SOUTHERN COPPER CORP/ - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended:    September 30, 2009

 

or

 

 

For the transition period from                to                

 

Commission File Number:       1-14066

 

SOUTHERN COPPER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (602) 494-5328

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

As of October 31, 2009 there were outstanding 850,000,000 shares of Southern Copper Corporation common stock, par value $0.01 per share.

 

 

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Southern Copper Corporation (“SCC”)

 

INDEX TO FORM 10-Q

 

			Page No.
Part I.  Financial Information:
Item. 1	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2009 and 2008		3
	Condensed Consolidated Balance Sheet September 30, 2009 and December 31, 2008		4
	Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2009 and 2008		5
	Notes to Condensed Consolidated Financial Statements		6-32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33-49
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		50-52
Item 4.	Controls and Procedures		53
Report of Independent Registered Public Accounting Firm			54
Part II. Other Information:
Item 1.	Legal Proceedings		55
Item 1A.	Risk factors		55-57
Item 2.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		58
Item 6.	Exhibits		59
	Signatures		60
	List of Exhibits		61
Exhibit 15	Independent Accountants’ Awareness Letter
Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101	Financial statements for the quarter ended September 30, 2009 Formatted in XBRL: (i) the Condensed Consolidated Statement of Earnings, (ii) the Condensed Consolidated Balance Sheet, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.		Submitted electronically with this report

 

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Part I – FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)

 

		3 Months Ended						9 Months Ended
		September 30,						September 30,
		2009			2008			2009			2008
		(in thousands, except per share amounts)
Net sales		$	1,151,769		$	1,440,077		$	2,598,276		$	4,401,079
Operating costs and expenses:
Cost of sales (exclusive of depreciation, amortization and depletion shown separately below)		529,893			645,798			1,324,824			1,716,845
Selling, general and administrative		23,804			25,937			60,697			77,318
Depreciation, amortization and depletion		82,266			83,944			239,202			248,339
Exploration		7,075			8,452			17,498			25,504
Total operating costs and expenses		643,038			764,131			1,642,221			2,068,006
Operating income		508,731			675,946			956,055			2,333,073
Interest expense		(25,126		)	(25,610		)	(74,402		)	(80,275		)
Capitalized interest		(3,287		)	2,305			2,156			4,834
Gain(loss) on derivative instruments		(37		)	(13,621		)	4,144			(12,700		)
Other income (expense)		760			21,274			2,628			19,689
Interest income		845			9,764			6,018			39,360
Income before income taxes		481,886			670,058			896,599			2,303,981
Income taxes		167,661			249,700			327,099			764,614
Net income		314,225			420,358			569,500			1,539,367
Less: Net income attributable to the non-controlling interest		1,774			2,556			3,389			8,115
Net income attributable to SCC		$	312,451		$	417,802		$	566,111		$	1,531,252
Per common share amounts:
Net income attributable to SCC - basic and diluted		$	0.37		$	0.47		$	0.67		$	1.73
Dividends paid to SCC common shareholders		$	0.10		$	0.57		$	0.26		$	1.61
Weighted average common shares outstanding - basic and diluted		850,009			882,696			850,929			883,165

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

		September 30,			December 31,
		2009			2008
		(in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	413,280		$	716,740
Short-term investments		25,956			62,376
Accounts receivable trade, less allowance for doubtful accounts (2009 - $4,611; 2008 - $4,811)		449,373			104,149
Accounts receivable other (including affiliates 2009 - $2,978; 2008 - $1,925)		17,315			29,439
Inventories		417,657			451,597
Deferred income tax		14,650			64,711
Other current assets		64,791			124,681
Total current assets		1,403,022			1,553,693
Property, net		3,942,922			3,810,508
Leachable material, net		119,520			156,294
Intangible assets, net		114,335			115,059
Deferred income tax		45,060			83,106
Other assets		51,661			45,664
Total assets		$	5,676,520		$	5,764,324
LIABILITIES
Current liabilities:
Current portion of long-term debt		$	10,000		$	10,000
Accounts payable		231,407			413,351
Accrued income taxes		17,904			34,378
Due to affiliated companies		5,079			8,965
Accrued workers’ participation		93,427			205,466
Interest		18,983			40,968
Other accrued liabilities		35,307			24,335
Total current liabilities		412,107			737,463
Long-term debt		1,275,182			1,279,972
Deferred income taxes		120,766			169,342
Non-current taxes payable		73,171			70,266
Other liabilities and reserves		89,161			93,875
Asset retirement obligation		34,489			18,007
Total non-current liabilities		1,592,769			1,631,462
Commitments and Contingencies (Note L)
STOCKHOLDERS’ EQUITY
Common stock		8,846			8,846
Additional paid-in capital		1,007,844			993,826
Retained earnings		3,258,501			2,916,517
Accumulated other comprehensive loss		(23,142		)	(23,477		)
Treasury stock		(597,233		)	(514,453		)
Total SCC stockholders’ equity		3,654,816			3,381,259
Non-controlling interest		16,828			14,140
Total equity		3,671,644			3,395,399
Total liabilities and equity		$	5,676,520		$	5,764,324

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

		3 Months Ended						9 Months Ended
		September 30,						September 30,
		2009			2008			2009			2008
		(in thousands)
OPERATING ACTIVITIES
Net income attributable to SCC		$	312,451		$	417,802		$	566,111		$	1,531,252
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation, amortization and depletion		82,266			83,944			239,202			248,339
Capitalized leachable material		—			—			—			(2,246		)
(Gain) loss on currency translation effect		(3,786		)	(15,533		)	9,599			6,498
Provision (benefit) for deferred income taxes		(13,274		)	4,440			40,116			(10,290		)
Gain on sale of property		—			(26,330		)	—			(28,573		)
(Gain) loss on sale of short-term investment		(881		)	2,661			(3,200		)	4,596
Unrealized (gain) loss on derivative instruments		(8,319		)	(20,543		)	(57,037		)	(18,444		)
Non-controlling interest		1,774			2,556			3,389			8,115
Cash provided from (used for) operating assets and liabilities:
Accounts receivable		(103,312		)	109,372			(302,840		)	23,617
Inventories		38,872			(943		)	33,940			(44,238		)
Accounts payable and accrued liabilities		(9,281		)	28,057			(360,446		)	(172,697		)
Other operating assets and liabilities		84,113			114,857			127,895			66,563
Net cash provided from operating activities		380,623			700,340			296,729			1,612,492
INVESTING ACTIVITIES
Capital expenditures		(110,559		)	(137,627		)	(316,740		)	(320,573		)
Net proceeds from sale of short-term investments		8,815			11,816			39,620			30,295
Sale of property		858			55,447			2,798			59,727
Other		—			1,101			—			1,101
Net cash used for investing activities		(100,886		)	(69,263		)	(274,322		)	(229,450		)
FINANCING ACTIVITIES
Debt repaid		—			—			(5,000		)	(155,025		)
Dividends paid to common stockholders		(86,322		)	(503,543		)	(224,128		)	(1,416,437		)
Distributions to non-controlling interest		(381		)	(2,387		)	(570		)	(9,123		)
Repurchase of common shares		(337		)	(68,471		)	(71,903		)	(68,471		)
Other		351			61			990			855
Net cash used for financing activities		(86,689		)	(574,340		)	(300,611		)	(1,648,201		)
Effect of exchange rate changes on cash and cash equivalents		(15,308		)	(31,348		)	(25,256		)	31,535
Increase (decrease) in cash and cash equivalents		177,740			25,389			(303,460		)	(233,624		)
Cash and cash equivalents, at beginning of period		235,540			1,150,259			716,740			1,409,272
Cash and cash equivalents, at end of period		$	413,280		$	1,175,648		$	413,280		$	1,175,648

 

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

 

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Southern Copper Corporation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A.           In the opinion of Southern Copper Corporation, (the “Company”, “Southern Copper” or “SCC”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2009 and the results of operations and cash flows for the three and nine months ended September 30, 2009 and 2008.  The condensed consolidated financial statements for the three and nine months ended September 30, 2009 have been subject to a review by Galaz, Yamazaki, Ruiz Urquiza S.C., a member firm of Deloitte Touche Tohmatsu, the Company’s independent registered public accounting firm, whose report dated October 30, 2009, is presented on page 54.  The results of operations for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the full year.  The December 31, 2008 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2008 and notes included in the Company’s 2008 annual report on Form 10-K.

 

B.             Adoption of New Accounting Standards:

 

On June 30, 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2009-01 (“ASU No. 2009-01”) to amend topic Accounting Standard Codification 105 (“ASC-105”) “Generally Accepted Accounting Principles” an amendment based on Statement of Financial Accounting Standard No. 168 “the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”.  This amendment establishes the “FASB Accounting Standards Codification” (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification is effective for interim and annual periods ending on or after September 15, 2009.  Therefore, the Company is applying the Codification to its third-quarter interim financial statements.

 

Starting with this ASU, the FASB only will issue ASUs which will not be considered as authoritative in their own right and will serve only to update the Codification.

 

Prior authoritative literature:

 

As of June 30, 2009 the Company adopted the following pronouncements of the FASB which are now part of the Codification:

 

In May 2009, the FASB issued topic ASC 855 “Subsequent Events” (prior authoritative literature FAS 165 “Subsequent Events”) to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this topic sets forth: the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

 

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This topic introduces the concept of financial statements being available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  This topic is effective for interim or annual reporting periods ending after June 15, 2009 and therefore became effective for the Company as of June 30, 2009. Please see disclosures required in Note Q, Subsequent events.

 

In April 2009, the FASB issued ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments” (formerly FASB issued Staff Position (“FSP”) FAS 107-1) to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This ASC also amends ASC 270 “Interim Financial Reporting” (formerly APB Opinion No. 28), to require those disclosures in summarized financial information at interim reporting periods.  This ASC applies to all financial instruments within the scope of ASC 825-10-15 and requires disclosing in the body or in the accompanying notes, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position.  Fair value information disclosed shall be presented together with the related carrying amount in a form that makes clear whether the fair value and carrying amount represents assets or liabilities and how the carrying amount is reported in the statement of financial position.  Also the entity shall disclose the methods and significant assumptions used to estimate the fair value of financial instruments and shall describe their changes, if any, in the period.  This ASC is effective for interim reporting periods ending after June 15, 2009 and therefore became effective for the Company as of June 30, 2009.  Please see disclosures required in Note P, Financial instruments.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-than-temporary Impairments” and FSP FAS 157-4 “Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly”.  These FASB Staff positions are effective for interim reporting periods ending after June 15, 2009 and therefore became effective for the Company as of June 30, 2009 and do not have a material impact on its financial position or results of operations.

 

On January 1, 2009 the Company adopted the following pronouncements of the FASB which are now part of the Codification:

 

On March 19, 2008 the FASB issued ASC 815-10-50 “Disclosures about Derivative Instruments and Hedging Activities” (formerly FAS No. 161).  This ASC improves financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows.  The adoption of this statement has not had a material effect on the Company’s financial position and results of operations. See disclosures required in Note G, Derivative instruments.

 

In December 2007, the FASB published ASC 805 “Business Combinations” (former SFAS No. 141-R).  This statement improves the reporting of information about a business combination and its effects.  This statement establishes principles and requirements for how the acquirer will recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquisition.  Also, the statement determines the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase, and finally, determines the disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The Company has adopted this pronouncement on January 1, 2009 and will apply its requirements to future business combinations.

 

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C.             Short-term Investments:

 

Short-term investments were as follows (in millions):

 

		At
Investments		September 30,2009			December 31, 2008
Short-term investments in securities issued by public companies with a weighted average interest rate of 0.66% at September 30, 2009 and 1.85% at December 31, 2008		$	26.0		$	62.4

 

Short-term investments in securities consist of available for sale securities issued by public companies.  Each security is independent of the others.

 

Related to these investments for the three and nine months ended September 30, 2009 the Company earned interest of $0.1 million and $0.7 million, respectively, compared with $0.8 million and $3.4 million in the same periods of 2008, which were recorded as interest income in the condensed consolidated statement of earnings.  In addition, for the three and nine months ended September 30, 2009, the Company redeemed $8.8 million and $39.6 million, respectively, of these investments, compared with $11.8 million and $30.3 million in the same periods of 2008.

 

For the three and nine months ended September 30, 2009 the Company recorded gains of $0.9 million and $3.2 million, respectively, compared with losses of $2.7 million and $4.6 million in the same periods of 2008.  These gains/losses were recorded as other income (expense) in the condensed consolidated statement of earnings.

 

D.            Inventories were as follows:

 

(in millions)		September 30, 2009			December 31, 2008
Metals at lower of average cost or market:
Finished goods		$	40.3		$	46.7
Work-in-process		128.9			135.8
Supplies at average cost		248.4			269.1
Total inventories		$	417.6		$	451.6

 

E.              Income taxes:

 

The income tax provision for the nine months ended September 30, 2009 and 2008 were $327.1 million and $764.6 million, respectively.  These provisions include income taxes for Peru, Mexico and the United States.  The provision for income taxes was based on our effective tax rate of 36.5% for the nine months of 2009 as compared to 33.2% during the same period in 2008.  The increase in the effective tax rate for the nine months ended September 30, 2009 is largely due to the incremental U.S. tax provided on dividend distributions made by our Mexican subsidiary to the U.S. parent.  This dividend distribution is taxable in the U.S. at the difference between the 35% U.S. statutory rate and the foreign tax credit rate of 28.0%.

 

As of March 27, 2009, Grupo Mexico, through its wholly-owned subsidiary, Americas Mining Corporation (“AMC”), became the beneficial owner of 80% of SCC’s common stock.  As a result of this new level of ownership, beginning March 27, 2009 SCC will no longer file a separate U.S. federal income tax return and its operating results will be included in the AMC consolidated U.S. federal income tax return.  In addition to now holding an 80% interest in SCC, AMC also owns 100% of ASARCO LLC (“Asarco”) and its subsidiaries.  In accordance with paragraph 30-27 of ASC 740-10-30, it is expected that current and deferred taxes will be allocated to members of the AMC group as if each were a separate taxpayer.  The Company has initiated

 

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discussions with AMC to put in place a tax sharing agreement in order to establish this allocation as well as other procedures and policies necessary for an equitable management of U.S. federal income tax matters.  SCC provides current and deferred income taxes, as if it were a separate filer.

 

Accounting for Uncertainty in Income Taxes

 

There was no material changes in the unrecognized tax benefits in the nine months ended September 30, 2009.  In the United States, all tax years through 2004 are closed and generally are not subject to change.  The tax years 2005, 2006 and 2007 are currently under IRS field examination, which commenced in November 2008.  Management does not expect that any of the open years will result in a cash payment within the preceding twelve months of September 30, 2010.  The Company’s reasonable expectations about future resolutions of uncertain items did not materially change during the nine month period ended September 30, 2009.

 

F.              Provisionally Priced Sales:

 

At September 30, 2009, the Company has recorded provisionally priced sales of 22.6 million pounds of copper, at an average forward price of $2.80 per pound.  Also the Company has recorded provisionally priced sales of 11.6 million pounds of molybdenum at the September 30, 2009 market price of $13.55 per pound.

 

These sales are subject to final pricing based on the average monthly LME or COMEX copper prices and Dealer Oxide molybdenum prices in the future month of settlement.

 

Following are the provisionally priced copper and molybdenum sales outstanding at September 30, 2009:

 

Copper (million lbs.)		Priced at		Month of Settlement
22.6		2.80		October 2009

 

Molybdenum (million lbs.)		Priced at		Month of Settlement
3.1		13.55		October 2009
2.9		13.55		November 2009
3.3		13.55		December 2009
2.3		13.55		January 2010
11.6		13.55

 

Management believes that the final pricing of these sales will not have a material effect on the Company’s financial position or results of operations.

 

G.             Derivative Instruments

 

The Company occasionally uses derivative instruments to manage its exposure to market risk from changes in commodity prices, interest rate and exchange rate risk exposures and to enhance return on assets.  The Company does not enter into derivative contracts unless it anticipates a future activity that is likely to occur that will result in exposing the Company to market risk.

 

Copper derivatives:

 

From time to time the Company has entered into derivative contracts to protect a fixed copper or zinc price for a portion of its metal sales.

 

The Company did not hold any copper or zinc derivative contracts in the nine months

 

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ended September 30, 2009.

 

In the nine months ended September 30, 2008, the Company entered into copper collar and swap contracts to protect a portion of its 2008 sales of copper production.  As a result, the Company recorded a gain of $18.5 million and $29.2 million in the third quarter and nine months of 2008, respectively.  Related to the fair value of these copper derivative contracts the Company recorded an unrealized gain of $33.7 million at the end of September 2008.  These gains and losses were recorded in net sales in the condensed consolidated statement of earnings.

 

Gas swaps:

 

In 2009 and 2008 the Company entered into gas swap contracts to protect part of its gas consumptions as follows:

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2009			2008			2009			2008
Gas volume (MMBTUs)		122,000			305,000			122,000			305,000
Fixed price (per MMBTU)		$	3.6350		$	8.2175		$	3.6350		$	8.2175
Gain (loss) (in millions)		$	0.1		$	(0.7	)	$	0.1		$	(0.7	)

 

The gains (losses) obtained were charged to production cost. As of September 30, 2009 the Company held a gas swap contract to protect 184,000 MMBTUs of its gas consumption with a fixed price of $3.6350 per MMBTU for the fourth quarter of 2009.  Related to the settlement of this gas swap contract the Company recorded an unrealized gain of $0.2 million in the third quarter of 2009 which was included in the $0.1 million gain reported in the table above.

 

Exchange rate derivatives, U.S. dollar/Mexican peso contracts:

 

Because more than 85% of the Company’s sales collections in Mexico are in U.S. dollars and many of its costs are in Mexican pesos, the Company entered into zero-cost derivative contracts with the purpose of protecting, within a range, against an appreciation of the Mexican peso to the U.S. dollar.

 

Related to the exchange rate derivative contracts the Company recorded a loss of less than $0.1 million and a gain of $4.1 million for the three and nine months ended September 30, 2009, compared with losses of $13.6 million and $12.7 million, respectively, in the same periods of 2008.  These gains and losses were recorded as gain (loss) on derivative instruments in the condensed consolidated statements of earnings.

 

At September 30, 2009 the Company did not hold any exchange rate derivative contracts.

 

H.            Asset Retirement Obligation:

 

The Company maintains an estimated asset retirement obligation for its mining properties in Peru, as required by the Peruvian Mine Closure Law.  In accordance with the requirements of this law the Company has prepared and submitted the closure plans to the Peruvian Ministry of Energy and Mines (“MEM”).  These plans have been reviewed by the responsible governmental agency and have been open to public discussion in the areas of the Company’s operations.  The closure plan for the Cuajone facility was approved by MEM in the third quarter of 2009 and the closure plan for Ilo facility was approved in October 2009, it is anticipated that the closure plan for the Toquepala facility will be approved in the fourth quarter.  As part of the closure plan, commencing in January 2010 the Company will be required to make annual installments over a 34 year period of guarantees sufficient to provide the funds for the asset

 

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retirement obligation.  In the near term future the Company plans to use the value of its Lima office complex as support for this obligation.  The Company has adjusted its original retirement obligation for the Cuajone facility to record the liability established in the new agreement and will adjust its retirement obligation for Toquepala in the fourth quarter of 2009 (no adjustment is necessary for Ilo).  The Company does not believe that such adjustment will have a material effect on its financial results.

 

The closure cost recognized for this liability includes the agreed upon cost for Cuajone and the estimated cost for the Toquepala and Ilo operations, the tailings disposal, and dismantling the Toquepala and Cuajone concentrators, and the shops and auxiliary facilities.

 

As of September 30, 2009, the Company has made an estimated provision of $34.5 million for this liability in its financial statements, but expects to adjust this estimate in the fourth quarter of 2009 when closure plans for Toquepala and Ilo are finalized.

 

The following table summarizes the asset retirement obligation activity for the nine months ended September 30, 2009 and 2008 (in millions):

 

		2009			2008
Balance as of January 1		$	18.0		$	13.1
Changes in estimates		15.9			0.7
Additions		—			—
Accretion expense		0.6			0.7
Balance as of September 30,		$	34.5		$	14.5

 

I.                 Related Party Transactions:

 

Receivable and payable balances with affiliated companies are shown below (in millions):

 

		September 30,2009			December 31,2008
Affiliate receivable:
Grupo Mexico S.A.B de C.V. and affiliates		$	0.8		$	0.8
Ferrocarril Mexicano S.A. de C.V.		0.8			0.3
Mexico Proyectos y Desarrollos S.A. de C.V. and affiliates		1.4			0.8
		$	3.0		$	1.9
Affiliate payable:
Grupo Mexico S.A.B. de C.V. and affiliates		$	5.1		$	9.0
		$	5.1		$	9.0

 

The Company has entered into certain transactions in the ordinary course of business with parties that are controlling shareholders or their affiliates.  These transactions include the lease of office space, air transportation and construction services and products and services relating to mining and refining.  The Company lends and borrows funds among affiliates for acquisitions and other corporate purposes.  These financial transactions bear interest and are subject to review and approval by senior management, as are all related party transactions.  It is the Company’s policy that the Audit Committee of the Board of Directors shall review all related party transactions.  The Company is prohibited from entering or continuing a material related party transaction that has not been reviewed and approved or ratified by the Audit Committee.

 

Grupo Mexico, the Company’s ultimate parent and the majority indirect stockholder of the Company, and its affiliates provide various services to the Company.  These services are principally related to accounting, legal, tax, financial, treasury, human resources, price risk assessment and hedging, purchasing, procurement and

 

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logistics, sales and administrative and other support services.  The Company pays Grupo Mexico Servicios S.A de C.V., a subsidiary of Grupo Mexico for these services.  The total amount paid by the Company for such services in the nine months of 2009 and 2008 was $10.3 million and $9.6 million, respectively.  The Company expects to continue to pay for these services in the future.

 

The Company’s Mexican operations paid fees of $8.4 million and $7.9 million in the nine months of 2009 and 2008, respectively, for freight services provided by Ferrocarril Mexicano S.A de C.V and $12.1 million and $16.0 million in the nine months of 2009 and 2008, respectively, for construction services provided by Mexico Constructora Industrial; both companies are subsidiaries of Grupo Mexico.

 

The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including oil drilling services, construction, aviation, and real estate.  The Company engages in certain transactions in the ordinary course of business with other entities controlled by the Larrea family relating to mining and refining services, the lease of office space, sale of vehicles and air transportation and construction services.  In connection with this, the Company paid fees of $0.2 million and $1.7 million in the nine months of 2009 and 2008, respectively, for maintenance services and sale of vehicles provided by Mexico Compañia de Productos Automotrices, S.A. de C.V., a company controlled by the Larrea family.  Additionally, in 2007, our Mexican subsidiaries have provided guaranties for loans totaling $10.8 million obtained by Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”), a company controlled by the Larrea family. These loans mature in 2010 ($2.3 million) and 2013 ($8.4 million).  MexTransport provides aviation services to our Mexican operations.  The guaranty provided to MexTransport is backed up by the transport services provided by MexTransport to the Company’s Mexican subsidiaries.  The Company paid fees of $1.6 million and $2.2 million in the nine months of 2009 and 2008, respectively, to MexTransport for aviation services.

 

The Company purchased $4.0 million and $3.4 million in the nine months of 2009 and 2008, respectively, of industrial materials from Higher Technology S.A.C in which Mr. Carlos Gonzalez has a proprietary interest.  The Company paid fees of $0.2 million and $0.6 million in the nine months of 2009 and 2008, respectively, for maintenance services provided by Servicios y Fabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez has a proprietary interest. Mr. Carlos Gonzalez is the son of SCC’s Chief Executive Officer.

 

The Company purchased $0.6 million and $0.7 million in the nine months of 2009 and 2008, respectively, of industrial material from Sempertrans France Belting Technology, in which Mr. Alejandro Gonzalez is employed as a sales representative.  Also, the Company purchased $0.1 million and $0.5 million in the nine months of 2009 and 2008, respectively, of industrial material from PIGOBA, S.A. de C.V., a company in which Mr. Alejandro Gonzalez has a proprietary interest. Mr. Alejandro Gonzalez is the son of SCC’s Chief Executive Officer.

 

The Company purchased $0.8 million and $1.7 million in the nine months of 2009 and 2008, respectively, of industrial material and services from Breaker, S.A. de C.V., a company in which Mr. Jorge Gonzalez, son-in-law of SCC’s Chief Executive Officer, has a proprietary interest.

 

It is anticipated that in the future the Company will enter into similar transactions with the same parties.

 

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J.                Benefit Plans:

 

SCC Defined Benefit Pension Plans-

 

The components of the net periodic benefit costs for the nine months ended September 30 are as follows (in millions):

 

		2009			2008
Interest cost		$	0.5		$	0.5
Expected return on plan assets		(0.4		)	(0.4		)
Amortization of net loss (gain)		0.1			0.1
Net periodic benefit costs		$	0.2		$	0.2

 

SCC Post-retirement Health Care Plan-

 

The components of the net periodic benefit costs for the post-retirement health care plan for the nine months ended September 30, 2009 and 2008 are individually, and in total, less than $0.1 million.

 

Minera Mexico Pension Plans-

 

The components of the net periodic benefit costs for the nine months ended September 30, 2009 and 2008 are as follows (in millions):

 

		2009			2008
Interest cost		$	1.2		$	1.5
Service cost		1.4			1.9
Expected return on plan assets		(1.8		)	(2.3		)
Amortization of transition assets, net		(0.4		)	(*		)
Amortization of net actuarial loss		(*		)	(*		)
Amortization of prior services cost		0.1			(*		)
Net periodic benefit cost		$	0.5		$	1.1

 

(*) amount is lower than $0.1 million

 

Minera Mexico Post-retirement Health Care Plan-

 

The components of the net periodic cost for the nine months ended September 30, 2009 and 2008 are as follows (in millions):

 

		2009			2008
Interest cost		$	2.9		$	2.3
Service cost		0.4			0.5
Amortization of net loss (gain)		0.4			*
Amortization of transition obligation		0.9			*
Net periodic benefit cost		$	4.6		$	2.8

 

(*) amount is lower than $0.1 million

 

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K.            Comprehensive Income (in millions):

 

		Three months ended September 30,						Nine months ended September 30,
		2009			2008			2009			2008
Net income		$	314.2		$	420.4		$	569.5		$	1,539.4
Other comprehensive income (loss) net of tax:
Additional decrease in liability for employee benefit obligation		0.3			—			0.3			—
Comprehensive income		314.5			420.4			569.8			1,539.4
Comprehensive income attributable to the non-controlling interest		1.8			2.6			3.4			8.1
Comprehensive income attributable to SCC		$	312.7		$	417.8		$	566.4		$	1,531.3

 

L.              Commitments and Contingencies

 

Environmental matters:

 

The Company has instituted extensive environmental conservation programs at its mining facilities in Peru and Mexico.  The Company’s environmental programs include, among other features, water recovery systems to conserve water and minimize impact on nearby streams, reforestation programs to stabilize the surface of the tailings dams and the implementation of scrubbing technology in the mines to reduce dust emissions.

 

Peruvian operations

 

The Company’s operations are subject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through the MEM conducts annual audits of the Company’s Peruvian mining and metallurgical operations.  Through these environmental audits, matters related to environmental commitments, compliance with legal requirements, atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in material compliance with applicable Peruvian environmental laws and regulations.

 

In 2003 the Peruvian congress published a new law announcing future closure and remediation obligations for the mining industry.  In accordance with the requirements of this law the Company has submitted the required closure plans to MEM and were open to public discussion.  The closure plan for the Cuajone facility was approved by MEM in the third quarter of 2009, and the closure plan for the Ilo facility was approved in October 2009. It is anticipated that the closure plan for the Toquepala facility, will be approved in the fourth quarter.  As part of the closure plan, commencing in January 2010 the Company will be required to make annual installments over a 34 year period of guarantees sufficient to provide the funds for the asset retirement obligation.  See Note H, Asset retirement obligation, for further discussion of this matter.

 

For the Company’s Peruvian operations, environmental capital expenditures were $1.3 million and $5.1 million in the nine months ended September 30, 2009 and 2008, respectively.

 

Mexican operations

 

The Company’s operations are subject to applicable Mexican federal, state and municipal environmental laws, to Mexican official standards, and to regulations for the protection of the environment, including regulations relating to water supply, water quality, air quality, noise levels and hazardous and solid waste.

 

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The principal legislation applicable to the Company’s Mexican operations is the Federal General Law of Ecological Balance and Environmental Protection, which is enforced by the Federal Bureau of Environmental Protection (“PROFEPA”).  PROFEPA monitors compliance with environmental legislation and enforces Mexican environmental laws, regulations and official standards.  PROFEPA may initiate administrative proceedings against companies that violate environmental laws, which in the most extreme cases may result in the temporary or permanent closing of non-complying facilities, the revocation of operating licenses and/or other sanctions or fines.  Also, according to the Federal Criminal Code, PROFEPA must inform corresponding authorities regarding environmental non-compliance.

 

Mexican environmental regulations have become increasingly stringent in recent years, and this trend is likely to continue and has been influenced by the environmental treaty entered into by Mexico, United States and Canada in connection with NAFTA in 1999.  However, the Company’s management does not believe that continued compliance with the federal environmental law or Mexican state environmental laws will have a material adverse effect on the Company’s business, properties, results of operations, financial condition or prospects or will result in material capital expenditures.  Although the Company believes that all of its facilities are in material compliance with applicable environmental, mining and other laws and regulations, the Company cannot assure that future laws and regulations would not have a material adverse effect on the Company’s business, properties, results of operations, financial condition or prospects.

 

For the Company’s Mexican operations, environmental capital expenditures were $18.5 million and $6.7 million in the nine months ended September 30, 2009 and 2008, respectively.

 

Litigation matters:

 

Peruvian operations

 

Garcia Ataucuri and Others against SCC’s Peruvian Branch (“SCC’s Peruvian Branch”, “Branch” or “Peruvian Branch”):

 

In April 1996, the Branch was served with a complaint filed in Peru by approximately 800 former employees seeking the delivery of a substantial number of its “labor shares” (acciones laborales) plus dividends on such shares, to be issued in a proportional way to each former employee in accordance with their time of employment with SCC’s Peruvian Branch.

 

The Company conducts its operations in Peru through its Peruvian Branch, a registered branch.  Although the Peruvian Branch has neither capital nor liability separate from that of the Company, under Peruvian law it is deemed to have an equity capital for purposes of determining the economic interest of the holders of the labor shares.  The labor share litigation is based on claims of former employees for ownership of labor shares issued during the 1970s until 1979 under a former Peruvian mandated profit sharing system.  In 1971, the Peruvian government enacted legislation providing that workers in the mining industry would participate in the pre-tax profits of the enterprises for which they worked at a rate of 10%.  This participation was distributed 40% in cash and 60% as an equity interest in the enterprise.  Under the law, the equity participation was originally delivered to the “Mining Community”, an organization representing all workers in the mining industry.  The cash portion was distributed to the workers after the close of the year.  The accrual for this participation was (and continues to be) a current liability of the Company, until paid.  In 1978, the law was amended and the equity distribution was calculated at 5.5% of pre-tax profits and was made to individual workers of the enterprise in the form of “labor shares” to be issued in Peru by the Peruvian Branch of SCC.  These labor shares

 

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represented an equity interest in the enterprise.  In addition, according to the 1978 law, the equity participations previously distributed to the “Mining Community” were returned to the Branch and redistributed in the form of labor shares to the individual employees or former employees.  The cash participation was adjusted to 4.0% of pre-tax earnings and continued to be distributed to employees following the close of the year.  Effective in 1992, the law was amended to its present status, and the workers’ participation in pre-tax profits was set at 8%, with 100% payable in cash.  The equity participation component was eliminated from the law.

 

In 1995, the Company offered to exchange new common shares of the Company for the labor shares issued under the prior Peruvian law.  Approximately 80.8% of the issued labor shares were exchanged for the Company’s common shares, greatly reducing the minority interest, now called non-controlling interest, on the Company’s balance sheet.  What remains of the workers’ equity participation is now included on the consolidated balance sheet under the caption “Non-controlling interest.”

 

In relation to the issuance of “labor shares” by the Branch in Peru, the Branch is a defendant in the following lawsuits:

 

1)              As stated above, in April 1996, the Branch was served with a complaint filed in Peru by approximately 800 former employees, (Garcia Ataucuri and others vs. SCC’s Peruvian Branch), seeking the delivery of 38,763,806.80 “labor shares” (acciones laborales), now “investment shares” (acciones de inversion) (or Nuevos Soles (“S/.”) 3,876,380,679.56), as required by Law No. 22333, to be issued in a proportional way to each former employee or worker in accordance with their time of employment with SCC’s Peruvian Branch, plus dividends on such shares.  In 2000, the Branch appealed an adverse decision of an appellate civil court, affirming a decision of a lower civil court, to the Peruvian Supreme Court.  On September 19, 2001, the Peruvian Supreme Court annulled the proceedings noting that the civil courts lacked jurisdiction and that the matter had to be decided by a labor court.

 

In October 2007, in a separate proceeding initiated by the plaintiffs, the Peruvian Constitutional Court nullified the September 19, 2001 Peruvian Supreme Court decision and ordered the Supreme Court to decide again on the merits of the case accepting or denying the Branch’s 2000 appeal.

 

In May 2009, the Supreme Court rejected the 2000 appeal of the Branch affirming the adverse decision of the appellate civil court and lower civil court.  While the Supreme Court has ordered SCC’s Peruvian Branch to deliver the labor shares and dividends to the former employees of SCC’s Peruvian Branch it has clearly stated that SCC’s Peruvian Branch may prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former employees in accordance with the profit sharing law then in effect, an assertion which SCC’s Peruvian Branch continues to make.

 

On June 9, 2009 SCC’s Peruvian Branch filed an extraordinary appeal before a civil court in Peru seeking the nullity of the 2009 Supreme Court decision and other protective measures.  The civil court has now rendered a favorable decision suspending the enforcement of the Supreme Court decision, among other reasons, because, as was indicated above, the Supreme Court decision had clearly stated that SCC’s Peruvian Branch may prove, by all legal means, its assertion that the labor shares and dividends were distributed to the former employees in accordance with the profit sharing law then in effect.  In view of this and the recent civil court decision, SCC´s Peruvian Branch continues to analyze the manner in which the Supreme Court decision may be enforced and what financial impact, if any, said decision may have.

 

2)              On May 10, 2006, the Branch was served with a second complaint filed in Peru, this time by 44 former employees, (Cornejo Flores and others vs. SCC’s Peruvian Branch), seeking delivery of (1) labor shares (or shares of whatever other current

 

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legal denomination) corresponding to years 1971 to December 31, 1977 (the plaintiffs are seeking the same 38,763,806.80 labor shares mentioned in the prior lawsuit), that should have been issued in accordance with Law No. 22333, plus interest and (2) labor shares resulting from capital increases made by the Branch in 1980 “for the amount of the workers’ participation of S/.17,246,009,907.20, equivalent to 172,460,099.72 labor shares”, plus dividends.  On May 23, 2006, the Branch answered this new complaint, denying the validity of the claim.  As of September 30, 2009 the case remains open with no new developments.

 

3)              On June 27, 2008, the Branch was served with a new complaint filed in Peru, this time by 82 former employees, (Alejandro Zapata Mamani and others vs. SCC’s Peruvian Branch), seeking delivery of labor shares (or shares of whatever other current legal denomination) corresponding to years 1971 to December 31, 1977 (the plaintiffs are seeking the same 38,763,806.80 labor shares mentioned in the two previous labor share lawsuits), that should have been issued in accordance with Law No. 22333, plus interest, and labor shares resulting from capital increases, plus dividends.  The Branch answered this new complaint, denying the validity of the claim.  As of September 30, 2009 the case remains open with no new developments.

 

4)              Additionally, in January 2009, the Branch was served with a new complaint filed in Peru, this time by 12 former employees (Arenas Rodriguez and others —represented by Mr. Cornejo Flores- vs. SCC’s Peruvian Branch) seeking delivery of labor shares (or shares of whatever other current legal denomination) corresponding to years 1971 to December 31, 1977 (the plaintiffs are seeking the same 38,763,806.80 labor shares mentioned in the three previous labor share lawsuits), that should have been issued in accordance with Law No. 22333, plus interest, and labor shares resulting from capital increases, plus dividends.  The Branch answered this new complaint, denying the validity of the claim.  As of September 30, 2009 the case remains open with no new developments.

 

The Company asserts that the labor shares were distributed to the former employees in accordance with the profit sharing law then in effect.  The Company has not made a provision for these lawsuits because it believes that it has meritorious defenses to the claims asserted in the complaints.

 

Exploraciones de Concesiones Metalicas S.A.C.:

 

In August 2009 a new lawsuit was filed against SCC’s Branch by the former stockholders of Exploraciones de Concesiones Metalicas S.A.C. (“Excomet”).  The plaintiffs allege that the acquisition of their shares in Excomet by the Branch is null and void because the $2 million purchase price paid by the Branch for the shares of Excomet was not fairly negotiated by the plaintiffs and the Branch.  In 2005, the Branch acquired the shares of Excomet after lengthy negotiations with the plaintiffs, and after the plaintiffs, which were all of the stockholders of Excomet, approved the transaction in a general stockholders’ meeting.  Excomet was at the time owner of a mining concession which forms part of the Tia Maria project

 

The Company asserts that the lawsuit is without merit and is vigorously defending against this lawsuit.

 

Mexican operations

 

The Mexican Geological Services (“MGS”) Royalties:

 

In August 2002, MGS (formerly named Council of Mineral Resources (“COREMI”)) filed with the Third Federal District Judge in Civil Matters, an action demanding from Mexcobre (La Caridad) the payment of royalties since 1997.  In December 2005, Mexcobre signed an agreement with MGS.  Under the terms of this agreement the parties established a new procedure to calculate the royalty payments applicable for 2005 and

 

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the following years, and the Company paid in January 2006, $6.9 million of royalties for 2005 and $8.5 million as payment on account of royalties from the third quarter 1997 through the last quarter of 2004.  On January 22, 2007 the Third Federal District Judge issued a ruling regarding the payment related to the period from the third quarter of 1997 through the fourth quarter of 2004.  This ruling was appealed by both parties in February 2007.  The appeal was lost by the Company in October 2007.  The Company filed a protective action (Amparo) before the Ninth Collegiate Civil Tribunal which rendered a negative ruling on August 27, 2008.  The Company is defending its economic interest in the courts to determine the final amount to be paid to MGS.  On an ongoing basis the Company is required to pay a 1% royalty on La Caridad’s copper production value after deduction of treatment and refining charges and certain other carrying costs.

 

On September 25, 2009, Southern Copper Corporation (“SCC”) announced that its subsidiary, Industrial Minera Mexico S. A. (“IMMSA”), Desarrolladora Intersaba, S.A. de C.V. (“INTERSABA”) and the Municipality of San Luis Potosí had reached an agreement by means of which IMMSA agrees to change the technology in order to stop using anhydrous ammonia gas in the production process at its San Luis zinc plant.  The San Luis municipality also confirmed that local regulations permit IMMSA to use the land of the zinc plant for industrial purposes.

 

As part of the agreement, INTERSABA and the Municipality of San Luis Potosi agreed to donate an area that was considered by IMMSA as a buffer zone, in order for IMMSA to construct a park for the recreation of the San Luis population.  Also IMMSA and INTERSABA agreed to settle all litigation between them relating to land permits and buffer zone.

 

In addition to the foregoing, IMMSA has initiated a series of legal and administrative procedures against the municipality of San Luis Potosi due to its refusal to issue IMMSA’s use of land permit (licencia de uso de suelo) in respect to its zinc plant.  A federal judge ruled that IMMSA’s use of land permit should be granted.  In February 2009, the municipal authorities confirmed that local regulations permit IMMSA to use the land for industrial purposes.

 

On September 17, 2009, the San Luis municipality also confirmed that local regulations permit IMMSA to use the land for industrial purposes.

 

The Ejidal Commissariat of the “Ejido Pilares de Nacozari”, initiated a protective action (Amparo) against the second expropriation decree (by means of which 2.322 hectares were expropriated for public use), ignoring the judicial settlement reached with the Company on this matter.  The judicial settlement had been ratified in January 2006.  This case was solved by a federal judge, in first instance dismissing the Ejido case.  The Company will defend the settlement reached with the Ejido and seek the definitive dismissal of the case.

 

Pasta de Conchos Accident:

 

Mrs. Martinez, the wife of a miner, who died in the Pasta de Conchos accident, initiated a protective action against the negative ruling issued by the Ministry of Economy denying her request to launch a procedure to cancel IMMSA’s coal concessions, which she argued the accident should trigger.

 

The First District Administrative judge flatly dismissed the case, but this ruling was later reviewed by an appeals court.  In August 2009 the court definitely dismissed Mrs. Martinez’ case on the grounds of lack of standing.

 

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Labor matters:

 

In recent years the Company has experienced a number of strikes or other labor disruptions that have had an adverse impact on its operations and operating results.

 

Peruvian Operations

 

Approximately 68% of the Company’s Peruvian labor force was unionized at December 31, 2008, represented by eight separate unions.  Three of these unions, one at each major production area, represent the majority of the Company’s workers.  The collective bargaining agreements for these unions last through February 2010.  Additionally, there are five smaller unions, representing the balance of workers.  Collective bargaining agreements for this group are in force through November 2012.

 

From June 30 to July 5, 2008 the three major unions went on strike in support of a mining federation strike.  During this strike operations were near normal; an insignificant amount of production was lost as work continued with the support of staff and administrative personnel and with contractors.

 

Mexican operations –

 

Approximately 75% of the Mexican labor force was unionized at December 31, 2008, represented by two separate unions.  Under Mexican law, the terms of employment for unionized workers is set forth in collective bargaining agreements.  Mexican companies negotiate the salary provisions of collective bargaining agreements with the labor unions annually and negotiate other benefits every two years.  The Company conducts negotiations separately at each mining complex and each processing plant.

 

In the last eight years the Cananea mine has experienced more than nine labor stoppages totaling more than 816 days of inactivity through September 30, 2009.  The Company has tried unsuccessfully to resolve the current labor stoppage that obstructs production at Cananea.  In the second quarter 2008 the Board of Directors offered all Cananea employees a severance payment in accordance with the collective bargaining agreement and applicable law.  This was offered in order to award the employees a significant severance payment that allows them to choose the labor alternative that is best for each of them.  During 2008, under this plan a group of employees was terminated at a cost to the Company of $15.2 million, which was recorded in cost of sales on the consolidated statement of earnings.  There were no termination payments made in the nine months ended September 30, 2009.  In accordance with SFAS No. 112, the Company has estimated a liability of $35.1 million, which was recorded on the condensed consolidated balance sheet

 

On March 20, 2009 the Company notified the Mexican Federal Labor Court of the termination of all the individual labor contracts of the Cananea workers, including the collective bargaining agreement with the union.  This decision was based upon a finding by the Mexican mining authorities that confirmed that the Cananea mine was in a force majeure situation since it was unable to operate due to severe damages caused by striking workers.  On April 14, 2009, the Mexican Federal Labor Court issued a resolution approving the termination of Cananea’s labor relationships with individual and unionized employees, as well as the termination of its collective bargaining agreement with its employees and with the National Mining and Metal Workers Union.  This ruling has been challenged before federal tribunals.  Most of the individual challenges by unionized workers have been resolved by a federal judge, who dismissed their complaints.  The case presented by the Union is expected to be resolved in the fourth quarter of 2009.

 

The Company, the state of Sonora and the Mexican federal government are working to restore the necessary legal and safety conditions to resume operations at Cananea.

 

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Due to the lengthy work stoppage the Company has performed an impairment analysis on the assets at the Cananea mine.  The Company has determined through its impairment analysis that no impairment exists as of September 30, 2009.  Should estimates of future copper and molybdenum prices decrease significantly, such determination could change.

 

Additionally, the Taxco and San Martin mines have been on strike since July 2007.  It is expected that operations at these mines will remain suspended until these labor issues are resolved.

 

Other legal matters:

 

Class actions: Three purported class action derivative lawsuits have been filed in the Delaware Court of Chancery (New Castle County) late in December 2004 and early January 2005 relating to the acquisition of Minera Mexico by SCC.  On January 31, 2005, the three actions Lemon Bay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N, Therault Trust v. Luis Palomino Bonilla, et al., and Southern Copper Corporation, et al., Civil Action No. 969-N, and James Sousa v. Southern Copper Corporation, et al., Civil Action No. 978-N were consolidated into one action titled, In re Southern Copper Corporation Shareholder Derivative Litigation, Consol.  Civil Action No. 961-N and the complaint filed in Lemon Bay was designated as the operative complaint in the consolidated lawsuit.  The consolidated action purports to be brought on behalf of the Company’s common stockholders.

 

The consolidated complaint alleges, among other things, that the acquisition of Minera Mexico is the result of breaches of fiduciary duties by the Company’s directors and is not entirely fair to the Company and its minority stockholders.  The consolidated complaint seeks, among other things, a preliminary and permanent injunction to enjoin the acquisition, the award of damages to the class, the award of damages to the Company and such other relief that the court deems equitable, including interest, attorneys’ and experts’ fees and costs.  The defendants believe that this lawsuit is without merit and are vigorously defending against the action.

 

The Company’s management believes that the outcome of the aforementioned legal proceeding will not have a material adverse effect on the Company’s financial position or results of operations.

 

The Company is involved in various other legal proceedings incidental to its operations, but the Company does not believe that decisions adverse to it in any such proceedings individually or in the aggregate would have a material adverse effect on its financial position or results of operations.

 

The Company’s direct and indirect parent corporations, including AMC and Grupo Mexico, have from time to time been named parties in various litigations involving Asarco.  In August 2002 the U.S. Department of Justice brought a claim alleging fraudulent conveyance in connection with AMC’s then-proposed purchase of SCC from a subsidiary of Asarco.  That action was settled pursuant to a Consent Decree dated February 2, 2003.  In March 2003, AMC purchased its interest in SCC from Asarco.  In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and other parties, not including SCC, were named in a lawsuit filed in New York State court in connection with alleged asbestos liabilities, which lawsuit claims, among other matters, that AMC’s purchase of SCC from Asarco should be voided as a fraudulent conveyance.  The lawsuit filed in New York State court was stayed as a result of the August 2005 Chapter 11 bankruptcy filing by Asarco, as described below. However, on November 16, 2007, this lawsuit after being removed to federal court was transferred to the United States District Court for the Southern District of Texas in Brownsville, Texas, for resolution in conjunction with a new lawsuit filed by Asarco’s creditors, as described below. On February 2, 2007 a complaint was filed by Asarco on behalf of Asarco’s creditors, alleging many of the matters previously claimed in the New York State lawsuit,

 

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including that AMC’s purchase of SCC from Asarco should be voided as a fraudulent conveyance.  In June 2008 the lawsuit was concluded in Brownsville, Texas.  The constructive fraudulent conveyance claim was dismissed; however the actual fraud and the aiding and abetting the breach of fiduciary duties counts were favorable to plaintiffs.  On April 15, 2009, the United States District Court for the Southern District of Texas entered a judgment awarding Asarco certain shares of SCC, which represents approximately 30.6% of SCC’s current outstanding common shares, and an amount equal to the dividends paid on those shares of common stock of SCC since the date of their acquisition by AMC, plus interest. Grupo Mexico announced that AMC is appealing that judgment and that the enforcement of the judgment has been stayed pending the appeal.

 

In 2005, certain subsidiaries of Asarco filed bankruptcy petitions in connection with alleged asbestos liabilities.  In July 2005, the unionized workers of Asarco commenced a work stoppage. As a result of various factors, including the above-mentioned work stoppage, in August 2005 Asarco filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas.  Asarco’s bankruptcy case is being joined with the bankruptcy cases of its subsidiaries.  Asarco’s bankruptcy could result in additional claims being filed against Grupo Mexico and its subsidiaries, including SCC, Minera Mexico or its subsidiaries.

 

The Company cannot assure you that these or future claims, if successful, will not have an adverse effect on the Company’s parent corporation or the Company.  Any increase in the financial obligations of the Company’s parent corporation, as a result of matters related to Asarco or otherwise could, among other effects, result in the Company’s parent corporation attempting to obtain increased dividends or other funding from the Company.

 

Other commitments:

 

Regional development contribution:

 

In December 2006, the Company’s Peruvian Branch signed a contract with the Peruvian government committing the Company to make annual contributions for five years to support the regional development of Peru.  This was in response to an appeal by the president of Peru to the mining industry.  The contributions are being used for social benefit programs.  In 2009, 2008 and 2007, the Company made non-deductible contributions of $12.7 million, $18.9 million and $16.1 million out of 2008, 2007 and 2006 earnings, respectively.  These contributions were deposited with a separate entity, Copper Assistance Civil Association (Asociación Civil Ayuda del Cobre) which will make disbursements for approved investments in accordance with the agreement.  Future contributions could increase or decrease depending on copper prices.  The commitment of the Branch is for a total of 1.25% of its annual earnings, after Peruvian income tax.  If the average annual LME copper price is below $1.79 per pound the contribution will cease.  In the nine months ended September 30, 2009 the Company made a provision of $5.0 million based on Peruvian Branch earnings.

 

Royalty charge

 

In June 2004, the Peruvian Congress enacted legislation imposing a royalty charge to be paid by mining companies.  Under this law, the Company is subject to a 1% to 3% royalty, based on sales, applicable to the value of the concentrates produced in our Toquepala and Cuajone mines.  The Company made provisions of $28.6 million and $50.6 million in the nine months ended September 30, 2009 and 2008, respectively, for this royalty.  These provisions are included in “Cost of sales (exclusive of depreciation, amortization and depletion)” in the condensed consolidated statement of earnings.

 

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Power purchase agreement –

 

In 1997, SCC sold its Ilo power plant to an independent power company, Enersur S.A. (“Enersur”).  In connection with the sale, a power purchase agreement was also completed under which SCC agreed to purchase all of its power needs for its Peruvian operations from Enersur for twenty years, commencing in 1997.  In 2003 the agreement was amended releasing Enersur from its obligation to construct additional capacity to meet the Company’s increased electricity requirements and changing the power tariff as called for in the original agreement.

 

The Company has recently signed a Memorandum of Understanding (“MOU”) with Enersur regarding its power supply agreement.  The MOU contains new economic terms that the Company believes better reflect current economic conditions in the power industry and in Peru.  The Company expects to obtain savings in its future power costs.  The new economic conditions agreed in the MOU have been applied by Enersur to its invoices to the Company since May 2009.  Additionally, the MOU includes an option for providing power for the Tia Maria project.

 

Tax contingency matters:

 

Tax contingencies are provided for under ASC 740-10-50-15 Uncertain tax position (see Note E, Income taxes).

 

M.         Segment and Related Information:

 

Company management views Southern Copper as having three operating segments and manages on the basis of these segments.  Each of its segments report independently to the Chief Operating Officer and he focuses on operating income as a measure of performance to evaluate different segments, and to make decisions to allocate resources to the reported segments.

 

The three segments identified are groups of mines with similar economic characteristics, type of products, processes and support facilities, similar regulatory environments, similar employee bargaining contracts and similar currency risks.  In addition, each mine within the individual group earns revenues from similar type of customers for their products and services and each group incurs expenses independently, including commercial transactions between groups.

 

Intersegment sales are based on arms-length prices at the time of sale.  These may not be reflective of actual prices realized by the Company due to various factors, including additional processing, timing of sales to outside customers and transportation cost.  Added to the segment information is information regarding the Company’s sales.  The segments identified by the Company are:

 

1.               Peruvian operations segment, which includes the Toquepala and Cuajone mine complexes and the smelting and refining plants, industrial railroad and port facilities which service both mines.

 

2.               Mexican open pit operations segment, which includes La Caridad and Cananea mine complexes and the smelting and refining plants and support facilities which service both mines.

 

3.               Mexican underground mining operations segment, which includes five underground mines that produce zinc, copper, silver and gold, a coal mine which produces coal and coke, and several industrial processing facilities for zinc and copper.  This group is identified as the IMMSA unit.

 

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The Peruvian operations include two open pit copper mines whose mineral output is transported by rail to Ilo, Peru where it is processed at the Company’s smelter and refinery, without distinguishing between the products of the two mines.  The resulting product, anodes and refined copper, are then shipped to customers throughout the world.  These shipments are recorded as revenue of the Company’s Peruvian mines.

 

The Mexican open pit segment includes two copper mines whose mineral output is processed in the same smelter and refinery without distinguishing between the products of the two mines.  The resultant product, anodes and refined copper, are then shipped to customers throughout the world.  These shipments are recorded as revenues of the Company’s Mexican open pit mines.

 

The Company has determined that it is necessary to classify the Peruvian open pit operations as a separate operating segment from the Mexican open pit operations due to the very distinct regulatory and political environments in which they operate.  The Company’s Chief Operating Officer must consider the operations in each country separately when analyzing results of the Company and making key decisions.  The open pit mines in Peru must comply with stricter environmental rules and must continually deal with a political climate that has a very distinct vision of the mining industry as compared to Mexico.  In addition, the collective bargaining agreement contracts are negotiated very distinctly in each of the two countries.  These key differences result in the Company taking varying decisions with regards to the two countries.

 

The IMMSA segment includes five mines whose minerals are processed in the same smelter and refinery.  This segment also includes an underground coal mine.  Sales of product from this segment are recorded as revenues of the Company’s IMMSA unit.  While the Mexican underground mines are subject to a very similar regulatory environment as the Mexican open pit mines, the nature of the products and processes of the two Mexican operations vary distinctly.  These differences cause the Company’s Chief Operating Officer to take a very different approach when analyzing results and making decisions regarding the two Mexican operations.

 

Financial information is regularly prepared for each of the three segments and the results of the Company’s operations are regularly reported to the Chief Operating Officer on the segment basis.  The Chief Operating Officer of the Company focuses on operating income and on total assets as measures of performance to evaluate different segments and to make decisions to allocate resources to the reported segments.  These are common measures in the mining industry.

 

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Financial information relating to Southern Copper’s segments is as follows:

 

		Three Months Ended September 30, 2009 (in millions)
		Mexican Open Pit			Mexican IMMSA Unit			Peruvian Operations			Corporate, other and Eliminations			Consolidated
Net sales outside of segments		$	315.7		$	111.9		$	710.8		$	13.4		$	1,151.8
Intersegment sales		12.6			38.3			—			(50.9		)	—
Cost of sales (exclusive of depreciation, amortization and depletion)		145.5			105.1			322.0			(42.7		)	529.9
Selling, general and administrative		7.2			3.1			12.6			0.9			23.8
Depreciation, amortization and depletion		43.3			5.9			32.7			0.4			82.3
Exploration		0.9			2.9			3.3			—			7.1
Operating income		$	131.4		$	33.2		$	340.2		$	3.9		508.7
Less:
Interest, net														(27.5		)
Gain on derivative instruments														—
Other income (expense)														0.8
Income taxes														(167.7		)
Non-controlling interest														(1.8		)
Net income attributable to SCC														$	312.5
Capital expenditure		$	13.7		$	3.3		$	82.7		$	10.9		$	110.6
Property, net		$	1,630.0		$	268.7		$	1,988.9		$	55.3		$	3,942.9
Total assets		$	2,598.9		$	568.5		$	2,343.1		$	166.0		$	5,676.5

 

		Three Months Ended September 30, 2008 (in millions)
		Mexican Open Pit			Mexican IMMSA Unit			Peruvian Operations			Corporate, other and Eliminations			Consolidated
Net sales outside of segments		$	465.3		$	109.8		$	814.9		$	50.1		$	1,440.1
Intersegment sales		36.4			16.9						(53.3		)	—
Cost of sales (exclusive of depreciation, amortization and depletion)		207.8			116.7			324.2			(2.9		)	645.8
Selling, general and administrative		9.6			5.4			9.4			1.6			26.0
Depreciation, amortization and depletion		47.3			8.4			28.5			(0.2		)	84.0
Exploration		1.2			3.1			4.1			—			8.4
Operating income		$	235.8		$	(6.9	)	$	448.7		$	(1.7	)	675.9
Less:
Interest, net														(13.5		)
Loss on derivative instruments														(13.6		)
Other income (expense)														21.3
Income taxes														(249.7		)
Non-controlling interest														(2.6		)
Net income attributable to SCC														$	417.8
Capital expenditure		$	29.9		$	11.6		$	86.5		$	9.6		$	137.6
Property, net		$	1,625.3		$	263.2		$	1,737.3		$	41.7		$	3,667.5
Total assets		$	2,789.9		$	683.3		$	2,157.3		$	716.2		$	6,346.7

 

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