**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**2005 FORM 10-K/A**

**AmendmentNo. 1**

 

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

**THE SECURITIES EXCHANGE ACT OF 1934**

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

 

**SOUTHERN COPPER 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.) |
|                                                                        |       |                                 |
| **2575 East Camelback Rd. Phoenix, AZ**                                     | ** ** | **85016**                            |
| (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 Exchange  Lima 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 in Rule 405of the Securities Act.

Yeso             No ý

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15d of the Act.

Yeso             No ý

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yesý             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 anyamendment of this 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 ý | Accelerated  filer o | Non-accelerated  filer o |
|---------------------------------|----------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined by Rule 12b-2of the Act).

Yeso             No ý

 

 

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

 

PORTIONS OF THE FOLLOWINGDOCUMENTS 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

 

Southern CopperCorporation (“SCC”) is filing this Amendment No. 1 on Form 10-K/A to correctseveral typographical or computational errors in our Annual Report on Form 10-Kfor the year ended December 31, 2005 (the “Annual Report”) filed on March 13,2006 (“Original Filing”) with the Securities and Exchange Commission. For theconvenience of the reader, SCC has determined to re-file the entire AnnualReport as corrected.

 

The most importantcorrections are as follows:

 

On page A24, the NationalWater Commission was incorrectly abbreviated as “CAN” and has been corrected to“CNA”.

 

On page A43, the averagedrill-hole spacing for proven sulfide reserves in Cuajone and Toquepala as ofDecember 31, 2005 were incorrectly stated as 71.45 meters and 78.72 meters,respectively and have been corrected to 80.32 meters and 88.68 meters,respectively. The average drill-hole spacing for probable sulfide reserves inCuajone and Toquepala as of December 31, 2005 were incorrectly stated as 111.09meters and 110.63 meters, respectively and have been corrected to 120.48 metersand 120.92 meters, respectively.

 

On page A73, under *Cash**Flows from Investing**Activities*, the amount of capitalexpenditures used for equipment replacements and upgrades for the Mexicanoperations for 2005 was incorrectly stated as $140.5 million and has beencorrected to $148.7 million. Under *Cash**Flows from Financing Activities,*theamount of distribution to our shareholders in 2005 was incorrectly stated as$853.6 million and has been corrected to $853.9 million.

 

On page A74, under *Financing*the aggregate amount of the 7.5%old notes due 2035 was incorrectly stated as $595.5 million and has beencorrected to $590.5 million.

 

On page A82, on theConsolidated Combined Statement of Changes in Stockholder’s Equity, under *Additional**Paid-inCapital,*the balance at the beginning of the year of 2003 wasincorrectly stated as 365,865 and has been corrected to 635,865.

 

On page A87, under *Foreign**exchange*,the amount of gains and (losses) resulting from foreign currency transactions,excluding depreciation, amortization and depletion was incorrectly stated as$9.9 million for 2005, and has been corrected to $(12.1) million.

 

On page A114, under Note17 - Concentration of Risk, the percentage that one customer represented of ourtrade receivable balances at December 31, 2005 was incorrectly stated as 6.9%and has been corrected to 14.6%.

 

On page A129, underSchedule II, the balance of supplies at the end of period of December 31, 2005was incorrectly stated as $23.6 million and has been corrected to $23.4 million.

 

On page B3, Exhibit 10.4(Directors’ Stock Award Plan), the number of shares that have been awardedunder the Directors’ Stock Award Plan at December 31, 2005 were incorrectlystated as 32,200 shares and have been corrected to 31,200 shares.

 

Additionally, SCC hascorrected several minor typographical errors in the Original Filing.

 

Except for the mattersdescribed above, this amendment does not modify or update disclosures in theOriginal Filing. Furthermore, except for the matters described above, thisamendment does not change any previously reported financial results, nor doesit reflect events occurring after the date of the Original Filing. Thisamendment does not affect the timeliness of the original filing to which thisamendment relates.

 

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PART I

 

Item 1. Business

 

MINE ACCIDENT

 

On Sunday, February 19,2006, at about 2:00 am, a gas explosion occurred at our Pasta de Conchos coalmine, located in the San Juan Sabinas municipality, in the state of Coahuila,Mexico. The explosion caused a cave-in at three of the main tunnels leadinginto the mine. Initially 11 of our miners were rescued, some with minorinjuries and some unharmed. Regrettably, 65 of our miners remained trapped. Ourcrews, with assistance from the Mexican army, regional industry and supportfrom the government of Coahuila, worked around the clock to reach and rescueour men. As work progressed, the build up of methane gas made it apparent thatany chance of our men remaining alive was hopeless. Commencing on Saturday, February 25our efforts have been redefined as a mission to recover the bodies of our menso that their families can have the solace of proper burial. We honor thememory 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 leadingintegrated producer of copper, molybdenum, zinc and silver. All of our mining,smelting and refining facilities are located in Peru and in Mexico and weconduct exploration activities in those countries and Chile. See “Review ofOperations” for maps of our principal mines, smelting facilities and refineries.Our operations make us the largest mining company in Peru and also in Mexico. Weare the largest publicly traded copper mining company in the world based onreserves and the fifth largest copper mining company in the world based on 2004sales. We were incorporated in Delaware in 1952 and have conducted coppermining operations since 1960. Since 1996, our common stock has been listed onboth the New York Stock Exchange and the Lima Stock Exchange.

 

Our Peruvian copperoperations involve mining, milling and flotation of copper ore to producecopper concentrates and molybdenum concentrates; the smelting of copperconcentrates to produce blister copper and beginning in the first quarter of 2006copper anodes; and the refining of blister copper/anode copper to producecopper cathodes. As part of this production process, we also producesignificant amounts of molybdenum and silver. We also produce refined copperusing SX/EW technology. We operate the Toquepala 

 

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

 

Our Mexican operationsare conducted through our subsidiary, Minera México S.A. de C.V. (“MineraMexico”), which we acquired on April 1, 2005. Minera México engagesprincipally in the mining and processing of copper, zinc, silver, gold, leadand molybdenum. Minera México operates through subsidiaries that are groupedinto three separate units. Mexicana de Cobre S.A. de C.V. (together with itssubsidiaries, the “Mexcobre Unit”) operates an open-pit copper mine, a copperore concentrator, a SX/EW plant, a smelter, refinery and rod plant. Mexicana deCananea 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 manyup-to-date mining and processing methods, including global positioning systemsand computerized mining operations. Our operations have a high level ofvertical integration that allows us to manage the entire production process,from the mining of the ore to the production of refined copper and otherproducts and most related transport and logistics functions, using our own facilities,employees and equipment.

 

The sales prices for ourproducts are largely determined by market forces outside of our control. Foradditional information on the pricing of the metals we produce, please see “Metalprices”. Our management, therefore, focuses on cost control and productionenhancement to improve profitability. We achieve these goals through capitalspending programs, exploration efforts and cost reduction programs. Our focusis on seeking to remain profitable during periods of low copper prices andmaximizing results in periods of high copper prices.

 

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 NuevosSoles; and references to “peso”, “pesos”, or “Ps.”, are to Mexican pesos.

 

Unit Information:

 

Unless otherwise noted,all tonnages are in metric tons. To convert to short tons, multiply by 1.102. Allounces are troy ounces. All distances are in kilometers. To convert to miles,multiply by 0.621. To convert hectares to acres, multiply by 2.47.

 

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ORGANIZATIONAL STRUCTURE

 

The following is a chartdescribing Grupo México S.A. de C.V. (“Grupo Mexico”), its ownership of us andour ownership of our recently acquired Minera México subsidiary. For clarity ofpresentation, the chart identifies only principal subsidiaries and eliminatesintermediate holding companies.

 

 

We are a majority-owned,indirect subsidiary of Grupo México. Through its wholly-owned subsidiaries,Grupo México currently owns approximately 75.1% of our capital stock. GrupoMéxico’s principal business is to act as a holding company for shares of othercorporations engaged in the mining, processing, purchase and sale of mineralsand other products and railway and other related services.

 

We conduct our operationsin Peru through a registered branch (the “SPCC Peru Branch”). The SPCC PeruBranch comprises substantially all of our assets and liabilities associatedwith our copper operations in Peru. The SPCC Peru Branch is not a corporationseparate from us and, therefore, obligations of SPCC Peru Branch are directobligations of SCC and vice-versa. It is, however, an establishment, registeredpursuant to Peruvian law, through which we hold assets, incur liabilities andconduct operations in Peru. Although it has neither its own capital norliability separate from us, it is deemed to have equity capital for purposes ofdetermining the economic interests of holders of our investment shares.

 

On April 1, 2005, weacquired Minera México, the largest mining company in Mexico on a stand-alonebasis, from Americas Mining Corporation (“AMC”), a subsidiary of Grupo México,our controlling stockholder. Minera México is a holding company and all of itsoperations are conducted through subsidiaries that are grouped into threeseparate units: (i) the Mexcobre Unit, (ii) the Cananea Unit and (iii) theImmsa Unit. We now own 99.95% of Minera Mexico.

 

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CAUTIONARY STATEMENT

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products. Actual results could differ materiallydepending upon factors including the risks and uncertainties relating togeneral U.S. and international economic and political conditions, the cyclicaland volatile prices of copper, other commodities and supplies, including fueland electricity, availability of materials, insurance coverage, equipment,required permits or approvals and financing, the occurrence of unusual weatheror operating conditions, lower than expected ore grades, water and geologicalproblems, the failure of equipment or processes to operate in accordance withspecifications, failure to obtain financial assurance to meet closure andremediation obligations, labor relations, litigation and environmental risks,as well as political and economic risk associated with foreign operations. Resultsof operations are directly affected by metals prices on commodity exchanges,which can be volatile.

 

Additional businessinformation 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 form brass,in many industrial and consumer applications.

 

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

 

BUSINESS REPORTINGSEGMENTS:

 

Our Company operates in asingle 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 components or segments. These segments are our Peruvianoperations, our Mexican open-pit operations and our Mexican undergroundoperations, known as our IMMSA unit. Our Peruvian operations include theToquepala and Cuajone mine complexes and the smelting and refining plants,industrial railroad and port facilities which service both facilities. OurMexican open-pit operations combined two units of Minera Mexico, Mexcobre andMexcananea, which includes La Caridad and Cananea mine complexes and smeltingand refining plants and support facilities which service both complexes. OurIMMSA unit includes five underground mines that produce zinc, lead, copper,silver and gold, a coal and coke mine, and several industrial processingfacilities for copper, zinc and silver. Segment information is included underthe captions “Overview-Metal production” and “Ore reserves”, as well as in Note19 of our Consolidated Combined Financial Statements.

 

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REVIEW OF OPERATIONS

 

The following maps setforth the locations of our principal mines, smelting facilities and refineries.We operate open-pit copper mines in the southern part of Peru – atToquepala and Cuajone – and in Mexico, principally at La Caridad and Cananea. Wealso operate five underground mines that produce zinc, copper, silver and gold,as well as a coal mine and a coke oven.

 

 

COPPER AND MOLYBDENUMEXTRACTION PROCESSES

 

Our operations includeopen-pit and underground mining, concentrating, copper smelting, copperrefining, copper rod production, solvent extraction/electrowinning (SX/EW),zinc refining, sulfuric acid production, molybdenum concentrate production andsilver and gold refining. The copper and molybdenum extraction process isoutlined below, followed by a description of each principal component process.

 

OPEN-PIT MINING

 

In an open-pit mine, theproduction process begins at the mine pit, where waste rock, leaching ore andcopper ore are drilled and blasted and then loaded onto diesel-electric trucksby electric shovels. Waste is hauled to dump areas and leaching ore is hauledto leaching dumps. The ore to be milled is transported to the primary crushers.Crushed ore is then sent to the concentrator.

 

UNDERGROUND MINING

 

In an underground mine,the production process begins at the stopes, where copper, zinc and lead veinsare drilled and blasted and the ore is hauled to the underground crusherstation. The crushed ore is then hoisted to the surface for processing.

 

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CONCENTRATING

 

The copper ore with acopper grade over 0.4% from the open-pit primary crusher or the copper, zincand lead-bearing ore from the underground mines is transported to aconcentrator plant where gyratory crushers break the ore into sizes no largerthan three-quarters of an inch. The ore is then sent to a mill section whereit is ground to the consistency of fine powder. The finely ground ore is mixedwith water and chemical reagents and pumped as a slurry to the flotationseparator where it is mixed with certain chemicals. In the flotation separator,reagents solution and air pumped into the flotation cells cause the minerals toseparate from the waste rock and bubble to the surface where they are collectedand dried.

 

If the bulk concentratedcopper contains molybdenum it is first processed in a molybdenum plant asdescribed below under “Molybdenum Production.”

 

COPPER SMELTING

 

Copper concentrates aretransported to a smelter, where they are smelted using a furnace, converter andanode furnace to produce either copper blister (which is in the form ofcakes with air pockets) or copper anodes (which are cleaned of air pockets). Atthe smelter, the concentrates are mixed with flux (a chemical substanceintentionally included for high temperature processing) and then sent toreverberatory furnaces producing copper matte and slag (a mixture of iron andother impurities). Copper matte contains approximately 65% copper. Copper matteis then sent to the converters, where the material is oxidized in two steps: (i) theiron sulfides in the matte are oxidized with silica, producing slag that isreturned to the reverberatory furnaces; and (ii) the copper contained inthe matte sulfides is then oxidized to produce copper that, after casting, iscalled blister copper, containing approximately 98% to 99% copper, or anodes,containing approximately 99.7% copper. Some of the blister production is soldto customers and the remainder is sent to the refinery.

 

COPPER REFINING

 

Anodes are suspended intanks containing sulfuric acid and copper sulfate. A weak electrical current ispassed through the anodes and chemical solution and the dissolved copper isdeposited on very thin starting sheets to produce copper cathodes containingapproximately 99.99% copper. During this process, silver, gold and other metals(for example, palladium, platinum and selenium), along with other impurities,settle on the bottom of the tank. This anodic mud (slime) is processed at aprecious metal plant where silver and gold are recovered.

 

COPPER ROD PLANT

 

To produce copper rods,copper cathodes are first melted in a furnace and then dosified in a castingmachine. The dosified copper is then extruded and passed through a coolingsystem that begins solidification of copper into a 60 ́50millimeter copper bar. The resulting copper bar is gradually stretched in arolling mill to achieve the desired diameter. The rolled bar is then cooled andsprayed with wax as a preservation agent and collected into a rod coil that iscompacted and sent to market.

 

SOLVENTEXTRACTION/ELECTROWINNING (SX/EW)

 

An alternative to theconventional concentrator/smelter/refinery process is the leaching and SX/EWprocess. During the SX/EW process, certain types of low-grade ore with a coppergrade under 0.4% are leached with sulfuric acid to allow copper contentrecovery. The acid and copper solution is then agitated with a solvent thatcontains chemical additives that attract copper ions. As the solvent is lighterthan water, it floats to the surface carrying with it the copper content. Thesolvent is then separated using an acid solution, freeing the copper. The acidsolution containing the copper is then moved to electrolytic extraction tanksto produce copper cathodes. Refined copper can be produced more economically(though over a longer period) and from lower grade ore using the SX/EW processinstead of the traditional concentrating, smelting and refining process.

 

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MOLYBDENUM PRODUCTION

 

Molybdenum is recoveredfrom copper-molybdenum concentrates produced at the concentrator. The copper-molybdenumconcentrate is first treated with a thickener until it becomes slurry with 60%solids. The slurry is then agitated in a chemical and water solution and pumpedto the flotation separator. The separator creates a froth that carriesmolybdenum to the surface but not the copper mineral (which is later filteredto produce copper concentrates containing approximately 27% copper). Themolybdenum froth is skimmed off, filtered and dried to produce molybdenumconcentrates of approximately 58% contained molybdenum.

 

ZINC REFINING

 

Metallic zinc is producedthrough electrolysis using zinc concentrates and zinc oxides. Sulfur iseliminated from the concentrates by roasting and the zinc oxide is dissolved insulfuric acid solution to eliminate solid impurities. The purified zinc sulfidesolution is treated by electrolysis to produce refined zinc and to separatesilver and gold, which are recovered as concentrates.

 

SULFURIC ACID PRODUCTION

 

Sulfur dioxide gases areproduced in the copper smelting and zinc roasting processes. As a part ofour environmental preservation program, we treat the sulfur dioxide emissionsat two of our Mexican plants and at Peruvian processing facilities to producesulfuric acid, some of which is, in turn, used for the copper leaching process,with the rest sold to mining and fertilizer companies located in Mexico, Peru,the United States, Chile, Australia and other countries.

 

SILVER AND GOLD REFINING

 

Silver and gold arerecovered from copper, zinc and lead concentrates in the smelters and refineries,and from slimes through electrolytic refining.

 

SLOPE STABILITY:

 

Peruvian Operations

 

Both the Toquepala andCuajone pits are approximately 700 meters deep and under the present mine planconfiguration will reach a depth of 1,200 meters. The deepening pit presents uswith a number of geotechnical challenges. Perhaps the foremost concern is thepossibility of slope failure, a possibility that all open pit mines face. Inorder to maintain slope stability, in the past we have decreased pit slopeangles, installed additional or duplicate haul road access, and increasedstripping requirements. We have also responded to hydrological conditions andremoved material displaced by a slope failure. There is no assurance that wewill not have to take these or other actions in the future, any of which may negativelyaffect our results of operations and financial condition, as well as have theeffect of diminishing our stated ore reserves. To meet the geotechnicalchallenges relating to slope stability of the open pit mines, we have taken thefollowing steps:

 

In the late 1990’s wehosted round table meetings in Vancouver, B.C. with a group of recognized slopestability and open pit mining specialists. The agenda for these meetings wasprincipally a review of pit design for mines with greater than 700 meter depth.The discussions included practices for monitoring, data collection and blastingprocesses.

 

Based on the conceptsdefined at the Vancouver meetings, we initiated slope stability studies todefine the mining of reserves by optimum design. These studies were performedby outside consultants and included slope stability appraisals, evaluation ofthe numerical modeling, slope performance and inter-ramp angle design andevaluation of hydrological conditions.

 

The studies werecompleted in 2000 and we believe we implemented the study recommendations. Oneof the major changes implemented was slope angle reduction at both

 

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

 

Since 1998, a walldepressurization program has been in place in both pits. This consists of ahorizontal drilling program, which improves drainage thereby reducingsaturation and increasing wall stability. Additionally, a new blasting controlprogram was put in place, implementing vibration monitoring and blastingdesigns of low punctual energy. Also a new slope monitoring system wasimplemented using reflection prisms, deformation inclinometers and piezometersfor water level control, as well as real-time robotic monitoring equipment.

 

To increase thepossibility of mining in the event of a slide, we have provided for two rampsof extraction for each open pit mine.

 

While these measurescannot guarantee that a slope failure will not occur, we believe that ourmining practices are sound and that the steps taken and the ongoing reviewsperformed are a prudent methodology for open pit mining.

 

OVERVIEW – METALPRODUCTION

 

The table below setsforth 2005, 2004 and 2003 mine production data by metal.

 
| **(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 aredescriptions of the operations and other information relating to the operationsincluded in each of our three segments.

 

**PERUVIAN OPERATIONS**

** **

Our Peruvian segmentoperations include the Cuajone and Toquepala mine complexes and the smeltingand refining plants, industrial railroad and port facilities which service bothfacilities.

 

Cuajone

 

Our Cuajone operationsconsist of an open-pit copper mine and a concentrator located in southern Peru,30 kilometers from the city of Moquegua and 840 kilometers from Lima. Theconcentrator has a milling capacity of 87,000 tons per day. Overburden removalcommenced in 1970 and ore production commenced in 1976. Our Cuajone operationsutilize a conventional open-pit mining method to collect copper ore for furtherprocessing in our concentrator.

 

The table below setsforth 2005, 2004 and 2003 production information for our Cuajone operations.

 

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| ** **                                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average ore mined per  day                            |       | (kt)       |       | 80.9     |       | 80.3     |       | 81.5     |       |
| Stripping ratio                                       |       | (x)        |       | 2.72     |       | 2.45     |       | 2.28     |       |
| Copper grade                                          |       | (%)        |       | 0.643    |       | 0.792    |       | 0.745    |       |
| Molybdenum grade                                      |       | (%)        |       | 0.026    |       | 0.025    |       | 0.026    |       |
| Copper concentrate                                    |       | (kt)       |       | 619.2    |       | 752.9    |       | 710.0    |       |
| Molybdenum concentrate                                |       | (kt)       |       | 9.5      |       | 8.7      |       | 9.0      |       |
| Copper concentrate  average grade                     |       | (%)        |       | 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      |       |
| Average copper ore  processed by concentrator per day |       | (kt)       |       | 81.9     |       | 80.8     |       | 83.3     |       |
| Copper recovery                                       |       | (%)        |       | 85.96    |       | 83.64    |       | 83.13    |       |
| Molybdenum recovery                                   |       | (%)        |       | 69.7     |       | 64.5     |       | 63.5     |       |

 

----

| Key:   |   | kt = thousands of  tons                                            |
|--------|--------|-------------------------------------------------------------------------|
|   |   | x = ratio obtained  dividing waste plus leachable material by ore mined |

 

Geology

 

The Cuajone porphyrycopper deposit is located on the western slopes of Cordillera Occidental, inthe southern-most Andes Mountains of Peru. The deposit is part of amineral district that contains two additional known deposits, Toquepala andQuellaveco. The copper mineralization at Cuajone is typical of porphyry copperdeposits.

 

Concentrator

 

Our Cuajone operationsuse state-of-the-art computer monitoring systems at the concentrator, thecrushing plant and the flotation circuit in order to coordinate inflows andoptimize operations. Material with a copper grade over 0.40% is loaded ontorail cars and sent to the milling circuit, where giant rotating crushers reducethe size of the rocks to approximately one-half of an inch. The ore is thensent to the ball mills, which grind it to the consistency of fine powder. Thefinely ground powder is agitated in a water and reagents solution and is thentransported to flotation cells. Air is pumped into the cells producing a froththat 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 26.4%. Concentratesare then shipped by rail to the smelter at Ilo.

 

Tailings are sent tothickeners where water is recovered. The remaining tailings are sent to theQuebrada Honda dam, our Peruvian tailings storage facility.

 

Toquepala

 

Our Toquepala operationsconsist of an open-pit copper mine and a concentrator. We also refine copper atthe SX/EW facility through a leaching process. Toquepala is located in southernPeru, 30 kilometers from Cuajone and 870 kilometers from Lima. The concentratorhas a milling capacity of 60,000 tons per day, which has been expanded from45,000 tons per day in 2002. The SX/EW facility has a refining capacity of56,000 tons per year. Overburden removal commenced in 1957 and ore productioncommenced in 1960. Our Toquepala operations utilize a conventional open-pitmining method to collect copper ore for further processing in our concentrator.

 

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The table below setsforth 2005, 2004 and 2003 production information for our Toquepala operations.

 

| ** **                                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average ore mined per  day                            |       | (kt)       |       | 58.1     |       | 59.6     |       | 58.1     |       |
| Stripping ratio                                       |       | (x)        |       | 5.34     |       | 4.28     |       | 3.96     |       |
| Copper grade                                          |       | (%)        |       | 0.812    |       | 0.817    |       | 0.749    |       |
| Molybdenum grade                                      |       | (%)        |       | 0.039    |       | 0.044    |       | 0.029    |       |
| Copper concentrate                                    |       | (kt)       |       | 576.4    |       | 580.1    |       | 505.2    |       |
| Molybdenum concentrate                                |       | (kt)       |       | 9.7      |       | 11.2     |       | 7.8      |       |
| Copper concentrate  average grade                     |       | (%)        |       | 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    |       |
| SX/EW cathode  production                             |       | (kt)       |       | 36.5     |       | 42.1     |       | 47.8     |       |
| Molybdenum in  concentrate                            |       | (kt)       |       | 5.3      |       | 6.0      |       | 4.2      |       |
| Average copper ore  processed by concentrator per day |       | (kt)       |       | 59.5     |       | 60.6     |       | 60.0     |       |
| 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 plus leachable material by ore mined |

 

Geology

 

The Toquepala porphyrycopper deposit is located on the western slopes of Cordillera Occidental, inthe southern-most Andes Mountains of Peru. The deposit is part of amineral district that contains two additional known deposits, Cuajone andQuellaveco.

 

Concentrator

 

Our Toquepala operationsuse state-of-the-art computer monitoring systems at the concentrator, thecrushing plant and the flotation circuit in order to coordinate inflows andoptimize operations. Material with a copper grade over 0.40% is loaded ontorail cars and sent to the milling circuit, where giant rotating crushers reducethe size of the rocks to approximately one-half of an inch. The ore is thensent to the ball and bar mills, which grind it to the consistency of finepowder. The finely ground powder is agitated in a water and reagents solutionand is then transported to flotation cells. Air is pumped into the cellsproducing a froth, which carries the copper mineral to the surface but not thewaste rock, or tailings. Recovered copper, with the consistency of froth, isfiltered and dried to produce copper concentrates with an average coppercontent of 27.3%. Concentrates are then shipped by rail to the smelter at Ilo.

 

Tailings are sent tothickeners where water is recovered. The remaining tailings are sent to theQuebrada Honda dam, our Peruvian tailings storage facility.

 

SX/EW Plant

 

The SX/EW facility atToquepala produces refined copper from solutions obtained by leaching low-gradeore stored at the Toquepala and Cuajone mines. The leach plant commencedoperations in October 1995 with a design capacity of 35,629 tons per yearof copper cathodes. In August 1999 the capacity was expanded to 56,000tons per year.

 

Processing Facilities -Ilo

 

Our Ilo smelter andrefinery complex is located in the southern part of Peru, 17 kilometersnorth of the city of Ilo, 121 kilometers from Toquepala, 147 kilometers fromCuajone, and 1,240 kilometers from the city of Lima.

 

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Smelter

 

Our Ilo smelter providesblister copper for the refinery we operate as part of the same facility. Blistercopper produced by the smelter exceeds the refinery’s capacity and the excessis sold to other refineries around the world. The nominal installed capacity ofthe smelter is 1,131,500 tons per year. We are in the process of modernizingthe Ilo smelter to comply with Peruvian government requirements. The project ispart of our Environmental Compliance and Management Program, or PAMA,which was approved by the Peruvian government in 1997. The project willmodernize the smelter and is targeted to capture no less than 92% of the sulfurdioxide emissions, in compliance with PAMA requirements. The modernizationprogram is progressing on schedule and expected to be completed by the endof 2006. As part of this project an anode casting wheel was completed in January 2006and blister production was replaced with anode production, enabling us toeliminate a costly re-melting step in our production process.

 

During 2005, 2004 and2003, 325,623, 320,722 and 314,920 tons, respectively, of copper blister wereproduced, with average grades of 99.35%, 99.37% and 99.31%, respectively. Thecopper recovery was 97.57% for 2005, 97.23% for 2004 and 96.80% for 2003.

 

Refinery

 

The refinery consists ofan anode plant, an electrolytic plant, a precious metals plant and a number ofancillary installations. The refinery is producing grade A copper cathode of99.99% purity. The nominal capacity is 280,000 tons per year. Anodic slimes arerecovered from the refining process and are sent to the precious metalsfacility to produce silver, gold and selenium.

 

During 2005, 2004 and2003, 285,205, 280,679 and 284,006 tons, respectively, of copper cathodes wereproduced, with an average grade of 99.998% for the three years.

 

The precious metals plantproduced 109,894 kilograms of refined silver and 184 kilograms of gold in 2005,118,906 kilograms of refined silver and 174 kilograms of gold in 2004 and111,951 kilograms of refined silver and 265 kilograms of gold in 2003. Seleniumproduction was, 48.7 tons, 51.9 tons and 47.8 tons in 2005, 2004 and 2003,respectively.

 

MEXICAN OPEN PIT UNIT

 

Our Mexican open-pitsegment operations combines two units of Minera Mexico, Mexcobre andMexcananea, which includes La Caridad and Cananea mine complexes and smeltingand refining plants and support facilities which service both complexes.

 

Cananea

 

We operate an open-pitcopper mine, a concentrator and two SX/EW plants at our Cananea mining complex,located 71 kilometers from La Caridad, Mexico and 61 kilometers south of theArizona border on the outskirts of the town of Cananea. The concentrator has amilling capacity of 76,700 tons per day. The SX/EW facility has a refiningcapacity of 54,750 tons per year. The Cananea site is one of the world’slargest porphyry copper deposits. The Cananea mine is the oldest continuouslyoperating copper mine in North America, with operations tracing back to 1899.Cananea uses a conventional open-pit mining method to collect copper ore forfurther refining in our concentrator.

 

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The table below setsforth 2005, 2004 and 2003 production information for Cananea.

 

| ** **                                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average ore mined per  day                            |       | (kt)       |       | 70.2     |       | 73.1     |       | 58.4     |       |
| Stripping ratio                                       |       | (x)        |       | 3.00     |       | 2.55     |       | 2.73     |       |
| Copper grade                                          |       | (%)        |       | 0.572    |       | 0.583    |       | 0.576    |       |
| Copper concentrate                                    |       | (kt)       |       | 436.5    |       | 469.3    |       | 337.9    |       |
| Copper concentrate  average grade                     |       | (%)        |       | 27.21    |       | 26.26    |       | 27.85    |       |
| Copper in concentrate                                 |       | (kt)       |       | 118.7    |       | 123.2    |       | 94.1     |       |
| SX/EW cathode  production                             |       | (kt)       |       | 56.4     |       | 50.2     |       | 49.5     |       |
| Average copper ore  processed by concentrator per day |       | (kt)       |       | 70.2     |       | 73.1     |       | 58.4     |       |
| Copper recovery                                       |       | (%)        |       | 81.03    |       | 80.53    |       | 80.63    |       |

 

----

| Key:   |   | kt = thousands of  tons                                            |
|--------|--------|-------------------------------------------------------------------------|
|   |   | x = ratio obtained  dividing waste plus leachable material by ore mined |

 

Geology

 

The Cananea mine isunusual in that the ore explored and sampled at the mine has been of consistentquality, unlike most copper deposits which evidence a decline in grades atdeeper strata. The Cananea region is within the southern Cordilleran region,extending from southern Mexico to the northwestern United States.

 

Concentrator

 

Cananea usesstate-of-the-art computer monitoring systems at the concentrator, the crushingplant and the flotation circuit in order to coordinate inflows and optimizeoperations. Material with a copper grade over 0.38% is loaded onto trucks andsent to the milling circuit, where giant rotating crushers reduce the size ofthe rocks to approximately one-half of an inch. The ore is then sent to theball and bar mills, which grind it to the consistency of fine powder. Thefinely ground 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 27.21%. Concentratesare then shipped by rail to the smelter at La Caridad.

 

SX/EW Plant

 

The Cananea Unit operatesa leaching facility and two SX/EW plants. All copper ore with a grade lowerthan the mill cut-off grade 0.25%, but higher than 0.15% copper, is deliveredto the leaching dumps. A cycle of leaching and resting occurs for approximatelyfive years to achieve a 56% recovery.

 

The Cananea Unitcurrently maintains 16.5 million cubic meters of pregnant leach solutionin inventory with a concentration of approximately 1.79 grams of copper perliter.

 

La Caridad

 

Mexcobre operates the LaCaridad mining complex, located in the State of Sonora, Mexico 23 kilometerssoutheast of the town of Nacozari de García and 121 kilometers south of theU.S.-Mexico border. It includes an open-pit mine concentrator, smelter, copperrefinery, precious metals refinery, rod plant, SX/EW plant, lime plant and twosulfuric acid plants. The smelter and the sulfuric acid plants, as well as therefineries and rod plant, are located approximately 24 kilometers from themine, and the lime plant is situated 18 kilometers from the U.S. border. Accessis by paved highway and by railroad.

 

The concentrator beganoperations in June 1979, the molybdenum plant in June 1982, thesmelter in June 1986, the first sulfuric acid plant in July 1988, theSX/EW plant in July

 

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1995, the second sulfuricacid plant in January 1997, the copper refinery in July 1997, the rodplant in April 1998 and the precious metals refinery in July 1999.

 

The table below setsforth 2005, 2004 and 2003 production information for La Caridad.

 

| ** **                                            | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average ore mined per  day                            |       | (kt)       |       | 86.4     |       | 75.5     |       | 74.9     |       |
| Stripping ratio                                       |       | (x)        |       | 1.39     |       | 1.63     |       | 1.70     |       |
| Copper grade                                          |       | (%)        |       | 0.483    |       | 0.504    |       | 0.508    |       |
| Molybdenum grade                                      |       | (%)        |       | 0.0324   |       | 0.0341   |       | 0.0345   |       |
| Copper concentrate                                    |       | (kt)       |       | 449.6    |       | 401.6    |       | 410.5    |       |
| Molybdenum concentrate                                |       | (kt)       |       | 7.4      |       | 6.5      |       | 6.1      |       |
| Copper concentrate  average grade                     |       | (%)        |       | 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    |       |
| SX/EW cathode  production                             |       | (kt)       |       | 22.0     |       | 21.8     |       | 21.5     |       |
| Molybdenum in  concentrate                            |       | (kt)       |       | 4.2      |       | 3.7      |       | 3.5      |       |
| Average copper ore  processed by concentrator per day |       | (kt)       |       | 87.0     |       | 75.3     |       | 75.0     |       |
| Copper recovery                                       |       | (%)        |       | 79.95    |       | 79.62    |       | 77.36    |       |

 

----

| Key:   |   | kt = thousands of  tons                                            |
|--------|--------|-------------------------------------------------------------------------|
|   |   | x = ratio obtained  dividing waste plus leachable material by ore mined |

 

Geology

 

The La Caridad deposit isa porphyry copper deposit typical of those in the southern basin and rangeprovince in the southwestern United States. The Mexcobre Unit uses aconventional open-pit mining method. The ore body is situated within a mountaintop, which gives La Caridad the advantage of a relatively low waste-strippingratio, natural pit drainage and relatively short haul distances for both oreand waste. The mining method involves drilling, blasting, loading and haulageof waste, leach and ore to waste and leaching dumps and to the primarycrushers.

 

Concentrator

 

Mexcobre usesstate-of-the-art computer monitoring systems at the concentrator, the crushingplant and the flotation circuit in order to coordinate inflows and optimizeoperations. The concentrator has a current capacity of 90,000 metric tons ofore per day.

 

Ore extracted from themine with a copper grade over 0.30% is processed at the concentrator and isprocessed into copper concentrates and molybdenum concentrates. The copperconcentrates are sent to the smelter and the molybdenum concentrate is exported.The molybdenum recovery plant has a capacity of 2,000 tons per day of copper-molybdenumconcentrates. The lime plant has a capacity of 340 tons of finished product perday.

 

SX/EW Plant

 

Approximately 463.6million tons of leaching ore with an average grade of approximately 0.25%copper have been extracted from the La Caridad open-pit mine and deposited inleaching dumps from May 1995 to December 31, 2005. In 1995, Mexcobrecompleted the construction of a new SX/EW facility at La Caridad that hasallowed processing of this ore and certain leach ore reserves that are unminedand has resulted in a reduction in Mexcobre’s production costs of copper. TheSX/EW facility has a total capacity of 21,900 tons of copper cathodes per year.

 

Processing Facilities –La Caridad

 

Our La Caridad complexincludes a smelter, an electrolytic copper refinery, a precious metal refineryand a copper rod plant. The distance between this complex and the La Caridadmining unit is approximately 24 kilometers.

 

15

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Smelter

 

Copper concentrates arecarried to the La Caridad smelter where they are processed and cast into copperanodes of 99.2% purity to be sold to refineries. Sulfur dioxide off-gasescollected from the flash furnaces and converters are processed into sulfuricacid at two sulfuric acid plants and sold to third parties.

 

Almost all of the anodesproduced in the smelter are sent to the La Caridad copper refinery in order toincrease the copper purity. The actual installed capacity of the smelter is1,000,000 tons per year, capacity that is sufficient to receive theconcentrates of the Mexicana de Cobre (La Caridad) and Mexicana de CananeaMining Units. The amount of smelted copper concentrates was 894,735, 820,459and 629,505 tons for 2005, 2004 and 2003, respectively. The anode productioncapacity is 300,000 tons per year and the production for 2005, 2004 and 2003was 282,412, 250,890 and 199,033 tons, respectively.

 

Sulfuric acid productionwas 833,380, 778,350 and 603,300 tons for 2005, 2004 and 2003, respectively.

 

Refinery

 

Mexcobre includes anelectrolytic copper refinery at La Caridad that uses permanent cathode technology.The actual installed capacity of the refinery is 300,000 tons per year. Therefinery consists of an anode plant with a preparation area, an electrolyticplant, a slime treatment plant and a number of ancillary installations. Therefinery is producing grade A copper cathode of 99.99% purity. Anodic slimesare recovered from the refining process and sent to the slimes treatment plantwhere additional copper is extracted. The slimes are then filtered, packed andshipped to the La Caridad precious metals refinery to produce silver and gold. Therefined cathode production for 2005, 2004 and 2003 was 233,685, 202,146 and163,967 tons, respectively.

 

The operations of theprecious metal refinery are divided into two stages: (i) the antimony iseliminated from the slime; and (ii) the slime is dried in a steam dryer. Afterthis the dried slime is smelted and a gold and silver alloy is obtained, whichis known as dore.The process ends with the refining of the gold and silver alloy. The productionof gold for 2005, 2004 and 2003 was 817, 575 and 594 kilograms**,** respectively. The production of silverfor 2005, 2004 and 2003 was 142,534, 90,914 and 136,117 kilograms,respectively.

 

Copper Rod Plant

 

A rod plant at theMexcobre Unit was completed in April 1998 and reached its maximum annualoperating capacity of 150,000 tons in May 1999. The plant is producing 8millimeter copper rods with a purity of 99.99%. Copper rod production for 2005,2004 and 2003 was 113,167, 69,529 and 53,822 tons, respectively.

 

MEXICAN IMMSA UNIT

 

Our IMMSA unit(underground mining poly-metallic division) produces zinc, lead, copper, silverand gold, a coal and coke mine, and several industrial processing facilitiesfor zinc, lead, copper and silver and operates five underground mining complexessituated in central and northern Mexico. All of IMMSA’s mining facilitiesemploy exploitation systems and conventional equipment. We believe that all theplants and equipment are in satisfactory operating condition. IMMSA’s principalmining facilities include Charcas, Santa Barbara, San Martin, Santa Eulalia andTaxco.

 

The Charcas miningcomplex is located 111 kilometers north of the city of San Luis Potosi in theState of San Luis Potosi, Mexico. The complex includes three underground minesand one flotation plant and produces zinc, lead and copper concentrates, withsignificant

 

16

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amounts of silver. TheCharcas mining district was discovered in 1573 and operations in the 20thcentury began in 1911. The Charcas mine is characterized by low operating costsand good quality ores and is situated near the zinc refinery. We have expandedproduction capacity of the mine by 32% since 1993, and the Charcas mine is nowMexico’s largest producer of zinc.

 

The Charcas miningdistrict occupies the east-central part of the Central Mesa and is part ofthe Sierra Madre Metallogenic Province.

 

The Charcas mine uses thehydraulic cut-and-fill method and the room-and-pillar mining method withdescending benches. The broken ore is hauled to the underground crusher station.The crushed ore is then hoisted to the surface for processing in the flotationplant to produce lead, zinc and copper concentrates. The capacity of theflotation plant is 4,000 tons of ore per day; 1,327,990, 1,317,288 and1,212,938 tons of ore were mined at Charcas during 2005, 2004 and 2003,respectively. The lead concentrate produced at Charcas is treated at a thirdparty refinery in Mexico. The zinc and copper concentrates are treated at ourSan Luis Potosi zinc refinery and copper smelter.

 

The Santa Barbara miningcomplex is located approximately 26 kilometers southwest of the city of Hidalgodel Parral in southern Chihuahua, Mexico. It includes three main undergroundmines and a flotation plant and produces lead, copper and zinc concentrates,with significant amounts of silver. Gold-bearing veins were discovered in theSanta Barbara district as early as 1536. Mining activities in the 20th centurybegan in 1913.

 

The mining operations atSanta Barbara are more diverse and complex than at any of the other mines inour Mexican operations, with veins that aggregate approximately 21 kilometersin length. Each of the three underground mines has several shafts and crushers.Due to the variable characteristics of the ore bodies, four types of miningmethods are used: shrinkage stoping, long-hole drilled open stoping,cut-and-fill stoping and horizontal bench stoping. The ore, once crushed, isprocessed in the flotation plant to produce concentrates. The flotation planthas a capacity of 6,000 tons of ore per day; 1,486,622, 1,453,793 and 1,450,124tons of ore were mined at the Santa Barbara mine during 2005, 2004 and 2003,respectively. The lead concentrate produced is treated at a third partyrefinery in Mexico. The copper concentrates are treated at our San Luis Potosicopper smelter, and the zinc concentrates are either treated at the San LuisPotosi zinc refinery or exported.

 

The San Martin miningcomplex is located in the municipality of Sombrerete in the western part ofthe state of Zacatecas, Mexico, approximately 101 kilometers southeast of thecity of Durango. The complex includes an underground mine and a flotation plantand produces lead, copper and zinc concentrates, with significant amounts of silver.The mining district in which the San Martin mine is located was discovered in1555. Mining operations in the 20th century began in 1949. San Martin lies inthe Mesa Central between the Sierra Madre Occidental and the Sierra MadreOriental.

 

The horizontalcut-and-fill mining method is used at the San Martin mine. The broken ore ishauled to the underground crusher station. The ore is then brought to thesurface and fed to the flotation plant to produce concentrates. The flotationplant has a total capacity of 4,400 tons of ore per day; 1,231,476, 1,259,220and 1,287,239 tons of ore were mined at San Martin in 2005, 2004 and 2003,respectively. The lead concentrate is treated at a third party refinery inMexico. The copper concentrate is treated at our San Luis Potosi copper smelterand zinc concentrate is either treated at the San Luis Potosi zinc refinery orexported.

 

The mining district ofSanta Eulalia is located in the central part of the state of Chihuahua,Mexico, approximately 26 kilometers east of the city of Chihuahua. Thisdistrict covers approximately 48 square kilometers and is divided into threefields: east field, central field and west field. The west field and the eastfield, in which the principal mines of the unit are found, are separated by 6kilometers. The Buena Tierra mine is located in the west field and the SanAntonio mine is located in the east field.

 

17

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The mining district wasdiscovered in 1590, although exploitation did not formally begin until 1870.

 

The Santa Eulalia unitsuspended operations totally from October 2000 to December 2004,during which time rehabilitation work was completed at the Tiro San Antonio andpipes were installed to expand the pumping capacity to 10,500 gallons perminute. In January 2005, operations began at the Santa Eulalia unit, witha production plan for 230,900 tons. The flotation plant, at which leadconcentrate and zinc concentrate are produced, has a capacity of 1,500 tons orore per day 209,658 tons of ore were mined at Santa Eulalia in 2005. The leadconcentrate is treated at a third party refinery, and the zinc concentrate istreated at our San Luis Potosi zinc refinery. The production plan for 2006 isestimated to be 260,800 tons.

 

The Taxco mining complexis located on the outskirts of the city of Taxco in the northern part ofGuerrero State, Mexico, approximately 71 kilometers from the city of Cuernavaca.The complex includes several underground mines and a flotation plant andproduces lead and zinc concentrates, with some amounts of gold and silver. Themining district in which the Taxco mines are located was discovered in 1519. Miningactivities in the 20th century commenced in 1918.

 

TheTaxco district lies in the northern part of the Balsas-Mexcala basinadjacent to the Paleozoic Taxco-Zitacuaro Massif.

 

IMMSAemploys shrinkage, cut-and-fill and the room and pillar mining methods atthe Taxco mines. The flotation plant has a capacity of 2,000 tons of ore perday; 362,550, 352,174 and 328,243 tons or ore were mined at Taxco in 2005, 2004and 2003, respectively. The lead concentrate is sold in Mexico. The zincconcentrates is either treated at the San Luis Potosi zinc refinery orexported.

 

Processing Facilities -San Luis Potosi

 

Our San Luis Potosielectrolytic zinc refinery is located in the city of San Luis Potosi, in thestate of San Luis Potosi, Mexico. Our San Luis Potosi copper smelter isadjacent to the San Luis Potosi zinc refinery.

 

Smelter

 

The San Luis Potosicopper smelter has been in operation since 1925 and has gone through severalphases of modernization, principally over the last ten years. The smelterpresently has the capacity to process 230,000 tons of copper concentrate peryear.

 

The plant operates oneblast furnace (with a second on stand-by) that smelts incoming materials,mainly copper concentrates and copper byproducts from lead plants, to produce acopper matte. The copper matte is then treated in one of the two Pierce Smithconverters, producing copper blister (97.4% copper), which in 2005 containedapproximately one ounce of gold and 400 ounces of silver per ton of copperblister produced. Of a total copper concentrate intake of 50,243 tons in 2005,approximately 90% was supplied by the Immsa Unit’s mines and the remainingamount was smelted under toll arrangements with third parties. Copper blisterproduction in 2005, 2004 and 2003 amounted to 21,318, 22,666, and 23,548 tons,respectively.

 

As the materials treatedat the smelter contain various impurities (especially lead and arsenic), thefacility has been equipped with an arsenic recovery plant for treatment of theflue dust produced in the blast furnace section. This material containsapproximately 35% lead and 18% arsenic which, when treated, producesapproximately 1,800 tons per year of high purity arsenic trioxide which is, inturn, sold in the United States principally to the wood preserving industry. Approximately15,000 tons per year of lead bearing calcines (approximately 32% lead) are soldannually to Industrias Peñoles, S.A. de C.V. (“Peñoles”).

 

18

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Zinc Refinery

 

The San Luis Potosielectrolytic zinc refinery was built in 1982. It was designed to produce105,000 tons of refined zinc per year by treating up to 200,000 tons of zincconcentrate from our own mines, principally Charcas, located only 113kilometers from the refinery. Refined zinc production in 2005, 2004 and 2003amounted to 101,523, 102,556 and 101,069 tons, respectively. The refineryproduces special high grade zinc (99.995% zinc), high grade zinc (over 99.9%zinc) and zinc-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.

 

Nueva Rosita Coal andCoke Complex

 

The Nueva Rosita coal andcoke complex, which began operations in 1924, is located in the state ofCoahuila, Mexico on the outskirts of the city of Nueva Rosita near the Texasborder. It comprises an underground coal mine, with a present yearly capacityof approximately 280,000 tons of coal, and a 21-coke oven facility capable ofproducing 104,000 tons of metallurgical coke per year. At present the 21 ovensare being re-engineered and modernized, with an investment of $12 million,to service the operations of the facility for the next 25 years.

 

The room-and-pillarmining method is employed at the underground Nueva Rosita coal mine withcontinuous miners. At present, the coke oven installation supplies the San LuisPotosi copper smelter with low-cost coke, resulting in significant cost savingsto the smelter. The surplus production (approximately 21,608 tons per year) issold to Peñoles and other Mexican consumers in northern Mexico. The complexincludes a coal washing plant completed in 1998 that has a capacity of 900,000tons per year and produces cleaner coal of a higher quality. The 2005, 2004 and2003 production of clean coal was 257,016, 238,336 and 260,966 tons,respectively.

 

EXPANSION ANDMODERNIZATION PROGRAM

 

For a description of ourExpansion and Modernization Program see “Management’s Discussion and Analysisof Financial Condition and Results of Operations-Expansion and ModernizationProgram”.

 

EXPLORATION ACTIVITIES

 

We are engaged in ongoingextensive exploration to locate additional ore bodies in Peru, Mexico and Chile.We spent $24.4 million on exploration programs in 2005, $15.6 million in2004 and $17.9 million in 2003, and have budgeted $33.4 million for2006.

 

Currently in Peru, wehave direct control of 99,537 hectares of mineral rights. In Mexico, we hold295,367 hectares of exploration concessions. We also hold 38,200 hectares ofexploration concessions in Chile.

 

Peru

 

*LosChancas.*The Los Chancas project, located in the departmentof Apurimac in southern Peru, is a copper and molybdenum porphyry deposit. In2004 we completed the final phase of the diamond drilling program the secondand final phase of metallurgical testing. At the end of 2005 several companieshave been invited to present proposals for the execution of the pre-feasibilitystudies that will begin in 2006. Once completed, we will be able to make adetermination if more exploration is needed or if the project containscommercially mineable reserves, which would warrant future development aftercomprehensive economic, technical and legal feasibility studies are completed. Testingto date indicates a mineral deposit of 200 million tons with a copper grade of1.0%, 0.07% molybdenum and 0.12 grams of gold per ton.

 

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*Tantahuatay.*The Tantahuatay project is located in the department ofCajamarca in northern Peru. We have performed exploration work in the upper part ofthe deposit principally for gold recovery. Work to date indicatesmineralization of 27.1 million tons, with an average gold content of 0.89grams per ton and 13.0 grams of silver per ton. This project, in which we havea 44.25% share, continues in the exploratory stage. During 2004 and 2005 weconcentrated our efforts on dealing with social and environmental concerns ofcommunities near the project.

 

*TiaMaria.*The Tia Maria project, located in the department ofArequipa in southern Peru, is a copper porphyritic system. In 2005 a total of29,000 meters of diamond drilling was completed out of the 15,000 metersprojected. The drilling is continuing into 2006 to complete the program. Thisproject is in the exploratory stage.

 

*OtherPeruvian Prospects.*As part of our 2005 exploration anddevelopment program, we drilled at the Gloria Cristina prospect located innorthern Peru, in the department of La Libertad, and at the El Fiscal prospectin southern Peru, in the department of Arequipa. The El Fiscal prospect showsevidence of copper-gold mineralization and we are scheduling additionaldrilling as part of 2006 exploration and development program. Bothprospects show evidence of copper-gold mineralization.

 

Mexico

 

In addition toexploratory drilling programs at existing mines, we are currently conductingexploration to locate mineral deposits at various other sites in Mexico. Inparticular, we have identified significant copper and gold deposits at El Arcosite.

 

*El Arco.*The El Arco site is located in the state of Baja Californiain Mexico. Preliminary investigations of the El Arco site indicate a deposit of846 million tons of sulfide ore with average copper grades of 0.51% and0.14 grams of gold per ton, and 170 million tons of leaching ore with averagecopper grades of 0.56%. Currently we are in the process of identifying watersources for a leaching operation.

 

*Angangueo.*The Angangueo site is located in the state of Michoacán inMexico. A mineral deposit of 13 million tons of ore has been identified withdiamond drilling. The mineral deposit contains 0.16 grams of gold and 262 gramsof silver per ton, and is comprised of 0.79% lead, 0.97% copper and 3.5% zinc. During2005, we received the approval for our environmental impact study and we are inthe process of obtaining land use approval.

 

*Buenavista.*The Buenavista project site is located in the state of Sonorain Mexico, adjacent to the Cananea ore body. Drilling and metallurgical studieshave shown that the site contains a mineral deposit of 36 million tons of orecontaining 29 grams of silver, 0.69% of copper and 3.3% of zinc per ton.

 

Chile

 

In 2003 we acquiredseveral exploration properties in Chile with over 35,000 hectares of miningrights. In 2004 we started exploration work on certain of these Chileanproperties with diamond drilling on El Salado prospects.

 

*ElSalado.*The El Salado prospect, located in the AtacamaRegion, stretches over 2,700 hectares and is also being explored forcopper-gold. Through 2005, 11,079 meters of diamond drilling was completed. Weare currently doing a geological evaluation of Sierra Aspera, a copper-goldprospect, located in the north of Chile.

 

*OtherChilean Prospects.*Other prospects like Catanave andEsperanza, located in the Tarapaca and Atacama regions, respectively, innorthern Chile, are scheduled for future exploration.

 

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PRINCIPAL PRODUCTS ANDMARKETS

 

The principal uses of copper are in the buildingand construction industry, electrical and electronic products and, to a lesserextent, industrial machinery and equipment, consumer products and theautomotive and transportation industries. Molybdenum is used to toughen alloysteels and soften tungsten alloy and is also used in fertilizers, dyes, enamelsand reagents. Silver is used for photographic, electrical and electronicproducts and, 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.

 

Our marketing strategyand annual sales planning emphasize developing and maintaining long-termcustomer relationships, and thus acquiring annual or other long-term contractsfor the sale of our products is a high priority. Approximately 90% of our metalproduction for the year 2005, 2004 and 2003, was sold under annual orlonger-term contracts. Sales prices are determined based on prevailingcommodity prices for the quotation period, generally being the month of, themonth prior to or the months following the actual or contractual month ofshipment or delivery, according to the terms of the contract.

 

We focus on the ultimateend-user customers as opposed to selling on the spot market or to tradingcompanies. In addition, we devote significant marketing effort to diversifyingour sales both by region and by customer base. We strive to provide superiorcustomer service, including just-in-time deliveries of our products. Ourability to consistently fulfill customer demand is supported by our substantialproduction capacity.

 

For additionalinformation on sales by segment, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Segment Sales Information”.

 

METALS PRICES

 

Prices for our productsare principally a function of supply and demand and, except for molybdenum, areestablished on the Commodities Exchange, or COMEX, in New York and the LondonMetal Exchange or LME the two most important metal exchanges in the world. Pricesfor our molybdenum products are established by reference to the publicationPlatt’s Metals Week. Our contract prices also reflect any negotiated premiumsand the costs of freight and other factors. From time to time, we have enteredinto hedging transactions to provide partial protection against futuredecreases in the market price of metals and we may do so under certainmarket conditions. In 2003 and 2004, however, we did not enter into anymaterial hedging transactions. We have, however, entered into copper swapcontracts in 2005. At December 31, 2005 we do not have any copper swapcontracts. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations-Quantitative and Qualitative Disclosure about Market Risk”.For a further discussion of prices for our products, please see “Management’sDiscussion and Analysis of Financial Condition and Result of Operations – MetalPrices”.

 

COMPETITIVE CONDITIONS

 

Competition in the coppermarket is principally on a price and service basis, with price being the mostimportant consideration when supplies of copper are ample. The Company’sproducts compete with other materials, including aluminum and plastics.

 

EMPLOYEES

 

As of December 31,2005, we employed 12,877 persons, approximately 71% of whom are covered bylabor agreements with ten different labor unions. During the last severalyears, we have experienced strikes or other labor disruptions that have had anadverse impact on our operations and operating results. We cannot assure youthat in the future we will not experience strikes or other labor-related workstoppages that could have a material adverse effect on our financialcondition and results of operations.

 

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Peru

 

Approximately 59% of ourPeruvian labor force was unionized at December 31, 2005, represented bynine separate unions. Collective bargaining agreements are in effect with eachof these unions. These agreements are in force through 2007.

 

In Peru on August 31,2004, unionized workers at our mining units in Toquepala and Cuajone stoppedwork and asked for additional wage increases based on high metals prices. Thestrike ended after twelve days. The union demands included salary increases,benefits and different application of certain aspects of their labor agreementsand it also expressed opposition to our acquisition of Minera México. ThePeruvian labor ministry declared the strike illegal and the workers returned towork but asserted their right to return to strike. In early 2005, the workersremoved the strike threat, indicating they would pursue their grievancesthrough the labor ministry. There were no labor strikes in 2005 or 2003.

 

Employees of theToquepala and Cuajone units reside in town sites, where we have built 2,513houses and apartments and 1,186 houses and apartments respectively. In 1998,Company housing, at our Ilo unit, was sold to workers at nominal prices. Westill hold 90 houses at Ilo for staff personnel. Housing, together withmaintenance and utility services, is provided at minimal cost to most of ouremployees. Our town site and housing complexes include schools, medicalfacilities, churches, social clubs, shopping, banking and other services.

 

Mexico

 

Approximately 76% of ourMexican labor force at December 31, 2005 were members of the *Sindicato Nacional de Trabajadores MineraMetalúrgicos y Similares de la República Mexicana, A.C*. (theNational Mine Workers Union, or the Union). Under Mexican law, the terms ofemployment 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 went on strike claiming that theCompany still owed them profit sharing from 2003. The strike was declaredillegal and the workers returned to work two days later after the Companyagreed to pay each worker approximately $900.00. The total paid was $3.1million.

 

On July 12, 2004,the workers of Mexicana de Cobre went on strike, asking for the review ofcertain contractual clauses; workers were satisfied with the review andreturned to work 18 days later. On October 15, 2004, the workers ofMexicana de Cananea went on strike, followed by the Mexicana de Cobre workers. Thestrike lasted for 6 days at Mexicana de Cobre and 9 days at Mexicana de Cananea.The strike was resolved by the acquisition by Minera México of the 5% of thestock of Mexicana de Cananea and Mexicana de Cobre that was owned by the Union.

 

On January 20, 2003,approximately 1,117 members of the Union went on strike at the Cananea mine inthe state of Sonora, alleging a violation of their collective bargainingagreement. This strike was resolved on February 5, 2003.

 

Employees of the Mexcobreand Cananea Units reside in town sites at La Caridad and Cananea, where we havebuilt approximately 2,000 houses and apartments and 275 houses and apartments,respectively. Employees of the Immsa Unit principally reside on the grounds ofthe mining or processing complexes in which they work and where we have builtapproximately 900 houses and apartments. Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees. Ourtown sites and housing complexes include educational and, in some units,medical facilities, churches, social clubs, shopping, banking and otherservices. At the Cananea Unit, health care is provided free of charge toemployees and retired unionized employees and their families.

 

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FUEL, ELECTRICITY ANDWATER SUPPLIES

 

Aside from ore, theprincipal raw materials for our operations are fuels (including fuel oil topower boilers and generators, natural gas for metallurgical processes at ourMexican operations and diesel fuel for mining equipment), electricity and water.We believe that supplies of fuel, electricity and water are readily available. Althoughthe prices of these raw materials may fluctuate, we have generally beenable to offset all or a portion of our increased costs through cost and energysaving measures. However, during the period from 2003 through 2005 we haveexperienced increases in energy prices that have surpassed levels we caneffectively control through cost savings.

 

Peru

 

In Peru, electric powerfor our operating facilities is generated by two thermal electric plants ownedand operated by Energía del Sur, S.A. (“Enersur”), a diesel and waste heatboilers plant located adjacent to the Ilo smelter and a coal plant locatedsouth of Ilo. Power generation capacity for Peruvian operations is currently344 megawatts. In addition, we have 9 megawatts of power generation capacityfrom two small hydro-generating installations at Cuajone. Power is distributedover a 224-kilometer closed loop transmission circuit. We obtain fuel in Peruprincipally from the Exxon Mobil Corporation.

 

In 1997, we sold our Ilopower plant to Enersur and entered into a power purchase agreement. We andEnersur also entered into an agreement for the sharing of certain servicesbetween the power plant and our smelter at Ilo. These arrangements were amendedin 2003, and we made a one-time contractual payment to Enersur of$4.0 million associated with the termination of the original powerpurchase 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 waterconcessions for well fields at Huaitire, Vizcachas and Titijones and surfacewater rights from the Suches lake, which together are sufficient to supply theneeds of our two operating mine sites at Toquepala and Cuajone. At Ilo, we havedesalinization plants that produce water for industrial and domestic use thatwe believe are sufficient for our current and projected needs.

 

Mexico

 

In Mexico, fuel ispurchased directly or indirectly from Petróleos Mexicanos, (“PEMEX”), the stateoil monopoly. Electricity for our Mexican operations, which is used as the mainenergy source at each mining complex we operate, is either purchased from the *Comisión Federal de Electricidad* (theFederal Electricity Commission, or CFE), the state electrical power producer,or steam-generated at Mexcobre’s smelter by recovering energy from the flashfurnace through a waste heat boiler. Accordingly, a significant portion of ouroperating costs in Mexico are dependent upon the pricing policies of Pemex andCFE, which reflect government policy as well as international market prices forcrude oil, natural gas and conditions in the refinery markets. Mexcobre’snatural gas pipeline (between Douglas, Arizona and Nacozari, Sonora) that beganoperating in May 1999, permits us to import natural gas from the UnitedStates into Mexico at market prices and thereby reduce operational costs. Acontract with PEMEX, provides us with the option of using a fixed price for aportion of our natural gas purchases.

 

In December weannounced our plans for a 450 Megawatt power generation plant in Mexico tosupply our own facilities. We anticipate that the project, which is currentlyout for bids, will be built and managed by an independent power company and ourobligation will be the supply of coal from our reserves and an agreement to usethe power output. We expect this plant will give us the ability to bettercontrol the cost of our energy requirements, which are a major element of ouroperating costs. The project is expected 

 

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to be finished in 2008,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 anational property and industries not connected to a public services watersupply must obtain a water concession from *ComisiónNacional del Agua* (the “National Water Commission”, or “CNA”). Waterusage fees are established in the *LeyFederal Derechos,* which distinguishes several availability zoneswith different fees per unit of volume according to each zone. All of ouroperations have one or several water concessions and, with the exception ofMexicana de Cobre, pump out the required water from one or several wells.Mexicana de Cobre pumps water from the La Angostura dam, which is close to themine and plants. At our Cananea facility, we maintain our own wells and pay theCNA for water measured by usage. Water conservation committees have beenestablished in each plant in order to conserve and recycle water. Water usagefees are updated on a yearly basis and have been increasing in recent years.

 

ENVIRONMENTAL MATTERS

 

Fora discussion of environmental matters reference is made to the informationcontained under the caption “Environmental matters” in “Note 13 Commitments andContingencies” of the Consolidated Combined Financial Statements.

 

**MINING RIGHTS AND CONCESSIONS**

** **

Peru

 

We have 177,387 hectaresin concessions from the Peruvian Government for our exploration, exploitation,extraction and/or production operations, distributed among our various sites asfollows:

 
| ** **  | ** ** | **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 ourPeruvian concessions are in full force and effect under applicable Peruvianlaws and that we are in compliance with all material terms and requirementsapplicable to these concessions. The concessions have indefinite terms, subjectto our payment of concession fees of up to $3.00 per hectare annually for themining concessions and a fee based on nominal capacity for the processingconcessions. Fees paid during 2005, 2004 and 2003 were approximately $0.8, $1.1and $1.0 million, respectively. We have two types of mining concessions inPeru: metallic and non-metallic concessions. We also have water concessions forwell fields at Huaitire, Titijones and Vizcachas and surface water rights fromthe Suches Lake, which together are sufficient to supply the needs of ourToquepala and Cuajone operating units.

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining 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. We made provisions of $40.3 million and $17.6million in 2005 and 2004 respectively, for this new tax which went into effectas of June 25, 2004. These provisions are included in cost of sales(exclusive of depreciation, amortization and depletion) on the ConsolidatedCombined Statement of Earnings.

 

In a ruling, the PeruvianConstitutional Tribunal stated that the royalty charge applies to allconcessions held in the mining industry, implying that those entities with tax

 

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stability contracts aresubject to this charge. In 1996, we entered into a tax stability contract withthe Peruvian government (a “Guaranty and Promotional Measures for InvestmentContract”) relating to our own SX/EW production, which, among other things,fixes tax rates and other contributions relating to such production. We believethat the Constitutional Tribunal’s interpretation relating to entities with taxstability contracts is incorrect and we intend to protest the imposition of theroyalty charge on our SX/EW production, when and if assessed. Provision made byus for the royalty charge does not include approximately $5.9 million ofadditional potential liability relating to our SX/EW production from June 30,2004 through December 31, 2005.

 

Mexico

 

In Mexico we haveapproximately 505,127 hectares in concessions from the Mexican Government forour exploration and exploitation activities as outlined 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 ourMexican concessions are in full force and effect under applicable Mexican lawsand that we are in compliance with all material terms and requirementsapplicable to these concessions. Under Mexican law, mineral resources belong tothe Mexican nation and a concession from the Mexican federal government isrequired to explore (exploration concession) or mine mineral reserves(exploitation concession). Exploration concessions have a six-year term, at theend of which they have to be changed to exploitation concessions, which have a50-year term that can be renewed for another 50 years. Explorationconcessions have holding fees of up to $3 per hectare. Holding fees forexploitation concessions can be up to $15 per hectare. Fees paid during 2005,2004, and 2003 were approximately $2.1 million, $1.8 million and $2.1 million,respectively. In addition, all of our operating units in Mexico have waterconcessions that are in full force and effect. We generally own the land towhich our Mexican concessions relate, although ownership is not required inorder to explore or mine a concession. We also own all of the processingfacilities of our Mexican operations and the land on which they are constructed.

 

REPUBLIC OF PERU ANDMEXICO

 

All of our revenues arederived principally from our operations in Peru and Mexico. Risks attendant tothe Company’s operations in both countries include our operations in thosecountries associated with economic and political conditions, effects ofcurrency fluctuations and inflation, effects of government regulations and thegeographic concentration of the Company’s operations.

 

AVAILABLEINFORMATION

 

We file annual, quarterlyand current reports, proxy statements and other information with the U.S.Securities and Exchange Commission (“SEC”). You may read and copy anydocument we file at the SEC’s Public Reference Room at 450 Fifth Street,NW, 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*.*

 

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Our Internet address iswww.southerncoppercorp.com. Commencing with the Form 8-K dated March 14,2003, we have made available free of charge on this internet address ourannual, quarterly and current reports, as soon as reasonably practical after weelectronically file such material with, or furnish it to, the SEC. Our web page includesthe Corporate Governance guidelines and the charters of its most importantBoard Committees. However, the information found on our website is not part ofthis or any other report.

 

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Item 1A. Risk Factors

 

Every investor orpotential investor in Southern Copper Corporation should carefully consider thefollowing risk factors.

 

**Risks Relating to Our BusinessGenerally**

 

***Our financialperformance is highly dependent on the price of copper and the other metals weproduce.***

 

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 and certainother 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. Overthe past three years, as a result of this increase in molybdenum prices,molybdenum has 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 processingoperations.

 

***Changes in thelevel 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 changesincrease or decrease the need for our metal products. A change in demand couldimpact our results of operations and financial condition.

 

***Our actual reservesmay 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 requiredin the future to revise our reserves estimates based on our actual production. Wecannot assure you that our actual reserves conform to geological,metallurgical or other expectations or that the estimated volume and grade ofore will be recovered. Market prices, increased production costs, reducedrecovery rates, short-term operating factors, royalty taxes and other factors may renderproven and probable reserves uneconomic to exploit and may result inrevisions of reserves data from time to time. Reserves data are not indicativeof future results of operations. 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.We cannot 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 ourbusiness strategies.***

 

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.”

 

***Applicable lawrestricts the payment of dividends from our Minera México subsidiary to us.***

 

Minera México is a Mexican company and, as such, may paydividends 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 ofour Minera México subsidiary to pay dividends to us, which in turn, may havean impact on our ability to service debt.

 

***Our operations aresubject 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 provideadequate coverage in certain circumstances. Insurance against certain risks,including certain liabilities for environmental pollution or hazards as aresult of exploration and production, is not generally available to us or othercompanies within the mining industry. We do not have, and do not intend toobtain, political risk insurance. These or other uninsured events may adverselyaffect our financial condition and results of operations.

 

***The loss of one ofour large customers could have a negative impact on our results of operations.***

 

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.

 

***Deliveries underour copper sales agreements can be suspended or cancelled by our customers incertain cases.***

 

Under each of our copper sales agreements, we or ourcustomers may suspend or cancel delivery of copper during a period of forcemajeure. Events of force majeure under these agreements includeacts of nature, labor strikes, fires, floods, wars, transportation delays,government actions or other events that are beyond the control of the parties.Any suspension or cancellation by our customers of deliveries under our copperor other sales contracts that are not replaced by deliveries under newcontracts or sales on the spot market would reduce our cash flow and couldadversely affect our financial condition and results of operations.

 

***The copper miningindustry 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 in energycosts, 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 its June 15-16,2005 meeting. The consensus states that stripping costs incurred during theproduction phase of a mine are variable production costs that should beincluded in the cost of the inventory produced (extracted) during the periodthat the stripping costs are incurred. On January 1, 2006 the Companyadopted this consensus by reversing $499.5 million of net cumulativecapitalized stripping cost and capitalized leach inventory cost as of December 31,2005 and recording a net charge of $322.9 million to retained earnings afterthe recognition of a workers participation and tax benefit of $176.6 million.In addition, near-term future years operating income could be negativelyimpacted to the extent that costs previously capitalized are expensed. Forfurther discussions see “Notes to consolidated combined financial statements –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 andAnalysis of Financial Condition and Results of Operations–Liquidity and CapitalResources–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 on September 13,2004. Additionally, in February 2006 construction workers at the IloSmelter modernization project went on strike and blocked access to our Iloproduction facilities. Our Ilo refinery and smelter production was interruptedfor a short period before the matter was resolved. This disruption did notsignificantly affect our production.

 

In Mexico, on October 26, 2005 the workers at ourLa Caridad mining complex went on strike claiming that the Company still owedthem profit 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 adverseeffect on our financial condition and results of operations.

 

***Environmental,health and safety laws and other regulations may increase our costs ofdoing business, 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 beunsuccessful.***

 

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 ofdrilling before production is possible, during which time the economicfeasibility of production may change. Substantial expenditures arerequired to establish proven and probable ore reserves through drilling, todetermine metallurgical processes to extract the metals from the ore and, inthe case of new properties, to construct mining and processing facilities. Wecannot assure you that our exploration programs will result in the expansion orreplacement of current 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 originallyestimated. Moreover, significant decreases in actual or expected prices may meanreserves, once found, will be uneconomical to produce.

 

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***Our profits may benegatively 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 currenciesother than our functional currency, the U.S. dollar, fluctuations in currencyexchange rates may have a significant impact on our financial results.These costs 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 correspondingdevaluation of the nuevo sol or peso, our financial position, results ofoperations and cash flows could be adversely affected. To manage the volatilityrelated to the risk of currency rate fluctuations, we may enter intoforward exchange contracts. We cannot assure you, however, that currencyfluctuations will not have an impact on our financial condition and results ofoperations.

 

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 lowercopper prices, which would negatively affect our financial condition andresults of operations.

 

***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 financialcondition, 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 variouslitigations involving ASARCO LLC (“Asarco”). Asarco, a mining company, isindirectly wholly owned by Grupo México. In March 2003, AMC purchased its interestin SCC from Asarco. In August 2002 the U.S. Department of Justice broughta claim alleging fraudulent conveyance in connection with Asarco’senvironmental liabilities and AMC’s then-proposed purchase of SCC from Asarco.That action was settled pursuant to a Consent Decree dated February 2,2003. The consent 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

 

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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 stoppage wassettled in November 2005 with the extension of the existing contract foran additional 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 rulingswill have on Asarco and its subsidiaries and ultimately upon us.

 

***We are controlledby Grupo México, which exercises significant influence over our affairs andpolicies 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.In addition, 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:

 

•                  thecomposition of our board of directors and, as a result, any determinations ofour board with respect to our business direction and policy, including theappointment and removal of our officers;

•                  determinationswith respect to mergers and other business combinations, including those that may resultin a change of control;

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

•                  salesand dispositions of our assets; and

•                  theamount of debt 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. Foradditional information regarding the share ownership of, and our relationshipswith, Grupo México 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 directors may deemrelevant. We anticipate paying a significant amount of our net income as cashdividends on our common stock in the foreseeable future. Such payments wouldreduce cash available to meet our debt service obligations.

 

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**Risks Associated with Doing Businessin 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 June 2004,the Peruvian Congress enacted legislation imposing a royalty to be paid bymining 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 and Concessions–Peru.”  In Mexico, our mineral rights derive fromconcessions granted, on a discretionary basis, by the *Secretaría de Economía* (Ministry ofEconomy), pursuant to the *Ley Minera*(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.

 

***Peruvian economicand political conditions may have an adverse impact on our business.***

 

A significant part of our operations areconducted in Peru. Accordingly, our business, financial condition or results ofoperations could be affected by changes in economic or other policies of thePeruvian government or other political, regulatory or economic developments inPeru. During the past several decades, Peru has had a history of politicalinstability that has included military coups and a succession of regimes withdiffering policies and programs. Past governments have frequently intervened inthe nation’s economy and social structure. Among other actions, pastgovernments have imposed controls on prices, exchange rates and local andforeign investment as well as limitations on imports, have restricted theability of companies to dismiss employees, have expropriated private sectorassets (including mining companies) and have prohibited the remittance ofprofits 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 offunds limited the ability of our stockholders to receive dividends outside ofPeru but did not limit the ability of our stockholders to receive distributionsof earnings in Peru.

 

In July 1990, Alberto Fujimori was electedpresident, and his administration implemented a broad-based reform of Peru’seconomic and social conditions aimed at stabilizing the economy, restructuringthe national government by reducing bureaucracy, privatizing state-ownedcompanies, promoting private investment, developing and strengthening freemarkets and enacting programs for the strengthening of basic services relatedto education, health, housing and infrastructure. After taking office for histhird term in July 2000 under extreme protest, President Fujimori wasforced to call for general elections due to the outbreak of corruptionscandals, and later resigned in favor of a transitory government headed by thepresident of Congress, Valentín Paniagua.

 

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Mr. Paniagua took office in November 2000and in July 2001 handed over the presidency to Alejandro Toledo, thewinner of the elections decided in the second round held 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 Toledoalso implemented fiscal austerity programs, among other proposals, in order tostimulate the economy. Despite Peru’s moderate economic growth, the Toledoadministration has at times faced public unrest spurred by the high rates ofunemployment, 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 administration continues to facea fragmented Congress and continuing public unrest, we cannot assure you thatthe government will continue its current economic policies or that Peru’srecent economic growth will be sustained. In addition, presidential electionsare expected to be held in Peru in the second quarter of 2006, which may meana change in Peru’s economic policies. Because we have significant operations inPeru, future Peruvian governmental actions could have an adverse effect onmarket conditions, prices and returns on our securities, and on our business,results of operations, financial condition, ability to obtain financing andprospects.

 

There is a risk of terrorism in Peru relating to *Sendero Luminoso* and the *Movimiento Revolucionario Tupac Amaru*,which were particularly active in the 1980s and early 1990s. We cannotguarantee that acts by these or other terrorist organizations will notadversely affect our operations in the future.

 

***Mexican economicand political conditions may have an adverse impact on our business.***

 

A significant part of our operations are based inMexico. In the past, Mexico has experienced both prolonged periods of weakeconomic conditions and dramatic deterioration in economic conditions,characterized by exchange rate instability and significant devaluation of thepeso, increased inflation, high domestic interest rates, a substantial outflowof capital, negative economic growth, reduced consumer purchasing power andhigh 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. We cannot assure you that such conditionswill not recur, that other unforeseen negative political or social conditionswill not arise or that such conditions will not have a material adverse effecton our financial condition and results of operations.

 

On July 2, 2000, Vicente Fox of the *Partido Acción Nacional* (the NationalAction Party), or PAN, was elected president. Although his election ended morethan 70 years 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 in 2003 and 2004, the PAN lost additionalseats in the Mexican Congress and state governorships. 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. Suchlegislative gridlock has impeded the progress of structural reforms in Mexico,which may have a material adverse effect on the Mexican economy and causedisruptions 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 we have significant operations in Mexico,we cannot provide any assurance that current legislative gridlock and/or futurepolitical developments in Mexico, including the 2006 presidential and

 

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congressional elections, will not have a materialadverse effect on market conditions, prices and returns on our securities, ourability to obtain financing, and our results of operations and financialcondition.

 

***Peruvian inflation,reduced economic growth and fluctuations in the nuevo sol exchange rate may adverselyaffect our financial condition and results of operations.***

 

Over the past several decades, Peru has experiencedperiods of high inflation, slow or negative economic growth and substantialcurrency devaluation. The inflation rate in Peru, as measured by the *Indice de Precios al Consumidor* andpublished 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 currencyhas been devalued numerous times during the last 20 years. The devaluationrate has decreased from a high of 4,019.3% in 1990 to 4.5% in 2005. Ourrevenues are primarily denominated in U.S. dollars and our operating expensesare partly denominated in U.S. dollars. If inflation in Peru were to increasewithout a corresponding devaluation of the nuevo sol relative to the U.S.dollar, our financial position and results of operations, and the market priceof our common stock, could be affected. Although the Peruvian government’sstabilization plan has significantly reduced inflation and the Peruvian economyhas experienced moderate growth in recent years, we cannot assure you thatinflation will not increase from its current level or that such growth willcontinue in the future at similar rates or at all.

 

Among the economic circumstances that could lead to adevaluation of the nuevo sol is the decline of Peruvian foreign reserves toinadequate levels. Peru’s foreign reserves at February 28, 2006, were$14.0 billion as compared to $12.6 billion at December 31, 2004. We cannotassure you that Peru will be able to maintain adequate foreign reserves to meetits foreign currency denominated obligations or that Peru will not devalue itscurrency should its foreign reserves decline.

 

***Mexican inflation,restrictive exchange control policies and fluctuations in the peso exchangerate may adversely affect our financial condition and results ofoperations.***

 

Although all of our Mexican operations’ sales ofmetals are priced and invoiced in U.S. dollars, a substantial portion of ourMexican operations’ cost of sales are denominated in pesos. Accordingly, wheninflation in Mexico increases without a corresponding devaluation of the peso,as it did in 2000, 2001 and 2002, the net income generated by our Mexicanoperations is adversely affected.

 

The annual inflation rate in Mexico 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, thepeso has been subject in the past to significant devaluation, which may nothave been proportionate to the inflation rate and may not be proportionateto the inflation rate in the future. The value of the peso declined by 4.9% in2005 and increased by 0.3% in 2004 and 9.0% in 2003.

 

While the Mexican government does not currentlyrestrict the ability of Mexican companies or individuals to convert pesos intodollars or other currencies, in the future, the Mexican government could imposea restrictive exchange control policy, as it has done in the past. We cannotassure you that the Mexican government will maintain its current policies withregard to the peso or that the peso’s value will not fluctuate significantly inthe future. The imposition of such exchange control policies could impairMinera México’s ability to obtain imported goods and to meet its U.S.dollar-denominated obligations and could have an adverse effect on our businessand financial condition.

 

***Developments inother emerging market countries and in the United States may adverselyaffect the prices of our common stock and our debt securities*****.**

 

The market value of securities of companies withsignificant operations in Peru and Mexico is, to varying degrees, affected by economicand market conditions in other

 

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emerging market countries. Although economicconditions in such countries may differ significantly from economicconditions in Peru or Mexico, as the case may be, investors’ reactions todevelopments in any of these other countries may have an adverse effect onthe market value or trading price of the securities, including debt securities,of issuers that have significant operations in Peru or Mexico.

 

In addition, in recent years economic conditions inMexico have increasingly become correlated to U.S. economic conditions.Therefore, adverse economic conditions in the United States could also have asignificant adverse effect on Mexican economic conditions including the priceof our debt securities. We cannot assure you that the market value or tradingprices of our common stock and debt securities, will not be adversely affectedby events in the United States or elsewhere, including in emerging marketcountries.

 

Item 2. Properties

 

We were incorporated in Delaware in 1952. Ourcorporate offices in the United States are located at 2575 East Camelback Road,Suite 500, Phoenix, Arizona 85016. Our telephone number in Phoenix,Arizona is (602) 977-6595. Our corporate offices in Mexico are located inMexico City and our corporate offices in Peru are located in Lima. Our websiteis www.southerncoppercorp.com We believe that our existing properties are ingood 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***                        | %            |

 

38

----

 
| ***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 tons per day

ktpy= thousands of tons per year

tpy  = tons per year

 

(1)                                  Ourestimates of actual capacity contemplating normal operating conditions withallowance for normal downtime for repairs and maintenance and based on theaverage metal content for the 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.

 

39

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SUMMARY OPERATING DATA

 

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

 
| ** **                             | ** ** | **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 |   |

 

40

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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’s Metals WeekDealer Oxide

 

ORE RESERVES:

 

Ore reserves are thoseestimated quantities of proven and probable material that may beeconomically mined and processed for extraction of their mineral content. Orereserve estimates are based on engineering evaluations of assay values derivedfrom the sampling of drill holes and other openings. We believe that thesamplings taken are spaced at intervals close enough to render the estimatesreliable. The ore reserves estimates include assessments of the metallurgy todetermine copper recovery by flotation process and column leaching, as well aseconomic, marketing, legal, environmental, governmental, and other necessaryconsiderations.

 

Annually our engineeringdepartment reviews in detail the reserve computations. In addition, theengineering department reviews the computation when changes in assumptionsoccur. Changes can occur for price or cost assumptions, results in fielddrilling or new geotechnical parameters. We also engage third party consultantsto review mine planning procedures.

 

Pursuant to SEC guidance,the reserves information in this report are calculated using average metalsprices over the most recent three years unless otherwise stated. We refer tothese three-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 estimates in this report use $1.261 per poundfor copper and $17.817 per pound for molybdenum, both current prices as of December 31,2005. The current prices for copper and molybdenum were $0.939 and $8.425 as ofDecember 31, 2004 and $0.751 and $3.81as of December 31, 2003.

 

For purposes of our long-term planning, our managementuses metals price assumptions of $0.90 per pound for copper and $4.50 per poundfor molybdenum. These prices are intended to approximate average prices overthe long term. Our management uses these price assumptions, as it believesthese prices reflect the full price cycle of the metals market.

 

For Peruvian operations, commencing in 2003, we haveused reserves estimates based on current average prices as of the most recentyear then ended to determine the amount of mine stripping that is capitalized,units of production amortization of capitalized mine stripping and amortizationof intangible assets. In calculating such items in the case of our MineraMexico subsidiary for periods prior to 2005, we have used reserves estimatesbased on the longer-term price assumptions discussed above.

 

41

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We periodically reevaluate estimates of our orereserves, which represent our estimate as to the amount of unmined copperremaining in our existing mine locations that can be produced and sold at aprofit. These 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 our mines.

 

For more information regarding our reserve estimates,see “Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations–Critical Accounting Policies and Estimates–Ore Reserves”

 

COPPER AND MOLYBDENUM RESERVES BY SITE:

 

**The table below details our copper and molybdenumreserves 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 | % |
| 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)          The Cuajone, Toquepala,Cananea and La Caridad concentrator recoveries calculated for these reserveswere 83.7%, 87.0%, 81.0% and 82.59%, respectively, obtained by using recoveryformulas according to the different milling capacity and geo-metallurgicalzones.

 

(2)          The****ImmsaUnit includes the Charcas, Santa Bárbara, San Martin, Santa Eulalia and Taxcomines.

 

42

----

 

(3)          In preparing thesensitivity analysis, we recalculated our reserves based on the assumption thatcurrent average metal prices were 20% higher and 20% lower, respectively, thanthe actual current average prices for year-end 2005. Reserve results of thissensitivity analysis are not proportional to the increase or decrease in metalprice assumptions. The analysis abovedoes not include our Immsa Unit’s underground mines, for which the sensitivityanalysis 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)          Copper contained in orereserves for open-pit mines is (i) the product of sulfide ore reserves andthe average copper grade plus (ii) the product of in-pit leachablereserves 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       |       |

 

43

----

 

The table below details ourcopper and molybdenum reserves as of December 31, 2005 calculated based onlong-term price assumptions of, $0.90 for copper and $4.50 for 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                  |       | 51,647             |       |
| Average  grade:                                           |       |              |       |                |       |              |       |                      |       |                       |       |               |       |
| Copper                                                    |       | 0.636             | %          | 0.731               | %          | 0.597             | %          | 0.400                     | %          | 0.603                      | %          | 0.48               | %          |
| Molybdenum                                                |       | 0.020             | %          | 0.042               | %          | —            |       | 0.028                     | %          | 0.028                      | %          | —             |       |
| 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                     |       | 248                |       |

 

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(1)          The Immsa Unit includes the Charcas, Santa Barbara, San Martin, SantaEulalia and Taxco mines.

 

(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 necessarymonthly statistical data from our information system (“SRP”), which providesore tons milled and ore grades in the concentrator.

2.               Mined areas are topographically determined andrelated boundaries are built.

3.               Using the “interactive planner” option in ourmining software (Minesight), ore metric tons and grades are calculated insidemined areas over the block model. At this point the current cut-off grade isconsidered.

4.               In the final stage, accumulated tons mined,weighted average grade for ore material and leach is compared with data comingfrom our SRP system.

 

44

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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 errorappears greater than 3%, a detailed evaluation is done to review thedifferences, which normally could result in more in-fill drilling, in order tobetter know the geological characteristics (grade, rock type, mineralizationand alteration) and the spacing of drill holes which are considered in the orebody zone.

 

45

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Item 3. Legal Proceedings

 

Reference is made to theinformation under the caption “Litigation Matters” in Financial Statement Note13 “Commitments and Contingencies” on Page A-105.

 

Item 4. Submission ofMatters to a Vote of Security Holders

 

None.

 

46

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Executive Officers of theRegistrant

 

Set forth below are theexecutive officers of the Company, their ages as of February 6, 2006 andtheir 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                                       |

 

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**GermanLarrea Mota-Velasco** has served as our Chairman of the Boardsince December 1999 Chief Executive Officer from December 1999 to October 2004and as a member of the Board of Directors since November 1999. He has beenChairman of the Board of Directors, President and Chief Executive Officer ofGrupo México (holding) since 1994. Mr. Larrea has been Chairman and ChiefExecutive Officer of Americas Mining Corporation (mining division) 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. Larrea was previously Executive Vice Chairman ofGrupo México and has been a member of the 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.

 

**OscarGonzalez Rocha** has served as our Chief Executive Officersince October 21, 2004 and our President since December 1999. He hasbeen our Director since November 1999. Previously, he was our GeneralDirector and Chief Operating Officer from December 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 was an Alternate Director of Grupo Mexicofrom 1988 to April 2002.

 

**XavierGarcia de Quevedo Topete** has served as Executive VicePresident and Chief Operating Officer since April 12, 2005 and as a memberof our Board of Directors from November 1999 to the present. He has beenthe President and Chief Executive Officer of Minera México from September 2001to April 2005. He was Managing Director of Grupo Ferroviario Mexicano S.A.de C.V., and of Ferrocarril Mexicano, S.A. de C.V. from December 1997 to December 1999,and Director General of Exploration and Development of Grupo Mexico from 1994to 1997. He has been 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. He has been the President and ChiefFinancial Officer of Grupo Mexico’s Mining Division (Americas MiningCorporation) from January 2004 to March 2005 and its Chief FinancialOfficer from 1999 to March 2003. Mr. Gonzalez has been the ChiefFinancial Officer of Minera Mexico from mid-2001 to December 2003. He hadalso headed Grupo Mexico’s Treasury and Investor Relations departments from1999 to 2001. Prior to joining Grupo Mexico, Mr. Gonzalez was a SeniorAssociate at McKinsey & Company, Inc., heading work for clientsin various countries and industry sectors. Mr. Gonzalez has also worked atthe Kimberley-Clark Corporation and the Chicago Board Trade.

 

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

 

47

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Secretary from July 25,2001 to April 25, 2002. He has been General Counsel of Grupo México since May 2001.He is also Assistant Secretary of Grupo México. Previously, he headed the Uniton International Trade Practices of the Ministry of Economy of Mexico with therank of Deputy Vice Minister from January 1998 to mid-May 2001, andwas a negotiator for international matters for said Ministry from 1988 to May 2001.

 

**Jose N.Chirinos Fano** has served as our Comptroller since April 2005and as our Treasurer from April 2004 to April 2005. He has beenDirector of Comptroller and Finance since December 1999. From January 1994until April 2005 he 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 variouspositions in Accounting, Administration and Finance during his 39 years at ourCompany.

 

**MarioVinageras Barroso** has served as our Vice President,Commercial since April 25, 2002. He has been Commercial Director of GrupoMéxico since September 1994 and Corporate Director of Sales of Grupo Méxicosince June 1, 2000.

 

**VidalMuhech Dip** has served as our Vice President, Projects since April 25,2002. He has been Corporate Director of Engineering and Construction of GrupoMéxico since April 1995. Previously, he was Director of Engineering andConstruction of Industrial Minera México from 1985 to 1995.

 

48

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PART II

 

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

 

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

 

The table below setsforth the cash dividends paid per share of capital stock and the high and lowstock prices on both the NYSE, and the BVL for the periods 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 |   |

 

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Note (1) Dividendsper share based on the consolidated/combined results of SCC. Actual dividendsper share prior to the April 1, 2005 acquisition of 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 of 2004 and the year2004, respectively.

 

On January 26, 2006,a dividend of $2.75 per share was announced payable March 3, 2006 toshareholders of record as of February 15, 2006. Our dividend policycontinues to be reviewed at Board of Directors’ meetings, taking intoconsideration the current intensive capital investment program and expectedfuture cash flow generated from operations.

 

For a description oflimitations on our ability of the Company to make dividend distributions, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations andQuantitative and Qualitative Disclosures about Market Risk – Liquidity andCapital Resources” and Note 10 - Financings to our Consolidated CombinedFinancial Statements.

 

Equity Compensation PlanInformation 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 informationon the Company’s equity compensation plans see “Note 14 – Stockholders’ Equity”to the Company’s Consolidated Combined Financial Statements.

 

49

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Item 6. SelectedFinancial Data

 

FIVE-YEAR SELECTEDFINANCIAL AND STATISTICAL DATA

 

The selected historicalfinancial data presented below as of and for the five years ended December 31,2005, includes certain information that has been derived from our consolidatedcombined 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 | ) |
|                                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

50

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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)                      Net debt isdefined 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 beforeincome taxes, minority interest and cumulative effect of change in accountingprinciple, plus fixed charges and amortization of interest capitalized, lessinterest capitalized. Fixed charges are defined as the sum of interest expenseand interest capitalized, plus amortized premiums, discounts and capitalizedexpenses 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.

 

51

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Item 7 and 7.A –Management’s Discussion and Analysis of Financial Condition and Results ofOperations and Quantitative and Qualitative Disclosures about Market Risk

 

# EXECUTIVE SUMMARY

 

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and Quantitative and Qualitative Disclosures about Market Riskrelates to and should be read together with our Audited Consolidated CombinedFinancial Statements as of and for each of the years in the three-year periodended December 31, 2005. Effective April 1, 2005, Southern CopperCorporation acquired substantially all of the outstanding common stock ofMinera México. The acquisition was accounted for in a manner similar to apooling of interests as it involved the reorganization of entities under commoncontrol. Under such accounting, the financial statements of SCC and MineraMéxico are combined on a historical cost basis for all the periods presentedsince they were under the indirect common control of Grupo México during suchperiods. Therefore, unless otherwise noted, the discussion below of ourfinancial condition and results of operations is for us, including our MineraMéxico subsidiary, on a consolidated or combined basis for all periods. Ourcombined financial results may not be indicative of the results ofoperations that actually would have been achieved had the acquisition of MineraMéxico taken place at the beginning of the periods presented and do not purportto be indicative of our future results.*

 

*Thisdiscussion contains forward-looking statements that are based on management’scurrent expectations, estimates and projections about our business andoperations. Our actual results may differ materially from those currentlyanticipated and expressed in the forward-looking statements as a result of anumber of factors. See “Cautionary Statements.”*

 

OVERVIEW

 

Our business is primarilythe 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 ourproducts are largely determined by market forces outside of our control. Ourmanagement, therefore, focuses on production enhancement and cost control toimprove profitability. We believe we achieve these goals through capitalspending programs, exploration efforts and cost reduction programs. Our aim isto remain profitable during periods of low copper prices and to maximizefinancial performance in periods of high copper prices.

 

We discuss below severalmatters that our management believes are important to understand our results ofoperations 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 recent years, we have refocused our plans andbegan steps to internationalize our business and broaden our market exposure.In 2003, we acquired exploration properties in Chile, which are being evaluatedfor potential exploitation. Beginning in 2004, we began tolling copper into rodin Amarillo, Texas. The biggest step, in the new focus, however, is theacquisition of Minera Mexico, see Minera Mexico acquisition below.

 

Operating Cash Costs

 

An overall benchmark usedby us and a common industry metric to measure performance is operating cashcosts 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 ourcash cost per pound to the cost of sales (including depreciation, amortizationand depletion) as presented in the statement of earnings is presented under thesubheading, “Non-GAAP Information Reconciliation,” below. We have definedoperating 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; less byproducts revenue, depreciation,amortization and depletion, workers’ participation and other miscellaneouscharges, the Peruvian royalty charge and the change in inventory levels;divided by total pounds of copper produced and purchased by us. In ourcalculation of operating cash cost per pound of copper produced, and purchased,we credit against our costs, the revenues from the sale of byproducts,principally molybdenum, zinc and silver. We account for this byproduct revenuebecause we consider our principal business to be the production and sale ofcopper. We believe that our company is viewed by the investment community as acopper company, and is valued, in large part, by the investment community’sview of the copper market and our ability to produce copper at a reasonablecost. The increase over the last three years in the price of molybdenum,however, has had a significant effect on our traditional calculation of cashcost and its comparability between periods. Accordingly, we present cash costsbelow with and without crediting the byproduct revenues against our costs.

 

We exclude from ourcalculation of operating cash cost depreciation, amortization and depletion,which are considered non-cash expenses. Exploration is considered adiscretionary expenditure and is also excluded. Workers’ participationprovisions are determined on the basis of pre-tax earnings and are alsoexcluded. Additionally excluded from operating cash costs are inventorychanges, items of a non-recurring nature, and the portion of our mine strippingcosts that we capitalize.

 

Our operating cash costsper pound, as defined, are presented in the table below for the three yearsended 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 ouroperating cash costs per pound to our GAAP cost of sales is presented on page A-77under the subheading “Non-GAAP Information Reconciliation.”

 

The reduction in the cashcosts per pound of copper produced and purchased (including byproduct revenue)in 2005 and 2004 is to a large extent attributable to the increase in themolybdenum sales price. The credit to the above costs for molybdenum salesamounted to $0.617 per pound, $0.412 per pound and $0.102 per pound, in 2005,2004 and 2003, respectively. The cash cost without byproduct revenue increasedin 2005 and 2004 as a result of cost increases, including the cost of petroleumproducts, purchased electricity, maintenance expenses and the cost of replacementparts. In addition, the higher copper prices in 2005 and 2004 also increasedour computation of cash cost, as we include in our calculation the cost ofpurchased metal. The higher value and accordingly the higher cost of copper inthese years, increased our cash cost by $0.017 in 2004 and by a further $0.053in 2005. Additionally, we believe our operating cash costs will increase in2006 and the near-term years as a result of the EITF consensus, which weadopted on January 1, 2006 and is described below under “CriticalAccounting Policies and Estimates–Capitalized Mine Stripping Costs andLeachable Material”. If we had applied this consensus in 2005, 2004 and 2003our pound operating cash cost would have increased by $0.075, $0.056 and$0.052, respectively.

 

Metals Prices

 

The profitability of ouroperations is dependent on, and our financial performance is significantlyaffected by, the international market prices for the products we produce,especially for copper, molybdenum, zinc and silver. Metals prices historicallyhave been

 

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subject to widefluctuations and are affected by numerous factors beyond our control. Thesefactors, which affect each commodity to varying degrees, include internationaleconomic and political conditions, levels of supply and demand, theavailability and cost of substitutes, inventory levels maintained by producersand others and, to a lesser degree, inventory carrying costs and currencyexchange rates. In addition, the market prices of certain metals have onoccasion been subject to rapid short-term changes due to speculativeactivities.

 

We are subject to marketrisks arising from the volatility of copper and other metals prices. Assumingthat expected metal production and sales are achieved, that tax rates areunchanged and giving no effects to potential hedging programs, metal pricesensitivity factors would indicate the estimated change in net earningsresulting from metal 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, weacquired Minera México from Americas Mining Corporation, a subsidiary of GrupoMéxico, our controlling stockholder. Minera México is the largest miningcompany in Mexico and the eleventh largest copper producer in the world on astand-alone basis. On April 1, 2005, we exchanged 67,207,640 newly-issuedshares of our common stock for the outstanding shares of Minera México’s directmajority stockholder, and Minera México became our 99.1% owned subsidiary. As apart of this transaction, on March 1, 2005, we paid a specialtransaction dividend of $100 million to all of our stockholders. Uponcompletion of the merger, Grupo México increased its indirect beneficialownership of our capital stock from approximately 54.2% to approximately 75.1%.On October 20, 2005, our board of directors approved the acquisition of6,386,521 shares of Minera Mexico from Grupo Mexico. The acquired sharesrepresent 0.81833% of the outstanding shares of Minera Mexico and werepurchased for $30.3 million.

 

We are now in the processof integrating two companies that had previously been affiliated but operatedindependently. With this acquisition, we have increased our total copperreserves by 107%, or 23,199 million tons, based on year-end 2004 reserves,and have increased our annual copper production by 81%, equivalent to 320,000tons of copper, based on 2004 production.

 

# Businesssegments

 

Our Company operates in asingle 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 segments are our Peruvian operations, ourMexican open-pit operations and our Mexican underground operations, known asour IMMSA unit. Our Peruvian operations include the Toquepala and Cuajone minecomplexes and the smelting and refining plants, industrial railroad and portfacilities which service both mines. Our Mexican open-pit operations include LaCaridad and Cananea mine complexes, the smelting and refining plants and supportfacilities which service both mines. Our IMMSA unit includes five undergroundmines that produce zinc, lead, copper, silver and gold, a coal and coke mine,and several industrial processing facilities for zinc, copper and silver.

 

Segmentinformation is included in our review of “Results of Operations” and also inNote 19 of our Consolidated Combined Financial Statements.

 

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Inflation and Devaluationof the Peruvian Nuevo Sol and the Mexican Peso

 

Our functional currencyis the U.S. dollar. Portions of our operating costs are denominated in Peruviannuevos soles and Mexican pesos. Since our revenues are primarily denominated inU.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. Inaddition, the dollar value of our net monetary assets denominated in nuevossoles or pesos can be affected by devaluation of the nuevo sol or the peso,resulting in a remeasurement loss in our financial statements. Recent inflationand devaluation 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 andModernization Program

 

Excluding capitalizedstripping, we made capital expenditures of $470.6 million, $228.3 million and$64.9 million in 2005, 2004 and 2003, respectively, and we expect to makecapital expenditures, of approximately $412.0 million in 2006 excluding capitalizedinterest. In general, the capital expenditures and projects described below areintended to contribute to further vertical integration of our operations byincreasing the capacity for production of refined metal products.

 

During 2004 and 2003,Minera México’s capital expenditures were curtailed due to liquidityconstraints imposed by Minera México’s lenders. In late 2004 and during 2005,Minera México’s rate of capital expenditures increased significantly.

 

The table below setsforth our capital expenditures for the years ended December 31, 2005, 2004and 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 notinclude capitalized stripping of $116.4 million, $92.8 million and $79.7million for the years 2005, 2004 and 2003, respectively. Set forth below aredescriptions of some of our current projects and expected capital expenditures.

 

Ilo SmelterModernization:  Our largest outstandingshort-term capital investment project is the Ilo smelter modernization. Theproject is part of our Environmental Compliance and Management Program(known by its Spanish acronym, PAMA), which was approved by the Peruviangovernment in 1997. The project will modernize the smelter and is targeted tocapture no less than 92% of sulfur dioxide emissions, in compliance with Peru’senvironmental requirements. The project is moving ahead on schedule withdetailed engineering completed and construction work in process in order to becompleted by the end of 2006. The anode casting wheel part of this projectis being hot tested and starting in the first quarter of 2006 we will replaceIlo blister production with anodes. This will allow us to directly feed therefinery and eliminate the current cost of re-melting blister into anode form.The budget approved for this project is $500 million, including $389.0 millionexpended through December 31, 2005. We have budgeted $87.5 million forthis project in 2006 excluding capitalized interest.

 

Toquepala Leach DumpProject: *** ***To improve cost containment andproduction efficiency, in 2003 we started a project at Toquepala to install acrushing, conveying and spreading system at the leach dumps. The approvedbudget for this project is $81 million, with $75.5 million expended through December 31,2005. The new system is expected to improve recovery at our leaching facilitiesand will largely eliminate costly truck haulage in the process. The project is94% complete at December 31, 2005. The primary crusher was placed inoperation in August 2005. The overland conveyors 1, 2 and 3, and thegrasshoppers 30 and 31 were put in the production line. The conveying reached itsrated capacity of 6,500 ton/hr. in September 2005. The construction of theramp will continue until final completion of the project, expected in August 2006.

 

Cananea SX/EW Plant: *** ***We intend to increase ourCananea unit’s production of electrolytic copper by building a new SX/EW plant,(SXEW III). The plant will produce electrolytic copper cathodes of ASTM grade 1or LME grade A. The project includes the installation of storage fordeliverables required for operation of the plant and the installation of anemergency power plant and a fire protection system. The project is currentlyunderway. In its first stage, it is expected to produce 10,500 tons ofadditional copper by the end of 2007. Studies for a 22,900 ton subsequentexpansion of the SX/EW plant are also underway. As the Cananea mine has thelargest quantity of our copper reserves we are studying several possibilitiesfor expanding it to a scale that fully maximizes its potential. The approvedbudget for this project, including the subsequent 22,900 tons expansion, is $90million, of which $2.3 million has been expended through December 2005.

 

Nueva Rosita Coal Plant:  We commenced projects to increase theproduction at our Nueva Rosita unit in Coahuila, Mexico. These projects includean upgrade of our Pasta de Conchos mine and re-engineering and modernization ofour coking plant.

 

The Pasta de Conchos mine’sproject includes the open pit development in the east and westzones to increase coal production from 250,000 to 1,000,000 tons peryear and has a capital budget of $40.1 million of which $15.2 million wasexpended through 2005.

 

The coking plant projectincludes the re-engineering and modernization of 21 ovens, with thisre-engineering we expect to increase efficiency in the system to control emissionsduring the discharging of the ovens and provide for continuous operation. Thisproject has a capital budget of $12 million of which $8.7 million was expendedthrough 2005.The expected completion date of the re-engineering part ofthis project is March 2006. The modernization is forecast to be completedin 2009.

 

Other Expenditures:  Increasing the height of dams at QuebradaHonda for tailings impoundment is now under engineering study. The auxiliarydams constructed before will serve as initial dams to increase the impoundmentvolume at Quebrada Honda. The capital

 

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cost budget for thisproject will be ready after completion of the engineering studies, which isexpected in the third quarter 2006.

 

The new PLS dams projectat Huanaquera is for construction of new pregnant solution collection dams forthe Toquepala leaching facility. At year end 2005 this project has reachedapproximately 47% progress. The budget for this project is $32.5 million, $10.6million of which was expended as of December 31, 2005.

 

In order to reduceoperation and maintenance costs and comply with environmental requirements, wereplaced the disc filters at the Toquepala concentrator with a new verticalpress filter. The project was completed in 2005 at a cost of $3.7 million.

 

Proposed Projects:  We have a number of projects that webelieve may develop in the future. We evaluate new projects on the basisof expected return, environmental needs, required investment and estimated production,among other considerations.

 

Brownfield projects aredevelopment projects on existing properties, generally taking two to threeyears to complete. Below is a brief description of each of the brownfieldprojects that we believe we may pursue in the future. Information in thetable below, including descriptions and investments are estimates only. Theestimated completion time for each of these projects is approximately twoyears, once started. We cannot assure that it will undertake any of these projectsor that the 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) Excludingcapitalized interest.

 

In addition, in December 2005we announced our plans for a 450 Megawatt power generation plant in Mexico tosupply our own facilities. We anticipate that the project, which is currentlyout for bids, will be built and managed by an independent power company and ourobligation will be the supply of coal from our reserves and an agreement to usethe power output. We expect this plant will give us the ability tosubstantially reduce and control our power cost, as we will supply coal fromour mines. We believe we will be able to reduce the swings caused by thevariation in the international price of energy, a major element of ouroperating cost. The project, expected to be finished in 2008, will createnearly 900 permanent jobs, 3,000 jobs during the construction stage, and willexceed Mexican and international environmental standards. We also haveadditional projects that we are considering and may pursue.

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

** **

Our discussion andanalysis of our combined financial condition and results of operations, as wellas quantitative and qualitative disclosures about market risks, are based uponour consolidated combined financial statements, which have been prepared inaccordance with U.S. GAAP. Preparation of these consolidated combined financialstatements requires our management to make estimates and assumptions thataffect 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 the ultimate outcome for these itemsbased on historical trends and other information available when the financial

 

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statements are prepared.Changes in 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 the nature of the estimate makes itreasonably possible that actual results could materially differ from amountsestimated include: carrying value of the ore reserves that are the basis forfuture cash flows estimates and units-of-production depreciation andamortization calculations; revenue recognition; capitalized mine strippingcosts and leachable material; and asset retirement obligations. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates 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 are intended to approximate average prices overthe long term. Ore reserves based on these prices are the basis for ourinternal planning, including the preparation 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 SECguidance, the reserves information in this report is calculated using averagemetals prices over the most recent three years, 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 estimates in this report use $1.261 per pound for copper and $17.817per pound for molybdenum, both current average prices as of December 31,2005. The current average prices for copper and molybdenum were $0.939 and$8.425, respectively, as of December 31, 2004 and $0.751 and $3.81,respectively, as of December 31, 2003.

 

Certain financialinformation is based on reserve estimates calculated on the basis of currentaverage prices. These items include the amount of mine stripping that iscapitalized, units of production amortization of capitalized mine stripping andamortization of intangible assets. For our Peruvian mines, commencing in 2003,and for our Mexican operations commencing in 2005 we have used reserveestimates based on current average metals prices as of the most recent yearthen 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 MineStripping Costs and Leachable Material:*** ***In carrying out our mining operations, we are required toremove waste material to access mineral deposits. Because the concentration ofmineral deposits is not evenly distributed throughout the ore body, there areperiods during the life of the mine in which we mine more waste as compared toore produced, and periods during which we mine less waste as compared to oreproduced. These mining costs are commonly referred to as “stripping” costs.

 

For each of our existingmines in the production stage, our mine engineers have calculated alife-of-mine stripping ratio that represents our estimate of the total amountof waste to be removed at each mine divided by the estimated total proven andprobable reserves at such mine. The mine stripping ratios are used to determinethe amount of mine production costs to be charged against earnings. In periodswhen the actual ratio of waste to mineral ore extracted exceeds thelife-of-mine stripping ratios, we capitalize production costs associated withmining operations in proportion to the excess waste mined. Such capitalizedcosts are included in net capitalized mine stripping, and are amortized tooperations using the units of production method. This charge to operations forthe amortization of deferred stripping costs could differ materially betweenreporting periods to the extent that there were material changes in the valueof proven and probable reserves. Copper resources contained in piles ofleachable materials that have been extracted from the mines are not included inthe determination of units of production amortization. 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 weare stripping at the higher rates, increased mining costs associated with thehigher 

 

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tonnages are incurred.Costs of this nature are necessary in a mining operation to ensure theavailability of mineable ore in future periods. The deferred strippingaccounting method has been generally accepted in the mining industry wheremining operations have diverse grades and waste-to-mineral ore ratios; however,industry practice does vary.

 

At the March 17,2005 meeting of the Emerging Issues Task Force (EITF), the EITF reached aconsensus that stripping costs incurred during the production phase of a mineare variable production costs that should be included in the costs of theinventory produced (extracted) during the period that the stripping costs are incurred.The EITF noted that the consensus does not address the accounting for strippingcosts incurred during the pre-production phase of a mine. The consensus withrespect to this issue was ratified by the FASB on March 30, 2005, and willbe effective for the first reporting period in fiscal years beginning after December 15,2005, with early adoption permitted. In its June 15-16, 2005 meeting, theEITF also approved a modification to the transition provisions. On January 1,2006 we adopted this consensus by reversing $499.5 million of net cumulativecapitalized stripping cost and capitalized leach inventory as of December 31,2005 and recording a net charge of $322.9 million to retained earnings afterrecognition of workers’ participation and tax benefit of $176.6 million. Inaddition, near-term future operating income could be negatively impacted on theextent that costs previously capitalized are expensed.

 

If we were to haveexpensed all production stripping costs and capitalized leaching costs associatedwith our mining operations as incurred, net operating cost would have increasedby $43.0 million, $56.3 million and $53.9 million for the years ended December 31,2005, 2004 and 2003, respectively.

 

We further discusscapitalized mine stripping costs and leachable material in Notes 2 and 5 to ourConsolidated Combined Financial Statements included herein.

 

Asset RetirementObligation:*** ***Our mining andexploration activities are subject to various laws and regulations governingthe 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. Theseestimates are based on inflation assumptions using the U.S. Consumer PriceIndex and using our risk-free credit rate (which is based on our creditstatus). Actual costs incurred in future periods could differ from amountsestimated. Additionally, future changes to environmental laws and regulationscould increase the extent of reclamation and remediation work required to beperformed by us. Any such increases in future costs could materially impact theamounts charged to operations for reclamation and remediation.

 

We further discuss AssetRetirement Obligation in Note 9 to our consolidated combined financialstatements 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 is recorded at a provisional price at the timeof shipment. The provisionally priced copper sales are adjusted to reflectforward copper prices based on LME or COMEX 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. In the case of molybdenumsales, for which there are no published forward prices, the provisionally pricedsales are adjusted to reflect the market prices at the end of each month untila final adjustment is made to the price of the shipments upon settlement withcustomers pursuant to the terms of the contract.

 

The following are theprovisionally priced copper and molybdenum sales outstanding 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 salesadjustments included in accounts receivable and net sales 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 thatthe final pricing of these sales will not have a material effect on the Company’sfinancial position of results of operations.

 

Results of Operations

 

The following tablehighlights key combined financial and operating results for each of the yearsin 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 outlinesthe average published market metals prices (rounded to the nearest cent) forour metals for each of the years ended December 31, 2005, 2004 and 2003.

 

60

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**AverageMarket 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 | % |

 

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(1) Platt’s MetalsWeek Dealer Oxide.

 

# SegmentSales Information

 

The following tablepresents the volume of sales by segment of copper and our significantbyproducts, 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 |   |

 
| ** **                                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Byproduct sales (million pounds, except 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 million in 2004, an increase of$1,015.9 million or 32.8%. The increase was attributable to significant

 

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increases in metal pricesin 2005, particularly for copper, which rose approximately 30%, and molybdenum,which rose 94.7%. Sales volumes for copper declined by 24.5 million pounds in2005 a decrease of 1.6% compared with 2004. This decrease in copper salesvolume, as well as a decrease in the volume of silver sold, was to a large part offsetby increases in the volume of molybdenum and zinc sales.

 

The table below presentsinformation regarding the volume of our copper sales 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 2004period. The increase was due to the resumption of production at IMMSA’s SantaEulalia unit. Santa Eulalia’s operations were suspended from 2000 through 2004as the facilities were being modernized. The work at the Santa Eulalia mine wasdelayed due to liquidity issues of Minera Mexico in some years prior to 2004.Increased 2005 production from Santa Eulalia amounted to 27.6 million pounds.Grade decreases at our other zinc mines reduced somewhat the increase fromSanta Eulalia. In January 2006 an electrical fire at a power sub-stationat the San 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% ofnet sales in 2005 compared with 68.1% in 2004. Sales of byproducts in 2005totaled $1,373.6 million compared with $987.8 million in 2004, an increaseof 39.1%. The increase is principally attributable to significantly increasedsales of molybdenum, resulting from the 94.7% increase in the average marketprice for molybdenum in 2005 compared with 2004. In addition to increased metalprices, increased mine production was also a factor in increasing our byproductsales in 2005, molybdenum production for 2005 was 32.6 million pounds comparedwith 31.7 million pounds in 2004, an increase of 3%. The table below providesthe sales of our byproducts as a percentage of our total net sales.

 

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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 anddepletion)***

 

Our cost of sales(exclusive of depreciation, amortization and depletion) in 2005 was $1,635.4million, compared with $1,334.3 in 2004, an increase of $301.1 million, or22.6%. The principal elements of the cost of sales increase are a $72.5 millionincrease in the cost of purchased electric power and fuel, an increase of $27.2million for mining royalties, and a $125.6 million increase in worker’sparticipation, including an adjustment of $36.3 million, related to a change inthe method of calculating the amount of the statutory worker’s participationfor the Mexican workers, see “Liquidity and Capital Resources” for a discussionof this matter. In addition, the higher value of copper in 2005 increased ourcost of sales by $16.2 million over 2004, as we supplemented our copperproduction with copper acquired from third parties.

 

During 2005, in responseto an industry wide shortage of mine truck tires we put in place a tirerationalization program to optimize our tire usage. The program, whichincludes; road maintenance improvements; closer tire maintenance monitoring,including temperature and pressure checks; and stricter truck handlingprocedures; was in place for 2005 and resulted in an 18% reduction in tireconsumption when compared to 2004. While we expect the supply deficit to beresolved by mid-2007, we continue to monitor the supply situation for thisvital commodity and expect to satisfy our needs through prudent consumptionpractices and the development of alternative supply sources, if necessary.

 

We expect that cost ofsales will increase in 2006 and the near future years as a result of ouradoption, on January 1, 2006, of the EITF’s, consensus related to minestripping costs. See Critical Accounting and Estimates – Capitalized MineStripping and Leachable Material.

 

***Selling, general and administrative***

 

Our selling, general andadministrative expense in 2005 was $81.1 million, compared with $71.8 millionin 2004, an increase of $9.3 million. Our higher selling, general andadministrative expense in 2005 was principally a result of higher legal,auditing and consulting fees related in part to the acquisition of MineraMexico, to the issuance of new debt, and to the cost associated with compliancewith the Sarbanes-Oxley Act. In addition, the Peruvian tax on bank transferswas $1.4 million higher in 2005.

 

***Depreciation, amortization and depletion***

 

Our depreciation,amortization and depletion expense in 2005 was $277.2 million, compared with$192.6 million in 2004, an increase of $84.6 million. The increase wasprincipally the result of the increase in the amortization of capitalized minestripping costs and leachable materials of $37.0 million and an increase indepreciation related to replacement capital expenditures.

 

***Exploration***

 

Exploration expense in2005 was $24.4 million, compared with $15.6 million in 2004, an increase of$8.8 million. The increase was principally as a result of the drilling andcross path activities at the Tia Maria project in Peru, $3.7 million, and $1.7million and $1.2 million drilling costs in IMMSA and Cananea, respectively.

 

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***Interest expense***

 

Interest expense in 2005was $108.9 million compared with $106.5 million in 2004, an increase of $2.4million. Our currently paid interest expense decreased in 2005 principally as aresult of a reduction of our debt outstanding. However, included in 2005 therewas $15.0 million for the write-off of previously capitalized debt issuancecost for financings prepaid in such years. With respect to our financingprograms reference is made to “Liquidity and Capital Resources” for a furtherdiscussion of this matter.

 

***Capitalized interest***

 

Capitalized interest in2005 was $22.5 million, compared with $10.7 million in 2004, an increase of$11.8 million. This increase is mainly due to the Ilo smelter modernization andthe Toquepala crushing, conveying system for leachable material projects, onwhich capitalized interest increased by $6.4 million and $2.2 million,respectively in 2005.

 

***Interest income***

 

Interest income in 2005was $30.8 million, compared with $8.3 million in 2004, an increase of $22.5million. Our interest income increased principally as a result of higherinterest rates on short term securities and significantly higher investedbalances.

 

***Losson derivative instruments***

 

Loss on derivativeinstruments in 2005 was $22.3 million, compared with $1.4 million in 2004, anincrease of $20.9 million. In 2005, we recorded $23.5 million of loss in copperswaps and a gain of $1.2 million in interest rate swaps. In 2004 we recorded aloss of $1.4 million of interest rate swap.

 

***Loss on debt prepayments***

 

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

 

***Gain on disposal of property***

 

Gain on disposal ofproperty in 2004 was $53.5. This amount includes gain from the sale of non-coreproperty of our Mexican operation.

 

***Other expense***

 

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

 

***Income taxes***

 

Income taxes in 2005 were$589.7 million, compared with $433.7 million in 2004, an increase of $156.0million and include $576.3 million and $420.2 million of Peruvian and Mexicanincome taxes, $13.4 million and $13.5 million for US Federal and state taxesfor 2005 and 2004, respectively. US income taxes are primarily attributable toinvestment income as well as limitations on use of foreign tax credits indetermining the alternative minimum tax.

 

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

 

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Included in the 2005 taxprovision is a refund of $43.4 million received by Minera Mexico forasset-based taxes (minimum income tax) paid in prior years. Without the benefitof this credit the Company’s effective tax rate for the 2005 year wouldincrease to 31.6%

 

***Minority interest***

 

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

 

***Net earnings***

 

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

 

**Segment Operating IncomeInformation – 2005 vs. 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 Peruvianoperations in 2005 were $2,179.9 million, compared with $1,715.9 million in2004, an increase of $464.0 million. This increase was principally due tosignificant increases in the price of copper and molybdenum. Copper salesvolume decreased by 39.0 million pounds in 2005 principally as a result oflower production at Toquepala and Cuajone due to lower ore grade and a decreasein SX/EW production due to lower PLS grades.

 

Operating costs andexpenses at our Peruvian operations in 2005 were $879.4 million, compared with$788.8 in 2004, an increase of $90.6 million principally due to higher cost ofsales. The increase in cost of sales (exclusive of depreciation, amortizationand depletion) of $83.8 was principally the result of the higher cost of fuel,workers’ participation provision and Peruvian royalty charges.

 

Fuel costs, a keycomponent of our costs, were higher by $31.4 million in 2005. Our cost forworkers’ participation increased $27.6 million in 2005. This cost is calculatedbased on 8% of our Peruvian operations pre-tax earnings and increased as ourprofits increase. A Peruvian royalty provision which was instituted in June 2004added $22.7 million to our cost in 2005.

 

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

 

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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 ourMexican open-pit operations in 2005 were $1,769.6 million, compared with$1,189.7 million in 2004, an increase of $579.9 million or 48.7%. The increasein net sales was principally a result of significant increases in the price ofcopper and molybdenum and increased sales volume.

 

Operating cost andexpenses at our Mexican open-pit operations in 2005 was $1,054.2 millioncompared with $665.9 million in 2004, an increase of $388.3 million or 58.3%.This increase was principally the result of higher cost of sales and higherdepreciation, amortization and depletion in 2005. The increase in cost of salesof $288.4 million was principally the result of higher sales volumes, increasedfuel and purchased electric power cost, increased maintenance cost, higherpurchased metal costs, higher exchange losses, and increased workersparticipation. Production and sales volume increases added to our 2005 costs,as did an increase of $104.0 million for purchased metals from third parties.Our cost for workers’ participation, including an adjustment of $36.3 million,increased $106.1 million in 2005. This cost is calculated based on 10% ofpretax earnings and increases as our profits increase. Fuel and purchasedelectric power cost were higher by $31.4 million in 2005. Maintenance cost wasalso higher by $38.9 million in 2005. In addition, an exchange loss of $18.5million was reported in 2005 as a result of the appreciation of the pesoagainst the U.S. dollar during the year. The increase in depreciation,amortization and depletion of $85.7 million in 2005 was principally due to theamortization of capitalized mine stripping and leachable cost.

 

Operating income in 2005was $715.4 million, compared with $523.8 million in 2004, an increase of $191.6million or 36.6%. The operating income increased as a result of the factorsdescribed 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 IMMSAunit in 2005 were $448.7 million, compared with $317.1 million in 2004, anincrease of $131.6 million or 41.5%. The increase was due to higher salesprices in 2005 for copper, zinc and silver. In addition, an increase in salesvolume of copper and zinc added to the 2005 sales increase. Zinc from ourreopened Santa Eulalia mine added 22.7 million pounds to 2005 zinc sales.

 

Operating costs andexpenses at our IMMSA unit were $380.3 million in 2005, compared with $272.9million in 2004, an increase of $107.4 million or 39.4%. This increase wasprincipally the result of increased sales volumes for copper and zinc, thehigher cost of fuel and purchased electric power, higher volume of metalpurchased from third parties and an increase in the cost of contractorservices. In 2005, cost of sales (exclusive of depreciation, amortization anddepletion) increased $99.7 million, principally as a result of higherproduction and sales volumes for copper and zinc, which included an increase of$64.6 million for purchased metals from third parties.

 

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Our fuel and purchasedelectric power costs, a key component of our costs, were higher by $10.9million in 2005. In addition, the cost of contractor services, principally forour coal operations, increased by $13.0 million in 2005.

 

Operating income in 2005was $68.4 million, compared with $44.2 million in 2004, an increase of $24.2million or 54.8%. The operating income increased as a result of the factorsdescribed above.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and expenses and operating income displayed above will not be directlyequal to amounts in our consolidated combined statement of earnings because theadjustments of intersegment operating revenues and expenses must be taken intoaccount. Please see Note 19 to the financial statements.

 

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

 

***Net sales***

 

Our net sales in 2004were $3,096.7 million, compared with $1,576.6 in 2003, an increase of $1,520.1million or 96.4%. The increase was principally attributed to significantincreases in metals prices in 2004, particularly those of copper, for which ouraverage sales prices rose 67.9%, and molybdenum, for which our sales pricesrose 286.3%. In addition to increased metals prices, increased mine productionwas also an important factor in increasing our net sales in 2004. Copperproduction for 2004 was 718,007 tons, compared with 665,916 tons in 2003, anincrease of 7.8%.

 

The table below presentsinformation regarding the volume of our copper sales for each of the yearsended 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-pitcopper mines recorded increased output in 2004 compared with 2003. The Cananeamine recorded the most significant increase of 20.7%, equivalent to 29,003additional tons of copper, primarily due to a 29.3% increase in millthroughput. The Toquepala mine registered the second highest productionpercentage increase of 6.8%, contributing an additional 12,849 tons of copper.The increase in production at the Toquepala mine was primarily attributable toa higher ore grade of 0.817% in 2004 compared with 0.749% in 2003. The Cuajoneand La Caridad mines also delivered higher production output with Cuajonecontributing an additional 9,861 tons and La Caridad contributing an additional3,454 tons in 2004 compared with 2003. Cuajone’s additional output wasprimarily as a result of higher ore grades, while La Caridad’s higher outputwas as a result of increased production despite marginally lower ore 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 anddepletion)***

 

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%.Our higher cost of sales was principally due to increased production in 2004.As discussed above, copper mine production for 2004 increased 7.4% with allfour of our open-pit copper mines registering increased output in 2004 comparedwith 2003. Cost of sales (exclusive of depreciation, amortization anddepletion) also increased as a result of increases in the prices of certaininputs, including power, maintenance expenses and certain replacement parts.Cost of sales (exclusive of depreciation, amortization and depletion)additionally increased in 2004 as a result of an increase in the volume andcost of the copper concentrate we purchased from third parties in 2004. Wepurchase concentrate from third parties in order to produce additional copperrods for which we receive premium pricing, as well as to meet our commitmentsto customers. 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 ofcapitalized mine stripping costs and leachable materials of $10.6 million. Theincrease was also as a result of an increase in maintenance capitalexpenditures. In addition, the depreciation expense increased $6.2 million as aresult of a larger amount of capital expenditures incurred in 2004. Our totalcapital expenditures in 2004 were

 

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$228.3 million compared with $64.9 million in 2003.Our average depreciation rate was approximately 3% for 2004. We expectamortization will decrease in the future as a result of the aforementioned EITFconsensus.

 

***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 and drillingactivity 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 debt prepayments***

 

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 of properties***

 

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:***

 

***Peruvianoperations***

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **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 and operatingincome 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.

 

**Liquidityand Capital Resources**

 

Thefollowing discussion relates to our liquidity and capital resources for each ofthe years in the three year period ended 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 fromoperating activities was $1,644.2 million, $1,172.4 million and $64.8 millionin 2005, 2004 and 2003, respectively. The increases in 2005 and 2004 were forthe most part the result of higher net earnings in both years, which werethe result of improved prices for our products and for copper and molybdenum inparticular.

 

In 2005, our earningswere $1,400.1 million, approximately 85.2% of the net operating cash flow.Significant non-cash items deducted from, or added to, our earnings included,depreciation, amortization and depletion of $277.2 million, which positivelyincreased operating cash flow; and capitalized mine stripping and leachablematerial of $116.4 million and a deferred tax benefit of $42.3 million, whichreduced operating cash flow. Additionally, changes in working capital balancesadded a further $89.1 million to our net cash from operating activities.

 

In 2004, our earningswere $982.4 million, approximately 83.8% of the net operating cash flow.Significant non-cash items deducted from, or added to, our earnings included,depreciation, amortization and depletion of $192.6 million and a deferred taxprovision of $54.4 million, which positively increased our operating cash flow;and capitalized mine stripping and leachable material of $92.8 million whichdecreased our operating cash flow. In addition, $53.5 million a gain from thesale of non-core Mexican properties is deducted from earning to arrive atoperating cash flow, the contribution of these funds is included in investingcash flows. Changes in working capital assets and liabilities increased netoperating cash flow by $70.2 million. Some of these working capital accountsincluded some rather large changes in 2004, the growth of accounts receivablereduced operating cash flow by $261.3 million, which was the result of theimprovement in metal prices from the beginning of 2004 to the end. LME andCOMEX

 

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copper prices increasedby 49 cents and 48 cents during 2004, respectively, in addition the price formolybdenum increased by $10.80 per pound during 2004. Improving operating cashflow was the build up of payables and accruals during 2004, largely as a resultof increased worker participation and income tax provisions driven by higherearnings, payment of which carries over into the next year.

 

In 2003, our earningswere $83.5 million, approximately 128.8% of net operating cash flow.Depreciation, amortization and depletion amounted to a $177.1 million add backand capitalized mine stripping and leachable material amounted to a $79.7deduction to reach operating cash flow. In addition, working capital changesdecreased operating cash flow by $143.8 million.

 

***Cash Flows fromInvesting Activities***

 

Net cash used forinvesting activities was $425.4 million in 2005 compared to $219.5 million in2004. We made capital expenditures in an aggregate amount of $470.6 million in2005, including $234.5 million for the Ilo, Peru smelter modernization project,$32.8 million for the Toquepala crushing, conveyor system for leachablematerial, $9.1 million for the Toquepala leach dump project and $194.2 millionprincipally for equipment replacements and upgrades, of which $148.7 millionwas for our Mexican operations. Cash flow provided by investing activities in2005 was from the sale of marketable securities of $45.3 million.

 

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

 

Net cash used forinvesting activities was $59.7 million in 2003. Capital expenditures in 2003amounted to $64.9 million which was principally used for equipment replacementsand upgrades. During 2003 Minera Mexico’s capital expenditures were curtaileddue to liquidity restraints imposed by its lenders.

 

***Cash Flows fromFinancing Activities***

 

For the year ended December 31,2005, cash used for financing activities amounted to $1,055.6 million. Newfinancings undertaken in 2005 resulted not only in improved terms for our debtbut also reduced our debt burden by $158.2 million. In addition, we distributed$853.9 million to our shareholders in 2005 and $5.3 million to our remainingminority interest investors. In October, 2005, we purchased an additional 6.4million shares of Minera Mexico, representing 0.8133% of the outstandingshares, for $30.3 million.

 

For the year ended December 31,2004, cash used for financing activities amounted to $540.6 million mainly as aresult of a net debt repayment of $340.9 million and dividends paid of $191.4million.

 

For the year ended December 31,2003, cash provided from financing activities amounted to $185.6 million mainlyas a result of a net capital stock increase of $93.7 million related to MineraMéxico, cash previously restricted as collateral of $88 million wasreceived back as part of the repayment of debt and proceeds of $50.0million received from the issuance of our corporate bonds. Reducing cashprovided from financing activities were dividends paid to stockholders of $45.4million.

 

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***Other LiquidityConsiderations***

 

In June 2004, thePeruvian Congress enacted legislation imposing a royalty charge to be paid bymining 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%charge, based on sales, applicable to the value of the concentrates produced atour Toquepala and Cuajone mines. We made a provision of $40.3 million and $17.6million in 2005 and 2004 respectively, for this new charge, which went intoeffect as of June 25, 2004. During 2005 we made payments of $47.4 millionrelated to this charge. In addition, the Constitutional Tribunal stated thatthis charge applied to all concessions held in the mining industry. We believethat this interpretation is incorrect and intend to protest an imposition ofthe royalty charge on our SX/EW production, which is operating under a taxstability agreement (“Guaranty and promotional Measures for Investment Contract”).Provisions made by the Company for the royalty charge do not includeapproximately $5.9 million of additional potential liability relating to itsSX/EW production from June 30, 2004 through December 31, 2005. It isanticipated that the royalty charge will have an adverse effect on ouroperating income and cash flow.

 

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

 

While our combinedfinancial results show a positive cash position over the past three years, ourMinera México subsidiary, which we acquired on April 1, 2005, has facedchallenges to its liquidity as a result of low metals prices in previous years.These challenges resulted in its noncompliance with certain debt covenants in2001 and 2002. In April 2003 Minera México restructured certain of itsindebtedness, entering into a common agreement among Minera México, MineraMéxico’s principal subsidiaries (as guarantors) and the holders of suchindebtedness. Minera México paid amounts owing under this agreement withproceeds from a new credit facility established in October 2004. See “Financing”below.

 

In May 2005, theMexican Supreme Court rendered a decision that changed the method of computingthe amount of statutory workers’ profit sharing required to be paid by someMexican companies, including our Minera México subsidiary. The Supreme Court’sruling in effect prohibited the application of net operating loss carryforwardsin computing the income used as the base for determining the workers’ profitsharing amounts. We recognized in our 2005 results of operations a charge of$36.3 million for workers’ profit participation related to 2004. Inaddition, the ruling may affect our future results of operations andliquidity to the extent we pay higher workers’ profit sharing amounts.

 

***Financing***

 

At December 31,2005, we had outstanding borrowings of $1,178.3 million (before deduction of$6.3 million of debt discount valuation accounts), compared with $1,330.3 millionat December 31, 2004. At December 31, 2005, our outstanding debt as apercentage of total capitalization (the total of debt, minority interest andstockholders’ equity) was 26.0%, compared with 32.0% at December 31, 2004.At December 31, 2005, our cash and marketable securities amounted to$876.0 million, compared with $756.0 million at December 31, 2004.

 

Below we describe ouroutstanding long-term indebtedness, as well as certain financial covenants thataffect us. See Note 10 of the Consolidated Combined Financial Statements for afurther description of our long-term indebtedness.

 

On July 27, 2005 SCCissued $200 million 6.375% Notes due 2015 and $600 million 7.5% Notes due 2035.The notes are senior unsecured obligations of the Company. The net proceedsfrom the issuance and sale of the notes were used to repay outstandingindebtedness of our Peruvian and Mexican Operations, under its $200 million and$600 million ($480 million outstanding) credit facilities, respectively, andthe balance will be used for general corporate purposes. SCC filed aRegistration 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 $590.5million of the 7.5% old

 

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notes due 2035 weretendered in exchange for an equivalent amount of new notes. The new notes havebeen registered under the U.S. securities law. The indentures relating to thenotes contain certain covenants, including limitations on liens, limitations onsale and leaseback transactions, rights of the holders of the notes upon theoccurrence of a change of control triggering event, limitations on subsidiaryindebtedness and limitations on consolidations, mergers, sales or conveyances.All of these limitations and restrictions are subject to a number ofsignificant exceptions, and some of these covenants will cease to be applicablebefore the notes mature if the notes attain an investment grade rating. At December 31,2005, we are in compliance with these covenants.

 

In January 2005, theCompany signed a $200 million credit facility with a group of banks led byCitibank, N.A. Proceeds of this credit facility were used to prepay $199million the outstanding bonds of the Company’s Peruvian bond program. On July 28,2005, a portion of the proceeds from the July 27, 2005 financing, notedabove, were used to repay this facility.

 

In 1998, Minera Méxicoissued $500 million of unsecured debt, which we refer to as its Yankee bonds.The Yankee bonds were offered in two series: Series A for $375 million,with an interest rate of 8.25% and a 2008 maturity, and Series B for $125million, with an interest rate of 9.25% and a 2028 maturity date. During 2005,the Company repurchased $143.0 million of the Series A bonds. The bonds containa covenant requiring Minera Mexico to maintain a ratio of EBITDA to interestexpense of not less than 2.5 to 1.0, as such terms are defined by the bonds. AtDecember 31, 2005, Minera Mexico is in compliance with this covenant.

 

In 1999, the Companyestablished a $100 million credit facility with Mitsui & Co. Thefacility has a 15-year term with an interest rate of Japanese LIBO plus 1.25%(Japanese LIBO for this loan was 4.67% at December 31, 2005). The facilityis collateralized by the assignment of copper sales receivables of 31,000 tonsof copper per year and requires an escrow account to fund scheduled payments.The facility requires that we maintain a minimum stockholders’ equity of $750million and a ratio of debt to equity no greater than 0.5 to 1.0, all as suchterms are defined by the facility. Reduction of Grupo México’s direct orindirect voting interest in our Company to less than a majority wouldconstitute 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 pursuant to a facility with a finalmaturity date in 2009. The credit facility bore interest at LIBOR plus 200basis points. The proceeds from the credit facility were used to repay in fullthe amounts outstanding under a common agreement with holders of Minera Mexico’ssecured export notes and other financial institutions. The loan was secured bya pledge of Minera Mexico’s principal properties and was guaranteed by itsprincipal subsidiaries. In 2005, the Company prepaid the total amount of thisfinancing, using in part proceeds from the July 27, 2005 Noteissuance.

 

While we recently prepaidall amounts outstanding under our Peruvian bond program, we are authorized byPeru’s *Comisión Nacional Supervisora deEmpresas y Valores* (CONASEV) to issue additional bonds.

 

We expect that we willmeet our cash requirements for 2006 and beyond from internally generated funds,cash on hand and from additional external financing if required.

 

***Capital Expenditure Programs***

 

A discussion of ourcapital programs is an important part of understanding our liquidity andcapital resources. For information regarding our capital expenditure programs,see the Discussion under the caption “Expansion and Modernization Program” ofthis section.

 

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**ContractualObligations**

 

The following tablesummarizes our significant contractual obligations as 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 debtcalculated at rates in effect at December 31, 2005. Please refer to “Note10-Financings” of our Consolidated Combined Financial Statements for adescription of our long-term debt arrangements and credit facilities.

 

We have a commitment topurchase power for our Peruvian operations from Energía del Sur, S.A. until2017. Amounts indicated on the above table are based on power costs in 2005,which are subject to change as energy generation costs change and ourforecasted power requirements through the life of the agreements change.

 

Pursuant to our PAMA wehave committed to bring our operations into compliance with environmentalstandards established by the government of Peru. The capital purchaseobligation in the above table is for the estimated cost of completing the Ilosmelter modernization, our remaining obligation under our PAMA.

 

For an additionaldiscussion on this matter see “Environmental matters-Peruvian operations”, in “Note13-Commitments and Contingencies” of the Consolidated Combined FinancialStatements.

 

**Quantitativeand Qualitative Disclosure about Market Risk**

 

A portion of ouroutstanding debt bears interest at variable rates and accordingly is sensitiveto changes in interest rates. Interest rate changes would also result in gainsor losses in the market value of our fixed rate debt portfolio due todifferences in market interest rates and the rates at the inception of the debtagreements. Based upon our indebtedness at December 31, 2005, a change ininterest rates of 1 percent (or 100 basis points) would impact net income andcash flows by $0.8 million annually.

 

We are also exposed tomarket risk associated with changes in foreign currency exchange rates ascertain costs incurred are in currencies other than our functional currency. Tomanage the volatility related to the risk, we may enter into forwardexchange contracts, currency swaps or other currency hedging arrangements. Wehave only had limited involvement with derivative instruments and do not usethem for trading purposes.

 

We are subject to marketrisks arising from the volatility of copper and other metal prices. Assumingthat expected metal production and sales are achieved, that tax rates areunchanged, and giving no effects to potential hedging programs metal pricesensitivity factors would indicate estimated change in net earnings resultingfrom metal price changes in 2006 as provided in the table below.

 

76

----

 
| ** **                                                    | ** ** | **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 usedderivative instruments to manage our exposure to changes in commodity prices.However, at December 31, 2005, we hold no derivative instruments.

 

**Impactof New Accounting Standards**

 

For a description of theimpact of new accounting standards, see Note 2, “Summary of SignificantAccounting Policies–Impact of new accounting standards,” to our ConsolidatedCombined Financial Statements.

 

**Non-GAAPInformation Reconciliation**

 

We provide areconciliation of operating cash cost to GAAP cost of sales in millions ofdollars 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.

 

77

----

 

Item 8. Financial Statements and Supplementary Data

 

Southern CopperCorporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF EARNINGS

 
| **For the years ended December 31,  (in thousands, except for per share amounts)** | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| 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 notesare an integral part of these consolidated combined financial statements.

 

78

----

 

Southern CopperCorporation

and Subsidiaries

CONSOLIDATED COMBINED BALANCE SHEET

 
| **At December 31,  (in thousands)**                                                                                    | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| 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 notesare an integral part of these consolidated combined financial statements.

 

79

----

 

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CASH FLOWS

 
| **For the years ended December 31,  (in thousands)**     | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
|                                                                                   |       |       |       |      |       |     |       |
| 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 |   |

 

80

----

 
| ** **                                                                        | ** ** | **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 theseconsolidated combined financial statements.

 

81

----

 

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATED COMBINEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 
| **For years ended December 31,**                                                        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------|------------|-------------|------------|
| **(in thousands)**                                                                                     | ** ** | **2005**       | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|                                                                                                        |       |           |       |        |       |        |       |
| 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 consolidated combinedfinancial statements.

 

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SOUTHERN COPPER CORPORATION AND SUBSIDIARIES

NOTESTO CONSOLIDATED COMBINED FINANCIAL STATEMENTS

 

**NOTE 1-DESCRIPTION OF THEBUSINESS:**

 

The consolidated combined financial statementspresented herein consist of the accounts of Southern Copper Corporation (“SCC”)(formerly named Southern Peru Copper Corporation) and its subsidiaries as wellas those of Minera México, S.A. de C.V., (“MM”) and its subsidiaries. EffectiveApril 1, 2005, SCC acquired substantially all of the outstanding common stockof Minera Mexico, as further described below. Unless the context otherwise requires, the term “Company” refers to bothSCC and Minera Mexico as consolidated (after March 31, 2005) or combined (priorto April 1, 2005).

 

Effective April 1, 2005, Grupo México, through itssubsidiary, sold its approximately 99.15% shareholding in Minera Mexico to SCCin return for the issuance to AMC of 67.2 million new shares of common stock ofSCC.  The transaction resulted in GrupoMéxico increasing its indirect equity ownership in SCC to approximately 75.1%from its prior indirect interest of approximately 54.2%.  As part of this transaction, SCC paid aspecial transaction cash dividend of $100 million on March 1, 2005.  On October 20, 2005, the Company’s board ofdirectors approved the acquisition of 6,386,521 shares of Minera Mexico fromGrupo Mexico.  The acquired sharesrepresent 0.81833% of the outstanding shares of Minera Mexico and werepurchased for $30.3 million.

 

The acquisition of Minera Mexico by SCC isaccounted for in a manner similar to a pooling of interests since it involvedthe reorganization of entities under common control.  Under such accounting, the financialstatements of Minera Mexico and SCC are combined on a historical cost basis forall the periods presented since they were under common control during all ofthese periods.

 

The Company is an integrated producer of copperand other minerals, and operates mining, smelting and refining facilities inPeru and Mexico.  The Company conductsits primary operations in Peru through a registered branch (the “Branch”).  The Branch is not a corporation separate fromthe Company.  The Company’s Mexicanoperations are conducted through subsidiaries.

 

**NOTE 2-SUMMARY OF SIGNIFICANTACCOUNTING POLICIES:**

 

*Principles of consolidation andcombination–*

 

The consolidated combined financial statementsinclude the accounts of subsidiaries of which the Company has voting control,in accordance with FAS No. 94 Consolidation of All Majority-Owned Subsidiaries.  Such financial statements are prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”).  As mentioned above, thefinancial statements also reflect the recent combination of SCC and Minera Mexicoon a historical cost basis in a manner similar to a pooling of interests.

 

*Use of estimates–*

 

The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Significant items subject to such estimatesand assumptions include the carrying value of ore reserves that are the basisfor future cash flow estimates and units-of-production depreciation andamortization calculations; environmental, reclamation, closure and retirementobligations; estimates of recoverable copper in mill and leach stockpiles;asset impairments (including estimates of future cash flows); bad debts;inventory obsolescence; deferred and current income tax; valuation allowancesfor deferred tax assets; reserves for contingencies and litigation; and fairvalue of financial instruments. Management bases its estimates on the Company’s historical 

 

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experience and on various other assumptions thatare believed to be reasonable under the circumstances.  Actual results could differ from thoseestimates.

 

*Revenue recognition–*

 

Substantially all of the Company’s copper is soldunder annual or other longer-term contracts.

 

Revenue is recognized when title passes to thecustomer.  The passing of title is basedon terms of the contract, generally upon shipment.  Copper revenue is determined based on themonthly average of prevailing commodity prices according to the terms of thecontracts.

 

For certain of the Company’s sales of copper andmolybdenum products, customers are given the option to select a monthly averageLME or COMEX price (as is the case for sales of copper products) or themolybdenum oxide proprietary price of Platt’s Metal Week (as is the case forsales of molybdenum products), generally ranging between one and six monthssubsequent to shipment.  In such cases,revenue is recorded 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.

 

These provisional pricing arrangements areaccounted for separately from the contract as an embedded derivative instrumentunder SFAS No. 133 “Accounting for Derivative Instruments and HedgingActivities”, as amended (“FASB No. 133”). The Company sells copper in blister and refined form at industrystandard commercial terms.  Net salesinclude the invoiced value and corresponding fair value adjustment of therelated forward contract of copper, zinc, silver, molybdenum, acid and othermetals.

 

*Shipping and handling fees andcosts–*

 

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

 

*Cash and cash equivalents–*

 

Cash and cash equivalents include bank deposits,certificates of deposit and short term investment funds with originalmaturities of three months or less at the date of purchase.  The carrying value of cash and cashequivalents approximate fair value.

 

*Marketable securities–*

 

Marketable securities consist primarily ofcertificates of deposits with original maturities greater than 90 days butless than one year.  These deposits areheld to maturity and carried at amortized cost which approximates fair value.

 

*Inventories–*

 

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

 

Work-in-process inventories represent materialsthat are in the process of being converted into a saleable product.  Conversion processes vary depending on thenature of the copper ore and the specific mining operation.  For sulfide ores, processing includes millingand concentrating and the results from the production of copper and molybdenumconcentrates. Molybdenum in-process inventory includes the cost of molybdenumconcentrates and the costs 

 

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incurred to convert those concentrates intovarious high-purity molybdenum chemicals or metallurgical products.

 

Finished goods include saleable products (e.g.,copper concentrates, copper anodes, copper cathodes, copper rod, molybdenumconcentrate and other metallurgical products).

 

Supplies inventories are carried at average costless a reserve for obsolescence.

 

*Property–*

 

Property is recorded at acquisition cost, net ofaccumulated depreciation and amortization. Cost includes major expenditures for improvements and replacements,which extend useful lives or increase capacity and interest costs associatedwith significant capital additions. Maintenance, repairs, normal development costs at existing mines, andgains or losses on assets retired or sold are reflected in earnings as incurred.

 

Mine development includes primarily the cost ofacquiring land rights to an exploitable ore body, pre-production strippingcosts at new mines that are commercially exploitable, costs associated withbringing new mineral properties into production, and removal of overburden toprepare unique and identifiable areas outside the current mining area for suchfuture production.  Mine developmentcosts are amortized on a unit of production basis over the remaining life ofthe mines.

 

Buildings and equipment are depreciated on thestraight-line method over estimated lives from 5 to 40 years or the estimatedlife of the mine if shorter.

 

Property is reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Assets aredetermined impaired when the estimated future undiscounted cash flows expectedto result from the use of the asset are less than the carrying value of theasset.  The Company’s estimate as tofuture undiscounted cash flows takes into consideration, among other things,expected future metal prices, which are based on historical metal prices andprice trends.  The Company measures animpairment loss as the difference between the carrying value of the asset andits fair value as determined taking into consideration the estimated futurediscounted cash flows of the asset.

 

*Asset retirement obligations(reclamation and remediation costs)–*

 

Effective January 1, 2003, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 143, “Accounting forAsset Retirement Obligations”.  The fairvalue of a liability for asset retirement obligations is recognized in theperiod in which it is incurred.  Theliability is measured at fair value and is adjusted to its present value insubsequent periods as accretion expense is recorded. The corresponding assetretirement costs 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 excessamount paid over the book value for investment shares and mining andengineering development studies. Intangible assets are carried at acquisition costs, net of accumulatedamortization and are amortized principally on a unit of production basis overthe estimated remaining life of the mines. Intangible assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of the asset may not berecoverable.

 

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*Debt issuance costs–*

 

Debt issuance costs, which are included in otherassets, are amortized using the interest method over the term of the relateddebt.

 

*Ore reserves–*

 

The Company periodically reevaluates estimates of itsore reserves, which represent the Company’s estimate as to the amount ofunmined copper remaining in its existing mine locations that can be producedand sold at a profit.  Such estimates arebased on engineering evaluations derived from samples of drill holes and otheropenings, combined with assumptions about copper market prices and productioncosts at each of the respective mines.

 

The Company updates its estimate of ore reservesat the beginning of each year. In this calculation the Company uses currentmetal prices which are defined as the average metal price over the precedingthree years. However, in the case of the Company’s recently acquired Mexicansubsidiary, ore reserve estimates prior to 2005 were calculated based on acopper price of $0.90 per pound of copper. The current per pound of copperprice, as defined, was $0.939, $0.751 and $0.76 at the beginning of 2005, 2004and 2003, respectively.  These orereserve estimates are used to determine the amount of mine stripping that iscapitalized, units of production amortization of capitalized mine stripping andamortization of intangible assets.

 

*Capitalized mine stripping andleachable material–*

 

Effective January 1, 2006, the Company adopted theguidance of the Emerging Issues Task Force, ratified by the FinancialAccounting Standards Board in March 2005, which stated that stripping costsincurred during the production phase of a mine are variable production costsand should be included in the cost of inventory produced (extracted) during theperiod that the stripping costs are incurred. See Impact of New Accounting Standards.

 

Stripping costs are costs associated with theremoval of waste materials after production has commenced.  Over the life of the mine, stripping costsare deferred in periods when the actual ratio of waste materials to mineral oreextracted is above the life-of-mine stripping ratio, which represents theCompany’s estimate of the total amount of waste to be incurred divided by theestimated total proven and probable reserves. In periods when the actual mine stripping ratio is below thelife-of-mine stripping ratio, the Company reduces the net capitalized minestripping asset proportionally with a charge to amortization expense.  In addition, deferred mine stripping costsare amortized using the units of production method based on proven and probableore reserves.  Copper resources containedin piles of leachable materials that have been extracted from the mines are notincluded in the determination of units of production amortization.

 

The Company’s policy results in the smoothing ofstripping costs over the life of the mine and, in the view of the Company,better facilitates the matching of mine production costs over the life of themine with the mine’s revenues.

 

Stripping costs are assessed for recoverability aspart of property, plant and equipment and reviewed whenever events or changesin circumstances indicate that its carrying amount may not be recoverable.  If recoverable value has fallen belowcarrying value, the asset is written down to its recoverable value.

 

Leachable material.  At one of its mines the Company capitalizesthe cost of materials with low copper content extracted during the miningprocess (leachable material), which is collected in areas known as leachingdumps.  The amortization of thecapitalized costs is determined based on the depletion period of the leachingdumps, which is estimated to be five years (unaudited).

 

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*Exploration–*

 

Tangible and intangible costs incurred in thesearch for mineral properties are charged against earnings when incurred.

 

*Income taxes–*

 

Provisions for income taxes are based on taxespayable or refundable for the current year and deferred taxes on temporarydifferences between the amount of taxable income and pretax financial incomeand between the tax bases of assets and liabilities and their reported amountsin the financial statements.  Deferredtax assets and liabilities are included in the financial statements at currentlyenacted income tax rates applicable to the period in which the deferred taxassets and liabilities are expected to be realized and settled as prescribed inStatement of Financial Accounting Standards No. 109, “Accounting for IncomeTaxes”.  As changes in tax laws or ratesare enacted, deferred tax assets and liabilities are adjusted through theprovision for income taxes. Deferred income tax assets are reduced by anybenefits that, in the opinion of management, are more likely not to berealized.

 

*Foreign exchange–*

 

The Company’s functional currency is the U.S.dollar. As required by local law, both the Peruvian Branch and MM maintaintheir books of accounts in Peruvian nuevos soles and Mexican pesos,respectively.

 

Foreign currency assets and liabilities areremeasured into U.S. dollars at current exchange rates except for non-monetaryitems such as inventory, property, intangible assets and other assets which areremeasured at historical exchange rates. Revenues and expenses are generally translated at actual exchange ratesin effect during the period, except for those items related to balance sheetamounts that are remeasured at historical exchange rates.  Gains and losses from foreign currencyremeasurement are included in earnings of the period.

 

Gains and (losses) resulting from foreign currencytransactions are included in “Cost of sales (exclusive of depreciation,amortization and depletion)” and amounted to $(12.1) million, $(14.4) millionand $21.9 million in 2005, 2004 and 2003, respectively.

 

*Derivative instruments–*

 

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

 

*Other comprehensive income–*

 

Comprehensive income represents changes in equityduring a period, except those resulting from investments by owners anddistributions to owners. During the fiscal years ended December 31, 2005, 2004and 2003, the only components of “other comprehensive income (loss)” was theadditional minimum liability for employee benefit obligations and unrealizedgain on equity securities.

 

*Business segment*

 

The Company operates in a single industry, namely mining copper.  Prior to the April 1, 2005 acquisition ofMinera Mexico, the Company determined that its operations in Peru 

 

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fell within one segment.  Withthe acquisition of Minera Mexico the Company continues to operate principallyin 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 ashaving three operating segments and manages on the basis of thesesegments.  The segments identified by theCompany are: 1) Peruvian operations, which include the two open pit coppermines in Peru and the plants and services supporting such mines.  2) Mexican open pit mines, which include LaCaridad and Cananea mine complexes and 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 Companyproduces a number of metal by-products, most important 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 adoptedStatement of Financial Accounting Standards (SFAS) No. 143, “Accounting forAsset Retirement Obligations” (SFAS No. 143). This statement requires the fair value of a liability for an assetretirement obligation be recognized in the period 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 ofearnings.  In addition, as part of thiscumulative adjustment, the Company recorded an asset retirement obligationliability of $4.9 million, increased net property by $2.5 million and recordeddeferred tax and workers’ participation benefits of $0.9 million.  The adoption of this new principle resultedin an additional charge to earnings from continuing operations of $0.5 millionfor 2003 and has been included as an operating cost in the consolidatedcombined statement of earnings.

 

*Impact of new accountingstandards–*

 

On March 17, 2005 Emerging Issues Task Force, orEITF, reached a consensus in the issue 04-06, “Accounting for Stripping costsIncurred during Production in the Mining Industry”, which was ratified by theFinancial Accounting Standards Board, or “FASB”, on March 30 2005 and thesubsequent modification to the transition provisions approved by the EITF inits June 15-16 2005 meeting.  Theconsensus states that stripping costs incurred during the production phase of amine are variable production costs that should be included in the costs of theinventory produced (extracted) during the period that the stripping costs areincurred.  On January 1, 2006 the Companyadopted 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 $176.6 million.  In addition, near-term future years operatingincome could be negatively impacted to the extent that costs previouslycapitalized are expensed.

 

In March 2005, the FASB published FASBInterpretation No. 47 “Accounting for Conditional Asset Retirement Obligations”(FIN 47).  FIN 47 clarifies that the term*conditional asset retirement obligation*as used in SFAS No. 143, refers to a legal obligation to perform an assetretirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity.  Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated.  Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists.  This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation.  FIN 47 is effective no later than the end offiscal years ending after 

 

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December 15, 2005 (December 31, 2005, forcalendar-year enterprises). Retrospective application for interim financial information is permittedbut is not required.  Early adoption ofthis interpretation is encouraged.  FIN47 did not have a significant impact on the Company’s financial position orresults of operations.

 

In June 2005, the FASB published SFAS No. 154, “Accounting changes andError Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3”(“SFAS No. 154”), which changes the requirements for the accounting for andreporting of a change in accounting principle and redefines restatement as therevising of previously issued financial statements to reflect the correction ofan error.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine theperiod-specific effects of the cumulative effect of the change.  This Statement also carries forward withoutchange the guidance contained in Opinion 20 for reporting the correction of anerror in previously issued financial statements and a change in accountingestimate.  This Statement does not changethe transition provisions of any existing accounting pronouncement. SFAS No.154 will be effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The Company is evaluating the impact that this statement may have on itsfinancial position or results of operations.

 

In September 2005, FASB ratified the consensus reached by the EmergingIssues Task Force (EITF) on Issue N° 04-13, “Accounting for Purchases and Salesof Inventory with the Same Counterparty”. The consensus concluded that two or more legally separate exchangetransactions with the same counterparty should be combined and considered as asingle arrangement for accounting purposes, if they are entered into “incontemplation” of one another.  The EITFalso reached a consensus that non monetary exchanges of inventory within thesame business should be recognized at fair value.  The consensus reached on EITF Issue N°. 04-13is effective for new arrangements entered into, or modifications or renewals ofexisting arrangements, in reporting periods beginning after March 15,2006.  The Company is currentlydetermining the impact of this Issue on its financial reporting anddisclosures.

 

**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, the Company capitalized $3.0 million in costs associated withestablishing an asset retirement obligation for a portion of its long-livedassets in Peru.  These assets include adam on the Torata River, close to the Cuajone mine, and the SX/EWfacility.  The asset retirementobligations were established based on the Company’s environmental impactstudies for these projects.  Theretirement obligations for the dam are based on a weighting of two optionsavailable at 

 

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the end of the dam’s useful life.  These options are to turn the dam over to thelocal municipality and provide maintenance for a number of years or demolishthe dam and restore the river to its natural course.  The retirement obligation for the SX/EWfacility requires a dismantling of the plant and reclamation of theproperty.  The Company has not designatedspecific assets to satisfy these obligations but will provide funds fromoperations.  There were no additionalcosts capitalized in 2004 associated with asset retirement obligations.

 

In 2005 the Company capitalized $5.2 million anestimate of the asset cost associated with establishing an asset retirementobligation for its Peruvian mine closure plan. These costs are being depreciated on a straight line basis over the lifeof the related assets.  As for theMexican operations, the adoption of SFAS No. 143 did not have a material effecton the Company’s financial position or results of operations.  Management does not believe that there areany significant legal obligations for asset retirements in Mexico as ofDecember 31, 2004 and 2005.  Please alsosee Note 9, “Asset retirement obligation”.

 

Depreciation expense for the years ended December31, 2005, 2004 and 2003 amounted to $200.9 million, $153.4 million and $144.2million, respectively.

 

**NOTE 5-CAPITALIZED MINE STRIPPINGCOSTS AND LEACHABLE 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 leachablematerial is included in “Depreciation, amortization and depletion” and amountedto $73.2 million, $36.4 million and $25.6 million in 2005, 2004 and 2003,respectively.

 

The Company’s policy of deferring mine strippingcosts and leachable material decreased operating costs by $43.0 million, $56.3million and $53.9 million in 2005, 2004 and 2003, respectively, as compared towhat such amounts would have been if the Company expensed mine stripping costsand leachable material costs as incurred.

 

On January 1, 2006, the Company adopted theguidance of the EITF, “Accounting for Stripping Cost Incurred during Productionin the Mining Industry” and wrote off to retained earnings net cumulativecapitalized stripping and net capitalized leachable material, net of incometaxes and workers’ participation benefit. See Impact 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 $2.9million, $2.8 million and $3.2 million for the years ended December 31, 2005,2004 and 2003, respectively.  Theestimated aggregate amortization expense for intangibles is $16.5 million forthe years 2006 through 2010, approximately $3.3 million per year.

 

**NOTE 7-INCOME TAXES:**

 

The components of the provision for income taxesare 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 taxrate to the effective tax 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 acombined effective tax rate for 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 yearspresented, both companies filed separate tax returns in their respective taxjurisdictions.  Although the tax rulesand regulations 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 areparticular to the tax rules in Mexico or specific events related to Minera Mexico,such as the tax inflation effect, which requires that inflation be recognizedfor tax purposes (where it is not for financial reporting purposes), and theloss of tax benefits upon a corporate reorganization undertaken by Minera Mexicoin 2003.  Other items relate specificallyto SCC such as the percentage depletion. The impact of the change in the valuation allowance reflects the changein valuation allowances for the combined companies which is further describedbelow.

 

Deferred taxes include the U.S., Peruvian andMexican tax effects of the following types of temporary differences andcarryforwards, net of foreign tax credit effects:

 

91

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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 creditcarryforward available to reduce possible future U.S. income tax amounted toapproximately $49.0 million, expiring as follows: $19.0 million in 2007, $10.4million in 2008, and $19.6 million in 2015. No foreign tax credit carryforwards expired in 2005 or 2004.  For years beginning after October 22, 2004,unused foreign tax credits generated in years beginning after this date may becarried back only one year, but can now be carried forward ten years.

 

In October, 2004, the American Jobs Creation Actof 2004 was enacted in the U.S.  This lawrepealed the 90% limitation on the utilization of foreign tax credits whencalculating the Company’s alternative minimum tax (“AMT”).  The repeal is effective in 2005.  Although the new law was not effective until2005, 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 previouslybooked deferred U.S. tax liability was recorded as income in 2004.

 

*Peruvian Tax Matters–*

 

In December 2003, the Peruvian governmentestablished a new tax rate of 30% for years beginning after 2003.  Although this new rate did not affect thecurrent 2003 tax expense, the change in the tax rate required that the deferredPeruvian assets and liabilities be re-valued at the tax rate expected to applywhen these assets and liabilities are realized. Accordingly, the Company recorded a charge of $10.1 million inadditional deferred tax expense in 2003.

 

The Company obtains income tax credits in Peru forvalue-added taxes paid in connection with the purchase of capital equipment andother goods and services, employed in its operations and records these creditsas a prepaid expense.  Under currentPeruvian law, the Company is entitled to use the credits against its Peruvianincome tax liability or to receive a refund. The carrying value of these Peruvian tax credits approximates their netrealizable value.

 

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

 

92

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*Mexican Tax Matters–*

 

Minera Mexico and its subsidiaries obtainedauthorization from the Mexican tax authorities to file a consolidated incomeand asset tax return in Mexico.

 

In accordance with Mexican income tax law, Mexicansubsidiaries are subject to paying the greater of the asset tax or incometax.  The Mexican income tax law enactedJanuary 1, 2002, reduced the 35% federal income tax rate by one percentagepoint each year until it reached 32% in 2005.

 

As result of the amendments to the income tax lawapproved on November 13, 2004, the income tax rate was further reduced from the33% rate applicable in 2004 to a 30% rate in 2005, and it will be gradually bereduced by 1% per year until it reaches 28% in 2007.  In addition, effective fiscal year 2005,there is a change in the tax treatment of the inventory purchases for theyear.  Under the new law, cost of saleswill be deductible instead of inventory purchases.  The tax deduction for employees’ statutoryprofit sharing amounts and the obligation to withhold taxes on dividends paidto individuals and foreign residents 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% taxrate to Minera Mexico’s asset position, as defined by the law, and is payableonly to the extent that it exceeds the income tax payable for the sameperiod.  If in any year asset tax exceedsthe income tax payable, the asset tax payment for such excess may be reduced bythe amount by which the income tax exceeded the asset tax in the threepreceding years and any required payment of the asset tax is creditable againstthe excess of the income tax over the asset tax of the following 10 years.

 

Valuation allowances*–*

 

U.S.:

 

The Company’s valuation allowance consists of $49.0million in foreign tax credits and $32.2 million in AMT credit carryforwards.  Management believes that it is more likelythan not, that full value for both these credits will not be realized in thefuture.

 

Mexico:

 

In years prior to 2002, Minera Mexico experiencedsignificant liquidity and financial performance difficulties which resulted indefaults of various debt covenants. Therefore, prior to 2002, a valuation allowance was established forsubstantially all of its net operating loss and asset tax carryforwards sinceit was uncertain as to whether those carryforwards might be used.  The valuation allowances were reversed in 2003as Minera Mexico undertook its financial and corporate restructuring, andfinancial performance improved.  As ofDecember 31, 2005, the remaining tax loss carryforwards totaled $9.4 million. As of December 31, 2005, the remainingasset tax carryforward amounting to $0.2 million.

 

**NOTE 8-WORKERS’ PARTICIPATION:**

 

The Company’s operations in Peru and Mexico aresubject to statutory workers’ participation.

 

In Peru, the provision for workers’ participationis calculated at 8% of pre-tax earnings. The current portion of this participation, which is accrued during theyear, is based on Branch’s taxable income and is distributed to workersfollowing determination of final results for the year.  In Mexico, workers’ participation isdetermined using the guidelines established in the Mexican income tax law at arate of 10% of pre-tax earnings as adjusted by the tax law.

 

93

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The provision for workers’ participation isincluded in “Cost of sales (exclusive of depreciation, amortization anddepletion)” in the statement of earnings. 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 adecision that changed the method of computing the amount of statutory workers’profit sharing required to be paid by some Mexican companies, including theCompany’s Mexican subsidiary.  TheSupreme Court’s ruling in effect prohibited the application of net operatingloss carryforwards in computing the income used as the base for determining theworkers’ profit sharing amounts. As a result the Company recognized in its 2005results of operations a charge of $36.3 million for workers’ profitsharing related to 2004.

 

**NOTE 9-ASSET RETIREMENTOBLIGATION**

 

On January 1, 2003, the Company adopted SFAS No.143, “Accounting for Asset Retirement Obligations”, which established a uniformmethodology of accounting for estimated reclamation and abandonment costs.  The cumulative effect of the change ofaccounting principle, net of income tax was a charge to income of $1.5million.  As part of this change theCompany recorded an asset retirement obligation of $4.9 million and increasednet property $2.5 million.  This adoptionestablished the liability for a portion of the Company’s long-lived assets inPeru, and include a dam on the Torata river, close to the Cuajone mine and theSX/EW facility.

 

In 2005 the Company added an asset retirementobligation for its mining properties in Peru, as required by the Mine ClosureLaw, enacted in 2003 and regulated in 2005. This law requires the Company to present a mine closure plan to thePeruvian Ministry of Energy and Mines (“MEM”) by August 2006.  This plan will be subject to review andapproval by MEM and open to public discussion and comment in the area of theCompany’s operations.  In application ofSFAS No. 143 and according to the criteria established by FIN-47, the Companyhas made an estimate of this potential liability and recorded such liability,based on its review of the law.  However,we cannot assure that this liability will be adequate until our mine plan is presented,reviewed and accepted by MEM.

 

The closure cost recognized for this liabilityincludes the estimated cost required at the Peruvian operations, based on theCompany’s experience and includes cost at the Ilo smelter, the tailingdisposal, dismantling of the Toquepala and Cuajone concentrators, shops andauxiliary services.  In this connectionwe recorded an additional asset retirement liability in 2005 of $5.2 millionfor this new law and increased net property $4.6 million.

 

The following is a reconciliation of the assetretirement obligation for 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   |   |

 

94

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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 ofunsecured debt, which are referred to as Yankee bonds.  These bonds were offered in two series:Series A for $375 million, with an interest rate of 8.25% and a 2008 maturity,and Series B for $125 million, with an interest rate of 9.25% and a 2028maturity date.  During 2005, the Companyrepurchased $143.0 million of the Series A bonds.  In connection with this purchase the Companypaid a premium of $8.6 million, which is included in the consolidated combinedstatement of earnings on the line “Loss on debt prepayments”.  The bonds contain a covenant requiring MineraMexico to maintain a ratio of EBITDA to interest expense of not less than 2.5to 1.0 as such terms are defined by the facility.  At December 31, 2005, Minera Mexico is incompliance with this covenant.

 

In 1999, SCC entered a $100 million, 15-yearloan agreement with Mitsui.  The interestrate for this loan is the Japanese LIBO rate plus 1.25% (Japanese LIBO for thisloan at December 31, 2005 was 4.67%). The Mitsui credit agreement is collateralized by pledges of receivableson 31,000 tons of copper per year.  TheMitsui agreement requires the Company to maintain a minimum stockholders’equity of $750 million and a specific ratio of debt to equity.  Reduction of Grupo México’s direct orindirect voting interest in the Company to less than a majority wouldconstitute an event of default under the Mitsui agreement.  At December 31, 2005, the Company is incompliance with these covenants.

 

On October 29, 2004, Minera Mexico borrowed$600 million pursuant to a new credit facility with a final maturity datein 2009.  The new credit facility boreinterest at LIBOR plus 200 basis points.  The proceeds from the new credit facility wereused to repay in full the amounts outstanding under a common agreement withholders of Minera Mexico’s secured export notes and other financialinstitutions.  The loan was secured by apledge of Minera Mexico’s principal properties and was guaranteed by itsprincipal subsidiaries.  In 2005, theCompany prepaid the total amount of this loan. In connection with the repayment of this facility, the Company wrote off$10.2 million of deferred financing costs which is recorded in the consolidatedcombined statement of earning on the line “Interest Expense”.

 

In October 2004, Minera Mexico and Banamex enteredinto an interest rate swap agreement for a notional amount of $600 million tohedge the interest rate risk exposure on its $600 million credit facility grantedby Citibank.  See Note 14-DerivativeInstruments.

 

95

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In January 2005, the Company signed a $200 millioncredit facility with a group of banks led by Citibank, N.A.  Proceeds of this credit facility were used toprepay $199 million the outstanding bonds of the Company’s Peruvian bondprogram.  The Company capitalized $2.8million of costs associated with this facility. The Company paid a prepayment penalty of 1%, or $2.0 million, to thePeruvian bondholders.  Additionally, theCompany wrote off $2.3 million of previously capitalized bond issuance cost.  The $2.0 million penalty and the $2.3 millionamortization of bond issuance costs are included in the earning statement under“Loss or debt prepayments” and “Interest expense”, respectively.  On July 28, 2005 this credit facility wasrepaid and the Company wrote off $2.5 million of deferred financing cost.

 

On July 27, 2005 the Company issued $200 million6.375% Notes due 2015 at a discount of $1.1 million and $600 million 7.5% Notesdue 2035, at a discount of $5.3 million. The notes are senior unsecured obligations of the Company.  The Company capitalized $8.8 million of costsassociated with this facility and are included in “Other assets, net”, non-currenton the Consolidated combined balance sheet. The net proceeds from the issuance and sale of the notes were used torepay outstanding indebtedness of the Company’s Peruvian and MexicanOperations, under its $200 million and $600 million ($480 million outstanding)credit facilities, respectively, and the balance was used for general corporatepurposes.  The Company filed aRegistration Statement on Form S-4 with respect to these Notes on October 28,2005.  On January 3, 2006 the Companycompleted an exchange offer for $200 million, 6.375% Notes due 2015 and $600million, 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 $590.5 millionof the 7.5% old notes due 2035 were tendered in exchange for an equivalentamount of new notes.  The new notes havebeen registered under U.S. securities law.  The indentures relating to the notes containcertain covenants, including limitations on liens, limitations on sale andleaseback transactions, rights of the holders of the notes upon the occurrenceof a change of control triggering event, limitations on subsidiary indebtednessand limitations on consolidations, mergers, sales or conveyances.  All of these limitations and restrictions aresubject to a number of significant exceptions, and some of these covenants willcease to be applicable before the notes mature if the notes attain aninvestment grade rating.  At December 31,2005 the Company is in compliance with these covenants.

 

Aggregate maturities of the outstanding borrowingsat 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 debtdiscount valuation account of $6.3 million.

 

At December 31, 2005 and 2004, other assetsincluded $7.4 million and $6.8 million, respectively, held in escrowaccounts as required by the Company’s loan agreements. The funds are releasedfrom escrow as scheduled loan repayments are made.

 

At December 31, 2005 and 2004, the balance ofcapitalized debt issuance costs was $10.2 million and $10.7 million,respectively.  Amortization charged tointerest expense was $3.8 million, $5.1 million and $1.7 million in 2005, 2004and 2003, respectively.

 

96

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**NOTE 11-BENEFIT PLANS:**

 

*SPCC Defined Benefit PensionPlans–*

 

The Company has two noncontributory definedbenefit pension plans covering former salaried employees in the United Statesand certain former employees in Peru. Effective October 31, 2000, the Board of Directors amended the qualifiedpension plan to suspend the accrual of benefits.

 

The components of net periodic benefit costscalculated in accordance with SFAS No. 87 “Employers’ Accounting for Pensions”,using December 31 as 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 assetsand a reconciliation of 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 |   |

 

The assumptions used to determine the pension obligation and senioritypremiums as of 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 |   |

 

97

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The scheduled maturities of the benefits expectedto be paid in each of the 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 contributeamounts to the qualified plan sufficient to meet the minimum funding requirementsset forth in the Employee Retirement Income Security Act of 1974, plus suchadditional amounts as the Company may determine to be appropriate. Plan assetsare invested in commingled stock and bond funds.

 

The Company’s policy for determining asset mix-targetsincludes periodic consultation with recognized third party investmentconsultants.  The expected long-term rateof return on plan assets is updated periodically, taking into considerationasset allocations, historical returns and the current economicenvironment.  Based on these factors weexpect our assets will earn an average of 4.5% per annum assuming our long-termmix will be consistent with our current mix and an assumed discount rate of 5.5%.  The fair value of plan assets is impacted bygeneral market conditions.  If actualreturns on plan assets vary from the expected returns, actual results coulddiffer.

 

*SPCC Post-retirement Health CarePlan–*

 

The Company adopted the post-retirement healthcare plan for retired salaried employees eligible for Medicare on May 1,1996.  The plan is unfunded.

 

Effective October 31, 2000, the health care planfor retirees was terminated and the Company informed retirees that they wouldbe covered by the then in effect post-retirement health care plan of ASARCO, aformer shareholder of the Company and a subsidiary of Grupo México, whichoffered substantially the same benefits and required the samecontributions.  The plan is accounted forin accordance with SFAS No. 106, “Employers’ Accounting for Postretirement BenefitsOther Than Pensions”.

 

The components of net period benefit costs are asfollows:

 
| ** **                | ** ** | **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 |   |

 

98

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The change in benefit obligation and areconciliation of funded status are 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 otherpost-retirement benefits and cost as of December 31, 2005 and 2004 were5.5% and 6.0%, respectively.

 

The benefits expected to be paid in each of thenext five years, and thereafter, are as follows:

 

| **(in millions)** | ** ** | **Expected**              | ** ** |
|------------------------|------------|---------------------------|------------|
| **Year**               | ** ** | **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 ofincrease in the per capita cost of covered health care benefits was assumed for2005.  The rate is assumed to decreasegradually to 5% for 2014 and remain at that level thereafter.

 

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

 

*Minera Mexico Defined BenefitPension Plans–*

 

The components of net periodic benefit costscalculated in accordance with SFAS No. 87 “Employers Accounting for Pensions”,using December 31 as 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 |   |

 

99

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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 thenext five years, and thereafter, are as follows:

 

| **(in millions)** | ** ** | **Expected**              | ** ** |
|------------------------|------------|---------------------------|------------|
| **Year**               | ** ** | **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       |   |

 

100

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Minera Mexico Post-retirement health care plan*–*

 

The components of net period benefit costs are asfollows:

 
| ** **                                 | ** ** | **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 areconciliation of funded status are 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 otherpost-retirement benefits and costs as of December 31, 2005 and 2004 were6.0%.

 

The benefits expected to be paid in each of thenext five years, and thereafter, 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 havea significant effect on the amount of the reported obligations as well ascomponent cost of the other benefit plan. One percentage-point change in assumed other benefits cost trend rateswould 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 mixtargets includes periodic consultation with recognized third party investment consultants.  The expected long-term rate of return on planassets is updated periodically, taking into consideration assets allocations,historical returns and the current economic environment.  The fair value of plan assets is impacted bygeneral market conditions.  If actualreturns on plan assets vary from the expected returns, actual results coulddiffer.

 

These plans accounted for approximately 30% ofbenefit obligations.  The following tablerepresents 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 Companyexpects to be paid to the plan during 2006 is not material.

 

**NOTE 12-MINORITY INTEREST:**

 

For all the years presented, the minority intereston the consolidated combined statement of earnings is based on the earnings ofthe Company’s Peruvian Branch, and through October 2004 it also included theminority interest held in certain subsidiaries of Minera Mexico as furtherdescribed below.  In addition, itincluded the interest of minority shareholders in Minera Mexico.

 

On October 20, 2005, the Company acquired anadditional 0.81833% of the outstanding shares of Minera Mexico and werepurchased for $30.3 million.

 

The Company acquired 0.02 million and 0.2 millioninvestment shares at a $0.1 million and $0.7 million in 2004 and 2003,respectively.  There were no purchasesduring 2005.  These acquisitions havebeen accounted for as purchases of minority interests.  The carrying value of the minority interestpurchased was reduced by $0.08 million and $0.5 million in 2004 and 2003,respectively, and the excess paid over the carrying value was assigned tointangible assets and is being amortized based on production.  As a result of these acquisitions, theremaining investment shareholders hold a 0.71% interest in the Branch and areentitled to a pro rata participation in the cash distributions made by the PeruvianBranch.  The shares are recorded as a minorityinterest in the Company’s financial statements.

 

In addition, on October 23, 2004, Minera Mexicoreached an agreement with the National Union of Mine, Metallurgical and SimilarWorkers of the Mexican Republic (the “Union”) for the purchase of a 4.2% and1.5% stock stake owned by the Union in two of its subsidiaries.  The stock was purchased by delivery of a notein the amount of $51.5 million.  Thepurchase price of the interest acquired was less than its carrying value by$31.8 million and, therefore, such negative goodwill was allocated as reductionof the long-lived assets to be amortized based on production.  This note was paid in full in February 2005.

 

**NOTE 13-COMMITMENTS ANDCONTINGENCIES:**

 

Peruvian Operations

 

*Royalty charge:*

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty charge to be paid by mining companies in favorof the regional governments and communities where mining resources arelocated.  In 2004, more than 5,000Peruvian citizens filed a request to the Peruvian Constitutional Tribunal tohave the law declared unconstitutional. However, in 

 

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April 2005, the Constitutional Tribunal ruled theroyalty law to be constitutional and therefore applicable to mining activitiesin Peru.  In addition, the Company fileda suit in the Lima Civil Court to protest the law as unconstitutional.  On June 28, 2005 the court dismissed thelawsuit and the Company has decided not to appeal.  Under the new law, the Company is subject toa 1% to 3% royalty, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. The Company made provisions of $40.3 million and $17.6 million in 2005and 2004 respectively, for this royalty which went into effect as of June 25,2004.  These provisions are included in “Costof sales (exclusive of depreciation, amortization and depletion)” on theConsolidated combined statement of earnings.

 

In its ruling, the Constitutional Tribunal additionallystated that the royalty charge applies to all concessions held in the miningindustry, implying that those entities with tax stability contracts are subjectto this charge.  In 1996, the Companyentered into a tax stability contract with the Peruvian government (a “Guarantyand Promotional Measures for Investment Contract”) relating to our SX/EWproduction, which agreement purports to, among other things, fix tax rates othercontributions relating to such production. We believe that the Constitutional Tribunal’s interpretation relating toentities with 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 royaltycharge does not include approximately $5.9 million of additional potentialliability relating to its SX/EW production from June 30, 2004 through December31, 2005.

 

*Power purchase agreement–*

 

In 1997, SCC sold its Ilo power plant to anindependent power company, Enersur S.A. (“Enersur”), for $33.6 million.  In connection with the sale, a power purchaseagreement was also completed under which SCC agreed to purchase all of itspower needs for its Peruvian operations from Enersur for twenty years, commencingin 1997.

 

The Company agreed to amend its power purchaseagreement in June 2003, resolving certain issues that arose between the partiesand reducing power costs for the remaining life of the agreement.  The Company made a one-time contractualpayment of $4.0 million to Enersur under terms of the new agreement.  The new agreement releases Enersur from theobligation to construct additional capacity upon notice to meet the Company’sincreased electricity requirements from the planned expansion andmodernization.  SCC believes it cansatisfy the need for increased electricity requirements from other sources,including local power providers.

 

*Environmental matters–*

 

*Peruvian operations–*

 

Some of the Company’s operations are subject toapplicable Peruvian environmental 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 itis in material compliance with applicable Peruvian environmental laws andregulations.

 

In accordance with Peruvian regulations, in 1996SCC submitted its *Programa de Adecuación yManejo Ambiental* (the Environmental Compliance and ManagementProgram, known by its Spanish acronym, PAMA) to the MEM.  A third-party environmental audit was conductedin order to elaborate the PAMA.  The PAMAapplied to all current operations that did not have an approved environmentalimpact study at the time. SCC’s PAMA was approved in January 1997 and contains34 mitigation measures and projects necessary to (1) bring the existingoperations into compliance with the environmental standards established by theMEM and (2) identify areas impacted by operations that are no longer active andneed to be reclaimed or remedied.  By theend of 2004, 31 of these projects were completed, including all PAMAcommitments related to the Company’s operations in Cuajone and Toquepala. Thethree 

 

103

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pending PAMA projects all relate to the Ilosmelter operations.  The primary areas ofenvironmental concern are the smelter reverberatory slag eroded from slagdeposits up until 1994, and atmospheric emissions from the Ilo smelter.

 

The slag remediation program is progressing asscheduled and is expected 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, theCompany awarded the contract to provide the technology and basic engineeringfor the modernization of the Ilo smelter to 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 projectis the Company’s largest short-term capital investment project and is estimatedat $500 million, including $388.5 million 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 Congresspublished a new law announcing future closure and remediation obligations forthe mining industry.  The law was amendedon May 28, 2004 and again on May 8, 2005. The current modification establishes that mining companies submit theirmine closure plans within one year of publication of final regulations.  On August 16, 2005 final regulations werepublished and the Company has initiated the preparation of the required mineclosure plan.  As part of the law and thequalifying regulations the Company is also required to engage an independentconsulting entity to prepare the mine closure plan.  The final plan, which is required by August2006, is subject to approval by MEM and open to public discussion and commentin the area of Company operations. Additionally, the law requires companies to provide financial guaranteesto insure that remediation programs are completed.  The Company anticipates that this law willincrease its asset retirement obligations and require future expenditures andamortizations over the life of the mine to satisfy its requirements.  The Company believes the liability for theseasset retirement obligations cannot currently be precisely measured, or preciselyestimated, until the Company has substantially completed its mine closure planand is reasonably confident that it will be approved by MEM in most materialrespects.  However the Company has made apreliminary estimate of this liability and has recorded such amount in its 2005financial results.  Please see Note 9,above.  The Company believes that thisestimate should be viewed with caution, pending final approval of its mineclosure plan, expected later in 2006.

 

For the Company’s Peruvian operations,environmental capital expenditures were $234.6 million, $65.5 million and $2.2million in 2005, 2004 and 2003, respectively. The Company foresees significant environmental capital expenditures in2006.  Approximately $87.5 million hasbeen budgeted in 2006; the smelter modernization project accounts for most ofthis budget.

 

*Mexican operations–*

 

Some of the Company’s operations are subject toMexican federal, state and municipal environmental laws, to Mexican officialstandards, and to regulations for the protection of the environment, includingregulations relating to water supply, water pollution, air pollution, noisepollution and hazardous and solid wastes. Some of these laws and regulationsare relevant to legal proceedings pertaining to the Company’s San Luis Potosífacilities.

 

The principal legislation applicable to theCompany’s Mexican operations is the federal *LeyGeneral del Equilibrio Ecológico y la Protección al Ambiente* (theGeneral Law of Ecological Balance and Environmental Protection, or theEnvironmental Law), which is enforced by the *ProcuraduríaFederal de Protección al Ambiente* (Federal Bureau of EnvironmentalProtection, or the PROFEPA).  The PROFEPAmonitors compliance with environmental legislation and enforces Mexicanenvironmental laws, regulations and official standards and, if warranted, thePROFEPA may initiate administrative proceedings against companies that violateenvironmental laws, which in the most egregious cases may 

 

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result in the temporary or permanent closing ofnon-complying facilities, the revocation of operating licenses and/or othersanctions or fines.  Also, according tothe *Código Penal Federal* (FederalCriminal Code), the PROFEPA has to inform corresponding authorities regardingenvironmental crimes.

 

The Company’s operations near the U.S.-Mexicanborder are also subject to the Agreement on Cooperation for the Protection andImprovement of the Environment in the Border Area, or the La Paz Agreement,which was concluded in 1983 between the United States and Mexico for thepurpose of improving air quality along the border.  The La Paz Agreement establishes sulfurdioxide emissions standards and requires the installation and maintenance ofemission monitoring and record-keeping systems at our smelters in northwesternMexico.  In order to maintain compliancewith sulfur dioxide emissions standards promulgated under the Environmental Lawand the La Paz Agreement, Minera Mexico shut down the Cananea smelter andoperations at Monterrey in December 1999, after which the plants were dismantledand the Monterrey property was sold.

 

Mexican environmental regulations have becomeincreasingly stringent over the last decade, and this trend is likely tocontinue and may be influenced by the environmental agreement entered into byMexico, the United States and Canada in connection with NAFTA in February1999.  However, the Company’s managementdoes not believe that continued compliance with the Environmental Law orMexican state environmental laws will have a material adverse effect on theCompany’s business, properties, result of operations, financial condition orprospects or will result in material capital expenditures.  Although the Company believes that all of itsfacilities are in material compliance with applicable environmental, mining andother laws and regulations, the Company cannot assure you that stricterenforcement of existing laws and regulations or the adoption of additional lawsand regulations would not have a material adverse effect on the Company’sbusiness, properties, results of operations, financial condition or prospects.

 

Due to the proximity of certain facilities of MineraMexico to urban centers, the authorities may implement certain measures thatmay impact or restrain the operation of such facilities.  Any enforcement action to shut down any suchfacilities may have an adverse effect on the operating results of the relevantsubsidiary.

 

The Company has instituted extensive environmentalconservation programs at its mining facilities in Peru and Mexico.  The Company’s environmental programs includewater recovery systems to conserve water and minimize contamination of nearbystreams, reforestation programs to stabilize the surfaces of the tailings damsand the implementation of scrubbing technology in the mines to reduce dustemissions.

 

*Litigation matters–*

 

Peruvian Operations

 

Garcia-Ataucuriand Others vs. SCC:  In April 1996, the Company was served with acomplaint filed in Peru by approximately 800 former employees seeking thedelivery of 38,763,806.80 “labor shares” to be issued in a proportional way toeach in accordance with their time of work with SCC, plus dividends.  The Company conducts its operations in Peruthrough a registered Branch.  Althoughthe Branch has neither capital nor liability separate from that of the Company,under Peruvian law it is deemed to have an equity capital for purposes ofdetermining the economic interest of the holders of investment shares.  The labor shares litigation is based onclaims of former employees for ownership of labor shares issued during the1970s until 1989 under a former Peruvian mandated profit sharing system.  We assert that the claims are meritless andthat the labor shares were distributed to the former employees in accordancewith the then in effect Peruvian profit sharing system. We do not believe thatan unfavorable outcome is reasonably possible. In 1971, the Peruvian Government enacted legislation providing thatworkers in the mining industry would participate in the pre-tax profits of theenterprises for which 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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sheetcaption “Minority interest.”  Under thelaw, the equity participation was originally delivered to the “Mining Community”,an organization representing all workers. The cash portion was distributed to the workers after the close of theyear.  The accrual for this participationwas (and continues to be) a current liability of the Company, until paid.  In 1978, the law was amended and the equitydistribution was calculated at 5.5% of pre-tax profits and was made toindividual workers of the enterprise in the form of labor shares.  These labor shares represented an equityinterest 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 adjusted to 4.5% of pre-tax earnings andcontinued to be distributed to employees following the close of the year.Effective in 1992, the law was amended to its present status.  The workers participation in pre-tax profitswas set at 8%, with 100% payable in cash. The equity participation component was eliminated from the law. In 1995,the Company offered to exchange new common shares of the Company for the laborshares issued under the prior Peruvian law. Approximately 80.8% of the issued labor shares were exchanged for theCompany’s common shares, greatly reducing the Minority interest on the Company’sbalance sheet.  Since 1995, the Companyhas periodically purchased labor shares on the open market.  In 1998, labor shares were renamed “investmentshares.”  At December 31, 2005, theinvestment share interest in the Company’s Peruvian Branch amounted to 0.71%.

 

Asstated above, in April 1996, the Company was served with a complaint filed inPeru by approximately 800 former employees seeking the delivery of asubstantial number of “labor shares” (now referred to as “investment shares”)of its Peruvian Branch plus dividends on such shares.  This amount corresponds to the total numberof labor shares for the full Company workers, and the complaint is seeking tohave such shares issued to the plaintiffs in proportional way to each inaccordance with their time of work with the Company, plus dividends on suchshares.  In December 1999, a civil courtof first instance of Lima decided against the Company, ordering the delivery ofthe investment shares and dividends to the plaintiffs.  The Company appealed this decision in January2000.  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.  The lower court dismissed the lawsuit inJanuary 2005.  The plaintiffs haveappealed to the superior court.

 

The Company has not made a provision for thislawsuit because it believes that it has meritorious defenses to the claimsasserted in the complaint.

 

*Class actions*

 

Three purported class action derivative lawsuits havebeen filed in the Delaware Court of Chancery (New Castle County) late inDecember 2004 and early January 2005 relating to the acquisition of Minera Mexicoby SCC.  On January 31, 2005, the threeactions Lemon Bay, LLP v. Americas Mining Corporation, et al., Civil ActionNo. 961-N, Therault Trust v. Luis Palomino Bonilla, et al., and SouthernCopper Corporation, et al., Civil Action No. 969-N, and James Sousa v. SouthernCopper Corporation, et al., Civil Action No. 978-N were consolidated into oneaction titled,  In re Southern CopperCorporation Shareholder Derivative Litigation, Consol. C. A. No. 961-N and thecomplaint filed in Lemon Bay was designated as the operative complaint in theconsolidated lawsuit.  The consolidatedaction purports to be brought on behalf of the Company’s common stockholders.

 

The consolidated complaint alleges, among otherthings, that the acquisition of Minera Mexico is the result of breaches offiduciary duties by the Company’s directors and is not entirely fair to theCompany and its minority stockholders. The consolidated complaint seeks, among other things, a preliminary andpermanent injunction to enjoin the acquisition, the award of damages to theclass, the award of damages to the Company and such other relief that the courtdeems equitable, including interest, attorneys’ and experts’ fees andcosts.  The Company believes that thislawsuit is without merit and is vigorously defending itself against thisaction.

 

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It is the opinion of the Company’s management thatthe outcome of the aforementioned legal proceeding will not have a materialadverse effect on the Company’s financial position or results of operations onit or on its consolidated subsidiaries.

 

Mexican Operations

 

Ejido Land matter:

 

In July 1991, the Mexican agricultural community of Pilares de NacozariEjido, (“Ejido”), commenced an action in the first federal district court inSonora, Mexico, against the Mexican Ministry of Agrarian Reform, (“the Ministry”).  The action alleged improper expropriation ofapproximately 1,500 hectares of land adjacent to the La Caridad mine in whichcertain of Mexcobre’s (a subsidiary of Minera Mexico) facilities are currentlylocated.  Mexcobre was not named as adefendant in the action although it was included as an interested third partydue to its ownership of the land. Mexcobre bought the land in question in 1976 from the *Banco Nacional de Obras y Servicios Públicos*, which hadpreviously acquired it as a beneficiary of the expropriation by the Ministry in1973 and has alleged legal and physical impossibility 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 judgeruled that it is only partially impossible to physically return the land andruled that legal impossibility has not been proved.  Mexcobre has filed a complaint against thisruling.  This matter was finally settledamongst both parties, Ejido and Mexcobre, by entering and ratifying anagreement before the First Federal District Court in Hermosillo, 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 into effect in 1992, this obligation wasterminated.  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 ThirdFederal District Judge in Civil Matters, an action demanding from Mexcobre thepayment of royalties since 1997. Mexcobre answered and denied Coremi’s claims in October 2002 andcurrently is in the discovery stage (“*etapa de ofrecimiento depruebas*”).  On December 21,2005, an initial settlement was reached as follows; royalties for 2005 of $8.5million were duly paid, as for the royalties from the third quarter of 1997 tothe last quarter of 2004, a partial payment of $6.2 million was made on January11, 2006, however, litigation will continue in order that a Court establishes ifany additional amount is to be paid.  Weestimate that the payment made on January 11 will cover said ruling by100%.  The Company believes that anyfurther payment related to this matter 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 ofthe above mentioned legal proceedings be adverse to IMMSA’s interests, theconstruction of the “Villa Magna” housing and commercial development would not,in itself, affect the operations of IMMSA’s zinc plant.

 

In addition to the foregoing, IMMSA has initiated a series of legal andadministrative procedures against the Municipality of San Luis Potosí due toits refusal to issue IMMSA’s use of land permit in respect of its zincplant.  The Municipality has refused togrant such license based on the argument that IMMSA has failed to submit, aspart of the application process, *a “manifestaciónde impacto ambiental”* (environmental impact assessment).  IMMSA believes that the environmental impactassessment is not required because IMMSA will not undertake constructionactivities.  The trial judge has orderedthe Municipality to continue the analysis of IMMSA’s request to issue the “*licencia de uso de suelo”* (use of landpermit).  The municipality has refused toissue the land use permit.  IMMSA hasfiled a request for relief against such resolution to compel the court to issuethe land use permit.

 

Tax contingency matters*–*

 

U.S. Internal Revenue Service - IRS

 

The Company is regularly audited by the federal,state and foreign tax authorities both in the United States andinternationally.  These audits can resultin proposed assessments.  In 2002, theInternal Revenue Service (IRS) has issued a preliminary Notice of Proposed Adjustmentfor the years 1994 through 1996.  In2003, the Company settled these differences with the IRS and made a payment of$4.4 million, including interest. Generally, the years 1994 through 1996 are now closed to furtheradjustment.

 

The IRS has completed the field audit work for allyears preceding 2003 and currently is auditing only 2003.  During the audit of the tax years 1997 though1999, the IRS questioned the Company’s accounting policy for determination ofuseful lives, the calculation of deductible and creditable Peruvian taxes, themethodology of capitalizing interest and the capitalizing of certain costs(drilling, blasting and hauling) into inventory value as items for possibleadjustment.  In the fourth quarter of2003, the Company and the IRS had jointly requested technical advice from theIRS National Office to help resolve the inventory value dispute.  In August 2005 the National Office of the IRSresponded to the IRS field audit group’s request for technical advice.  The issuance of this technical advicememorandum (TAM) allowed the IRS to close the field audit work of the auditcycles 1997 through 1999 and 2000 through 2002. The TAM accepts the position of the IRS field office and concludes thatthe Company is required to capitalize mining costs to its leach dumps based onthe weight of material moved, without regard to metal content orrecoverability.

 

On October 5, 2005 the Company filed a formalprotest with the IRS to appeal the proposed changes with respect to the TAMconclusion, as well as other items of adjustment proposed by the IRS fieldaudit group.  These other adjustmentsinclude the methodology of capitalizing interest, the determination of usefullives for depreciable property, the calculation of deductible and creditablePeruvian taxes and the established service fee between the Company and relatedparties.  The Company believes that thepositions that it is reporting to the IRS are correct and appropriate.  The Company believes that it has substantialdefenses to the proposed IRS adjustments and that adequate provisions have beenmade so that resolution of any issues raised by the IRS will not have amaterial 

 

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adverse effect on its financial condition orresults of operations.  The Company isawaiting notification from the IRS Appeals Office for the first scheduledappeals conference related to its protest. Significant management judgment is required in determining the provisionfor tax contingencies.  The estimate ofthe probable cost for resolution of the tax contingencies has been developed inconsultation with legal and tax counsel. The Company does not believe thatthere is a reasonable likelihood that there is an exposure to loss in excess ofthe amounts accrued therefore.

 

Peruvian Operations:

 

InPeru the “Superintendencia Nacional de Administración Tributaria” (SUNAT), thePeruvian Tax Administration, regularly audits the Company.  These audits can result in proposedassessments.

 

1)             In year 2002 the Companyreceived assessments and penalties from SUNAT for fiscal years 1996 through1999, in which several deductions taken were disallowed. SUNAT has challengedthe Company’s depreciation method and deduction of other expenses related tocharges incurred outside of Peru from 1996 through 1999, and the deduction ofcertain exchange differences and interest expenses from 1997 through 1999.  The Company appealed these variousassessments and resolution is still pending.

 

InFebruary 2003, the Peruvian tax court confirmed SUNAT’s assessments and penalties with regard todepreciation and deductions of other expenses incurred outside of Peru forfiscal years 1996 and 1997. Consequently, the Company recognized an additional tax and workers participationliability for fiscal years 1998 and 1999 on the amounts assessed by SUNAT.  Therefore, in 2003 the Company recorded acharge to workers’ participation, included in cost of sales (exclusive ofdepreciation, amortization and depletion) on the statement of earnings andincome tax expense of $0.5 million and $4.4 million, respectively.  The Company, however, has not recognized aliability for penalties and interest assessed by SUNAT in connection with thedepreciation and other expenses deduction as it considers they are notapplicable.  The status of the penaltyappeals and other tax contingencies is as follows:

 

a)                          Year 1996:  With regard to the appeal of the penaltyrelated to fiscal year 1996, the Company was required to issue a letter ofcredit to SUNAT of $3.4 million, which was issued in July 2003.  This deposit is recorded in other assets onthe consolidated combined balance sheet. The Peruvian tax court denied the Company’s appeal in February2004.  Consequently, in April 2004, theCompany filed a lawsuit against the Peruvian tax court and SUNAT in thesuperior court of Peru.  The Company wasnot required to issue a deposit for appeal of assessments and rulings withrespect to any other years.  In September,2005 the Superior Court declared the Company’s claim valid.  SUNAT has appealed this decision to the SupremeCourt in Lima.

 

b)                         Year 1997:** **With regard to the penalty issued by SUNATrelated to fiscal year 1997, in November 2002 the Peruvian tax court indicatedthat the penalty needed to be modified and declared the previously issuedpenalty null.  Consequently, SUNAT issueda new penalty in December 2003.  Thispenalty and penalties related to fiscal years 1998 and 1999 have been protestedbefore 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 theSuperior Court remanded the case to SUNAT for a new pronouncement. SUNAT hasappealed the courts decision to the Supreme Court in Lima.

 

c)                          SUNAT has not ruled on the interestdeductions for 1998 or 1999.

 

d)                         The Company has not recorded any expenseassociated with the assessment challenging deductions of interest expense forthe years 1997, 1998, or 1999,

 

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nor has the Company recorded any expense associated with the assessmentsfor 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, theCompany received assessments and penalties from SUNAT for the fiscal years 2000and 2001, in which certain deductions taken by the Company were disallowed.SUNAT has objected to the Company’s method of deducting vacation pay accrualsin 2000, a deduction in 2000 for a fixed asset write-off, as well as certainother deductions in both years.  The Companyhas appealed these assessments and resolution is still pending.  The Company received penalties andassessments from SUNAT relating to the treatment of foreign exchangedifferences for 2000 and 2001, which the Company is contesting before SUNAT.

 

MexicanOperations

 

Labor matters*–*

 

In the last several years the Company hasexperienced a number of strikes or other labor disruptions that have had anadverse impact on its operations and operating results. For example, in Peru onAugust 31, 2004, unionized workers at the mining units in Toquepala andCuajone initiated work stoppages and sought additional wage increases based onhigh metal prices.  The strike wasresolved in September 13, 2004. In Mexico, on July 12, 2004, the workersof Mexicana de Cobre site went on strike asking for the review of certaincontractual clauses. Such a review was performed and the workers returned towork 18 days later. On October 15, 2004, the workers of Mexicana deCananea went on strike, followed by the Mexicana de Cobre workers.  The strike lasted for six days at Mexicana deCobre and nine days at Mexicana de Cananea. In each case, the operations at the particular mine ceased until thestrike was resolved.  The Company cannotmake assurances that they will not experience strikes or other labor-relatedwork stoppages in the future that could have a material adverse effect on itsfinancial condition and results of operations.

 

Other legal matters*–*

 

The Company is involved in various other legalproceedings incidental to its operations, but the Company does not believe thatdecisions adverse to it in any such proceedings individually or in theaggregate would have a material adverse effect on its financial position andresults of operations.

 

Our direct and indirect parent corporations,including AMC and Grupo México, have from time to time been named parties invarious litigations involving Asarco.  InMarch 2003, AMC purchased its interest in SCC from Asarco.  In August 2002 the U.S. Department of Justicebrought a claim alleging fraudulent conveyance in connection with Asarco’senvironmental liabilities and AMC’s then-proposed purchase of SCC fromAsarco.  That action was settled pursuantto a Consent Decree dated February 2, 2003.  The consent decree is binding solely on theU.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.  While Grupo México and its affiliates believethat these claims are without merit, we cannot assure you that these or futureclaims, if successful, will not have an adverse effect on our parentcorporations or us.  Any increase in thefinancial obligations of our parent corporations, as a result of mattersrelated to Asarco or otherwise could, among other matters result in our parentcorporations attempting to obtain increased dividends or other funding fromus.  In 2005, certain subsidiaries ofAsarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  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 itssubsidiaries.  As a result of variousfactors, including the above-mentioned work stoppage on August 9, 2005 Asarcofiled a voluntary petition for relief under Chapter 11 of the U.S. BankruptcyCode before the U.S. Bankruptcy Court of Corpus Christi, Texas. Asarco’sbankruptcy case is being joined with the bankruptcy cases of itssubsidiaries.  Asarco is in continuingpossession of its properties and is operating and managing its businesses as adebtor in possession.

 

Asarco believes that by utilizing the Chapter 11process it can achieve an orderly restructuring of its business and finallyresolve, among other contingencies, its environmental and asbestos claims.  However, it is impossible to predict how thebankruptcy court will ultimately rule with respect to such petitions and theimpact such rulings will have on Asarco and its subsidiaries.

 

**NOTE 14-STOCKHOLDERS’ EQUITY:**

 

Merger adjustments*–*

 

Pursuant to U.S. GAAP, since both SCC and Minera Mexicoare under common control for all the periods presented, the transfer of Minera Mexicoto SCC has been reflected at the historical carrying value of Minera Mexico’sassets and liabilities in a manner similar to a pooling of interests.  The difference in the value of the newlyissued 67,207,640 shares of SCC and the net carrying value of Minera Mexico hasbeen recognized in equity as a reduction in additional paid-in capital. Inaddition, Minera Mexico’s historical common stock, treasury stock andadditional paid in capital accounts were eliminated and classified within SCC’sadditional paid-in capital. Minera Mexico’s retained earnings were carriedforward as reported to be combined with retained earnings of SCC.  For the purpose of these financialstatements, the issuing of 67,207,640 shares have been reflected as if they hadbeen 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 sharesoutstanding. Class A common stockholders were entitled to five votes pershare.  Common share stockholders areentitled to one vote per share.

 

In connection with the acquisition of Minera Mexico,the Company’s Class A common stock was converted into common stock andpreferential voting rights were eliminated. On June 9, 2005, Cerro Trading Company, Inc., SPC Investors L.L.C.,Phelps Dodge Overseas Capital Corporation and Climax Molybdenum B.V.,subsidiaries of two of SCC’s founding shareholder’s and affiliates, sold theirequity holdings in SCC.

 

Stock Options:

 

The Company has two stockholder approved plans, aStock Incentive Plan and 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.  The price at which options may be grantedunder the Stock Incentive Plan shall not be less than 100% of their fair marketvalue of the common stock on the date of grant in the case of incentive stockoptions, or 50% in the case of other options. In general, options are not exercisable for six months and expire after10 years from the date of grant.

 

The authorized number of shares under the StockIncentive Plan is 1,000,000 of which 300,000 may be awarded as restrictedstock.  At December 31, 2005 and 2004,645,060 shares are available for future grants under this plan.  There were no outstanding stock options underthis plan at December 31, 2005 or 2004.

 

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The Directors’ Stock Award Plan provides thatdirectors who are not compensated as employees of the Company will beautomatically awarded 200 shares of common stock upon election and 200additional shares following each annual meeting of stockholders thereafter.  Under the directors’ plan, 100,000 shareshave been reserved for awards.  AtDecember 31 2005, 31,200 shares have been awarded under this plan.

 

**NOTE 15-DERIVATIVEINSTRUMENTS:**

 

The Company occasionally uses derivative instruments to manage itsexposure to 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.

 

Copper swaps:

 

In 2005, the Companyentered into copper swap contracts to protect the future sales of 662.6 millionpounds of its 2005 copper production at a fixed copper price.  The Company recorded losses of $23.5 millionrelated 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, theCompany did not hold any open copper swaps.

 

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 financialinstruments, including cash and cash equivalents, accounts receivable (otherthan accounts receivable associated with provisionally priced sales) andaccounts payable, the carrying amounts approximate fair value due to theirshort maturities.  Consequently, suchfinancial instruments are not included in the following table that provides informationabout the carrying amounts and estimated fair values of other financialinstruments:

 

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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 toestimate the fair value of each class of financial instruments for which it is practicableto estimate that value:

 

Accounts receivable associated with provisionallypriced sales: Fair value of copper is based on published forward prices andfair value of molybdenum is based on year-end market prices.

 

Marketable securities: Fair value is based onquoted market prices.

 

Long-term debt: Fair value is based on quotedmarket prices.

 

Interest rate swap: Fair value was calculatedbased on discounted expected future cash flows of interests to be received andpaid.

 

**NOTE 17-CONCENTRATION OF RISK:**

 

The Company operates four copper open-pit mines,five underground poly metal mines, three smelters and eight refineries in Peruand Mexico and substantially all of its assets are located in thesecountries.  There can be no assurancesthat the Company’s operations and assets that are subject to the jurisdictionof the governments of Peru and Mexico will not be adversely affected by futureactions of such governments. Substantially all of the Company’s products are exported from Peru andMéxico to customers principally in United States, Europe, Asia and SouthAmerica.

 

Financial instruments, which potentially subjectthe Company to a concentration of credit risk, consist primarily of cash andcash equivalents, marketable securities and trade accounts receivable.

 

The Company invests or maintains available cashwith various banks, principally in the United States, Mexico, Europe and Peru,or in commercial paper of highly-rated companies.  As part of its cash management process, theCompany regularly monitors the relative credit standing of theseinstitutions.  At December 31, 2005, SCChad invested 29.2% of its cash equivalents and marketable securities withPeruvian banks, of which 41.8% was invested with one institution.  Likewise, SCC invested 6.4% of its cashequivalent and marketable securities with Mexican banks, of which 3.29% wereinvested in one institution.

 

During the normal course of business, the Companyprovides credit to its customers. Although the receivables resulting from these transactions are notcollateralized, the Company has not experienced significant problems with thecollection of receivables.

 

The Company is exposed to credit loss in caseswhere the financial institutions with which it has entered into derivativetransactions (commodity, foreign exchange and currency/interest rate swaps) areunable to pay when they owe funds as a result of 

 

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protection agreements with them. To minimize therisk of such losses, the Company only uses highly-rated financial institutionsthat meet certain requirements. The Company also periodically reviews thecreditworthiness of these institutions to ensure that they are maintainingtheir ratings. The Company does not anticipate that any of the financialinstitutions will default on their obligations.

 

The Company’s five largest trade receivablebalances accounted for 40.9% and 33.7% and 26.5% of the trade accountsreceivable at December 31, 2005, 2004 and 2003, respectively, of which onecustomer represented approximately 14.6%, 10.7% and 6.7%, respectively, of our tradeaccounts receivable.

 

**NOTE 18-RELATED PARTYTRANSACTIONS:**

 

Balances receivable and payable with affiliatedcompanies and related parties 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 transactionsin the ordinary course of business with parties that are controllingshareholders. These transactions include the lease of office space, airtransportation, construction services and products and services relating tomining and refining. The Company lends and borrows funds among affiliates foracquisitions and other corporate purposes. These financial transactions bearinterest.

 

Grupo México, the Company’s ultimate parent andthe majority indirect stockholder of the Company and its affiliates, providesvarious services to the Company. In 2005, these activities were principallyrelated to accounting, legal, tax, financial, treasury, human resources, pricerisk assessment and hedging, purchasing, procurement and logistics, sales andadministrative and other support services. Grupo México is reimbursed for thesesupport services. The total amount paid by the Company to Grupo México for suchservices in 2005, 2004 and 2003 was $13.8 million. The Company expects tocontinue to pay for these services going forward in an amount of$13.8 million per year.

 

The Company paid $0.5 million, $3.3 millionand $3.4 million in 2005, 2004 and 2003, respectively, in interest expenserelated to borrowings from Grupo México.

 

The former holders of the Company’s Class Acommon stock until June 2005 and their affiliates purchase copper and otherproducts from the Company from time to time at prices determined by referenceto the LME and COMEX market price for copper and published prices for otherproducts, 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 ofPhelps Dodge Overseas Corporation and Climax Molybdenum B.V., stockholders ofthe Company until 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 affiliatedcompany of one of the Company’s stockholders until June 2005, purchased $13.7million 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, aformer stockholder of the Company and a subsidiary of Grupo México, used miningequipment. In compliance with Peruvian regulations related to used vehicles andmining equipment, the trucks and mining equipment were independently appraisedat fair market value at the time of purchase for $10 million. Additionallyin 2003, the Company purchased from Asarco mineral exploration properties inChile, at a cost of $3.7 million. The Company used an independentappraisal firm to determine the purchase price.

 

On January 15, 2004, the Company entered into atolling agreement with Asarco.  Underterms of the agreement, in the first quarter of 2004 the Company, through itswholly owned US subsidiary, Southern Peru Limited (“SPL”), commenced deliveringto Asarco, at its Amarillo, Texas refinery, copper cathodes for conversion intocopper rods, 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 that because of a strike at theirfacilities, they would be unable to accept shipments from the Company.  Accordingly, deliveries to the refinery weresuspended and the Company has redirected the copper otherwise intended fordelivery to the refinery to other customers. At December 31, 2005 the Company did not have copper at the Asarcorefinery.  The Company paid Asarco atolling charge upon its receipt of copper rods. These charges, $1.6 million in 2005 and $3.8 million in 2004, are basedon competitive market terms.  ThroughJune 9 2005 the Company sold a portion of the copper treated by Asarco,approximately $13.7 million, to the Marmon Group – Cerro Wire, a stockholder ofthe Company until June 9, 2005 and sold $70.2 million to Cerro, in 2004.  At December 31, 2004 there was $8.5 millionin affiliates accounts receivable related to SPL’s sales to Cerro.

 

In addition to the charges noted above, theCompany paid Asarco $4.9 million and $9.9 million in 2004 and 2003,respectively, for refining and other services.

 

The Company contracted an aggregate ofapproximately $3.2 million and $1.2 million in 2004 and 2003,respectively, for shipping services to and from Peru by Compañía Sud-Americanade Vapores S.A. (“CSAV”), and a subsidiary company. CSAV is a companyindirectly controlled by Quemchi, S.A. Mr. Jaime Claro, a director of SCCduring 2003 and the first half of 2004, is chairman of Quemchi S.A.

 

The Company purchased $0.4 million and $1.3 millionin 2004 and 2003, respectively, of industrial materials from Higher TechnologySolutions S.A. (“Higher Tec”), a Peruvian corporation and a related company.Mr. Carlos González, a son of SCC’s President and Chief Executive Officer,is an investor in Higher Tec and the owner of the related company.Additionally, in 2005 the company purchased $3.3 million and $0.7 million andin 2004 $1.1 million and $0.7 million of industrial material fromHigher Technology S.A.C. and Servicios y Fabricaciones Mecánicas S.A.C.,respectively. Mr. Carlos González is the principal owner of thesecompanies. In addition, the Company purchased $0.2 million, $0.4 millionand $0.2 million, in 2005, 2004 and 2003, respectively, of industrialmaterials from Société Française des Bandes Transporteuses, a French corporation. Mr. AlejandroGonzález, a son of SCC’s President and Chief Executive Officer, is a salesrepresentative with this company.

 

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The Company’s Mexican operations paid fees of $21.0million, $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 paidfees of $29.7 million and $0.4 million in 2005 and 2004, respectively, forconstruction services provided by Mexico Constructora Industrial S.A. de C.V.,an indirect subsidiary of Grupo Mexico. At December 31, 2005 the Company had a balance due of $5.0 million foradvances provided to the company.

 

The Larrea family controls a majority of thecapital stock of Grupo México, and has extensive interests in other businesses,including oil drilling services, construction and real estate. The Companyengages in certain transactions in the ordinary course of business with otherentities controlled by the family relating to mining and refining services, thelease of office space, and air transportation and construction services. Thesetransactions amounted to approximately $3.7 million in 2005, $6.1 millionin 2004 and $8.4 million in 2003.

 

See also the disclosure on the acquisition ofMinera Mexico on page A-54.

 

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

 

**NOTE 19-SEGMENT AND RELATED INFORMATION:**

 

Southern Copper operates in a single industry,namely mining copper.  Prior to the April1, 2005 acquisition of Minera Mexico, the Company determined that itsoperations in Peru fell within one segment. With the acquisition of Minera Mexico the Company continues to operateprincipally in one industry, the mining of copper.  However, because of the demands of managingoperations in two countries, effective April 1, 2005, Company management viewsthe new Southern Peru as having three operating segments and manages on thebasis of these segments.  Additionally,in mining copper the Company produces a number of metal byproducts, mostimportant of which are molybdenum, silver and zinc.  The significant increase in the price ofmolybdenum over the past three years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three coppersegments.  Added to the segment informationis information 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.               Mexican open pit operations,which includes La Caridad and Cananea mine complexes and the smelting andrefining plants and support facilities which service both mines.

 

3.               Mexican undergroundmining operations, which includes five underground mines that produce zinc,copper, silver and gold, a coal and coke mine, and several industrialprocessing 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.

 

116

----

 

Financial information relating to Company’s segments is as follows:

 
| ** **                                                             | ** ** | **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 |   |

 

117

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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 |   |

 

118

----

 

Salesvalue 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 GEOGRAPHICALINFORMATION:**

 

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 hasrecorded provisionally priced sales of 163.7 million pounds of copper, ata forward average price of $2.04 per pound. Also, the Company has recordedprovisionally priced sales of 6.1 million pounds of molybdenum at theyear-end market price of $25.00 per pound. These sales are subject to finalpricing based on the average monthly LME and COMEX copper prices and DealerOxide molybdenum prices in the future month of settlement.

 

Following are the provisionally priced copper andmolybdenum sales outstanding at December 31, 2005:

 

119

----

 

| **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 inaccounts receivable and net sales were as follows at December 31 (inmillions):

 
| ** ** | ** ** | **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 ofthese sales will not have a material effect on the Company’s financial positionor results of operations.

 

The following are the significant outstandinglong-term contracts:

 

Under the terms of a forward sales contract withUnion Minière, as amended, November 12,2003, the Company is required to supply Union Minière, through its agent, S.A. SOGEM N.V., with 18,000tons of blister 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 tonsof copper cathodes annually for a fifteen-year period through December 31,2013.  If the shipment destination isAsia, the pricing of the cathodes is based upon the LME monthly averagesettlement price.  However, if thedestination of shipments is the United States, the pricing of the cathodes isbased upon the COMEX monthly average settlement price plus a producer premium,which is agreed upon annually based on world market terms.  90,000 tons related to a prior contract(period 1994-2000) will be supplied as follows: 48,000 in 2014 and 42,000 in2015.

 

120

----

 

**NOTE 20-QUARTERLY DATA (unaudited)**

(in millions, except pershare 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, Mexico Citytime, at Avenida Baja California No. 200, Fifth Floor, Colonia Roma Sur, MexicoCity, 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:

2575 E. Camelback Rd. Suite 500, Phoenix, Az.85016, USA

Telephone: (602)977-6595

 

121

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**SOUTHERN COPPER CORPORATION**

 

2575 E. Camelback Rd. Suite 500, Phoenix, Az.85016, 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

** **

**CERTIFICATION REQUIRED 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 underSection 302 of the Sarbanes-Oxley Act of 2002, as exhibits to the 2004 AnnualReport on Form 10-K.  The Companyanticipates filing, on a timely basis, the 2006 NYSE certification and isfiling the Section 302 certifications as exhibits to this Annual Report on Form10-K.**

 

122

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Mexico D.F. March 13, 2006

 

To the Board of Directors and Shareholders of Southern CopperCorporation:

 

We have completed integrated audits of SouthernCopper Corporation’s and its subsidiaries 2005 and 2004 consolidated combinedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2005, and an audit of its 2003 consolidated combined financialstatements in accordance with the standards of the Public Company AccountingOversight Board (United States).  Ouropinions, based on our audits, are presented below.

 

Consolidatedcombined 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 in the period endedDecember 31, 2005 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on 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 includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide 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 basedon criteria established in *Internal Control –Integrated Framework*issued by the****Committeeof Sponsoring Organizations of the Treadway Commission (COSO), is fairlystated, in all material respects, based on those criteria.

 

Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2005, based on criteriaestablished in *Internal Control – Integrated Framework*issued by the COSO.  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.  Ourresponsibility is to express opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.  We conducted our audit ofinternal control over financial reporting in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  An audit of internal controlover financial reporting includes obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we consider necessary in thecircumstances.  We believe that our auditprovides a 

 

123

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reasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that(i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and(iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting 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

 

124

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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 DISCLOSURECONTROLS AND PROCEDURES

 

As of December 31, 2005,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s Disclosure Committee and the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Basedupon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic SEC filings.

 

CHANGES IN INTERNALCONTROL OVER FINANCIAL REPORTING

 

There was no change inthe Company’s internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Actof 1934, as amended) that occurred during the quarter ended December 31, 2005that has materially affected, or is reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

MANAGEMENT’S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theCompany.  Under the supervision and withthe participation of management, including the Company’s principal executiveofficer and principal financial officer, the Company conducted an evaluation ofthe effectiveness of its internal control over financial reporting based on theframework in Internal Control-Integrated Framework issued by the Committee of SponsoringOrganization of the Treadway Commission. Based on the evaluation made under this framework, management concludedthat as of December 31, 2005 such internal control over financial reporting iseffective.

 

Because of its inherentlimitations, internal control over financial reporting, may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness for future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or that thedegree of compliance with policies or procedures may deteriorate.

 

Our management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005 has been audited byPricewaterhouseCoopers, an independent registered public accounting firm, asstated in their report which appears herein.

 

Item 9.B.  Other Information

 

None.

 

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PART III

 

Items 10, 11, 12, 13, and14

 

Reference is made to theSection captioned “Executive Officers of the Registrant” on pages A-47 to A-48.  Information in response to the disclosurerequirements specified by Part III, Items 10, 11, 12, 13, and 14 will beincluded in a definitive proxy statement, which will be filed pursuant toRegulation 14A of the 1934 Securities Exchange Act, as amended, prior to April 27,2006 or will be provided by amendment to this Form 10-K, also to be filed nolater than April 30, 2006.

 

The information containedin such definitive proxy statement is incorporated herein by reference.

 

126

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PART IV

 

Item 15.  Exhibits, Financial Statement Schedules andReports on Form 8-K

 

(A) The followingdocuments are filed as part of this report:

 

1.                               FinancialStatements

 

The followingfinancial statements of Southern Copper Corporation and its subsidiaries areincluded at the indicated pages of the document as stated below:

 
| Consolidated  Combined Statement of Earnings for the years ended December 31, 2005, 2004  and 2003                             |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Combined Balance Sheet at December 31, 2005 and 2004                                                             |   |
| Consolidated  Combined Statement of Cash Flows for the years ended December 31, 2005, 2004  and 2003                           |   |
| Consolidated  Combined Statement of Changes in Stockholders’ Equity for the years ended  December 31, 2005, 2004 and 2003 |   |
| Notes to the  Consolidated Combined Financial Statements                                                                       |   |
| Reports of Independent  Registered Public Accounting Firm                                                                      |   |

 

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,                                      |

 

127

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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 as10.2 through 10.6 above are the management contracts or compensatory plans orarrangements required to be filed pursuant to Item 15(c) of Form 10-K.

 

128

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Schedule II

Valuation and QualifyingAccounts 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 |   |

 

129

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused his Report on Form 10-K to be signed onits 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 requirementsof the Securities Exchange Act of 1934, this Report on Form 10-K has beensigned below by the following persons on behalf of the Registrant and in thecapacities 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          |   |                                                           |   |
|                           |   |                                                           |
| /s/ J. Eduardo  Gonzalez       |   | Vice  President, Finance, Chief Financial Officer and Director |
| J. Eduardo  Gonzalez           |   | (principal  financial officer)                                 |   |
|                           |   |                                                           |
| /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

 

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Southern CopperCorporation

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                                                                                                                          |       |             |

 

131

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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)                                                                                                                                                        |   |   |

 

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