**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**2006FORM 10-K****ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006     Commission File Number: 1-14066**

**SOUTHERNCOPPER CORPORATION**

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(Exactname of registrant as specified in its charter)

 

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

 

| **11811 North Tatum Blvd. Suite 2500, Phoenix, AZ**                          | ** ** | **85028**  |
|------------------------------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)                                    |       | (Zip code) |
|                                                                         |       |       |
| Registrant’s  telephone number, including area code: **(602) 494-5328** |

 

Securitiesregistered pursuant to Section 12(b) of the Act:

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|                                          |                 | Name of each  exchange   |
|------------------------------------------|----------------------|--------------------------|
|                                     | Title of each  class |                     | on which  registered |   |
| Common Stock,  par value $0.01 per share |                 | New York Stock  Exchange |
|                                     |                 | Lima Stock  Exchange     |
|                                          |                      |                          |  |  |  |  |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.Yes x     No o

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15d of the Act.Yes o     No x

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentof 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 x |   | Accelerated  filer o |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

 

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

Asof January 31, 2007, there were of record 294,461,250 shares of Common Stock,par value $0.01 per share, outstanding, and the aggregate market value of theshares of Common Stock (based upon the closing price on such date as reportedon the New York Stock Exchange - Composite Transactions) of Southern CopperCorporation held by non affiliates was approximately $4,584.3 million.

 

 

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PORTIONS OF THEFOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 
| Part III: | Proxy statement in connection with the 2007 Annual  Meeting of Stockholders |
|-----------|-----------------------------------------------------------------------------|
|      |                                                                        |
| Part IV:  | Exhibit index is on Page B1 through B2.                                     |

 

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PART I

Item 1.  Business

THE COMPANY

We are a leading integrated producer of copper,molybdenum, zinc and silver.  All of ourmining, smelting and refining facilities are located in Peru and in Mexico andwe conduct exploration activities in those countries and Chile.  See “Review of Operations” for maps of ourprincipal mines, smelting facilities and refineries.  Our operations make us the largest miningcompany in Peru and also in Mexico. Based on the “*October2006,**Copper Quarterly Industry and Market Outlook*”,as published by CRU International, we are the fourth largest publicly tradedcopper mining company in the world based on 2005 mine output.  We were incorporated in Delaware in 1952 andhave conducted copper mining operations since 1960.  Since 1996, our common stock has been listedon both the New York Stock Exchange and the Lima Stock Exchange.

Our Peruvian copper operations involve mining, millingand flotation of copper ore to produce copper concentrates and molybdenumconcentrates; the smelting of copper concentrates to produce anode and blistercopper; and the refining of blister /anode copper to produce copper cathodes.As part of this production process, we also produce significant amounts ofmolybdenum and silver.  We also producerefined copper using SX/EW technology. We operate the Toquepala and Cuajone mines high in the Andes mountains,approximately 984 kilometers southeast of the city of Lima, Peru.  We also operate a smelter and refinery westof the Toquepala and Cuajone mines in the coastal city of Ilo, Peru.

Our Mexican operations are conducted through oursubsidiary, Minera Mexico S.A. de C.V. (“Minera Mexico”), which we acquired onApril 1, 2005.  Minera Mexico engagesprincipally in the mining and processing of copper, zinc, silver, gold, leadand molybdenum.  Minera Mexico operatesthrough subsidiaries that are grouped into three separate units.  Mexicana de Cobre S.A. de C.V. (together withits subsidiaries, the “Mexcobre Unit”) operates La Caridad, an open-pit coppermine, a copper ore concentrator, a SX/EW plant, a smelter, refinery and a rodplant.  Mexicana de Cananea S.A. de C.V.(together with its subsidiaries, the “Cananea Unit”) operates Cananea, anopen-pit copper mine, which is located at the site of one of the world’slargest copper ore deposits, a copper concentrator and two SX/EW plants.  Industrial Minera Mexico, S.A. de C.V. andMinerales Metálicos del Norte, S.A. (together with its subsidiaries, the “IMMSAUnit”) operate five underground mines that produce zinc, lead, copper, silverand gold, a coal and coke mine and several industrial processing facilities forzinc and copper.

We utilize many up-to-date mining and processing methods,including global positioning systems and computerized mining operations.  Our operations have a high level of verticalintegration that allows us to manage the entire production process, from themining of the ore to the production of refined copper and other products andmost related transport and logistics functions, using our own facilities,employees and equipment.

The sales prices for our products are largely determinedby market forces outside of our control. For additional information on the pricing of the metals we produce,please see “Metal prices”.  Ourmanagement, therefore, focuses on cost control and production enhancement toimprove profitability.  We achieve thesegoals through capital spending programs, exploration efforts and cost reductionprograms.  Our focus is on seeking toremain profitable during periods of low copper prices and maximizing results inperiods 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/.”, “nuevosol” or “nuevos soles”, are to Peruvian Nuevos Soles; and references to “peso”,“pesos”, or “Ps.”, are to Mexican pesos.

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UnitInformation:

Unless otherwise noted, all tonnages are in metrictons.  To convert to short tons, multiplyby 1.102.  All ounces are troyounces.  All distances are inkilometers.  To convert to miles,multiply by 0.621. To convert hectares to acres, multiply 2.47

ORGANIZATIONAL STRUCTURE

The following chart describes our organizationalstructure starting with our controlling stockholder.  For clarity of presentation, the chartidentifies only principal subsidiaries and eliminates intermediate holdingcompanies.

 

We are a majority-owned,indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”).  Through its wholly-owned subsidiaries,Grupo Mexico currently owns approximately 75.1% of our capital stock. GrupoMexico’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 operations in Peru through a registeredbranch (the “SPCC Peru Branch”).  TheSPCC Peru Branch comprises substantially all of our assets and liabilitiesassociated with our copper operations in Peru. The SPCC Peru Branch is not a corporation separate from us and,therefore, obligations of SPCC Peru Branch are direct obligations of SCC andvice-versa.  It is, however, anestablishment, registered pursuant to Peruvian law, through which we holdassets, incur liabilities and conduct 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, we acquired Minera Mexico, the largestmining company in Mexico on a stand-alone basis, from Americas MiningCorporation (“AMC”), a subsidiary of Grupo Mexico, our controllingstockholder.  Minera Mexico is a holdingcompany and all of its operations 

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are conducted through subsidiaries that are grouped intothree units: (i)the Mexcobre unit (ii) the Cananea unit and (iii) the IMMSAunit.  We now own 99.95% of MineraMexico.

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 materially depending upon factors includingthe risks and uncertainties relating to general U.S. and international economicand political conditions, the cyclical and volatile prices of copper, othercommodities and supplies, including fuel and electricity, availability ofmaterials, insurance coverage, equipment, required permits or approvals andfinancing, the occurrence of unusual weather or operating conditions, lowerthan expected ore grades, water and geological problems, the failure of equipmentor processes to operate in accordance with specifications, failure to obtainfinancial assurance to meet closure and remediation obligations, laborrelations, litigation and environmental risks, as well as political andeconomic risk associated with foreign operations.  Results of operations are directly affectedby 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 unique chemical and physicalproperties, including high electrical conductivity and resistance to corrosion,as well as excellent malleability and ductility that has made it a superior materialfor use in the electrical energy, telecommunications, building construction,transportation and industrial machinery businesses.  Copper is also an important metal innon-electrical applications such as plumbing, roofing and, when alloyed withzinc to form brass, in many industrial and consumer applications.

Copper industryfundamentals, including copper demand, price levels and stocks, strengthened inlate 2003 and copper prices have continued to improve through 2006 from the15-year price lows 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 thatto effectively manage our business we needed to focus on three operating componentsor segments.  These segments are ourPeruvian operations, our Mexican open-pit operations and our Mexicanunderground operations, known as our IMMSA unit.  Our Peruvian operations include the Toquepalaand Cuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both facilities.  Our Mexican open-pit operations combined twounits of Minera Mexico, Mexcobre and Mexcananea, which includes La Caridad andCananea mine complexes, smelting and refining plants and support facilitieswhich service both complexes.  Our IMMSAunit includes five underground mines that produce zinc, lead, copper, silverand gold, a coal and coke mine, and several industrial processing facilitiesfor copper, zinc and silver.   Segmentinformation is included under the captions “Overview-Metal production” and “Orereserves”, as well as in Note 20 of our Consolidated Combined FinancialStatements.

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REVIEW OF OPERATIONS

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

COPPER AND MOLYBDENUM EXTRACTIONPROCESSES

Our operations include open-pit and underground mining,concentrating, copper smelting, copper refining, copper rod production, solventextraction/electrowinning (SX/EW), zinc refining, sulfuric acid production,molybdenum concentrate production and silver and gold refining.  The copper and molybdenum extraction processis summarized below.

OPEN-PIT MINING

In an open-pit mine, the production process beginsat the mine pit, where waste rock, leaching ore and copper ore are drilled andblasted and then loaded onto diesel-electric trucks by electricshovels.  Waste is hauled to dump areasand leaching ore is hauled to leaching dumps. The ore to be milled is transported to the primary crushers.

UNDERGROUND MINING

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

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CONCENTRATING

The copper ore with a copper grade over 0.4% from the primarycrusher or the copper, zinc and lead-bearing ore from the underground mines istransported to a concentrator plant where gyratory crushers break the ore intosizes no larger than three-quarters of an inch.  The ore is then sent to a mill section whereit is ground to the consistency of fine powder. The finely ground ore is mixed with water and chemical reagents andpumped as a slurry to the flotation separator where it is mixed with certainchemicals.  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 concentrated copper contains molybdenum it isfirst processed in a molybdenum plant as described below under “MolybdenumProduction.”

COPPER SMELTING

Copper concentrates are transported to a smelter, wherethey are smelted using a furnace, converter and anode furnace to produce eithercopper blister (which is in the form of cakes with air pockets) or copperanodes (which are cleaned of air pockets). At the 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 containsapproximately 65% copper.  Copper matteis then sent to the converters, where the material is oxidized in two steps:(i) the iron sulfides in the matte are oxidized with silica, producing slagthat is returned to the reverberatory furnaces; and (ii) the copper containedin the matte sulfides is then oxidized to produce copper that, after casting,is called blister copper, containing approximately 98% to 99% copper, oranodes, containing approximately 99.7% copper. Some of the blister production is sold to customers and the remainder issent to the refinery.

COPPER REFINING

Anodes are suspended in tanks containing sulfuric acidand copper sulfate.  A weak electricalcurrent is passed through the anodes and chemical solution and the dissolvedcopper is deposited on very thin starting sheets to produce copper cathodes containingapproximately 99.99% copper.  During thisprocess, silver, gold and other metals (for example, palladium, platinum andselenium), along with other impurities, settle on the bottom of the tank(anodic slime).  This anodic slime isprocessed at a precious metal plant where selenium, silver and gold arerecovered.

COPPER ROD PLANT

To produce copper rods, copper cathodes are first meltedin a furnace and then dosified in a casting machine.  The dosified copper is then extruded andpassed through a cooling system that begins solidification of copper into a 60 ́50 millimeter copper bar.  Theresulting copper bar is gradually stretched in a rolling mill to achieve thedesired diameter.  The rolled bar is thencooled and sprayed with wax as a preservation agent and collected into a rodcoil that is compacted and sent to market.

SOLVENT EXTRACTION/ELECTROWINNING (SX/EW)

An alternative to the conventionalconcentrator/smelter/refinery process is the leaching and SX/EW process.  During the SX/EW process, certain types oflow-grade ore with a copper grade under 0.4% are leached with sulfuric acid toallow copper content recovery.  The acidand copper solution is then agitated with a solvent that contains chemicaladditives that attract copper ions.  Asthe solvent is lighter than water, it floats to the surface carrying with itthe copper content.  The solvent is thenseparated using an acid solution, freeing the copper.  The acid solution containing the copper isthen moved to electrolytic extraction tanks to produce copper cathodes.  Refined copper can be produced

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more economically (though over a longer period) and fromlower grade ore using the SX/EW process instead of the traditionalconcentrating, smelting and refining process.

MOLYBDENUM PRODUCTION

Molybdenum is recovered from copper-molybdenumconcentrates produced at the concentrator. The copper-molybdenum concentrate is first treated with athickener until it becomes slurry with 60% solids.  The slurry is then agitated in a chemical andwater solution and pumped to 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).  The molybdenum froth is skimmed off, filteredand dried to produce molybdenum concentrates of approximately 58% containedmolybdenum.

ZINC REFINING

Metallic zinc is produced through electrolysis using zincconcentrates 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 sulfide solution is treatedby electrolysis to produce refined zinc and to separate silver and gold, whichare recovered as concentrates.

SULFURIC ACID PRODUCTION

Sulfur dioxide gases are produced in the copper smeltingand zinc roasting processes.  As a partof our environmental preservation program, we treat the sulfur dioxideemissions at two of our Mexican plants and at Peruvian processing facilities toproduce sulfuric acid, some of which is, in turn, used for the copper leachingprocess, with the rest sold to mining and fertilizer companies located inMexico, Peru, the United States, Chile, Australia and other countries.

SILVER AND GOLD REFINING

Silverand gold are recovered from copper, zinc and lead concentrates in the smeltersand refineries, and from slimes through electrolytic refining.

SLOPESTABILITY:

PeruvianOperations

Boththe Toquepala and Cuajone pits are approximately 700 meters deep and under thepresent mine plan configuration will reach a depth of 1,200 meters.  The deepening pit presents us with a numberof geotechnical challenges.  Perhaps theforemost concern is the possibility of slope failure, a possibility that allopen pit mines face.  In order tomaintain slope stability, in the past we have decreased pit slope angles,installed additional or duplicate haul road access, and increased strippingrequirements.  We have also responded tohydrological conditions and removed material displaced by a slope failure.  There is no assurance that we will not haveto 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 geotechnical challenges relating to slope stability of theopen pit mines, we have taken the following 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 was principally a review of pit design formines with greater than 700 meter depth. The discussions included practices for monitoring, data collection andblasting processes.

Based on the conceptsdefined at the Vancouver meetings, we initiated slope stability studies todefine the mining of reserves by optimum design.  These studies were

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performed by outsideconsultants and included slope stability appraisals, evaluation of thenumerical 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.  One of the major changes implemented wasslope angle reduction at both mines, Toquepala by five degrees average andCuajone by seven degrees average. Although this increased the waste included in the mineable reservecalculation, it also improved the stability of the pits.

Since 1998, a walldepressurization program has been in place in both pits.  This consists of a horizontal drillingprogram, which improves drainage thereby reducing saturation and increasingwall stability.  Additionally, a newblasting control program was put in place, implementing vibration monitoringand blasting designs of low punctual energy. Also a new slope monitoring system was implemented using reflectionprisms, deformation inclinometers and piezometers for water level control, aswell 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.

Mexican operations

In 2004, our 15-year mine plan study for the La Caridad minewas given to an independent consulting firm for geotechnical evaluation.  The purpose of the plan was to develop aprogram of optimum bench design and inter-ramp slope angles for the mine.  A number of recommendations and observationswere presented by the consultants, these included a recommendation that 72degrees be the maximum average bench face angle, additionally, single benchingwas recommended for the upper sections of the west, south and east walls of themain pit.  Also, double benching wasrecommended for the lower levels of the main pit and single benching recommendedfor the upper slope segments that are composed of either alluvial material,mine waste dumps or mineralized stockpile material.  Alternatively, slopes composed of thesematerials may be designed at a continuous 37-degree inclination.  We are reviewing these recommendations, butas final pit limits have not been established at La Caridad, all current pitwalls are effectively working slopes. ****Structure data and geomechanical data collected bythe Company from cell-mapping and oriented-core databases provided the basisfor the geotechnical evaluation.****

A geotechnical evaluation, of the Cananea 15-year pit slopedesign, was prepared by an independent mine consulting firm.  Recommendations included slope design anglesas well as recommendations related to slope stability.  Currently the mine is in the second phase ofa geohydrological study.  This is afollow-up study of a phase 1 study completed by independent water managementconsultants in 2004.  A third phase ofthe study, which addresses pit dewatering design, will follow and is expectedto be completed in 2008.  Therecommendations of the consulting firm are being implemented.

OVERVIEW — METALPRODUCTION

The table below sets forth 2006, 2005 and 2004 mineproduction data by metal.

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| **(million pounds)**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Copper contained in  concentrates                 |       | 1,116    |       | 1,268    |       | 1,331    |       |
| Copper in SX/EW  cathodes                         |       | 219      |       | 253      |       | 252      |       |
| Total copper                                      |       | 1,335    |       | 1,521    |       | 1,583    |       |
|                                              |       |     |       |     |       |     |       |
| Zinc contained in  concentrate                    |       | 301      |       | 317      |       | 295      |       |
| Molybdenum contained in  concentrate              |       | 26       |       | 33       |       | 32       |       |
| Silver contained in  concentrate (million ounces) |       | 16       |       | 18       |       | 19       |       |
| Gold contained in concentrate (thousands ounces)  |       | 28       |       | 32       |       | 34       |       |

 

**METAL PRODUCTION BY SEGMENTS**

Set forth below are descriptions of the operations andother information relating to the operations included in each of our threesegments.

**PERUVIAN OPERATIONS**

OurPeruvian segment operations include the Cuajone and Toquepala mine complexesand the smelting and refining plants, industrial railroad which links Ilo,Toquepala and Cuajone and port facilities.

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

Cuajone

Our Cuajone operations consist of an open-pit copper mineand a concentrator located in southern Peru, 30 kilometers from the city ofMoquegua and 840 kilometers from Lima. Access to the Cuajone property is by plane from Lima to Tacna (1:20hours) and then by highway to Moquegua and Cuajone (3:30 hours).  The concentrator has a milling capacity of87,000 tons per day.  Overburden removalcommenced in 1970 and ore production commenced in 1976.  Our Cuajone operations utilize a conventionalopen-pit mining method to collect copper ore for further processing in ourconcentrator.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Cuajone operations:

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| ** **                            | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual operating  days           |       | (days)     |       | 365      |       | 365      |       | 366      |       |
| Total material mined                  |       | (kt)       |       | 112,410  |       | 109,855  |       | 101,265  |       |
| Total ore mined                       |       | (kt)       |       | 28,299   |       | 29,544   |       | 29,380   |       |
| Copper grade                          |       | (%)        |       | 0.703    |       | 0.643    |       | 0.792    |       |
| Molybdenum grade                      |       | (%)        |       | 0.020    |       | 0.026    |       | 0.025    |       |
| Leach material mined  (1)             |       | (kt)       |       | 41.6     |       | -        |       | -        |       |
| Leach material grade                  |       | (%)        |       | 0.655    |       | -        |       | -        |       |
| Stripping ratio                       |       | (x)        |       | 2.97     |       | 2.72     |       | 2.45     |       |
| Total material milled                 |       | (kt)       |       | 28,228   |       | 29,621   |       | 29,319   |       |
| Copper recovery                       |       | (%)        |       | 87.87    |       | 85.96    |       | 83.64    |       |
| Molybdenum recovery                   |       | (%)        |       | 62.6     |       | 69.7     |       | 64.5     |       |
| Copper concentrate                    |       | (kt)       |       | 666.7    |       | 619.2    |       | 752.9    |       |
| Molybdenum concentrate                |       | (kt)       |       | 6.4      |       | 9.5      |       | 8.7      |       |
| Copper concentrates  average grade    |       | (%)        |       | 26.16    |       | 26.43    |       | 25.82    |       |
| Molybdenum concentrate  average grade |       | (%)        |       | 55.18    |       | 55.58    |       | 53.74    |       |
| Copper in concentrate                 |       | (kt)       |       | 174.4    |       | 163.7    |       | 194.4    |       |
| Molybdenum in concentrate             |       | (kt)       |       | 3.5      |       | 5.3      |       | 4.7      |       |

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| Key:   | kt = thousand tons                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------|
|   | x = ratio obtained dividing waste plus leachable  material by ore mined                                       |
|   | Copper and molybdenum grades are referred to as  total copper grade and total molybdenum grade, respectively. |

(1)  In 2006, 41.6 kt of copper oxides wereextracted from the Cuajone mine. No oxide material was mined in 2005 and 2004.

Major Cuajone mine equipment include six trucks with a290-ton capacity, twenty trucks with a 218-ton capacity and eight trucks with a231-ton capacity, three shovels with a 56-cubic yard capacity, one shovel with a42-cubic yard capacity, one front end loader with a 33-cubic yard capacity,four electric drills, seven track dozer, seven rubber track dozer, three frontend loader CAT 988 and 966 and three motorgraders.  We continuously improve and renovate ourequipment.

Geology

The Cuajone porphyry copper deposit is located on thewestern slopes of Cordillera Occidental, in the southern-most Andes Mountainsof 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.

The Cuajone deposit is located approximately 28kilometers from the Toquepala deposit and is part of the Toquepala Group dated60 to 100 million years (Upper Cretaceous to Lower Tertiary).  The Cuajone lithology includes volcanic rocksfrom Cretaceous to Quaternary.  There are32 rock types including, pre-mineral rocks, balsaltic andesite, porphyriticrhyolite, Toquepala dolerite and intrusive rocks, including diorite,porphyritic latite, breccias and dikes. In addition, the following post-mineral rocks are present, theHuaylillas formation which appears in the south-southeast side of the depositand has been formed by conglomerates, tuffs, traquites and agglomerates.  These formations date 17 to 23 million yearsand are found in the Toquepala Group as discordance.  The Chuntacala formation which dates 9 to 14million years and is formed by conglomerates, flows, tuffs and agglomeratesplaced gradually in some cases and in discordance in others.  Also Quaternary deposits are found in therivers, creeks and hills.  The mineralogyis simple with regular grade distribution and vertically funnel-shaped.  Ore minerals include chalcopyrite(CuFeS2), chalcosine(Cu2S) andmolybdenite (MoS2) withoccasional galena, tetraedrite and enargite as non economical ore.

Exploration in the mine

Exploration activities during the drill campaign in 2006are as follows:

 

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| **Studies**        | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                     |
|--------------------|------------|------------|------------|-----------|------------|-------------------------------|
| Infill Drilling    |       | 2,996.95   |       | 35        |       | Evaluated the 2007 Mine  Plan |
| Geotechnical Holes |       | 1,681.85   |       | 12        |       | Piezometric holes             |
| **Total**          |       | 4,678.80   |       | 47        |       |                          |

 

Concentrator

Our Cuajone operations use state-of-the-art computermonitoring systems at the concentrator, the crushing plant and the flotationcircuit in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.40% isloaded onto rail cars and sent to the milling circuit, where giant rotatingcrushers reduce the size of the rocks to approximately one-half of aninch.  The ore is then sent to the ballmills, which grind it to the consistency of fine powder.  The finely ground powder is agitated in awater and reagents solution and is then transported to flotation cells.  Air is pumped into the cells producing afroth that carries the copper mineral to the surface but not the waste rock, ortailings.  Recovered copper, with theconsistency of froth, is filtered and dried to produce copper concentrates withan average copper content of approximately 26.2%.  Concentrates are then shipped by rail to thesmelter at Ilo.  Sulfides under 0.40%copper are considered waste.

Tailings are sent to thickeners where water isrecovered.  The remaining tailings aresent to the Quebrada Honda dam, our principal tailings storage facility.

Major Cuajone concentrator plant equipment includes: oneprimary crusher, three secondary crushers, seven tertiary crushers, 10 primaryball mills, four ball mills for re-grinding rougher concentrate; one verticalmill for re-grinding rougher concentrate; thirty 100ft3 cells forrougher flotation; four 160ft3 cells for rougher flotation; five 60ft3 cells forcleaner scavenger; six 1350ft3 cells for cleaner scavenger; fourteen 300ft3 cells forcleaner scavenger; eight column cells; one Larox filter press; two thickenersfor Cu-Mo and Cu concentrates; three tailings thickeners; one High-Rate tailings thickener and six pumps forrecycling reclaimed water.

Since the 1999 mill expansion, only some minor changeshave been made to the plant. The plant’s equipment is in good physicalcondition and currently in operation.  In2003 and 2004, two additional column cells and four additional flotation cellswere installed to increase resident time and copper recovery.

During 2005 and 2006, eight ball mill shells werereplaced after operating at Cuajone for 26 years.

Toquepala

Our Toquepala operations consist of an open-pit coppermine and a concentrator.  We also refinecopper at the SX/EW facility through a leaching process.  Toquepala is located in southern Peru, 30kilometers from Cuajone and 870 kilometers from Lima.  Access is by plane from Lima to the city ofTacna (1:20 hours) and then by the Pan-American highway to Camiara (1:20 hours)and by trail road to Toquepala (1 hour). The concentrator has a milling capacity of 60,000 tons per day.  The SX/EW facility has a refining capacity of56,000 tons per year.  Overburden removalcommenced in 1957 and ore production commenced in 1960.  Our Toquepala operations utilize aconventional open-pit mining method to collect copper ore for furtherprocessing in our concentrator.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Toquepala operations:

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| ** **                            | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 365      |       | 365      |       | 366      |       |
| Total material  mined                 |       | (kt)       |       | 131,607  |       | 134,505  |       | 115,120  |       |
| Total ore mined                       |       | (kt)       |       | 20,813   |       | 21,224   |       | 21,820   |       |
| Copper grade                          |       | (%)        |       | 0.797    |       | 0.812    |       | 0.817    |       |
| Molybdenum grade                      |       | (%)        |       | 0.043    |       | 0.039    |       | 0.044    |       |
| Leach material  mined                 |       | (kt)       |       | 42,827   |       | 16,693   |       | 9,708    |       |
| Leach material  grade                 |       | (%)        |       | 0.221    |       | 0.222    |       | 0.268    |       |
| Estimated leach  recovery             |       | (%)        |       | 28.44    |       | 28.24    |       | 26.87    |       |
| SX/EW cathode  production             |       | (kt)       |       | 35.8     |       | 36.5     |       | 42.1     |       |
| Stripping ratio                       |       | (x)        |       | 5.32     |       | 5.34     |       | 4.28     |       |
| Total material  milled                |       | (kt)       |       | 20,628   |       | 21,225   |       | 21,807   |       |
| Copper recovery                       |       | (%)        |       | 91.43    |       | 91.47    |       | 90.28    |       |
| Molybdenum  recovery                  |       | (%)        |       | 65.0     |       | 64.6     |       | 62.2     |       |
| Copper  concentrate                   |       | (kt)       |       | 557.5    |       | 576.4    |       | 580.1    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 10.7     |       | 9.7      |       | 11.2     |       |
| Copper  concentrate average grade     |       | (%)        |       | 27.22    |       | 27.32    |       | 27.73    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 54.08    |       | 54.67    |       | 53.71    |       |
| Copper in  concentrate                |       | (kt)       |       | 151.8    |       | 157.5    |       | 160.9    |       |
| Molybdenum in  concentrate            |       | (kt)       |       | 5.8      |       | 5.3      |       | 6.0      |       |

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Key:                       kt = thousand tonsx = ratio obtained dividing waste plusleachable material by ore mined.  Copper and molybdenum grades arereferred to as total copper grade and total molybdenum grade, respectively.

Major mine equipment at Toquepala includes thirteen290-ton capacity trucks, five 231-ton capacity trucks, eighteen 218-ton capacity trucks, six 181-toncapacity trucks, one 78-ton capacity shovel, three 73-ton capacity shovels, three20-ton capacity shovels, five electric rotary drills, one Down the Hole (DTH)drill for pre-split and one front-end loader with a capacity of 37 tons.

We continuously improveand renovate our equipment. In 2003, we started a project to install acrushing, conveying and spreading system at the Toquepala mine to improve costcontainment and production efficiency. The new system is expected to improve recovery at our leachingfacilities and will largely eliminate costly truck haulage in the process.  The primary crusher was placed in operationin August 2005.  The overland conveyors1, 2 and 3, and the grasshoppers 30 and 31 were put in the productionline.  The conveying reached its ratedcapacity of 6,500 ton/hr. in September 2005. The construction of the ramp will continue until final completionexpected in the first quarter of 2007. After reaching level 2875 we will begin the spreading process in orderto leach this material with a higher level of copper recovery.  Additionally in 2006 we put into operationfive new Komatsu 930E3 trucks improving hauling efficiency and costeffectiveness.  In 2006, we have alsoplaced in operation a new pre-splitting drill to fit better with the slopestability requirements.

Geology

The Toquepala porphyry copper deposit is located on thewestern slopes of Cordillera Occidental, in the southern-most Andes Mountainsof Peru.  The deposit is part of amineral district that contains two additional known deposits, Cuajone andQuellaveco.

The Toquepala deposit is inthe southern region of Peru, located on the western slope of the Andes mountainrange, approximately 120 kilometers from the border with Chile.  This region extends into Chile and is home tomany of the worlds most significant known copper deposits.  The deposit is in a territory with intrusiveand eruptive activities of rhyolitic and andesitic rocks which are 70 millionyears old (Cretaceous-Tertiary) and which created a series of volcaniclava.  The lava is composed of rhiolites,andesites and volcanic agglomerates with a western dip and at an altitude of1,500 meters.  These series are known asthe Toquepala Group.  Subsequently,different intrusive activities occurred 

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which broke and smelted therocks of the Toquepala Group.  Theseintrusive activities resulted in diorites, granodiorites and dikes of porphyricdacite.  Toquepala has a simple mineralogywith regular copper grade distribution. Economic ore is found as disseminated sulfurs throughout the deposit asveinlets, replenishing empty places or as small aggregates.  Ore minerals include chalcopyrite (CuFeS2),chalcosine (Cu2S) and molybdenite (MoS2). A secondary enrichment zone is also found with thicknesses between 0 and150 meters.

Exploration in the mine

Exploration activities during the drill campaign in 2006are as follows:

 
| **Studies**                 | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                                              |
|-----------------------------|------------|------------|------------|-----------|------------|--------------------------------------------------------------------------------------------------------|
| Leach Material Confirmation |       | 4,738.02   |       | 33        |       | Phase III exploration on East side of pit to confirm  leach material indicated in the long-term model. |
| Geotechnical Drilling       |       | 413.16     |       | 1         |       | Inclinometers relocation and information about  inside rock from the east side using oriented drills.  |
| Total                       |       | 5,151.18   |       | 34        | ** ** | ** **                                                                                             |

 

Concentrator

Our Toquepala concentrator operations usestate-of-the-art computer monitoring systems in order to coordinate inflows andoptimize operations.  Material with acopper grade over 0.40% is loaded onto rail cars and sent to the crushingcircuit, where giant rotating crushers reduce the size of the rocks toapproximately one-half of an inch.  Theore is then sent to the ball and bar mills, which grind it in a mix with waterto the consistency of fine powder.  Thefinely ground powder mixed with water is then transported to flotationcells.  Air is pumped into the cellsproducing a froth, which carries the copper mineral to the surface but not thewaste rock, or tailings.  Recoveredcopper, with the consistency of froth, is filtered and dried to produce copperconcentrates with an average copper content of approximately 27.5%.  Concentrates are then shipped by rail to thesmelter at Ilo.

Tailings are sent to thickeners where water isrecovered.  The remaining tailings aresent to the Quebrada Honda dam, our principal tailings storage facility.

Majorconcentrator plant equipment at Toquepala include one primary crusher, threesecondary crushers, six tertiary crushers, eight bar mills, thirty-three ballmills, one distributed control system (DCS), one optimizing control system(OCS), forty-two flotation cells, fifteen column cells, seventy-two Agitair1.13 m3 cells, two Larox pressure filters, five middling thickeners, twotailings thickeners, three high-rate tailings thickeners, one tripper car, onetrack tractor and a recycled water pipe line.

In order to reduce operating andmaintenance costs and to comply with environmental requirements, we replacedthe disc filters at the Toquepala concentrator with a new vertical press filterin 2005.

SX/EW Plant

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

Copper oxides from Cuajone with a copper grade higherthan 0.359%, with an acid solubility index higher than 20% and a cyanidesolubility index higher than 50% are leached. In 

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Toquepala,the leach material cutoff grade is 0.095% and therefore material with a totalcopper grade between 0.095% and 0.40% are leached.

Major equipment at the CuajoneSX plant include one primary jaw crusher and one secondary cone crusher with a capacity of390 tons per hour, to process Cuajone’s oxides.  In addition the plant has one agglomeration mill, one front end loader and three trucks each witha capacity of 109 tons for agglomerated ore hauling to the leach dumps.  Copper in solution produced in Cuajone issent to Toquepala through an eight-inch pipe laid alongside the Cuajone -Toquepala railroad track.

Major equipment at theToquepala plant include two spray systems, one for the south dump and one for the northwest dump and four pregnantsolution (PLS) ponds, each with its own pumping system to send the solution tothe SX/EW Plant.  The plant also hasthree lines of SX, each with a nominal capacity of 1,068 m3/hr of pregnantsolution and 162 electrowinning cells arranged in two lines, one with 122 cellsand the other with 40 cells.

Equipment and main facilitiesare supported by a SX/EW maintenance plan and a SX/EW quality management systemto assure good physical condition and high availability. The  SX/EW plant has maintained its ISO 9000certification since 2002.

Processing Facilities - Ilo

OurIlo smelter and refinery complex is located in the southern part of Peru, 17kilometers north of the city of Ilo, 121 kilometers from Toquepala, 147kilometers from Cuajone, and 1,240 kilometers from the city of Lima.  Access is by plane from Lima to Tacna (1:20hours) and then by highway to the city of Ilo (two hours).  Additionally, we maintain a port facility inIlo, from which we ship our product and receive supplies.  Product shipped and supplies received movebetween Toquepala, Cuajone and Ilo on our industrial railroad.

Smelter

Our Ilo smelter provides copper for the refinery weoperate as part of the same facility. Copper produced by the smelter exceeds the refinery’s capacity and theexcess is sold to other refineries around the world.  The nominal installed capacity of the smelteris 1,131,500 tons per year.

In January 2007, the Company finalized the smeltermodernization project, with the completion of this project we fulfilled ourcommitments under the Environmental Compliance and Management Program(known by its Spanish acronym, PAMA), whichwas executed with the Peruvian government on January 31, 1997. With themodernization of the smelter, we increased sulfur recapture over the 92%requirement established by the PAMA.  Thenew smelter is expected to maintain production at current levels and useadvanced technology to reduce sulfur emissions, in order to achieve the maingoal of the project.

The new copper smelter uses a technology used in manysmelters throughout the world. For the fusion process, it utilizes an Isasmelttechnology furnace, a stationary vertical furnace 17 meters high, with atreatment capacity of 165 tons of copper concentrates per hour.  The smelter also uses two rotary holdingfurnaces (RHF) to separate the matte, with 62% copper content, from theslag.  The smelter also has a new oxygenplant, with a production capacity of 1,000 tons per day.  In the conversion process, four Pierce Smithconverter furnaces are used to produce copper with 99.3% purity.  This copper product is then sent to the newanodes plant, which has two rotary furnaces of 400 tons capacity each and twocasting wheels that produce anodes with 99.7% purity.  The anode plant was completed in January 2006and blister production was mostly replaced with anode production, enabling usto eliminate a costly re-melting step in our production process.

In addition, we have built a new sulfuric acid plant torecapture sulfur dioxide in excess of the 92% recapture requirement establishedin the PAMA.  The new acid plant 

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has a production capacity of 800,000 tons of acid peryear.  Also, we have built two storagetanks and an effluents plant.  The newsmelter also includes a new seawater intake system, two desalinization plantsto provide water for the process, an electric substation and a new system ofcentralized controls using advanced computer technology.

The table below sets forth2006, 2005 and 2004 production and sales information for our Ilo smelter plant:
| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Concentrate smelted  (kt)           |       | 1,107    |       | 1,206    |       | 1,213    |       |
| Average copper recovery             |       | 97.29    | %          | 97.57    | %          | 97.23    | %          |
| Blister production (kt)             |       | 30.8     |       | 325.6    |       | 320.7    |       |
| Average blister grade  (%)          |       | 99.349   | %          | 99.349   | %          | 99.349   | %          |
| Anode production (kt)               |       | 298.4    |       | —   |       | —   |       |
| Average anode grade (%)             |       | 99.708   | %          | —   |       | —   |       |
| Sulfuric acid produced  (kt)        |       | 376      |       | 370      |       | 390      |       |
| Blister sales (kt)                  |       | 3.0      |       | 41.3     |       | 29.7     |       |
| Anode sales (kt)                    |       | 13.5     |       | —   |       | —   |       |
| Average blister sales  price ($/lb) |       | 3.10     |       | 1.87     |       | 1.35     |       |
| Average anode sales price ($/lb)    |       | 3.17     |       | —   |       | —   |       |

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Key:         kt =thousand tons

As of December 31, 2006, major equipment at our Ilosmelter include two reverberatory furnaces, seven Pierce Smithconverters, one El Teniente converter, two anode furnaces and a twin wheelcasting system, a sulfuricacid plant with a capacity of 300,000 tons per year and an oxygen plant with acapacity of 100,000 tons per year.  Thisequipment does not include the additional equipment from the smeltermodernization.

Refinery

The refinery consists of an anode plant, an electrolyticplant, a precious metal plant and a number of ancillary installations.  The refinery is producing grade A coppercathode of 99.998% purity.  The nominalcapacity is 280,000 tons per year. Anodic slimes are recovered from the refining process and then sent tothe precious metals facility to produce refined silver, refined gold andcommercial grade selenium.

The table below sets forth2006, 2005 and 2004 production and sales information for our Ilo refinery andprecious metals plants:
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cathodes produced (kt)                     |       | 273.3    |       | 285.2    |       | 280.7    |       |
| Average copper grade  (%)                  |       | 99.998   | %          | 99.998   | %          | 99.998   | %          |
| Refined silver produced  (000 Kg)          |       | 119.2    |       | 109.9    |       | 118.9    |       |
| Refined gold produced  (kg)                |       | 260.9    |       | 183.7    |       | 174.4    |       |
| Commercial grade  selenium produced (tons) |       | 49.8     |       | 48.7     |       | 48.5     |       |
| Average cathodes sales  price ($/lb)       |       | 3.20     |       | 1.79     |       | 1.35     |       |
| Average silver sales  price ($/Ounce)      |       | 11.46    |       | 7.26     |       | 6.54     |       |
| Average gold sales price ($/Ounce)         |       | 589.76   |       | 447.33   |       | 407.85   |       |

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Key:        kt=thousands tons

Major anodecasting equipment at the Ilo refinery includes two tilting furnaces, each witha nominal capacity of 400 tons, one casting wheel with a casting capacity of 70tons/hr., this equipment is on a stand-by basis, since the completion of theanode casting at the smelter.

The refinery alsoincludes one electrolytic plant, with 926 commercial cells, fifty-two startingsheets cells, sixteen primary liberator cells, sixteen secondary liberatorcells, an anodic slime treatment circuit (includes leaching andcentrifugation), and a 

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crude NiSO4production circuit.

Main equipment atthe precious metals plant includes one selenium reactor, one Copella furnace,twenty-four silver refining cells including an induction furnace for shots andsilver ingots production and one hydrometallurgical system for gold recoverythat also includes an induction furnace.

The refinery alsoincludes these facilities:

·                  Laboratory:Provides sample analysis services to many areas of the Company, including theanalysis of final products like copper cathodes, electrowon cathodes, copperconcentrates and oil analysis.

·                  Maintenance:  Is responsible for maintenance of allequipment involved in the process.

·                  Auxiliaryfacilities: Includes one desalinization plant to produce fresh water and aGonella boiler to produce steam used in the refinery and two stand-by KMHboilers.

Other facilities in Ilo are a coquina plant with aproduction capacity of 200,000 tons per year of seashells and a lime plant witha capacity of 80,000 tons per year.  Wealso operate an industrial railroad to haul production and supplies betweenToquepala, Cuajone and Ilo.

The industrial railroad’s main equipment includesfourteen locomotives of different types including 4000HP EMD’s SD70, 3000HP EMD’sGP40-3, 2250HP GE U23B and others.  Mainrollingstock has approximately 490 cars of different types and capacities,including ore concentrate cars, gondolas, flat cars, dump cars, boxcars, tankcars and others. The track runs in a single 214 km standard gauge line.  The total length of the track system isaround 257 kilometers including main yards and sidings lengths.

The infrastructure includes 27 kilometers of track undertunnels, maintained by company personnel. The industrial railroad includes a car repair shop which is responsiblefor maintenance and repair of the car fleet. During the last eight years an upgrade program has been completed whichupgraded the main line (into 115 and 133 pound rail).  Also a program to upgrade the ore concentratecars to improve its net capacity from 70 to 100 net tons is well advanced.  Traffic is around 24 hours a day in order toguarantee production requirements. Annual tonnage transported is approximately 5.5 millions of metric tons.

MEXICAN  OPERATIONS

Followingis a map indicating the approximate location of our Mexican mines and  processing facilities:

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MEXICAN OPEN PIT SEGMENT

OurMexican open-pit segment operations combines two units of Minera Mexico,Mexcobre and Mexcananea, which includes La Caridad and Cananea mine complexesand smelting and refining plants and support facilities which service bothcomplexes.

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

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Cananea

We operate an open-pit copper mine, a concentrator andtwo SX/EW plants at our Cananea mining complex, located 71 kilometers from LaCaridad, Mexico and 61 kilometers south of the Arizona border on the outskirtsof the town of Cananea.  Cananea isconnected by paved highways to the city of Agua Prieta in the northeast, to thetown of Nacozari in the southeast, and to the town of Imuris in the west.  Cananea is also connected by railway to AguaPrieta and Nogales.  A municipal airportis located approximately 20 km to the northeast of Cananea.

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The concentrator has a milling capacity of 76,700 tonsper day.  The SX/EW facility has arefining capacity of 54,750 tons per year. The Cananea ore deposit is one of the world’s largest porphyry copperdeposits.  Cananea is the oldestcontinuously operated copper mine in North America, with operations tracingback to 1899.  The mine was acquired bythe Anaconda Company in 1917 and mined exclusively for underground metals untilthe early 1940s when the first open pit was developed.  Anaconda sold 51% of the Compañía Minera deCananea, S.A. (Cominca) to Nacional Financiera (Nafin), a development bank fromthe Mexican government, in 1971 and transferred its remaining interest to Nafinin 1982.  Two attempts to sell thecompany in 1988 failed, and a strike in 1989 precipitated Cominca’s bankruptcyproceedings.  In 1990 through a publicauction procedure, Mexcobre acquired from the receivership 100% of the assetsat approximately $475 million.  Cananea uses a conventional open-pit miningmethod to collect copper ore for further processing in our concentrator.Crushed leachable material is transported by conveyor belts and as run-of-mineby trucks to leach heaps.

The table below sets forth 2006, 2005 and 2004 productioninformation for Cananea:

 
| ** **                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual operating  days       |       | (days)(1)  |       | 331      |       | 365      |       | 359      |       |
| Total material mined              |       | (kt)       |       | 114,595  |       | 102,508  |       | 93,160   |       |
| Total ore mined                   |       | (kt)       |       | 22,896   |       | 25,638   |       | 26,258   |       |
| Copper grade                      |       | (%)        |       | 0.588    |       | 0.572    |       | 0.583    |       |
| Leach material mined              |       | (kt)       |       | 59,678   |       | 52,112   |       | 39,048   |       |
| Leach material grade              |       | (%)        |       | 0.292    |       | 0.301    |       | 0.284    |       |
| Estimated leach  recovery         |       | (%)        |       | 62.50    |       | 50.00    |       | 50.00    |       |
| SX/EW cathode  production         |       | (kt)       |       | 52.5     |       | 56.4     |       | 50.2     |       |
| Stripping ratio                   |       | (x)        |       | 4.01     |       | 3.00     |       | 2.55     |       |
| Total material milled             |       | (kt)       |       | 22,915   |       | 25,622   |       | 26,256   |       |
| Copper concentrate                |       | (kt)       |       | 386.0    |       | 436.5    |       | 469.3    |       |
| Copper concentrate  average grade |       | (%)        |       | 28.83    |       | 27.21    |       | 26.26    |       |
| Copper in concentrate             |       | (kt)       |       | 111.3    |       | 118.7    |       | 123.2    |       |
| Copper recovery                   |       | (%)        |       | 82.56    |       | 81.03    |       | 80.53    |       |

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Key:                       kt = thousand tonsx = ratio obtained dividing waste plusleachable material by ore mined.The copper grade is total grade.(1)  Whilethere were 47 days of strikes in 2006, only 34 production days were lost as 13days of production were       maintained with the support ofmanagement personnel.

Major Cananea mine equipmentinclude 45 trucks for ore hauling with capacities that range from 240 to 360tons, eight shovels with capacities that range from 39 to 70 tons, and mineauxiliary equipment including, eight drillers, five front loaders, five motorgraders and twenty-four tractors.

Geology

The Cananea porphyry copper deposit is unusual in thatthe ore explored and sampled at the mine has been of consistent quality, unlikemost copper deposits which evidence a decline in grades at deeper zonesexplored.

Cananea is in the Southern Cordilleran Orogen, whichextends to the northwest of the lower 48 states of the United States.  The geological and structural features of theregion are representative of large copper deposits of the disseminated porphyrytype.  The mining district lies within ametalogenetic Basin and Range province.  Thegeology is complex and consists of a series of Paleozoic age calcareous rocks,from Cambrian to Carboniferous, correlated to a type section in southeastern Arizona, that unconformably overliea Precambrian granitic basement.  Aprominent deep-seated igneous activity occurred during various epochs.  Volcanic rocks, grading in composition fromrhyolites to andesites and tuffs, were intruded, by shallow, quartz monzoniteporphyries of Laramide age, along structural weak zones, thus closing thegeologic history of the region.

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Intense and pervasive hydrothermal phyllic-argillicalteration and sulfide mineralization also occurred in several episodes.  An initial early pegmatitic stage, associatedwith chalcopyrite, bornite, pyrite and molybdenite in breccia chimneys,followed by an extensive flooding of hydrothermal solutions, widely accompaniedwith mineralization of quartz, pyrite and chalcopyrite.  A subsequent stage of quartz-pyrite comprisesand closes the primary sequence.

An extensive and economically important zone of supergeneenrichment, principally with disseminations and veinlets of chalcocite (Cu2S),formed below the iron oxide capping. This zone coincides with the topography and has an average thickness of300 meters.  In the hypogene zone, thepredominant sulfide mineral is chalcopyrite (CuFeS2).  Likewise, it has been documented thatmolybdenite (MoS2) content in the deposit increases with depth.

The Cananea copper porphyry deposit is considered uniquesince the deepest exploration conducted to date in the core of the deposit hasconfirmed a significant increase in copper grades.  It is unlike other deposits of similar type,which commonly display relative lower grades at depth.  The district is also unique for theoccurrence of high grade breccia pipes, usually in the form of clusters thatfollow the mineralized trend.  Thecurrent aerial dimensions of the mineralized ore body are 5 X 3 kilometers andprojects to more than one kilometer at depth. Considering the potential that the ore deposit in Cananea presents, itis expected that the operation can support a sizeable increase in the capacityof copper production.

Mine Exploration

The exploration program to define and quantify themolybdenum mineral resources and reserves started in the third quarter of2005.  We conducted a geo-statisticanalysis to define the interpolation parameters, modeling and quantification ofmolybdenum associated with copper reserves in the deposit.  In the first quarter of 2006, we started adiamond drilling program.  We expect tofinish this exploration program in the first quarter of 2007 which will in-fillmolybdenum grade information and will validate the data base in the model.Recent molybdenum exploration results, in the Cananea porphyry deposit continueto show a close correlation with copper mineralization.

In 2005, we started an exploration drilling program nearthe porphyric copper ground.  The mainobjective of this exploration is to define the areas where leach and barrenmaterial will be placed.  The firstdrilling stage was carried out through the inverse circulation method reachinga depth close to 300 meters.  The secondexploration stage started in the third quarter of 2006 with core drilling rigswith the objective of exploring at greater depths.

Preliminaryresults of the exploration program being conducted in the peripheral zones ofthe deposit, confirm the mineralization and alteration patterns evidencedthroughout the Cananea mining district.

Concentrator

Cananea uses state-of-the-art computer monitoring systemsat the concentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. Material with a copper grade over 0.38% is loaded onto trucks and sentto the milling circuit, where giant rotating crushers reduce the size of therocks to approximately one-half of an inch. The ore is then sent to the ball and bar mills, which grind it to theconsistency of fine powder.  The finelyground powder is agitated in a water and reagents solution and is thentransported to flotation cells.  Air ispumped into the cells producing a froth, which carries the copper mineral tothe surface but not the waste rock, or tailings.  Recovered copper, with the consistency offroth, is filtered and dried to produce copper concentrates with an averagecopper content of 28.83%.  Concentratesare then shipped by rail to the smelter at La Caridad.

The Cananea concentrator plant, with a milling capacityof 76,700 tons per day, consists of two primary crushers, four secondarycrushers, ten tertiary crushers, ten primary 

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mills, a distributed control system, five mills forre-grinding, 103 primary flotation cells, ten column cells, 70 exhaustionflotation cells, seven thickeners and three ceramic filters.

SX/EW Plant

The Cananea unit operates a leaching facility and twoSX/EW plants.  All copper ore with agrade lower than the mill cut-off grade 0.38%, but higher than 0.25% copper, isdelivered to the leaching dumps.  A cycleof leaching and resting occurs for approximately five years to achieve a 62.5%recovery in the run-of-mine dumps and three years for the crushed leachmaterial to achieve a 73% recovery.

The Cananea unit currently maintains 18.2 million cubicmeters of pregnant leach solution in inventory with a concentration ofapproximately 1.82 grams of copper per liter.

Major equipment at the two SX-EW plants of Cananeainclude two crushing systems (No. 1 and No. 2). Crushing system No. 1 has a capacity of 32,000 tons per day, 10 milliontons per year, and includes an apron feeder, a conveyor belt feeder, sevenconveyor belts system and a distributor car. Crushing system No. 2 has a capacity of 48,000 tons per day, 15 milliontons per year, and includes one crusher, a conveyor belt feeder, three conveyorbelts and a distributing car.  There are fourirrigation systems for the dumps and 6 dams for Pregnant Leach Solution(PLS).  Plant I has three solventextraction tanks with a nominal capacity of 960 m3/hr of PLS and 46electrowinning cells.  Plant I has adaily production capacity of 30 tons of copper cathodes with 99.999%purity.  Plant II has five trains ofsolvent extraction with a nominal capacity of 55,000 lt./min of PLS and 216cells distributed in two bays.  Plant IIhas a daily production capacity of 120 tons of copper cathodes with 99.999%purity.

We intend to increase ourCananea unit’s production of copper cathodes by building a new SX/EW plant,(SXEW III).  The plant will producecopper cathodes of ASTM grade 1 or LME grade A. The project includes the installation of storage for deliverablesrequired for operation of the plant and the installation of an emergency powerplant and a fire protection system.  Theproject is currently underway and when completed in 2009, we expect to produce33,000 tons per year of electrowon cathodes.

La Caridad

The La Caridad complex includes an open-pit mineconcentrator, smelter, copper refinery, precious metals refinery, rod plant,SX/EW plant, lime plant and two sulfuric acid plants. La Caridad mine and millare located about 23 km southeast of the town of Nacozari de Garcia innortheastern Sonora.  Nacozari is about264 km northeast of the Sonora state capital of Hermosillo and 121 km south ofthe US-Mexico border.  Nacozari isconnected by paved highway with Hermosillo and Agua Prieta and by rail with theinternational port of Guaymas, and the Mexican and United States railsystems.  An airstrip with a reportedrunway length of 2,500 meters is located 36 km north of Nacozari, less than onekilometer away from the La Caridad copper smelter and refinery.  The smelter and the sulfuric acid plants, aswell as the refineries and rod plant, are located approximately 24 km from themine, and the lime plant is situated 18 km from the U.S. border.  Access is by paved highway and by railroad.

The concentrator began operations in June 1979, themolybdenum plant in June 1982, the smelter in June 1986, the first sulfuricacid plant in July 1988, the SX/EW plant in July 1995, the second sulfuric acidplant in January 1997, the copper refinery in July 1997, the rod plant in April1998 and the precious metals refinery in July 1999.

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The table below sets forth 2006, 2005 and 2004 productioninformation for La Caridad:
| ** **                            | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)(1)  |       | 229      |       | 364      |       | 365      |       |
| Total material  mined                 |       | (kt)       |       | 46,606   |       | 75,465   |       | 72,430   |       |
| Total ore mined                       |       | (kt)       |       | 16,872   |       | 31,551   |       | 27,574   |       |
| Copper grade                          |       | (%)        |       | 0.449    |       | 0.483    |       | 0.504    |       |
| Molybdenum grade                      |       | (%)        |       | 0.0348   |       | 0.0324   |       | 0.0341   |       |
| Leach material  mined                 |       | (kt)       |       | 19,109   |       | 29,969   |       | 22,450   |       |
| Leach material  grade                 |       | (%)        |       | 0.252    |       | 0.260    |       | 0.274    |       |
| Estimated leach  recovery             |       | (%)        |       | 34.39    |       | 38.54    |       | 36.68    |       |
| SX/EW cathode  production             |       | (kt)       |       | 11.2     |       | 22.0     |       | 21.8     |       |
| Total material  milled                |       | (kt)       |       | 16,637   |       | 31,644   |       | 27,488   |       |
| Stripping ratio                       |       | (x)        |       | 1.76     |       | 1.39     |       | 1.63     |       |
| Copper  concentrate                   |       | (kt)       |       | 227.8    |       | 449.6    |       | 401.6    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 4.5      |       | 7.4      |       | 6.5      |       |
| Copper  concentrate average grade     |       | (%)        |       | 25.49    |       | 27.20    |       | 27.49    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 55.92    |       | 56.88    |       | 56.69    |       |
| Copper in  concentrate                |       | (kt)       |       | 58.1     |       | 122.3    |       | 110.4    |       |
| Molybdenum in  concentrate            |       | (kt)       |       | 2.5      |       | 4.2      |       | 3.7      |       |
| Copper recovery                       |       | (%)        |       | 77.69    |       | 79.95    |       | 79.62    |       |

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Key:                       kt =thousand tonsx = ratio obtained dividing waste plus leachable material by ore mined(1)  In 2006 there were 125 days ofstrikes.The copper and molybdenum grade are total grade.  The molybdenum grade value corresponds tomolybdenum disulfide (molybdenite); molybdenum recovery is presently about43.2%.

Major mine equipment include thirty-two trucks for orehauling with capacity that range 170 to 240 tons, eight shovels with individual capacities that range 16 to 43tons.  Loading and auxiliary equipmentinclude six drillers, four front loaders, four motor graders and twenty-onetractors.Geology

The La Caridad deposit is a porphyry copper deposittypical of those in the southern basin and range province in the southwesternUnited States.  The La Caridad mine usesa conventional open-pit mining method. The ore body is situated within a mountain top,  which gives La Caridad the advantage of arelatively low waste-stripping ratio, natural pit drainage and relativelyshort haul distances for both ore and waste. The mining method involves drilling, blasting, loading and haulage ofwaste, leach and ore to waste and leaching dumps and to the primary crushers.

LaCaridad deposit is located in northeastern Sonora, Mexico.  The deposit is situated near the crest of theSierra Juriquipa, about 15 kilometers southeast of the town of Nacozari,Sonora, Mexico.  The Sierra Juriquiparises to elevations of around 2,000 meters in the vicinity of La Caridad and isone of the many north-trending mountain ranges in Sonora that form a southernextension of the Basin and Range province.

The La Caridad porphyry copperdeposit occurs exclusively in felsic to intermediate intrusive igneous rocksand associated breccias.  Host rocksinclude diorite and granodiorite.  Theserocks are intruded by a quartz monzonite porphyry stock and by numerous brecciamasses, which contain fragments of all the older rock types.

Supergene enrichment,consisting of complete to partial chalcosite (Cu2S) replacement of chalcopyrite(CuFeS2).  The zone of supergeneenrichment occurs as a flat and tabular blanket with an average diameter of1,700 meters and  thickness generallybetween 0 and 90 meters.

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Economic ore is found as disseminatedsulfurs within the central part of the deposit. Sulfide-filled breccias cavities are most abundant in the intrusivebreccias.  This breccias-cavitymineralization occurs as sulfide aggregates which have crystallized in thespaces separating breccias clast.  Nearthe margins of the deposit, mineralization occurs almost exclusively inveinlets.  Ore minerals includechalcopyrite (CuFeS2), chalcosite (Cu2S) and molybdenite (MoS2).

Mine Exploration

We have been mining the LaCaridad orebody for over 25 years.  Theextent of the model area is approximately 6,000 meters by 4,000 meters withelevation ranging from 750 to 1,800 meters.

Fourteen drilling campaignshave been conducted on the property since 1968. These campaigns drilled a total of 3,182 drill holes.  There are 2,055 reverse circulation drillholes.  The rest are diamond drill holes,and some hammer drilling.  A total of521,406 meters have been drilled through January 2007.

Currently,La Caridad is drilling a new exploration program, the budget is for 25,000meters.  The target is to get down to the900 level in order to reduce the drilling space and to define the copper andmolybdenum mineralization continuity and also carry out metallurgical testingfor the flotation and leaching processes.

Concentrator

La Caridad uses state-of-the-art computer monitoringsystems at the concentrator, the crushing plant and the flotation circuit inorder to coordinate inflows and optimize operations.  The concentrator has a current capacity of90,000 tons of ore per day.

Ore extracted from the mine with a copper grade over0.30% is processed at the concentrator and is processed into copperconcentrates and molybdenum concentrates. The copper concentrates are sent to the smelter and the molybdenumconcentrate is exported.  The molybdenumrecovery plant has a capacity of 2,000 tons per day of copper-molybdenumconcentrates.  The lime plant has acapacity of 340 tons of finished product per day.

La Caridad concentrator plant has a milling capacity of90,000 tons per day and consists of two primary crushers, six secondarycrushers, twelve tertiary crushers, twelve ball mills, a master milling controlsystem, 100 primary flotation cells, four re-grinding mills, 96 cleaningflotation cells, twelve thickeners and six drum filters.

In2004, we improved our concentrator with the acquisition of an allied primarycrusher.  In addition, in 2003 weimproved our La Francisca leach dam with a pumping and instrumentation system.

SX/EW Plant

Approximately 481.4 million tons of leaching ore with anaverage grade of approximately 0.25% copper have been extracted from the LaCaridad open-pit mine and deposited in leaching dumps from May 1995 to December31, 2006.  All copper ore with a grade lowerthan the mill cut-off grade 0.30%, but higher than 0.15% copper, is deliveredto the leaching dumps.  In 1995, wecompleted the construction of a new SX/EW facility at La Caridad that hasallowed processing of this ore and certain leach ore reserves that are notmined and has resulted in a reduction in our production costs of copper.  The SX/EW facility has a total capacity of21,900 tons of copper cathodes per year.

The La Caridad SX-EW plant has nine irrigation systemsfor the dumps and two PLS dams, a container of heads that permits the combinationof the solutions of both dams and feeds the SX/EW plant with a more homogenousconcentration.  The plant has threetrains of solvent extraction with a nominal capacity of 2,070 m3/hr and 94electrowinning cells 

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distributed in one single electrolytic bay.  The plant has a daily production capacity of62 copper cathodes tons with 99.999% purity.

Processing Facilities — La Caridad

OurLa Caridad complex includes a smelter, an electrolytic copper refinery, aprecious metal refinery and a copper rod plant. The distance between this complex and the La Caridad mine isapproximately 24 kilometers.

Smelter

Copper concentrates are carried to the La Caridad smelterwhere they are processed and cast into copper anodes of 99.2% purity.  Sulfur dioxide off-gases collected from theflash furnaces and converters are processed into sulfuric acid, at two sulfuricacid plants.  This acid is used by ourSX/EW plants and the remaining volumes are sold to third parties.

Almostall of the anodes produced in the smelter are sent to the La Caridad copperrefinery.  The actual installed capacityof the smelter is 1,000,000 tons per year, a capacity that is sufficient totreat all the concentrates of the La Caridad and Cananea mining complexes.  The smelter includes a flash typeconcentrates drier, a steam drier, a flash furnace, one El Teniente  modified converted furnace, two electricfurnaces for the cleaning of slag, three Pierce Smith converters, threeraffinate furnaces and two casting wheels. The anode production capacity is 300,000 tons per year.

Refinery

Mexcobre includes an electrolytic copper refinery at LaCaridad that uses permanent cathode technology. The actual installed capacity of the refinery is 300,000 tons peryear.  The refinery consists of an anodeplant with a preparation area, an electrolytic plant with anelectrolytic cell house with 1,115 cells and 32 releaser cells, two cathodestripping machines, an anode washing machine,a slime treatment plant and a number of ancillary installations.  The refinery is producing grade A coppercathode 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 and shipped to the La Caridadprecious metals refinery to produce silver and gold.

Theoperations of the precious metal refinery are divided into two stages: (i) theantimony is eliminated from the slime; and (ii) the slime is dried in a steamdryer.  After this the dried slime is smeltedand a gold and silver alloy is obtained, which is known as dore.  The precious metal refinery plant has ahydrometallurgic stage and a pyrometallurgic stage, besides a steam drier, doremolding system Kaldo furnace, 20 electrolytic cells in the silver refinery, oneinduction furnace for silver, one silver ingot molding system, two reactors forobtaining fine gold.  The process endswith the refining of the gold and silver alloy.

CopperRod Plant

A rod plant at the Mexcobre complex was completed in April1998 and reached its full annual operating capacity of 150,000 tons in May1999.  The plant is producing eightmillimeter copper rods with a purity of 99.99%. The rod plant includes a vertical furnace, one retention furnace,one molding machine, one laminating machine, one coiling machine and one coilcompacter.

Otherfacilities include a lime plant with a capacity of 132,000 tons per yearand located near the city of Agua Prieta in the State of Sonora; two sulfuricacid plants, one with an annual capacity of 2,625 tons and the second with anannual capacity of 2,135 tons; three oxygen plants, two with a productioncapacity of 200,000 tons per year and the third, with a capacity of 100,000tons per year

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andtwo power turbogenerators that use the kiln residual heat from the furnace, thefirst with a 11.5 Mw capacity and the second with a 25 Mw capacity.

The table below sets forth 2006, 2005 and 2004 productioninformation for the La Caridad processing facilities:
| ** **                        | ** ** | ** ** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Smelter**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total copper  concentrate smelted |       | (kt)       |       | 724.0      |       | 894.7      |       | 820.5      |       |
| Anode copper  production          |       | (kt)       |       | 242.4      |       | 282.4      |       | 250.9      |       |
| Average copper  content in anode  |       | (%)        |       | 99.28      |       | 99.25      |       | 99.21      |       |
| Average smelter  recovery         |       | (%)        |       | 97.44      |       | 97.40      |       | 97.41      |       |
| Sulfuric acid  production         |       | (kt)       |       | 670.5      |       | 833.4      |       | 778.4      |       |
| **Refinery**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Refined cathode  production       |       | (kt)       |       | 200.4      |       | 233.7      |       | 202.1      |       |
| Refined silver  production        |       | (000 kg)   |       | 131.0      |       | 142.5      |       | 90.9       |       |
| Refined gold  production          |       | (Kg)       |       | 722        |       | 817        |       | 575        |       |
| **Rod  Plant**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Copper rod production             |       | (kt)       |       | 96.6       |       | 113.2      |       | 69.5       |       |

 
| ** **                                    | ** ** | ** **         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| **Sales data**                           |       |               |       |     |       |     |       |     |       |
| Copper  concentrate                           |       | (kt)               |       | —   |       | 22.7     |       | —   |       |
| Average realized  price copper   concentrates |       | ($ per lb)    |       | —   |       | 1.73     |       | —   |       |
| Anode Copper                                  |       | (kt)               |       | —   |       | —   |       | —   |       |
| Average realized  price copper rod            |       | ($ per lb)    |       | 3.11     |       | 1.75     |       | 1.35     |       |
| Average premium  copper rod                   |       | ($ per lb)    |       | 0.08     |       | 0.07     |       | 0.06     |       |
| Average realized  price gold                  |       | ($ per ounce) |       | 596.83   |       | 442.92   |       | 408.35   |       |
| Average realized  price silver                |       | ($ per ounce) |       | 11.58    |       | 7.40     |       | 6.65     |       |
| Average realized price  sulfuric acid         |       | ($ per ton)   |       | 41.86    |       | 35.52    |       | 18.33    |       |

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Key:        kt =thousand tons

MEXICAN IMMSA UNIT

OurIMMSA unit (underground mining poly-metallic division) produces zinc, lead,copper, silver, gold and has a coal and coke mine, and several industrialprocessing facilities for zinc, lead, copper, silver and operates five underground mining complexessituated in central and northern Mexico. All of IMMSA’s mining facilities employ exploitation systems andconventional equipment.  We believe thatall the plants and equipment are in satisfactory operating condition.  IMMSA’s principal mining facilities includeCharcas, Santa Barbara, San Martin, Santa Eulalia and Taxco.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Mexican IMMSA unit:

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| ** **                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average annual  operating days(*) |       |       |       | 323      |       | 311      |       | 311      |       |
| Total material  mined and milled  |       | (kt)       |       | 4,407    |       | 4,618    |       | 4,389    |       |
| Zinc average ore  grade           |       | (%)        |       | 3.56     |       | 3.58     |       | 3.46     |       |
| Zinc concentrate                  |       | (kt)       |       | 252.1    |       | 264.3    |       | 244.1    |       |
| Zinc concentrate  average grade   |       | (%)        |       | 54.17    |       | 54.33    |       | 54.79    |       |
| Zinc average  recovery            |       | (%)        |       | 87.06    |       | 86.80    |       | 88.01    |       |
| Lead average ore  grade           |       | (%)        |       | 0.57     |       | 0.58     |       | 0.61     |       |
| Lead concentrate                  |       | (kt)       |       | 38.9     |       | 38.5     |       | 37.5     |       |
| Lead concentrate  average grade   |       | (%)        |       | 49.06    |       | 50.71    |       | 50.19    |       |
| Lead average  recovery            |       | (%)        |       | 76.32    |       | 72.70    |       | 70.77    |       |
| Copper average  ore grade         |       | (%)        |       | 0.41     |       | 0.44     |       | 0.50     |       |
| Copper  concentrate               |       | (kt)       |       | 46.4     |       | 56.4     |       | 68.3     |       |
| Copper  concentrate average grade |       | (%)        |       | 22.72    |       | 22.68    |       | 22.03    |       |
| Copper average recovery           |       | (%)        |       | 59.09    |       | 62.32    |       | 68.19    |       |

kt = thousand tons(*) Weighted average annual operating daysbased on total material mined and milled in the five mines: Charcas, SanMartin, Taxco, Santa Barbara and Santa Eulalia

Charcas

The Charcas mining complex is located 111 kilometersnorth of the city of San Luis Potosi in the State of San Luis Potosi,Mexico.  Charcas is connected to thestate capital by a paved highway of 130 km. 14 km from the southeast of the Charcas complex is the “Los Charcos”railroad station which connects with the Mexico-Laredo railway.  Also, a paved road connects Charcas to thecity of Matehuala through federal highway no. 57 and begins at the northeast ofthe Charcas town site.  The complexincludes three underground mines and one flotation plant and produces zinc,lead and copper concentrates, with significant amounts of silver.  The Charcas mining district was discovered in1573 and operations in the 20th century began in 1911.  The Charcas mine is characterized by lowoperating costs and good quality ores and is situated near the zincrefinery.  We have expanded productioncapacity of the mine by 32% since 1993, and the Charcas mine is now Mexico’slargest producer of zinc.

The Charcas complex’s equipment include nine jumbodrilling tools, sixteen scoop trams for mucking and loading, five trucks andfour locomotives for internal ore haulage and three hoists.  For treating the ore there are two primarycrushers, one secondary crusher, one tertiary crusher, four mills and threeflotation circuits.

Geology

The Charcas mining district occupies the east-centralpart of the Mexican Central Mesa and is part of the Sierra Madre MetallogenicProvince.  Geological historystarts in the Superior Triasic, where sandy clay sediments were depositedargilloarenaceous.  Due to emersion inthe beginning of the Jurassic Superior, the sediments suffered intense erosion,settling on continental sediments.  Thissequence was affected by tectonic effort, which folded and failed on this rockpackage.  Later the positioning ofintrusive rocks originated fractures, which gave way to positioning of mineraldeposits.  The site’s paragenesissuggests two stages of mineralization. First minerals are rich in silver, lead and zinc, with abundant calciteand small quantities of quartz chalcopyrite. Second, there is a link of copper and silver, where the characteristicminerals are chalcopyrite, lead ore with silver content, pyrite and scarcesphalerite.  Economic ore is found as replacement sulfurs in carbonates host rock.The ore mineralogy is comprised predominantly of calcopyrite (CuFeS2), sphalerite(ZnS), galena (PbS) and silver minerals as diaphorite (Pb2Ag3Sb3S8).

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Mine exploration

In Charcas, 23,607 metersof diamond drilling were executed from underground stations.  With this drilling, 416,422 tons were addedto the reserve base in 2006.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Charcas mine:
| ** **                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days)     |       | 323      |       | 324      |       | 326      |       |
| Total material  mined and milled  |       | (kt)       |       | 1,343    |       | 1,328    |       | 1,317    |       |
| Zinc average ore  grade           |       | (%)        |       | 5.37     |       | 5.68     |       | 5.76     |       |
| Zinc concentrate                  |       | (kt)       |       | 117.8    |       | 123.6    |       | 123.8    |       |
| Zinc concentrate  average grade   |       | (%)        |       | 56.90    |       | 57.11    |       | 57.34    |       |
| Zinc average  recovery            |       | (%)        |       | 92.97    |       | 93.59    |       | 93.56    |       |
| Lead average ore  grade           |       | (%)        |       | 0.20     |       | 0.29     |       | 0.33     |       |
| Lead concentrate                  |       | (kt)       |       | 4.6      |       | 6.0      |       | 7.1      |       |
| Lead concentrate  average grade   |       | (%)        |       | 27.14    |       | 36.75    |       | 38.44    |       |
| Lead average  recovery            |       | (%)        |       | 45.86    |       | 56.14    |       | 63.51    |       |
| Copper average  ore grade         |       | (%)        |       | 0.21     |       | 0.20     |       | 0.20     |       |
| Copper  concentrate               |       | (kt)       |       | 4.2      |       | 2.9      |       | 2.5      |       |
| Copper  concentrate average grade |       | (%)        |       | 26.08    |       | 27.62    |       | 25.50    |       |
| Copper average recovery           |       | (%)        |       | 38.16    |       | 30.36    |       | 24.17    |       |

kt = thousand tons

The Charcas mine uses the hydraulic cut-and-fill methodand the room-and-pillar mining method with descending benches.  The broken ore is hauled to the undergroundcrusher station.  The crushed ore is thenhoisted to the surface for processing in the flotation plant to produce lead,zinc and copper concentrates.  Thecapacity of the flotation plant is 4,000 tons of ore per day.  The lead concentrate produced at Charcas istreated at a third party refinery in Mexico. The zinc and copper concentrates are treated at our San Luis Potosi zincrefinery and copper smelter.

Santa Barbara

The Santa Barbara mining complex is located approximately26 kilometers southwest of the city of Hidalgo del Parral in southernChihuahua, Mexico.  The area can bereached via paved road from Hidalgo del Parral, a city on federal highway 45,which provides all essential services. Chihuahua, the state capital is located 250 km north of the Santa Barbaracomplex.  Additionally, El Paso on theTexas border is located 600 km north of Santa Barbara.  Santa Barbara 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 century began in 1913.

The mining operations at Santa Barbara are more diverseand complex than at any of the other mines in our Mexican operations, withveins that aggregate approximately 21 kilometers in length.  Each of the three underground mines hasseveral shafts and crushers.  Due to thevariable characteristics of the ore bodies, four types of mining methods areused: shrinkage stoping, long-hole drilled open stoping, cut-and-fill stopingand horizontal bench stoping.  The ore,once crushed, is processed in the flotation plant to produce concentrates.  The flotation plant has a capacity of 6,000tons of ore per day.  The leadconcentrate produced is treated at a third party refinery in Mexico.  The copper concentrates are treated at ourSan Luis Potosi copper smelter, and the zinc concentrates are either treated atthe San Luis Potosi zinc refinery or exported.

Themajor mine equipment at Santa Barbara include twelve jumbo drilling tools, twoSimba drilling tools, thirty-three scoop trams, nine trucks and six locomotivesfor internal ore haulage, five trucks for external haulage and six hoists.  For treating the ore, there are four primaryjaw crushers, one secondary crusher and two tertiary crushers, three mills andthree flotation circuits.  Theconcentrator plant has a milling capacity of 6,000 tons of ore per day.

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Geology

The majority ofproduction from the district comes from quartz veins within faults andfractures.  The north to northwesterntrending veins is up to several kilometers long, dips steeply to the west andis 0.5 to 30 meters wide.  Ore shoots upto several hundred meters in length, extends to at least 900 meters below thesurface and is separated from other ore by 0.5 to 1 meter of barren quartzvein.  Metal zoning occurs in some veins,with zinc and lead content generally decreasing with depth and copperincreasing with depth.  Three mainsystems of veins exist inside the district, represented by the veins Coyote,Segovedad Novedad and Coyote Seca Palmar. In addition to the main veins, there are many smaller sub-parallel tobranching ore bearing veins. Economic ore minerals include sphalerite (ZnS),marmatite (ZnFeS), galena (PbS), chalcopyrite (CuFeS2) and tetrahedrite  (CuFe12Sb4S13). Gangue minerals includequartz (SiO2), pyrite (FeS2), magnetite (Fe2O4), pirrotite (Fe2+S),arsenopyrite (FeAsS) and fluorite (CaF2).

The Santa Barbaradistrict has mineralization to indicate that it will continue to be asignificant producer of lead, copper and zinc for decades.  The full potential of the district has notyet been defined, but the area seems to justify an increase of the explorationto support a new increase in the production.

Mine Exploration

In Santa Barbara,12,655 meters were drilled from underground stations in 2006.  The measured resource developed was 189,702tons.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Santa Barbara mines:

|                                   | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days)     |       | 326      |       | 328      |       | 328      |       |
| Total material  mined and milled  |       | (kt)       |       | 1,484    |       | 1,487    |       | 1,454    |       |
| Zinc average ore  grade           |       | (%)        |       | 2.11     |       | 2.28     |       | 2.43     |       |
| Zinc concentrate                  |       | (kt)       |       | 48.6     |       | 54.2     |       | 58.3     |       |
| Zinc concentrate  average grade   |       | (%)        |       | 54.38    |       | 53.99    |       | 53.29    |       |
| Zinc average  recovery            |       | (%)        |       | 84.50    |       | 86.33    |       | 88.02    |       |
| Lead average ore  grade           |       | (%)        |       | 0.86     |       | 0.92     |       | 1.09     |       |
| Lead concentrate                  |       | (kt)       |       | 20.1     |       | 20.5     |       | 24.1     |       |
| Lead concentrate  average grade   |       | (%)        |       | 54.11    |       | 55.43    |       | 53.06    |       |
| Lead average  recovery            |       | (%)        |       | 85.20    |       | 83.24    |       | 80.82    |       |
| Copper average  ore grade         |       | (%)        |       | 0.52     |       | 0.50     |       | 0.45     |       |
| Copper  concentrate               |       | (kt)       |       | 14.3     |       | 14.3     |       | 11.3     |       |
| Copper  concentrate average grade |       | (%)        |       | 30.20    |       | 29.39    |       | 27.70    |       |
| Copper average recovery           |       | (%)        |       | 56.10    |       | 56.45    |       | 48.00    |       |

 

kt = thousand tons

San Martin

The San Martin mining complex is located in themunicipality of Sombrerete in the western part of the state of Zacatecas,Mexico, approximately 101 kilometers southeast of the city of Durango andnine km east of the Durango State boundary.  Access to the property is via federalhighway no. 45 between the cities of Durango and Zacatecas.  A paved six kilometer road connects the mineand town of San Martin with the highway. The city of Sombrerete is about 16 kilometers east of the property. The complex includes an underground mine and aflotation plant and produces lead, copper and zinc concentrates, withsignificant amounts of silver.  Themining district in which the San Martin mine is located was discovered in1555.  Mining operations in the 20thcentury began in 1949.  San Martin liesin the Mesa Central between the Sierra Madre Occidental and the Sierra MadreOriental.

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The horizontal cut-and-fill mining method is used at theSan Martin mine.  The broken ore ishauled to the underground crusher station. The ore is then brought to the surface and fed to the flotation plant toproduce concentrates.  The flotationplant has a total capacity of 4,400 tons of ore per day.  The lead concentrate is treated at a thirdparty refinery in Mexico.  The copperconcentrate is treated at our San Luis Potosi copper smelter and zincconcentrate is either treated at the San Luis Potosi zinc refinery or exported.

Geology

San Martin lies in theCentral Mesa between two major geologic provinces, Sierra Madre Occidental andSierra Madre Oriental.  The mainsedimentary rock-formation in the San Martin district is the Upper CretaceousAge Cuesta del Cura limestone.  Theformation is an interlayered sequence of shallow marine limestone and blackchert, and it is overlain by Indura formation which outcrops at the foot of thetopographic heights of the Cuesta del Cura formation.  It consists mainly of alternating shales andfine-grained clayed limestones in ten to thirty centimeter thick layers.

The district’s mostimportant mineral deposits are replacement veins and bodies generated in theskarn by Cerro de la Gloria granodiorite intrusion.  An extensive zone of skarn west of theintrusive, hosts the San Marcial, Ibarra and Gallo-Gallina main ore veins, whichappear at the surface for distances of up to 1,000 meters, with thicknesses of40 centimeters to four meters, paralleling the intrusive contact.  In the central part of the deposit there is ahorizontal zoning with respect to the contact of the intrusive with high valuesof silver and copper.  In the top of thedeposit there is mostly lead and zinc. In the northeast/east over concentric structures to the intrusive thereis an increment of lead, zinc and silver in the skarn.  Economic ore is found as replacement orebodies between the main veins as massive and disseminated sulfides with widthsfrom eight meters up to 200 meters. These bodies consist mostly of chalcopyrite (CuFeS2), sphalerite (ZnS),galena (PbS), bornite (Cu5FeS4), tetrahedrite (CuFe12Sb4S13), native silver (Ag),****pyrrite(FeS), arsenopyrite (FeAsS), stibnite (Sb2S3). Molybdenum and tungsten are found in little portions in the skarn nearthe contact associated with the calcite.

Mine Exploration

A total of 8,962 metersof diamond drilling were executed in San Martin, 5,391 meters from undergroundand 3,571 meters from surface.  A totalmeasured resource of 931,895 tons has been developed.

The table below sets forth 2006,2005 and 2004 production information for our San Martin mines:
| ** **                        | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days) (1) |       | 239      |       | 301      |       | 304      |       |
| Total material  mined and milled  |       | (kt)       |       | 925.8    |       | 1,231    |       | 1,259    |       |
| Zinc average ore  grade           |       | (%)        |       | 2.17     |       | 2.03     |       | 2.21     |       |
| Zinc concentrate                  |       | (kt)       |       | 29.9     |       | 36.7     |       | 40.5     |       |
| Zinc concentrate  average grade   |       | (%)        |       | 51.45    |       | 51.11    |       | 52.19    |       |
| Zinc average  recovery            |       | (%)        |       | 76.67    |       | 75.25    |       | 75.96    |       |
| Lead average ore  grade           |       | (%)        |       | 0.21     |       | 0.20     |       | —   |       |
| Lead concentrate                  |       | (kt)       |       | 2.6      |       | 2.4      |       | —   |       |
| Lead concentrate  average grade   |       | (%)        |       | 34.02    |       | 31.60    |       | —   |       |
| Lead average  recovery            |       | (%)        |       | 44.65    |       | 29.16    |       | —   |       |
| Copper average  ore grade         |       | (%)        |       | 0.71     |       | 0.80     |       | 1.01     |       |
| Copper  concentrate               |       | (kt)       |       | 27.9     |       | 39.2     |       | 54.5     |       |
| Copper  concentrate average grade |       | (%)        |       | 18.38    |       | 19.87    |       | 20.70    |       |
| Copper average recovery           |       | (%)        |       | 77.89    |       | 79.05    |       | 88.74    |       |

                           kt =thousand tons(1) In 2006 there were 77 days of strikes.

 

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Santa Eulalia

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

The district of SantaEulalia is connected to the city of Chihuahua by a paved road (highway no. 45),at a distance of ten km there is a paved detour to Aquiles Serdan and FranciscoPortillo (also known as Santo Domingo) where the Company’s offices and theBuena Tierra mine are located. Access to the Buena Tierra mine and San Antoniomine is through an 11 km unpaved road.

The Santa Eulalia mine suspended operations totally fromOctober 2000 to December 2004, during which time rehabilitation work wascompleted at the Tiro San Antonio and pipes were installed to expand thepumping capacity to 10,500 gallons per minute. In January 2005, operations began at the Santa Eulalia mine, with aproduction plan for 230,900 tons.  Theflotation plant, at which lead concentrate and zinc concentrate are produced,has a capacity of 1,500 tons or ore per day. The lead concentrate is treated at a third party refinery, and the zincconcentrate is treated at our San Luis Potosi zinc refinery.

Major mine equipment at the Santa Eulalia mineinclude three Jumbo drilling tools, nine scoop trams for mucking and loading,three trucks, four hoists, two primary crushers, two mill crushers, one milland two flotation circuits.  Theconcentrator plant has a milling capacity of 1,450 tons of ore per day.

Geology

Santa Eulalia is thelargest of a number of similar districts that lie along the intersection of theLaramide-aged Mexican Thrust Belt and the Tertiary volcanic plateau of theSierra Madre Occidental.  Depositsthroughout the belt occur in a thick Jurassic-Cretaceous carbonate successionthat overlies Paleozoic or older crust.

The main sedimentary rockin the Santa Eulalia district is the Lower Cretaceous Limestone. These areirregularly covered by volcanic sedimentary conglomerates that are overlaid byvolcanic rocks of the tertiary and alluvial material of the Quaternary Age.

In the Santa Eulalia miningdistrict a thickness of 500 meters of sedimentary rocks is known to exist whichconsists of the following formations: 1) Formation Lagrima (limestone fossils);2) Formation Glen Rose (limestone blue and at its base a black limestoneappears); and 3) Formation Cuchillo (limestone with shale). Dikes and sills ofriolite composition and  sills of diabasealso exist.

In the district there areseveral systems of fractures and faults associated with the emplacement offelsitic and maphic intrusives.  The mostimportant controller of the ore bodies are the fractures North-South.

The mineralizationcorresponds in its majority to ore skarns — silicoaluminates of calcium, ironand manganese with variable quantities of lead, zinc, copper and iron sulfides,located in the planes of crossings in the interstices of the silicates.

Economic ore is found asreplacement in the Limestone Glen Rose in the contact with dikes and sills andreplacements in diabase sills.  Themineralogy is comprised predominantly of sphalerite (ZnS), galena (PbS) andsmall quantities of pyrargyrite (Ag3 Sb S3).

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Mine Exploration

At Santa Eulalia,in 2006, 2,719 meters were drilled from underground and 2,650 meters from thesurface.  An additional measured resourceof 160,750 tons was developed.

The table belowsets forth 2006, 2005 and 2004 production information for our Santa Eulaliamine:

 
| ** **                       | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days           |       | (days)     |       | 326      |       | 329      |       | 16       |       |
| Total material  mined and milled |       | (kt)       |       | 244      |       | 210      |       | 6        |       |
| Zinc average ore  grade          |       | (%)        |       | 6.95     |       | 8.08     |       | 10.19    |       |
| Zinc concentrate                 |       | (kt)       |       | 26.1     |       | 24.8     |       | 0.7      |       |
| Zinc concentrate  average grade  |       | (%)        |       | 51.19    |       | 51.73    |       | 45.93    |       |
| Zinc average  recovery           |       | (%)        |       | 78.75    |       | 75.68    |       | 49.71    |       |
| Lead average ore  grade          |       | (%)        |       | 2.04     |       | 1.89     |       | 2.40     |       |
| Lead concentrate                 |       | (kt)       |       | 7.1      |       | 4.6      |       | 0.2      |       |
| Lead concentrate  average grade  |       | (%)        |       | 56.17    |       | 60.32    |       | 51.03    |       |
| Lead average recovery            |       | (%)        |       | 80.13    |       | 69.75    |       | 65.71    |       |

kt = thousand tons

Taxco

The Taxco mining complex is located on the outskirts ofthe city of Taxco in the northern part of Guerrero State, Mexico, approximately71 kilometers from the city of Cuernavaca Morelos where access throughthe highway to the complex is possible.  The complex includes several undergroundmines and a flotation plant and produces lead and zinc concentrates, with someamounts of gold and silver.  The miningdistrict in which the Taxco mines are located was discovered in 1519.  Mining activities in the 20th centurycommenced in 1918.  The Taxco district lies in the northern partof the Balsas-Mexcala basin adjacent to the Paleozoic Taxco-Zitacuaro Massif.

IMMSA employs shrinkage,cut-and-fill and the room and pillar mining methods at the Taxco mines.  The flotation plant has a capacity of 2,000tons of ore per day.  The lead concentrate is treated at a third partyrefinery in Mexico.  The zinc concentrates is either treated atthe San Luis Potosi zinc refinery or exported.

Themajor mine equipment at the Taxco complex include five Jumbo drilling tools,twelve scoop trams for mucking and loading, six trucks and four locomotives forinternal ore haulage and three hoists. For treating the ore, there are twoprimary crushers, three secondary crushers, three mills and two flotationcircuits.  The concentrator plant has amilling capacity of 2,000 tons of ore per day.

Geology

The Taxco district isstratigraphically formed of rocks from Jurassic to recent periods, which aredescribed below, with emphasis on the mineralization controlcharacteristics.  Taxco Schist iscomposed of a series of schists and fylites, most likely from avolcanic-sedimentary sequence of tufa and limonites.  They represent a sequence ofmetamorphological arch and its age has been defined as Jurassic Medium. Morelosformation, from the Upper Cretaceous age (Apian-Turonian) lies on a discordantform over Taxco schist and its contact is several times marked by a clay zone(mylonites) and breccia, which implies a shifting of this unit over the schist(packs).  Mezcala formation, isconstituted by a sequence of shale and sandstone with some inter-stratifiedlayers of limestone.  Its base iscalcarean.  Its top tends to be rich inclay with thin limestone layers.   Balsasgroup, which is constituted by conglomerates and is sandy on its base, rests indiscordance form on an erosioned surface from the Mexcala formation.  The Tilzapotla Ryolite is the newest rock,which emerged in the district before the alluvial deposit.  It is formed of flux, breccia, tuffaceous,ignimbrites and vitrophyrre of ryolite composition.

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There are four types ofore deposits found in Taxco district.  Inorder of importance they are as follows: fisure-filling veins, replacementveins, blanket-like replacement bodies (so called “mantos”), stock works andbrecciate chimneys.  The three first onesare intimately related and they were formed in the same era, although indifferent stages.

The veins reach upto two kilometers in length with a variable potency of thirty centimeters up toeight meters, which is the case of copper veins at the mines of Guerrero,Hueyapa and Palo Amarillo at the San Antonio mine; the Remedios mine has amongother veins, El Muerto and El Cristo one kilometer long and five meters inaverage potency.

Economic ore is found inthe deposit in veins. Ore mineral include argentiferous galena (PbS),sphalerite (ZnS), pyrargyrite (Ag3Sb S3), and other sulfosalts, and replacement“mantos”.  The most mineralized zones arein the vicinity of the veins with the limestone.  The mineralization is more intensive in thebase of the limestone and consists of sphalerite(ZnS), galena (PbS), pyrite(FeS) and magnetite (FeOFe2O3).

Mine Exploration

The drilling in thisproperty was 12,459 meters, 1,817 meters were drilled from surface and 10,642from underground. With this drilling 597,386 tons of mineralized materialassaying 4.02% zinc were identified.

The table below sets forth 2006, 2005 and 2004 productioninformation for our Taxco mine:

 
| ** **                       | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days           |       | (days)     |       | 323      |       | 215      |       | 217      |       |
| Total material  mined and milled |       | (kt)       |       | 411      |       | 363      |       | 352      |       |
| Zinc average ore  grade          |       | (%)        |       | 4.0      |       | 3.92     |       | 3.49     |       |
| Zinc concentrate                 |       | (kt)       |       | 29.7     |       | 25.0     |       | 20.7     |       |
| Zinc concentrate  average grade  |       | (%)        |       | 48.35    |       | 48.66    |       | 49.23    |       |
| Zinc average  recovery           |       | (%)        |       | 87.29    |       | 85.51    |       | 82.97    |       |
| Lead average ore  grade          |       | (%)        |       | 0.65     |       | 0.80     |       | 1.07     |       |
| Lead concentrate                 |       | (kt)       |       | 4.6      |       | 5.1      |       | 6.1      |       |
| Lead concentrate  average grade  |       | (%)        |       | 46.16    |       | 48.24    |       | 52.55    |       |
| Lead average recovery            |       | (%)        |       | 79.24    |       | 85.03    |       | 84.51    |       |

kt = thousand tons

Processing Facilities - San Luis Potosi

Our San Luis Potosi electrolytic zinc refinery is locatedin the city of San Luis Potosi, in the state of San Luis Potosi, Mexico.  Our San Luis Potosi copper smelter isadjacent to the San Luis Potosi zinc refinery. The city of San Luis Potosi isconnected to our refinery and smelter by a major highway and our refinery andsmelter are connected to each other by paved roads.

Smelter

The San Luis Potosi copper smelter has been in operationsince 1925 and has gone through several phases of modernization, principallyover the last ten years.  The smelterpresently has the capacity to process 230,000 tons of copper concentrate peryear.

The plant operates one blast furnace (with a second onstand-by) that smelts incoming materials, mainly copper concentrates and copperbyproducts from lead plants, to produce a copper matte.  The copper matte is then treated in one ofthe two Pierce Smith converters, producing copper blister (95.7% copper), whichin 2006 contained approximately 1.6 ounces of gold and 460 ounces of silver perton of copper blister produced.  Of atotal copper concentrate intake of 48,065 tons in 2006, approximately 90% wassupplied by the IMMSA Unit’s mines and the remaining amount was smelted undertoll arrangements with third parties. All of the blister production is sold to third party refineriesthroughout the world.

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TheSan Luis Potosi copper smelter’s equipment include two yard locomotives, twodragshovels, twenty dump cars and six mechanic front loaders for the furnacecharge mixing. Smelting and conversion equipment include three blast furnaces,two Pierce Smith converter furnaces, two molding furnaces, six electric frontloaders, six towing units, three narrow way locomotives, two bridge cranes, two7-ton cranes and three hoists.  Ventingsystem equipment include nine fans with different capacities and two filteringbag houses.  This plant has a smeltingcapacity of 24,000 tons of blister copper per year.

As the materials treated at the smelter contain variousimpurities (especially lead and arsenic), the facility has been equipped withan arsenic recovery plant for treatment of the flue dust produced in the blastfurnace 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 preservingindustry.  Approximately 13,000 tons peryear of lead bearing calcines (approximately 32% lead) are sold annually toIndustrias Peñoles, S.A. de C.V. (“Peñoles”).

The table below sets forth 2006, 2005 and 2004 productioninformation for our San Luis Potosi copper smelter:

 
| ** **                             | ** ** | ** **         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Total copper  concentrate smelted      |       | (kt)               |       | 48.1     |       | 50.2     |       | 59.2     |       |
| Blister copper  production             |       | (kt)               |       | 20.2     |       | 21.3     |       | 22.7     |       |
| Copper average  grade in blister       |       | (%)                |       | 96.75    |       | 98.17    |       | 97.40    |       |
| Average smelter  recovery              |       | (%)                |       | 98.13    |       | 96.89    |       | 98.19    |       |
| Average realized price  copper blister |       | ($ per pound) |       | 3.51     |       | 1.83     |       | 0.80     |       |

kt = thousand tons

Zinc Refinery

The San Luis Potosi electrolytic zinc refinery was builtin 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.  Therefinery produces special high grade zinc (99.995% zinc), high grade zinc (over99.9% zinc) and zinc-based alloys with aluminum, lead, copper or magnesium invarying quantities and sizes depending on market demand.  In 2006, the plant produced as byproducts98,501 tons of sulfuric acid, 408 tons of refined cadmium, 9,203 kilograms ofsilver and seven kilograms of gold.

Theelectrolytic zinc refinery’s major equipment include a roaster with a capacityof 85 m2 of roasting area, a steam recovery boiler and an acid plant.  There is a calcinea processing area with fiveleaching stages: neutral, hot acid, intermediate acid, acid, purified fourthand jarosite, as well as two stages for solution purifying.  Additionally, the equipment include a cellhouse with two electrowinning circuits to finally obtain metallic zinc; analloy and molding area with two induction furnaces and four molding systems,two of them with chains to produce 25 kilograms ingots; and two casting wheelsto manufacture one ton Jumbo pieces. This refinery has a production capacity of 104,000 tons of refined zincper year.

The table below sets forth 2006, 2005 and 2004 productioninformation for our San Luis Potosi zinc refinery:

 
| ** **                               | ** ** | ** **          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Total zinc  concentrate treated          |       | (kt)                |       | 118.0    |       | 166.8    |       | 164.2    |       |
| Zinc production                          |       | (kt)                |       | 45.3     |       | 101.5    |       | 102.6    |       |
| Average refinery  recovery               |       | (%)                 |       | 73.35    |       | 94.57    |       | 94.90    |       |
| Average realized  price refined zinc     |       | ($ per  pound) |       | 1.67     |       | 0.64     |       | 0.42     |       |
| Average realized  price zinc concentrate |       | ($ per  pound) |       | 1.46     |       | 0.64     |       | 0.48     |       |
| Average realized price  silver           |       | ($ per ounce)  |       | 11.45    |       | 7.19     |       | 6.67     |       |

kt =thousand tons

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Nueva Rosita Coal and Coke Complex

The Nueva Rosita coal and coke complex, which beganoperations in 1924, is located in the state of Coahuila, Mexico on theoutskirts of the city of Nueva Rosita near the Texas border.  It comprises an underground coal mine, with apresent yearly capacity of approximately 280,000 tons of coal, and a 21-cokeoven facility capable of producing 105,000 tons of total coke (nut and fine)and 95,000 tons of metallurgical coke per year. The re-engineering and modernization of 21 ovens was completed in April2006.

The room-and-pillar mining method is employed at theunderground Nueva Rosita coal mine with continuous miners.  At present, the coke oven installationsupplies the San Luis Potosi copper smelter with low-cost coke, resulting insignificant cost savings to the smelter. The surplus production is sold to Peñoles and other Mexican consumers innorthern Mexico.  We expect to sell52,000 tons of metallurgical coke in 2007. The complex includes a coal washing plant completed in 1998 that has acapacity of 900,000 tons per year and produces cleaner coal of a higherquality.  In February 2006, a gasexplosion occurred at our Pasta de Conchos mine.  The underground mine has been closed sincethen and will remain closed until we complete efforts to recover the remains ofour workers lost in the accident.

Exploration:

At Nueva Rosita, 59,446meters of diamond drilling were done at the Guayacan, Esperanza, Obayos and ElAs areas.  Through this drilling weidentified approximately 29 million tons of in situ resources at Esperanza and approximately12 million tons at Guayacan.  Thedrilling at Obayos is still in a preliminary stage and at El As the drillingresults indicated an absence of significant resources.  In 2007 we intend to continue to drill atEsperanza and Obayos.

The table below sets forth 2006,2005 and 2004 production information for our Nueva Rosita coal and cokecomplex:

 
| ** **                                 | ** ** | ** **        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Coal mined -  underground mine             |       | (kt)              |       | 29.4     |       | 257.0    |       | 238.3    |       |
| Coal mined - open  pit                     |       | (kt)              |       | 185.9    |       | 407.1    |       | 129.3    |       |
| Total coal mined                           |       | (kt)              |       | 215.3    |       | 664.1    |       | 367.6    |       |
| Average BTU  content                       |       | BTU/Lb            |       | 9,720.0  |       | 10,017.2 |       | 9,883.8  |       |
| Average percent  sulfur                    |       | %                 |       | 0.80     |       | 1.02     |       | 0.95     |       |
| Clean coal  produced                       |       | (kt)              |       | 52.8     |       | 181.0    |       | 116.6    |       |
| Coke tonnage  produced                     |       | (kt)              |       | 55.7     |       | 44.4     |       | 46.2     |       |
| Average realized  price coal               |       | ($ per  ton) |       | 25.49    |       | 24.41    |       | 25.27    |       |
| Average realized  price arsenic clean coal |       | ($ per  ton) |       | 47.07    |       | 62.83    |       | 56.46    |       |
| Average realized price  coke               |       | ($ per ton)  |       | 222.35   |       | 197.99   |       | 189.98   |       |

kt = thousand tons

Inthe Pasta de Conchos mining complex within the mine there are five continuousmining circuits, six transporting cars, two locomotives, one long wallequipment and a cutting machine.  Thereis also a hoist to transport materials inside the unit; a breaker in thesurface to feed the washing plant; and a set of 21 coke ovens with a capacityof 100,000 coke tons per year.  There isa by-product plant to clean the coke gas in which tar, ammonium sulfate andlight crude oil are recovered.  There arealso two boilers to produce 80,000 steam pounds that are used in theby-products plant.

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”.

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EXPLORATION ACTIVITIES

We are engaged in ongoing extensive exploration to locateadditional ore bodies in Peru, Mexico and Chile.  We invested $26.1 million on explorationprograms in 2006, $24.4 million in 2005 and $15.6 million in 2004, and havebudgeted $45.9 million for 2007.

Currently in Peru, we have direct control of 114,133hectares of mineral rights.  In Mexico,we hold  342,094hectares of exploration concessions.  Wealso hold 35,258 hectares of exploration concessions in Chile.

Peru

We presently directly control over 114,133 mininghectares in Peru.

*Los Chancas.*  The LosChancas project, located in the department of Apurimac in southern Peru, is acopper and molybdenum porphyry deposit. The exploration program and the final phase of the metallurgical testingwere completed in early 2006.  Thepre-feasibility studies started in mid 2006 and should be completed by early2007, when new commercially exploitable reserves will be better defined.  To-date there are 200 million tons with acopper grade of 1.0%, 0.07% molybdenum and 0.12 grams of gold per ton.

*Tantahuatay.*  TheTantahuatay project is located in the department of Cajamarca in northernPeru.  The exploration work is intended toevaluate the upper part of the deposit mainly for gold recovery.  Work to date indicates mineralization of 27.1million tons, with an average gold content of 0.89 grams per ton and 13.0 gramsof silver per ton.  We have a 44.25%share in this project.  During the lastyears we have concentrated our efforts on dealing with social and environmentalconcerns of communities near the project.

*Tia Maria.*  The TiaMaria project, located in the department of Arequipa on the southern coast ofPeru, is part of a copper porphyritic system. In 2006 the diamond drilling program was completed and the project’sfeasibility studies were initiated considering the new porphyritic copper-golddeposit recently discovered of La Tapada, as part of the Tia Mariaproject.  During 2006 a total of 41,195meters of diamond drilling was performed and we expect to conclude the infilldrilling in the first months of 2007.

The feasibility study of the Tia Maria project isexpected to be concluded by the third quarter of 2007.

*Other Peruvian Prospects.*  As part of our 2006 exploration anddevelopment program, we drilled 2,410 meters in the prospect named El Fiscal,in the south which is under exploration for copper.  The intention is to intensify explorationduring 2007.  The Portuguesa prospect hasbeen explored for gold in the Department of Ayacucho in the central Peruviansierra, with a total of 2,580 meters of diamond drilling.

Mexico

In addition to exploratory drilling programs at existingmines, we are currently conducting exploration to locate mineral deposits atvarious other sites in Mexico.  Inparticular, we have identified significant copper and gold deposits at the ElArco site.

*El Arco.*  The ElArco site is located in the state of Baja California in Mexico.  Preliminary investigations of the El Arcosite indicate a mineral deposit of 846 million tons of sulfide with averagecopper grades of 0.51% and 0.14 grams of gold per ton, and 170 million tons ofleach materials with average copper grades of 0.56%.  Currently we are in the process ofidentifying water sources for a leaching operation, and have finished the firsttest hole that indicates good water potential.

*Angangueo.*  TheAngangueo site is located in the state of Michoacán in Mexico.  A mineral deposit of 13 million tons has beenidentified with diamond drilling. Testing indicates that the mineral deposit contains 0.16 grams of goldand 262 grams of silver per ton, and is comprised of 0.79% lead, 0.97% copperand 3.5% zinc.  During 2005, we receivedthe

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approval for our environmental impact study and we are inthe process of obtaining land use approval. During 2006, we have been negotiating with the state of Michoacan topurchase various properties essential to the operation.

*Buenavista.*  TheBuenavista project site is located in the state of Sonora in Mexico, adjacentto the Cananea ore body.  Drilling andmetallurgical studies have shown that the site contains a mineral deposit of 36million tons containing 29 grams of silver, 0.69% of copper and 3.3% of zincper ton.  A new “scoping level” studyindicates that Buenavista may be an economical deposit, but further diamonddrilling is needed to upgrade resources and further metallurgical testing tofirm up the flotation process.

*Carbon Coahuila*.  InCoahuila, an intensive exploration program of diamond drilling has identifiedtwo additional areas of interest, Esperanza with a potential for plus 30million tons of “in place” coal and Guayacan with a potential for 15 milliontons of “in place” coal, that could be used for a future coal-fired powerplant.

*The Chalchihuites*.  The Chalchihuites project is located in thestate of Zacatecas.  It is a contactdeposit with mixed oxides and sulfides of lead, copper, zinc and silver.  A drilling program , in the late nineties,defined 16 million tons containing 95 grams of silver, 0.36% lead, 0.69% copperand 3.08% zinc per ton.  Preliminarymetallurgical testing indicates a leaching precipitating-flotation (LPF)recovery process that can be applied to this ore.  Due to favorable metal prices, an evaluationof this ore body was started.

Chile

In Chile we have control of 35,258 hectares of miningrights, and are currently developing different exploration programs.

*El Salado.*  The ElSalado prospect, located in the Atacama Region, is being explored forcopper-gold.  Through 2006, 20,350 metersof diamond drilling were completed, 8,326 meters was drilled in 2006. Likewise, in the Sierra Aspera, a copper-gold prospect, located in thenorth of Chile, 1,128 meters of diamond drilling was performed.

*Other Chilean Prospects.*  There areother prospects such as Esperanza, located in the Atacama region, wheredrilling started at the end of 2006.  Weare also continuing with the exploration of Catanave in the Tarapaca region.

PRINCIPAL PRODUCTS ANDMARKETS

Theprincipal uses of copper are in the building and construction industry,electrical and electronic products and, to a lesser extent, industrialmachinery and equipment, consumer products and the automotive andtransportation industries.  Molybdenum isused to toughen alloy steels and soften tungsten alloy and is also used infertilizers, dyes, enamels and reagents. Silver is used for photographic, electrical and electronic products and,to a lesser extent, brazing alloys and solder, jewelry, coinage, silverware andcatalysts.  Zinc is primarily used as acoating on iron and steel to protect against corrosion.  It is also used to make die cast parts, inthe manufacturing of batteries and in the form of sheets for architecturalpurposes.

Our marketing strategy and annual sales planningemphasize developing and maintaining long-term customer relationships, and thusacquiring annual or other long-term contracts for the sale of our products is ahigh priority.  Approximately 90% of ourmetal production for the year 2006, 2005 and 2004, was sold under annual orlonger-term contracts.  Sales prices aredetermined based on prevailing commodity prices for the quotation period,generally being the month of, the month prior to or the months following theactual or contractual month of shipment or delivery, according to the terms ofthe contract.

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We focus on the ultimate end-user customers as opposed toselling on the spot market or to trading companies.  In addition, we devote significant marketingeffort to diversifying our sales both by region and by customer base.  We strive to provide superior customerservice, including just-in-time deliveries of our products.  Our ability to consistently fulfill customerdemand is supported by our substantial production capacity.

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

METALS PRICES

Prices for our products are principally a function ofsupply and demand and, except for molybdenum, are established on theCommodities Exchange, or COMEX, in New York and the London Metal Exchange orLME the two most important metal exchanges in the world.  Prices for our molybdenum products areestablished by reference to the publication Platt’s Metals Week.  Our contract prices also reflect anynegotiated premiums and the costs of freight and other factors.  From time to time, we have entered intohedging transactions to provide partial protection against future decreases inthe market price of metals and we may do so under certain marketconditions.  In 2004 we did not enterinto any material hedging transactions. We have, however, entered into copper swap contracts in 2005 and2006.  At December 31, 2006 we did nothave any copper swap contracts outstanding. 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 ourproducts, please see “Management’s Discussion and Analysis of FinancialCondition and Result of Operations —Metal Prices”.

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’s products compete with othermaterials, including aluminum and plastics.

EMPLOYEES

As of December 31, 2006, we employed 12,218 persons,approximately 64% of whom are covered by labor agreements with ten differentlabor 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 you that in the future wewill not experience strikes or other labor-related work stoppages thatcould have a material adverse effect on our financial condition and results ofoperations.

Peru

Approximately 59% of our Peruvian labor force wasunionized at December 31, 2006, represented by nine separate unions.  Collective bargaining agreements are ineffect with each of these unions.  Theseagreements are in force into 2007. Certain unions in common locations maybe exploring the possibility of merging. In addition, we have also received initial proposals from certainunions.  It is too early to assess theoutcome of this year’s labor negotiations, we believe, however, that newagreements can be reached without disruptions to the operations.

In Peru on August 31, 2004, unionized workers at ourmining units in Toquepala and Cuajone stopped work and asked for additionalwage increases based on high metals prices. The strike ended after twelve days. The union demands included salary increases, benefits and differentapplication of certain aspects of their labor agreements and it also expressedopposition to our acquisition of Minera Mexico. The Peruvian labor ministry declared the strike illegal and the workersreturned to work but asserted their right to return to strike.  In early 2005, the workers removed the strikethreat, indicating they would pursue their grievances through the laborministry.  There were no labor strikes in2006 or 2005.

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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. We still hold 90 houses at Ilo for staff personnel.  Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees.  Our town site and housing complexes includeschools, medical facilities, churches, social clubs, shopping, banking andother services.

Mexico

Approximately 66% of our Mexican labor force at December31, 2006 were members of the *SindicatoNacional de Trabajadores Minera Metalúrgicos y Similares de la RepúblicaMexicana, A.C*. (the National Mine Workers Union, or the Union).  Under Mexican law, the terms of employmentfor unionized workers is set forth in collective bargaining agreements.  Mexican companies negotiate the salaryprovisions of collective bargaining agreements with the labor unions annuallyand negotiate other benefits every two years. We conduct negotiations separately at each mining complex and eachprocessing plant.

In 2006, there were a number of work stoppages at some ofour Mexican operations.  While some ofthese work stoppages were of a short-term nature with little or no productionloss, others have been more disruptive. A strike at the La Caridad copper mine in Sonora began in the firstquarter of 2006 and ended when the mine was returned to us on July 26,2006.  A strike at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 andended in May 2006.  Additionally, workersat the Cananea copper mine went on a strike on June 1, 2006 returning to worksix weeks later on July 17, 2006.  Thesework stoppages were declared illegal by the Mexican authorities.  On June 9, 2006, we announced the closing ofthe La Caridad mine as picketing workers made it impossible to continueoperations.  As a result of thesestrikes, we declared “force majeure” on certain of our June and July coppercontracts.  On July 14, 2006, with theapproval of a Labor Court, we dismissed the La Caridad workers.  Individual work agreements, and thecollective union contract, were terminated in compliance with the provisions ofthe ruling rendered by federal labor authorities.  On July 26, 2006, the La Caridadinstallations were returned to us and we commenced to hire workers to resumeoperations.  In July 2006, we reopenedthe La Caridad mine and have restored a 100% production capacity by the end of2006.

OnOctober 26, 2005, the workers at our La Caridad mining complex went on strikeclaiming that we still owed them profit sharing from 2003.  The strike was declared illegal and theworkers returned to work two days later after the Company agreed to pay eachworker approximately $900.00.  The totalpaid was $3.1 million.

On July 12, 2004, the workers of Mexicana de Cobre wenton strike, asking for the review of certain contractual clauses. Such a reviewwas performed and the workers returned to work 18 days later.  On October 15, 2004, the workers of Mexicanade Cananea 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. The strike was resolved by the acquisition by Minera Mexico of the 5% ofthe stock of Mexicana de Cananea and Mexicana de Cobre that was owned by theUnion.

Employees of the Mexcobre and Cananea Units reside intown sites at La Caridad and Cananea, where we have built approximately 2,000houses and apartments and 275 houses and apartments, respectively.  Employees of the IMMSA Unit principallyreside on the grounds of the mining or processing complexes in which they workand where we have built approximately 900 houses and apartments.  Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees.  Our town sites and housing complexes includeeducational and, in some units, medical facilities, churches, social clubs,shopping, banking and other services.  Atthe Cananea Unit, health care is provided free of charge to employees andretired unionized employees and their families.

 

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FUEL, ELECTRICITY AND WATERSUPPLIES

The principal raw materials used in our operations arefuels (including fuel oil to power boilers and generators, natural gas formetallurgical processes at our Mexican operations and diesel fuel for miningequipment), electricity and water.  Webelieve that supplies of fuel, electricity and water are readilyavailable.  Although the prices of theseraw materials may fluctuate, we have generally been able to offset all or aportion of our increased costs through cost and energy saving measures.  However, during the period from 2003 through2005 we have experienced increases in energy prices that have surpassed levelswe can effectively control through cost savings.

Peru

In Peru, electric power for our operating facilities isgenerated by two thermal electric plants owned and operated by Energía del Sur,S.A. (“Enersur”), a diesel and waste heat boilers plant located adjacent to theIlo smelter and a coal plant located south of Ilo.  Power generation capacity for Peruvian operationsis currently 344 megawatts.  In addition,we have nine megawatts of power generation capacity from two small hydro-generatinginstallations at Cuajone.  Power isdistributed over a 224-kilometer closed loop transmission circuit.  We obtain fuel in Peru principally from theExxon Mobil Corporation.

In 1997, we sold our Ilo power plant to Enersur andentered into a twenty year power purchase agreement.  We and Enersur also entered into an agreementfor the sharing of certain services between the power plant and our smelter atIlo.  These arrangements were amended in2003, releasing Enersur from its obligations to construct additional capacityto meet our increased electricity requirements. We believe we can satisfy the need for increased electricityrequirements for our Peru operations from other sources, including local powerproviders.

In Peru, we have water concessions for well fields atHuaitire, Vizcachas and Titijones and surface water rights from the Sucheslake, which together are sufficient to supply the needs of our two operatingmine sites at Toquepala and Cuajone.  AtIlo, we have desalinization plants that produce water for industrial anddomestic use that we believe are sufficient for our current and projectedneeds.

Mexico

In Mexico, fuel is purchased directly or indirectly fromPetróleos Mexicanos, (“PEMEX”), the state oil monopoly.  Electricity for our Mexican operations, whichis used as the main energy source at our mining complexes, is either purchasedfrom the *Comisión Federal de Electricidad*(the Federal Electricity Commission, or CFE), the state’s electrical powerproducer, or steam-generated at Mexcobre’s smelter by recovering energyfrom waste heat boilers.  Accordingly, asignificant portion of our operating costs in Mexico are dependent upon thepricing policies of Pemex and CFE, which reflect government policy as well asinternational market prices for crude oil, natural gas and conditions in therefinery markets.  Mexcobre importsnatural gas from the U.S. through its pipeline (between Douglas, Arizona andNacozari, Sonora) this permits us to import natural gas from the United Statesat market prices and thereby reduce operational costs.  A contract with PEMEX, provides us with theoption of using a fixed price for a portion of our natural gas purchases.

In 2006, we entered into long swap contracts for 3.7million MMBTUs with a fixed price of $4.2668 per MMBTU.  In this respect, we recorded a gain of $6.3million which was credited to the production cost in 2006.

At December 31, 2006, we held long fixed price swapcontracts for 10,000 MMBTUs per day at a fixed price of $7.525 per MMBTU forthe first three months of 2007 to protect our production cost from theuncertainty and high volatility of energy prices during the 2007 winter season.

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InDecember 2005 we announced our plans for a 450 Megawatt power generation plantin Mexico to supply our own facilities. We anticipate that the project will be built and managed by anindependent power company and our obligation will be the supply of coal and anagreement to use the power output.  Weexpect this plant will give us the ability to better control the cost of ourenergy requirements.  The project is alsoexpected to create nearly 600 permanent jobs and 3,000 jobs during theconstruction stage.  It is anticipatedthat the project will be completed in 2011 and that it will exceed Mexican andinternational environmental standards.

In Mexico, water is a national property and industriesnot connected to a public services water supply must obtain a water concessionfrom *Comisión Nacional del Agua*(the “National Water Commission”, or “CNA”). Water usage fees are established in the *LeyFederal de Derechos (the Federal Law on Water Rights),* whichdistinguishes several availability zones with different fees per unit of volumeaccording 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 Cananeafacility, we maintain our own wells and pay the CNA for water measured byusage.  Water conservation committeeshave been established in each plant in order to conserve and recyclewater.  Water usage fees are updated on ayearly basis and have been increasing in recent years.

In December 2006, theFederal Water Rights Law was modified effective January 1, 2007. Commencing in2007, persons engaged in mining activities will pay for water at 100% of theestablished water rate. Prior to the modification persons engaged in miningactivities paid for water at 25% of the rate. We anticipate that this change will increase water usage cost byapproximately $16.9 million in 2007.

ENVIRONMENTAL MATTERS

Fora discussion of environmental matters reference is made to the informationcontained under the caption “Environmental matters” in “Note 14 Commitments andContingencies” of the Consolidated Combined Financial Statements.

**MINING RIGHTS AND CONCESSIONS**

Peru

We have 192,283 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  |       | 41,919        |       | 22,663         |       | 12,411     |       | —    |       | 76,993    |       |
| Exploration |       | —        |       | —         |       | —     |       | 114,113   |       | 114,113   |       |
| Total       |       | 42,219        |       | 23,119         |       | 12,832     |       | 114,113   |       | 192,283   |       |

 

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.  Theconcessions have indefinite terms, subject to our payment of concession fees ofup to $3.00 per hectare annually for the mining concessions and a fee based onnominal capacity for the processing concessions.  Fees paid during 2006, 2005 and 2004 wereapproximately $0.8 million, $0.8 million and $1.1 million, respectively.  We have two types of mining concessions inPeru: metallic and non-metallic concessions. We also have water concessions for well fields at Huaitire, Titijonesand Vizcachas and surface water rights from the Suches Lake, which together aresufficient to supply the needs of our Toquepala and Cuajone operating units.

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In June 2004, the Peruvian Congress enacted legislationimposing a royalty charge to be paid by mining companies in favor of theregional governments and communities where mining resources are located.  Under this 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 madeprovisions of $67.2 million, $40.3 million and 17.6 million in 2006, 2005 and2004 respectively, for this tax which went into effect as of June 25,2004.  These provisions are included incost of sales (exclusive of depreciation, amortization and depletion) on theconsolidated combined statement of earnings.

In a ruling, the Peruvian Constitutional Tribunal statedthat the royalty charge applies to all concessions held in the mining industry,implying that those entities with tax stability contracts are subject to thischarge.  In 1996, we entered into a taxstability contract with the Peruvian government (a “Guaranty and PromotionalMeasures for Investment Contract”) relating to our own SX/EW production, which,among other things, fixes tax rates and other contributions relating to suchproduction.  We believe that theConstitutional 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 by us for the royalty chargedoes not include approximately $14.0 million of additional potential liabilityrelating to our SX/EW production from June 30, 2004 through December 31, 2006.

Mexico

In Mexico we haveapproximately 513,936 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)**      | ** ** | ** **  | ** ** |
| Mine concessions |       | 84,553                 |       | 117,164             |       | 13,282      |       | 298,937      |       | 513,936   |       |

 

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.  UnderMexican law, mineral resources belong to the Mexican nation and a concessionfrom the Mexican federal government is required to explore or mine mineralreserves.  Mining concessions have a50-year term that can be renewed for another 50 years.  Holding fees for mining concessions can befrom $0.4 to $8.8 per hectare depending on the expedition dates of miningconcession.  Fees paid during 2006, 2005and 2004 were approximately $2.1 million, $2.1 million and $1.8 million,respectively.  In addition, all of ouroperating units in Mexico have water concessions that are in full force andeffect.  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 processing facilities of our Mexican operationsand the land on which they are constructed.

REPUBLIC OF PERU AND MEXICO

All of our revenues arederived principally from our operations in Peru and Mexico.  Risks attendant to the Company’s operationsin both countries include our operations in those countries associated witheconomic and political conditions, effects of currency fluctuations andinflation, effects of government regulations and the geographic concentrationof the Company’s operations.

AVAILABLEINFORMATION

We file annual, quarterlyand current reports, proxy statements and other information

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with the U.S. Securitiesand Exchange Commission (“SEC”).  You mayread and copy any document we file at the SEC’s Public Reference Room at 100 FStreet, Washington, D.C. 20549.  Pleasecall the SEC at 1-800-SEC-0330 for information on the Public ReferenceRoom.  The SEC maintains a web-site thatcontains annual, quarterly and current reports, proxy statements and otherinformation that issuers (including Southern Copper Corporation) file electronicallywith the SEC.  The SEC’s web-site is**www.sec.gov*.*

Our Internet address iswww.southerncoppercorp.com.  Commencingwith the Form 8-K dated March 14, 2003, we have made available free of chargeon this internet address our annual, quarterly and current reports, as soon asreasonably practical after we electronically file such material with, orfurnish it to, the SEC.  Our web pageincludes the Corporate Governance guidelines and the charters of its mostimportant Board Committees.  However, theinformation found on our website is not part of this 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, molybdenum and zinc. Historically, prices of the metals we produce have been subject to widefluctuations and are affected by numerous factors beyond our control, includinginternational economic and political conditions, levels of supply and demand,the availability and costs of substitutes, inventory levels maintained byusers, actions of participants in the commodities markets and currency exchangerates.  In addition, the market prices ofcopper and certain other metals have on occasion been subject to rapid short-termchanges.

In 2006, an approximately 83% increase in copperprices on the LME, and the COMEX, and a 136% increase in zinc prices,contributed to an increase of approximately 34% in our total sales in 2006 ascompared with 2005, this after an increase of approximately 32% in 2005.  While the price of copper dropped to a15-year low of $0.61 per pound in 2001, it has since increased by approximately323.0% to $2.58 per pound as of January 31, 2007 and reached a maximum of$4.0755 on the COMEX on May 23, 2006. The price of zinc has also recently increased to record levels with anaverage of $1.49 per pound in 2006 from $0.63 per pound in 2005 and an averageof $0.40 per pound in the period 2001-2004. While lower than in 2005, the 2006average price of molybdenum continues to be high, by historical standards. Theaverage price was $24.38 and $31.05 per pound in 2006 and 2005, respectively,compared with an average of $8.25 per pound in the prior three-yearperiod.  Over the past three years, as aresult of this increase in molybdenum prices, molybdenum has become asignificant contributor to our sales.

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

***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 consumer habits may affect the level of that demand tothe extent that changes increase or decrease the need for our metalproducts.  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 and we depend on ourability to replenish ore reserves for our long-term viability.***

There is a degree of uncertainty attributable to thecalculation of reserves.  Until reservesare actually mined and processed, the quantity of ore and grades must beconsidered as estimates only.  The provenand probable ore reserves data included in this report are estimates preparedby us based on evaluation methods generally used in the mining industry.  In December 2006, as a result of an intensivedrilling program followed by a review by independent mining consultants, weannounced an increase in ore reserves at our Peruvian copper mines.  We may be required in the future to reviseour reserves estimates based on our actual production.  We cannot assure you that our actual reservesconform to geological, metallurgical or other expectations or that the

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estimated volume and grade of ore will berecovered.  Market prices, increasedproduction costs, reduced recovery rates, short-term operating factors, royaltytaxes and other factors may render proven and probable reserves uneconomic toexploit and may result in revisions of reserves data from time to time.  Reserves data are not indicative of futureresults of operations.  Our reserves aredepleted as we mine.  We depend on ourability to replenish our ore reserves for our long-term viability.  We use several strategies to replenish andincrease our ore reserves, including exploration and investment in propertieslocated near our existing mine sites and investing in technology that couldextend the life of a mine by allowing us to cost-effectively process ore typesthat were previously considered uneconomic. Acquisitions may also contribute to increased ore reserves and we reviewpotential acquisition opportunities on a regular basis.

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

Our business is capital intensive.  Specifically, the exploration and exploitationof copper and other metal reserves, mining, smelting and refining costs, themaintenance of machinery and equipment and compliance with laws and regulationsrequire 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 weproduce.  We cannot assure you that wewill be able to maintain our production levels to generate sufficient cash, orthat we have access to sufficient financing to continue our exploration,exploitation and refining activities at or above present levels.

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

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

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

Minera Mexico is a Mexican company and, as such, maypay dividends only out of net income that has been approved by theshareholders.  Shareholders must alsoapprove the actual dividend payment, after mandatory legal reserves have beencreated and losses for prior fiscal years have been satisfied.  As a result, these legal constraints maylimit the ability of our Minera Mexico subsidiary to pay dividends to us, whichin turn, may have an impact on our ability to service debt.

***Our operations aresubject to risks, some of which are not insurable.***

As shown by the February 2006 tragic mining accidentin Mexico, 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 other naturalphenomena, such as earthquakes.  Suchoccurrences could result in damage to, or destruction of, mining operationsresulting in monetary losses and possible legal liability.  In particular, surface and underground miningand related processing activities present inherent risks of injury to personneland damage to equipment.  We maintaininsurance against many of these and other risks, which may not provide adequatecoverage in certain circumstances. Insurance against certain risks, including certain liabilities forenvironmental damage or hazards as a result of exploration and production, isnot generally available to us or other companies within the miningindustry.  Nevertheless recentenvironmental legal initiatives have considered future regulations regardingenvironmental damage insurance.  In casesuch regulations come into force, we will have to analyze the need to obtainsuch insurance.  We do not have, and donot intend to obtain, political risk insurance. These or other uninsured events may adversely affect our financialcondition 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.  In 2006, 2005 and 2004, our largest customeraccounted for approximately 10.1%, 11.7% and 10.7%, respectively, of our sales.

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Additionally, our five largest customers in each of2006, 2005 and 2004 collectively accounted for approximately 33.7%, 40.8% and33.7%, 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 underthese agreements include acts of nature, labor strikes, fires, floods, wars,transportation delays, government actions or other events that are beyond thecontrol of the parties.  Any suspensionor cancellation by our customers of deliveries under our copper or other salescontracts that are not replaced by deliveries under new contracts or sales onthe spot market would reduce our cash flow and could adversely affect ourfinancial 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 the lowest cost copper producers in ourregion, we cannot assure you that competition from lower cost producers willnot adversely affect us in the future.

In addition, mines have limited lives and, as aresult, we must periodically seek to replace and expand our reserves byacquiring new properties.  Significantcompetition exists to acquire properties producing or capable of producingcopper 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 cannotassure you that the result of current or further consolidation in the industrywill 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 be able to compete on the basis ofprice or other factors with companies that in the future may benefit fromfavorable trading or other arrangements.

***Increases in energycosts, accounting policy changes and other matters may adversely affect ourresults of operations.***

We require substantial amounts of fuel oil,electricity and other resources for our operations.  Fuel, gas and power costs constituteapproximately 42.0% of our production cost. We rely upon third parties for our supply of the energy resourcesconsumed in our operations.  The pricesfor and availability of energy resources may be subject to change orcurtailment, respectively, due to, among other things, new laws or regulations,imposition of new taxes or tariffs, interruptions in production by suppliers,worldwide price levels and market conditions. For example, during the 1970s and 1980s, our ability to import fuel oilwas restricted by Peruvian government policies that required us to purchasefuel oil domestically from a government-owned oil producer at pricessubstantially above those prevailing on the world market. In addition, inrecent 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 2005 EmergingIssues Task Force, or EITF 04-06, consensus, which states that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the cost of the inventory produced (extracted) duringthe period that the stripping costs are incurred.

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A 2005 Mexican Supreme Court decision reduced ourresults by requiring increased workers’ profit sharing payments by our MineraMexico subsidiary.  In May 2005, thecourt rendered a decision that changed the method of computing the amount ofstatutory workers’ profit-sharing required to be paid by certain Mexicancompanies, including Minera Mexico.  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 andResults of Operations—Liquidity and Capital Resources—Other LiquidityConsiderations”.

Additionally, we expect our future results willcontinue to be affected by the Peruvian mining royalty charge, which hasreduced our earnings since the second half of 2004, as further described underBusiness—Mining Rights and Concessions—Peru.

***We may be adverselyaffected 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, in Peru, on August 31, 2004,unionized workers at our mining units in Toquepala and Cuajone initiated workstoppages and sought additional wage increases based on high metalsprices.  The strike was resolved onSeptember 13, 2004.  Additionally,in February 2006 construction workers at the Ilo smelter modernization projectwent on strike and blocked access to our Ilo production facilities.  Our Ilo refinery and smelter production wasinterrupted for a short period before the matter was resolved.  This disruption did not significantly affectour production.

In 2006, there were a number of work stoppages at someof our Mexican operations.  While some ofthese work stoppages were of a short-term nature with little or no productionloss, others have been more disruptive. A strike at the La Caridad copper mine in Sonora began in the firstquarter of 2006 and ended when the mine was returned to us on July 26,2006.  A strike at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 and endedin May 2006.  Additionally, workers atthe Cananea copper mine went on strike on June 1, 2006, returning to work sixweeks later on July 17, 2006.  These workstoppages were declared illegal by the Mexican authorities.  On June 9, 2006, we announced the closing ofthe La Caridad mine as picketing workers made it impossible to continueoperations.  As a result of these illegalstrikes, we declared “force majeure” on certain of our June and July coppercontracts.  On July 14, 2006, with theapproval of the Labor Court, we dismissed the La Caridad workers.  Individual work agreements, and thecollective union contract, were terminated in compliance with the provisions ofa ruling rendered by federal labor authorities. On July 26, 2006, the installations were returned to us and we commencedto hire workers to resume operations.  InJuly 2006, we reopened the La Caridad mine and restored 100% productioncapacity in the fourth quarter of 2006.

In Mexico, on October 26, 2005 the workers at our LaCaridad mining complex went on strike claiming that we still owed them profitsharing from 2003.  The strike wasdeclared illegal and the workers returned to work two days later after weagreed to pay each worker approximately $900. The total paid was $3.1 million. On July 12, 2004, the workers of Mexcobre went on strike asking for areview of certain contractual clauses. Such a review was performed and theworkers returned to work 18 days later. On October 15, 2004, the workers of Mexcananea went on strike, followedby the Mexicana de Cobre workers.  Thestrike lasted for six days at Mexicana de Cobre and nine days at Mexicana deCananea.  In each case, operations at themines ceased until the strike was resolved. In Mexico, collective bargaining agreements are negotiated every year inrespect of salaries and every two years for other benefits.  We cannot assure you that we will notexperience strikes or other labor-related work stoppages that could have amaterial adverse effect on our financial condition and results of operations.

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

Our exploration, mining, milling, smelting andrefining activities are subject to a number of Peruvian and Mexican laws andregulations, including environmental laws and regulations, as well as certainindustry technical standards.  Additionalmatters subject to regulation include, but are not limited to, concession fees,transportation, production, water use and discharge, power use and generation,use and storage of explosives, surface rights, housing and other facilities forworkers, reclamation, taxation, labor standards, mine safety and occupationalhealth.

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 becomemore rigorous and strict in enforcing Mexican environmental laws.  We expect additional laws and regulationswill be enacted over time with respect to environmental matters.  Recently, Peruvian environmental laws have beenenacted imposing closure and remediation obligations on the miningindustry.  Moreover, our Mexicanoperations are also subject to the environmental agreement entered into byMexico, the United States and Canada in connection with the North American FreeTrade Agreement. We believe our operations are in compliance with allenvironmental laws and regulations within the areas we operate.

In December 2006, the Federal Water Rights law wasmodified effective January 1, 2007. Commencing in 2007 persons engaged in mining activities will pay forwater at 100% of the established water rate. Prior to the modification personsengaged in mining activities paid 25% of the rate.  We anticipate that this change will increasewater usage cost by approximately $16.9 million in 2007, compared to 2006.

The development of more stringent environmentalprotection programs in Peru and Mexico and in relevant trade agreements couldimpose constraints and additional costs on our operations and require us tomake significant capital expenditures in the future.  We cannot assure you that future legislative,regulatory or trade developments will not have an adverse effect on ourbusiness, properties, results of operations, financial condition or prospects.

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

Metals exploration is highly speculative in nature,involves many risks and is frequently unsuccessful.  Once mineralization is discovered, it maytake a number of years from the initial phases of drilling before production ispossible, during which time the economic feasibility of production maychange.  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.  We cannot assure you that our explorationprograms will result in the expansion or replacement of current production withnew 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.  Estimatesare, to a large extent, based upon the interpretation of geological dataobtained from drill holes and other sampling techniques, and feasibilitystudies that derive estimates of cash operating costs based upon anticipatedtonnage and grades of ore to be mined and processed, the configuration of theore body, expected recovery rates of the mineral from the ore, comparablefacility and equipment operating costs, anticipated climatic conditions andother 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, significantdecreases in actual or expected prices may mean reserves, once found, will beuneconomical 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 someof our costs are incurred in currencies other than our functional currency, theU.S. dollar, fluctuations in currency exchange rates may have a significantimpact on our financial results.  Thesecosts principally include electricity, labor, maintenance, local contractors andfuel.  For the year ended December 31,2006, a substantial portion of our costs were denominated in a currency otherthan U.S. dollar.  Operating costs areinfluenced by the currencies of the countries where our mines and processingplants are located and also by those currencies in which the costs of equipmentand services are determined.  ThePeruvian nuevo sol, the Mexican peso and the U.S. dollar are the most importantcurrencies influencing our costs.

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 Mexicanpesos.  Accordingly, when inflation inPeru or Mexico increases without a corresponding devaluation of the nuevo solor peso, our financial position, results of operations and cash flows could beadversely affected.  To manage thevolatility related to the risk of currency rate fluctuations, we may enter intoforward exchange contracts.  We cannotassure you, however, that currency fluctuations will not have an impact on ourfinancial condition and results of operations.

Further, in the past there has been a strongcorrelation between copper prices and the exchange rate of the U.S.dollar.  A strengthening of the U.S.dollar may therefore be accompanied by lower copper prices, which wouldnegatively affect our financial condition and results of operations.

***We may be adverselyaffected 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 decreasepit slope angles or provide additional road access to prevent such a failure,our stated reserves could be negatively affected.  Further, hydrological conditions relating topit slopes, renewal of material displaced by slope failures and increasedstripping requirements could also negatively affect our stated reserves.  We have taken actions in order to maintainslope stability, but we cannot assure you that we will not have to takeadditional action in the future or that our actions taken to date will besufficient.  Unexpected failure oradditional requirements to prevent slope failure may negatively affect ourresults of operations and financial condition, as well as have the effect ofdiminishing our stated ore reserves.

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

Our direct and indirect parentcorporations, including AMC and Grupo Mexico, have from time to time been namedparties in various litigations involving ASARCO LLC (“Asarco”).  Asarco, a mining company, is indirectlywholly owned by Grupo Mexico.  In August2002 the U.S. Department of Justice brought a claim alleging fraudulentconveyance in connection with Asarco’s environmental liabilities and AMC’sthen-proposed purchase of SCC from Asarco. That action was settled pursuant to a Consent Decree dated February 2,2003.  The consent decree is bindingsolely on the U.S. government.  In March2003, AMC purchased its interest in SCC from Asarco.  In October 2004, AMC, Grupo Mexico, Mexicanade Cobre and other parties, not including SCC, were named in a lawsuit filed inNew York State court in connection with alleged asbestos liabilities, whichlawsuit claims, among other matters, that AMC’s purchase of SCC from Asarcoshould be voided as a fraudulent conveyance. The lawsuit filed in New YorkState court was stayed as a result of the August 9, 2005 Chapter 11 bankruptcyfiling by Asarco, as described below. On February 2, 2007 a complaint was filedby Asarco, the debtor in possession, alleging many of the matters previouslyclaimed in the New York State lawsuit, including that AMC ́s purchase of SCCfrom Asarco should be voided as a fraudulent conveyance.

 

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While Grupo Mexico and itsaffiliates believe that these claims are without merit, we cannot assure youthat these or future claims, if successful, will not have an adverse effect onour parent corporations or us.  Anyincrease in the financial obligations of our parent corporations, as a resultof matters related to Asarco or otherwise could, among other effects, result inour parent corporations attempting to obtain increased dividends or otherfunding from us.  In 2005, certainsubsidiaries of Asarco filed bankruptcy petitions in connection with allegedasbestos liabilities.  In July 2005, theunionized workers of Asarco commenced a work stoppage. As a result of variousfactors, including the above mentioned work stoppage, in August 2005, Asarcoentered into bankruptcy proceedings under Chapter 11 of the U.S. BankruptcyCode before the U.S. Bankruptcy Court of Corpus Christi, Texas.  Asarco’s bankruptcy case is jointlyadministered with the bankruptcy cases of its subsidiaries.  Asarco’s bankruptcy could result inadditional claims being filed against Grupo Mexico and its subsidiaries,including SCC, Minera Mexico or its subsidiaries.

***We are controlledby Grupo Mexico, which exercises significant influence over our affairs andpolicies and whose interests may be different from yours.***

Grupo Mexico owns indirectly approximately 75.1% ofour capital stock.  We own substantiallyall of Minera Mexico’s capital stock.  Inaddition, certain of our and Minera Mexico’s officers and directors are alsoofficers of Grupo Mexico.  We cannotassure you that the interests of Grupo Mexico will not conflict with ours.

Grupo Mexico 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 thatmay result in 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

·                  the amount ofdebt financing that we incur.

In addition, we and Minera Mexico have in the pastengaged in, and expect to continue to engage in, transactions with Grupo Mexicoand its other affiliates that may present conflicts of interest.  For additional information regarding theshare ownership of, and our relationships with, Grupo Mexico and itsaffiliates, 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.  Ourdividend practice is subject to change at the discretion of our board ofdirectors at any time.  The amount thatwe pay in dividends is subject to a number of factors, including our results ofoperations, financial condition, cash requirements, tax considerations, futureprospects, legal restrictions, contractual restrictions in credit agreements,limitations imposed by the government of Peru, Mexico or other countries wherewe have significant operations and other factors that our board of directorsmay deem relevant.  We anticipate payinga significant amount of our net income as cash dividends on our common stock inthe foreseeable future.  Such paymentswould reduce 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 derive from concessions from the PeruvianMinistry of Energy and Mines for our exploration, exploitation, extractionand/or production operations. In June 2004, the Peruvian Congress enactedlegislation imposing a royalty to be paid by mining companies in favor of theregional governments and communities where mining resources are located.  Under this 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—MiningRights and Concessions—Peru.”  In Mexico,our mineral rights derive from concessions granted, on a discretionary basis,by the *Secretaría de Economía*(Ministry of Economy), pursuant to the *LeyMinera* (the Mining Law) and regulations thereunder.

Mining concessions in both Peru and Mexico may beterminated if the obligations of the concessionaire are not satisfied.  In Peru, we are obligated to pay certain feesfor 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 unfavorable modification of the terms of one or moreof our concessions, or failure to obtain renewals of such concessions subjectto renewal or extensions, could have a material adverse effect on our financialcondition and prospects.

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

A significant part of our operations are conducted inPeru.  Accordingly, our business,financial condition or results of operations could be affected by changes ineconomic or other policies of the Peruvian government or other political,regulatory or economic developments in Peru. 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.  Pastgovernments have frequently intervened in the nation’s economy and socialstructure.  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 of profitsto 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, currency exchange rates werestrictly controlled and all exports sales were required to be deposited in Peru’s*Banco Central de Reserva*, wherethey were exchanged from U.S. dollars to the Peruvian currency atless-than-favorable rates of exchange. These policies generally had an adverse effect on our results ofoperations. Controls on repatriation of funds limited the ability of ourstockholders to receive dividends outside of Peru but did not limit the abilityof our stockholders to receive distributions of earnings in Peru.

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

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Mr. Paniagua took office in November 2000 and in July2001 handed over the presidency to Alejandro Toledo, the winner of theelections decided in the second round held on June 3, 2001, ending twoyears of political turmoil.  PresidentToledo retained, for the most part, the economic policies of the previousgovernment, focusing on promoting private investment, eliminating taxexemptions, reducing underemployment and unemployment and privatizingstate-owned companies in various sectors including energy, mining and public services.  President Toledo also implemented fiscalausterity programs, among other proposals, in order to stimulate theeconomy.  Despite Peru’s moderateeconomic growth, the Toledo administration has at times faced public unrestspurred by the high rates of unemployment, underemployment and poverty.  President Toledo has been forced torestructure his cabinet on several occasions to quell public unrest and tomaintain his political alliances.

On April 9, 2006,Peruvian citizens participated in the election for president, congress andrepresentatives to the Andean Parliament, to be appointed for the five-yearperiod commencing July 28, 2006.  24political parties participated in this election process.

As none of thepresidential candidates received more than 50 percent of the valid votes; onJune 4, 2006 a run-off election between the top two vote getters was held.  On June 16, 2006 the National Office ofElectoral Processes proclaimed Mr. Alan Garcia president-elect, therebybringing the electoral process to an end. Mr. Garcia assumed office on July 28,2006.  Mr. Garcia, a member of the APRAparty, was president of Peru from 1985 to 1990. At the inauguration an appeal was made to the mining industry for avoluntary contribution for regional development.  In December 2006, the Company signed anagreement with the Peruvian government to make a contribution for this purpose.

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 cannot guarantee that acts by these orother terrorist organizations will not adversely affect our operations in thefuture.

Because we havesignificant operations in Peru, we cannot provide any assurance that politicaldevelopments in Peru, will not have a material adverse effect on marketconditions, prices of our securities, our ability to obtain financing, and ourresults of operations and financial condition.

***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 crisisoccurred in 1995 in the context of a series of internal disruptions andpolitical events including a large current account deficit, civil unrest in thesouthern state of Chiapas, the assassination of two prominent politicalfigures, a substantial outflow of capital and a significant devaluation of thepeso.  We cannot assure you that suchconditions will not recur, that other unforeseen negative political or socialconditions will not arise or that such conditions will not have a materialadverse effect on 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 more than 70 years of presidential rule bythe *Partido Revolucionario Institucional*(the Institutional Revolutionary Party), or PRI, neither the PAN nor the PRIsucceeded in securing a majority in the Mexican congress.  In elections in 2003 and 2004, the PAN lostadditional seats in the Mexican Congress and state governorships.

A general election washeld in Mexico on Sunday, July 2, 2006. Voters went to the polls to elect, on the federal level: a new Presidentof the Republic for six years, 500

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members to the Chamber ofDeputies and 128 members to the Senate. On July 6, 2006 preliminary results declared Mr. Felipe Calderon winnerof the presidential election, by a very slim margin.  Mr. Calderon is a member of Partido AccionNacional (the National Action Party). Mr. Andres Lopez Obrador, the candidate of the Partido de la RevolucionDemocratica, the runner-up to Mr. Calderon filed challenges in many electoraldistricts, alleging several irregularities and called for street protests.  The Federal Electoral Tribunal, Mexico’shighest court in electoral matters, confirmed Mr. Felipe Calderon as theelected President on September 5, 2006, and dismissed all fraud allegations. OnDecember 1, 2006 Mr. Felipe Calderon was sworn in as president of México.

Because we havesignificant operations in Mexico, we cannot provide any assurance thatpolitical developments in Mexico, will not have a material adverse effect onmarket conditions, prices of our securities, our ability to obtain financing,and our results of operations and financial condition.

***Peruvian inflation,reduced economic growth and fluctuations in the nuevo sol exchange rate mayadversely affect 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 ratein Peru, as measured by the *Indice dePrecios al Consumidor* and published by the *Instituto Nacional de Estadística e Informática*,the National Institute of Statistics, has fallen from a high of 7,649.7% in1990 to 1.1% in 2006.  The Peruviancurrency has been devalued numerous times during the last 20 years.  The devaluation rate has decreased from ahigh of 4,019.3% in 1990 to a revaluation of 6.8% in 2006.  Our revenues are primarily denominated inU.S. dollars and our operating expenses are partly denominated in U.S. dollars.If inflation in Peru were to increase without a corresponding devaluation ofthe nuevo sol relative to the U.S. dollar, our financial position and resultsof operations, and the market price of our common stock, could beaffected.  Although the Peruviangovernment’s stabilization plan has significantly reduced inflation and thePeruvian economy has experienced moderate growth in recent years, we cannotassure you that inflation will not increase from its current level or that suchgrowth will continue in the future at similar rates or at all.

Among the economic circumstances that could lead to adevaluation of the nuevo sol is the decline of Peruvian foreign reserves toinadequate levels.  Peru’s foreignreserves at January 30, 2007, were $17.8 billion as compared to $17.3 billionat December 31, 2006.  We cannot assurethat Peru will be able to maintain adequate foreign reserves to meet itsforeign 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 of operations.***

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, when inflation in Mexicoincreases without a corresponding devaluation of the peso, as it did in 2000,2001 and 2002, the net income generated by our Mexican operations is adverselyaffected.

The annual inflation rate in Mexico was 4.1% in 2006,3.3% in 2005 and 5.2% in 2004.  TheMexican government has publicly announced that it does not expect inflation toexceed 3.5% in 2007.  At the same time,the peso has been subject in the past to significant devaluation, which may nothave been proportionate to the inflation rate and may not be proportionate tothe inflation rate in the future.  Thevalue of the peso decreased by 1.5% in 2006, increased by 4.9% in 2005 and decreasedby 0.3% in 2004.

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 cannot assure you that the Mexicangovernment will maintain

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its current policies with regard to the peso or thatthe peso’s value will not fluctuate significantly in the future.  The imposition of such exchange controlpolicies could impair Minera Mexico’s ability to obtain imported goods and tomeet its U.S. dollar-denominated obligations and could have an adverse effecton our business and financial condition.

***Developments inother emerging market countries and in the United States may adversely affectthe 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 byeconomic and market conditions in other emerging market countries.  Although economic conditions in suchcountries may differ significantly from economic conditions in Peru or Mexico,as the case may be, investors’ reactions to developments in any of these othercountries may have an adverse effect on the market value or trading price ofthe securities, including debt securities, of issuers that have significantoperations 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 theUnited States could also have a significant adverse effect on Mexican economicconditions including the price of our debt securities.  We cannot assure you that the market value ortrading prices of our common stock and debt securities, will not be adverselyaffected by events in the United States or elsewhere, including in emergingmarket countries.

Item 2.  Properties

We were incorporated in Delaware in 1952.  Our corporate offices in the United Statesare located at 11811 North Tatum Blvd. Suite 2500, Phoenix, Arizona 85028.  Our telephone number in Phoenix, Arizona is(602) 494-5328.  Our corporate offices inMexico are located in Mexico City and our corporate offices in Peru are locatedin Lima.  Our website iswww.southerncoppercorp.com  We believethat our existing properties are in good condition and suitable for the conductof its business.

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The following table sets forth as of December 31,2006, the locations of production facilities by reportable segment, theprocesses used, as well as the key production and capacity data for eachlocation:

*** ***
| **Facility Name**             | ** ** | **Location**     | ** ** | **Process**                                                                        | ** ** | **Nominal  Capacity (1)**            | ** ** | **2006  Production** | ** ** | **2006  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             |       | 78.2 ktpd            |       | 90.0%                           |
| Toquepala  Open-pit Mine      |       | Toquepala (Peru) |       | Copper ore milling and recovery, copper and  molybdenum concentrate production     |       | 60.0 ktpd — Milling             |       | 58.6 ktpd            |       | 97.7%                           |
| Toquepala SX-EW  Plant        |       | Toquepala (Peru) |       | Leaching, solvent extraction and cathode electro  winning                          |       | 56.0 ktpy — Refined             |       | 35.8 ktpy            |       | 63.9%                           |
|                          |       |             |       |                                                                               |       |                                 |       |                 |       |                            |
| **Processing Operations**     |       |             |       |                                                                               |       |                                 |       |                 |
| Ilo Copper  Smelter           |       | Ilo (Peru)       |       | Copper smelting, blister, anodes production                                        |       | 1,131.5 ktpy — Concentrate feed |       | 1,107.5 ktpy         |       | 97.9%                           |
| Ilo Copper  Refinery          |       | Ilo (Peru)       |       | Copper refining                                                                    |       | 280 ktpy — Refined cathodes     |       | 273.3 ktpy           |       | 97.6%                           |
| Ilo Acid Plant                |       | Ilo (Peru)       |       | Sulfuric Acid                                                                      |       | 300 ktpy — Sulfuric acid        |       | 376.4 ktpy           |       | 125.5%                          |
| Ilo Precious  Metals Refinery |       | Ilo (Peru)       |       | Slime recovery & processing, gold & silver  refining                       |       | 320 tpy                              |       | 328.8 tpy            |       | 102.8%                          |
|                          |       |             |       |                                                                               |       |                                 |       |                 |       |                            |
| **MEXICAN OPEN PIT UNIT**     |       |             |       |                                                                               |       |                                 |       |                 |
| Cananea Open-Pit  Mine        |       | Sonora (Mexico)  |       | Copper Ore milling & recovery, copper  concentrate production                  |       | 76.7 ktpd — Milling             |       | 69.2%                |       | 90.2%                           |
| Cananea SX-EW I,  II Plants   |       | Sonora (Mexico)  |       | Leaching, solvent extraction & refined cathode  electrowinning                 |       | 54.8 ktpy (combined)                 |       | 52.5 ktpy            |       | 95.9%                           |
| La Caridad  Open-Pit Mine     |       | Sonora (Mexico)  |       | Copper ore milling & recovery, copper &  molybdenum concentrate production |       | 90.0 ktpd — Milling             |       | 75.6 ktpd            |       | 84.0%                           |
| La Caridad SX-EW  Plant       |       | Sonora (Mexico)  |       | Leaching, solvent extraction & cathode electro  winning                        |       | 21.9 ktpy — Refined             |       | 11.2 ktpy            |       | 51.4%                           |
|                          |       |             |       |                                                                               |       |                                 |       |                 |       |                            |
| **Processing Operations**     |       |             |       |                                                                               |       |                                 |       |                 |
| La Caridad  Copper Smelter    |       | Sonora (Mexico)  |       | Concentrate smelting, anode production                                             |       | 1,000 ktpy — Concentrate feed   |       | 724.0 ktpy           |       | 72.4%                           |
| La Caridad  Copper Refinery   |       | Sonora (Mexico)  |       | Copper refining                                                                    |       | 300 ktpy Copper cathode              |       | 200.4 ktpy           |       | 66.8%                           |
| La Caridad  Copper Rod Plant  |       | Sonora (Mexico)  |       | Copper rod production                                                              |       | 150 ktpy Copper rod                  |       | 96.6 ktpy            |       | 64.4%                           |

 

A55

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| La Caridad  Precious Metals Refinery     |   | Sonora (Mexico)          |   | Slime recovery & processing, gold & silver  refining                           |   | 2.8 ktpy — Slime             |   | 0.6 ktpy     |   | 21.9%  |
|------------------------------------------|--------|--------------------------|--------|----------------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------|--------|--------|
| La Caridad  Sulfuric Acid Plant          |   | Sonora (Mexico)          |   | Sulfuric acid                                                                          |   | 1,565.5 ktpy — Sulfuric acid |   | 670.5 ktpy   |   | 42.8%  |
|                                     |   |                     |   |                                                                                   |   |                              |   |         |   |   |
| **IMMSA  UNIT**                          |   |                     |   |                                                                                   |   |                              |   |         |   |   |
| Underground  Mines                       |   |                     |   |                                                                                   |   |                              |   |         |   |   |
| Charcas                                  |   | San Luis Potosi (Mexico) |   | Copper, zinc, lead milling, recovery &  concentrate production                     |   | 1,460 ktpy — Milled ore      |   | 1,343.5 ktpy |   | 92.0%  |
| San Martin                               |   | Zacatecas (Mexico)       |   | Lead, zinc, copper & silver mining, milling  recovery & concentrate production |   | 1,606 ktpy — Milled ore      |   | 925.8 ktpy   |   | 57.7%  |
| Santa Barbara                            |   | Chihuahua (Mexico)       |   | Lead, copper and zinc mining & concentrates  production                            |   | 2,190 ktpy — Milled ore      |   | 1,483.7 ktpy |   | 67.8%  |
| Santa Eulalia                            |   | Chihuahua (Mexico)       |   | Lead & zinc mining and milling recovery &  concentrate production              |   | 547.5 ktpy — Milled ore      |   | 243.7 ktpy   |   | 44.5%  |
| Taxco                                    |   | Guerrero (Mexico)        |   | Lead, zinc silver & gold mining recovery &  concentrate production             |   | 730 ktpy — Milled ore        |   | 410.6 ktpy   |   | 56.2%  |
|                                     |   |                     |   |                                                                                   |   |                              |   |         |   |   |
| Nueva Rosita  Coal & Coke Complex(2) |   | Coahuila (Mexico)        |   | Clean coal production                                                                  |   | 900 ktpy clean coal               |   | 52.8 ktpy    |   | 5.9%   |
|                                     |   |                     |   |                                                                                   |   |                              |   |         |   |   |
| **Procesing Operationss**                |   |                     |   |                                                                                   |   |                              |   |         |
| San Luis Potosi  Copper Smelter          |   | San Luis Potosi (Mexico) |   | Concentrate smelting, blister production                                               |   | 230 ktpy Concentrate feed         |   | 99.1 ktpy    |   | 43.1%  |
| San Luis Potosi  Zinc Refinery           |   | San Luis Potosi (Mexico) |   | Zinc concentrates refining                                                             |   | 105 ktpy Zinc cathode             |   | 45.3 ktpy    |   | 43.1%  |
| San Luis Potosi  Sulfuric Acid Plant     |   | San Luis Potosi (Mexico) |   | Sulfuric acid                                                                          |   | 180.0 ktpy Sulfuric acid          |   | 98.5 ktpy    |   | 54.7%  |

----

Key:

koz = thousands of ounces

ktpy = 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, 2006, the coalreserves for the Nueva Rosita coal were 66,460,069 tons with average sulfurcontent of 0.85% and a BTU content of 8,876 per pound.

(3)           At December 31, 2006, net book valuesof property are as follows: Peruvian operation $1,637.1 million (Cuajone $412.1million, Toquepala $762.9 million and Ilo and other support facilities $462.1million), Mexican open pit $1,587.5 million (Cananea $1,057.0 million, LaCaridad $530.5 million) and Mexican IMMSA unit $268.9 million (San Luis Potosí$42.1 million, zinc electrolitic refinery $ 44.0 million, Charcas $4.0 million,San Martin $20.9 million, Santa Barbara $25.0 million, Taxco $4.5 million,Santa Eulalia $11.1 million, Pasta de Conchos and Nueva Rosita $12.6 millionand property in progress and other facilities $104.7 million).

A56

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SUMMARY OPERATING DATA

The following table sets out certain operating dataunderlying our combined financial and operating information for each of theperiods indicated.

|                                    | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **COPPER  (thousand pounds):**     |       |                                       |       |   |   |   |   |
| **Mined**                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  open pit**                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                          |       | 334,605                                    |       | 347,130 |   | 354,618 |   |
| Cuajone                            |       | 384,493                                    |       | 360,805 |   | 428,553 |   |
| SX-EW Toquepala                    |       | 78,935                                     |       | 80,464 |   | 92,869 |   |
|                               |       |                                       |       |   |   |   |   |
| **Mexico  open pit**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                         |       | 128,024                                    |       | 269,662 |   | 243,358 |   |
| Cananea                            |       | 245,331                                    |       | 261,778 |   | 271,670 |   |
| SX-EW La Caridad                   |       | 24,796                                     |       | 48,603 |   | 48,005 |   |
| SX-EW Cananea                      |       | 115,794                                    |       | 124,359 |   | 110,671 |   |
| **IMMSA  Unit**                    |       | 23,270                                     |       | 28,228 |   | 33,186 |   |
| **Total  Mined**                   | ** ** | **1,335,248**                              | ** ** | **1,521,029** | ** ** | **1,582,930** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| **Smelted**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Blister Ilo                        |       | 67,364                                     |       | 713,200 |   | 702,646 |   |
| Anodes Ilo                         |       | 656,016                                    |       | — |   | — |   |
| Anodes La  Caridad                 |       | 530,592                                    |       | 617,953 |   | 548,763 |   |
| Blister IMMSA                      |       | 44,518                                     |       | 46,998 |   | 49,970 |   |
| **Total  Smelted**                 | ** ** | **1,298,490**                              | ** ** | **1,378,151** | ** ** | **1,301,379** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| **Refined**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  Open Pit**                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes Ilo                       |       | 602,520                                    |       | 628,769 |   | 618,790 |   |
| SX-EW Toquepala                    |       | 78,935                                     |       | 80,464 |   | 92,869 |   |
|                               |       |                                       |       |   |   |   |   |
| **Mexico  Open Pit**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes La  Caridad               |       | 441,705                                    |       | 515,179 |   | 445,649 |   |
| SX-EW La Caridad                   |       | 24,796                                     |       | 48,603 |   | 48,005 |   |
| SX-EW Cananea                      |       | 115,794                                    |       | 124,359 |   | 110,671 |   |
| **Total  Refined**                 | ** ** | **1,263,750**                              | ** ** | **1,397,374** | ** ** | **1,315,984** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| **Rod  Mexico Open Pit**           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                         |       | 212,923                                    |       | 249,485 |   | 153,282 |   |
| **Total  Rod**                     | ** ** | **212,923**                                | ** ** | **249,485** | ** ** | **153,282** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| **SILVER  (thousand ounces)**      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mined**                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  Open Pit**                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                          |       | 2,083                                      |       | 2,230 |   | 2,048 |   |
| Cuajone                            |       | 2,141                                      |       | 2,261 |   | 2,712 |   |
|                               |       |                                       |       |   |   |   |   |
| **Mexico  Open Pit**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                         |       | 1,055                                      |       | 2,123 |   | 1,777 |   |
| Cananea                            |       | 1,616                                      |       | 1,698 |   | 1,523 |   |
| **IMMSA  Unit**                    |       | 9,276                                      |       | 10,183 |   | 10,470 |   |
| **Total  Mined**                   | ** ** | **16,171**                                 | ** ** | **18,495** | ** ** | **18,530** | ** ** |
|                               |       |                                       |       |   |   |   |   |
| **Refined**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Peru Open Pit —  Ilo          |       | 3,831                                      |       | 3,533 |   | 3,823 |   |
| Mexico Open Pit  — La Caridad |       | 4,211                                      |       | 4,583 |   | 2,923 |   |
| IMMSA Unit                         |       | 4,337                                      |       | 4,371 |   | 4,050 |   |
| **Total Refined**                  | ** ** | **12,379**                                 | ** ** | **12,487** | ** ** | **10,796** | ** ** |

 

A57

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| **MOLYBDENUM  (thousand pounds)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Mined**                         |       |       |       |       |       |       |       |
| Toquepala                         |       | 12,815     |       | 11,737     |       | 13,236     |       |
| Cuajone                           |       | 7,767      |       | 11,638     |       | 10,267     |       |
| La Caridad                        |       | 5,514      |       | 9,260      |       | 8,184      |       |
| **Total  Mined**                  | ** ** | **26,096** | ** ** | **32,635** | ** ** | **31,687** | ** ** |
|                              |       |       |       |       |       |       |       |
| **ZINC  (thousand pounds)**       |       |       |       |       |       |       |       |
| Mined IMMSA                       |       | 301,133    |       | 316,603    |       | 294,930    |       |
| Refined IMMSA                     |       | 112,513    |       | 223,820    |       | 226,097    |       |

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **Average Market Prices**           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Copper price ($ per  pound — LME)   |       | $                                          | 3.05       |   | $ | 1.67 |   | $ | 1.30 |   |
| Copper price ($ per  pound — COMEX) |       | $                                          | 3.09       |   | $ | 1.68 |   | $ | 1.29 |   |
| Molybdenum price  ($ per pound) (1)      |       | $                                          | 24.38      |   | $ | 31.05 |   | $ | 15.95 |   |
| Zinc price ($ per  pound — LME)     |       | $                                          | 1.49       |   | $ | 0.63 |   | $ | 0.48 |   |
| Silver price ($ per  ounce — COMEX) |       | $                                          | 11.54      |   | $ | 7.32 |   | $ | 6.68 |   |

----

(1)          Platt’s Metals Week Dealer Oxide

ORE RESERVES:

Ore reserves are thoseestimated quantities of proven and probable material that may be economicallymined and processed for extraction of their mineral content, at the time of thereserve determination. “Proven” (measured) reserves are reserves for which (a)quantity is computed from dimensions revealed in outcrops, trenches, workingsor drill holes; (b) grade and/or quality are computed from the results ofdetailed samplings; and (c) the sites for inspection, sampling and measurementare spaced so closely and the geologic character is so well defined that size,shape, depth and mineral content of reserves are well-established.  “Probable” (indicated) reserves are reservesfor which quantity and grade and/or quality are computed from informationsimilar to that used for proven (measured) reserves, but the sites forinspection, sampling, and measurement are farther apart or are otherwise lessadequately spaced.  The degree ofassurance, although lower than that for proven (measured) reserves, is highenough to assume continuity between points of observation. “Mineralizedmaterial,” on the other hand, is a mineralized body that has been delineated byappropriately spaced drilling and/or underground sampling to support thereported tonnage and average grade of metal(s). Such a deposit does not qualify as a reserve until legal and economicfeasibility are concluded based upon a comprehensive evaluation of unit costs,grade, recoveries and other material factors.

Our proven and probableore reserve estimates are based on engineering evaluations of assay valuesderived from the sampling of drill holes and other openings.  We believe that the samplings taken are spacedat intervals sufficiently close enough and the geological characteristics ofthe deposits are sufficiently well defined to render the estimatesreliable.  The ore reserves estimatesinclude assessments of the resource, mining and metallurgy, as well aseconomic, marketing, legal, environmental, governmental, social and othernecessary considerations.

Our Peruvian operations,including the Toquepala and Cuajone reserves, are classified into proven(measured), probable (indicated) and possible (inferred) categories based on aRCB Index (Relative Confidence Bound Index) that measures our level of geologicknowledge and confidence in each block. The RCB index is a measure of relative confidence in the block grade estimate.  This approach combines the local variabilityof the composites used to krig a block with the Kriging variance andincorporates the use of confidence intervals in measuring uncertainty of the blockestimates relative to each

A58

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other.  The final resource classification is thenbased on the distribution of these RCB values for blocks above 0.05% Cu.  It is the distribution that is used to findthe breaks between proven/probable and probable/possible.

On December 7, 2006, weannounced a significant increase in ore reserves at our Peruvian mines.  Using a 90 cents per pound copper priceassumption, ore reserves increased 83% in Toquepala and 8% in Cuajone.  The metal content has increased by 61% inToquepala and 22% in Cuajone, extending the life of the Toquepala mine by 23years and the life of the Cuajone mine by three years.

Our Mexican operations,including the Cananea and La Caridad reserves, are calculated using amathematical block model and applying the Mine-Sight software system. Theestimated grades per block are classified as proven and probable.  These grades are calculated applying athree-dimensional interpolation procedure and the inverse distancesquared.  Likewise, the quadrant methodor spherical search is implemented in order to limit the number of compositesthat will affect the block’s interpolated value.  The composites data is derived from thegeological exploration of the ore body. In order to classify the individual blocks in the model, a thoroughgeostatistical variogram analysis is conducted, taking under consideration theprincipal characteristics of the deposit. Based from this block model classification, and with the implementationof the Lerch-Grossman algorithm, and the Mine-Sight Pit Optimizer procedure,mineable reserves are determined.  Thecalculated proven and probable reserves include those blocks that resulteconomically feasible to mine by open pit method within a particular minedesign.

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

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

Pursuant to SEC guidance,the reserves information in this report are calculated using average metalsprices over the most recent three years unless otherwise stated.  We refer to these three-year average metalsprices as “current prices.”  Our currentprices for copper are calculated using prices quoted by COMEX, and our currentprices for molybdenum are calculated according to Platt’s *Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $2.020 per pound for copper and $24.315 per pound formolybdenum, both current prices as of December 31, 2006.  The current prices for copper and molybdenumwere $1.261 and $17.817 as of December 31, 2005 and $0.939 and $8.425 as ofDecember 31, 2004.

For purposes of our long-term planning, our managementuses conservative metals price assumptions of $0.90 per pound for copper and$5.00 per pound for molybdenum.  Theseprices are intended to approximate average prices over the long term.  Our management uses these price assumptions,as it believes these prices reflect the full price cycle of the metals market.

A59

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For Peruvian operations, commencing in 2003, we haveused reserves estimates based on current average prices as of the most recentyear then ended to determine amortization of mine development and intangibleassets, for the years prior to 2006 the amount of mine stripping that wascapitalized and units of production amortization of capitalized minestripping.  In calculating such items inthe case of our Minera Mexico subsidiary for periods prior to 2005, we haveused reserves estimates based on the longer-term price assumptions discussedabove.

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 onengineering evaluations derived from samples of drill holes and other openings,combined with assumptions about copper market prices and production costs ateach 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 MOLYBDENUMRESERVES BY SITE:

**The table below details ourproven and probable copper and molybdenum reserves as estimated at December 31,2006.**
| ** **                                                   | ** ** | **PERUVIAN OPEN-PIT  UNIT** | ** ** | **MEXICAN OPEN-PIT  UNIT** | ** ** | **TOTAL**                  | ** ** | **MEXICAN  IMMSA UNIT**       | ** ** | **Sensitivity to  Change in metals  prices (3)** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|----------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **Cuajone  Mine (1)**       | ** ** | **Toquepala  Mine (2)**    | ** ** | **Cananea  Mine (1)** | ** ** | **La Caridad  Mine (1)** | ** ** | **OPEN-PIT  MINES**                                                  | ** ** | **IMMSA (2)** | ** ** | **Increase 20%** | ** ** | **Decrease 20%** | ** ** |
| Mineral Reserves                                             |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| Metal prices:                                                |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| Copper ($/lb.)                                               |       | 2.020                            |       | 2.020                           |       | 2.020                      |       | 2.020                              |       | 2.020                                                                |       | 2.020 |   | 2.425 |   | 1.616 |   |
| Molybdenum  ($/lb.)                                          |       | 24.315                           |       | 24.315                          |       | 24.315                     |       | 24.315                             |       | 24.315                                                               |       | 24.315 |   | 29.178 |   | 19.452 |   |
| Cut-off grade                                                |       | 0.183                            | %          | 0.217                           | %          | 0.141                      | %          | 0.110                              | %          | 0.159                                                                | %          | — |   | 0.133 | % | 0.203 | % |
| Sulfide ore  reserves (thousands of tons)                    |       | 2,423,252                        |       | 3,716,159                       |       | 6,111,482                  |       | 3,422,081                          |       | 15,672,974                                                           |       | 47,372 |   | 17,417,189 |   | 12,905,441 |   |
| Average grade:                                               |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| Copper                                                       |       | 0.519                            | %          | 0.491                           | %          | 0.401                      | %          | 0.244                              | %          | 0.406                                                                | %          | 0.48 | % | 0.384 | % | 0.445 | % |
| Molybdenum                                                   |       | 0.017                            | %          | 0.024                           | %          | —                     |       | 0.029                              | %          | 0.024                                                                | %          | — |   | 0.023 | % | 0.025 | % |
| Lead                                                         |       | —                           |       | —                          |       | —                     |       | —                             |       | —                                                               |       | 1.03 | % | — |   | — |   |
| Zinc                                                         |       | —                           |       | —                          |       | —                     |       | —                             |       | —                                                               |       | 3.37 | % | — |   | — |   |
| Leachable  material (thousands of tons)                      |       | 16,115                           |       | 118,178                         |       | 1,754,218                  |       | 1,247,388                          |       | 3,135,899                                                            |       | — |   | 2,563,029 |   | 3,738,800 |   |
| Leachable  material grade                                    |       | 0.496                            | %          | 0.207                           | %          | 0.142                      | %          | 0.117                              | %          | 0.136                                                                | %          | — |   | 0.122 | % | 0.159 | % |
|                                                         |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| Waste (thousands  of tons) (5)                               |       | 6,190,725                        |       | 14,592,989                      |       | 5,963,936                  |       | 1,010,496                          |       | 27,758,146                                                           |       | — |   | 29,111,835 |   | 25,527,493 |   |
| Total material  (thousands of tons)                          |       | 8,630,092                        |       | 18,427,326                      |       | 13,829,636                 |       | 5,679,965                          |       | 46,567,019                                                           |       | — |   | 49,092,053 |   | 42,171,734 |   |
| Stripping ratio                                              |       | 2.56                             |       | 3.96                            |       | 1.26                       |       | 0.66                               |       | 1.97                                                                 |       | — |   | 1.82 |   | 2.27 |   |
|                                                         |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| **Leachable  material**                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** **                         | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves in stock  (thousands of tons)                       |       | 22,997                           |       | 849,981                         |       | 665,389                    |       | 486,898                            |       | 2,025,265                                                            |       | — |   | 2,025,265 |   | 2,025,265 |   |
| Average copper  grade                                        |       | 0.468                            | %          | 0.137                           | %          | 0.145                      | %          | 0.250                              | %          | 0.170                                                                | %          | — |   | 0.170 | % | 0.170 | % |
|                                                         |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| In pit reserves  (thousands of tons)                         |       | 16,115                           |       | 118,178                         |       | 1,754,218                  |       | 1,247,388                          |       | 3,135,899                                                            |       | — |   | 2,563,029 |   | 3,738,800 |   |
| Average copper  grade                                        |       | 0.496                            | %          | 0.207                           | %          | 0.142                      | %          | 0.117                              | %          | 0.136                                                                | %          | — |   | 0.122 | % | 0.159 | % |
|                                                         |       |                             |       |                            |       |                       |       |                               |       |                                                                 |       |   |   |   |   |   |   |
| Total leachable  reserves (thousands of tons)                |       | 39,112                           |       | 968,159                         |       | 2,419,607                  |       | 1,734,286                          |       | 5,161,164                                                            |       | — |   | 4,588,294 |   | 5,764,065 |   |
| Average copper  grade                                        |       | 0.479                            | %          | 0.145                           | %          | 0.143                      | %          | 0.154                              | %          | 0.150                                                                | %          | — |   | 0.143 | % | 0.163 | % |
| **Copper contained in ore  reserves (thousand of tons) (4)** | ** ** | **12,657**                       | ** ** | **18,491**                      | ** ** | **26,998**                 | ** ** | **9,809**                          | ** ** | **67,955**                                                           | ** ** | **227** | ** ** | **70,056** | ** ** | **63,334** | ** ** |

 

A60

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----

(1)                      TheCuajone, Toquepala, Cananea and La Caridad concentrator recoveries calculatedfor these reserves were 85.5%, 87.1%, 81.0% and 81.5%, respectively, obtainedby using recovery formulas according to the different milling capacity andgeo-metallurgical zones.

(2)                      The****IMMSA Unit includes the Charcas, Santa Barbara, San Martin,Santa Eulalia and Taxco mines. Zinc and lead contained in ore reserves are1,596 and 488 thousand tons, respectively.

(3)                      Inpreparing the sensitivity analysis, we recalculated our reserves based on theassumption that current average metal prices were 20% higher and 20% lower,respectively, than the actual current average prices for year-end 2006.  Reserve results of this sensitivity analysisare not proportional to the increase or decrease in metal priceassumptions.  The analysis above does not include our IMMSA Unit’s underground mines,for which the sensitivity analysis is as follows:

|                                           | ** ** | **Sensitivity to 20% Change in Metals Prices** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Increase 20%**                                                        | ** ** | **Decrease 20%** | ** ** |
| Sulfide ore  reserves (thousands of tons) |       | 48,814                                                                       |       | 43,778 |   |
| Average grade  copper                     |       | 0.47                                                                         | %          | 0.50 | % |
| Copper contained  (thousands of tons)     |       | 229                                                                          |       | 219 |   |

 

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

(5)                      InCuajone mine, waste includes 681,435 thousand tons of low grade sulfurmaterial.

The following is the average drill-hole spacing forproven and probable sulfide reserves:

|                                                 | ** ** | ** **                                     | ** ** | ** **   | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|--------------|------------|
| ** **                                      | ** ** | **Proven**                                     | ** ** | **Probable** | ** ** |
| **As of December 31, 2006** | ** ** | **(average spacing in meters)** | ** ** |
| Cuajone                                         |       | 80.58                                          |       | 119.45       |       |
| Toquepala                                       |       | 87.50                                          |       | 120.41       |       |
| Cananea                                         |       | 51.96                                          |       | 100.94       |       |
| La Caridad                                      |       | 40.04                                          |       | 105.97       |       |

 

The table below details ourproven and probable copper and molybdenum reserves as of December 31, 2006calculated based on long-term price assumptions of, $0.90 for copper and $5.00for molybdenum.

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| ** **                                               | ** ** | **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.)                                      |       | $                 | 5.00       |                | $          | 5.00              |       | $                         | 4.50       |                       | $          | 4.50           |       | $ | 4.50 |   | $ | 4.50 |   |
| Cut-off grade                                            |       | 0.362             | %          | 0.362               | %          | 0.365             | %          | 0.240                     | %          | 0.351                      | %          | —         |       |
| Sulfide ore  reserves (thousands of tons)                |       | 1,123,094         |       | 1,032,670           |       | 2,036,899         |       | 456,941                   |       | 4,649,604                  |       | 33,394         |       |
| Average grade:                                           |       |              |       |                |       |              |       |                      |       |                       |       |           |       |
| Copper                                                   |       | 0.608             | %          | 0.665               | %          | 0.603             | %          | 0.404                     | %          | 0.598                      | %          | 0.57           | %          |
| Molybdenum                                               |       | 0.019             | %          | 0.040               | %          | —            |       | 0.028                     | %          | 0.029                      | %          | —         |       |
| Lead                                                     |       | —            |       | —              |       | —            |       | —                    |       | —                     |       | 1.09           | %          |
| Zinc                                                     |       | —            |       | —              |       | —            |       | —                    |       | —                     |       | 3.52           | %          |
| Leachable material (thousands  of tons)                  |       | 11,099            |       | 1,209,932           |       | 1,923,580         |       | 864,768                   |       | 4,009,379                  |       | —         |       |
| Leachable material grade                                 |       | 0.591             | %          | 0.242               | %          | 0.282             | %          | 0.201                     | %          | 0.253                      | %          | —         |       |
| Waste (thousands of  tons)                               |       | 2,037,263         |       | 3,434,952           |       | 2,750,348         |       | 239,863                   |       | 8,462,426                  |       | —         |       |
| Total material  (thousands of tons)                      |       | 3,171,456         |       | 5,677,554           |       | 6,710,827         |       | 1,561,572                 |       | 17,121,409                 |       | —         |       |
| Stripping ratio                                          |       | 1.82              |       | 4.50                |       | 2.29              |       | 2.42                      |       | 2.68                       |       | —         |       |
|                                                     |       |              |       |                |       |              |       |                      |       |                       |       |           |       |
| **Leachable material**                                   |       |              |       |                |       |              |       |                      |       |                       |       |           |       |
| Reserves in stock  (thousands of tons)                   |       | 22,997            |       | 849,981             |       | 665,389           |       | 486,898                   |       | 2,025,265                  |       | —         |       |
| Average copper grade                                     |       | 0.468             | %          | 0.137               | %          | 0.145             | %          | 0.250                     | %          | 0.170                      | %          | —         |       |
| In-pit reserves  (thousands of tons)                     |       | 11,099            |       | 1,209,932           |       | 1,923,580         |       | 864,768                   |       | 4,009,379                  |       | —         |       |
| Average copper grade                                     |       | 0.591             | %          | 0.242               | %          | 0.282             | %          | 0.201                     | %          | 0.253                      | %          | —         |       |
| Total Leachable  reserves (thousands of tons)            |       | 34,096            |       | 2,059,913           |       | 2,588,969         |       | 1,351,666                 |       | 6,034,644                  |       | —         |       |
| Average copper grade                                     |       | 0.510             | %          | 0.199               | %          | 0.247             | %          | 0.219                     | %          | 0.226                      | %          | —         |       |
| Copper contained in ore reserves (thousands of tons) (2) |       | 6,894             |       | 9,795               |       | 17,707            |       | 3,584                     |       | 37,980                     |       | 190            |       |

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(1)                      The IMMSA Unit includes the Charcas, SantaBarbara, San Martin, Santa Eulalia and Taxco mines. Zinc and lead containedin ore reserves are 1,175 and 364 thousand tons, respectively.

(2)                      Copper contained in ore reserves for open-pitmines is (i) the product of sulfide ore reserves and the average copper gradeplus (ii) the product of in-pit leachable reserves and the average grade ofcopper.  Copper contained in ore reservesfor underground mines is the product of sulfide ore reserves and the averagecopper 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 tons and grades are calculated inside minedareas over the block model.  At thispoint the current cut-off grade is considered.

4.               Inthe final stage, accumulated tons mined, weighted average grade for orematerial and leach is compared with data coming from our SRP system.

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Tonnage and gradereconciliation for 2006 are as follows:

** **
| ** ** | ** ** | **Long Range Model** | ** ** | **Mill**          | ** ** | **Variance**          | ** ** |
|------------|------------|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Mine**   | ** ** | **Tons  (thousands)**          | ** ** | **% Copper** | ** ** | **Tons  (thousands)** | ** ** | **% Copper** | ** ** | **Tons  (thousands)** | ** ** | **% Copper** | ** ** |
| Cuajone    |       | 29,502                         |       | 0.680             |       | 28,299                |       | 0.703 |   | 1,203 |   | (0.023 | ) |
| Toquepala  |       | 20,871                         |       | 0.810             |       | 20,813                |       | 0.800 |   | 58 |   | 0.010 |   |
| Cananea    |       | 23,656                         |       | 0.626             |       | 23,554                |       | 0.590 |   | 102 |   | 0.036 |   |
| La Caridad |       | 17,100                         |       | 0.444             |       | 16,872                |       | 0.449 |   | 228 |   | 0.005 |   |

 

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.

Item 3.  Legal Proceedings

Reference is made to theinformation under the caption “Litigation Matters” in Financial Statement Note14 “Commitments and Contingencies”.

Item 4.  Submission of Matters to a Vote of SecurityHolders

None.

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Executive Officers of theRegistrant

Set forth below are the executive officers of the Company,their ages as of February 6, 2007 and their positions.
| **Name**                         | ** ** | **Age** | ** ** | **Position**                                                    |
|----------------------------------|------------|---------|------------|-----------------------------------------------------------------|
| German Larrea  Mota-Velasco      |       | 53      |       | Chairman of the Board and Director                              |
| Oscar Gonzalez  Rocha            |       | 68      |       | President, Chief Executive Officer and Director                 |
| Xavier Garcia de  Quevedo Topete |       | 60      |       | Executive Vice President, Chief Operating Officer  and Director |
| J. Eduardo  Gonzalez Felix       |       | 38      |       | Vice President Finance, Chief Financial Officer and  Director   |
| Armando Ortega  Gomez            |       | 46      |       | Vice President, Legal, General Counsel, Secretary  and Director |
| Jose N. Chirinos  Fano           |       | 65      |       | Comptroller                                                     |
| Mario Vinageras  Barroso         |       | 51      |       | Vice President, Commercial                                      |
| Vidal Muhech Dip                 |       | 66      |       | Vice President, Projects                                        |
| Remigio Martinez  Müller    |       | 63      |       | Vice President, Explorations                                    |

 

**German Larrea Mota-Velasco** has served as our Chairman of the Board sinceDecember 1999 Chief Executive Officer from December 1999 to October 2004 and asa member of the Board of Directors since November 1999.  He has been Chairman of the Board ofDirectors, President and Chief Executive Officer of Grupo Mexico (holding)since 1994.  Mr. Larrea has been Chairmanand Chief Executive Officer of Americas Mining Corporation (mining division)since 2003.  Mr. Larrea has been Chairmanof the Board and Chief Executive Officer of Grupo Ferroviario Mexicano(railroad division) since 1997.  Mr.Larrea was previously Executive Vice Chairman of Grupo Mexico and has been amember of the Board of Directors since 1981. He is also a director of Grupo Financiero Banamex, (Citigroup) S.A. deC.V., Banco Nacional de Mexico, S.A., Consejo Mexicano de Hombres de Negocios,and Grupo Televisa, S.A. de C.V.

**Oscar Gonzalez Rocha** has served as our Chief Executive Officer sinceOctober 21, 2004 and our President since December 1999.  He has been our Director since November1999.  Previously, he was our GeneralDirector and Chief Operating Officer from December 1999 to October 20,2004.  He has been a Director of GrupoMexico since 2002 and Managing Director of Mexicana de Cobre, S.A. de C.V. from1986 to 1999 and of Mexicana de Cananea S.A. de C.V. from 1990 to 1999.  He was an Alternate Director of Grupo Mexicofrom 1988 to April 2002.

**Xavier Garcia de Quevedo Topete** has served as Executive Vice President and ChiefOperating Officer since April 12, 2005 and as a member of our Board of Directorsfrom November 1999 to the present.  Hehas been the President and Chief Executive Officer of Minera Mexico fromSeptember 2001 to date.  He was Presidentof Grupo Ferroviario Mexicano S.A. de C.V., and of Ferrocarril Mexicano, S.A.de C.V. from December 1997 to December 1999, and Managing Director ofExploration and Development of Grupo Mexico from 1994 to 1997.  He has been a director of Grupo Mexico sinceApril 2002.

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

**Armando Ortega Gomez** has served as a member of our Board of Directorssince August 2002.  Mr. Ortega has beenour General Counsel since October 23, 2003, and has served as our Vice

A64

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President, Legal and Secretary since April 25, 2002.  Previously, he was our Assistant Secretaryfrom July 25, 2001 to April 25, 2002.  Hewas General Counsel of Grupo Mexico since May 2001 to February 2007.  Previously, he headed the Unit onInternational Trade Practices of the Ministry of Economy of Mexico with therank of Deputy Vice Minister from January 1998 to mid-May 2001, and was anegotiator 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 been Director of Comptroller andFinance since December 1999.  FromJanuary 1994 until April 2005 he was our Assistant Comptroller.  Since January 2004, Mr. Chirinos has beenVice President of Finance and Chief Financial Officer of Southern Peru Limited,one of our subsidiaries.  He has held variouspositions in Accounting, Administration and Finance during his 40 years at ourCompany.

**Mario Vinageras Barroso** has served as our Vice President, Commercialsince April 25, 2002. He has been Commercial Director of Grupo Mexico sinceSeptember 1994 and Corporate Director of Sales of Grupo Mexico since June 1,2000.

**Vidal Muhech Dip** has served as our Vice President, Projects sinceApril 25, 2002.  He has been CorporateDirector of Engineering and Construction of Grupo Mexico since April 1995.  Previously, he was Director of Engineeringand Construction of Industrial Minera Mexico from 1985 to 1995.

**Remigio Martinez Müller**has served as our Vice President, Explorationsince April 25, 2006.  Previously, heserved as our Vice President, Exploration from April 2002 to April 2005.  During the remainder of 2005 until April 24,2006, he served as our Director of Exploration. He has been Corporate Director of Exploration of Grupo Mexico since2002. From 1990 to 2001 he was Director of Exploration of Mexicana de Cobre,S.A. de C.V. Mr. Martinez has held several other managerial positions withinGrupo Mexico and its predecessor, Asarco Mexicana.

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PART II

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

At December 31, 2006,there were 2,348 holders of record of our Common Stock.  SCC’s Common Stock is traded on the New YorkStock Exchange (“NYSE”) and the Lima Stock Exchange(“BVL”).  The SCC Common Stock symbol is PCU on theNYSE and PCU1 on the BVL.

On August 30, 2006 theExecutive Committee of the Board of Directors declared a two-for-one split ofthe Company’s outstanding common stock. On October 2, 2006 common shareholders of record at the close ofbusiness on September 15, 2006, received one additional share of common stockfor every share owned.  The Company’scommon stock began trading at its post-split price on October 3, 2006.  The split increased the number of sharesoutstanding to 294,460,850 from 147,230,425.

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.  Dividends per share and the stock marketprice have been retroactively adjusted to reflect the stock split.
| ** **          | ** ** | **2006** | ** ** | **2005 (1)** | ** ** |
|---------------------|------------|----------|------------|-------------------|------------|
| **Quarters**        | ** ** | **1st**  | ** ** | **2nd**           | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Dividend per  Share |       | $        | 1.3750     |              | $          | 1.3750 |   | $ | 1.0000 |   | $ | 1.3750 |   | $ | 5.1250 |   | $ | 0.3396 |   | $ | 1.1888 |   | $ | 0.5215 |   | $ | 0.8500 |   | $ | 2.8999 |   |
|                |       |     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock market  Price |       |     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NYSE:               |       |     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                |       | $        | 45.58      |              | $          | 52.93 |   | $ | 48.87 |   | $ | 58.12 |   | $ | 58.12 |   | $ | 32.10 |   | $ | 29.60 |   | $ | 27.98 |   | $ | 35.30 |   | $ | 35.30 |   |
| Low                 |       | $        | 34.65      |              | $          | 35.45 |   | $ | 41.49 |   | $ | 44.40 |   | $ | 34.65 |   | $ | 21.59 |   | $ | 20.82 |   | $ | 21.44 |   | $ | 25.10 |   | $ | 20.82 |   |
|                |       |     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BVL:                |       |     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                |       | $        | 45.60      |              | $          | 53.25 |   | $ | 48.75 |   | $ | 57.90 |   | $ | 57.90 |   | $ | 32.00 |   | $ | 29.60 |   | $ | 27.99 |   | $ | 35.38 |   | $ | 35.38 |   |
| Low                 |       | $        | 34.55      |              | $          | 35.50 |   | $ | 42.45 |   | $ | 44.30 |   | $ | 34.55 |   | $ | 21.70 |   | $ | 20.88 |   | $ | 21.28 |   | $ | 25.18 |   | $ | 20.88 |   |

----

(1) Dividends per sharebased on the consolidated/combined results of SCC.  Actual dividends per share prior to the April1, 2005 acquisition Minera Mexico were $1.2497 in the first quarter of 2005.

**Shareholder Return PerformancePresentation**

Set forth is a line graphcomparing the yearly change in the cumulative total returns on the Company’sCommon Stock against cumulative total return on the S&P 500 Stock Index andthe S&P Metals and Mining Select Industry Index, for the five year periodending December 31, 2006. The Company’s Common Stock commenced trading on theNew York Stock Exchange on January 5, 1996. The chart below analyzes the totalreturn on SCC ́s Common Stock for the period commencing  December 31, 2001 and ending December 31,2006, compared to the total return of the S&P 500 and the S&P Metalsand Mining Select Industry Index for the five-year period commencing  December 31, 2001 and ending December 31,2006. In 2002, SCC ́s stock provided a positive return of 22.06%, compared to anegative return of 23.37% and 20.14% for the S&P 500 and the S&P Metalsand Mining Select Industry Index, respectively. In 2003, SCC ́s stock increased230.35%, compared to a positive return of 26.39% for the S&P 500 and apositive return of 75.91% for the S&P Metals and Mining Select IndustryIndex. In 2004, SCC ́s stock return was positive 3.63% compared to a positivereturn of 8.99% or the S&P 500 and a positive return of 33.02% for theS&P Metals and Mining Select Industry Index. In 2005, SCC ́s stock returnwas positive 58.27% compared to 3.00% and 21.23% for the S&P 500 and theS&P Metals and Mining Select Industry Index, respectively. In 2006, SCC ́sstock provided a positive return of 75.76% compared to 13.62% for S&P 500and 33.83% for S&P Metals and Mining Select Industry Index.

A66

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Comparison of FiveYear Cumulative Total Return *SCC Stock, S&P 500 Index and S&P DIV Metals Index **

*  Total return assumes reinvestment ofdividends

** The comparison assumes $100 dollars invested onDecember 31, 2001

The information in theforegoing stock performance graph shall not be deemed “filed” for purposes ofSection 18 of the Securities Act of 1934, nor shall it be deemed incorporatedby reference in any filing under the Securities Act of 1933.

On January 25, 2007, adividend of $1.70 per share was announced payable March 2, 2007 to shareholdersof record as of February 13, 2007.  Ourdividend policy continues to be reviewed at Board of Directors’ meetings,taking into consideration the current intensive capital investment program andexpected future 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 11 - Financings to our Consolidated CombinedFinancial Statements.

The followingtable sets forth certain information related to the Equity Compensation PlanInformation related to our Shares held as treasury stock at December 31, 2006:
| **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)**                                                                                     | ** ** |
| Directors’ stock  award plan |       | N/A                                                                                                              |       | N/A                                                                         |       | 132,400                                                                                     |       |

 

A67

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The following table setsforth certain information related to the Grupo Mexico ́s Shares in treasury stockfor the employee stock purchase plans at December 31, 2006:

 
| **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)**                                                                                     | ** ** |
| Employee stock purchase  plans |       | N/A                                                                                                              |       | N/A                                                                         |       | 139,326,973                                                                                 |       |

 

For further informationon the Company’s equity compensation plans see “Note 15 — Stockholders’ Equity”to the Company’s Consolidated Combined Financial Statements.

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Item 6.  Selected Financial Data

FIVE-YEAR SELECTEDFINANCIAL AND STATISTICAL DATA

The selected historical financial data presented below asof and for the five years ended December 31, 2006, includes certain informationthat has been derived from our consolidated combined financial statements.  The selected financial data should be read inconjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations and Quantitative and QualitativeDisclosures about Market Risk” and the consolidated combined financialstatements and notes thereto.

 
| **(In millions, except Capital  Stock and Financial Data,   except where noted)** | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statement of Earnings Data**                                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                                                                                                                 |       | $                                          | 5,460.2    |   | $ | 4,089.1 |   | $ | 3,096.7 |   | $ | 1,576.6 |   | $ | 1,388.4 |   |
| Operating income                                                                                                          |       | 3,054.3                                    |       | 2,071.0 |   | 1,482.4 |   | 325.7 |   | 186.9 |   |
| Minority  interest                                                                                                        |       | (9.3                                       | )          | (12.5 | ) | (4.7 | ) | (4.3 | ) | (8.9 | ) |
| Cumulative effect  of change in accounting principle,  net of income tax                                                  |       | —                                     |       | — |   | — |   | (1.5 | ) | — |   |
|                                                                                                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                                                      |       | $                                          | 2,037.6    |   | $ | 1,400.1 |   | $ | 982.4 |   | $ | 83.5 |   | $ | 144.9 |   |
|                                                                                                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Per share  amounts:                                                                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  basic and diluted                                                                                        |       | $                                          | 6.92       |   | $ | 4.76 |   | $ | 3.34 |   | $ | 0.28 |   | $ | 0.49 |   |
| Dividends paid                                                                                                            |       | $                                          | 5.13       |   | $ | 2.90 |   | $ | 0.65 |   | $ | 0.16 |   | $ | 0.10 |   |

 

 
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| **Balance Sheet Data**                  | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                                     | 1,302.8    |   | $ | 876.0 |   | $ | 756.0 |   | $ | 351.6 |   | $ | 175.1 |   |
| Total assets                                      |       | 6,376.4                               |       | 5,687.6 |   | 5,319.2 |   | 4,491.0 |   | 4,419.0 |   |
| Total long-term  debt, including current portion  |       | 1,528.1                               |       | 1,172.1 |   | 1,330.3 |   | 1,671.2 |   | 1,621.2 |   |
| Total  liabilities                                |       | 2,695.8                               |       | 2,348.8 |   | 2,494.3 |   | 2,385.9 |   | 2,452.5 |   |
| Total stockholders’  equity                  |       | 3,666.6                               |       | $ | 3,326.1 |   | $ | 2,813.6 |   | $ | 2,022.7 |   | $ | 1,881.5 |   |
|                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| **Statement of Cash Flows**          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash provided  from operating activities            |       | $                                          | 2,059.4    |   | $ | 1,663.5 |   | $ | 1,172.4 |   | $ | 64.8 |   | $ | 181.9 |   |
| Depreciation,  amortization and depletion           |       | 275.1                                      |       | 277.2 |   | 192.6 |   | 177.1 |   | 157.6 |   |
| Cash(used for)  investing activities                |       | (725.3                                     | )          | (435.9 | ) | (219.5 | ) | (59.7 | ) | (85.2 | ) |
| Capital  expenditures                               |       | (455.8                                     | )          | (470.6 | ) | (228.3 | ) | (64.9 | ) | (85.4 | ) |
| Cash (used for)  provided from financing activities |       | (1,164.4                                   | )          | (1,064.4 | ) | (540.6 | ) | 185.6 |   | (145.9 | ) |
| Dividends paid                                      |       | (1,509.1                                   | )          | (853.9 | ) | (191.4 | ) | (45.4 | ) | (21.5 | ) |
|                                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| **Capital Stock (1)**                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Common shares  outstanding — basic (in thousands)   |       | 294,461                                    |       | 294,456 |   | 294,448 |   | 294,440 |   | 294,426 |   |
| Common shares  outstanding — diluted (in thousands) |       | 294,461                                    |       | 294,456 |   | 294,448 |   | 294,450 |   | 294,434 |   |
| NYSE Price —  High                                  |       | $                                          | 58.12      |   | $ | 35.30 |   | $ | 27.05 |   | $ | 24.43 |   | $ | 7.77 |   |
| NYSE Price — Low                                    |       | $                                          | 34.65      |   | $ | 20.82 |   | $ | 13.27 |   | $ | 7.21 |   | $ | 5.41 |   |
| Book value per  share                                    |       | 12.45                                      |       | 11.30 |   | 9.56 |   | 6.87 |   | 6.39 |   |
| P/E ratio                                                |       | 7.79                                       |       | 7.04 |   | 7.08 |   | 83.11 |   | 15.41 |   |

----

(1)                      Number or shares and values per share have beenadjusted to reflect the stock split made in 2006.

 
| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| **Financial Ratios**               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Gross margin (2)                        |       | 58.0                                       | %          | 53.2 | % | 50.7 | % | 25.8 | % | 19.4 | % |
| Operating income  margin (3)            |       | 55.9                                       | %          | 50.6 | % | 47.9 | % | 20.7 | % | 13.5 | % |
| Net margin (4)                          |       | 37.3                                       | %          | 34.2 | % | 31.7 | % | 5.3 | % | 10.4 | % |
| Current assets  to current liabilities  |       | 2.84                                       |       | 2.15 |   | 1.70 |   | 1.88 |   | 1.64 |   |
| Net debt (5) /total  Capitalization (6) |       | 5.8                                        | %          | 8.2 | % | 17.0 | % | 39.5 | % | 43.4 | % |
| Ratio of Earnings to  Fixed charges (7) |       | 27.2x                                      |       | 17.8x |   | 12.6x |   | 2.7x |   | 1.5x |   |

----

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

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

(4)                      Representsnet earnings divided by sales as apercentage.

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

(6)                      Representsnet debt divided by net debt plusstockholders’ equity.

(7)                      Represents earnings 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 aredefined as the sum of interest expense and interest capitalized, plus amortizedpremiums, discounts and capitalized expenses related to indebtedness

 

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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

*This Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Quantitative andQualitative Disclosures about Market Risk relates to and should be readtogether with our Audited Consolidated Combined Financial Statements as of andfor each of the years in the three-year period ended December 31, 2006.  Effective April 1, 2005, Southern CopperCorporation acquired substantially all of the outstanding common stock ofMinera Mexico.  The acquisition wasaccounted for in a manner similar to a pooling of interests as it involved thereorganization of entities under common control.  Under such accounting, the financialstatements of SCC and Minera Mexico are combined on a historical cost basis forall the periods presented since they were under the indirect common control ofGrupo Mexico during such periods. Therefore, unless otherwise noted, the discussion below of our financialcondition and results of operations is for us, including our Minera Mexicosubsidiary, on a consolidated or combined basis for all periods.  Our combined financial results may not beindicative of the results of operations that actually would have been achievedhad the acquisition of Minera Mexico taken place at the beginning of theperiods presented and do not purport to be indicative of our future results.*

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

OVERVIEW

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

A number of significant events shaped 2006 for ourCompany.  The explosion at the Pasta deConchos coal mine in February led to the death of 65 of our miners and cast apallor over the year.  We continue ourefforts to recover their remains.  Thefuture of this operation will be considered once we have completed thistask.  Lengthy strikes at some of ourMexican operations reduced the year’s copper production.  These strikes have been resolved and ourmining operations are now operating at normal capacity.  In the fourth quarter, after an extensivedrilling program, followed by a review by an independent international miningconsultant, we announced a significant increase in ore reserves at our Peruvianmines.  In response to a governmentappeal for support for regional improvement, made by the new President of Peru,our Company as well as the mining industry has responded positively to helpwith this cause.  The programs envisionedwill focus initially on nutrition for young children and expectant mothers,education and health services.  OurCompany has agreed to a five-year program of contributions, starting in 2007,with a contribution of $16.1 million, calculated based on our 2006 Peruvianearnings.  This amount has been deductedfrom the earnings of 2006.  The followingfour years’ contributions could increase or decrease depending on earnings andprices.  Perhaps, the most significantevent(s)  for us has been the record copperand zinc prices and the continued high silver and molybdenum prices.  The copper price resurgence, which began inlate 2003 has continued through 2006. While the market price for copper has seen a decrease in late 2006continuing into early 2007, we believe the fundamentals for copper remainstrong.  In January 2007, we completedthe modernization of the Ilo

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smelter, bringing the smelter into compliance withPeruvian environmental rules, and completing our obligations under our 1997PAMA agreement.

We discuss below several matters that our managementbelieves are important to understand our results of operations and financialcondition.  These matters include (i) our“operating cash costs” as a measure of our performance, (ii) metals prices,(iii) our acquisition of Minera Mexico, (iv) our business segments and (v) theeffects of inflation and other local currency issues.

Since our inception, we have principally maintainedoperations in Peru.  However, in recentyears, we have refocused our plans and began steps to internationalize ourbusiness and broaden our market exposure. In 2003, we acquired exploration properties in Chile, which are beingevaluated for potential exploitation.  Thebiggest step, in the new focus, however, is the acquisition of Minera Mexico,see Minera Mexico Acquisition below.

Operating Cash Costs

An overall benchmark used by us and a common industrymetric to measure performance is operating cash costs per pound of copperproduced.  Operating cash cost is anon-GAAP measure that does not have a standardized meaning and may not becomparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (including depreciation, amortization anddepletion) as presented in the statement of earnings is presented under thesubheading, “Non-GAAP Information Reconciliation,” below.  We have defined operating cash cost per poundas cost of sales (including depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges;less byproducts revenue and sales premiums, depreciation, amortization anddepletion, workers’ participation and other miscellaneous charges, the Peruvianroyalty charge and the change in inventory levels; divided by total pounds ofcopper produced and purchased by us.  Inour calculation of operating cash cost per pound of copper produced, we creditagainst our costs the revenues from the sale of byproducts, principallymolybdenum, zinc and silver and the premium over market price that we receiveon copper sales.  We account for thebyproduct revenue in this way because we consider our principal business to bethe production and sale of copper.  Webelieve that our Company is viewed by the investment community as a coppercompany, and is valued, in large part, by the investment community’s view ofthe copper market and our ability to produce copper at a reasonable cost.  We also include copper sales premiums as acredit, as these amounts are in excess of published copper prices.  The increase over the last three years in theprice of molybdenum, however, has had a significant effect on our traditionalcalculation of cash cost and its comparability between periods.  Accordingly, we present cash costs with andwithout crediting the byproduct revenues against our costs.

We exclude from our calculation of operating cash costdepreciation, amortization and depletion, which are considered non-cashexpenses.  Exploration is considered adiscretionary expenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-taxearnings and are also excluded. Additionally excluded from operating cash costs are items of anon-recurring nature, the new Peruvian royalty and in periods prior to 2006 theportion of our mine stripping costs that we capitalized.

Our operating cash costs per pound, as defined, arepresented in the table below for the three years ended December 31, 2006.  We present cash costs with and without theinclusion of byproduct revenues.

 
| ** **                                                                                  | ** ** | **2006**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                  | ** ** | **(dollars per pound)** | ** ** |
| Operating cash  cost per pound of copper produced and purchased                             |       | $                                 | 0.152      |     | $          | 0.030    |       | $ | 0.182 |   |
| Operating cash cost per  pound of copper produced and purchased (without byproduct revenue) |       | $                                 | 1.276      |     | $          | 1.009    |       | $ | 0.852 |   |

 

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The increase (decrease) in the cash costs per pound ofcopper produced and purchased (including byproduct revenue) in 2006 and 2005 isattributable to higher byproducts prices in 2005 and higher cost of purchasedmaterial in 2006.  The credit formolybdenum sales amounted to $0.420 per pound,$0.617 per pound and $0.412 perpound, in 2006, 2005 and 2004, respectively. The credit to the cost for zinc sales amounted to $0.374 per pound,$0.126 per pound and $0.085 per pound in 2006, 2005 and 2004,respectively.  The increase in thebyproduct credit in the 2005 year is largely driven by price improvements.  In the 2006 year the increased credit forzinc was largely offset by the decrease in the molybdenum credit.  In the 2006 year, both the molybdenum salesvolume and sales prices were approximately 20% lower.  The cash cost without byproduct revenueincreased in 2006 and 2005 as a result of cost increases.  The increasingly higher copper prices in 2006and 2005 increased our computation of cash cost, as we include in ourcalculation the cost of purchased metal. The higher value and thus the higher cost of copper in these yearsincreased our cash cost by $0.053 in 2005 and by a further $0.240 in 2006.  Significant strike activity at some of ourMexican properties required us to purchase larger quantities of third partycopper in 2006.  Also the cost of  fuel products, electricity and other suppliesincreased in both 2006 and 2005. Additionally, our operating cash costs increased in 2006 as a result ofthe EITF consensus, which we adopted on January 1, 2006 and is described belowunder “Critical Accounting Policies and Estimates-Capitalized Mine StrippingCosts”.  If we had applied this consensusin 2005 and 2004 our per pound operating cash cost would have increased by$0.023 and $0.021, respectively.

Metals Prices

The profitability of our operations is dependent on, andour financial performance is significantly affected by, the internationalmarket prices for the products we produce, especially for copper, molybdenum,zinc and silver.  Metals priceshistorically have been subject to wide fluctuations and are affected by numerousfactors beyond our control.  These factors,which affect each commodity to varying degrees, include international economicand political conditions, levels of supply and demand, the availability andcost of substitutes, inventory levels maintained by producers and others and,to a lesser degree, inventory carrying costs and currency exchange rates.  In addition, the market prices of certainmetals have on occasion been subject to rapid short-term changes due tospeculative activities.

We are subject to market risks arising from thevolatility of copper and other metals prices. Assuming that expected metal production and sales are achieved, that taxrates are unchanged and giving no effects to potential hedging programs, metalprice sensitivity factors would indicate the estimated change in net earningsresulting from metal price changes in 2007 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        |           | $          | 17.1     |       | $          | 1.6        |   | $ | 10.5 |   |

 

Minera Mexico Acquisition

In April, 2005, we acquired Minera Mexico from asubsidiary of Grupo Mexico, our controlling stockholder.  At the time of the acquisition Minera Mexicowas the largest mining company in Mexico and the eleventh largest copperproducer in the world on a stand-alone basis.  We exchanged 67,207,640 newly-issuedshares of our common stock for the outstanding shares of Minera Mexico’s directmajority stockholder, and Minera Mexico became our 99.1% owned subsidiary.  As a part of this transaction, on March 1,2005, we paid a special transaction dividend of $100 million to all of ourstockholders.  Upon completion of themerger, Grupo Mexico increased its indirect beneficial ownership of our capitalstock from approximately 54.2% to approximately 75.1%.  In October 2005, in another transaction weacquired 6,386,521 shares of Minera Mexico from Grupo Mexico for $30.3million.  This increased our holdings inMinera Mexico to 99.95%.

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We are now in the process of integrating two companiesthat had previously been affiliated but operated independently.  With this acquisition, based on the thencurrent data, we increased our total copper reserves by over 100% and increasedour annual copper production by approximately 80%.

Business segments

Our Company operates in asingle industry, the copper industry. With the acquisition of Minera Mexico in April 2005, we determined thatto effectively manage our business we needed to focus on three operating segments.  These segments are our Peruvian operations,our Mexican open-pit operations and our Mexican underground operations, knownas our IMMSA unit.  Our Peruvianoperations include the Toquepala and Cuajone mine complexes and the smeltingand refining plants, industrial railroad and port facilities which service bothmines.  Our Mexican open-pit operationsinclude La Caridad and Cananea mine complexes, the smelting and refining plantsand support facilities 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 20 of our Consolidated Combined Financial Statements.

Inflation and Devaluation of the Peruvian NuevoSol and the Mexican Peso

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

 
| ** **                                       | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2006**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peru                                             |       |                              |       |   |   |   |   |
| Peruvian inflation rate                          |       | 1.1                               | %          | 1.5 | % | 3.5 | % |
| Nuevo sol/dollar (appreciation)/devaluation rate |       | (6.8                              | )%         | 4.5 | % | (5.2 | )% |
| Mexico                                           |       |                              |       |   |   |   |   |
| Mexican inflation rate                           |       | 4.1                               | %          | 3.3 | % | 5.2 | % |
| Peso/dollar (appreciation)/devaluation rate      |       | 1.5                               | %          | (4.9 | )% | 0.3 | % |

 

Expansion and Modernization Program

We made capital expenditures of $455.8 million, $470.6million and $228.3 million in 2006, 2005 and 2004, respectively, and we expectto make capital expenditures, of approximately $500.0 million in 2007.  In general, the capital expenditures andprojects described below are intended to contribute to further verticalintegration of our operations by increasing the capacity for production ofrefined metal products.

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The table below sets forth our capital expenditures forthe years ended December 31, 2006, 2005 and 2004:

 
| ****                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **(dollars in millions)**        | ** ** |
| Projects                                                         |       |                                       |       |   |   |   |   |
| Ilo smelter  modernization                                       |       | $                                          | 160.9      |   | $ | 234.6 |   | $ | 65.6 |   |
| La Caridad SX/EW  plant                                          |       | 0.9                                        |       | 8.1 |   | — |   |
| Toquepala  crushing, conveying system for leachable material     |       | 3.3                                        |       | 32.8 |   | 40.4 |   |
| San Martin,  Santa Bárbara, Charcas and Nueva Rosita units. |       | 9.7                                        |       | 14.5 |   | 1.3 |   |
| Pasta de Conchos  mine                                           |       | 4.2                                        |       | 13.3 |   | 1.9 |   |
| La Caridad  smelter, sulfuric acid plant and refinery            |       | 13.7                                       |       | 10.2 |   | 4.1 |   |
| Toquepala concentrator  expansion                                |       | —                                     |       | 0.6 |   | 0.7 |   |
| Cananea SX/EW  plant                                             |       | 12.8                                       |       | 2.3 |   | 2.5 |   |
| New copper  filter at Toquepala                                  |       | —                                     |       | 2.2 |   | 1.5 |   |
| Tailings  disposal — Quebrada Honda dam                     |       | 2.5                                        |       | — |   | — |   |
| New Cuajone  leaching pad                                        |       | 2.4                                        |       | — |   | — |   |
| PLS dams at  Huanaquera                                          |       | 15.6                                       |       | 9.1 |   | 1.5 |   |
| Total project  expenditures                                      |       | 226.0                                      |       | 327.7 |   | 119.5 |   |
|                                                             |       |                                       |       |   |   |   |   |
| Replacement  capital expenditures:                               |       |                                       |       |   |   |   |   |
| Mexico                                                           |       | 161.2                                      |       | 100.3 |   | 46.8 |   |
| Peru                                                             |       | 68.6                                       |       | 42.6 |   | 62.0 |   |
| Total  replacement expenditures                                  |       | 229.8                                      |       | 142.9 |   | 108.8 |   |
| Total capital  expenditures                                      |       | $                                          | 455.8      |   | $ | 470.6 |   | $ | 228.3 |   |

 

Set forth below are descriptions of some of our current projects andexpected capital expenditures.

Ilo Smelter Modernization:  With the completion of this project inJanuary 2007, we have finished our commitments under the PAMA, which wasexecuted with the Peruvian government on January 31, 1997.  With the smelter modernization project, weincreased sulfur recapture over the 92% requirement established by the PAMA.The new smelter is expected to maintain production at current levels and willuse advanced technology to reduce sulfur emissions, in order to achieve themain goal of the project.  The anodeplant was completed and commenced its operations in January 2006. Sea waterintake and two desalination plants are working since August 2006.  Three converters were upgraded and a new onewas installed and are operating. Isasmelt and converters off-gas ductwork was completed.  The new oxygen plant is in operation sinceOctober 2006 and the construction of the new acid plant was completed.  Spending on this project through December 31,2006 was $549.4 million.  Excludingcapitalized interest, we have budgeted $40.5 million for completion of thisproject in 2007.

Toquepala Leach Dump Project: *** ***To improve cost containment andproduction efficiency, in 2003 we began a project at Toquepala to install acrushing, conveying and spreading system at the leach dumps.  The approved budget for this project is $81million, with $78.8 million expended through December 31, 2006.  The project was 99.1% complete at December31, 2006.  The new system has improvedrecovery at our leaching facilities and has eliminated costly truck haulage inthe process.  The overland conveyorssystem is working with conveyors 1, 2, 3, 15 and partially with conveyor 16 inthe production line.  The conveyingreached its rated capacity of 8,500 ton/hr. in September 2006.  The construction of the ramp will continueuntil final completion of the project, expected in March 2007.

Cananea SX/EW Plant: *** ***Weintend to increase our Cananea unit’s production of copper cathodes by buildinga new SX/EW plant, (SXEW III).  The plantwill produce copper cathodes of ASTM grade 1 or LME grade A.  The project includes the installation ofstorage for deliverables required for operation of the plant and theinstallation of an emergency power plant and a fire protection system.  The project is currently underway and when completedin 2009, we expect to produce 33,000 tons per year of electrowon cathodes.

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Other Expenditures:

Tailings disposal at Quebrada Honda: The engineeringstudy was completed and the capital cost was estimated. Procurement for themain equipment, with long lead-time was started.

A pre-feasibility study for the Los Chancas project, byindependent consultants, is under way with completion expected in the secondquarter of 2007.  A feasibility study forTia Maria project was awarded to Bechtel and is expected in the third quarterof 2007.

The dam project at Huanaquera is for the construction ofa PLS collection dam for the Toquepala leaching facility.  At year-end 2006 this project has reachedapproximately 84.5% progress.  The budgetfor this project including acid addition is $38.1 million, $26.1 million ofwhich was expended as of December 31, 2006.

Potential Projects:  Wehave a number of projects that we may develop in the future.  We evaluate new projects on the basis of ourlong-term corporate objectives, expected return, environmental needs, requiredinvestment and estimated production, among other considerations.  We have defined three “generations” ofcapital projects as follows:

First generation: Projects that we are planning.This generation includes four projects (1) the Cananea III SX/EW plant; (2) anexpansion of the Cananea concentrator; (3) a new molybdenum circuit at Cananeaand (4) an SX/EW facility at Tia Maria.

Secondgeneration: Possible projects requiring further study.

This generation includes projects which representsignificant Brownfield expansions and are intended to increase ourproduction.  The Company’s Board will beevaluating the investment in these projects in line with their expectedreturns, the metal market price performance and the operating and capitalcosts.  Projects in this generationinclude an expansion of the Cuajone concentrator and a conveyor system forCuajone leaching, a Toquepala concentrator expansion, expansion of productivecapacity at the Ilo smelter and refinery and a new Cananea concentrator.

Thirdgeneration: Projects that are attractive but will require significantadditional evaluation.

This generation includes two Greenfield projects: El Arcoand Los Chancas exploration properties. We believe that these two properties could add 360,000 tons of annualcopper production, in concentrate and SX/EW copper.

InDecember 2005 we announced our plans for a 450 Megawatt power generation plantin Mexico to supply our own facilities. We anticipate that the project will be built and managed by anindependent power company and our obligation will be the supply of coal and anagreement to use the power output.  Weexpect this plant will give us the ability to better control the cost of ourenergy requirements, which is a major element of our operating costs.  The project is expected to be finished in2011, it is expected to create nearly 600 permanent jobs, 3,000 jobs during theconstruction stage and will exceed Mexican and international environmentalstandards.

The above information about potential projects areestimates only.  We cannot make anyassurance that we will undertake any of these projects or that the informationnoted is accurate.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

Our discussion and analysis of financial condition andresults of operations, as well as quantitative and qualitative disclosuresabout market risks, are based upon our consolidated combined financialstatements, which have been prepared in accordance with U.S. GAAP.  Preparation of these consolidated combinedfinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the

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financial statements and the reported amounts of revenuesand expenses during the reporting period. Management makes its best estimate of the ultimate outcome for theseitems based on historical trends and other information available when thefinancial statements are prepared. Changes in estimates are recognized in accordance with the accountingrules for the estimate, which is typically in the period when new information becomesavailable to management.  Areas where thenature of the estimate makes it reasonably possible that actual results couldmaterially differ from amounts estimated include: ore reserves; revenuerecognition; estimated mine stripping ratios, leachable material and relatedamortization, the estimated useful lives of fixed assets, asset retirementobligations, litigation and contingencies, valuation allowances for deferredassets, fair value of financial instruments and inventory obsolescence.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.

Ore Reserves:*** ***For purposes ofour long-term planning, we use metal price assumptions of $0.90 per pound forcopper and $5.00 per pound for molybdenum. These prices are intended to approximate average prices over the longterm.  Ore reserves based on these pricesare the basis for our internal planning, including the preparation of the mineplans for our mines.  Our management usesthese price assumptions, as it believes these prices reflect the full pricecycle of the metals market.

However, pursuant to SEC guidance, the reservesinformation in this report is calculated using average metals prices over themost recent three years, except as otherwise stated.  We refer to these three-year average metalsprices as “current average prices.”  Ourcurrent average prices for copper are calculated using prices quoted by COMEX,and our current average prices for molybdenum are calculated according to *Platt’s**Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $2.020 per pound for copper and $24.315 per pound formolybdenum, both current average prices as of December 31, 2006.  The current average per pound prices forcopper and molybdenum were $1.261 and $17.817, respectively, as of December 31,2005 and $0.939 and $8.425, respectively, as of December 31, 2004.

Certain financial information is based on reserve estimatescalculated on the basis of current average prices.  This includes amortization of minedevelopment and intangible assets, and for years prior to 2006 the amount ofmine stripping that was capitalized and units of production amortization ofcapitalized mine stripping.  For ourPeruvian mines, commencing in 2003, and for our Mexican operations commencingin 2005 we have used reserve estimates based on current average metals pricesas of the most recent year then ended to determine these items.  In the case of prior periods we have usedreserves estimates based on a price assumption of $0.90 per pound of copper and$4.50 per pound of molybdenum.

Leachable material:  At one ofour Mexican mines, we capitalize the cost of materials with low copper contentextracted during the mining process (leachable material), which is collected inleach dumps.  The amortization of thecapitalized cost is determined based on the depletion period of the leachdumps, which is estimated to be five years.

If we were to have expensed all capitalized leachingcosts associated with this mining operation as incurred, net operating costwould have increased by $19.3 million, $68.0 million and $31.2 million for theyears 2006, 2005 and 2004.

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

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Using our ore reserve calculations, our mine engineershave calculated a life-of-mine stripping ratio. In years prior to 2006, when current mine stripping was in excess of thelife-of-mine stripping ratio a portion of our mine production cost wascapitalized.  Conversely, in periods whenthe actual ratio was less than the life-of-mine stripping ratio, we reduced thecapitalized mine stripping.

In 2005, the Emerging Issues Task Force of the FASBreached a consensus that stripping costs incurred during the production phaseof a mine are variable production costs that should be included in the costs ofthe inventory produced (extracted) during the period that the stripping costsare incurred.  This consensus wasratified by the FASB and became effective for us in 2006.  On January 1, 2006, we adopted this consensusand recorded a charge to retained earnings of $166.6 million.  If we were to have charged all stripping costto inventory produced in the years 2005 and 2004, our net operating cost wouldhave (decreased) increased by $(25.2) million and $24.5 million, respectively.

Asset Retirement Obligation:*** ***Our mining andexploration activities are subject to various laws and regulations governingthe protection of the environment. Accounting for reclamation and remediation obligations requiresmanagement to make estimates unique to each mining operation of the futurecosts we will incur to complete the reclamation and remediation work requiredto comply with existing laws and regulations. These estimates are based in part on our inflation and credit rateassumptions.  Actual costs incurred infuture periods could differ from amounts estimated.  Additionally, future changes to environmentallaws and regulations could increase the extent of reclamation and remediationwork required to be performed by us.  Anysuch increases in future costs could materially impact the amounts charged tooperations for reclamation and remediation.

We further discuss Asset Retirement Obligation in Note 10to our consolidated combined financial statements included herein.

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

Deferred Taxes:**In preparing ourconsolidated combined financial statements, we recognize income taxes in eachof the jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount of currentlypayable or receivable as well as deferred tax assets and liabilitiesattributable to temporary differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases.  Deferred income tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which these temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in rate is recognized in income in theperiod that the change is enacted.

A valuation allowance isprovided for those deferred tax assets for which it is more likely than notthat the related benefits will not be realized. In determining the amount of the valuation allowance, we considerestimated future taxable income as well as feasible tax planning strategies ineach jurisdiction.  If we determine thatwe will not

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realize all or a portion ofour deferred tax assets, we will increase our valuation allowance with a chargeto income tax expense.  Conversely, if wedetermine that we will ultimately be able to realize all or a portion of therelated benefits for which a valuation allowance has been provided, all or aportion of the related valuation allowance will be reduced with a credit toincome tax expense.

Asset Impairments: We evaluate our long-term assets when events orchanges in economic circumstances indicate that the carrying amount of suchassets may not be recoverable. Our evaluations are based on business plans thatare prepared using a time horizon that is reflective of our expectations ofmetal prices over our business cycle. We are currently using a long-termaverage copper price of $2.00 per pound of copper and an average molybdenumprice of $12.00 per pound, along with near-term price forecast, for 2007through 2009, reflective of the current price environment, for our impairmenttests. We use an estimate of the future undiscounted net cash flows of therelated asset or asset group over the remaining life to measure whether theassets are recoverable and measure any impairment by reference to fair value.Should estimates of future copper and molybdenum prices decrease significantly,impairments could result.

The following are the provisionally priced copper andmolybdenum sales outstanding at December 31, 2006, 2005 and 2004:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| **Provisionally Priced Sales** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Copper                                   |       |                                       |       |   |   |   |   |
| Millions of pounds                       |       | 169.9                                      |       | 163.7 |   | 179.7 |   |
| Priced at (per pound)                    |       | $                                          | 2.87       |   | $ | 2.04 |   | $ | 1.46 |   |
| Molybdenum                               |       |                                       |       |   |   |   |   |
| Millions of pounds                       |       | 7.3                                        |       | 6.1 |   | 6.3 |   |
| Priced at (per  pound)                   |       | $                                          | 24.50      |   | $ | 25.00 |   | $ | 32.38 |   |

 

Provisional sales adjustments included in accountsreceivable and net sales were as follows at December 31, 2006, 2005 and 2004:

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| **Provisional Sales Adjustments** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(dollars in millions)**        | ** ** |
| Copper                                      |       | $                                          | (47.3      | ) | $ | 7.9 |   | $ | 15.9 |   |
| Molybdenum                                  |       | (11.5                                      | )          | (39.2 | ) | 69.2 |   |
| **Total**                                   |       | $                                          | (58.8      | ) | $ | (31.3 | ) | $ | 85.1 |   |

 

During the month ofJanuary  2007, the market price of copperdecreased. And the molybdenum market price had a slight increase. The effect ofthese changes on 2006 sales settling in January 2007 was a reduction of $26.1million in sales. Additionally, forward prices for copper as of January 31, 2007also decreased, the effect of this decrease on 2006 open sales settling afterJanuary 2007 would be a further reduction of $22.1 million in sales.

Results of Operations

The following table highlights key combined financial andoperating results for each of the years in the three-year period ended December31, 2006.

 

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| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statement of Earnings Data**                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(dollars in millions)**        | ** ** |
| Net sales                                                              |       | $                                          | 5,460.2    |   | $ | 4,089.1 |   | $ | 3,096.7 |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | (2,019.8                                   | )          | (1,635.4 | ) | (1,334.3 | ) |
| Selling, general and  administrative                                   |       | (88.3                                      | )          | (81.1 | ) | (71.8 | ) |
| Depreciation,  amortization and depletion                              |       | (275.1                                     | )          | (277.2 | ) | (192.6 | ) |
| Exploration                                                            |       | (22.7                                      | )          | (24.4 | ) | (15.6 | ) |
|                                                                   |       |                                       |       |   |   |   |   |
| Operating income                                                       |       | 3,054.3                                    |       | 2,071.0 |   | 1,482.4 |   |
| Interest expense                                                       |       | (113.4                                     | )          | (108.9 | ) | (106.5 | ) |
| Interest capitalized                                                   |       | 27.9                                       |       | 22.5 |   | 10.7 |   |
| Interest income                                                        |       | 50.2                                       |       | 30.8 |   | 8.3 |   |
| Loss on debt  prepayments                                              |       | (1.1                                       | )          | (10.6 | ) | (16.5 | ) |
| (Loss) gain on  derivative instruments                                 |       | (11.6                                      | )          | 1.1 |   | (1.4 | ) |
| Gain on disposal of  properties                                        |       | 1.9                                        |       | 2.1 |   | 53.5 |   |
| Other income (expense)                                                 |       | (2.2                                       | )          | (5.7 | ) | (9.7 | ) |
| Income taxes                                                           |       | (959.1                                     | )          | (589.7 | ) | (433.7 | ) |
| Minority interest                                                      |       | (9.3                                       | )          | (12.5 | ) | (4.7 | ) |
| Net earnings                                                           |       | $                                          | 2,037.6    |   | $ | 1,400.1 |   | $ | 982.4 |   |

 

Thetable below outlines the average published market metals prices (rounded to thenearest cent) for our metals for each of the years ended December 31, 2006,2005 and 2004:

**AverageMarket Metals Prices**
| ** **                               | ** ** | **Year Ended December 31,** | ** ** | **% Change** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2006**                                   | ** ** | **2005**          | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| Copper price ($ per  pound - LME)   |       | $                                          | 3.05       |              | $          | 1.67 |   | $ | 1.30 |   | 82.6 | % | 28.5 | % |
| Copper price ($ per  pound - COMEX) |       | $                                          | 3.09       |              | $          | 1.68 |   | $ | 1.29 |   | 83.9 | % | 30.2 | % |
| Molybdenum price ($ per  pound)(1)  |       | $                                          | 24.38      |              | $          | 31.05 |   | $ | 15.95 |   | (21.5 | )% | 94.7 | % |
| Zinc price ($ per pound  - LME)     |       | $                                          | 1.49       |              | $          | 0.63 |   | $ | 0.48 |   | 136.5 | % | 31.3 | % |
| Silver price ($ per ounce - COMEX)  |       | $                                          | 11.54      |              | $          | 7.32 |   | $ | 6.68 |   | 57.7 | % | 9.6 | % |

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(1) Platt’s MetalsWeek Dealer Oxide.

Segment SalesInformation

The following tablepresents the volume of sales by segment of copper and our significantbyproducts, for each of the years in the three year period ended December 31,2006:
| **Copper sales (million pounds)** | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peruvian operations                              |       | 860.9                                      |       | 825.3 |   | 864.4 |   |
| Mexican open-pit                                 |       | 594.8                                      |       | 768.8 |   | 680.6 |   |
| Mexican IMMSA unit                               |       | 36.4                                       |       | 93.1 |   | 53.9 |   |
| Intersegment  elimination                        |       | (105.9                                     | )          | (147.2 | ) | (34.4 | ) |
| Total copper sales                               |       | 1,386.2                                    |       | 1,540.0 |   | 1,564.5 |   |

 

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| **Byproduct sales (million pounds, except silver - million ounces)** | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Peruvian operations:                                                                                         |       |                                       |       |   |   |   |   |
| Molybdenum contained  in concentrate                                                                         |       | 20.6                                       |       | 23.4 |   | 23.5 |   |
| Zinc-refined and  in concentrate (1)                                                                         |       | 49.6                                       |       | — |   | — |   |
| Silver                                                                                                       |       | 5.6                                        |       | 4.2 |   | 4.6 |   |
|                                                                                                         |       |                                       |       |   |   |   |   |
| Mexican open-pit  operations:                                                                                |       |                                       |       |   |   |   |   |
| Molybdenum  contained in concentrate                                                                         |       | 5.0                                        |       | 8.8 |   | 8.1 |   |
| Zinc-refined and  in concentrate (1)                                                                         |       | 15.5                                       |       | 108.9 |   | 101.1 |   |
| Silver                                                                                                       |       | 4.5                                        |       | 7.2 |   | 7.5 |   |
|                                                                                                         |       |                                       |       |   |   |   |   |
| IMMSA unit                                                                                                   |       |                                       |       |   |   |   |   |
| Zinc-refined and  in concentrate                                                                             |       | 273.1                                      |       | 288.7 |   | 269.1 |   |
| Silver                                                                                                       |       | 12.0                                       |       | 11.5 |   | 12.6 |   |
|                                                                                                         |       |                                       |       |   |   |   |   |
| Intersegment  elimination                                                                                    |       |                                       |       |   |   |   |   |
| Zinc                                                                                                         |       | (57.1                                      | )          | (103.4 | ) | (103.6 | ) |
| Silver                                                                                                       |       | (2.3                                       | )          | (3.1 | ) | (4.5 | ) |
|                                                                                                         |       |                                       |       |   |   |   |   |
| Total byproduct sales                                                                                        |       |                                       |       |   |   |   |   |
| Molybdenum  contained in concentrate                                                                         |       | 25.6                                       |       | 32.2 |   | 31.6 |   |
| Zinc-refined and  in concentrate                                                                             |       | 281.1                                      |       | 294.2 |   | 266.6 |   |
| Silver                                                                                                       |       | 19.8                                       |       | 19.8 |   | 20.2 |   |

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(1) In 2006, the Peruvian operations purchased zincproducts from IMMSA and the Mexican open-pit operations for resale to itscustomers, there were no zinc purchases in 2005 or 2004.

**Results of operations for the Year Ended December31, 2006 Compared to Year Ended December 31, 2005.**

***Net sales***

Our sales in 2006were $5,460.2 million, compared with $4,089.1 million in 2005, an increase of$1,371.1 million or 33.5%.  The increasewas attributable to significant increases in metal prices in 2006, particularlyfor copper, which rose approximately 83%, zinc and silver, which rose 136.5%and 57.7%, respectively.  As a result ofa change in our accounting presentation, net sales includes losses on copperderivatives of $276.1 million and $23.5 million in 2006 and 2005, respectively,and $0.2 million on zinc derivatives in 2006.

Sales volumes forcopper declined by 153.8 million pounds in 2006 a decrease of 10% compared with2005.  This decrease in copper salesvolume, as well as a decrease in the volume of zinc and molybdenum soldreduced, somewhat, the sales price increase.

Thetable below presents information regarding the volume of our copper salesproducts.
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| **Copper sales (million pounds)** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Refined                                          |       | 835.0                                      |       | 817.3 |   |
| Blister                                          |       | 43.9                                       |       | 110.3 |   |
| Anode                                            |       | 29.9                                       |       | — |   |
| Concentrates                                     |       | 56.0                                       |       | 14.2 |   |
| SX/EW                                            |       | 210.9                                      |       | 267.4 |   |
| Rod                                              |       | 210.5                                      |       | 330.8 |   |
| **Total**                                        |       | 1,386.2                                    |       | 1,540.0 |   |

 

Mine copper productionwas 1,335.2 million pounds in 2006, a decrease of 12.2% from 2005.  This decrease of 185.8 million poundsincluded a decrease of 190.5 million pounds from the Mexican open pitoperations, 4.9 million pounds in the Mexican underground

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mines and an increase of9.6 million pounds from the Peruvian mines. The decrease of 190.5 millionpounds in the Mexican open pit mines was principally the result of the 125 daystrike at La Caridad mine and 47 days of strike at the Cananea mine.  The decrease of 4.9 million pounds in theMexican underground mines was due to lower ore grades.  The increase of 9.6 million pounds in productionfrom the Peruvian mines was principally due to higher ore grade and recovery inthe Cuajone mine.

Molybdenum productiondecreased 19.9% from 32.6 million pounds in 2005 to 26.1 million pounds in2006.  This decrease in productionincludes 3.7 million pounds from La Caridad due to the strike activity and 2.8 million pounds from our Peruvianoperations mainly due to lower ore grade and recovery at the Cuajone mine.

Mine zinc productionamounted to 301.1 million pounds in 2006, a decrease of 15.5 million pounds or4.9% from 2005.  This decrease was theresult of lower production at three of IMMSA’s zinc mines.  Lower ore grades at Charcas and Santa Barbaraand reduced throughput at San Martin were the prime reasons for the lowerproduction.  Production increases at twoof the other IMMSA mines, Taxco and Santa Eulalia, somewhat reduced theproduction losses.  The decrease inthroughput at San Martin was caused by a 77-day strike in the first half of2006.  The increases in throughput atTaxco and Santa Eulalia were caused by increased operating days at Taxco, 15days were lost due to strike in 2005 and the increase at Santa Eulalia wascaused as production ramped up after a prolonged shutdown.  Santa Eulalia restarted operations at the endof 2004 after a three-year shutdown.

A fire at the San LuisPotosi zinc refinery in the first quarter of 2006, reduced refined zincproduction in 2006, we were, however, able to sell zinc concentrates onfavorable terms until the refinery was fully operational, which occurred by theend of the third quarter of 2006.

Coppermade up 76.0% of net sales in 2006 compared with 66.4% in 2005.  Sales of byproducts in 2006 totaled $1,313.1million compared with $1,373.6 million in 2005, a decrease of 4.4%.  The decrease is principally attributable tothe decrease in the volume and sales prices for molybdenum.  The decrease in molybdenum was to a greatextent reduced by the improved prices for zinc and silver, which increased by136.5% and 57.7%, respectively.  Thetable below provides the sales of our byproducts as a percentage of our totalnet sales.

 
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Byproduct Sales as a Percentage of Total Net Sales** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Molybdenum                                                                                     |       | 10.5                                       | %          | 22.7 | % |
| Zinc                                                                                           |       | 7.1                                        | %          | 4.9 |   |
| Silver                                                                                         |       | 4.1                                        | %          | 3.6 |   |
| Other byproducts                                                                               |       | 2.3                                        | %          | 2.4 |   |
| **Total**                                                                                      |       | 24.0                                       | %          | 33.6 | % |

 

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

Our cost of sales(exclusive of depreciation, amortization and depletion) in 2006 was $2,019.8million, compared with $1,635.4 million in 2005, an increase of $384.4 million,or 23.5%.  The principal element of the costof sales increase is the higher value of copper purchased in 2006 whichincreased our cost of sales by $280.6 million over 2005.  Cost of sales in 2006 also had an increase of$23.9 million in Peruvian mining royalties and an increase of $52.4 million inworkers’ participation.  In addition,cost of sales also increased in 2006 due to the requirement of EITF 04-6 whichprohibits the capitalization of mine stripping costs at our operating mines. Assuch, this cost is now included in cost of sales.  The practice of capitalizing mine strippingcost in 2005 reduced cost of sales by approximately $35.0 million.

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***Selling, general and administrative***

Ourselling, general and administrative expense in 2006 was $88.3 million, comparedwith $81.1 million in 2005, an increase of $7.2 million, $5.2 million of whichwas in our Mexican operations.  TheMexican increase is principally due to higher labor costs of $4.4 million andhigher professional fees of $1.7 million.

***Depreciation, amortization anddepletion***

Ourdepreciation, amortization and depletion expense in 2006 was $275.1 million,compared with $277.2 million in 2005, a decrease of $2.1 million.  The decrease was due to the change inaccounting for mine stripping cost. Depreciation, amortization and depletion in 2005, included amortizationof $67.6 million of capitalized mine stripping. A 2006 increase in depreciation related to replacement capitalexpenditures reduced the impact of the accounting change.

***Exploration***

Explorationexpense in 2006 was $22.7 million, compared with $24.4 million in 2005, adecrease of $1.7 million.  The decreasewas principally as a result of $2.3 million of lower drilling costs in ourMexican operations, mainly at La Caridad due to strikes, $1.2 million of higherinvestment at Coimolache and Tantahuatay projects net of a decrease of $0.7million in drilling cost at the Tia Maria project in Peru.

***Interest expense***

Interestexpense in 2006 was $113.4 million compared with $108.9 million in 2005, anincrease of $4.5 million.  Our currentlypaid interest expense increased in 2006 principally as a result of an increase inour debt outstanding.  However, includedin 2005 there was $15.0 million for the write-off of previously capitalizeddebt issuance cost for financings prepaid in such years.  With respect to our financing programsreference is made to “Liquidity and Capital Resources” for a further discussionof this matter.

***Capitalized interest***

Capitalizedinterest in 2006 was $27.9 million, compared with $22.5 million in 2005, anincrease of $5.4 million.  This increaseis largely due to the Ilo smelter modernization project, on which wecapitalized $16.4 million.

***Interest income***

Interestincome in 2006 was $50.2 million, compared with $30.8 million in 2005, anincrease of $19.4 million.  Our interestincome increased principally as a result of higher interest rates on short termsecurities and significantly higher invested balances.

***Loss on debt prepayments***

Losson debt prepayments in 2006 was $1.1 million, compared with $10.6 million in2005, a decrease of $9.5 million.  In2006 and 2005 we paid a premium of $1.1 million and $8.6 million, respectivelyin the Yankee bonds repurchase.  Inaddition in 2005 we paid a penalty of $2.0 million for the prepayment of $199million of Peruvian bonds.

***(Loss)Gain on derivative instruments***

Losson derivatives instruments in 2006 was $11.6 million, compared with a gain of$1.1 million in 2005. Gain or losses on copper and other metal derivatives areincluded in the net sales line and gain or losses on gas derivatives areincluded in the cost of sales line of the consolidated combined statement ofearnings. The loss of $11.6 million in 2006 is a fair value adjustment made oninvestments made by the Company in 2006

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***Gain on disposal of property***

Gainon disposal of property in 2006 was $1.9 million, compared with $2.1 million in2005.  These amounts include gain fromthe sale of non-core property of our Mexican operation.

***Other income (expense)***

Otherexpense in 2006 was $2.2 million, compared with an expense of $5.7 million in2005, a decrease of $3.5 million.  Themajor component of other expenses in 2006 is a provision of $16.1 million forour contribution to the Peruvian regional development fund, this program,requested by the new president of Peru, will be used for nutritional, health,education and other social benefits in our areas of activities. This amount isreduced by gains from insurance recoveries of $11.2 million principally from apartial payment for a fire at our zinc refinery in Mexico, at the beginning of2006, $3.2 million due to a Mexican tax benefit on gas imports,$2.4 million for a prior year tax adjustment and other miscellaneousincome in our Mexican operations of $3.3 million.

***Income taxes***

Incometaxes in 2006 were $959.1 million, compared with $589.7 million in 2005, anincrease of $369.4 million and include $940.3 million and $576.3 million ofPeruvian and Mexican income taxes, $18.8 million and $13.4 million for USFederal and state taxes for 2006 and 2005, respectively.  US income taxes are primarily attributable toinvestment income as well as limitations on use of the alternative minimum tax.

Theincrease of $369.4 million or 62.6% was primarily due to $1,003.7 million ofhigher pretax income.  The effective taxrate for 2006 was 31.9%, compared with 29.4% in 2005.  Included in the 2005 tax provision is arefund of $43.4 million received by Minera Mexico for asset-based taxes(minimum income tax) paid in prior years. Without the benefit of this credit the Company’s effective tax rate forthe 2005 year would have been 31.6%.

***Minority interest***

Minorityinterest in 2006 was $9.3 million compared with $12.5 million in 2005, adecrease of $3.2 million or 25.6%.  Thisdecrease is result of the acquisition in the fourth quarter of 2005 of aminority holding of shares in our Minera Mexico subsidiary.

***Net earnings***

Ournet earnings in 2006 were $2,037.6 million, compared with $1,400.1 million in2005, an increase of $637.5 million or 45.5%. Net earnings increased as a result of the factors described above.

**Segment Operating Income Information — 2006vs.2005:**

**Peruvian open-pit operations**
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 3,215.4    |       | $          | 2,167.7    |       | $ | 1,047.7 |   | 48.3 | % |
| Operating costs  and expenses |       | (1,383.4   | )          | (879.4     | )          | (504.0     | )          | 57.3 | % |
| Operating income              |       | $          | 1,832.0    |       | $          | 1,288.3    |       | $ | 543.7 |   | 42.2 | % |

 

Net sales at our Peruvianoperations in 2006 were $3,215.4 million, compared with $2,167.7  million in 2005, an increase of $1,047.7million.  This increase was principallydue to significant increases in the price of copper and silver.  Copper sales volume increased by 35.5 millionpounds in 2006 in part as a result of the 

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purchase and resale ofcopper acquired from our Mexican operations. Net sales in 2006 and 2005 includelosses on copper derivatives of $162.3 million and $12.2 million, respectively.

Operating costs andexpenses at our Peruvian operations in 2006 were $1,383.4 million, comparedwith $879.4 in 2005, an increase of $504.0 million principally due to highercost of sales.  The increase in cost ofsales (exclusive of depreciation, amortization and depletion) of $491.4 millionwas principally the result of the higher cost of metals purchased from ourMexican operations of $397.5 million.  Inaddition, cost of sales increased in 2006 due to the adoption of the newaccounting rule for mine stripping costs. This practice reduced cost of salesby approximately $35.0 million in 2005, in 2006 such costs are charged to thecost of production.

Our cost for workers’participation increased $53.4 million in 2006. This cost is calculated based on 8% of our Peruvian operations pre-taxearnings and increased as our profits increase. A Peruvian royalty provision which was instituted in June 2004 added$26.9 million to our cost in 2006.

Operating income in 2006was $1,832.0 million, compared with $1,288.3 million in 2005, an increase of$543.7 million.  The operating incomeincreased as a result of the factors described above.

**Mexican open-pit operations.**
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 1,987.1    |       | $          | 1,758.3    |       | $ | 228.8 |   | 13.0 | % |
| Operating costs  and expenses |       | (1,067.3   | )          | (1,054.2   | )          | (13.1      | )          | 1.2 | % |
| Operating income              |       | $          | 919.8      |       | $          | 704.1      |       | $ | 215.7 |   | 30.6 | % |

 

Net sales from ourMexican open-pit operations in 2006 were $1,987.1 million, compared with$1,758.3 million in 2005, an increase of $228.8 million or 13.0%.  The increase in net sales was principally aresult of significant increases in the price of copper and silver partiallyreduced by a decrease in sales volume as a consequence of the strike activityat La Caridad and Cananea mines.  Netsales in 2006 and 2005 include losses on copper derivatives of $113.9 millionand $11.3 million, respectively.

Operating cost andexpenses at our Mexican open-pit operations in 2006 was $1,067.3 millioncompared with $1,054.2 million in 2005, an increase of $13.1 million or1.2%.  This increase was principally theresult of higher cost of sales net of lower depreciation, amortization anddepletion.  The increase in cost of sales(exclusive of depreciation, amortization and depletion)of $31.2 million wasprincipally the result of higher purchased metal from third parties with a costof $73.8 million partially offset by a decrease of $31.8 million in workersparticipation and lower sales expenses of $15.3 million.   Our cost for workers’ participation includesan adjustment of $36.3 million in 2005. This cost is calculated based on 10% of pretax earnings and increases asour profits increase. The decrease in depreciation, amortization and depletionof $16.5 million in 2006 was principally due to the amortization of capitalizedmine stripping in 2005.

Operating income in 2006was $919.8 million, compared with $704.1 million in 2005, an increase of $215.7million or 30.6%.  The operating incomeincreased as a result of the factors described above.

**IMMSA unit**.
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 702.5      |       | $          | 448.7      |       | $ | 253.8 |   | 56.6 | % |
| Operating costs  and expenses |       | (405.2     | )          | (381.9     | )          | (23.3      | )          | 6.1 | % |
| Operating income              |       | $          | 297.3      |       | $          | 66.8       |       | $ | 230.5 |   | 345.1 | % |

 

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Net sales at our IMMSAunit in 2006 were $702.5 million, compared with $448.7 million in 2005, anincrease of $253.8 million or 56.6%.  Theincrease was due to higher sales prices in 2006 for copper, zinc and silver.  In addition, an increase in sales volume ofcopper added to the 2006 sales increase which was reduced by lower zinc andsilver sales volumes. Net sales in 2006 include a loss on zinc derivatives of$0.2 million.

Operating costs andexpenses at our IMMSA unit were $405.2 million in 2006, compared with $381.9million in 2005, an increase of $23.3 million or 6.1%.  This increase was principally the result ofincreased cost of sales, administrative expenses and depreciation, amortizationand depletion.  In 2006, cost of sales(exclusive of depreciation, amortization and depletion) increased $15.1million, principally as a result of higher purchased metals from third partiesand higher workers participation.

Operating income in 2006was $297.3 million, compared with $66.8 million in 2005, an increase of $230.5million or 345.1%.  The operating incomeincreased as a result of the factors described 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 20 to thefinancial statements.

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

***Net sales***

Our sales in 2005were $4,089.1 million, compared with $3,096.7 million in 2004, an increase of$992.4 million or 32.0%  The increase wasattributable to significant increases in metal prices in 2005, particularly forcopper, which rose approximately 30%, and molybdenum, which rose 94.7%.  Net sales in 2005 includes a loss on copperderivatives of $23.5 million.  Salesvolumes for copper declined by 24.5 million pounds in 2005 a decrease of 1.6%compared with 2004.  This decrease incopper sales volume, as well as a decrease in the volume of silver sold, was toa large part offset by increases in the volume of molybdenum and zinc sales.

Thetable below presents information regarding the volume of our copper salesproducts.
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| **Copper sales (million pounds)** | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Refined                                          |       | 817.3                                      |       | 803.8 |   |
| Blister                                          |       | 110.3                                      |       | 81.4 |   |
| Concentrates                                     |       | 14.2                                       |       | 107.5 |   |
| SX/EW                                            |       | 267.4                                      |       | 239.1 |   |
| Rod                                              |       | 330.8                                      |       | 332.7 |   |
| **Total**                                        |       | 1,540.0                                    |       | 1,564.5 |   |

 

Mine copper productionwas 1,521.0 million pounds in 2005, a decrease of 3.9% from 2004.  This decrease of 61.9 million pounds includeda decrease of 87.6 million pounds from the Peruvian open pit operations and 5.0million pounds in the Mexican underground mines, which were partially offset byan increase of 30.7 million pounds from the Mexican open pit mines.

The decrease of 87.6million pounds in the Peruvian mines was the result of lower ore grades at theCuajone and Toquepala mines and lower PLS grade in the SX/EW operation.  The decrease of 5.0 million pounds in theMexican underground mines was due to lower ore grades. The increase of 30.7million pounds in production from the Mexican open pit 

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mines was principallydue to higher throughput in La Caridad mine and higher recovery and an increasein SX-EW production due to higher quantities of PLS treated and higher powerefficiency.

Molybdenum productionincreased from 31.7 million pounds in 2004 to 32.6 million pounds in 2005. This2.8% increase in production was mainly the result of an increase in the Mexicanproduction, due to higher recoveries.

Mine zinc productionamounted to 316.6 million pounds in 2005, an increase of 21.6 million pounds or7.3% over the 2004 period.  The increasewas due to the resumption of production at IMMSA’s Santa Eulalia unit.  Santa Eulalia’s operations were suspendedfrom 2000 through 2004 as the facilities were being modernized.  The work at the Santa Eulalia mine wasdelayed due to liquidity issues of Minera Mexico in some years prior to2004.  Increased 2005 production fromSanta Eulalia amounted to 27.6 million pounds. Grade decreases at our other zinc mines reduced somewhat the increasefrom Santa Eulalia.  In January 2006 anelectrical fire at a power sub-station at the San Luis Potosi zinc refineryshut down operations.  After evaluatingthe damage, 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 we are selling zincconcentrates.  Due to a shortage of zincconcentrate, the Company is able to receive favorable terms on these sales andexpect that the overall return will be favorable.  In addition, insurance coverage is expectedto cover the cost of repairs, equipment replacement and any loss on production.

Coppermade up 66.4% of net sales in 2005 compared with 68.1% in 2004.  Sales of byproducts in 2005 totaled $1,373.6million compared with $987.8 million in 2004, an increase of 39.1%.  The increase is principally attributable tosignificantly increased sales of molybdenum, resulting from the 94.7% increasein the average market price for molybdenum in 2005 compared with 2004.  In addition to increased metal prices,increased mine production was also a factor in increasing our byproduct salesin 2005, molybdenum production for 2005 was 32.6 million pounds compared with31.7 million pounds in 2004, an increase of 3%. The table below provides the sales of our byproducts as a percentage ofour total net sales.
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Byproduct Sales as a Percentage of Total Net Sales** | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Molybdenum                                                                                     |       | 22.7                                       | %          | 20.9 | % |
| Zinc                                                                                           |       | 4.9                                        |       | 5.4 |   |
| Silver                                                                                         |       | 3.6                                        |       | 5.1 |   |
| Other byproducts                                                                               |       | 2.4                                        |       | 0.5 |   |
| **Total**                                                                                      |       | 33.6                                       | %          | 31.9 | % |

 

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

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 thecost of sales increase are a $72.5 million increase in the cost of purchasedelectric power and fuel, an increase of $27.2 million for mining royalties, anda $125.6 million increase in worker’s participation, including an adjustment of$36.3 million, related to a change in the method of calculating the amount ofthe statutory worker’s participation for the Mexican workers, see “Liquidityand Capital Resources” for a discussion of this matter.  In addition, the higher value of copper in2005 increased our cost of sales by $16.2 million over 2004, as we supplementedour copper production with copper acquired from third parties.

During 2005, inresponse to an industry wide shortage of mine truck tires we put in place atire rationalization program to optimize our tire usage.  The program, which includes; road maintenanceimprovements; closer tire maintenance monitoring, including temperature andpressure checks; and stricter truck handling procedures; was in place for 2005and resulted in an 18% reduction in tire consumption when compared to 2004.  While we expect 

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the supply deficitto be resolved by mid-2007, we continue to monitor the supply situation forthis vital commodity and expect to satisfy our needs through prudentconsumption practices and the development of alternative supply sources, ifnecessary.

Weexpect that cost of sales will increase in 2006 and the near future years as aresult of our adoption, on January 1, 2006, of the EITF’s, consensus related tomine stripping costs.  See CriticalAccounting and Estimates — Capitalized Mine Stripping and Leachable Material.

***Selling, general and administrative***

Ourselling, general and administrative expense in 2005 was $81.1 million, comparedwith $71.8 million in 2004, an increase of $9.3 million.  Our higher selling, general and administrativeexpense in 2005 was principally a result of higher legal, auditing andconsulting fees related in part to the acquisition of Minera Mexico, to theissuance of new debt, and to the cost associated with compliance with theSarbanes-Oxley Act.  In addition, thePeruvian tax on bank transfers was $1.4 million higher in 2005.

***Depreciation, amortization anddepletion***

Ourdepreciation, 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 was principally the result ofthe increase in the amortization of capitalized mine stripping costs andleachable materials of $37.0 million and an increase in depreciation related toreplacement capital expenditures.

***Exploration***

Explorationexpense in 2005 was $24.4 million, compared with $15.6 million in 2004, anincrease of $8.8 million.  The increasewas principally as a result of the drilling and cross path activities at theTia Maria project in Peru, $3.7 million, and $1.7 million and $1.2 milliondrilling costs in IMMSA and Cananea, respectively.

***Interest expense***

Interestexpense in 2005 was $108.9 million compared with $106.5 million in 2004, anincrease of $2.4 million.  Our currentlypaid interest expense decreased in 2005 principally as a result of a reductionof our debt outstanding.  However,included in 2005 there was $15.0 million for the write-off of previouslycapitalized debt issuance cost for financings prepaid in such years.  With respect to our financing programs referenceis made to “Liquidity and Capital Resources” for a further discussion of thismatter.

***Capitalized interest***

Capitalizedinterest in 2005 was $22.5 million, compared with $10.7 million in 2004, anincrease of $11.8 million.  This increaseis mainly due to the Ilo smelter modernization and the Toquepala crushing,conveying system for leachable material projects, on which capitalized interestincreased by $6.4 million and $2.2 million, respectively in 2005.

***Interest income***

Interestincome in 2005 was $30.8 million, compared with $8.3 million in 2004, anincrease of $22.5 million.  Our interestincome increased principally as a result of higher interest rates on short termsecurities and significantly higher invested balances.

***Gain on derivative instruments***

Gainon derivative instruments in 2005 was $1.1 million, due to a gain on interestrate swaps. Gain or losses on copper derivatives are included in the net salesline of the earnings statement. In 2004, we recorded a loss of$1.4 million on interest rate derivates.

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***Loss on debt prepayments***

Losson debt prepayments in 2005 was $10.6 million, compared with $16.5 million in2004, a decrease of $5.9 million.  In2005 we paid a penalty of $2.0 million for the prepayment of $199 million ofPeruvian bonds and a premium of $8.6 million in the Yankee bondsrepurchase.  In 2004, we incurred $12.8million of prepayment fees and prepayment interest differential and $3.7million for a debt restructuring charge.

***Gain on disposal of property***

Gainon disposal of property in 2005 was $2.1 million, compared with $53.5 millionin 2004.  These amounts include gain fromthe sale of non-core property of our Mexican operation.

***Other expense***

Otherexpense in 2005 was $5.7 million, compared with $9.7 million in 2004 a decreaseof $4.0 million.  Included in otherexpense are fees and other costs incurred in conjunction with the acquisitionof Minera Mexico and were $3.3 million and $5.8 million in 2005 and 2004,respectively.

***Income taxes***

Incometaxes in 2005 were $589.7 million, compared with $433.7 million in 2004, anincrease of $156.0 million and include $576.3 million and $420.2 million ofPeruvian and Mexican income taxes, $13.4 million and $13.5 million for USFederal and state taxes for 2005 and 2004, respectively. US income taxes areprimarily attributable to investment income as well as limitations on use offoreign tax credits in determining the alternative minimum tax.

Theincrease of $156.0 million or 36.0% was primarily due to $581.5 million ofhigher pretax income.  The effective taxrate for 2005 was 29.4%, compared with 30.4% in 2004.  Included in the 2005 tax provision is arefund of $43.4 million received by Minera Mexico for asset-based taxes(minimum income tax) paid in prior years. Without the benefit of this creditthe Company’s effective tax rate for the 2005 year would increase to 31.6%

***Minority interest***

Minorityinterest in 2005 was $12.5 million compared with $4.7 million in 2004, anincrease of $7.8 million or 166.0%.  Thisincrease is due to higher earnings in the period.

***Net earnings***

Ournet earnings in 2005 were $1,400.1 million, compared with $982.4 million in2004, an increase of $417.8 million or 42.5%. Net earnings increased as a result of the factors described above.

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

**Peruvian open-pit operations**
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 2,167.7    |       | $          | 1,715.9    |       | $ | 451.8 |   | 26.3 | % |
| Operating costs  and expenses |       | (879.4     | )          | (788.8     | )          | (90.6      | )          | 11.5 | % |
| Operating income              |       | $          | 1,288.3    |       | $          | 927.1      |       | $ | 361.2 |   | 39.0 | % |

 

Net sales at our Peruvianoperations in 2005 were $2,167.7 million, compared with

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$1,715.9 million in 2004,an increase of $451.8 million.  Thisincrease was principally due to significant increases in the price of copperand molybdenum.  Copper sales volume decreasedby 39.0 million pounds in 2005 principally as a result of lower production atToquepala and Cuajone due to lower ore grade and a decrease in SX/EW productiondue to lower PLS grades. Net sales in 2005 also includes a loss on copper swapsof $12.2 million.

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, amortization and depletion) of $83.8 was principallythe result of the higher cost of fuel, workers’ participation provision andPeruvian royalty charges.

Fuel costs, a keycomponent of our costs, were higher by $31.4 million in 2005.  Our cost for workers’ participation increased$27.6 million in 2005.  This cost iscalculated based on 8% of our Peruvian operations pre-tax earnings andincreased as our profits increase.  APeruvian royalty provision which was instituted in June 2004 added $22.7million 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 incomeincreased as a result of the factors described above.

**Mexican open-pit operations.**
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 1,758.3    |       | $          | 1,189.7    |       | $ | 568.6 |   | 47.8 | % |
| Operating costs and  expenses |       | (1,054.2   | )          | (665.9     | )          | (388.3     | )          | 58.3 | % |
| Operating income              |       | $          | 704.1      |       | $          | 523.8      |       | $ | 180.3 |   | 34.4 | % |

 

Net sales from ourMexican open-pit operations in 2005 were $1,758.3 million, compared with$1,189.7 million in 2004, an increase of $568.6 million or 48.7%.  The increase in net sales was principally aresult of significant increases in the price of copper and molybdenum andincreased sales volume. Net sales in 2005 also includes a loss on copper swapsof $11.3 million.

Operating cost and expensesat our Mexican open-pit operations in 2005 was $1,054.2 million compared with$665.9 million in 2004, an increase of $388.3 million or 58.3%.  This increase was principally the result ofhigher cost of sales and higher depreciation, amortization and depletion in2005.  The increase in cost of sales of$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 salesvolume increases added to our 2005 costs, as did an increase of $104.0 millionfor purchased metals from third parties. Our cost for workers’ participation, including an adjustment of $36.3million, increased $106.1 million in 2005. This cost is calculated based on 10% of pretax earnings and increases asour profits increase. Fuel and purchased electric power cost were higher by$31.4 million in 2005.  Maintenance costwas also higher by $38.9 million in 2005. In addition, an exchange loss of $18.5 million was reported in 2005 as aresult of the appreciation of the peso against the U.S. dollar during theyear.  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 $704.1 million, compared with $523.8 million in 2004, an increase of $180.3million or 34.4%.  The operating incomeincreased as a result of the factors described above.

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**IMMSA unit**.
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 448.7      |       | $          | 317.1      |       | $ | 131.6 |   | 41.5 | % |
| Operating costs and  expenses |       | (381.9     | )          | (272.9     | )          | (109.0     | )          | 39.9 | % |
| Operating income              |       | $          | 66.8       |       | $          | 44.2       |       | $ | 22.6 |   | 51.1 | % |

 

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%.  Theincrease was due to higher sales prices in 2005 for copper, zinc and silver.  In addition, an increase in sales volume ofcopper and zinc added to the 2005 sales increase.  Zinc from our reopened Santa Eulalia mineadded 22.7 million pounds to 2005 zinc sales.

Operating costs andexpenses at our IMMSA unit were $381.9 million in 2005, compared with$272.9 million in 2004, an increase of $109.0 million or 39.9%.  This increase was principally the result ofincreased sales volumes for copper and zinc, the higher cost of fuel andpurchased electric power, higher volume of metal purchased from third partiesand an increase in the cost of contractor services.  In 2005, cost of sales (exclusive ofdepreciation, amortization and depletion) increased $99.7 million, principallyas a result of higher production and sales volumes for copper and zinc, whichincluded an increase of $64.6 million for purchased metals from thirdparties.  Our fuel and purchased electricpower costs, a key component of our costs, were higher by $10.9 million in2005.  In addition, the cost ofcontractor services, principally for our coal operations, increased by $13.0million in 2005.

Operating income in 2005was $66.8 million, compared with $44.2 million in 2004, an increase of $22.6 millionor 51.1%.  The operating income increasedas a result of the factors described above.

IntersegmentEliminations and Adjustments

The net sales, operating costs and expenses andoperating income displayed above will not be directly equal to amounts in ourconsolidated combined statement of earnings because the adjustments ofintersegment operating revenues and expenses must be taken into account.  Please see Note 20 to the financialstatements.

**Liquidity and Capital Resources**

The following discussion relates to our liquidityand capital resources for each of the years in the three year period endedDecember 31, 2006.

***Liquidity***
| **(in millions)**                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash  provided from operating activities            |       | $                                          | 2,059.4    |   | $ | 1,663.5 |   | $ | 1,172.4 |   |
| Net cash used  for investing activities                 |       | (725.3                                     | )          | (435.9 | ) | (219.5 | ) |
| Net cash (used for)  provided from financing activities |       | (1,164.4                                   | )          | (1,064.4 | ) | (540.6 | ) |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |

 

***Cash Flows from OperatingActivities***

Net cash provided fromoperating activities was $2,059.4 million, $1,663.5 million and $1,172.4million in 2006, 2005 and 2004, respectively. The increases in 2006 and 2005 were for the most part the result ofhigher net earnings in both years, which were the result of improved salesprices for our copper, zinc and silver in each of the years. Molybdenum saleshave contributed significantly to our cash flow, however, the sales 

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price of molybdenum in2006 has decreased somewhat from the 2005 sales price.

In 2006, our earningswere $2,037.6 million, approximately 98.9% of the net operating cash flow.  Significant items deducted from, or added to,our earnings to arrive to operating cash flow included, depreciation,amortization and depletion of $275.1 million and $11.6 million of unrealizedloss on derivative instruments which positively increased operating cash flowand capitalized leachable material of $65.9 million which lowered  our cash flow.  Additionally, an increase in working capitalreduced operating cash flow by $178.5 million. The working capital increase wasthe result of an increase of $217.9 million of receivables as a result ofhigher copper prices, this increase was reduced by a buildup of $96.7 millionof accounts payable and accrued liabilities, a key component of which was theincrease of $104.3 million in the unpaid provision for workers’ participation, whichis expected to be paid in the first quarter of 2007. Other increases in workingcapital amounted $57.2 million.

In 2005, our earningswere $1,400.1 million, approximately 84.2% of the net operating cash flow.  Significant items deducted from, or added to,our earnings to arrive to operating cash flow included, depreciation,amortization and depletion of $277.2 million, which positively increasedoperating cash flow; and capitalized mine stripping and leachable material of$38.9 million and $77.5 million, respectively, and a deferred tax benefit of$42.3 million, which reduced operating cash flow.  Additionally, changes in working capitalbalances added $110.5 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 items deducted from, or added to,our earnings to arrive to operating cash flow included, depreciation,amortization and depletion of $192.6 million and a deferred tax provision of$54.4 million, which positively increased our operating cash flow; andcapitalized mine stripping and leachable material of $41.6 million and $50.2million, respectively,  which decreasedour operating cash flow.  In addition,$53.5 million a gain from the sale of non-core Mexican properties is deductedfrom earning to arrive at operating cash flow, the contribution of these fundsis included in investing cash flows. Changes in working capital assets and liabilities increased netoperating cash flow by $69.2 million. Some of these working capital accounts included some rather largechanges in 2004, the growth of accounts receivable reduced operating cash flowby $261.3 million, which was the result of the improvement in metal prices fromthe beginning of 2004 to the end. LME and COMEX copper prices increased by 49cents and 48 cents during 2004, respectively, in addition the price formolybdenum increased by $10.80 per pound during 2004.  Improving operating cash flow was the buildup of payables and accruals during 2004, largely as a result of increasedworker participation and income tax provisions driven by higher earnings,payment of which carries over into the next year.

***Cash Flows from InvestingActivities***

Net cash used for investing activities was $725.3 million in 2006compared to $435.9 million in 2005.  Wemade capital expenditures of $455.8 million in 2006, including $160.9 millionfor the Ilo smelter modernization project, $15.6 million for the Toquepala leachdump project and $279.3 million principally for equipment replacements andupgrades, of which $202.5 million was for our Mexican operations.  In addition, the Company had a net increasein marketable securities of $280.0 million.

Netcash used for investing activities was $435.9 million in 2005 compared to$219.5 million in 2004.  We made capitalexpenditures in an aggregate amount of $470.6 million in 2005, including $234.6million for the Ilo smelter modernization project, $32.8 million for the Toquepalacrushing, conveyor system for leachable material, $9.1 million for theToquepala leach dump project and $194.1 million principally for equipmentreplacements and upgrades, of which $148.7 million was for our Mexicanoperations.  Cash flow provided byinvesting activities in 2005 was from the net sale of marketable securities of$45.3 million.

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

***Cash Flows from FinancingActivities***

Forthe year ended December 31, 2006, cash used for financing activities amounted to$1,164.4 million, mainly as a result of a distribution of $1,509.1 million toour shareholders and $8.3 million to our remaining minority interest investors.It was partially offset by $356.0 million of net debt incurred.

Forthe year ended December 31, 2005, cash used for financing activities amountedto $1,064.4 million.  New financingsundertaken in 2005 resulted not only in improved terms for our debt but alsoreduced our debt burden by $158.2 million. In addition, we distributed $853.9 million to our shareholders in 2005and $5.3 million to our remaining minority interest investors.  In October 2005, we purchased an additional6.4 million shares of Minera Mexico, representing 0.8133% of the outstandingshares, for $30.3 million.

Forthe year ended December 31, 2004, cash used for financing activities amountedto $540.6 million mainly as a result of a net debt repayment of $340.9 millionand dividends paid of $191.4 million.

***Other Liquidity Considerations***

OnJanuary 25, 2007, the Board of Directors approved a dividend of $1.70 pershare, totaling $500.6 million, to be paid on March 2, 2007 to shareholders ofrecord as of February 13,2007.

OnDecember 28, 2006, our Peruvian branch signed a contract with the Peruviangovernment that commits our Company to make annual (five-year) contributionsfor the regional development of Peru. This has been in response to an appeal by the new president of Peru tothe mining industry.  Our Company as wellas the mining industry has responded positively to help with this cause.  The programs envisioned will focus initiallyon nutrition for young children and expectant mothers, education and healthservices.  Our Company has a program ofcontributions, starting in 2007, with a contribution of about $16 million, calculatedbased on 2006 Peruvian earnings.  Thisnon-tax deductible amount has been taken from our 2006 earnings.  The following four years’ contributions couldincrease or decrease depending on earnings and copper prices.

InJune 2004, the Peruvian Congress enacted legislation imposing a royalty chargeto be paid by mining companies in favor of the regional governments andcommunities where mining resources are located. Under this law, we are subject to a 1% to 3% charge, based on sales,applicable to the value of the concentrates produced at our Toquepala andCuajone mines.  We made a provision of$67.2 million, $40.3 million and $17.6 million in 2006, 2005 and 2004respectively, for this charge, which went into effect as of June 25, 2004.  During 2006 and 2005 we made payments of$67.1 million and $47.4 million, respectively, related to this charge.  In addition, the Constitutional Tribunalstated that this charge applied to all concessions held in the mining industry.  We believe that this interpretation isincorrect and intend to protest an imposition of the royalty charge on ourSX/EW production, which is operating under a tax stability agreement (“Guarantyand promotional Measures for Investment Contract”).  Provisions made by the Company for the royaltycharge do not include approximately $14.0 million of additional potentialliability relating to its SX/EW production from June 30, 2004 through December31, 2006.  

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Itis anticipated that the royalty charge will have an adverse effect on ouroperating income and cash flow.

Whileour combined financial results show a positive cash position over the pastthree years, our Minera Mexico subsidiary, which we acquired on April 1, 2005,has faced challenges to its liquidity as a result of low metals prices in previousyears.  These challenges resulted in itsnoncompliance with certain debt covenants in 2001 and 2002.  In April 2003 Minera Mexico restructuredcertain of its indebtedness, entering into a common agreement among MineraMexico, Minera Mexico’s principal subsidiaries (as guarantors) and the holdersof such indebtedness.  Minera Mexico paidamounts owing under this agreement with proceeds from a new credit facilityestablished in October 2004.  See “Financing”below.

InMay 2005, the Mexican Supreme Court rendered a decision that changed the methodof computing the amount of statutory workers’ profit sharing required to bepaid by some Mexican companies, including our Minera Mexico subsidiary.  The Supreme Court’s ruling in effectprohibited the application of net operating loss carryforwards in computing theincome used as the base for determining the workers’ profit sharingamounts.  We recognized in our 2005results of operations a charge of $36.3 million for workers’ profitparticipation related to 2004.  Inaddition, the ruling may affect our future results of operations and liquidityto the extent we pay higher workers’ profit sharing amounts.

***Financing:***

The Company’s total debtat December 31, 2006 was $1,545.0 million compared with $1,178.3 million atDecember 31, 2005 before deductions of $16.9 million and $6.3 million of debtdiscount valuation accounts for 2006 and 2005, respectively.  The $366.7 million net increase in total debtduring 2006 was primarily due to the issuance of $400 million, 7.5% notes onMay 9, 2006, which are due 2035.

The Company’s ratio ofdebt to total capitalization was 29.3% at December 31, 2006, compared with 26%at December 31, 2005.

The $400 million notesissued in 2006 are in addition to the $600 million of existing 7.5% notes due2035 that were issued in July 2005.  The2006 financing was issued at a spread of +240 basis points over the 30-yearU.S. Treasury bond.  Comparatively, thefinancing in July 2005 was issued at a spread of +315 basis points over the30-year U.S. Treasury bond.  The notesare Investment Grade rated Baa2 by Moody’s, BBB- by Standard & Poor’s, andBBB- by Fitch. The 2006 financing was issued at a discount of $10.8 million.Additionally, the Company capitalized in “Other assets, net,” on the consolidatedcombined balance sheet, $3.2 million of cost associated with the 2006 facility.

The Company is using orexpects to use the proceeds from the May 2006 issuance in its expansionprograms, which includes construction of a new SX/EW plant at the Cananea mine,the initial cost to develop the Los Chancas and Tia Maria projects, theremaining investment to complete the Ilo smelter modernization and perhaps fora possible expansion of the productive capacity of the Ilo smelter and refinery.

***Capital Expenditure Programs***

Adiscussion of our capital programs is an important part of understanding ourliquidity and capital resources.  Forinformation regarding our capital expenditure programs, see the Discussionunder the caption “Expansion and Modernization Program” of this section.

**Contractual Obligations**

Thefollowing table summarizes our significant contractual obligations as ofDecember 31, 2006:

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| ** **                    | ** ** | **Payments due by Period** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and  Thereafter** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**       | ** ** |
| Long-term  debt               |       | $                                         | 1,545.0    |   | $ | 10.0 |   | $ | 160.0 |   | $ | 10.0 |   | 10.0 |   | $ | 10.0 |   | $ | 1,345.0 |   |
| Interest on debt              |       | 2,526.9                                   |       | 104.9 |   | 104.1 |   | 102.5 |   | 101.7 |   | 101.2 |   | 2,012.5 |   |
| Purchase  obligations:        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commitment to purchase energy |       | 1,586.2                                   |       | 144.2 |   | 144.2 |   | 144.2 |   | 144.2 |   | 144.2 |   | 865.2 |   |
| Capital purchase obligations  |       | 40.5                                      |       | 40.5 |   | — |   | — |   | — |   | — |   | — |   |
| Total                         |       | $                                         | 5,698.6    |   | $ | 299.6 |   | $ | 408.3 |   | $ | 256.7 |   | $ | 255.9 |   | $ | 255.4 |   | $ | 4,222.7 |   |
|                               |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intereston debt calculated at rates in effect at December 31, 2006.  Please refer to “Note 11-Financings” of ourConsolidated Combined Financial Statements for a description of our long-termdebt arrangements and credit facilities.

Wehave a commitment to purchase power for our Peruvian operations from Energíadel Sur, S.A. until 2017.  Amountsindicated on the above table are based on power costs in 2006, which aresubject to change as energy generation costs change and our forecasted powerrequirements through the life of the agreements change.

Pursuantto our PAMA we have committed to bring our operations into compliance withenvironmental standards established by the government of Peru. We completed ourPAMA obligations in January 2007. The capital purchase obligation in the abovetable is for the remaining cost of completing the Ilo smelter modernization.

Foran additional discussion on this matter see “Environmental matters-Peruvianoperations”, in “Note 14-Commitments and Contingencies” of the ConsolidatedCombined Financial Statements.

**Quantitative and Qualitative Disclosure about Market Risk**

Aportion of our outstanding debt bears interest at variable rates andaccordingly is sensitive to changes in interest rates.  Interest rate changes would also result ingains or 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 indebtednessat December 31, 2005, a change in interest rates of one percent (or 100 basispoints) would impact net income and cash flows by $0.7 million annually.

Weare also exposed to market risk associated with changes in foreign currencyexchange rates as certain costs incurred are in currencies other than ourfunctional currency.  To manage thevolatility related to the risk, we may enter into forward exchange contracts,currency swaps or other currency hedging arrangements.  We have only had limited involvement withderivative instruments and do not use them for trading purposes.

Weare subject to market risks arising from the volatility of copper and othermetal prices. Assuming that expected metal production and sales are achieved,that tax rates are unchanged, and giving no effects to potential hedgingprograms metal price sensitivity factors would indicate estimated change in netearnings resulting from metal price changes in 2006 as provided in the tablebelow.
| ** **                                                         | ** ** | **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        |           | $          | 17.1     |       | $          | 1.6        |   | $ | 10.5 |   |

 

The Company occasionallyuses derivative instruments to manage its exposure to market 

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risk from changes incommodity prices, interest rate and exchange rate risk exposures and to enhancereturn on assets.  The Company generallydoes not enter into derivative contracts unless it anticipates a futureactivity that is likely to occur that will result in exposing the Company tomarket risk.

Copper and zinc swaps:

Transactions under thesemetal price protection programs are not accounted for as hedges under SFAS No.133 and are adjusted to fair market value based on the metal prices as of thelast day of the respective reporting period with the gain or loss recorded innet sales on the consolidated combined statement of earnings.  In 2006, the Company changed its accountingclassification policy to recognize gains or losses on metal price derivativesin net sales.  The Company believes thatthis income statement classification reflects better the intention of thisprice protection program.  Before 2006,the change in the fair market value of our derivative instruments was accountedfor in a separate non-operating income statement line item.  Prior-year gains and losses have beenreclassified to conform to the 2006 presentation.

During 2006 and 2005 theCompany entered into short copper swap contracts to protect a portion of itscopper production. In 2006 the Company entered into swap contracts for 384,500metric tons of its copper production for future sales at a weighted averageprice of 316.77 cents per pound and during 2005 the Company entered swapcontracts for 299,457 metric tons of copper at a weighted average price of163.36 cents per pound. Related to the settlement of these copper swapcontracts the Company recorded losses of $276.1 million and $23.5 million in2006 and 2005, respectively.  Theselosses were recorded in net sales on the consolidated combined statement ofearnings. Also, these losses were recorded in net earnings in operatingactivities of the consolidated combined statement of cash flows.

In addition, the Companyentered into a long zinc swap contract to protect the cost of a portion of thezinc concentrates purchases during the recovery from a fire at the San LuisPotosi zinc refinery. Related to the settlement of this zinc swap contract theCompany recorded a loss of $0.2 million in 2006.  This loss was recorded in net sales on theconsolidated combined statement of earnings. Also, this loss was recorded innet earnings in operating activities of the consolidated combined statement ofcash flow.

At December 31,2006 the Company did not hold any open copper or zinc futures positions.

Gas swap:

In 2006, the Companyestablished long swap contracts for 3.7 million MMBTUs with a fixed price of$4.2668 per MMBTU.  In this respect, theCompany recorded a gain of $6.3 million which was credited to the productioncost of 2006.

At December 31, 2006, theCompany held long fixed price swap contracts for 10,000 MMBTUs per day at afixed price of $7.525 per MMBTU for the first three months of 2007 to protectthe Company’s production cost from the uncertainty and high volatility ofenergy prices during the 2007 winter season.

ExchangeRate Derivatives, U.S. Dollar / Mexican Peso Contracts:

Because more than 85% ofour sales collections in Mexico are in US dollars and many of our costs are inMexican pesos, during 2006 the Company entered into zero-cost derivativescontracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar. In these contracts if theexchange rate settles at or below the barrier, the Company does not selldollars, if the exchange rate settles above the barrier price established inthe contract, the Company sells dollars at the strike price established in thecontract.

In 2006, the exercise ofthese zero-cost derivative contracts resulted in a gain of $0.9 million, whichwas recorded as a gain on derivative instruments on the consolidated combinedstatement of earnings.

At December 31, 2006 theCompany held the following exchange rate derivative operations:

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| **Notional Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican Pesos/  U.S. Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $22.0                                |       | 1st  Quarter 2007                                      |       | 11.19                                                           |       | 10.82                                                            |       |
| $22.0                                |       | 1st  Quarter 2007                                      |       | 11.50                                                           |       | 11.19                                                            |       |
| $78.0                                |       | 3rd  Quarter 2007                                      |       | 11.15                                                           |       | 10.675                                                           |       |
| $78.0                                |       | 3rd  Quarter 2007                                      |       | 11.52                                                           |       | 11.15                                                            |       |
| $83.2                                |       | 4th  Quarter 2007                                      |       | 11.35                                                           |       | 10.65                                                            |       |
| $106.0                               |       | 1st Quarter 2008                                       |       | 11.28                                                           |       | 10.70                                                            |       |

 

AtDecember 31, 2006, the fair value of the above listed exchange rate derivativecontracts is $0.5 million. The notional amount are comprised on thereintransactions that have the same strike and Barrier price.

ReverseConvertible Notes:

Commencingin 2006 the Company began making short term investments (90 days to 1 year). In2006, the Company earned $9.3 million on these investments, which were recordedin interest income on the consolidated combined statement of earnings.  The investments contain interest rates whichare above the prevailing market rates. At December 31, 2006 the Company holds$280 million in investments of these types, as follows ($ in millions):
| **Investment**                                                                                                                                                                                               | ** ** | **Investment  Book Value** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| 3-month note,  issued Dec 12, 2006 with extensions every 3 months up to a maximum of 12  months, with an interest rate of 7%, a barrier range is established by a pool  of Mexican and Peruvian bond issues. |       | $                               | 200.0      |   |
| 180-day note,  maturing June 12, 2007 with an interest rate of 6%, with barrier range of  $37.669 and $69.957 of SCC stock price, NYSE symbol PCU.                                                           |       | $                               | 40.0       |   |
| 180-day note,  maturing June 28, 2007 with an interest rate of 6%, with barrier range of  $38.738 and $71.942 of SCC stock price, NYSE symbol PCU.                                                           |       | 20.0                            |       |
| 180-day note, maturing  June 23, 2007 with an interest rate of 6%, with barrier range of $37.7205 and  $70.0523 of SCC stock price, NYSE symbol PCU.                                                         |       | 20.0                            |       |
|                                                                                                                                                                                                         |       | $                               | 280.0      |   |

 

Dueto the short term nature of the investments, book value is deemed toapproximate fair value.

Certainof these investments are indexed to SCC common stock while others are indexedto certain bond pools.  Both types ofindexation clauses could cause the principal of the investment to be reduced ifthe established ranges are breached. These indexation clauses have been deemedto be bifurcated embedded derivatives and have been subject to valuation usinga binomial model.  At December 31, 2006,valuing the embedded derivatives at fair value resulted in a liability of $11.6million.  This liability has been includedin other accounts payable, and is recorded as loss on derivative instruments inthe income statement.

**Impact of New Accounting Standards**

In June 2006, FASB issuedFASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes —aninterpretation of FASB Statement No. 109” (FIN 48), which prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006.

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We will adopt FIN 48effective January 1, 2007 and we are currently evaluating the impact theadoption of FIN 48 will have on our financial reporting and disclosurerequirements.

Fora description of the impact of other new accounting standards, see Note 2, “Summaryof Significant Accounting Policies—Impact of new accounting standards,” to ourconsolidated combined financial statements.

**Non-GAAP Information Reconciliation-**

Weprovide a reconciliation of operating cash cost to GAAP cost of sales inmillions of dollars and cents per pound in the table below.
| ** **                                                                    | ** ** | **2006**           | ** ** | **2005**                 | ** ** | **2004**           | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** |
| Cost of sales  (including depreciation, amortization and depletion)—GAAP |       | $                  | 2,294.9    |                     | 1.668      |               | $          | 1,912.6 |   | $ | 1.266 |   | $ | 1,526.9 |   | $ | 0.969 |   |
| Add:                                                                          |       |               |       |                     |       |               |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                                 |       | 88.3               |       | 0.064                    |       | 81.1               |       | 0.054 |   | 71.8 |   | 0.046 |   |
| Treatment and  refining charges                                               |       | 61.0               |       | 0.044                    |       | 34.3               |       | 0.023 |   | 27.7 |   | 0.018 |   |
| Less:                                                                         |       |               |       |                     |       |               |       |   |   |   |   |   |   |
| Byproducts  revenue (1)                                                       |       | (1,547.1           | )          | (1.124                   | )          | (1,478.0           | )          | (0.979 | ) | (1,056.3 | ) | (0.670 | ) |
| Depreciation,  amortization and Depletion                                     |       | (275.1             | )          | (0.200                   | )          | (277.2             | )          | (0.184 | ) | (192.6 | ) | (0.122 | ) |
| Workers’  participation                                                  |       | (271.5             | )          | (0.197                   | )          | (219.2             | )          | (0.145 | ) | (93.6 | ) | (0.059 | ) |
| Royalty charge  and other, net                                                |       | (136.4             | )          | (0.100                   | )          | (40.8              | )          | (0.027 | ) | (42.1 | ) | (0.028 | ) |
| Inventory change                                                              |       | (4.4               | )          | (0.003                   | )          | 33.0               |       | 0.022 |   | 44.4 |   | 0.028 |   |
| **Operating  Cash Cost**                                                      | ** ** | **$**              | **209.7**  | ** **               | **$**      | **0.152**          | ** ** | **$** | **45.8** | ** ** | **$** | **0.030** | ** ** | **$** | **286.2** | ** ** | **$** | **0.182** | ** ** |
| Add byproducts  revenue                                                       |       | 1,547.1            |       | 1.124                    |       | 1,478.0            |       | 0.979 |   | 1,056.3 |   | 0.670 |   |
| Operating Cash  Cost, without byproduct revenue                               |       | $                  | 1,759.9    |                     | $          | 1.276              |       | $ | 1,523.8 |   | $ | 1.009 |   | $ | 1,342.5 |   | $ | 0.852 |   |
| Total pounds of copper  produced and purchased (in millions)                  |       | 1,375.9            |       |                     |       | 1,510.4            |       |   |   | 1,576.5 |   |   |   |

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

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Item8.  Financial Statements andSupplementary Data

Southern CopperCorporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF EARNINGS
| **For the years ended December 31,**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands, except for per share amounts)**                 | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Net sales:                                                                                     |       |       |       |       |       |       |       |
| Non-affiliates                                                                                 |       | $          | 5,460,221  |       | $          | 4,060,788  |       | $ | 3,022,614 |   |
| Affiliates                                                                                     |       | —     |       | 28,357     |       | 74,083     |       |
| Total net sales                                                                                |       | $          | 5,460,221  |       | 4,089,145  |       | 3,096,697  |   |
| Operating cost and  expenses:                                                                  |       |       |       |       |       |       |       |
| Cost of sales  (exclusive of depreciation,  amortization and depletion shown separately below) |       | 2,019,840  |       | 1,635,393  |       | 1,334,330  |       |
| Selling, general  and administrative                                                           |       | 88,274     |       | 81,132     |       | 71,778     |       |
| Depreciation,  amortization and depletion                                                      |       | 275,062    |       | 277,248    |       | 192,586    |       |
| Exploration                                                                                    |       | 22,704     |       | 24,356     |       | 15,610     |       |
| Total operating  costs and expenses                                                            |       | 2,405,880  |       | 2,018,129  |       | 1,614,304  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Operating income                                                                               |       | 3,054,341  |       | 2,071,016  |       | 1,482,393  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Interest expense                                                                               |       | (113,422   | )          | (108,874   | )          | (106,491   | )          |
| Capitalized interest                                                                           |       | 27,951     |       | 22,509     |       | 10,681     |       |
| Gain (loss) on  derivative instruments                                                         |       | (11,595    | )          | 1,159      |       | (1,413     | )          |
| Loss on debt  prepayments                                                                      |       | (1,137     | )          | (10,559    | )          | (16,500    | )          |
| Gain on disposal of  property                                                                  |       | 1,881      |       | 2,084      |       | 53,542     |       |
| Other income (expense)                                                                         |       | (2,207     | )          | (5,733     | )          | (9,689     | )          |
| Interest income                                                                                |       | 50,217     |       | 30,765     |       | 8,348      |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings before income  taxes and minority interest                                            |       | 3,006,029  |       | 2,002,367  |       | 1,420,871  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Income taxes                                                                                   |       | 959,087    |       | 589,744    |       | 433,758    |       |
| Minority interest                                                                              |       | 9,302      |       | 12,475     |       | 4,727      |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net earnings                                                                                   |       | $          | 2,037,640  |       | $          | 1,400,148  |       | $ | 982,386 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Per common share  amounts:                                                                     |       |       |       |       |       |       |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net earnings -  basic and diluted                                                              |       | $          | 6.92       |       | $          | 4.76       |       | $ | 3.34 |   |
| Dividends paid                                                                                 |       | $          | 5.13       |       | $          | 2.90       |       | $ | 0.65 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Weighted average shares  outstanding - basic                                                   |       | 294,461    |       | 294,456    |       | 294,448    |       |
| Weighted average shares outstanding - diluted                                                  |       | 294,461    |       | 294,456    |       | 294,448    |       |

 

The accompanying notes are an integral part of theseconsolidated combined financial statements.

A99

----

Southern CopperCorporation

and Subsidiaries

CONSOLIDATEDCOMBINED BALANCE SHEET
| **At December 31,**                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| ASSETS                                                                                                                 |       |       |       |       |       |
| Current assets:                                                                                                        |       |       |       |       |       |
| Cash and cash equivalents                                                                                              |       | $          | 1,022,778  |       | $          | 876,003 |   |
| Marketable securities                                                                                                  |       | 280,000    |       | —     |       |
| Accounts receivable trade:                                                                                             |       |       |       |       |       |
| Non-affiliates (less allowance for doubtful accounts  (2006 - $5,948 and 2005 - $5,699)                                |       | 560,227    |       | 342,412    |       |
| Affiliates                                                                                                             |       | 2,630      |       | 9,099      |       |
| Accounts receivable — other                                                                                       |       | 43,569     |       | 34,949     |       |
| Inventories                                                                                                            |       | 413,652    |       | 395,845    |       |
| Deferred income tax — current portion                                                                             |       | 65,638     |       | 5,248      |       |
| Other current assets, net                                                                                              |       | 54,383     |       | 50,798     |       |
| Total current assets                                                                                                   |       | 2,442,877  |       | 1,714,354  |       |
|                                                                                                                   |       |       |       |       |       |
| Property, net                                                                                                          |       | 3,538,295  |       | 3,326,126  |       |
| Capitalized mine stripping costs, net                                                                                  |       | —     |       | 289,369    |       |
| Leachable material, net                                                                                                |       | 231,516    |       | 210,118    |       |
| Intangible assets, net                                                                                                 |       | 118,107    |       | 120,861    |       |
| Deferred income tax non-current                                                                                        |       | 14,549     |       | —     |       |
| Other assets, net                                                                                                      |       | 31,070     |       | 26,746     |       |
| Total assets                                                                                                           |       | $          | 6,376,414  |       | $          | 5,687,574 |   |
|                                                                                                                   |       |       |       |       |       |
| LIABILITIES                                                                                                            |       |       |       |       |       |
| Current liabilities:                                                                                                   |       |       |       |       |       |
| Current portion of long-term debt                                                                                      |       | $          | 10,000     |       | $          | 10,000 |   |
| Accounts payable                                                                                                       |       | 271,064    |       | 284,977    |       |
| Accrued income taxes                                                                                                   |       | 226,047    |       | 275,763    |       |
| Due to affiliated companies                                                                                            |       | 3,581      |       | 6,355      |       |
| Accrued workers’ participation                                                                                    |       | 299,892    |       | 195,552    |       |
| Interest                                                                                                               |       | 37,140     |       | 14,009     |       |
| Accrued liabilities                                                                                                    |       | 11,847     |       | 8,976      |       |
| Total current liabilities                                                                                              |       | 859,571    |       | 795,632    |       |
|                                                                                                                   |       |       |       |       |       |
| Long-term debt                                                                                                         |       | 1,518,111  |       | 1,162,065  |       |
| Deferred income taxes                                                                                                  |       | 194,759    |       | 259,089    |       |
| Other liabilities and reserves                                                                                         |       | 111,196    |       | 120,795    |       |
| Asset retirement obligation                                                                                            |       | 12,183     |       | 11,221     |       |
| Total non-current liabilities                                                                                          |       | 1,836,249  |       | 1,553,170  |       |
|                                                                                                                   |       |       |       |       |       |
| Commitments and contingencies (Note 14)                                                                                |       |       |       |       |       |
|                                                                                                                   |       |       |       |       |       |
| MINORITY  INTEREST                                                                                                     |       | 13,989     |       | 12,695     |       |
|                                                                                                                   |       |       |       |       |       |
| STOCKHOLDERS’  EQUITY                                                                                             |       |       |       |       |       |
| Common stock par value $0.01; shares authorized:  2006 and 2005- 334,415,280; shares issued 2006 and 2005- 294,865,362 |       | 2,949      |       | 2,949      |       |
| Additional paid-in capital                                                                                             |       | 772,693    |       | 772,693    |       |
| Retained earnings                                                                                                      |       | 3,010,307  |       | 2,648,359  |       |
| Other accumulated comprehensive loss                                                                                   |       | (22,332    | )          | (13,090    | )          |
| Treasury stock, at cost, common shares                                                                                 |       | (97,012)   |       | (84,834    | )          |
| Total stockholders’ equity                                                                                        |       | 3,666,605  |       | 3,326,077  |       |
| Total  liabilities, Minority Interest and Stockholders’ Equity                                                    |       | $          | 6,376,414  |       | $          | 5,687,574 |   |

 

The accompanying notesare an integral part of these consolidated combined financial statements.

A100

----

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CASH FLOWS
| **For the years ended December 31,**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| OPERATING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Net earnings                                                                           |       | $          | 2,037,640  |       | $          | 1,400,148  |       | $ | 982,386 |   |
|                                                                                   |       |       |       |       |       |       |       |
| Adjustments to reconcile net earnings to net  cash provided from operating activities: |       |       |       |       |       |       |       |
| Depreciation, amortization and depletion                                               |       | 275,062    |       | 277,248    |       | 192,586    |       |
| Capitalized leachable material                                                         |       | (65,930    | )          | (77,523    | )          | (50,168    | )          |
| Capitalized mine stripping                                                             |       | —     |       | (38,886    | )          | (41,629    | )          |
| Remeasurement loss (gain)                                                              |       | 5,758      |       | 8,885      |       | 14,379     |       |
| Provision for deferred income taxes                                                    |       | (33,693    | )          | (42,268    | )          | 54,385     |       |
| Loss (gain) on sale of property                                                        |       | (1,881     | )          | (2,084     | )          | (53,542    | )          |
| Unrealized (gain)/loss on derivative instruments                                       |       | 11,595     |       | —     |       | —     |       |
| Write-off unamortized financial cost                                                   |       | —     |       | 14,965     |       | —     |       |
| Minority interest                                                                      |       | 9,302      |       | 12,475     |       | 4,727      |       |
| Cash provided from (used for) operating assets and  liabilities:                       |       |       |       |       |       |       |       |
| Accounts receivable                                                                    |       | (217,991   | )          | 59,457     |       | (261,301   | )          |
| Inventories                                                                            |       | (17,807    | )          | (43,468    | )          | (54,330    | )          |
| Accounts payable and accrued liabilities                                               |       | 96,694     |       | 75,269     |       | 371,477    |       |
| Other operating assets and liabilities                                                 |       | (39,366)   |       | 19,278     |       | 13,383     |       |
| Net cash provided from operating activities                                            |       | 2,059,383  |       | 1,663,496  |       | 1,172,353  |       |
|                                                                                   |       |       |       |       |       |       |       |
| INVESTING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Capital expenditures                                                                   |       | (455,818   | )          | (470,636   | )          | (228,299   | )          |
| Purchase of marketable securities                                                      |       | (280,000   | )          | (74,339    | )          | (69,409    | )          |
| Sales and maturity of marketable securities                                            |       | —     |       | 119,606    |       | 24,142     |       |
| Sale of property                                                                       |       | 5,730      |       | 1,177      |       | 59,980     |       |
| Other                                                                                  |       | 4,802      |       | (11,678    | )          | (5,876     | )          |
| Net cash used for investing activities                                                 |       | (725,286   | )          | (435,870   | )          | (219,462   | )          |
|                                                                                   |       |       |       |       |       |       |       |
| FINANCING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Debt incurred                                                                          |       | 389,192    |       | 993,717    |       | 600,000    |       |
| Debt repaid                                                                            |       | (33,146    | )          | (1,151,940 | )          | (940,912   | )          |
| Capitalized of debt issuance cost                                                      |       | (3,150     | )          | (8,800     | )          | —     |       |
| Capital stock transaction — Minera Mexico                                         |       | —     |       | (7,438     | )          | (1,319     | )          |
| Dividends paid to common stockholders                                                  |       | (1,509,099 | )          | (853,887   | )          | (191,360   | )          |
| Escrow on long-term loans                                                              |       | 58         |       | (601       | )          | (5,532     | )          |
| Distributions to minority interest                                                     |       | (8,282     | )          | (5,297     | )          | (1,465     | )          |
| Purchase of shares Minera Mexico                                                       |       | —     |       | (30,276    | )          | —     |       |
| Other                                                                                  |       | 57         |       | 123        |       | (21)       |       |
| Net cash provided from (used for) financing activities                                 |       | (1,164,370 | )          | (1,064,399 | )          | (540,609   | )          |
|                                                                                   |       |       |       |       |       |       |       |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | (22,952    | )          | 2,069      |       | (53,185    | )          |
|                                                                                   |       |       |       |       |       |       |       |
| Increase in cash  and cash equivalents                                                 |       | 146,775    |       | 165,296    |       | 359,097    |       |
| Cash and cash  equivalents, at beginning of year                                       |       | 876,003    |       | 710,707    |       | 351,610    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Cash and cash  equivalents, at end of year                                             |       | $          | 1,022,778  |       | $          | 876,003    |       | $ | 710,707 |   |

 

A101

----

 
| ** **                                                                         | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                         | ** ** | **(in thousands)** | ** ** |
| Supplemental  disclosure of cash flow information:                                 |       |                    |       |     |       |     |       |
| Cash paid during the year for:                                                     |       |                    |       |     |       |     |       |
| Interest                                                                           |       | $                       | 43,302     |     | $          | 80,286   |       | $ | 116,048 |   |
| Income taxes                                                                       |       | $                       | 1,128,351  |     | $          | 702,660  |       | $ | 165,548 |   |
| Supplemental schedule  of non-cash operating,  investing and financing activities: |       |                    |       |     |       |     |       |
| Accounts receivable from affiliate offset by  accounts payable                     |       | $                       | 3,520      |     | $          | —   |       | $ | — |   |
| Additional liability for employee benefit obligation                               |       | $                       | (1,160     | )        | $          | (849     | )          | $ | 1,060 |   |
| Impact of FASB 158 applications                                                    |       | $                       | 11,785     |     |       |     |       |   |
| Note payable for  acquisition of minority interest                                 |       | $                       | —     |     | $          | —   |       | $ | 51,352 |   |
|                                                                               |       |                    |       |     |       |     |       |
| Non cash  transactions:                                                            |       |                    |       |     |       |     |       |
| Common stock  split:                                                               |       |                    |       |     |       |     |       |
| Increase in  Common stock                                                          |       | $                       | 1,472      |     |       |     |       |   |
| Decrease in Additional  paid-in capital                                            |       | $                       | 1,472      |     |       |     |       |   |

 

The accompanying notesare an integral part of these consolidated combined financial statements.

A102

----

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| **For years ended December 31,**                                                                                  | ** ** | ** **          | ** ** | ** **    | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------|------------|-------------------|------------|
| **(in thousands)**                                                                                                               | ** ** | **2006**            | ** ** | **2005**      | ** ** | **2004**          | ** ** |
| CAPITAL STOCK:                                                                                                                        |       |                |       |          |       |              |       |
| Balance at beginning of year:                                                                                                         |       | $                   | 2,949      |          | $          | 1,631             |       | $ | 1,631 |   |
| Issued in exchange for class A common stock                                                                                           |       | —              |       | 1,318         |       | —            |       |
| Balance at end of year                                                                                                                |       | 2,949               |       | 2,949         |       | 1,631             |       |
|                                                                                                                                  |       |                |       |          |       |              |       |
| Class A Common  Stock:                                                                                                                |       |                |       |          |       |              |       |
| Balance at beginning of year                                                                                                          |       | —              |       | 1,318         |       | 1,318             |       |
| Exchanged for common stock                                                                                                            |       | —              |       | (1,318        | )          | —            |       |
| Balance at end of year                                                                                                                |       | —              |       | —        |       | 1,318             |       |
|                                                                                                                                  |       |                |       |          |       |              |       |
| ADDITIONAL  PAID-IN CAPITAL:                                                                                                          |       |                |       |          |       |              |       |
| Balance at beginning of year                                                                                                          |       | 772,693             |       | 799,687       |       | 801,006           |       |
| Net movement of the period                                                                                                            |       | —              |       | (26,994       | )          | (1,319            | )          |
| Balance at end of year                                                                                                                |       | 772,693             |       | 772,693       |       | 799,687           |       |
|                                                                                                                                  |       |                |       |          |       |              |       |
| TREASURY STOCK:                                                                                                                       |       |                |       |          |       |              |       |
| Southern Copper  Common shares                                                                                                        |       |                |       |          |       |              |       |
| Balance at beginning of the year                                                                                                      |       | (4,466              | )          | (4,589        | )          | (4,672            | )          |
| Purchase of shares                                                                                                                    |       | —              |       | —        |       | —            |       |
| Used for corporate purposes                                                                                                           |       | 57                  |       | 123           |       | 83                |       |
| Balance at end of period                                                                                                              |       | (4,409              | )          | (4,466        | )          | (4,589            | )          |
|                                                                                                                                  |       |                |       |          |       |              |       |
| Parent Company  Common Shares                                                                                                         |       |                |       |          |       |              |       |
| Balance at beginning of year                                                                                                          |       | (80,368             | )          | (72,897       | )          | (72,897           | )          |
| Purchase of shares                                                                                                                    |       | (12,235             | )          | (7,471        | )          | —            |       |
| Balance at end of year                                                                                                                |       | (92,603             | )          | (80,368       | )          | (72,897           | )          |
|                                                                                                                                  |       |                |       |          |       |              |       |
| Treasury stock balance at end of year                                                                                                 |       | (97,012             | )          | (84,834       | )          | (77,486           | )          |
|                                                                                                                                  |       |                |       |          |       |              |       |
| RETAINED  EARNINGS:                                                                                                                   |       |                |       |          |       |              |       |
| Balance at beginning of year                                                                                                          |       | 2,648,359           |       | 2,102,098     |       | 1,311,072         |       |
| Net earnings                                                                                                                          |       | 2,037,640           |       | 1,400,148     |       | 982,386           |       |
| Net effect of change in accounting for mine

stripping cost, net of income tax                                                        |       |  

(166,593)   |       | —        |       | —            |       |
| Dividends paid, Common stock, per share, 2006 —

$5.13 2005 - $2.90, 2004 - $0.65                                                |       |  

(1,509,099) |       | (853,887)     |       |  

(191,360) |       |
| Balance at end of year                                                                                                                |       | 3,010,307           |       | 2,648,359     |       | 2,102,098         |       |
|                                                                                                                                  |       |                |       |          |       |              |       |
| OTHER  ACCUMULATED COMPREHENSIVE LOSS:                                                                                                |       |                |       |          |       |              |       |
| Balance at beginning of year                                                                                                          |       | (13,090             | )          | (13,653       | )          | (14,713           | )          |
| Additional decrease in liability for employee  benefit obligations                                                                    |       |  

1,160       |       |  

(849) |       |  

1,060     |       |
| Net effect of the adoption of change in  accounting for pensions and post retirement  benefit obligations, net of income tax (FAS158) |       |  

(16,527)    |       | —        |       | —            |       |
| Unrealized gain on equity securities                                                                                                  |       | 6,125               |       | 1,412         |       | —            |       |
| Balance at end of year                                                                                                                |       | (22,332             | )          | (13,090       | )          | (13,653           | )          |
|                                                                                                                                  |       |                |       |          |       |              |       |
| TOTAL STOCKHOLDERS’  EQUITY                                                                                                      |       | $                   | 3,666,605  |          | $          | 3,326,077         |       | $ | 2,813,595 |   |

 

A103

----

 
| COMPREHENSIVE  INCOME:             |       |     |       |     |       |      |       |
|------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
| Net earnings                       |       | $        | 2,037,640  |     | $          | 1,400,148 |       | $ | 982,386 |   |
| Other  comprehensive income (loss) |       | (9,242   | )          | 563      |       | 1,060     |       |
| Total comprehensive  income        |       | $        | 2,028,398  |     | $          | 1,400,711 |       | $ | 983,446 |   |

 

The accompanying notesare an integral part of these consolidated combined financial statements.

A104

----

SOUTHERN COPPERCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS

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

Theconsolidated combined financial statements presented herein consist of theaccounts of Southern Copper Corporation (“SCC”) (formerly named Southern PeruCopper Corporation) and its subsidiaries as well as those of Minera Mexico,S.A. de C.V., (“MM”) and its subsidiaries. Effective April 1, 2005, SCCacquired substantially all of the outstanding common stock of Minera Mexico, asfurther described below.  Unless thecontext otherwise requires, the term “Company” refers to both SCC and MM asconsolidated (after March 31, 2005) or combined (prior to April 1, 2005).

EffectiveApril 1, 2005, Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”), through itssubsidiary, Americas Mining Corporation (“AMC”) sold its approximately 99.15%shareholding in MM to SCC in return for the issuance to AMC of 134.4 millionnew shares of common stock of SCC (see note 15).  The transaction resulted in Grupo Mexicoincreasing its indirect equity ownership in SCC to approximately 75.1% from itsprior indirect interest of approximately 54.2%. As part of this transaction, SCC paid a special transaction cashdividend of $100 million on March 1, 2005. On October 20, 2005, the Company’s board of directors approved theacquisition of 6,386,521 shares of MM from Grupo Mexico.  The acquired shares represent 0.81833% of theoutstanding shares of MM and were purchased for $30.3 million.  This acquisition increased the Company’sholding in MM to 99.95%.

Theacquisition of MM by SCC is accounted for in a manner similar to a pooling ofinterests since it involved the reorganization of entities under commoncontrol.  Under such accounting, thefinancial statements of Minera Mexico and SCC are combined on a historical costbasis for all the periods presented since they were under common control duringall of these periods.

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

OnAugust 30,2006 the Company declared a share split (see note 15)

**NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

*Principles of consolidation and combination—*

Theconsolidated combined financial statements include the accounts of subsidiariesof which the Company has voting control, in accordance with FAS No. 94Consolidation 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 combination of SCC and MM on a historicalcost basis in a manner similar to a pooling of interests.

*Use of estimates—*

Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Significant items subject to such estimates and assumptions include thecarrying value of ore reserves that are the basis for future cash flowestimates and amortization calculations; environmental, reclamation, closureand retirement obligations; 

A105

----

estimatesof 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 allowances for deferred tax assets;reserves for contingencies and litigation; and fair value of financialinstruments.  Management bases itsestimates on the Company’s historical experience and on various otherassumptions that are believed to be reasonable under the circumstances.  Actual results could differ from thoseestimates.

*Revenue recognition—*

Substantiallyall of the Company’s copper is sold under annual or other longer-termcontracts.

Revenueis recognized when title passes to the customer.  The passing of title is based on terms of thecontract, generally upon shipment. Copper revenue is determined based on the monthly average of prevailingcommodity prices according to the terms of the contracts. The Company providesallowances for doubtful accounts based upon historical bad debt and claimsexperience and periodic evaluation of specific customer accounts.

Forcertain of the Company’s sales of copper and molybdenum products, customers aregiven the option to select a monthly average LME or COMEX price (as is the casefor sales of copper products) or the molybdenum oxide proprietary price ofPlatt’s Metal Week (as is the case for sales of molybdenum products), generallyranging between one and six months subsequent to shipment.  In such cases, revenue is recorded at aprovisional price at the time of shipment. The provisionally priced copper sales are adjusted to reflect forwardLME or COMEX copper prices at the end of each month until a final adjustment ismade to the price of the shipments upon settlement with customers pursuant tothe terms of the contract.  In the caseof molybdenum sales, for which there are no published forward prices, theprovisionally priced sales are adjusted to reflect the market prices at the endof each month until a final adjustment is made to the price of the shipmentsupon settlement with customers pursuant to the terms of the contract.

Theseprovisional pricing arrangements are accounted for separately from the contractas an embedded derivative instrument under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities”, as amended (“FASB No. 133”).  The Company sells copper in concentrate,anode, blister and refined form at industry standard commercial terms.  Net sales include the invoiced value andcorresponding fair value adjustment of the related forward contract of copper,zinc, silver, molybdenum, acid and other metals.

*Shipping and handling fees and costs—*

Amountsbilled to customers for shipping and handling, are classified as sales.  Amounts incurred for shipping and handlingare included in cost of sales (exclusive of depreciation, amortization anddepletion).

*Cash and cash equivalents—*

Cashand cash equivalents include bank deposits, certificates of deposit and shortterm investment funds with original maturities of three months or less at thedate of purchase.  The carrying value ofcash and cash equivalents approximate fair value.

*Marketable securities—*

Marketablesecurities consist primarily of interest bearing instruments with originalmaturities greater than 90 days but less than one year.  These deposits are held to maturity andcarried at cost. Due to the short term nature of the investments, cost isdeemed to approximate fair value.

*Inventories—*

Metalinventories, consisting of work-in-process and finished goods, are carried atthe lower of average cost or market. Costs incurred in the production of metal inventories exclude generaland administrative costs.

A106

----

Work-in-processinventories represent materials that are in the process of being converted intoa saleable product.  Conversion processesvary depending on the nature of the copper ore and the specific miningoperation.  For sulfide ores, processingincludes milling and concentrating and the results from the production ofcopper and molybdenum concentrates. Molybdenum in-process inventory includesthe cost of molybdenum concentrates and the costs incurred to convert thoseconcentrates into various high-purity molybdenum chemicals or metallurgicalproducts.

Finishedgoods include saleable products (e.g., copper concentrates, copper anodes,copper cathodes, copper rod, molybdenum concentrate and other metallurgicalproducts).

Suppliesinventories are carried at average cost less a reserve for obsolescence.

*Property—*

Propertyis recorded at acquisition cost, net of accumulated depreciation andamortization.  Cost includes majorexpenditures for improvements and replacements, which extend useful lives orincrease capacity and interest costs associated with significant capitaladditions.  Maintenance, repairs, normaldevelopment costs at existing mines, and gains or losses on assets retired orsold are reflected in earnings as incurred.

Minedevelopment includes primarily the cost of acquiring land rights to anexploitable ore body, pre-production stripping costs at new mines that arecommercially exploitable, costs associated with bringing new mineral propertiesinto production, and removal of overburden to prepare unique and identifiableareas outside the current mining area for such future production.  Mine development costs are amortized on aunit of production basis over the remaining life of the mines.

Buildingsand equipment are depreciated on the straight-line method over estimated livesfrom five to 40 years or the estimated life of the mine if shorter.

Propertyis reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Assets are determined impaired when theestimated future undiscounted cash flows expected to result from the use of theasset are less than the carrying value of the asset.  The Company’s estimate as to futureundiscounted cash flows takes into consideration, among other things, expectedfuture metal prices, which are based on historical metal prices and pricetrends.  The Company measures 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 remediationcosts)—*

Thefair value of a liability for asset retirement obligations is recognized in theperiod in which the liability is incurred. The liability is measured at fair value and is adjusted to its presentvalue in subsequent periods as accretion expense is recorded. The correspondingasset retirement costs are capitalized as part of the carrying value of therelated long-lived assets and depreciated over the asset’s useful life.

*Intangible assets—*

Intangibleassets include primarily the excess amount paid over the book value forinvestment shares and mining and engineering development studies.  Intangible assets are carried at acquisitioncosts, net of accumulated amortization and are amortized principally on a unitof production basis over the estimated remaining life of the mines.  Intangible assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable.

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*Debt issuance costs—*

Debtissuance costs, which are included in other assets, are amortized using theinterest method over the term of the related debt.

*Ore reserves—*

TheCompany periodically reevaluates estimates of its ore reserves, which representthe Company’s estimate as to the amount of unmined copper remaining in itsexisting mine locations that can be produced and sold at a profit.  Such estimates are based on engineeringevaluations derived from samples of drill holes and other openings, combined withassumptions about copper market prices and production costs at each of therespective mines.

TheCompany updates its estimate of ore reserves at the beginning of each year. Inthis calculation the Company uses current metal prices which are defined as theaverage metal price over the preceding three years. However, in the case of theCompany’s recently acquired Mexican subsidiary, ore reserve estimates prior to2005 were calculated based on a copper price of $0.90 per pound of copper. Thecurrent per pound of copper price, as defined, was $ 1.261, $0.939 and $0.751at the beginning of 2006, 2005 and 2004, respectively.  In years prior to 2006, these ore reserveestimates were used to determine the amount of mine stripping that iscapitalized, units of production amortization of capitalized mine stripping,mine development and amortization of intangible assets.  In 2005, the Emerging Issues Task Force ofthe FASB reached a consensus that stripping costs incurred during theproduction phase of a mine are variable production costs that should beincluded in the costs of the inventory produced (extracted) during the periodthat the stripping costs are incurred. This consensus was ratified by the FASB and became effective for us in2006.  On January 1, 2006, the Companyadopted this consensus by reversing $289.4 million of net cumulative strippingcost as of December 31, 2005 and recording a net charge of $166.6 million toretained earnings after recognition of workers’ participation and tax benefitsof $122.8 million.  Accordingly, minestripping costs are included in the cost of inventory.  The Company continues to use ore reserveestimates to amortize mine development and intangible assets.

*Leachable material—*

Atone of its mines the Company capitalizes the cost of materials with low coppercontent extracted during the mining process (leachable material), which iscollected in areas known as leaching dumps. The amortization of the capitalized costs is determined based on thedepletion period of the leaching dumps, which is estimated to be five years(unaudited).

*Exploration—*

Tangibleand intangible costs incurred in the search for mineral properties are chargedagainst earnings when incurred.

*Income taxes—*

Provisionsfor income taxes are based on taxes payable or refundable for the current yearand deferred taxes on temporary differences between the amount of taxableincome and pretax financial income and between the tax bases of assets andliabilities and their reported amounts in the financial statements.  Deferred tax assets and liabilities areincluded in the financial statements at currently enacted income tax ratesapplicable to the period in which the deferred tax assets and liabilities areexpected to be realized and settled as prescribed in Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes”.  As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision forincome taxes. Deferred income tax assets are reduced by any benefits that, inthe opinion of management, are more likely not to be realized.

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*Deferred Taxes—*

In preparing our consolidated combined financialstatements, we recognize income taxes in each of the jurisdictions in which weoperate.  For each jurisdiction, weestimate the actual amount of currently payable or receivable as well asdeferred tax assets and liabilities attributable to temporary differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thesetemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in rate is recognized in income in the period that thechange is enacted.

A valuation allowance is provided for thosedeferred tax assets for which it is more likely than not that the relatedbenefits will not be realized.  Indetermining the amount of the valuation allowance, we consider estimated futuretaxable income as well as feasible tax planning strategies in eachjurisdiction.  If we determine that wewill not realize all or a portion of our deferred tax assets, we will increaseour valuation allowance with a charge to income tax expense.  Conversely, if we determine that we willultimately be able to realize all or a portion of the related benefits forwhich a valuation allowance has been provided, all or a portion of the relatedvaluation allowance will be reduced with a credit to income tax expense.

*Foreign exchange—*

TheCompany’s functional currency is the U.S. dollar. As required by local law,both the Peruvian Branch and MM maintain their books of accounts in Peruviannuevos soles and Mexican pesos, respectively.

Foreigncurrency assets and liabilities are remeasured into U.S. dollars at currentexchange rates except for non-monetary items such as inventory, property,intangible assets and other assets which are remeasured at historical exchangerates.  Revenues and expenses aregenerally translated at actual exchange rates in effect during the period,except for those items related to balance sheet amounts that are remeasured athistorical exchange rates.  Gains andlosses from foreign currency remeasurement are included in earnings of theperiod.

Gainsand (losses) resulting from foreign currency transactions are included in “Costof sales (exclusive of depreciation, amortization and depletion)” and amountedto $(5.8) million, $(11.8) million and $(14.4) million in 2006, 2005 and 2004,respectively.

*Derivative instruments—*

TheCompany utilizes certain types of derivative financial instruments to enhanceits ability to manage risks that exist as part of its ongoing businessoperations and to enhance its return on Company assets.  Derivative contracts are reflected as assetsor liabilities in the balance sheet at their fair value.  The estimated fair value of the derivativesis based on market and/or dealer quotations and in certain cases valuationmodeling.  From time to time the Companyhas entered into copper and zinc swap contracts to protect a fixed copper andzinc price for portions of its metal sales, hedging contracts to fix powerprices for a portion of its production costs, interest rate swap agreements tohedge the interest rate risk exposure on certain of its bank obligations withvariable interest rates, currency swap arrangements to ensure Mexican peso/U.S. dollar conversion rates and certain barrier investment securities toenhance the return on its investments. Gains and losses related to copper and zinc hedges are included in netsales, gain and losses related to power costs are included in cost of sales,all other gains and losses on derivative contracts are included in “Gain (loss)on derivative contracts” in the statement of earnings.

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*Asset Impairments—*

Weevaluate our long-term assets when events or changes in economic circumstancesindicate that the carrying amount of such assets may not be recoverable. Ourevaluations are based on business plans that are prepared using a time horizonthat is reflective of our expectations of metal prices over our business cycle.We are currently using a long-term average copper price of $2.00 per pound ofcopper and an average molybdenum price of $12.00 per pound, along withnear-term price forecast, for 2007 through 2009, reflective of the currentprice environment, for our impairment tests. We use an estimate of the futureundiscounted net cash flows of the related asset or asset group over theremaining life to measure whether the asses are recoverable and measure anyimpairment by reference to fair value. Should estimates of future copper andmolybdenum prices decrease significantly, impairments could result.

*Other comprehensive income—*

Comprehensiveincome represents changes in equity during a period, except those resultingfrom investments by owners and distributions to owners. During the fiscal yearsended December 31, 2006, 2005 and 2004, the components of “other comprehensiveincome (loss)” was the additional minimum liability for employee benefitobligations and unrealized gain on equity securities and the adjustmentnecessary to adopt SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans”.

*Business segment—*

The Company operates in asingle industry, the copper industry. Prior to the April 1, 2005 acquisition of MM, the Company determinedthat its operations in Peru fell within one segment.  With the acquisition of MM the Companycontinues to operate principally in the copper industry.  However, because of the demands of managingoperations in two countries, effective April 1, 2005, Company management viewsthe new Southern Copper as having three operating segments and manages on thebasis of these segments.  The segmentsidentified by the Company are: 1) Peruvian operations, which include the twoopen pit copper mines in Peru and the plants and services supporting such mines.  2) Mexican open pit mines, which include 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 and 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 OperatingOfficer of the Company focuses on operating income as measure of performance toevaluate different segments, and to make decisions to allocate resources to thereported segments.

*New accounting pronouncements—*

InSeptember 2006, the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin No.108 (SAB 108), “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements”. SAB 108 provides guidance on the consideration of the effects ofprior year misstatements in quantifying current year misstatements for thepurpose of a materiality assessment. SAB 108 permits existing public companiesto record the cumulative effect of initially applying this approach in thefiscal year ending after November 15, 2006 by recording necessary correctingadjustments to the carrying values of assets and liabilities as of thebeginning of that year with the offsetting adjustment recorded to the openingbalance of retained earnings.  Theadoption of this Staff Accounting Bulleting did not have a material impact onour financial reporting and disclosures.

In September 2006 theFASB published SFAS No. 157 “Fair Value Measurements”, which provides enhancedguidance for using fair value to measure assets and liabilities. SFAS No. 157establishes a common definition of fair value, provides a framework for 

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measuring fair valueunder U.S. GAAP and expands disclosure requirements about fair valuemeasurements. SFAS No. 157 is effective for financial statements issued infiscal years beginning after November 15, 2007, and interim periods within thosefiscal years.  We are currentlyevaluating the impact, if any, the adoption of SFAS no. 157 will have on ourfinancial reporting and disclosures.

In June 2006, FASB issuedFASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes —aninterpretation of FASB Statement No. 109” (FIN 48), which prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. We will adopt FIN 48 effective January 1, 2007 and we are currentlyevaluating the impact the adoption of FIN 48 will have on our financialreporting and disclosure requirements.

In March 2006 the FASBpublished SFAS No. 156 “Accounting for Servicing of Financial Assets anamendment of FASB Statement No. 140”. This statement requires that all separately recognized servicing assetsand servicing liabilities be initially measured at fair value, ifpracticable.  The Board concluded thatfair value is the most relevant measurement attribute for the initial recognitionof all servicing assets and SFAS No. 156 permits, but does not require, thesubsequent measurement of servicing assets and servicing liabilities at fairvalue.  An entity that uses derivativeinstruments to mitigate the risks inherent in servicing assets and servicingliabilities is required to account for those derivative instruments at fairvalue.  Under this Statement, an entitycan elect subsequent fair value measurement of its servicing assets andservicing liabilities by class, thus simplifying its accounting and providingfor income statement recognition of the potential offsetting changes in fairvalue of the servicing assets, servicing liabilities, and related derivativeinstruments.  An entity that elects tosubsequently measure servicing assets and servicing liabilities at fair valueis expected to recognize declines in fair value of the servicing assets andservicing liabilities more consistently than by reporting other-than-temporaryimpairments.

The Board decided torequire additional disclosures and separate presentation in the statement offinancial position of the carrying amounts of servicing assets and servicingliabilities that an entity elects to subsequently measure at fair value toaddress concerns about comparability that may result from the use of electivemeasurement methods.

SFAS No. 156 will beadopted by the Company as of the beginning of the fiscal year that begins afterSeptember 15, 2006. The Company believes that this statement will not have anymaterial impact on its financial position or results of operations.

In February 2006 the FASBpublished SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments” anamendment of SFAS No. 133 and 140.  Thisstatement improves financial reporting by eliminating the exemption fromapplying statement 133 to interests in securitized financial assets so thatsimilar instruments are accounted for similarly regardless of the form of theinstruments.  This statement alsoimproves financial reporting by allowing a preparer to elect fair valuemeasurement at acquisition, at issuance or when a previously recognizedfinancial instrument is subject 

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to a remeasurement (newbasis) event, on an instrument-by-instrument basis, in cases in which aderivative would otherwise have to be bifurcated.  Providing a fair value measurement electionalso results in more financial instruments being measured at what the Boardregards as the most relevant attribute for financial instruments, fair value.  SFAS 155 will be effective for allinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company believes that this statement will not have any materialimpact on its financial position or results of operations.

**NOTE 3- MARKETABLE SECURITIES**

Commencingin 2006 the Company began making short term investments (90 days to 1 year). In2006, the Company earned $9.3 million on these investments, which were recordedin interest income on the consolidated combined statement of earnings.  The investments contain interest rates whichare above the prevailing market rates. At December 31, 2006 the Company holds$280 million in investments of these types, as follows ($ in millions):
| **Investment**                                                                                                                                                                                               | ** ** | **Investment  Book Value** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| 3-month note,  issued Dec 12, 2006 with extensions every 3 months up to a maximum of 12  months, with an interest rate of 7%, a barrier range is established by a pool  of Mexican and Peruvian bond issues. |       | $                               | 200.0      |   |
| 180-day note,  maturing June 12, 2007 with an interest rate of 6%, with barrier range of  $37.669 and $69.957 of SCC stock price, NYSE symbol PCU.                                                           |       | 40.0                            |       |
| 180-day note,  maturing June 28, 2007 with an interest rate of 6%, with barrier range of  $38.738 and $71.942 of SCC stock price, NYSE symbol PCU.                                                           |       | 20.0                            |       |
| 180-day note,  maturing June 23, 2007 with an interest rate of 6%, with barrier range of  $37.7205 and $70.0523 of SCC stock price, NYSE symbol PCU.                                                         |       | 20.0                            |       |
|                                                                                                                                                                                                         |       | $                               | 280.0      |   |

 

Dueto the short term nature of the investments, current value is deemed toapproximate fair value.

Certainof these investments are indexed to SCC common stock while others are indexedto certain bond pools.  Both types ofindexation clauses could cause the principal of the investment to be reduced ifthe established ranges are breached. These indexation clauses have been deemedto be bifurcated embedded derivatives and have been subject to valuation usinga binomial model.  At December 31, 2006,valuing the embedded derivatives at fair value resulted in a liability of $11.6million.  This liability has been includedin other accounts payable, and is recorded as loss on derivative instruments inthe income statement.

**NOTE 4-INVENTORIES:**
| ** **             | ** ** | **As of December 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| **(in millions)** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Metals:                |       |                                  |       |   |   |
| Finished goods         |       | $                                     | 116.1      |   | $ | 106.9 |   |
| Work-in-process        |       | 121.9                                 |       | 135.4 |   |
| Supplies               |       | 175.7                                 |       | 153.5 |   |
| Total inventories      |       | $                                     | 413.7      |   | $ | 395.8 |   |

 

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**NOTE 5-PROPERTY:**
| ** **                                            | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Buildings and  equipment                              |       | $                                     | 5,615.2    |   | $ | 5,266.1 |   |
| Construction in  progress                             |       | 579.7                                 |       | 565.8 |   |
| Mine development                                      |       | 240.3                                 |       | 239.6 |   |
| Land, other than  mineral                             |       | 73.6                                  |       | 66.4 |   |
| Total property                                        |       | 6,508.8                               |       | 6,137.9 |   |
| Accumulated  depreciation, amortization and depletion |       | (2,970.5                              | )          | (2,811.8 | ) |
| Total property, net                                   |       | $                                     | 3,538.3    |   | $ | 3,326.1 |   |

 

Depreciationexpense for the years ended December 31, 2006, 2005 and 2004 amounted to $221.9million, $201.1 million and $153.4 million, respectively.

**NOTE 6-CAPITALIZED MINE STRIPPING COSTS AND LEACHABLEMATERIAL:**
| ** **                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| **(in millions)**           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Capitalized mine  stripping cost |       | $                                     | —     |   | $ | 418.2 |   |
| Accumulated  amortization        |       | —                                |       | (128.8 | ) |
| Capitalized mine  stripping, net |       | $                                     | —     |   | $ | 289.4 |   |

 
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**               | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Capitalized  leachable material      |       | $                                     | 323.8      |   | $ | 252.0 |   |
| Accumulated  amortization            |       | (92.3                                 | )          | (41.9 | ) |
| Capitalized leachable material,  net |       | $                                     | 231.5      |   | $ | 210.1 |   |

 

EffectiveJanuary 1, 2006, the Company adopted EITF 04-6, ratified by the FASB, whichstates that stripping costs incurred during the production phase of a mine arevariable production costs that should be included in the cost of inventoryproduced.  Accordingly, the Companyreversed $289.4 million of net cumulative capitalized stripping cost, recordinga net charge of $166.6 million to retained earnings after recognition ofworkers’ participation and tax benefit of $122.8 million.

Amortizationof mine stripping is included in “Depreciation, amortization and depletion” andamounted to $67.5 million and $19.7 million in 2005 and 2004,respectively.  Amortization of leachablematerial is included in “Depreciation, amortization and depletion” and amountedto $50.4 million, $5.7 million and $16.6 million in 2006, 2005 and 2004,respectively.

TheCompany’s policy of deferring mine stripping costs (through 2005)and leachablematerial decreased operating costs by $19.3 million, $42.8 million and $56.3million in 2006, 2005 and 2004, respectively, as compared to what such amountswould have been if the Company expensed mine stripping costs and leachablematerial costs as incurred.

**NOTE 7-INTANGIBLE ASSETS:**
| ** **                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                    | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Mining  concessions                       |       | $                                     | 121.2      |   | $ | 121.2 |   |
| Mine engineering  and development studies |       | 6.0                                   |       | 6.0 |   |
| Goodwill                                  |       | 17.0                                  |       | 17.0 |   |
|                                      |       | 144.2                                 |       | 144.2 |   |
| Accumulated  amortization                 |       | (26.1                                 | )          | (23.3 | ) |
| Intangible assets, net                    |       | $                                     | 118.1      |   | $ | 120.9 |   |

 

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Amortizationexpense on intangibles was $2.8 million, $2.9 million and $2.8 million for theyears ended December 31, 2006, 2005 and 2004, respectively.  The estimated aggregate amortization expensefor intangibles is $16.2 million for the years 2007 through 2011, approximately$3.2 million per year.

**NOTE 8-INCOME TAXES:**

Thecomponents of the provision for income taxes are as follows:
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| **(in millions)**            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S. federal and  state:          |       |                                       |       |   |   |   |   |
| Current                           |       | $                                          | (4.0       | ) | $ | 13.4 |   | $ | 21.7 |   |
| Deferred                          |       | 22.8                                       |       | — |   | (8.2 | ) |
|                              |       | 18.8                                       |       | 13.4 |   | 13.5 |   |
| Foreign (Peru  and Mexico):       |       |                                       |       |   |   |   |   |
| Current                           |       | 996.7                                      |       | 618.6 |   | 356.6 |   |
| Deferred                          |       | (56.4                                      | )          | (42.3 | ) | 63.6 |   |
|                              |       | 940.3                                      |       | 576.3 |   | 420.2 |   |
| Total provision for  income taxes |       | $                                          | 959.1      |   | $ | 589.7 |   | $ | 433.7 |   |

 

Thereconciliation of the statutory income tax rate to the effective tax rate is asfollows:
| ** **                                                      | ** ** | **For the years ended  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected tax                                                    |       | 30.0                                                      | %          | 30.0 | % | 30.0 | % |
|                                                            |       |                                                      |       |   |   |   |   |
| Effect of income  taxed at a rate other than the statutory rate |       | 0.4                                                       |       | 1.5 |   | 3.9 |   |
| Permanent  differences                                          |       | 1.8                                                       |       | 0.7 |   | 1.2 |   |
| Effect of tax  rate change in Mexico                            |       | (0.1                                                      | )          | (2.5 | ) | (1.2 | ) |
| Loss of tax  benefits upon corporate reorganization             |       | —                                                    |       | (1.8 | ) | — |   |
| Reduction in  valuation allowance                               |       | (2.7                                                      | )          | — |   | (4.1 | ) |
| Adjustment to  deferred taxes                                   |       | 2.9                                                       |       | — |   | — |   |
| Other                                                           |       | (0.4)                                                     |       | 1.5 |   | 0.6 |   |
| Effective income tax  rate                                      |       | 31.9                                                      | %          | 29.4 | % | 30.4 | % |

 

Theeffective tax rate presented above is a combined effective tax rate for SCCincluding MM.  The statutory income taxrate has changed from an expected tax of 35% to 30% since the major componentof the provision for income taxes is from the foreign jurisdictions of Peru andMexico. The statutory income tax rate in Mexico has decreased over the pastthree years.  For all of the years presented,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 in statutorytax 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 MM, such asthe tax inflation effect, which requires that inflation be recognized for taxpurposes (where it is not for financial reporting purposes).  Other items relate specifically to SCC suchas the percentage depletion.  A specialin depth analysis of Peruvian and U.S. deferred taxes resulted in the aboveadjustment for 2006.  The impact of thechange in the valuation allowance reflects the change in valuation allowancesfor the combined companies which is further described below.

Deferredtaxes include the U.S., Peruvian and Mexican tax effects of the following typesof temporary differences and carryforwards, net of foreign tax credit effects:

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| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                             | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Current:                                           |       |                                  |       |   |   |
| Inventories                                        |       | $                                     | (5.4       | ) | $ | 28.4 |   |
| Other                                              |       | (1.0                                  | )          | (1.3 | ) |
| Other accrued expenses                             |       | (59.2                                 | )          | (32.3 | ) |
| Net current  deferred tax liability                |       | (65.6                                 | )          | (5.2) |   |
| Non-current:                                       |       |                                  |       |   |   |
| Property and equipment                             |       | 382.9                                 |       | 186.2 |   |
| Tax loss carryforwards                             |       | —                                |       | (2.7 | ) |
| Recoverable asset tax                              |       | —                                |       | (0.3 | ) |
| AMT credit carryforwards                           |       | (29.2                                 | )          | (32.2 | ) |
| Deferred charges                                   |       | 77.1                                  |       | 69.4 |   |
| Foreign tax credit carryforwards                   |       | (102.4                                | )          | (49.0 | ) |
| Other accrued expenses                             |       | (26.7                                 | )          | (34.7 | ) |
| Loss on marketable securities                      |       | (7.9                                  | )          | — |   |
| Sales adjustment / price adjustment                |       | (38.4                                 | )          | — |   |
| Labor share buyback                                |       | (21.6                                 | )          | — |   |
| Other                                              |       | (53.4                                 | )          | 41.1 |   |
|                                               |       |                                  |       |   |   |
| Less, valuation  allowance for deferred tax assets |       | —                                |       | 81.2 |   |
| Net non-current  deferred tax liability            |       | 180.4                                 |       | 259.0 |   |
| Total net  deferred tax liability                  |       | $                                     | 114.8      |   | $ | 253.8 |   |

 

*U.S.Tax Matters—*

AtDecember 31, 2006, the foreign tax credit carryforward available to reducepossible future U.S. income tax amounted to approximately $102.4 million,expiring in 2012 through 2016.   Noforeign tax credit carryforwards expired in 2006 or 2005.  The minimum tax credit carryforward availableto reduce possible future U.S. income tax, which was $29.2 million at December31, 2006, is not subject to expiration.

*Peruvian Tax Matters—*

TheCompany obtains income tax credits in Peru for value-added taxes paid inconnection with the purchase of capital equipment and other goods and services,employed in its operations and records these credits as a prepaid expense.  Under current Peruvian law, the Company isentitled to use the credits against its Peruvian income tax liability or toreceive a refund.  The carrying value ofthese Peruvian tax credits approximates their net realizable value.

Inaccordance with a 1996 agreement with the Peruvian government, income generatedfrom the SX/EW operations is taxed at a fixed rate of 30% through the year2010.

*Mexican Tax Matters—*

MineraMexico and its subsidiaries obtained authorization from the Mexican taxauthorities to file a consolidated income and asset tax return in Mexico.

Inaccordance with Mexican income tax law, Mexican subsidiaries are subject topaying the greater of the asset tax or income tax.  The Mexican income tax law enacted January 1,2002, reduced the 35% federal income tax rate by one percentage point each yearuntil it reached 32% in 2005.

As result of amendmentsto the income tax law approved on November 13, 2004, the income tax rate wasfurther reduced from the 33% rate applicable in 2004 to a 30% rate in 2005, 29%in 2006 and it will be further reduced to 28% in 2007.  In addition, effective with the fiscal year2005, 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 

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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.

Assettax is calculated by applying a 1.8% tax rate to Minera Mexico’s assetposition, as defined by the law, and is payable only to the extent that itexceeds the income tax payable for the same period.  If in any year asset tax exceeds the incometax payable, the asset tax payment for such excess may be reduced by the amountby which the income tax exceeded the asset tax in the three preceding years andany required payment of the asset tax is creditable against the excess of theincome tax over the asset tax of the following ten years.

Outof period adjustement—

During2006, the Company completed a comprehensive deferred tax analysis. Thisanalysis was performed as of December 31, 2005, 2004 and 2003. The resultof this analysis was an increase in deferred tax liabilities of$85.4 million and a release of valuation allowance of $81.2 million.The net effect of this analysis is $4.2 million.

In thisanalysis, the Company trued up its Peru and US gross temporary differences andthen measured its U.S. deferred taxes by applying the regular statutory taxrate (35%). This recalculation exercise resulted in cumulative additionaldeferred tax liabilities equaling $85.4 million as of December 31,2005.

Asa second component to the comprehensive deferred tax analysis, the Companyundertook a scheduling exercise of certain carryforward credits relating to USminimum tax and foreign tax credits. Prior to this scheduling exercise, theCompany had created a valuation allowance related to US minimum tax and foreigntax credits. The scheduling exercise component of the comprehensive analysis resultedin the Company releasing the December 31, 2004 cumulative valuationallowance of $81.2 million.

Thecombined net effect of the deferred tax analysis was an increase in the total incometax expense of $4.2 million. This adjustment is being recorded as part ofincome tax expense in 2006. The Company accounted for this adjustment as an outof period adjustment as it falls below the materiality levels established inthe Company’s SAB 108 analysis.

**NOTE 9-WORKERS’ PARTICIPATION:**

TheCompany’s operations in Peru and Mexico are subject to statutory workers’participation.

InPeru, the provision for workers’ participation is calculated at 8% of pre-taxearnings.  The current portion of thisparticipation, which is accrued during the year, is based on Branch’s taxableincome and is distributed to workers following determination of final resultsfor the year.  In Mexico, workers’participation is determined using the guidelines established in the Mexicanincome tax law at a rate of 10% of pre-tax earnings as adjusted by the tax law.

Theprovision for workers’ participation is included in “Cost of sales (exclusiveof depreciation, amortization and depletion)” in the consolidated combinedstatement of earnings.  For the yearsended December 31, 2006, 2005 and 2004, workers’ participation expense was$271.5 million, $219.1 million and $93.6 million, respectively.

InMay 2005, the Mexican Supreme Court rendered a decision that changed the methodof computing the amount of statutory workers’ profit sharing required to bepaid by some Mexican companies, including the Company’s Mexicansubsidiary.  The Supreme Court’s rulingin effect prohibited the application of net operating loss carryforwards incomputing the income used as the base for determining the workers’ profitsharing amounts. As a result the Company recognized in its 2005 results ofoperations a charge of $36.3 million for workers’ profit sharing related to2004.

**NOTE 10-ASSET RETIREMENT OBLIGATION**

On January 1, 2003, theCompany adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”,which established a uniform methodology of accounting for estimated reclamationand abandonment costs.  The cumulativeeffect of the change of accounting principle, net of income tax was a charge toincome of $1.5 million.  As part of thischange the Company recorded an asset retirement obligation of $4.9 million andincreased net property $2.5 million. This adoption established the liability for a portion of the 

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Company’slong-lived assets in Peru, and includes a dam on the Torata River, close to theCuajone mine and the SX/EW facility.

In2005 the Company added an estimated asset retirement obligation for its miningproperties in Peru, as required by the Mine Closure Law, enacted in 2003 andregulated in 2005.  In accordance withthe law a conceptual mine closure plan, without costs, was submitted to thePeruvian Ministry of Energy and Mines (“MEM”) in August 2006.  The plan is subject to review by MEM in 45days.  After the MEM review the Companywill have 90 days to prepare and resubmit the mine closure plan, includingcosts, which will then be subject to MEM approval and open to public discussionand comment in the area of the Company operations.  As of the end of February 2007, the Companyis still awaiting MEM’s initial review. The Company has made an estimated provision  for this liability in its financialstatements, but believes that this estimate should be viewed with caution, pendingfinal approval of the mine closure plan, expected later in 2007.

Theclosure cost recognized for this liability includes the estimated cost requiredat the Peruvian operations, based on the Company’s experience and includes costat the Ilo smelter, the tailing disposal, dismantling of the Toquepala andCuajone concentrators, shops and auxiliary services.  In this connection we recorded an additionalasset retirement liability in 2005 of $5.2 million for this new law andincreased net property $4.6 million.

Thefollowing is a reconciliation of the asset retirement obligation for the twoyears ended December 31, 2005 and 2006 (in millions):

| Balance January 1, 2005         |   | $      | 5.6    |   |
|---------------------------------|--------|--------|--------|--------|
| Additions, changes in estimates |   | 5.2    |   |
| Accretion expense               |   | 0.4    |   |
|                            |   |   |   |
| Balance, December 31, 2005      |   | 11.2   |   |
| Additions, changes in estimates |   | — |   |
| Accretion expense               |   | 1.0    |   |
|                            |   |   |   |
| Balance,  December 31, 2006     |   | $      | 12.2   |   |

 

**NOTE 11-FINANCINGS:**

*Long term debt:*
| ** **                                                                                                                                                   | ** ** | **As of  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| **(in millions)**                                                                                                                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| **SCC:**                                                                                                                                                     |       |                    |       |   |   |
| 6.375% Notes due 2015 ($200 million face amount,  less unamortized discount of $0.9 million and $1.0 million at December 31,  2006 and 2005, respectively)   |       | $                       | 199.1      |   | $ | 199.0 |   |
| 7.500% Notes due 2035 ($1,000 million face amount,  less unamortized discount of $16.0 million and $5.2 million at December  31,2006 and 2005, respectively) |       | 984.0                   |       | 594.8 |   |
| 6.60%** ** Mitsui credit agreement due 2013 (5.92% at  December 31, 2005)                                                                               |       | 70.0                    |       | 80.0 |   |
| **Minera  Mexico:**                                                                                                                                          |       |                    |       |   |   |
| 8.25% Yankee  bonds—Series A due 2008                                                                                                                   |       | 150.0                   |       | 173.3 |   |
| 9.25% Yankee  bonds—Series B due 2028                                                                                                                   |       | 125.0                   |       | 125.0 |   |
| Total debt                                                                                                                                                   |       | 1,528.1                 |       | 1,172.1 |   |
| Less, current  portion                                                                                                                                       |       | (10.0                   | )          | (10.0 | ) |
| Total long-term  debt                                                                                                                                        |       | $                       | 1,518.1    |   | $ | 1,162.1 |   |

 

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In1998, Minera Mexico issued $500 million of unsecured debt, which are referredto as Yankee bonds.  These bonds wereoffered in two series: Series A for $375 million, with an interest rate of8.25% and a 2008 maturity, and Series B for $125 million, with an interest rateof 9.25% and a 2028 maturity date. During 2006 and 2005, the Company repurchased $23.3 million and $143.0million, respectively of the Series A bonds. In connection with this purchase the Company paid a premium of $1.1million and $8.6 million, in 2006 and 2005, respectively, which is included inthe consolidated combined statement of earnings on the line “Loss on debtprepayments”.  The bonds contain a covenantrequiring Minera Mexico to maintain a ratio of EBITDA to interest expense ofnot less than 2.5 to 1.0 as such terms are defined by the facility.  At December 31, 2006, Minera Mexico is incompliance with this covenant.

In1999, SCC entered a $100 million, 15-year loan agreement with Mitsui.  The interest rate for this loan is theJapanese LIBO rate plus 1.25% (Japanese LIBO for this loan at December 31, 2006was 5.35%).  The Mitsui credit agreementis collateralized by pledges of receivables on 31,000 tons of copper peryear.  The Mitsui agreement requires theCompany to maintain a minimum stockholders’ equity of $750 million and aspecific ratio of debt to equity. Reduction of Grupo Mexico’s direct or indirect voting interest in theCompany to less than a majority would constitute an event of default under theMitsui agreement.  At December 31, 2006,the Company is in compliance with these covenants.

In2005, the Company prepaid a Minera Mexico $600 million Citibank creditfacility.  In connection with theprepayment of this facility, the Company wrote off $10.2 million of deferredfinancing costs which is recorded in the consolidated combined statement ofearning on the line “Interest expense”.

InJanuary 2005, the Company signed a $200 million credit facility with a group ofbanks led by Citibank, N.A.  Proceeds ofthis credit facility were used to prepay $199 million the outstanding bonds ofthe Company’s Peruvian bond program.  TheCompany capitalized $2.8 million of costs associated with this facility.  The Company paid a prepayment penalty of 1%,or $2.0 million, to the Peruvian bondholders. Additionally, the Company wrote off $2.3 million of previouslycapitalized bond issuance cost.  The $2.0million penalty and the $2.3 million amortization of bond issuance costs areincluded in the earnings statement under “Loss or debt prepayments” and “Interestexpense”, respectively.  On July 28, 2005this credit facility was repaid and the Company wrote off $2.5 million ofdeferred financing cost.

OnJuly 27, 2005 the Company issued $200 million 6.375% Notes due 2015 at adiscount of $1.1 million and $600 million 7.5% Notes due 2035, at a discount of$5.3 million.  The notes are seniorunsecured obligations of the Company. The Company capitalized $8.8 million of costs associated with thisfacility and are included in “Other assets, net”, non-current on theConsolidated combined balance sheet.  Thenet proceeds from the issuance and sale of the notes were used to repayoutstanding indebtedness of the Company’s Peruvian and Mexican Operations,under its $200 million and $600 million ($480 million outstanding) creditfacilities, respectively, and the balance was used for general corporatepurposes.  The Company filed a RegistrationStatement on Form S-4 with respect to these Notes on October 28, 2005.  On January 3, 2006 the Company completed anexchange offer for $200 million, 6.375% Notes due 2015 and $600 million, 7.5%Notes due 2035.  In the exchange offer,$197.4 million of the 6.375% old notes due 2015 were tendered in exchange foran equivalent amount of new notes and an aggregate of $590.5 million of the7.5% old notes due 2035 were tendered in exchange for an equivalent amount ofnew notes.  The new notes have been registeredunder U.S. securities law.  Theindentures relating to the notes contain certain covenants, includinglimitations on liens, limitations on sale and leaseback transactions, rights ofthe holders of the notes upon the occurrence of a change of control triggeringevent, limitations on subsidiary indebtedness and limitations onconsolidations, mergers, sales or conveyances. All of these limitations 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, 2006 the Company is incompliance with these covenants.

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On May 9, 2006, theCompany issued an additional $400 million 7.5% notes due 2035.  These notes are in addition to the $600 millionof existing 7.5% notes due 2035 that were issued in July 2005.  The current transaction was issued at aspread of +240 basis points over the 30-year U.S. Treasury bond.  The original issue in July 2005 was issued ata spread of +315 basis points over the 30-year U.S. Treasury bond.  The notes are Investment Grade rated Baa2 byMoody’s, BBB- by Standard & Poor’s, and BBB- by Fitch. The notes wereissued at a discount of $10.8 million. The Company capitalized $3.2 million ofcost associated with this facility and is included in “Other assets, net”non-current on the consolidated combined balance sheet. The Company expect touse  proceeds from the May 2006 issuancein its expansion programs, which includes construction of a new SX/EW plant atthe Cananea mine, the initial cost to develop the Los Chancas and Tia Mariaprojects, the remaining investment to complete the Ilo smelter modernizationand perhaps for a possible expansion of the productive capacity of the Ilosmelter and refinery.

The notes issued in July2005 and the new notes issued in May 2006 are treated as a single series ofnotes under the indenture, including for purposes of covenants, waivers andamendments.  The Company has filed aregistration statement with the Securities and Exchange Commission, whichregistration statement has become effective, to exchange the new notes fornotes registered under the Securities Act of 1933, as amended.

Aggregatematurities of the outstanding borrowings at December 31, 2006, are as follows:

| (in millions) | ** ** | ** **             | ** ** |
|--------------------|------------|------------------------|------------|
| **Year**           | ** ** | **Principal Due** | ** ** |
| 2007               |       | $                      | 10.0       |   |
| 2008               |       | 160.0                  |       |
| 2009               |       | 10.0                   |       |
| 2010               |       | 10.0                   |       |
| 2011               |       | 10.0                   |       |
| Thereafter         |       | 1,345.0                |       |
| Total              |       | $                      | 1,545.0    |   |

 

Totaldebt maturities do not include the debt discount valuation account of $16.9million.

AtDecember 31, 2006 and 2005, other assets included $7.3 million and $7.4million, respectively, held in escrow accounts as required by the Company’sloan agreements. The funds are released from escrow as scheduled loanrepayments are made.

AtDecember 31, 2006 and 2005, the balance of capitalized debt issuance costs was$12.3 million and $10.2 million, respectively. Amortization charged to interest expense was $1.6 million, $4.1 millionand $5.1 million in 2006, 2005 and 2004, respectively.

**NOTE 12-BENEFIT PLANS:**

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132(R)”. This standard requires employers torecognize the underfunded or overfunded status of defined benefit pension andpostretirement plans as an asset or liability in its statement of financialposition, and recognize changes in the funded status in the year in which thechanges occur through accumulated other comprehensive income, which is acomponent of stockholders’ equity.  TheCompany adopted this standard as of December 31, 2006. 

SCCDefined Benefit Pension Plans—

TheCompany has two noncontributory defined benefit pension plans covering formersalaried employees in the United States and certain former employees inPeru.  Effective October 31, 2000, theBoard of Directors amended the qualified pension plan to suspend the accrual ofbenefits.

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Thecomponents of net periodic benefit costs calculated in accordance with SFAS No.87 “Employers’ Accounting for Pensions”, using December 31 as ameasurement date, consist of the following:
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| **(in millions)**         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest cost                  |       | $                                          | 0.6        |   | $ | 0.6 |   | $ | 0.7 |   |
| Expected return on plan assets |       | (0.5                                       | )          | (0.5 | ) | (0.6 | ) |
| Amortization of net loss       |       | 0.1                                        |       | — |   | — |   |
| Net periodic  benefit cost     |       | $                                          | 0.2        |   | $ | 0.1 |   | $ | 0.1 |   |

 

Thechange in benefit obligation and plan assets and a reconciliation of fundedstatus are as follows:
| ** **                                                                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Change in Benefit Obligation:                                                           |       |                                  |       |   |   |
| Projected benefit obligation at beginning of year                                       |       | $                                     | 11.9       |   | $ | 11.5 |   |
| Interest cost                                                                           |       | 0.7                                   |       | 0.6 |   |
| Benefits paid                                                                           |       | (0.9                                  | )          | (0.9 | ) |
| Actuarial gain (loss)                                                                   |       | 0.7                                   |       | 0.7 |   |
| Projected benefit obligation at end of year                                             |       | $                                     | 12.4       |   | $ | 11.9 |   |
|                                                                                    |       |                                  |       |   |   |
| Change in Plan Assets:                                                                  |       |                                  |       |   |   |
| Fair value of plan assets at beginning of year                                          |       | $                                     | 12.4       |   | $ | 12.3 |   |
| Actual return on plan assets                                                            |       | 0.5                                   |       | 0.3 |   |
| Employer contributions                                                                  |       | —                                |       | 0.8 |   |
| Benefits paid                                                                           |       | (0.9                                  | )          | (0.9 | ) |
| Administrative expenses                                                                 |       | —                                |       | (0.1 | ) |
| Fair value of plan assets at end of year                                                |       | $                                     | 12.0       |   | $ | 12.4 |   |
|                                                                                    |       |                                  |       |   |   |
| Funded Status at end of year:                                                           |       | $                                     | ($0.4      | ) | $ | (0.5 | ) |
|                                                                                    |       |                                  |       |   |   |
| SFAS No. 158 amounts recognized in statement of  financial position consists of:        |       |                                  |       |   |   |
| Non current assets                                                                      |       | —                                |       | N/A |   |
| Current liabilities                                                                     |       | —                                |       | N/A |   |
| Non current liabilities                                                                 |       | $                                     | 0.4        |   | N/A |   |
| Total                                                                                   |       | $                                     | 0.4        |   | N/A |   |
|                                                                                    |       |                                  |       |   |   |
| SFAS No. 158 amounts recognized in accumulated other  comprehensive income consists of: |       |                                  |       |   |   |
| Net loss (gain) net of  income tax                                                      |       | $                                     | 2.4        |   | N/A |   |
| Prior service cost  (credit)                                                            |       | —                                |       | N/A |   |
| Transition obligation  (asset)                                                          |       | —                                |       | N/A |   |
| Total (net of income tax of $1.3 million)                                               |       | $                                     | 2.4        |   | N/A |   |

 

Theassumptions used to determine the pension obligation and seniority premiums asof year end and net cost in the ensuing year were:
| Discount rate                                    |   | 5.5 | %      |
|--------------------------------------------------|--------|-----|--------|
| Expected long-term rate of return on plan assets |   | 4.5 | %      |
| Rate of  compensation increase                   |   | N/A |   |

 

Thescheduled maturities of the benefits expected to be paid in each of the nextfive years, and thereafter, are as follows:

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|              | ** ** | **Expected  Benefit Payments** | ** ** |
|--------------|------------|-------------------------------------|------------|
| ** **   | ** ** | **(in millions)**              | ** ** |
| Year         |       |                                |       |   |
| 2007         |       | $                                   | 0.9        |   |
| 2008         |       | 0.9                                 |       |
| 2009         |       | 0.9                                 |       |
| 2010         |       | 0.9                                 |       |
| 2011         |       | 0.9                                 |       |
| 2012 to 2016 |       | 4.5                                 |       |
| Total        |       | $                                   | 9.0        |   |
|              |            |                                     |            |  |  |

 

TheCompany’s funding policy is to contribute amounts to the qualified plansufficient to meet the minimum funding requirements set forth in the EmployeeRetirement Income Security Act of 1974, plus such additional amounts as theCompany may determine to be appropriate. Plan assets are invested in commingledstock and bond funds.

TheCompany’s policy for determining asset mix-targets includes periodicconsultation with recognized third party investment consultants.  The expected long-term rate of return on planassets is updated periodically, taking into consideration asset allocations,historical returns and the current economic environment.  Based on these factors we expect our assetswill earn an average of 4.5% per annum assuming our long-term mix will beconsistent 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.

*SCC Post-retirement Health Care Plan—*

TheCompany adopted the post-retirement health care plan for retired salariedemployees eligible for Medicare on May 1, 1996. The plan is unfunded.

EffectiveOctober 31, 2000, the health care plan for retirees was terminated and theCompany informed retirees that they would be covered by the then in effectpost-retirement health care plan of ASARCO, a former shareholder of the Companyand a subsidiary of Grupo Mexico, which offered substantially the same benefitsand required the same contributions.  Theplan is accounted for in accordance with SFAS No. 106, “Employers’ Accountingfor Postretirement Benefits Other Than Pensions”, as amended by SFAS No. 158.

Thecomponents of net period benefit costs are as follows:
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| **(in millions)**     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost               |       | $                                          | —     |   | $ | — |   | $ | — |   |
| Interest cost              |       | 0.1                                        |       | 0.1 |   | 0.1 |   |
| Net periodic benefit  cost |       | $                                          | 0.1        |   | $ | 0.1 |   | $ | 0.1 |   |

 

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Thechange in benefit obligation and a reconciliation of funded status are asfollows:
| ** **                                                                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Change in Benefit Obligation:                                                           |       |                                  |       |   |   |
| Benefit obligation at  beginning of year                                                |       | $                                     | 1.4        |   | $ | 1.4 |   |
| Interest cost                                                                           |       | 0.1                                   |       | 0.1 |   |
| Plan Amendments                                                                         |       | —                                |       | — |   |
| Benefits paid                                                                           |       | (0.1                                  | )          | (0.1 | ) |
| Actuarial (gain) or  loss                                                               |       | —                                |       | — |   |
| Benefit obligation at end of year                                                       |       | $                                     | 1.4        |   | $ | 1.4 |   |
|                                                                                    |       |                                  |       |   |   |
| Change in Plan Assets:                                                                  |       |                                  |       |   |   |
| Fair value of plan  assets at beginning of year                                         |       | $                                     | —     |   | $ | — |   |
| Employer contributions                                                                  |       | 0.1                                   |       | 0.1 |   |
| Benefits paid                                                                           |       | (0.1                                  | )          | (0.1 | ) |
| Fair value of plan assets at end of year                                                |       | $                                     | —     |   | $ | — |   |
|                                                                                    |       |                                  |       |   |   |
| Funded status at end of year                                                            |       | $                                     | (1.4       | ) | $ | (1.4 | ) |
|                                                                                    |       |                                  |       |   |   |
| SFAS No. 158 amounts recognized in statement of  financial position consists of:        |       |                                  |       |   |   |
| Non current assets                                                                      |       | —                                |       | N/A |   |
| Current liabilities                                                                     |       | (0.1                                  | )          | N/A |   |
| Non current liabilities                                                                 |       | (1.3                                  | )          | N/A |   |
| Total                                                                                   |       | $                                     | (1.4       | ) | N/A |   |
|                                                                                    |       |                                  |       |   |   |
| SFAS No. 158 amounts recognized in accumulated other  comprehensive income consists of: |       |                                  |       |   |   |
| Net loss (gain)                                                                         |       | $                                     | 0.4        |   | N/A |   |
| Prior service cost  (credit)                                                            |       | (0.3                                  | )          | N/A |   |
| Total (net of income tax)                                                               |       | $                                     | 0.1        |   | N/A |   |

 

Thediscount rate used in the calculation of other post-retirement benefitsand cost as of December 31, 2006 and 2005 was 5.5%.

Thebenefits expected to be paid in each of the next five years, and thereafter,are as follows:

| (in millions) | ** ** | ** **                          | ** ** |
|--------------------|------------|-------------------------------------|------------|
| **Year**           | ** ** | **Expected  Benefit Payments** | ** ** |
| 2007               |       | $                                   | 0.1        |   |
| 2008               |       | 0.1                                 |       |
| 2009               |       | 0.1                                 |       |
| 2010               |       | 0.1                                 |       |
| 2011               |       | 0.1                                 |       |
| 2012 to 2016       |       | 0.5                                 |       |
| Total              |       | $                                   | 1.0        |   |

 

Formeasurement purposes, an 10% annual rate of increase in the per capita cost ofcovered health care benefits was assumed for 2006.  The rate is assumed to decrease gradually to5% for 2014 and remain at that level thereafter.

Assumedhealth care cost trend rates can have a significant effect on the amountreported for the health care plan.  A onepercentage-point change in assumed health care trend rate would not havea significant effect.

*Minera Mexico Defined Benefit Pension Plans—*

MineraMexico has established for both its salaried and union employees anon-contributory defined benefit pension plan. This plan is in addition to benefits granted by the Instituto Mexicanode Seguro Social (IMSS).

The benefits earned inthe Company’s defined benefit plan are based on salaries adjusted byinflation.   As Mexico has experienced aperiod of low inflation in recent years, the benefits earned from the IMSS haveexceeded those earned from the Company’s non-contributory defined benefitplan.  Due to this fact, and due to thefact that the Company wants assure the economic well being of its retiredemployees, the Company decided in 2006 

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tocreate a new defined contribution plan. Certain groups of salaried employees agreed to transfer from thenon-contributory defined benefit plan to the new defined contributionplan.  Benefits earned by participatingemployees as of January 1, 2006 were transferred into the new definedcontribution plan.  The initial transferof benefits from the non-contributory defined benefit plan to the new definedcontribution plan equaled $13.7 million.

Underthe new plan, the Company will make yearly contributions equaling 3% ofparticipating employee’s base salary.  In2006, the company recorded contribution expense of $1.1 million.

Thechange in plan was accounted for as a settlement under SFAS88, “Employee’sAccounting for Settlements and Curtailments of Deferred Benefit Pension Plansand for Termination Benefits.”  TheCompany recorded a $1.7 million settlement gain in relation to the change in plan.

Thecomponents of net periodic benefit costs calculated in accordance with SFAS No.87 “Employers Accounting for Pensions”, using December 31 as a measurementdate, consist of the following:
| ** **                             | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------|------------|
| **(in millions)**                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest cost                          |       | $                                                             | 1.8        |   | $ | 2.9 |   | $ | 2.6 |   |
| Service cost                           |       | 2.1                                                           |       | 2.6 |   | 2.1 |   |
| Expected return on plan assets         |       | (2.0                                                          | )          | 3.1 |   | (1.1 | ) |
| Amortization of transition assets, net |       | 0.0                                                           |       | (0.2 | ) | (0.2 | ) |
| Recognized net actuarial loss          |       | 0.0                                                           |       | 0.2 |   | 0.5 |   |
| Settlement (Gain)                      |       | (1.7                                                          | )          | — |   | — |   |
| Net period benefit cost                |       | $                                                             | 0.2        |   | $ | 8.6 |   | $ | 3.9 |   |

 

The change inbenefit obligation and plan assets are as follows:
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Change in benefit obligation:                     |       |                  |       |   |   |
| Projected benefit obligation at beginning of year |       | $                     | 42.1       |   | $ | 36.1 |   |
| Service cost                                      |       | 2.1                   |       | 2.6 |   |
| Interest cost                                     |       | 1.8                   |       | 2.9 |   |
| Actuarial (loss) gain, net                        |       | 3.9                   |       | 0.9 |   |
| Amendments                                        |       | 3.2                   |       | — |   |
| Settlements                                       |       | (14.7                 | )          | — |   |
| Benefits paid                                     |       | (1.7                  | )          | (2.3 | ) |
| Inflation adjustment                              |       | (0.6                  | )          | 1.9 |   |
| Projected benefit obligation at end of year       |       | $                     | 36.1       |   | $ | 42.1 |   |
|                                              |       |                  |       |   |   |
| Change in plan assets:                            |       |                  |       |   |   |
| Fair value of plan assets at beginning of year    |       | $                     | 36.6       |   | $ | 27.2 |   |
| Actuarial return on plan assets                   |       | 11.9                  |       | 9.4 |   |
| Employer contribution                             |       | (0.7                  | )          | — |   |
| Benefits paid                                     |       | (0.5                  | )          | — |   |
| Other transfer                                    |       | (13.7                 | )          | — |   |
| Fair value of  plan assets at end of year         |       | $                     | 33.6       |   | $ | 36.6 |   |

 

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Thepension plan liability is as follows:
| ** **                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Reconciliation of Funded Status:                                                        |       |                  |       |   |   |
| Funded status                                                                           |       | $                     | (2.5       | ) | $ | (5.5 | ) |
| Unrecognized prior service cost                                                         |       | —                |       | 2.5 |   |
| Unrecognized net actuarial gain                                                         |       | —                |       | (9.6 | ) |
| Unrecognized transition assets                                                          |       | —                |       | (1.3 | ) |
| Additional minimum liability                                                            |       | —                |       | (8.1 | ) |
| Net pension liability                                                                   |       | $                     | (2.5       | ) | $ | (22.0 | ) |
|                                                                                    |       |                  |       |   |   |
|                                                                                    |       |                  |       |   |   |
|                                                                                    |       |                  |       |   |   |
| SFAS No. 158 amounts recognized in statement of financial  position consists of:        |       |                  |       |   |   |
| Non current assets                                                                      |       | —                |       | N/A |   |
| Current liabilities                                                                     |       | —                |       | N/A |   |
| Non current liabilities                                                                 |       | (2.5                  | )          | N/A |   |
| Total                                                                                   |       | $                     | (2.5       | ) | N/A |   |
|                                                                                    |       |                  |       |   |   |
|                                                                                    |       |                  |       |   |   |
|                                                                                    |       |                  |       |   |   |
|                                                                                    |       |                  |       |   |   |
| SFAS No. 158 amounts recognized in accumulated other  comprehensive income consists of: |       |                  |       |   |   |
| Net loss (gain)                                                                         |       | $                     | (7.6       | ) | N/A |   |
| Prior service cost  (credit)                                                            |       | 1.3                   |       | N/A |   |
| Transition Obligation  (asset)                                                          |       | (0.2                  | )          |   |   |
| Total (net of income tax of $4.0 million)                                               |       | $                     | (6.5       | ) | N/A |   |

 

The assumptionsused to determine the pension obligation and seniority premiums as of year-endand net cost in the ensuing year were:
| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average discount rate                   |       | 10       | %          | 10       | %          | 10       | %          |
| Expected long-term rate of return on plan  asset |       | 10       | %          | 12       | %          | 12       | %          |
| Rate of increase  in future compensation level   |       | 6        | %          | 6        | %          | 6        | %          |

 

These rates arebased on Mexican pesos as pension plan payments will be paid in Mexico.

Thebenefits expected to be paid in each of the next five years, and thereafter,are as follows:

| (in millions) | ** ** | **Expected**              | ** ** |
|--------------------|------------|---------------------------|------------|
| **Year**           | ** ** | **Benefit Payments** | ** ** |
| 2007               |       | $                         | 30.0       |   |
| 2008               |       | 0.8                       |       |
| 2009               |       | 0.9                       |       |
| 2010               |       | 0.9                       |       |
| 2011               |       | 1.0                       |       |
| 2012 to 2016       |       | 6.7                       |       |
| Total              |       | $                         | 40.3       |   |

 

MineraMexico’s policy for determining asset mix targets includes periodicconsultation 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.

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These plans accounted for approximately 30% of benefitobligations.  The following tablerepresents the asset mix of the investment portfolio as of December 31:
| ** **        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Asset category:   |       |     |       |     |       |
| Equity securities |       | 79       | %          | 61       | %          |
| Treasury bills    |       | 21       |       | 39       |       |
|              |       | 100      | %          | 100      | %          |

 

The amount of contributions that the Company expects tobe paid to the plan during 2006 is not material.

Minera Mexico Post-retirement health care plan -

The components of net period benefit costs are asfollows:
| ** **                                 | ** ** | **For the year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|
| **(in millions)**                     | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest cost                              |       | $                                                        | 2.3        |   | $ | 2.2 |   | $ | 2.2 |   |
| Service cost                               |       | 0.5                                                      |       | 0.4 |   | 0.5 |   |
| Amortization of  transition assets, net    |       | 0.0                                                      |       | 1.6 |   | 1.6 |   |
| Net periodic post-retirement benefit costs |       | $                                                        | 2.8        |   | $ | 4.2 |   | $ | 4.3 |   |

 

The change in benefit obligation and a reconciliation offunded status are as follows:
| ** **                                         | ** ** | **As of December 31** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| Change in benefit  obligation:                     |       |                                 |       |   |   |
| Projected benefit  obligation at beginning of year |       | $                                    | 48.8       |   | $ | 46.8 |   |
| Service cost                                       |       | 0.5                                  |       | 0.4 |   |
| Interest costs                                     |       | 2.3                                  |       | 2.2 |   |
| Actuarial (loss) gain,  net                        |       | 0.9                                  |       | 0.5 |   |
| Benefits paid                                      |       | (3.0                                 | )          | (2.8 | ) |
| Settlements                                        |       | —                               |       | — |   |
| Inflation adjustment                               |       | 1.2                                  |       | 1.7 |   |
| Projected benefit  obligation at end of year       |       | $                                    | 50.7       |   | $ | 48.8 |   |
|                                               |       |                                 |       |   |   |
| Reconciliation of  funded status:                  |       |                                 |       |   |   |
| Funded status                                      |       | $                                    | (50.7      | ) | $ | (48.8 | ) |
| Unrecognized actuarial  loss                       |       | —                               |       | 6.8 |   |
| Unrecognized transition  obligation                |       | —                               |       | 26.5 |   |
| Post-retirement benefit obligation                 |       | $                                    | (50.7      | ) | $ | (15.5 | ) |

 
| SFAS No. 158  amounts recognized in statement of financial position consists of: |   |   |   |   |   |
|----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|  Non current assets                                                         |   | $      | — |   | N/A    |   |
|  Current liabilities                                                        |   | — |   | N/A    |   |
|  Non current liabilities                                                    |   | (50.7  | )      | N/A    |   |
|  Total                                                                      |   | $      | (50.7  | )      | N/A    |   |

 
| SFAS No. 158  amounts recognized in accumulated other comprehensive income consists of: |   |   |   |   |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|  Net loss (gain)                                                                   |   | $      | 4.9    |   | N/A    |   |
|  Prior service cost (credit)                                                       |   | 0.0    |   | N/A    |   |
|  Transition Obligation (asset)                                                     |   | 15.8   |   |   |   |
|  Total (net of income tax of $12.7 million)                                        |   | $      | 20.7   |   | N/A    |   |

 

Discount rates used in the calculation of otherpost-retirement benefits and costs as of December 31, 2006 and 2005 were 5.0%and 6.0%, respectively.

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Thebenefits expected to be paid in each of the next five years, and thereafter,are as follows:

| (in millions)  Year | ** ** | **Expected  Benefit Payments** | ** ** |
|--------------------------|------------|-------------------------------------|------------|
| 2007                     |       | $                                   | 3.8        |   |
| 2008                     |       | 4.1                                 |       |
| 2009                     |       | 4.4                                 |       |
| 2010                     |       | 4.6                                 |       |
| 2011                     |       | 4.9                                 |       |
| 2012 to 2016             |       | 35.3                                |       |
| Total                    |       | $                                   | 57.1       |   |

 

For measurement purposes, a 2.5% annual rate of increasein the per capita cost of covered health care benefits was assumed for 2006 andremain at that level thereafter.

An increase in other benefit cost trend rates have asignificant 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 trendrates would have the following effects:
| ** **                                            | ** ** | **One Percentage Point** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                | ** ** | **Increase**                       | ** ** | **Decrease** | ** ** |
| Effect on total  service and interest cost components |       | $                                  | 3.4        |   | $ | 2.7 |   |
| Effect on the  post-retirement benefit obligation     |       | $                                  | 56.8       |   | $ | 45.6 |   |

 

**NOTE 13-MINORITYINTEREST:**

For all the years presented, the minority interest on theconsolidated combined statement of earnings is based on the earnings of theCompany’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 an additional0.81833% of the outstanding shares of Minera Mexico for $30.3 million.  This acquisition increased the Company’sholding in MM to 99.95%.

The Company acquired 0.02 million investment shares at acost of $0.1 million in 2004.  There wereno purchases during 2005 and 2006.  Theseacquisitions have been accounted for as purchases of minority interests.  The carrying value of the minority interestpurchased was reduced by $0.08 million in 2004 and the excess paid over thecarrying value was assigned to intangible assets and is being amortized basedon production.  As a result of theseacquisitions, the remaining investment shareholders hold a 0.71% interest inthe Branch and are entitled to a pro rata participation in the cashdistributions made by the Peruvian Branch. The shares are recorded as a minority interest in the Company’sfinancial statements.

In addition, on October 23, 2004, Minera Mexico reachedan agreement with the National Union of Mine, Metallurgical and Similar Workersof the Mexican Republic (the “Union”) for the purchase of a 4.2% and 1.5% stockstake owned by the Union in two of its subsidiaries.  The stock was purchased 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.

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**NOTE14-COMMITMENTS AND CONTINGENCIES:**

Peruvian Operations

Extraordinarycontribution:

On December 28, 2006, theCompany’s Peruvian branch signed a contract with the Peruvian government thatcommits the Company to make annual (five-year) contributions for the regionaldevelopment of Peru.  This has been inresponse to an appeal by the new president of Peru to the mining industry.  The Company, as well as the mining industry,has responded positively to help with this cause.  The programs envisioned will focus initiallyon nutrition for young children and expectant mothers, education and healthservices.  The Company has a program ofcontributions, starting in 2007, with a contribution of about $16.1 million,calculated based on 2006 Peruvian earnings. This non-tax deductible amount has been taken from 2006 earnings.  The following four years’ contributions couldincrease or decrease depending on earnings and copper prices.

Royalty charge:

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 thislaw, the Company is subject to a 1% to 3% royalty, based on sales, applicableto the value of the concentrates produced in our Toquepala and Cuajonemines.  The Company made provisions of$67.2 million, $40.3 million and $17.6 million in 2006, 2005 and 2004,respectively, for this royalty.  Theseprovisions are included in “Cost of sales (exclusive of depreciation,amortization and depletion)” on the condensed consolidated combined statementof earnings.

In April 2005, aConstitutional Tribunal ruled the law constitutional and additionally statedthat the royalty charge applies to all concessions held in the mining industry,implying that those entities with tax stability contracts are subject to thischarge.  In 1996, the Company enteredinto a tax stability contract with the Peruvian government (a “Guarantee andPromotional Measures for Investment Contract”), relating to our solventextraction and electrowinning (“SX/EW”) production, which agreement  purports to, among other things, fix taxrates and other charges relating to such production.  The Company believes that the ConstitutionalTribunal’s interpretation relating to entities with tax stability contracts isincorrect and intends to protest the imposition of the royalty charge on SX/EWproduction, when and if assessed. Provisions made by the Company for the royalty charge do not includeapproximately $14.0 million of additional potential liability relating to itsSX/EW production from June 30, 2004 through December 31, 2006.

Power purchaseagreement:

In 1997, SCC sold its Ilopower plant to an independent power company, Enersur S.A. (“Enersur”).  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,commencing in 1997.

In 2003 the agreement wasamended releasing Enersur from its obligation to construct additional capacityto meet the Company’s increased electricity requirements.  SCC believes it can satisfy the need forincreased electricity requirements from other sources, including local powerproviders.

Environmental matters:

The Company’s operationsare subject to applicable Peruvian environmental laws and regulations.  The Peruvian government, through its *Ministerio de Energía y Minas* (the Ministry of Energy andMines, or “MEM”) conducts annual audits of the Company’s Peruvian mining andmetallurgical operations.  Through theseenvironmental audits, matters related to environmental commitments, compliancewith legal requirements, atmospheric 

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emissions and effluentmonitoring are reviewed.  The Companybelieves that it is in material compliance with applicable Peruvianenvironmental laws and regulations.

Inaccordance with Peruvian regulations, in 1996 SCC submitted its *Programa de Adecuación y Manejo Ambiental* (the EnvironmentalCompliance and Management Program, known by its Spanish acronym, PAMA) to theMEM. A third-party environmental audit was conducted in order to elaborate thePAMA.  The PAMA applied to all current operationsthat did not have an approved environmental impact study at the time.  SCC’s PAMA was approved in January 1997 andcontained 34 mitigation measures and projects necessary to (1) bring theexisting operations into compliance with the environmental standardsestablished by the MEM and (2) identify areas impacted by operations that wereno longer active and needed to be reclaimed. By the end of 2006, 32 of these projects were completed, including allPAMA commitments related to the Company’s operations in Cuajone and Toquepala.

Thetwo pending PAMA projects were related to the Ilo smelter operations.  The primary areas of environmental concernwere the smelter reverberatory slag eroded from slag deposits up until 1994,and atmospheric emissions from the Ilo smelter. PAMA commitments related to theslag remediation program and the smelter modernization project were bothcompleted  by January 31, 2007.  With thecompletion of these projects SCC fulfilled its environmental commitments underthe PAMA.

With the smelter modernization project, the Companyincreased sulfur recapture over the 92% requirement established by the PAMA.The new smelter is expected to maintain production at current levels and willuse advanced technology to drastically reduce sulfur emissions, in order toachieve the main goal of the project.

A new stationary 17-meter high smelting furnace(IsaSmelt), with a nominal capacity to treat 165 tons of copper concentrate perhour has been installed as part of the modernization project.  The furnace uses Isa technology which isproven throughout the world. Additionally, two rotary holding furnaces (RHF) have been installed toseparate the slag.  The matte (62%copper) from the RHF is then sent to Peirce-Smith converters to produce 99.3%pure copper.  Two 400-ton anode furnacesreceive the copper from the converters and with the use of two casting wheels99.7% pure copper anodes are produced. Since January 2006, when the anode furnaces entered operation, blistercopper production has been basically replaced by anode copper.

As part of the smelter modernization project a new1000-ton per day oxygen plant as well as a new 800,000 tons per year sulfuricacid plant, two desalination plants, and two effluent treatment plants havebeen constructed.

Spendingon this project through December 31, 2006 was $549.4 million (which includes$56.1 million of capitalized interest).

In 2003, the PeruvianCongress published a new law announcing future closure and remediationobligations for the mining industry.  Thelaw was amended in May 2004 and again in May 2005.  The current modification establishes thatmining companies submit their mine closure plans within one year of publicationof final regulations.  On August 16, 2005final regulations were published and the Company initiated the preparation ofthe required mine closure plan.  Thisplan, in its final form, will include theestimated cost required for the Peruvian operations, including cost at the Ilosmelter and refinery, tailings disposal, and the dismantling of the Toquepalaand Cuajone concentrators, shops and auxiliary services.

As the law requires thatthe mine closure plan be prepared by an independent consulting entity, theCompany engaged Walsh Peru S.A., a Peruvian subsidiary of Walsh EnvironmentalScientists and Engineers, Inc. (Boulder, Colorado), and the Mines Group Inc(Reno, Nevada) independent consulting entities to prepare the mine closureplan.  The conceptual plan, withoutcosts, was submitted to MEM in August 2006 and is subject to review by MEM for45 days.  After the MEM review (as of theend of February 2007 this review is pending) the Company will have 90 days toprepare and resubmit the mine closure plan, 

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including costs, which isthen subject to approval by MEM and open to public discussion and comment inthe area of Company operations. Additionally, the law requires companies to provide financial guaranteesto insure that remediation programs are completed.  The Company believes the liability for theseasset retirement obligations cannot currently be precisely measured, orestimated, until the Company has completed its final mine closure plan and isreasonably confident that it will be approved by MEM in most materialrespects.  However, the Company has madea preliminary estimate of this liability and has recorded such amount in itsfinancial statements.  As of December 31,2006, the Company has recorded $5.8 million for this liability.  The Company believes that this estimateshould be viewed with caution, pending final approval of its mine closure plan,expected in 2007.

For the Company’sPeruvian operations, environmental capital expenditures were $160.9 million,$234.6 million and $65.6 million in 2006, 2005 and 2004, respectively.  The Company expects to spend approximately$40.5 million for environmental capital expenditures in 2007, for completion ofthe Ilo smelter modernization project.

Mexican operations:

Environmental matters:

The Company’s operationsare subject to applicable Mexican federal, state and municipal environmentallaws, to Mexican official standards, and to regulations for the protection ofthe environment, including regulations relating to water supply, water quality,air quality, noise levels and hazardous and solid waste.  Some of these laws and regulations arerelevant to legal proceedings pertaining to the Company’s San Luis Potosicopper facilities.

The principal legislationapplicable to the Company’s Mexican operations is the federal *Ley General del Equilibrio Ecológico y la Protección al Ambiente*(the General 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 result in thetemporary or permanent closing of non-complying facilities, the revocation ofoperating licenses and/or other sanctions or fines.  Also, according to the *Código PenalFederal* (Federal Criminal Code), the PROFEPA must inform correspondingauthorities regarding environmental non-compliance.

Mexican environmentalregulations have become increasingly stringent over the last decade, and thistrend is likely to continue and has been influenced by the environmental treatyentered into by Mexico, United States and Canada in connection with NAFTA inFebruary 1999.  However, the Company’smanagement does not believe that continued compliance with the EnvironmentalLaw or Mexican State environmental laws will have a material adverse effect onthe Company’s business, properties, result of operations, financial conditionor prospects 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 that stricter enforcementof existing laws and regulations or the adoption of additional laws andregulations would not have a material adverse effect on the Company’s business,properties, results of operations, financial condition or prospects.

Due to the proximity ofcertain facilities of Minera Mexico to urban centers, the authorities mayimplement certain measures that may impact or restrain the operation of suchfacilities.  Any enforcement action mayhave an adverse effect on the operating results of the relevant subsidiary.

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For the Company’s Mexicanoperations, environmental capital expenditures were $10.5 million, $7.5 millionin 2006 and 2005, respectively. Approximately $3.9 million has been budgeted for environmental capitalexpenditures in 2007.

The Company hasinstituted extensive environmental conservation programs at its miningfacilities in Peru and Mexico.  TheCompany’s environmental programs include water recovery systems to conservewater and minimize impact on nearby streams, reforestation programs tostabilize the surfaces of the tailings dams and the implementation of scrubbingtechnology in the mines to reduce dust emissions.

Litigation matters:

Peruvian operations:

Garcia-Ataucuri andOthers vs. SCC:  InApril 1996, the Company was served with a complaint filed in Peru byapproximately 800 former employees seeking the delivery of a substantial numberof “labor shares” (*acciones laborales*)of its Peruvian Branch plus dividends on such shares, to be issued in aproportional way to each former employee in accordance with their time of workwith SCC’s Branch in Peru.

The Company conducts itsoperations in Peru through a registered Branch. Although the Branch has neither capital nor liability separate from thatof the Company, under Peruvian law it is deemed to have an equity capital forpurposes of determining the economic interest of the holders of the laborshares.  The labor share litigation isbased on claims of former employees for ownership of labor shares issued duringthe 1970s until 1989 under a former Peruvian mandated profit sharing system. In1971, the Peruvian Government enacted legislation providing that workers in themining industry would participate in the pre-tax profits of the enterprises forwhich they worked at a rate of 10%.  Thisparticipation was distributed 40% in cash and 60% as an equity interest in theenterprise. Under the law, the equity participation was originally delivered tothe “Mining Community”, an organization representing all workers.  The cash portion was distributed to theworkers after the close of the year.  Theaccrual for this participation was (and continues to be) a current liability ofthe Company, until paid.  In 1978, thelaw was amended and the equity distribution was calculated at 5.5% of pre-taxprofits and was made to individual workers of the enterprise in the form of “laborshares” to be issued in Peru by the Peruvian Branch of SCC.  These labor shares represented an equity interestin the enterprise.  In addition,according to the 1978 law, the equity participations previously distributed tothe “Mining Community” were returned to the Company and redistributed in theform of labor shares to the individual employees or former employees.  The cash participation was adjusted to 4.0%of pre-tax earnings and continued to be distributed to employees following theclose of the year.  Effective in 1992,the law was amended to its present status, and the workers’ participation inpre-tax profits was set at 8%, with 100% payable in cash.  The equity participation component waseliminated from the law.

In 1995, the Companyoffered to exchange new common shares of the Company for the labor sharesissued 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. What remains of the workers’ equity participation is nowincluded in the consolidated combined balance sheet under the caption “MinorityInterest”.

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

1) As stated above, inApril 1996, the Company was served with a complaint filed in Peru byapproximately 800 former employees, (García Ataucuri and others vs. SCC),seeking the delivery of 38,763,806.80 “labor shares” (acciones laborales) (orS/. 3,876,380,679.56), as required by Law # 22333, to be issued in aproportional way to each former employee or worker in accordance with theirtime of work with SCC’s Branch in Peru, plus dividends on such shares. Thisamount corresponds to the total number of labor shares 

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for all of the Company’sPeruvian workers, and the complaint is seeking to have labor shares issued tothe plaintiffs proportionally to each in accordance with their time of workwith the Company, plus dividends on such labor shares. In December 1999, acivil court of first instance of Lima decided against the Company, ordering thedelivery of the labor 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 the proceeding noting that the civil courtslacked jurisdiction and that the matter had to be decided by a labor court. OnMarch 8, 2002, Mr. García Ataucuri restated the claim to comply with Peruvian laborlaw and procedure requirements, and increased the number of plaintiffs toapproximately 958 ex-workers.  The lowerlabor judge dismissed the lawsuit in January 2005.  In March 2005, the plaintiffs appealed to theLima Labor superior court which has dismissed the lawsuit due to the plaintiffsnot following the proper appeal procedures.

2) Additionally, on May10, 2006, the Company was served with a new complaint filed in Peru, this timeby 44 former employees, (Cornejo Flores and others vs. SCC), of the Companyseeking delivery of (1) labor shares (or shares of whatever other current legaldenomination) corresponding to years 1971 to December 31,1977 (we understandthe plaintiffs are seeking the same 38,763,806.80 labor shares mentioned in theprior lawsuit), that should have been issued in accordance with Law # 22333,plus interest” and (2) labor shares resulting from capital increases made bythe Branch in 1980 “...for the amount of the workers’ participation of S/.17,246,009,907.20, equivalent to 172,460,099.72 labor shares”, plus dividends.On May 23, 2006, the Company answered this new complaint, denying the validityof the claim.

Previous Case:

The two abovementioned cases, are similar to a concluded lawsuit filed by 127 formeremployees on July 15, 1996, also represented by Mr. Garcia Ataucuri, whichsought the issuance and delivery of 38,763,806.80 labor shares plus dividendsand S/. 1,118,439,980.23 representing labor share capital increases made by theBranch.  In December 1999, the lower courtdismissed the complaint against the Company. Plaintiffs appealed this decision in January 2000 before the SuperiorCourt.  In August 2000 the Superior Courtaffirmed the lower court decision and the plaintiffs filed an appeal before theSupreme Court.  In June 2002 the SupremeCourt dismissed the appeal and as a consequence the Superior Court decisionbecame final.

It should be noted thatthese two (2) lawsuits refer to a prior Peruvian currency called “sol de oro,”which was later changed to the “new sol.”  One billion of soles de oro is equivalent to today’s one new sol.  The labor shares are currently calledinvestment shares.

The Company asserts thatthe claims are meritless and that the labor shares were distributed to theformer employees in accordance with the profit sharing law then in effect. Wedo not believe that an unfavorable outcome is reasonably possible. The Companyhas not made a provision for these lawsuits because it believes that it hasmeritorious defenses to the claims asserted in the complaints.

Class actions

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

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The consolidatedcomplaint alleges, among other things, that the acquisition of Minera Mexico isthe result of breaches of fiduciary duties by the Company’s directors and isnot entirely fair to the Company and its minority stockholders.  The consolidated complaint seeks, among otherthings, a preliminary and permanent injunction to enjoin the acquisition, theaward of damages to the class, the award of damages to the Company and suchother relief that the court deems equitable, including interest, attorneys’ andexperts’ fees and costs.  The Companybelieves that this lawsuit is without merit and is vigorously defending itself againstthis action.

The Company’s managementbelieves that the outcome of the aforementioned legal proceeding will not havea material adverse effect on the Company’s financial position or results ofoperations.

Mexican operations-

The Mexican Geological Services(MGS) Royalties:

In August 2002, MGS(formerly named Council of Mineral Resources (“COREMI”)) filed with the ThirdFederal District Judge in Civil Matters, an action demanding from Mexcobre thepayment of royalties since 1997. Mexcobre answered and denied MGS’s claims in October 2002.  In December 2005, Mexcobre signed anagreement with MGS.  Under the terms ofthis agreement the parties established a new procedure to calculate the royaltypayments applicable for 2005 and the following years, and the Company paid inJanuary 2006, $6.9 million of royalties for 2005 and $8.5 million as payment onaccount of royalties from the third quarter 1997 through the last quarter of2004.  We estimate that the payment madeon January 11 will cover 100% of the royalty payments required for pastperiods.  The residual payments will bedetermined based on a recent ruling of the Third Federal District Judge issuedon January 22, 2007.  On an ongoing basisthe Company will be required to pay a 1% royalty on La Caridad’s copperproduction value after deduction of treatment and refining charges and certainother carrying costs.

San Luis PotosiFacilities:

The municipality of SanLuis Potosi has granted Desarrolladora Intersaba, S.A. de C.V., licenses foruse of land and construction for housing and/or commercial zones in the formerEjido Capulines, where the residential project “Villa Magna” is expected to bedeveloped in the near future.

The “Villa Magna”residential project will be developed within an area that IMMSA’s approved RiskAnalysis by SEMARNAT (the federal environmental authority) has secured as asafeguard and buffer zone due to the use by IMMSA of Anhydrous Ammonia Gas.

Based on the foregoing,IMMSA has initiated two different actions regarding this matter:

(1)        First, against the municipality of SanLuis Potosi, requesting the annulment of the authorization and licenses grantedto Desarrolladora Intersaba S.A. de C.V. to develop “Villa Magna” within thezinc plant’s safeguard and buffer zone; and

(2)       Second, filed before SEMARNAT a requestfor a declaration of a safeguard and buffer zone surrounding IMMSA’s zincplant.

The first action wasresolved by denying IMMSA’s interest on August 23, 2006 by a FederalCourt.  IMMSA submitted on September 21,2006 its last appeal before the Supreme Court of Justice.

Based on the foregoingIMMSA is expecting that in the near future Desarrolladora Intersaba, S.A. deC.V. will file a lawsuit against IMMSA, requesting payment of certain damagessupposedly caused by IMMSA, during the procedure of annulment requested.

These actions areawaiting final resolutions. IMMSA believes that, should the outcome of 

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the above mentioned legalproceedings be adverse to IMMSA’s interests, the construction of the “VillaMagna” housing and commercial development would not, in itself, affect theoperations of IMMSA’s zinc plant.

In addition to theforegoing, IMMSA has initiated a series of legal and administrative proceduresagainst the Municipality of San Luis Potosi due to its refusal to issue IMMSA’suse of land permit in respect to its zinc plant.  The Municipality has refused to grant suchlicense based on the argument that IMMSA has failed to submit, as part of theapplication process, a “*manifestación de impactoambiental*” (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*” (land use permit).  The municipality has refused to issue theland use permit.  IMMSA has filed arequest for relief against such resolution to compel the court to issue the landuse permit.

Tax contingency matters-

U.S. Internal RevenueService (IRS)

The Company is regularlyaudited by the federal, state and foreign tax authorities both in the UnitedStates and internationally.  These auditscan result in proposed assessments.  In2002, IRS issued a preliminary Notice of Proposed Adjustment for the years 1994through 1996.  In 2003, the Companysettled these differences with the IRS and made a payment of $4.4 million,including interest.  Generally, the years1994 through 1996 are now closed to further adjustment.

The IRS completed fieldaudit work for all years preceding 2003 and currently is auditing 2003 and2004.  During the audit of the tax years1997 through 1999, the IRS questioned the Company’s accounting policy fordetermination of useful lives for depreciable property, the calculation ofdeductible and creditable Peruvian taxes, the methodology of capitalizinginterest and the capitalizing of certain costs (drilling, blasting and hauling)into inventory value as items for possible adjustment.  In the fourth quarter of 2003, the Companyand the IRS had jointly requested technical advice from the IRS National Officeto help resolve the inventory value dispute. In August 2005 the National Office of the IRS responded to the IRS fieldaudit group’s request for technical advice. The issuance of this technical advice memorandum (TAM) allowed the IRSto close the field audit work for the audit cycles 1997 through 1999 and 2000through 2002.  The TAM accepts theposition of the IRS field office and concludes that the Company is required tocapitalize the drilling, blasting and hauling costs of material transported toits leach dumps based on the weight of material moved, without regard to metalcontent or recoverability.

On October 5, 2005 theCompany filed a formal protest with the IRS to appeal the proposed changes withrespect to the TAM conclusion, as well as other items of adjustment proposed bythe IRS field audit group.  These otheradjustments include the methodology of capitalizing interest, the determinationof useful lives for depreciable property, the calculation of deductible andcreditable Peruvian taxes and the established service fee between the Companyand related parties.  The Companybelieves that the positions that it is reporting to the IRS are correct andappropriate.  The Company believes thatit has substantial defenses to the proposed IRS adjustments and that adequateprovisions have been made so that resolution of any issues raised by the IRSwill not have a material adverse effect on its financial condition or resultsof operations. Discussions with the Appeals Office representatives have begunand the parties have agreed to working through the protested issues andconcluding the appeals process by December 31, 2007.

Peruvian operations:

In Peru the *Superintendencia Nacional de Administración Tributaria* (“SUNAT”),the Peruvian Tax Administration, regularly audits the Company.  These audits can result in proposedassessments.

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In 2002, the Companyreceived assessments and penalties from SUNAT for fiscal years 1996 through1999, in which several deductions taken were disallowed.  After appeal, the Company settled many of theissues with SUNAT in 2003.  However, theportion of the assessment related to the disallowance of financial expenses isstill pending resolution.  In addition,the Company has not recognized a liability for penalties and interest relatedto the portion of the assessments settled in 2003 or for the pending assessmentrelated to financial expenses, as it considers that they are notapplicable.  The status of these pendingissues as well as 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 condensed consolidated balance sheet. The Company was not required to issue a deposit for appeal of assessmentsand rulings with respect to any other years. In February 2004, the Peruvian tax court denied the Company’sappeal.  Consequently, in April 2004, theCompany filed a lawsuit against the Peruvian tax court and SUNAT in thesuperior court of Peru.  In September2005, the Superior Court declared the Company’s claim valid.  SUNAT appealed this decision to the PeruvianSupreme Court in Lima.  In December 2006,the Peruvian Supreme Court confirmed the opinion of the lower court thatdeclared valid SPCC’s claim.  As SUNAThas not appealed this decision within the legal timeline, the Company considersthis case closed and will file for a refund of the funds related to the letterof credit in the first quarter of 2007.

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 had been protested before SUNAT. The Company’s appeal before the Peruvian tax court related to theassessments (pertaining to the deduction of certain financial expense) forfiscal year 1997 was denied.  In May2003, the Company filed a lawsuit before the superior court against SUNAT andthe Peruvian tax court, seeking the reversal of the ruling of the taxcourt.  In July 2005 the Superior Courtdecided in favor of the Company and remanded the case to SUNAT for a newpronouncement.  SUNAT has appealed the court’sdecision to the Peruvian Supreme Court in Lima. In December 2006, the Supreme Court declared null the lower court’sopinion and remanded the case back to the lower court for final resolution.

c) Years 1998 and 1999:SUNAT has not ruled on the portion of the 1998 and 1999 assessment related tothe financial deductions.  However, inAugust 2006, SUNAT ruled on other 1998/1999 issues related to payment ofcommissions to certain financial institutions. The ruling resolved one issue in favor of the Company and other issuesagainst the Company.  The Company hasappealed before the Peruvian tax court the portion of the claim decided againstthe Company.

d) Years 2000 and2001: In December 2004 and January 2005, the Company received assessmentsand penalties from SUNAT for the fiscal years 2000 and 2001, in which certaindeductions taken by the Company were disallowed.  SUNAT has objected to the Company’s method ofdeducting vacation pay accruals in 2000, a deduction in 2000 for a fixed assetwrite-off, as well as certain other deductions in both years.  The Company has appealed these assessmentsand resolution is still pending. Additionally, the Company received penalties and assessments from SUNATrelating to treatment of foreign exchange differences for 2000 and 2001.  The Company has appealed these assessmentsand resolution is still pending.

In June 2006, a fiscalcourt resolution was published with regards to another company, which statesthat profits related to foreign exchange differences need not be included incalculations for monthly advance tax payments. The fiscal court has indicated that this resolution is applicable to allfuture cases that are similar. As such, the Company expects that the portion ofthe 2000/2001 tax assessment related to foreign exchange difference will beremoved from the assessment.

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In September 2006, SUNATdeclared not valid the Company’s claim related to the income tax rate appliedto commissions paid to certain financial institutions. The Company has appealedSUNAT’s decision before the Peruvian tax court.

e) Year 2002: InDecember 2006, the Company received assessments and penalties from SUNAT forthe fiscal years 2002 in which income tax rate applied to services received bythe Company and deductions taken by the Company were disallowed. In February2007, The Company appealed these SUNAT assessments.

Mexican Operations:

MM is regularly examinedby the Servicios de Administración Tributaria (“SAT”), the Mexican taxadministration.  These examinations canresult in proposed assessments.

a) Year 1995:  In March 2001, SAT issued an assessment,related to 1995 tax year, disallowing certain deductions related to the Companyhousing and local travel expenses.  TheCompany has appealed these assessment. The tax courts have ruled against the Company.  The Company believes that final resolution ofthis issue will not be material to Company financial results.

b) Year 1999:  In May 2005 SAT issued an assessment againstMM claiming that MM understated asset value used in the determination of assettax.  In addition, SAT claimed that MMimproperly reduced their consolidated results through the consolidation of twosubsidiaries.

MM believes that the SATassessment is not legal. Accordingly,  in July 2005, MMfiled a Nullity Motion with the Metropolitan Regional Tax Court, Exchequerdivision, against the assessment, which is currently at the stage of submittaland admission of expert and documentary evidence.

Significant managementjudgment is required in determining the provision for tax contingencies inMexico, Peru and the United States.  Theestimate of the probable cost for resolution of the tax contingencies has beendeveloped in consultation with legal and tax counsel.  The Company does not believe that there is areasonable likelihood that there is an exposure to loss in excess of theamounts accrued.

Labor matters

During 2006, there were anumber of work stoppages at some of the Company’s Mexican operations.  While some of these work stoppages were of ashort-term nature with little or no production loss, others have been moredisruptive.  A strike at the La Caridadcopper mine in Sonora began in the first quarter of 2006 and ended in July2006.  A strike at the San Martinpolymetallic complex in Zacatecas commenced in the first quarter of 2006 andended in May 2006.  Workers at theCananea copper mine went on a strike on June 1, 2006 returning to work sixweeks later on July 17, 2006.  These workstoppages were declared illegal by the Mexican authorities.  On June 9, 2006, the Company announced theclosing of the La Caridad mine as picketing workers made it impossible tocontinue operations.  As a result ofthese strikes, the Company declared “force majeure” on certain of its June andJuly copper contracts.  On July 14, 2006,with the approval of a Labor Court, the Company dismissed the La Caridadworkers. Individual work agreements, and the collective union contract, wereterminated in compliance with the provisions of the ruling rendered by federallabor authorities. On July 26, 2006, the installations were returned to theCompany and the Company commenced to hire workers to resume operations.  In July 2006, the Company reopened the LaCaridad mine and in the fourth quarter of 2006 restored production to 100%capacity.

In Mexico, on July 12,2004 the workers of La Caridad went on strike asking for the review of certaincontractual clauses.  Such a review wasperformed and the workers

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returned to work 18 dayslater.  On October 15, 2004, the workersof Cananea went on strike, followed by La Caridad workers.  The strike lasted for six days at La Caridadand nine days at Cananea.  In such case,the operations at the particular mine ceased until the strike was resolved.

In recent years theCompany has experienced a number of strikes or other labor disruptions thathave had an adverse impact on its operations and operating results.  In Peru on August 31, 2004, unionized workersat the mining units in Toquepala and Cuajone initiated strike and soughtadditional wage increases based on high metal prices.  The strike ended after twelve days.  Collective bargaining agreements with theCompany’s nine Peruvian labor unions expire in 2007.  It is believed that certain of the unions incommon locations are exploring the possibility of merging.  In addition, the Company has received initialproposals from certain unions.  It is tooearly to assess the outcome of this years labor negotiations, the Company,however, is hopeful that new agreements can be reached without disruptions tothe operations.  The Company cannot giveassurances that they will not experience strikes or other labor-related workstoppages in the future that could have a material adverse effect on itsfinancial condition and results of operations.

Mine accident:

On February 19, 2006 anexplosion occurred at the IMMSA unit’s Pasta de Conchos coal mine, located inSan Juan de Sabinas, Coahuila, Mexico. Immediately, IMMSA along withneighboring industry initiated a rescue effort. Federal and local governmental help and support was received.  As a result of the accident eight miners wereinjured and 65 perished.

Both the Coahuila PublicDistrict Attorney (*Procurador de Justicia*)and the Federal Attorney Office (Procuraduria Federal de la República)initiated investigations to establish (1) the causes of the accident and (2)the responsible party.  The investigationis underway; however, it will be necessary for the investigation team to haveaccess to the site where the explosion occurred, which at present isblocked.  Recovery efforts are alsocontinuing, however progress is very slow as access is blocked by debris androcks.  It may still take several moremonths to complete this effort.  Theunderground mine has been closed since the accident and will remain closeduntil we complete efforts to recover the remains of our workers lost in theaccident.

Other legal matters:

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

Our direct and indirectparent corporations, including AMC and Grupo Mexico, have from time to timebeen named parties in various litigations involving Asarco.  In August 2002 the U.S. Department of Justicebrought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from Asarco. That action was settled pursuant to a Consent Decree dated February 2,2003.  The consent decree is bindingsolely on the U.S. government. In March 2003, AMC purchased its interest in SCCfrom Asarco. In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and otherparties, not including SCC, were named in a lawsuit filed in New York Statecourt in connection with alleged asbestos liabilities, which lawsuit claims,among other matters, that AMC’s purchase of SCC from Asarco should be voided asa fraudulent conveyance.  The lawsuitfiled in New York State court was stayed as a result of the August 9, 2005Chapter 11 bankruptcy filing by Asarco, as described below.  On February 2, 2007 a complaint was filed byAsarco, the debtor in possession, alleging many of the matters previouslyclaimed in the New York State lawsuit, including that AMC ́s purchase of SCCfrom Asarco should be voided as a fraudulent conveyance.  While Grupo Mexico 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 the Company’s parent

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corporation or theCompany.  Any increase in the financialobligations of the Company’s parent corporation, as a result of matters relatedto Asarco or otherwise could, among other effects, result in the Company’sparent corporation attempting to obtain increased dividends or other fundingfrom the Company.  In 2005, certain subsidiariesof Asarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  In July 2005, the unionizedworkers of Asarco commenced a work stoppage. As a result of various factors, including the above-mentioned workstoppage, on August 9, 2005 Asarco filed a voluntary petition for relief underChapter 11 of the U.S. Bankruptcy Code before the U.S. Bankruptcy Court inCorpus Christi, Texas.  Asarco’sbankruptcy case is jointly administered with the bankruptcy cases of itssubsidiaries.  Asarco’s bankruptcy couldresult in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

**NOTE 15-STOCKHOLDERS’ EQUITY:**

Merger adjustments:

Pursuantto U.S. GAAP, since both SCC and Minera Mexico are under common control for allthe periods presented, the acquisition of Minera Mexico by SCC has beenreflected at the historical carrying value of Minera Mexico’s assets andliabilities in a manner similar to a pooling of interests.  The difference in the value of the 134.4 millionshares of SCC issued and the net carrying value of Minera Mexico has been recognizedin equity as a reduction in additional paid-in capital.  In addition, Minera Mexico’s historicalcommon stock, treasury stock and additional paid in capital accounts wereeliminated and classified within SCC’s additional paid-in capital.  Minera Mexico’s retained earnings werecarried forward as reported to be combined with retained earnings of SCC.  For the purpose of these financialstatements, the issuing of 134.4 million shares has been reflected as ifthey had been outstanding as of January 1, 2004.  Therefore, historical common stock and pershare data presented herein differs from that previously reported by SCC on astand-alone basis.

Commonstock:

The Company had two classes of common sharesoutstanding.  Class A common stockholderswere entitled to five votes per share. Common share stockholders are entitled to one vote per share.

In connection with the acquisition of Minera Mexico, theCompany’s Class A common stock was converted into common stock and preferentialvoting rights were eliminated.  On June9, 2005, Cerro Trading Company, Inc., SPC Investors L.L.C., Phelps DodgeOverseas Capital Corporation and Climax Molybdenum B.V., subsidiaries of two ofSCC’s founding shareholder’s and affiliates, sold their equity holdings in SCC.

Stock split:

OnAugust 30, 2006 the Executive Committee of the Board of Directors declared atwo-for-one split of the Company’s outstanding common stock.  On October 2, 2006 common shareholders ofrecord at the close of business on September 15, 2006, received one additionalshare of common stock for every share owned. The Company’s common stock began trading at its post-split price onOctober 3, 2006.  The split increased thenumber of shares outstanding to 294,460,850 from 147,230,425.  The stock split has been recorded in our 2006financial statements.  All share and pershare amounts have been retroactively adjusted to reflect the stock split.

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Directors Stock Award Plan:

The Company established anon-vested stock award compensation plan for certain directors who are notcompensated as employees of the Company. Under this plan, participants will receive 400 shares of common stockupon election and 400 additional shares following each annual meeting ofstockholders thereafter. 200,000 shares of Southern Copper common stock havebeen reserved for this plan.  At December31, 2006 and 2005, 67,500 and 62,400 shares, respectively, have been awardedunder this plan.

Stock Incentive Plan:

The Company’s Stock Incentive Plan expired on January 1,2006.  There were no outstanding stock options underthis plan as of December 31, 2006 and 2005.

Employee Stock Purchase Plan:

Grupo Mexico offers eligibleemployees a stock purchase plan (the “Employee Stock Purchase Plan”) through atrust that acquires shares of Grupo Mexico for future sales to our employees,subsidiaries and certain affiliated companies. Sales are at the approximatefair market value.  Every two yearsemployees will be able to purchase shares subscribed for purchase in theprevious two years.   The employees willpay for shares purchased through monthly payroll deductions over the eight yearperiod of the plan.   At the end of the 8year period, Grupo Mexico will grant the participant a bonus of 1 share forevery 10 shares purchased by the employee.

If Grupo Mexico pays dividendson shares during the eight year period, the participant will be entitled toreceive the dividend in cash for all shares that have been fully purchased andpaid as of the date that the dividend is paid. If the participant has only partially paid for shares, the entitleddividends will be used to reduce the remaining liability owed for purchased shares.

Executive Stock Purchase Plan:

Grupo Mexico also offers a stock purchase plan forcertain members of executive management. Under this plan, participants will receive incentive cash bonuses whichare used to purchase up to 250,000 shares of Grupo Mexico over an eight yearperiod. In 2006 and 2005, participants received 100,000 and 150,000 shares,respectively, and pursuant to FAS 123R, the Company recorded, net of tax,$0.2 million, in compensation expense in both periods.

Treasury Stock:

Included in treasurystock are shares of the Company’s common stock carried at cost.  In addition, included in treasury stock areshares of the Company’s principal shareholder, Grupo Mexico.  At December 31, 2006 and 2005 treasury stockholds 404,112 shares and 409,312 shares of Southern Copper Corporation commonstock with a cost of $4.5 million for both periods.  At December 31, 2006 and 2005 treasury stockholds 139,326,973 shares and 133,365,564 shares with a cost of $82.2 millionand $72.0 million of Grupo Mexico, respectively.

The shares of SouthernCopper Corporation are used to make awards under the Directors’ Stock Award plan.

The shares of GrupoMexico are used to make awards under both stock purchase plans. As of December31, 2006, no shares have been assigned to participants under either plan.

Beginningbalance of 2004 has been reclassified from additional paid in capital totreasury stock for $72.9 million, which represents the carrying value of theinvestment in shares held by one of its Mexican subsidiaries in its controllingshareholder Grupo Mexico.

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**NOTE16-DERIVATIVE INSTRUMENTS:**

The Company occasionallyuses derivative instruments to manage its exposure to market risk from changesin commodity prices, interest rate and exchange rate risk exposures and toenhance return on assets.  The Companygenerally does not enter into derivative contracts unless it anticipates afuture activity that is likely to occur that will result in exposing theCompany to market risk.

Copper and zinc swaps:

Transactions under thesemetal price protection programs are not accounted for as hedges under SFAS No.133 and are adjusted to fair market value based on the metal prices as of thelast day of the respective reporting period with the gain or loss recorded innet sales on the consolidated combined statement of earnings.  In 2006, the Company changed its accountingclassification policy to recognize gains or losses on metal price derivativesin net sales.  The Company believes thatthis income statement classification reflects better the intention of thisprice protection program.  Before 2006,the change in the fair market value of our derivative instruments was accountedfor in a separate non-operating income statement line item.  Prior-year gains and losses have beenreclassified to conform to the 2006 presentation.

During 2006 and 2005 theCompany entered into short copper swap contracts to protect a portion of itscopper production. In 2006 the Company entered into swap contracts for 384,500metric tons of its copper production for future sales at a weighted averageprice of 316.77 cents per pound and during 2005 the Company entered swapcontracts for 299,457 metric tons of copper at a weighted average price of163.36 cents per pound. Related to the settlement of these copper swapcontracts the Company recorded losses of $276.1 million and $23.5 million in2006 and 2005, respectively.  Theselosses were recorded in net sales on the consolidated combined statement ofearnings. Also, these losses were recorded in net earnings in operatingactivities of the consolidated combined statement of cash flow.

In addition, the Companyentered into a long zinc swap contract to protect the cost of a portion of thezinc concentrates purchases during the recovery from a fire at the San LuisPotosi zinc refinery. Related to the settlement of this zinc swap contract theCompany recorded a loss of $0.2 million in 2006.  This loss was recorded in net sales on theconsolidated combined statement of earnings. Also, this loss was recorded innet earnings in operating activities of the consolidated combined statement ofcash flow.

At December 31,2006 the Company did not hold any open copper or zinc futures positions.

Gas swaps:

In 2006, the Company established long swap contracts for3.7 million MMBTUs with a fixed price of $4.2668 per MMBTU.  In this respect, the Company recorded a gainof $6.3 million which was credited to the production cost of 2006.

At December 31, 2006, the Company held long fixed priceswap contracts for 10,000 MMBTUs per day at a fixed price of $7.525 per MMBTUfor the first three months of 2007 to protect the Company’s production costfrom the uncertainty and high volatility of energy prices during the 2007winter season.

Interest Rate Swaps:

During 2005 and 2004, the Company entered into shortinterest rate swap contracts to reduce its exposure to interest rate risk on certainof its floating rate bank obligations. As a result of these positions, the Company recorded a net gain of $1.2million and a net loss of $1.4 million in 2005 and 2004, respectively. Thesegains and losses were recorded in loss on derivatives in the consolidatedcombined statement of earnings.  TheCompany did not hold any interest rate swap contracts during 2006 and does nothold any open position as of December 31, 2006.

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Exchange Rate Derivatives, U.S. Dollar / MexicanPeso Contracts:

Because more than 85% ofour sales collections in Mexico are in US dollars and many of our costs are inMexican pesos, during 2006 the Company entered into zero-cost derivativescontracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar. In these contracts if theexchange rate settles at or below the barrier, the Company does not selldollars, if the exchange rate settles above the barrier price established inthe contract the Company sells dollars at the strike price established in thecontract.

In 2006, the exercise ofthese zero-cost derivative contracts resulted in a gain of $0.9 million, whichwas recorded as a gain on derivative instruments on the consolidated combinedstatement of earnings.

At December 31,2006 the Company held the following exchange rate derivative operations:
| **Notional Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican Pesos/  U.S. Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| $22.0                                |       | 1st Quarter 2007                                       |       | 11.19                                                           |       | 10.82                                                       |       |
| $22.0                                |       | 1st Quarter 2007                                       |       | 11.50                                                           |       | 11.19                                                       |       |
| $78.0                                |       | 3rd Quarter 2007                                       |       | 11.15                                                           |       | 10.675                                                           |       |
| $78.0                                |       | 3rd Quarter 2007                                       |       | 11.52                                                           |       | 11.15                                                       |       |
| $83.2                                |       | 4th Quarter 2007                                       |       | 11.35                                                           |       | 10.65                                                       |       |
| $106.0                               |       | 1st Quarter 2008                                       |       | 11.28                                                           |       | 10.70                                                       |       |

 

At December 31, 2006, the fair value of the above listedexchange rate derivative contracts is $0.5 million.  The notional amount are comprised on thereintransactions that have the same strike and Barrier price.

Additionally, the Company holds embedded derivativeswhich are described in note 3 “Marketable Securities.”

**NOTE17-FINANCIAL INSTRUMENTS:**

For certain of the Company’s financial instruments,including cash and cash equivalents, accounts receivable (other than accountsreceivable associated with provisionally priced sales) and accounts payable,the carrying amounts approximate fair value due to their short maturities.  Consequently, such financial instruments arenot included in the following table that provides information about thecarrying amounts and estimated fair values of other financial instruments:
| ** **                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **Carrying  value**                   | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Assets:                                                          |       |                                  |       |   |   |   |   |   |   |
| Accounts receivable  associated with provisionally priced sales: |       |                                  |       |   |   |   |   |   |   |
| Copper                                                           |       | $                                     | (47.3      | ) | $ | (47.3 | ) | $ | 7.8 |   | $ | 7.8 |   |
| Molybdenum                                                       |       | $                                     | (11.5      | ) | $ | (11.5 | ) | $ | (39.2 | ) | $ | (39.2 | ) |
|  Marketable  securities                                     |       | $                                     | 280.0      |   | $ | 280.0 |   | — |   | — |   |
|                                                             |       |                                  |       |   |   |   |   |   |   |
| Liabilities:                                                     |       |                                  |       |   |   |   |   |   |   |
| Debt                                                             |       | $                                     | 1,525.0    |   | $ | 1,681.1 |   | $ | 1,172.1 |   | $ | 1,189.4 |   |

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instruments for which it is practicable to estimate thatvalue:

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Accounts receivable associated with provisionally pricedsales: Fair value of copper is based on published forward prices and fair valueof molybdenum is based on year-end market prices.

Marketable securities: Due to the short term nature ofthe investments, current value is deemed to approximate fair value.

Long-term debt: Fair value is based on quoted marketprices.

**NOTE18-CONCENTRATION OF RISK:**

The Company operates four copper open-pit mines, fiveunderground poly metal mines, three smelters and eight refineries in Peru andMexico and substantially all of its assets are located in these countries.  There can be no assurances that the Company’soperations and assets that are subject to the jurisdiction of the governmentsof Peru and Mexico will not be adversely affected by future actions of suchgovernments.  Much of the Company’sproducts are exported from Peru and Mexico to customers principally in UnitedStates, Europe, Asia and South America.

Financial instruments, which potentially subject theCompany to a concentration of credit risk, consist primarily of cash and cashequivalents, marketable securities and trade accounts receivable.

The Company invests or maintains available cash withvarious banks, principally in the United States, Mexico, Europe and Peru, or incommercial paper of highly-rated companies.  As part of its cash management process, theCompany regularly monitors the relative credit standing of theseinstitutions.  At December 31, 2006, SCChad invested 25.14% of its cash equivalents and marketable securities withPeruvian banks, of which 9.13% was invested with one institution.  Likewise, SCC invested 40.72% of its cashequivalent and marketable securities with Mexican banks, of which 34.88% 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 cases where thefinancial institutions with which it has entered into derivative transactions(commodity, foreign exchange and currency/interest rate swaps) are unable topay when they owe funds as a result of protection agreements with them. Tominimize the risk of such losses, the Company only uses highly-ratedfinancial institutions that meet certain requirements. The Company alsoperiodically reviews the creditworthiness of these institutions to ensure thatthey are maintaining their ratings. The Company does not anticipate that any ofthe financial institutions will default on their obligations.

The Company’s five largest trade receivable balancesaccounted for 39.5%, 40.9% and 33.7% of the trade accounts receivable atDecember 31, 2006, 2005 and 2004, respectively, of which one customerrepresented approximately 10.9%, 14.6% and 10.7%, respectively, of our tradeaccounts receivable.

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**NOTE 19-RELATEDPARTY TRANSACTIONS:**

Balances receivable and payable with affiliated companiesare shown below (in millions):

 
| ** **                                                                                                                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Affiliate  receivable:                                                                                                                        |       |                                  |       |   |   |
| Grupo Mexico S.A.B de C.V. and affiliates                                                                                                     |       | $                                     | —     |   | $ | 3.0 |   |
| Mexico Proyectos y Desarrollos S.A. de C.V. and  affiliates                                                                                   |       | 2.6                                   |       | 5.0 |   |
| Intermodal Mexico, S.A. de C.V.                                                                                                               |       | —                                |       | 0.4 |   |
| Ferrocarril Mexicano, S.A. de C.V.                                                                                                            |       | —                                |       | 0.4 |   |
| Other                                                                                                                                         |       | —                                |       | 0.3 |   |
|                                                                                                                                          |       | $                                     | 2.6        |   | $ | 9.1 |   |
| Affiliate  payable:                                                                                                                           |       |                                  |       |   |   |
| Grupo Mexico S.A.B. de C.V. and affiliates                                                                                                    |       | $                                     | 0.4        |   | $ | 2.5 |   |
| Ferrocarril Mexicano, S.A. de C.V.                                                                                                            |       | 3.2                                   |       | 3.0 |   |
| Other                                                                                                                                         |       | —                                |       | 0.9 |   |
|                                                                                                                                          |       | $                                     | 3.6        |   | $ | 6.4 |   |
|                                                                                                                                          |       |                                  |       |   |   |
| Account  Receivable from company owned by majority shareholders (Included in Accounts  receivable other)—Transportes Aereos S.A. de C.V. |       | $                                     | 10.6       |   | $ | — |   |

 

The Company has enteredinto certain transactions in the ordinary course of business with parties thatare controlling shareholders or their affiliates.  These transactions include the lease ofoffice space, air transportation and construction services and products andservices relating to mining and refining. The Company lends and borrows funds among affiliates for acquisitionsand other corporate purposes.  Thesefinancial transactions bear interest.

The Company sold toAsarco LLC (Asarco), an affiliate of Grupo Mexico, $0.3 million, $11.6 millionand $13.0 million of metal products in 2006, 2005 and 2004, respectively; andpurchased metal products from Asarco for $1.1 million and $1.0 million in 2005and 2004, respectively. In addition, the Company paid $2.5 million and $3.8million to Asarco in 2005 and 2004, respectively, for tolling services. Therewere no purchases of metal products and tolling services from Asarco in 2006.

Grupo Mexico, the Company’sultimate parent and the majority indirect stockholder of the Company, and itsaffiliates provide various 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. The Company pays Grupo Mexico for these support services.  The total amount paid by the Company to GrupoMexico for such services in each of the years 2006, 2005 and 2004 was $13.8million.  The Company expects to continueto pay for these services going forward in an amount of $13.8 million per year.

The Company paidnil, $0.5 million and $3.3 million in 2006, 2005 and 2004, respectively, ininterest expenses related to borrowings from Grupo Mexico.

The Company’s Mexicanoperations paid fees of $17.2 million, $21.0 million and $19.3 million in 2006,2005 and 2004, respectively; primarily for freight services provided byFerrocarril Mexicano, S.A. de C.V., a subsidiary of Grupo Mexico.

In addition, the Company’sMexican operations paid cargo, services rendered of $29.8 million, $29.8mi1lion and $0.4 million in 2006, 2005 and 2004, respectively, for constructionservices provided by Mexico Constructora Industrial S.A. de C.V., an indirectsubsidiary of Grupo Mexico.

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The Larrea familycontrols a majority of the capital stock of Grupo Mexico, and has extensiveinterests in other businesses, including oil drilling services, construction,aviation and real estate.  The Companyengages in certain transactions in the ordinary course of business with otherentities controlled by the Larrea family relating to mining and refiningservices, the lease of office space, and air transportation and constructionservices.  These transactions amounted toapproximately $5.5 million, $3.7 million and $6.1 million in 2006, 2005 and2004, respectively. Additionally, in the third quarter of 2006 our Mexicansubsidiary provided a short-term~~~~interest bearing loan of $10.6 millionto Mexico Transportes Aereos, S.A. de C.V. (“MexTransport”) for the purchase ofan airplane.  MexTransport, a companycontrolled by the Larrea family, provides aviation services to our Mexicanoperations.

TheCompany purchased $5.5 million, $4.0 million and $1.8 million in 2006, 2005 and2004, respectively; of industrial material from companies in which Mr. CarlosGonzalez has a proprietary interest.  Mr.Carlos Gonzalez is the son of SCC’s Chief Executive Officer.  In addition, the Company purchased $0.5million, $0.2 million and $0.4 million in 2006, 2005 and 2004, respectively, ofindustrial material from companies in which Mr. Alejandro Gonzalez is employedas a sales representative.  Mr. AlejandroGonzalez is the son of SCC’s Chief Executive Officer.

Theformer holders of the Company’s Class A common stock until June 2005 and theiraffiliates purchase copper and other products from the Company from time totime at prices determined by reference to the LME and COMEX market price forcopper and published prices for other products, if available.  These purchases were $15.2 million and $73.9million in 2005 and 2004, respectively.

See also the disclosure on the acquisition of MineraMexico in note 1.

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

**NOTE 20-SEGMENT AND RELATEDINFORMATION:**

Southern Copper operates in a single industry, the copperindustry.  Prior to the April 1, 2005acquisition of Minera Mexico, the Company determined that its operations inPeru fell within one segment.  With theacquisition of Minera Mexico the Company continues to operate principally inone industry.  However, because of thedemands of managing operations in two countries, effective April 1, 2005,Company management views the new Southern Peru as having three operatingsegments and manages on the basis of these segments.  Additionally, in mining copper the Companyproduces a number of metal byproducts, most important of which are molybdenum,silver and zinc.  The significantincrease in the price of molybdenum over the past three years has had animportant impact on the Company’s earnings. Nevertheless, the Company continues to manage its operations on thebasis of the three copper segments. Intersegment sales included in this information, are based onarms-length prices at the time of sale. These may not be reflective of actualprices realized by the Company due to various factors, including additionalprocessing, timing of sales to outside customers and transportation cost.  Added to the segment information isinformation regarding the Company’s molybdenum sales.  The segments identified by the Company are:

1.               Peruvianoperations, which includes the Toquepala and Cuajone mine complexes and thesmelting and refining plants, industrial railroad and port facilities whichservice both mines.

2.               Mexican open pitoperations, which includes La Caridad and Cananea mine complexes and thesmelting and refining plants and support facilities which service both mines.

3.               Mexican undergroundmining operations, which includes five underground mines that

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produce zinc, copper, silver and gold, a coal and cokemine, and several industrial processing facilities for zinc and copper.  This group is identified as the IMMSA Unit.

The Chief OperatingOfficer of the Company focuses on operating income and on total assets asmeasures of performance to evaluate different segments and to make decisions toallocate resources to the reported segments. These are common measures in the mining industry.

Financialinformation relating to Company’s segments is as follows:

 
| ** **                                                             | ** ** | **Year Ended, December 31, 2006** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Mexican  Open Pit**                            | ** ** | **Mexican  IMMSA  Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other eliminations** | ** ** | **Total  Combined** | ** ** |
| ** **                                                             | ** ** | **(in millions)**                                | ** ** |
|                                                                   |       |                                                  |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                                     | 1,679.1    |   | $ | 598.3 |   | $ | 3,182.8 |   | $ | — |   | $ | 5,460.2 |   |
| Intersegment  sales                                                    |       | 308.0                                                 |       | 104.2 |   | 32.6 |   | (444.8 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 867.8                                                 |       | 345.9 |   | 1,247.4 |   | (441.3 | ) | 2,019.8 |   |
| Selling, general  and administrative expenses                          |       | 37.5                                                  |       | 23.8 |   | 36.0 |   | (9.0 | ) | 88.3 |   |
| Depreciation,  amortization and depletion                              |       | 160.2                                                 |       | 28.2 |   | 86.4 |   | 0.3 |   | 275.1 |   |
| Exploration                                                            |       | 1.8                                                   |       | 7.3 |   | 13.6 |   | — |   | 22.7 |   |
| Operating income                                                       |       | $                                                     | 919.8      |   | $ | 297.3 |   | $ | 1,832.0 |   | $ | 5.2 |   | 3,054.3 |   |
|                                                                   |       |                                                  |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                  |       |   |   |   |   |   |   | (35.3 | ) |
| Loss on debt prepayment                                                |       |                                                  |       |   |   |   |   |   |   | (1.1 | ) |
| Loss on derivative instruments                                         |       |                                                  |       |   |   |   |   |   |   | (11.6 | ) |
| Gain on disposal of property                                           |       |                                                  |       |   |   |   |   |   |   | 1.9 |   |
| Other income (expense)                                                 |       |                                                  |       |   |   |   |   |   |   | (2.2 | ) |
| Taxes on income                                                        |       |                                                  |       |   |   |   |   |   |   | (959.1 | ) |
| Minority interest                                                      | ** ** | ** **                                            |       |   |   |   |   |   |   | (9.3 | ) |
| Net earnings                                                           |       |                                                  |       |   |   |   |   |   |   | $ | 2,037.6 |   |
|                                                                   |       |                                                  |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                  |       | $                                                     | 157.2      |   | $ | 45.3 |   | $ | 253.3 |   | $ | — |   | 455.8 |   |
| Property, net                                                          |       | $                                                     | 1,587.5    |   | $ | 268.9 |   | $ | 1,637.1 |   | $ | 44.8 |   | 3,538.3 |   |
| Total assets                                                           |       | $                                                     | 2,624.8    |   | $ | 658.7 |   | $ | 3,210.4 |   | $ | (132.0 | ) | $ | 6,361.9 |   |

 

 

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| ** **                                                             | ** ** | **Year Ended, December 31, 2005** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                                | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Corporate  and other eliminations** | ** ** | **Total  Combined** | ** ** |
| Net sales outside of  segments                                         |       | $                                                     | 1,667.4    |   | $ | 261.8 |   | $ | 2,159.9 |   | $ | — |   | $ | 4,089.1 |   |
| 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 |   |
| Selling, general and  administrative expenses                          |       | 37.1                                                  |       | 19.4 |   | 34.0 |   | (9.4 | ) | 81.1 |   |
| Depreciation,  amortization and depletion                              |       | 176.7                                                 |       | 24.0 |   | 76.5 |   |   |   | 277.2 |   |
| Exploration                                                            |       | 3.8                                                   |       | 7.7 |   | 12.9 |   | — |   | 24.4 |   |
| Operating income                                                       |       | $                                                     | 704.1      |   | $ | 66.8 |   | $ | 1,288.3 |   | $ | 11.8 |   | 2,071.0 |   |
|                                                                   |       |                                                  |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                                  |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                                  |       |   |   |   |   |   |   | (55.6 | ) |
| Gain on  derivative instruments                                        |       |                                                  |       |   |   |   |   |   |   | 1.1 |   |
| Loss on debt  prepayment                                               |       |                                                  |       |   |   |   |   |   |   | (10.6 | ) |
| Gain on disposal  of property                                          |       |                                                  |       |   |   |   |   |   |   | 2.1 |   |
| Other income  (expense)                                                |       |                                                  |       |   |   |   |   |   |   | (5.7 | ) |
| 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 |   |

 

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

 

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Sales value per segment:
| ** **             | ** ** | **Year Ended, December 31, 2006** | ** ** | ** **                   | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Consolidated** | ** ** |
| Copper                 |       | $                                                     | 1,748.9    |                         | $          | 124.7 |   | $ | 2,595.0 |   | $ | (321.4 | ) | $ | 4,147.2 |   |
| Molybdenum             |       | 125.3                                                 |       | —                       |       | 449.7 |   |   |   | 575.0 |   |
| Other                  |       | 112.9                                                 |       | 577.8                        |       | 170.7 |   | (123.4 | ) | 738.0 |   |
| Total                  |       | $                                                     | 1,987.1    |                         | $          | 702.5 |   | $ | 3,215.4 |   | $ | (444.8 | ) | $ | 5,460.2 |   |

 
| ** **             | ** ** | **Year Ended, December 31, 2005** | ** ** | ** **                   | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                            | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Combined** | ** ** |
| Copper                 |       | $                                                     | 1,310.3    |                         | $          | 134.2 |   | $ | 1,467.5 |   | $ | (196.5 | ) | $ | 2,715.5 |   |
| Molybdenum             |       | 271.0                                                 |       | —                       |       | 655.5 |   | — |   | 926.5 |   |
| Other                  |       | 177.0                                                 |       | 314.5                        |       | 44.7 |   | (89.1 | ) | 447.1 |   |
| Total                  |       | $                                                     | 1,758.3    |                         | $          | 448.7 |   | $ | 2,167.7 |   | $ | (285.6 | ) | $ | 4,089.1 |   |

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

 

**NET SALES AND GEOGRAPHICAL INFORMATION:**

Netsales to respective countries were as follows:
| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| **(in millions)**                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States                             |       | $                                          | 1,747.5    |   | $ | 1,394.2 |   | $ | 1,108.3 |   |
| Europe                                    |       | 1,711.6                                    |       | 823.7 |   | 675.7 |   |
| Mexico                                    |       | 1,094.7                                    |       | 930.9 |   | 629.6 |   |
| Peru                                      |       | 155.2                                      |       | 72.0 |   | 43.8 |   |
| Latin America,  excluding Mexico and Peru |       | 659.4                                      |       | 671.7 |   | 460.2 |   |
| Australia                                 |       | —                                     |       | 3.3 |   | 6.2 |   |
| Asia                                      |       | 368.1                                      |       | 216.8 |   | 172.9 |   |
| Derivative  instruments                   |       | (276.3                                     | )          | (23.5 | ) | — |   |
| Total                                     |       | $                                          | 5,460.2    |   | $ | 4,089.1 |   | $ | 3,096.7 |   |

 

AtDecember 31, 2006, the Company has recorded provisionally priced sales of 169.9million pounds of copper, at a forward average price of $2.87 per pound.  Also, the Company has recorded provisionallypriced sales of 7.3 million pounds of molybdenum at the year-end market priceof $24.50 per pound.  These sales aresubject to final pricing based on the average monthly LME and COMEX copperprices and Dealer Oxide molybdenum prices in the future month of settlement.

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Followingare the provisionally priced copper and molybdenum sales outstanding atDecember 31, 2006:

| Pounds  of copper | ** ** | **Priced at** | ** ** | **Month of settlement** | ** ** |
|------------------------|------------|--------------------|------------|-----------------------------------|------------|
| **(millions)**         | ** ** | ** **         | ** ** | ** **                        | ** ** |
| 90.5                   |       | 2.86159            |       | January  2007                     |       |
| 62.9                   |       | 2.86694            |       | February  2007                    |       |
| 4.8                    |       | 2.87396            |       | April  2007                       |       |
| 11.7                   |       | 2.87759            |       | June  2007                        |       |
| 169.9                  |       | 2.86502            |       | Total                             |       |

 

| Pounds  of molybdenum | ** ** | **Market price** | ** ** | **Month of settlement** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------|------------|
| **(millions)**             | ** ** | ** **            | ** ** | ** **                        | ** ** |
| 4.5                        |       | 24.50000              |       | January  2007                     |       |
| 1.8                        |       | 24.50000              |       | February  2007                    |       |
| 1.0                        |       | 24.50000              |       | March  2007                       |       |
| 7.3                        |       | 24.50000              |       | Total                             |       |

 

Provisionalsales price adjustments included in accounts receivable and net sales were asfollows at December 31 (in millions):

|            | ** ** | **As of December 31,** | ** ** |
|------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Copper     |       | $                                     | (47.3      | ) | $ | 7.9 |   |
| Molybdenum |       | (11.5                                 | )          | (39.2 | ) |
| Total      |       | $                                     | (58.8      | ) | $ | (31.3 | ) |

 

During the month ofJanuary  2007, the market price of copperdecreased. And the molybdenum market price had a slight increase. The effect ofthese changes on 2006 sales settling in January 2007 was a reduction of $26.1million in sales. Additionally, forward prices for copper as of January 31,2007also decreased, the effect of this decrease on 2006 open sales settling afterJanuary 2007 would be a further reduction of $22.1 million in sales.

Thefollowing are the significant outstanding long-term contracts:

Underthe terms of a forward sales contract with Union Minière, as amended, November12, 2003, the Company is required to supply Union Minière, through its agent,S.A. SOGEM N.V., with 18,000 tons of blister copper annually for a five-yearperiod from January 1, 2004 through December 31, 2008 and 13,800 tons ofblister during 2009.  The price of thecopper contained in blister supplied under the contract is determined based onthe LME monthly average settlement price, less a refining allowance, which is negotiatedannually.

Underthe terms of a sales contract with Mitsui Bussan Metals Sales Co., an affiliateof Mitsui & Co. Ltd. (“Mitsui”), the Company is required to supply Mitsuiwith 48,000 tons of copper cathodes annually for a fifteen-year period throughDecember 31, 2013.  If the shipment destinationis Asia, 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.

A148

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**NOTE 21-QUARTERLY DATA(unaudited)**

(in millions, except pershare data)

 
| ** **                     | ** ** | **2006** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------|------------|------------|------------|
| ** **                     | ** ** | **1st**  | ** ** | **2nd**    | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales                      |       | $        | 1,121.3    |       | $          | 1,276.7 |   | $ | 1,412.2 |   | $ | 1,650.0 |   | $ | 5,460.2 |   |
| Operating income               |       | $        | 632.7      |       | $          | 649.0 |   | $ | 804.5 |   | $ | 968.1 |   | $ | 3,054.3 |   |
| Net earnings                   |       | $        | 421.6      |       | $          | 439.3 |   | $ | 521.6 |   | $ | 655.1 |   | $ | 2,037.6 |   |
| Net earnings per   share: |       |     |       |       |       |   |   |   |   |   |   |
| Basic and diluted              |       | $        | 1.43       |       | $          | 1.49 |   | $ | 1.77 |   | $ | 2.23 |   | $ | 6.92 |   |
| Dividend per share             |       | $        | 1.38       |       | $          | 1.38 |   | $ | 1.00 |   | $ | 1.37 |   | $ | 5.13 |   |

 
| ** **                     | ** ** | **2005** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------|------------|------------|------------|
| ** **                     | ** ** | **1st**  | ** ** | **2nd**    | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales                      |       | $        | 945.1      |       | $          | 947.8 |   | $ | 1,030.2 |   | $ | 1,166.0 |   | $ | 4,089.1 |   |
| Operating income               |       | $        | 470.6      |       | $          | 438.3 |   | $ | 545.8 |   | $ | 616.3 |   | $ | 2,071.0 |   |
| Net earnings                   |       | $        | 298.4      |       | $          | 311.9 |   | $ | 369.4 |   | $ | 420.4 |   | $ | 1,400.1 |   |
| Net earnings per   share: |       |     |       |       |       |   |   |   |   |   |   |
| Basic and diluted              |       | $        | 1.01       |       | $          | 1.06 |   | $ | 1.26 |   | $ | 1.43 |   | $ | 4.76 |   |
| Dividend per share             |       | $        | 0.34       |       | $          | 1.19 |   | $ | 0.52 |   | $ | 0.85 |   | $ | 2.90 |   |

 

All the per share amountsprior to 3rd quarter 2006 had been restated to reflect the common stock split.

**NOTE 22—SUBSEQUENT EVENTS**

On January 25, 2007, adividend of $1.70 per share was announced payable March 2, 2007 to shareholdersof record as of February 13, 2007.  Ourdividend policy continues to be reviewed at Board of Directors’ meetings,taking into consideration the current intensive capital investment program andexpected future cash flow generated from operations.

**OTHER COMPANY INFORMATION:**

** **

**ANNUAL MEETING**

**The annual stockholders meeting ofSouthern Copper Corporation will be held on Thursday, April 26, 2007 at09:00hrs, Mexico City time, at Avenida Baja California No. 200, Fifth Floor,Colonia Roma Sur, Mexico City, Mexico.**

**TRANSFER AGENT, REGISTRAR AND STOCKHOLDERSSERVICES**

**The Bank of New York**

**101 Barclay Street**

**New York, NY, 10286**

**Phone: (800)524-4458**

**DIVIDEND REINVESTMENT PROGRAM**

**SCC stockholders can have theirdividends automatically reinvested in SCC common shares.  SCC pays all administrative and brokeragefees.  This plan is administered by TheBank of New York.  For more information,contact The Bank of New York at (800)524-4458.**

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**STOCK EXCHANGE LISTING**

**The principal markets for SCC’sCommon Stock are the NYSE and the Lima Stock Exchange.  SCC’s Common Stock symbol is PCU on both theNYSE and the Lima Stock Exchange.**

**OTHER SECURITIES**

**The Branch in Peru has issued, in accordance with PeruvianLaw, “investment shares” (formerly named labor shares) that are quoted on theLima Stock Exchange under symbols S-1 and S-2. Transfer Agent, registrar and stockholders services are provided byBanco de Credito del Peru, Avenida Centenario 156, La Molina, Lima 12, Peru.**

**Telephone (511) 348-5999, Fax (511)349-0592.**

**OTHER CORPORATE INFORMATION**

For other information on the Company or to obtain, free of charge,additional copies of the Annual Report on Form 10-K, contact the InvestorRelations Department at:

11811 North Tatum Blvd. Suite 2500, Phoenix, Az. 85028, USA

Telephone: (602) 494-5328

**SOUTHERN COPPER CORPORATION**

11811 North Tatum Blvd. Suite 2500, Phoenix, Az. 85028, USA

Telephone: (602) 494-5328, Fax: (602) 494-5317

NYSE Symbol: PCU

Avenida Caminos del Inca 171, Chacarilla del Estanque, Santiago deSurco, 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 STOCKEXCHANGE**

**The Company has filed with the NewYork Stock Exchange (“NYSE”) the 2006 certification that the Chief ExecutiveOfficer is unaware of any violation of the corporate governance standards ofthe NYSE.  The Company has also filedwith the Securities and Exchange Commission (“SEC”) the certifications requiredunder Section 302 of the Sarbanes-Oxley Act of 2002, as exhibits to the 2005Annual Report on Form 10-K.  The Companyanticipates filing, on a timely basis, the 2007 NYSE certification and isfiling the Section 302 certifications as exhibits to this Annual Report on Form10-K.**

A150

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholders of Southern Copper Corporation:

Wehave completed integrated audits of Southern Copper Corporation and its subsidiariesconsolidated combined financial statements and of its internal control overfinancial reporting as of December 31, 2006 in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, arepresented below.

Consolidatedcombined financial statements

In our opinion, theaccompanying consolidated combined balance sheets and the related consolidatedcombined statements of earnings, changes in stockholders’ equity and cash flowspresent fairly, in all material respects, the financial position of SouthernCopper Corporation and its subsidiaries at December 31, 2006 and December 31,2005, and the results of their operations and their cash flows for each of thethree years ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.  We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

As discussed in Note 6 to the consolidatedcombined financial statements, the Company changed its methods of accountingfor stripping costs incurred during the production phase of a mine, effectiveJanuary 1, 2006. As discussed in Note 12 to the consolidated combinedfinancial statements, the Company changed its methods of accounting for definedbenefit pension and other post retirement plans, effective December 31,2006.

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, 2006 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 material respects,effective internal control over financial reporting as of December 31,2006, 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 internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other 

A151

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procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and (iii)provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

PRICEWATERHOUSECOOPERS

Mexico D.F. February 28,2007

A152

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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, 2006,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 Act of1934, as amended) that occurred during the quarter ended December 31, 2006 thathas 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 with theparticipation 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 ofSponsoring Organization of the Treadway Commission.  Based on the evaluation made under thisframework, management concluded that as of December 31, 2006 such internalcontrol over financial reporting is effective.

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 thatthe degree 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, 2006 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, and 14

Reference is made to theSection captioned “Executive Officers of the Registrant” on pages A-63 toA-64.  Information in response to thedisclosure requirements specified by Part III, Items 10, 11, 12, 13, and 14will be included in a definitive proxy statement, which will be filed pursuantto Regulation 14A of the 1934 Securities Exchange Act, as amended, prior toApril 26, 2007 or will be provided by amendment to this Form 10-K, also to befiled no later than April 30, 2007.

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

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PART IV

Item 15.        Exhibits, Financial Statement Schedulesand Reports on Form 8-K

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

1.                               FinancialStatements

The following financial statements of Southern Copper Corporation andits subsidiaries are included at the indicated pages of the document as statedbelow:
|                                                                                                                                | ** ** | **Form 10-K** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
| ** **                                                                                                                     | ** ** | **Pages**     |
| Consolidated  Combined Statement of Earnings for the years ended December 31, 2006, 2005  and 2004                             |       | A99           |
| Consolidated  Combined Balance Sheet at December 31, 2006 and 2005                                                             |       | A100          |
| Consolidated  Combined Statement of Cash Flows for the years ended December 31, 2006, 2005  and 2004                           |       | A101-A102     |
| Consolidated  Combined Statement of Changes in Stockholders’ Equity for the years ended  December 31, 2006, 2005 and 2004 |       | A103          |
| Notes to the  Consolidated Combined Financial Statements                                                                       |       | A104-A146     |
| Reports of  Independent Registered Public Accounting Firm                                                                      |       | A147-148      |

 

2.                               Exhibits
| 3.1    |   | (a) Amended and Restated Certificate of  Incorporation, filed on October 11, 2005.                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (b) Amended and Restated Certificate of  Incorporation (as amended May 2, 2006).                                                                                                         |
|   |   |                                                                                                                                                                                     |
| 3.2    |   | By-Laws, (as amended on April 27 and May 4, 2006).                                                                                                                                       |
|   |   |                                                                                                                                                                                     |
| 4.1    |   | (a) Registration Rights Agreement, dated as of July  27, 2005, by and between Southern Copper Corporation, Citigroup Global  Markets Inc. and UBS Securities LLC.                        |
|   |   | (b) Registration Rights Agreement, dated as of May 9  2006, by and between Southern Copper Corporation and Citigroup Global  Markets, Inc. as Representatives of the Initial Purchasers. |
|   |   |                                                                                                                                                                                     |
| 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    |   | (a) 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.            |
|   |   | (b) Indenture governing 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)                                                                                                                                        |
|   |   |                                                                                                                                                                                     |
| 4.6    |   | Form of New 7.500% Note (included in Exhibit 4.3  (b)).                                                                                                                                  |
|   |   |                                                                                                                                                                                     |
| 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                                                                                                                                               |

A155

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|   |   |                                                                                                                                                                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3   |   | Form of Directors Stock Award Plan of the Company                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                    |
| 10.4   |   | Service Agreement entered into by the Company with a  subsidiary of Grupo Mexico S.A.B. de C.V., assigned upon the same terms and  conditions to Grupo Mexico S.A.B. de C.V. in February 2004                           |
|   |   |                                                                                                                                                                                                                    |
| 10.5   |   | 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 Mexico  S.A. de C.V. |
|   |   |                                                                                                                                                                                                                    |
| 12.1   |   | Computation of financial ratios                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                    |
| 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                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                    |
| 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.

A156

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Schedule II

Valuation and Qualifying Accounts and Reserves

(in millions)
| ** **                                              | ** ** | ** **                                     | ** ** | **Additions**                                 | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Balance at  beginning of  period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Other**  | ** ** | **Deduction** | ** ** | **Balance at  end of  period** | ** ** |
| Reserve deducted  in balance sheet to which applicable: |       |                                           |       |                                          |       |       |       |   |   |   |   |
| Accounts  Receivable:                                   |       |                                           |       |                                          |       |       |       |   |   |   |   |
| 2006                                                    |       | 5.6                                            |       | 0.3                                           |       |       |       |   |   | 5.9 |   |
| 2005                                                    |       | 8.3                                            |       | 0.4                                           |       | —     |       | 3.1 |   | 5.6 |   |
| 2004                                                    |       | 8.2                                            |       | 0.9                                           |       | —     |       | 0.8 |   | 8.3 |   |
|                                                    |       |                                           |       |                                          |       |       |       |   |   |   |   |
| Supplies:                                               |       |                                           |       |                                          |       |       |       |   |   |   |   |
| 2006                                                    |       | 23.4                                           |       | 4.9                                           |       |       |       | 0.3 |   | 28.0 |   |
| 2005                                                    |       | 21.5                                           |       | 3.3                                           |       |       |       | 1.4 |   | 23.4 |   |
| 2004                                                    |       | 9.5                                            |       | 12.7                                          |       | —     |       | 0.7 |   | 21.5 |   |
|                                                    |       |                                           |       |                                          |       |       |       |   |   |   |   |
| Notes issued  under the pair:                           |       |                                           |       |                                          |       |       |       |   |   |   |   |
| 2006                                                    |       | 6.3                                            |       | 10.8                                          |       | —     |       | 0.5 |   | 16.6 |   |
| 2005                                                    |       | —                                         |       | 6.4                                           |       | —     |       | 0.1 |   | 6.3 |   |
| 2004                                                    |       | —                                         |       | —                                        |       | —     |       | — |   | — |   |
|                                                    |       |                                           |       |                                          |       |       |       |   |   |   |   |
| Deferred Tax  Assets:                                   |       |                                           |       |                                          |       |       |       |   |   |   |   |
| 2006                                                    |       | 81.2                                           |       | —                                        |       | —     |       | 81.2 |   | — |   |
| 2005                                                    |       | 33.4                                           |       | 47.8                                          |       | —     |       | — |   | 81.2 |   |
| 2004                                                    |       | 87.2                                           |       | —                                        |       | —     |       | 53.8 |   | 33.4 |   |

 

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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:  February 26, 2007

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 |
| J. Eduardo  Gonzalez           |       | Director (principal financial officer)               |
|                           |       |                                                 |
|                           |       |                                                 |
| /s/ Jose N. Chirinos Fano      |       | Comptroller (principal accounting officer)           |
| Jose N. Chirinos  Fano         |       |                                                 |
|                           |       |                                                 |
| **DIRECTORS**                  | ** ** |
|                           |       |                                                 |
| /s/ German Larrea Mota-Velasco |       | /s/ Harold S. Handelsman                             |
| German Larrea  Mota-Velasco    |       | Harold S.  Handelsman                                |
|                           |       |                                                 |
| /s/ Emilio Carrillo Gamboa     |       | /s/ Genaro Larrea Mota-Velasco                       |
| Emilio Carrillo  Gamboa        |       | Genaro Larrea  Mota-Velasco                          |
|                           |       |                                                 |
| /s/ Alfredo Casar Perez        |       | /s/ Armando Ortega Gomez                             |
| Alfredo Casar  Perez           |       | 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                               |

 

Date:  February 26, 2007

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Southern CopperCorporation

Exhibit Index
| Sequential  Exhibit  Number | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Page Number** |
|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 3.1                         |       | (a) 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) (b) Amended and Restated Certificate of  Incorporation (as amended May 2, 2006). (Filed as Exhibit 3.1 to Registration  Statement on Form S-4, File No. 333-135170) filed on June 20, 2006 and  incorporated herein by reference)                                                                                                                                                                                              |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 3.2                         |       | By-Laws, as amended on April 27 and May 4, 2006.  (Filed as Exhibit 3.2 to Registration Statement on Form S-4, File No.  333-135170 filed on June 20, 2006 and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 4.1                         |       | (a) 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) (b) Registration Rights Agreement, dated as  of May 9, 2006, by and between Southern Copper Corporation and Citigroup  Global Markets Inc. as Representative of the Initial Purchasers. Filed as  Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-135170 filed  on June 20, 2006 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. (Filed as Exhibit 4.1 to the  Company’s current Report on Form 8-K, filed on August 1, 2005 and  incorporated by reference                                                                                                                                                                                                                                                                                                                                                 |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 4.3                         |       | (a) 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. (Filed as Exhibit 4.2 to the  company’s Current Report on Form 8-K, filed on August 1, 2005) and  incorporated herein by reference) (b) Indenture governing $400,000,000 7.500%  Notes due 2035, by and between Southern Copper Corporation, The Bank of new  York, The Bank of New York (Luxembourg) S.A. (Filed as Exhibit 4.1 to the  Company’s Current Report on Form 8-K, filed on August 1, 2005 and incorporated  herein by reference)                     |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 4.4                         |       | Form of 6.375% Note (included in exhibit 4.2(a))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 4.5                         |       | Form of New 7.500% Note (included in Exhibit 4.3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 4.6                         |       | Form of New 7.500% Note (included in Exhibit 4.3(b))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |            |
| 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)                                                                                                                                                                                                                                                                                                                                |       |            |

 

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| 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   |   | Form of Directors’ Stock Award Plan of the Company  (Filed as exhibit 10.4 to the Company’s 2005 Annual Report on Form 10-K and  incorporated herein by reference)                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                      |   |   |
| 10.4   |   | Service Agreement entered into by the Company with a  subsidiary of Grupo Mexico S.A.B. de C.V., assigned upon the same terms and  conditions to Grupo Mexico S.A.B. de C.V. in February 2004 (Filed as Exhibit  10.10 to the Company’s 2002 Annual Report on Form 10-K and incorporated  herein by reference)       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                      |   |   |
| 10.5   |   | 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 Mexico  S.A. de C.V. (Filed as an exhibit to Form 8-K filed on October 22, 2004 and  incorporated herein by reference) |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                      |   |   |
| 12.1   |   | Computation of financial ratios                                                                                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                      |   |   |
| 14.0   |   | 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)                                                                                                                                                                                                                                                                              |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                      |   |   |
| 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)                                                                                                                                                   |   |   |

 

B2

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