**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**2005 FORM 10-K/A**

 

**Amendment No. 2**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 
| **For the  fiscal year ended December 31, 2005** | ** ** | **Commission  File Number: 1-14066** |
|--------------------------------------------------|------------|--------------------------------------|

 

**SOUTHERNCOPPER CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **13-3849074**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **11811 North Tatum Blvd. Suite 2500, Phoenix, AZ**                         | ** ** | **85028**  |
|-----------------------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                                    |       | (Zip code) |
|                                                                        |       |       |
| Registrant’s telephone number, including area code: **(602) 977-6595** |

 

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

 
| **Title of  each class**          | ** ** | **Name of  each exchange  on which registered** |
|-----------------------------------|------------|-------------------------------------------------|
| Stock,  par value $0.01 per share |       | New  York Stock ExchangeLima Stock Exchange     |
| $200,000,000                      |       | 6.375%                                          | Notes due 2015 |   | Luxembourg  Stock Exchange |
| $600,000,000                      |       | 7.500%                                          | Notes due 2035 |   | Luxembourg  Stock Exchange |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes  o  No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15d of the Act. Yes  o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x  No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment ofthis Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act).

 

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Act). Yes  o    No x

 

 

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Asof January 31, 2006, there were of record 147,228,025 shares of Common Stock,par value $0.01 per share, outstanding, and the aggregate market value of theshares of Common Stock (based upon the closing price on such date as reportedon the New York Stock Exchange - Composite Transactions) of Southern CopperCorporation held by non affiliates was approximately $3,194.1 million.

 

PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 
| Part III: |   | Proxy  statement in connection with the 2006 Annual Meeting of Stockholders |
|-----------|--------|-----------------------------------------------------------------------------|
|      |   |                                                                        |
| Part IV:  |   | Exhibit  index is on Page B1 through B2.                                    |

 

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EXPLANATORY NOTE

 

This amendmenton Form 10-K/A is being filed to amend the Annual Report on Form 10-K ofSouthern Copper Corporation (“SCC”) for the year ended December 31, 2005 (the “Form10-K”), originally filed with the Securities and Exchange Commission on March13, 2006 (the “Original Filing”) and amended on Form 10-K/A on March 28, 2006. Thepurpose of this amendment is to amend portions of Item 1 and Item 2 as well asto update SCC’s address in our Form 10-K. Additionally, SCC has correctedcertain minor typographical errors in the Original Filing.

 

While we areamending only certain portions of our Form 10-K, for convenience and ease ofreference, we are filing the entire Form 10-K, in an amended and restatedformat. Unless stated otherwise, all information contained in this amendment isas of December 31, 2005. This amendment does not change any previously reportedfinancial results, nor does it reflect events occurring after the date of theOriginal Filing. This amendment does not affect the timeliness of the originalfiling to which this amendment relates.

 

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PART I

 

Item 1.  Business

 

MINE ACCIDENT

 

On Sunday, February 19, 2006, at about 2:00 am, a gas explosionoccurred at our Pasta de Conchos coal mine, located in the San Juan Sabinasmunicipality, in the state of Coahuila, Mexico. The explosion caused a cave-inat three of the main tunnels leading into the mine. Initially 11 of our minerswere rescued, some with minor injuries and some unharmed. Regrettably, 65 of ourminers remained trapped. Our crews, with assistance from the Mexican army,regional industry and supported from the government of Coahuila, worked aroundthe clock to reach and rescue our men. As work progressed, the build up ofmethane gas made it apparent that any chance of our men remaining alive washopeless. Commencing on Saturday, February 25 our efforts have been redefinedas a mission to recover the bodies of our men so that their families can havethe solace of proper burial. We honor the memory of these men –

 
| Javier Perez  Aguilar        |   | Ignacio  Hernandez Lopez       |   | Julian  Martinez Ojeda          |
|------------------------------|--------|--------------------------------|--------|---------------------------------|
| Amado  Rosales Hernandez     |   | Jorge  Antonio Moreno Tovar    |   | Raul  Villasana Cantu           |
| Jesus  Morales Boone         |   | Juan Manuel  Rosas Hernandez   |   | Eliud Valero  Valero            |
| Lauro Olacio  Zarazu         |   | Jesus  Alvarez Flota           |   | Juan Antonio  Cardenas Limon    |
| Guillermo  Iglesias Ramos    |   | Agustin  Botello Hernandez     |   | Gilberto  Rios Salazar          |
| Adrian  Barboza Alvarez      |   | Jorge  Bladimir Muñoz D.  |   | Guillermo  Ortiz Mora           |
| Jose Luis  Calvillo H.       |   | Ignacio  Campos Rosales        |   | Mario de Jesus Cordero A.       |
| Oscar Javier  Cerda Espinoza |   | Juan Antonio  Cruz Garcia      |   | Jose  Porfirio Cibrian M.       |
| Jose Angel  Guzman Franco    |   | Juan  Fernando Garcia M.       |   | Jose Ramon  Hernandez Ramos     |
| Roberto  Zapata Gonzalez     |   | Jesus Cortez  Ibarra           |   | Juan Raul  Artega Garcia        |
| Mario Alberto  Ruiz Ramos    |   | Tomas Patlan  Martinez         |   | Luis Jorge de Hoyos Marquez     |
| Pedro Doñez  Posada     |   | Juan Arturo  Salazar Olvera    |   | Mauro  Antonio Sanchez Rocha    |
| Ricardo  Hernandez Rocha     |   | Felipe de Jesus Torres R.      |   | Ernesto de la Cruz Sanchez      |
| Jesus  Armando Rodriguez T.  |   | Feliciano  Vazquez Posada      |   | Jose Alfredo  Silva C.          |
| Jesus Alberto de Leon C.     |   | Pablo Soto  Nieto              |   | Jorge Arturo  Ortega Jimenez    |
| Fermin  Tavares Garza        |   | Hugo Ramirez  Garcia           |   | Juan Ramon  Barrientos G.       |
| Jose  Guadalupe Garcia M.    |   | Jose Alfredo  Ordoñez M.  |   | Arturo  Garcia Diaz             |
| Rolando  Alcocer Soria       |   | Margarito  Cruz Rios           |   | Juan Martin  Gomez Martinez     |
| Roberto  Guerrero Ramirez    |   | Gregorio  Rangel Ocura         |   | Reyes Cuevas  Silva             |
| Gil Rico  Montelongo         |   | Margarito  Zamarron Alfaro     |   | Jose Armando  Castillo M.       |
| Isidoro  Briseño Rios   |   | Jose Manuel  Peña Saucedo |   | Jose Isabel  Mijares Yañez |
| Jesus Viera  Armendariz      |   | Jose Eduardo  Martinez B.      |   |                            |

 

THE COMPANY

 

We are a leading integrated producer of copper, molybdenum, zinc andsilver. All of our mining, smelting and refining facilities are located in Peruand in Mexico and we conduct exploration activities in those countries andChile. See “Review of Operations” for maps of our principal mines, smeltingfacilities and refineries. Our operations make us the largest mining company inPeru and also in Mexico. We are the largest publicly traded copper miningcompany in the world based on reserves and the fifth largest copper miningcompany in the world based on 2004 sales. We were incorporated in Delaware in1952 and have conducted copper mining operations since 1960. Since 1996, ourcommon stock has been listed on both the New York Stock Exchange and the LimaStock Exchange.

 

Our Peruvian copper operations involve mining, milling and flotation ofcopper ore to produce copper concentrates and molybdenum concentrates; thesmelting of copper concentrates to produce blister copper and beginning in thefirst quarter of 2006 copper anodes; and the refining of blister copper/anodecopper to produce copper cathodes. As part of this production process, we alsoproduce significant amounts of molybdenum and silver. We also produce refinedcopper using SX/EW technology. We operate the Toquepala

 

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and Cuajone mines high in the Andes mountains, approximately 984kilometers southeast of the city of Lima, Peru. We also operate a smelter andrefinery west of the Toquepala and Cuajone mines in the city of Ilo, Peru.

 

Our Mexican operations are conducted through our subsidiary, MineraMéxico S.A. de C.V. (“Minera Mexico”), which we acquired on April 1, 2005. MineraMéxico engages principally in the mining and processing of copper, zinc,silver, gold, lead and molybdenum. Minera México operates through subsidiariesthat are grouped into three separate units. Mexicana de Cobre S.A. de C.V. (togetherwith its subsidiaries, the “Mexcobre Unit”) operates an open-pit copper mine, acopper ore concentrator, a SX/EW plant, a smelter, refinery and rod plant. Mexicanade Cananea S.A. de C.V. (together with its subsidiaries, the “Cananea Unit”)operates an open-pit copper mine, which is located at the site of one of theworld’s largest copper ore deposits, a copper concentrator and two SX/EW plants.Industrial Minera México, S.A. de C.V. (“Immsa”) and Minerales Metálicos delNorte, S.A. (together with Immsa and its subsidiaries, the “Immsa Unit”)operate five underground mines that produce zinc, lead, copper, silver andgold, a coal and coke mine and several industrial processing facilities forzinc and copper.

 

We utilize many up-to-date mining and processing methods, includingglobal positioning systems and computerized mining operations. Our operationshave a high level of vertical integration that allows us to manage the entireproduction process, from the mining of the ore to the production of refinedcopper and other products and most related transport and logistics functions,using our own facilities, employees and equipment.

 

The sales prices for our products are largely determined by marketforces outside of our control. For additional information on the pricing of themetals we produce, please see “Metal prices”. Our management, therefore,focuses on cost control and production enhancement to improve profitability. Weachieve these goals through capital spending programs, exploration efforts andcost reduction programs. Our focus is on seeking to remain profitable duringperiods of low copper prices and maximizing results in periods of high copperprices.

 

Currency Information:

 

Unless stated otherwise, references herein to “U.S. dollars”, “dollars”,or “$” are to U.S. dollars; references to “S/.”, “nuevo sol” or “nuevos soles”,are to Peruvian Nuevos Soles; and references to “peso”, “pesos”, or “Ps.”, areto Mexican pesos.

 

Unit Information:

 

Unless otherwise noted, all tonnages are in metric tons. To convert toshort tons, multiply by 1.102. All ounces are troy ounces. All distances are inkilometers. To convert to miles, multiply by 0.621. To convert hectares toacres, multiply by 2.47.

 

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ORGANIZATIONAL STRUCTURE

 

The following is a chart describing Grupo México S.A. de C.V. (“GrupoMexico”), its ownership of us and our ownership of our recently acquired MineraMéxico subsidiary. For clarity of presentation, the chart identifies onlyprincipal subsidiaries and eliminates intermediate holding companies.

 

 

We are a majority-owned, indirect subsidiary of Grupo México. Throughits wholly-owned subsidiaries, Grupo México currently owns approximately 75.1%of our capital stock. Grupo México’s principal business is to act as a holdingcompany for shares of other corporations engaged in the mining, processing,purchase and sale of minerals and other products and railway and other relatedservices.

 

We conduct our operations in Peru through a registered branch (the “SPCCPeru Branch”). The SPCC Peru Branch comprises substantially all of our assetsand liabilities associated with our copper operations in Peru. The SPCC PeruBranch is not a corporation separate from us and, therefore, obligations ofSPCC Peru Branch are direct obligations of SCC and vice-versa. It is, however,an establishment, registered pursuant to Peruvian law, through which we holdassets, incur liabilities and conduct operations in Peru. Although it hasneither its own capital nor liability separate from us, it is deemed to haveequity capital for purposes of determining the economic interests of holders ofour investment shares.

 

On April 1, 2005, we acquired Minera México, the largest mining companyin Mexico on a stand-alone basis, from Americas Mining Corporation (“AMC”), asubsidiary of Grupo México, our controlling stockholder. Minera México is aholding company and all of its operations are conducted through subsidiariesthat are grouped into three separate units: (i) the Mexcobre Unit, (ii) theCananea Unit and (iii) the Immsa Unit. We now own 99.95% of Minera Mexico.

 

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CAUTIONARY STATEMENT

 

Forward-looking statements in this report and in other Companystatements include statements regarding expected commencement dates of miningor metal production operations, projected quantities of future metalproduction, anticipated production rates, operating efficiencies, costs andexpenditures as well as projected demand or supply for the Company’s products. Actualresults could differ materially depending upon factors including the risks anduncertainties relating to general U.S. and international economic and politicalconditions, the cyclical and volatile prices of copper, other commodities and supplies,including fuel and electricity, availability of materials, insurance coverage,equipment, required permits or approvals and financing, the occurrence ofunusual weather or operating conditions, lower than expected ore grades, waterand geological problems, the failure of equipment or processes to operate inaccordance with specifications, failure to obtain financial assurance to meetclosure and remediation obligations, labor relations, litigation andenvironmental risks, as well as political and economic risk associated withforeign operations. Results of operations are directly affected by metalsprices on commodity exchanges, which can be volatile.

 

Additional business information follows:

 

COPPER BUSINESS

 

Copper is the world’s third most widely used metal andan important component in the world’s infrastructure. Copper has uniquechemical and physical properties, including high electrical conductivity andresistance to corrosion, as well as excellent malleability and ductility thathas made it a superior material for use in the electrical energy,telecommunications, building construction, transportation and industrialmachinery businesses. Copper is also an important metal in non-electricalapplications such as plumbing, roofing and, when alloyed with zinc to formbrass, in many industrial and consumer applications.

 

Copper industry fundamentals, including copper demand, price levels andstocks, strengthened in late 2003 and copper prices have continued to improvein 2004 and 2005 from the 15-year price lows set during 2002.

 

BUSINESS REPORTING SEGMENTS:

 

Our Company operates in a single industry, the copper industry. Withthe acquisition of Minera Mexico in April 2005, we determined that toeffectively manage our business we needed to focus on three operatingcomponents or segments. These segments are our Peruvian operations, our Mexicanopen-pit operations and our Mexican underground operations, known as our IMMSAunit. Our Peruvian operations include the Toquepala and Cuajone mine complexesand the smelting and refining plants, industrial railroad and port facilitieswhich service both facilities. Our Mexican open-pit operations combined twounits of Minera Mexico, Mexcobre and Mexcananea, which includes La Caridad andCananea mine complexes and smelting and refining plants and support facilitieswhich service both complexes. Our IMMSA unit includes five underground minesthat produce zinc, lead, copper, silver and gold, a coal and coke mine, andseveral industrial processing facilities for copper, zinc and silver. Segmentinformation is included under the captions “Overview-Metal production” and “Orereserves”, as well as in Note 19 of our Consolidated Combined FinancialStatements.

 

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REVIEW OF OPERATIONS

 

The following maps set forth the locations of our principal mines,smelting facilities and refineries. We operate open-pit copper mines in thesouthern part of Peru – at Toquepala and Cuajone – and in Mexico, principallyat La Caridad and Cananea. We also operate five underground mines that producezinc, copper, silver and gold, as well as a coal mine and a coke oven.

 

 

COPPER AND MOLYBDENUMEXTRACTION PROCESSES

 

Our operations include open-pit and underground mining, concentrating,copper smelting, copper refining, copper rod production, solventextraction/electrowinning (SX/EW), zinc refining, sulfuric acid production,molybdenum concentrate production and silver and gold refining. The copper andmolybdenum extraction process is outlined below, followed by a description ofeach principal component process.

 

OPEN-PIT MINING

 

In an open-pit mine, the production process begins at the mine pit,where waste rock, leaching ore and copper ore are drilled and blasted and thenloaded onto diesel-electric trucks by electric shovels. Waste is hauled to dumpareas and leaching ore is hauled to leaching dumps. The ore to be milled istransported to the primary crushers. Crushed ore is then sent to theconcentrator.

 

UNDERGROUND MINING

 

In an underground mine, the production process begins at the stopes,where copper, zinc and lead veins are drilled and blasted and the ore is hauledto the underground crusher station. The crushed ore is then hoisted to thesurface for processing.

 

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CONCENTRATING

 

The copper ore with a copper grade over 0.4% from the open-pit primarycrusher or the copper, zinc and lead-bearing ore from the underground mines istransported to a concentrator plant where gyratory crushers break the ore intosizes no larger than three-quarters of an inch. The ore is then sent to a millsection where it is ground to the consistency of fine powder. The finely groundore is mixed with water and chemical reagents and pumped as a slurry to theflotation separator where it is mixed with certain chemicals. In the flotationseparator, reagents solution and air pumped into the flotation cells cause theminerals to separate from the waste rock and bubble to the surface where theyare collected and dried.

 

If the bulk concentrated copper contains molybdenum it is firstprocessed in a molybdenum plant as described below under “MolybdenumProduction.”

 

COPPER SMELTING

 

Copper concentrates are transported to a smelter, where they aresmelted using a furnace, converter and anode furnace to produce either copperblister (which is in the form of cakes with air pockets) or copper anodes(which are cleaned of air pockets). At the smelter, the concentrates are mixedwith flux (a chemical substance intentionally included for high temperatureprocessing) and then sent to reverberatory furnaces producing copper matte andslag (a mixture of iron and other impurities). Copper matte containsapproximately 65% copper. Copper matte is then sent to the converters, wherethe material is oxidized in two steps: (i) the iron sulfides in the matte areoxidized with silica, producing slag that is returned to the reverberatoryfurnaces; and (ii) the copper contained in the matte sulfides is then oxidizedto produce copper that, after casting, is called blister copper, containingapproximately 98% to 99% copper, or anodes, containing approximately 99.7%copper. Some of the blister production is sold to customers and the remainderis sent to the refinery.

 

COPPER REFINING

 

Anodes are suspended in tanks containing sulfuric acid and coppersulfate. A weak electrical current is passed through the anodes and chemicalsolution and the dissolved copper is deposited on very thin starting sheets toproduce copper cathodes containing approximately 99.99% copper. During thisprocess, silver, gold and other metals (for example, palladium, platinum andselenium), along with other impurities, settle on the bottom of the tank. Thisanodic mud (slime) is processed at a precious metal plant where silver and goldare recovered.

 

COPPER ROD PLANT

 

To produce copper rods, copper cathodes are first melted in a furnaceand then dosified in a casting machine. The dosified copper is then extrudedand passed through a cooling system that begins solidification of copper into a60 ́50 millimetercopper bar. The resulting copper bar is gradually stretched in a rolling millto achieve the desired diameter. The rolled bar is then cooled and sprayed withwax as a preservation agent and collected into a rod coil that is compacted andsent to market.

 

SOLVENT EXTRACTION/ELECTROWINNING (SX/EW)

 

An alternative to the conventional concentrator/smelter/refineryprocess is the leaching and SX/EW process. During the SX/EW process, certaintypes of low-grade ore with a copper grade under 0.4% are leached with sulfuricacid to allow copper content recovery. The acid and copper solution is thenagitated with a solvent that contains chemical additives that attract copperions. As the solvent is lighter than water, it floats to the surface carryingwith it the copper content. The solvent is then separated using an acidsolution, freeing the copper. The acid solution containing the copper is thenmoved to electrolytic extraction tanks to produce copper cathodes. Refinedcopper can be produced more economically (though over a longer period) and fromlower grade ore using the SX/EW process instead of the traditionalconcentrating, smelting and refining process.

 

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MOLYBDENUM PRODUCTION

 

Molybdenum is recovered from copper-molybdenum concentrates produced atthe concentrator. The copper-molybdenum concentrate is first treated with athickener until it becomes slurry with 60% solids. The slurry is then agitatedin a chemical and water solution and pumped to the flotation separator. Theseparator creates a froth that carries molybdenum to the surface but not thecopper mineral (which is later filtered to produce copper concentratescontaining approximately 27% copper). The molybdenum froth is skimmed off, filteredand dried to produce molybdenum concentrates of approximately 58% containedmolybdenum.

 

ZINC REFINING

 

Metallic zinc is produced through electrolysis using zinc concentratesand zinc oxides. Sulfur is eliminated from the concentrates by roasting and thezinc oxide is dissolved in sulfuric acid solution to eliminate solid impurities.The purified zinc sulfide solution is treated by electrolysis to producerefined zinc and to separate silver and gold, which are recovered asconcentrates.

 

SULFURIC ACID PRODUCTION

 

Sulfur dioxide gases are produced in the copper smelting and zincroasting processes. As a part of our environmental preservation program, wetreat the sulfur dioxide emissions at two of our Mexican plants and at Peruvianprocessing facilities to produce sulfuric acid, some of which is, in turn, usedfor the copper leaching process, with the rest sold to mining and fertilizercompanies located in Mexico, Peru, the United States, Chile, Australia andother countries.

 

SILVER AND GOLD REFINING

 

Silver and gold are recovered from copper, zinc and lead concentratesin the smelters and refineries, and from slimes through electrolytic refining.

 

SLOPE STABILITY:

 

Peruvian Operations

 

Both the Toquepala and Cuajone pits are approximately 700 meters deepand under the present mine plan configuration will reach a depth of 1,200meters. The deepening pit presents us with a number of geotechnical challenges.Perhaps the foremost concern is the possibility of slope failure, a possibilitythat all open pit mines face. In order to maintain slope stability, in the pastwe have decreased pit slope angles, installed additional or duplicate haul roadaccess, and increased stripping requirements. We have also responded tohydrological conditions and removed material displaced by a slope failure. Thereis no assurance that we will not have to take these or other actions in thefuture, any of which may negatively affect our results of operations andfinancial condition, as well as have the effect of diminishing our stated orereserves. To meet the geotechnical challenges relating to slope stability ofthe open pit mines, we have taken the following steps:

 

In the late 1990’s we hosted round table meetings in Vancouver, B.C.with a group of recognized slope stability and open pit mining specialists. Theagenda for these meetings was principally a review of pit design for mines withgreater than 700 meter depth. The discussions included practices formonitoring, data collection and blasting processes.

 

Based on the concepts defined at the Vancouver meetings, we initiatedslope stability studies to define the mining of reserves by optimum design. Thesestudies were performed by outside consultants and included slope stabilityappraisals, evaluation of the numerical modeling, slope performance andinter-ramp angle design and evaluation of hydrological conditions.

 

The studies were completed in 2000 and we believe we implemented thestudy recommendations. One of the major changes implemented was slope anglereduction at both

 

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mines, Toquepala by 5 degrees average and Cuajone by 7 degrees average.Although this increased the waste included in the mineable reserve calculation,it also improved the stability of the pits.

 

Since 1998, a wall depressurization program has been in place in bothpits. This consists of a horizontal drilling program, which improves drainagethereby reducing saturation and increasing wall stability. Additionally, a newblasting control program was put in place, implementing vibration monitoringand blasting designs of low punctual energy. Also a new slope monitoring systemwas implemented using reflection prisms, deformation inclinometers andpiezometers for water level control, as well as real-time robotic monitoringequipment.

 

To increase the possibility of mining in the event of a slide, we haveprovided for two ramps of extraction for each open pit mine.

 

While these measures cannot guarantee that a slope failure will notoccur, we believe that our mining practices are sound and that the steps takenand the ongoing reviews performed are a prudent methodology for open pitmining.

 

OVERVIEW – METAL PRODUCTION

 

The table below sets forth 2005, 2004 and 2003 mine production data bymetal.

 

| **(million pounds)**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Copper  contained in concentrates                 |       | 1,268    |       | 1,331    |       | 1,206    |       |
| Copper in  SX/EW cathodes                         |       | 253      |       | 252      |       | 262      |       |
| Total copper                                      |       | 1,521    |       | 1,583    |       | 1,468    |       |
|                                              |       |     |       |     |       |     |       |
| Zinc  contained in concentrate                    |       | 317      |       | 295      |       | 284      |       |
| Molybdenum  contained in concentrate              |       | 33       |       | 32       |       | 28       |       |
| Silver  contained in concentrate (million ounces) |       | 18       |       | 19       |       | 18       |       |
| Gold  contained in concentrate (thousands ounces) |       | 32       |       | 34       |       | 31       |       |

 

**METAL PRODUCTION BYSEGMENTS**

** **

Set forth below are descriptions of the operations and other informationrelating to the operations included in each of our three segments.

 

**PERUVIAN OPERATIONS**

** **

Our Peruvian segment operations include the Cuajone and Toquepala minecomplexes and the smelting and refining plants, industrial railroad and portfacilities which service both facilities.

 

Followingis a map indicating the approximate location of, and access to, our Cuajone andToquepala mine complexes as well as our Ilo processing facilities:

 

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Cuajone

 

Our Cuajone operations consist of an open-pit copper mine and aconcentrator located in southern Peru, 30 kilometers from the city of Moqueguaand 840 kilometers from Lima. Access to the Cuajone property is by plane fromLima to Tacna (1:20 hours) and then by highway to Moquegua and Cuajone (3:30hours). The concentrator has a milling capacity of 87,000 tons per day. Overburdenremoval commenced in 1970 and ore production commenced in 1976. Our Cuajoneoperations utilize a conventional open-pit mining method to collect copper orefor further processing in our concentrator.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Cuajone operations:

 

| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 365      |       | 366      |       | 365      |       |
| Total  material mined                 |       | (kt)       |       | 109,855  |       | 101,265  |       | 97,471   |       |
| Total ore  mined                      |       | (kt)       |       | 29,544   |       | 29,380   |       | 29,754   |       |
| Copper grade                          |       | (%)        |       | 0.643    |       | 0.792    |       | 0.745    |       |
| Molybdenum  grade                     |       | (%)        |       | 0.026    |       | 0.025    |       | 0.026    |       |
| Average ore  mined per day            |       | (kt)       |       | 80.9     |       | 80.3     |       | 81.5     |       |
| Leach  material mined                 |       | (kt)       |       | 0        |       | 0        |       | 0        |       |
| Leach  material grade                 |       | (%)        |       | 0        |       | 0        |       | 0        |       |
| Stripping  ratio                      |       | (x)        |       | 2.72     |       | 2.45     |       | 2.28     |       |
| Total  material milled                |       | (kt)       |       | 29,621   |       | 29,319   |       | 29,798   |       |
| Copper  concentrate                   |       | (kt)       |       | 619.2    |       | 752.9    |       | 710.0    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 9.5      |       | 8.7      |       | 9.0      |       |
| Average  copper grade in concentrates |       | (%)        |       | 26.43    |       | 25.82    |       | 25.99    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 55.576   |       | 53.742   |       | 53.881   |       |
| Copper in  concentrate                |       | (kt)       |       | 163.7    |       | 194.4    |       | 184.5    |       |
| Molybdenum  in concentrate            |       | (kt)       |       | 5.3      |       | 4.7      |       | 4.9      |       |
| Copper  recovery                      |       | (%)        |       | 85.96    |       | 83.64    |       | 83.13    |       |
| Molybdenum  recovery                  |       | (%)        |       | 69.7     |       | 64.5     |       | 63.5     |       |

 

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Key:                       kt =thousands of tons

x = ratio obtained dividing waste plusleachable material by ore mined

Copper andmolybdenum grades are referred to as total copper grade and total molybdenumgrade, respectively.

 

12

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Major Cuajonemine equipment include 3 trucks with a capacity of 290 tons, 18 trucks with acapacity of 240 tons and 8 trucks with a capacity of 218 tons, 4 trucks with acapacity of 109 tons, 3 shovels with a capacity of 73 tons (43 m3), 1 shovelwith a capacity of 54 tons, 1 shovel with a capacity of 23 tons (11.4 m3), 1front end loader with a capacity of 42 tons, 4 front end loaders with acapacity of 3.8 m3, 3 front end loaders with a capacity of 3.1 m3, 3 front endloaders with a capacity of 6.1 m3, 4 electric drills and 1 wheel tractor. Wecontinuously improve and renovate our equipment

 

Geology

 

The Cuajone porphyry copper deposit is located on the western slopes ofCordillera Occidental, in the southern-most Andes Mountains of Peru. Thedeposit is part of a mineral district that contains two additional knowndeposits, Toquepala and Quellaveco. The copper mineralization at Cuajone istypical of porphyry copper deposits.

 

The Cuajone deposit is located approximately 28 kilometers from theToquepala deposit and is part of the Toquepala Group dated 60 to 100 millionyears (Upper Cretaceous to Lower Tertiary). The Cuajone lithology includesvolcanic rocks from Cretaceous to Quaternary. There are 32 rock typesincluding, pre-mineral rocks, balsaltic andesite, porphyritic rhyolite,Toquepala dolerite and intrusive rocks, including diorite, porphyritic latite,breccias and dikes. In addition, the following post-mineral rocks are present,the Huaylillas formation which appears in the south-southeast side of thedeposit and has been formed by conglomerates, tuffs, traquites and agglomerates.These formations date 17 to 23 million years and are found in the ToquepalaGroup as discordance. The Chuntacala formation which dates 9 to 14 millionyears and is formed by conglomerates, flows, tuffs and agglomerates placedgradually in some cases and in discordance in others. Also Quaternary depositsare found in the rivers, creeks and hills. The mineralogy is simple withregular grade distribution and vertically funnel-shaped. Ore minerals includechalcopyrite (CuFeS2), chalcosine (Cu2S) and molybdenite(MoS2) with occasional galena, tetraedrite and enargite as noneconomical ore.

 

Exploration in the mine

 

Exploration activities during the drill campaign in 2005 are asfollows:

 
| **Studies**         | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                     | ** ** |
|---------------------|------------|------------|------------|-----------|------------|-------------------------------|------------|
| Infill  Drilling    |       | 1,795.60   |       | 14        |       | Evaluated  the 2006 Mine Plan |       |
| Geotechnical  Holes |       | 1,536.85   |       | 11        |       | Dewatering  holes             |       |
| **Total**           |       | 3,332.45   |       | 25        |       |                          |       |

 

Concentrator

 

Our Cuajone operations use state-of-the-art computer monitoring systemsat the concentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. Material with a copper grade over0.40% is loaded onto rail cars and sent to the milling circuit, where giantrotating crushers reduce the size of the rocks to approximately one-half of aninch. The ore is then sent to the ball mills, which grind it to the consistencyof fine powder. The finely ground powder is agitated in a water and reagentssolution and is then transported to flotation cells. Air is pumped into thecells producing a froth that carries the copper mineral to the surface but notthe waste rock, or tailings. Recovered copper, with the consistency of froth,is filtered and dried to produce copper concentrates with an average coppercontent of 26.4%. Concentrates are then shipped by rail to the smelter at Ilo.Sulfures under 0.40% copper are considered waste.

 

Tailings are sent to thickeners where water is recovered. The remainingtailings are sent to the Quebrada Honda dam, our Peruvian tailings storagefacility.

 

13

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Major Cuajone concentrator plant equipment include 1 primary crusher, 3secondary crushers, 7 tertiary crushers, 10 primary ball mills, 4 ball millsfor re-crushing, 1 vertical mill, 110 flotation cells, 8 column cells, 1 LaroxFilter Press, 2 Middling Thickeners, 3 Tailings Thickeners, 1 High-RateTailings, 1 truck and a recycled water pipe line.

 

Since the mill expansion to reach actual nominal capacity finished in1999, only some minor changes have been made to the plant. The plant’sequipment is in good physical condition and currently in operation.

 

In 2003 and 2004, 2 additional column cells and 4 additional flotationcells were installed to increase resident time and copper recovery.

 

In 2005, 8 cracked ball mill shells were replaced after operating atCuajone for the last 26 years. In 2006, 2 mill shells will be replaced in orderto complete the replacement schedule. After these replacements, all ball millswill be completely operational. In 2006, 5 additional flotation cells wereinstalled.

 

Toquepala

 

Our Toquepala operations consist of an open-pit copper mine and aconcentrator. We also refine copper at the SX/EW facility through a leachingprocess. Toquepala is located in southern Peru, 30 kilometers from Cuajone and870 kilometers from Lima. Access is by plane from Lima to the city of Tacna(1:20 hours) and then by the Pan-American highway to Camiara (1:20 hours) andby trail road to Toquepala (1 hour). The concentrator has a milling capacity of60,000 tons per day, which has been expanded from 45,000 tons per day in 2002.The SX/EW facility has a refining capacity of 56,000 tons per year. Overburdenremoval commenced in 1957 and ore production commenced in 1960. Our Toquepalaoperations utilize a conventional open-pit mining method to collect copper orefor further processing in our concentrator.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Toquepala operations:

 

| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 365      |       | 366      |       | 365      |       |
| Total  material mined                 |       | (kt)       |       | 134,505  |       | 115,120  |       | 105,242  |       |
| Total ore  mined                      |       | (kt)       |       | 21,224   |       | 21,820   |       | 21,215   |       |
| Copper grade                          |       | (%)        |       | 0.812    |       | 0.817    |       | 0.749    |       |
| Molybdenum  grade                     |       | (%)        |       | 0.039    |       | 0.044    |       | 0.029    |       |
| Average ore  mined per day            |       | (kt)       |       | 58.1     |       | 59.6     |       | 58.1     |       |
| Leach  material mined                 |       | (kt)       |       | 16,693   |       | 9,708    |       | 28,013   |       |
| Leach  material grade                 |       | (%)        |       | 0.222    |       | 0.268    |       | 0.268    |       |
| Estimated  leach recovery             |       | (%)        |       | 28.24    |       | 26.87    |       | 24.86    |       |
| SX/EW  cathode production             |       | (kt)       |       | 36.5     |       | 42.1     |       | 47.8     |       |
| Stripping  ratio                      |       | (x)        |       | 5.34     |       | 4.28     |       | 3.96     |       |
| Total  material milled                |       | (kt)       |       | 21,225   |       | 21,807   |       | 21,208   |       |
| Copper  concentrate                   |       | (kt)       |       | 576.4    |       | 580.1    |       | 505.2    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 9.7      |       | 11.2     |       | 7.8      |       |
| Average  copper grade in concentrates |       | (%)        |       | 27.32    |       | 27.73    |       | 28.18    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 54.7     |       | 53.7     |       | 53.2     |       |
| Copper in  concentrate                |       | (kt)       |       | 157.5    |       | 160.9    |       | 142.4    |       |
| Molybdenum  in concentrate            |       | (kt)       |       | 5.3      |       | 6.0      |       | 4.2      |       |
| Copper  recovery                      |       | (%)        |       | 91.47    |       | 90.28    |       | 89.63    |       |
| Molybdenum  recovery                  |       | (%)        |       | 64.6     |       | 62.2     |       | 66.4     |       |

 

----

Key:                       kt =thousands of tons

x = ratio obtained dividing waste plusleachable material by ore mined

 

Copper and molybdenum grades are referred to as total copper grade andtotal molybdenum grade, respectively.

 

14

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Major mine equipment at Toquepala include 8trucks with a capacity of290 tons, 5 trucks with a capacity of 231 tons, 18 trucks with a capacity of 218 tons, 9 trucks with a capacity of 181 tons, 1 truck with a capacity of 109 tons, 4 shovels with a capacity of 73 tm (43 m3), 3 shovels with a capacity of 23 tons (11.4 m3), 3 electric drills, 2rotary drills, 1 front-end loader with a capacity of 21.4 m3.

 

We continuously improve and renovate our equipment. In 2003, we starteda project to install a crushing, conveying and spreading system at theToquepala mine to improve cost containment and production efficiency. The newsystem is expected to improve recovery at our leaching facilities and willlargely eliminate costly truck haulage in the process. The primary crusher wasplaced in operation in August 2005. The overland conveyors 1, 2 and 3, and thegrasshoppers 30 and 31 were put in the production line. The conveying reachedits rated capacity of 6,500 ton/hr. in September 2005. The construction of theramp will continue until final completion of the project, expected in thefourth quarter of 2006.

 

Geology

 

The Toquepala porphyry copper deposit is located on the western slopesof Cordillera Occidental, in the southern-most Andes Mountains of Peru. Thedeposit is part of a mineral district that contains two additional knowndeposits, Cuajone and Quellaveco.

 

The Toquepala deposit is in the southernregion of Peru, located on the western slope of the Andes mountain range,approximately 120 kilometers from the border with Chile. This region extendsinto Chile and is home to many of the worlds most significant known copperdeposits. The deposit is in a territory with intrusive and eruptive activitiesof rhyolitic and andesitic rocks which are 70 million years old(Cretaceous-Tertiary) and which created a series of volcanic lava. The lava iscomposed of rhiolites, andesites and volcanic agglomerates with a western dipand at an altitude of 1,500 meters. These series are known as the ToquepalaGroup. Subsequently, different intrusive activities occurred which broke andsmelted the rocks of the Toquepala Group. These intrusive activities resultedin diorites, granodiorites and dikes of porphyric dacite. Toquepala has asimple mineralogy with regular copper grade distribution. Economic ore is foundas disseminated sulfurs throughout the deposit as veinlets, replenishing emptyplaces or as small aggregates. Ore minerals include chalcopyrite (CuFeS2),chalcosine (Cu2S) and molybdenite (MoS2). A secondary enrichment zone is alsofound with thicknesses between 0 and 150 meters.

 

Exploration in the mine

 

Exploration activities during the drill campaign in 2005 are asfollows:

 

| **Studies**                      | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                                                    | ** ** |
|----------------------------------|------------|------------|------------|-----------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| Lateral Boundaries               |       | 503.76     |       | 2         |       | Delayed  drilling from the 2004 drill campaign made in January 2005.                                         |       |
| Leach Material Confirmation |       | 434.10     |       | 7         |       | Phase III  exploration on East side of pit in order to confirm leach material indicated  in Long Term Model. |       |
| Geotechnical Drilling            |       | 5,639.48   |       | 21        |       | Inclinometers  relocation and information about inside rock from the east side using  oriented drills.       |       |
| Total                            |       | 6,577.34   |       | 30        |       |                                                                                                         |       |

 

Concentrator

 

Our Toquepala operations use state-of-the-art computer monitoringsystems at the concentrator, the crushing plant and the flotation circuit inorder to coordinate inflows and optimize operations. Material with a coppergrade over 0.40% is loaded onto rail cars and sent to the milling circuit,where giant rotating crushers reduce the size of the rocks to approximatelyone-half of an inch. The ore is then sent to the ball and bar

 

15

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mills, which grind it to the consistency of fine powder. The finelyground powder is agitated in a water and reagents solution and is thentransported to flotation cells. Air is pumped into the cells producing a froth,which carries the copper mineral to the surface but not the waste rock, ortailings. Recovered copper, with the consistency of froth, is filtered anddried to produce copper concentrates with an average copper content of 27.3%. Concentratesare then shipped by rail to the smelter at Ilo.

 

Tailings are sent to thickeners where water is recovered. The remainingtailings are sent to the Quebrada Honda dam, our Peruvian tailings storagefacility.

 

Major concentrator plant equipment at Toquepala include 1 primarycrusher, 3 secondary crushers, 6 tertiary crushers, 8 bar mills, 33 ball mills,1 Distributed Control System (DCS), 1 optimizing control system (OCS), 42flotation cells, 15 column cells, 72 Agitair 1.13 m3 cells, 2 Larox filterpresses, 5 middling thickeners, 2 tailings thickeners, 3 high-rate tailings, 1tripper car, 1 track tractor and a recycled water pipe line.

 

In order to reduceoperation and maintenance costs and to comply with environmental requirements,we replaced the disc filters at the Toquepala concentrator with a new verticalpress filter in 2005. The same year we also conducted a modernization projectto replace old equipment with new and more efficient equipment.

 

SX/EW Plant

 

The SX/EW facility at Toquepala produces refined copper from solutionsobtained by leaching low-grade ore stored at the Toquepala and Cuajone mines. Theleach plant commenced operations in October 1995 with a design capacity of35,629 tons per year of copper cathodes. In August 1999 the capacity wasexpanded to 56,000 tons per year.

 

Copper oxides from Cuajone with a grade higher than 0.359%TCu, with anacid solubility index higher than 20% and a cyanide solubility index higherthan 50% is leached. In Toquepala, the leach material cutoff grade is 0.25% TCuand therefore material with a total copper grade between 0.25% and 0.40% isleached.

 

Major equipment at the SX Cuajone plantinclude 1 primary jaw crusher and 1 secondary cone crusher with a capacity of4,170 tons per day, to process Cuajone’s oxides. In addition the plant has 1agglomeration mill, 1 front end loader and 3 trucks each with a capacity of 109tons for agglomerated ore hauling to the leach dumps. Copper in solutionproduced in Cuajone is sent to Toquepala through an 8 pipe laid alongside theCuajone - Toquepala railroad track.

 

Major equipment at the Toquepala Plantinclude 2 spray systems, 1 for the south dump and 1 for the northwest dump and4 pregnant solution (PLS) ponds, each with its own pumping system to send thesolution to the SX/EW Plant. The plant also has 3 lines of SX, each with a nominalcapacity of 1,068 m3/hr of pregnant solution and 162 electrowinning cellsarranged in two lines, one with 122 cells and the other with 40 cells.

 

Equipment and main facilities are supportedby a SX/EW maintenance plan and a SX/EW Quality Management System to assuregood physical condition and high availability. The  SX/EW plant has maintained its ISO 9000certification since 2002.

 

Processing Facilities - Ilo

 

Our Ilo smelter and refinery complex is located in the southern part ofPeru, 17 kilometers north of the city of Ilo, 121 kilometers from Toquepala,147 kilometers from Cuajone, and 1,240 kilometers from the city of Lima. Accessis by plane from Lima to Tacna (1:20 hours) and then by highway to the city ofIlo (2 hours). Additionally, we maintain a port facility in Ilo, from which weship our product and receive supplies. Product shipped and supplies receivedmove between Toquepala, Cuajone and Ilo on our industrial railroad.

 

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Smelter

 

Our Ilo smelter provides blister copper for the refinery we operate aspart of the same facility. Blister copper produced by the smelter exceeds therefinery’s capacity and the excess is sold to other refineries around the world.The nominal installed capacity of the smelter is 1,131,500 tons per year. Weare in the process of modernizing the Ilo smelter to comply with Peruviangovernment requirements. The project is part of our Environmental Complianceand Management Program, or PAMA, which was approved by the Peruvian governmentin 1997. The project will modernize the smelter and is targeted to capture noless than 92% of the sulfur dioxide emissions, in compliance with PAMArequirements. The modernization program is progressing on schedule and expectedto be completed by the end of 2006. As part of this project an anode castingwheel was completed in January 2006 and blister production was replaced withanode production, enabling us to eliminate a costly re-melting step in ourproduction process.

 

During 2005, 2004 and 2003, 325,623, 320,722 and 314,920 tons,respectively, of copper blister were produced, with average grades of 99.35%,99.37% and 99.31%, respectively. The copper recovery was 97.57% for 2005,97.23% for 2004 and 96.80% for 2003.

 

The table below set forth 2005, 2004 and 2003production and sales information for our Ilo smelter plant:

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Concentrate  smelted (kt)            |       | 1,206    |       | 1,213    |       | 1,183    |       |
| Sulfuric  acid produced (kt)         |       | 370      |       | 390      |       | 363      |       |
| Blister  sales (kt)                  |       | 41,321   |       | 29,684   |       | 28,060   |       |
| Average blister  price ($/t or $/lb) |       | 1.87     |       | 1.35     |       | 0.79     |       |
| Average gold  price ($/t or $/lb)    |       | 447.33   |       | 407.85   |       | 356.32   |       |
| Average  silver price ($/t or $/lb)  |       | 7.26     |       | 6.54     |       | 4.85     |       |

 

Major equipment at our Ilo smelter include 2 reverberatory furnaces, 7converters, 1 El Teniente converter, 2 casting wheels, a sulfuric acid plantwith a capacity of 300,000 tons per year and an oxygen plant with a capacity of100,000 tons per year.

 

Refinery

 

The refinery consists of an anode plant, an electrolytic plant, aprecious metals plant and a number of ancillary installations. The refinery isproducing grade A copper cathode of 99.99% purity. The nominal capacity is280,000 tons per year. Anodic slimes are recovered from the refining processand are sent to the precious metals facility to produce silver, gold andselenium.

 

During 2005, 2004 and 2003, 285,205, 280,679 and 284,006 tons,respectively, of copper cathodes were produced, with an average grade of99.998% for the three years.

 

The precious metals plant produced 109,894 kilograms of refined silverand 184 kilograms of gold in 2005, 118,906 kilograms of refined silver and 174kilograms of gold in 2004 and 111,951 kilograms of refined silver and 265kilograms of gold in 2003. Selenium production was, 48.7 tons, 51.9 tons and47.8 tons in 2005, 2004 and 2003, respectively.

 

Major equipment at our Ilo refinery plant include 2 basculant ovenseach with a 400 tons capacity, 1 casting wheel (70 MT/hour), 1 electrolyticplant of 280,000 tons/year capacity (cathodes), 926 commercial cells and 52starting cells. Major equipment at the precious metals plant include 1 seleniumreactor, 2 copella furnaces, 22 silver refining cells and 1 hydrometallurgicalsystem for gold recovery.

 

Other facilities in Ilo are a coquina plant with a production capacityof 200,000 tons per year of seashells and a lime plant with a capacity of80,000 tons per year. We also operate an industrial railroad to haulconcentrates and supplies between Toquepala, Cuajone and Ilo. The railroad’sequipment include 30 locomotives, 264 dump cars, 91 flat

 

17

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cars, 254 boxcars, 8 closed boxcars, 11 closed hopper-type cars, 34open hopper-type cars, 36 various tank wagons, 24 sulfuric acid tanks and 5patrol cars.

 

MEXICAN  OPERATIONS

 

Followingis a map indicating the approximate location of our Mexican mine complexes aswell as our processing facilities:

 

 

MEXICAN OPEN PIT UNIT

 

Our Mexican open-pit segment operations combines two units of MineraMexico, Mexcobre and Mexcananea, which includes La Caridad and Cananea minecomplexes and smelting and refining plants and support facilities which serviceboth complexes.

 

Followingis a map indicating the approximate location of, and access to, our Mexicanopen pit mine complexes as well as our processing facilities:

 

18

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Cananea

 

We operate an open-pit copper mine, a concentrator and two SX/EW plantsat our Cananea mining complex, located 71 kilometers from La Caridad, Mexicoand 61 kilometers south of the Arizona border on the outskirts of the town ofCananea. Cananea is connected by paved highways to the city of Agua Prieta inthe northeast, to the town of Nacozari in the southeast, and to the town ofImuris in the west. Cananea is also connected by railway to Agua Prieta andNogales. A municipal airport is located approximately 20 km to the northeast ofCananea.

 

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The concentrator has a milling capacity of 76,700 tons per day. The SX/EWfacility has a refining capacity of 54,750 tons per year. The Cananea site isone of the world’s largest porphyry copper deposits. The Cananea mine is theoldest continuously operating copper mine in North America, with operationstracing back to 1899. Cananea uses a conventional open-pit mining method tocollect copper ore for further refining in our concentrator.

 

The table below sets forth 2005, 2004 and 2003 production informationfor Cananea:

 

| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 365      |       | 359      |       | 348      |       |
| Total  material mined                 |       | (kt)       |       | 102,508  |       | 93,160   |       | 75,692   |       |
| Total ore  mined                      |       | (kt)       |       | 25,638   |       | 26,258   |       | 20,314   |       |
| Copper grade                          |       | (%)        |       | 0.572    |       | 0.583    |       | 0.576    |       |
| Average ore  mined per day            |       | (kt)       |       | 70.2     |       | 73.1     |       | 58.4     |       |
| Leach  material mined                 |       | (kt)       |       | 52,112   |       | 39,048   |       | 26,793   |       |
| Leach  material grade                 |       | (%)        |       | 0.314    |       | 0.284    |       | 0.281    |       |
| Estimated  leach recovery             |       | (%)        |       | 50.00    |       | 50.00    |       | 50.00    |       |
| SX/EW  cathode production             |       | (kt)       |       | 56.4     |       | 50.2     |       | 49.5     |       |
| Stripping  ratio                      |       | (x)        |       | 3.00     |       | 2.55     |       | 2.73     |       |
| Total  material milled                |       | (kt)       |       | 25,622   |       | 26,256   |       | 20,316   |       |
| Copper  concentrate                   |       | (kt)       |       | 436.5    |       | 469.3    |       | 337.9    |       |
| Average  copper grade in concentrates |       | (%)        |       | 27.21    |       | 26.26    |       | 27.85    |       |
| Copper in  concentrate                |       | (kt)       |       | 118.7    |       | 123.2    |       | 94.1     |       |
| Copper  recovery                      |       | (%)        |       | 81.03    |       | 80.53    |       | 80.63    |       |

 

----

Key:                       kt =thousands of tons

x = ratio obtained dividing waste plusleachable material by ore mined

The copper andmolybdenum grade are total grade. The molybdenum grade value corresponds to molybdenumdisulfide (molybdenite); molybdenum recovery is presently about 42%.

 

Major Cananea mineequipment include 41 trucks for ore hauling with individual capacities thatrange from 240 to 360 tons, 8 shovels with individual capacities that rangefrom 39 to 70 tons, and mine auxiliary equipment such as 9 drillers, 3 frontloaders, 5 motor graders and 25 tractors.

 

Geology

 

The Cananea mine is unusual in that the ore explored and sampled at themine has been of consistent quality, unlike most copper deposits which evidencea decline in grades at deeper strata. The Cananea region is within the southernCordilleran region, extending from southern Mexico to the northwestern UnitedStates.

 

Cananea is in the Southern Cordilleran Orogen which extends to thenorthwest of the lower 48 states of the United States. The geological andstructural features of the region are representative of large copper depositsof the disseminated porphyry type. The mining district lies within ametalogenetic Basin and Range province. The geology is complex and consistsof  a series of Paleozoic age calcareousrocks, from Cambrian to Carboniferous, correlated to a type section insoutheastern Arizona, USA,  thatunconformably overlie a Precambrian granitic basement. A prominent  deep seated igneous activity,  occurred during various epochs. Volcanicrocks, grading in composition from rhyolites to andesites and tuffs, wereintruded, by shallow, quartz monzonite porphyries of Laramide age, alongstructural weak zones, thus closing the geologic history of the region. Intenseand pervasive hydrothermal phyllic-argillic alteration,  and sulfide mineralization also occurred in several episodes. An initial earlypegmatitic stage, associated with chalcopyrite, bornite, pyrite and molybdenitein breccia chimneys, followed by an extensive flooding of hydrothermalsolutions, widely accompanied with mineralization of quartz, pyrite andchalcopyrite. A subsequent stage of quartz-pyrite comprises and closes theprimary sequence.

 

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An extensive and economically important zone of supergene enrichment,principally with disseminations and veinlets of chalcocite (Cu2S), formed belowthe iron oxide capping. This zone coincides with the topography and has anaverage thickness of 300 meters. In the hypogene zone, the predominant sulfidemineral is chalcopyrite (CuFeS2). Likewise, it has been documented thatmolybdenite (MoS2) content in the deposit increases with depth.

 

The Cananea copper porphyry deposit is considered unique since thedeepest exploration conducted to date in the core of the deposit has confirmeda significant increase in copper grades. It is unlike other deposits of similartype which commonly display relative lower grades at depth. The district isalso unique for the occurrence of high grade breccia pipes, usually in the formof clusters that follow the mineralized trend. From the perspective of the sizeof the resources and reserves of this outstanding porphyry copper deposit, itis recognized as world class. The current aerial dimensions of the mineralizedore body are 5 X 3 kilometers and projects to more than 1 kilometer at depth.Considering the enormous potential that the ore deposit in Cananea presents, itis assured that the operation can support a significant increase in thecapacity of copper production.

 

Mine Exploration

 

The exploration program to define and quantify the molybdenum mineralresources and reserves started in the third quarter of 2005. We conducted ageo-statistic analysis to define the interpolation parameters, modeling andquantification of molybdenum associated with copper reserves in the deposit. Inthe first quarter of 2006, we started a diamond drilling program. We expect tofinish this exploration program at the beginning of 2007.

 

In 2005, we started an exploration drilling program near the porphyriccopper ground. The main objective of this exploration is to condemn the areaswhere leach and barren material will be dumped. The first drilling stage wascarried out through the inverse circulation method reaching a depth close to300 meters. The second exploration stage is about to start, and diamonddrilling will be used, in order to reach greater depths.

 

Regarding molybdenum exploration results, the Cananea porphydic depositcontinues to show the relation copper-molybdenum. Peripheral explorationresults on the deposit confirm the mineralogic pattern throughout the district.

 

Concentrator

 

Cananea uses state-of-the-art computer monitoring systems at theconcentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. Material with a copper grade over0.38% is loaded onto trucks and sent to the milling circuit, where giantrotating crushers reduce the size of the rocks to approximately one-half of aninch. The ore is then sent to the ball and bar mills, which grind it to theconsistency of fine powder. The finely ground powder is agitated in a water andreagents solution and is then transported to flotation cells. Air is pumpedinto the cells producing a froth, which carries the copper mineral to thesurface but not the waste rock, or tailings. Recovered copper, with theconsistency of froth, is filtered and dried to produce copper concentrates withan average copper content of 27.21%. Concentrates are then shipped by rail to thesmelter at La Caridad.

 

The Cananea concentrator plant, with a milling capacity of 76,700 tonsper day, consists of 2 primary crushers, 4 secondary crushers, 10 tertiarycrushers, 10 primary mills, a Distributed Control System, 5 mills forre-grinding, 103 primary flotation cells, 10 column cells, 70 exhaustionflotation cells, 7 thickeners and 2 drum filters.

 

SX/EW Plant

 

The Cananea Unit operates a leaching facility and two SX/EW plants. Allcopper ore with a grade lower than the mill cut-off grade 0.38%, but higherthan 0.25% copper, is delivered to the leaching dumps. A cycle of leaching andresting occurs for approximately five years to achieve a 56% recovery.

 

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The Cananea Unit currently maintains 16.5 million cubic meters ofpregnant leach solution in inventory with a concentration of approximately 1.79grams of copper per liter.

 

Major equipment at the Solvents Extraction and Electrowinning (SX-EW) Iand II Plants of Cananea include 2 crushing systems (no. 1 and no. 2). Crushingsystem no. 1 has a capacity of 10,000 tons per day and includes an apronfeeder, a conveyor belt feeder, 7 conveyor belts system and a distributor car.Crushing system no. 2 has a capacity of 15,000 tons per day and includes onecrusher, a conveyor belt feeder, 3 conveyor belts and a distributing car. Thereare 4 irrigation systems for the dumps and 6 dams for Pregnant Leach Solution(PLS). Plant I has 3 solvent extraction tanks with a nominal capacity of 960m3/hr of PLS and 46 electrowinning cells. Plant I has a daily productioncapacity of 30 tons of copper cathodes with 99.999% purity. Plant II has 5trains of solvent extraction with a nominal capacity of 3,300 m3/hr of PLS and176 cells distributed in two bays. Plant II has a daily production capacity of120 tons of copper cathodes with 99.999% purity.

 

We intend to increase Cananea’s production of electrolytic copper bybuilding a new SX/EW plant(SXEW III). The new plant will produce electrolyticcopper cathodes of ASTM grade 1 or LME grade A. The project includes theinstallation of storage for deliverables required for operation of the plantand the installation of an emergency power plant and a fire protection system. Theproject is currently underway. In its first stage, it is expected to produce10,500 tons of additional copper by the end of 2007. Studies for a 22,900 tonsubsequent expansion of the SX/EW plant are also underway. As the Cananea minehas the largest quantity of our copper reserves, we are studying severalpossibilities for expanding it to a scale that fully maximizes its potential.

 

La Caridad

 

The La Caridad complex includes an open-pit mine concentrator, smelter,copper refinery, precious metals refinery, rod plant, SX/EW plant, lime plantand two sulfuric acid plants.

 

La Caridad mine and mill are located about 23 km southeast of the townof Nacozari de Garcia in northeastern Sonora. Nacozari is about 264 kmnortheast of the Sonora state capital of Hermosillo and 121 km south of theUS-Mexico border. Nacozari is connected by paved highway with Hermosillo andAgua Prieta and by rail with the international port of Guaymas, and the Mexicanand United States rail systems. An airstrip with a reported runway length of2,500 meters is located 36 km north of Nacozari, less than one kilometer awayfrom the La Caridad copper smelter and refinery. The smelter and the sulfuricacid plants, as well as the refineries and rod plant, are located approximately24 km from the mine, and the lime plant is situated 18 km from the U.S. border.Access is by paved highway and by railroad.

 

The concentrator began operations in June 1979, the molybdenum plant inJune 1982, the smelter in June 1986, the first sulfuric acid plant in July1988, the SX/EW plant in July 1995, the second sulfuric acid plant in January1997, the copper refinery in July 1997, the rod plant in April 1998 and theprecious metals refinery in July 1999.

 

The table below sets forth 2005, 2004 and 2003 production informationfor La Caridad:

 

| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 364      |       | 365      |       | 364      |       |
| Total  material mined                 |       | (kt)       |       | 75,465   |       | 72,430   |       | 73,916   |       |
| Total ore  mined                      |       | (kt)       |       | 31,551   |       | 27,574   |       | 27,327   |       |
| Copper grade                          |       | (%)        |       | 0.483    |       | 0.504    |       | 0.508    |       |
| Molybdenum  grade                     |       | (%)        |       | 0.0324   |       | 0.0341   |       | 0.0345   |       |
| Average ore  mined per day            |       | (kt)       |       | 86.4     |       | 75.5     |       | 74.9     |       |
| Leach  material mined                 |       | (kt)       |       | 29,969   |       | 22,450   |       | 28,996   |       |
| Leach  material grade                 |       | (%)        |       | 0.260    |       | 0.274    |       | 0.267    |       |
| Estimated  leach recovery             |       | (%)        |       | 38.54    |       | 36.68    |       | 29.88    |       |
| SX/EW  cathode production             |       | (kt)       |       | 22.0     |       | 21.8     |       | 21.5     |       |
| Total  material milled                |       | (kt)       |       | 31,644   |       | 27,488   |       | 27,307   |       |
| Stripping  ratio                      |       | (x)        |       | 1.39     |       | 1.63     |       | 1.70     |       |
| Copper  concentrate                   |       | (kt)       |       | 449.6    |       | 401.6    |       | 410.5    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 7.4      |       | 6.5      |       | 6.1      |       |
| Average  copper grade in concentrates |       | (%)        |       | 27.20    |       | 27.49    |       | 26.12    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 56.88    |       | 56.69    |       | 57.33    |       |
| Copper in  concentrate                |       | (kt)       |       | 122.3    |       | 110.4    |       | 107.2    |       |
| Molybdenum  in concentrate            |       | (kt)       |       | 4.2      |       | 3.7      |       | 3.5      |       |
| Copper  recovery                      |       | (%)        |       | 79.95    |       | 79.62    |       | 77.36    |       |

 

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----

Key:                       kt =thousands of tons

x = ratio obtained dividing waste plusleachable material by ore mined

The copper and molybdenum grade are total grade. The molybdenum gradevalue corresponds to molybdenum disulfide (molybdenite); molybdenum recovery ispresently about 42%.

 

Major mineequipment include 33 trucks for ore hauling with individual capacity from 170to 240 tons, 8 shovels with individual capacities from 22 to 52 tons. Loadingand auxiliary equipment include 6 drillers, 3 front loaders, 4 motor gradersand 21 tractors.

 

Geology

 

The La Caridad deposit is a porphyry copper deposit typical of those inthe southern basin and range province in the southwestern United States. The LaCaridad mine uses a conventional open-pit mining method. The ore body issituated within a mountain top, which gives La Caridad the advantage of arelatively low waste-stripping ratio, natural pit drainage and relatively shorthaul distances for both ore and waste. The mining method involves drilling,blasting, loading and haulage of waste, leach and ore to waste and leachingdumps and to the primary crushers.

 

La Caridad deposit is located in northeasternSonora, Mexico. The deposit is situated near the crest of theSierra Juriquipa, about 15 kilometers southeast of the town of Nacozari,Sonora, Mexico. The Sierra Juriquipa rises to elevations of around 2,000 metersin the vicinity of La Caridad and is one of the many north-trending mountainranges in Sonora that form a southern extension of the Basin and Rangeprovince.

 

The La Caridad porphyry copper deposit occursexclusively in felsic to intermediate intrusive igneous rocks and associatedbreccias. Host rocks include diorite and granodiorite. These rocks are intrudedby a quartz monzonite porphyry stock and by numerous breccia masses whichcontain fragments of all the older rock types.

 

Supergene enrichment, consisting of completeto partial chalcosite (Cu2S) replacement of chalcopyrite (CuFeS2). The zone ofsupergene enrichment occurs as a flat and tabular blanket with an averagediameter of 1,700 meters and an average thickness between 0 and 90 meters.

 

Economic ore is found as disseminated sulfurswithin the central part of the deposit. Sulfide-filled breccias cavities aremost abundant in the intrusive breccias. This breccias-cavity mineralizationoccurs as sulfide aggregates which have crystallized in the spaces separatingbreccias clast. Near the margins of the deposit, mineralization occurs almostexclusively in veinlets.

 

Ore minerals include chalcopyrite (CuFeS2),chalcosite (Cu2S) and molybdenite (MoS2).

 

Mine Exploration

 

We have been mining the La Caridad orebodyfor the past 25 years. The extent of the model area is approximately 6,000meters by 4,000 meters with elevation ranging from 750 to 1,800 meters.

 

23

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Fourteen drilling campaigns have beenconducted on the property since 1968. These campaigns drilled a total of 3,162drill holes. There are 2,055 reverse circulation drill holes. The rest arediamond drill holes, and some hammer drilling. A total of 515,297.74 metershave been drilled.

 

Currently, Mexicana de Cobre, is drilling anew exploration program, the budget is 25,000 meters. The target is to get upto 900 levels in order to reduce the drilling space and to define the copperand molybdenum mineralization continuity and also carry out metallurgicaltesting as for flotation and leaching processes.

 

Concentrator

 

Mexcobre uses state-of-the-art computer monitoring systems at theconcentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. The concentrator has a currentcapacity of 90,000 tons of ore per day.

 

Ore extracted from the mine with a copper grade over 0.30% is processedat the concentrator and is processed into copper concentrates and molybdenumconcentrates. The copper concentrates are sent to the smelter and themolybdenum concentrate is exported. The molybdenum recovery plant has acapacity of 2,000 tons per day of copper-molybdenum concentrates. The limeplant has a capacity of 340 tons of finished product per day.

 

La Caridad concentrator plant has a milling capacity of 90,000 tons perday and consists of 2 primary crushers, 6 secondary crushers, 12 tertiarycrushers, 12 ball mills, a master milling control system, 168 primary flotationcells, 4 re-grinding mills, 60 cleaning flotation cells, 6 thickeners and 6drum filters.

 

In 2004, we improved our concentrator with the acquisition of an alliedprimary crusher. In addition, in 2003 we improved our La Francisca leach damwith a pumping and instrumentation system.

 

SX/EW Plant

 

Approximately 463.6 million tons of leaching ore with an average gradeof approximately 0.25% copper have been extracted from the La Caridad open-pitmine and deposited in leaching dumps from May 1995 to December 31, 2005. Allcopper ore with a grade lower than the mill cut-off grade 0.30%, but higherthan 0.15% copper, is delivered to the leaching dumps. In 1995, we completedthe construction of a new SX/EW facility at La Caridad that has allowedprocessing of this ore and certain leach ore reserves that are not mined andhas resulted in a reduction in our production costs of copper. The SX/EWfacility has a total capacity of 21,900 tons of copper cathodes per year.

 

La Caridad Solvent Extraction and Electrowinning (SX-EW) Plant has 9irrigation systems for the dumps and 2 dams of pregnant copper solution (PLS),a container of heads that permits the combination of the solutions of both damsand feeds the Solvent Extraction plant with a more homogenous concentration.The plant has 3 trains of solvent extraction with a nominal capacity of 2,070m3/hr and 94 electrowinning cells distributed in one single electrolytic bay.The plant has a daily production capacity of 62 copper cathodes tons with99.999% purity.

 

Processing Facilities – La Caridad

 

Our La Caridad complex includes a smelter, an electrolytic copperrefinery, a precious metal refinery and a copper rod plant. The distancebetween this complex and the La Caridad mine is approximately 24 kilometers.

 

Smelter

 

Copper concentrates are carried to the La Caridad smelter where theyare processed and cast into copper anodes of 99.2% purity to be sold torefineries. Sulfur dioxide off-gases collected from the flash furnaces andconverters are processed into sulfuric acid at two sulfuric acid plants andsold to third parties.

 

24

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Almost all of the anodes produced in the smelter are sent to the LaCaridad copper refinery in order to increase the copper purity. The actualinstalled capacity of the smelter is 1,000,000 tons per year, capacity that issufficient to receive the concentrates of the Mexicana de Cobre (La Caridad)and Mexicana de Cananea Mining complex. The smelter includes a flash typeconcentrates drier, a steam drier, a flash furnace, 1 El Teniente  modified converted furnace, 2 electricfurnaces for the cleaning of slag, 3 Peirce Smith converters, 3 raffinate furnacesand 2 casting wheels. The amount of smelted copper concentrates was 894,735,820,459 and 629,505 tons for 2005, 2004 and 2003, respectively. The anodeproduction capacity is 300,000 tons per year and the production for 2005, 2004and 2003 was 282,412, 250,890 and 199,033 tons, respectively.

 

Sulfuric acid production was 833,380, 778,350 and 603,300 tons for2005, 2004 and 2003, respectively.

 

The table below setsforth 2005, 2004 and 2003 production information for the La Caridad processingfacilities:

 
| ** **                                  | ** ** | ** **         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Total Copper  concentrate smelted           |       | (kt)               |       | 894.7    |       | 820.5    |       | 629.5    |       |
| Anode copper  production                    |       | (kt)               |       | 282.4    |       | 250.9    |       | 199.0    |       |
| Average  copper content in anode            |       | (%)                |       | 99.25    |       | 99.21    |       | 99.17    |       |
| Average  smelter recovery                   |       | (%)                |       | 97.40    |       | 97.41    |       | 98.70    |       |
|                                        |       |               |       |     |       |     |       |     |       |
| **Sales data:**                             |       |               |       |     |       |     |       |     |       |
| Copper  concentrate                         |       | (kt)               |       | 22.7     |       | —   |       | —   |       |
| Average  realized price copper concentrates |       | ($ per pound) |       | 1.73     |       | —   |       | —   |       |
| Anode Copper                                |       | (kt)               |       | —   |       | —   |       | —   |       |
| Average  realized price anode copper        |       | ($ per pound) |       | —   |       | —   |       | —   |       |
| Average  realized price copper rod          |       | ($ per pound) |       | 1.75     |       | 1.35     |       | 0.88     |       |
| Average  premium copper rod                 |       | ($ per pound) |       | 0.07     |       | 0.06     |       | 0.07     |       |
| Average  realized price gold                |       | ($ per ounce) |       | 442.92   |       | 408.35   |       | 360.46   |       |
| Average  realized price silver              |       | ($ per ounce) |       | 7.40     |       | 6.65     |       | 4.84     |       |
| Average  realized price sulfuric acid       |       | ($ per ton)   |       | 35.52    |       | 18.33    |       | 13.73    |       |

 

Refinery

 

Mexcobre includes an electrolytic copper refinery at La Caridad thatuses permanent cathode technology. The actual installed capacity of therefinery is 300,000 tons per year. The refinery consists of an anode plant witha preparation area, an electrolytic plant with an electrolytic cell house with1,115 cells and 32 releaser cells, 2 cathode stripping machines, an anodewashing machine, a slime treatment plant and a number of ancillaryinstallations. The refinery is producing grade A copper cathode of 99.99%purity. Anodic slimes are recovered from the refining process and sent to theslimes treatment plant where additional copper is extracted. The slimes arethen filtered, packed and shipped to the La Caridad precious metals refinery toproduce silver and gold. The refined cathode production for 2005, 2004 and 2003was 233,685, 202,146 and 163,967 tons, respectively.

 

The operations of the precious metal refinery are divided into twostages: (i) the antimony is eliminated from the slime; and (ii) the slime isdried in a steam dryer. After this the dried slime is smelted and a gold andsilver alloy is obtained, which is known as dore. The precious metal refinery plant hasa Hydrometallurgic Stage and a Pyrometallurgic Stage, besides a Steam Drier,Dore Molding System Kaldo Furnace, 20 Electrolytic Cells in the silverrefinery, 1 Induction Furnace for Silver, 1 Silver Ingot Molding System, 2Reactors for obtaining fine Gold. The process ends with the refining of thegold and silver alloy. The production of gold for 2005, 2004 and 2003 was 817,575 and 594 kilograms**,**respectively. The production of silver for 2005, 2004 and 2003 was 142,534,90,914 and 136,117 kilograms, respectively.

 

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Copper Rod Plant

 

A rod plant at the Mexcobre complex was completed in April 1998 andreached its maximum annual operating capacity of 150,000 tons in May 1999. Theplant is producing 8 millimeter copper rods with a purity of 99.99%. The rodplant includes a vertical furnace, 1 retention furnace, 1 molding machine, 1laminating machine, 1 coiling machine and 1 coil compacter. Copper rodproduction for 2005, 2004 and 2003 was 113,167, 69,529 and 53,822 tons,respectively.

 

Otherfacilities include the lime plant with a capacity of 132,000 tonsper year and located near the Agua Prieta city in the State of Sonora; 2sulfuric acid plants, one with an annual capacity of 2,625 tons and the secondwith an annual capacity of 2,135 tons; 3 oxygen plants, two with a productioncapacity of 200,000 tons per year and the third, with a capacity of 100,000tons per year; and 2 power turbogenerators that use the kiln residual heat fromthe furnace, the first with a 11.5 Mw capacity and the second with a 25 Mwcapacity.

 

MEXICAN IMMSA UNIT

 

Our IMMSA unit (underground mining poly-metallic division) produceszinc, lead, copper, silver and gold, a coal and coke mine, and severalindustrial processing facilities for zinc, lead, copper and silver and operatesfive underground mining complexes situated in central and northern Mexico. Allof IMMSA’s mining facilities employ exploitation systems and conventionalequipment. We believe that all the plants and equipment are in satisfactoryoperating condition. IMMSA’s principal mining facilities include Charcas, SantaBarbara, San Martin, Santa Eulalia and Taxco.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Mexican IMMSA unit:

 
| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average  annual operating days(*)     |       |       |       | 311      |       | 311      |       | 311      |       |
| Total  material mined and milled      |       | (kt)       |       | 4,618    |       | 4,389    |       | 4,279    |       |
| Zinc  concentrate                     |       | (kt)       |       | 264.3    |       | 244.1    |       | 236.4    |       |
| Zinc average  ore grade               |       | (%)        |       | 3.58     |       | 3.46     |       | 3.57     |       |
| Zinc average  grade in concentrates   |       | (%)        |       | 54.33    |       | 54.79    |       | 54.46    |       |
| Zinc average  recovery                |       | (%)        |       | 86.80    |       | 88.01    |       | 84.34    |       |
| Lead  concentrate                     |       | (kt)       |       | 38.5     |       | 37.5     |       | 40.2     |       |
| Lead average  ore grade               |       | (%)        |       | 0.58     |       | 0.61     |       | 0.68     |       |
| Lead average  grade in concentrates   |       | (%)        |       | 50.71    |       | 50.19    |       | 51.94    |       |
| Lead average  recovery                |       | (%)        |       | 72.70    |       | 70.77    |       | 71.76    |       |
| Copper concentrate                    |       | (kt)       |       | 56.4     |       | 68.3     |       | 84.2     |       |
| Copper  average ore grade             |       | (%)        |       | 0.44     |       | 0.50     |       | 0.65     |       |
| Copper  average grade in concentrates |       | (%)        |       | 22.68    |       | 22.03    |       | 24.48    |       |
| Copper  average recovery              |       | (%)        |       | 62.32    |       | 68.19    |       | 67.77    |       |

 

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(*) Weighted average annual operating days based on total materialmined and milled in the 5 mines: Charcas, San Martin, Taxco, Santa Barbara andSanta Eulalia

 

Charcas

 

The Charcas mining complex is located 111 kilometers north of the cityof San Luis Potosi in the State of San Luis Potosi, Mexico. Charcas isconnected to the state capital by a paved highway of 130 km. 14 km from thesoutheast of the Charcas complex is the “Los Charcos” railroad station whichconnects with the Mexico-Laredo railway. Also, there is a paved road whichconnects Charcas to the city of Matehuala through federal highway no. 57 whichbegins at the northeast of the Charcas town site. The complex includes threeunderground mines and one flotation plant and produces zinc, lead and copperconcentrates, with significant amounts of silver. The Charcas mining districtwas discovered in 1573

 

26

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and operations in the 20th century began in 1911. The Charcas mine ischaracterized by low operating costs and good quality ores and is situated nearthe zinc refinery. We have expanded production capacity of the mine by 32%since 1993, and the Charcas mine is now Mexico’s largest producer of zinc.

 

The Charcas complex’s equipment include 9 Jumbo drilling tools, 16scoop trams for mucking and loading, 5 trucks and 4 locomotives for internalore haulage and 3 hoists. For treating the ore, there are 2 primary crushers,one secondary crusher, one tertiary crusher, 4 mills and 3 flotation circuits.

 

Geology

 

The Charcas mining district occupies the east-central part of theMexica Central Mesa and is part of the Sierra Madre Metallogenic Province. Geologicalhistory starts in the Superior Triasic, where sandy clay sediments weredeposited argilloarenaceous. Due to emersion, in the beginning of the JurassicSuperior, the sediments suffered intense erosion, settling on continentalsediments. This sequence was affected by tectonic effort which folded andfailed on this rock package. Later the positioning of intrusive rocksoriginated fractures which gave way to positioning of mineral deposits. Thesite’s paragenesis suggests two stages of mineralization. First minerals arerich in silver, lead and zinc, with abundant calcite and small quantities ofquartz chalcopyrite. Second, there is a link of copper and silver, where thecharacteristic minerals are chalcopyrite, lead ore with silver content, pyriteand scarce sphalerite. Economic ore is found as replacement sulfurs incarbonates host rock. The ore mineralogy comprises predominantly calcopyrite (CuFeS2),sphalerite (ZnS), galena (PbS) and silver minerals as diaphorite (Pb2Ag3Sb3S8).

 

Mine exploration

 

In Charcas, 17,702 meters of diamond drilling were executed fromunderground stations. With this drilling, one million tons of measuredresources were added to the reserve base in 2005.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Chancas mine:

 

| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual  operating days                |       | (days)     |       | 324      |       | 326      |       | 326      |       |
| Total  material mined and milled      |       | (kt)       |       | 1,328    |       | 1,317    |       | 1,213    |       |
| Zinc  concentrate                     |       | (kt)       |       | 123.6    |       | 123.8    |       | 116.6    |       |
| Zinc average  ore grade               |       | (%)        |       | 5.68     |       | 5.76     |       | 5.85     |       |
| Zinc average  grade in concentrates   |       | (%)        |       | 57.11    |       | 57.34    |       | 57.42    |       |
| Zinc average  recovery                |       | (%)        |       | 93.59    |       | 93.56    |       | 94.32    |       |
| Lead  concentrate                     |       | (kt)       |       | 6.0      |       | 7.1      |       | 7.4      |       |
| Lead average  ore grade               |       | (%)        |       | 0.29     |       | 0.33     |       | 0.38     |       |
| Lead average  grade in concentrates   |       | (%)        |       | 36.75    |       | 38.44    |       | 41.79    |       |
| Lead average  recovery                |       | (%)        |       | 56.14    |       | 63.51    |       | 66.89    |       |
| Copper  concentrate                   |       | (kt)       |       | 2.9      |       | 2.5      |       | 2.6      |       |
| Copper  average ore grade             |       | (%)        |       | 0.20     |       | 0.20     |       | 0.23     |       |
| Copper  average grade in concentrates |       | (%)        |       | 27.62    |       | 25.50    |       | 26.57    |       |
| Copper  average recovery              |       | (%)        |       | 30.36    |       | 24.17    |       | 25.00    |       |

 

The Charcas mine uses the hydraulic cut-and-fill method and theroom-and-pillar mining method with descending benches. The broken ore is hauledto the underground crusher station. The crushed ore is then hoisted to thesurface for processing in the flotation plant to produce lead, zinc and copperconcentrates. The capacity of the flotation plant is 4,000 tons of ore per day;1,327,990, 1,317,288 and 1,212,938 tons of ore were mined at Charcas during2005, 2004 and 2003, respectively. The lead concentrate produced at Charcas istreated at a third party refinery in Mexico. The zinc and copper concentratesare treated at our San Luis Potosi zinc refinery and copper smelter.

 

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Santa Barbara

 

The Santa Barbara mining complex is located approximately 26 kilometerssouthwest of the city of Hidalgo del Parral in southern Chihuahua, Mexico. Thearea can be reached via paved road from Hidalgo del Parral, a city on federalhighway 45, which provides all essential services. Chihuahua, the state capitalis located 250 km north of the Santa Barbara complex. Additionally, El Paso onthe Texas border is located 600 km north of Santa Barbara. Santa Barbaraincludes three main underground mines and a flotation plant and produces lead,copper and zinc concentrates, with significant amounts of silver. Gold-bearingveins were discovered in the Santa Barbara district as early as 1536. Miningactivities in the 20th century began in 1913.

 

The mining operations at Santa Barbara are more diverse and complexthan at any of the other mines in our Mexican operations, with veins thataggregate approximately 21 kilometers in length. Each of the three undergroundmines has several shafts and crushers. Due to the variable characteristics ofthe ore bodies, four types of mining methods are used: shrinkage stoping,long-hole drilled open stoping, cut-and-fill stoping and horizontal benchstoping. The ore, once crushed, is processed in the flotation plant to produceconcentrates. The flotation plant has a capacity of 6,000 tons of ore per day;1,486,622, 1,453,793 and 1,450,124 tons of ore were mined at the Santa Barbaramine during 2005, 2004 and 2003, respectively. The lead concentrate produced istreated at a third party refinery in Mexico. The copper concentrates aretreated at our San Luis Potosi copper smelter, and the zinc concentrates are eithertreated at the San Luis Potosi zinc refinery or exported.

 

The major mine equipment at Santa Barbara include 12 Jumbo drillingtools, 2 Simba drilling tools, 33 scoop trams, 9 trucks and 6 locomotives forinternal ore haulage, 5 trucks for external haulage and 6 hoists. For treatingthe ore, there are 4 primary jaw crushers, one secondary crusher and 2 tertiarycrushers, 3 mills and 3 flotation circuits. The concentrator plant has amilling capacity of 6,000 tons of ore per day.

 

Geology

 

The majority of production from the district comes from quartz veinswithin faults and fractures. The north to northwestern trending veins is up toseveral kilometers long, dips steeply to the west and is 0.5 to 30 meters wide.Ore shoots up to several hundred meters in length, extends to at least 900meters below the surface and is separated from other ore by 0.5 to 1 meter ofbarren quartz vein. Metal zoning occurs in some veins, with zinc and leadcontent generally decreasing with depth and copper increasing with depth. Threemain systems of veins exist inside the district, represented by the veinsCoyote, Segovedad Novedad and Coyote Seca Palmar. In addition to the mainveins, there are many smaller sub-parallel to branching ore bearing veins.Economic ore minerals include sphalerite (ZnS), marmatite (ZnFeS), galena(PbS), chalcopyrite (CuFeS2) and tetrahedrite (CuFe)12Sb4S13. Gangue minerals include quartz (SiO2), pyrite (FeS2),magnetite (Fe2O4), pyrrhotite (Fe2+S), arsenopyrite (FeAsS) and fluorite (CF2)..

 

The Santa Barbara district has mineralization to indicate that it willcontinue to be a significant producer of lead, copper and zinc for decades. Thefull potential of the district has not yet been defined, but the area seems tojustify an increase of the exploration to support a new increase in theproduction.

 

Mine Exploration

 

In Santa Barbara, 12,140 meters were drilled from underground stationsin 2005. The measured resource developed was 724,576 tons.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Santa Barbara mines:

 

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| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual  operating days                |       | (days)     |       | 328      |       | 328      |       | 327      |       |
| Total  material mined and milled      |       | (kt)       |       | 1,487    |       | 1,454    |       | 1,450    |       |
| Zinc  concentrate                     |       | (kt)       |       | 54.2     |       | 58.3     |       | 57.9     |       |
| Zinc average  ore grade               |       | (%)        |       | 2.28     |       | 2.43     |       | 2.49     |       |
| Zinc average  grade in concentrates   |       | (%)        |       | 53.99    |       | 53.29    |       | 53.20    |       |
| Zinc average  recovery                |       | (%)        |       | 86.33    |       | 88.02    |       | 85.31    |       |
| Lead  concentrate                     |       | (kt)       |       | 20.5     |       | 24.1     |       | 24.1     |       |
| Lead average  ore grade               |       | (%)        |       | 0.92     |       | 1.09     |       | 1.21     |       |
| Lead average  grade in concentrates   |       | (%)        |       | 55.43    |       | 53.06    |       | 55.51    |       |
| Lead average  recovery                |       | (%)        |       | 83.24    |       | 80.82    |       | 82.07    |       |
| Copper  concentrate                   |       | (kt)       |       | 14.3     |       | 11.3     |       | 14.2     |       |
| Copper  average ore grade             |       | (%)        |       | 0.50     |       | 0.45     |       | 0.53     |       |
| Copper  average grade in concentrates |       | (%)        |       | 29.39    |       | 27.70    |       | 28.34    |       |
| Copper  average recovery              |       | (%)        |       | 56.45    |       | 48.00    |       | 52.51    |       |

 

San Martin

 

The San Martin mining complex is located in the municipality ofSombrerete in the western part of the state of Zacatecas, Mexico, approximately101 kilometers southeast of the city of Durango and 9 km east of the DurangoState boundary. Access to the property is via federal highway no. 45 betweenthe cities of Durango and Zacatecas. A paved six kilometer road connects the mineand town of San Martin with the highway. The city of Sombrerete is about 16kilometers east of the property. The complex includes an underground mine and aflotation plant and produces lead, copper and zinc concentrates, withsignificant amounts of silver. The mining district in which the San Martin mineis located was discovered in 1555. Mining operations in the 20th century beganin 1949. San Martin lies in the Mesa Central between the Sierra MadreOccidental and the Sierra Madre Oriental.

 

The horizontal cut-and-fill mining method is used at the San Martinmine. The broken ore is hauled to the underground crusher station. The ore isthen brought to the surface and fed to the flotation plant to produceconcentrates. The flotation plant has a total capacity of 4,400 tons of ore perday; 1,231,476, 1,259,220 and 1,287,239 tons of ore were mined at San Martin in2005, 2004 and 2003, respectively. The lead concentrate is treated at a thirdparty refinery in Mexico. The copper concentrate is treated at our San LuisPotosi copper smelter and zinc concentrate is either treated at the San LuisPotosi zinc refinery or exported.

 

Geology

 

San Martin lies in the Central Mesa between two major geologicprovinces, Sierra Madre Occidental and Sierra Madre Oriental. The mainsedimentary rock-formation in the San Martin district is the Upper CretaceousAge Cuesta del Cura limestone. The formation is an interlayered sequence ofshallow marine limestone and black chert, and it is overlain by Induraformation which outcrops at the foot of the topographic heights of the Cuestadel Cura formation. It consists mainly of alternating shales and fine-grainedclayed limestones in 10 to 30 centimeter thick layers.

 

The district’s most important mineral deposits are replacement veinsand bodies generated in the skarn by Cerro de la Gloria granodiorite intrusion.An extensive zone of skarn west of the intrusive, hosts the San Marcial, Ibarraand Gallo-Gallina main ore veins, which appear at the surface for distances ofup to 1,000 meters, with thicknesses of 40 centimeters to 4 meters, parallelingthe intrusive contact. In the central part of the deposit there is a horizontalzoning with respect to the contact of the intrusive with high values of silverand copper. In the top of the deposit there is mostly lead and zinc. In thenortheast/east over concentric structures to the intrusive there is anincrement of lead, zinc and silver in the skarn. Economic ore is found asreplacement ore bodies between the main veins as massive and disseminatedsulphides with widths from 8m up 200m. These bodies consist mostly ofchalcopyrite (Cu Fe S2), sphalerite (Zn S), galena (Pb S), bornite (Cu5 Fe S4),tetrahedrite  (CuFe)12Sb4S13, nativesilver (Ag),

 

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pyrrotite (FeS), arsenopirite (Fe As S), stibnite (Sb2 S3). Themolybdenum and tungsten are found in little portions in the skarn near thecontact associated with the calcite.

 

Mine Exploration

 

A total of 9,782 meters of diamond drilling were executed in SanMartin, 7,137 meters from underground and 2,645 meters from surface. A totalmeasured resource of 778,594 tons has been developed.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our San Martin mines:

 
| ** **                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual  operating days                |       | (days)     |       | 301      |       | 304      |       | 301      |       |
| Total  material mined and milled      |       | (kt)       |       | 1,231    |       | 1,259    |       | 1,287    |       |
| Zinc  concentrate                     |       | (kt)       |       | 36.7     |       | 40.5     |       | 44.3     |       |
| Zinc average  ore grade               |       | (%)        |       | 2.03     |       | 2.21     |       | 2.65     |       |
| Zinc average  grade in concentrates   |       | (%)        |       | 51.12    |       | 52.19    |       | 49.91    |       |
| Zinc average  recovery                |       | (%)        |       | 75.25    |       | 75.96    |       | 64.89    |       |
| Lead  concentrate                     |       | (kt)       |       | 2.4      |       | —   |       | —   |       |
| Lead average  ore grade               |       | (%)        |       | 0.20     |       | —   |       | —   |       |
| Lead average  grade in concentrates   |       | (%)        |       | 31.60    |       | —   |       | —   |       |
| Lead average  recovery                |       | (%)        |       | 29.16    |       | —   |       | —   |       |
| Copper  concentrate                   |       | (kt)       |       | 39.2     |       | 54.5     |       | 67.4     |       |
| Copper  average ore grade             |       | (%)        |       | 0.80     |       | 1.01     |       | 1.34     |       |
| Copper  average grade in concentrates |       | (%)        |       | 19.87    |       | 20.70    |       | 21.09    |       |
| Copper  average recovery              |       | (%)        |       | 79.05    |       | 88.74    |       | 82.22    |       |

 

SantaEulalia

 

The mining district of Santa Eulalia is located in the central part ofthe state of Chihuahua, Mexico, approximately 26 kilometers east of the city ofChihuahua. This district covers approximately 48 square kilometers and isdivided into three fields: east field, central field and west field. The westfield and the east field, in which the principal mines of the complex arefound, are separated by 6 kilometers. The Buena Tierra mine is located in thewest field and the San Antonio mine is located in the east field. The miningdistrict was discovered in 1590, although exploitation did not formally beginuntil 1870.

 

The district of Santa Eulalia is connected to the city of Chihuahua bya paved road (highway no. 45), at a distance of 10 km there is a paved detourto Aquiles Serdan and Francisco Portillo (also known as Santo Domingo) wherethe Company’s offices and the Buena Tierra mine are located. Access to theBuena Tierra mine and San Antonio mine is through an 11 km unpaved road.

 

The Santa Eulalia mine suspended operations totally from October 2000to December 2004, during which time rehabilitation work was completed at theTiro San Antonio and pipes were installed to expand the pumping capacity to10,500 gallons per minute. In January 2005, operations began at the SantaEulalia mine, with a production plan for 230,900 tons. The flotation plant, atwhich lead concentrate and zinc concentrate are produced, has a capacity of1,500 tons or ore per day 209,658 tons of ore were mined at Santa Eulalia in2005. The lead concentrate is treated at a third party refinery, and the zincconcentrate is treated at our San Luis Potosi zinc refinery. The productionplan for 2006 is estimated to be 260,800 tons.

 

Majormine equipment at the Santa Eulalia mine include 3 Jumbo drilling tools, 9scoop trams for mucking and loading, 3 trucks, 4 hoists, 2 primary crushers, 2mill crushers, 1 mill and 2 flotation circuits. The concentrator plant has amilling capacity of 1,450 tons of ore per day.

 

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Geology

 

SantaEulalia is the largest of a number of similar districts that lie along theintersection of the Laramide-aged Mexican Thrust Belt and the Tertiary volcanicplateau of the Sierra Madre Occidental. Deposits throughout the belt occur in athick Jurassic-Cretaceous carbonate succession that overlies Paleozoic or oldercrust.

 

Themain sedimentary rock in the Santa Eulalia district is the Lower CretaceousLimestone. These are irregularly covered by volcano sedimentary conglomeratesthat are overlaid by volcanic rocks of the Tertiary and alluvial material ofthe Quaternary Age.

 

Inthe Santa Eulalia mining district a thickness of 500 meters of sedimentaryrocks is known to exist which consists of the following formations: 1)Formation Lagrima (limestone fossils); 2) Formation Glen Rose (limestone blueand at its base a black limestone appears); and 3) Formation Cuchillo(limestone with shale). Dikes and sills of riolite composition and  sills of diabase also exist.

 

Inthe district there are several systems of fractures and faults associated withthe emplacement of felsitic and maphic intrusives. The most importantcontroller of the ore bodies are the fractures North-South.

 

Themineralization corresponds in its majority to ore skarns – silicoaluminates ofcalcium, iron and manganese with variable quantities of lead, zinc, copper andiron sulphides, located in the planes of crossings in the interstices of thesilicates.

 

Economicore is found as replacement in the Limestone Glen Rose in the contact withdikes and sills and replacements in diabase sills. The mineralogy comprisespredominantly: sphalerite (ZnS), galena (PbS) and small quantities of  pyrargyrite (Ag3 Sb S3).

 

Mine Exploration

 

2,918 meters were drilled from underground in 2005. The measuredresource developed was 211,635 tons.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Santa Eulalia mine:

 

| ** **                          | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual  operating days              |       | (days)     |       | 329      |       | 16       |       | —   |       |
| Total  material mined and milled    |       | (kt)       |       | 210      |       | 6        |       | —   |       |
| Zinc  concentrate                   |       | (kt)       |       | 24.8     |       | 0.7      |       | —   |       |
| Zinc average  ore grade             |       | (%)        |       | 8.08     |       | 10.19    |       | —   |       |
| Zinc average  grade in concentrates |       | (%)        |       | 51.73    |       | 45.93    |       | —   |       |
| Zinc average  recovery              |       | (%)        |       | 75.68    |       | 49.71    |       | —   |       |
| Lead  concentrate                   |       | (kt)       |       | 4.6      |       | 0.2      |       | —   |       |
| Lead average  ore grade             |       | (%)        |       | 1.89     |       | 2.40     |       | —   |       |
| Lead average  grade in concentrates |       | (%)        |       | 60.32    |       | 51.033   |       | —   |       |
| Lead average  recovery              |       | (%)        |       | 69.75    |       | 65.71    |       | —   |       |

 

Taxco

 

The Taxco mining complex is located on the outskirts of the city ofTaxco in the northern part of Guerrero State, Mexico, approximately 71kilometers from the city of Cuernavaca Morelos where access through the highwayto the complex is possible. The complex includes several underground mines and a flotationplant and produces lead and zinc concentrates, with some amounts of gold andsilver. The mining district in which the Taxco mines are located was discoveredin 1519. Mining activities in the 20th century commenced in 1918. The Taxco district lies in the northern partof the Balsas-Mexcala basin adjacent to the Paleozoic Taxco-Zitacuaro Massif.

 

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IMMSA employs shrinkage, cut-and-fill and theroom and pillar mining methods at the Taxco mines. The flotation plant has acapacity of 2,000 tons of ore per day; 362,550, 352,174 and 328,243 tons or orewere mined at Taxco in 2005, 2004 and 2003, respectively. Thelead concentrate is treated at a third party refinery in Mexico. The zinc concentrates is either treated atthe San Luis Potosi zinc refinery or exported.

 

The major mine equipment at the Taxco complex include 5 Jumbo drillingtools, 12 scoop trams for mucking and loading, 6 trucks and 4 locomotives forinternal ore haulage and 3 hoists. For treating the ore, there are 2 primarycrushers, 3 secondary crushers, 3 mills and 2 flotation circuits. Theconcentrator plant has a milling capacity of 2,000 tons of ore per day.

 

Geology

 

The Taxco district is stratigraphically formed of rocks from Jurassicto recent periods which are described below, with emphasis on themineralization control characteristics. Taxco Schist is composed of a series ofschists and fylites, most likely from a volcanic-sedimentary sequence of tufaand limonites. They represent a sequence of metamorphological arch and its agehas been defined as Jurassic Medium. Morelos formation,  from the Upper Cretaceous age(Apian-Turonian) lies on a discordant form over Taxco schist and its contact isseveral times marked by a clay zone (mylonites) and breccia, which implies ashifting of this unit over the schist (packs). Mezcala formation, isconstituted by a sequence of shale and sandstone with some inter-stratifiedlayers of limestone. Its base is calcarean which sometimes is mistaken with topof Morelos formation. Its top tends to be rich in clay with thin limestonelayers. Balsas group, which is constituted by conglomerates and is sandy on itsbase, rests in discordance form on an erosioned surface from the Mexcalaformation. The Tilzapotla Ryolite is the newest rock which emerged in thedistrict before the alluvial deposit. It is formed of flux, breccia,tuffaceous, ignimbrites and vitrophyrre of ryolite composition.

 

There are four types of ore deposits found in Taxco district. In orderof importance they are as follows: fisure-filling veins, replacement  veins, blanket-like  replacement bodies (so called “mantos”),stockworks and brecciate chimneys. The three first ones are intimately related andthey were formed in the same era, although in different stages.

 

The veins reach up to 2 kilometers in length and variable potency of 30centimeters to 8 meters, which is the case of copper veins at the mines ofGuerrero, Hueyapa and Palo Amarillo at the San Antonio mine; the Remedios minehas among other veins, El Muerto and El Cristo 1 kilometer long and 5 meters inaverage potency.

 

Economic ore is found in the deposit in veins. Ore mineral includeargentiferous galena (PbS), sphalerite (ZnS), pyrargyrite (Ag3 Sb S3), andother sulphosalts, and replacement “mantos”. The most mineralized zones are inthe vicinity of the veins with the limestone. The mineralization is moreintensive in the base of the limestone and consists of sphalerite(ZnS), galena(PbS), pyrite (FeS) and magnetite (FeOFe2O3).

 

Mine Exploration

 

The underground drilling in this property was 7,357 meters. Fromsurface, 4,194 meters were drilled. The measured resource developed with thisdrilling was 643,267 tons.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Taxco mine:

 

| ** **                          | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual  operating days              |       | (days)     |       | 215      |       | 217      |       | 222      |       |
| Total  material mined and milled    |       | (kt)       |       | 363      |       | 352      |       | 328      |       |
| Zinc  concentrate                   |       | (kt)       |       | 25.0     |       | 20.7     |       | 17.7     |       |
| Zinc average  ore grade             |       | (%)        |       | 3.92     |       | 3.49     |       | 3.51     |       |
| Zinc average  grade in concentrates |       | (%)        |       | 48.66    |       | 49.23    |       | 50.51    |       |
| Zinc average  recovery              |       | (%)        |       | 85.51    |       | 82.97    |       | 77.39    |       |
| Lead  concentrate                   |       | (kt)       |       | 5.1      |       | 6.1      |       | 6.8      |       |
| Lead average  ore grade             |       | (%)        |       | 0.80     |       | 1.07     |       | 1.28     |       |
| Lead average  grade in concentrates |       | (%)        |       | 48.24    |       | 52.55    |       | 49.25    |       |
| Lead average  recovery              |       | (%)        |       | 85.03    |       | 84.51    |       | 79.71    |       |

 

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Processing Facilities - San Luis Potosi

 

Our San Luis Potosi electrolytic zinc refinery is located in the cityof San Luis Potosi, in the state of San Luis Potosi, Mexico. Our San LuisPotosi copper smelter is adjacent to the San Luis Potosi zinc refinery.

 

Smelter

 

The San Luis Potosi copper smelter has been in operation since 1925 andhas gone through several phases of modernization, principally over the last tenyears. The smelter presently has the capacity to process 230,000 tons of copperconcentrate per year.

 

The plant operates one blast furnace (with a second on stand-by) thatsmelts incoming materials, mainly copper concentrates and copper byproductsfrom lead plants, to produce a copper matte. The copper matte is then treatedin one of the two Pierce Smith converters, producing copper blister (97.4%copper), which in 2005 contained approximately one ounce of gold and 400 ouncesof silver per ton of copper blister produced. Of a total copper concentrateintake of 50,243 tons in 2005, approximately 90% was supplied by the Immsa Unit’smines and the remaining amount was smelted under toll arrangements with thirdparties. Copper blister production in 2005, 2004 and 2003 amounted to 21,318,22,666, and 23,548 tons, respectively. Blister production is sold to thirdparties. Approximately 50% of blister production was sold to customers in theUnited States in 2005, 21% was sold to customers in Germany, 10% to customersin Mexico and the remaining to customers in other countries.

 

The San Luis Potosi copper smelter’s equipment include 2 yardlocomotives, 2 Traxcavos, 20 dump cars and 6 mechanic front loaders for thefurnace charge mixing. Smelting and conversion equipment include 3 blastfurnaces, 2 Pierce Smith converter furnaces, 2 molding furnaces, 6 electricfront loaders, 6 towing units, 3 narrow way locomotives, 2 bridge cranes, two7-ton cranes and 3 hoists. Venting System equipment include 9 fans withdifferent capacities and 2 filtering bag houses. This plant has a smeltingcapacity of 24,000 tons of blister copper per year.

 

As the materials treated at the smelter contain various impurities(especially lead and arsenic), the facility has been equipped with an arsenicrecovery plant for treatment of the flue dust produced in the blast furnacesection. This material contains approximately 35% lead and 18% arsenic which,when treated, produces approximately 1,800 tons per year of high purity arsenictrioxide which is, in turn, sold in the United States principally to the woodpreserving industry. Approximately 15,000 tons per year of lead bearingcalcines (approximately 32% lead) are sold annually to Industrias Peñoles, S.A.de C.V. (“Peñoles”).

 

The table below sets forth 2005, 2004 and 2003 production informationfor our San Luis Potosi copper smelter:

 
| ** **                             | ** ** | ** **         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Total copper  concentrate smelted      |       | (kt)               |       | 50.2     |       | 59.2     |       | 62.0     |       |
| Blister  copper production             |       | (kt)               |       | 21.3     |       | 22.7     |       | 23.5     |       |
| Copper  average grade in blister       |       | (%)                |       | 98.17    |       | 97.40    |       | 96.74    |       |
| Average  smelter recovery              |       | (%)                |       | 96.89    |       | 98.19    |       | 95.20    |       |
| Average  realized price copper blister |       | ($ per pound) |       | 1.83     |       | 0.80     |       | 0.80     |       |

 

Zinc Refinery

 

The San Luis Potosi electrolytic zinc refinery was built in 1982. Itwas designed to produce 105,000 tons of refined zinc per year by treating up to200,000 tons of zinc concentrate from our own mines, principally Charcas,located only 113 kilometers from the

 

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refinery. Refined zinc production in 2005, 2004 and 2003 amounted to101,523, 102,556 and 101,069 tons, respectively. The refinery produces specialhigh grade zinc (99.995% zinc), high grade zinc (over 99.9% zinc) andzinc-based alloys with aluminum, lead, copper or magnesium in varyingquantities and sizes depending on market demand. In 2005, the plant produced asbyproducts 176,295 tons of sulfuric acid, 706 tons of refined cadmium, 14,566kilograms of silver and 4 kilograms of gold.

 

The electrolytic zinc refinery’s major equipmentinclude a roaster with a capacity of 85 m2 of roasting area, a steam recoveryboiler and an acid plant. There is a calcinea processing area with 5 leachingstages: neutral, hot acid, intermediate acid, acid, purified fourth andjarosite, as well as two stages for solution purifying. Additionally, theequipment include a cell house with two electrowinning circuits to finallyobtain metallic zinc; an alloy and molding area with 2 induction furnaces andfour molding systems, two of them with chains to produce 25 kilograms ingots;and two casting wheels to manufacture one ton Jumbo pieces. This refinery has aproduction capacity of 104,000 tons of refined zinc per year.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our San Luis Potosi zinc refinery:

 
| ** **                               | ** ** | ** **         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Total zinc  concentrate treated          |       | (kt)               |       | 166.8    |       | 164.2    |       | 169.7    |       |
| Zinc  production                         |       | (kt)               |       | 101.5    |       | 102.6    |       | 101.1    |       |
| Average  refinery recovery               |       | (%)                |       | 94.57    |       | 94.90    |       | 94.72    |       |
| Average  realized price refined zinc     |       | ($ per pound) |       | 0.64     |       | 0.42     |       | 0.40     |       |
| Average  realized price zinc concentrate |       | ($ per pound) |       | 0.64     |       | 0.48     |       | 0.40     |       |
| Average  realized price silver           |       | ($ per ounce) |       | 7.19     |       | 6.67     |       | 4.84     |       |

 

Nueva Rosita Coal andCoke Complex

 

The Nueva Rosita coal and coke complex, which began operations in 1924,is located in the state of Coahuila, Mexico on the outskirts of the city ofNueva Rosita near the Texas border. It comprises an underground coal mine, witha present yearly capacity of approximately 280,000 tons of coal, and a 21-cokeoven facility capable of producing 104,000 tons of metallurgical coke per year.At present the 21 ovens are being re-engineered and modernized, with aninvestment of $12 million, to service the operations of the facility forthe next 25 years.

 

The room-and-pillar mining method is employed at the underground NuevaRosita coal mine with continuous miners. At present, the coke oven installationsupplies the San Luis Potosi copper smelter with low-cost coke, resulting insignificant cost savings to the smelter. The surplus production (approximately21,608 tons per year) is sold to Peñoles and other Mexican consumers innorthern Mexico. The complex includes a coal washing plant completed in 1998that has a capacity of 900,000 tons per year and produces cleaner coal of ahigher quality. The 2005, 2004 and 2003 production of clean coal was 257,016,238,336 and 260,966 tons, respectively.

 

Exploration:

 

At Nueva Rosita, 8,771 meters of diamond drilling and 2,943 meters ofreverse circulation were drilled. The diamond drilling was done in theGuayacan, Santo Tomas and Esperanza areas located within a 30 km radius of ourpresent mine. The results at Esperanza and Guayacán are encouraging, but theresults at Santo Tomas were negative. The drilling will continue at all threeproperties in 2006.

 

The table below sets forth 2005, 2004 and 2003 production informationfor our Nueva Rosita coal and coke complex:

 

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| ** **                                 | ** ** | ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|
| Underground  mine                          |       | (kt)             |       | 257.0    |       | 238.3    |       | 261.0    |       |
| Open pit                                   |       | (kt)             |       | 407.1    |       | 129.3    |       | 142.8    |       |
| Coal mined                                 |       | (kt)             |       | 664.1    |       | 367.6    |       | 403.8    |       |
| Average BTU  content                       |       | BTU/Lb           |       | 10,017.2 |       | 9,883.8  |       | 9,872.3  |       |
| Average  percent sulfur                    |       | %                |       | 1.02     |       | 0.95     |       | 0.97     |       |
| Clean coal  produced                       |       | (kt)             |       | 181.0    |       | 116.6    |       | 112.6    |       |
| Coke tonnage  produced                     |       | (kt)             |       | 44.4     |       | 46.2     |       | 76.6     |       |
| Average  realized price coal               |       | ($ per ton) |       | 24.41    |       | 25.27    |       | 23.41    |       |
| Average  realized price arsenic clean coal |       | ($ per ton) |       | 62.83    |       | 56.46    |       | 29.74    |       |
| Average  realized price coke               |       | ($ per ton) |       | 197.99   |       | 189.98   |       | 112.85   |       |

 

In the Pasta de Conchos mining complex within the mine there are 5continuous mining equipment, 6 transporting cars, 2 locomotives, 1 long wallequipment and a cutting machine. There is also a hoist to transport materialsinside the unit; a breaker in the surface to feed the washing plant; and a setof 21 coke ovens with a capacity of 100,000 coke tons per year. There is aby-product plant to clean the coke gas in which tar, ammonium sulfate and lightcrude oil are recovered. There are also two boilers to produce 80,000 steampounds that are used in the by-products plant.

 

EXPANSION AND MODERNIZATION PROGRAM

 

For a description of our Expansion and Modernization Program see “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations-Expansion and Modernization Program”.

 

EXPLORATION ACTIVITIES

 

We are engaged in ongoing extensive exploration to locate additionalore bodies in Peru, Mexico and Chile. We spent $24.4 million on explorationprograms in 2005, $15.6 million in 2004 and $17.9 million in 2003,and have budgeted $33.4 million for 2006.

 

Currently in Peru, we have direct control of 99,537 hectares of mineralrights. In Mexico, we hold 295,367 hectares of exploration concessions. We alsohold 38,200 hectares of exploration concessions in Chile.

 

Peru

 

*Los Chancas.*The LosChancas project, located in the department of Apurimac in southern Peru, is acopper and molybdenum porphyry deposit. In 2004 we completed the final phase ofthe diamond drilling program the second and final phase of metallurgicaltesting. At the end of 2005 several companies have been invited to presentproposals for the execution of the pre-feasibility studies that will begin in2006. Once completed, we will be able to make a determination if moreexploration is needed or if the project contains commercially mineablereserves, which would warrant future development after comprehensive economic,technical and legal feasibility studies are completed. Testing to dateindicates a mineral deposit of 200 million tons with a copper grade of 1.0%,0.07% molybdenum and 0.12 grams of gold per ton.

 

*Tantahuatay.*TheTantahuatay project is located in the department of Cajamarca in northern Peru.We have performed exploration work in the upper part of the deposit principallyfor gold recovery. Work to date indicates mineralization of 27.1 milliontons, with an average gold content of 0.89 grams per ton and 13.0 grams ofsilver per ton. This project, in which we have a 44.25% share, continues in theexploratory stage. During 2004 and 2005 we concentrated our efforts on dealingwith social and environmental concerns of communities near the project.

 

*Tia Maria.*The TiaMaria project, located in the department of Arequipa in southern Peru, is acopper porphyritic system. In 2005 a total of 29,000 meters of diamond drillingwas

 

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completed out of the 15,000 meters projected. The drilling iscontinuing into 2006 to complete the program. This project is in the exploratorystage.

 

*Other Peruvian Prospects.*Aspart of our 2005 exploration and development program, we drilled at the GloriaCristina prospect located in northern Peru, in the department of La Libertad,and at the El Fiscal prospect in southern Peru, in the department of Arequipa. TheEl Fiscal prospect shows evidence of copper-gold mineralization and we arescheduling additional drilling as part of 2006 exploration and developmentprogram. Both prospects show evidence of copper-gold mineralization.

 

Mexico

 

In addition to exploratory drilling programs at existing mines, we arecurrently conducting exploration to locate mineral deposits at various othersites in Mexico. In particular, we have identified significant copper and golddeposits at El Arco site.

 

*El Arco.*The El Arcosite is located in the state of Baja California in Mexico. Preliminaryinvestigations of the El Arco site indicate a mineral deposit of 846 milliontons of sulfide with average copper grades of 0.51% and 0.14 grams of gold perton, and 170 million tons of leach materials with average copper grades of0.56%. Currently we are in the process of identifying water sources for aleaching operation.

 

*Angangueo.*TheAngangueo site is located in the state of Michoacán in Mexico. A mineral depositof 13 million tons has been identified with diamond drilling. The mineraldeposit contains 0.16 grams of gold and 262 grams of silver per ton, and iscomprised of 0.79% lead, 0.97% copper and 3.5% zinc. During 2005, we receivedthe approval for our environmental impact study and we are in the process ofobtaining land use approval.

 

*Buenavista.*TheBuenavista project site is located in the state of Sonora in Mexico, adjacentto the Cananea ore body. Drilling and metallurgical studies have shown that thesite contains a mineral deposit of 36 million tons containing 29 grams ofsilver, 0.69% of copper and 3.3% of zinc per ton.

 

Chile

 

In 2003 we acquired several exploration properties in Chile with over35,000 hectares of mining rights. In 2004 we started exploration work oncertain of these Chilean properties with diamond drilling on El Saladoprospects.

 

*El Salado.*The ElSalado prospect, located in the Atacama Region, stretches over 2,700 hectaresand is also being explored for copper-gold. Through 2005, 11,079 meters ofdiamond drilling was completed. We are currently doing a geological evaluationof Sierra Aspera, a copper-gold prospect, located in the north of Chile.

 

*Other Chilean Prospects.*Otherprospects like Catanave and Esperanza, located in the Tarapaca and Atacamaregions, respectively, in northern Chile, are scheduled for future exploration.

 

PRINCIPAL PRODUCTS AND MARKETS

 

Theprincipal uses of copper are in the building and construction industry,electrical and electronic products and, to a lesser extent, industrialmachinery and equipment, consumer products and the automotive andtransportation industries. Molybdenum is used to toughen alloy steels andsoften tungsten alloy and is also used in fertilizers, dyes, enamels andreagents. Silver is used for photographic, electrical and electronic productsand, to a lesser extent, brazing alloys and solder, jewelry, coinage,silverware and catalysts. Zinc is primarily used as a coating on iron and steelto protect against corrosion. It is also used to make die cast parts, in themanufacturing of batteries and in the form of sheets for architecturalpurposes.

 

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Our marketing strategy and annual sales planning emphasize developingand maintaining long-term customer relationships, and thus acquiring annual orother long-term contracts for the sale of our products is a high priority. Approximately90% of our metal production for the year 2005, 2004 and 2003, was sold underannual or longer-term contracts. Sales prices are determined based onprevailing commodity prices for the quotation period, generally being the monthof, the month prior to or the months following the actual or contractual monthof shipment or delivery, according to the terms of the contract.

 

We focus on the ultimate end-user customers as opposed to selling onthe spot market or to trading companies. In addition, we devote significantmarketing effort to diversifying our sales both by region and by customer base.We strive to provide superior customer service, including just-in-timedeliveries of our products. Our ability to consistently fulfill customer demandis supported by our substantial production capacity.

 

For additional information on sales by segment, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Segment Sales Information”.

 

METALS PRICES

 

Prices for our products are principally a function of supply and demandand, except for molybdenum, are established on the Commodities Exchange, orCOMEX, in New York and the London Metal Exchange or LME the two most importantmetal exchanges in the world. Prices for our molybdenum products areestablished by reference to the publication Platt’s Metals Week. Our contractprices also reflect any negotiated premiums and the costs of freight and otherfactors. From time to time, we have entered into hedging transactions toprovide partial protection against future decreases in the market price ofmetals and we may do so under certain market conditions. In 2003 and 2004,however, we did not enter into any material hedging transactions. We have,however, entered into copper swap contracts in 2005. At December 31, 2005 we donot have any copper swap contracts. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Quantitative and QualitativeDisclosure about Market Risk”. For a further discussion of prices for ourproducts, please see “Management’s Discussion and Analysis of FinancialCondition and Result of Operations –Metal Prices”.

 

COMPETITIVE CONDITIONS

 

Competition in the copper market is principally on a price and servicebasis, with price being the most important consideration when supplies ofcopper are ample. The Company’s products compete with other materials, includingaluminum and plastics.

 

EMPLOYEES

 

As of December 31, 2005, we employed 12,877 persons, approximately 71%of whom are covered by labor agreements with ten different labor unions. Duringthe last several years, we have experienced strikes or other labor disruptionsthat have had an adverse impact on our operations and operating results. Wecannot assure you that in the future we will not experience strikes or otherlabor-related work stoppages that could have a material adverse effect on ourfinancial condition and results of operations.

 

Peru

 

Approximately 59% of our Peruvian labor force was unionized at December31, 2005, represented by nine separate unions. Collective bargaining agreementsare in effect with each of these unions. These agreements are in force through2007.

 

In Peru on August 31, 2004, unionized workers at our mining units inToquepala and Cuajone stopped work and asked for additional wage increasesbased on high metals prices. The strike ended after twelve days. The uniondemands included salary increases, benefits and different application ofcertain aspects of their labor agreements and it also expressed

 

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opposition to our acquisition of Minera México. The Peruvian laborministry declared the strike illegal and the workers returned to work butasserted their right to return to strike. In early 2005, the workers removedthe strike threat, indicating they would pursue their grievances through thelabor ministry. There were no labor strikes in 2005 or 2003.

 

Employees of the Toquepala and Cuajone units reside in town sites,where we have built 2,513 houses and apartments and 1,186 houses and apartmentsrespectively. In 1998, Company housing, at our Ilo unit, was sold to workers atnominal prices. We still hold 90 houses at Ilo for staff personnel. Housing,together with maintenance and utility services, is provided at minimal cost tomost of our employees. Our town site and housing complexes include schools,medical facilities, churches, social clubs, shopping, banking and otherservices.

 

Mexico

 

Approximately 76% of our Mexican labor force at December 31, 2005were members of the *Sindicato Nacional deTrabajadores Minera Metalúrgicos y Similares de la República Mexicana, A.C*.(the National Mine Workers Union, or the Union). Under Mexican law, the termsof employment for unionized workers is set forth in collective bargainingagreements. Mexican companies negotiate the salary provisions of collectivebargaining agreements with the labor unions annually and negotiate otherbenefits every two years. We conduct negotiations separately at each miningcomplex and each processing plant.

 

On October 26, 2005, the workers at our La Caridad mining complex wenton strike claiming that the Company still owed them profit sharing from 2003. Thestrike was declared illegal and the workers returned to work two days laterafter the Company agreed to pay each worker approximately $900.00. The totalpaid was $3.1 million.

 

On July 12, 2004, the workers of Mexicana de Cobre went on strike,asking for the review of certain contractual clauses; workers were satisfiedwith the review and returned to work 18 days later. On October 15, 2004, theworkers of Mexicana de Cananea went on strike, followed by the Mexicana deCobre workers. The strike lasted for 6 days at Mexicana de Cobre and 9 days atMexicana de Cananea. The strike was resolved by the acquisition by MineraMéxico of the 5% of the stock of Mexicana de Cananea and Mexicana de Cobre thatwas owned by the Union.

 

On January 20, 2003, approximately 1,117 members of the Union went onstrike at the Cananea mine in the state of Sonora, alleging a violation oftheir collective bargaining agreement. This strike was resolved on February 5,2003.

 

Employees of the Mexcobre and Cananea Units reside in town sites at LaCaridad and Cananea, where we have built approximately 2,000 houses andapartments and 275 houses and apartments, respectively. Employees of the ImmsaUnit principally reside on the grounds of the mining or processing complexes inwhich they work and where we have built approximately 900 houses and apartments.Housing, together with maintenance and utility services, is provided at minimalcost to most of our employees. Our town sites and housing complexes includeeducational and, in some units, medical facilities, churches, social clubs,shopping, banking and other services. At the Cananea Unit, health care isprovided free of charge to employees and retired unionized employees and theirfamilies.

 

FUEL, ELECTRICITY ANDWATER SUPPLIES

 

Aside from ore, the principal raw materials for our operations arefuels (including fuel oil to power boilers and generators, natural gas formetallurgical processes at our Mexican operations and diesel fuel for mining equipment),electricity and water. We believe that supplies of fuel, electricity and waterare readily available. Although the prices of these raw materials mayfluctuate, we have generally been able to offset all or a portion of ourincreased costs through cost and energy saving measures. However, during

 

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the period from 2003 through 2005 we have experienced increases inenergy prices that have surpassed levels we can effectively control throughcost savings.

 

Peru

 

In Peru, electric power for our operating facilities is generated bytwo thermal electric plants owned and operated by Energía del Sur, S.A. (“Enersur”),a diesel and waste heat boilers plant located adjacent to the Ilo smelter and acoal plant located south of Ilo. Power generation capacity for Peruvianoperations is currently 344 megawatts. In addition, we have 9 megawatts ofpower generation capacity from two small hydro-generating installations atCuajone. Power is distributed over a 224-kilometer closed loop transmissioncircuit. We obtain fuel in Peru principally from the Exxon Mobil Corporation.

 

In 1997, we sold our Ilo power plant to Enersur and entered into apower purchase agreement. We and Enersur also entered into an agreement for thesharing of certain services between the power plant and our smelter at Ilo. Thesearrangements were amended in 2003, and we made a one-time contractual paymentto Enersur of $4.0 million associated with the termination of the originalpower purchase agreement. We believe we can satisfy the need for increasedelectricity requirements for our Peru operations from other sources, includinglocal power providers.

 

In Peru, we have water concessions for well fields at Huaitire,Vizcachas and Titijones and surface water rights from the Suches lake, whichtogether are sufficient to supply the needs of our two operating mine sites atToquepala and Cuajone. At Ilo, we have desalinization plants that produce waterfor industrial and domestic use that we believe are sufficient for our currentand projected needs.

 

Mexico

 

In Mexico, fuel is purchased directly or indirectly from PetróleosMexicanos, (“PEMEX”), the state oil monopoly. Electricity for our Mexicanoperations, which is used as the main energy source at each mining complex weoperate, is either purchased from the *ComisiónFederal de Electricidad* (the Federal Electricity Commission, orCFE), the state electrical power producer, or steam-generated at Mexcobre’ssmelter by recovering energy from the flash furnace through a waste heat boiler.Accordingly, a significant portion of our operating costs in Mexico aredependent upon the pricing policies of Pemex and CFE, which reflect governmentpolicy as well as international market prices for crude oil, natural gas andconditions in the refinery markets. Mexcobre’s natural gas pipeline (betweenDouglas, Arizona and Nacozari, Sonora) that began operating in May 1999,permits us to import natural gas from the United States into Mexico at marketprices and thereby reduce operational costs. A contract with PEMEX, provides uswith the option of using a fixed price for a portion of our natural gaspurchases.

 

In December we announced our plans for a 450 Megawatt power generationplant in Mexico to supply our own facilities. We anticipate that the project,which is currently out for bids, will be built and managed by an independentpower company and our obligation will be the supply of coal from our reservesand an agreement to use the power output. We expect this plant will give us theability to better control the cost of our energy requirements, which are amajor element of our operating costs. The project is expected to be finished in2008, is expected to create nearly 900 permanent jobs, 3,000 jobs during theconstruction stage and will exceed Mexican and international environmentalstandards.

 

In Mexico, water is a national property and industries not connected toa public services water supply must obtain a water concession from *Comisión Nacional del Agua* (the “NationalWater Commission”, or “CNA”). Water usage fees are established in the *Ley Federal Derechos,* which distinguishesseveral availability zones with different fees per unit of volume according toeach zone. All of our operations have one or several water concessions and,with the exception of Mexicana de Cobre, pump out the required water from

 

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one or several wells. Mexicana de Cobre pumps water from the LaAngostura dam, which is close to the mine and plants. At our Cananea facility,we maintain our own wells and pay the CNA for water measured by usage. Waterconservation committees have been established in each plant in order toconserve and recycle water. Water usage fees are updated on a yearly basis andhave been increasing in recent years.

 

ENVIRONMENTAL MATTERS

 

For a discussion of environmental mattersreference is made to the information contained under the caption “Environmentalmatters” in “Note 13 Commitments and Contingencies” of the Consolidated CombinedFinancial Statements.

 

**MININGRIGHTS AND CONCESSIONS**

** **

Peru

 

We have 177,387 hectares in concessions from the Peruvian Governmentfor our exploration, exploitation, extraction and/or production operations,distributed among our various sites as follows:

 
| ** **  | ** ** | **Toquepala**  | ** ** | **Cuajone** | ** ** | **Ilo** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------|------------|----------------|------------|-------------|------------|---------|------------|-----------|------------|-----------|------------|
| ** **  | ** ** | **(hectares)** | ** ** |
| Plants      |       | 300            |       | 456         |       | 421     |       | —    |       | 1,177     |       |
| Operations  |       | 40,699         |       | 22,663      |       | 13,311  |       | —    |       | 76,673    |       |
| Exploration |       | —         |       | —      |       | —  |       | 99,537    |       | 99,537    |       |
| Total       |       | 40,999         |       | 23,119      |       | 13,732  |       | 99,537    |       | 177,387   |       |

 

We believe that our Peruvian concessions are in full force and effectunder applicable Peruvian laws and that we are in compliance with all materialterms and requirements applicable to these concessions. The concessions haveindefinite terms, subject to our payment of concession fees of up to $3.00 perhectare annually for the mining concessions and a fee based on nominal capacityfor the processing concessions. Fees paid during 2005, 2004 and 2003 wereapproximately $0.8, $1.1 and $1.0 million, respectively. We have two typesof mining concessions in Peru: metallic and non-metallic concessions. We alsohave water concessions for well fields at Huaitire, Titijones and Vizcachas andsurface water rights from the Suches Lake, which together are sufficient tosupply the needs of our Toquepala and Cuajone operating units.

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located. Under the newlaw, we are subject to a 1% to 3% tax, based on sales, applicable to the valueof the concentrates produced in our Toquepala and Cuajone mines. We madeprovisions of $40.3 million and $17.6 million in 2005 and 2004 respectively,for this new tax which went into effect as of June 25, 2004. These provisionsare included in cost of sales (exclusive of depreciation, amortization anddepletion) on the Consolidated Combined Statement of Earnings.

 

In a ruling, the Peruvian Constitutional Tribunal stated that theroyalty charge applies to all concessions held in the mining industry, implyingthat those entities with tax stability contracts are subject to this charge. In1996, we entered into a tax stability contract with the Peruvian government (a “Guarantyand Promotional Measures for Investment Contract”) relating to our own SX/EWproduction, which, among other things, fixes tax rates and other contributionsrelating to such production. We believe that the Constitutional Tribunal’sinterpretation relating to entities with tax stability contracts is incorrectand we intend to protest the imposition of the royalty charge on our SX/EWproduction, when and if assessed. Provision made by us for the royalty chargedoes not include approximately $5.9 million of additional potential liabilityrelating to our SX/EW production from June 30, 2004 through December 31, 2005.

 

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Mexico

 

In Mexico we have approximately 505,127 hectares in concessions fromthe Mexican Government for our exploration and exploitation activities asoutlined in the table below.

 
| ** **   | ** ** | **Underground  Mines** | ** ** | **La Caridad** | ** ** | **Cananea** | ** ** | **Projects** | ** ** | **Total** | ** ** |
|--------------|------------|------------------------|------------|----------------|------------|-------------|------------|--------------|------------|-----------|------------|
| ** **   | ** ** | **(hectares)**         | ** ** |
| Exploration  |       | 25,250                 |       | 91,084         |       | 5,492       |       | 173,541      |       | 295,367   |       |
| Exploitation |       | 29,835                 |       | 44,257         |       | 7,790       |       | 127,878      |       | 209,760   |       |
| Total        |       | 55,085                 |       | 135,341        |       | 13,282      |       | 301,419      |       | 505,127   |       |

 

We believe that our Mexican concessions are in full force and effectunder applicable Mexican laws and that we are in compliance with all materialterms and requirements applicable to these concessions. Under Mexican law,mineral resources belong to the Mexican nation and a concession from theMexican federal government is required to explore (exploration concession) ormine mineral reserves (exploitation concession). Exploration concessions have asix-year term, at the end of which they have to be changed to exploitationconcessions, which have a 50-year term that can be renewed for another50 years. Exploration concessions have holding fees of up to $3 per hectare.Holding fees for exploitation concessions can be up to $15 per hectare. Feespaid during 2005, 2004, and 2003 were approximately $2.1 million, $1.8 millionand $2.1 million, respectively. In addition, all of our operating units inMexico have water concessions that are in full force and effect. We generallyown the land to which our Mexican concessions relate, although ownership is notrequired in order to explore or mine a concession. We also own all of theprocessing facilities of our Mexican operations and the land on which they areconstructed.

 

REPUBLIC OF PERU AND MEXICO

 

All of our revenues are derived principally from our operations in Peruand Mexico. Risks attendant to the Company’s operations in both countriesinclude our operations in those countries associated with economic andpolitical conditions, effects of currency fluctuations and inflation, effectsof government regulations and the geographic concentration of the Company’soperations.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and current reports, proxy statements andother information with the U.S. Securities and Exchange Commission (“SEC”). Youmay read and copy any document we file at the SEC’s Public Reference Room at100 F Street, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 forinformation on the Public Reference Room. The SEC maintains a web-site thatcontains annual, quarterly and current reports, proxy statements and otherinformation that issuers (including Southern Copper Corporation) fileelectronically with the SEC. The SEC’s web-site is**www.sec.gov*.*

 

Our Internet address is www.southerncoppercorp.com. Commencing with theForm 8-K dated March 14, 2003, we have made available free of charge on thisinternet address our annual, quarterly and current reports, as soon asreasonably practical after we electronically file such material with, orfurnish it to, the SEC. Our web page includes the Corporate Governanceguidelines and the charters of its most important Board Committees. However,the information found on our website is not part of this or any other report.

 

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Item 1A. Risk Factors

 

Every investor or potential investor in SouthernCopper Corporation should carefully consider the following risk factors.

 

**Risks Relating to Our BusinessGenerally**

 

***Ourfinancial performance is highly dependent on the price of copper and the othermetals we produce.***

 

Our financial performance is significantly affected bythe market prices of the metals that we produce, particularly the market pricesof copper and molybdenum. Historically, prices of the metals we produce havebeen subject to wide fluctuations and are affected by numerous factors beyondour control, including international economic and political conditions, levelsof supply and demand, the availability and costs of substitutes, inventorylevels maintained by users, actions of participants in the commodities marketsand currency exchange rates. In addition, the market prices of copper andcertain other metals have on occasion been subject to rapid short-term changes.

 

In 2005, an approximately 29% increase in copperprices on the LME, and the COMEX, and a 95% increase in molybdenum prices,contributed to an increase of approximately 33% in our total sales in 2005 ascompared with 2004, this after an increase of approximately 96% in 2004. Whilethe price of copper dropped to a 15-year low of $0.61 per pound in 2001, it hassince increased by approximately 213.0% to $2.26 per pound as of February 28,2006. The price of molybdenum has also recently increased significantly and iscurrently at historically high levels. The average annual price of molybdenumover the five-year period ended December 31, 2005 was $11.54 per pound,with a price per pound as of February 28, 2006 of $22.25 per pound. Over thepast three years, as a result of this increase in molybdenum prices, molybdenumhas become a significant contributor to our sales.

 

We cannot predict whether metals prices will rise orfall in the future. A decline in metals prices and, in particular, copper ormolybdenum prices, could have an adverse impact on our results of operationsand financial condition, and we might, in very adverse market conditions,consider curtailing or modifying certain of our mining and processing operations.

 

***Changes inthe level of demand for our products could adversely affect our product sales.***

 

Our revenue is dependent on the level of industrialand consumer demand for the concentrates and refined and semi-refined metalproducts we sell. Changes in technology, industrial processes and consumerhabits may affect the level of that demand to the extent that changes increaseor decrease the need for our metal products. A change in demand could impactour results of operations and financial condition.

 

***Our actualreserves may not conform to our current estimates of our ore deposits.***

 

There is a degree of uncertainty attributable to thecalculation of reserves. Until reserves are actually mined and processed, thequantity of ore and grades must be considered as estimates only. The proven andprobable ore reserves data included in this report are estimates prepared by usbased on evaluation methods generally used in the mining industry. Independentengineers have not verified these reserves estimates. We may be required in thefuture to revise our reserves estimates based on our actual production. Wecannot assure you that our actual reserves conform to geological, metallurgicalor other expectations or that the estimated volume and grade of ore will be recovered.Market prices, increased production costs, reduced recovery rates, short-termoperating factors, royalty taxes and other factors may render proven andprobable reserves uneconomic to exploit and may result in revisions of reservesdata from time to time. Reserves data are not indicative of future results ofoperations. See “Ore Reserves”.

 

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***Our businessrequires capital expenditures which we may not be able to maintain.***

 

Our business is capital intensive. Specifically, theexploration and exploitation of copper and other metal reserves, mining,smelting and refining costs, the maintenance of machinery and equipment andcompliance with laws and regulations require capital expenditures. We mustcontinue to invest capital to maintain or to increase the amount of copperreserves that we exploit and the amount of copper and other metals we produce. Wecannot assure that we will be able to maintain our production levels togenerate sufficient cash, or that we have access to sufficient financing tocontinue our exploration, exploitation and refining activities at or abovepresent levels.

 

***The expectedbenefits of our recent acquisition of Minera México, including expectedsynergies, may not be realized.***

 

On April 1, 2005, we completed our acquisition ofMinera México from AMC, a subsidiary of Grupo México, our controllingstockholder. We are now in the process of integrating two companies thatpreviously had been affiliated but operated independently. We acquired MineraMéxico based on a number of factors, including trends we believe may favorconsolidation in the copper mining industry, potential improvement inproduction and our relative cost position, geographic diversification of ouroperations and potential operating synergies. We also considered potentialnegative effects in evaluating the transaction, including lower than expectedmineral production from Minera México, diversion of management’s attention andthe risk that potential operating synergies may not be realized. We cannotassure you that the benefits we expect from the acquisition will be achieved orthat potential negative effects will not be realized and adversely affect us.

 

***Restrictivecovenants in the agreements governing our indebtedness and the indebtedness ofour Minera México subsidiary may restrict our ability to pursue our businessstrategies.***

 

Our financing instruments and those of our MineraMéxico subsidiary include financial and other restrictive covenants that, amongother things, limit our and Minera Mexico’s abilities to incur additional debtand sell assets. If either we or our Minera México subsidiary do not complywith these obligations, we could be in default under the applicable agreementswhich, if not addressed or waived, could require repayment of the indebtednessimmediately. Our Minera México subsidiary is further limited by the terms ofits outstanding notes, which also restrict the Company’s applicable incurrenceof debt and liens. In addition, future credit facilities may containlimitations on its incurrence of additional debt and liens and on its abilityto dispose of assets. See “Management’s Discussion and of Financial Conditionand Results of Operations—Liquidity and Capital Resources—Financing.”

 

***Applicablelaw restricts the payment of dividends from our Minera México subsidiary to us.***

 

Minera México is a Mexican company and, as such, maypay dividends only out of net income that has been approved by the shareholders.Shareholders must also approve the actual dividend payment, after mandatorylegal reserves have been created and losses for prior fiscal years have beensatisfied. As a result, these legal constraints may limit the ability of ourMinera México subsidiary to pay dividends to us, which in turn, may have animpact on our ability to service debt.

 

***Ouroperations are subject to risks, some of which are not insurable.***

 

As shown by our recent tragic mining accident inMexico, the business of mining, smelting and refining copper, zinc and othermetals is subject to a number of risks and hazards, including industrialaccidents, labor disputes, unusual or unexpected geological conditions, changesin the regulatory environment, environmental hazards and weather and othernatural phenomena, such as earthquakes. Such occurrences could result

 

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in damage to, or destruction of, mining operationsresulting in monetary losses and possible legal liability. In particular,surface and underground mining and related processing activities presentinherent risks of injury to personnel and damage to equipment. We maintaininsurance against many of these and other risks, which may not provide adequatecoverage in certain circumstances. Insurance against certain risks, including certainliabilities for environmental pollution or hazards as a result of explorationand production, is not generally available to us or other companies within themining industry. We do not have, and do not intend to obtain, political riskinsurance. These or other uninsured events may adversely affect our financialcondition and results of operations.

 

***The loss ofone of our large customers could have a negative impact on our results ofoperations.***

 

The loss of one or more of our significant customerscould adversely affect our financial condition and results of operations. In2005, 2004 and 2003, our largest customer accounted for approximately 11.7%,10.7% and 6.7%, respectively, of our sales. Additionally, our five largestcustomers in each of 2005, 2004 and 2003 collectively accounted forapproximately 40.8%, 33.7% and 26.5%, respectively, of our sales.

 

***Deliveriesunder our copper sales agreements can be suspended or cancelled by ourcustomers in certain cases.***

 

Under each of our copper sales agreements, we or ourcustomers may suspend or cancel delivery of copper during a period of force majeure. Events of force majeure under theseagreements include acts of nature, labor strikes, fires, floods, wars,transportation delays, government actions or other events that are beyond thecontrol of the parties. Any suspension or cancellation by our customers ofdeliveries under our copper or other sales contracts that are not replaced bydeliveries under new contracts or sales on the spot market would reduce ourcash flow and could adversely affect our financial condition and results ofoperations.

 

***The coppermining industry is highly competitive.***

 

We face competition from other copper mining andproducing companies around the world. Although we are currently among thelowest cost copper producers in our region, we cannot assure you thatcompetition from lower cost producers will not adversely affect us in thefuture.

 

In addition, mines have limited lives and, as aresult, we must periodically seek to replace and expand our reserves byacquiring new properties. Significant competition exists to acquire propertiesproducing or capable of producing copper and other metals.

 

The mining industry has experienced significantconsolidation in recent years, including consolidation among some of our maincompetitors, as a result of which an increased percentage of copper productionis from companies that also produce other products and may, consequently, bemore diversified than we are. We cannot assure you that the result of currentor further consolidation in the industry will not adversely affect us.

 

Potential changes to international trade agreements,trade concessions or other political and economic arrangements may benefitcopper producers operating in countries other than Peru and Mexico, where ourmining operations are currently located. We cannot assure you that we will beable to compete on the basis of price or other factors with companies that inthe future may benefit from favorable trading or other arrangements.

 

***Increases inenergy costs, accounting policy changes and other matters may adversely affectour results of operations.***

 

We require substantial amounts of fuel oil,electricity and other resources for our operations. Fuel, gas and power costsconstitute approximately 43.4% of our production

 

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cost. We rely upon third parties for our supply of theenergy resources consumed in our operations. The prices for and availability ofenergy resources may be subject to change or curtailment, respectively, due to,among other things, new laws or regulations, imposition of new taxes ortariffs, interruptions in production by suppliers, worldwide price levels andmarket conditions. For example, during the 1970s and 1980s, our ability toimport fuel oil was restricted by Peruvian government policies that required usto purchase fuel oil domestically from a government-owned oil producer atprices substantially above those prevailing on the world market. In addition,in recent years the price of oil has risen dramatically due to a variety offactors. Disruptions in supply or increases in costs of energy resources couldhave a material adverse effect on our financial condition and results ofoperations.

 

We believe our results of operations can, from time totime, be affected by accounting policy changes, including the March 17,2005 Emerging Issues Task Force, or EITF, consensus ratified by the FinancialAccounting Standards Board, or FASB, on March 30, 2005 and the subsequentmodification to the transition provisions approved by the EITF in itsJune 15-16, 2005 meeting. The consensus states that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the cost of the inventory produced (extracted)during the period that the stripping costs are incurred. On January 1, 2006 theCompany adopted this consensus by reversing $499.5 million of net cumulativecapitalized stripping cost and capitalized leach inventory cost as of December31, 2005 and recording a net charge of $322.9 million to retained earningsafter the recognition of a workers participation and tax benefit of $176.6million. In addition, near-term future years operating income could benegatively impacted to the extent that costs previously capitalized areexpensed. For further discussions see “Notes to consolidated combined financialstatements – Impact of new accounting standards”.

 

A 2005 Mexican Supreme Court decision reduced ourresults by requiring increased workers’ profit sharing payments by our MineraMéxico subsidiary. In May 2005, the court rendered a decision that changedthe method of computing the amount of statutory workers’ profit-sharingrequired to be paid by certain Mexican companies, including Minera México. Thecourt’s ruling in effect prohibited applying net operating loss carryforwardsin computing the income used as the base for determining the workers’ profitsharing amounts, as further described under “Management’s Discussion and Analysis  of Financial Condition and Results ofOperations-Liquidity and Capital Resources-Other Liquidity Considerations”.

 

Additionally, we expect our future results willcontinue to be affected by the recently-enacted Peruvian mining royalty charge,which has reduced our earnings in the second half of 2004 and the year 2005, asfurther described under Business-Mining Rights and Concessions-Peru.

 

***We may beadversely affected by labor disputes.***

 

In the last several years we have experienced a numberof strikes or other labor disruptions that have had an adverse impact on ouroperations and operating results. See “Business-Employees.” For example, inPeru, on August 31, 2004, unionized workers at our mining units inToquepala and Cuajone initiated work stoppages and sought additional wageincreases based on high metals prices. The strike was resolved onSeptember 13, 2004. Additionally, in February 2006 construction workers atthe Ilo Smelter modernization project went on strike and blocked access to ourIlo production facilities. Our Ilo refinery and smelter production wasinterrupted for a short period before the matter was resolved. This disruptiondid not significantly affect our production.

 

In Mexico, on October 26, 2005 the workers at our LaCaridad mining complex went on strike claiming that the Company still owed themprofit sharing from 2003. The strike was declared illegal and the workersreturned to work two days later after the Company agreed to pay each workerapproximately $900.00. The total paid was $3.1 million. On July 12, 2004,the workers of Mexcobre went on strike asking for the review of certain

 

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contractual clauses. Such a review was performed andthe workers returned to work 18 days later. On October 15, 2004, theworkers of Mexcananea went on strike, followed by the Mexicana de Cobreworkers. The strike lasted for 6 days at Mexicana de Cobre and 9 daysat Mexicana de Cananea. In each case, our operations at the particular mineceased until the strike was resolved. In Mexico, collective bargainingagreements are negotiated every year in respect of salaries and every two yearsfor other benefits. We cannot assure you that we will not experience strikes orother labor-related work stoppages that could have a material adverse effect onour financial condition and results of operations.

 

***Environmental,health and safety laws and other regulations may increase our costs of doingbusiness, restrict our operations or result in operational delays.***

 

Our exploration, mining, milling, smelting andrefining activities are subject to a number of Peruvian and Mexican laws andregulations, including environmental laws and regulations, as well as certainindustry technical standards. Additional matters subject to regulation include,but are not limited to, concession fees, transportation, production, water useand discharge, power use and generation, use and storage of explosives, surfacerights, housing and other facilities for workers, reclamation, taxation, laborstandards, mine safety and occupational health.

 

Environmental regulations in Peru and Mexico havebecome increasingly stringent over the last decade and we have been required todedicate more time and money to compliance and remediation activities.Furthermore, Mexican authorities have become more rigorous and strict inenforcing Mexican environmental laws. We expect additional laws and regulationswill be enacted over time with respect to environmental matters. Recently,Peruvian environmental laws have been enacted imposing closure and remediationobligations on the mining industry. Our Mexican operations are also subject tothe environmental agreement entered into by Mexico, the United States andCanada in connection with the North American Free Trade Agreement. Thedevelopment of more stringent environmental protection programs in Peru andMexico and in relevant trade agreements could impose constraints and additionalcosts on our operations and require us to make significant capital expendituresin the future. We cannot assure you that future legislative, regulatory ortrade developments will not have an adverse effect on our business, properties,results of operations, financial condition or prospects.

 

***Our metalsexploration efforts are highly speculative in nature and may be unsuccessful.***

 

Metals exploration is highly speculative in nature,involves many risks and is frequently unsuccessful. Once mineralization isdiscovered, it may take a number of years from the initial phases of drillingbefore production is possible, during which time the economic feasibility ofproduction may change. Substantial expenditures are required to establishproven and probable ore reserves through drilling, to determine metallurgicalprocesses to extract the metals from the ore and, in the case of newproperties, to construct mining and processing facilities. We cannot assure youthat our exploration programs will result in the expansion or replacement ofcurrent production with new proven and probable ore reserves.

 

Development projects have no operating history uponwhich to base estimates of proven and probable ore reserves and estimates offuture cash operating costs. Estimates are, to a large extent, based upon theinterpretation of geological data obtained from drill holes and other samplingtechniques, and feasibility studies that derive estimates of cash operatingcosts based upon anticipated tonnage and grades of ore to be mined andprocessed, the configuration of the ore body, expected recovery rates of themineral from the ore, comparable facility and equipment operating costs,anticipated climatic conditions and other factors. As a result, actual cashoperating costs and economic returns based upon development of proven andprobable ore reserves may differ significantly from those originally estimated.Moreover, significant decreases in actual or expected prices may mean reserves,once found, will be uneconomical to produce.

 

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***Our profitsmay be negatively affected by currency exchange rate fluctuations.***

 

Our assets, earnings and cash flows are influenced byvarious currencies due to the geographic diversity of our sales and thecountries in which we operate. As some of our costs are incurred in currencies otherthan our functional currency, the U.S. dollar, fluctuations in currencyexchange rates may have a significant impact on our financial results. Thesecosts principally include electricity, labor, maintenance, operationcontractors and fuel. For the year ended December 31, 2005, a substantialportion of our costs were denominated in a currency other than U.S. dollar.Operating costs are influenced by the currencies of the countries where ourmines and processing plants are located and also by those currencies in whichthe costs of equipment and services are determined. The Peruvian nuevo sol, theMexican peso and the U.S. dollar are the most important currencies influencingcosts.

 

The U.S. dollar is our functional currency and ourrevenues are primarily denominated in U.S. dollars. However, portions of ouroperating costs are denominated in Peruvian nuevos soles and Mexican pesos. Accordingly,when inflation in Peru or Mexico increases without a corresponding devaluationof the nuevo sol or peso, our financial position, results of operations andcash flows could be adversely affected. To manage the volatility related to therisk of currency rate fluctuations, we may enter into forward exchangecontracts. We cannot assure you, however, that currency fluctuations will nothave an impact on our financial condition and results of operations.

 

Further, in the past there has been a strongcorrelation between copper prices and the exchange rate of the U.S. dollar. Astrengthening of the U.S. dollar may therefore be accompanied by lower copperprices, which would negatively affect our financial condition and results ofoperations.

 

***We may beadversely affected by challenges relating to slope stability.***

 

Our open-pit mines get deeper as we mine them,presenting certain geotechnical challenges including the possibility of slopefailure. If we are required to decrease pit slope angles or provide additionalroad access to prevent such a failure, our stated reserves could be negativelyaffected. Further, hydrological conditions relating to pit slopes, renewal ofmaterial displaced by slope failures and increased stripping requirements couldalso negatively affect our stated reserves. We have taken actions in order tomaintain slope stability, but we cannot assure you that we will not have totake additional action in the future or that our actions taken to date will besufficient. Unexpected failure or additional requirements to prevent slopefailure may negatively affect our results of operations and financial condition,as well as have the effect of diminishing our stated ore reserves.

 

***Litigationinvolving Asarco may adversely affect us.***

 

Our direct and indirect parent corporations, includingAMC and Grupo México, have from time to time been named parties in various litigationsinvolving ASARCO LLC (“Asarco”). Asarco, a mining company, is indirectly whollyowned by Grupo México. In March 2003, AMC purchased its interest in SCC fromAsarco. In August 2002 the U.S. Department of Justice brought a claim allegingfraudulent conveyance in connection with Asarco’s environmental liabilities andAMC’s then-proposed purchase of SCC from Asarco. That action was settledpursuant to a Consent Decree dated February 2, 2003. The consent decree isbinding solely on the U.S. government. In October 2004, AMC, Grupo México,Mexicana de Cobre and other parties, not including SCC, were named in a lawsuitfiled in New York State court in connection with alleged asbestos liabilities,which lawsuit claims, among other matters, that AMC’s purchase of SCC fromAsarco should be voided as a fraudulent conveyance. While Grupo México and itsaffiliates believe that these claims are without merit, we cannot assure youthat these or future claims, if successful, will not have an adverse effect onour parent corporations or us. Any increase in the financial obligations of ourparent corporations, as a result of matters related to Asarco or otherwisecould, among other matters result in our parent corporations attempting toobtain increased dividends or other funding from us. In

 

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2005, certain subsidiaries of Asarco filed bankruptcypetitions in connection with alleged asbestos liabilities. In July 2005,the unionized workers of Asarco commenced a work stoppage. The work stoppagewas settled in November 2005 with the extension of the existing contract for anadditional thirteen month period until December 31, 2006. A furtherdeterioration of the financial condition of Asarco could result in additionalclaims being filed against Grupo México and its subsidiaries, including SCC,Minera México or its subsidiaries. As a result of various factors, includingthe above mentioned work stoppage, in August 2005, Asarco LLC entered intobankruptcy proceedings under Chapter 11 of the U.S. Bankruptcy Code before theU.S. Bankruptcy Court of Corpus Christi, Texas. Asarco’s bankruptcy case isbeing joined with the bankruptcy cases of its subsidiaries. Asarco is incontinuing possession of its properties and is operating and managing itsbusinesses as a debtor in possession. Asarco believes that by utilizing theChapter 11 process it can achieve an orderly restructuring of its business andfinally resolve, among other contingencies, its environmental and asbestosclaims. However, it is impossible to predict how the bankruptcy court willultimately rule with respect to such petitions and the impact such rulings willhave on Asarco and its subsidiaries and ultimately upon us.

 

***We arecontrolled by Grupo México, which exercises significant influence over ouraffairs and policies and whose interests may be different from yours.***

 

Grupo México owns indirectly approximately 75.1% ofour capital stock. We own substantially all of Minera México’s capital stock. Inaddition, certain of our and Minera México’s officers and directors are alsoofficers of Grupo México. We cannot assure you that the interests of GrupoMéxico will not conflict with yours.

 

Grupo México has the ability to determine the outcomeof substantially all matters submitted for a vote to our stockholders and thusexercises control over our business policies and affairs, including thefollowing:

 

•                  the compositionof our board of directors and, as a result, any determinations of our boardwith respect to our business direction and policy, including the appointmentand removal of our officers;

•                  determinationswith respect to mergers and other business combinations, including those thatmay result in a change of control;

•                  whetherdividends are paid or other distributions are made and the amount of anydividends or other distributions;

•                  sales anddispositions of our assets; and

•                  the amount ofdebt financing that we incur.

 

In addition, we and Minera México have in the pastengaged in, and expect to continue to engage in, transactions with Grupo Méxicoand its other affiliates that may present conflicts of interest. For additionalinformation regarding the share ownership of, and our relationships with, GrupoMéxico and its affiliates, see “Related Party Transactions.”

 

***We may pay asignificant amount of our net income as cash dividends on our common stock inthe future.***

 

We have distributed a significant amount of our netincome as dividends since 1996. Our dividend practice is subject to change atthe discretion of our board of directors at any time. The amount that we pay individends is subject to a number of factors, including our results ofoperations, financial condition, cash requirements, tax considerations, futureprospects, legal restrictions, contractual restrictions in credit agreements,limitations imposed by the government of Peru, Mexico or other countries wherewe have significant operations and other factors that our board of directorsmay deem relevant. We anticipate paying a significant amount of our net incomeas cash dividends on our common stock in the foreseeable future. Such paymentswould reduce cash available to meet our debt service obligations.

 

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**Risks Associated with DoingBusiness in Peru and Mexico**

 

***There isuncertainty as to the termination and renewal of our mining concessions.***

 

Under the laws of Peru and Mexico, mineral resourcesbelong to the state and government concessions are required in both countriesto explore for or exploit mineral reserves. In Peru, our mineral rights derivefrom concessions from the Peruvian Ministry of Energy and Mines for ourexploration, exploitation, extraction and/or production operations. In June2004, the Peruvian Congress enacted legislation imposing a royalty to be paidby mining companies in favor of the regional governments and communities wheremining resources are located. Under the new law, we are subject to a 1% to 3%tax, based on sales, applicable to the value of the concentrates produced inour Toquepala and Cuajone mines. See “Business—Mining Rights andConcessions—Peru.”  In Mexico, ourmineral rights derive from concessions granted, on a discretionary basis, bythe *Secretaría de Economía*(Ministry of Economy), pursuant to the *LeyMinera* (the Mining Law) and regulations thereunder.

 

Mining concessions in both Peru and Mexico may beterminated if the obligations of the concessionaire are not satisfied. In Peru,we are obligated to pay certain fees for our mining concession. In Mexico, weare obligated, among other things, to explore or exploit the relevantconcession, to pay any relevant fees, to comply with all environmental andsafety standards, to provide information to the Ministry of Economy and toallow inspections by the Ministry of Economy. Any termination or unfavorablemodification of the terms of one or more of our concessions, or failure toobtain renewals of such concessions subject to renewal or extensions, couldhave a material adverse effect on our financial condition and prospects.

 

***Peruvianeconomic and political conditions may have an adverse impact on our business.***

 

A significant part of our operations are conducted inPeru. Accordingly, our business, financial condition or results of operationscould be affected by changes in economic or other policies of the Peruviangovernment or other political, regulatory or economic developments in Peru. Duringthe past several decades, Peru has had a history of political instability thathas included military coups and a succession of regimes with differing policiesand programs. Past governments have frequently intervened in the nation’seconomy and social structure. Among other actions, past governments haveimposed controls on prices, exchange rates and local and foreign investment aswell as limitations on imports, have restricted the ability of companies todismiss employees, have expropriated private sector assets (including miningcompanies) and have prohibited the remittance of profits to foreign investors.

 

From 1985 through 1990, during the Alan Garcíaadministration, government policies restricted our ability, among other things,to repatriate funds and import products from abroad. In addition, currencyexchange rates were strictly controlled and all exports sales were required tobe deposited in Peru’s *Banco Central deReserva*, where they were exchanged from U.S. dollars to the Peruviancurrency at less-than-favorable rates of exchange. These policies generally hadan adverse effect on our results of operations. Controls on repatriation of fundslimited the ability of our stockholders to receive dividends outside of Perubut did not limit the ability of our stockholders to receive distributions ofearnings in Peru.

 

In July 1990, Alberto Fujimori was elected president,and his administration implemented a broad-based reform of Peru’s economic andsocial conditions aimed at stabilizing the economy, restructuring the nationalgovernment by reducing bureaucracy, privatizing state-owned companies,promoting private investment, developing and strengthening free markets andenacting programs for the strengthening of basic services related to education,health, housing and infrastructure. After taking office for his third term inJuly 2000 under extreme protest, President Fujimori was forced to call forgeneral elections due to the outbreak of corruption scandals, and laterresigned in favor of a transitory government headed by the president ofCongress, Valentín Paniagua.

 

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Mr. Paniagua tookoffice in November 2000 and in July 2001 handed over the presidencyto Alejandro Toledo, the winner of the elections decided in the second roundheld on June 3, 2001, ending two years of political turmoil.  Since his election, President Toledo hasretained, for the most part, the economic policies of the previous government,focusing on promoting private investment, eliminating tax exemptions, reducingunderemployment and unemployment and privatizing state-owned companies invarious sectors including energy, mining and public services.  President Toledo also implemented fiscalausterity programs, among other proposals, in order to stimulate theeconomy.  Despite Peru’s moderateeconomic growth, the Toledo administration has at times faced public unrestspurred by the high rates of unemployment, underemployment and poverty.  President Toledo has been forced torestructure his cabinet on several occasions to quell public unrest and tomaintain his political alliances.

 

Given that the Toledo administrationcontinues to face a fragmented Congress and continuing public unrest, we cannotassure you that the government will continue its current economic policies orthat Peru’s recent economic growth will be sustained.  In addition, presidential elections areexpected to be held in Peru in the second quarter of 2006, which may mean achange in Peru’s economic policies. Because we have significant operations in Peru, future Peruviangovernmental actions could have an adverse effect on market conditions, pricesand returns on our securities, and on our business, results of operations,financial condition, ability to obtain financing and prospects.

 

There is a risk of terrorismin Peru relating to *Sendero Luminoso*and the *Movimiento Revolucionario TupacAmaru*, which were particularly active in the 1980s and early1990s.  We cannot guarantee that acts bythese or other terrorist organizations will not adversely affect our operationsin the future.

 

***Mexican economic and political conditions may have an adverse impact onour business.***

 

A significant part of ouroperations are based in Mexico. In the past, Mexico has experienced bothprolonged periods of weak economic conditions and dramatic deterioration ineconomic conditions, characterized by exchange rate instability and significantdevaluation of the peso, increased inflation, high domestic interest rates, asubstantial outflow of capital, negative economic growth, reduced consumerpurchasing power and high unemployment. An economic crisis occurred in 1995 in the context of a series ofinternal disruptions and political events including a large current accountdeficit, civil unrest in the southern state of Chiapas, the assassination oftwo prominent political figures, a substantial outflow of capital and asignificant devaluation of the peso.  Wecannot assure you that such conditions will not recur, that other unforeseennegative political or social conditions will not arise or that such conditionswill not have a material adverse effect on our financial condition and resultsof operations.

 

On July 2, 2000,Vicente Fox of the *Partido Acción Nacional*(the National Action Party), or PAN, was elected president.  Although his election ended more than 70years of presidential rule by the *PartidoRevolucionario Institucional* (the Institutional RevolutionaryParty), or PRI, neither the PAN nor the PRI succeeded in securing a majority inthe Mexican congress.  In elections in2003 and 2004, the PAN lost additional seats in the Mexican Congress and stategovernorships.  The lack of a majorityparty in the legislature and the lack of alignment between the legislature andthe executive branch have resulted in legislative gridlock, which is expectedto continue at least until the Mexican presidential elections in 2006.  Such legislative gridlock has impeded theprogress of structural reforms in Mexico, which may have a material adverseeffect on the Mexican economy and cause disruptions to our operations.  Furthermore, economic plans of the Mexicangovernment in the past have not, in certain respects, fully achieved theirobjectives, and we cannot assure you that any reforms that are undertaken willachieve their stated goals.  Because wehave significant operations in Mexico, we cannot provide any assurance thatcurrent legislative gridlock and/or future political developments in Mexico,including the 2006 presidential and 

 

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congressional elections,will not have a material adverse effect on market conditions, prices andreturns on our securities, our ability to obtain financing, and our results ofoperations and financial condition.

 

***Peruvian inflation, reduced economic growth and fluctuations in thenuevo sol exchange rate may adversely affect our financial condition andresults of operations.***

 

Over the past severaldecades, Peru has experienced periods of high inflation, slow or negativeeconomic growth and substantial currency devaluation.  The inflation rate in Peru, as measured bythe *Indice de Precios al Consumidor*and published by the *Instituto Nacional deEstadística e Informática*, the National Institute of Statistics, hasfallen from a high of 7,649.7% in 1990 to 1.5% in 2005.  The Peruvian currency has been devaluednumerous times during the last 20 years. The devaluation rate has decreased from a high of 4,019.3% in 1990 to4.5% in 2005.  Our revenues are primarilydenominated in U.S. dollars and our operating expenses are partly denominatedin U.S. dollars. If inflation in Peru were to increase without a correspondingdevaluation of the nuevo sol relative to the U.S. dollar, our financialposition and results of operations, and the market price of our common stock,could be affected.  Although the Peruviangovernment’s stabilization plan has significantly reduced inflation and thePeruvian economy has experienced moderate growth in recent years, we cannotassure you that inflation will not increase from its current level or that suchgrowth will continue in the future at similar rates or at all.

 

Among the economiccircumstances that could lead to a devaluation of the nuevo sol is the declineof Peruvian foreign reserves to inadequate levels.  Peru’s foreign reserves at February 28,2006, were $14.0 billion as compared to $12.6 billion at December 31,2004.  We cannot assure you that Peruwill be able to maintain adequate foreign reserves to meet its foreign currencydenominated obligations or that Peru will not devalue its currency should itsforeign reserves decline.

 

***Mexican inflation, restrictive exchange control policies andfluctuations in the peso exchange rate may adversely affect our financialcondition and results of operations.***

 

Although all of our Mexicanoperations’ sales of metals are priced and invoiced in U.S. dollars, asubstantial portion of our Mexican operations’ cost of sales are denominated inpesos.  Accordingly, when inflation inMexico increases without a corresponding devaluation of the peso, as it did in2000, 2001 and 2002, the net income generated by our Mexican operations isadversely affected.

 

The annual inflation rate inMexico was 3.3% in 2005, 5.2% in 2004 and 4.0% in 2003.  The Mexican government has publicly announcedthat it does not expect inflation to exceed 3.0% in 2006.  At the same time, the peso has been subjectin the past to significant devaluation, which may not have been proportionateto the inflation rate and may not be proportionate to the inflation rate in thefuture.  The value of the peso declinedby 4.9% in 2005 and increased by 0.3% in 2004 and 9.0% in 2003.

 

While the Mexican governmentdoes not currently restrict the ability of Mexican companies or individuals toconvert pesos into dollars or other currencies, in the future, the Mexicangovernment could impose a restrictive exchange control policy, as it has donein the past.  We cannot assure you thatthe Mexican government will maintain its current policies with regard to thepeso or that the peso’s value will not fluctuate significantly in thefuture.  The imposition of such exchangecontrol policies could impair Minera México’s ability to obtain imported goodsand to meet its U.S. dollar-denominated obligations and could have an adverseeffect on our business and financial condition.

 

***Developments in other emerging market countries and in the UnitedStates may adversely affect the prices of our common stock and our debtsecurities*****.**

 

The market value ofsecurities of companies with significant operations in Peru and Mexico is, tovarying degrees, affected by economic and market conditions in other 

 

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emerging marketcountries.  Although economic conditionsin such countries may differ significantly from economic conditions in Peru orMexico, as the case may be, investors’ reactions to developments in any of theseother countries may have an adverse effect on the market value or trading priceof the securities, including debt securities, of issuers that have significantoperations in Peru or Mexico.

 

In addition, in recent yearseconomic conditions in Mexico have increasingly become correlated to U.S.economic conditions.  Therefore, adverseeconomic conditions in the United States could also have a significant adverseeffect on Mexican economic conditions including the price of our debtsecurities.  We cannot assure you thatthe market value or trading prices of our common stock and debt securities,will not be adversely affected by events in the United States or elsewhere,including in emerging market countries.

 

Item 2. Properties

 

We wereincorporated in Delaware in 1952.  Ourcorporate offices in the United States are located at 11811 North Tatum Blvd. Suite 2500,Phoenix, Arizona 85028.  Our telephonenumber in Phoenix, Arizona is (602) 977-6595. Our corporate offices in Mexico are located in Mexico City and ourcorporate offices in Peru are located in Lima. Our website is www.southerncoppercorp.com  We believe that our existing properties arein good condition and suitable for the conduct of its business.

 

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***The following table sets forth asof December 31, 2005, the locations of production facilities by reportablesegment, the processes used, as well as the key production and capacity datafor each location:***

*** ***
| ***Facility Name***                   | *** *** | ***Location***         | *** *** | ***Process***                                                                                      | *** *** | ***Nominal***Capacity (1)             | *** *** | ***2005***Production | *** *** | ***2005  Capacity  Utilization*** | *** *** |
|---------------------------------------|--------------|------------------------|--------------|----------------------------------------------------------------------------------------------------|--------------|---------------------------------------|--------------|----------------------|--------------|-----------------------------------|--------------|
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***PERUVIAN  OPEN PIT UNIT***         | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Mining  Operations***              | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Cuajone***Open-pit Mine            | *** *** | ***Cuajone (Peru)***   | *** *** | ***Copper ore milling and recovery, copper and molybdenum concentrate  production***               | *** *** | ***87.0 ktpd - Milling***             | *** *** | ***81.9 ktpd***      | *** *** | ***94.1***                        | ***%***      |
| ***Toquepala***Open-pit Mine          | *** *** | ***Toquepala (Peru)*** | *** *** | ***Copper ore milling and recovery, copper and molybdenum concentrate  production***               | *** *** | ***60.0 ktpd - Milling***             | *** *** | ***59.5 ktpd***      | *** *** | ***99.1***                        | ***%***      |
| ***Toquepala SX-EW Plant***           | *** *** | ***Toquepala (Peru)*** | *** *** | ***Leaching, solvent extraction and cathode electro winning***                                     | *** *** | ***56.0 ktpy - Refined***             | *** *** | ***36.5 ktpy***      | *** *** | ***65.2***                        | ***%***      |
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Processing  Operations***          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Ilo Copper Smelter***              | *** *** | ***Ilo (Peru)***       | *** *** | ***Copper smelting, blister production***                                                          | *** *** | ***1,131.5 ktpy - Concentrate feed*** | *** *** | ***1,206.3 ktpy***   | *** *** | ***106.6***                       | ***%***      |
| ***Ilo Copper Refinery***             | *** *** | ***Ilo (Peru)***       | *** *** | ***Copper refining***                                                                              | *** *** | ***280 ktpy - Refined cathodes***     | *** *** | ***285.2 ktpy***     | *** *** | ***101.9***                       | ***%***      |
| ***Ilo Acid Plant***                  | *** *** | ***Ilo (Peru)***       | *** *** | ***Sulfuric Acid***                                                                                | *** *** | ***300 ktpy - Sulfuric acid***        | *** *** | ***369.7 ktpy***     | *** *** | ***123.2***                       | ***%***      |
| ***Ilo Precious Metals Refinery***    | *** *** | ***Ilo (Peru)***       | *** *** | ***Slime recovery & processing, gold & silver refining***                        | *** *** | ***365 tpy***                         | *** *** | ***311.4 tpy***      | *** *** | ***85.3***                        | ***%***      |
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***MEXICAN  OPEN PIT UNIT***          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Cananea***Open-Pit Mine            | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper Ore milling & recovery, copper concentrate production***                        | *** *** | ***76.7 ktpd - Milling***             | *** *** | ***70.2 ktpd***      | *** *** | ***91.5***                        | ***%***      |
| ***Cananea SX-EW I, II Plants*** | *** *** | ***Sonora (Mexico)***  | *** *** | ***Leaching, solvent extraction & refined cathode  electrowinning***                      | *** *** | ***54.8 ktpy (combined)***            | *** *** | ***56.4ktpy***       | *** *** | ***103.0***                       | ***%***      |
| ***La Caridad Open-Pit Mine***        | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper ore milling & recovery, copper & molybdenum  concentrate production*** | *** *** | ***90.0 ktpd - Milling***             | *** *** | ***87.0 ktpd***      | *** *** | ***96.7***                        | ***%***      |
| ***La Caridad SX-EW Plant***          | *** *** | ***Sonora (Mexico)***  | *** *** | ***Leaching, solvent extraction & cathode electro winning***                              | *** *** | ***21.9 ktpy - Refined***             | *** *** | ***22.0 ktpy***      | *** *** | ***100.5***                       | ***%***      |
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***Processing  Operations***          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                          | *** *** | *** ***         | *** *** | *** ***                      | *** *** |
| ***La Caridad Copper Smelter***       | *** *** | ***Sonora (Mexico)***  | *** *** | ***Concentrate smelting, anode production***                                                       | *** *** | ***1,000 ktpy - Concentrate feed***   | *** *** | ***894.7 ktpy***     | *** *** | ***89.5***                        | ***%***      |
| ***La Caridad Copper Refinery***      | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper refining***                                                                              | *** *** | ***300 ktpy Copper cathode***         | *** *** | ***233.7 ktpy***     | *** *** | ***77.9***                        | ***%***      |
| ***La Caridad Copper Rod Plant***     | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper rod production***                                                                        | *** *** | ***150 ktpy Copper rod***             | *** *** | ***113.2 ktpy***     | *** *** | ***75.4***                        | ***%***      |

 

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| ***La Caridad Precious Metals  Refinery***          | *** *** | ***Sonora (Mexico)***          | *** *** | ***Slime recovery & processing, gold & silver refining***                            | *** *** | ***2.8 ktpy - Slime***             | *** *** | ***0.7 ktpy***    | *** *** | ***26.6***   | ***%***      |
|-----------------------------------------------------|--------------|--------------------------------|--------------|--------------------------------------------------------------------------------------------------------|--------------|------------------------------------|--------------|-------------------|--------------|--------------|--------------|
| ***La Caridad Sulfuric Acid Plant***                | *** *** | ***Sonora (Mexico)***          | *** *** | ***Sulfuric acid***                                                                                    | *** *** | ***1,565.5 ktpy - Sulfuric acid*** | *** *** | ***833.4 ktpy***  | *** *** | ***53.2***   | ***%***      |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***IMMSA  UNIT***                                   | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***Underground Mines***                             | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***Charcas***                                       | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Copper, zinc, lead milling, recovery & concentrate  production***                          | *** *** | ***4.0 ktpd - Milled ore***        | *** *** | ***3.6 ktpd***    | *** *** | ***91.0***   | ***%***      |
| ***San Martin***                                    | *** *** | ***Zacatecas (Mexico)***       | *** *** | ***Lead, zinc, copper & silver mining, milling  recovery & concentrate production*** | *** *** | ***4.4 ktpd Milled ore***          | *** *** | ***3.4 ktpd***    | *** *** | ***76.7***   | ***%***      |
| ***Santa Barbara***                                 | *** *** | ***Chihuahua (Mexico)***       | *** *** | ***Lead, copper and zinc mining & concentrates production***                                  | *** *** | ***6.0 ktpd Milled ore***          | *** *** | ***4.1 ktpd***    | *** *** | ***67.9***   | ***%***      |
| ***Santa Eulalia***                                 | *** *** | ***Chihuahua (Mexico)***       | *** *** | ***Lead & zinc mining and milling recovery &  concentrate production***              | *** *** | ***1.5 ktpd Milled ore***          | *** *** | ***0.6 ktpd***    | *** *** | ***38.3***   | ***%***      |
| ***Taxco***                                         | *** *** | ***Guerrero (Mexico)***        | *** *** | ***Lead, zinc silver & gold mining recovery &  concentrate production***             | *** *** | ***2.0 ktpd Milled ore***          | *** *** | ***1.0 ktpd***    | *** *** | ***49.7***   | ***%***      |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***Nueva Rosita Coal &  Coke Complex***(2) | *** *** | ***Coahuila (Mexico)***        | *** *** | ***Clean coal production***                                                                            | *** *** | ***900 ktpy clean coal***          | *** *** | ***181 ktpy***    | *** *** | ***20.1***   | ***%***      |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***Processing  Operations***                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                       | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***San Luis Potosi Copper Smelter***                | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Concentrate smelting, blister production***                                                         | *** *** | ***230 ktpy Concentrate feed***    | *** *** | ***103.1 ktpy***  | *** *** | ***44.8***   | ***%***      |
| ***San Luis Potosi Zinc Refinery***                 | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Zinc concentrates refining***                                                                       | *** *** | ***105 ktpy Zinc cathode***        | *** *** | ***101.5% ktpy*** | *** *** | ***96.7***   | ***%***      |
| ***San Luis Potosi Sulfuric Acid Plant***           | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Sulfuric acid***                                                                                    | *** *** | ***180.0 ktpy Sulfuric acid***     | *** *** | ***176.3 ktpy***  | *** *** | ***97.9***   | ***%***      |

 

----

Key:  

koz =  thousands of ounces

ktpd = thousands of tonsper day

ktpy = thousands of tonsper year

tpy  = tons per year

 

(1)    Our estimates of actualcapacity contemplating normal operating conditions with allowance for normaldowntime for repairs and maintenance and based on the average metal content forthe relevant period.

(2)    At December 31,2005, the coal reserves for the Nueva Rosita coal were 66,981,498 tons withaverage sulfur content of 1.0% and a BTU content of 8800 per pound.

 

SUMMARY OPERATING DATA

 

The following table sets out certain operating data underlying ourcombined financial and operating information for each of the periods indicated.

 

54

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| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| **COPPER**  (thousand pounds):     |       |                             |       |   |   |   |   |
| **Mined**                          |       |                             |       |   |   |   |   |
| **Peru open pit**                  |       |                             |       |   |   |   |   |
| Toquepala                          |       | 347,130                          |       | 354,618 |   | 313,878 |   |
| Cuajone                            |       | 360,805                          |       | 428,553 |   | 406,814 |   |
| SX–EW Toquepala               |       | 80,464                           |       | 92,869 |   | 105,283 |   |
|                               |       |                             |       |   |   |   |   |
| **Mexico open pit**                |       |                             |       |   |   |   |   |
| La Caridad                         |       | 269,662                          |       | 243,358 |   | 236,414 |   |
| Cananea                            |       | 261,778                          |       | 271,670 |   | 207,461 |   |
| SX–EW La Caridad              |       | 48,603                           |       | 48,005 |   | 47,334 |   |
| SX–EW Cananea                 |       | 124,359                          |       | 110,671 |   | 109,169 |   |
| **IMMSA Unit**                     |       | 28,228                           |       | 33,186 |   | 41,738 |   |
| **Total Mined**                    | ** ** | **1,521,029**                    | ** ** | **1,582,930** | ** ** | **1,468,091** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **Smelted**                        |       |                             |       |   |   |   |   |
| Blister Ilo                        |       | 713,200                          |       | 702,646 |   | 689,513 |   |
| Anodes La Caridad                  |       | 617,953                          |       | 548,763 |   | 435,168 |   |
| Blister IMMSA                      |       | 46,998                           |       | 49,970 |   | 51,914 |   |
| **Total Smelted**                  | ** ** | **1,378,151**                    | ** ** | **1,301,379** | ** ** | **1,176,595** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **Refined**                        |       |                             |       |   |   |   |   |
| **Peru Open Pit**                  |       |                             |       |   |   |   |   |
| Cathodes Ilo                       |       | 628,769                          |       | 618,790 |   | 626,126 |   |
| SX–EW Toquepala               |       | 80,464                           |       | 92,869 |   | 105,283 |   |
|                               |       |                             |       |   |   |   |   |
| **Mexico Open Pit**                |       |                             |       |   |   |   |   |
| Cathodes La Caridad                |       | 515,179                          |       | 445,649 |   | 361,480 |   |
| SX–EW La Caridad              |       | 48,603                           |       | 48,005 |   | 47,334 |   |
| SX–EW Cananea                 |       | 124,359                          |       | 110,671 |   | 109,169 |   |
| **Total Refined**                  | ** ** | **1,397,374**                    | ** ** | **1,315,984** | ** ** | **1,249,392** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **Rod Mexico Open Pit**            |       |                             |       |   |   |   |   |
| La Caridad                         |       | 249,485                          |       | 153,282 |   | 118,654 |   |
| **Total Rod**                      | ** ** | **249,485**                      | ** ** | **153,282** | ** ** | **118,654** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **SILVER**  (thousand ounces)      |       |                             |       |   |   |   |   |
| **Mined**                          |       |                             |       |   |   |   |   |
| **Peru Open Pit**                  |       |                             |       |   |   |   |   |
| Toquepala                          |       | 2,230                            |       | 2,048 |   | 1,822 |   |
| Cuajone                            |       | 2,261                            |       | 2,712 |   | 2,490 |   |
|                               |       |                             |       |   |   |   |   |
| **Mexico Open Pit**                |       |                             |       |   |   |   |   |
| La Caridad                         |       | 2,123                            |       | 1,777 |   | 1,846 |   |
| Cananea                            |       | 1,698                            |       | 1,523 |   | 1,075 |   |
| **IMMSA Unit**                     |       | 10,183                           |       | 10,470 |   | 10,770 |   |
| **Total Mined**                    | ** ** | **18,495**                       | ** ** | **18,530** | ** ** | **18,003** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **Refined**                        |       |                             |       |   |   |   |   |
| Peru Open Pit – Ilo           |       | 3,533                            |       | 3,823 |   | 3,599 |   |
| Mexico Open  Pit – La Caridad |       | 4,583                            |       | 2,923 |   | 4,376 |   |
| IMMSA Unit                         |       | 4,371                            |       | 4,050 |   | 4,171 |   |
| **Total Refined**                  | ** ** | **12,487**                       | ** ** | **10,796** | ** ** | **12,146** | ** ** |
|                               |       |                             |       |   |   |   |   |
| **MOLYBDENUM**  (thousand pounds)  |       |                             |       |   |   |   |   |
| **Mined**                          |       |                             |       |   |   |   |   |
| Toquepala                          |       | 11,737                           |       | 13,236 |   | 9,156 |   |
| Cuajone                            |       | 11,638                           |       | 10,267 |   | 10,730 |   |
| La Caridad                         |       | 9,260                            |       | 8,184 |   | 8,184 |   |
| **Total Mined**                    | ** ** | **32,635**                       | ** ** | **31,687** | ** ** | **28,070** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **ZINC** (thousand  pounds)        |       |                             |       |   |   |   |   |
| Mined IMMSA                        |       | 316,603                          |       | 294,930 |   | 283,867 |   |
| Refined IMMSA                      |       | 223,820                          |       | 226,097 |   | 222,819 |   |

 

55

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| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| **Average Market Prices**               | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Copper price ($ per pound - LME)   |       | $                                | 1.67       |   | $ | 1.30 |   | $ | 0.81 |   |
| Copper price ($ per pound - COMEX) |       | $                                | 1.68       |   | $ | 1.29 |   | $ | 0.81 |   |
| Molybdenum price ($ per pound) (1) |       | $                                | 31.05      |   | $ | 15.95 |   | $ | 5.21 |   |
| Zinc price ($ per pound - LME)     |       | $                                | 0.63       |   | $ | 0.48 |   | $ | 0.38 |   |
| Silver price ($ per ounce - COMEX) |       | $                                | 7.32       |   | $ | 6.68 |   | $ | 4.89 |   |

 

----

(1)   Platt’sMetals Week Dealer Oxide

 

ORE RESERVES:

 

Ore reserves are those estimated quantities of proven and probablematerial that may be economically mined and processed for extraction of theirmineral content. “Proven” (measured) reserves are reserves for which (a) quantityis computed from dimensions revealed in outcrops, trenches, workings or drillholes; (b)grade and/or quality are computed from the results of detailedsamplings; and (c) the sites for inspection, sampling and measurement arespaced so closely and the geologic character is so well defined that size,shape, depth and mineral content of reserves are well-established.  “Probable” (indicated) reserves are reservesfor which quantity and grade and/or quality are computed from informationsimilar to that used for proven (measure) reserves, but the sites forinspection, sampling, and measurement are farther apart or are otherwise lessadequately spaced. The degree of assurance, although lower than that for proven(measured) reserves, is high enough to assume continuity between points ofobservation.

 

“Mineralized material,” on the other hand, is a mineralized body thathas been delineated by appropriately spaced drilling and/or undergroundsampling to support the reported tonnage and average grade of metal(s). Such adeposit does not qualify as a reserve until legal and economic feasibility areconcluded based upon a comprehensive evaluation of unit costs, grade,recoveries and other material factors.

 

Our proven and probable ore reserve estimates are based on engineeringevaluations of assay values derived from the sampling of drill holes and otheropenings.  We believe that the samplingstaken are spaced at intervals close enough to render the estimatesreliable.  The ore reserves estimatesinclude assessments of the metallurgy to determine copper recovery by flotationprocess and column leaching, as well as economic, marketing, legal,environmental, governmental, and other necessary considerations.

 

Our Peruvian operations,including the Toquepala and Cuajone reserves, are classified into proven(measured), probable (indicated) and possible (inferred) categories based on aRCB Index (Relative Confidence Bound Index) that measures our level of geologicknowledge and confidence in each block. The RCB index is a measure of relative confidence in the block gradeestimate. This approach combines the local variability of the composites usedto krig a block with the Kriging variance and incorporates the use ofconfidence intervals in measuring uncertainty of the block estimates relativeto each other. The final resource classification is then based on thedistribution of these RCB values for blocks above 0.05% Cu. It is thedistribution that is used to find the breaks between proven/probable andprobable/possible.

 

Our Mexican operations,including the Cananea and La Caridad reserves, are calculated 

 

56

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using a mathematicalblock model and applying the Mine-Sight software system. The estimated gradesper block are classified as proven and probable.  These grades are calculated applying athree-dimensional interpolation procedure and the inverse distancesquared.  Likewise, the quadrant methodor spherical search is implemented in order to limit the number of compositesthat will affect the block’s interpolated value.  The composites data is derived from thegeological exploration of the ore body. In order to classify the individual blocks in the model, a thoroughgeostatistical variogram analysis is conducted, taking under consideration theprincipal characteristics of the deposit. Based from this block modelclassification, and with the implementation of the Lerch-Grossman algorithm,and the Mine-Sight Pit Optimizer procedure, mineable reserves aredetermined.  The calculated proven andprobable reserves include those blocks that result economically feasible tomine by open pit method within a particular mine design.

 

For the IMMSA Unit, thebasis for reserve estimations are sampling of mining operations and drillingexploration, geographical and topographic surveys, tracking down all theforegoing in the corresponding maps, measurement, calculations andinterpretation based on the maps and reports from the mines, the mills and/orsmelters.  Mineral reserves are mineralstock which is estimated for extraction, to exploit if necessary, to sell orutilize economically, all or in part, taking into consideration the quotations,subsidies, costs, availability of treatment plants and other conditions whichthe Company estimates will prevail in the period for which reserves are beingcalculated.  The reserves are dividedinto proven (85% reliable or more according to statistical studies) andprobable (70-80% reliable or more according to statistical studies) categoriesaccording to their level of reliability and availability. In order to complywith SEC regulations, proven reserves is a classification that can only be usedfor such mineral found on top of the last level of the mine (either mineral upto 15 meters below the last level or below the first 15 meters only withsufficient drilling (25 or 30 meters between each drill)).

 

Annually our engineeringdepartment reviews in detail the reserve computations.  In addition, the engineering departmentreviews the computation when changes in assumptions occur.  Changes can occur for price or costassumptions, results in field drilling or new geotechnical parameters.  We also engage third party consultants toreview mine planning procedures.

 

Pursuant to SEC guidance, the reserves information in this report arecalculated using average metals prices over the most recent three years unlessotherwise stated.  We refer to thesethree-year average metals prices as “current prices.”  Our current prices for copper are calculatedusing prices quoted by COMEX, and our current prices for molybdenum arecalculated according to Platt’s *Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $1.261 per pound for copper and $17.817 per pound formolybdenum, both current prices as of December 31, 2005.  The current prices for copper and molybdenumwere $0.939 and $8.425 as of December 31, 2004 and $0.751 and $3.81 as of December 31, 2003.

 

For purposesof our long-term planning, our management uses metals price assumptions of$0.90 per pound for copper and $4.50 per pound for molybdenum.  These prices are intended to approximateaverage prices over the long term.  Ourmanagement uses these price assumptions, as it believes these prices reflectthe full price cycle of the metals market.

 

For Peruvianoperations, commencing in 2003, we have used reserves estimates based oncurrent average prices as of the most recent year then ended to determine theamount of mine stripping that is capitalized, units of production amortizationof capitalized mine stripping and amortization of intangible assets.  In calculating such items in the case of ourMinera Mexico subsidiary for periods prior to 2005, we have used reservesestimates based on the longer-term price assumptions discussed above.

 

Weperiodically reevaluate estimates of our ore reserves, which represent ourestimate as to the amount of unmined copper remaining in our existing minelocations that can be produced and sold at a profit.  These estimates are based on engineering evaluations

 

57

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derived fromsamples of drill holes and other openings, combined with assumptions aboutcopper market prices and production costs at each of our mines.

 

For moreinformation regarding our reserve estimates, see “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Critical AccountingPolicies and Estimates—Ore Reserves”

 

COPPER AND MOLYBDENUM RESERVES BY SITE:

 

**The table below details our proven and probablecopper and molybdenum reserves as estimated at December 31, 2005.**

** **
| ** **                                                   | ** ** | **PERUVIAN  OPEN-PIT  UNIT** | ** ** | **MEXICAN  OPEN-PIT  UNIT** | ** ** | ** **            | ** ** | **MEXICAN  IMMSA  UNIT**   | ** ** | **Sensitivity  to Change   in metals prices (3)** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **Cuajone  Mine (1)**        | ** ** | **Toquepala  Mine (2)**     | ** ** | **Cananea  Mine (1)** | ** ** | **La  Caridad   Mine (1)** | ** ** | **TOTAL  OPEN-  PIT MINES**                       | ** ** | **IMMSA  (2)** | ** ** | **Increase  20%** | ** ** | **Decrease  20%** | ** ** |
| Mineral Reserves                                             |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| Metal prices:                                                |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| Copper ($/lb.)                                               |       | 1.261                        |       | 1.261                       |       | 1.261                 |       | 1.261                      |       | 1.261                                             |       | 1.261 |   | 1.513 |   | 1.009 |   |
| Molybdenum  ($/lb.)                                          |       | 17.817                       |       | 17.817                      |       | 17.817                |       | 17.817                     |       | 17,817                                            |       | 17.817 |   | 21.381 |   | 14.254 |   |
| Cut-off grade                                                |       | 0.30                         | %          | 0.30                        | %          | 0.25                  | %          | 0.20                       | %          | 0.26                                              | %          | — |   | 0.21 | % | 0.36 | % |
| Sulfide ore  reserves (thousands of tons)                    |       | 1,935,407                    |       | 2,174,479                   |       | 3,759,426             |       | 1,562,184                  |       | 9,431,496                                         |       | 41,644 |   | 12,481,624 |   | 6,111,769 |   |
| Average grade:                                               |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| Copper                                                       |       | 0.561                        | %          | 0.580                       | %          | 0.494                 | %          | 0.315                      | %          | 0.498                                             | %          | 0.51 | % | 0.450 | % | 0.577 | % |
| Molybdenum                                                   |       | 0.019                        | %          | 0.032                       | %          | —                |       | 0.028                      | %          | 0.026                                             | %          | — |   | 0.025 | % | 0.029 | % |
| Lead                                                         |       | —                       |       | —                      |       | —                |       | —                     |       | —                                            |       | 1.06 | % | — |   | — |   |
| Zinc                                                         |       | —                       |       | —                      |       | —                |       | —                     |       | —                                            |       | 3.54 | % | — |   | — |   |
| Leachable material  (thousands of tons)                      |       | 11,604                       |       | 2,777,807                   |       | 1,499,915             |       | 1,489,303                  |       | 5,778,629                                         |       | — |   | 5,383,676 |   | 5,466,250 |   |
| Leachable  material grade                                    |       | 0.568                        | %          | 0.172                       | %          | 0.226                 | %          | 0.157                      | %          | 0.183                                             | %          | — |   | 0.159 | % | 0.216 | % |
|                                                         |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| Waste (thousands  of tons)                                   |       | 5,022,010                    |       | 7,364,671                   |       | 3,979,732             |       | 540,455                    |       | 16,906,868                                        |       | — |   | 20,813,111 |   | 13,510,787 |   |
| Total material  (thousands of tons)                          |       | 6,969,021                    |       | 12,316,957                  |       | 9,239,073             |       | 3,591,942                  |       | 32,116,993                                        |       | — |   | 38,678,411 |   | 25,088,806 |   |
| Stripping ratio                                              |       | 2.60                         |       | 4.66                        |       | 1.46                  |       | 1.30                       |       | 2.41                                              |       | — |   | 2.10 |   | 3.10 |   |
|                                                         |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| **Leachable  material**                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves in stock  (thousands of tons)                       |       | 23,982                       |       | 807,154                     |       | 605,711               |       | 467,789                    |       | 1,904,636                                         |       | — |   | 1,904,636 |   | 1,904,636 |   |
| Average copper  grade                                        |       | 0.463                        | %          | 0.136                       | %          | 0.139                 | %          | 0.252                      | %          | 0.170                                             | %          | — |   | 0.170 | % | 0.170 | % |
|                                                         |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| In pit reserves  (thousands of tons)                         |       | 11,604                       |       | 2,777,807                   |       | 1,499,915             |       | 1,489,303                  |       | 5,778,629                                         |       | — |   | 5,383,676 |   | 5,466,250 |   |
| Average copper  grade                                        |       | 0.568                        | %          | 0.172                       | %          | 0.226                 | %          | 0.157                      | %          | 0.183                                             | %          | — |   | 0.159 | % | 0.216 | % |
|                                                         |       |                         |       |                        |       |                  |       |                       |       |                                              |       |   |   |   |   |   |   |
| Total leachable  reserves (thousands of tons)                |       | 35,586                       |       | 3,584,961                   |       | 2,105,626             |       | 1,957,092                  |       | 7,683,265                                         |       | — |   | 7,288,312 |   | 7,370,886 |   |
| Average copper  grade                                        |       | 0.497                        | %          | 0.164                       | %          | 0.201                 | %          | 0.180                      | %          | 0.180                                             | %          | — |   | 0.162 | % | 0.204 | % |
| **Copper  contained in ore reserves (thousand of tons) (4)** | ** ** | **10,924**                   | ** ** | **17,390**                  | ** ** | **21,961**            | ** ** | **7,259**                  | ** ** | **57,534**                                        | ** ** | **212** | ** ** | **64,707** | ** ** | **47,040** | ** ** |

 

----

(1)       TheCuajone, Toquepala, Cananea and La Caridad concentrator recoveries calculatedfor these reserves were 83.7%, 87.0%, 81.0% and 82.59%, respectively, obtainedby using recovery formulas according to the different milling capacity andgeo-metallurgical zones.

(2)       The****Immsa Unit includes the Charcas, Santa Bárbara, San Martin,Santa Eulalia and Taxco mines. Zinc and lead contained in ore reserves are1,474 and 441 thousand tons, respectively.

(3)       Inpreparing the sensitivity analysis, we recalculated our reserves based on the 

 

58

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assumption that current average metal priceswere 20% higher and 20% lower, respectively, than the actual current averageprices for year-end 2005.  Reserveresults of this sensitivity analysis are not proportional to the increase ordecrease in metal price assumptions.  The analysis above does not include our ImmsaUnit’s underground mines, for which the sensitivity analysis is as follows:

 
| ** **                               | ** ** | **Sensitivity to 20% Change in Metals Prices** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **Increase 20%**                               | ** ** | **Decrease 20%** | ** ** |
| Sulfide ore reserves (thousands of tons) |       | 45,337                                         |       | 32,638 |   |
| Average grade copper                     |       | 0.49                                           | %          | 0.58 | % |
| Copper contained (thousands of tons)     |       | 222                                            |       | 189 |   |

 

(4)       Coppercontained in ore reserves for open-pit mines is (i) the product of sulfideore reserves and the average copper grade plus (ii) the product of in-pitleachable reserves and the average copper grade.  Copper contained in ore reserves forunderground mines is the product of sulfide ore reserves and the average coppergrade.

 

The following is the averagedrill-hole spacing for proven and probable sulfide reserves:

 

As of December 31, 2005

 
| ** ** | ** ** | **Proven**                      | ** ** | **Probable** | ** ** |
|------------|------------|---------------------------------|------------|--------------|------------|
| ** ** | ** ** | **(average spacing in meters)** | ** ** |
| Cuajone    |       | 80.32                           |       | 120.48       |       |
| Toquepala  |       | 88.68                           |       | 120.92       |       |
| Cananea    |       | 51.96                           |       | 100.94       |       |
| La Caridad |       | 38.52                           |       | 105.90       |       |

 

59

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The table below details ourproven and probable copper and molybdenum reserves as of December 31, 2005calculated based on long-term price assumptions of, $0.90 for copper and $4.50for molybdenum.

 
| ** **                                                | ** ** | **Cuajone   Mine** | ** ** | **Toquepala   Mine** | ** ** | **Cananea   Mine** | ** ** | **La Caridad   Mine** | ** ** | **Total   Open-Pit   Mines** | ** ** | **Immsa  (1)** | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|----------------------|------------|--------------------|------------|-----------------------|------------|------------------------------|------------|----------------|------------|
| **Mineral Reserves**                                      |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| Metal prices:                                             |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| Copper ($/lb.)                                            |       | $                  | 0.90       |                 | $          | 0.90               |       | $                     | 0.90       |                         | $          | 0.90           |       | $ | 0.90 |   | $ | 0.90 |   |
| Molybdenum ($/lb.)                                        |       | $                  | 4.50       |                 | $          | 4.50               |       | $                     | 4.50       |                         | $          | 4.50           |       | $ | 4.50 |   | $ | 4.50 |   |
| Sulfide ore reserves (thousands of tons)                  |       | 1,064,339          |       | 576,593              |       | 2,102,432          |       | 480,477               |       | 4,223,841                    |       | 34,568         |       |
| Average grade:                                            |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| Copper                                                    |       | 0.636              | %          | 0.731                | %          | 0.597              | %          | 0.400                 | %          | 0.603                        | %          | 0.54           | %          |
| Molybdenum                                                |       | 0.020              | %          | 0.042                | %          | —             |       | 0.028                 | %          | 0.028                        | %          | —         |       |
| Lead                                                      |       | —             |       | —               |       | —             |       | —                |       | —                       |       | 1.15           | %          |
| Zinc                                                      |       | —             |       | —               |       | —             |       | —                |       | —                       |       | 3.77           | %          |
| Leachable material                                        |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| (thousands of tons)                                       |       | 32,211             |       | 925,075              |       | 1,378,185          |       | 826,505               |       | 3,161,976                    |       | —         |       |
| Leachable material grade                                  |       | 0.344              | %          | 0.218                | %          | 0.301              | %          | 0.206                 | %          | 0.252                        | %          | —         |       |
| Waste (thousands of tons)                                 |       | 1,233,031          |       | 681,828              |       | 3,011,209          |       | 205,863               |       | 5,131,931                    |       | —         |       |
| Total material (thousands of tons)                        |       | 2,329,581          |       | 2,183,496            |       | 6,491,826          |       | 1,512,845             |       | 12,517,748                   |       | —         |       |
| Stripping ratio                                           |       | 1.19               |       | 2.79                 |       | 2.09               |       | 2.15                  |       | 1.96                         |       | —         |       |
|                                                      |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| **Leachable material**                                    |       |               |       |                 |       |               |       |                  |       |                         |       |           |       |
| Reserves in stock (thousands of tons)                     |       | 23,982             |       | 807,154              |       | 605,711            |       | 467,789               |       | 1,904,636                    |       | —         |       |
| Average copper grade                                      |       | 0.463              | %          | 0.136                | %          | 0.139              | %          | 0.252                 | %          | 0.169                        | %          | —         |       |
| In-pit reserves (thousands of tons)                       |       | 32,211             |       | 925,075              |       | 1,378,185          |       | 826,505               |       | 3,161,976                    |       | —         |       |
| Average copper grade                                      |       | 0.344              | %          | 0.218                | %          | 0.301              | %          | 0.206                 | %          | 0.252                        | %          | —         |       |
| Total Leachable reserves (thousands of  tons)             |       | 56,193             |       | 1,732,229            |       | 1,983,896          |       | 1,294,294             |       | 5,066,612                    |       | —         |       |
| Average copper grade                                      |       | 0.395              | %          | 0.180                | %          | 0.251              | %          | 0.223                 | %          | 0.221                        | %          | —         |       |
| Copper contained in ore reserves (thousands  of tons) (2) |       | 6,880              |       | 6,232                |       | 16,700             |       | 3,625                 |       | 33,437                       |       | 187            |       |

 

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(1)       The Immsa Unit includes the Charcas, Santa Barbara, San Martin, SantaEulalia and Taxco mines. Zinc and lead contained in ore reserves are1,303 and 398 thousand tons, respectively.

(2)       Copper contained in ore reserves for open-pit mines is (i) theproduct of sulfide ore reserves and the average copper grade plus (ii) theproduct of in-pit leachable reserves and the average grade of copper. Coppercontained in ore reserves for underground mines is the product of sulfide orereserves and the average copper grade.

 

OVERVIEW OF BLOCK MODELRECONCILIATION PROCESS

 

We apply the following blockmodel to mill reconciliation procedure.

 

The following stages areidentified in the Cuajone, Toquepala, Cananea and La Caridad mines:

 

1.     The mine geologists gather the necessary monthly statistical data fromour information system (“SRP”), which provides ore tons milled and ore gradesin the concentrator.

2.     Mined areas are topographically determined and related boundaries arebuilt.

3.     Using the “interactive planner” option in our mining software(Minesight), ore tons and grades are calculated inside mined areas over theblock model. At this point the current cut-off grade is considered.

 

60

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4.     In the final stage, accumulated tons mined, weighted average grade forore material and leach is compared with data coming from our SRP system.

 

Tonnage and gradereconciliation for 2005 are as follows:

 
| ** ** | ** ** | **Long Range Model** | ** ** | **Mill**     | ** ** | **Variance**    | ** ** |
|------------|------------|----------------------|------------|--------------|------------|-----------------|------------|
| **Mine**   | ** ** | **Tons**             | ** ** | **% Copper** | ** ** | **TONS**        | ** ** | **% Copper** | ** ** | **Tons** | ** ** | **% Copper** | ** ** |
| ** ** | ** ** | **(thousands)**      | ** ** | ** **   | ** ** | **(thousands)** | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
| Cuajone    |       | 29,616               |       | 0.650        |       | 29,544          |       | 0.643 |   | 72 |   | 0.007 |   |
| Toquepala  |       | 21,144               |       | 0.849        |       | 21,224          |       | 0.812 |   | (80 | ) | 0.037 |   |
| Cananea    |       | 28,080               |       | 0.567        |       | 26,449          |       | 0.573 |   | 1,631 |   | 0.006 |   |
| La Caridad |       | 33,539               |       | 0.492        |       | 31,551          |       | 0.483 |   | 1,988 |   | 0.009 |   |

 

If the estimation error appears greater than 3%, a detailed evaluationis done to review the differences, which normally could result in more in-filldrilling, in order to better know the geological characteristics (grade, rocktype, mineralization and alteration) and the spacing of drill holes which areconsidered in the ore body zone.

 

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Item 3. Legal Proceedings

 

Reference is made to the information under the caption “LitigationMatters” in Financial Statement Note 13 “Commitments and Contingencies” on Page A-121.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

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Executive Officers of theRegistrant

 

Set forth below are the executive officers of the Company, their agesas of February 6, 2006 and their positions.

 
| **Name**                        | ** ** | **Age** | ** ** | **Position**                                                    |
|---------------------------------|------------|---------|------------|-----------------------------------------------------------------|
| German Larrea Mota-Velasco      |       | 52      |       | Chairman of the Board and Director                              |
| Oscar Gonzalez Rocha            |       | 67      |       | President, Chief Executive Officer and  Director                |
| Xavier Garcia de Quevedo Topete |       | 59      |       | Executive Vice President, Chief Operating  Officer and Director |
| J. Eduardo Gonzalez Felix       |       | 37      |       | Vice President Finance, Chief Financial  Officer and Director   |
| Armando Ortega Gomez            |       | 45      |       | Vice President, Legal, General Counsel,  Secretary and Director |
| Jose N. Chirinos Fano           |       | 64      |       | Comptroller                                                     |
| Mario Vinageras Barroso         |       | 50      |       | Vice President, Commercial                                      |
| Vidal Muhech Dip                |       | 65      |       | Vice President, Projects                                        |

 

**German Larrea Mota-Velasco**has served as our Chairman of the Board since December 1999 ChiefExecutive Officer from December 1999 to October 2004 and as a memberof the Board of Directors since November 1999.  He has been Chairman of the Board ofDirectors, President and Chief Executive Officer of Grupo México (holding)since 1994.  Mr. Larrea has beenChairman and Chief Executive Officer of Americas Mining Corporation (miningdivision) since 2003.  Mr. Larreahas been Chairman of the Board and Chief Executive Officer of Grupo MineraMéxico (mining division) since 1994 and of Grupo Ferroviario Mexicano (railroaddivision) since 1997.  Mr. Larreawas previously Executive Vice Chairman of Grupo México and has been a member ofthe Board of Directors since 1981.  He is also a director of GrupoFinanciero Banamex, (Citigroup) S.A. de C.V., Banco Nacional de Mexico, S.A.,Consejo Mexicano de Hombres de Negocios, and Grupo Televisa, S.A. de C.V.

 

**Oscar Gonzalez Rocha**has served as our Chief Executive Officer since October 21, 2004 and ourPresident since December 1999.  Hehas been our Director since November 1999. Previously, he was our General Director and Chief Operating Officer fromDecember 1999 to October 20, 2004. He has been a Director of Grupo México since 2002 and Managing Directorof Mexicana de Cobre, S.A. de C.V. from 1986 to 1999 and of Mexicana de CananeaS.A. de C.V. from 1990 to 1999.  He wasan Alternate Director of Grupo Mexico from 1988 to April 2002.

 

**Xavier Garcia de Quevedo Topete**has served as Executive Vice President and Chief Operating Officer since April 12,2005 and as a member of our Board of Directors from November 1999 to thepresent.  He has been the President andChief Executive Officer of Minera México from September 2001 to April 2005.  He was Managing Director of Grupo FerroviarioMexicano S.A. de C.V., and of Ferrocarril Mexicano, S.A. de C.V. from December 1997to December 1999, and Director General of Exploration and Development ofGrupo Mexico from 1994 to 1997.  He hasbeen a director of Grupo México since April 2002.

 

**J. Eduardo Gonzalez Felix**has served as our Director and Vice President, Finance, and Chief FinancialOfficer since March 11, 2005.  Hehas been the President and Chief Financial Officer of Grupo Mexico’s MiningDivision (Americas Mining Corporation) from January 2004 to March 2005and its Chief Financial Officer from 1999 to March 2003.  Mr. Gonzalezhas been the Chief Financial Officer of Minera Mexico from mid-2001 to December 2003.  He had also headed Grupo Mexico’s Treasuryand Investor Relations departments from 1999 to 2001.  Prior to joining Grupo Mexico, Mr. Gonzalezwas a Senior Associate at McKinsey & Company, Inc., heading workfor clients in various countries and industry sectors.  Mr. Gonzalez has also worked at theKimberley-Clark Corporation and the Chicago Board Trade.

 

**Armando Ortega Gomez**has served as a member of our Board of Directors since August 2002.  Mr. Ortega has been our General Counselsince October 23, 2003, and has served as our Vice President, Legal andSecretary since April 25, 2002. Previously, he was our Assistant 

 

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Secretary from July 25, 2001 to April 25, 2002.  He has been General Counsel of Grupo Méxicosince May 2001.  He is alsoAssistant Secretary of Grupo México. Previously, he headed the Unit on International Trade Practices of theMinistry of Economy of Mexico with the rank of Deputy Vice Minister from January 1998to mid-May 2001, and was a negotiator for international matters for saidMinistry from 1988 to May 2001.

 

**Jose N. Chirinos Fano**has served as our Comptroller since April 2005 and as our Treasurer from April 2004to April 2005.  He has been Directorof Comptroller and Finance since December 1999.  From January 1994 until April 2005he was our Assistant Comptroller.  Since January 2004,Mr. Chirinos has been Vice President of Finance and Chief FinancialOfficer of Southern Peru Limited, one of our subsidiaries.  He has held various positions in Accounting,Administration and Finance during his 39 years at our Company.

 

**Mario Vinageras Barroso**has served as our Vice President, Commercial since April 25, 2002. He hasbeen Commercial Director of Grupo México since September 1994 andCorporate Director of Sales of Grupo México since June 1, 2000.

 

**Vidal Muhech Dip** hasserved as our Vice President, Projects since April 25, 2002.  He has been Corporate Director of Engineeringand Construction of Grupo México since April 1995.  Previously, he was Director of Engineeringand Construction of Industrial Minera México from 1985 to 1995.

 

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PART II

 

Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters

 

At December 31, 2005, there were 2,116 holders of record of ourCommon Stock.  SCC’s Common Stock istraded on the New York Stock Exchange (“NYSE”) and the Lima Stock Exchange(“BVL”).  The SCC Common Stock symbol is PCU on theNYSE and PCU1 on the BVL.

 

The table below sets forth the cash dividends paid per share of capitalstock and the high and low stock prices on both the NYSE, and the BVL for theperiods indicated.

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| **Quarters**                 | ** ** | **1st**  | ** ** | **2nd**  | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Dividend per  Share (Note 1) |       | $        | 0.6792     |     | $          | 2.3776 |   | $ | 1.0430 |   | $ | 1.7000 |   | $ | 5.7998 |   | $ | 0.1467 |   | $ | 0.2946 |   | $ | 0.4103 |   | $ | 0.4481 |   | $ | 1.2998 |   |
|                         |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock market  Price          |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NYSE:                        |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                         |       | $        | 64.20      |     | $          | 59.20 |   | $ | 55.96 |   | $ | 70.60 |   | $ | 70.60 |   | $ | 50.50 |   | $ | 41.85 |   | $ | 51.66 |   | $ | 54.10 |   | $ | 54.10 |   |
| Low                          |       | $        | 43.17      |     | $          | 41.63 |   | $ | 42.88 |   | $ | 50.20 |   | $ | 41.63 |   | $ | 36.16 |   | $ | 26.53 |   | $ | 36.16 |   | $ | 42.15 |   | $ | 26.53 |   |
|                         |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BVL:                         |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                         |       | $        | 64.00      |     | $          | 59.20 |   | $ | 55.98 |   | $ | 70.75 |   | $ | 70.75 |   | $ | 50.80 |   | $ | 41.70 |   | $ | 52.00 |   | $ | 55.00 |   | $ | 55.00 |   |
| Low                          |       | $        | 43.39      |     | $          | 41.75 |   | $ | 42.55 |   | $ | 50.35 |   | $ | 41.75 |   | $ | 36.00 |   | $ | 26.50 |   | $ | 36.40 |   | $ | 42.20 |   | $ | 26.50 |   |

 

----

Note (1) Dividends per share based on the consolidated/combinedresults of SCC.

 

Actual dividends per share prior to the April 1, 2005 acquisitionof Minera Mexico were $1.2497 in the first quarter of 2005; and $0.27, $0.542,$0.755, $0.8245 and $2.3915 for the first, second, third and fourth quarters of2004 and the year 2004, respectively.

 

On January 26, 2006, a dividend of $2.75 per share was announcedpayable March 3, 2006 to shareholders of record as of February 15,2006.  Our dividend policy continues tobe reviewed at Board of Directors’ meetings, taking into consideration thecurrent intensive capital investment program and expected future cash flowgenerated from operations.

 

For a description of limitations on our ability of the Company to makedividend distributions, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations and Quantitative and QualitativeDisclosures about Market Risk — Liquidity and Capital Resources” and Note 10 -Financings to our Consolidated Combined Financial Statements.

 

Equity Compensation Plan Information at December 31, 2005:

 
| **Plan Category**                | ** ** | **Number of securities   to be issued upon   exercise of   outstanding options** | ** ** | **Weighted-average   exercise price of   outstanding options** | ** ** | **Number of securities   remaining available   for future issuance** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                       | ** ** | **(a)**                                                                          | ** ** | **(b)**                                                        | ** ** | **(c)**                                                              | ** ** |
| Stock incentive plan             |       | —                                                                           |       | —                                                         |       | 645,060                                                              |       |
| Directors’ stock award plan |       | N/A                                                                              |       | N/A                                                            |       | 68,800                                                               |       |

 

For further information on the Company’s equity compensation plans see “Note14 – Stockholders’ Equity” to the Company’s Consolidated Combined FinancialStatements.

 

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Item 6. Selected Financial Data

 

FIVE-YEAR SELECTED FINANCIAL AND STATISTICAL DATA

 

The selected historical financial data presented below as of and forthe five years ended December 31, 2005, includes certain information thathas been derived from our consolidated combined financial statements.  The selected financial data should be read inconjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations and Quantitative and QualitativeDisclosures about Market Risk” and the consolidated combined financialstatements and notes thereto.

 

(In millions, except CapitalStock and Financial Data, except where noted)

 
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Statement of Earnings Data**                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001(1)** | ** ** |
| Net sales                                                               |       | $                                | 4,112.6    |   | $ | 3,096.7 |   | $ | 1,576.6 |   | $ | 1,388.4 |   | $ | 1,560.0 |   |
| Operating income                                                        |       | 2,094.5                          |       | 1,482.4 |   | 325.7 |   | 186.9 |   | 75.2 |   |
| Minority interest                                                       |       | (12.5                            | )          | (4.7 | ) | (4.3 | ) | (8.9 | ) | 2.8 |   |
| Cumulative effect of change in accounting  principle, net of income tax |       | —                           |       | — |   | (1.5 | ) | — |   | — |   |
|                                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                     |       | $                                | 1,400.1    |   | $ | 982.4 |   | $ | 83.5 |   | $ | 144.9 |   | $ | (109.9 | ) |
|                                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Per share amounts:                                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss) basic and diluted                                       |       | $                                | 9.51       |   | $ | 6.67 |   | $ | 0.57 |   | $ | 0.98 |   | $ | (0.75 | ) |
| Dividends paid                                                          |       | $                                | 5.80       |   | $ | 1.30 |   | $ | 0.31 |   | $ | 0.19 |   | $ | 0.19 |   |

 
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| **Balance Sheet Data**                            | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001 (1)** | ** ** |
|                                              |       |                        |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable  securities |       | $                           | 876.0      |   | $ | 756.0 |   | $ | 351.6 |   | $ | 175.1 |   | $ | 260.5 |   |
| Total assets                                      |       | 5,687.6                     |       | 5,319.2 |   | 4,491.0 |   | 4,419.0 |   | 4,480.6 |   |
| Total long-term debt, including current  portion  |       | 1,172.1                     |       | 1,330.3 |   | 1,671.2 |   | 1,621.2 |   | 1,714.3 |   |
| Total liabilities                                 |       | 2,348.8                     |       | 2,494.3 |   | 2,385.9 |   | 2,452.5 |   | 2,633.3 |   |
| Total stockholders’ equity                   |       | $                           | 3,326.1    |   | $ | 2,813.6 |   | $ | 2,022.7 |   | $ | 1,881.5 |   | $ | 1,751.9 |   |

 
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| **Statement of Cash Flows**                         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001(1)** | ** ** |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |
| Cash provided from operating activities             |       | $                                | 1,644.2    |   | $ | 1,172.4 |   | $ | 64.8 |   | $ | 181.9 |   | N/A | (2) |
| Depreciation, amortization and depletion            |       | 277.2                            |       | 192.6 |   | 177.1 |   | 157.6 |   | 165.9 |   |
| Cash (used for) investing activities                |       | (425.4                           | )          | (219.5 | ) | (59.7 | ) | (85.2 | ) | N/A | (2) |
| Capital expenditures                                |       | (470.6                           | )          | (228.3 | ) | (64.9 | ) | (85.4 | ) | (180.9 | ) |
| Cash (used for) provided from financing  activities |       | (1,055.6                         | )          | (540.6 | ) | 185.6 |   | (145.9 | ) | N/A | (2) |
| Dividends paid                                      |       | (853.9                           | )          | (191.4 | ) | (45.4 | ) | (21.5 | ) | (28.8 | ) |
|                                                     |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

66

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| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| **Capital Stock**                                        | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001(1)** | ** ** |
| Common shares outstanding – basic (in  thousands)   |       | 147,228                          |       | 147,224 |   | 147,220 |   | 147,213 |   | 147,210 |   |
| Common shares outstanding – diluted (in  thousands) |       | 147,228                          |       | 147,224 |   | 147,225 |   | 147,217 |   | 147,212 |   |
| NYSE Price – High                                   |       | $                                | 70.60      |   | $ | 54.10 |   | $ | 48.85 |   | $ | 15.54 |   | $ | 15.10 |   |
| NYSE Price – Low                                    |       | $                                | 41.63      |   | $ | 26.53 |   | $ | 14.42 |   | $ | 10.82 |   | $ | 8.42 |   |
| Book value per share                                     |       | 22.59                            |       | 19.11 |   | 13.74 |   | 12.78 |   | 11.90 |   |
| P/E ratio                                                |       | 7.04                             |       | 7.08 |   | 83.11 |   | 15.41 |   | (20.25 | ) |

 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| **Financial Ratios**                  | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001(1)** | ** ** |
|                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Gross margin(3)                       |       | 53.5                             | %          | 50.7 | % | 25.8 | % | 19.4 | % | 10.3 | % |
| Operating income margin(4)            |       | 50.9                             | %          | 47.9 | % | 20.7 | % | 13.5 | % | 4.8 | % |
| Net margin(5)                         |       | 34.0                             | %          | 31.7 | % | 5.3 | % | 10.4 | % | (7.0 | )% |
| Current assets to current liabilities |       | 2.15                             |       | 1.70 |   | 1.88 |   | 1.64 |   | 0.46 |   |
| Net debt(6)/total capitalization(7)   |       | 8.2                              | %          | 17.0 | % | 39.5 | % | 43.4 | % | 45.4 | % |
| Ratio of Earnings to Fixed charges(8) |       | 17.8                             | x          | 12.6 | x | 2.7 | x | 1.5 | x | — |   |

 

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(1)       Financialinformation as of and for the year ended December 31, 2001 is unaudited.

(2)       Informationnot available

(3)       Representsnet sales less cost of sales (including depreciation, amortization anddepletion), divided by net sales as a percentage.

(4)       Representsoperating income divided by sales as a percentage.

(5)       Representsnet earnings divided by sales as a percentage.

(6)       Netdebt is defined as total debt minus cash balance.

(7)       Representsnet debt divided by net debt plus stockholders’ equity.

(8)       Representsearnings divided by fixed charges. Earnings are defined as earnings before income taxes, minority interestand cumulative effect of change in accounting principle, plus fixed charges andamortization of interest capitalized, less interest capitalized.  Fixed charges are defined as the sum ofinterest expense and interest capitalized, plus amortized premiums, discountsand capitalized expenses related to indebtedness.  For the year 2001, the company would have hadto generate additional earnings of $75,392,000 to achieve a ratio of earningsto fixed charges of 1:1.

 

67

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Item 7 and 7.A — Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Quantitative andQualitative Disclosures about Market Risk

 

# EXECUTIVE SUMMARY

 

*This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and Quantitative and QualitativeDisclosures about Market Risk relates to and should be read together with ourAudited Consolidated Combined Financial Statements as of and for each of theyears in the three-year period ended December 31, 2005.  Effective April 1, 2005, Southern CopperCorporation acquired substantially all of the outstanding common stock ofMinera México.  The acquisition wasaccounted for in a manner similar to a pooling of interests as it involved thereorganization of entities under common control.  Under such accounting, the financialstatements of SCC and Minera México are combined on a historical cost basis forall the periods presented since they were under the indirect common control ofGrupo México during such periods. Therefore, unless otherwise noted, the discussion below of our financialcondition and results of operations is for us, including our Minera Méxicosubsidiary, on a consolidated or combined basis for all periods.  Our combined financial results may not beindicative of the results of operations that actually would have been achievedhad the acquisition of Minera México taken place at the beginning of theperiods presented and do not purport to be indicative of our future results.*

 

*This discussion contains forward-lookingstatements that are based on management’s current expectations, estimates andprojections about our business and operations. Our actual results may differ materially from those currentlyanticipated and expressed in the forward-looking statements as a result of anumber of factors.  See “CautionaryStatements.”*

 

OVERVIEW

 

Our business is primarily the production and sale of copper.  In the process of producing copper, a numberof valuable metallurgical byproducts are recovered, such as molybdenum, zinc,silver, lead and gold, which we also produce and sell.  The sales prices for our products are largelydetermined by market forces outside of our control. Our management, therefore,focuses on production enhancement and cost control to improve profitability.  We believe we achieve these goals throughcapital spending programs, exploration efforts and cost reductionprograms.  Our aim is to remainprofitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

We discuss below several matters that our management believes areimportant to understand our results of operations and financial condition.  These matters include (i) our “operatingcash costs” as a measure of our performance, (ii) metals prices, (iii) ourrecent acquisition of Minera México, (iv) our business segments and (v) theeffects of inflation and other local currency issues.

 

Since our inception, we have principally maintainedoperations in Peru.  However, in recentyears, we have refocused our plans and began steps to internationalize ourbusiness and broaden our market exposure. In 2003, we acquired exploration properties in Chile, which are beingevaluated for potential exploitation. Beginning in 2004, we began tolling copper into rod in Amarillo,Texas.  The biggest step, in the newfocus, however, is the acquisition of Minera Mexico, see Minera Mexicoacquisition below.

 

Operating Cash Costs

 

An overall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced.  Operating cash cost is a non-GAAP measurethat does not have a standardized meaning and may not be comparable tosimilarly titled measures provided by other companies.  A reconciliation of our cash cost per poundto the cost of sales (including depreciation, amortization and depletion) aspresented in the statement of earnings is presented under the subheading, “Non-GAAPInformation Reconciliation,” below.  Wehave defined operating cash cost per pound as cost of sales 

 

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(including depreciation, amortization and depletion); plus selling,general and administrative charges, treatment and refining charges; lessbyproducts revenue, depreciation, amortization and depletion, workers’participation and other miscellaneous charges, the Peruvian royalty charge andthe change in inventory levels; divided by total pounds of copper produced andpurchased by us.  In our calculation ofoperating cash cost per pound of copper produced, and purchased, we creditagainst our costs, the revenues from the sale of byproducts, principallymolybdenum, zinc and silver. We account for this byproduct revenue because weconsider our principal business to be the production and sale of copper.  We believe that our company is viewed by theinvestment community as a copper company, and is valued, in large part, by theinvestment community’s view of the copper market and our ability to producecopper at a reasonable cost.  Theincrease over the last three years in the price of molybdenum, however, has hada significant effect on our traditional calculation of cash cost and itscomparability between periods. Accordingly, we present cash costs below with and without crediting thebyproduct revenues against our costs.

 

We exclude from our calculation of operating cash cost depreciation,amortization and depletion, which are considered non-cash expenses.  Exploration is considered a discretionaryexpenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-taxearnings and are also excluded. Additionally excluded from operating cash costs are inventory changes,items of a non-recurring nature, and the portion of our mine stripping coststhat we capitalize.

 

Our operating cash costs per pound, as defined, are presented in thetable below for the three years ended December 31, 2005.  We present cash costs with and without theinclusion of byproduct revenues below.

 
| ** **                                                                                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(dollars per pound)** | ** ** |
| Operating cash cost per pound of copper  produced and purchased                             |       | $                       | 0.026      |     | $          | 0.182    |       | $ | 0.435 |   |
| Operating cash cost per pound of copper  produced and purchased (without byproduct revenue) |       | $                       | 1.005      |     | $          | 0.852    |       | $ | 0.743 |   |

 

A reconciliation of our operating cash costs per pound to our GAAP costof sales is presented on page A-93 under the subheading “Non-GAAPInformation Reconciliation.”

 

The reduction in the cash costs per pound of copper produced andpurchased (including byproduct revenue) in 2005 and 2004 is to a large extentattributable to the increase in the molybdenum sales price.  The credit to the above costs for molybdenumsales amounted to $0.617 per pound, $0.412 per pound and $0.102 per pound, in2005, 2004 and 2003, respectively.  Thecash cost without byproduct revenue increased in 2005 and 2004 as a result ofcost increases, including the cost of petroleum products, purchasedelectricity, maintenance expenses and the cost of replacement parts.  In addition, the higher copper prices in 2005and 2004 also increased our computation of cash cost, as we include in ourcalculation the cost of purchased metal. The higher value and accordingly the higher cost of copper in theseyears, increased our cash cost by $0.017 in 2004 and by a further $0.053 in2005.  Additionally, we believe ouroperating cash costs will increase in 2006 and the near-term years as a resultof the EITF consensus, which we adopted on January 1, 2006 and isdescribed below under “Critical Accounting Policies and Estimates—CapitalizedMine Stripping Costs and Leachable Material”. If we had applied this consensus in 2005, 2004 and 2003 our poundoperating cash cost would have increased by $0.075, $0.056 and $0.052,respectively.

 

Metals Prices

 

The profitability of our operations is dependent on, and our financialperformance is significantly affected by, the international market prices forthe products we produce, especially for copper, molybdenum, zinc andsilver.  Metals prices historically havebeen subject to wide fluctuations and are affected by numerous factors beyondour control.  

 

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These factors, which affect each commodity to varying degrees, includeinternational economic and political conditions, levels of supply and demand,the availability and cost of substitutes, inventory levels maintained byproducers and others and, to a lesser degree, inventory carrying costs andcurrency exchange rates.  In addition,the market prices of certain metals have on occasion been subject to rapidshort-term changes due to speculative activities.

 

We are subject to market risks arising from the volatility of copperand other metals prices.  Assuming thatexpected metal production and sales are achieved, that tax rates are unchangedand giving no effects to potential hedging programs, metal price sensitivityfactors would indicate the estimated change in net earnings resulting frommetal price changes in 2006 as provided in the table below.

 
| ** **                                                         | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in metal prices (per pound except  silver – per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Change in net earnings (in millions)                               |       | $          | 8.7        |           | $          | 14.4     |       | $          | 1.8        |   | $ | 11.4 |   |

 

Minera México Acquisition

 

On April 1, 2005, we acquired Minera México from Americas MiningCorporation, a subsidiary of Grupo México, our controlling stockholder.  Minera México is the largest mining companyin Mexico and the eleventh largest copper producer in the world on a stand-alonebasis.  On April 1, 2005, weexchanged 67,207,640 newly-issued shares of our common stock for theoutstanding shares of Minera México’s direct majority stockholder, and MineraMéxico became our 99.1% owned subsidiary. As a part of this transaction, on March 1, 2005, we paid a specialtransaction dividend of $100 million to all of our stockholders.  Upon completion of the merger, Grupo Méxicoincreased its indirect beneficial ownership of our capital stock fromapproximately 54.2% to approximately 75.1%. On October 20, 2005, our board of directors approved theacquisition of 6,386,521 shares of Minera Mexico from Grupo Mexico.  The acquired shares represent 0.81833% of theoutstanding shares of Minera Mexico and were purchased for $30.3 million.

 

We are now in the process of integrating two companies that hadpreviously been affiliated but operated independently.  With this acquisition, we have increased ourtotal copper reserves by 107%, or 23,199 million tons, based on year-end2004 reserves, and have increased our annual copper production by 81%,equivalent to 320,000 tons of copper, based on 2004 production.

 

# Businesssegments

#  

Our Company operates in a single industry, the copper industry.  With the acquisition of Minera Mexico in April 2005,we determined that to effectively manage our business we needed to focus onthree operating segments.  These segmentsare our Peruvian operations, our Mexican open-pit operations and our Mexicanunderground operations, known as our IMMSA unit.  Our Peruvian operations include the Toquepalaand Cuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.  Our Mexican open-pit operations include LaCaridad and Cananea mine complexes, the smelting and refining plants andsupport facilities which service both mines. Our IMMSA unit includes five underground mines that produce zinc, lead,copper, silver and gold, a coal and coke mine, and several industrialprocessing facilities for zinc, copper and silver.

 

Segment information is included in our reviewof “Results of Operations” and also in Note 19 of our Consolidated CombinedFinancial Statements.

 

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Inflation and Devaluation of the PeruvianNuevo Sol and the Mexican Peso

 

Our functional currency is the U.S. dollar.  Portions of our operating costs aredenominated in Peruvian nuevos soles and Mexican pesos.  Since our revenues are primarily denominatedin U.S. dollars, when inflation/deflation in Peru or Mexico is not offset by achange in the exchange rate of the nuevo sol or the peso, respectively, to thedollar, our financial position, results of operations and cash flows could beadversely affected to the extent that the inflation/devaluation effects arepassed onto us by our suppliers or reflected in our wage adjustments.  In addition, the dollar value of our net monetaryassets denominated in nuevos soles or pesos can be affected by devaluation ofthe nuevo sol or the peso, resulting in a remeasurement loss in our financialstatements.  Recent inflation anddevaluation rates are provided in the table below.

 
| ** **                                               | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Peru                                                     |       |                              |       |   |   |   |   |
| Peruvian inflation rate                                  |       | 1.5                               | %          | 3.5 | % | 2.5 | % |
| Nuevo sol/dollar (change in exchange rate  year to year) |       | 4.5                               | %          | (5.2 | )% | (1.5 | )% |
| Mexico                                                   |       |                              |       |   |   |   |   |
| Mexican inflation rate                                   |       | 3.3                               | %          | 5.2 | % | 4.0 | % |
| Peso/dollar (change in exchange rate year  to year)      |       | (4.9                              | )%         | 0.3 | % | 9.0 | % |

 

Expansion and Modernization Program

 

Excluding capitalized stripping, we made capital expenditures of $470.6million, $228.3 million and $64.9 million in 2005, 2004 and 2003, respectively,and we expect to make capital expenditures, of approximately $412.0 million in2006 excluding capitalized interest.  Ingeneral, the capital expenditures and projects described below are intended tocontribute to further vertical integration of our operations by increasing thecapacity for production of refined metal products.

 

During 2004 and 2003, Minera México’s capital expenditures werecurtailed due to liquidity constraints imposed by Minera México’s lenders.  In late 2004 and during 2005, Minera México’srate of capital expenditures increased significantly.

 

The table below sets forth our capital expenditures for the years endedDecember 31, 2005, 2004 and 2003:

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         |       | **(dollars  in millions)**       |       |
| Projects                                                                           |       |                             |       |   |   |   |   |
| Ilo smelter modernization                                                          |       | $                                | 234.6      |   | $ | 65.6 |   | $ | 6.3 |   |
| La Caridad  SX/EW plant                                                            |       | 8.1                              |       | — |   | — |   |
| Toquepala crushing, conveying system for  leachable material                       |       | 32.8                             |       | 40.4 |   | 2.2 |   |
| San Martín Unit, Santa Bárbara Unit,  Charcas Unit and Nueva Rosita Unit |       | 27.8                             |       | 1.3 |   | 0.8 |   |
| La Caridad copper smelter, sulfuric acid  plant and copper refinery                |       | 10.2                             |       | 4.1 |   | 1.8 |   |
| Toquepala concentrator expansion                                                   |       | 0.6                              |       | 0.7 |   | 1.7 |   |
| Cananea SX/EW plant                                                                |       | 2.3                              |       | 2.5 |   | 0.8 |   |
| New copper filter at Toquepala                                                     |       | 2.2                              |       | 1.5 |   | — |   |
| PLS dams at Huanaquera                                                             |       | 9.1                              |       | 1.5 |   | — |   |
| Total project expenditures                                                         |       | 327.7                            |       | 117.6 |   | 13.6 |   |
|                                                                               |       |                             |       |   |   |   |   |
| Replacement capital expenditures:                                                  |       |                             |       |   |   |   |   |
| Mexico                                                                             |       | 100.3                            |       | 48.7 |   | 11.7 |   |
| Peru                                                                               |       | 42.6                             |       | 62.0 |   | 39.6 |   |
| Total replacement expenditures                                                     |       | 142.9                            |       | 110.7 |   | 51.3 |   |
| Total capital expenditures                                                         |       | $                                | 470.6      |   | $ | 228.3 |   | $ | 64.9 |   |

 

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The above table does not include capitalized stripping of $116.4million, $92.8 million and $79.7 million for the years 2005, 2004 and 2003,respectively.  Set forth below aredescriptions of some of our current projects and expected capital expenditures.

 

Ilo Smelter Modernization:  Ourlargest outstanding short-term capital investment project is the Ilo smeltermodernization.  The project is part ofour Environmental Compliance and Management Program (known by its Spanishacronym, PAMA), which was approved by the Peruvian government in 1997.  The project will modernize the smelter and istargeted to capture no less than 92% of sulfur dioxide emissions, in compliancewith Peru’s environmental requirements. The project is moving ahead on schedule with detailed engineeringcompleted and construction work in process in order to be completed by the endof 2006.  The anode casting wheel part ofthis project is being hot tested and starting in the first quarter of 2006 wewill replace Ilo blister production with anodes.  This will allow us to directly feed therefinery and eliminate the current cost of re-melting blister into anodeform.  The budget approved for thisproject is $500 million, including $389 million expended through December 31,2005.  We have budgeted $87.5 million forthis project in 2006 excluding capitalized interest.

 

Toquepala Leach Dump Project: *** ***Toimprove cost containment and production efficiency, in 2003 we started aproject at Toquepala to install a crushing, conveying and spreading system atthe leach dumps.  The approved budget forthis project is $81 million, with $75.5 million expended through December 31,2005.  The new system is expected toimprove recovery at our leaching facilities and will largely eliminate costlytruck haulage in the process.  Theproject is 94% complete at December 31, 2005.  The primary crusher was placed in operationin August 2005.  The overlandconveyors 1, 2 and 3, and the grasshoppers 30 and 31 were put in the productionline.  The conveying reached its ratedcapacity of 6,500 ton/hr. in September 2005.  The construction of the ramp will continueuntil final completion of the project, expected in August 2006.

 

Cananea SX/EW Plant: *** ***We intend toincrease our Cananea unit’s production of electrolytic copper by building a newSX/EW plant, (SXEW III).  The plant willproduce electrolytic copper cathodes of ASTM grade 1 or LME grade A.  The project includes the installation ofstorage for deliverables required for operation of the plant and theinstallation of an emergency power plant and a fire protection system.  The project is currently underway.  In its first stage, it is expected to produce10,500 tons of additional copper by the end of 2007.  Studies for a 22,900 ton subsequent expansionof the SX/EW plant are also underway.  Asthe Cananea mine has the largest quantity of our copper reserves we arestudying several possibilities for expanding it to a scale that fully maximizesits potential.  The approved budget forthis project, including the subsequent 22,900 tons expansion, is $90 million,of which $2.3 million has been expended through December 2005.

 

Nueva Rosita Coal Plant:  Wecommenced projects to increase the production at our Nueva Rosita unit inCoahuila, Mexico.  These projects includean upgrade of our Pasta de Conchos mine and re-engineering and modernization ofour coking plant.

 

The Pasta de Conchos mine’s project includes the open pit developmentin the east and west zones to increase coal production from 250,000to 1,000,000 tons per year and has a capital budget of $40.1 million ofwhich $15.2 million was expended through 2005.

 

The coking plant project includes the re-engineering and modernizationof 21 ovens, with this re-engineering we expect to increase efficiency in thesystem to control emissions during the discharging of the ovens and provide forcontinuous operation. This project has a capital budget of $12 million of which$8.7 million was expended through 2005. The expected completion date of the re-engineering part of this projectis March 2006. The modernization is forecast to be completed in 2009.

 

Other Expenditures:  Increasingthe height of dams at Quebrada Honda for tailings impoundment is now underengineering study. The auxiliary dams constructed before will serve as initialdams to increase the impoundment volume at Quebrada Honda. The capital 

 

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cost budget for this project will be ready after completion of theengineering studies, which is expected in the third quarter 2006.

 

The new PLS dams project at Huanaquera is for construction of newpregnant solution collection dams for the Toquepala leaching facility. At yearend 2005 this project has reached approximately 47% progress.  The budget for this project is $32.5 million,$10.6 million of which was expended as of December 31, 2005.

 

In order to reduce operation and maintenance costs and comply withenvironmental requirements, we replaced the disc filters at the Toquepalaconcentrator with a new vertical press filter. The project was completed in 2005 at a cost of $3.7 million.

 

Proposed Projects:  We have a number ofprojects that we believe may develop in the future.  We evaluate new projects on the basis ofexpected return, environmental needs, required investment and estimatedproduction, among other considerations.

 

Brownfield projects are development projects on existing properties,generally taking two to three years to complete. Below is a brief descriptionof each of the brownfield projects that we believe we may pursue in the future.Information in the table below, including descriptions and investments areestimates only. The estimated completion time for each of these projects isapproximately two years, once started. We cannot assure that it will undertake any of these projects or thatthe information in the table below will be accurate for any project weundertake.

 
| **Projects**   | ** ** | **Description**                                              | ** ** | **Location**                  | ** ** | **Estimated Investment  (in millions)(1)** |
|----------------|------------|--------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------|
| Concentrator   |       | Additional  7,000,000 tons per year of sulfide ore processed |       | Cananea (Mexico)              |       | $80 - $100                                 |
| SX/EW Plant    |       | Additional  22,000 tons per year of copper cathode           |       | La Caridad (Mexico)           |       | $110 - $130                                |
| Rod Plant      |       | Additional  150,000 tons per year of copper rod              |       | La Caridad (Mexico)           |       | $25 - $35                                  |
| Zinc  Refinery |       | Additional  50,000 tons per year of refined zinc             |       | San Luis Potosí (Mexico) |       | $100 - $120                                |

 

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(1) Excluding capitalized interest.

 

In addition, in December 2005 we announced our plans for a 450Megawatt power generation plant in Mexico to supply our own facilities.  We anticipate that the project, which iscurrently out for bids, will be built and managed by an independent powercompany and our obligation will be the supply of coal from our reserves and anagreement to use the power output.  Weexpect this plant will give us the ability to substantially reduce and controlour power cost, as we will supply coal from our mines.  We believe we will be able to reduce theswings caused by the variation in the international price of energy, a majorelement of our operating cost.  Theproject, expected to be finished in 2008, will create nearly 900 permanentjobs, 3,000 jobs during the construction stage, and will exceed Mexican and internationalenvironmental standards.  We also haveadditional projects that we are considering and may pursue.

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

** **

Our discussion and analysis of our combined financial condition andresults of operations, as well as quantitative and qualitative disclosuresabout market risks, are based upon our consolidated combined financialstatements, which have been prepared in accordance with U.S. GAAP.  Preparation of these consolidated combinedfinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Management makes its best estimate of theultimate outcome for these items based on historical trends and otherinformation available when the financial

 

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statements are prepared.  Changesin estimates are recognized in accordance with the accounting rules forthe estimate, which is typically in the period when new information becomesavailable to management.  Areas where thenature of the estimate makes it reasonably possible that actual results couldmaterially differ from amounts estimated include: carrying value of the orereserves that are the basis for future cash flows estimates andunits-of-production depreciation and amortization calculations; revenuerecognition; capitalized mine stripping costs and leachable material; and assetretirement obligations.  We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Ore Reserves:*** ***For purposes of our long-term planning, our managementuses metal price assumptions of $0.90 per pound for copper and $4.50 per poundfor molybdenum.  These prices areintended to approximate average prices over the long term. Ore reserves basedon these prices are the basis for our internal planning, including thepreparation of the mine plans for our mines. Our management uses these price assumptions, as it believes these pricesreflect the full price cycle of the metals market.

 

However, pursuant to SEC guidance, the reserves information in thisreport is calculated using average metals prices over the most recent threeyears, except as otherwise stated.  Werefer to these three-year average metals prices as “current average prices.”  Our current average prices for copper arecalculated using prices quoted by COMEX, and our current average prices formolybdenum are calculated according to *Platt’s**Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $1.261 per pound for copper and $17.817 per pound formolybdenum, both current average prices as of December 31, 2005.  The current average prices for copper andmolybdenum were $0.939 and $8.425, respectively, as of December 31, 2004and $0.751 and $3.81, respectively, as of December 31, 2003.

 

Certain financial information is based on reserve estimates calculatedon the basis of current average prices. These items include the amount of mine stripping that is capitalized,units of production amortization of capitalized mine stripping and amortizationof intangible assets.  For our Peruvianmines, commencing in 2003, and for our Mexican operations commencing in 2005 wehave used reserve estimates based on current average metals prices as of themost recent year then ended to determine these items.  In the case of prior periods we have usedreserves estimates based on a price assumption of $ 0.90 per pound of copperand $ 4.50 per pound of molybdenum.

 

Capitalized Mine Stripping Costs andLeachable Material:*** ***Incarrying out our mining operations, we are required to remove waste material toaccess mineral deposits.  Because theconcentration of mineral deposits is not evenly distributed throughout the orebody, there are periods during the life of the mine in which we mine more wasteas compared to ore produced, and periods during which we mine less waste ascompared to ore produced.  These miningcosts are commonly referred to as “stripping” costs.

 

For each of our existing mines in the production stage, our mineengineers have calculated a life-of-mine stripping ratio that represents ourestimate of the total amount of waste to be removed at each mine divided by theestimated total proven and probable reserves at such mine.  The mine stripping ratios are used todetermine the amount of mine production costs to be charged againstearnings.  In periods when the actualratio of waste to mineral ore extracted exceeds the life-of-mine strippingratios, we capitalize production costs associated with mining operations inproportion to the excess waste mined. Such capitalized costs are included in net capitalized mine stripping,and are amortized to operations using the units of production method.  This charge to operations for theamortization of deferred stripping costs could differ materially betweenreporting periods to the extent that there were material changes in the valueof proven and probable reserves.  Copperresources contained in piles of leachable materials that have been extractedfrom the mines are not included in the determination of units of productionamortization.  Conversely, in periodswhen the actual ratio of waste to mineral ore mined is less than thelife-of-mine stripping ratio, we reduce the net capitalized mine strippingasset proportionally with a charge to amortization expense.  During periods we are stripping at the higherrates, increased mining costs associated with the higher 

 

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tonnages are incurred.  Costs ofthis nature are necessary in a mining operation to ensure the availability ofmineable ore in future periods.  Thedeferred stripping accounting method has been generally accepted in the miningindustry where mining operations have diverse grades and waste-to-mineral oreratios; however, industry practice does vary.

 

At the March 17, 2005 meeting of the Emerging Issues Task Force(EITF), the EITF reached a consensus that stripping costs incurred during theproduction phase of a mine are variable production costs that should beincluded in the costs of the inventory produced (extracted) during the periodthat the stripping costs are incurred. The EITF noted that the consensus does not address the accounting forstripping costs incurred during the pre-production phase of a mine.  The consensus with respect to this issue wasratified by the FASB on March 30, 2005, and will be effective for thefirst reporting period in fiscal years beginning after December 15, 2005,with early adoption permitted. In its June 15-16, 2005 meeting, the EITFalso approved a modification to the transition provisions.  On January 1, 2006 we adopted thisconsensus by reversing $499.5 million of net cumulative capitalized strippingcost and capitalized leach inventory as of December 31, 2005 and recordinga net charge of $322.9 million to retained earnings after recognition ofworkers’ participation and tax benefit of $176.6 million.  In addition, near-term future operatingincome could be negatively impacted on the extent that costs previouslycapitalized are expensed.

 

If we were to have expensed all production stripping costs andcapitalized leaching costs associated with our mining operations as incurred,net operating cost would have increased by $43.0 million, $56.3 million and$53.9 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

We further discuss capitalized mine stripping costs and leachablematerial in Notes 2 and 5 to our Consolidated Combined Financial Statementsincluded herein.

 

Asset Retirement Obligation:*** ***Our mining and exploration activities are subject tovarious laws and regulations governing the protection of the environment.  Accounting for reclamation and remediationobligations requires management to make estimates unique to each miningoperation of the future costs we will incur to complete the reclamation andremediation work required to comply with existing laws and regulations.  These estimates are based on inflationassumptions using the U.S. Consumer Price Index and using our risk-free creditrate (which is based on our credit status). Actual costs incurred in future periods could differ from amountsestimated.  Additionally, future changesto environmental laws and regulations could increase the extent of reclamationand remediation work required to be performed by us.  Any such increases in future costs couldmaterially impact the amounts charged to operations for reclamation andremediation.

 

We further discuss Asset Retirement Obligation in Note 9 to ourconsolidated combined financial statements included herein.

 

Revenue Recognition:*** ***For certain of our sales of copper and molybdenumproducts, customers are given the option to select a monthly average LME orCOMEX price (as is the case for sales of copper products) or the molybdenumoxide proprietary market price estimate of Platt’s *Metals Week* (as is the case for sales of molybdenumproducts), generally ranging between one and three months subsequent toshipment.  In such cases, revenue isrecorded at a provisional price at the time of shipment.  The provisionally priced copper sales areadjusted to reflect forward copper prices based on LME or COMEX prices at theend of each month until a final adjustment is made to the price of theshipments upon settlement with customers pursuant to the terms of thecontract.  In the case of molybdenumsales, for which there are no published forward prices, the provisionallypriced sales are adjusted to reflect the market prices at the end of each monthuntil a final adjustment is made to the price of the shipments upon settlementwith customers pursuant to the terms of the contract.

 

The following are the provisionally priced copper and molybdenum salesoutstanding at December 31, 2005, 2004 and 2003:

 

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| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| **Provisionally Priced Sales** | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Copper                         |       |                             |       |   |   |   |   |
| Millions of pounds             |       | 163.7                            |       | 179.7 |   | 51.1 |   |
| Priced at (per pound)          |       | $                                | 2.04       |   | $ | 1.46 |   | $ | 1.08 |   |
| Molybdenum                     |       |                             |       |   |   |   |   |
| Millions of pounds             |       | 6.1                              |       | 6.3 |   | 3.7 |   |
| Priced at (per pound)          |       | $                                | 25.00      |   | $ | 32.38 |   | $ | 7.60 |   |

 

Provisional sales adjustments included in accounts receivable and netsales were as follows at December 31, 2005, 2004 and 2003:

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Provisional Sales Adjustments** | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        |       | **(dollars  in millions)**       |       |
| Copper                            |       | $                                | 7.9        |   | $ | 15.9 |   | $ | 8.4 |   |
| Molybdenum                        |       | (39.2                            | )          | 69.2 |   | 6.9 |   |
| **Total**                         |       | $                                | (31.3      | ) | $ | 85.1 |   | $ | 15.3 |   |

 

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

 

Results of Operations

 

The following table highlights key combined financial and operatingresults for each of the years in the three-year period ended December 31,2005.

 
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Statement of Earnings Data**                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | **(dollars in millions)**        | ** ** |
|                                                                    |       |                             |       |   |   |   |   |
| Net sales                                                               |       | $                                | 4,112.6    |   | $ | 3,096.7 |   | $ | 1,576.6 |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion)  |       | (1,635.4                         | )          | (1,334.3 | ) | (992.4 | ) |
| Selling, general and administrative                                     |       | (81.1                            | )          | (71.8 | ) | (63.5 | ) |
| Depreciation, amortization and depletion                                |       | (277.2                           | )          | (192.6 | ) | (177.1 | ) |
| Exploration                                                             |       | (24.4                            | )          | (15.6 | ) | (17.9 | ) |
|                                                                    |       |                             |       |   |   |   |   |
| Operating income                                                        |       | 2,094.5                          |       | 1,482.4 |   | 325.7 |   |
| Interest expense                                                        |       | (108.9                           | )          | (106.5 | ) | (117.0 | ) |
| Interest capitalized                                                    |       | 22.5                             |       | 10.7 |   | 5.6 |   |
| Interest income                                                         |       | 30.8                             |       | 8.3 |   | 5.2 |   |
| Loss on debt prepayments                                                |       | (10.6                            | )          | (16.5 | ) | (5.8 | ) |
| Loss on derivative instruments                                          |       | (22.3                            | )          | (1.4 | ) | — |   |
| Gain on disposal of properties                                          |       | —                           |       | 53.5 |   | — |   |
| Other income (expense)                                                  |       | (3.7                             | )          | (9.7 | ) | (4.2 | ) |
| Income taxes                                                            |       | (589.7                           | )          | (433.7 | ) | (120.1 | ) |
| Minority interest                                                       |       | (12.5                            | )          | (4.7 | ) | (4.3 | ) |
| Cumulative effect of change in accounting Principle,  net of income tax |       | —                           |       | — |   | (1.5 | ) |
| Net earnings                                                            |       | $                                | 1,400.1    |   | $ | 982.4 |   | $ | 83.5 |   |

 

The table below outlines the average published market metals prices(rounded to the nearest cent) for our metals for each of the years ended December 31,2005, 2004 and 2003.

 

76

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**Average Market Metals Prices**

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** | **% Change** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                               | ** ** | **2005**                         | ** ** | **2004**     | ** ** | **2003** | ** ** | **2004 to 2005** | ** ** | **2003 to 2004** | ** ** |
| Copper price  ($ per pound - LME)   |       | $                                | 1.67       |         | $          | 1.30 |   | $ | 0.81 |   | 28.5 | % | 60.5 | % |
| Copper price  ($ per pound - COMEX) |       | $                                | 1.68       |         | $          | 1.29 |   | $ | 0.81 |   | 30.2 | % | 59.3 | % |
| Molybdenum  price ($ per pound) (1) |       | $                                | 31.05      |         | $          | 15.95 |   | $ | 5.21 |   | 94.7 | % | 206.1 | % |
| Zinc price  ($ per pound - LME)     |       | $                                | 0.63       |         | $          | 0.48 |   | $ | 0.38 |   | 31.3 | % | 26.3 | % |
| Silver price  ($ per ounce - COMEX) |       | $                                | 7.32       |         | $          | 6.68 |   | $ | 4.89 |   | 9.6 | % | 36.6 | % |

 

----

(1) Platt’s Metals Week Dealer Oxide.

 

# SegmentSales Information

 

The following table presents the volume of sales by segment of copperand our significant byproducts, for each of the three years ended December 31,2005.

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper sales (million pounds)** | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                             |       |   |   |   |   |
| Peruvian  operations              |       | 825.3                            |       | 864.4 |   | 827.1 |   |
| Mexican  open-pit                 |       | 768.8                            |       | 680.6 |   | 625.5 |   |
| Mexican  IMMSA unit               |       | 93.1                             |       | 53.9 |   | 49.1 |   |
| Intersegment  elimination         |       | (147.2                           | )          | (34.4 | ) | (45.6 | ) |
| Total copper  sales               |       | 1,540.0                          |       | 1,564.5 |   | 1,456.1 |   |

 
| **Byproduct sales (million  pounds, except** | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **silver - million ounces)**                 | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Peruvian operations:                         |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate         |       | 23.4                             |       | 23.5 |   | 20.0 |   |
| Silver                                       |       | 4.2                              |       | 4.6 |   | 4.2 |   |
|                                         |       |                             |       |   |   |   |   |
| Mexican open-pit operations:                 |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate         |       | 8.8                              |       | 8.1 |   | 7.6 |   |
| Zinc-refined  and in concentrate             |       | 108.9                            |       | 101.1 |   | 90.1 |   |
| Silver                                       |       | 7.2                              |       | 7.5 |   | 8.5 |   |
|                                         |       |                             |       |   |   |   |   |
| IMMSA unit                                   |       |                             |       |   |   |   |   |
| Zinc-refined  and in concentrate             |       | 288.7                            |       | 269.1 |   | 274.8 |   |
| Silver                                       |       | 11.5                             |       | 12.6 |   | 12.1 |   |
|                                         |       |                             |       |   |   |   |   |
| Intersegment elimination                     |       |                             |       |   |   |   |   |
| Zinc                                         |       | (103.5                           | )          | (103.6 | ) | (95.5 | ) |
| Silver                                       |       | (3.1                             | )          | (4.5 | ) | (5.3 | ) |
|                                         |       |                             |       |   |   |   |   |
| Total byproduct sales                        |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate         |       | 32.2                             |       | 31.6 |   | 27.6 |   |
| Zinc-refined  and in concentrate             |       | 294.1                            |       | 266.6 |   | 269.4 |   |
| Silver                                       |       | 19.8                             |       | 20.2 |   | 19.5 |   |

 

**Resultsof operations for the Year Ended December 31, 2005 Compared to Year Ended December 31,2004.**

 

***Net sales***

 

Our sales in 2005 were $4,112.6 million, compared with $3,096.7 millionin 2004, an increase of $1,015.9 million or 32.8%. The increase wasattributable to significant

 

77

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increases in metal prices in 2005, particularly for copper, which roseapproximately 30%, and molybdenum, which rose 94.7%. Sales volumes for copperdeclined by 24.5 million pounds in 2005 a decrease of 1.6% compared with 2004. Thisdecrease in copper sales volume, as well as a decrease in the volume of silversold, was to a large part offset by increases in the volume of molybdenumand zinc sales.

 

The table below presents information regarding the volume of our coppersales products.

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper sales (million pounds)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Refined                           |       | 818.2                            |       | 790.6 |   |
| Blister                           |       | 109.4                            |       | 93.9 |   |
| Concentrates                      |       | 20.0                             |       | 107.8 |   |
| SX/EW                             |       | 261.7                            |       | 239.1 |   |
| Rod                               |       | 330.7                            |       | 333.1 |   |
| **Total**                         |       | 1,540.0                          |       | 1,564.5 |   |

 

Mine copper production was 1,521.0 millionpounds in 2005, a decrease of 3.9% from 2004. This decrease of 61.9 millionpounds included a decrease of 87.6 million pounds from the Peruvian open pitoperations and 5.0 million pounds in the Mexican underground mines, which werepartially offset by an increase of 30.7 million pounds from the Mexican openpit mines.

 

The decrease of 87.6 million pounds in thePeruvian mines was the result of lower ore grades at the Cuajone and Toquepalamines and lower PLS grade in the SX/EW operation. The decrease of 5.0 millionpounds in the Mexican underground mines was due to lower ore grades. Theincrease of 30.7 million pounds in production from the Mexican open pit mineswas principally due to higher throughput in La Caridad mine and higher recoveryand an increase in SX-EW production due to higher quantities of PLS treated andhigher power efficiency.

 

Molybdenum production increased from 31.7million pounds in 2004 to 32.6 million pounds in 2005. This 2.8% increase inproduction was mainly the result of an increase in the Mexican production, dueto higher recoveries.

 

Mine zinc production amounted to 316.6 millionpounds in 2005, an increase of 21.6 million pounds or 7.3% over the 2004 period.The increase was due to the resumption of production at IMMSA’s Santa Eulaliaunit. Santa Eulalia’s operations were suspended from 2000 through 2004 as thefacilities were being modernized. The work at the Santa Eulalia mine wasdelayed due to liquidity issues of Minera Mexico in some years prior to 2004. Increased2005 production from Santa Eulalia amounted to 27.6 million pounds. Gradedecreases at our other zinc mines reduced somewhat the increase from SantaEulalia. In January 2006 an electrical fire at a power sub-station at theSan Luis Potosi zinc refinery shut down operations. After evaluating thedamage, we expect to restore 50% of the production in the second quarter of2006 and the remaining 50% at the end of the third quarter. In the interim weare selling zinc concentrates. Due to a shortage of zinc concentrate, theCompany is able to receive favorable terms on these sales and expect that theoverall return will be favorable. In addition, insurance coverage is expectedto cover the cost of repairs, equipment replacement and any loss on production.

 

Copper made up 66.6% of net sales in 2005 compared with 68.1% in 2004. Salesof byproducts in 2005 totaled $1,373.6 million compared with$987.8 million in 2004, an increase of 39.1%. The increase is principallyattributable to significantly increased sales of molybdenum, resulting from the94.7% increase in the average market price for molybdenum in 2005 compared with2004. In addition to increased metal prices, increased mine production was alsoa factor in increasing our byproduct sales in 2005, molybdenum production for2005 was 32.6 million pounds compared with 31.7 million pounds in 2004, anincrease of 3%. The table below provides the sales of our byproducts as apercentage of our total net sales.

 

78

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| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| **Byproduct Sales as a Percentage of Total Net Sales** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Molybdenum                                             |       | 22.5                             | %          | 20.9 | % |
| Zinc                                                   |       | 4.3                              |       | 4.1 |   |
| Silver                                                 |       | 3.5                              |       | 4.1 |   |
| Other byproducts                                       |       | 3.1                              |       | 2.8 |   |
| **Total**                                              |       | 33.4                             | %          | 31.9 | % |

 

***Cost of sales(exclusive of depreciation, amortization and depletion)***

 

Our cost of sales (exclusive of depreciation, amortization anddepletion) in 2005 was $1,635.4 million, compared with $1,334.3 in 2004, anincrease of $301.1 million, or 22.6%. The principal elements of the cost ofsales increase are a $72.5 million increase in the cost of purchased electricpower and fuel, an increase of $27.2 million for mining royalties, and a $125.6million increase in worker’s participation, including an adjustment of $36.3million, related to a change in the method of calculating the amount of thestatutory worker’s participation for the Mexican workers, see “Liquidity andCapital Resources” for a discussion of this matter. In addition, the highervalue of copper in 2005 increased our cost of sales by $16.2 million over 2004,as we supplemented our copper production with copper acquired from thirdparties.

 

During 2005, in response to an industry wide shortage of mine trucktires we put in place a tire rationalization program to optimize our tire usage.The program, which includes; road maintenance improvements; closer tiremaintenance monitoring, including temperature and pressure checks; and strictertruck handling procedures; was in place for 2005 and resulted in an 18%reduction in tire consumption when compared to 2004. While we expect the supplydeficit to be resolved by mid-2007, we continue to monitor the supply situationfor this vital commodity and expect to satisfy our needs through prudentconsumption practices and the development of alternative supply sources, ifnecessary.

 

We expect that cost of sales will increase in 2006 and the near futureyears as a result of our adoption, on January 1, 2006, of the EITF’s,consensus related to mine stripping costs. See Critical Accounting andEstimates – Capitalized Mine Stripping and Leachable Material.

 

***Selling, general andadministrative***

 

Our selling, general and administrative expense in 2005 was $81.1million, compared with $71.8 million in 2004, an increase of $9.3 million. Ourhigher selling, general and administrative expense in 2005 was principally aresult of higher legal, auditing and consulting fees related in part tothe acquisition of Minera Mexico, to the issuance of new debt, and to the costassociated with compliance with the Sarbanes-Oxley Act. In addition, thePeruvian tax on bank transfers was $1.4 million higher in 2005.

 

***Depreciation,amortization and depletion***

 

Our depreciation, amortization and depletion expense in 2005 was $277.2million, compared with $192.6 million in 2004, an increase of $84.6 million. Theincrease was principally the result of the increase in the amortization ofcapitalized mine stripping costs and leachable materials of $37.0 million andan increase in depreciation related to replacement capital expenditures.

 

***Exploration***

 

Exploration expense in 2005 was $24.4 million, compared with $15.6million in 2004, an increase of $8.8 million. The increase was principally as aresult of the drilling and cross path activities at the Tia Maria project inPeru, $3.7 million, and $1.7 million and $1.2 million drilling costs in IMMSAand Cananea, respectively.

 

79

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***Interest expense***

 

Interest expense in 2005 was $108.9 million compared with $106.5million in 2004, an increase of $2.4 million. Our currently paid interestexpense decreased in 2005 principally as a result of a reduction of our debtoutstanding. However, included in 2005 there was $15.0 million for thewrite-off of previously capitalized debt issuance cost for financings prepaidin such years. With respect to our financing programs reference is made to “Liquidityand Capital Resources” for a further discussion of this matter.

 

***Capitalized interest***

 

Capitalized interest in 2005 was $22.5 million, compared with $10.7million in 2004, an increase of $11.8 million. This increase is mainly due tothe Ilo smelter modernization and the Toquepala crushing, conveying system forleachable material projects, on which capitalized interest increased by $6.4million and $2.2 million, respectively in 2005.

 

***Interest income***

 

Interest income in 2005 was $30.8 million, compared with $8.3 millionin 2004, an increase of $22.5 million. Our interest income increasedprincipally as a result of higher interest rates on short term securities andsignificantly higher invested balances.

 

***Loss on derivative instruments***

 

Loss on derivative instruments in 2005 was $22.3 million, compared with$1.4 million in 2004, an increase of $20.9 million. In 2005, we recorded $23.5million of loss in copper swaps and a gain of $1.2 million in interest rateswaps. In 2004 we recorded a loss of $1.4 million of interest rate swap.

 

***Loss on debtprepayments***

 

Loss on debt prepayments in 2005 was $10.6 million, compared with $16.5million in 2004, a decrease of $5.9 million. In 2005 we paid a penalty of $2.0million for the prepayment of $199 million of Peruvian bonds and a premium of$8.6 million in the Yankee bonds repurchase. In 2004, we incurred $12.8 millionof prepayment fees and prepayment interest differential and $3.7 million for adebt restructuring charge.

 

***Gain on disposal ofproperty***

 

Gain on disposal of property in 2004 was $53.5. This amount includesgain from the sale of non-core property of our Mexican operation.

 

***Other expense***

 

Other expense in 2005 was $3.7 million, compared with $9.7 million in2004 a decrease of $6.0 million. Included in other expense are fees and othercosts incurred in conjunction with the acquisition of Minera Mexico and were$3.3 million and $5.8 million in 2005 and 2004, respectively.

 

***Income taxes***

 

Income taxes in 2005 were $589.7 million, compared with $433.7 millionin 2004, an increase of $156.0 million and include $576.3 million and $420.2million of Peruvian and Mexican income taxes, $13.4 million and $13.5 millionfor US Federal and state taxes for 2005 and 2004, respectively. US income taxesare primarily attributable to investment income as well as limitations on useof foreign tax credits in determining the alternative minimum tax.

 

The increase of $156.0 million or 36.0% was primarily due to $581.5million of higher pretax income. The effective tax rate for 2005 was 29.4%,compared with 30.4% in 2004.

 

80

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Included in the 2005 tax provision is a refund of $43.4 millionreceived by Minera Mexico for asset-based taxes (minimum income tax) paid inprior years. Without the benefit of this credit the Company’s effective taxrate for the 2005 year would increase to 31.6%

 

***Minority interest***

 

Minority interest in 2005 was $12.5 million compared with $4.7 millionin 2004, an increase of $7.8 million or 166.0%. This increase is due to higherearnings in the period.

 

***Net earnings***

 

Our net earnings in 2005 were $1,400.2 million, compared with $982.4million in 2004, an increase of $417.8 million or 42.5%. Net earnings increasedas a result of the factors described above.

 

**Segment Operating Income Information – 2005vs. 2004:**

 

**Peruvian open-pit operations**

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 2,179.9    |       | $          | 1,715.9    |       | $ | 464.0 |   | 27.0 | % |
| Operating costs and expenses |       | (879.4     | )          | (788.8     | )          | (90.6      | )          | 11.5 | % |
| Operating income             |       | $          | 1,300.5    |       | $          | 927.1      |       | $ | 373.4 |   | 40.3 | % |

 

Net sales at our Peruvian operations in 2005 were $2,179.9 million,compared with $1,715.9 million in 2004, an increase of $464.0 million. Thisincrease was principally due to significant increases in the price of copper andmolybdenum. Copper sales volume decreased by 39.0 million pounds in 2005principally as a result of lower production at Toquepala and Cuajone due tolower ore grade and a decrease in SX/EW production due to lower PLS grades.

 

Operating costs and expenses at our Peruvian operations in 2005 were$879.4 million, compared with $788.8 in 2004, an increase of $90.6 millionprincipally due to higher cost of sales. The increase in cost of sales(exclusive of depreciation, amortization and depletion) of $83.8 wasprincipally the result of the higher cost of fuel, workers’ participationprovision and Peruvian royalty charges.

 

Fuel costs, a key component of our costs, were higher by $31.4 millionin 2005. Our cost for workers’ participation increased $27.6 million in 2005. Thiscost is calculated based on 8% of our Peruvian operations pre-tax earnings andincreased as our profits increase. A Peruvian royalty provision which wasinstituted in June 2004 added $22.7 million to our cost in 2005.

 

Operating income in 2005 was $1,300.5 million, compared with $927.1million in 2004, an increase of $373.4 million. The operating income increasedas a result of the factors described above.

 

81

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**Mexican open-pit operations.**

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 1,769.6    |       | $          | 1,189.7    |       | $ | 579.9 |   | 48.7 | % |
| Operating costs and expenses |       | (1,054.2   | )          | (665.9     | )          | (388.3     | )          | 58.3 | % |
| Operating income             |       | $          | 715.4      |       | $          | 523.8      |       | $ | 191.6 |   | 36.6 | % |

 

Net sales from our Mexican open-pit operations in 2005 were $1,769.6million, compared with $1,189.7 million in 2004, an increase of $579.9 millionor 48.7%. The increase in net sales was principally a result of significantincreases in the price of copper and molybdenum and increased sales volume.

 

Operating cost and expenses at our Mexican open-pit operations in 2005was $1,054.2 million compared with $665.9 million in 2004, an increase of$388.3 million or 58.3%. This increase was principally the result of highercost of sales and higher depreciation, amortization and depletion in 2005. Theincrease in cost of sales of $288.4 million was principally the result ofhigher sales volumes, increased fuel and purchased electric power cost,increased maintenance cost, higher purchased metal costs, higher exchangelosses, and increased workers participation. Production and sales volumeincreases added to our 2005 costs, as did an increase of $104.0 million forpurchased metals from third parties. Our cost for workers’ participation,including an adjustment of $36.3 million, increased $106.1 million in 2005. Thiscost is calculated based on 10% of pretax earnings and increases as our profitsincrease. Fuel and purchased electric power cost were higher by $31.4 millionin 2005. Maintenance cost was also higher by $38.9 million in 2005. Inaddition, an exchange loss of $18.5 million was reported in 2005 as a result ofthe appreciation of the peso against the U.S. dollar during the year. Theincrease in depreciation, amortization and depletion of $85.7 million in 2005was principally due to the amortization of capitalized mine stripping andleachable cost.

 

Operating income in 2005 was $715.4 million, compared with $523.8million in 2004, an increase of $191.6 million or 36.6%. The operating incomeincreased as a result of the factors described above.

 

**IMMSA unit**.

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 448.7      |       | $          | 317.1      |       | $ | 131.6 |   | 41.5 | % |
| Operating costs and expenses |       | (380.3     | )          | (272.9     | )          | (107.4     | )          | 39.4 | % |
| Operating income             |       | $          | 68.4       |       | $          | 44.2       |       | $ | 24.2 |   | 54.8 | % |

 

Net sales at our IMMSA unit in 2005 were $448.7 million, compared with$317.1 million in 2004, an increase of $131.6 million or 41.5%. The increasewas due to higher sales prices in 2005 for copper, zinc and silver. Inaddition, an increase in sales volume of copper and zinc added to the 2005sales increase. Zinc from our reopened Santa Eulalia mine added 22.7 millionpounds to 2005 zinc sales.

 

Operating costs and expenses at our IMMSA unit were $380.3 million in2005, compared with $272.9 million in 2004, an increase of $107.4 million or39.4%. This increase was principally the result of increased sales volumes forcopper and zinc, the higher cost of fuel and purchased electric power, highervolume of metal purchased from third parties and an increase in the cost ofcontractor services. In 2005, cost of sales (exclusive of depreciation,amortization and depletion) increased $99.7 million, principally as a result ofhigher production and sales volumes for copper and zinc, which included anincrease of $64.6 million for purchased metals from third parties.

 

82

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Our fuel and purchased electric power costs, a key component of ourcosts, were higher by $10.9 million in 2005. In addition, the cost ofcontractor services, principally for our coal operations, increased by $13.0million in 2005.

 

Operating income in 2005 was $68.4 million, compared with $44.2 millionin 2004, an increase of $24.2 million or 54.8%. The operating income increasedas a result of the factors described above.

 

Intersegment Eliminations and Adjustments

 

The net sales, operating costs and expenses and operating incomedisplayed above will not be directly equal to amounts in our consolidatedcombined statement of earnings because the adjustments of intersegmentoperating revenues and expenses must be taken into account. Please see Note 19to the financial statements.

 

**Resultsof Operations for the Year Ended December 31, 2004 compared with YearEnded December 31, 2003**

 

***Net sales***

 

Our net sales in 2004 were $3,096.7 million, compared with $1,576.6 in2003, an increase of $1,520.1 million or 96.4%. The increase was principallyattributed to significant increases in metals prices in 2004, particularlythose of copper, for which our average sales prices rose 67.9%, and molybdenum,for which our sales prices rose 286.3%. In addition to increased metals prices,increased mine production was also an important factor in increasing our netsales in 2004. Copper production for 2004 was 718,007 tons, compared with665,916 tons in 2003, an increase of 7.8%.

 

The table below presents information regarding the volume of our coppersales for each of the years ended December 31, 2004 and 2003.

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper sales (million pounds)** | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Refined                           |       | 790.6                            |       | 846.1 |   |
| Blister                           |       | 93.9                             |       | 90.2 |   |
| Concentrates                      |       | 107.8                            |       | 82.0 |   |
| SX/EW                             |       | 239.1                            |       | 280.4 |   |
| Rod                               |       | 333.1                            |       | 157.4 |   |
| **Total**                         |       | 1,564.5                          |       | 1,456.1 |   |

 

All four of our open-pit copper mines recorded increased output in 2004compared with 2003. The Cananea mine recorded the most significant increase of20.7%, equivalent to 29,003 additional tons of copper, primarily due to a 29.3%increase in mill throughput. The Toquepala mine registered the second highestproduction percentage increase of 6.8%, contributing an additional 12,849 tonsof copper. The increase in production at the Toquepala mine was primarilyattributable to a higher ore grade of 0.817% in 2004 compared with 0.749% in2003. The Cuajone and La Caridad mines also delivered higher production outputwith Cuajone contributing an additional 9,861 tons and La Caridad contributingan additional 3,454 tons in 2004 compared with 2003. Cuajone’s additionaloutput was primarily as a result of higher ore grades, while La Caridad’shigher output was as a result of increased production despite marginally lowerore grades. Copper made up 68.1% of our net sales in 2004 compared with 74.7%in 2003.

 

Our sales of byproducts in 2004 totaled $987.8million, compared with $396.1 million in 2003, an increase of $591.7 or 149.4%.The increase was principally attributable to significantly increased sales ofmolybdenum, resulting from the 286.3% increase in our

 

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average sales price for molybdenum in 2004 comparedwith 2003. The table below provides the sales of our byproducts as a percentageof our total net sales for 2004 and 2003.

 
| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| **Byproduct Sales as a Percentage of Total Net Sales** | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Molybdenum                                             |       | 20.9                             | %          | 9.1 | % |
| Zinc                                                   |       | 4.1                              |       | 6.4 |   |
| Silver                                                 |       | 4.1                              |       | 6.0 |   |
| Gold and other metals                                  |       | 2.8                              |       | 3.8 |   |
| Total                                                  |       | 31.9                             | %          | 25.3 | % |

 

***Cost of sales(exclusive of depreciation, amortization and depletion)***

 

Our cost of sales in 2004 was $1,334.3 million,compared with $992.4 million in 2003, an increase of $341.9 million or 34.5%. Ourhigher cost of sales was principally due to increased production in 2004. Asdiscussed above, copper mine production for 2004 increased 7.4% with all fourof our open-pit copper mines registering increased output in 2004 compared with2003. Cost of sales (exclusive of depreciation, amortization and depletion)also increased as a result of increases in the prices of certain inputs,including power, maintenance expenses and certain replacement parts. Cost ofsales (exclusive of depreciation, amortization and depletion) additionallyincreased in 2004 as a result of an increase in the volume and cost of thecopper concentrate we purchased from third parties in 2004. We purchaseconcentrate from third parties in order to produce additional copper rods forwhich we receive premium pricing, as well as to meet our commitments tocustomers. The cost of this purchased copper, acquired at prevailing marketprices, was $69.9 million in 2004, compared with $25.0 million in 2003. Theincrease in the cost of purchased copper resulted from the increased volumepurchased and from the increase in the price of copper.

 

Other factors contributing to the increased costs in2004 included a provision of $17.6 million for the recently enacted miningroyalty charge in Peru. This mining royalty charge will be 1% to 3% based onsales applicable to the value of concentrates produced in the Toquepala andCuajone mines.

 

We expect that cost of sales will increase in the nearfuture years as a result of the recently issued Emerging Issues Task Force, orEITF, consensus, which we describe above under “Critical Accounting Policiesand Estimates — Capitalized Mine Stripping Costs and Leachable Material.”

 

***Selling, general andadministrative***

*** ***

Selling, general and administrative expense in 2004was $71.8 million, compared with $63.6 million in 2003, an increase of $8.2million or 12.9%. Our higher selling, general and administrative expense in2004 was principally as a result of $13.8 million in management fees paid toGrupo México. The increase in management fees payable to Grupo México islargely attributable to the transfer of some corporate staff from Minera Méxicoto Grupo México. Such management fees, which were not payable in 2003, werepartially offset by a payroll reduction of $2.7 million and a reduction inlease expenses of $2.6 million. Management fees include corporate, legal,accounting, finance, and commercial and similar costs.

 

***Depreciation,amortization and depletion***

 

Depreciation, amortization and depletion expense in2004 was $192.6 million, compared with $177.1 million in 2003, an increase of$15.5 million or 8.8%. Depreciation, amortization and depletion expenseincreased principally as a result of the increase in the amortization of capitalizedmine stripping costs and leachable materials of $10.6 million. The increase wasalso as a result of an increase in maintenance capital expenditures. Inaddition, the depreciation expense increased $6.2 million as a result of alarger amount of capital expenditures incurred in 2004. Our total capitalexpenditures in 2004 were

 

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$228.3 million compared with $64.9 million in 2003. Ouraverage depreciation rate was approximately 3% for 2004. We expect amortizationwill decrease in the future as a result of the aforementioned EITF consensus.

 

***Exploration***

 

Exploration expense in 2004 was $15.6 million,compared with $17.9 million in 2003, a decrease of $2.3 million or 12.8%. In2003 exploration expense included the acquisition of exploration properties inChile for $3.7 million. There was no similar acquisition in 2004. Excludingthese costs, exploration expense increased as a result of exploration anddrilling activity in Mexico.

 

***Interest expense***

 

Interest expense in 2004 was $106.5 million, comparedwith $117.0 million in 2003, a decrease of $10.5 million or 9.0%. Interestexpense decreased in 2004 compared with 2003 principally as a result of areduction in the amount of debt outstanding. In addition, in the last quarterin 2004, we refinanced a portion of outstanding debt at a reduced interest ratein connection with our new $600 million credit facility.

 

***Capitalized interest***

 

Capitalized interest in 2004 was $10.7 million,compared with $5.6 million in 2003, an increase of $5.1 million, or92%. Capitalized interest increased principally as a result of an increase inour capital expenditures from $64.9 million in 2003 to $228.3 million in 2004.

 

***Interest income***

 

Interest income in 2004 was $8.3 million, comparedwith $5.2 million in 2003, an increase of $3.1 million or 60.6%. Despitedecreases in prevailing interest rates, our interest income increased in 2004compared with 2003, principally due to increased levels of cash invested,principally in short-term securities.

 

***Loss on debtprepayments***

 

The loss on debt prepayments in 2004 was $16.5million, compared with $5.8 million in 2003, an increase of $10.7 million or182.3%. Loss on debt prepayments increased in 2004 compared with 2003 as aresult of our increased financing activity. In 2004 we incurred $12.8 millionof prepayment fees and prepayment interest differential and $3.7 million for adebt restructuring charge. In 2003 we incurred debt refinancing expenses of$5.8 million, including prepayment fees and the write-off of debt issuancecosts.

 

***Gain on disposal ofproperties***

 

Gain on disposal of properties in 2004 was $53.5million. This gain is a result of the sale of non-core assets in 2004 by MineraMéxico.

 

***Other expense***

 

Other expense in 2004 was $9.7 million, compared with$4.2 million in 2003, an increase of $5.5 million or 132.1%. Other expenseincreased principally due to fees paid to third parties in connection with theacquisition of Minera Mexico.

 

***Income taxes***

 

Income taxes in 2004 were $433.7 million, comparedwith $120.1 million in 2003, and include $420.2 million and $113.8 million ofPeruvian and Mexican income taxes, $13.5 million and $6.3 million for USfederal and state taxes for 2004 and 2003, respectively.

 

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The increase of $313.6 million or 261.1% was primarilydue to a $1,211.4 million increase in pre-tax income. Such increase waspartially offset by the effect of the changes in our permanent differences from2004 to 2003. Our effective tax rates were 30.4% in 2004 based on pre-taxincome of $1,420.9 million and 57.3% in 2003 based on pre-tax income of $209.5million. See Note 7 to the Consolidated Combined Financial Statements.

 

***Minority interest***

 

Minority interest in 2004 was $4.7 million, comparedwith $4.3 million in 2003, an increase of $0.4 million or 10.9%. Minorityinterest increased due to improved after-tax earnings. This increase waspartially offset by the reduction of certain minority interests upon thepurchase of such interests by Minera México in 2004.

 

***Net earnings***

 

Net earnings in 2004 were $982.4 million, comparedwith $83.5 million in 2003, an increase of $898.9 million or 1,076%. Netearnings increased as a result of the factors described above.

 

***SegmentOperating Income Information – 2004 vs. 2003:***

*** ***

***Peruvian operations***

*** ***
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 1,715.9    |       | $          | 798.4      |       | $ | 917.5 |   | 114.9 | % |
| Operating costs and expenses |       | (788.8     | )          | (581.6     | )          | (207.2     | )          | 35.6 | % |
| Operating income             |       | $          | 927.1      |       | $          | 216.8      |       | $ | 710.3 |   | 327.6 | % |

*** ***

Net sales at our Peruvian operations in 2004 were$1,715.9 million, compared with $798.4 million in 2003, an increase of $917.5million or 114.9%. This increase in net sales was principally due tosignificant increases in the price of copper and molybdenum. In addition,copper sales volume increased by 37.3 million pounds in 2004 as productionincreased at both the Toquepala and Cuajone mines. Increased throughput at theToquepala mill and better recoveries and higher ore grades treated at bothmills increased copper production by 28,340 tons. This increase was partiallyoffset by decrease of 5,631 tons in SX/EW copper production caused by lower PLSgrades. The volume of sales of molybdenum and silver, the principal byproductsof our Peruvian operations, also increased in 2004. We anticipate a reductionin the volume of 2005 copper production of approximately 8% at our Peruvianoperations as a result of an expected decline in ore grade at our Cuajone mine.

 

Operating costs and expenses at our Peruvianoperations in 2004 were $788.8 million, compared with $581.6 million in 2003,an increase of $207.2 million or 35.6%. The increase was a result of highersales volume, higher cost of fuel and power, an increase in the workers’participation provision, a new Peruvian royalty charge and increaseddepreciation, amortization and depletion.

 

Sales of copper from our Peruvian mines in 2004increased by 21.6 million pounds compared with 2003 and sales of copperprocessed up from purchased third party material increased by 15.7 millionpounds. We pay prevailing market prices for this purchased material, which weresignificantly higher in 2004. Cost of copper purchased from third partiesincreased to $49.7 million in 2004 from $6.1 million in 2003. Power and fuelcosts, a key component of our costs, were significantly higher in 2004. Ourprovision for workers’ participation increased by $67.5 million in 2004. Thiscost is calculated based on 8% of our Peruvian operations pre-tax earnings andincreases as our profits increase. A provision for a new Peruvian royalty added$17.6 million to our costs in 2004. This Peruvian royalty was put in place inmid-year 2004 and will continue to affect our 2005

 

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results. In addition, depreciation, amortization anddepletion increased by $4.2 million in 2004, principally due to capitalizationand depreciation of new projects. In addition, our Peruvian operation paidmanagement fees of $7.0 million to Grupo México in 2004 and 2003.

 

Operating income in 2004 was $927.1 million comparedwith $216.8 million in 2003, an increase of $710.3 million or 327.6%. Theoperating income increased as a result of the factors described above.

 

***Mexicanopen-pit operations***

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 1,189.7    |       | $          | 649.3      |       | $ | 540.4 |   | 83.2 | % |
| Operating costs and expenses |       | (665.9     | )          | (548.6     | )          | (117.3     | )          | 21.4 | % |
| Operating income             |       | $          | 523.8      |       | $          | 100.7      |       | $ | 423.1 |   | 420.2 | % |

 

Net sales from our Mexican open-pit operations in 2004were $1,189.7 million, compared with $649.3 million in 2003, an increase of$540.4 million or 83.2%. The increase in net sales was principally a result ofsignificant increases in the price of copper and molybdenum and increased salesvolume. Copper sales volume increased by 55.1 million pounds in 2004 comparedwith 2003 as production at both open-pit mines increased. The Cananea minerecorded the most significant increase, 20.7%, equivalent to 29,003 additionaltons of copper, primarily due to a 29.3% increase in mill throughput. The LaCaridad mine increased production of copper in 2004 by 3,454 tons, primarilybecause of higher mill recoveries.

 

Operating costs and expenses at our Mexican open-pitoperations in 2004 were $665.9 million, compared with $548.6 million in 2003,an increase of $117.3 million or 21.4%. The increase was principally the resultof higher sales volumes, increased fuel and power costs, and increased cost andconsumption of other production inputs and increased maintenance activity. In2004, sales of copper produced and sales of copper processed from third partymaterial increased. Copper purchased from third parties increased by $37.0million in 2004. Copper purchased from IMMSA in 2004 amounted to $87.5 million.In addition, a devaluation of the Mexican Peso caused an increase of $17.8million in 2004’s reported exchange loss. Our Mexican open-pit operation paidmanagement fees of $4.5 million to Grupo México in 2004 and 2003.

 

Operating income in 2004 was $523.8 million, comparedwith $100.7 million in 2003, an increase of $423.1 million or 420.2%. Theoperating income increased as a result of the factors described above.

 

***IMMSAunit***

 
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                    |       | $          | 317.1      |       | $          | 230.9      |       | $ | 86.2 |   | 37.3 | % |
| Operating costs and expenses |       | (272.9     | )          | (218.9     | )          | (54.0      | )          | 24.7 | % |
| Operating income             |       | $          | 44.2       |       | $          | 12.0       |       | $ | 32.2 |   | 268.3 | % |

 

Net sales at our IMMSA unit in 2004 were $317.1million, compared with $230.9 million in 2003, an increase of $86.2million or 37.3%. This increase was due to higher sales prices in 2004 forcopper, zinc and silver, its principal products. In addition, an increase insales volume of copper and silver added to the 2004 sales increase.

 

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Operating costs and expenses at our IMMSA unit were$272.9 million in 2004, compared with $218.9 million in 2003, an increase of$54.0 million or 24.7%. This increase was the result of increased sales volumeof copper and silver and increases in power and fuel and other operating costs,and contractor services. Cost of copper purchased from third parties increasedto $89.6 million in 2004 from $22.8 million in 2003. 2004 purchases include$11.1 million from our Mexican open-pit operations. In addition, a devaluationof the Mexican Peso caused an increase in the reported exchange loss of $2.1million in 2004. Our IMMSA unit paid management fees of $2.3 million to GrupoMéxico in 2004 and 2003.

 

Operating income in 2004 was $44.2 million, comparedwith $12.0 million in 2003, an increase of $32.2 million or 268.3%. Theoperating income increased as a result of the factors described above.

 

Intersegment Eliminations and Adjustments

 

The net sales, operating costs and expenses andoperating income displayed above will not be directly equal to amounts in ourconsolidated combined statement of earnings because the adjustments ofintersegment operating revenues and expenses must be taken into account. Pleasesee Note 19 to the financial statements.

 

**Liquidity and Capital Resources**

 

The following discussion relates to ourliquidity and capital resources for each of the years in the three year periodended December 31, 2005.

 

***Liquidity***

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                                       | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                             |       |   |   |   |   |
| Net cash provided from operating activities             |       | $                                | 1,644.2    |   | $ | 1,172.4 |   | $ | 64.8 |   |
| Net cash used for investing activities                  |       | (425.4                           | )          | (219.5 | ) | (59.7 | ) |
| Net cash (used for) provided from financing  activities |       | (1,055.6                         | )          | (540.6 | ) | 185.6 |   |
|                                                         |            |                                  |            |  |  |  |  |  |  |  |

 

***Cash Flows fromOperating Activities***

 

Net cash provided from operating activities was $1,644.2 million,$1,172.4 million and $64.8 million in 2005, 2004 and 2003, respectively. Theincreases in 2005 and 2004 were for the most part the result of higher netearnings in both years, which were the result of improved prices for ourproducts and for copper and molybdenum in particular.

 

In 2005, our earnings were $1,400.1 million, approximately 85.2% of thenet operating cash flow. Significant non-cash items deducted from, or added to,our earnings included, depreciation, amortization and depletion of $277.2million, which positively increased operating cash flow; and capitalized minestripping and leachable material of $116.4 million and a deferred tax benefitof $42.3 million, which reduced operating cash flow. Additionally, changes inworking capital balances added a further $89.1 million to our net cash fromoperating activities.

 

In 2004, our earnings were $982.4 million, approximately 83.8% of thenet operating cash flow. Significant non-cash items deducted from, or added to,our earnings included, depreciation, amortization and depletion of $192.6million and a deferred tax provision of $54.4 million, which positivelyincreased our operating cash flow; and capitalized mine stripping and leachablematerial of $92.8 million which decreased our operating cash flow. In addition,$53.5 million a gain from the sale of non-core Mexican properties is deductedfrom earning to arrive at operating cash flow, the contribution of these fundsis included in investing cash flows. Changes in working capital assets andliabilities increased net operating cash flow by $70.2 million. Some of theseworking capital accounts included some rather large changes in 2004, the growthof accounts receivable reduced operating cash flow by $261.3 million, which wasthe result of the improvement in metal prices from the beginning of 2004 to theend. LME and COMEX

 

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copper prices increased by 49 cents and 48 cents during 2004,respectively, in addition the price for molybdenum increased by $10.80 perpound during 2004. Improving operating cash flow was the build up of payablesand accruals during 2004, largely as a result of increased worker participationand income tax provisions driven by higher earnings, payment of which carriesover into the next year.

 

In 2003, our earnings were $83.5 million, approximately 128.8% of netoperating cash flow. Depreciation, amortization and depletion amounted to a$177.1 million add back and capitalized mine stripping and leachable materialamounted to a $79.7 deduction to reach operating cash flow. In addition,working capital changes decreased operating cash flow by $143.8 million.

 

***Cash Flows fromInvesting Activities***

 

Net cash used for investing activities was $425.4 million in 2005compared to $219.5 million in 2004. We made capital expenditures in anaggregate amount of $470.6 million in 2005, including $234.5 million for theIlo, Peru smelter modernization project, $32.8 million for the Toquepalacrushing, conveyor system for leachable material, $9.1 million for theToquepala leach dump project and $194.2 million principally for equipmentreplacements and upgrades, of which $148.7 million was for our Mexicanoperations. Cash flow provided by investing activities in 2005 was from thesale of marketable securities of $45.3 million.

 

Net cash used for investing activities was $219.5 million in 2004compared to $59.7 million in 2003. We made capital expenditures of $228.3million in 2004, including $65.6 million for the Ilo smelter modernizationproject, $40.4 million for the Toquepala leach dump project and $122.2 millionfor equipment replacements and upgrades. During 2004, we purchased marketablesecurities for $69.4 million. Cash flow provided by investing activities in2004 was primarily due to the sale of marketable securities of $24.1 million,and proceeds from the sale of non-core properties, principally in Mexico, for$60 million.

 

Net cash used for investing activities was $59.7 million in 2003. Capitalexpenditures in 2003 amounted to $64.9 million which was principally used forequipment replacements and upgrades. During 2003 Minera Mexico’s capitalexpenditures were curtailed due to liquidity restraints imposed by its lenders.

 

***Cash Flows fromFinancing Activities***

 

For the year ended December 31, 2005, cash used for financingactivities amounted to $1,055.6 million. New financings undertaken in 2005resulted not only in improved terms for our debt but also reduced our debtburden by $158.2 million. In addition, we distributed $853.9 million to ourshareholders in 2005 and $5.3 million to our remaining minority interestinvestors. In October, 2005, we purchased an additional 6.4 million shares ofMinera Mexico, representing 0.8133% of the outstanding shares, for $30.3million.

 

For the year ended December 31, 2004, cash used for financingactivities amounted to $540.6 million mainly as a result of a net debtrepayment of $340.9 million and dividends paid of $191.4 million.

 

For the year ended December 31, 2003, cash provided from financingactivities amounted to $185.6 million mainly as a result of a net capital stockincrease of $93.7 million related to Minera México, cash previously restrictedas collateral of $88 million was received back as part of the repaymentof debt and proceeds of $50.0 million received from the issuance of ourcorporate bonds. Reducing cash provided from financing activities weredividends paid to stockholders of $45.4 million.

 

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***Other LiquidityConsiderations***

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located. Under the newlaw, we are subject to a 1% to 3% charge, based on sales, applicable to thevalue of the concentrates produced at our Toquepala and Cuajone mines. We madea provision of $40.3 million and $17.6 million in 2005 and 2004 respectively,for this new charge, which went into effect as of June 25, 2004. During2005 we made payments of $47.4 million related to this charge. In addition, theConstitutional Tribunal stated that this charge applied to all concessions heldin the mining industry. We believe that this interpretation is incorrect andintend to protest an imposition of the royalty charge on our SX/EW production,which is operating under a tax stability agreement (“Guaranty and promotionalMeasures for Investment Contract”). Provisions made by the Company for theroyalty charge do not include approximately $5.9 million of additionalpotential liability relating to its SX/EW production from June 30, 2004through December 31, 2005. It is anticipated that the royalty charge willhave an adverse effect on our operating income and cash flow.

 

On January 26, 2006, the Board of Directors approved a dividend of$2.75 per share, totaling $404.9 million, to be paid on March 3, 2006.

 

While our combined financial results show a positive cash position overthe past three years, our Minera México subsidiary, which we acquired on April 1,2005, has faced challenges to its liquidity as a result of low metals prices inprevious years. These challenges resulted in its noncompliance with certaindebt covenants in 2001 and 2002. In April 2003 Minera México restructuredcertain of its indebtedness, entering into a common agreement among MineraMéxico, Minera México’s principal subsidiaries (as guarantors) and the holdersof such indebtedness. Minera México paid amounts owing under this agreement withproceeds from a new credit facility established in October 2004. See “Financing”below.

 

In May 2005, the Mexican Supreme Court rendered a decision thatchanged the method of computing the amount of statutory workers’ profit sharingrequired to be paid by some Mexican companies, including our Minera Méxicosubsidiary. The Supreme Court’s ruling in effect prohibited the application ofnet operating loss carryforwards in computing the income used as the base fordetermining the workers’ profit sharing amounts. We recognized in our 2005results of operations a charge of $36.3 million for workers’ profitparticipation related to 2004. In addition, the ruling may affect ourfuture results of operations and liquidity to the extent we pay higher workers’profit sharing amounts.

 

***Financing***

 

At December 31, 2005, we had outstanding borrowings of $1,178.3million (before deduction of $6.3 million of debt discount valuation accounts),compared with $1,330.3 million at December 31, 2004. At December 31,2005, our outstanding debt as a percentage of total capitalization (the totalof debt, minority interest and stockholders’ equity) was 26.0%, compared with32.0% at December 31, 2004. At December 31, 2005, our cash andmarketable securities amounted to $876.0 million, compared with $756.0 millionat December 31, 2004.

 

Below we describe our outstanding long-term indebtedness, as well ascertain financial covenants that affect us. See Note 10 of the ConsolidatedCombined Financial Statements for a further description of our long-termindebtedness.

 

On July 27, 2005 SCC issued $200 million 6.375% Notes due 2015 and$600 million 7.5% Notes due 2035. The notes are senior unsecured obligations ofthe Company. The net proceeds from the issuance and sale of the notes were usedto repay outstanding indebtedness of our Peruvian and Mexican Operations, underits $200 million and $600 million ($480 million outstanding) credit facilities,respectively, and the balance will be used for general corporate purposes. SCCfiled a Registration Statement on Form S-4 with respect to these Notes on October 28,2005. On January 3, 2006 the Company completed an exchange offer for $200million, 6.375% Notes due 2015 and $600 million, 7.5% Notes due 2035. In theexchange offer, $197.4 million of the 6.375% old notes due 2015 were tenderedin exchange for an equivalent amount of new notes and an aggregate of $595.5million of the 7.5% old

 

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notes due 2035 were tendered in exchange for an equivalent amount ofnew notes. The new notes have been registered under the U.S. securities law. Theindentures relating to the notes contain certain covenants, includinglimitations on liens, limitations on sale and leaseback transactions, rights ofthe holders of the notes upon the occurrence of a change of control triggeringevent, limitations on subsidiary indebtedness and limitations onconsolidations, mergers, sales or conveyances. All of these limitations andrestrictions are subject to a number of significant exceptions, and some ofthese covenants will cease to be applicable before the notes mature if thenotes attain an investment grade rating. At December 31, 2005, we are incompliance with these covenants.

 

In January 2005, the Company signed a $200 million credit facilitywith a group of banks led by Citibank, N.A. Proceeds of this credit facilitywere used to prepay $199 million the outstanding bonds of the Company’sPeruvian bond program. On July 28, 2005, a portion of the proceeds fromthe July 27, 2005 financing, noted above, were used to repay thisfacility.

 

In 1998, Minera México issued $500 million of unsecured debt, which werefer to as its Yankee bonds. The Yankee bonds were offered in two series: Series Afor $375 million, with an interest rate of 8.25% and a 2008 maturity, and Series Bfor $125 million, with an interest rate of 9.25% and a 2028 maturity date. During2005, the Company repurchased $143.0 million of the Series A bonds. Thebonds contain a covenant requiring Minera Mexico to maintain a ratio of EBITDAto interest expense of not less than 2.5 to 1.0, as such terms are defined bythe bonds. At December 31, 2005, Minera Mexico is in compliance with thiscovenant.

 

In 1999, the Company established a $100 million credit facility withMitsui & Co. The facility has a 15-year term with an interest rate ofJapanese LIBO plus 1.25% (Japanese LIBO for this loan was 4.67% at December 31,2005). The facility is collateralized by the assignment of copper salesreceivables of 31,000 tons of copper per year and requires an escrow account tofund scheduled payments. The facility requires that we maintain a minimumstockholders’ equity of $750 million and a ratio of debt to equity no greaterthan 0.5 to 1.0, all as such terms are defined by the facility. Reduction ofGrupo México’s direct or indirect voting interest in our Company to less than amajority would constitute an event of default under the facility. At December 31,2005, we are in compliance with these covenants.

 

On October 29, 2004, Minera Mexico borrowed $600 million pursuantto a facility with a final maturity date in 2009. The credit facility boreinterest at LIBOR plus 200 basis points. The proceeds from the credit facilitywere used to repay in full the amounts outstanding under a common agreementwith holders of Minera Mexico’s secured export notes and other financialinstitutions. The loan was secured by a pledge of Minera Mexico’s principalproperties and was guaranteed by its principal subsidiaries. In 2005, theCompany prepaid the total amount of this financing, using in part proceedsfrom the July 27, 2005 Note issuance.

 

While we recently prepaid all amounts outstanding under our Peruvianbond program, we are authorized by Peru’s *ComisiónNacional Supervisora de Empresas y Valores* (CONASEV) to issueadditional bonds.

 

We expect that we will meet our cash requirements for 2006 and beyondfrom internally generated funds, cash on hand and from additional externalfinancing if required.

 

***Capital ExpenditurePrograms***

 

A discussion of our capital programs is an important part ofunderstanding our liquidity and capital resources. For information regardingour capital expenditure programs, see the Discussion under the caption “Expansionand Modernization Program” of this section.

 

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**Contractual Obligations**

 

The following table summarizes our significant contractual obligationsas of December 31, 2005:

 
| ** **                     | ** ** | ** ** | ** ** | **Payments due by Period** | ** ** |
|--------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **(dollars in millions)**  | ** ** |
| Long-term  debt                |       | $          | 1,178.3    |                       | $          | 10.0 |   | $ | 10.0 |   | $ | 183.3 |   | 10.0 |   | $ | 10.0 |   | $ | 955.0 |   |
| Interest on  debt              |       | 1,782.6    |       | 88.3                       |       | 87.6 |   | 87.1 |   | 72.1 |   | 71.6 |   | 1,375.9 |   |
| Purchase  obligations:         |       |       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commitment  to purchase energy |       | 1,625.7    |       | 144.2                      |       | 134.7 |   | 134.7 |   | 134.7 |   | 134.7 |   | 942.7 |   |
| Capital  purchase obligations  |       | 183.3      |       | 87.5                       |       | 95.8 |   | — |   | — |   | — |   | — |   |
| Total                          |       | $          | 4,769.9    |                       | $          | 330.0 |   | $ | 328.1 |   | $ | 405.1 |   | $ | 216.8 |   | $ | 216.3 |   | $ | 3,273.6 |   |
|                                |            |            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest on debt calculated at rates in effect at December 31,2005. Please refer to “Note 10-Financings” of our Consolidated CombinedFinancial Statements for a description of our long-term debt arrangements andcredit facilities.

 

We have a commitment to purchase power for our Peruvian operations fromEnergía del Sur, S.A. until 2017. Amounts indicated on the above table arebased on power costs in 2005, which are subject to change as energy generationcosts change and our forecasted power requirements through the life of theagreements change.

 

Pursuant to our PAMA we have committed to bring our operations intocompliance with environmental standards established by the government of Peru. Thecapital purchase obligation in the above table is for the estimated cost ofcompleting the Ilo smelter modernization, our remaining obligation under ourPAMA.

 

For an additional discussion on this matter see “Environmentalmatters-Peruvian operations”, in “Note 13-Commitments and Contingencies” of theConsolidated Combined Financial Statements.

 

**Quantitative and Qualitative Disclosure aboutMarket Risk**

 

A portion of our outstanding debt bears interest at variable rates andaccordingly is sensitive to changes in interest rates. Interest rate changeswould also result in gains or losses in the market value of our fixed rate debtportfolio due to differences in market interest rates and the rates at theinception of the debt agreements. Based upon our indebtedness at December 31,2005, a change in interest rates of 1 percent (or 100 basis points) wouldimpact net income and cash flows by $0.8 million annually.

 

We are also exposed to market risk associated with changes in foreigncurrency exchange rates as certain costs incurred are in currencies other thanour functional currency. To manage the volatility related to the risk, we may enterinto forward exchange contracts, currency swaps or other currency hedgingarrangements. We have only had limited involvement with derivative instrumentsand do not use them for trading purposes.

 

We are subject to market risks arising from the volatility of copperand other metal prices. Assuming that expected metal production and sales areachieved, that tax rates are unchanged, and giving no effects to potentialhedging programs metal price sensitivity factors would indicate estimatedchange in net earnings resulting from metal price changes in 2006 as providedin the table below.

 

92

----

 
| ** **                                                         | ** ** | **Copper** | ** ** | **Molybdenum** | ** ** | **Zinc** | ** ** | **Silver** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------|------------|------------|------------|
| Change in  metal prices (per pound except silver – per ounce) |       | $          | 0.01       |           | $          | 1.00     |       | $          | 0.01       |   | $ | 1.00 |   |
| Change in  net earnings (in millions)                              |       | $          | 8.7        |           | $          | 14.4     |       | $          | 1.8        |   | $ | 11.4 |   |

 

We have occasionally used derivative instruments to manage our exposureto changes in commodity prices. However, at December 31, 2005, we hold noderivative instruments.

 

**Impact of New Accounting Standards**

 

For a description of the impact of new accounting standards, see Note2, “Summary of Significant Accounting Policies—Impact of new accountingstandards,” to our Consolidated Combined Financial Statements.

 

**Non-GAAP Information Reconciliation**

 

We provide a reconciliation of operating cash cost to GAAP cost ofsales in millions of dollars and cents per pound in the table below.

 
| ** **                                                                    | ** ** | **2005**           | ** ** | **2004**            | ** ** | **2003**           | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** |
| Cost of  sales (including depreciation, amortization and depletion)–GAAP |       | $                  | 1,912.6    |                | $          | 1.266              |       | $ | 1,526.9 |   | $ | 0.969 |   | $ | 1,169.4 |   | $ | 0.814 |   |
| Add:                                                                          |       |               |       |                |       |               |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses                                 |       | 81.1               |       | 0.054               |       | 71.8               |       | 0.046 |   | 63.6 |   | 0.044 |   |
| Treatment  and refining charges                                               |       | 34.3               |       | 0.023               |       | 27.7               |       | 0.018 |   | 24.9 |   | 0.017 |   |
| Less:                                                                         |       |               |       |                |       |               |       |   |   |   |   |   |   |
| Byproducts  revenue (1)                                                       |       | (1,478.0           | )          | (0.979              | )          | (1,056.3           | )          | (0.670 | ) | (442.8 | ) | (0.308 | ) |
| Depreciation,  amortization and depletion                                     |       | (277.2             | )          | (0.184              | )          | (192.6             | )          | (0.122 | ) | (177.1 | ) | (0.123 | ) |
| Workers’  participation                                                  |       | (219.2             | )          | (0.145              | )          | (93.6              | )          | (0.059 | ) | (20.2 | ) | (0.014 | ) |
| Royalty  charge and other, net                                                |       | (46.7              | )          | (0.031              | )          | (42.1              | )          | (0.028 | ) | 11.5 |   | 0.008 |   |
| Inventory  change                                                             |       | 33.0               |       | 0.022               |       | 44.4               |       | 0.028 |   | (4.5 | ) | (0.003 | ) |
| **Operating  Cash Cost**                                                      | ** ** | **$**              | **39.9**   | ** **          | **$**      | **0.026**          | ** ** | **$** | **286.2** | ** ** | **$** | **0.182** | ** ** | **$** | **624.8** | ** ** | **$** | **0.435** | ** ** |
| Add  byproducts revenue                                                       |       | 1,478.0            |       | 0.979               |       | 1,056.3            |       | 0.670 |   | 442.8 |   | 0.308 |   |
| Operating  Cash Cost, without byproduct revenue                               |       | $                  | 1,517.9    |                | $          | 1.005              |       | $ | 1,342.5 |   | $ | 0.852 |   | $ | 1,067.6 |   | $ | 0.743 |   |
| Total pounds  of copper produced and purchased (in millions)                  |       | 1,510.4            |       |                |       | 1,576.5            |       |   |   | 1,436.8 |   |   |   |

 

----

(1)          Includes net byproductsales revenue and premiums on sales of refined products.

 

93

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Item 8. FinancialStatements and Supplementary Data

 

Southern Copper Corporation

and Subsidiaries

CONSOLIDATED COMBINED STATEMENTOF EARNINGS

 
| **For the years ended December 31,**                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands, except for per share amounts)**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales:                                                                                     |       |       |       |       |       |       |       |
| Non-affiliates                                                                                 |       | $          | 4,096,729  |       | $          | 3,022,614  |       | $ | 1,574,789 |   |
| Affiliates                                                                                     |       | 15,900     |       | 74,083     |       | 1,852      |       |
| Total net  sales                                                                               |       | 4,112,629  |       | 3,096,697  |       | 1,576,641  |       |
| Operating  cost and expenses:                                                                  |       |       |       |       |       |       |       |
| Cost of  sales (exclusive of depreciation, amortization and depletion shown separately  below) |       | 1,635,393  |       | 1,334,330  |       | 992,383    |       |
| Selling,  general and administrative                                                           |       | 81,132     |       | 71,778     |       | 63,597     |       |
| Depreciation,  amortization and depletion                                                      |       | 277,248    |       | 192,586    |       | 177,058    |       |
| Exploration                                                                                    |       | 24,356     |       | 15,610     |       | 17,869     |       |
| Total  operating costs and expenses                                                            |       | 2,018,129  |       | 1,614,304  |       | 1,250,907  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Operating  income                                                                              |       | 2,094,500  |       | 1,482,393  |       | 325,734    |       |
|                                                                                           |       |       |       |       |       |       |       |
| Interest  expense                                                                              |       | (108,874   | )          | (106,491   | )          | (117,009   | )          |
| Capitalized  interest                                                                          |       | 22,509     |       | 10,681     |       | 5,563      |       |
| Loss on  derivative instruments                                                                |       | (22,262    | )          | (1,413     | )          | —     |       |
| Loss on debt  prepayments                                                                      |       | (10,559    | )          | (16,500    | )          | (5,844     | )          |
| Gain on  disposal of property                                                                  |       | —     |       | 53,542     |       | —     |       |
| Other income  (expense)                                                                        |       | (3,712     | )          | (9,689     | )          | (4,174     | )          |
| Interest  income                                                                               |       | 30,765     |       | 8,348      |       | 5,198      |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings  before income taxes and minority interest                                            |       | 2,002,367  |       | 1,420,871  |       | 209,468    |       |
|                                                                                           |       |       |       |       |       |       |       |
| Income taxes                                                                                   |       | 589,744    |       | 433,758    |       | 120,129    |       |
| Minority  interest                                                                             |       | 12,475     |       | 4,727      |       | 4,262      |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings  before cumulative effect of change in accounting principle                           |       | 1,400,148  |       | 982,386    |       | 85,077     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Cumulative  effect of change in accounting principle, net of income taxes                      |       | —     |       | —     |       | (1,541     | )          |
|                                                                                           |       |       |       |       |       |       |       |
| Net earnings                                                                                   |       | $          | 1,400,148  |       | $          | 982,386    |       | $ | 83,536 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Per common  share amounts:                                                                     |       |       |       |       |       |       |       |
| Earnings  before cumulative effect of change in accounting principle                           |       | $          | 9.51       |       | $          | 6.67       |       | $ | 0.58 |   |
| Cumulative  effect of change in accounting principle, net of income tax                        |       | —     |       | —     |       | (0.01      | )          |
| Net earnings  - basic and diluted                                                              |       | $          | 9.51       |       | $          | 6.67       |       | $ | 0.57 |   |
| Dividends  paid                                                                                |       | $          | 5.80       |       | $          | 1.30       |       | $ | 0.31 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Weighted  average shares outstanding - basic                                                   |       | 147,228    |       | 147,224    |       | 147,220    |       |
| Weighted  average shares outstanding - diluted                                                 |       | 147,228    |       | 147,224    |       | 147,225    |       |

 

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

 

94

----

 

Southern Copper Corporation

and Subsidiaries

CONSOLIDATED COMBINED BALANCE SHEET

 
| **At December 31,**                                                                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                                                |       |       |       |       |       |
| Current  assets:                                                                                                                      |       |       |       |       |       |
| Cash and  cash equivalents                                                                                                            |       | $          | 876,003    |       | $          | 710,707 |   |
| Marketable  securities                                                                                                                |       | —     |       | 45,267     |       |
| Accounts  receivable trade:                                                                                                           |       |       |       |       |       |
| Non  affiliates                                                                                                                       |       | 342,412    |       | 425,790    |       |
| Affiliates                                                                                                                            |       | 9,099      |       | 15,353     |       |
| Accounts  receivable - other                                                                                                          |       | 34,949     |       | 33,081     |       |
| Inventories                                                                                                                           |       | 395,845    |       | 352,377    |       |
| Deferred  Income tax - current portion                                                                                                |       | 5,248      |       | —     |       |
| Other  current assets, net                                                                                                            |       | 50,798     |       | 52,966     |       |
| Total  current assets                                                                                                                 |       | 1,714,354  |       | 1,635,541  |       |
|                                                                                                                                  |       |       |       |       |       |
| Property,  net                                                                                                                        |       | 3,326,126  |       | 3,068,486  |       |
| Capitalized  mine stripping costs, net                                                                                                |       | 289,369    |       | 318,116    |       |
| Leachable  material, net                                                                                                              |       | 210,118    |       | 134,621    |       |
| Intangible  assets, net                                                                                                               |       | 120,861    |       | 123,496    |       |
| Other  assets, net                                                                                                                    |       | 26,746     |       | 38,933     |       |
| Total assets                                                                                                                          |       | $          | 5,687,574  |       | $          | 5,319,193 |   |
|                                                                                                                                  |       |       |       |       |       |
| LIABILITIES                                                                                                                           |       |       |       |       |       |
| Current  liabilities:                                                                                                                 |       |       |       |       |       |
| Current  portion of long-term debt                                                                                                    |       | $          | 10,000     |       | $          | 152,314 |   |
| Accounts  payable                                                                                                                     |       | 284,977    |       | 142,362    |       |
| Accrued  income taxes                                                                                                                 |       | 275,763    |       | 293,295    |       |
| Due to  affiliated companies                                                                                                          |       | 6,355      |       | 66,524     |       |
| Deferred  income taxes                                                                                                                |       | —     |       | 42,500     |       |
| Accrued  workers’ participation                                                                                                  |       | 195,552    |       | 84,245     |       |
| Accrued  liabilities                                                                                                                  |       | 22,985     |       | 180,678    |       |
| Total  current liabilities                                                                                                            |       | 795,632    |       | 961,918    |       |
|                                                                                                                                  |       |       |       |       |       |
| Long-term  debt                                                                                                                       |       | 1,162,065  |       | 1,177,974  |       |
| Deferred  income taxes                                                                                                                |       | 259,089    |       | 243,600    |       |
| Other  liabilities and reserves                                                                                                       |       | 120,795    |       | 105,179    |       |
| Asset  retirement obligation                                                                                                          |       | 11,221     |       | 5,643      |       |
| Total  non-current liabilities                                                                                                        |       | 1,553,170  |       | 1,532,396  |       |
|                                                                                                                                  |       |       |       |       |       |
| Commitments  and contingencies (Note 13)                                                                                              |       |       |       |       |       |
|                                                                                                                                  |       |       |       |       |       |
| MINORITY  INTEREST                                                                                                                    |       | 12,695     |       | 11,284     |       |
|                                                                                                                                  |       |       |       |       |       |
| STOCKHOLDERS’  EQUITY                                                                                                            |       |       |       |       |       |
| Common stock  par value $0.01; shares authorized: 2005-167,207,640; 2004-101,306,807 shares  issued 2005-147,432,681; 2004-81,531,848 |       | 1,474      |       | 815        |       |
| Class A  Common Stock, par value $0.01; shares issued and authorized 65,900,833                                                  |       | —     |       | 659        |       |
| Additional  paid-in capital                                                                                                           |       | 693,800    |       | 728,265    |       |
| Retained  earnings                                                                                                                    |       | 2,648,359  |       | 2,102,098  |       |
| Other  accumulated comprehensive loss                                                                                                 |       | (13,090    | )          | (13,653    | )          |
| Treasury  stock, at cost, common shares, 2005-204,656; 2004-207,256                                                                   |       | (4,466     | )          | (4,589     | )          |
| Total stockholders’  equity                                                                                                      |       | 3,326,077  |       | 2,813,595  |       |
| Total  liabilities, Minority Interest and Stockholders’ Equity                                                                   |       | $          | 5,687,574  |       | $          | 5,319,193 |   |

 

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

 

95

----

 

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CASH FLOWS

 
| **For the years ended December 31,**                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |       |       |       |       |       |       |
| OPERATING ACTIVITIES                                                                   |       |       |       |       |       |       |       |
| Net earnings                                                                           |       | $          | 1,400,148  |       | $          | 982,386    |       | $ | 83,536 |   |
| Cumulative  effect of the change in accounting principle, net of income tax            |       | —     |       | —     |       | 1,541      |       |
| Adjustments  to reconcile net earnings to net cash provided from operating activities: |       |       |       |       |       |       |       |
| Depreciation,  amortization and depletion                                              |       | 277,248    |       | 192,586    |       | 177,058    |       |
| Capitalized  mine stripping and leachable material                                     |       | (116,409   | )          | (92,797    | )          | (79,704    | )          |
| Remeasurement  loss (gain)                                                             |       | 8,885      |       | 14,379     |       | (21,982    | )          |
| Provision  for deferred income taxes                                                   |       | (42,268    | )          | 54,385     |       | 31,526     |       |
| Minority  interest                                                                     |       | 12,475     |       | 4,727      |       | 4,262      |       |
| Gain on sale  of property                                                              |       | —     |       | (53,542    | )          | —     |       |
| Amortization  of deferred financing fees                                               |       | 15,065     |       | —     |       | —     |       |
| Other                                                                                  |       | —     |       | —     |       | 12,388     |       |
| Cash  provided from (used for) operating assets and liabilities:                       |       |       |       |       |       |       |       |
| Accounts receivable                                                                    |       | 59,457     |       | (261,301   | )          | (39,187    | )          |
| Inventories                                                                            |       | (43,468    | )          | (54,330    | )          | 14,806     |       |
| Accounts  payable and accrued liabilities                                              |       | 66,469     |       | 371,477    |       | (116,924   | )          |
| Other  operating assets and liabilities                                                |       | 6,593      |       | 14,383     |       | (2,475     | )          |
| Net cash  provided from operating activities                                           |       | 1,644,195  |       | 1,172,353  |       | 64,845     |       |
|                                                                                   |       |       |       |       |       |       |       |
| INVESTING ACTIVITIES                                                                   |       |       |       |       |       |       |       |
| Capital  expenditures                                                                  |       | (470,636   | )          | (228,299   | )          | (64,880    | )          |
| Purchase of  marketable securities                                                     |       | —     |       | (69,409    | )          | —     |       |
| Sales and  maturity of marketable securities                                           |       | 45,267     |       | 24,142     |       | —     |       |
| Sale of  property                                                                      |       | —     |       | 59,980     |       | —     |       |
| Other                                                                                  |       | —     |       | (5,876     | )          | 5,228      |       |
| Net cash  used for investing activities                                                |       | (425,369   | )          | (219,462   | )          | (59,652    | )          |
|                                                                                   |       |       |       |       |       |       |       |
| FINANCING ACTIVITIES                                                                   |       |       |       |       |       |       |       |
| Debt  incurred                                                                         |       | 993,646    |       | 600,000    |       | 50,000     |       |
| Debt repaid                                                                            |       | (1,151,869 | )          | (940,912   | )          | —     |       |
| Capital  stock transaction – Minera Mexico                                        |       | (7,438     | )          | (1,319     | )          | 93,719     |       |
| Dividends  paid to common stockholders                                                 |       | (853,887   | )          | (191,360   | )          | (45,352    | )          |
| Escrow on  long-term loans                                                             |       | (601       | )          | (5,532     | )          | 88,048     |       |
| Distributions  to minority interest                                                    |       | (5,297     | )          | (1,465     | )          | (408       | )          |
| Purchase of  shares Minera Mexico                                                      |       | (30,276    | )          | —     |       | —     |       |
| Other                                                                                  |       | 123        |       | (21        | )          | (437       | )          |
| Net cash  provided from (used for) financing activities                                |       | (1,055,599 | )          | (540,609   | )          | 185,570    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Effect of exchange rate changes on cash and  cash equivalents                          |       | 2,069      |       | (53,185    | )          | (14,224    | )          |
|                                                                                   |       |       |       |       |       |       |       |
| Increase in cash and cash equivalents                                                  |       | 165,296    |       | 359,097    |       | 176,539    |       |
| Cash and cash equivalents, at beginning of  year                                       |       | 710,707    |       | 351,610    |       | 175,071    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Cash and cash equivalents, at end of year                                              |       | $          | 876,003    |       | $          | 710,707    |       | $ | 351,610 |   |

 

96

----

 
| ** **                                                                             | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                                             | ** ** | **(in thousands)** | ** ** |
| Supplemental  disclosure of cash flow information:                                     |       |               |       |     |       |     |       |
| Cash paid  during the year for:                                                        |       |               |       |     |       |     |       |
| Interest                                                                               |       | $                  | 80,286     |     | $          | 116,048  |       | $ | 117,573 |   |
| Income taxes                                                                           |       | $                  | 702,660    |     | $          | 165,548  |       | $ | 39,812 |   |
| Supplemental  schedule of non-cash operating, investing and financing activities: |       |               |       |     |       |     |       |
| Accounts  receivable from affiliate offset by accounts payable to affiliate            |       | $                  | —     |     | $          | —   |       | $ | 212 |   |
| Additional  liability for employee benefit obligation                                  |       | $                  | (849       | )        | $          | 1,060    |       | $ | 9,241 |   |
| Note payable  for acquisition of minority interest                                     |       | $                  | —     |     | $          | 51,352   |       | $ | — |   |

 

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

 

97

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SouthernCopper Corporation

and Subsidiaries

CONSOLIDATED COMBINED STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY

 
| **For years ended December 31,**                                                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                              |       |       |       |       |       |       |       |
| CAPITAL  STOCK:                                                                                                   |       |       |       |       |       |       |       |
| Balance at  beginning of year:                                                                                    |       | $          | 815        |       | $          | 815        |       | $ | 815 |   |
| Issued in  exchange for class A common stock                                                                 |       | 659        |       | —     |       | —     |       |
| Balance at  end of year                                                                                           |       | 1,474      |       | 815        |       | 815        |       |
|                                                                                                              |       |       |       |       |       |       |       |
| Class A  Common Stock                                                                                        |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                     |       | 659        |       | 659        |       | 659        |       |
| Exchanged  for common stock                                                                                       |       | (659       | )          | —     |       | —     |       |
| Balance at  end of year                                                                                           |       | —     |       | 659        |       | 659        |       |
|                                                                                                              |       |       |       |       |       |       |       |
| ADDITIONAL  PAID-IN CAPITAL                                                                                       |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                     |       | 728,265    |       | 729,584    |       | 635,865    |       |
| Net movement  of the period                                                                                       |       | (34,465    | )          | (1,319     | )          | 93,719     |       |
| Balance at  end of year                                                                                           |       | 693,800    |       | 728,265    |       | 729,584    |       |
|                                                                                                              |       |       |       |       |       |       |       |
| TREASURY  STOCK:                                                                                                  |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                     |       | (4,589     | )          | (4,672     | )          | (4,821     | )          |
| Used for  corporate purposes                                                                                      |       | 123        |       | 83         |       | 149        |       |
| Balance at  end of year                                                                                           |       | (4,466     | )          | (4,589     | )          | (4,672     | )          |
|                                                                                                              |       |       |       |       |       |       |       |
| RETAINED  EARNINGS:                                                                                               |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                     |       | 2,102,098  |       | 1,311,072  |       | 1,272,888  |       |
| Net earnings                                                                                                      |       | 1,400,148  |       | 982,386    |       | 83,536     |       |
| Dividends  paid, Common stock and Class A Common stock, per share, 2005 - $5.80,  2004 - $1.30, 2003 - $0.31 |       | (853,887   | )          | (191,360   | )          | (45,352    | )          |
| Balance at  end of year                                                                                           |       | 2,648,359  |       | 2,102,098  |       | 1,311,072  |       |
|                                                                                                              |       |       |       |       |       |       |       |
| OTHER  ACCUMULATED COMPREHENSIVE LOSS:                                                                            |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                     |       | (13,653    | )          | (14,713    | )          | (23,954    | )          |
| Additional decrease in liability for  employee benefit obligations                                                |       | (849       | )          | 1,060      |       | 9,241      |       |
| Unrealized  gain on equity securities                                                                             |       | 1,412      |       | —     |       | —     |       |
| Balance at  end of year                                                                                           |       | (13,090    | )          | (13,653    | )          | (14,713    | )          |
|                                                                                                              |       |       |       |       |       |       |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                  |       | $          | 3,326,077  |       | $          | 2,813,595  |       | $ | 2,022,745 |   |

 

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

 

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SOUTHERN COPPER CORPORATION ANDSUBSIDIARIES

NOTES TO CONSOLIDATED COMBINEDFINANCIAL STATEMENTS

 

**NOTE 1-DESCRIPTION OF THE BUSINESS:**

 

The consolidated combined financial statements presented herein consistof the accounts of Southern Copper Corporation (“SCC”) (formerly named SouthernPeru Copper Corporation) and its subsidiaries as well as those of MineraMéxico, S.A. de C.V., (“MM”) and its subsidiaries. Effective April 1,2005, SCC acquired substantially all of the outstanding common stock of MineraMexico, as further described below. Unless the context otherwise requires, theterm “Company” refers to both SCC and Minera Mexico as consolidated (after March 31,2005) or combined (prior to April 1, 2005).

 

Effective April 1, 2005, Grupo México, through its subsidiary,sold its approximately 99.15% shareholding in Minera Mexico to SCC in returnfor the issuance to AMC of 67.2 million new shares of common stock of SCC. Thetransaction resulted in Grupo México increasing its indirect equity ownershipin SCC to approximately 75.1% from its prior indirect interest of approximately54.2%. As part of this transaction, SCC paid a special transaction cashdividend of $100 million on March 1, 2005. On October 20, 2005, theCompany’s board of directors approved the acquisition of 6,386,521 shares ofMinera Mexico from Grupo Mexico. The acquired shares represent 0.81833% of theoutstanding shares of Minera Mexico and were purchased for $30.3 million.

 

The acquisition of Minera Mexico by SCC is accounted for in a mannersimilar to a pooling of interests since it involved the reorganization ofentities under common control. Under such accounting, the financial statementsof Minera Mexico and SCC are combined on a historical cost basis for all theperiods presented since they were under common control during all of theseperiods.

 

The Company is an integrated producer of copper and other minerals, andoperates mining, smelting and refining facilities in Peru and Mexico. TheCompany conducts its primary operations in Peru through a registered branch(the “Branch”). The Branch is not a corporation separate from the Company. TheCompany’s Mexican operations are conducted through subsidiaries.

 

**NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES:**

 

*Principles of consolidation and combination–*

 

The consolidated combined financial statements include the accounts ofsubsidiaries of which the Company has voting control, in accordance with FAS No. 94Consolidation of All Majority-Owned Subsidiaries. Such financial statements areprepared in accordance with accounting principles generally accepted in theUnited States (“U.S. GAAP”). As mentioned above, the financial statements alsoreflect the recent combination of SCC and Minera Mexico on a historical costbasis in a manner similar to a pooling of interests.

 

*Use of estimates–*

 

The preparation of financial statements in conformity with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period. Significant items subjectto such estimates and assumptions include the carrying value of ore reservesthat are the basis for future cash flow estimates and units-of-productiondepreciation and amortization calculations; environmental, reclamation, closureand retirement obligations; estimates of recoverable copper in mill and leachstockpiles; asset impairments (including estimates of future cash flows); baddebts; inventory obsolescence; deferred and current income tax; valuationallowances for deferred tax assets; reserves for contingencies and litigation;and fair value of financial instruments. Management bases its estimates on theCompany’s historical

 

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experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results could differ from thoseestimates.

 

*Revenue recognition–*

 

Substantially all of the Company’s copper is sold under annual or otherlonger-term contracts.

 

Revenue is recognized when title passes to the customer. The passing oftitle is based on terms of the contract, generally upon shipment. Copperrevenue is determined based on the monthly average of prevailing commodityprices according to the terms of the contracts.

 

For certain of the Company’s sales of copper and molybdenum products,customers are given the option to select a monthly average LME or COMEX price(as is the case for sales of copper products) or the molybdenum oxideproprietary price of Platt’s Metal Week (as is the case for sales of molybdenumproducts), generally ranging between one and six months subsequent to shipment.In such cases, revenue is recorded at a provisional price at the time ofshipment. The provisionally priced copper sales are adjusted to reflect forwardcopper prices based on LME or COMEX prices at the end of each month until afinal adjustment is made to the price of the shipments upon settlement withcustomers pursuant to the terms of the contract. In the case of molybdenumsales, for which there are no published forward prices, the provisionallypriced sales are adjusted to reflect the market prices at the end of each monthuntil a final adjustment is made to the price of the shipments upon settlementwith customers pursuant to the terms of the contract.

 

These provisional pricing arrangements are accounted for separatelyfrom the contract as an embedded derivative instrument under SFAS No. 133 “Accountingfor Derivative Instruments and Hedging Activities”, as amended (“FASB No. 133”).The Company sells copper in blister and refined form at industry standardcommercial terms. Net sales include the invoiced value and corresponding fairvalue adjustment of the related forward contract of copper, zinc, silver,molybdenum, acid and other metals.

 

*Shipping and handling fees and costs–*

 

Amounts billed to customers for shipping and handling, are classifiedas sales. Amounts incurred for shipping and handling are included in cost ofsales (exclusive of depreciation, amortization and depletion).

 

*Cash and cash equivalents–*

 

Cash and cash equivalents include bank deposits, certificates ofdeposit and short term investment funds with original maturities of threemonths or less at the date of purchase. The carrying value of cash and cashequivalents approximate fair value.

 

*Marketable securities–*

 

Marketable securities consist primarily of certificates of depositswith original maturities greater than 90 days but less than one year. Thesedeposits are held to maturity and carried at amortized cost which approximatesfair value.

 

*Inventories–*

 

Metal inventories, consisting of work in process and finished goods,are carried at the lower of average cost or market. Costs incurred in theproduction of metal inventories exclude general and administrative costs.

 

Work-in-process inventories represent materials that are in the processof being converted into a saleable product. Conversion processes vary dependingon the nature of the copper ore and the specific mining operation. For sulfideores, processing includes milling and concentrating and the results from theproduction of copper and molybdenum concentrates. Molybdenum in-processinventory includes the cost of molybdenum concentrates and the costs

 

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incurred to convert those concentrates into various high-puritymolybdenum chemicals or metallurgical products.

 

Finished goods include saleable products (e.g., copper concentrates,copper anodes, copper cathodes, copper rod, molybdenum concentrate and othermetallurgical products).

 

Supplies inventories are carried at average cost less a reserve forobsolescence.

 

*Property–*

 

Property is recorded at acquisition cost, net of accumulateddepreciation and amortization. Cost includes major expenditures forimprovements and replacements, which extend useful lives or increase capacityand interest costs associated with significant capital additions. Maintenance,repairs, normal development costs at existing mines, and gains or losses onassets retired or sold are reflected in earnings as incurred.

 

Mine development includes primarily the cost of acquiring land rightsto an exploitable ore body, pre-production stripping costs at new mines thatare commercially exploitable, costs associated with bringing new mineralproperties into production, and removal of overburden to prepare unique andidentifiable areas outside the current mining area for such future production. Minedevelopment costs are amortized on a unit of production basis over theremaining life of the mines.

 

Buildings and equipment are depreciated on the straight-line methodover estimated lives from 5 to 40 years or the estimated life of the mine ifshorter.

 

Property is reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Assets are determined impaired when the estimated futureundiscounted cash flows expected to result from the use of the asset are lessthan the carrying value of the asset. The Company’s estimate as to futureundiscounted cash flows takes into consideration, among other things, expectedfuture metal prices, which are based on historical metal prices and pricetrends. The Company measures an impairment loss as the difference between thecarrying value of the asset and its fair value as determined taking into considerationthe estimated future discounted cash flows of the asset.

 

*Asset retirement obligations (reclamation andremediation costs)–*

 

Effective January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards (SFAS) No. 143, “Accounting for AssetRetirement Obligations”. The fair value of a liability for asset retirementobligations is recognized in the period in which it is incurred. The liabilityis measured at fair value and is adjusted to its present value in subsequentperiods as accretion expense is recorded. The corresponding asset retirementcosts are capitalized as part of the carrying value of the relatedlong-lived assets and depreciated over the asset’s useful life.

 

*Intangible assets–*

 

Intangible assets include primarily the excess amount paid over thebook value for investment shares and mining and engineering development studies.Intangible assets are carried at acquisition costs, net of accumulatedamortization and are amortized principally on a unit of production basis over theestimated remaining life of the mines. Intangible assets are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable.

 

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*Debt issuance costs–*

 

Debt issuance costs, which are included in other assets, are amortizedusing the interest method over the term of the related debt.

 

*Ore reserves–*

 

The Company periodically reevaluates estimates of its ore reserves,which represent the Company’s estimate as to the amount of unmined copperremaining in its existing mine locations that can be produced and sold at aprofit. Such estimates are based on engineering evaluations derived fromsamples of drill holes and other openings, combined with assumptions aboutcopper market prices and production costs at each of the respective mines.

 

The Company updates its estimate of ore reserves at the beginning ofeach year. In this calculation the Company uses current metal prices which aredefined as the average metal price over the preceding three years. However, inthe case of the Company’s recently acquired Mexican subsidiary, ore reserveestimates prior to 2005 were calculated based on a copper price of $0.90 perpound of copper. The current per pound of copper price, as defined, was $0.939,$0.751 and $0.76 at the beginning of 2005, 2004 and 2003, respectively. Theseore reserve estimates are used to determine the amount of mine stripping thatis capitalized, units of production amortization of capitalized mine strippingand amortization of intangible assets.

 

*Capitalized mine stripping and leachablematerial–*

 

Effective January 1, 2006, the Company adopted the guidance of theEmerging Issues Task Force, ratified by the Financial Accounting StandardsBoard in March 2005, which stated that stripping costs incurred during theproduction phase of a mine are variable production costs and should be includedin the cost of inventory produced (extracted) during the period that thestripping costs are incurred. See Impact of New Accounting Standards.

 

Stripping costs are costs associated with the removal of wastematerials after production has commenced. Over the life of the mine, strippingcosts are deferred in periods when the actual ratio of waste materials tomineral ore extracted is above the life-of-mine stripping ratio, whichrepresents the Company’s estimate of the total amount of waste to be incurreddivided by the estimated total proven and probable reserves. In periods whenthe actual mine stripping ratio is below the life-of-mine stripping ratio, theCompany reduces the net capitalized mine stripping asset proportionally with acharge to amortization expense. In addition, deferred mine stripping costs areamortized using the units of production method based on proven and probable orereserves. Copper resources contained in piles of leachable materials that havebeen extracted from the mines are not included in the determination of units ofproduction amortization.

 

The Company’s policy results in the smoothing of stripping costs overthe life of the mine and, in the view of the Company, better facilitates thematching of mine production costs over the life of the mine with the mine’srevenues.

 

Stripping costs are assessed for recoverability as part ofproperty, plant and equipment and reviewed whenever events or changes incircumstances indicate that its carrying amount may not be recoverable. Ifrecoverable value has fallen below carrying value, the asset is written down toits recoverable value.

 

Leachable material. At one of its mines the Company capitalizes thecost of materials with low copper content extracted during the mining process(leachable material), which is collected in areas known as leaching dumps. Theamortization of the capitalized costs is determined based on the depletionperiod of the leaching dumps, which is estimated to be five years (unaudited).

 

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*Exploration–*

 

Tangible and intangible costs incurred in the search for mineralproperties are charged against earnings when incurred.

 

*Income taxes–*

 

Provisions for income taxes are based on taxes payable or refundablefor the current year and deferred taxes on temporary differences between theamount of taxable income and pretax financial income and between the tax basesof assets and liabilities and their reported amounts in the financialstatements. Deferred tax assets and liabilities are included in the financialstatements at currently enacted income tax rates applicable to the period inwhich the deferred tax assets and liabilities are expected to be realized andsettled as prescribed in Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes”. As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision forincome taxes. Deferred income tax assets are reduced by any benefits that, inthe opinion of management, are more likely not to be realized.

 

*Foreign exchange–*

 

The Company’s functional currency is the U.S. dollar. As required bylocal law, both the Peruvian Branch and MM maintain their books of accounts inPeruvian nuevos soles and Mexican pesos, respectively.

 

Foreign currency assets and liabilities are remeasured into U.S.dollars at current exchange rates except for non-monetary items such asinventory, property, intangible assets and other assets which are remeasured athistorical exchange rates. Revenues and expenses are generally translated atactual exchange rates in effect during the period, except for those itemsrelated to balance sheet amounts that are remeasured at historical exchangerates. Gains and losses from foreign currency remeasurement are included inearnings of the period.

 

Gains and (losses) resulting from foreign currency transactions areincluded in “Cost of sales (exclusive of depreciation, amortization anddepletion)” and amounted to $(12.1) million, $(14.4) million and $21.9 millionin 2005, 2004 and 2003, respectively.

 

*Derivative instruments–*

 

Derivative contracts are reflected as assets or liabilities in thebalance sheet at their fair value. The Company entered into an interest rateswap agreement to hedge the interest rate risk exposure on a credit facility. TheCompany has also entered into copper swap contracts to protect future sales ona portion of its future copper production at a fixed copper price. At December 31,2005, the Company held no open swap agreements. The gains and losses oncontracts held during the year are recorded in earnings.

 

*Other comprehensive income–*

 

Comprehensive income represents changes in equity during a period,except those resulting from investments by owners and distributions to owners.During the fiscal years ended December 31, 2005, 2004 and 2003, the onlycomponents of “other comprehensive income (loss)” was the additional minimumliability for employee benefit obligations and unrealized gain on equitysecurities.

 

*Business segment*

 

The Company operates in a single industry, namely mining copper. Priorto the April 1, 2005 acquisition of Minera Mexico, the Company determinedthat its operations in Peru fell within one segment. With the acquisition ofMinera Mexico the Company continues to

 

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operate principally in one industry, the mining of copper. However,because of the demands of managing operations in two countries, effective April 1,2005, Company management views the new Southern Copper as having threeoperating segments and manages on the basis of these segments. The segmentsidentified by the Company are: 1) Peruvian operations, which include the twoopen pit copper mines in Peru and the plants and services supporting such mines.2) Mexican open pit mines, which include La Caridad and Cananea mine complexesand their supporting facilities. 3) The Mexican underground mining operations,which include five underground mines that produce zinc, copper, silver andgold, a coal and coke mine, several industrial processing facilities. Additionally,in mining copper the Company produces a number of metal by-products, mostimportant of which are molybdenum, silver and zinc.

 

The Chief Operating Officer of the Company focuses on operating incomeas measure of performance to evaluate different segments, and to make decisionsto allocate resources to the reported segments.

 

*Change in accounting principle–*

 

Effective January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards (SFAS) No. 143, “Accounting for AssetRetirement Obligations” (SFAS No. 143). This statement requires the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred. The cumulative effect of this change inaccounting principle, net of taxes, was a charge to earnings of $1.5 millionand is shown separately on the consolidated combined statement of earnings. Inaddition, as part of this cumulative adjustment, the Company recorded anasset retirement obligation liability of $4.9 million, increased net propertyby $2.5 million and recorded deferred tax and workers’ participation benefitsof $0.9 million. The adoption of this new principle resulted in an additionalcharge to earnings from continuing operations of $0.5 million for 2003 and hasbeen included as an operating cost in the consolidated combined statement ofearnings.

 

*Impact of new accounting standards–*

 

On March 17, 2005 Emerging Issues Task Force, or EITF, reached aconsensus in the issue 04-06, “Accounting for Stripping costs Incurred duringProduction in the Mining Industry”, which was ratified by the FinancialAccounting Standards Board, or “FASB”, on March 30 2005 and the subsequentmodification to the transition provisions approved by the EITF in its June 15-162005 meeting. The consensus states that stripping costs incurred during the productionphase of a mine are variable production costs that should be included in thecosts of the inventory produced (extracted) during the period that thestripping costs are incurred. On January 1, 2006 the Company adopted thisconsensus by reversing $499.5 million of net cumulative capitalized strippingcost and capitalized leach inventory cost as of December 31, 2005 andrecording a net charge of $322.9 million to retained earnings after therecognition of a workers participation and tax benefit of $176.6 million. Inaddition, near-term future years operating income could be negatively impactedto the extent that costs previously capitalized are expensed.

 

In March 2005, the FASB published FASB Interpretation No. 47 “Accountingfor Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies thatthe term *conditional asset retirementobligation* as used in SFAS No. 143, refers to a legalobligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or may notbe within the control of the entity. Accordingly, an entity is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Uncertaintyabout the timing and/or method of settlement of a conditional asset retirementobligation should be factored into the measurement of the liability whensufficient information exists. This interpretation also clarifies when an entitywould have sufficient information to reasonably estimate the fair value of anasset retirement obligation. FIN 47 is effective no later than the end offiscal years ending after December 15, 2005 (December 31, 2005, forcalendar-year enterprises). Retrospective

 

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application for interim financial information is permitted but is notrequired. Early adoption of this interpretation is encouraged. FIN 47 did nothave a significant impact on the Company’s financial position or results ofoperations.

 

In June 2005, the FASB published SFAS No. 154, “Accountingchanges and Error Corrections a replacement of APB Opinion No. 20 and FASBStatement No. 3” (“SFAS No. 154”), which changes the requirements forthe accounting for and reporting of a change in accounting principle andredefines restatement as the revising of previously issued financial statementsto reflect the correction of an error. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine the period-specific effectsof the cumulative effect of the change. This Statement also carries forwardwithout change the guidance contained in Opinion 20 for reporting thecorrection of an error in previously issued financial statements and a changein accounting estimate. This Statement does not change the transitionprovisions of any existing accounting pronouncement. SFAS No. 154 will beeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Company is evaluating the impactthat this statement may have on its financial position or results ofoperations.

 

In September 2005, FASB ratified the consensus reached by theEmerging Issues Task Force (EITF) on Issue N° 04-13, “Accounting for Purchasesand Sales of Inventory with the Same Counterparty”. The consensus concludedthat two or more legally separate exchange transactions with the samecounterparty should be combined and considered as a single arrangement foraccounting purposes, if they are entered into “in contemplation” of one another.The EITF also reached a consensus that non monetary exchanges of inventorywithin the same business should be recognized at fair value. The consensusreached on EITF Issue N°. 04-13 is effective for new arrangements entered into,or modifications or renewals of existing arrangements, in reporting periodsbeginning after March 15, 2006. The Company is currently determining theimpact of this Issue on its financial reporting and disclosures.

 

**NOTE 3-INVENTORIES:**

 
| ** **             | ** ** | **As of December 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| **(in millions)** | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Metals:                |       |                                  |       |   |   |
| Finished  goods        |       | $                                     | 106.9      |   | $ | 60.0 |   |
| Work-in-process        |       | 135.4                                 |       | 149.3 |   |
| Supplies               |       | 153.5                                 |       | 143.1 |   |
| Total  inventories     |       | $                                     | 395.8      |   | $ | 352.4 |   |

 

**NOTE 4-PROPERTY:**

 
| ** **                                            | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Buildings  and equipment                              |       | $                                     | 5,266.8    |   | $ | 5,156.1 |   |
| Construction  in progress                             |       | 565.8                                 |       | 252.4 |   |
| Mine  development                                     |       | 260.0                                 |       | 255.6 |   |
| Land, other  than mineral                             |       | 66.3                                  |       | 65.6 |   |
| Total  property                                       |       | 6,158.9                               |       | 5,729.7 |   |
| Accumulated  depreciation, amortization and depletion |       | (2,832.8                              | )          | (2,661.2 | ) |
| Total  property, net                                  |       | $                                     | 3,326.1    |   | $ | 3,068.5 |   |

 

In conjunction with the adoption of SFAS No. 143, during 2003, theCompany capitalized $3.0 million in costs associated with establishing an assetretirement obligation for a portion of its long-lived assets in Peru. Theseassets include a dam on the Torata River, close to the Cuajone mine, and theSX/EW facility. The asset retirement obligations were established based on theCompany’s environmental impact studies for these projects. The retirementobligations for the dam are based on a weighting of two options available atthe end of the dam’s useful life. These options are to turn the dam over to thelocal

 

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municipality and provide maintenance for a number of years or demolishthe dam and restore the river to its natural course. The retirement obligationfor the SX/EW facility requires a dismantling of the plant and reclamation ofthe property. The Company has not designated specific assets to satisfy theseobligations but will provide funds from operations. There were no additionalcosts capitalized in 2004 associated with asset retirement obligations.

 

In 2005 the Company capitalized $5.2 million an estimate of the assetcost associated with establishing an asset retirement obligation for itsPeruvian mine closure plan. These costs are being depreciated on a straightline basis over the life of the related assets. As for the Mexican operations,the adoption of SFAS No. 143 did not have a material effect on the Company’sfinancial position or results of operations. Management does not believe thatthere are any significant legal obligations for asset retirements in Mexico asof December 31, 2004 and 2005. Please also see Note 9, “Asset retirementobligation”.

 

Depreciation expense for the years ended December 31, 2005, 2004and 2003 amounted to $200.9 million, $153.4 million and $144.2 million,respectively.

 

**NOTE 5-CAPITALIZED MINE STRIPPING COSTS ANDLEACHABLE MATERIAL:**

 
| ** **                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| **(in millions)**           | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Capitalized  mine stripping cost |       | $                                     | 418.2      |   | $ | 379.4 |   |
| Accumulated  amortization        |       | (128.8                                | )          | (61.3 | ) |
| Capitalized  mine stripping, net |       | $                                     | 289.4      |   | $ | 318.1 |   |

 
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Capitalized  leachable material      |       | $                                     | 252.0      |   | $ | 170.8 |   |
| Accumulated  amortization            |       | (41.9                                 | )          | (36.2 | ) |
| Capitalized  leachable material, net |       | $                                     | 210.1      |   | $ | 134.6 |   |

 

Amortization of mine stripping and leachable material is included in “Depreciation,amortization and depletion” and amounted to $73.2 million, $36.4 million and$25.6 million in 2005, 2004 and 2003, respectively.

 

The Company’s policy of deferring mine stripping costs and leachablematerial decreased operating costs by $43.0 million, $56.3 million and $53.9million in 2005, 2004 and 2003, respectively, as compared to what such amountswould have been if the Company expensed mine stripping costs and leachable materialcosts as incurred.

 

On January 1, 2006, the Company adopted the guidance of the EITF, “Accountingfor Stripping Cost Incurred during Production in the Mining Industry” and wroteoff to retained earnings net cumulative capitalized stripping and net capitalizedleachable material, net of income taxes and workers’ participation benefit. SeeImpact of new accounting standards.

 

**NOTE 6-INTANGIBLE ASSETS:**

 
| ** **                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                    | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Mining  concessions                       |       | $                                     | 121.2      |   | $ | 121.2 |   |
| Mine engineering  and development studies |       | 6.0                                   |       | 5.7 |   |
| Goodwill                                  |       | 17.0                                  |       | 17.0 |   |
|                                      |       | 144.2                                 |       | 143.9 |   |
| Accumulated  amortization                 |       | (23.3                                 | )          | (20.4 | ) |
| Intangible  assets, net                   |       | $                                     | 120.9      |   | $ | 123.5 |   |

 

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Amortization expense on intangibles was $2.9 million, $2.8 million and$3.2 million for the years ended December 31, 2005, 2004 and 2003,respectively. The estimated aggregate amortization expense for intangibles is$16.5 million for the years 2006 through 2010, approximately $3.3 million peryear.

 

**NOTE 7-INCOME TAXES:**

 

The components of the provision for income taxes are as follows:

 
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| **(in millions)**            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. federal  and state:          |       |                                       |       |   |   |   |   |
| Current                           |       | $                                          | 13.4       |   | $ | 21.7 |   | $ | 4.0 |   |
| Deferred                          |       | —                                     |       | (8.2 | ) | 2.3 |   |
|                              |       | 13.4                                       |       | 13.5 |   | 6.3 |   |
| Foreign  (Peru and Mexico):       |       |                                       |       |   |   |   |   |
| Current                           |       | 618.6                                      |       | 356.6 |   | 84.9 |   |
| Deferred                          |       | (42.3                                      | )          | 63.6 |   | 28.9 |   |
|                              |       | 576.3                                      |       | 420.2 |   | 113.8 |   |
| Total  provision for income taxes |       | $                                          | 589.7      |   | $ | 433.7 |   | $ | 120.1 |   |

 

The reconciliation of the statutory income tax rate to the effectivetax rate is as follows:

 
| ** **                                                               | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected tax                                                             |       | 30.0                                                          | %          | 30.0 | % | 30.0 | % |
|                                                                     |       |                                                          |       |   |   |   |   |
| Effect of  income taxed at a rate other than the statutory rate          |       | 1.5                                                           |       | 3.9 |   | 1.8 |   |
| Permanent  differences                                                   |       | 0.7                                                           |       | 1.2 |   | 3.4 |   |
| Effect of  tax rate change                                               |       | (2.5                                                          | )          | (1.2 | ) | 4.9 |   |
| Loss of tax  benefits upon corporate reorganization                      |       | (1.8                                                          | )          | — |   | 32.6 |   |
| Loss  generated by subsidiaries                                          |       | —                                                        |       | — |   | 6.2 |   |
| Valuation  allowance for tax loss carryforward and recoverable tax asset |       | —                                                        |       | (4.1 | ) | (30.4 | ) |
| Other                                                                    |       | 1.5                                                           |       | 0.6 |   | 8.8 |   |
| Effective  income tax rate                                               |       | 29.4                                                          | %          | 30.4 | % | 57.3 | % |

 

The effective tax rate presented above is a combined effective tax ratefor SCC including Minera Mexico. From prior years’ reports, the statutoryincome tax rate has changed from an expected tax of 35% to 30% since the majorcomponent of the provision for income taxes is from the foreign jurisdictionsof Peru and Mexico. For all of the years presented, both companies filedseparate tax returns in their respective tax jurisdictions. Although the tax rules andregulations imposed in the separate tax jurisdictions may varysignificantly, similar permanent items exist, such as the impact of changes instatutory tax rates, and income and expense items which are nondeductible ornontaxable. Several items above are particular to the tax rules in Mexicoor specific events related to Minera Mexico, such as the tax inflation effect,which requires that inflation be recognized for tax purposes (where it is notfor financial reporting purposes), and the loss of tax benefits upon acorporate reorganization undertaken by Minera Mexico in 2003. Other itemsrelate specifically to SCC such as the percentage depletion. The impact of thechange in the valuation allowance reflects the change in valuation allowancesfor the combined companies which is further described below.

 

Deferred taxes include the U.S., Peruvian and Mexican tax effects ofthe following types of temporary differences and carryforwards, net of foreigntax credit effects:

 

107

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| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Current:                                           |       |                                  |       |   |   |
| Inventories                                        |       | $                                     | 28.4       |   | $ | 57.9 |   |
| Other                                              |       | (1.3                                  | )          | (1.2 | ) |
| Other  accrued expenses                            |       | (32.3                                 | )          | (14.2 | ) |
| Net current  deferred tax liability                |       | (5.2                                  | )          | 42.5 |   |
| Non-current:                                       |       |                                  |       |   |   |
| Property and  equipment                            |       | 186.2                                 |       | 238.7 |   |
| Tax loss  carryforwards                            |       | (2.7                                  | )          | (62.3 | ) |
| Recoverable  asset tax                             |       | (0.3                                  | )          | (44.9 | ) |
| AMT credit  carryforwards                          |       | (32.2                                 | )          | (32.6 | ) |
| Deferred  charges                                  |       | 69.4                                  |       | 64.5 |   |
| Foreign tax  credit carryforwards                  |       | (49.0                                 | )          | — |   |
| Other  accrued expenses                            |       | (34.7                                 | )          | — |   |
| Other                                              |       | 41.1                                  |       | 46.8 |   |
|                                               |       |                                  |       |   |   |
| Less,  valuation allowance for deferred tax assets |       | 81.2                                  |       | 33.4 |   |
| Net  non-current deferred tax liability            |       | 259.0                                 |       | 243.6 |   |
| Total net deferred  tax liability                  |       | $                                     | 253.8      |   | $ | 286.1 |   |

 

*U.S. Tax Matters–*

 

At December 31, 2005, the foreign tax credit carryforwardavailable to reduce possible future U.S. income tax amounted to approximately$49.0 million, expiring as follows: $19.0 million in 2007, $10.4 million in2008, and $19.6 million in 2015. No foreign tax credit carryforwards expired in2005 or 2004. For years beginning after October 22, 2004, unused foreigntax credits generated in years beginning after this date may be carriedback only one year, but can now be carried forward ten years.

 

In October, 2004, the American Jobs Creation Act of 2004 was enacted inthe U.S. This law repealed the 90% limitation on the utilization of foreign taxcredits when calculating the Company’s alternative minimum tax (“AMT”). Therepeal is effective in 2005. Although the new law was not effective until 2005,under SFAS No. 109, the effect of the law change is required to bereflected in the period that includes the enactment date. As a result,$9.5 million of previously booked deferred U.S. tax liability was recordedas income in 2004.

 

*Peruvian Tax Matters–*

 

In December 2003, the Peruvian government established a new taxrate of 30% for years beginning after 2003. Although this new rate did notaffect the current 2003 tax expense, the change in the tax rate required thatthe deferred Peruvian assets and liabilities be re-valued at the tax rateexpected to apply when these assets and liabilities are realized. Accordingly,the Company recorded a charge of $10.1 million in additional deferred taxexpense in 2003.

 

The Company obtains income tax credits in Peru for value-added taxespaid in connection with the purchase of capital equipment and other goods andservices, employed in its operations and records these credits as a prepaidexpense. Under current Peruvian law, the Company is entitled to use the creditsagainst its Peruvian income tax liability or to receive a refund. The carryingvalue of these Peruvian tax credits approximates their net realizable value.

 

In accordance with a 1996 agreement with the Peruvian government,income generated from the SX/EW operations is taxed at a fixed rate of 30%through the year 2010.

 

108

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*Mexican Tax Matters–*

 

Minera Mexico and its subsidiaries obtained authorization from theMexican tax authorities to file a consolidated income and asset tax return inMexico.

 

In accordance with Mexican income tax law, Mexican subsidiaries aresubject to paying the greater of the asset tax or income tax. The Mexicanincome tax law enacted January 1, 2002, reduced the 35% federal income taxrate by one percentage point each year until it reached 32% in 2005.

 

As result of the amendments to the income tax law approved on November 13,2004, the income tax rate was further reduced from the 33% rate applicable in2004 to a 30% rate in 2005, and it will be gradually be reduced by 1% per yearuntil it reaches 28% in 2007. In addition, effective fiscal year 2005, there isa change in the tax treatment of the inventory purchases for the year. Underthe new law, cost of sales will be deductible instead of inventory purchases. Thetax deduction for employees’ statutory profit sharing amounts and theobligation to withhold taxes on dividends paid to individuals and foreignresidents was also eliminated. The impact of the reduction in the corporateincome tax rate as a result of the tax law changes in 2004 resulted in areduction in tax expense of $21.6 million in 2004.

 

Asset tax is calculated by applying a 1.8% tax rate to Minera Mexico’sasset position, as defined by the law, and is payable only to the extent thatit exceeds the income tax payable for the same period. If in any year asset taxexceeds the income tax payable, the asset tax payment for such excess may bereduced by the amount by which the income tax exceeded the asset tax in thethree preceding years and any required payment of the asset tax is creditableagainst the excess of the income tax over the asset tax of the following10 years.

 

Valuation allowances–

 

U.S.:

 

The Company’s valuation allowance consists of $49.0 million in foreigntax credits and $32.2 million in AMT credit carryforwards. Managementbelieves that it is more likely than not, that full value for both thesecredits will not be realized in the future.

 

Mexico:

 

In years prior to 2002, Minera Mexico experienced significant liquidityand financial performance difficulties which resulted in defaults of variousdebt covenants. Therefore, prior to 2002, a valuation allowance was establishedfor substantially all of its net operating loss and asset tax carryforwardssince it was uncertain as to whether those carryforwards might be used. Thevaluation allowances were reversed in 2003 as Minera Mexico undertook itsfinancial and corporate restructuring, and financial performance improved. Asof December 31, 2005, the remaining tax loss carryforwards totaled$9.4 million. As of December 31, 2005, the remaining asset taxcarryforward amounting to $0.2 million.

 

**NOTE 8-WORKERS’ PARTICIPATION:**

 

The Company’s operations in Peru and Mexico are subject to statutoryworkers’ participation.

 

In Peru, the provision for workers’ participation is calculated at 8%of pre-tax earnings. The current portion of this participation, which isaccrued during the year, is based on Branch’s taxable income and is distributedto workers following determination of final results for the year. In Mexico,workers’ participation is determined using the guidelines established in theMexican income tax law at a rate of 10% of pre-tax earnings as adjusted by thetax law.

 

109

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The provision for workers’ participation is included in “Cost of sales(exclusive of depreciation, amortization and depletion)” in the statement ofearnings. For the years ended December 31, 2005, 2004 and 2003, workers’participation expense was $219.2 million, $93.6 million and $20.2 million,respectively.

 

In May 2005, the Mexican Supreme Court rendered a decision thatchanged the method of computing the amount of statutory workers’ profit sharingrequired to be paid by some Mexican companies, including the Company’s Mexicansubsidiary. The Supreme Court’s ruling in effect prohibited the application ofnet operating loss carryforwards in computing the income used as the base fordetermining the workers’ profit sharing amounts. As a result the Companyrecognized in its 2005 results of operations a charge of $36.3 million forworkers’ profit sharing related to 2004.

 

**NOTE 9-ASSET RETIREMENT OBLIGATION**

 

On January 1, 2003, the Company adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations”, which established a uniform methodologyof accounting for estimated reclamation and abandonment costs. The cumulativeeffect of the change of accounting principle, net of income tax was a charge toincome of $1.5 million. As part of this change the Company recorded anasset retirement obligation of $4.9 million and increased net property $2.5million. This adoption established the liability for a portion of the Company’slong-lived assets in Peru, and include a dam on the Torata river, close to theCuajone mine and the SX/EW facility.

 

In 2005 the Company added an asset retirement obligation for its miningproperties in Peru, as required by the Mine Closure Law, enacted in 2003 andregulated in 2005. This law requires the Company to present a mine closure planto the Peruvian Ministry of Energy and Mines (“MEM”) by August 2006. Thisplan will be subject to review and approval by MEM and open to publicdiscussion and comment in the area of the Company’s operations. In applicationof SFAS No. 143 and according to the criteria established by FIN-47, theCompany has made an estimate of this potential liability and recorded suchliability, based on its review of the law. However, we cannot assure that thisliability will be adequate until our mine plan is presented, reviewed andaccepted by MEM.

 

The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience andincludes cost at the Ilo smelter, the tailing disposal, dismantling of theToquepala and Cuajone concentrators, shops and auxiliary services. In thisconnection we recorded an additional asset retirement liability in 2005 of $5.2million for this new law and increased net property $4.6 million.

 

The following is a reconciliation of the asset retirement obligationfor the two years ended December 31, 2005 (in millions):

 
| Balance January 1,  2004    |   | $      | 5.3    |   |
|----------------------------------|--------|--------|--------|--------|
| Additions,  changes in estimates |   | — |   |
| Accretion  expense               |   | 0.3    |   |
|                             |   |   |   |
| Balance, December 31,  2004 |   | 5.6    |   |
| Additions,  changes in estimates |   | 4.6    |   |
| Accretion  expense               |   | 1.0    |   |
|                             |   |   |   |
| Balance, December 31,  2005 |   | $      | 11.2   |   |

 

110

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**NOTE 10-FINANCINGS:**

 

*Long term debt:*

 
| ** **                                                                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **SCC:**                                                                                      |       |                                  |       |   |   |
| 6.375% Notes  due 2015 ($200 million face amount, less unamortized discount of $1.0  million) |       | $                                     | 199.0      |   | $ | — |   |
| 7.500% Notes  due 2035 ($600 million face amount, less unamortized discount of $5.2  million) |       | 594.8                                 |       | — |   |
| 8.75%  Corporate bonds due 2007                                                               |       | —                                |       | 50.0 |   |
| 5.5625%  Corporate bonds due 2005-2012                                                        |       | —                                |       | 73.1 |   |
| 5.3750%  Corporate bonds due 2005-2012                                                        |       | —                                |       | 25.9 |   |
| 4.5000%  Corporate bonds due 2005-2010                                                        |       | —                                |       | 25.0 |   |
| 4.6250% Corporate  bonds due 2005-2010                                                        |       | —                                |       | 25.0 |   |
| 5.92% Mitsui  credit agreement due 2013 (3.94% at December 31, 2004)                     |       | 80.0                                  |       | 90.0 |   |
| **Minera  Mexico:**                                                                           |       |                                  |       |   |   |
| Citibank  credit facility                                                                     |       | —                                |       | 600.0 |   |
| 8.25% Yankee  bonds-Series A due 2008                                                    |       | 173.3                                 |       | 316.3 |   |
| 9.25% Yankee  bonds-Series B due 2028                                                    |       | 125.0                                 |       | 125.0 |   |
| Total debt                                                                                    |       | 1,172.1                               |       | 1,330.3 |   |
| Less,  current portion                                                                        |       | (10.0                                 | )          | (152.3 | ) |
| Total  long-term debt                                                                         |       | $                                     | 1,162.1    |   | $ | 1,178.0 |   |

 

In 1998, Minera Mexico issued $500 million of unsecured debt, which arereferred to as Yankee bonds. These bonds were offered in two series: Series Afor $375 million, with an interest rate of 8.25% and a 2008 maturity, and Series Bfor $125 million, with an interest rate of 9.25% and a 2028 maturity date. During2005, the Company repurchased $143.0 million of the Series A bonds. Inconnection with this purchase the Company paid a premium of $8.6 million, whichis included in the consolidated combined statement of earnings on the line “Losson debt prepayments”. The bonds contain a covenant requiring Minera Mexico tomaintain a ratio of EBITDA to interest expense of not less than 2.5 to 1.0 assuch terms are defined by the facility. At December 31, 2005, MineraMexico is in compliance with this covenant.

 

In 1999, SCC entered a $100 million, 15-year loan agreement withMitsui. The interest rate for this loan is the Japanese LIBO rate plus 1.25%(Japanese LIBO for this loan at December 31, 2005 was 4.67%). The Mitsuicredit agreement is collateralized by pledges of receivables on 31,000 tons ofcopper per year. The Mitsui agreement requires the Company to maintain aminimum stockholders’ equity of $750 million and a specific ratio of debt toequity. Reduction of Grupo México’s direct or indirect voting interest in theCompany to less than a majority would constitute an event of default under theMitsui agreement. At December 31, 2005, the Company is in compliance withthese covenants.

 

On October 29, 2004, Minera Mexico borrowed $600 millionpursuant to a new credit facility with a final maturity date in 2009. The newcredit facility bore interest at LIBOR plus 200 basis points. The proceeds fromthe new credit facility were used to repay in full the amounts outstandingunder a common agreement with holders of Minera Mexico’s secured export notesand other financial institutions. The loan was secured by a pledge of MineraMexico’s principal properties and was guaranteed by its principal subsidiaries.In 2005, the Company prepaid the total amount of this loan. In connection withthe repayment of this facility, the Company wrote off $10.2 million of deferredfinancing costs which is recorded in the consolidated combined statement ofearning on the line “Interest Expense”.

 

In October 2004, Minera Mexico and Banamex entered into aninterest rate swap agreement for a notional amount of $600 million to hedge theinterest rate risk exposure on its $600 million credit facility granted byCitibank. See Note 14-Derivative Instruments.

 

111

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In January 2005, the Company signed a $200 million credit facilitywith a group of banks led by Citibank, N.A. Proceeds of this credit facilitywere used to prepay $199 million the outstanding bonds of the Company’sPeruvian bond program. The Company capitalized $2.8 million of costs associatedwith this facility. The Company paid a prepayment penalty of 1%, or $2.0million, to the Peruvian bondholders. Additionally, the Company wrote off $2.3million of previously capitalized bond issuance cost. The $2.0 million penaltyand the $2.3 million amortization of bond issuance costs are included in theearning statement under “Loss or debt prepayments” and “Interest expense”,respectively. On July 28, 2005 this credit facility was repaid and theCompany wrote off $2.5 million of deferred financing cost.

 

On July 27, 2005 the Company issued $200 million 6.375% Notes due2015 at a discount of $1.1 million and $600 million 7.5% Notes due 2035, at adiscount of $5.3 million. The notes are senior unsecured obligations of theCompany. The Company capitalized $8.8 million of costs associated with thisfacility and are included in “Other assets, net”, non-current on theConsolidated combined balance sheet. The net proceeds from the issuance andsale of the notes were used to repay outstanding indebtedness of the Company’sPeruvian and Mexican Operations, under its $200 million and $600 million ($480million outstanding) credit facilities, respectively, and the balance was usedfor general corporate purposes. The Company filed a Registration Statement on Form S-4with respect to these Notes on October 28, 2005. On January 3, 2006the Company completed an exchange offer for $200 million, 6.375% Notes due 2015and $600 million, 7.5% Notes due 2035. In the exchange offer, $197.4 million ofthe 6.375% old notes due 2015 were tendered in exchange for an equivalentamount of new notes and an aggregate of $590.5 million of the 7.5% old notesdue 2035 were tendered in exchange for an equivalent amount of new notes. Thenew notes have been registered under U.S. securities law. The indenturesrelating to the notes contain certain covenants, including limitations onliens, limitations on sale and leaseback transactions, rights of the holders ofthe notes upon the occurrence of a change of control triggering event, limitationson subsidiary indebtedness and limitations on consolidations, mergers, sales orconveyances. All of these limitations and restrictions are subject to a numberof significant exceptions, and some of these covenants will cease to beapplicable before the notes mature if the notes attain an investment graderating. At December 31, 2005 the Company is in compliance with thesecovenants.

 

Aggregate maturities of the outstanding borrowings at December 31,2005, are as follows:

 
| **(in millions)** | ** ** | ** **             | ** ** |
|------------------------|------------|------------------------|------------|
| **Year**               | ** ** | **Principal Due** | ** ** |
| 2006                   |       | $                      | 10.0       |   |
| 2007                   |       | 10.0                   |       |
| 2008                   |       | 183.3                  |       |
| 2009                   |       | 10.0                   |       |
| 2010                   |       | 10.0                   |       |
| Thereafter             |       | 955.0                  |       |
| Total                  |       | $                      | 1,178.3    |   |

 

Total debt maturities do not include the debt discount valuationaccount of $6.3 million.

 

At December 31, 2005 and 2004, other assets included$7.4 million and $6.8 million, respectively, held in escrow accounts asrequired by the Company’s loan agreements. The funds are released from escrowas scheduled loan repayments are made.

 

At December 31, 2005 and 2004, the balance of capitalized debtissuance costs was $10.2 million and $10.7 million, respectively. Amortizationcharged to interest expense was $3.8 million, $5.1 million and $1.7 million in2005, 2004 and 2003, respectively.

 

112

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**NOTE 11-BENEFIT PLANS:**

 

*SPCC Defined Benefit Pension Plans–*

 

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

 

The components of net periodic benefit costs calculated in accordancewith SFAS No. 87 “Employers’ Accounting for Pensions”, using December 31as a measurement date, consist of the following:

 
| ** **                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| **(in millions)**          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest  cost                  |       | $                                          | 0.6        |   | $ | 0.7 |   | $ | 0.7 |   |
| Expected  return on plan assets |       | (0.5                                       | )          | (0.6 | ) | (0.8 | ) |
| Net periodic  benefit cost      |       | $                                          | 0.1        |   | $ | 0.1 |   | $ | (0.1 | ) |

 

The change in benefit obligation and plan assets and a reconciliationof funded status are as follows:

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Change in  Benefit Obligation:                     |       |                                  |       |   |   |
| Projected  benefit obligation at beginning of year |       | $                                     | 11.5       |   | $ | 12.0 |   |
| Interest cost                                      |       | 0.6                                   |       | 0.7 |   |
| Benefits  paid                                     |       | (0.9                                  | )          | (0.9 | ) |
| Actuarial  gain (loss)                             |       | 0.7                                   |       | (0.3 | ) |
| Projected  benefit obligation at end of year       |       | $                                     | 11.9       |   | $ | 11.5 |   |
|                                               |       |                                  |       |   |   |
| Change in  Plan Assets:                            |       |                                  |       |   |   |
| Fair value  of plan assets at beginning of year    |       | $                                     | 12.3       |   | $ | 9.7 |   |
| Actual  return on plan assets                      |       | 0.3                                   |       | 0.4 |   |
| Employer  contributions                            |       | 0.8                                   |       | 3.2 |   |
| Benefits  paid                                     |       | (0.9                                  | )          | (0.9 | ) |
| Administrative  expenses                           |       | (0.1                                  | )          | (0.1 | ) |
| Fair value  of plan assets at end of year          |       | $                                     | 12.4       |   | $ | 12.3 |   |
|                                               |       |                                  |       |   |   |
| Reconciliation  of Funded Status:                  |       |                                  |       |   |   |
| Funded  status                                     |       | $                                     | 0.5        |   | $ | 0.8 |   |
| Unrecognized  actuarial loss                       |       | 2.9                                   |       | 2.0 |   |
| Net amount  reflected in Balance Sheet             |       | $                                     | 3.4        |   | $ | 2.8 |   |

 

Theassumptions used to determine the pension obligation and seniority premiums asof year end and net cost in the ensuing year were:

 
| Discount  rate                                    |   | 5.5 | %      | 6.0 | %      |
|---------------------------------------------------|--------|-----|--------|-----|--------|
| Expected  long-term rate of return on plan assets |   | 4.5 | %      | 5.0 | %      |
| Rate of  compensation increase                    |   | N/A |   | N/A |   |

 

113

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The scheduled maturities of the benefits expected to be paid in each ofthe next five years, and thereafter, are as follows:

 
| **Year**     | ** ** | **Expected  Benefit Payments** | ** ** |
|--------------|------------|-------------------------------------|------------|
| ** **   | ** ** | **(in millions)**              | ** ** |
|         |       |                                |       |
| 2006         |       | $                                   | 0.9        |   |
| 2007         |       | 0.9                                 |       |
| 2008         |       | 0.9                                 |       |
| 2009         |       | 0.9                                 |       |
| 2010         |       | 0.9                                 |       |
| 2011 to 2015 |       | 4.2                                 |       |
| Total        |       | $                                   | 8.7        |   |

 

The Company’s funding policy is to contribute amounts to the qualifiedplan sufficient to meet the minimum funding requirements set forth in theEmployee Retirement Income Security Act of 1974, plus such additional amountsas the Company may determine to be appropriate. Plan assets are investedin commingled stock and bond funds.

 

The Company’s policy for determining asset mix-targets includesperiodic consultation with recognized third party investment consultants. Theexpected long-term rate of return on plan assets is updated periodically,taking into consideration asset allocations, historical returns and the currenteconomic environment. Based on these factors we expect our assets will earn anaverage of 4.5% per annum assuming our long-term mix will be consistent with ourcurrent mix and an assumed discount rate of 5.5%. The fair value of plan assetsis impacted by general market conditions. If actual returns on plan assets varyfrom the expected returns, actual results could differ.

 

*SPCC Post-retirement Health Care Plan–*

 

The Company adopted the post-retirement health care plan for retiredsalaried employees eligible for Medicare on May 1, 1996. The plan isunfunded.

 

Effective October 31, 2000, the health care plan for retirees wasterminated and the Company informed retirees that they would be covered by thethen in effect post-retirement health care plan of ASARCO, a former shareholderof the Company and a subsidiary of Grupo México, which offered substantiallythe same benefits and required the same contributions. The plan is accountedfor in accordance with SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions”.

 

The components of net period benefit costs are as follows:

 
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| **(in millions)**     | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost               |       | $                                          | —     |   | $ | — |   | $ | — |   |
| Interest  cost             |       | 0.1                                        |       | 0.1 |   | 0.1 |   |
| Net periodic  benefit cost |       | $                                          | 0.1        |   | $ | 0.1 |   | $ | 0.1 |   |

 

114

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The change in benefit obligation and a reconciliation of funded statusare as follows:

 
| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                   | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Change in  Benefit Obligation:           |       |                                  |       |   |   |
| Benefit  obligation at beginning of year |       | $                                     | 1.4        |   | $ | 1.8 |   |
| Interest  cost                           |       | 0.1                                   |       | 0.1 |   |
| Plan  Amendments                         |       | —                                |       | (0.3 | ) |
| Benefits  paid                           |       | (0.1                                  | )          | — |   |
| Actuarial  (gain) or loss                |       | —                                |       | (0.2 | ) |
| Benefit  obligation at end of year       |       | $                                     | 1.4        |   | $ | 1.4 |   |
|                                     |       |                                  |       |   |   |
| Reconciliation  of Funded Status:        |       |                                  |       |   |   |
| Funded  status                           |       | $                                     | (1.4       | ) | $ | (1.4 | ) |
| Unrecognized  actuarial loss             |       | 0.4                                   |       | 0.4 |   |
| Unrecognized  prior service cost         |       | (0.3                                  | )          | (0.3 | ) |
| Post-retirement  benefit obligation      |       | $                                     | (1.3       | ) | $ | (1.3 | ) |

 

Discount rate used in the calculation of other post-retirement benefitsand cost as of December 31, 2005 and 2004 were 5.5% and 6.0%,respectively.

 

The benefits expected to be paid in each of the next five years, andthereafter, are as follows:

 
| **(in millions)** | ** ** | ** **                          | ** ** |
|------------------------|------------|-------------------------------------|------------|
| **Year**               | ** ** | **Expected  Benefit Payments** | ** ** |
| 2006                   |       | $                                   | 0.1        |   |
| 2007                   |       | 0.1                                 |       |
| 2008                   |       | 0.1                                 |       |
| 2009                   |       | 0.1                                 |       |
| 2010                   |       | 0.1                                 |       |
| 2011 to 2015           |       | 0.5                                 |       |
| Total                  |       | $                                   | 1.0        |   |

 

For measurement purposes, an 11% annual rate of increase in the per capitacost of covered health care benefits was assumed for 2005. The rate is assumedto decrease gradually to 5% for 2014 and remain at that level thereafter.

 

Assumed health care cost trend rates can have a significant effect onthe amount reported for the health care plan. A one percentage-point change inassumed health care trend rate would not have a significant effect.

 

*Minera Mexico Defined Benefit Pension Plans–*

 

The components of net periodic benefit costs calculated in accordancewith SFAS No. 87 “Employers Accounting for Pensions”, using December 31as a measurement date, consist of the following:

 
| ** **                              | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------|------------|
| **(in millions)**                  | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest  cost                          |       | $                                                             | 2.9        |   | $ | 2.6 |   | $ | 2.6 |   |
| Service cost                            |       | 2.6                                                           |       | 2.1 |   | 2.3 |   |
| Expected  return on plan assets         |       | 3.1                                                           |       | (1.1 | ) | (0.7 | ) |
| Amortization  of transition assets, net |       | (0.2                                                          | )          | (0.2 | ) | (0.2 | ) |
| Recognized  net actuarial loss          |       | 0.2                                                           |       | 0.5 |   | 0.9 |   |
| Net period  benefit cost                |       | $                                                             | 8.6        |   | $ | 3.9 |   | $ | 4.9 |   |

 

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The change in benefit obligation and plan assets are as follows:

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Change in  benefit obligation:                     |       |                  |       |   |   |
| Projected  benefit obligation at beginning of year |       | $                     | 36.1       |   | $ | 35.0 |   |
| Service cost                                       |       | 2.6                   |       | 2.1 |   |
| Interest  cost                                     |       | 2.9                   |       | 2.6 |   |
| Actuarial  (loss) gain, net                        |       | 0.9                   |       | (0.2 | ) |
| Benefits  paid                                     |       | (2.3                  | )          | (2.2 | ) |
| Inflation  adjustment                              |       | 1.9                   |       | (1.2 | ) |
| Projected  benefit obligation at end of year       |       | $                     | 42.1       |   | $ | 36.1 |   |
|                                               |       |                  |       |   |   |
| Change in  plan assets:                            |       |                  |       |   |   |
| Fair value  of plan assets at beginning of year    |       | $                     | 27.2       |   | $ | 12.0 |   |
| Actuarial  return on plan assets                   |       | 9.4                   |       | 15.2 |   |
| Fair value  of plan assets at end of year          |       | $                     | 36.6       |   | $ | 27.2 |   |

 

The pension plan liability is as follows:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| **(in millions)**                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Reconciliation  of Funded Status: |       |                  |       |   |   |
| Funded  status                    |       | $                     | (5.5       | ) | $ | (8.9 | ) |
| Unrecognized  prior service cost  |       | 2.5                   |       | 2.5 |   |
| Unrecognized  net actuarial gain  |       | (9.6                  | )          | (5.2 | ) |
| Unrecognized  transition assets   |       | (1.3                  | )          | (1.3 | ) |
| Additional  minimum liability     |       | (8.1                  | )          | (7.3 | ) |
| Net pension  liability            |       | $                     | (22.0      | ) | $ | (20.2 | ) |

 

The assumptions used to determine the pension obligation and senioritypremiums as of year-end and net cost in the ensuing year were:

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted  average discount rate                  |       | 10       | %          | 10       | %          | 10       | %          |
| Expected  long-term rate of return on plan asset |       | 12       | %          | 12       | %          | 12       | %          |
| Rate of  increase in future compensation level   |       | 6        | %          | 6        | %          | 6        | %          |

 

These rates are based on Mexican pesos as pension plan payments will bepaid in Mexico.

 

The benefits expected to be paid in each of the next five years, andthereafter, are as follows:

 
| **(in millions)** | ** ** | ** **                          | ** ** |
|------------------------|------------|-------------------------------------|------------|
| **Year**               | ** ** | **Expected  Benefit Payments** | ** ** |
| 2006                   |       | $                                   | 17.7       |   |
| 2007                   |       | 2.0                                 |       |
| 2008                   |       | 2.2                                 |       |
| 2009                   |       | 2.4                                 |       |
| 2010                   |       | 2.4                                 |       |
| 2011 to 2015           |       | 16.6                                |       |
| Total                  |       | $                                   | 43.3       |   |

 

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Minera Mexico Post-retirement health care plan–

 

The components of net period benefit costs are as follows:

 
| ** **                                  | ** ** | **For the year ended  December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| **(in millions)**                      | ** ** | **2005**                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest  cost                              |       | $                                                        | 2.2        |   | $ | 2.2 |   | $ | 2.1 |   |
| Service cost                                |       | 0.4                                                      |       | 0.5 |   | 0.4 |   |
| Amortization  of transition assets, net     |       | 1.6                                                      |       | 1.6 |   | 1.6 |   |
| Net periodic  post-retirement benefit costs |       | $                                                        | 4.2        |   | $ | 4.3 |   | $ | 4.1 |   |

 

The change in benefit obligation and a reconciliation of funded statusare as follows:

 
| ** **                                         | ** ** | **As of December 31** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                             | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Change in  benefit obligation:                     |       |                                 |       |   |   |
| Projected  benefit obligation at beginning of year |       | $                                    | 46.8       |   | $ | 46.2 |   |
| Service cost                                       |       | 0.4                                  |       | 0.5 |   |
| Interest  costs                                    |       | 2.2                                  |       | 2.2 |   |
| Actuarial  (loss) gain, net                        |       | 0.5                                  |       | (4.0 | ) |
| Benefits  paid                                     |       | (2.8                                 | )          | (2.7 | ) |
| Settlements                                        |       | —                               |       | — |   |
| Inflation  adjustment                              |       | 1.7                                  |       | 2.3 |   |
| Projected  benefit obligation at end of year       |       | $                                    | 48.8       |   | $ | 44.5 |   |
|                                               |       |                                 |       |   |   |
| Reconciliation  of funded status:                  |       |                                 |       |   |   |
| Funded  status                                     |       | $                                    | 48.8       |   | $ | 44.5 |   |
| Unrecognized  actuarial loss                       |       | (6.8                                 | )          | (5.8 | ) |
| Unrecognized  transition obligation                |       | (26.5                                | )          | (25.8 | ) |
| Post-retirement  benefit obligation                |       | $                                    | 15.5       |   | $ | 12.9 |   |

 

Discount rates used in the calculation of other post-retirementbenefits and costs as of December 31, 2005 and 2004 were 6.0%.

 

The benefits expected to be paid in each of the next five years, andthereafter, are as follows:

 
| **(in millions)** | ** ** | ** **                          | ** ** |
|------------------------|------------|-------------------------------------|------------|
| **Year**               | ** ** | **Expected  Benefit Payments** | ** ** |
| 2006                   |       | $                                   | 3.4        |   |
| 2007                   |       | 3.5                                 |       |
| 2008                   |       | 3.4                                 |       |
| 2009                   |       | 3.4                                 |       |
| 2010                   |       | 3.4                                 |       |
| 2011 to 2015           |       | 3.5                                 |       |
| Total                  |       | $                                   | 20.6       |   |

 

An increase in other benefit cost trend rates have a significant effecton the amount of the reported obligations as well as component cost of theother benefit plan. One percentage-point change in assumed other benefits costtrend rates would have the following effects:

 
| ** **                                            | ** ** | **One Percentage Point** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                | ** ** | **Increase**                       | ** ** | **Decrease** | ** ** |
| Effect on  total service and interest cost components |       | $                                  | 3.3        |   | $ | 1.1 |   |
| Effect on  the post-retirement benefit obligation     |       | $                                  | 54.1       |   | $ | 15.1 |   |

 

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Minera Mexico’s policy for determining asset mix targets includesperiodic consultation with recognized third party investment consultants. Theexpected long-term rate of return on plan assets is updated periodically,taking into consideration assets allocations, historical returns and thecurrent economic environment. The fair value of plan assets is impacted bygeneral market conditions. If actual returns on plan assets vary from theexpected returns, actual results could differ.

 

These plans accounted for approximately 30% of benefit obligations. Thefollowing table represents the asset mix of the investment portfolio as of December 31:

 
| ** **         | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Asset  category:   |       |     |       |     |       |
| Equity  securities |       | 61       | %          | 88       | %          |
| Treasury  bills    |       | 39       |       | 12       |       |
|               |       | 100      | %          | 100      | %          |

 

The amount of contributions that the Company expects to be paid to theplan during 2006 is not material.

 

**NOTE 12-MINORITY INTEREST:**

 

For all the years presented, the minority interest on the consolidatedcombined statement of earnings is based on the earnings of the Company’sPeruvian Branch, and through October 2004 it also included the minorityinterest held in certain subsidiaries of Minera Mexico as further describedbelow. In addition, it included the interest of minority shareholders in MineraMexico.

 

On October 20, 2005, the Company acquired an additional 0.81833%of the outstanding shares of Minera Mexico and were purchased for $30.3million.

 

The Company acquired 0.02 million and 0.2 million investment shares ata $0.1 million and $0.7 million in 2004 and 2003, respectively. There were nopurchases during 2005. These acquisitions have been accounted for as purchasesof minority interests. The carrying value of the minority interest purchasedwas reduced by $0.08 million and $0.5 million in 2004 and 2003, respectively,and the excess paid over the carrying value was assigned to intangible assetsand is being amortized based on production. As a result of these acquisitions,the remaining investment shareholders hold a 0.71% interest in the Branch andare entitled to a pro rata participation in the cash distributions made by thePeruvian Branch. The shares are recorded as a minority interest in the Company’sfinancial statements.

 

In addition, on October 23, 2004, Minera Mexico reached anagreement with the National Union of Mine, Metallurgical and Similar Workers ofthe Mexican Republic (the “Union”) for the purchase of a 4.2% and 1.5% stockstake owned by the Union in two of its subsidiaries. The stock was purchased bydelivery of a note in the amount of $51.5 million. The purchase price of theinterest acquired was less than its carrying value by $31.8 million and,therefore, such negative goodwill was allocated as reduction of the long-livedassets to be amortized based on production. This note was paid in full in February 2005.

 

**NOTE 13-COMMITMENTS AND CONTINGENCIES:**

 

Peruvian Operations

 

*Royalty charge:*

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located. In 2004, morethan 5,000 Peruvian citizens filed a request to the Peruvian ConstitutionalTribunal to have the law declared unconstitutional. However, in

 

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April 2005, the Constitutional Tribunal ruled the royalty law tobe constitutional and therefore applicable to mining activities in Peru. Inaddition, the Company filed a suit in the Lima Civil Court to protest the lawas unconstitutional. On June 28, 2005 the court dismissed the lawsuit andthe Company has decided not to appeal. Under the new law, the Company issubject to a 1% to 3% royalty, based on sales, applicable to the value of theconcentrates produced in our Toquepala and Cuajone mines. The Company madeprovisions of $40.3 million and $17.6 million in 2005 and 2004 respectively,for this royalty which went into effect as of June 25, 2004. Theseprovisions are included in “Cost of sales (exclusive of depreciation,amortization and depletion)” on the Consolidated combined statement ofearnings.

 

In its ruling, the Constitutional Tribunal additionally stated that theroyalty charge applies to all concessions held in the mining industry, implyingthat those entities with tax stability contracts are subject to this charge. In1996, the Company entered into a tax stability contract with the Peruviangovernment (a “Guaranty and Promotional Measures for Investment Contract”)relating to our SX/EW production, which agreement purports to, among otherthings, fix tax rates other contributions relating to such production. Webelieve that the Constitutional Tribunal’s interpretation relating to entitieswith tax stability contracts is incorrect and we intend to protest theimposition of the royalty charge on our SX/EW production, when and if assessed.Provision made by the Company for the royalty charge does not includeapproximately $5.9 million of additional potential liability relating to itsSX/EW production from June 30, 2004 through December 31, 2005.

 

*Power purchase agreement–*

 

In 1997, SCC sold its Ilo power plant to an independent power company,Enersur S.A. (“Enersur”), for $33.6 million. In connection with the sale, apower purchase agreement was also completed under which SCC agreed to purchaseall of its power needs for its Peruvian operations from Enersur for twentyyears, commencing in 1997.

 

The Company agreed to amend its power purchase agreement in June 2003,resolving certain issues that arose between the parties and reducing powercosts for the remaining life of the agreement. The Company made a one-timecontractual payment of $4.0 million to Enersur under terms of the new agreement.The new agreement releases Enersur from the obligation to construct additionalcapacity upon notice to meet the Company’s increased electricity requirementsfrom the planned expansion and modernization. SCC believes it can satisfy theneed for increased electricity requirements from other sources, including localpower providers.

 

*Environmental matters–*

 

*Peruvian operations–*

 

Some of the Company’s operations are subject to applicable Peruvianenvironmental laws and regulations. The Peruvian government, through its *Ministerio de Energía y Minas* (theMinistry of Energy and Mines, or MEM) conducts certain annual audits of theCompany’s Peruvian mining and metallurgical operations. Through theseenvironmental audits, matters related to environmental commitments, compliancewith legal requirements, atmospheric emissions and effluent monitoring arereviewed. The Company believes that it is in material compliance withapplicable Peruvian environmental laws and regulations.

 

In accordance with Peruvian regulations, in 1996 SCC submitted its *Programa de Adecuación y Manejo Ambiental*(the Environmental Compliance and Management Program, known by its Spanishacronym, PAMA) to the MEM. A third-party environmental audit was conducted inorder to elaborate the PAMA. The PAMA applied to all current operations thatdid not have an approved environmental impact study at the time. SCC’s PAMA wasapproved in January 1997 and contains 34 mitigation measures and projectsnecessary to (1) bring the existing operations into compliance with theenvironmental standards established by the MEM and (2) identify areasimpacted by operations that are no longer active and need to be reclaimed orremedied. By the end of 2004, 31 of these projects were completed, includingall PAMA commitments related to the Company’s operations in Cuajone andToquepala. The three

 

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pending PAMA projects all relate to the Ilo smelter operations. Theprimary areas of environmental concern are the smelter reverberatory slageroded from slag deposits up until 1994, and atmospheric emissions from the Ilosmelter.

 

The slag remediation program is progressing as scheduled and isexpected to be completed by 2007. With respect to the smelter emissions, thethird phase of the Ilo smelter modernization has started and is scheduled to becompleted by 2007. In July 2003, the Company awarded the contract to providethe technology and basic engineering for the modernization of the Ilo smelterto Fluor Chile S.A. and Xstrata plc (formerly M.I.M. Holdings Limited). TheCompany believes that the selected proposal complies with the currentenvironmental regulations. This project is the Company’s largest short-termcapital investment project and is estimated at $500 million, including $388.5million expended through 2005. Beginning in 1995 and continuing while thisproject is under construction, the Company has established an emissionscurtailment program that has allowed us to comply with the annual sulfurdioxide air quality standard (established by the MEM in 1996) in the populatedareas of the city of Ilo.

 

On October 14, 2003, the Peruvian Congress published a new lawannouncing future closure and remediation obligations for the mining industry. Thelaw was amended on May 28, 2004 and again on May 8, 2005. The currentmodification establishes that mining companies submit their mine closure planswithin one year of publication of final regulations. On August 16, 2005final regulations were published and the Company has initiated the preparationof the required mine closure plan. As part of the law and the qualifyingregulations the Company is also required to engage an independent consultingentity to prepare the mine closure plan. The final plan, which is required by August 2006,is subject to approval by MEM and open to public discussion and comment in thearea of Company operations. Additionally, the law requires companies to providefinancial guarantees to insure that remediation programs are completed. TheCompany anticipates that this law will increase its asset retirementobligations and require future expenditures and amortizations over the life ofthe mine to satisfy its requirements. The Company believes the liability forthese asset retirement obligations cannot currently be precisely measured, orprecisely estimated, until the Company has substantially completed its mineclosure plan and is reasonably confident that it will be approved by MEM inmost material respects. However the Company has made a preliminary estimate ofthis liability and has recorded such amount in its 2005 financial results. Pleasesee Note 9, above. The Company believes that this estimate should be viewedwith caution, pending final approval of its mine closure plan, expected laterin 2006.

 

For the Company’s Peruvian operations, environmental capitalexpenditures were $234.6 million, $65.5 million and $2.2 million in 2005, 2004and 2003, respectively. The Company foresees significant environmental capitalexpenditures in 2006. Approximately $87.5 million has been budgeted in 2006;the smelter modernization project accounts for most of this budget.

 

*Mexican operations–*

 

Some of the Company’s operations are subject to Mexican federal, stateand municipal environmental laws, to Mexican official standards, and toregulations for the protection of the environment, including regulationsrelating to water supply, water pollution, air pollution, noise pollution andhazardous and solid wastes. Some of these laws and regulations are relevant tolegal proceedings pertaining to the Company’s San Luis Potosí facilities.

 

The principal legislation applicable to the Company’s Mexicanoperations is the federal *Ley General delEquilibrio Ecológico y la Protección al Ambiente* (the General Law ofEcological Balance and Environmental Protection, or the Environmental Law),which is enforced by the *ProcuraduríaFederal de Protección al Ambiente* (Federal Bureau of EnvironmentalProtection, or the PROFEPA). The PROFEPA monitors compliance with environmentallegislation and enforces Mexican environmental laws, regulations and officialstandards and, if warranted, the PROFEPA may initiate administrativeproceedings against companies that violate environmental laws, which in themost egregious cases may

 

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result in the temporary or permanent closing of non-complyingfacilities, the revocation of operating licenses and/or other sanctions orfines. Also, according to the *Código PenalFederal* (Federal Criminal Code), the PROFEPA has to inform correspondingauthorities regarding environmental crimes.

 

The Company’s operations near the U.S.-Mexican border are also subjectto the Agreement on Cooperation for the Protection and Improvement of theEnvironment in the Border Area, or the La Paz Agreement, which was concluded in1983 between the United States and Mexico for the purpose of improving airquality along the border. The La Paz Agreement establishes sulfur dioxideemissions standards and requires the installation and maintenance of emissionmonitoring and record-keeping systems at our smelters in northwestern Mexico. Inorder to maintain compliance with sulfur dioxide emissions standardspromulgated under the Environmental Law and the La Paz Agreement, Minera Mexicoshut down the Cananea smelter and operations at Monterrey in December 1999,after which the plants were dismantled and the Monterrey property was sold.

 

Mexican environmental regulations have become increasingly stringentover the last decade, and this trend is likely to continue and may beinfluenced by the environmental agreement entered into by Mexico, the UnitedStates and Canada in connection with NAFTA in February 1999. However, theCompany’s management does not believe that continued compliance with theEnvironmental Law or Mexican state environmental laws will have a materialadverse effect on the Company’s business, properties, result of operations,financial condition or prospects or will result in material capitalexpenditures. Although the Company believes that all of its facilities are inmaterial compliance with applicable environmental, mining and other laws andregulations, the Company cannot assure you that stricter enforcement ofexisting laws and regulations or the adoption of additional laws andregulations would not have a material adverse effect on the Company’s business,properties, results of operations, financial condition or prospects.

 

Due to the proximity of certain facilities of Minera Mexico to urbancenters, the authorities may implement certain measures that may impactor restrain the operation of such facilities. Any enforcement action to shutdown any such facilities may have an adverse effect on the operatingresults of the relevant subsidiary.

 

The Company has instituted extensive environmental conservationprograms at its mining facilities in Peru and Mexico. The Company’senvironmental programs include water recovery systems to conserve water andminimize contamination of nearby streams, reforestation programs to stabilizethe surfaces of the tailings dams and the implementation of scrubbingtechnology in the mines to reduce dust emissions.

 

*Litigation matters–*

 

Peruvian Operations

 

Garcia-Ataucuri and Others vs. SCC:  In April 1996,the Company was served with a complaint filed in Peru by approximately 800former employees seeking the delivery of 38,763,806.80 “labor shares” to beissued in a proportional way to each in accordance with their time of work withSCC, plus dividends. The Company conducts its operations in Peru througha registered Branch. Although the Branch has neither capital nor liabilityseparate from that of the Company, under Peruvian law it is deemed to have an equitycapital for purposes of determining the economic interest of the holders ofinvestment shares. The labor shares litigation is based on claims of formeremployees for ownership of labor shares issued during the 1970s until 1989under a former Peruvian mandated profit sharing system. We assert that theclaims are meritless and that the labor shares were distributed to the formeremployees in accordance with the then in effect Peruvian profit sharing system.We do not believe that an unfavorable outcome is reasonably possible. In 1971,the Peruvian Government enacted legislation providing that workers in themining industry would participate in the pre-tax profits of the enterprises forwhich they worked at a rate of 10%. This participation was distributed to theworkers with 40% in cash and 60% as an equity interest in the enterprise. Whatremains of the equity participation is now included in the consolidatedcombined balance

 

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sheet caption “Minority interest.”  Under the law, the equity participation wasoriginally delivered to the “Mining Community”, an organization representingall workers. The cash portion was distributed to the workers after the close ofthe year. The accrual for this participation was (and continues to be) acurrent liability of the Company, until paid. In 1978, the law was amended andthe equity distribution was calculated at 5.5% of pre-tax profits and was madeto individual workers of the enterprise in the form of labor shares. Theselabor shares represented an equity interest in the enterprise. In addition,equity participations previously distributed to the “Mining Community” werereturned to the Company and redistributed in the form of labor shares toindividual employees or former employees. The cash participation was adjustedto 4.5% of pre-tax earnings and continued to be distributed to employeesfollowing the close of the year. Effective in 1992, the law was amended to itspresent status. The workers participation in pre-tax profits was set at 8%,with 100% payable in cash. The equity participation component was eliminatedfrom the law. In 1995, the Company offered to exchange new common shares of theCompany for the labor shares issued under the prior Peruvian law. Approximately80.8% of the issued labor shares were exchanged for the Company’s commonshares, greatly reducing the Minority interest on the Company’s balance sheet. Since1995, the Company has periodically purchased labor shares on the open market. In1998, labor shares were renamed “investment shares.”  At December 31, 2005, the investmentshare interest in the Company’s Peruvian Branch amounted to 0.71%.

 

As stated above, in April 1996, the Companywas served with a complaint filed in Peru by approximately 800 former employeesseeking the delivery of a substantial number of “labor shares” (now referred toas “investment shares”) of its Peruvian Branch plus dividends on such shares. Thisamount corresponds to the total number of labor shares for the full Company workers,and the complaint is seeking to have such shares issued to the plaintiffs inproportional way to each in accordance with their time of work with theCompany, plus dividends on such shares. In December 1999, a civil court offirst instance of Lima decided against the Company, ordering the delivery ofthe investment shares and dividends to the plaintiffs. The Company appealedthis decision in January 2000. On October 10, 2000, the SuperiorCourt of Lima affirmed the lower court’s decision, which had been adverse tothe Company. On appeal by the Company, the Peruvian Supreme Court annulled theproceeding noting that the civil courts lacked jurisdiction and that the matterhad to be decided by a labor court. Thelower court dismissed the lawsuit in January 2005. The plaintiffs haveappealed to the superior court.

 

The Company has notmade a provision for this lawsuit because it believes that it has meritoriousdefenses to the claims asserted in the complaint.

 

*Class actions*

 

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

 

The consolidated complaint alleges, among other things, that theacquisition of Minera Mexico is the result of breaches of fiduciary duties bythe Company’s directors and is not entirely fair to the Company and itsminority stockholders. The consolidated complaint seeks, among other things, apreliminary and permanent injunction to enjoin the acquisition, the award ofdamages to the class, the award of damages to the Company and such other reliefthat the court deems equitable, including interest, attorneys’ and experts’fees and costs. The Company believes that this lawsuit is without merit and isvigorously defending itself against this action.

 

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It is the opinion of the Company’s management that the outcome of theaforementioned legal proceeding will not have a material adverse effect on theCompany’s financial position or results of operations on it or on itsconsolidated subsidiaries.

 

Mexican Operations

 

Ejido Land matter:

 

In July 1991, the Mexican agricultural community of Pilares deNacozari Ejido, (“Ejido”), commenced an action in the first federal districtcourt in Sonora, Mexico, against the Mexican Ministry of Agrarian Reform, (“theMinistry”). The action alleged improper expropriation of approximately 1,500hectares of land adjacent to the La Caridad mine in which certain of Mexcobre’s(a subsidiary of Minera Mexico) facilities are currently located. Mexcobre wasnot named as a defendant in the action although it was included as aninterested third party due to its ownership of the land. Mexcobre bought theland in question in 1976 from the *Banco Nacional de Obras yServicios Públicos*, which had previously acquired it as a beneficiaryof the expropriation by the Ministry in 1973 and has alleged legal and physicalimpossibility of returning the land.

 

After two previous rulings stating that it is impossible to return theland as a means of restitution, a third and final ruling from the MexicanAppellate District Court instructed the district court judge to resolve thelegal and material impossibility of returning the land as a means ofrestitution. The district court judge ruled that it is only partiallyimpossible to physically return the land and ruled that legal impossibility hasnot been proved. Mexcobre has filed a complaint against this ruling. Thismatter was finally settled amongst both parties, Ejido and Mexcobre, byentering and ratifying an agreement before the First Federal District Court inHermosillo, Sonora, Mexico, on January 16, 2006, terminating the case.

 

Coremi Royalties:

 

When Mexcobre originally received mining concessions related to its LaCaridad unit in 1970, it was required to pay royalties to the Council of MineralResources, which is referred to as “Coremi”. When the Mining Law came intoeffect in 1992, this obligation was terminated. However, Coremi, the MexicanSuperintendent of Mining and the Mexican Secretary of Economy, did not concedethat the royalty obligation to Coremi was terminated and, in 1995, Coremiinitiated a series of legal actions that are still pending. In August 2002,Coremi filed with the Third Federal District Judge in Civil Matters, an actiondemanding from Mexcobre the payment of royalties since 1997. Mexcobre answeredand denied Coremi’s claims in October 2002 and currently is in thediscovery stage (“*etapa de ofrecimiento de pruebas*”).On December 21, 2005, an initial settlement was reached as follows;royalties for 2005 of $8.5 million were duly paid, as for the royalties fromthe third quarter of 1997 to the last quarter of 2004, a partial payment of$6.2 million was made on January 11, 2006, however, litigation willcontinue in order that a Court establishes if any additional amount is to bepaid. We estimate that the payment made on January 11 will cover saidruling by 100%. The Company believes that any further payment related to thismatter will not be material.

 

San Luis Potosí Facilities:

 

The municipality of San Luis Potosí has granted DesarrolladoraIntersaba, S.A. de C.V., licenses of use of land and construction for housingand/or commercial zones in the former Ejido Capulines, where the residentialproject “Villa Magna” is expected to be developed in the near future.

 

The “Villa Magna” residential project will be developed within an areathat IMMSA’s approved Risk Analysis by SEMARNAT (the federal environmentalauthority) has secure as a safeguard and buffer zone due to the use by IMMSA ofAnhydrous Ammonia Gas.

 

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Based on the foregoing, IMMSA has initiated two different actionsregarding this matter:

 

(1)                                  first,against the Municipality of San Luis Potosí, requesting the annulment of theauthorization and licenses granted to Desarrolladora Intersaba, S.A. de C.A. todevelop “Villa Magna” within the zinc plant’s safeguard and buffer zone; and

 

(2)                                  second,filed before SEMARNAT a request for a declaration of a safeguard and bufferzone surrounding IMMSA’s zinc plant.

 

These actions are awaiting final resolutions. IMMSA believes that,should the outcome of the above mentioned legal proceedings be adverse to IMMSA’sinterests, the construction of the “Villa Magna” housing and commercialdevelopment would not, in itself, affect the operations of IMMSA’s zinc plant.

 

In addition to the foregoing, IMMSA has initiated a series oflegal and administrative procedures against the Municipality of San Luis Potosídue to its refusal to issue IMMSA’s use of land permit in respect of its zinc plant.The Municipality has refused to grant such license based on the argument thatIMMSA has failed to submit, as part of the application process, *a “manifestación de impacto ambiental”*(environmental impact assessment). IMMSA believes that the environmental impactassessment is not required because IMMSA will not undertake constructionactivities. The trial judge has ordered the Municipality to continue theanalysis of IMMSA’s request to issue the “*licenciade uso de suelo”* (use of land permit). The municipality has refusedto issue the land use permit. IMMSA has filed a request for relief against suchresolution to compel the court to issue the land use permit.

 

Tax contingency matters–

 

U.S. Internal Revenue Service - IRS

 

The Company is regularly audited by the federal, state and foreign taxauthorities both in the United States and internationally. These audits canresult in proposed assessments. In 2002, the Internal Revenue Service (IRS) hasissued a preliminary Notice of Proposed Adjustment for the years 1994 through1996. In 2003, the Company settled these differences with the IRS and made apayment of $4.4 million, including interest. Generally, the years 1994 through1996 are now closed to further adjustment.

 

The IRS has completed the field audit work for all years preceding 2003and currently is auditing only 2003. During the audit of the tax years 1997though 1999, the IRS questioned the Company’s accounting policy fordetermination of useful lives, the calculation of deductible and creditable Peruviantaxes, the methodology of capitalizing interest and the capitalizing of certaincosts (drilling, blasting and hauling) into inventory value as items forpossible adjustment. In the fourth quarter of 2003, the Company and the IRS hadjointly requested technical advice from the IRS National Office to help resolvethe inventory value dispute. In August 2005 the National Office of the IRSresponded to the IRS field audit group’s request for technical advice. Theissuance of this technical advice memorandum (TAM) allowed the IRS to close thefield audit work of the audit cycles 1997 through 1999 and 2000 through 2002. TheTAM accepts the position of the IRS field office and concludes that the Companyis required to capitalize mining costs to its leach dumps based on the weightof material moved, without regard to metal content or recoverability.

 

On October 5, 2005 the Company filed a formal protest with the IRSto appeal the proposed changes with respect to the TAM conclusion, as well asother items of adjustment proposed by the IRS field audit group. These otheradjustments include the methodology of capitalizing interest, the determinationof useful lives for depreciable property, the calculation of deductible andcreditable Peruvian taxes and the established service fee between the Companyand related parties. The Company believes that the positions that it isreporting to the IRS are correct and appropriate. The Company believes that ithas substantial defenses to the proposed IRS adjustments and that adequateprovisions have been made so that resolution of any issues raised by the IRSwill not have a material

 

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adverse effect on its financial condition or results of operations. TheCompany is awaiting notification from the IRS Appeals Office for the firstscheduled appeals conference related to its protest. Significant managementjudgment is required in determining the provision for tax contingencies. Theestimate of the probable cost for resolution of the tax contingencies has beendeveloped in consultation with legal and tax counsel. The Company does notbelieve that there is a reasonable likelihood that there is an exposure to lossin excess of the amounts accrued therefore.

 

Peruvian Operations:

 

In Peru the “Superintendencia Nacional de Administración Tributaria”(SUNAT), the Peruvian Tax Administration, regularly audits the Company. Theseaudits can result in proposed assessments.

 

1)                                      Inyear 2002 the Company received assessments and penalties from SUNAT forfiscal years 1996 through 1999, in which several deductions taken weredisallowed. SUNAT has challenged the Company’s depreciation method anddeduction of other expenses related to charges incurred outside of Peru from1996 through 1999, and the deduction of certain exchange differences andinterest expenses from 1997 through 1999. The Company appealed these variousassessments and resolution is still pending.

 

In February 2003, the Peruvian tax court confirmed SUNAT’sassessments and penalties with regard to depreciation and deductions of otherexpenses incurred outside of Peru for fiscal years 1996 and 1997. Consequently,the Company recognized an additional tax and workers participation liabilityfor fiscal years 1998 and 1999 on the amounts assessed by SUNAT. Therefore, in2003 the Company recorded a charge to workers’ participation, included in costof sales (exclusive of depreciation, amortization and depletion) on thestatement of earnings and income tax expense of $0.5 million and $4.4 million,respectively. The Company, however, has not recognized a liability forpenalties and interest assessed by SUNAT in connection with the depreciationand other expenses deduction as it considers they are not applicable. Thestatus of the penalty appeals and other tax contingencies is as follows:

 

a)                          Year 1996:                                                      Withregard to the appeal of the penalty related to fiscal year 1996, the Companywas required to issue a letter of credit to SUNAT of $3.4 million, which wasissued in July 2003. This deposit is recorded in other assets on theconsolidated combined balance sheet. The Peruvian tax court denied the Company’sappeal in February 2004. Consequently, in April 2004, the Companyfiled a lawsuit against the Peruvian tax court and SUNAT in the superior courtof Peru. The Company was not required to issue a deposit for appeal ofassessments and rulings with respect to any other years. In September, 2005 theSuperior Court declared the Company’s claim valid. SUNAT has appealed thisdecision to the Supreme Court in Lima.

 

b)                         Year 1997:      **                                               **Withregard to the penalty issued by SUNAT related to fiscal year 1997, in November 2002the Peruvian tax court indicated that the penalty needed to be modified anddeclared the previously issued penalty null. Consequently, SUNAT issued a newpenalty in December 2003. This penalty and penalties related to fiscalyears 1998 and 1999 have been protested before SUNAT. The Company’s appealbefore the Peruvian tax court related to the assessments (pertaining to thededuction of certain interest expense) for fiscal year 1997 was denied. In thisregard, in May 2003, the Company filed a lawsuit before the superior courtagainst SUNAT and the Peruvian tax court, seeking the reversal of the ruling ofthe tax court. In July, 2005 the Superior Court remanded the case to SUNAT fora new pronouncement. SUNAT has appealed the courts decision to the SupremeCourt in Lima.

 

c)                          SUNAT has not ruled on theinterest deductions for 1998 or 1999.

 

d)                         The Company has not recordedany expense associated with the assessment challenging deductions of interestexpense for the years 1997, 1998, or 1999,

 

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nor has the Company recorded any expense associated with theassessments for the years 2000 and 2001.

 

e)                          Years 1998 and 1999:  The Company’s appeal is still pendingresolution by SUNAT.

 

In December 2004 and January 2005, the Company receivedassessments and penalties from SUNAT for the fiscal years 2000 and 2001, inwhich certain deductions taken by the Company were disallowed. SUNAT hasobjected to the Company’s method of deducting vacation pay accruals in 2000, adeduction in 2000 for a fixed asset write-off, as well as certain otherdeductions in both years. The Company has appealed these assessments and resolutionis still pending. The Company received penalties and assessments from SUNATrelating to the treatment of foreign exchange differences for 2000 and 2001,which the Company is contesting before SUNAT.

 

MexicanOperations

 

Labor matters–

 

In the last several years the Company has experienced a number ofstrikes or other labor disruptions that have had an adverse impact on itsoperations and operating results. For example, in Peru on August 31, 2004,unionized workers at the mining units in Toquepala and Cuajone initiated workstoppages and sought additional wage increases based on high metal prices.The strike was resolved in September 13, 2004. In Mexico, on July 12,2004, the workers of Mexicana de Cobre site went on strike asking for thereview of certain contractual clauses. Such a review was performed and theworkers returned to work 18 days later. On October 15, 2004, theworkers of Mexicana de Cananea went on strike, followed by the Mexicana deCobre workers. The strike lasted for six days at Mexicana de Cobre and ninedays at Mexicana de Cananea. In each case, the operations at the particularmine ceased until the strike was resolved. The Company cannot make assurancesthat they will not experience strikes or other labor-related work stoppages inthe future that could have a material adverse effect on its financial conditionand results of operations.

 

Other legal matters–

 

The Company is involved in various other legal proceedings incidentalto its operations, but the Company does not believe that decisions adverse toit in any such proceedings individually or in the aggregate would have amaterial adverse effect on its financial position and results of operations.

 

Our direct and indirect parent corporations, including AMC and GrupoMéxico, have from time to time been named parties in various litigationsinvolving Asarco. In March 2003, AMC purchased its interest in SCC fromAsarco. In August 2002 the U.S. Department of Justice brought a claimalleging fraudulent conveyance in connection with Asarco’s environmentalliabilities and AMC’s then-proposed purchase of SCC from Asarco. That actionwas settled pursuant to a Consent Decree dated February 2, 2003. Theconsent decree is binding solely on the U.S. government. In October 2004,AMC, Grupo México, Mexicana de Cobre and other parties, not including SCC, werenamed in a lawsuit filed in New York State court in connection with allegedasbestos liabilities, which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance. WhileGrupo México and its affiliates believe that these claims are without merit, wecannot assure you that these or future claims, if successful, will not have anadverse effect on our parent corporations or us. Any increase in the financialobligations of our parent corporations, as a result of matters related toAsarco or otherwise could, among other matters result in our parentcorporations attempting to obtain increased dividends or other funding from us.In 2005, certain subsidiaries of Asarco filed bankruptcy petitions inconnection with alleged asbestos liabilities. In July 2005, the unionizedworkers of Asarco commenced a work stoppage, which was settled in November 2005with the extension of the existing contract for an additional thirteen monthperiod until December 31, 2006. A further deterioration of the financialcondition of Asarco could result in additional claims being filed against GrupoMéxico and its 

 

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subsidiaries, including SCC, Minera México or its subsidiaries. As aresult of various factors, including the above-mentioned work stoppage on August 9,2005 Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court of Corpus Christi, Texas.Asarco’s bankruptcy case is being joined with the bankruptcy cases of itssubsidiaries. Asarco is in continuing possession of its properties and isoperating and managing its businesses as a debtor in possession.

 

Asarco believes that by utilizing the Chapter 11 process it can achievean orderly restructuring of its business and finally resolve, among othercontingencies, its environmental and asbestos claims. However, it is impossibleto predict how the bankruptcy court will ultimately rule with respect tosuch petitions and the impact such rulings will have on Asarco and itssubsidiaries.

 

**NOTE 14-STOCKHOLDERS’ EQUITY:**

 

Merger adjustments–

 

Pursuant to U.S. GAAP, since both SCC and Minera Mexico are under commoncontrol for all the periods presented, the transfer of Minera Mexico to SCC hasbeen reflected at the historical carrying value of Minera Mexico’s assets andliabilities in a manner similar to a pooling of interests. The difference inthe value of the newly issued 67,207,640 shares of SCC and the net carryingvalue of Minera Mexico has been recognized in equity as a reduction inadditional paid-in capital. In addition, Minera Mexico’s historical commonstock, treasury stock and additional paid in capital accounts were eliminatedand classified within SCC’s additional paid-in capital. Minera Mexico’sretained earnings were carried forward as reported to be combined with retainedearnings of SCC. For the purpose of these financial statements, the issuing of67,207,640 shares have been reflected as if they had been outstanding as of January 1,2003. Therefore, historical common stock and per share data presented hereindiffers from that previously reported by SCC on a stand-alone basis.

 

Common stock–

 

The Company had two classes of common shares outstanding. Class Acommon stockholders were entitled to five votes per share. Common sharestockholders are entitled to one vote per share.

 

In connection with the acquisition of Minera Mexico, the Company’s Class Acommon stock was converted into common stock and preferential voting rightswere eliminated. On June 9, 2005, Cerro Trading Company, Inc., SPCInvestors L.L.C., Phelps Dodge Overseas Capital Corporation and ClimaxMolybdenum B.V., subsidiaries of two of SCC’s founding shareholder’s andaffiliates, sold their equity holdings in SCC.

 

Stock Options:

 

The Company has two stockholder approved plans, a Stock Incentive Planand a Director’s Stock Award Plan. The Stock Incentive Plan provides for thegranting of nonqualified or incentive stock options, as defined under theInternal Revenue Code of 1986, as amended, as well as for the award ofrestricted stock, stock appreciation rights and bonuses payable in stock. Theprice at which options may be granted under the Stock Incentive Plan shallnot be less than 100% of their fair market value of the common stock on thedate of grant in the case of incentive stock options, or 50% in the case ofother options. In general, options are not exercisable for six months andexpire after 10 years from the date of grant.

 

The authorized number of shares under the Stock Incentive Plan is1,000,000 of which 300,000 may be awarded as restricted stock. At December 31,2005 and 2004, 645,060 shares are available for future grants under this plan. Therewere no outstanding stock options under this plan at December 31, 2005 or2004.

 

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The Directors’ Stock Award Plan provides that directors who are notcompensated as employees of the Company will be automatically awarded 200shares of common stock upon election and 200 additional shares following eachannual meeting of stockholders thereafter. Under the directors’ plan, 100,000 shares have been reserved forawards.  At December 31 2005, 31,200shares have been awarded under this plan.

 

**NOTE 15-DERIVATIVE INSTRUMENTS:**

 

The Company occasionally uses derivative instruments to manage its exposureto market risk from changes in commodity prices and interest rate riskexposure.  The Company does not enterinto derivative contracts unless it anticipates a future activity that islikely to occur that will result in exposing the Company to market risk.

 

Copperswaps:

In2005, the Company entered into copper swap contracts to protect the futuresales of 662.6 million pounds of its 2005 copper production at a fixed copperprice.  The Company recorded losses of$23.5 million related to these copper swap contracts during 2005.  These losses are recorded as a non-operatingitem in the consolidated combined statement of income.

 

At December 31, 2005, the Company did not hold any open copperswaps.

 

Interest rate swaps:

In October 2004, Minera Mexico and Citibank-Banamex entered into an interest rate swap agreement for a notional principal amount of $600 million.  Under this agreement, MM agreed to pay Banamex a fixed rate equivalent to 3.49% and, in exchange, Banamex agreed to pay a variable rate equivalent to 3-month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $600 million Citibank credit facility.  Additionally, in April 2005, the Company entered into a contract to hedge interest rate exposure on $120 million of its $200 million Citibank credit facility.  Under this contract the Company pays fixed rate interest payments at 4.46% and receives a variable rate equivalent to three month LIBOR.  Payments under the interest rate swap are scheduled to match the interest payment dates of the $200 million credit facility.  Both of these loan facilities were repaid and the related swaps were terminated in July 2005.  As a result of these transactions the Company recorded losses of $2.7 million and $1.4 million in 2005 and 2004, respectively.

 

On July 19, 2005 the Company entered into a one day interest rate swap contract on $700 million of its $800 million notes issued.  Under this contract, the Company made fixed rate interest payments at 4.46% and received a variable rate equivalent to 5.375% of treasury bonds maturing on February 15, 2031.  As a result of this transaction, the Company recorded a gain of $3.9 million in 2005 in the consolidated combined statement of earnings for the cost of terminating this transaction.

 

The Company recorded net gains of $ 1.2 million and a loss of $1.4 million related to the interest swap transactions in 2005 and 2004, respectively.  These gains (losses) are recorded as loss on derivative instruments on the condensed consolidated combined statement of earnings.

 

At December 31, 2005, the Company did not hold any open interest rate swap contracts.

 

**NOTE 16-FINANCIAL INSTRUMENTS:**

 

For certain of the Company’s financial instruments, including cash andcash equivalents, accounts receivable (other than accounts receivableassociated with provisionally priced sales) and accounts payable, the carryingamounts approximate fair value due to their short maturities.  Consequently, such financial instruments arenot included in the following table that provides information about thecarrying amounts and estimated fair values of other financial instruments:

 

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| ** **                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **Carrying  value**         | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Assets:                                                          |       |                        |       |   |   |   |   |   |   |
| Accounts receivable associated with provisionally  priced sales: |       |                        |       |   |   |   |   |   |   |
| Copper                                                           |       | $                           | 7.8        |   | $ | 7.8 |   | $ | 185.9 |   | $ | 185.9 |   |
| Molybdenum                                                       |       | $                           | (39.2      | ) | $ | (39.2 | ) | $ | 202.7 |   | $ | 202.7 |   |
| Marketable securities                                            |       | —                      |       | — |   | $ | 45.3 |   | $ | 45.3 |   |
|                                                             |       |                        |       |   |   |   |   |   |   |
| Liabilities:                                                     |       |                        |       |   |   |   |   |   |   |
| Debt                                                             |       | $                           | 1,172.1    |   | $ | 1,189.4 |   | $ | 1,330.3 |   | $ | 1,343.1 |   |
| Interest rate swaps                                              |       | —                      |       | — |   | $ | 2.6 |   | $ | 2.6 |   |

 

The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate that value:

 

Accounts receivable associated with provisionally priced sales: Fairvalue of copper is based on published forward prices and fair value ofmolybdenum is based on year-end market prices.

 

Marketable securities: Fair value is based on quoted market prices.

 

Long-term debt: Fair value is based on quoted market prices.

 

Interest rate swap: Fair value was calculated based on discountedexpected future cash flows of interests to be received and paid.

 

**NOTE 17-CONCENTRATION OF RISK:**

 

The Company operates four copper open-pit mines, five underground polymetal mines, three smelters and eight refineries in Peru and Mexico andsubstantially all of its assets are located in these countries.  There can be no assurances that the Company’soperations and assets that are subject to the jurisdiction of the governmentsof Peru and Mexico will not be adversely affected by future actions of suchgovernments.  Substantially all of theCompany’s products are exported from Peru and México to customers principallyin United States, Europe, Asia and South America.

 

Financial instruments, which potentially subject the Company to aconcentration of credit risk, consist primarily of cash and cash equivalents,marketable securities and trade accounts receivable.

 

The Company invests or maintains available cash with various banks,principally in the United States, Mexico, Europe and Peru, or in commercialpaper of highly-rated companies.  As partof its cash management process, the Company regularly monitors the relativecredit standing of these institutions. At December 31, 2005, SCC had invested 29.2% of its cashequivalents and marketable securities with Peruvian banks, of which 41.8% wasinvested with one institution.  Likewise,SCC invested 6.4% of its cash equivalent and marketable securities with Mexicanbanks, of which 3.29% were invested in one institution.

 

During the normal course of business, the Company provides credit toits customers.  Although the receivablesresulting from these transactions are not collateralized, the Company has notexperienced significant problems with the collection of receivables.

 

The Company is exposed to credit loss in cases where the financialinstitutions with which it has entered into derivative transactions (commodity,foreign exchange and currency/interest rate swaps) are unable to pay when theyowe funds as a result of 

 

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protection agreements with them. To minimize the risk of such losses,the Company only uses highly-rated financial institutions that meet certainrequirements. The Company also periodically reviews the creditworthiness ofthese institutions to ensure that they are maintaining their ratings. TheCompany does not anticipate that any of the financial institutions will defaulton their obligations.

 

The Company’s five largest trade receivable balances accounted for40.9% and 33.7% and 26.5% of the trade accounts receivable at December 31,2005, 2004 and 2003, respectively, of which one customer representedapproximately 14.6%, 10.7% and 6.7%, respectively, of our trade accountsreceivable.

 

**NOTE 18-RELATED PARTY TRANSACTIONS:**

 

Balances receivable and payable with affiliated companies and relatedparties are shown below (in millions):

 
| ** **                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Affiliate receivable:                         |       |                        |       |   |   |
| Grupo Mexico  Servicios S.A. de C.V.          |       | $                           | 2.6        |   | $ | — |   |
| Grupo Mexico  S.A. de C.V.                    |       | 0.4                         |       | — |   |
| AMC                                           |       | —                      |       | 1.1 |   |
| Cerro Wire & Cable Co.               |       | —                      |       | 8.5 |   |
| Mexico  Constructora Industrial, S.A. de C.V. |       | 5.0                         |       | 1.5 |   |
| Intermodal  Mexico, S.A. de C.V.              |       | 0.4                         |       | 0.4 |   |
| Ferrocarril  Mexicano, S.A. de C.V.           |       | 0.4                         |       | — |   |
| Other                                         |       | 0.3                         |       | 3.9 |   |
|                                          |       | $                           | 9.1        |   | $ | 15.4 |   |
| Affiliate payable:                            |       |                        |       |   |   |
| Grupo Mexico  S.A. de C.V.                    |       | $                           | 2.5        |   | $ | 63.2 |   |
| Ferrocarril  Mexicano, S.A. de C.V.           |       | 3.0                         |       | 3.3 |   |
| Other                                         |       | 0.9                         |       | — |   |
|                                          |       | $                           | 6.4        |   | $ | 66.5 |   |

 

The Company has entered into certain transactions in the ordinarycourse of business with parties that are controlling shareholders. Thesetransactions include the lease of office space, air transportation,construction services and products and services relating to mining andrefining. The Company lends and borrows funds among affiliates for acquisitionsand other corporate purposes. These financial transactions bear interest.

 

Grupo México, the Company’s ultimate parent and the majority indirectstockholder of the Company and its affiliates, provides various services to theCompany. In 2005, these activities were principally related to accounting,legal, tax, financial, treasury, human resources, price risk assessment andhedging, purchasing, procurement and logistics, sales and administrative andother support services. Grupo México is reimbursed for these support services.The total amount paid by the Company to Grupo México for such services in 2005,2004 and 2003 was $13.8 million. The Company expects to continue to pay forthese services going forward in an amount of $13.8 million per year.

 

The Company paid $0.5 million, $3.3 million and $3.4 millionin 2005, 2004 and 2003, respectively, in interest expense related to borrowingsfrom Grupo México.

 

The former holders of the Company’s Class A common stock until June 2005and their affiliates purchase copper and other products from the Company fromtime to time at prices determined by reference to the LME and COMEX marketprice for copper and published prices for other products, if available.

 

The Companypurchased metal products from ASARCO for $1.1 million, $1.0 million and $2.9million in 2005, 2004 and 2003, respectively and sold products, principallysulfuric acid and silver to Asarco for $11.6 million, $13.0 million and $6.2million in 2005, 

 

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2004 and 2003,respectively.

 

Sociedad Minera Cerro Verde, S.A., an affiliate of Phelps DodgeOverseas Corporation and Climax Molybdenum B.V., stockholders of the Companyuntil June 2005, purchased $1.5 million, $3.7 million and$1.9 million of acid products from the Company in 2005 (through June),2004 and 2003, respectively.

 

Cerro Wire and Cable LLC (“Cerro”), an affiliated company of one of theCompany’s stockholders until June 2005, purchased $13.7 million and$70.2 million of copper products from the Company in 2005 and 2004respectively. There were no such purchases by Cerro in 2003.

 

In 2003, the Company purchased from Asarco, a former stockholder of theCompany and a subsidiary of Grupo México, used mining equipment. In compliancewith Peruvian regulations related to used vehicles and mining equipment, thetrucks and mining equipment were independently appraised at fair market valueat the time of purchase for $10 million. Additionally in 2003, the Companypurchased from Asarco mineral exploration properties in Chile, at a cost of$3.7 million. The Company used an independent appraisal firm to determinethe purchase price.

 

On January 15, 2004, the Company entered into a tolling agreementwith Asarco.  Under terms of theagreement, in the first quarter of 2004 the Company, through its wholly ownedUS subsidiary, Southern Peru Limited (“SPL”), commenced delivering to Asarco,at its Amarillo, Texas refinery, copper cathodes for conversion into copperrods, which the Company sells to customers in the United States.  The Company delivered 29,000 tons and 77,000tons of copper during 2005 and 2004, respectively to the Asarco refinery.  On July 8, 2005 Asarco declared Force Majeure, notifying SPL thatbecause of a strike at their facilities, they would be unable to acceptshipments from the Company.  Accordingly,deliveries to the refinery were suspended and the Company has redirected thecopper otherwise intended for delivery to the refinery to other customers.  At December 31, 2005 the Company did nothave copper at the Asarco refinery.  TheCompany paid Asarco a tolling charge upon its receipt of copper rods.  These charges, $1.6 million in 2005 and $3.8million in 2004, are based on competitive market terms.  Through June 9 2005 the Company sold aportion of the copper treated by Asarco, approximately $13.7 million, to theMarmon Group — Cerro Wire, a stockholder of the Company until June 9, 2005and sold $70.2 million to Cerro, in 2004. At December 31, 2004 there was $8.5 million in affiliates accountsreceivable related to SPL’s sales to Cerro.

 

In addition to the charges noted above, the Company paid Asarco $4.9million and $9.9 million in 2004 and 2003, respectively, for refining and otherservices.

 

The Company contracted an aggregate of approximately $3.2 millionand $1.2 million in 2004 and 2003, respectively, for shipping services toand from Peru by Compañía Sud-Americana de Vapores S.A. (“CSAV”), and asubsidiary company. CSAV is a company indirectly controlled by Quemchi, S.A. Mr. JaimeClaro, a director of SCC during 2003 and the first half of 2004, is chairman ofQuemchi S.A.

 

The Company purchased $0.4 million and $1.3 million in 2004and 2003, respectively, of industrial materials from Higher TechnologySolutions S.A. (“Higher Tec”), a Peruvian corporation and a related company. Mr. CarlosGonzález, a son of SCC’s President and Chief Executive Officer, is an investorin Higher Tec and the owner of the related company. Additionally, in 2005 thecompany purchased $3.3 million and $0.7 million and in 2004 $1.1 millionand $0.7 million of industrial material from Higher Technology S.A.C. andServicios y Fabricaciones Mecánicas S.A.C., respectively. Mr. CarlosGonzález is the principal owner of these companies. In addition, the Companypurchased $0.2 million, $0.4 million and $0.2 million, in 2005, 2004and 2003, respectively, of industrial materials from Société Française des BandesTransporteuses, a French corporation. Mr. Alejandro González, a sonof SCC’s President and Chief Executive Officer, is a sales representative withthis company.

 

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The Company’s Mexican operations paid fees of $21.0 million,$19.3 million and $13.8 million in 2005, 2004 and 2003, respectively,primarily for freight services provided by Ferrocarril Mexicano, S.A. de C.V.,an indirect subsidiary of Grupo México.

 

In addition, the Company’s Mexican operations paid fees of $29.7million and $0.4 million in 2005 and 2004, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.  At December 31,2005 the Company had a balance due of $5.0 million for advances provided to thecompany.

 

The Larrea family controls a majority of the capital stock of GrupoMéxico, and has extensive interests in other businesses, including oil drillingservices, construction and real estate. The Company engages in certaintransactions in the ordinary course of business with other entities controlledby the family relating to mining and refining services, the lease of officespace, and air transportation and construction services. These transactionsamounted to approximately $3.7 million in 2005, $6.1 million in 2004 and$8.4 million in 2003.

 

See also the disclosure on the acquisition of Minera Mexico on page A-99.

 

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

 

**NOTE 19-SEGMENT AND RELATED INFORMATION:**

 

Southern Copper operates in a single industry, namely miningcopper.  Prior to the April 1, 2005acquisition of Minera Mexico, the Company determined that its operations inPeru fell within one segment.  With theacquisition of Minera Mexico the Company continues to operate principally inone industry, the mining of copper. However, because of the demands of managing operations in two countries,effective April 1, 2005, Company management views the new Southern Peru ashaving three operating segments and manages on the basis of thesesegments.  Additionally, in mining copperthe Company produces a number of metal byproducts, most important of which aremolybdenum, silver and zinc.  Thesignificant increase in the price of molybdenum over the past three years hashad an important impact on the Company’s earnings.  Nevertheless, the Company continues to manageits operations on the basis of the three copper segments.  Added to the segment information isinformation regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.     Peruvianoperations, which includes the Toquepala and Cuajone mine complexes and thesmelting and refining plants, industrial railroad and port facilities whichservice both mines.

 

2.     Mexicanopen pit operations, which includes La Caridad and Cananea mine complexes andthe smelting and refining plants and support facilities which service bothmines.

 

3.     Mexicanunderground mining operations, which includes five underground mines thatproduce zinc, copper, silver and gold, a coal and coke mine, and severalindustrial processing facilities for zinc and copper.  This group is identified as the IMMSA Unit.

 

The Chief Operating Officer of the Company focuses on operating incomeand on total assets as measures of performance to evaluate different segmentsand to make decisions to allocate resources to the reported segments.  These are common measures in the miningindustry.

 

Financial information relating to Company’s segments is as follows:

 

132

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| ** **                                                             | ** ** | **Year Ended, December 31, 2005** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican   Open Pit**                 | ** ** | **Mexican   IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other****eliminations** | ** ** | **Total  Combined** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                      | 1,678.7    |   | $ | 261.8 |   | $ | 2,172.1 |   | $ | — |   | $ | 4,112.6 |   |
| Intersegment sales                                                     |       | 90.9                                   |       | 186.9 |   | 7.8 |   | (285.6 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | 836.6                                  |       | 330.8 |   | 756.0 |   | (288.0 | ) | 1,635.4 |   |
| Exploration                                                            |       | 3.8                                    |       | 6.1 |   | 12.9 |   | 1.6 |   | 24.4 |   |
| Depreciation, amortization and depletion                               |       | 176.7                                  |       | 24.0 |   | 76.5 |   |   |   | 277.2 |   |
| Selling, general and administrative  expenses                          |       | 37.1                                   |       | 19.4 |   | 34.0 |   | (9.4 | ) | 81.1 |   |
| Operating Income                                                       |       | $                                      | 715.4      |   | $ | 68.4 |   | $ | 1,300.5 |   | $ | 10.2 |   | $ | 2,094.5 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (55.6 | ) |
| Loss (gain) on derivative instruments                                  |       |                                   |       |   |   |   |   |   |   | (22.3 | ) |
| Loss on debt prepayment                                                |       |                                   |       |   |   |   |   |   |   | (10.6 | ) |
| Other income (expense)                                                 |       |                                   |       |   |   |   |   |   |   | (3.7 | ) |
| Taxes on income                                                        |       |                                   |       |   |   |   |   |   |   | (589.7 | ) |
| Minority interest                                                      |       |                                   |       |   |   |   |   |   |   | (12.5 | ) |
| Net Earnings                                                           |       |                                   |       |   |   |   |   |   |   | $ | 1,400.1 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                   |       | $                                      | 104.5      |   | $ | 44.2 |   | $ | 321.9 |   | $ | — |   | $ | 470.6 |   |
| Property, net                                                          |       | $                                      | 1,559.3    |   | $ | 270.1 |   | $ | 1,468.7 |   | $ | 28.0 |   | $ | 3,326.1 |   |
| Total Assets                                                           |       | $                                      | 2,538.3    |   | $ | 518.9 |   | $ | 3,333.6 |   | $ | (703.2 | ) | $ | 5,687.6 |   |

 
| ** **                                                             | ** ** | **Year Ended, December 31, 2004** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican   IMMSA  Unit** | ** ** | **Peruvian   Operations** | ** ** | **Corporate   and other   eliminations** | ** ** | **Total   Combined** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                      | 1,189.3    |   | $ | 191.5 |   | $ | 1,715.9 |   | $ | — |   | $ | 3,096.7 |   |
| Intersegment sales                                                     |       | 0.4                                    |       | 125.6 |   | — |   | (126.0 | ) | — |   |
| Cost of sales (exclusive of depreciation,  Amortization and depletion) |       | 548.2                                  |       | 231.1 |   | 672.2 |   | (117.2 | ) | 1,334.3 |   |
| Exploration                                                            |       | 2.5                                    |       | 4.1 |   | 9.0 |   | — |   | 15.6 |   |
| Depreciation, amortization and depletion                               |       | 91.0                                   |       | 22.3 |   | 77.7 |   | 1.6 |   | 192.6 |   |
| Selling, general and administrative  expenses                          |       | 24.2                                   |       | 15.4 |   | 29.9 |   | 2.3 |   | 71.8 |   |
| Operating Income                                                       |       | $                                      | 523.8      |   | $ | 44.2 |   | $ | 927.1 |   | $ | (12.7 | ) | $ | 1,482.4 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (87.5 | ) |
| Gain on disposal of properties                                         |       |                                   |       |   |   |   |   |   |   | 53.5 |   |
| Loss on derivative instruments                                         |       |                                   |       |   |   |   |   |   |   | (1.4 | ) |
| Loss on debt prepayment                                                |       |                                   |       |   |   |   |   |   |   | (16.5 | ) |
| Other income (expense)                                                 |       |                                   |       |   |   |   |   |   |   | (9.7 | ) |
| Taxes on income                                                        |       |                                   |       |   |   |   |   |   |   | (433.7 | ) |
| Minority interest                                                      | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | (4.7 | ) |
| Net Earnings                                                           |       |                                   |       |   |   |   |   |   |   | $ | 982.4 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                   |       | $                                      | 41.4       |   | $ | 15.2 |   | $ | 171.7 |   | $ | — |   | $ | 228.3 |   |
| Property, net                                                          |       | $                                      | 1,574.1    |   | $ | 257.1 |   | $ | 1,217.5 |   | $ | 19.8 |   | $ | 3,068.5 |   |
| Total Assets                                                           |       | $                                      | 3,297.8    |   | $ | 598.4 |   | $ | 2,597.1 |   | $ | (1,174.1 | ) | $ | 5,319.2 |   |
|                                                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

133

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| ** **                                                              | ** ** | **Year Ended, December 31, 2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **(in millions)**                      | ** ** |
| ** **                                                              | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other  Eliminations** | ** ** | **Total  Combined** | ** ** |
|                                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales outside of Segments                                           |       | $                                      | 638.2      |   | $ | 143.4 |   | $ | 795.0 |   | $ | — |   | $ | 1,576.6 |   |
| Intersegment sales                                                      |       | 11.1                                   |       | 87.5 |   | 3.4 |   | (102.0 | ) | — |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion)  |       | 448.0                                  |       | 181.1 |   | 468.5 |   | (105.2 | ) | 992.4 |   |
| Exploration                                                             |       | 1.3                                    |       | 4.3 |   | 12.3 |   | — |   | 17.9 |   |
| Depreciation, amortization and depletion                                |       | 80.2                                   |       | 22.8 |   | 73.6 |   | 0.5 |   | 177.1 |   |
| Selling, general and administrative  expenses                           |       | 19.1                                   |       | 10.7 |   | 27.2 |   | 6.5 |   | 63.5 |   |
| Operating Income                                                        |       | $                                      | 100.7      |   | $ | 12.0 |   | $ | 216.8 |   | $ | (3.8 | ) | $ | 325.7 |   |
|                                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                           |       |                                   |       |   |   |   |   |   |   | (106.3 | ) |
| Loss on debt prepayment                                                 |       |                                   |       |   |   |   |   |   |   | (5.8 | ) |
| Other income (expense)                                                  |       |                                   |       |   |   |   |   |   |   | (4.2 | ) |
| Taxes on income                                                         |       |                                   |       |   |   |   |   |   |   | (120.1 | ) |
| Minority interest                                                       | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | (4.3 | ) |
| Cumulative effect of change in accounting  principle, net of income tax | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | (1.5 | ) |
| Net Earnings                                                            |       |                                   |       |   |   |   |   |   |   | $ | 83.5 |   |
|                                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                    |       | $                                      | 8.8        |   | $ | 6.3 |   | $ | 49.8 |   | $ | — |   | $ | 64.9 |   |
| Property, net                                                           |       | $                                      | 1,602.8    |   | $ | 282.9 |   | $ | 1,118.2 |   | $ | 36.8 |   | $ | 3,040.7 |   |
| Total Assets                                                            |       | $                                      | 2,693.5    |   | $ | 533.4 |   | $ | 1,930.8 |   | $ | (666.7 | ) | $ | 4,491.0 |   |
|                                                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

134

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Sales value per segment:

 
| ** **        | ** ** | **Year Ended, December 31, 2005** | ** ** | ** **               | ** ** |
|-------------------|------------|----------------------------------------|------------|--------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican   IMMSA Unit** | ** ** | **Peruvian   Operations** | ** ** | **Intersegment   Elimination** | ** ** | **Total   Combined** | ** ** |
|              |       |                                   |       |                     |       |   |   |   |   |   |   |
| Copper            |       | $                                      | 1,321.6    |                     | $          | 134.2 |   | $ | 1,479.7 |   | $ | (196.5 | ) | $ | 2,739.0 |   |
| Molybdenum        |       | 271.0                                  |       | —                   |       | 655.5 |   | — |   | 926.5 |   |
| Other             |       | 177.0                                  |       | 314.5                    |       | 44.7 |   | (89.1 | ) | 447.1 |   |
| Total             |       | $                                      | 1,769.6    |                     | $          | 448.7 |   | $ | 2,179.9 |   | $ | (285.6 | ) | $ | 4,112.6 |   |

 
| ** **        | ** ** | **Year Ended, December 31, 2004** | ** ** | ** **               | ** ** |
|-------------------|------------|----------------------------------------|------------|--------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican   IMMSA Unit** | ** ** | **Peruvian   Operations** | ** ** | **Intersegment   Elimination** | ** ** | **Total  Combined** | ** ** |
|              |       |                                   |       |                     |       |   |   |   |   |   |   |
| Copper            |       | $                                      | 908.0      |                     | $          | 67.9 |   | $ | 1,177.3 |   | $ | (44.3 | ) | $ | 2,108.9 |   |
| Molybdenum        |       | 151.8                                  |       | —                   |       | 495.6 |   | — |   | 647.4 |   |
| Other             |       | 129.9                                  |       | 249.2                    |       | 43.0 |   | (81.7 | ) | 340.4 |   |
| Total             |       | $                                      | 1,189.7    |                     | $          | 317.1 |   | $ | 1,715.9 |   | $ | (126.0 | ) | $ | 3,096.7 |   |

 
| ** **        | ** ** | **Year Ended, December 31, 2003** | ** ** | ** **               | ** ** |
|-------------------|------------|----------------------------------------|------------|--------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican   IMMSA Unit** | ** ** | **Peruvian   Operations** | ** ** | **Intersegment   Elimination** | ** ** | **Total   Combined** | ** ** |
|              |       |                                   |       |                     |       |   |   |   |   |   |   |
| Copper            |       | $                                      | 514.8      |                     | $          | 34.3 |   | $ | 664.4 |   | $ | (33.0 | ) | $ | 1,180.5 |   |
| Molybdenum        |       | 38.2                                   |       | —                   |       | 104.9 |   | — |   | 143.1 |   |
| Other             |       | 96.3                                   |       | 196.6                    |       | 29.1 |   | (69.0 | ) | 253.0 |   |
| Total             |       | $                                      | 649.3      |                     | $          | 230.9 |   | $ | 798.4 |   | $ | (102.0 | ) | $ | 1,576.6 |   |

 

**NET SALES AND GEOGRAPHICAL INFORMATION:**

 

Net sales to respective countries were as follows:

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                        | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States                            |       | $                                | 1,394      |   | $ | 1,106 |   | $ | 557 |   |
| Europe                                   |       | 824                              |       | 673 |   | 344 |   |
| Mexico                                   |       | 931                              |       | 630 |   | 387 |   |
| Peru                                     |       | 72                               |       | 44 |   | 1 |   |
| Latin America, excluding Mexico and Peru |       | 672                              |       | 468 |   | 151 |   |
| Australia                                |       | 3                                |       | — |   | — |   |
| Asia                                     |       | 217                              |       | 176 |   | 137 |   |
| Total                                    |       | $                                | 4,113      |   | $ | 3,097 |   | $ | 1,577 |   |

 

At December 31, 2005, the Company has recorded provisionallypriced sales of 163.7 million pounds of copper, at a forward average priceof $2.04 per pound. Also, the Company has recorded provisionally priced salesof 6.1 million pounds of molybdenum at the year-end market price of $25.00per pound. These sales are subject to final pricing based on the averagemonthly LME and COMEX copper prices and Dealer Oxide molybdenum prices in thefuture month of settlement.

 

Following are the provisionally priced copper and molybdenum salesoutstanding at December 31, 2005:

 

135

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| **Pounds  of copper** | ** ** | **Priced at** | ** ** | **Month of settlement**              | ** ** |
|-----------------------|------------|---------------|------------|--------------------------------------|------------|
| **(millions)**        | ** ** | ** **    | ** ** | ** **                           | ** ** |
| 78.5                  |       | 2.09890       |       | January 2006                    |       |
| 24.5                  |       | 2.05994       |       | February 2006                   |       |
| 8.1                   |       | 2.00987       |       | March 2006                      |       |
| 8.7                   |       | 1.97721       |       | April 2006                      |       |
| 18.6                  |       | 1.95939       |       | May 2006                        |       |
| 23.1                  |       | 1.91915       |       | June 2006                       |       |
| 2.2                   |       | 1.89284       |       | July 2006                       |       |
| 163.7                 |       | 2,03821       |       | January 2006  to July 2006 |       |

 
| **Pounds  of molybdenum** | ** ** | **Market price** | ** ** | **Month of settlement**               | ** ** |
|---------------------------|------------|------------------|------------|---------------------------------------|------------|
| **(millions)**            | ** ** | ** **       | ** ** | ** **                            | ** ** |
| 1.7                       |       | 25.00000         |       | January 2006                     |       |
| 3.0                       |       | 25.00000         |       | February 2006                    |       |
| 1.4                       |       | 25.00000         |       | March 2006                       |       |
| 6.1                       |       | 25.00000         |       | January 2006  to March 2006 |       |

 

Provisional sales price adjustments included in accounts receivable andnet sales were as follows at December 31 (in millions):

 
| ** ** | ** ** | **As of December 31,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Copper     |       | $                           | 7.9        |   | $ | 15.9 |   |
| Molybdenum |       | (39.2                       | )          | 69.2 |   |
| Total      |       | $                           | (31.3      | ) | $ | 85.1 |   |

 

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

 

The following are the significant outstanding long-term contracts:

 

Under the terms of a forward sales contract with Union Minière, as amended, November 12,2003, the Company is required to supply Union Minière, through its agent, S.A. SOGEM N.V., with 18,000 tons ofblister copper annually for a five-year period from January 1, 2004through December 31, 2008 and 13,800 tons of blister during 2009.  The price of the copper contained in blistersupplied under the contract is determined based on the LME monthly averagesettlement price, less a refining allowance, which is negotiated annually.

 

Under the terms of a sales contract with Mitsui & Co. Ltd. (“Mitsui”),the Company is required to supply Mitsui with 48,000 tons of copper cathodesannually for a fifteen-year period through December 31, 2013.  If the shipment destination is Asia, thepricing of the cathodes is based upon the LME monthly average settlementprice.  However, if the destination ofshipments is the United States, the pricing of the cathodes is based upon theCOMEX monthly average settlement price plus a producer premium, which is agreedupon annually based on world market terms. 90,000 tons related to a prior contract (period 1994-2000) will besupplied as follows: 48,000 in 2014 and 42,000 in 2015.

 

136

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**NOTE 20-QUARTERLY DATA (unaudited)**

(in millions, except per share data)

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| ** **              | ** ** | **1st**  | ** ** | **2nd**  | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales               |       | $        | 946.1      |     | $          | 958.0 |   | $ | 1,030.2 |   | $ | 1,178.3 |   | $ | 4,112.6 |   | $ | 602.5 |   | $ | 722.2 |   | $ | 739.6 |   | $ | 1,032.4 |   | $ | 3,096.7 |   |
| Operating Income        |       | $        | 471.6      |     | $          | 448.5 |   | $ | 545.8 |   | $ | 628.6 |   | $ | 2,094.5 |   | $ | 272.1 |   | $ | 342.1 |   | $ | 322.5 |   | $ | 545.7 |   | $ | 1,482.4 |   |
| Net earnings            |       | $        | 298.4      |     | $          | 311.9 |   | $ | 369.4 |   | $ | 420.4 |   | $ | 1,400.1 |   | $ | 167.5 |   | $ | 231.0 |   | $ | 216.8 |   | $ | 367.1 |   | $ | 982.4 |   |
| Net earnings per share: |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted       |       | $        | 2.03       |     | $          | 2.12 |   | $ | 2.51 |   | $ | 2.85 |   | $ | 9.51 |   | $ | 1.14 |   | $ | 1.57 |   | $ | 1.47 |   | $ | 2.49 |   | $ | 6.67 |   |
|                    |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend per  share     |       | $        | 0.68       |     | $          | 2.38 |   | $ | 1.04 |   | $ | 1.70 |   | $ | 5.80 |   | $ | 0.15 |   | $ | 0.29 |   | $ | 0.41 |   | $ | 0.45 |   | $ | 1.30 |   |

 

**OTHERCOMPANY INFORMATION:**

** **

**ANNUALMEETING**

** **

**The annual stockholders meeting of Southern CopperCorporation will be held on Thursday, April 27, 2006 at 17:00hrs, MexicoCity time, at Avenida Baja California No. 200, Fifth Floor, Colonia RomaSur, Mexico City, Mexico.**

** **

**TRANSFERAGENT, REGISTRAR AND STOCKHOLDERS SERVICES**

** **

**The Bank of New York**

**101 Barclay Street**

**New York, NY, 10286**

**Phone: (800)524-4458**

** **

**DIVIDENDREINVESTMENT PROGRAM**

** **

**SCC stockholders can have their dividends automaticallyreinvested in SCC common shares.  SCCpays all administrative and brokerage fees. This plan is administered by The Bank of New York.  For more information, contact The Bank of NewYork at (800)524-4458.**

** **

**STOCKEXCHANGE LISTING**

** **

**The principal markets for SCC’s Common Stock are the NYSEand the Lima Stock Exchange.  SCC’sCommon Stock symbol is PCU on both the NYSE and the Lima Stock Exchange.**

** **

**OTHERSECURITIES**

** **

**The Branch in Peru has issued, in accordance with PeruvianLaw, “investment shares” (formerly named labor shares) that are quoted on theLima Stock Exchange under symbols S-1 and S-2. Transfer Agent, registrar and stockholders services are provided byBanco de Credito del Peru, Avenida Centenario 156, La Molina, Lima 12, Peru.**

**Telephone (511) 348-5999, Fax (511)349-0592.**

** **

**OTHER CORPORATE INFORMATION**

 

For other information on the Company or to obtain, free of charge,additional copies of the Annual Report on Form 10-K, contact the InvestorRelations Department at:

11811 North Tatum Blvd. Suite 2500, Phoenix, Az. 85028, USA

Telephone: (602)977-6595

 

137

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**SOUTHERN COPPER CORPORATION**

 

11811 North Tatum Blvd. Suite 2500, Phoenix, Az. 85028, USA

Telephone: (602)977-6595, Fax: (602)977-6700

NYSE Symbol: PCU

Avenida Caminos del Inca 171,Chacarilla del Estanque, Santiago de Surco, Lima 33 — Peru

Lima Stock Exchange Symbol: PCU

Web Page: www.southerncoppercorp.com

**Email address:**spcc@southerncopper.com.pe

** **

**CERTIFICATIONREQUIRED BY THE NEW YORK STOCK EXCHANGE**

** **

**The Company has filed with the New York Stock Exchange (“NYSE”)the 2005 certification that the Chief Executive Officer is unaware of anyviolation of the corporate governance standards of the NYSE.  The Company has also filed with theSecurities and Exchange Commission (“SEC”) the certifications required under Section 302of the Sarbanes-Oxley Act of 2002, as exhibits to the 2004 Annual Report on Form 10-K.  The Company anticipates filing, on a timelybasis, the 2006 NYSE certification and is filing the Section 302certifications as exhibits to this Annual Report on Form 10-K.**

** **

**138**

----

** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Mexico D.F. March 13, 2006

 

To the Board of Directors and Shareholders of Southern Copper Corporation:

 

We have completed integrated audits of Southern Copper Corporation’sand its subsidiaries 2005 and 2004 consolidated combined financial statementsand of its internal control over financial reporting as of December 31,2005, and audit of its 2003 consolidated combined financial statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Our opinions, based onour audits, are presented below.

 

Consolidated combined financial statements

 

In our opinion, the accompanying consolidated combined balance sheetsand the related consolidated combined statements of earnings, changes instockholders’ equity and cash flows present fairly, in all material respects,the financial position of Southern Copper Corporation’s and its subsidiaries atDecember 31, 2005 and December 31, 2004, and the results of theiroperations and their cash flows for each of the three years ended December 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit of financial statements includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Management’sreport on internal Control over Financial Reporting appearing under Item 9A,that the Company maintained effective internal control over financial reportingas of December 31, 2005 based on criteria established in *Internal Control – Integrated Framework*issued by the****Committee of Sponsoring Organizations of the TreadwayCommission (COSO), is fairly stated, in all material respects, based on thosecriteria.

 

Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control –Integrated Framework* issued by the COSO.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Anaudit of internal control over financial reporting includes obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the 

 

139

----

 

design and operating effectiveness of internal control, and performingsuch other procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

 

PRICEWATERHOUSECOOPERS

 

140

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Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure

 

None

 

Item 9.A.  Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES

 

As of December 31, 2005, the Company carried out an evaluation,under the supervision and with the participation of the Company’s DisclosureCommittee and the Company’s management, including the Chief Executive Officerand the Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended). Based upon that evaluation, the ChiefExecutive Officer and the Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic SEC filings.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIALREPORTING

 

There was no change in the Company’s internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934, as amended) that occurred during thequarter ended December 31, 2005 that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the Company.  Under thesupervision and with the participation of management, including the Company’sprincipal executive officer and principal financial officer, the Companyconducted an evaluation of the effectiveness of its internal control overfinancial reporting based on the framework in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organization of the TreadwayCommission.  Based on the evaluation madeunder this framework, management concluded that as of December 31, 2005such internal control over financial reporting is effective.

 

Because of its inherent limitations, internal control over financialreporting, may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness for future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with policies or procedures may deteriorate.

 

Our management’s assessment of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005 has beenaudited by PricewaterhouseCoopers, an independent registered public accountingfirm, as stated in their report which appears herein.

 

Item 9.B. Other Information

 

None.

 

141

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PART III

 

Items 10, 11, 12, 13, and 14

 

Reference is made to the Section captioned “Executive Officers ofthe Registrant” on pages A-47 to A-48. Information in response to the disclosure requirements specified by Part III,Items 10, 11, 12, 13, and 14 will be included in a definitive proxy statement,which will be filed pursuant to Regulation 14A of the 1934 Securities ExchangeAct, as amended, prior to April 27, 2006 or will be provided by amendmentto this Form 10-K, also to be filed no later than April 30, 2006.

 

The information contained in such definitive proxy statement isincorporated herein by reference.

 

142

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PART IV

 

Item 15.  Exhibits, Financial Statement Schedules andReports on Form 8-K

 

(A) Thefollowing documents are filed as part of this report:

 

1.             FinancialStatements

 

The following financial statements ofSouthern Copper Corporation and its subsidiaries are included at the indicated pages ofthe document as stated below:

 
| ** **                                                                                                                          | ** ** | **Form 10-K** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
| ** **                                                                                                                          | ** ** | **Pages**     |
| Consolidated  Combined Statement of Earnings for the years ended December 31, 2005,  2004 and 2003                             |       | A94           |
| Consolidated Combined Balance Sheet at December 31, 2005 and  2004                                                             |       | A95           |
| Consolidated Combined Statement of Cash Flows for the years ended  December 31, 2005, 2004 and 2003                            |       | A96-A97       |
| Consolidated Combined  Statement of Changes in Stockholders’ Equity for the years ended  December 31, 2005, 2004 and 2003 |       | A98           |
| Notes to the Consolidated Combined Financial Statements                                                                             |       | A99-A137      |
| Reports  of Independent Registered Public Accounting Firm                                                                           |       | A139-140      |

 

2.             Exhibits

 
| 3.1    |   | Amended and Restated Certificate of  Incorporation, filed on October 11, 2005                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |
| 3.2    |   | By-Laws, as last amended on  February 3, 1998                                                                                                                                             |
|   |   |                                                                                                                                                                                           |
| 4.1    |   | Registration Rights Agreement, dated as of  July 27, 2005, by and between Southern Copper Corporation, Citigroup  Global Markets Inc. and UBS Securities LLC                              |
|   |   |                                                                                                                                                                                           |
| 4.2    |   | Indenture governing U.S.$200,000,000 6.375%  Notes due 2015, by and between Southern Copper Corporation, The Bank of New  York and The Bank of New York (Luxembourg) S.A.                      |
|   |   |                                                                                                                                                                                           |
| 4.3    |   | Indenture governing U.S.$600,000,000 7.500%  Notes due 2035, by and between Southern Copper Corporation, The Bank of New  York and The Bank of New York (Luxembourg) S.A.                      |
|   |   |                                                                                                                                                                                           |
| 4.4    |   | Form of 6.375% Note (included in  Exhibit 4.2)                                                                                                                                       |
|   |   |                                                                                                                                                                                           |
| 4.5    |   | Form of New 7.500% Note (included in  Exhibit 4.3)                                                                                                                                   |
|   |   |                                                                                                                                                                                           |
| 10.1   |   | Tax Stability Agreement, dated  August 8, 1994, between the Government of Peru and the Company regarding  SX/EW facility (and English translation)                                        |
|   |   |                                                                                                                                                                                           |
| 10.2   |   | Incentive Compensation Plan of the Company                                                                                                                                                     |
|   |   |                                                                                                                                                                                           |
| 10.3   |   | Stock Incentive Plan of the Company                                                                                                                                                            |
|   |   |                                                                                                                                                                                           |
| 10.4   |   | Form of Directors Stock Award Plan of  the Company                                                                                                                                        |
|   |   |                                                                                                                                                                                           |
| 10.5   |   | Service Agreement entered into by the  Company with a subsidiary of Grupo Mexico S.A. de C.V., assigned upon the  same terms and conditions to Grupo Mexico S.A. de C.V. in February 2004 |
|   |   |                                                                                                                                                                                           |
| 10.6   |   | Agreement and Plan of Merger, dated as of  October 21, 2004, by and among Southern Copper Corporation, SCC Merger  Sub, Inc., Americas Sales Company,                           |

 

143

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|   |   | Inc., Americas Mining Corporation and  Minera México S.A. de C.V.                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                             |
| 14     |   | Code of Business Conduct and Ethics adopted  by the Board of Directors on May 8, 2003 and amended by the Board of  Directors on October 21, 2004       |
|   |   |                                                                                                                                                             |
| 21.1   |   | Subsidiaries of the Company                                                                                                                                      |
|   |   |                                                                                                                                                             |
| 23.1   |   | Consent of Registered Public Accounting  Firm (PricewaterhouseCoopers S.C.)                                                                                      |
|   |   |                                                                                                                                                             |
| 31.1   |   | Certification required by Section 302  of the Sarbanes-Oxley Act of 2002                                                                                    |
|   |   |                                                                                                                                                             |
| 31.2   |   | Certification required by Section 302  of the Sarbanes-Oxley Act of 2002                                                                                    |
|   |   |                                                                                                                                                             |
| 32.1   |   | Certification required by Section 906  of the Sarbanes-Oxley Act of 2002. This document is being furnished in  accordance with SEC Release No. 33-8328 |
|   |   |                                                                                                                                                             |
| 32.2   |   | Certification required by Section 906  of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance  with SEC Release No. 33-8328 |

 

The exhibits listed as 10.2 through 10.6 above are the managementcontracts or compensatory plans or arrangements required to be filed pursuantto Item 15(c) of Form 10-K.

 

144

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Schedule II

Valuation and Qualifying Accounts and Reserves

(in millions)

 
| ** **                                              | ** ** | **Additions**                         | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **Balance at   beginning  of period** | ** ** | **Charged to   costs and   expenses** | ** ** | **Other** | ** ** | **Deduction** | ** ** | **Balance at   end of   period** | ** ** |
| Reserve deducted in balance sheet to which  applicable: |       |                                  |       |   |   |   |   |   |   |   |   |
| Accounts Receivable:                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| December 31, 2005                                  |       | 8.3                                   |       | 0.4 |   | — |   | 3.1 |   | 5.6 |   |
| December 31, 2004                                  |       | 8.2                                   |       | 0.9 |   | — |   | 0.8 |   | 8.3 |   |
| December 31, 2003                                  |       | 7.4                                   |       | 2.2 |   | — |   | 1.4 |   | 8.2 |   |
|                                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Supplies:                                               |       |                                  |       |   |   |   |   |   |   |   |   |
| December 31, 2005                                  |       | 21.5                                  |       | 3.3 |   |   |   | 1.4 |   | 23.4 |   |
| December 31, 2004                                  |       | 9.5                                   |       | 12.7 |   | — |   | 0.7 |   | 21.5 |   |
| December 31, 2003                                  |       | 7.8                                   |       | 2.2 |   | — |   | 0.5 |   | 9.5 |   |
|                                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Deferred Tax Assets:                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| December 31, 2005                                  |       | 33.4                                  |       | 47.8 |   | — |   | — |   | 81.2 |   |
| December 31, 2004                                  |       | 87.2                                  |       | — |   | — |   | 53.8 |   | 33.4 |   |
| December 31, 2003                                  |       | 140.9                                 |       | — |   | — |   | 53.7 |   | 87.2 |   |

 

145

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, the Registrant has duly caused hisReport on Form 10-K to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   | SOUTHERN COPPER CORPORATION           |
|--------|---------------------------------------|
|   | (Registrant)                          |
|   |                                  |
|   |                                  |
|   | By:                                   | /s/ Oscar Gonzalez Rocha |   |   |
|   | Oscar  Gonzalez Rocha                 |   |
|   | President and Chief Executive Officer |   |

 

 

Date:  March 6, 2006

 

 

Pursuant to requirements of the Securities Exchange Act of 1934, thisReport on Form 10-K has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

 
| /s/ German  Larrea Mota-Velasco   |   |                                             | Chairman of the Board, and Director             |
|-----------------------------------|--------|--------------------------------------------------|-------------------------------------------------|
|  German  Larrea Mota-Velasco |   |                                             |                                            |
|                              |   |                                             |                                            |
|                              |   |                                             |
| /s/ Oscar Gonzalez Rocha          |   |                                             | President, Chief Executive Officer and Director |
|  Oscar  Gonzalez Rocha       |   |                                             |                                            |
|                              |   |                                             |                                            |
|                              |   | Vice President, Finance, Chief Financial Officer |
| /s/ J. Eduardo Gonzalez           |   |                                             | and Director (principal financial officer)      |
|  J.  Eduardo Gonzalez        |   |                                             |                                            |
|                              |   |                                             |                                            |
|                              |   |                                             |
| /s/ Jose N. Chirinos Fano         |   |                                             | Comptroller (principal accounting officer)      |
|  Jose  N. Chirinos Fano      |   |                                             |                                            |
|                                   |        |                                                  |                                                 |  |  |  |

 

**DIRECTORS**

 
| /s/ German  Larrea Mota-Velasco   |   |   | /s/ Genaro  Larrea Mota-Velasco       |       |
|-----------------------------------|--------|--------|---------------------------------------|------------|
|  German  Larrea Mota-Velasco |   |   |  Genaro  Larrea Mota-Velasco     |       |
|                              |   |   |
| /s/ Emilio Carrillo Gamboa        |   |   | /s/ Armando  Ortega Gomez             |       |
|  Emilio Carrillo  Gamboa     |   |   |  Armando Ortega  Gomez           |       |
|                              |   |   |                                  |       |
| /s/ Jaime Collazo Gonzalez        |   |   | /s/ L. Miguel Palomino Bonilla        |       |
|  Jaime  Collazo Gonzalez     |   |   |  L.  Miguel Palomino Bonilla     |       |
|                              |   |   |                                  |       |
| /s/Xavier  Garcia de Quevedo      |   |   | /s/ Gilberto Perezalonso Cifuentes    |       |
| Xavier  Garcia de Quevedo         |   |   |  Gilberto  Perezalonso Cifuentes |       |
|                              |   |   |                                  |       |
| /s/ J. Eduardo Gonzales           |   |   | /s/ Juan Rebolledo Gout               |       |
|  J.  Eduardo Gonzalez        |   |   |  Juan  Rebolledo Gout            | ~~ ~~ |
|                              |   |   |                                  |       |
| /s/ Oscar Gonzalez Rocha          |   |   | /s/ Carlos Ruiz Sacristan             |       |
|  Oscar  Gonzalez Rocha       |   |   |  Carlos  Ruiz Sacristan          | ~~ ~~ |
|                              |   |   |                                  |       |
| /s/ Harold S. Handelsman          |   |   |                                  |       |
|  Harold  S. Handelsman       |   |   |                                  |       |
|                                   |        |        |                                       |            |  |  |  |  |  |  |  |  |  |

 

Date:  March 6, 2006

 

146

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, the Registrant has duly causedthis Amendment No. 2 on Form 10-K/A to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | SOUTHERN COPPER CORPORATION           |
|--------|---------------------------------------|
|   | (Registrant)                          |
|   |                                  |
|   |                                  |
|   | By:                                   | /s/ Oscar Gonzalez Rocha |   |   |
|   | Oscar  Gonzalez Rocha                 |   |
|   | President and Chief Executive Officer |   |

 

 

Date:  August 29, 2006

 

147

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Southern Copper Corporation

Exhibit Index

 
| **Sequential   Exhibit  Number** | ** ** | **Document  Description**                                                                                                                                                                                                                                                                                                                           | ** ** | **Page  Number** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 3.1                              |       | Amended and Restated Certificate of  Incorporation, filed on October 11, 2005. (Filed as Exhibit 3.1 to  the Company’s 2005 3rd quarter Quarterly Report on Form 10-Q  and incorporated herein by reference)                                                                                                                    |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 3.2                              |       | By-Laws, as last amended on  February 3, 1998 (Filed as Exhibit 3.6 to the Company’s 1997 Annual  Report on Form 10-K and incorporated herein by reference)                                                                                                                                                                     |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 4.1                              |       | Registration Rights Agreement, dated as of  July 27, 2005, by and between Southern Copper Corporation, Citigroup  Global Markets Inc. and UBS Securities LLC (Filed as Exhibit 4.1 to  Registration Statement on Form S-4, File No. 33-129287 filed on  October 28, 2005 and incorporated herein by reference)             |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 4.2                              |       | Indenture governing U.S.$200,000,000 6.375%  Notes due 2015, by and between Southern Copper Corporation, The Bank of New  York and The Bank of New York (Luxembourg) S.A. (incorporated by reference to  Exhibit 4.1 to the company’s Current Report on Form 8-K, filed on  August 1, 2005)                                     |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 4.3                              |       | Indenture governing U.S.$600,000,000 7.500%  Notes due 2035, by and between Southern Copper Corporation, The Bank of New  York and The Bank of New York (Luxembourg) S.A. (incorporated by reference to  Exhibit 4.2 to the company’s Current Report on Form 8-K, filed on  August 1, 2005)                                     |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 4.4                              |       | Form of 6.375% Note (included in  exhibit 4.2)                                                                                                                                                                                                                                                                                                 |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 4.5                              |       | Form of New 7.500% Note (included in  Exhibit 4.3)                                                                                                                                                                                                                                                                                        |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 10.1                             |       | Tax Stability Agreement, dated  August 8, 1994, between the Government of Peru and the Company regarding  SX/EW facility (and English translation) (incorporated by reference to  Exhibit 10.3 to the Company’s Registration Statement on Form S-4,  as amended by Amendments No. 1 and 2 thereto, File No. 33-97790) |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 10.2                             |       | Incentive Compensation Plan of the Company  (Filed as Exhibit 10.11 to the Company’s Form S-4 and incorporated  herein by reference)                                                                                                                                                                                                 |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 10.3                             |       | Stock Incentive Plan of the Company (Filed  as an Exhibit to the Company’s Registration Statement on Form S-8  dated March 25, 1996 (Registration No. 333-2736) and incorporated  herein by reference)                                                                                                                     |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 10.4                             |       | Form of Directors Stock Award Plan of  the Company (filed herewith)                                                                                                                                                                                                                                                                            |       |             |
|                             |       |                                                                                                                                                                                                                                                                                                                                                |       |             |
| 10.5                             |       | Service Agreement entered into by the  Company with a subsidiary of Grupo Mexico S.A. de C.V., assigned upon the  same terms and conditions to Grupo Mexico S.A. de C.V. in February 2004  (Filed                                                                                                                                              |       |             |

 

148

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|   |   | as Exhibit 10.10 to the Company’s 2002  Annual Report on Form 10-K and incorporated herein by reference)                                                                                                                                                                                                                                  |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 10.6   |   | Agreement and Plan of Merger, dated as of  October 21, 2004, by and among Southern Copper Corporation, SCC Merger  Sub, Inc., Americas Sales Company, Inc., Americas Mining  Corporation and Minera México S.A. de C.V. (Filed as an exhibit to  Form 8-K filed on October 22, 2004 and incorporated herein by  reference) |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 14.    |   | Code of Business Conduct and Ethics adopted  by the Board of Directors on May 8, 2003 and amended on October 21,  2004 (Filed as Exhibit 14 to the Company’s Current Report on  Form 8-K dated October 22, 2004 and incorporated herein by  reference)                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 21.1   |   | Subsidiaries of the Company (filed herewith)                                                                                                                                                                                                                                                                                                             |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 23.1   |   | Consent of Registered Public Accounting  Firm (PricewaterhouseCoopers) (filed herewith)                                                                                                                                                                                                                                                                  |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 31.1   |   | Certification required by Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 31.2   |   | Certification required by Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 32.1   |   | Certification required by Section 906  of the Sarbanes-Oxley Act of 2002. This document is being furnished in  accordance with SEC Release No. 33-8238 (filed herewith)                                                                                                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |   |   |
| 32.2   |   | Certification required by Section 906  of the Sarbanes-Oxley Act of 2002. This document is being furnished in  accordance with SEC Release No. 33-8238 (filed herewith)                                                                                                                                                                        |   |   |

 

149

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