008. The Company was withholding payment of the final instalment of $13,341,380 due May 30, 2008 and the above interest payments, an amount totalling $13,940,237.

    On July 16, 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 $14,881,912. The Company agreed to pay out $14,258,332 to the Defendant’s lawyers trust account (the “Trust Funds”) in partial payment of the judgment. The consent order requires that the Trust Funds be held in trust pending the outcome of the litigation. If the trial has not commenced by June 30, 2011, the Trust Funds can be released on that date to the Defendant, unless otherwise ordered by the Court. At present time, the trial is scheduled to commence in the Supreme Court of British Columbia, Vancouver, British Columbia in February, 2011. The Consent Order does not affect the standing of the Company’s claims for relief against the Defendant in the Action.


    - - 6 -

    On June 5, 2006, First Majestic and First Silver entered into a letter agreement whereby the parties agreed to enter into a business combination such that First Majestic would acquire all of the outstanding securities of First Silver and First Silver would become a wholly owned subsidiary of First Majestic. The business combination was structured as a plan of arrangement (the “Arrangement”) which was formalized in a combination agreement with the parties dated August 9, 2006. On September 14, 2006, First Majestic acquired all of the issued and outstanding First Silver shares which it did not already own for an aggregate of 6,712,159 common shares of First Majestic and an aggregate cash payment of $777,672 paid at closing and $388,836 due on each of September 14, 2007 (which was paid) and September 14, 2008 (which was paid), with interest payable quarterly and compounded annually at 6.0% per annum on the unpaid balances from the closing of the Arrangement.

    In addition, upon closing of the Arrangement, 12,500 stock options exercisable at a price of $3.28 per share expiring on June 13, 2009 and 550,000 stock options exercisable at a price of $4.30 per share expiring on June 19, 2011 were granted by the Company in exchange for 25,000 stock options of First Silver exercisable at a price of $1.64 per share expiring on June 13, 2009 and 1,100,000 stock options of First Silver exercisable at a price of $2.15 per share expiring on June 19, 2011. The common shares of First Silver were delisted from the Toronto Stock Exchange at the close of business on September 18, 2006.

    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 a 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.

    In August 2006, the Company entered into three agreements to acquire the Quebradillas and Viboras Silver mines and a contiguous land package of 3,126 hectares of mining concessions located in the La Parrilla Mining District in Durango State, México, which now forms part of the Company’s La Parrilla Silver Mine. The Company acquired the right to purchase all the mining concessions, the mines, the data of past diamond drill programs and the assets located within the mine areas for a total purchase price of US$3,000,000 payable over a period of two years of which an aggregate of US$2,251,000 had been paid as of December 31, 2008. During the year ended December 31, 2008, the Company amended payment terms to the optionor regarding the outstanding payments as at December 31, 2008. The Company paid the balance of US$749,000 for concession payments in monthly instalments during 2009. As of December 31, 2009, no further payments were due. There is a net smelter royalty of 1.5% (“NSR”) of sales revenue to a maximum of US$2,500,000 and the Company has the option to purchase the NSR at any time for US$2,000,000. For the year ended December 31, 2009, the Company paid US$135,363 (December 31, 2008 – US$69,000) relating to royalties.

    In August 2006, the Company entered into a letter agreement pursuant to which the Company acquired 100% of the issued and outstanding shares of Desmin S.A. de C. V. (“Desmin”), a privately held Mexican mining company for the purchase price of US$1.5 million (the final payment having been made on April 30, 2007), resulting in Desmin becoming a wholly owned subsidiary of the Company. Desmin’s primary asset was an exploitation contract which entitled Desmin to operate the La Encantada Silver Mine located in Coahuila State in Northern México. The exploitation contract provided Desmin an option to acquire all properties within the 697 hectare land package, including the operations of the mine and mill and all the auxiliary installations and associated equipment. The Company purchased the operations of Desmin effective November 1, 2006 and took over the operations of the La Encantada Silver Mine. In addition, Desmin had an option agreement to acquire the La Encantada Silver Mine, including the mill and surrounding mining claims.


    - - 7 -

    In December 2006, the Company signed a letter of agreement to acquire 100% of the issued and outstanding shares of Minera La Encantada S.A. de C.V. (“La Encantada”), a Mexican mining company owned by Minas Peñoles S.A. de C.V. and Industrias Peñoles S.A de C.V. for the purchase price of US$3,250,000 and a 4% NSR. La Encantada’s primary asset is the La Encantada Silver Mine in Coahuila State, Mexico. A non-refundable deposit of US$1,000,000 was made on the date of the agreement and the balance was paid upon closing the acquisition on March 20, 2007. Pursuant to the terms of the agreement, the Company exercised its option to acquire the 4% NSR in exchange for 382,582 common shares at a value of $5.32 per share and 191,291 warrants exercisable at a price of $6.81 per share for a two-year period.

    The Company changed its financial year from June 30 to December 31, effective for the financial period July 1, 2006 to December 31, 2006. The decision to change the Company’s fiscal year end was made so that the Company would have the same fiscal year end as its operating subsidiaries in México. To facilitate the change, the Company reported a one-time, six-month transition year covering the period from July 1, 2006 to December 31, 2006. Subsequent to the transition year, the first full financial year covered the period January 1, 2007 to December 31, 2007.

    Past Three Years

    In January 2007, the Company completed the acquisition of the San Juan silver mine which forms part of the Del Toro Silver Mine (formerly referred to as the Chalchihuites Group of Properties) by making the final payments of US$500,000 and US$150,000 due January 7, 2007 and July 7, 2007, respectively, pursuant to the agreement. In connection therewith, a finder’s fee in the amount of $77,808 (US$68,422) was paid to a director of the Company.

    In March 2007, the Company acquired all of the issued and outstanding shares of Minera La Encantada S.A. de C.V. (“Minera La Encantada”), a Mexican mining company owned by Industrias Peñoles, S.A. de C.V. (“Peñoles”) for a total purchase price of US$3,250,000 and an NSR of 4%. The Company also acquired the underlying 4% NSR through the issuance of 382,582 shares and 191,291 warrants, each warrant entitling Peñoles to purchase one additional share at a price of $6.81 which expired on March 20, 2009. Desmin paid a sliding-scale royalty to Peñoles pursuant to the terms of its exploitation contract. As a result of the Company’s purchase of Minera La Encantada, all royalties were cancelled at closing on March 20, 2007. On January 1, 2008, Desmin amalgamated with Minera La Encantada S.A. de C.V.

    On May 10, 2007, the Company completed a private placement of special warrants for gross proceeds of $34,415,000. A total of 6,883,000 special warrants were sold at a price of $5.00 per special warrant through Cormark Securities Inc. and CIBC World Markets Inc., as co-lead underwriters, and Blackmont Capital Inc. Each special warrant was automatically exercised for one common share of the Company and one half of a common share purchase warrant on July 25, 2007 (the date the Company obtained a final receipt for a prospectus qualifying the underlying securities). Each whole share purchase warrant was exercisable at a price of $6.50. The warrants expired on November 10, 2008, none of which were exercised prior to expiry. The underwriters received a commission of 5.5% of the gross proceeds of the offering at closing.

    On July 31, 2007, the Company incorporated a new wholly owned Mexican subsidiary, Corporación First Majestic, S.A. de C.V., (“CFM”) and effected a corporate restructuring of Desmin, La Encantada and First Majestic Plata, on August 14, 2007, such that Desmin and La Encantada were amalgamated and the Company now holds the shares of FM Plata, Minera El Pilon and La Encantada, through CFM, which became a Mexican holding company for Mexican tax consolidation purposes.


    - - 8 -

    In August 2007, the Company entered into an agreement with Prospector whereby Prospector had the right to acquire a 100% interest in the Company’s option to acquire the Candameña Mining District Property by paying $50,000 within five business days following the execution of the agreement (paid) and issuing 2,000,000 of its shares to the Company within five business days of regulatory approval or September 7, 2007, whichever is earlier. As Prospector had not received regulatory approval by September 7, 2007, it paid an additional US$150,000 to the Company on October 19, 2007 to satisfy an option commitment to the underlying vendor. In March 2008, the Company received 2,000,000 common shares from Prospector. In August 2008, the Company after having made numerous unsuccessful attempts to assist Prospector in the transfer of the rights to the Candameña property, and having advised Prospector that the underlying agreements with the Candameña property owners were in breach the Company was required to return the mining rights to their respective underlying property owners.

    The Company’s common shares and warrants were listed and commenced trading on the Toronto Stock Exchange effective January 15, 2008.

    On March 25, 2008, the Company completed a public offering with a syndicate of underwriters led by CIBC World Markets Inc. and including Blackmont Capital Inc., Cormark Securities Inc. and GMP Securities L.P., who purchased 8,500,000 units of the Company at a price of $5.35 per unit. 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 entitled the holder to acquire one additional common share at a price of $7.00 for a period of 24 months from the closing of the offering. The underwriters also received an over-allotment option, exercisable up until 30 days following the closing of the offering to purchase up to an additional 1,275,000 common shares at a price of $5.07 per share and up to an additional 637,500 share purchase warrants at a price of $0.56 per warrant. On April 4, 2008, the Company completed the issuance of an aggregate of 637,500 warrants pursuant to the exercise of the over-allotment option.

    On July 6, 2008, the Company entered into an agreement to acquire the Fatima mining concession consisting of 46 hectares of mining concessions located in the Zacatecas State, México which forms part of the Del Toro Silver Mine. The Company has the right to purchase all the mining concessions, for a total purchase price of US$387,500 payable over a period of 30 months, of which an aggregate of US$162,500 had been paid as of December 31, 2009.

    On March 5, 2009, the Company completed a public offering with a syndicate of underwriters led by CIBC World Markets Inc. and including Blackmont Capital Inc., GMP Securities L.P. and Thomas Weisel Partners, who purchased 8,487,576 units of the Company at a price of $2.50 per unit for gross proceeds to the Company of $21,218,940. 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 for a period of 24 months from the closing of the offering. The underwriters also received an over-allotment option, exercisable up until 30 days following the 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 share purchase warrants at a price of $0.20 per warrant.

    On August 20, 2009, the Company completed the first tranche of a non-brokered private placement consisting of 3,499,000 units at a price of $2.30 per unit for gross proceeds of $8,047,700. 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 warrant share for a period of two years after the closing of the offering. A finder’s fee in the amount of $101,016 cash and 50,000 finder’s warrants were paid in respect to a portion of this private placement. The finder’s warrants are subject to the same terms and conditions as those issued to the subscribers.


    - - 9 -

    On August 20, 2009, the Company also settled certain current liabilities amounting to $822,053 by the issuance of 357,414 common shares of the Company at a deemed price of $2.30 per common share.

    On September 16, 2009, the Company completed the second and final tranche of the non-brokered private placement consisting of 668,478 units at a price of $2.30 per unit for gross proceeds of $1,537,500. 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 warrant share for a period of two years after the closing of the offering.

    On September 18, 2009, the Company settled certain current liabilities amounting to $1,919,209 by the issuance of 834,438 common shares of the Company at a deemed price of $2.30 per common share.

    On November 13, 2009, the Company announced the closing of a plan of arrangement (the “Normabec Arrangement”) to acquire all of the issued and outstanding shares of Normabec Mining Resources Ltd. (“Normabec”) a publicly traded mining company listed on the TSX Venture Exchange in exchange for the issuance of 4,652,778 common shares of the Company. In addition, the Company issued warrants to purchase an aggregate of 260,965 common shares of the Company in exchange for all outstanding share purchase warrants of Normabec, all of which expired by January 2, 2010. Normabec’s primary asset is the Real de Catorce Silver Project 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. Real de Catorce is an historic mining region, with estimated historical production of 230 million ounces between the years 1773 and 1990.

    Concurrent with the completion of the Normabec Arrangement, the non-Mexican assets of Normabec were divested to a newly formed entity named Brionor Resources Inc. (“Brionor”) Holders of Normabec shares also received 0.25 Brionor shares for each Normabec common share. The Company also purchased, via private placement, 2,115,195 common shares of Brionor for an aggregate purchase price of $300,000, representing a price per share of approximately $0.1418. These shares represented 9.9% of the total issued and outstanding shares of Brionor upon completion of the transaction at November 13, 2009. Brionor is a public company listed on the TSX Venture Exchange.

    Through the acquisition of Normabec and its wholly owned subsidiary, Mineral Real de Bonanza SA de CV, 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. 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$1,000,000 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.

    The Company had an option dated November 25, 2004 with Consorcio Minero Latinamericano, SA de CV, a private Mexican company owned by a former director of First Silver, for the purchase of a 100% interest in seven mining claims referred to as the Cuitaboca Silver Project covering 3,718 hectares located in the State of Sinaloa, México. To purchase the claims, the Company was required to pay a total of US$2,500,000 in staged cash payments through November 25, 2010. Subsequent to acquiring Normabec and during the year ended December 31, 2009, the Company elected not to proceed with the acquisition of the Cuitaboca Silver Project. Accordingly, the historical investment including exploration totalling $2,589,824 was written off during the year ended December 31, 2009.


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    DESCRIPTION OF BUSINESS

    General

    The Company is in the business of the production, development, exploration and acquisition of mineral properties focusing on silver in México. The common shares and certain warrants of the Company trade on the Toronto Stock Exchange under the symbols “FR” and “FR.WT.B”. 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”.

    The Company has ownership of three producing properties in México: the La Encantada Silver Mine in Coahuila State, the La Parrilla Silver Mine in Durango State, and the San Martin Silver Mine in Jalisco State. The Company also owns two advanced stage development silver project, the Del Toro Silver Mine, formerly referred to as the Chalchihuites Group Properties in Zacatecas State, and the Real de Catorce Silver Project in San Luis Potosi State, and has an interest in several exploration properties in various states in México.

    The Company’s business is not materially affected by intangibles such as licences, patents and trademarks, nor is it affected by seasonal changes. The Company is not aware of any aspect of its business which may be affected in the current financial year by renegotiation or termination of contracts.

    At December 31, 2009, the Company had 13 employees based in its Vancouver corporate office, one employee in the United Kingdom and approximately 1,449 employees, contractors and other personnel in México. Additional consultants are also retained from time to time for specific corporate activities, development and exploration programs.

    Risk Factors

    The Company, and thus the securities of the Company, should be considered a speculative investment and investors should carefully consider all of the information disclosed in this AIF prior to making an investment in the Company. In addition to the other information presented in this AIF, the following risk factors should be given special consideration when evaluating an investment in the Company’s securities.

    Operating Hazards and Risks

    The operation and development of a mine or mineral property involves many risks which a combination of experience, knowledge and careful evaluation may not be able to overcome. These risks include:

    These occurrences could result in environmental damage and liabilities, work stoppages and delayed production, increased production costs, damage to, or destruction of, mineral properties or production facilities, personal injury or death, asset write downs, monetary losses and other liabilities. Liabilities that First Majestic incurs may exceed the policy limits of its insurance coverage or may not be insurable, in which event First Majestic could incur significant costs that could adversely impact its business, operations or profitability.


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    Uncertainty in the Calculation of Mineral Reserves, Resources and Silver Recovery

    There is a degree of uncertainty attributable to the calculation of mineral Reserves and mineral Resources and corresponding grades being mined or dedicated to future production. Until mineral Reserves or mineral Resources are actually mined and processed, the quantity of minerals and grades must be considered estimates only. In addition, the quantity of mineral Reserves and mineral Resources may vary depending on, among other things, metal prices. Any material change in the quantity of mineral Reserves, mineral Resources, grade or minimum mining widths may affect the economic viability of First Majestic’s properties. In addition, there can be no assurance that silver recoveries or other metal recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production, or that the existing known and experienced recoveries will continue.

    Substantial Decommissioning and Reclamation Costs

    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 $1.65 million of the reclamation obligation relates to the La Parrilla Silver Mine, $1.99 million of the obligation relates to the San Martin Silver Mine, and $2.49 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.

    The costs of performing the decommissioning and reclamation must be funded by the Company’s operations. These costs can be significant and are subject to change. The Company cannot predict what level of decommissioning and reclamation may be required in the future by regulators. If the Company is required to comply with significant additional regulations or if the actual cost of future decommissioning and reclamation is significantly higher than current estimates, this could have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.

    Obtaining Future Financing

    The further development and exploration of mineral properties in which the Company holds interests or which the Company acquires may depend upon its ability to obtain financing through joint ventures, debt financing, equity financing or other means. There is no assurance that the Company will be successful in obtaining required financing as and when needed. Volatile precious metals markets may make it difficult or impossible for the Company to obtain debt financing or equity financing on favourable terms or at all.

    The Company currently has $5.9 million of cash in treasury. As a result of the Company’s ability to earn cash flow from its ongoing operations, the Company considers that it has sufficient capital to support its current operating requirements provided it can continue to generate cash from its operations and that its capital projects are not materially over their projected costs. There is a risk that commodity prices decline and that the Company is unable to continue generating sufficient cash flow from operations or that the Company requires significant additional cash to fund expansions and potential acquisitions. Failure to obtain additional financing on a timely basis may cause the Company to postpone acquisitions, major expansion and development plans.


    - - 12 -

    Key Personnel

    Recruiting and retaining qualified personnel is critical to First Majestic’s success. The number of persons skilled in mining, exploration and development of mining properties is limited and competition for such persons is intense. As First Majestic’s business activity grows, First Majestic will require additional key financial, administrative and mining personnel as well as additional operations staff. Although the Company believes it will be successful in attracting, training and retaining qualified personnel, there can be no assurance of such success. If the Company is not successful in attracting and training qualified personnel, the efficiency of First Majestic’s operations could be affected, which could have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.

    Factors Beyond the Company’s Control

    There are also a number of factors beyond the Company’s control. These factors include government regulation, high levels of volatility in market prices, availability of markets, availability of adequate transportation and smelting facilities and the imposition of new or amendments to existing taxes and royalties. The effects of these factors cannot be accurately predicted.

    Uninsured Risks

    First Majestic’s mineral properties are subject to the risks normally inherent in mineral properties, including but not limited to environmental hazards, industrial accidents, flooding, periodic or seasonal interruptions due to climate and hazardous weather conditions and unusual or unexpected geological formations. Such risks could result in damages, delays and possible legal liability. The Company may become subject to liability for pollution and other hazards against which it cannot insure or against which it may elect not to insure due to high premium costs or other reasons. The payments for any such liabilities would reduce the funds available for exploration and development activities and may have a material impact on First Majestic’s financial position.

    Foreign Operations

    The Company’s mining, exploration and development projects are located in México. Such projects could be adversely affected by exchange controls, currency fluctuations, changes in taxation and corporate laws or policies of México or Canada affecting foreign trade, investment or repatriation of financial assets.

    Changes in mining or investment policies or shifts in political attitude in México may adversely affect the Company’s business. Operations may be affected by governmental regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety. The effect, if any, of these factors cannot be accurately predicted.

    Foreign Currency

    The Company carries on its primary business activity outside of Canada. Accordingly, it is subject to the risks associated with fluctuation of the rate of exchange of other foreign currencies, in particular the Mexican peso, the currency of México, and the United States dollar, the currency for calculating the Company’s sales of silver based on the world’s commodity markets. 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, accounts payable, and investments in mining interests. Such currency fluctuations may materially affect the Company’s financial position and results of operations.


    - - 13 -

    Title to Properties

    Although the Company has obtained title opinions with respect to certain of its properties and has taken reasonable measures to ensure proper title to its properties, there is no guarantee that title to any of its properties will not be challenged or impugned. Third parties may have valid claims underlying portions of the Company’s interest.

    Property Interests

    The option agreement relating to the Del Toro Silver Mine pursuant to which the Company holds its rights in certain of the properties provide that the Company must make a series of cash payments over certain time periods. If the Company fails to make such payments in a timely manner, the Company may lose some or all of its interest in the Fatima mining concession portion of this property which covers 46 hectares of a total of 393 hectares. The payments consist of US$62,500 due June 10, 2010 and US$162,500 due October 10, 2010.

    Permits and Licenses

    The operations of the Company may require licenses and permits from various governmental authorities. There can be no assurance that the Company will be able to obtain or maintain all necessary licenses and permits that may be required to carry out exploration, development and mining operations at its projects.

    Metal Prices

    There are global economic factors beyond the control of the Company that may affect the marketability of minerals already discovered and any future minerals to be discovered. Metal prices have historically fluctuated widely and are affected by numerous factors beyond the Company’s control, including international, economic and political trends, expectations for inflation, currency exchange fluctuations, interest rates, global or regional consumption patterns, speculative activities and worldwide production levels. Movements in the spot price of silver have a direct and immediate impact on the Company’s income. The Company does not use derivative instruments to hedge its silver commodity price risk, but the Company forward sells its lead production between one and six months ahead. The effect of these price variation factors cannot accurately be predicted.

    Price Volatility of Other Commodities

    The Company’s profitability is also affected by the market prices of commodities which are consumed or otherwise used in connection with the Company’s operations, such as diesel fuel, natural gas, electricity and cement. Prices of such commodities are also subject to volatile price movements over short periods of time and are affected by factors that are beyond the Company’s control.

    Competition

    The mining industry is highly competitive in all its phases. The Company competes with a number of companies which are more mature or in later stages of production. These companies may possess greater financial resources, more significant investments in capital equipment and mining infrastructure for the ongoing development, exploration and acquisition of mineral interests, as well as for the recruitment and retention of qualified employees.


    - - 14 -

    Environmental Regulations

    The Company’s operations are subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation provides for restrictions and prohibition of spills, release or emission of various substances related to mining industry operations, which could result in environmental pollution. A breach of such legislation may result in imposition of fines and penalties. In addition, certain types of operations require submissions to and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards and enforcement, and fines and penalties for non-compliance are becoming more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of operations. The Company intends to fully comply with all environmental regulations. On February 25, 2009, the Mexican Environmental Authority PROFEPA (Procuradoria Federal Proteccion al Ambiente) awarded a CLEAN INDUSTRY CERTIFICATE to one of the Company's wholly owned subsidiaries, First Majestic Plata, SA de CV., regarding its activities at the La Parrilla Silver Mine.

    Conflicts of Interest

    Certain directors of the Company are also directors or officers or shareholders of other companies that are similarly engaged in the business of acquiring, developing and exploiting natural resource properties. Such associations may give rise to conflicts of interest from time to time. The directors of the Company are required by law and the Company’s policies to act honestly and in good faith with a view to the best interests of the Company and to disclose any interest, which they may have in any project or opportunity of the Company. If a conflict of interest arises at a meeting of the board of directors, any director in a conflict is required to disclose his interest and abstain from voting on such matter. In determining whether or not the Company will participate in any project or opportunity, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time.

    History of Losses

    The Company has a history of losses including a net loss of $5,144,784 for the year ended December 31, 2008; however, for the year ended December 31, 2009, the Company had net income of $6,205,822. At December 31, 2009, the Company had an accumulated deficit (net loss) of $33,271,061.

    Shares Reserved for Future Issuance

    There are stock options and share purchase warrants of the Company outstanding pursuant to which common shares may be issued in the future. Pursuant to the Arrangement between First Majestic and First Silver, there are also shares of First Silver that may be tendered for shares of First Majestic until September 14, 2012. As of the date of this AIF, there are 114,254 shares of First Silver outstanding that may be tendered for 57,127 shares of First Majestic. Options and share purchase warrants are likely to be exercised when the market price of the Company’s common shares exceeds the exercise price of such options or warrants. The exercise of such options or warrants and the subsequent resale of such common shares in the public market could adversely affect the prevailing market price and the Company’s ability to raise equity capital in the future at a time and price which it deems appropriate. The Company may also enter into commitments in the future which would require the issuance of additional common shares and the Company may grant additional share purchase warrants and stock options. Any share issuances from the Company’s treasury will result in immediate dilution to existing shareholders.


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    Volatility of Share Price

    The price of the shares of resource companies tends to be volatile. Fluctuations in the world price of precious metals and many other elements beyond the control of the Company could materially affect the market price of the Company’s common shares.

    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 refunds and other receivables. The Company sells and receives payment upon delivery of its silver doré and byproducts 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 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 of 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.

    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 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 long-term 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.

    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 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% .

    Future Exploration and Development Activities

    Exploration and development of mineral properties involve significant financial risks which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of an ore body may result in substantial rewards, few properties which are explored are ultimately developed into producing mines. Major expenses may be required to establish reserves by drilling, constructing mining and processing facilities at a site, developing metallurgical processes and extracting precious metals from ore. The Company cannot ensure that its current exploration and development programs will result in profitable commercial mining operations. Also, substantial expenses may be incurred on exploration projects which are subsequently abandoned due to poor exploration results or the inability to define reserves which can be mined economically.


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    The economic feasibility of development projects is based upon many factors, including the accuracy of reserve estimates, metal recoveries; capital and operating costs; government regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting and environmental protection; and precious metal prices, which are highly volatile. Development projects are also subject to the successful completion of economic evaluations or feasibility studies, issuance of necessary governmental permits and availability of adequate financing.

    Development projects have no operating history upon which to base estimates of future cash flow. Estimates of Proven and Probable Reserves and Measured, Indicated and Inferred Resources are, to a large extent, based upon detailed geological and engineering analysis.

    Mineral Projects

    Pursuant to National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102”), the following properties and projects have been identified by First Majestic as being material: the La Parrilla Silver Mine, the San Martin Silver Mine, the La Encantada Silver Mine and the Del Toro Silver Mine.

    The following table shows the total tonnage mined from each of the Company’s three producing properties during 2009, including total ounces of silver and silver equivalent ounces produced from each property and the tonnage mined from delineated reserves and resources at each such property.

      San Martin La Parrilla La Encantada Total
    TONNES OF ORE PROCESSED TONNES 291,339 277,917 279,536 848,792
    OUNCES OF SILVER PRODUCED OZ 1,112,698 1,367,742 1,249,377 3,729,817
    OUNCES OF SILVER EQ PRODUCED OZ EQ 134,538 275,465 129,257 539,260
    TOTAL OZ OF SILVER EQ PRODUCED OZ EQ 1,247,236 1,643,207 1,378,634 4,269,077
    TONNES MINED FROM 43-101 TONNES 64,514 214,443 169,733 448,690
    TONNES MINED OUTSIDE OF 43-101 TONNES 226,825 63,474 109,803 400,102

    La Parrilla Silver Mine, México

    Certain of the information on the La Parrilla Silver Mine is based on the technical report prepared by Richard Addison, P.E. and Leonel Lopez, C.P.G. of Pincock Allen & Holt (“PAH”) entitled, “Technical Report for the La Parrilla Silver Mine, Durango State, Mexico” dated February 16, 2009, as amended and restated on February 26, 2009 (in this section, the “Current Technical Report”) and has been updated as necessary. Mr. Addison and Mr. Lopez are independent Qualified Persons for the purposes of NI 43-101. The Current Technical Report has been filed with securities regulatory authorities in each province of Canada. Portions of the following information are based in assumptions, qualifications and procedures which are not fully described herein. Reference should be made to the full text of the Current Technical Report which is available for review on SEDAR located at www.sedar.com.


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    Property Description and Location

    La Parrilla Silver Mine is a producing underground silver mine and processing facility in Durango State, Mexico. The mine is wholly owned and operated by First Majestic Plata, S.A. de C.V. (“FM Plata”) a wholly-owned indirect subsidiary of the Company through its Mexican holding company, Corporación First Majestic, S.A. de C.V.

    La Parrilla consists of 38 contiguous mining concessions in the La Parrilla mining district of Durango State which provide mineral rights which cover an area of 53,249.21 hectares (131,581.20 acres). All of these mining concessions convey exploitation rights for 50 years from the date of registration.

    Certain of the La Parrilla claims were purchased from Grupo México and include a net smelter return of 1.5% payable to Grupo México. This net smelter return may be acquired by FM Plata for a total payment of US$2,000,000. In the event that FM Plata does not acquire the net smelter royalty, the royalties payable thereunder will be capped at US$2,500,000. To date a total of US$229,233 had been paid by the Company under the net smelter royalty. There are no other encumbrances on La Parrilla mining concessions.

    The La Parrilla area is located partly within Ejido San José de la Parrilla and partly within private property. The Comisión de Fomento Minero (the “CFM”) executed a lease agreement on the surface rights from Ejido San José de la Parrilla to permit the use of surface rights for development of projects that are of general economic interest, including mining operations. In 1990 the Gamiz Family acquired the surface rights and mill from CFM and reconfirmed the lease agreement with the Ejido. Subsequently, First Majestic acquired the surface rights and the mill from the Gamiz Family. First Majestic updated the lease agreement with the Ejido and negotiated a lease to extend the surface rights to a total of 100 hectares where the second tailings dam has been built and is now operating; this includes a yearly payment to the Ejido San José de La Parrilla. First Majestic also has a lease agreement for 100 hectares with a private land owner where the Quebradillas, and San Marcos mines are located. First Majestic also owns surface land of 38 hectares which was acquired from Grupo México where the Vacas mine is located.

    Accessibility, Climate, Local Resources, Infrastructure and Physiography

    The La Parrilla Silver Mine is located in the south-eastern part of the state of Durango, about 60 kilometres from the capital city of Durango. The La Parrilla mine is connected to various communities within distances of 10 kilometres to 20 kilometres, such as Nombre de Dios and Vicente Guerrero. Most of La Parrilla’s workers are transported from these towns to work at the mine. To access more specialized resources such as universities and private and public hospitals the cities of Durango and Zacatecas are within easy driving distances from La Parrilla. International flights by commercial airlines to cities in the United States and to most major cities in Mexico are available from Durango and/or Zacatecas.

    Access to the La Parrilla mine is by Federal Highway No. 45 from Durango to Zacatecas. A four kilometre detour at the 75 kilometre marker leads to La Parrilla and the mine and plant through the village of San José de la Parrilla. La Parrilla is connected to the San José de la Parrilla village by a one kilometre dirt road.

    Power supply to the camp is provided by the national power grid. Potable water supply is provided from a water well, and from the Quebradillas shaft. Telephone communications at the mine are integrated into the national telecommunications grid. Satellite and ISDN copper connections provide internet communications capabilities to the La Parrilla. Hand held radios are carried by all supervisors, managers and all vehicle operators for local ground communications. Most of the suppliers and labourers required for the operation are brought in from the cities of Vicente Guerrero, Durango and Zacatecas.


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    The climate at La Parrilla is semi-dry with annual average temperatures that vary from 12º Celsius to 26º Celsius, with an annual average of about 18º Celsius. The annual average rainfall is about 580 millimetres with most of the rain occurring during the summer months, with only occasional rains during the winter months. Occasional rain storms may partially interrupt the La Parrilla operations.

    Vegetation in the area consists of desert bush and shrub, including small mesquite, cacti, and grasses. At higher elevations there are pine, cedar and oak trees. Farming is mostly developed in the areas neighbouring the population centers in the Mesa Central flatlands, and the principal crops are corn, beans and some wheat. Apple and peach trees are also grown in the region.

    The La Parrilla area is located within the physiographic sub-province of Sierras y Llanuras de Durango, which borders between the Sierra Madre Occidental and the Mesa Central in north-western México. This physiographic sub-province presents elevations of about 1,600 metres above sea level in the Mesa Central and up to 3,000 metres above sea level in the mountain peaks of the Sierra Madre Occidental. Topography in the La Parrilla area is dominated by either isolated mountains or north-west oriented mountain chains, all surrounded by the plateaus and flat lands of the Mesa Central. The La Parrilla (San José) mine portal is located at an elevation of 2,100 metres above sea level.

    History

    Mining activity in La Parrilla mining district began during colonial times. La Parrilla consists of underground silver-gold-lead mines with a processing facility that was originally constructed in 1956. In 1960, the mining claims were acquired by Minera Los Rosarios, S.A. de C.V. (“Minera Los Rosarios”) who operated the mine until 1999 when operations were shut down due to low silver prices. The CFM, a Mexican federal entity responsible for promoting and supporting mining, constructed a 180 tonnes per day flotation plant at La Parrilla, which operated as a custom mill, processing ores from nearby areas, such as Chalchihuites, Sombrerete and Zacatecas. This plant was purchased in 1990 by Minera Los Rosarios from CFM.

    In 2004, First Majestic acquired the mining rights and the plant from Minera Los Rosarios and, in 2006, successfully negotiated the acquisition of the mineral rights held by Grupo México which surrounded the original La Parrilla mine. Today First Majestic has consolidated ownership of the plant and all the mining rights of the land surrounding La Parrilla, where numerous mineral occurrences and mineral deposits are being investigated.

    Geological Setting

    La Parrilla mining district is located in the border zone between the physiographic provinces of the Sierra Madre Occidental and the Mesa Central, within the sub-province of Sierras y Llanuras de Durango. La Parrilla is located in the northern side of a contact zone between a dioritic intrusive stock and a sequence of Cretaceous sedimentary rocks.

    La Parrilla’s mineral deposits are associated to geologic structures, which appear related to the intrusive stock, dikes and sills. Structural intersections have also originated breccia zones that caused favorable conditions for mineralization emplacement as stockwork zones. The contact zone between the intrusive stock and sedimentary rocks has also originated metasomatic deposits.

    The most important known deposits at La Parrilla occur as vein deposits that pinch and swell along strike as well as downdip. These are enclosed by three main systems within the mining district. The first structural system may be related in orientation to the regional intrusive stock. Its general strike is north east 60º south west, dipping nearly vertical. It cuts through all regional rock units and it does not appear to represent economic significance.


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    The second structural system occurs with a general orientation of north 45º - 75º west dipping approximately 50º to 85º to the north east. It cuts through limestone, diorite and skarn zones. It encloses several mineral deposits in the area including Los Rosarios, El Cármen, San Cayetano and San José.

    The third regional structural system is oriented north-south and dips to the east from 45º top vertical. It is generally concordant with the stratification and it encloses mineral concentrations, such as San Marcos, Quebradillas and San Nicolas.

    Exploration

    La Parrilla was discovered in colonial times and developed from outcroppings by following mineralization along the structures until high