SOUTHERN COPPER CORP/ - Quarter Report: 2013 March (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:   March 31, 2013

 

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) 264-1375

 

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  Yes x  No o

 

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 April 30, 2013 there were outstanding 845,550,550 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 months ended March 31, 2013 and 2012	3
	Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2013 and 2012	4
	Condensed Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012	5
	Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7-25
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26-39
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	40-42
Item 4.	Controls and procedures	43
	Report of Independent Registered Public Accounting Firm	44
Part II. Other Information:
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 4.	Mine Safety Disclosures	45
Item 6.	Exhibits	45-46
	Signatures	47
	List of Exhibits	48-49
Exhibit 15	Independent Accountants’ Awareness Letter	1
Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	1
Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	1
Exhibit 32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	1
Exhibit 32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	1
Exhibit 101	Financial statements for the quarter ended March 31, 2013 Formatted in XBRL: (i) the Condensed Consolidated Statement of Earnings, (ii) the Condensed Consolidated Statement of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheet, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged in detail.	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
		March 31,
		2013			2012
		(in thousands, except per share amounts)
Net sales (including sales to related parties 2013 - $36,608 and 2012 - $10,972)		$	1,623,002		$	1,805,936
Operating costs and expenses:
Cost of sales (exclusive of depreciation, amortization and depletion shown separately below)		726,682			721,927
Selling, general and administrative		25,374			25,431
Depreciation, amortization and depletion		90,572			76,944
Exploration		10,324			8,725
Total operating costs and expenses		852,952			833,027
Operating income		770,050			972,909
Interest expense		(65,290		)	(47,175		)
Capitalized interest		12,239			2,861
Other income (expense)		848			7,235
Interest income		5,969			3,847
Income before income taxes		723,816			939,677
Income taxes		234,946			318,769
Net income before equity earnings of affiliate		488,870			620,908
Equity earnings of affiliate, net of income tax		8,163			2,654
Net income		497,033			623,562
Less: Net income attributable to the non-controlling interest		1,641			2,132
Net income attributable to SCC		$	495,392		$	621,430
Per common share amounts attributable to SCC:
Net earnings - basic and diluted		$	0.59		$	0.73
Dividends paid		$	0.24		$	0.54
Weighted average shares outstanding - basic and diluted		845,551			849,978

 

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

 

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Southern Copper Corporation

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

		3 Months Ended
		March 31,
		2013			2012
		(in thousands)
Net income		$	497,033		$	623,562
Other comprehensive income (loss) net of tax:
Derivative instruments classified as cash flow hedge:
Unrealized net loss on derivative instruments classified as cash flow hedges (net of income taxes of $3,459)		—			(5,447		)
Total comprehensive income		$	497,033		$	618,115
Comprehensive income attributable to the non-controlling interest		$	1,641		$	2,154
Comprehensive income attributable to SCC		$	495,392		$	615,961

 

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)

 

		March 31,			December 31,
		2013			2012
		(in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	2,462,350		$	2,459,488
Short-term investments		204,488			134,298
Accounts receivable trade		566,756			669,333
Accounts receivable other (including related parties 2013 - $ 34,165 and 2012 - $ 25,740)		105,549			82,636
Inventories		692,369			682,749
Deferred income tax		148,505			103,193
Other current assets		180,217			156,262
Total current assets		4,360,234			4,287,959
Property, net		5,349,196			5,156,731
Leachable material, net		284,290			262,795
Intangible assets, net		108,806			109,300
Related parties receivable		173,377			183,950
Deferred income tax		222,553			205,939
Other assets		278,413			177,075
Total assets		$	10,776,869		$	10,383,749
LIABILITIES
Current liabilities:
Current portion of long-term debt		$	10,000		$	10,000
Accounts payable (including related parties 2013 -$4,113 and 2012 - $20,310)		518,543			475,566
Accrued income taxes		35,851			12,198
Accrued workers’ participation		232,176			266,571
Accrued interest		91,177			70,582
Other accrued liabilities		33,898			22,218
Total current liabilities		921,645			857,135
Long-term debt		4,204,121			4,203,863
Deferred income taxes		167,382			141,426
Non-current taxes payable		214,934			214,934
Other liabilities and reserves		65,459			59,065
Asset retirement obligation		120,005			118,226
Total non-current liabilities		4,771,901			4,737,514
Commitments and contingencies (Note 10)
STOCKHOLDERS’ EQUITY
Common stock		8,846			8,846
Additional paid-in capital		3,334,024			3,320,927
Retained earnings		2,642,584			2,350,126
Accumulated other comprehensive income		4,032			4,032
Treasury stock, at cost, common shares		(931,224		)	(918,791		)
Total Southern Copper Corporation stockholders’ equity		5,058,262			4,765,140
Non-controlling interest		25,061			23,960
Total equity		5,083,323			4,789,100
Total liabilities and equity		$	10,776,869		$	10,383,749

 

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
		March 31,
		2013			2012
		(in thousands)
OPERATING ACTIVITIES
Net income		$	497,033		$	623,562
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation, amortization and depletion		90,572			76,944
Equity earnings of affiliate		(8,163		)	(2,654		)
Loss on currency translation effect		13,894			7,531
Deferred income taxes benefit		(5,745		)	(12,509		)
Loss (gain) on short-term investments		(1,438		)	(5,835		)
Cash provided from (used for) operating assets and liabilities:
Accounts receivable		79,664			59,047
Inventories		(31,115		)	11,812
Accounts payable and accrued liabilities		64,510			(34,855		)
Other operating assets and liabilities		(104,740		)	(2,636		)
Net cash provided from operating activities		594,472			720,407
INVESTING ACTIVITIES
Capital expenditures		(316,798		)	(177,417		)
(Purchase of) proceeds on sale of short-term investments, net		(70,190		)	294,694
Repayment of loan from related parties, net		10,573			—
Sales of property		224			98
Net cash (used for) provided from investing activities		(376,191		)	117,375
FINANCING ACTIVITIES
Cash dividends paid to common stockholders		(202,932		)	(159,811		)
Distributions to non-controlling interest		(472		)	(472		)
Other		258			153
Net cash used for financing activities		(203,146		)	(160,130		)
Effect of exchange rate changes on cash and cash equivalents		(12,273		)	(7,589		)
Increase in cash and cash equivalents		2,862			670,063
Cash and cash equivalents, at beginning of period		2,459,488			848,118
Cash and cash equivalents, at end of period		$	2,462,350		$	1,518,181

 

Non-cash transactions
Effect of common stock dividend:
–  Retained earnings		$	296,590
–  Treasury stock		(151,458		)
–  Additional paid-in capital		(145,132		)

 

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)

 

NOTE 1 — DESCRIPTION OF THE BUSINESS:

 

In the opinion of Southern Copper Corporation, (the “Company” 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 March 31, 2013 and the results of operations, comprehensive income and cash flows for the three months ended March 31, 2013 and 2012.  The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year.  The December 31, 2012 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 (“GAAP”).  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements at December 31, 2012 and notes included in the Company’s 2012 annual report on Form 10-K.

 

NOTE 2 — SHORT-TERM INVESTMENTS:

 

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

 

		March 31,			December 31,
		2013			2012
Trading securities		$	198.0		$	127.8
Weighted average interest rate		1.43		%	1.87		%
Available for sale		$	6.5		$	6.5
Weighted average interest rate		0.44		%	0.43		%
Total		$	204.5		$	134.3

 

Trading securities consist of bonds issued by public companies and are publicly traded.  Each financial instrument is independent of the others.  The Company has the intention to sell these bonds in the short-term.

 

Available for sale investments consist of securities issued by public companies.  Each security is independent of the others and, as of March 31, 2013, included corporate bonds and asset and mortgage backed obligations.  As of March 31, 2013 and December 31, 2012, gross unrealized gains and losses on available for sale securities were not material.

 

Related to these investments the Company earned interest, which was recorded as interest income in the condensed consolidated statement of earnings.  Also the Company redeemed some of these securities and recognized gains (losses) due to changes in fair value, which were recorded as other income (expense) in the condensed consolidated statement of earnings.

 

The following table summarizes the activity of these investments by category (in millions):

 

		Three months ended March 31,
		2013			2012
Trading:
Interest earned		$	0.6		$	0.8
Unrealized gain (loss)		$	1.1		$	5.0
Available for sale:
Interest earned		(*		)	(*		)
Investment redeemed		$	—		$	0.3

 

(*) Less than $0.1 million.

 

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NOTE 3 - INVENTORIES:

 

Inventories were as follows:

 

(in millions)		March 31, 2013			December 31, 2012
Inventory, current:
Metals at lower of average cost or market:
Finished goods		$	93.5		$	101.1
Work-in-process		303.6			297.4
Supplies at average cost		295.3			284.2
Total current inventory		$	692.4		$	682.7
Inventory, long-term:
Leach stockpiles		$	284.3		$	262.8

 

In the first quarter 2013 and 2012 total leaching costs capitalized as long-term inventory of leachable material amounted to $68.2 million and $52.7 million, respectively. Leachable material inventories recognized as cost of sales amounted to $26.7 million and $18.4 million for the first quarter 2013 and 2012, respectively.

 

NOTE 4 — INCOME TAXES:

 

The income tax provision and the effective income tax rate for the first quarter 2013 and 2012 were as follows ($ in millions):

 

		2013			2012
Income tax provision		$	234.9		$	318.8
Effective income tax rate		32.5		%	33.9		%

 

These provisions include income taxes for Peru, Mexico and the United States.  The decrease in the effective tax rate for the first quarter of 2013 from the same period in the prior year is primarily due to a reduction in taxes allocated to the current quarter caused by a one-time net tax benefit discrete to this quarter.

 

For United States federal income tax reporting the operating results of SCC are included in the Americas Mining Corporation (“AMC”) U.S. federal income tax return.  In accordance with paragraph 30-27 of ASC 740-10-30, current and deferred taxes are allocated to members of the AMC group as if each were a separate taxpayer.  SCC provides current and deferred income taxes as if it was a separate taxpayer.

 

Special Mining tax

 

In September 2011, the Peruvian government enacted a tax for the mining industry.  This tax is based on operating income and its rate ranges from 2% to 8.4%. It begins at 2% for operating income margin up to 10% and increases by 0.4% of operating income for each additional 5% of operating income until 85% of operating income is reached.  The Company has accrued $15.5 million and $11.9 million of special mining tax as part of the income tax provision for the first quarter 2013 and 2012, respectively.

 

NOTE 5 — PROVISIONALLY PRICED SALES:

 

At March 31, 2013, the Company has recorded provisionally priced sales of copper at average forward prices per pound, and molybdenum at the March 31, 2013 market price per pound.  These sales are subject to final pricing based on the average monthly London Metal Exchange (“LME”), or New York Commodities Exchange (“COMEX”), copper prices and Dealer Oxide molybdenum prices in the future month of settlement.

 

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Following are the provisionally priced copper and molybdenum sales outstanding at March 31, 2013:

 

Copper (million lbs.)		Priced at			Month of Settlement
8.8		$	3.41		April 2013

 

Molybdenum (million lbs.)		Priced at			Month of Settlement
9.3		$	10.85		April through June 2013

 

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.

 

NOTE 6 — DERIVATIVE INSTRUMENTS:

 

As part of its risk management policy, the Company occasionally uses derivative instruments to (i) safeguard the corporate assets, (ii) insure the value of its future revenue stream, and (iii) lessen the impact of unforeseen market swings on its sales revenues.  To comply with these objectives the Company, from time to time, enters into commodity price derivatives, interest rate derivatives, exchange rate derivatives and other instruments.  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 hedges:

 

In 2011, the Company entered into copper zero cost collar derivative contracts to reduce price volatility and to protect a portion of its sales value for the first quarter of 2012. Under these contracts the Company protected 46.3 million pounds at an average cap price of $5.18 and a floor price of $3.50.  These transactions meet the requirements of hedge accounting.  There were no realized gains and losses from these transactions.

 

As of March 31, 2013, the Company does not hold copper derivative contracts.

 

NOTE 7 - 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’s closure plans were approved by the Peruvian Ministry of Energy and Mines (“MINEM”).  As part of the closure plans, commencing in January 2010 and, as amended in 2012, the Company is required to provide annual guarantees over the estimated life of the mines, based on a present value approach, and to furnish the funds for the asset retirement obligation.  This law requires a first review after three years and then successive reviews every five years.  Currently and for the near-term future, the Company has pledged the value of its Lima office complex as support for this obligation.  The accepted value of the Lima office building, for this purpose, is $17 million. Through March 2013, the Company has provided guarantees of $10.5 million.  The closure cost recognized for this liability includes the cost, as outlined in its closure plans, of dismantling the Toquepala and Cuajone concentrators, the smelter and refinery in Ilo, and the shops and auxiliary facilities at the three units, including the Ilo marine trestle. In the last quarter of 2012, the Company submitted updates to the closure plans for Toquepala, Cuajone and Ilo in accordance with the requirement of the Mine Closure Law. As a result of these revised plans, the Company adjusted its asset retirement obligation.

 

In 2012, the Company decided to recognize an estimated asset retirement obligation for its mining properties in Mexico as part of its environmental commitment.  Even though, there is currently no enacted law, statute, ordinance, or written or oral contract requiring the Company to carry out mine closure and environmental remediation activities, the Company considered that a constructive obligation presently exists based on, among other things, the remediation caused by the closure of the San Luis Potosi smelter in 2010.  The overall cost recognized for mining closure includes the estimated costs of dismantling concentrators, smelter and refinery plants, shops and other facilities.

 

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The following table summarizes the asset retirement obligation activity for the three months ended March 31, 2013 and 2012 (in millions):

 

		2013			2012
Balance as of January 1		$	118.2		$	62.0
Changes in estimates		—			—
Additions		—			—
Accretion expense		1.8			0.8
Balance as of March 31,		$	120.0		$	62.8

 

NOTE 8 — RELATED PARTY TRANSACTIONS:

 

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 related 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.

 

Receivable and payable balances with related parties are shown below (in millions):

 

		As of
		March 31, 2013			December 31, 2012
Related parties receivable current:
Grupo Mexico S.A.B de C.V. and affiliates		$	0.8		$	1.8
Asarco LLC.		9.2			—
Compania Perforadora Mexico S.A.P.I. de C.V.		0.6			0.5
Compania Minera Coimolache S.A.		23.4			23.4
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates		0.2			—
		$	34.2		$	25.7
Related parties receivable non-current:
Mexico Generadora de Energia S.de R.L. (“MGE”)		$	173.4		$	184.0
Related parties payable:
Grupo Mexico S.A.B. de C.V. and affiliates		$	0.7		$	—
Asarco LLC		—			15.3
Higher Technology S.A.C.		0.1			0.2
Breaker, S.A. de C.V		0.3			—
Mexico Transportes Aereos S.A. de C.V. (“Mextransport”)		0.4			0.1
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates		—			2.1
Ferrocarril Mexicano S.A. de C.V.		2.6			2.6
		$	4.1		$	20.3

 

Purchase Activity:

 

The following table summarizes the purchase activity with related parties in the three months ended March 31, 2013 and 2012 (in millions):

 

		As of March 31,
		2013			2012
Grupo Mexico and affiliates:
Grupo Mexico Servicios S.A de C.V		$	3.5		$	3.5
Asarco LLC.		32.9			5.6
Ferrocarril Mexicano S.A de C.V.		5.8			4.1
Mexico Proyectos y Desarrollos, S.A. de C.V. and affiliates		9.3			11.2
Cia Perforadora Mexico S.A.P.I. de C.V and affiliates		0.6			0.1
Other Larrea family companies:
Mextransport		0.6			0.7
Companies with relationships to SCC executive officers families:
Higher Technology S.A.C.		0.3			0.3
Servicios y Fabricaciones Mecanicas S.A.C.		0.1			—
Sempertrans France Belting Technology		0.1			—
Breaker S.A. de C.V.		0.8			0.5
Total purchases		$	54.0		$	26.0

 

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Grupo Mexico and its affiliates: 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 primarily related to accounting, legal, tax, financial, treasury, human resources, price risk assessment and hedging, purchasing, procurement and logistics, sales and administrative and other support services.  The Company pays Grupo Mexico for these services.  The Company expects to continue to pay for these services in the future.

 

The Company’s Mexican operations paid fees for freight services provided by Ferrocarril Mexicano S.A de C.V., for construction services provided by Mexico Proyectos y Desarrollo S.A. de C.V. and its affiliates and for drilling services provided by Compania Perforadora Mexico S.A.P.I. de C.V. The three companies are subsidiaries of Grupo Mexico.

 

In the first quarter of 2013 and 2012, the Company’s Peruvian operations paid fees for engineering and construction services provided by subsidiaries of Mexico Proyectos y Desarrolles S.A. de C.V., a subsidiary of Grupo Mexico.

 

In 2005, the Company organized MGE, as a subsidiary of Minera Mexico, for the construction of two power plants to supply power to the Company’s Mexican operations. In May 2010, the Company’s Mexican operations granted a $350 million line of credit to MGE for the construction of the power plants.  That line of credit was due on December 31, 2012 and carried an interest rate of 5.75%.  In the first quarter of 2012, Controladora de Infraestructura Energetica Mexico, S. A. de C. V., an indirect subsidiary of Grupo Mexico, acquired 99.999% of MGE through a capital subscription of 1,928.6 million of Mexican pesos (approximately $150 million), reducing Minera Mexico’s participation to less than 0.001%. As consequence, of this change in control MGE became an indirect subsidiary of Grupo Mexico.  Additionally, at the same time, MGE paid $150 million to the Company’s Mexican operations partially reducing the total debt.  At December 31, 2012, the outstanding balance of $184.0 million was restructured as subordinated debt of MGE.  The $184.0 million includes $37.6 million drawn on the line of credit in 2012 and $146.4 million drawn through December 31, 2011.  It is expected that MGE will complete the construction of the first power plant in 2013 and the second in 2014.  MGE will repay its debt to the Company using a percentage of its profits until such time as the debt is satisfied.  At March 31, 2013 the remaining balance of the debt was $173.4 million and was recorded as non-current related party receivable on the condensed consolidated balance sheet.  Related to this loan the Company received $2.7 million of interest in the first quarter of 2013.

 

In December 2012, the Company signed a power purchase agreement with MGE, whereby MGE will supply certain of the Company’s Mexican operations with power through 2032; see also Note 10 - Commitments and Contingencies, Other commitments.

 

Other Larrea family companies: The Larrea family controls a majority of the capital stock of Grupo Mexico, and has extensive interests in other businesses, including 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 the lease of office space and air transportation. In 2007, the Company’s Mexican subsidiaries provided guaranties for two loans obtained by MexTransport, a company controlled by the Larrea family, from Bank of Nova Scotia in Mexico. One of these loans has been repaid and the remaining loan requires semi-annual repayments. Conditions and balance as of March 31, 2013 are as follows:

 

		Loan
Original loan balance (in millions)		$	8.5
Maturity		August 2013
Interest rate		Libor + 0.15		%
Remaining balance at March 31, 2013 (in millions)		$	0.6

 

MexTransport provides aviation services to the Company’s Mexican operations.  The guaranty provided to MexTransport is backed up by the transport services provided by MexTransport to the Company’s Mexican subsidiaries.

 

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Companies with relationships to SCC executive officers families: The Company purchased industrial materials from Higher Technology S.A.C and paid fees for maintenance services provided by Servicios y Fabricaciones Mecanicas S.A.C. Mr. Carlos Gonzalez, the son of SCC’s Chief Executive Officer, has a proprietary interest in these companies.

 

The Company purchased industrial material from Sempertrans France Belting Technology, in which Mr. Alejandro Gonzalez is employed as a sales representative.  Also, the Company purchased 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 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.

 

Sales Activity: The Company sold copper cathodes, rod and anodes, as well as sulfuric acid, silver, gold and lime to Asarco.  In addition, the Company received fees for building rental and maintenance services provided to Mexico Proyectos y Desarrollos, S.A. de C.V. and its affiliates and for services provided to MGE, both subsidiaries of Grupo Mexico and to Mextransport a company of the Larrea family.

 

The following table summarizes the sales and other revenue activity with related parties in the first quarter of 2013 and 2012 (in millions):

 

		As of March 31,
		2013			2012
Asarco		$	36.6		$	11.0
Mexico Proyectos y Desarrollos, S.A. de C.V.		0.2			0.1
Cia Perforadora Mexico S.A.P.I. de C.V and affiliates		0.1			—
MGE		0.1
Mextransport		0.1			0.7
Total		$	37.1		$	11.8

 

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

 

Equity Investment in Affiliate: The Company has a 44.2% participation in Coimolache S.A. (“Coimolache”), which it accounts for on the equity method. Coimolache owns Tantahuatay, a gold mine located in the northern part of Peru.  To support the cost of the development of Tantahuatay, the Company loaned $56.6 million to Coimolache.  Conditions and balance of the loan as of March 31, 2013 are as follows (in millions):

 

		Loan
Total loan granted		$	56.6
Interest rate		6 months Libor + 3% (approximately 3.45		)%
Remaining balance at March 31, 2013		$	23.4
Interest earned in the first quarter 2013		$	0.4
Interest earned in the first quarter 2012		$	0.5

 

On April 2, 2013, Coimolache repaid the Company $16.5 million of the outstanding loan balance.

 

NOTE 9 — BENEFIT PLANS:

 

Post retirement defined benefit plans

 

The Company has two noncontributory defined benefit pension plans covering former salaried employees in the United States and certain former employees in Peru. Effective October 31, 2000, the Board of Directors amended the qualified pension plan to suspend the accrual of benefits.

 

In addition, our Mexican subsidiaries have a defined contribution benefit pension plan for salaried employees and a noncontributory defined benefit pension plan for union employees.

 

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The components of the net periodic benefit costs for the three months ended March 31, 2013 and 2012 are as follows (in millions):

 

		2013			2012
Service cost		$	0.3		$	0.3
Interest cost		0.3			0.3
Expected return on plan assets		(0.9		)	(0.9		)
Amortization of net actuarial loss		(0.2		)	(0.2		)
Amortization of net loss (gain)		(*		)	(*		)
Net periodic benefit costs		$	(0.5	)	$	(0.5	)

 

(*) amount is lower than $0.1 million

 

Post-retirement health care plan

 

Peru: The Company adopted a post-retirement health care plan for retired salaried employees eligible for Medicare in 1996. The plan is unfunded. The Company manages the plan and is currently providing health benefits to retirees. The plan is accounted for in accordance with ASC 715 “Compensation retirement benefits.”

 

Mexico: Through 2007, the Buenavista unit provided health care services free of charge to employees and retired unionized employees and their families through its own hospital at the Buenavista unit. In 2011, the Company signed an agreement with the Secretary of Health of the State of Sonora to provide these services to its retired workers and their families at a lower cost for the Company but still free of charge to the retired workers.

 

The components of the net periodic benefit cost for the three months ended March 31, 2013 and 2012 are as follows (in millions):

 

		2013			2012
Interest cost		$	0.4		$	0.4
Amortization of net loss (gain)		(*		)	(0.1		)
Amortization of prior service cost (credit)		(*		)	(*		)
Net periodic benefit cost		$	0.3		$	0.3

 

(*) amount is lower than $0.1 million

 

NOTE 10 — 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.

 

Environmental capital expenditures in the three months ended March 31, 2013 and 2012 were as follows (in millions):

 

		2013			2012
Peruvian operations		$	0.7		$	1.1
Mexican operations		10.5			8.3
		$	11.2		$	9.4

 

Peruvian operations

 

The Company’s operations are subject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through the Environmental Ministry conducts annual audits of the Company’s Peruvian mining and metallurgical operations.

 

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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.

 

Peruvian law requires that companies in the mining industry provide for future closure and remediation.  In accordance with the requirements of this law the Company’s closure plans were approved by MINEM.  As part of the closure plans, the Company is providing guarantees to ensure that sufficient funds will be available for the asset retirement obligation.  See Note 7, “Asset retirement obligation,” for further discussion of this matter.

 

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.

 

The principal legislation applicable to the Company’s Mexican operations is the Federal General Law of Ecological Balance and Environmental Protection (the “General Law”), 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.

 

On January 28, 2011, Article 180 of the General Law was amended. This amendment, gives an individual or entity the ability to contest administrative acts, including environmental authorizations, permits or concessions granted, without the need to demonstrate the actual existence of harm to the environment, natural resources, flora, fauna or human health, because it will be sufficient to argue that the harm may be caused.

 

In addition in 2011, amendments to the Civil Federal Procedures Code (“CFPC”) were published in the Official Gazette and are now in force. These amendments establish three categories of collective actions, by means of which 30 or more people claiming injury derived from environmental, consumer protection, financial services and economic competition issues will be considered to be sufficient in order to have a legitimate interest to seek through a civil procedure restitution or economic compensation or suspension of the activities from which the alleged injury derived. The amendments to the CFPC may result in more litigation, with plaintiffs seeking remedies, including suspension of the activities alleged to cause harm.

 

On December 5, 2011, the Mexican Senate Chamber approved the Environmental Liability Federal Law, which establishes general guidelines in order to determine which environmental actions will be considered to cause environmental harm that will give rise to administrative responsibilities (remediation or compensations) and criminal responsibilities. Also economic fines could be established. This initiative has been returned to the lower chamber for discussion and voting. The law will be in force once approved by the lower chamber and signed by the President.

 

In March 2010, the Company announced to the Mexican federal environmental authorities the closure of the copper smelter plant at San Luis Potosi. The Company initiated a program for plant demolition and soil remediation with a budget of $35.7 million, of which the Company has spent $33.5 million through March 31, 2013.  Plant demolition and construction of a confinement area at the south of the property were completed in 2012 and the Company expects to complete soil remediation and the construction of a second confinement by the end of 2013.  The Company will deposit in the confinement areas metallurgical and other waste material resulting from plant demolition. The program also includes the construction of a recreational park, a plant nursery to improve the environmental culture, and a logistic center for raw material and finished goods from the San Luis Potosi zinc plant, which the Company expects will improve the flow of traffic in the west of the city. The Company expects that once the site is remediated, the Company will be able to promote an urban development to generate a net gain on the disposal of the property.

 

The Company believes that all of its facilities in Peru and Mexico are in material compliance with applicable environmental, mining and other laws and regulations.

 

The Company also believes that continued compliance with environmental laws of Mexico and Peru will not have a material adverse effect on the Company’s business, properties, result of operations, financial condition or prospects and will not result in material capital expenditures.

 

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Litigation matters:

 

Peruvian operations

 

Garcia Ataucuri and Others against SCC’s Peruvian Branch:

 

In April 1996, the Branch was served with a complaint filed in Peru by Mr. Garcia Ataucuri and approximately 900 former employees seeking the delivery of a substantial number of “labor shares” (acciones laborales) plus dividends on such shares, to be issued to each former employee in proportion to their time of employment with SCC’s Peruvian Branch.

 

The labor share litigation is based on claims of former employees for ownership of labor shares that the plaintiffs state that the Branch did not issue during the 1970s until 1979 under a former Peruvian mandated profit sharing system. In 1971, the Peruvian government enacted legislation providing that mining workers would have a 10% participation in the pre-tax profits of their employing enterprises. This participation was distributed 40% in cash and 60% in an equity interest of the enterprise. In 1978, the equity portion, which was originally delivered to a mining industry workers’ organization, was set at 5.5% of pre-tax profits and was delivered, mainly in the form of “labor shares” to individual workers. The cash portion was set at 4.0% of pre-tax earnings and was delivered to individual employees also in proportion to their time of employment with the Branch. In 1992, the workers’ participation was set at 8%, with 100% payable in cash and the equity participation was eliminated from the law.

 

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

 

1)             Mr. Garcia Ataucuri seeks delivery, to himself and each of the approximately 900 former employees of the Peruvian Branch, of the 3,876,380,679.65 old soles or 38,763,806.80 “labor shares” (acciones laborales), as required by Decree Law 22333 (a former profit sharing law), to be issued proportionally to each former employee in accordance with the time of employment of such employee with SCC’s Branch in Peru, plus dividends on such shares. The 38,763,806.80 labor shares sought in the complaint, with a face value of 100.00 old soles each, represent 100% of the labor shares issued by the Branch during the 1970s until 1979 for all of its employees during that period. The plaintiffs do not represent 100% of the Branch´s eligible employees during that period.

 

It should be noted that the lawsuit refers to a prior Peruvian currency called “sol de oro” or old soles, which was later changed to the “inti”, and then into today´s “nuevo sol.” One billion of old soles is equivalent to today’s one nuevo sol.

 

After lengthy proceedings before the civil courts in Peru on September 19, 2001, on appeal from the Branch (the 2000 appeal), 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, 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. None of the court decisions state the manner by which the Branch must comply with the delivery of such labor shares or make a liquidation of the amount to be paid for past dividends and interest, if any.

 

On June 9, 2009, SCC’s Peruvian Branch filed a proceeding of relief before a civil court in Peru seeking the nullity of the 2009 Supreme Court decision and, in a separate proceeding, a request for a precautionary measure. The civil court rendered a favorable decision on the nullity and the precautionary measure, suspending the enforcement of the Supreme Court decision, for the reasons indicated above and other reasons. In February 2012, the Branch was notified that the civil court had reversed its decision regarding the nullity. The precautionary measure is still in effect. The Peruvian Branch has appealed the unfavorable decision before the superior court. 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)             In addition, there are filed against SCC’s Branch the following lawsuits, involving approximately 800 plaintiffs, which seek the same number of labor shares as in the Garcia Ataucuri case, plus interest, labor shares resulting from capital increases and

 

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dividends: Armando Cornejo Flores and others v. SCC’s Peruvian Branch (filed May 10, 2006); Alejandro Zapata Mamani and others v. SCC’s Peruvian Branch (filed June 27, 2008); Arenas Rodriguez and others, represented by Mr. Cornejo Flores, v. SCC’s Peruvian Branch (filed January 2009); Eduardo Chujutalli v. SCC’s Peruvian Branch (filed May 2011); Edgardo Garcia Ataucuri, in representation of 216 of SCC’s Peruvian Branch former workers, v. SCC’s Peruvian Branch (filed May 2011); Silvestre Macedo Condori v. SCC’s Peruvian Branch (filed June 2011); Juan Guillermo Oporto Carpio v. SCC’s Peruvian Branch (filed August 2011); Rene Mercado Caballero v. SCC’s Peruvian Branch (filed November 2011); Enrique Salazar Alvarez and others v. SCC’s Peruvian Branch (filed December 2011); Indalecio Carlos Perez Cano and others v. SCC Peruvian Branch (filed March 2012); Jesús Mamani Chura and others v. SCC’s Peruvian Branch (filed March, 2012); Armando Cornejo Flores, in representation of 37 of SCC’s Peruvian Branch former workers v. SCC’s Peruvian Branch (filed March, 2012) and Porfirio Ochochoque Mamani and others v. SCC´s Peruvian Branch (filed July, 2012). SCC’s Peruvian Branch has answered the complaints and denied the validity of the claims.

 

SCC’s Peruvian Branch asserts that the labor shares were distributed to the former employees in accordance with the profit sharing law then in effect. The Peruvian Branch has not made a provision for these lawsuits because it believes that it has meritorious defenses to the claims asserted in the complaints. Additionally, the amount of this contingency cannot be reasonably estimated by management at this time.

 

The “Virgen Maria” Mining Concessions of the Tía Maria Mining Project

 

The Tia Maria project includes various mining concessions, totaling 32,989.64 hectares.  One of the concessions is the “Virgen María” mining concession totaling 943.72 hectares or 2.9% of the total mining concessions.

 

Related to the “Virgen María” mining concessions, the Company is party to the following lawsuits:

 

a)             Exploraciones de Concesiones Metalicas S.A.C. (“Excomet”):  In August 2009, a lawsuit was filed against SCC’s Branch by the former stockholders of Excomet.  The plaintiffs allege that the acquisition of Excomet’s shares 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 the stockholders of Excomet, approved the transaction in a general stockholders’ meeting.  Excomet was at the time owner of the “Virgen Maria” mining concession.  In October 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations.  On appeal by the plaintiffs, the superior court reversed the lower court decision.  As of March 31, 2013, the case is pending resolution.

 

b)             Sociedad Minera de Responsabilidad Limitada Virgen Maria de Arequipa (SMRL Virgen Maria): In August 2010, a lawsuit was filed against SCC’s Branch and others by SMRL Virgen Maria, a company which until July 2003 owned the mining concession Virgen Maria.  SMRL Virgen Maria sold this mining concession in July 2003 to Excomet (see a) above).  The plaintiff alleges that the sale of the mining concession Virgen Maria to Excomet is null and void because the persons who attended the shareholders’ meeting of SMRL Virgen Maria, at which the purchase was agreed upon, were not the real owners of the shares.  The plaintiff is also pursuing the nullity of all the subsequent acts regarding the mining property (acquisition of the shares of Excomet by SCC’s Branch, noted above, and the sale of this concession to SCC’s Branch by Excomet). On October, 2011, the civil court dismissed the case on the grounds that the claim had been barred by the statute of limitations.  Upon appeal by the plaintiffs, the superior court remanded the proceedings to the lower court, ordering the issuance of a new decision.  As of March 31, 2013, the case is pending resolution.

 

c)              Omar Nuñez Melgar: In May 2011, Mr. Omar Nuñez Melgar commenced a lawsuit against the Peruvian Mining and Metallurgical Institute (“INGEMMET”) and MINEM challenging the denial of his request of a new mining concession that conflicted with SCC’s Branch’s Virgen Maria mining concession.  SCC’s Branch has been made a party to the proceedings as the owner of the Virgen Maria concession.  SCC’s Branch has answered the complaint and denied the validity of the claim.  As of March 31, 2013, this case is pending resolution.

 

The Company asserts that the lawsuits are without merit and is vigorously defending against these lawsuits.

 

Special Regional Pasto Grande Project (“Pasto Grande Project”)

 

In the last quarter of 2012, the Pasto Grande Project, an entity of the Regional Government of Moquegua, filed a lawsuit against SCC’s Peruvian Branch alleging property rights over a certain area used by the Peruvian Branch and seeking the demolition of the tailings dam where SCC’s Peruvian Branch has deposited its tailings from the Toquepala and Cuajone operations since 1995.  The Peruvian Branch has had title to use the area in question since 1960 and has constructed and

 

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operated the tailing dams also with proper governmental authorization, since 1995.  SCC’s Peruvian Branch asserts that the lawsuit is without merit and is vigorously defending against the lawsuit.  As of March 31, 2013, this case is pending resolution.

 

Mexican Operations

 

Pasta de Conchos Accident:

 

On February 19, 2010, three widows of miners, who perished in the 2006 Pasta de Conchos accident, filed a complaint for damages in the United States District Court for the District of Arizona against the defendants, Grupo Mexico, AMC and SCC. The plaintiffs allege that the defendants’ purported failure to maintain a safe working environment at the mine amounted to a violation of several laws and treaties. On April 13, 2010, the Company filed a motion to dismiss the plaintiffs’ complaint. On March 29, 2011, the District Court for the District of Arizona dismissed the case for lack of subject-matter jurisdiction. On April 5, 2011, the plaintiffs filed a notice of appeal in this case.  On November 7, 2012, the United States Court of Appeals for the Ninth Circuit affirmed the decision of the United States District Court of the District of Arizona, which had dismissed in its entirety the case for lack of subject-matter jurisdiction. As the time for further appeals has expired on February 28, 2013, this case is now closed.

 

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 65% of the Company’s 4,574 Peruvian employees were unionized at March 31, 2013, represented by eight separate unions.  Three of these unions, one at each major production area, represent 2,229 workers. Also, there are five smaller unions, representing the balance of workers.  The Company conducted negotiations with the eight unions whose collective bargaining agreements expired in 2012. During the first two months of 2013, the Company has signed three-year agreements with all the unions. The agreements included, among other things, annual salary increases of 6.5%, 5% and 5% for each of the three years, respectively, for all workers.

 

On December 24 and 25, 2012, the three major unions held a two-day illegal work stoppage which did not have a material impact on production. There were no strikes in the first quarter of 2013 and 2012.

 

Mexican operations

 

In recent years, the Mexican operations have experienced a positive improvement of their labor environment, as its workers, in a free decision, opted to change their affiliation from the Sindicato Nacional de Trabajadores Mineros, Metalúrgicos y Similares de la Republica Mexicana (National Union of Mine and Metal Workers and Similar Activities of the Mexican Republic or the “National Mining Union”) to other unions.  In 2006, workers of Mexicana del Cobre mining complex and IMMSA joined the Sindicato Nacional de Trabajadores de la Exploración, Explotación y Beneficio de Minas en la Republica Mexicana (National Union of Workers Engaged in Exploration, Exploitation and Processing of Mines in the Mexican Republic), and the Mexicana del Cobre metallurgical workers joined the Sindicato de Trabajadores de la Industria Minero Metalurgica (Union of Workers of the Mine and Metals Industry or the “CTM”).  Finally, in 2011 Buenavista del Cobre workers joined the CTM.  This positive labor environment allows the Company to increase its productivity and to develop its capital expansion programs.

 

The workers of the San Martin and Taxco mines, still under the National Mining Union, have been on strike since July 2007.  On December 10, 2009, a federal court confirmed the legality of the San Martin strike.  In order to recover the control of the San Martin mine and resume operations, on January 27, 2011, the Company filed a court petition requesting that the court, among other things define the termination payment for each unionized worker.  The court denied the petition alleging that, according to federal labor law, the union was the only legitimate party to file such petition.  On appeal by the Company, on May 13, 2011, the Mexican federal tribunal accepted the petition.  In July 2011, the National Mining Union appealed the favorable court decision before the Supreme Court.  On November 7, 2012, the Supreme Court affirmed the decision of the federal tribunal.  The Company filed a new proceeding before the labor court on the basis of the Supreme Court decision, which recognized the right of the labor court to define responsibility for the strike and the termination payment for each unionized worker.  A favorable decision of the labor court in this new proceeding would have the effect of terminating the protracted strike at San Martin.  As of March 31, 2013, the case is pending resolution.

 

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In July 2012, Minera Krypton, a Mexican mining company, not affiliated with Grupo Mexico or the Company, hired 130 workers for the rehabilitation of its mining unit at Chalchihuites, Zacatecas.  Most of these workers, which are or were workers of the San Martin mine, in order to work for Minera Krypton joined a new union called the Sindicato de Trabajadores de la Industria Minera y Similares de la Republica Mexicana (Union of Workers of the Mine and Metals Industry and Similar Activities of the Mexican Republic or the “Union of Mexican Mine and Metal Workers”). On August 31, 2012, the Union of Mexican Mine and Metal Workers filed a petition with the labor authorities to replace the existing union at the San Martin mine.  On September 1, 2012, the workers affiliated with the Union of Mexican Mine and Metal Workers took over the San Martin mine evicting the workers on strike.  Several hearings took place during September 2012 with the federal labor authorities. On October 12, 2012, the federal labor court ordered and enforced a recount in order to establish which union will hold the collective bargaining agreement. The Union of Mexican Mine and Metal Workers lost the recount.  The result of the recount was challenged by the Union of Mexican Mine and Metal Workers and as of March 31, 2013, this case is pending resolution.

 

In the case of the Taxco mine, following the workers refusal to allow exploration of new reserves, the Company commenced litigation seeking to terminate the labor relationship with workers of the Taxco mine (including the related collective bargaining agreement).  On September 1, 2010, the federal labor court issued a ruling approving the termination of the collective bargaining agreement and all the individual labor contracts of the workers affiliated with the Mexican mining union at the Taxco mine.  The ruling was based upon the resistance of the mining union to allow the Company search for reserves at the Taxco mine.  The mining union appealed the labor court ruling before a federal court.  In September 2011, the federal court accepted the union’s appeal and requested that the federal labor court reviews the procedure and takes into account all the evidence to issue a new resolution.  On January 3, 2012, the federal labor court issued a new resolution, approving the termination of the collective bargaining agreement and all the individual labor contracts of the workers affiliated with the National Mining Union at the Taxco mine.  On January 25, 2012, the National Mining Union appealed the resolution before the federal court.  On June 14, 2012, the federal court accepted the union’s appeal and requested that the federal labor court issue a new resolution, taking into account all the evidence submitted by the parties.  On August 6, 2012, the federal labor court issued a new decision disapproving the termination of the collective bargaining agreement and the individual labor contracts of the workers affiliated with the National Mining Union at the Taxco mine. On August 29, 2012, the Company filed a proceeding seeking relief from the decision before a federal court.  On January 25, 2013, the Company filed a new proceeding before the labor court on the basis of the Supreme Court decision in the San Martin case, which recognized the right of the labor court to define responsibility for the strike and the termination payment for each unionized worker.  A favorable decision of the labor court in this new proceeding would have the effect of terminating the protracted strike at San Martin. As of March 31, 2013, this case is pending resolution.

 

It is expected that operations at these mines will remain suspended until these labor issues are resolved.

 

Other legal matters:

 

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 effect on its financial position or results of operations.

 

Other Contingencies:

 

Tia Maria:

 

Tia Maria, an over $1.0 billion Peruvian investment project, was suspended by governmental action in April 2011 in light of protests and disruptions carried out by a small group of activists who alleged, among other things, that the project would result in severe environmental contamination and the diversion of agricultural water resources.

 

The Company is preparing a new EIA study that we believe will take into account local community concerns and new government guidance. The Company considers that this new EIA process will alleviate all the concerns previously raised by the Tia Maria project’s neighboring communities, provide them with an independent source of information and reaffirm the validity of the Company’s assessment of the project. The Company is confident that this initiative will have a positive effect on its stakeholders and will allow the Company to obtain the approval for the development of the 120,000 ton annual production copper project. In view of the delays, the mining operations for the project have been rescheduled to start-up in 2016,

 

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contingent upon receiving all required governmental approvals in the time frame provided by law. No assurances can be given as to the specific timing of each such approval.

 

The Company has legal and valid title to the Tia Maria mining concessions and the over-lapping surface land in the area. None of above noted activities have in any way challenged, revoked, impaired or annulled the Company´s legal rights to the Tia Maria mining concessions and/or the over-lapping surface land titles acquired in the past. All the Company’s property rights on these areas are in full force.

 

In view of the suspension of this project, the Company has reviewed the carrying value of this asset to ascertain whether impairment exists. Total spending on the project, through March 31, 2013, was $495.6 million of which $196.5 million of Tia Maria equipment has been reassigned to other Company operations.  Should the Tia Maria project not be restarted, the Company is confident that most of the project equipment will continue to be used productively, through reassignment to other mine locations operated by the Company.  The Company believes that an impairment loss, if any, will not be material.

 

Other commitments:

 

Peruvian Operations

 

Power purchase agreement - Enersur

 

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 (“PPA”) was also completed under which SCC agreed to purchase all of its power needs for its current Peruvian operations from Enersur for twenty years, commencing in 1997.

 

The Company signed in 2009 a Memorandum of Understanding (“MOU”) with Enersur regarding its PPA.  The MOU contains new economic terms that the Company believes better reflects current economic conditions in the power industry in Peru.  The new economic conditions agreed to 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. However, due to the delay at the Tia Maria project the final agreement was put on hold, see caption “Tia Maria” above.

 

Toquepala Concentrator Expansion

 

In connection with the EIA of the Toquepala expansion project, some community groups raised concerns related to water usage and pollution. As a result of these issues the Peruvian government started discussions with the local communities and the regional authorities to resolve this impasse. On February 8, 2013, the Company reached a final agreement with the province of Candarave, one of the three provinces neighboring the Toquepala unit, which commits the Company to funding S/.255 million (approximately $100 million) for development projects in the province. This agreement is contingent upon receiving approval for the project.

 

Mexican operations

 

Power purchase agreement - MGE

 

MGE, a subsidiary of Grupo Mexico, is constructing two power plants in Mexico to supply power to some of the Company’s Mexican operations.  In December 2012, the Company signed a power supply agreement with MGE, whereby MGE will supply the Company with power through 2032.  The estimated monthly capacity charge is approximately $4.3 million.

 

Tax contingency matters:

 

Tax contingencies are provided for under ASC 740-10-50-15 Uncertain tax positions (see Note 4, “Income taxes”).

 

NOTE 11 — SEGMENT AND RELATED INFORMATION:

 

Company management views Southern Copper as having three reportable segments and manages it on the basis of these segments.  The reportable segments identified by the Company are: the Peruvian operations, the Mexican open pit operations and the Mexican underground mining operations segment identified as the IMMSA unit.

 

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The three reportable segments identified are groups of mines, each of which constitute an operating segment, 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.

 

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.

 

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

 

		Three Months Ended March 31, 2013
		(in millions)
		Mexican Open-Pit			Mexican IMMSA Unit			Peruvian Operations			Corporate, other and eliminations			Consolidated
Net sales outside of segments		$	862.6		$	89.9		$	670.5		—			$	1,623.0
Intersegment sales		—			32.0			—			$	(32.0	)	—
Cost of sales (exclusive of depreciation, amortization and depletion)		380.7			73.1			316.9			(44.0		)	726.7
Selling, general and administrative		8.8			3.8			12.1			0.7			25.4
Depreciation, amortization and depletion		40.2			6.7			41.4			2.3			90.6
Exploration		0.9			6.1			3.3			—			10.3
Operating income		$	432.0		$	32.2		$	296.8		$	9.0		770.0
Less:
Interest, net														(47.1		)
Other income (expense)														0.8
Income taxes														(234.9		)
Equity earnings of affiliate														8.2
Non-controlling interest														(1.6		)
Net income attributable to SCC														$	495.4
Capital expenditure		$	250.6		$	17.9		$	39.3		$	9.0		$	316.8
Property, net		$	2,694.0		$	359.7		$	2,213.9		$	81.6		$	5,349.2
Total assets		$	4,647.7		$	892.7		$	3,425.1		$	1,811.4		$	10,776.9

 

		Three Months Ended March 31, 2012
		(in millions)
		Mexican Open-Pit			Mexican IMMSA Unit			Peruvian Operations			Corporate, other and eliminations			Consolidated
Net sales outside of segments		$	878.8		$	100.6		$	826.5		$	—		$	1,805.9
Intersegment sales		—			37.9			—			(37.9		)	—
Cost of sales (exclusive of depreciation, amortization and depletion)		319.6			75.5			359.2			(32.4		)	721.9
Selling, general and administrative		8.7			3.6			12.5			0.6			25.4
Depreciation, amortization and depletion		33.6			6.3			39.0			(2.0		)	76.9
Exploration		0.7			6.2			1.8			—			8.7
Operating income		$	516.2		$	46.9		$	414.0		$	(4.1	)	973.0
Less:
Interest, net														(40.5		)
Other income (expense)														7.2
Income taxes														(318.8		)
Equity earnings of affiliate														2.6
Non-controlling interest														(2.1		)
Net income attributable to SCC														$	621.4
Capital expenditure		$	135.1		$	14.4		$	27.9		$	—		$	177.4
Property, net		$	1,913.7		$	327.7		$	2,204.0		$	50.5		$	4,495.9
Total assets		$	3,849.7		$	764.5		$	3,170.5		$	709.2		$	8,493.9

 

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