EX-99.2 3 exhibit99-2.htm AUDITED CONSOLIDATED FINANCIAL STATEMENTS First Majestic Silver Corp.: Exhibit 99.1 - Filed by newsfilecorp.com

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED

DECEMBER 31, 2010

 

 

 

 

 

 

 

 

 

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


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”
   
Keith Neumeyer Raymond Polman, CA
President & CEO Chief Financial Officer
February 25, 2011 February 25, 2011

Report of Independent Registered Chartered Accountants

To the Shareholders of First Majestic Silver Corp.

We have audited the accompanying consolidated financial statements of First Majestic Silver Corp. and subsidiaries (the “Company”), which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009, and the consolidated statements of income, shareholders' equity and comprehensive income (loss) and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of First Majestic Silver Corp. and subsidiaries as at December 31, 2010 and December 31, 2009 and the results of their operations and cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants
February 25, 2011
Vancouver, Canada


FIRST MAJESTIC SILVER CORP.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2010 AND 2009
(Expressed in Canadian dollars)

    December 31, 2010     December 31, 2009  
  $    $   
             
ASSETS    
CURRENT ASSETS            
Cash and cash equivalents   40,940,704     5,889,793  
Accounts receivable   2,733,582     2,174,848  
Other receivables (Note 5)   5,580,961     6,624,200  
Inventories (Note 6)   8,604,399     3,812,460  
Prepaid expenses and other (Note 7)   1,918,736     1,467,759  
Future income tax (Note 15)   2,310,559     -  
TOTAL CURRENT ASSETS   62,088,941     19,969,060  
             
MINING INTERESTS AND PLANT AND EQUIPMENT (Note 8)            
     Producing properties   65,902,274     57,144,477  
     Exploration properties   113,931,240     109,255,696  
     Plant and equipment   75,902,712     60,388,530  
    255,736,226     226,788,703  
CORPORATE OFFICE EQUIPMENT (Note 8)   491,918     409,281  
DEPOSITS ON LONG-TERM ASSETS   2,412,556     4,306,419  
FUTURE INCOME TAX (Note 15)   738,379     -  
TOTAL ASSETS   321,468,020     251,473,463  
             
LIABILITIES    
CURRENT LIABILITIES            
Accounts payable and accrued liabilities   12,190,647     11,202,381  
Unearned revenue on silver bullion sales   97,804     158,147  
Current portion of capital lease obligations (Note 10)   1,239,939     2,139,352  
Income and other taxes payable   437,674     117,844  
Current portion of debt facilities (Note 9)   -     1,546,612  
TOTAL CURRENT LIABILITIES   13,966,064     15,164,336  
             
CAPITAL LEASE OBLIGATIONS (Note 10)   2,317,575     668,284  
FUTURE INCOME TAXES (Note 15)   42,373,025     28,417,011  
OTHER LONG TERM LIABILITIES (Note 8(b) and 11)   888,259     753,657  
ASSET RETIREMENT OBLIGATIONS (Note 12)   6,104,302     4,336,088  
LONG-TERM PORTION OF DEBT FACILITIES (Note 9)   -     3,213,487  
TOTAL LIABILITIES   65,649,225     52,552,863  
             
SHAREHOLDERS' EQUITY    
SHARE CAPITAL (Note 13(a))   265,504,530     244,241,006  
SHARE CAPITAL TO BE ISSUED (Note 13(d))   274,075     276,495  
CONTRIBUTED SURPLUS   27,952,397     27,808,671  
ACCUMULATED OTHER COMPREHENSIVE LOSS   (40,850,494 )   (40,238,914 )
RETAINED EARNINGS (DEFICIT)   2,938,287     (33,166,658 )
TOTAL SHAREHOLDERS' EQUITY   255,818,795     198,920,600  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   321,468,020     251,473,463  
             
CONTINGENT LIABILITIES (Note 19)            
COMMITMENTS (Note 20)            

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

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


FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Expressed in Canadian dollars, except share amounts)

    Year Ended December 31,  
    2010     2009  
  $    $   
             
Revenues (Note 14)   120,765,361     59,510,669  
             
Cost of sales   49,834,491     34,351,853  
Depletion, depreciation and amortization   9,383,782     6,252,774  
Accretion of reclamation obligation (Note 12)   375,672     445,090  
Mine operating earnings   61,171,416     18,460,952  
             
General and administrative   10,787,267     8,089,087  
Stock-based compensation (Note 13(b))   4,548,633     3,302,780  
Write-down of mineral properties (Note 8(f))   -     2,589,824  
    15,335,900     13,981,691  
             
Operating income   45,835,516     4,479,261  
             
Interest and other expenses   (1,863,640 )   (2,101,862 )
Investment and other income   3,022,113     1,129,527  
Impairment of marketable securities   -     (390,467 )
Foreign exchange gain (loss)   18,030     (36,426 )
Income before taxes   47,012,019     3,080,033  
             
Income tax expense - current (Note 15)   448,027     85,786  
Income tax expense (recovery) - future (Note 15)   10,459,047     (3,315,978 )
    10,907,074     (3,230,192 )
             
NET INCOME FOR THE YEAR   36,104,945     6,310,225  
             
EARNINGS PER COMMON SHARE            
         BASIC $  0.39   $  0.08  
         DILUTED $  0.37   $  0.07  
             
WEIGHTED AVERAGE SHARES OUTSTANDING            
         BASIC   93,587,581     83,389,253  
         DILUTED   98,857,498     85,913,487  

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


FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Expressed in Canadian dollars, except share amounts)

                            Accumulated                    
                            Other                    
                            Comprehensive      Retained      Total        
    Share Capital     Contributed     Loss     Earnings     AOCL        
    Shares     Amount     To be issued     Surplus     ("AOCL")     (Deficit)     and Deficit     Total  
        $     $   $     $   $    $    $   
                                                 
Balance at December 31, 2008   73,847,810     196,648,345     276,495     23,297,258     (23,216,390 )   (39,476,883 )   (62,693,273 )   157,528,825  
Net income   -     -     -     -     -     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     68,838     -     -     -     -     -     68,838  
 Exercise of warrants   50,000     165,000     -     -     -     -     -     165,000  
 Public offering, net of issue costs (Note 13(a)(i))   8,487,576     18,840,890     -     848,758     -     -     -     19,689,648  
 Private placements, net of issue costs (Note 13(a)(ii))   4,167,478     9,051,069     -     389,000     -     -     -     9,440,069  
 Debt settlements (Note 13(a)(iii))   1,191,852     2,741,260     -     -     -     -     -     2,741,260  
 Acquisition of Normabec (Note 18)   4,867,778     16,696,479     -     -     -     -     -     16,696,479  
Stock option expense during the year   -     -     -     3,302,780     -     -     -     3,302,780  
Transfer of contributed surplus upon exercise of stock options   -     29,125     -     (29,125 )   -     -     -     -  
Balance at December 31, 2009   92,648,744     244,241,006     276,495     27,808,671     (40,238,914 )   (33,166,658 )   (73,405,572 )   198,920,600  
                                                 
Net income   -     -     -     -     -     36,104,945     36,104,945     36,104,945  
Other comprehensive income:                                                
 Translation adjustment   -     -     -     -     (686,277 )   -     (686,277 )   (686,277 )
 Unrealized gain on marketable securities   -     -     -     -     74,697     -     74,697     74,697  
Total comprehensive income                                       35,493,365     35,493,365  
Shares issued for:                                                
 Exercise of options   3,573,125     11,295,994     -     -     -     -     -     11,295,994  
 Exercise of warrants   1,185,250     4,045,975     -     -     -     -     -     4,045,975  
 Acquisition of assets at Real de Catorce (Note 8(e))   152,798     1,514,228     -     -     -     -     -     1,514,228  
 Conversion of shares to be issued (Note 13(d))   500     2,420     (2,420 )   -     -     -     -     -  
Stock option expense during the year   -     -     -     4,548,633     -     -     -     4,548,633  
Transfer of contributed surplus upon exercise of stock options and warrants   -     4,404,907     -     (4,404,907 )   -     -     -     -  
Balance at December 31, 2010   97,560,417     265,504,530     274,075     27,952,397     (40,850,494 )   2,938,287     (37,912,207 )   255,818,795  

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


FIRST MAJESTIC SILVER CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Expressed in Canadian dollars)

    Year Ended December 31,  
    2010     2009  
  $    $   
OPERATING ACTIVITIES            
Net income for the year   36,104,945     6,310,225  
Adjustment for items not affecting cash            
    Depletion, depreciation and amortization   9,383,782     6,252,774  
    Stock-based compensation   4,548,633     3,302,780  
    Accretion of reclamation obligation   375,672     445,090  
    Other income from derivative financial instruments   (3,007,199 )   (1,002,780 )
    Future income tax provision (recovery)   10,459,047     (3,315,978 )
    Unrealized foreign exchange loss and other   489,228     566,553  
    Write-down of mineral properties   -     2,589,824  
    Write-down of marketable securities   -     390,467  
             
Net change in non-cash working capital items            
    Decrease (increase) in accounts receivable and other receivables   484,505     (960,183 )
    Decrease (increase) in inventories   (4,791,939 )   365,964  
    Decrease (increase) in prepaid expenses and other   (446,354 )   (1,144,849 )
    Increase (decrease) in accounts payable and accrued liabilities   4,508,651     (5,813,014 )
    Increase (decrease) in unearned revenue   (60,343 )   47,889  
    Increase (decrease) in income and other taxes payable   319,830     (89,190 )
    Decrease in vendor liability on mineral property   -     (1,242,543 )
             
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES   58,368,458     6,703,029  
             
INVESTING ACTIVITIES            
Additions to plant and equipment (net of accruals)   (18,573,718 )   (19,861,580 )
Expenditures on mineral property interests (net of accruals)   (15,766,402 )   (14,025,158 )
Realized gain on derivative financial instruments   3,007,199     1,002,780  
Proceeds from sale of marketable securities   108,062     -  
Increase of deposits on long-term assets   (2,412,556 )   (2,508,617 )
Investment in marketable securities   (25,000 )   (300,000 )
Net proceeds from pre-commercial operation   2,101,124     496,371  
Acquisition of Normabec, less cash acquired   -     (531,419 )
Decrease in silver futures contract deposits   -     352,383  
Payment of restricted cash into trust account   -     (14,258,332 )
             
CASH FLOWS USED IN INVESTING ACTIVITIES   (31,561,291 )   (49,633,572 )
             
FINANCING ACTIVITIES            
Issuance of common shares and warrants, net of issue costs   -     29,129,717  
Issuance of common shares on exercise of stock options and warrants   15,341,969     233,838  
Payment of capital lease obligations   (2,172,366 )   (2,708,513 )
Proceeds from (repayment of) prepayment facility   (450,940 )   415,632  
Proceeds from (repayment of) debt facilities   (4,309,159 )   4,309,159  
Repayment of other long-term liabilities   (40,272 )   -  
             
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES   8,369,232     31,379,833  
             
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   35,176,399     (11,550,710 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH HELD IN FOREIGN CURRENCY   (125,488 )   16,380  
CASH AND CASH EQUIVALENTS - BEGINNING OF THE YEAR   5,889,793     17,424,123  
             
CASH AND CASH EQUIVALENTS - END OF YEAR   40,940,704     5,889,793  
             
CASH AND CASH EQUIVALENTS IS COMPRISED OF:            
Cash   34,762,355     5,296,059  
Short term deposits   6,178,349     593,734  
             
    40,940,704     5,889,793  
             
Interest paid   713,391     636,950  
Income taxes paid   327,871     -  
             
NON-CASH FINANCING AND INVESTING ACTIVITIES (NOTE 21)            

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


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

1. DESCRIPTION OF BUSINESS

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

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”). Significant differences from accounting principles generally accepted in the United States (“US GAAP”) are discussed in Note 23.

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 de 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 17. Intercompany balances and transactions are eliminated on consolidation. The Company has determined that it has no variable interest entities.

Measurement Uncertainties

The preparation of consolidated financial statements in accordance 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 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.

Inventories

Finished product inventories of silver doré and silver, lead and zinc concentrates, and silver coins and bullion, as well as 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-products. Materials and supplies are valued at the lower of cost and net replacement cost.

Notes Page 1


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Mineral Property Interests

Mineral property costs and exploration, development and field support costs directly related 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 estimated 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. Borrowing costs incurred that are attributable to acquiring or developing plant and equipment and constructing new facilities are capitalized and included in the carrying amounts of related assets until mining properties and facilities are ready for their intended use.

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 or generate the necessary funds 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.

Notes Page 2


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

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

The functional currency of the Company, the parent entity, is the Canadian dollar. The accounts of our self-sustaining foreign operations are translated at year end exchange rates, and revenues and expenses are translated at the exchange rates in effect at the date of the underlying transactions. Differences arising from these foreign currency translations are recorded in other comprehensive income.

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.

Plant and Equipment

Plant and equipment are recorded at cost less accumulated depreciation. Amortization of plant and equipment is calculated on a straight-line basis over the estimated useful life of the asset, not exceeding the estimated life of mine. Amortization of construction in progress costs commence when the related asset is complete, ready for use, and utilized in commercial production.

Revenue Recognition

Revenue from the sale of silver, lead and zinc is recognized when title transfers to the customer (which generally occurs when the goods have been delivered to a contractually agreed location) 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. 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.

When cash has been received from customers prior to shipping their ordered silver coins, ingots and bullion products, the amounts are recorded as unearned revenue until the products are shipped.

Notes Page 3


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings Per Share

Basic earnings per share is computed by dividing the earnings 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 in which the assumed proceeds of dilutive convertible securities are used to purchase the Company’s common shares at their average market price for the period.

Stock-based Compensation

The Company uses the fair value method for recording compensation for all stock option awards made to directors, employees and non-employees. The stock-based compensation expense is determined as the fair value of the stock 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 loss (“AOCL”).

Financial Instruments – Recognition and Measurement and Hedges

Financial assets and liabilities, including derivatives, are recognized on the Company’s 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. 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, for loans and receivables, are 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.

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 recognized in OCI.

Notes Page 4


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial Instruments – Recognition and Measurement and Hedges (continued)

Other than temporary losses on available-for-sale, financial assets are recognized in the consolidated statements of income. 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 commodity contracts to manage exposure to fluctuations in 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.

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

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

Changes in Accounting Policies

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

Future Accounting Pronouncements

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.

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 year ended December 31, 2009.

Notes Page 5


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

3. MANAGEMENT OF CAPITAL RISK (continued)

The capital of the Company consists of debt facilities and shareholders’ equity, comprising issued capital, share capital to be issued, contributed surplus, retained earnings and accumulated other comprehensive loss, net of cash and cash equivalents as follows:

    December 31, 2010     December 31, 2009  
  $    $   
Shareholders' Equity   255,818,795     198,920,600  
Debt facilities   -     4,760,099  
    255,818,795     203,680,699  
Less: cash and cash equivalents   (40,940,704 )   (5,889,793 )
    214,878,091     197,790,906  

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.

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.

As at December 31, 2010 and 2009, the carrying and fair values of our financial instruments by category are as follows:

    December 31, 2010     December 31, 2009  
    Carrying     Fair     Carrying     Fair  
    value     value     value     value  
  $    $    $    $   
Financial assets                        
Held for trading                        
 Cash and cash equivalents   40,940,704     40,940,704     5,889,793     5,889,793  
Loans and receivables                        
 Accounts and other receivables   8,314,543     8,314,543     8,799,048     8,799,048  
Available for sale                        
 Marketable securities   355,027     355,027     387,425     387,425  
Total financial assets   49,610,274     49,610,274     15,076,266     15,076,266  
                         
Financial liabilities                        
Other financial liabilities                        
 Accounts payable and accrued liabilities   12,190,647     12,190,647     11,202,381     11,202,381  
 Debt facilities   -     -     4,760,099     4,760,099  
Total financial liabilities   12,190,647     12,190,647     15,962,480     15,962,480  

Notes Page 6


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

4. FINANCIAL INSTRUMENTS AND RISKS

Fair Value Hierarchy

The Company uses various valuation techniques in determining the fair value of financial assets and liabilities based on the extent to which the fair value is observable. The following fair value hierarchy is used to categorize and disclose the Company’s financial assets and liabilities held at fair value for which a valuation technique is used:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: All inputs which have a significant effect on the fair value are observable, either directly or indirectly, for substantially the full contractual term.

Level 3: Inputs which have a significant effect on the fair value are not based on observable market data.

          December 31, 2010        
    Level 1     Level 2     Level 3     Total  
  $    $    $    $   
Financial assets                        
Held for trading                        
 Cash and cash equivalents   40,940,704     -     -     40,940,704  
Available for sale                        
 Marketable securities (1)   355,027     -     -     355,027  

(1) Marketable securities are valued based on unadjusted quoted prices for identical assets in an active market obtained from securities exchanges.

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 cash and cash equivalents, 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 its by-products primarily through two international organizations. 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 $4.6 million as at December 31, 2010, a portion of which is past due. The Company is proceeding through a review process with Mexican tax authorities. However, the Company expects to fully recover these amounts and no allowance has been recorded.

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 and to support its expansion plans. As at December 31, 2010, the Company has no outstanding debt except for capital leases secured by purchased equipment.

The Company believes it has sufficient cash on hand to meet operating requirements as they arise for at least the next twelve months.

Notes Page 7


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

4. FINANCIAL INSTRUMENTS AND RISKS (continued)

Liquidity Risk (continued)

The Company’s liabilities have contractual maturities the carrying values of which are summarized below:

    Payments Due By Period  
    Total     Less than     1 to 3     4 to 5     After 5  
          1 year     years     years     years  
    $     $     $     $     $  
Office Lease   289,500     231,600     57,900     -     -  
Capital Lease Obligations   3,557,514     1,239,939     1,637,223     680,352     -  
Asset Retirement Obligations   6,104,302     -     -     -     6,104,302  
Accounts Payable and Accrued Liabilities   12,190,647     12,190,647     -     -     -  
Total Contractual Obligations   22,141,963     13,662,186     1,695,123     680,352     6,104,302  

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, 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 US dollar, Mexican peso and the Canadian dollar is included in the table below.

    December 31, 2010  
Balances in CAD$                     Net assets     Effect of +/- 10%  
    Cash and cash     Accounts and     Accounts and     (liabilities)     change in  
    equivalents     other receivable     other payables     exposure     currency  
  $    $    $    $    $   
U.S. dollar   23,257,889     2,729,853     (2,391,757 )   23,595,984     2,359,598  
Mexican peso   53,940     5,494,096     (5,058,803 )   489,233     54,359  
    23,311,828     8,223,949     (7,450,561 )   24,085,216     2,413,957  

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, which accounts for less than 5% of the Company’s gross revenue. The Company’s sales levels are directly dependent on commodity prices that have shown significant volatility and which are beyond the Company’s control. The Company uses derivative instruments to hedge its commodity price risk for a short term period, not exceeding one month of production. There were no derivatives outstanding as at December 31, 2010.

As at December 31, 2010, based on unsettled silver ounces sold by the Company that is subject to market price adjustments, a 10% increase or decrease of silver price at December 31, 2010 would result in an increase or decrease, respectively, of our accounts receivable and net revenue by $0.2 million.

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.

Notes Page 8


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

4. FINANCIAL INSTRUMENTS AND RISKS (continued)

Interest Rate Risk (continued)

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. As at December 31, 2010, with the exception of capital leases, which have fixed interest rates, the Company has no interest bearing financial liabilities.

Based on the Company’s interest rate exposure at December 31, 2010, a change of 25 basis points increase or decrease of market interest rate does not have a significant impact in net earnings.

5. OTHER RECEIVABLES

Details of the components of other receivables are as follows:

    December 31, 2010     December 31, 2009  
  $    $   
Value added taxes recoverable   3,979,085     4,066,074  
Other taxes and value added taxes on accounts payable   1,291,626     2,072,442  
Loan receivable and other   310,250     485,684  
    5,580,961     6,624,200  

6. INVENTORIES

Inventories consist of the following:

    December 31, 2010     December 31, 2009  
  $    $   
Finished product - doré and concentrates   1,813,478     343,990  
Ore in process   1,226,394     463,549  
Stockpile   954,198     387,836  
Materials and supplies   4,217,330     2,343,823  
Silver coins and bullion including in process shipments   392,999     273,262  
    8,604,399     3,812,460  

The amount of inventory recognized as expense during the year is equivalent to the cost of sales for the year.

7. PREPAID EXPENSES AND OTHER

Details of prepaid expenses and other are as follows:

    December 31, 2010     December 31, 2009  
  $    $   
Prepayments to suppliers and contractors   1,328,646     865,298  
Deposits   235,063     215,036  
Marketable securities   355,027     387,425  
    1,918,736     1,467,759  

Notes Page 9

FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

8. MINING INTERESTS AND PLANT AND EQUIPMENT

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

    December 31, 2010     December 31, 2009  
          Accumulated                 Accumulated        
          Depreciation,                 Depreciation,        
          Depletion and     Net Book           Depletion and     Net Book  
    Cost     Amortization     Value     Cost     Amortization     Value  
  $    $    $    $    $    $   
Mining interests   201,555,376     21,721,862     179,833,514     183,585,673     17,185,500     166,400,173  
Plant and equipment   89,157,527     13,254,815     75,902,712     69,026,387     8,637,857     60,388,530  
    290,712,903     34,976,677     255,736,226     252,612,060     25,823,357     226,788,703  

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

    December 31, 2010     December 31, 2009  
          Accumulated                 Accumulated        
          Depletion                 Depletion        
          and     Net Book           and     Net Book  
    Cost     Amortization     Value     Cost     Amortization     Value  
MEXICO $    $    $    $    $    $   
                                     
Producing properties                                    
La Encantada (a)   18,888,198     5,087,307     13,800,891     13,055,900     2,886,830     10,169,070  
La Parrilla (b)   27,894,687     3,513,898     24,380,789     22,371,850     3,009,041     19,362,809  
San Martin (c)   40,841,251     13,120,657     27,720,594     38,902,227     11,289,629     27,612,598  
    87,624,136     21,721,862     65,902,274     74,329,977     17,185,500     57,144,477  
Exploration properties                                    
La Encantada (a)   3,049,450     -     3,049,450     2,467,451     -     2,467,451  
La Parrilla (b)   7,851,668     -     7,851,668     7,625,168     -     7,625,168  
San Martin (c)   67,825,354     -     67,825,354     65,931,244     -     65,931,244  
Del Toro (d)   12,466,106     -     12,466,106     11,855,627     -     11,855,627  
Real de Catorce (e)   22,738,662     -     22,738,662     21,376,206     -     21,376,206  
    113,931,240     -     113,931,240     109,255,696     -     109,255,696  
    201,555,376     21,721,862     179,833,514     183,585,673     17,185,500     166,400,173  

Notes Page 10


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

8. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

A summary of plant and equipment is as follows:

    December 31, 2010     December 31, 2009  
          Accumulated     Net Book           Accumulated     Net Book  
    Cost     Depreciation     Value     Cost     Depreciation     Value  
  $    $    $    $    $    $   
La Encantada Silver Mine   54,041,339     4,556,261     49,485,078     42,001,694     1,954,699     40,046,995  
La Parrilla Silver Mine   22,275,429     5,298,865     16,976,564     17,228,300     3,792,818     13,435,482  
San Martin Silver Mine   11,501,455     3,361,671     8,139,784     9,751,407     2,889,290     6,862,117  
Real de Catorce Silver Project   1,339,304     38,018     1,301,286     44,986     1,050     43,936  
Used in Mining Operations   89,157,527     13,254,815     75,902,712     69,026,387     8,637,857     60,388,530  
Corporate office equipment   1,096,160     604,242     491,918     767,782     358,501     409,281  
    90,253,687     13,859,057     76,394,630     69,794,169     8,996,358     60,797,811  

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

    December 31, 2010     December 31, 2009  
          Accumulated     Net Book           Accumulated     Net Book  
    Cost     Depreciation     Value     Cost     Depreciation     Value  
  $    $    $    $    $    $   
Land   3,331,012     -     3,331,012     2,279,494     -     2,279,494  
Automobile   734,870     238,871     495,999     401,056     204,920     196,136  
Buildings   11,717,679     958,289     10,759,390     5,918,355     578,177     5,340,178  
Machinery and equipment   67,669,464     11,410,207     56,259,257     26,154,678     7,311,470     18,843,208  
Computer equipment   1,131,312     532,472     598,840     560,018     279,783     280,235  
Office equipment   656,523     487,535     168,988     577,215     460,070     117,145  
Leasehold improvements   332,483     231,683     100,800     320,304     161,938     158,366  
Construction in progress (1)(2)   4,680,344     -     4,680,344     33,583,049     -     33,583,049  
    90,253,687     13,859,057     76,394,630     69,794,169     8,996,358     60,797,811  

(1)

Construction in progress includes $850,361 relating to La Encantada, $1,891,503 relating to La Parrilla and $1,938,480 relating to San Martin (December 31, 2009 - $31,283,949 relating to La Encantada, $535,604 relating to La Parrilla and $1,763,496 relating to San Martin).

   
(2)

On April 1, 2010, the La Encantada mill expansion project was commissioned. Prior to April 1, 2010, the net amount of revenues less production costs of $2,770,596 (December 31, 2009 - $496,371) in connection with the sale of 316,680 silver equivalent ounces (December 31, 2009 – 54,277 silver equivalent ounces) in the form of precipitates during the pre- operating period from November 19, 2009 to March 31, 2010 were offset to construction in progress.

(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 La Encantada Silver Mine consists of a 3,750 tonnes per day cyanidation plant, a 1,000 tonnes per day flotation plant (currently in care-and-maintenance), an airstrip, and a village with 180 houses as well as administrative offices and infrastructure required for such an operation. The mine is comprised of 4,076 hectares of mining rights and surface land ownership of 1,343 hectares. The closest town, Muzquiz, is 225 km away via mostly paved road. The Company owns 100% of the La Encantada Silver Mine. On April 1, 2010, the mill expansion project achieved commercial stage production and all revenues and costs from that date are recorded in the mine operating earnings.

Notes Page 11


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

8. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

(b) La Parrilla Silver Mine, Durango State

The La Parrilla Silver Mine is a system of connected underground producing mines consisting of the La Rosa/Rosarios/La Blanca, the San Marcos mine and the Quebradillas mine. La Parrilla is located approximately 65 km southeast of the city of Durango, in the State of Durango, Mexico. Located at the mine are: a 850 tonnes per day milling facility consisting of a 425 tpd cyanidation circuit and a 425 tpd flotation circuit, mining equipment, buildings and infrastructure related to the operation and mining concessions covering an area of 69,867 hectares. The Company owns 100% of the La Parrilla Silver Mine. In September 2010, the Company entered into an agreement to acquire an additional 15 hectares of surface rights at Quebradillas for total consideration of $348,710 (4.2 million Mexican pesos). At December 31, 2010, the Company had paid $75,194 (926,000 Mexican pesos). The remaining balance of $267,969 (3.3 million Mexican pesos) will be paid in 25 monthly instalments of $12,377 (150,000 Mexican pesos). The Company owns 45 hectares and leases an additional 69 hectares of surface rights. During 2010, the Company staked an additional 16,630 hectares of mining rights at Quebradillas, which created a 69,867 hectare contiguous block of mining rights surrounding the La Parrilla mining operations.

There is a net smelter royalty (“NSR”) agreement of 1.5% of sales revenue associated with the Quebradillas Mine, with a maximum payable of US$2.5 million. The Company has an option to purchase the NSR at any time for an amount of US$2.0 million. For the year ended December 31, 2010, the Company paid royalties of $119,707 (US$116,208) (2009 - $154,585 or US$135,363). The sum of total royalties paid to date for the Quebradillas NSR is US$320,572 as at December 31, 2010.

(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 operation consists of a 900 tonne per day cyanidation mill, flotation circuit, mine buildings, administrative offices and all related infrastructure. The mine is comprised of approximately 7,841 hectares of mineral rights, approximately 1,300 hectares of surface rights surrounding the mine, and another 104 hectares of surface rights where the mill is located. The Company owns 100% of the San Martin Silver Mine. The Company also owns the Jalisco Group of Properties which consist of 5,240 hectares of mining claims in Jalisco State, Mexico. In January 2011, the Company entered into a letter of intent to grant an option to acquire up to 90% interest in the Jalisco Group of Properties. See Note 22(a) for details.

(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 393 contiguous hectares of mining claims and 129 hectares of surface rights covering the area surrounding the San Juan mine. The Del Toro Silver Mine consists of two old silver mines, the San Juan and Perseverancia mines, which are approximately one kilometre apart. The Company owns 100% of the Del Toro Silver Mine.

In July 2008, the Company acquired 46 hectares of mining rights (“Fatima”) for US$387,500 in option payments due between 2008 and 2010. During 2010, the Company completed the acquisition by paying the remaining US$225,000 in option payments.

(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.

Notes Page 12


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

8. MINING INTERESTS AND PLANT AND EQUIPMENT (continued)

 (e) Real de Catorce Silver Project, San Luis Potosi State (continued)

In November 2010, the Company agreed to acquire the 3% NSR, the surface rights of the property, the buildings located thereon covering the location of the previous mining operations, and all technical and geological information collected pertaining to the area, in consideration for US$3.0 million. Consideration for the purchase consisted of a cash payment of US$1.05 million and US$1.5 million in shares of the Company in November 2010, and US$0.45 million which was paid by January 31, 2011 and was included in accrued liabilities at December 31, 2010.

(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 in 2009.

9. DEBT FACILITIES

(a) Pre-Payment Facility

In August 2009, the Company entered into an agreement for a six-month pre-payment advance on the sale of lead concentrate. 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. During 2010, the pre-payment facility was fully repaid. As at December 31, 2010, the balance owing on the pre-payment facility was $nil (2009 - $450,940).

(b) FIFOMI Loan Facilities

In October 2009, the Company entered into an agreement with the Mexican Mining Development Trust -Fideicomiso de Fomento Minero (FIFOMI) for two loan facilities, a capital asset loan and a working capital loan, totalling $4.3 million (53.8 million Mexican pesos). Funds from these loans were used for the completion of the 3,500 tonnes per day cyanidation plant at the La Encantada Silver Mine and for working capital purposes. The capital asset loan, for up to $3.7 million (47.1 million Mexican pesos), had interest at the Mexican interbank rate (4.5%) plus 7.51% per annum and was repayable over a 60-month period. The working capital loan, for up to $0.6 million (6.7 million Mexican pesos), had interest at the Mexican interbank rate plus 7.31% per annum and was a 90-day revolving loan. The loans were secured against real property, land, buildings, facilities, machinery and equipment at the La Encantada Silver Mine.

During the year ended December 31, 2010, the Company repaid the FIFOMI loan facilities. At December 31, 2010, the balance owing was $nil (2009 - $4,309,159). The early repayment has released the Company’s security and all guarantees relating to the FIFOMI loans.

10. CAPITAL LEASE OBLIGATIONS

In 2007 and 2008, the Company completed lease financings for $14.1 million (US$11.2 million) of mining equipment. The Company paid 50% prior to the arrival of the equipment, and financed the remaining 50% in quarterly payments over a period of 24 months at 9% interest over the term of the lease. In March 2009, the Company refinanced the balance of $3.6 million (US$2.9 million) to be paid over 24 monthly payments commencing in February 2009 and to be completed by January 2011 with interest payable at 9% on the outstanding principal balance, secured by a guarantee from the Company.

Notes Page 13

FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

10. CAPITAL LEASE OBLIGATIONS (continued)

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

During 2010, the Company entered into various lease financing arrangements for $3.7 million (US$3.7 million) of mining equipment. The Company paid 15% prior to delivery of the equipment, and financed the remaining 85% over a period of 48 months at an interest rate of 7.9% . The leases are secured by guarantees from the Company.

The following is a schedule of future minimum lease payments under the capital leases as at December 31, 2010 and 2009:

    December 31, 2010     December 31, 2009  
  $    $   
2010 Gross lease payments   -     2,235,960  
2011 Gross lease payments   1,400,895     684,364  
2012 Gross lease payments   1,048,062     139,309  
2013 Gross lease payments   915,083     -  
2014 Gross lease payments   709,881     -  
    4,073,921     3,059,633  
Less: interest   (516,407 )   (251,997 )
Total payments, net of interest   3,557,514     2,807,636  
Less: current portion   (1,239,939 )   (2,139,352 )
Capital lease obligation - long-term portion   2,317,575     668,284  

11. 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 accrued at December 31, 2010 including interest and penalties amounts to $767,766 (2009-$753,657).

12. ASSET RETIREMENT OBLIGATIONS

    Year Ended     Year Ended  
    December 31, 2010     December 31, 2009  
  $    $   
Balance, beginning of the year   4,336,088     5,304,369  
Effect of change in estimates   1,387,413     (877,834 )
Interest accretion   375,672     445,090  
Effect of translation of foreign currencies   5,129     (535,537 )
Balance, end of the year   6,104,302     4,336,088  

Notes Page 14


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

12. ASSET RETIREMENT OBLIGATIONS (continued)

Asset retirement obligations allocated by mineral properties are as follows:

    Anticipated     December 31, 2010     December 31, 2009  
    Date   $    $   
La Encantada Silver Mine   2017     2,233,125     1,815,518  
La Parrilla Silver Mine   2018     1,675,646     998,293  
San Martin Silver Mine   2019     1,725,450     1,522,277  
Real de Catorce Project   2028     470,081     -  
          6,104,302     4,336,088  

During the year ended December 31, 2010, 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 $7.8 million (2009 - $6.1 million), which has been discounted using a credit adjusted risk free rate of 8.5% (2009 - 8.5%), of which $2.1 million (2009 -$1.7 million) of the reclamation obligation relates to the La Parrilla Silver Mine, $2.2 million (2009 - $2.0 million) of the obligation relates to the San Martin Silver Mine, $2.7 million (2009 - $2.5 million) relates to the La Encantada Silver Mine and $0.8 million (2009 - $nil) relates to the Real de Catorce Project. 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.

13. SHARE CAPITAL

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

  Issued   Year Ended December 31, 2010     Year Ended December 31, 2009  
      Shares   $      Shares   $   
  Balance - beginning of the year   92,648,744     244,241,006     73,847,810     196,648,345  
  Issued during the year                        
  For cash:                        
   Exercise of options   3,573,125     11,295,994     36,250     68,838  
   Exercise of warrants   1,185,250     4,045,975     50,000     165,000  
   Public offering of units (i)   -     -     8,487,576     18,840,890  
   Private placements (ii)   -     -     4,167,478     9,051,069  
  For debt settlements (iii)   -     -     1,191,852     2,741,260  
  For Normabec acquisition (iv)   -     -     4,867,778     16,696,479  
  For acquisition of assets at Real de Catorce (Note 8(e))   152,798     1,514,228     -     -  
  For conversion of shares to be issued   500     2,420     -     -  
  Transfer of contributed surplus for stock options and warrants exercised   -     4,404,907     -     29,125  
  Balance - end of the year   97,560,417     265,504,530     92,648,744     244,241,006  

(i)

In March 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.

Notes Page 15


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

13. SHARE CAPITAL (continued)

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

(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.

     
  (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 18).

(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, 2010 and 2009 are as follows:

    Year Ended December 31, 2010     Year Ended December 31, 2009  
                         
          Weighted Average           Weighted Average  
          Exercise Price           Exercise Price  
    Number of Shares     ($)     Number of Shares     ($)  
Balance, beginning of the year   8,603,750     3.50     6,862,500     3.84  
Granted   2,003,000     10.03     2,842,500     2.88  
Exercised   (3,573,125 )   3.16     (36,250 )   1.90  
Expired   (568,750 )   4.63     (1,065,000 )   4.11  
Balance, end of the year   6,464,875     5.61     8,603,750     3.50  

Notes Page 16


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

13. SHARE CAPITAL (continued)

(b) Stock Options (continued)

The following table summarizes both the stock options outstanding and those that are exercisable at December 31, 2010:

Price   Options     Options        
$   Outstanding     Exercisable     Expiry Dates  
4.02   30,000     30,000     May 15, 2011  
4.30   200,000     200,000     June 19, 2011  
4.67   50,000     50,000     July 4, 2011  
4.15   220,000     220,000     July 28, 2011  
3.62   190,000     190,000     August 28, 2011  
4.32   140,000     140,000     December 6, 2011  
4.41   300,000     300,000     December 22, 2011  
5.00   140,000     140,000     February 7, 2012  
2.03   542,500     542,500     May 7, 2012  
2.62   27,500     12,500     September 16, 2012  
2.96   12,500     6,250     October 28, 2012  
4.34   925,000     925,000     December 5, 2012  
3.52   455,000     320,000     December 7, 2012  
3.70   456,250     328,750     December 15, 2012  
3.56   200,000     100,000     February 2, 2013  
3.15   12,500     -     March 19, 2013  
3.98   90,000     45,000     May 13, 2013  
3.74   75,000     25,000     May 15, 2013  
3.94   10,000     5,000     June 3, 2013  
4.47   50,000     25,000     June 28, 2013  
4.04   100,000     25,000     August 9, 2013  
3.62   100,000     100,000     August 28, 2013  
12.44   993,000     248,250     December 15, 2013  
2.03   358,125     358,125     May 7, 2014  
2.32   12,500     12,500     June 15, 2014  
3.70   325,000     237,500     December 15, 2014  
12.44   450,000     112,500     December 15, 2015  
Total   6,464,875     4,698,875        
Weighted average exercise price $  5.61   $  4.32        

During the year ended December 31, 2010, the Company granted stock options to directors, officers and employees to purchase 2,003,000 (2009 - 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 during the year was $8,400,000 (2009 - $3,991,000), of which $2,603,046 (2009 -$1,455,279) was expensed in the current year and the remaining balance will be amortized over the remaining vesting period of the stock options.

Notes Page 17


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

13. SHARE CAPITAL (continued)

(b) Stock Options (continued)

The weighted average fair value of each stock options granted during the year was $4.19 (2009 - $1.41) . 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, 2010 December 31, 2009
Risk-free interest rate 1.6% 1.1%
Estimated volatility 72.4% 83.7%
Expected life 2.1 years 2.2 years
Expected dividend yield 0% 0%

The Black-Scholes option pricing model requires the use of the above noted estimates and assumptions including the expected volatility of share prices. Changes in these underlying assumptions can materially affect the fair value estimates, therefore, the Black-Scholes model does not necessarily provide an accurate measure of the ongoing actual fair value of the Company’s stock options.

(c) Share Purchase Warrants

The changes in share purchase warrants for the years ended December 31, 2010 and 2009 are as follows:

    Year Ended December 31, 2010     Year Ended December 31, 2009  
          Weighted Average           Weighted Average  
          Exercise Price           Exercise Price  
    Number of Shares     ($)     Number of Shares     ($)  
Balance, beginning of the year   11,357,465     5.04     5,078,791     6.99  
Issued (i)(ii)(iii)(iv)   -     -     6,638,492     3.66  
Exercised   (1,185,250 )   3.41     (50,000 )   3.30  
Cancelled or expired   (5,029,938 )   7.06     (309,818 )   7.69  
Balance, end of the year   5,142,277     3.44     11,357,465     5.04  

(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.

Notes Page 18


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

13. SHARE CAPITAL (continued)

(c) Share Purchase Warrants (continued)

(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 18). 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%). Value of these warrants was nominal and no value was credited to contributed surplus.

The following table summarizes the share purchase warrants outstanding at December 31, 2010:

Exercise Price   Warrants        
$   Outstanding     Expiry Dates  
3.50   3,570,538     March 5, 2011  
3.30   1,300,000     August 20, 2011  
3.30   271,739     September 16, 2011  
    5,142,277        

(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, 2010, the prior shareholders of First Silver had yet to exchange the remaining 113,254 (2009 -114,254) shares of First Silver, exchangeable for 56,627 (2009 - 57,127) shares of First Majestic resulting in a remaining value of shares to be issued of $274,075 (2009 - $276,495).

Any certificate formerly representing First Silver shares not duly surrendered on or prior to September 14, 2012 will 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.

Notes Page 19


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

14. REVENUE

Details of the components of revenue are as follows:

    Year Ended December 31,  
    2010     2009  
  $    $   
Combined revenue - silver doré bars, concentrates, and bullion   138,189,740     76,596,113  
Less: intercompany eliminations   (6,016,853 )   (5,070,039 )
Consolidated gross revenue   132,172,887     71,526,074  
Less: refining, smelting, net of intercompany eliminations   (7,620,841 )   (9,310,475 )
Less: metal deductions, net of intercompany eliminations   (3,786,685 )   (2,704,930 )
Net revenue   120,765,361     59,510,669  

The La Encantada mill expansion project achieved commercial stage of production on April 1, 2010. Sales incurred during the pre-operating period were recorded as a reduction of capital costs and are excluded from sales revenue. As a result, sales of $4,718,618 (2009 - $944,468) in connection with the sale of 262,403 (2009 - 54,277) silver equivalent ounces of precipitates during the year have been excluded from the above net revenue table.

15. INCOME TAXES

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

    December 31, 2010     December 31, 2009  
  $    $   
Combined federal and provincial income tax rate   28.50%     30.00%  
             
Income tax expense (benefit) computed at Canadian statutory rates   13,398,425     924,010  
Non-deductible expenses   2,101,782     424,678  
Impact of change in tax rates on future income taxes   809,851     (836,147 )
Difference between statutory and actual tax rates   773,876     (241,100 )
Foreign exchange   (1,235,887 )   (2,409,644 )
Change in valuation allowance   (5,869,351 )   (1,493,871 )
Other   928,378     401,882  
Income tax expense (recovery) for the year   10,907,074     (3,230,192 )

Notes Page 20


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

15. INCOME TAXES (continued)

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

    December 31, 2010     December 31, 2009  
  $    $   
Future income tax assets            
 Net tax losses carried forward   11,451,103     19,453,298  
 Other assets/liabilities   2,365,209     3,235,061  
 Share issue costs   963,116     1,707,129  
 Capital losses   71,011     530,986  
 Valuation allowance   (501,428 )   (6,175,094 )
Net future income tax assets   14,349,011     18,751,380  
Future income tax liabilities            
Excess of carrying value of mineral property assets over tax value   (53,673,098 )   (47,168,391 )
Future income tax liabilities, net   (39,324,087 )   (28,417,011 )
Future income tax asset - current   2,310,559     -  
Future income tax asset - long term   738,379     -  
Future income tax liability - long term   (42,373,025 )   (28,417,011 )
Future income tax liabilities, net   (39,324,087 )   (28,417,011 )

At December 31, 2010, the Company has non-capital losses available for tax purposes for which no valuation allowance was recorded, consisting of:

    Amount     Expiry  
  $         
Canada   7,392,848     2026 - 2027  
Mexico   30,291,726     2016 - 2020  

The Company has capital losses available for deduction against future capital gains of $0.5 million (2009 -$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 certain future tax assets and therefore a valuation allowance has been recorded.

16. SEGMENTED INFORMATION

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

Notes Page 21


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

16. SEGMENTED INFORMATION (continued)

These reportable operating segments are summarized in the table below:

    Year Ended December 31, 2010  
                            Corporate and        
    San Martin     La Parrilla     La Encantada           Other        
    operations     operations     operations     Coin Sales     Eliminations     Total  
  $    $    $    $    $    $   
Revenue   24,626,577     31,650,272     63,223,142     6,661,640     (5,396,270 )   120,765,361  
Cost of sales   12,621,429     12,514,539     23,780,542     5,749,646     (4,831,666 )   49,834,491  
Mine operating earnings (loss)   9,202,897     16,504,128     35,117,002     911,994     (564,604 )   61,171,416  
Net income (loss)   5,296,440     3,959,434     20,244,019     911,994     5,693,059     36,104,945  
Capital expenditures   5,966,865     11,395,805     17,753,392     -     4,101,044     39,217,106  
Total assets   108,690,238     70,693,429     78,652,217     393,973     63,038,163     321,468,020  
                                     
                                     
    Year ended December 31, 2009  
                                     
                            Corporate and        
    San Martin     La Parrilla     La Encantada           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  
Mine operating earnings (loss)   6,436,510     7,527,047     4,589,546     271,255     (363,406 )   18,460,952  
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   103,851,426     60,345,275     62,556,787     651,642     24,068,333     251,473,463  

17. 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 final 25% instalment of $13,341,380 was due on May 30, 2008, and interest on the outstanding vendor balance amounting to $14,258,332 was paid into a trust account of the Company and First Silver against the Majority Shareholder pending the outcome of the claims.

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 alleged 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.

Notes Page 22


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

17. VENDOR LIABILITY AND INTEREST (continued)

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 $14,258,332 into the Defendant’s lawyer’s trust account (the “Trust Funds”) in partial payment of the Judgment. The Consent Order requires that the Trust Funds be held pending the outcome of the Action. The trial is scheduled to commence in the Supreme Court of British Columbia, Vancouver, British Columbia on April 17, 2012. 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.

18. 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.

The allocation of the purchase price to the assets acquired and liabilities assumed on November 13, 2009 was 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 Normabec   504,297  
  $  17,397,538  
Allocation of purchase price:      
   Net working capital $  154,914  
   Investments   38,513  
   Property, plant and equipment   44,986  
   Mining rights   21,215,673  
   Future income taxes   (4,056,548 )
  $  17,397,538  

19. 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.

Notes Page 23


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

20. COMMITMENTS

The Company is obligated to make certain mining property option payments as described in Note 8(b), in connection with the acquisition of its mineral property interests.

The Company has office lease and annual operating costs commitments as follows:

Year $   
2011   231,600  
2012   57,900  
Total   289,500  

The Company is committed to making severance payments in the amount of approximately $2.5 million (2009 -$1.9 million), subject to certain adjustments, to four officers in the event of a change of control of the Company.

21. NON-CASH FINANCING AND INVESTING ACTIVITIES

    Year Ended December 31,  
    2010     2009  
  $    $   
             
NON-CASH FINANCING AND INVESTING ACTIVITIES:            
Issuance of shares for acquisition of assets of the Real de Catorce project   1,514,228     16,696,479  
Assets acquired by capital lease   3,146,633     2,259,380  
Transfer of contributed surplus upon exercise of stock options and warrants   4,404,907     29,125  
Conversion of shares to be issued to common shares outstanding   2,420     -  
Fair value of warrants issued   -     1,237,758  
Issuance of shares for debt settlement   -     2,741,260  

22. SUBSEQUENT EVENTS

Subsequent to December 31, 2010:

(a)

In January 2011, the Company entered into a Letter of Intent whereby the Company has agreed to grant an option to acquire up to 90% in the Jalisco Group of Properties (the “Properties”) located in the Jalisco State, Mexico. Upon execution of a definitive agreement, expected to take place within 90 days, the optionee will be required to issue 10 million shares of common stock to the Company and spend $3 million over the first 3 years to earn a 50% interest and $5 million over 5 years to earn a 70% interest. In order to obtain a 90% interest, the optionee is required to complete a bankable feasibility study within 7 years. First Majestic will retain a 10% free carried interest and a 2.375% NSR.

   
(b)

From January 1, 2011 to February 25, 2011, 389,325 options and 1,989,300 warrants were exercised for gross proceeds of $8,191,259.

Notes Page 24


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

23. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which differ in certain material respects from those principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with accounting principles and practices generally accepted in the United States ("US GAAP").

Consolidated Statements of Income

The reconciliation between Canadian GAAP and US GAAP of the net income is as follows:

    Year Ended December 31,  
    2010     2009  
             
NET INCOME UNDER CANADIAN GAAP $  36,104,945   $  6,310,225  
Adjusted for:            
   Write-off of exploration expenditures (a)   (2,295,116 )   (3,165,664 )
   Pre-operating income (b)   1,415,482     297,344  
   Depletion expense (c)   (4,600,018 )   (2,177,516 )
   Future income tax recovery (d)   1,478,026     1,435,089  
NET INCOME UNDER US GAAP $  32,103,319   $  2,699,478  
             
EARNINGS PER SHARE UNDER US GAAP            
   Basic $  0.34   $  0.03  
   Diluted $  0.32   $  0.03  
             
WEIGHTED AVERAGE NUMBER OF COMMON SHARES            
   Basic   93,587,581     83,389,253  
   Diluted   98,857,498     85,913,487  

Comprehensive Income (Loss)

Comprehensive income (loss) under US GAAP is as follows:

    Year Ended December 31,  
    2010     2009  
             
NET INCOME UNDER US GAAP $  32,101,319   $  2,699,478  
             
Other comprehensive loss under Canadian GAAP: $  (611,580 ) $  (17,022,524 )
Adjusted for:            
     Translation adjustment (e)   (344,567 )   4,028,278  
    (956,147 )   (12,994,246 )
COMPREHENSIVE INCOME (LOSS) UNDER US GAAP $  31,145,172   $  (10,294,768 )

Notes Page 25


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

23. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

Consolidated Balance Sheets

The reconciliation between Canadian GAAP and US GAAP of the total assets, total liabilities and total shareholders’ equity is as follows:

    December 31, 2010     December 31, 2009  
             
TOTAL ASSETS UNDER CANADIAN GAAP $  321,468,020   $  251,473,463  
Adjustment to:            
   Mining interests, plant and equipment related to:            
       Exploration expenditures (a)   (41,437,142 )   (38,797,459 )
       Pre-operating income (b)   1,710,826     297,344  
       Depletion expense (c)   (6,992,329 )   (2,392,311 )
TOTAL ASSETS UNDER US GAAP $  274,749,375   $  210,581,037  
             
TOTAL LIABILITIES UNDER CANADIAN GAAP $  65,649,225   $  52,552,863  
   Adjustment to future tax liabilities (d)   (14,383,370 )   (12,905,344 )
TOTAL LIABILITIES UNDER US GAAP $  51,265,855   $  39,647,519  
             
SHAREHOLDERS' EQUITY UNDER CANADIAN GAAP $  255,818,795   $  198,920,600  
   Cumulative mining interests adjustment (a)   (46,211,180 )   (43,916,064 )
   Cumulative adjustment for pre-operating income (b)   1,710,826     297,344  
   Cumulative adjustment to depletion (c)   (6,992,329 )   (2,392,311 )
   Cumulative adjustment to future income taxes (d)   14,383,370     12,905,344  
   Cumulative adjustment to accumulated other comprehensive loss (e)   4,774,038     5,118,605  
SHAREHOLDERS' EQUITY UNDER US GAAP   223,483,520     170,933,518  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY UNDER US GAAP $  274,749,375   $  210,581,037  

The components of shareholders' equity under US GAAP would be as follows:

    December 31, 2010     December 31, 2009  
             
Share capital $  265,504,530   $  244,241,006  
Share capital to be issued   274,075     276,495  
Contributed surplus   27,952,397     27,808,671  
Accumulated other comprehensive loss   (36,076,456 )   (35,120,309 )
Deficit   (34,171,026 )   (66,272,345 )
Total shareholders' equity $  223,483,520   $  170,933,518  

Notes Page 26


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

23. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

Consolidated Statements of Cash Flows

The reconciliation between Canadian GAAP and US GAAP of the statements of cash flows is as follows:

    Year Ended December 31,  
    2010     2009  
OPERATING ACTIVITIES UNDER CANADIAN GAAP $  58,368,458   $  6,703,029  
Adjustment for:            
   Exploration expenditures (a)   (2,295,116 )   (3,165,664 )
   Pre-operating income (b)   2,477,213     416,887  
OPERATING ACTIVITIES UNDER US GAAP   58,550,555     3,954,252  
             
INVESTING ACTIVITIES UNDER CANADIAN GAAP   (31,561,291 )   (49,633,572 )
Adjustment for:            
   Exploration expenditures (a)   2,295,116     3,165,664  
   Pre-operating income (b)   (2,477,213 )   (416,887 )
   Change in restricted cash (g)   -     13,940,237  
INVESTING ACTIVITIES UNDER US GAAP   (31,743,388 )   (32,944,558 )
             
FINANCING ACTIVITIES UNDER CANADIAN GAAP AND US GAAP   8,369,232     31,379,833  
             
INCREASE IN CASH AND CASH EQUIVALENTS   35,176,399     2,389,527  
EFFECT OF EXCHANGE RATE ON CASH HELD IN FOREIGN CURRENCY   (125,488 )   16,380  
OPENING CASH AND CASH EQUIVALENTS - US GAAP   5,889,793     3,483,886  
CLOSING CASH AND CASH EQUIVALENTS - US GAAP $  40,940,704   $  5,889,793  

  (a)

Exploration expenditures

     
 

Canadian GAAP allows exploration costs to be capitalized during the search for a commercially mineable body of ore if the Company considers such costs to have the characteristics of fixed assets. Under US GAAP, exploration expenditures on mining interests can only be deferred subsequent to the establishment of mining reserves as defined under SEC regulations. For US GAAP purposes, the Company has expensed exploration expenditures in the period incurred.

     
  (b)

Revenues and expenditures during the pre-operating period

     
 

For Canadian GAAP purposes, the La Encantada Mill Expansion Project had not achieved a commercial stage of production until April 1, 2010 and therefore the net amount of revenues less production costs in connection with the sale of 261,957 (2009 - 54,277) silver equivalent ounces of precipitates during the pre-operating period were recorded to construction in progress. Under US GAAP, the production stage is deemed to begin when saleable minerals are extracted from an ore body, regardless of the level of production. The earlier commencement of commercial production under US GAAP for the year ended December 31, 2010 results in an increase in income of $1,415,482 (2009 - $297,344) with a corresponding increase to construction in progress.

Notes Page 27


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

23. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

  (c)

Depletion expense

       
 

The adjustment to depletion expense is comprised of the following:

       
  (i)

Depletion expense under Canadian GAAP is higher than under US GAAP, as a result of differences in the carrying amounts of mining interests under Canadian GAAP and US GAAP as described in Note 23(a).

       
  (ii)

The earlier commencement of commercial production under US GAAP as described in Note 23(b) results in an increase in depletion expense under US GAAP.

       
  (iii)

For Canadian GAAP purposes, acquisition, development and deferred exploration costs related to mining interests are depleted on a units-of-production basis over the estimated economic life of the ore body following commencement of production. The estimated economic life of the ore body for certain mining properties includes a portion of mineralization expected to be classified as reserves, as opposed to only proven and probable reserves. Under US GAAP, in accordance with the United States Securities and Exchange Commission Industry Guide 7, the base used for the depletion calculation is limited to proven and probable reserves resulting in higher depletion expense.

       
  (d)

Income taxes

       
 

The income tax adjustment reflects the impact on income taxes of the US GAAP adjustments described above. Accounting for income taxes under Canadian and US GAAP is similar, except that income tax rates of enacted or substantively enacted tax law must be used to calculate future income tax assets and liabilities under Canadian GAAP, whereas only income tax rates of enacted tax law can be used under US GAAP.

       
  (e)

Cumulative translation adjustment

       
 

The cumulative translation adjustment recorded as a component of accumulated other comprehensive income under Canadian GAAP is lower than under US GAAP, as a result of differences in the carrying amounts of mining interests under Canadian and US GAAP.

       
  (f)

Income taxes related to uncertain income tax positions

       
 

US GAAP prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its consolidated financial statements uncertain income tax positions that it has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Canadian GAAP has no similar requirements related to the measurement of uncertain income tax positions. The Company identified no measurement differences related to uncertain tax positions.

       
 

The following additional disclosures relating to income taxes are required under US GAAP:


  Tax years subject to examination by jurisdiction are:  
                   Canada   2003 – 2010  
                   Mexico   2004 – 2010  

Notes Page 28


FIRST MAJESTIC SILVER CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

23. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

  (g)

Restricted cash

     
 

For US GAAP purposes, restricted cash has been excluded from cash and cash equivalents for the periods presented and the change in restricted cash for the period has been classified as investing activities.

Notes Page 29