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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **

**x****       ****ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended: December 31, 2008**

** **

**or**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Forthe transition period from      to**

 

**Commission File Number: 1-14066**

 

**SOUTHERN COPPER CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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) |

 

**(602) 494-5328**

(Registrant’s telephone number, including areacode)

 

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

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

 

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

**None**

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment of this Form 10-K. o

 

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

 

| Large accelerated filer x |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

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

 

As of January 31, 2009, there were of record 853,825,000 shares ofCommon Stock, par value $0.01 per share, outstanding.

 

The aggregate market value of the shares of Common Stock (based upon theclosing price on such date as reported on the New York Stock Exchange -Composite Transactions) of Southern Copper Corporation held by non affiliateswas approximately $2,481.7 million.

 

PORTIONS OF THEFOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 
| Part III: | Proxy statement  for 2009 Annual Meeting of Stockholders |
|----------------|----------------------------------------------------------|
|           |                                                     |
| Part IV:  | Exhibit Index  is on Page 177 through 178      |

 

 

 

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Southern CopperCorporation

 

INDEX TO FORM 10-K

 

 
| ** **     | ** **                                                                                                         | **Page No.** |
|----------------|--------------------------------------------------------------------------------------------------------------------|-------------------|
| Part I    | Financial Information                                                                                              |              |
|           |                                                                                                               |              |
| Item. 1        | Business                                                                                                           | 4-17              |
|           |                                                                                                               |              |
| Item 1A        | Risk factors                                                                                                       | 18-28             |
|           |                                                                                                               |              |
| Item 1B        | Unresolved Staff  Comments                                                                                         | 28                |
|           |                                                                                                               |              |
| Item 2         | Properties                                                                                                         | 29-69             |
|           |                                                                                                               |              |
| Item 3         | Legal Proceedings                                                                                                  | 70                |
|           |                                                                                                               |              |
| Item 4.        | Submission of Matters to a Vote of  Security Holders                                                               | 70                |
|           |                                                                                                               |              |
| Item 4A.       | Executive officers of the registrant                                                                               | 70-71             |
|           |                                                                                                               |              |
| Part II.  |                                                                                                               |              |
|           |                                                                                                               |              |
| Item 5.        | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 72-74             |
|           |                                                                                                               |              |
| Item 6.        | Selected Financial  Data                                                                                           | 75-76             |
|           |                                                                                                               |              |
| Item 7.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 77-106            |
|           |                                                                                                               |              |
| Item 7A.       | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 107-111           |
|           |                                                                                                               |              |
| Item 8.        | Financial  Statements and Supplementary Data                                                                       | 112-174           |
|           |                                                                                                               |              |
| Item 9.        | Changes in and  Disagreements with Accountant on Accounting and Financial Disclosure                               | 175               |
|           |                                                                                                               |              |
| Item 9A.       | Controls and  Procedures                                                                                           | 175               |
|           |                                                                                                               |              |
| Item 9B.       | Other Information                                                                                                  | 175               |
|           |                                                                                                               |              |
|           |                                                                                                               |              |
| PART III. |                                                                                                               |              |
|           |                                                                                                               |              |
| Item 10.       | Directors, Executive Officers  and Corporate Governance                                                            | 176               |
|           |                                                                                                               |              |
| Item 11.       | Executive Compensation                                                                                             | 176               |
|           |                                                                                                               |              |
| Item 12.       | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters.                   | 176               |
|           |                                                                                                               |              |
| Item 13.       | Certain Relationships and  Related Transactions and Director Independence.                                         | 176               |

 

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|          |                                     |    |
|---------------|------------------------------------------|---------|
| Item 14.      | Principal Accounting Fees and  Services  | 176     |
|          |                                     |    |
|          |                                     |    |
| PART IV. |                                     |    |
|          |                                     |    |
| Item 15.      | Exhibits,  Financial Statement Schedules | 177-179 |
|          |                                     |    |
|          | Signatures                               | 180     |
|          |                                     |    |
|          | Exhibits                                 | 181-182 |

 

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PART I

 

Item 1. Business:

 

THE COMPANY

 

Southern Copper Corporation is one of the largest integrated copperproducers in the world.  We producecopper, molybdenum, zinc and silver.  Allof our mining, smelting and refining facilities are located in Peru and inMexico and we conduct exploration activities in those countries and Chile.  See Item 2 Properties, “Review of Operations”for maps of our principal mines, smelting facilities and refineries.  Our operations make us one of the largestmining companies in Peru and also in Mexico. We are one the largest copper mining companies in the world withsignificant copper reserves.  We wereincorporated in Delaware in 1952 and have conducted copper mining operationssince 1960.  Since 1996, our common stockhas been listed on both the New York and Lima Stock Exchanges.

 

Our Peruvian copper operations involve mining, milling and flotation ofcopper ore to produce copper concentrates and molybdenum concentrates; thesmelting of copper concentrates to produce anode copper; and the refining ofanode copper to produce copper cathodes. As part of this production process, we also produce significant amountsof molybdenum concentrate and refined silver. We also produce refined copper using SX/EW technology.  We operate the Toquepala and Cuajone mineshigh in the Andes Mountains, approximately 860 kilometers southeast of the cityof Lima, Peru.  We also operate a smelterand refinery west of the Toquepala and Cuajone mines in the coastal city ofIlo, Peru.

 

Our Mexican operations are conducted through our subsidiary, MineraMexico S.A. de C.V. (“Minera Mexico”), which we acquired on April 1,2005.  Minera Mexico engages principallyin the mining and processing of copper, molybdenum, zinc, silver, gold andlead.  Minera Mexico operates throughsubsidiaries 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 Metalicos del Norte, S.A. (together with its subsidiaries, the “IMMSAUnit”) operate five underground mines that produce zinc, lead, copper, silverand gold, a coal mine and several industrial processing facilities for zinc andcopper.

 

We utilize many up-to-date mining and processing methods, includingglobal 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 determined by marketforces outside of our control. Our management, therefore, focuses on costcontrol and production enhancement to remain profitable.  We endeavor to achieve these goals throughcapital 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.  Foradditional information on the sale prices of the metals we produce, please see “Metalprices.”

 

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Currency Information:

 

Unless stated otherwise, all our financial information is presented inUS dollars and any reference herein to “U.S. dollars”, “dollars”, or “$” are toU.S. dollars; references to “S/.”, “nuevo sol” or “nuevos soles”, are toPeruvian nuevos soles; and references to “peso”, “pesos”, or “Ps.”, are toMexican pesos.

 

Unit Information:

 

Unless otherwise noted, all tonnages are in metric tons.  To convert to short tons, multiply by1.102.  All ounces are troy ounces.  All distances are in kilometers.  To convert to miles, multiply by 0.621.  To convert hectares to acres, multiply by2.47.

 

ORGANIZATIONAL STRUCTURE

 

The following chart describes our organizational structure startingwith our controlling stockholder as of December 31, 2008.  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, GrupoMexico as of December 31, 2008ownsapproximately 79.0% of our capital stock. Grupo Mexico’s principal business isto act as a holding company for shares of other corporations engaged in themining, processing, purchase and sale of minerals and other products andrailway and other related services.

 

We conduct our operations in Peru through a registered branch (the “SPCCPeru Branch” or “Peruvian Branch”).  TheSPCC Peru Branch comprises substantially all of our assets and liabilitiesassociated with our copper operations in Peru. The SPCC Peru Branch is not 

 

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a corporation separate from us and, therefore, obligations of SPCC PeruBranch are direct obligations of SCC and vice-versa.  It is, however, an establishment, registeredpursuant to Peruvian law, through which we hold assets, incur liabilities andconduct operations in Peru.  Although ithas neither its own capital nor liability separate from us, it is deemed tohave equity capital for purposes of determining the economic interests ofholders of our investment shares, formerly known as labor shares (See Note 13 “Minorityinterest” of our consolidated financial statements).

 

On April 1, 2005, we acquired Minera Mexico, the largest miningcompany in Mexico on a stand-alone basis, from Americas Mining Corporation (“AMC”),a subsidiary of Grupo Mexico, our controlling stockholder.  Minera Mexico is a holding company and all ofits operations are conducted through subsidiaries that are grouped into threeunits: (i)the Mexcobre unit (ii) the Cananea unit and (iii) the IMMSAunit.  We own 99.95% of Minera Mexico.

 

In 2008, in accordancewith our approved $500 million share repurchase plan, we repurchased 28.5million of our common shares.  Inaddition, in 2008 AMC purchased approximately 11.8 million shares of our commonshares.   As a result of thesetransactions Grupo Mexico’s ownership of our capital stock increased to 79.0%. In2009, through February 23, we purchased an additional 2.7 million shares ofour common shares and AMC purchased 2.2 million shares of our common shares. Asa result, as of February 23, 2009 Grupo Mexico’s ownership of our capital stockincreased to 79.5%. Please see Note 22 “Subsequent Events”.

 

REPUBLIC OF PERU ANDMEXICO

 

Our revenues are derivedprincipally 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 with the U.S.Securities and Exchange Commission (“SEC”). You may read and copy any document we file at the SEC’s Public ReferenceRoom at 100 F Street, Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 forinformation on the Public Reference Room. The SEC maintains a web-site that contains annual, quarterly and currentreports, proxy statements and other information that issuers (includingSouthern Copper Corporation) file electronically with 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 freeof charge on this internet address our annual, quarterly and current reports,as soon as reasonably practical after we electronically file such materialwith, or furnish it to, the SEC.  Our webpage includes the Corporate Governance guidelines and the charters of ourmost significant Board Committees. However, the information found on our website is not part of this or anyother report.

 

CAUTIONARY STATEMENT

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production 

 

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operations, projectedquantities of future metal production, anticipated production rates, operatingefficiencies, costs and expenditures, including taxes, as well as projecteddemand or supply 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 and financing,the occurrence of unusual weather or operating conditions, lower than expectedore grades, water and geological problems, the failure of equipment orprocesses 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 affected bymetals prices on commodity exchanges, which can be volatile.

 

Additional businessinformation follows:

 

COPPER BUSINESS

 

Copper is the world’s third most widely used metal and an importantcomponent in the world’s infrastructure. Copper has unique chemical and physical properties, including highelectrical conductivity and resistance to corrosion, as well as excellentmalleability and ductility that has made it a superior material for use in theelectrical energy, telecommunications, building construction, transportationand industrial machinery businesses. Copper is also an important metal in non-electrical applications such asplumbing and roofing and, when alloyed with zinc to form brass, in manyindustrial and consumer applications.

 

Copper industryfundamentals, including copper demand, price levels and stocks, strengthened inlate 2003 and copper prices continued to improve into the third quarter of2008, from the 15-year price lows set during 2002.  However, late in the third quarter of 2008the price of copper along with many of the world’s principal commoditiesweakened and began a decline that continues to date.

 

BUSINESS REPORTINGSEGMENTS:

 

Company management views Southern Copper as having three operatingsegments and manages on the basis of these segments.

 

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

 

Intersegment sales are based on arm’s-length prices at the time ofsale. These may not be reflective of actual prices realized by the Company dueto various factors, including additional processing, timing of sales to outsidecustomers and transportation cost.  Addedto the segment information is information regarding the Company’s sales.  The segments identified by the Company are:

 

1.               Peruvian operations include the Toquepalaand Cuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines. Sales of its productsare recorded as revenue of our Peruvian mines. The Peruvian operations producecopper, with production of by-product molybdenum, silver and other material.

 

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2.               Mexican open pit operations, whichinclude La Caridad and Cananea mine complexes and the smelting and refiningplants and support facilities which service both mines.  Sales of its products are recorded as revenueof our Mexican mines.  The Mexican openpit operations produce copper, with production of by-products of molybdenum,silver and other material.

 

3.               Mexican underground mining operationsinclude five underground mines that produce zinc, copper, silver and gold, acoal mine which produces coal and coke, and several industrial processingfacilities for zinc, copper and silver. This group is identified as the IMMSA unit and sales of its products arerecorded as revenue of the IMMSA unit.

 

Financial information isregularly prepared for each of the three segments and the results are reportedto the Chief Operating Officer on the segment basis.  The Chief Operating Officer focuses onoperating income and on total assets as measures of performance to evaluatedifferent segments and to make decisions to allocate resources to the reportedsegments.  These are common measures inthe mining industry.

 

Segment information isincluded in Item 2 under the captions “Metal Production by Segments” and “OreReserves.”  More information on businesssegment and segment financial information are included in Note 20 of ourconsolidated financial statements.

 

CAPITAL EXPANSION PROGRAM

 

For a description of ourCapital Expansion Program see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations-Capital Expansion Program.”

 

EXPLORATION ACTIVITIES

 

We are engaged in ongoing extensive exploration to locate additionalore bodies in Peru, Mexico and Chile.  Wealso conduct exploration in the areas of our current mining operations.  We invested $37.0 million on explorationprograms in 2008, $40.2 million in 2007 and $22.7 million in 2006.  In view of the uncertain economic conditionsand the low metal prices we have reduced our budgeted 2009 explorationexpenditures to $22.7 million.

 

Currently in Peru, we have direct control of 194,190 hectares ofmineral rights.  In Mexico, we hold347,734 hectares of explorationconcessions.  We also hold 35,958hectares of exploration concessions in Chile.

 

Peru

 

*Los Chancas.*  The LosChancas project, located in the department of Apurimac in southern Peru, is acopper and molybdenum porphyry deposit.

 

As a result of the pre-feasibility studies and after the preliminarydesign of the pit, estimates show 355 million tons of mineralized material witha copper content of 0.62%, 0.05% of molybdenum and 0.039 grams of gold perton.  In the last quarter of 2008additional studies were started as well as a diamond drilling program foradditional 35,000 meters, in order to define the extent of the deposit.  Also a bidding process is under way for afeasibility study to be developed in 2009.

 

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* *

*Tantahuatay.*  TheTantahuatay project is located in the department of Cajamarca in northernPeru.  The exploration work conducted in2008 was intended to evaluate the upper part of the deposit mainly for goldrecovery.  Work to date indicates 27.1million tons of mineralized material, with an average silver content of 13.0grams per ton and 0.89 grams of gold per ton. In 2008 we continued with the feasibility study and with our efforts toresolve the social and environmental concerns of communities near theproject.  We have a 44.25% share in thisproject.

 

*Other Peruvian Prospects*

 

In 2008 we conducted a total of 32,551.90 meters of diamond drilling inthe area surrounding the Tia Maria Project as well as regional explorationconducted mainly in the Ayacucho Region. For 2009 the exploration program will be focused in central and southernPeru with defined projects in the Tacna and Ayacucho regions and we will continuewith prospecting programs in the different mineralized strips.

 

Mexico

 

In addition to exploratory drilling programs at existing mines, we arecurrently conducting exploration to locate mineral deposits at various othersites in Mexico.  The following are someof the more significant exploration projects:

 

*El Arco.*  The El Arcosite is located in the state of Baja California in Mexico.  Preliminary investigations of the El Arcosite indicate a deposit of 846 million tons of mineralized material with averagecopper grades of 0.51% and 0.14 grams of gold per ton, and 170 million tons ofleach mineralized materials with average copper grades of 0.56%.  In 2008, we have continued the process ofidentifying water sources for a leaching operation.  Production wells will be tested to determinethe water potential of this area.  Also,five diamond drill holes have been drilled to a depth of 600 meters.  The drilling indicates mineralized material,with 0.50%-0.70% copper mineralization extending 270 meters below thepreviously known mineralization.

 

*Angangueo.*  The Angangueosite is located in the state of Michoacán in Mexico.  A deposit of 13 million tons of mineralizedmaterial has been identified with diamond drilling.  Testing indicates that the deposit containsmineralized material containing 0.16 grams of gold and 262 grams of silver perton, and is comprised of 0.79% lead, 0.97% copper and 3.5% zinc.  During 2005, we received the approval for ourenvironmental impact study and we are in the process of obtaining land useapproval.  During 2008, we have continuednegotiating with the state of Michoacan to purchase various propertiesessential to the operation.  In addition,a feasibility study was commissioned; the results are expected to be availableby the end of first quarter 2009.

 

*Buenavista.*  The Buenavistaproject site is located in the state of Sonora in Mexico, adjacent to theCananea ore body.  Drilling andmetallurgical studies have shown that the site contains 36 million tons ofmineralized material containing 29 grams of silver, 0.69% of copper and 3.3% ofzinc per ton.  A new “scoping level”study indicates that Buenavista may be an economical deposit.  During 2007, 2,100 meters were drilled toupgrade the mineralized material and to acquire material for metallurgicaltesting.  Results confirm the previousgeologic interpretation of the mineralized areas.  Due to the Cananea strike no work wasperformed in 2008.

 

*Carbon Coahuila*.  In Coahuila,an intensive exploration program of diamond drilling has identified twoadditional areas, Esperanza with a potential for more than 30 million tons of “inplace” mineralized coal and Guayacan with a potential for 15 million tons of “inplace” mineralized coal, that could be used for a future coal-fired power plant.  During 2007 along with 5,767 meters ofdrilling, 23 million tons of mineralized coal 

 

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resources were identified at our Nueva Rosita No. 16concession.  Due to changed priorities,no work was done on this project in 2008.

 

*The Chalchihuites*. The Chalchihuites project is located in the state of Zacatecas.  It is a contact deposit with mixed oxides andsulfides of lead, copper, zinc and silver. A drilling program, in the late nineties, defined 16 million tons ofmineralized material containing 95 grams of silver, 0.36% lead, 0.69% copperand 3.08% zinc per ton.  Preliminarymetallurgical testing indicates a leaching precipitating-flotation recoveryprocess that can be applied to this ore. Due to other priorities only the diamond drilling for metallurgicaltesting was performed in 2008.

 

*Sierra de Lobos*. This project is located southwest of the city of Leon, Guanajuato.  Our target is a copper and zinc deposit withgrades between 0.5% and 1.0% copper and between 5% and 7% zinc including asmall contribution of gold and silver. In 2008, 1,636 meters were drilled. Results confirm the presence of copper and zinc mineralization, but aneconomic deposit has not yet been identified.

 

*Pilares*. During 2008, we bought Freeport-McMoran’s 49% interest in MineraPilares,S.A. de C.V. (“Minera Pilares”), giving us 100% ownership.  Minera Pilares is located in the state ofSonora, ten kilometers from the town of Nacozari de Garcia.  The work to clear and prepare the access tothe Porvenir tunnel started at the end of 2008. Calculations using Mine-Sight software indicated 52.9 million tons ofmineralized material, with 0.92% copper content.

 

Chile

 

*El Salado.*  The El Saladoprospect, located in the Atacama Region, corresponds to a copper-gold ore bodywhich includes the Diego de Almeida sector. During 2008 a total of 3,232 meters of diamond drilling was performedwhich is expected to continue in 2009.

 

*Other Chilean Prospects. *During 2008 we continued with the exploration ofResguardo, (gold and copper veins) located in northern Chile (RegionIII-Atacama), with 3,729 meters of diamond drilling.  We also performed 1,000 meters of diamonddrilling at the Ticnamar prospect located in northern Chile (RegionI-Tarapaca).  Ticnamar is a porphiricdeposit of copper and molybdenum.  Theexploration program for 2009 mainly contemplates continuing with the diamonddrilling at El Salado, Resguardo and Ticnamar and to obtain the necessarypermits to continue with the exploration of the gold-silver Catanave prospect.

 

PRINCIPAL PRODUCTS ANDMARKETS

 

The principal usesof copper are in the building and construction industry, electrical andelectronic products and, to a lesser extent, industrial machinery andequipment, consumer products and the automotive and transportationindustries.  Molybdenum is used totoughen alloy steels and soften tungsten alloy and is also used in fertilizers,dyes, enamels and reagents.  Silver isused for photographic, electrical and electronic products and, to a lesserextent, brazing alloys and solder, jewelry, coinage, silverware and catalysts.  Zinc is primarily used as a coating on ironand steel to protect against corrosion. It is also used to make die cast parts, in the manufacturing ofbatteries and in the form of sheets for architectural purposes.

 

Our marketing strategy and annual sales planning emphasize developingand maintaining long-term customer relationships, and thus acquiring annual orother long-term contracts for the sale of our products is a high priority.  Approximately 90% of our metal production forthe year 2008, 2007 and 2006, was sold under annual or longer-term 

 

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contracts.  Sales prices aredetermined based on prevailing commodity prices for the quotation periodaccording to the terms of the contract.

 

We focus on the ultimate end-user customers as opposed to selling onthe spot market or to trading companies. In addition, we devote significant marketing effort to diversifying oursales both by region and by customer base. We strive to provide superior customer service, including just-in-timedeliveries of our products.  Our abilityto consistently fulfill customer demand is supported by our substantialproduction capacity.

 

For additional information on sales please see Revenue recognition on Note2 “Summary of significant accounting policies” and Note 20 “Segments” of ourconsolidated financial statements.

 

METALS PRICES

 

Prices for our products are principally a function of supply and demandand, except for molybdenum, are established on the Commodities Exchange, orCOMEX, in New York and the London Metal Exchange or LME, the two most importantmetal exchanges in the world.  Prices forour molybdenum products are established by reference to the publication Platt’sMetals Week.  Our contract prices alsoreflect any negotiated premiums and the costs of freight and otherfactors.  From time to time, we haveentered into hedging transactions to provide partial protection against futuredecreases in the market price of metals and we may do so under certain marketconditions.  We have entered into copperswaps and collar contracts in 2008, 2007 and 2006, and into zinc swap contractsin 2006.  At December 31, 2008 wedid not have any copper or zinc swap contracts outstanding.  For a further discussion of derivativeinstruments see “Item 7 Quantitative and Qualitative Discussion about MarketRisk”.  For a further discussion ofprices for our products, please see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations —Metal Prices.”

 

The table below shows thehigh, low and average COMEX and LME copper prices during the last 15 years:

 
| ** ** | ** ** | **Copper (COMEX)** | ** ** | **Copper (LME)** | ** ** |
|------------|------------|--------------------|------------|------------------|------------|
| **Year**   | ** ** | **High**           | ** ** | **Low**          | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| 1994       |       | 1.40               |       | 0.78             |       | 1.07 |   | 1.40 |   | 0.78 |   | 1.05 |   |
| 1995       |       | 1.44               |       | 1.30             |       | 1.37 |   | 1.47 |   | 1.23 |   | 1.33 |   |
| 1996       |       | 1.31               |       | 0.86             |       | 1.06 |   | 1.29 |   | 0.83 |   | 1.04 |   |
| 1997       |       | 1.23               |       | 0.76             |       | 1.04 |   | 1.23 |   | 0.77 |   | 1.03 |   |
| 1998       |       | 0.86               |       | 0.64             |       | 0.75 |   | 0.85 |   | 0.65 |   | 0.75 |   |
| 1999       |       | 0.85               |       | 0.61             |       | 0.72 |   | 0.84 |   | 0.61 |   | 0.71 |   |
| 2000       |       | 0.93               |       | 0.74             |       | 0.84 |   | 0.91 |   | 0.73 |   | 0.82 |   |
| 2001       |       | 0.87               |       | 0.60             |       | 0.73 |   | 0.83 |   | 0.60 |   | 0.72 |   |
| 2002       |       | 0.78               |       | 0.65             |       | 0.72 |   | 0.77 |   | 0.64 |   | 0.71 |   |
| 2003       |       | 1.04               |       | 0.71             |       | 0.81 |   | 1.05 |   | 0.70 |   | 0.81 |   |
| 2004       |       | 1.54               |       | 1.06             |       | 1.29 |   | 1.49 |   | 1.06 |   | 1.30 |   |
| 2005       |       | 2.28               |       | 1.40             |       | 1.68 |   | 2.11 |   | 1.39 |   | 1.67 |   |
| 2006       |       | 4.08               |       | 2.13             |       | 3.10 |   | 3.99 |   | 2.06 |   | 3.05 |   |
| 2007       |       | 3.75               |       | 2.40             |       | 3.23 |   | 3.77 |   | 2.37 |   | 3.23 |   |
|       |       |               |       |             |       |   |   |   |   |   |   |   |   |
| 2008-1st Q |       | 3.99               |       | 3.05             |       | 3.53 |   | 4.03 |   | 3.02 |   | 3.54 |   |
| 2008-2nd Q |       | 4.03               |       | 3.53             |       | 3.80 |   | 4.03 |   | 3.59 |   | 3.83 |   |
| 2008-3rd Q |       | 4.08               |       | 2.89             |       | 3.45 |   | 4.08 |   | 2.91 |   | 3.48 |   |
| 2008-4th Q |       | 2.80               |       | 1.25             |       | 1.75 |   | 2.89 |   | 1.26 |   | 1.77 |   |
| 2008       |       | 4.08               |       | 1.25             |       | 3.13 |   | 4.08 |   | 1.26 |   | 3.16 |   |

 

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The per pound COMEXcopper price during the last 5, 10 and 15 year periods averaged $2.49, $1.63and $1.44, respectively.  The per poundLME copper price during the last 5, 10 and 15 year periods averaged $2.48,$1.62 and $1.42, respectively.

 

At February 23,2009, the COMEX and LME copper prices were $1.45 and $1.43 per pound,respectively.

 

The table below shows thehigh, low and average market prices for our three principal by-products duringthe last 15 years:

 
| ** ** | ** ** | **Zinc (LME)** | ** ** | **Silver (COMEX)** | ** ** | **Molybdenum  (Dealer Oxide Platt’s Metals Week)** | ** ** |
|------------|------------|----------------|------------|--------------------|------------|---------------------------------------------------------|------------|
| **Year**   | ** ** | **High**       | ** ** | **Low**            | ** ** | **Average**                                             | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| 1994       |       | 0.52           |       | 0.42               |       | 0.45                                                    |       | 5.78 |   | 4.57 |   | 5.28 |   | 15.50 |   | 2.76 |   | 4.51 |   |
| 1995       |       | 0.52           |       | 0.44               |       | 0.47                                                    |       | 6.10 |   | 4.38 |   | 5.19 |   | 16.50 |   | 4.25 |   | 8.08 |   |
| 1996       |       | 0.48           |       | 0.45               |       | 0.47                                                    |       | 5.82 |   | 4.67 |   | 5.18 |   | 5.25 |   | 3.13 |   | 3.79 |   |
| 1997       |       | 0.80           |       | 0.47               |       | 0.60                                                    |       | 6.31 |   | 4.16 |   | 4.87 |   | 4.75 |   | 3.59 |   | 4.31 |   |
| 1998       |       | 0.52           |       | 0.42               |       | 0.46                                                    |       | 7.26 |   | 4.61 |   | 5.53 |   | 4.48 |   | 2.10 |   | 3.42 |   |
| 1999       |       | 0.56           |       | 0.41               |       | 0.49                                                    |       | 5.76 |   | 4.87 |   | 5.22 |   | 2.80 |   | 2.52 |   | 2.66 |   |
| 2000       |       | 0.58           |       | 0.46               |       | 0.51                                                    |       | 5.55 |   | 4.56 |   | 4.97 |   | 2.92 |   | 2.19 |   | 2.56 |   |
| 2001       |       | 0.48           |       | 0.33               |       | 0.40                                                    |       | 4.81 |   | 4.03 |   | 4.36 |   | 2.58 |   | 2.19 |   | 2.35 |   |
| 2002       |       | 0.38           |       | 0.33               |       | 0.35                                                    |       | 5.11 |   | 4.22 |   | 4.60 |   | 7.90 |   | 2.43 |   | 3.76 |   |
| 2003       |       | 0.46           |       | 0.34               |       | 0.38                                                    |       | 5.98 |   | 4.35 |   | 4.89 |   | 7.60 |   | 3.28 |   | 5.29 |   |
| 2004       |       | 0.58           |       | 0.43               |       | 0.48                                                    |       | 8.21 |   | 5.51 |   | 6.68 |   | 32.38 |   | 7.35 |   | 16.20 |   |
| 2005       |       | 0.87           |       | 0.53               |       | 0.63                                                    |       | 9.00 |   | 6.43 |   | 7.32 |   | 39.25 |   | 25.00 |   | 31.99 |   |
| 2006       |       | 2.10           |       | 0.87               |       | 1.49                                                    |       | 14.85 |   | 8.82 |   | 11.54 |   | 28.20 |   | 21.00 |   | 24.75 |   |
| 2007       |       | 1.93           |       | 1.00               |       | 1.47                                                    |       | 15.50 |   | 11.47 |   | 13.39 |   | 33.75 |   | 24.50 |   | 30.19 |   |
|       |       |           |       |               |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 2008-1st Q |       | 1.28           |       | 0.99               |       | 1.10                                                    |       | 20.69 |   | 15.17 |   | 17.62 |   | 33.55 |   | 32.38 |   | 33.22 |   |
| 2008-2nd Q |       | 1.07           |       | 0.82               |       | 0.96                                                    |       | 18.31 |   | 16.12 |   | 17.17 |   | 33.35 |   | 32.35 |   | 32.90 |   |
| 2008-3rd Q |       | 0.92           |       | 0.74               |       | 0.80                                                    |       | 19.18 |   | 10.46 |   | 14.92 |   | 33.88 |   | 32.25 |   | 33.53 |   |
| 2008-4th Q |       | 0.75           |       | 0.47               |       | 0.54                                                    |       | 12.72 |   | 8.79 |   | 10.15 |   | 31.40 |   | 8.75 |   | 16.63 |   |
| 2008       |       | 1.28           |       | 0.47               |       | 0.85                                                    |       | 20.69 |   | 8.80 |   | 14.97 |   | 33.88 |   | 8.75 |   | 28.42 |   |

 

The per pound LME zincprice during the last 5, 10 and 15 year periods averaged $0.98, $0.71 and $0.63,respectively.  The per ounce COMEX silverprice during the last 5, 10  and 15 yearperiods averaged $10.78, $7.79 and $6.93, respectively.  The per pound Platt’s Metals Week DealerOxide molybdenum price during the last 5, 10 and 15 year periods averaged $26.31,$14.82 and $11.49, respectively.

 

At February 23, 2009the LME zinc price was $0.49 per pound, the COMEX silver price was $14.36 perounce and the Platt’s Metals Week Dealer Oxide molybdenum price was $8.70 perpound.

 

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, 2008, we had 11,494 employees, approximately73.0% of whom are covered by labor agreements with ten different laborunions.  During the last several 

 

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years, we have experienced strikes or other labor disruptions that havehad an adverse impact on our operations and operating results.  Since July 2007 and during all of 2008our Cananea mine, Taxco mine and San Martin mine in Mexico have been onstrike.  We cannot assure you when thesestrikes will be settled, or that in the future we will not experience strikesor other labor related work stoppages that could have a material adverseeffect on our financial condition and results of operations.

 

Peru

 

Approximately 68% of our Peruvian labor force was unionized at December 31,2008, represented by eight separate unions. Three of these unions, one at eachof our major production areas, represent the majority of our workers. Thecollective bargaining agreements for these unions last through February 2010.  Additionally, there are five smaller unions,representing the balance of our workers. Collective bargaining agreements forthis group are in force through November 2012.

 

From June 30 to July 5,2008 the three major unions went on strike in support of a mining federationstrike.  During this strike operationswere near normal; an insignificant amount of production was lost as we workedwith the support of the staff and administrative personnel and withcontractors.

 

Employees of theToquepala and Cuajone units reside in townsites, 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 townsite and housing complexes includeschools, medical facilities, churches, social clubs, shopping, banking andother services.

 

Mexico

 

Approximately 75% of our Mexican labor force was unionized at December 31,2008, represented by two separate unions. Under Mexican law, the terms of employment for unionized workers is setforth in collective bargaining agreements. Mexican companies negotiate the salary provisions of collectivebargaining agreements with the labor unions annually and negotiate otherbenefits every two years.  We conductnegotiations separately at each mining complex and each processing plant.

 

In the last sevenyears the Cananea mine has experienced more than nine labor stoppages totalingmore than 634 days of inactivity through December 31, 2008.  Since July 30, 2007 and during 2008, ourCananea mine in Mexico started a work stoppage, which continues into 2009.  On January 11, 2008 the Mexican FederalLabor Court declared the Cananea strike illegal and ordered the workers toreturn to work within 24 hours.  Theworkers partially returned to work and the Company resumed operations.  However, on April 11, 2008 the workersrestarted the labor stoppage and shut down production, based upon a newfederal ruling.  On September 4,2008, the Fourth Labor District Judge granted the Company’s motion forreconsideration of a ruling by the federal labor court.  In December 2008, the Mexican FederalLabor Court ruled in favor of the Company and declared the strike illegal.  The union appealed this decision.  On January 7, 2009 the judge of thefifth district on labor matters annulled the favorable decision to theCompany.  The Company has filed a requestfor a review of this ruling before an appellate federal court.  The Company will continue to pursue afavorable resolution of the labor stoppage.

 

The Company hastried unsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea; hence in the second quarter 2008, the Board of Directorsoffered all Cananea employees a severance payment in accordance with the 

 

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collective bargainingagreement and applicable law.  This wasoffered in order to award the employees a significant severance payment thatallows them to choose the labor alternative that is best for each of them.  During 2008, under this plan, a group ofemployees was terminated at a cost to the Company of $15.2 million, which wasrecorded in cost of sales on the consolidated statement of earnings.  We have estimated a liability of $36.4million, which has been recorded on the consolidated balance sheet.

 

The Company has the right to resume operations at the mine with thoseworkers who wish to continue. Nevertheless some strikers have illegally blocked the entrance to theunit.  The Company has filed twosuccessive complaints before an upper court in order to require the FifthDistrict judge to safeguard the Company’s right to operate.

 

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

 

In 2006, there were a number of work stoppages at some of ourMexican operations.  While some of thesework 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,workers at the Cananea copper mine went on strike on June 1, 2006returning to work six weeks later on July 17, 2006.  These work stoppages were declaredillegal by the Mexican authorities.  On June 9,2006, we announced the closing of the La Caridad mine as picketing workers madeit impossible to continue operations.  Asa result of these strikes, we declared “force majeure” on certain of our June andJuly copper contracts.  On July 14,2006, with the approval of a labor court, we dismissed the La Caridadworkers.  Individual work agreements, andthe collective union contract, were terminated in compliance with theprovisions of the 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.

 

Employees of the Mexcobre and Cananea Units reside in townsites at LaCaridad and Cananea, where we have built approximately 2,000 houses andapartments 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 townsites 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, retiredunionized employees and their families.

 

FUEL, ELECTRICITY AND WATER SUPPLIES

 

The principal raw materials used in our operations are fuels (includingfuel oil to power boilers and generators, natural gas for metallurgicalprocesses at our Mexican operations and diesel fuel for mining equipment),electricity and water.  We believe thatsupplies of fuel, electricity and water are readily available.  Although the prices of these raw materialsmay fluctuate beyond our control, we focus our efforts to reduce theseincreased costs through cost and energy saving measures.

 

Peru

 

In Peru, electric power for our operating facilities is generated bytwo thermal electric plants owned and operated by Energia del Sur, S.A. (“Enersur”),a diesel and 

 

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waste heat boilers plant located adjacent to the Ilo smelter and a coalplant located south of Ilo.  Powergeneration capacity for Peruvian operations is currently 344 megawatts.  In addition, we have nine megawatts of powergeneration capacity from two small hydro-generating installations atCuajone.  Power is distributed over a224-kilometer closed loop transmission circuit. We obtain fuel in Peru principally from a local producer.

 

In 1997, we sold our Ilo power plant to Enersur and entered into atwenty year power purchase agreement.  Weand Enersur also entered into an agreement for the sharing of certain servicesbetween the power plant and our smelter at Ilo. These arrangements were amended in 2003, releasing Enersur from itsobligations to construct additional capacity to meet our increased electricityrequirements.  We believe we can satisfythe need for increased electricity requirements for our Peru operations fromother sources, including local power providers.

 

In Peru, we have water rights or licenses for up to 1,950 liters persecond from well fields at Huaitire, Vizcachas and Titijones aquifers and alsosurface water from the Suches lake and two small water courses, namely QuebradaHonda and Quebrada Tacalaya, which together are sufficient to supply the needsof our two operating units at Toquepala and Cuajone.  At Ilo, we have desalinization plants thatproduce water for industrial and domestic use that we believe are sufficientfor our current and projected needs.

 

Mexico

 

In Mexico, fuel is purchased directly or indirectly from PetroleosMexicanos, (“PEMEX”), the state oil monopoly. Electricity for our Mexican operations, which is used as the main energysource at our mining complexes, is either purchased from the *Comision Federal de Electricidad* (theFederal Electricity Commission, or CFE), the state’s electrical power producer,or steam-generated at Mexcobre’s smelter by recovering energy from waste heatboilers.  Accordingly, a significantportion of our operating costs in Mexico are dependent upon the pricingpolicies 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 toimport natural gas from the United States at market prices and thereby reduceoperating costs.  A contract with PEMEXprovides us with the option of using a fixed price for a portion of our naturalgas purchases.

 

In the last three years we entered into gas swap contracts to protectpart of our gas consumption in both periods as follows:

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|----------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Gas volume  (MMBTUs)       |       | 460,000  |       | 900,000  |       | 3,650,000 |       |
| Fixed price                |       | $        | 8.2175     |     | $          | 7.5250    |       | $ | 4.2668 |   |
| (Loss) gain (in  millions) |       | $        | (0.9       | )        | $          | (0.9      | )          | $ | 6.3 |   |

 

The losses and gain obtained were included in the production cost.  At December 31, 2008, we did not holdany open gas swap contracts.

 

In December 2005, we announced our plans for a 450 megawatt coalpower generation plant in the state of Sonora, Mexico to supply our facilities.

 

In 2007, we reformulated this project to increase the plant capacity to600 megawatt.  During 2008, we continuedwith a feasibility study for this plant. In addition, we are reviewingdevelopments in the power plant equipment market, as well as the coal market,in order to reassess the project in light of the current economic crisis.

 

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In Mexico, water is a national property and industries not connected toa public services water supply must obtain a water concession from *Comisión Nacional del Agua* (the “NationalWater Commission”, or “CNA”).  Waterusage 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 LaAngostura dam, which is close to the mine and plants.  At our Cananea facility, we maintain our ownwells and pay the CNA for water measured by usage.  Water conservation committees have beenestablished in each plant in order to conserve and recycle water.  Water usage fees are updated on a yearly basisand have been increasing in recent years.

 

ENVIRONMENTAL MATTERS

 

Fora discussion of environmental matters reference is made to the informationcontained under the caption “Environmental matters” in “Note 14 Commitments andContingencies” of the consolidated financial statements.

 

**MINING RIGHTS AND CONCESSIONS**

** **

Peru

 

We have 249,554 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  |       | 25,045         |       | 19,723      |       | 9,419   |       | —    |       | 54,187    |       |
| Exploration |       | —         |       | —      |       | —  |       | 194,190   |       | 194,190   |       |
| Total       |       | 25,345         |       | 20,179      |       | 9,840   |       | 194,190   |       | 249,554   |       |

 

We believe that our Peruvianconcessions are in full force and in effect under applicable Peruvian laws andthat we are in compliance with all material terms and requirements applicableto these concessions.  The concessionshave indefinite terms, subject to our payment of concession fees of up to $3.00per hectare annually for the mining concessions and a fee based on nominalcapacity for the processing concessions. Fees paid during 2008, 2007 and 2006 were approximately $1.8 million,$1.4 million and $0.8 million, respectively. We have two types of mining concessions in Peru: metallic andnon-metallic concessions.  We also havewater concessions for well fields at Huaitire, Titijones and Vizcachas andsurface water rights from the Suches Lake, which together are sufficient to supplythe needs of our Toquepala and Cuajone operating units.

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies in favor of the regionalgovernments and communities where mining resources are located.  Under this law, we are subject to a 1% to 3%charge, based on sales, applicable to the value of the concentrates produced inour Toquepala and Cuajone mines.  We madeprovisions of $53.9 million, $62.8 million and $67.2 million in 2008, 2007 and2006, respectively, for this charge. These provisions are included in cost of sales (exclusive ofdepreciation, amortization and depletion) on the consolidated statement ofearnings.

 

 

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Mexico

 

In Mexico we haveapproximately 474,079 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 |       | 88,417                 |       | 112,409        |       | 22,317      |       | 250,936      |       | 474,079   |       |

 

We believe that ourMexican concessions are in full force and in effect under applicable Mexicanlaws and 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 mineral reserves.  Mining concessions have a 50-year term thatcan be renewed for another 50 years. Holding fees for mining concessions can be from $0.4 to $8.8 per hectaredepending on the expedition dates of mining concession.  Fees paid during 2008, 2007 and 2006 wereapproximately $2.5 million, $2.2 million and $2.1 million, respectively.  In addition, all of our operating units inMexico have water concessions that are in full force and effect.  We generally own the land to which ourMexican concessions relate, although ownership is not required in order toexplore or mine a concession.  We alsoown all of the processing facilities of our Mexican operations and the land onwhich they are constructed.

 

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Item 1A. Riskfactors

 

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

 

**GeneralRisks Relating to Our Business**

 

***Our financial performance is highly dependent on the priceof copper and the other metals we produce.***

 

Our financial performanceis significantly affected by the market prices of the metals that we produce,particularly the market prices of copper, molybdenum, zinc and silver.  Historically, prices of the metals we producehave been subject to wide fluctuations and are affected by numerous factorsbeyond our control, including international economic and political conditions,levels of supply and demand, the availability and costs of substitutes,inventory levels maintained by users, actions of participants in thecommodities markets and currency exchange rates.  In addition, the market prices of copper and certainother metals have on occasion been subject to rapid short-term changes.

 

During the last 15-yearperiod the yearly average price of copper per pound on the COMEX ranged from alow $0.72 in 1999 and 2002, to a high $3.23 in 2007.  In 2008 the COMEX copper price decreased froma quarterly high of $3.80 per pound in the second quarter to a quarterly low of$ 1.75 per pound in the fourth quarter and closed the year at $1.39 perpound.  The LME copper prices duringthese periods, while slightly different, closely paralleled the COMEXprices.  Molybdenum, zinc and silverduring the same 15-year period showed average highs and lows as follows:molybdenum $2.35 per pound, low in 2001 and $31.99 per pound, high in 2005;zinc $0.35 per pound, low in 2002 and $1.49 per pound, high in 2006; and silver$4.36 per ounce, low in 2001 and $14.97 per ounce high in 2008.  Also please see discussion in Item 1, “Business,”“Metal Prices.”

 

We cannot predict whethermetals prices will rise or fall in the future. Further declines in metals prices and, in particular, copper ormolybdenum prices, will have an adverse impact on our results of operations andfinancial condition, and we might, in very adverse market conditions, considercurtailing or modifying certain of our mining and processing operations.

 

***Changes in the level of demand for our products couldadversely affect our product sales.***

 

Our revenue is dependenton the level of industrial and consumer demand for the concentrates and refinedand semi-refined metal products we sell. Changes in technology, industrial processes and consumer habits mayaffect the level of that demand to the extent that changes increase or decreasethe need for our metal products.  Achange in demand, including any change resulting from economic slow-downs orrecessions, could impact our results of operations and financial condition.

 

***Our actual reserves may not conform to our current estimatesof our ore deposits and we depend on our ability to replenish ore reserves forour long-term viability.***

 

There is a degree ofuncertainty attributable to the calculation of reserves.  Until reserves are actually mined andprocessed, the quantity of ore and grades must be considered as estimatesonly.  The proven and probable orereserves data included in this report are estimates prepared by us based onevaluation methods generally used in the mining industry. In December 2006,as a result of an intensive drilling program followed by a review byindependent mining consultants, we announced an increase in 

 

 

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ore reserves at ourPeruvian copper mines.  We may berequired in the future to revise our reserves estimates based on our actualproduction.  We cannot assure you thatour actual reserves conform to geological, metallurgical or other expectationsor that the estimated volume and grade of ore will be recovered.  Market prices of our metals, 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 business requires levels of capital expenditures whichwe may not be able to maintain.***

 

Our business is capitalintensive.  Specifically, the explorationand exploitation of copper and other metal reserves, mining, smelting andrefining costs, the maintenance of machinery and equipment and compliance withlaws and regulations require capital expenditures.  We must continue to invest capital tomaintain or to increase the amount of copper reserves that we exploit and theamount of copper and other metals we produce. We cannot assure you that we will be able to maintain our productionlevels to generate sufficient cash, or that we have access to sufficient financingto continue our exploration, exploitation and refining activities at or abovepresent levels.  As a result of the world’scurrent economic situation, we have suspended most of our capital investmentprojects.

 

***Restrictive covenants in the agreements governing ourindebtedness and the indebtedness of our Minera Mexico subsidiary may restrictour ability to pursue our business strategies.***

 

Our financing instrumentsand those of our Minera Mexico subsidiary include financial and otherrestrictive covenants that, among other things, limit our and Minera Mexico’sabilities to incur additional debt and sell assets.  If either we or our Minera Mexico subsidiarydo not comply with these obligations, we could be in default under theapplicable agreements which, if not addressed or waived, could requirerepayment of the indebtedness immediately. Our Minera Mexico subsidiary is further limited by the terms of itsoutstanding notes, which also restrict the Company’s applicable incurrence ofdebt and liens.  In addition, futurecredit facilities may contain limitations on our incurrence of additional debtand liens and on our ability to dispose of assets.

 

***Applicable law restricts the payment of dividends from ourMinera Mexico subsidiary to us.***

 

Minera Mexico is aMexican company and, as such, may pay dividends only out of net income that hasbeen approved by the shareholders. Shareholders must also approve the actual dividend payment, aftermandatory legal reserves have been created and losses for prior fiscal yearshave been satisfied.  As a result, theselegal constraints may limit the ability of our Minera Mexico subsidiary to paydividends to us, which in turn, may have an impact on our ability to servicedebt.

 

Through 2008, our management set aside $2.4 billion of unremittedearnings of its Mexican subsidiary, Minera Mexico, as appropriated retainedearnings.  It is our 

 

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intention to indefinitely invest these funds in Mexico.  These amounts are earmarked for the Company’sMexican expansion program.  See also Note8 of the consolidated financial statements.

 

***Our operations are subject to risks, some of which are notinsurable.***

 

The business of mining,smelting and refining copper, zinc and other metals is subject to a number ofrisks and hazards, including industrial accidents, labor disputes, unusual orunexpected geological conditions, changes in the regulatory environment,environmental hazards and weather and other natural phenomena, such asearthquakes.  Such occurrences couldresult in damage to, or destruction of, mining operations resulting in monetarylosses and possible legal liability.  Inparticular, surface and underground mining and related processing activitiespresent inherent risks of injury to personnel and damage to equipment.  We maintain insurance against many of theseand other risks, which may not provide adequate coverage in certaincircumstances.  Insurance against certainrisks, including certain liabilities for environmental damage or hazards as aresult of exploration and production, is not generally available to us or othercompanies within the mining industry. Nevertheless recent environmental legal initiatives have consideredfuture regulations regarding environmental damage insurance.  In case such regulations come into force, wewill have to analyze the need to obtain such insurance.  We do not have, and do not intend to obtain,political risk insurance.  These or otheruninsured events may adversely affect our financial condition and results ofoperations.

 

***The loss of one of our large customers could have a negativeimpact on our results of operations.***

 

The loss of one or moreof our significant customers could adversely affect our financial condition andresults of operations.  In 2008, 2007 and2006, our largest customer accounted for approximately 10.6%, 12.4% and 10.1%,respectively, of our sales.  Additionally,our five largest customers in each of 2008, 2007 and 2006 collectivelyaccounted for approximately 35.8%, 39.6% and 33.7%, respectively, of our sales.

 

***Deliveries under our copper sales agreements can besuspended or cancelled by our customers in certain cases.***

 

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

 

***The copper mining industry is highly competitive.***

 

We face competition fromother copper mining and producing companies around the world.  We cannot assure you that competition from lowercost producers will not adversely affect us in the future.

 

In addition, mines havelimited lives and, as a result, we must periodically seek to replace and expandour reserves by acquiring new properties. Significant competition exists to acquire properties producing orcapable of producing copper and other metals.

 

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The mining industry hasexperienced significant consolidation in recent years, including consolidationamong some of our main competitors, as a result of which an increasedpercentage of copper production is from companies that also produce otherproducts and may, consequently, be more diversified than we are.  We cannot assure you that the result ofcurrent or further consolidation in the industry will not adversely affect us.

 

Potential changes tointernational trade agreements, trade concessions or other political andeconomic arrangements may benefit copper producers operating in countries otherthan Peru and Mexico, where our mining operations are currently located.  We cannot assure you that we will be able tocompete on the basis of price or other factors with companies that in thefuture may benefit from favorable trading or other arrangements.

 

***Increases in energy costs, accounting policy changes andother matters may adversely affect our results of operations.***

 

We require substantialamounts of fuel oil, electricity and other resources for our operations.  Fuel, gas and power costs constituteapproximately 43% of our total 2008 production cost.  We rely upon third parties for our supply ofthe energy resources consumed in our operations.  The prices for and availability of energyresources may be subject to change or curtailment, respectively, due to, amongother things, new laws or regulations, imposition of new taxes or tariffs,interruptions in production by suppliers, worldwide price levels and marketconditions.  For example, during the 1970sand 1980s, our ability to import fuel oil was restricted by Peruvian governmentpolicies that required us to purchase fuel oil domestically from agovernment-owned oil producer at prices generally substantially above thoseprevailing on the world market.  Inaddition, in recent years the price of oil has risen dramatically due to avariety of factors. Disruptions in supply or increases in costs of energyresources could have a material adverse effect on our financial condition andresults of operations.

 

We believe our results ofoperations can, from time to time, be affected by accounting policy changes,which could have a material adverse effect on our results of operations and ourfinancial position.

 

Additionally, we expectour future results will continue to be affected by the Peruvian mining royaltycharge, which has reduced our earnings since 2004, as further described underBusiness—Mining Rights and Concessions—Peru.

 

***Our results and financial condition are affected by globaland local market conditions.***

 

We are subject to the risks arising from adversechanges in domestic and global economic and political conditions.  The United States has been in recession sinceDecember 2007.  Business activityacross a wide range of industries and regions has greatly been reduced and manybusinesses are in serious difficulty due to the lack of consumer spending andthe lack of liquidity in the credit markets. Unemployment has increased significantly.  Other economies in the world are similarlyaffected.  Our industry is cyclical bynature and fluctuates with economic cycles, including the current globaleconomic recession.

 

The continued creditcrisis and related turmoil in the global financial system has had and maycontinue to have an impact on our business and our financial condition.  The global economic recession and creditcrisis in the financial markets may prompt banks to limit or deny lending to usor to our customers, which may have an adverse effect on our liquidity and onour ability to carry out our announced capital investment 

 

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programs.  Additionally, the global economic recessionand credit crisis may prompt our customers to slow down or reduce the purchaseof our products.  We may experiencelonger sales cycles, difficulty in collecting sales proceeds, and lower pricesfor our products.  A change in the demandof our products could impact our results of operations and financialcondition.  We cannot provide any assurance that any ofthese events will not have a material adverse effect on market conditions,prices of our securities, our ability to obtain financing, and our results ofoperations and financial condition.

 

***We may be adversely affected by labor disputes.***

 

In the last several yearswe have experienced a number of strikes or other labor disruptions that havehad an adverse impact on our operations and operating results.  See “Business—Employees.”  We could experience labor disputes, work stoppages orother disruptions in production that could adversely affect us. As of December 31,2008, unions represented approximately 73% of our workforce.

 

In the last seven yearsthe Cananea mine has experienced more than nine labor stoppages totalingmore than 634 days of inactivity as of December 31, 2008.  Beginning in July 2007, our Cananeamine, as well as Taxco and San Martin in Mexico started a work stoppage, whichcontinues into 2009.  On January 11,2008 the Mexican Federal Labor Court declared the Cananea strike illegal andordered the workers to return to work within 24 hours.  The workers partially returned to work andthe Company resumed operations. However, on April 11, 2008 the workersrestarted the labor stoppage and shut down production, based upon a newfederal ruling.  On September 4,2008, the Fourth Labor District Judge granted the Company the right for a newrevision regarding a ruling by the federal labor court which will issue a newdecision.  The Company has triedunsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea and in the second quarter 2008, the Board of Directorsoffered all employees a severance payment in accordance with the collectivebargaining agreement and applicable law. This was offered in order to award the employees a significant severancepayment that allows them to choose the labor alternative that is best for eachof them.  During 2008, under this plan agroup of employees was terminated at a cost of $15.2 million.  In December 2008, the Mexican FederalLabor Court ruled in favor of the Company and declared the strike illegal.  The union appealed this decision.  On January 7, 2009 the judge of thefifth district on labor matters annulled the favorable decision to theCompany.  The Company has filed a requestfor a review of this ruling before an appellate federal court.  The Company will continue to pursue afavorable resolution of the labor stoppage.

 

The Company hasthe right to resume operations at the mine with those workers who wish tocontinue.  Nevertheless some strikershave illegally blocked the entrance to the unit.  The Company has filed two successivecomplaints before an upper court in order to require the Fifth District judgeto safeguard the Company’s right to operate.

 

Additionally, during2006, there were a number of work stoppages at some of our other Mexicanoperations.  While some of these workstoppages were of a short-term nature with little or no production loss, othershave been more disruptive.  A strike atthe La Caridad copper mine in Sonora began in the first quarter of 2006 andended in July 2006.  As a result ofthese strikes, we were forced to declare “force majeure” on certain of our June andJuly copper contracts. In 2006, we also experienced strikes at our Cananeaand San Martin mines.

 

Collective bargaining agreements with the Company’s Peruvian laborunions expired in 2007.  A number ofstrikes were initiated by the Company’s labor unions, demanding wage increasesand better benefits.  In addition, someof the unions went on strike in support of national union strikes.  These strikes were generally of a briefnature and 

 

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the Company was able to continue normal operations with the support ofstaff and administrative personnel and contractors.  New collective bargaining agreements, forperiods ranging from three to six years were signed with all of the Company’sunions.

 

***Environmental, health and safety laws and other regulationsmay increase our costs of doing business, restrict our operations or result inoperational delays.***

 

Our exploration, mining,milling, smelting and refining activities are subject to a number of Peruvianand Mexican laws and regulations, including environmental laws and regulations,as well as certain industry technical standards.  Additional matters subject to regulationinclude, but are not limited to, concession fees, transportation, production,water use and discharge, power use and generation, use and storage ofexplosives, surface rights, housing and other facilities for workers,reclamation, taxation, labor standards, mine safety and occupational health.

 

Environmental regulationsin Peru and Mexico have become increasingly stringent over the last decade andwe have been required to dedicate more time and money to compliance andremediation activities.  Furthermore, Mexicanauthorities have become more rigorous and strict in enforcing Mexicanenvironmental laws.  We expect additionallaws and regulations will be enacted over time with respect to environmentalmatters.  Recently, Peruvianenvironmental laws have been enacted imposing closure and remediationobligations on the mining industry. Moreover, our Mexican operations are also subject to the environmentalagreement entered into by Mexico, the United States and Canada in connectionwith the North American Free Trade Agreement. We believe our operations are incompliance with all environmental laws and regulations within the areas weoperate.

 

The development of morestringent environmental protection programs in Peru and Mexico and in relevanttrade agreements could impose constraints and additional costs on ouroperations and require us to make significant capital expenditures in thefuture.  We cannot assure you that futurelegislative, regulatory or trade developments will not have an adverse effecton our business, properties, results of operations, financial condition orprospects.

 

***Our metals exploration efforts are highly speculative innature and may be unsuccessful.***

 

Metals exploration ishighly speculative in nature, involves many risks and is frequentlyunsuccessful.  Once mineralization isdiscovered, it may take a number of years from the initial phases of drillingbefore production is possible, during which time the economic feasibility ofproduction may change.  Substantialexpenditures are required to establish proven and probable ore reserves throughdrilling, to determine metallurgical processes to extract the metals from theore and, in the case of new properties, to construct mining and processingfacilities.  We cannot assure you thatour exploration programs will result in the expansion or replacement of currentproduction with new proven and probable ore reserves.

 

Development projects haveno operating history upon which to base estimates of proven and probable orereserves and estimates of future cash operating costs.  Estimates are, to a large extent, based uponthe interpretation of geological data obtained from drill holes and othersampling techniques, and feasibility studies that derive estimates of cashoperating costs based upon anticipated tonnage and grades of ore to be minedand processed, the configuration of the ore body, expected recovery rates ofthe mineral from the ore, comparable facility and equipment operating costs,anticipated climatic conditions and other factors.  As a result, actual cash operating costs andeconomic returns based upon development of proven and probable ore reserves maydiffer significantly from those originally estimated.  Moreover, significant 

 

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decreases in actual orexpected prices may mean reserves, once found, will be uneconomical to produce.

 

***Our profits may be negatively affected by currency exchangerate fluctuations.***

 

The U.S. dollar is ourfunctional currency and our revenues are primarily denominated in U.S.dollars.  However, portions of ouroperating costs are denominated in Peruvian nuevos soles and Mexican pesos.  Accordingly, when inflation in Peru or Mexicoincreases without a corresponding devaluation of the nuevo sol or the Mexicanpeso 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.

 

Our assets, earnings andcash flows are influenced by various currencies due to the geographic diversityof our sales and the countries in which we operate.  As some of our costs are incurred incurrencies other than our functional currency, the U.S. dollar, fluctuations incurrency exchange rates may have a significant impact on our financial results.  These costs principally include electricity,labor, maintenance, local contractors and fuel. For the year ended December 31, 2008, a substantial portion of ourcosts were denominated in a currency other than U.S. dollar.  Operating costs are influenced by thecurrencies of the countries where our mines and processing plants are locatedand also by those currencies in which the costs of equipment and services aredetermined.  The Peruvian nuevo sol, theMexican peso and the U.S. dollar are the most important currencies influencingour costs.

 

Further, in the pastthere has been a strong correlation between copper prices and the exchange rateof the U.S. dollar.  A strengthening ofthe U.S. dollar may therefore be accompanied by lower copper prices, whichwould negatively affect our financial condition and results of operations.

 

***We may be adversely affected by challenges relating to slopestability.***

 

Our open-pit mines getdeeper as we mine them, presenting certain geotechnical challenges including thepossibility of slope failure.  If we arerequired to decrease pit slope angles or provide additional road access toprevent 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.

 

***Litigation involving Asarco may adversely affect us.***

 

Our direct andindirect parent corporations, including AMC and Grupo Mexico, have from time totime been named parties in various litigations involving Asarco LLC (“Asarco”).  In August 2002 the U.S. Department ofJustice brought 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.  In March 2003, AMC purchasedits interest in SCC from a subsidiary of Asarco.  In October 2004, AMC, Grupo Mexico,Mexicana de Cobre and other parties, not including SCC, were named in a lawsuitfiled in New York State court in connection with alleged asbestos liabilities,which lawsuit claims, among other matters, that AMC’s purchase of SCC fromAsarco should 

 

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be voided as afraudulent conveyance.  The lawsuit filedin New York State court was stayed as a result of the August 2005 Chapter11 bankruptcy filing by Asarco, as described below.  However, on November 16, 2007, thislawsuit, after being removed to federal court, was transferred to the UnitedStates District Court for the Southern District of Texas in Brownsville, Texas,for resolution in conjunction with a new lawsuit filed by Asarco, the debtor inpossession.  On February 2, 2007 acomplaint was filed by Asarco, the debtor in possession, alleging many of thematters previously claimed in the New York State lawsuit, including that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance. In June 2008the lawsuit was concluded in Brownsville, Texas. The constructive fraudulentconveyance claim was dismissed; however the actual fraud and the aiding andabetting the breach of fiduciary duties counts were favorable to plaintiffs.The court’s decision did not determine the damage amount.  Grupo Mexico has stated they will appeal theruling.  In late December 2004 andearly January 2005, three purported class action derivative lawsuits werefiled in the Delaware Court of Chancery (New Castle County) relating to themerger transaction between SCC and Minera Mexico. On January 31, 2005, thethree actions were consolidated. The complaint alleges, among other things,that the merger was the result of breaches of fiduciary duties by SCC’sdirectors and was not entirely fair to SCC and its minority stockholders.  The case is currently in the early stages ofdiscovery. The defendants believe that the lawsuit is without merit and arevigorously defending the action.  WhileGrupo Mexico and its affiliates believe that these claims are without merit,the Company cannot assure you that these or future claims, if successful, willnot have an adverse effect on the Company’s parent 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, certainsubsidiaries of Asarco filed bankruptcy petitions in connection with allegedasbestos liabilities.  In July 2005,the unionized workers of Asarco commenced a work stoppage.  As a result of various factors, including theabove-mentioned work stoppage, in August 2005 Asarco filed a voluntarypetition for relief under Chapter 11 of the U.S. Bankruptcy Code before theU.S. Bankruptcy Court in Corpus Christi, Texas. Asarco’s bankruptcy case is being joined with the bankruptcy cases ofits subsidiaries.  Asarco’s bankruptcycould result in additional claims being filed against Grupo Mexico and itssubsidiaries, including SCC, Minera Mexico or its subsidiaries.

 

***We are controlled by Grupo Mexico, which exercises controlover our affairs and policies and whose interests may be different from yours.***

 

Grupo Mexico ownsindirectly approximately 79.0% of our capital stock.  Certain of our and Minera Mexico’s officersand directors are also officers of Grupo Mexico.  We cannot assure you that the interests ofGrupo Mexico will not conflict with ours.

 

Grupo Mexico has theability to determine the outcome of substantially all matters submitted for avote to our stockholders and thus exercises control over our business policiesand affairs, including the following:

 

·                  the composition of our board of directorsand, as a result, any determinations of our board with respect to our businessdirection and policy, including the appointment and removal of our officers;

 

·                  determinations with respect to mergersand other business combinations, including those that may result in a change ofcontrol;

 

·                  whether dividends are paid or otherdistributions are made and the amount of any dividends or other distributions;

 

·                  sales and dispositions of our assets; and

 

·                  the amount of debt financing that weincur.

 

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In addition, we andMinera Mexico have in the past engaged in, and expect to continue to engage in,transactions with Grupo Mexico and its other affiliates which are related partytransactions and 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 not continue to pay a significant amount of our netincome as cash dividends on our common stock in the future.***

 

We have distributed asignificant amount of our net income as dividends since 1996.  Our dividend practice is subject to change atthe discretion of our Board of Directors at any time.  The amount that we pay in dividends issubject to a number of factors, including our results of operations, financialcondition, cash requirements, tax considerations, future prospects, legal restrictions,contractual restrictions in credit agreements, limitations imposed by thegovernment of Peru, Mexico or other countries where we have significantoperations and other factors that our board of directors may deemrelevant.  In light of our expansionprogram and the current global economic recession and credit crisis we expectthat future dividend distributions will be reduced from the levels of recentyears.

 

**RisksAssociated with Doing Business in Peru and Mexico**

 

***There is uncertainty as to the termination and renewal ofour mining concessions.***

 

Under the laws of Peruand Mexico, mineral resources belong to the state and government concessionsare required in both countries to explore for or exploit mineral reserves.  In Peru, our mineral rights derive from concessionsfrom the Peruvian Ministry of Energy and Mines for our exploration,exploitation, extraction and/or production operations.  In Mexico, our mineral rights derive fromconcessions granted, on a discretionary basis, by the Ministry of Economy,pursuant to the Mining Law and regulations thereunder.

 

Mining concessions inboth Peru and Mexico may be terminated if the obligations of the concessionaireare not satisfied.  In Peru, we areobligated to pay certain fees for our mining concession.  In Mexico, we are obligated, among otherthings, to explore or exploit the relevant concession, to pay any relevantfees, to comply with all environmental and safety standards, to provideinformation to the Ministry of Economy and to allow inspections by the Ministryof Economy.  Any termination orunfavorable modification of the terms of one or more of our concessions, orfailure to obtain renewals of such concessions subject to renewal orextensions, could have a material adverse effect on our financial condition andprospects.

 

***Peruvian economic and political conditions may have anadverse impact on our business.***

 

A significant part of ouroperations are conducted in Peru. Accordingly, our business, financial condition or results of operationscould be affected by changes in economic or other policies of the Peruviangovernment or other political, regulatory or economic developments inPeru.  During the past several decades,Peru has had a history of political instability that has included military coupsand a succession of regimes with differing policies and programs.  Past governments have frequently intervenedin the nation’s economy and social structure. Among other actions, past governments have imposed controls on prices,exchange rates and local and foreign investment as well as limitations onimports, have restricted the ability of companies to dismiss employees, haveexpropriated private sector assets (including mining companies) and haveprohibited the remittance of profits to foreign investors.

 

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There is a risk ofterrorism in Peru relating to *SenderoLuminoso* and the *MovimientoRevolucionario Tupac Amaru*, which were particularly active in the1980s and early 1990s.  To a much lesserdegree terrorist incidents have continued in some rural areas of the country.

 

Because we havesignificant operations in Peru, we cannot provide any assurance that politicaldevelopments and economic conditions in Peru and/or terrorist activity will nothave a material adverse effect on market conditions, prices of our securities,our ability to obtain financing, and our results of operations and financialcondition.

 

***Mexican economic and political conditions may have anadverse impact on our business.***

 

A significant part of ouroperations are based in Mexico. In the past, Mexico has experienced bothprolonged periods of weak economic conditions and dramatic deterioration ineconomic conditions, characterized by exchange rate instability and significantdevaluation of the peso, increased inflation, high domestic interest rates, asubstantial outflow of capital, negative economic growth, reduced consumerpurchasing power and high unemployment. An economic crisis occurred in 1995 in the context of a series ofinternal disruptions and political events including a large current accountdeficit, civil unrest in the southern state of Chiapas, the assassination oftwo prominent political figures, a substantial outflow of capital and asignificant devaluation of the peso.

 

A general election washeld in Mexico on July 2, 2006, with Mr. Felipe Calderon as thewinner.  The results were contested andrecounts were made.  Nevertheless, on December 1,2006, Mr. Calderon was sworn in as president of Mexico.

 

Because we havesignificant operations in Mexico, we cannot provide any assurance thatpolitical developments and economic conditions in Mexico, will not have amaterial adverse effect on market conditions, prices of our securities, ourability to obtain financing, and our results of operations and financialcondition.

 

***Peruvian inflation reduced economic growth and fluctuationsin the nuevo sol exchange rate may adversely affect our financial condition andresults of operations.***

 

Over the past severaldecades, Peru has experienced periods of high inflation, slow or negativeeconomic growth and substantial currency devaluation.  The inflation rate in Peru, as measured bythe *Indice de Precios al Consumidor*(Consumer Price Index) and published by the *InstitutoNacional de Estadistica e Informatica*, (National Institute ofStatistics and Informatics), has fallen from a high of 7,649.7% in 1990 to 6.7%in 2008.  The Peruvian currency has beendevalued numerous times during the last 20 years.  The devaluation rate has decreased from ahigh of 4,019.3% in 1990 to 4.8% in 2008. Our revenues are primarily denominated in U.S. dollars and our operatingexpenses are partly denominated in U.S. dollars.  If inflation in Peru were to increase withouta corresponding devaluation of the nuevo sol relative to the U.S. dollar, ourfinancial position and results of operations, and the market price of ourcommon stock, could be affected. Although the Peruvian government’s economic policy reduced inflation andthe Peruvian economy has experienced a significant growth in recent years, wecannot assure you that inflation will not increase from its current level orthat such growth will continue in the future at similar rates or at all.

 

Among the economiccircumstances that could lead to a devaluation of the nuevo sol is the declineof Peruvian foreign reserves to inadequate levels.  Peru’s foreign reserves at December 31,2008, were $31.2 billion as compared to $27.7 billion and $17.3 billion at December 31,2007 and 2006, respectively.  We cannotassure that Peru will be able to maintain adequate foreign reserves to meet itsforeign currency 

 

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denominated obligationsor that Peru will not devalue its currency should its foreign reserves decline.

 

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

 

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

 

The annual inflation ratein Mexico was 6.5% in 2008, 3.8% in 2007 and 4.1% in 2006.  The Bank of Mexico has publicly announced anobjective of 3% inflation for 2009.  Atthe same time, the peso has been subject in the past to significantdevaluation, which may not have been proportionate to the inflation rate andmay not be proportionate to the inflation rate in the future.  The value of the peso decreased by 24.5% in2008, increased by 0.1% in 2007 and decreased by 1.5% in 2006.

 

While the Mexicangovernment does not currently restrict the ability of Mexican companies orindividuals to convert pesos into dollars or other currencies, in the future,the Mexican government could impose a restrictive exchange control policy, asit has done in the past.  We cannotassure you that the Mexican government will maintain its current policies withregard to the peso or that the peso’s value will not fluctuate significantly inthe future.  The imposition of suchexchange control policies could impair Minera Mexico’s ability to obtainimported goods and to meet its U.S. dollar-denominated obligations and couldhave an adverse effect on our business and financial condition.

 

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

 

The market value ofsecurities of companies with significant operations in Peru and Mexico is, tovarying degrees, affected by economic and market conditions in other emergingmarket countries.  Although economicconditions in such countries may differ significantly from economic conditionsin Peru or Mexico, as the case may be, investors’ reactions to developments inany of these other countries may have an adverse effect on the market value ortrading price of the securities, including debt securities, of issuers thathave significant operations in Peru or Mexico.

 

In addition, in recentyears economic conditions in Mexico have increasingly become correlated to U.S.economic conditions.  Therefore, adverseeconomic conditions in the United States could also have a significant adverseeffect on Mexican economic conditions, including the price of our common stockor debt securities.

 

We cannot assure you thatthe market value or trading prices of our common stock and debt securities,will not be adversely affected by events in the United States or elsewhere,including in emerging market countries.

 

Item 1B.Unresolved Staff Comments

 

None

 

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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, Arizona85028.  Our telephone number in Phoenix,Arizona is (602) 494-5328.  Our corporateoffices in Mexico are located in Mexico City and our corporate offices in Peruare located in Lima.  Our website iswww.southerncoppercorp.com.  We believethat our existing properties are in good condition and suitable for the conductof our business.

 

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.

 

 

EXTRACTION, SMELTING AND REFINING PROCESSES

 

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

 

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OPEN-PIT MINING

 

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

 

UNDERGROUND MINING

 

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

 

CONCENTRATING

 

The copper ore with a copper grade over 0.4% from the primary crusheror 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 where it is ground to theconsistency of fine powder.  The finelyground ore is mixed with water and chemical reagents and pumped as a slurry tothe flotation separator where it is mixed with certain chemicals.  In the flotation separator, reagents solutionand air pumped into the flotation cells cause the minerals to separate from thewaste rock and bubble to the surface where they are collected and dried.

 

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

 

COPPER SMELTING

 

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

 

COPPER REFINING

 

Anodes are suspended in tanks containing sulfuric acid and coppersulfate.  A weak electrical current ispassed through the anodes and chemical solution and the dissolved copper isdeposited on very thin starting sheets to produce copper cathodes containingapproximately 99.99% copper.  During 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.

 

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COPPER ROD PLANT

 

To produce copper rod, copper cathodes are first smelted in a furnaceand then dosified in a casting machine. The dosified copper is then extruded and passed through a cooling systemthat begins solidification of copper into a 60 ́50millimeter copper bar.  The resultingcopper bar is gradually stretched in a rolling mill to achieve the desireddiameter.  The rolled bar is then cooledand sprayed with wax as a preservation agent and collected into a rod coil thatis compacted and sent to market.

 

SOLVENT EXTRACTION/ELECTROWINNING (SX/EW)

 

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

 

MOLYBDENUM PRODUCTION

 

Molybdenum is recovered from copper-molybdenum concentrates produced atthe concentrator.  The copper-molybdenumconcentrate is first treated with a thickener until it becomes slurry with 60%solids.  The slurry is then agitated in achemical and water 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 zinc concentratesand zinc oxides.  Sulfur is eliminatedfrom the concentrates by roasting and the zinc oxide is dissolved in sulfuricacid solution to eliminate solid impurities. The purified zinc sulfide solution is treated by electrolysis to producerefined zinc and to separate silver and gold, which are recovered asconcentrates.

 

SULFURIC ACID PRODUCTION

 

Sulfur dioxide gases are produced in the copper smelting and zincroasting processes.  As a part of ourenvironmental preservation program, we treat the sulfur dioxide emissions attwo of our Mexican plants and at Peruvian processing facilities to producesulfuric acid, some of which is, in turn, used for the copper leaching process,with the rest sold to mining and fertilizer companies located principally inMexico, Peru, the United States, Chile and other countries.

 

SILVER AND GOLD REFINING

 

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

 

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*** ***

***KEY PRODUCTION CAPACITY DATA:***

*** ***

***All production facilities areowned by the Company.  The followingtable sets forth as of December 31, 2008, the locations of productionfacilities by reportable segment, the processes used, as well as the keyproduction and capacity data for each location:***

*** ***
| **Facility Name**                   | ** ** | **Location**     | ** ** | **Process**                                                                                  | ** ** | **Nominal Capacity (1)**             | ** ** | **2008  Production** | ** ** | **2008 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             |       | 83.8 ktpd            |       | 96.3 %                        |
| Toquepala  Open-pit Mine            |       | Toquepala (Peru) |       | Copper ore milling and recovery, copper and  molybdenum concentrate production               |       | 60.0 ktpd — Milling             |       | 59.8 ktpd            |       | 99.7 %                        |
| Toquepala   SX-EW Plant             |       | Toquepala (Peru) |       | Leaching, solvent extraction and cathode electro  winning                                    |       | 56.0 ktpy — Refined             |       | 40.1 ktpy            |       | 71.6 %                        |
|                                |       |             |       |                                                                                         |       |                                 |       |                 |       |                          |
| **Processing Operations**           | ** ** | ** **       | ** ** | ** **                                                                                   | ** ** | ** **                           | ** ** | ** **           |
| Ilo Copper Smelter                  |       | Ilo (Peru)       |       | Copper smelting, blister, anodes production                                                  |       | 1,200.0 ktpy — Concentrate feed |       | 1,003.3 ktpy         |       | 83.6 %                        |
| Ilo Copper Refinery                 |       | Ilo (Peru)       |       | Copper refining                                                                              |       | 280 ktpy — Refined cathodes     |       | 248.7 ktpy           |       | 88.8 %                        |
| Ilo Acid Plants                     |       | Ilo (Peru)       |       | Sulfuric Acid                                                                                |       | 1,050 ktpy — Sulfuric acid      |       | 958.6 ktpy           |       | 91.2 %                        |
| Ilo Precious Metals Refinery        |       | Ilo (Peru)       |       | Slime recovery & processing,  gold & silver refining                       |       | 320 tpy                              |       | 294.0 tpy            |       | 91.9 %                        |
|                                |       |             |       |                                                                                         |       |                                 |       |                 |       |                          |
| **MEXICAN OPEN PIT UNIT**           | ** ** | ** **       | ** ** | ** **                                                                                   | ** ** | ** **                           | ** ** | ** **           |
| Cananea Open-Pit Mine (2)           |       | Sonora (Mexico)  |       | Copper Ore milling & recovery, copper concentrate  production                       |       | 76.7 ktpd — Milling             |       | 16.7 ktpd            |       | 21.8 %                        |
| Cananea SX-EW I, II Plants (2) |       | Sonora (Mexico)  |       | Leaching, solvent extraction & refined  cathode electrowinning                      |       | 54.8 ktpy (combined)                 |       | 9.5 ktpy             |       | 17.3 %                        |
| La Caridad Open-Pit Mine            |       | Sonora (Mexico)  |       | Copper ore milling & recovery,  copper & molybdenum concentrate production |       | 90.0 ktpd — Milling             |       | 86.3 ktpd            |       | 95.9 %                        |
| La Caridad SX-EW Plant              |       | Sonora (Mexico)  |       | Leaching, solvent extraction & cathode  electro winning                             |       | 21.9 ktpy — Refined             |       | 22.0 ktpy            |       | 100.5 %                       |

 

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| **Processing Operations**                | ** ** | ** **                | ** ** | ** **                                                                                       | ** ** | ** **                                             | ** ** | ** **           |
|------------------------------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------|
| La Caridad Copper Smelter                |       | Sonora (Mexico)           |       | Concentrate smelting, anode production                                                           |       | 1,000 ktpy — Concentrate feed                     |       | 574.6 ktpy           |   | 57.5 % |
| La Caridad Copper Refinery               |       | Sonora (Mexico)           |       | Copper refining                                                                                  |       | 300 ktpy Copper cathode                                |       | 140.3 ktpy           |   | 46.8 % |
| La Caridad Copper Rod Plant              |       | Sonora (Mexico)           |       | Copper rod production                                                                            |       | 150 ktpy Copper rod                                    |       | 76.3 ktpy            |   | 50.9 % |
| La Caridad Precious Metals Refinery      |       | Sonora (Mexico)           |       | Slime recovery & processing,  gold & silver refining                           |       | 2.8 ktpy — Slime                                  |       | 0.6 ktpy             |   | 21.4 % |
| La Caridad Sulfuric Acid Plant           |       | Sonora (Mexico)           |       | Sulfuric acid                                                                                    |       | 1,565.5 ktpy — Sulfuric acid                      |       | 578.2 ktpy           |   | 36.9 % |
|                                     |       |                      |       |                                                                                             |       |                                                   |       |                 |   |   |
| **IMMSA UNIT**                           | ** ** | ** **                | ** ** | ** **                                                                                       | ** ** | ** **                                             | ** ** | ** **           |
| Underground Mines                        | ** ** | ** **                | ** ** | ** **                                                                                       | ** ** | ** **                                             | ** ** | ** **           |
| Charcas                                  |       | San Luis Potosi (Mexico)  |       | Copper, zinc, lead milling, recovery &  concentrate production                          |       | 1,460 ktpy — Milled ore                           |       | 1,168.7 ktpy         |   | 80.1 % |
| San Martin (2)                           |       | Zacatecas (Mexico)        |       | Lead, zinc, copper & silver mining, milling  recovery & concentrate production |       | 1,606 ktpy — Milled ore                           |       | 0.0 ktpy             |   | 0.0 % |
| Santa Barbara                            |       | Chihuahua (Mexico)        |       | Lead, copper and zinc mining & concentrates  production                                 |       | 2,190 ktpy - Milled ore                                |       | 1,450.5 ktpy         |   | 66.2 % |
| Santa Eulalia                            |       | Chihuahua (Mexico)        |       | Lead & zinc mining and milling  recovery & concentrate production              |       | 547.5 ktpy — Milled ore                           |       | 280.9 ktpy           |   | 51.3 % |
| Taxco (2)                                |       | Guerrero (Mexico)         |       | Lead, zinc silver & gold mining  recovery & concentrate production             |       | 730 ktpy — Milled ore                             |       | 0.0 ktpy             |   | 0.0 % |
| Nueva Rosita Coal  & Coke Complex(3) |       | Coahuila  (Mexico)        |       | Clean coal  production                                                                           |       | 900 ktpy clean coal  100 ktpy coke                     |       | 71.3 ktpy  70.3 ktpy |   | 15.8 %  70.3 % |
|                                     |       |                      |       |                                                                                             |       |                                                   |       |                 |   |   |
| **Processing Operations**                | ** ** | ** **                | ** ** | ** **                                                                                       | ** ** | ** **                                             | ** ** | ** **           |
| San Luis Potosi  Copper Smelter          |       | San Luis Potosi  (Mexico) |       | Concentrate  smelting, blister production                                                        |       | 60 ktpy concentrate feed  24.0 ktpy blister production |       | 40.9 ktpy  19.0 ktpy |   | 82.2 %  79.2 % |
| San Luis Potosí Zinc Refinery       |       | San Luis Potosi (Mexico)  |       | Zinc concentrates refining                                                                       |       | 105.0 ktpy zinc cathode                                |       | 95.4 ktpy            |   | 90.9 % |
| San Luis Potosi Sulfuric Acid Plant      |       | San Luis Potosi (Mexico)  |       | Sulfuric acid                                                                                    |       | 180.0 ktpy sulfuric acid                               |       | 162.1 ktpy           |   | 90.1 % |

----

Key:                       ktpd= thousands of tons per day

ktpy = thousands of tons per year

tpy = tons per year

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

(2)          During2008, there were 278 days ofillegal strike work stoppage at Cananea and there was no production atTaxco and San Martin in 2008, due to illegal work stoppages.

(3)          AtDecember 31, 2008, thecoal reserves for the Nueva Rosita coal plant were 66,038,000 tons with averagesulfur content of 1.78% and a BTU content of 9,054.9 per pound.

 

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PROPERTIESBOOK VALUE

 

At December 31, 2008, net book values of property are as follows:

 

Peruvian operations $1,846.7 million: Cuajone $396.7 million, Toquepala$624.8 million, Tia Maria Project $118.0 million and Ilo and other supportfacilities $707.2 million.

 

Mexican open pitoperations: $1,644.5 million: (Cananea $559.4 million, La Caridad $1,081.2million, property in progress and other facilities $3.9 million) and

 

Mexican IMMSA unit:$271.1 million (San Luis Potosi $40.5 million, zinc electrolytic refinery $62.2million, Charcas $13.9 million, San Martin $33.6 million, Santa Barbara $56.4million, Taxco $6.3 million, Santa Eulalia $17.7 million, Pasta de Conchos andNueva Rosita $23.1 million and property in progress and other facilities $17.4million).

 

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SUMMARY OPERATING DATA

 

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

 
| ** **                          | ** ** | **Year  Ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **COPPER  (thousand pounds):**      |       |                              |       |   |   |   |   |
| **Mined**                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  open pit**                  | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                           |       | 251,651                           |       | 310,560 |   | 334,605 |   |
| Cuajone                             |       | 432,249                           |       | 401,498 |   | 384,493 |   |
| SX-EW Toquepala                     |       | 85,537                            |       | 80,844 |   | 78,935 |   |
|                                |       |                              |       |   |   |   |   |
| **Mexico  open pit**                | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                          |       | 213,691                           |       | 225,443 |   | 128,024 |   |
| Cananea                             |       | 13,591                            |       | 140,896 |   | 245,331 |   |
| SX-EW La Caridad                    |       | 48,422                            |       | 50,072 |   | 24,796 |   |
| SX-EW Cananea                       |       | 20,811                            |       | 76,265 |   | 115,794 |   |
| ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IMMSA  Unit**                     |       | 11,949                            |       | 19,961 |   | 23,270 |   |
| **Total  Mined**                    | ** ** | **1,077,901**                     | ** ** | **1,305,539** | ** ** | **1,335,248** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **Smelted**                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  open pit**                  |       |                              |       |   |   |   |   |
| Blister Ilo                         |       | —                            |       | 20,466 |   | 67,364 |   |
| Anodes Ilo                          |       | 675,903                           |       | 511,906 |   | 656,016 |   |
|                                |       |                              |       |   |   |   |   |
| **Mexico  open pit**                |       |                              |       |   |   |   |   |
| Anodes La Caridad                   |       | 379,000                           |       | 446,894 |   | 530,592 |   |
| ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IMMSA  Unit**                     |       |                              |       |   |   |   |   |
| Blister IMMSA                       |       | 41,881                            |       | 45,894 |   | 44,518 |   |
| **Total  Smelted**                  | ** ** | **1,096,784**                     | ** ** | **1,025,160** | ** ** | **1,298,490** | ** ** |
| ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Refined**                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  Open Pit**                  | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes Ilo                        |       | 548,381                           |       | 393,297 |   | 602,520 |   |
| SX-EW Toquepala                     |       | 88,511                            |       | 88,920 |   | 78,935 |   |
|                                |       |                              |       |   |   |   |   |
| **Mexico  Open Pit**                | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes La  Caridad                |       | 309,366                           |       | 382,152 |   | 441,705 |   |
| SX-EW La Caridad                    |       | 48,422                            |       | 50,072 |   | 24,796 |   |
| SX-EW Cananea                       |       | 20,811                            |       | 76,265 |   | 115,794 |   |
| **Total  Refined**                  | ** ** | **1,015,491**                     | ** ** | **990,706** | ** ** | **1,263,750** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **Rod  Mexico Open Pit**            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                          |       | 168,172                           |       | 212,978 |   | 212,923 |   |
| **Total  Rod**                      | ** ** | **168,172**                       | ** ** | **212,978** | ** ** | **212,923** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **SILVER****(thousand ounces)**     | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mined**                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru  Open Pit**                  | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                           |       | 1,591                             |       | 2,047 |   | 2,083 |   |
| Cuajone                             |       | 2,482                             |       | 2,219 |   | 2,141 |   |
|                                |       |                              |       |   |   |   |   |
| **Mexico  Open Pit**                | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                          |       | 1,796                             |       | 1,893 |   | 1,055 |   |
| Cananea                             |       | 81                                |       | 798 |   | 1,616 |   |
|                                |       |                              |       |   |   |   |   |
| **IMMSA  Unit**                     |       | 6,366                             |       | 8,272 |   | 9,276 |   |
| **Total  Mined**                    | ** ** | **12,316**                        | ** ** | **15,229** | ** ** | **16,171** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **Refined**                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Peru Open Pit —  Ilo           |       | 2,971                             |       | 2,657 |   | 3,831 |   |
| Mexico Open Pit — La Caridad   |       | 4,386                             |       | 3,539 |   | 4,211 |   |
| IMMSA Unit                          |       | 3,484                             |       | 3,805 |   | 4,337 |   |
| **Total  Refined**                  | ** ** | **10,841**                        | ** ** | **10,001** | ** ** | **12,379** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **MOLYBDENUM****(thousand pounds)** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mined**                           |       |                              |       |   |   |   |   |
| Toquepala                           |       | 10,289                            |       | 13,730 |   | 12,815 |   |
| Cuajone                             |       | 9,793                             |       | 8,424 |   | 7,767 |   |
| La Caridad                          |       | 16,052                            |       | 13,578 |   | 5,514 |   |
| **Total  Mined**                    | ** ** | **36,134**                        | ** ** | **35,732** | ** ** | **26,096** | ** ** |
|                                |       |                              |       |   |   |   |   |
| **ZINC****(thousand pounds)**       |       |                              |       |   |   |   |   |
| Mined IMMSA                         |       | 235,718                           |       | 266,787 |   | 301,133 |   |
| Refined IMMSA                       |       | 210,365                           |       | 200,105 |   | 112,513 |   |

 

SLOPE STABILITY:

 

Peruvian Operations

 

The Toquepala and Cuajone pits are approximately 700 meters and 800meters deep, respectively, under the present mine plan configuration both pitswill reach a depth of 1,200 meters.  Thedeepening pit presents us with a number of geotechnical challenges.  Perhaps the foremost concern is thepossibility of slope failure, a possibility that all open pit mines face.  In order to maintain slope stability, in thepast we have decreased pit slope angles, installed additional or duplicate haulroad access, and increased stripping requirements.  We have also responded to hydrologicalconditions 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 

 

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of which may negatively affect our results of operations and financialcondition, as well as have the effect of diminishing our stated orereserves.  To meet the geotechnicalchallenges relating to slope stability of the open pit mines, we have taken thefollowing steps:

 

In the late 1990’s wehosted round table meetings in Vancouver, B.C. with a group of recognized slopestability and open pit mining specialists. The agenda for these meetings 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 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 an average of five degreesand Cuajone by an average of seven degrees. Although this increased the waste included in the mineable reservecalculation, it also improved the stability of the pits.

 

In the Toquepala mine in2007 we installed 20 meter wide geotechnical berms every 10 benches. We believethis will further strengthen the stability of the Toquepala pit.

 

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 mineplan study for the La Caridad mine was awarded to an independent consultingfirm to conduct a geotechnical evaluation. The purpose of the plan was to develop a program of optimum bench designand inter-ramp slope angles for the open pit. A number of recommendations and observations were presented by theconsultants. These included a recommendation of a maximum average bench face angleof 72 degrees. Additionally, single benching was recommended for the uppersections of the west, south and east walls of the main pit.  Likewise, double benching was recommended forthe lower levels of the main pit and single benching for the upper slopesegments that consist of either alluvial material, mine waste dumps ormineralized stockpile material. Alternatively, slopes in these types of materials, may be designed withan overall 37 degree slope.  We are currentlyreviewing these recommendations, but since final pit limits have not been yetestablished at La Caridad, all current pit walls are effectively workingslopes.  Geostructural and geotechnicaldata collected at the open pit mine from cell-mapping and oriented-coredrilling databases provided the basis for the geotechnical evaluation and 

 

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recommendations.  We are also collecting new informationrelated to geotechnical data from the last drill hole drilled in 2008.

 

A geotechnicalevaluation, of the Cananea 15-year pit slope design, was prepared by anindependent mine consulting firm. Results of the study included slope design angles by sectors as well asrecommendations related to slope stability. Currently, the mine is in the second phase of a geohydrologicalstudy.  This is a follow-up study of aphase 1 open pit dewatering assessment completed by independent watermanagement consultants in 2004.  A thirdphase of the study, which addresses pit dewatering design, and drilling ofperipheral monitoring boreholes and dewatering test wells, will follow and isexpected to be completed in 2010.  Therecommendations proposed by the consulting firms in Phases 1 and 2, are beingimplemented.

 

**METAL PRODUCTION BYSEGMENTS**

** **

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

 

**PERUVIAN OPERATIONS**

** **

Our Peruvian segment operations include the Cuajone and Toquepala minecomplexes and the smelting and refining plants, industrial railroad which linksIlo, 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 mine and aconcentrator located in southern Peru, 30 kilometers from the city of Moqueguaand 840 kilometers from Lima.  Access tothe Cuajone property is by plane from Lima to Tacna (1:20 hours) and then by 

 

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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 our concentrator.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our Cuajone operations:

 
| ** **                            | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days           |       | (days)     |       | 366      |       | 365      |       | 365      |       |
| Total material  mined                 |       | (kt)       |       | 118,054  |       | 116,438  |       | 112,410  |       |
| Total ore mined                       |       | (kt)       |       | 30,217   |       | 28,310   |       | 28,299   |       |
| Copper grade                          |       | (%)        |       | 0.751    |       | 0.755    |       | 0.703    |       |
| Molybdenum grade                      |       | (%)        |       | 0.022    |       | 0.022    |       | 0.020    |       |
| Leach material  mined (1)             |       | (kt)       |       | —   |       | —   |       | 41.6     |       |
| Leach material  grade                 |       | (%)        |       | —   |       | —   |       | 0.655    |       |
| Stripping ratio                       |       | (x)        |       | 2.91     |       | 3.11     |       | 2.97     |       |
| Total material  milled                |       | (kt)       |       | 30,250   |       | 28,352   |       | 28,228   |       |
| Copper recovery                       |       | (%)        |       | 86.38    |       | 85.10    |       | 87.87    |       |
| Molybdenum  recovery                  |       | (%)        |       | 66.2     |       | 61.1     |       | 62.6     |       |
| Copper  concentrate                   |       | (kt)       |       | 759.1    |       | 706.7    |       | 666.7    |       |
| Molybdenum  concentrate               |       | (kt)       |       | 8.1      |       | 7.0      |       | 6.4      |       |
| Copper  concentrates average grade    |       | (%)        |       | 25.83    |       | 25.77    |       | 26.16    |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 54.89    |       | 54.57    |       | 55.18    |       |
| Copper in  concentrate                |       | (kt)       |       | 196.1    |       | 182.1    |       | 174.4    |       |
| Molybdenum in  concentrate            |       | (kt)       |       | 4.4      |       | 3.8      |       | 3.5      |       |

 

----

Key:                       kt = thousand tons

x =ratio obtained dividing waste plus leachable material by ore mined

(1)          In 2006, 41.6kt of copper oxides were extracted from the Cuajone mine. No oxide material wasmined in 2008 and 2007.

Copperand molybdenum grades are referred to as total copper grade and totalmolybdenum grade, respectively.

 

Major Cuajone mine equipment includes seven 290-toncapacity trucks, twenty 218-ton capacity trucks and seven 231-ton capacitytrucks, three 73-ton capacity shovels, one 54-ton capacity shovel, one 43-toncapacity front end loader, four electric drills, seven track dozers, sevenrubber track dozers, three front end loaders CAT 988 and 966 and three motorgraders.  We continuously improve andrenovate our equipment.

 

Geology

 

The Cuajone porphyry copper deposit is located on the western slopes ofCordillera Occidental, in the southern-most Andes Mountains of Peru.  The deposit is part of a mineral districtthat contains two additional known deposits, Toquepala and Quellaveco. Thecopper mineralization at Cuajone is typical of porphyry copper deposits.

 

The Cuajone deposit is located approximately 28 kilometers from theToquepala deposit and is part of the Toquepala Group dated 60 to 100 millionyears (Upper Cretaceous to Lower Tertiary). The Cuajone lithology includes volcanic rocks from Cretaceous toQuaternary.  There are 32 rock typesincluding, pre-mineral rocks, balsaltic andesite, porphyritic rhyolite,Toquepala dolerite and intrusive rocks, including diorite, porphyritic latite,breccias and dikes.  In addition, thefollowing post-mineral rocks are present, the Huaylillas formation whichappears in the south-southeast side of the deposit and has been formed byconglomerates, tuffs, traquites and agglomerates.  These formations date 17 to 23 million yearsand are found in the Toquepala Group as 

 

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discordance.  The Chuntacalaformation which dates 9 to 14 million years and is formed by conglomerates,flows, tuffs and agglomerates placed gradually in some cases and in discordancein others.  Also Quaternary deposits arefound in the rivers, creeks and hills. The mineralogy is simple with regular grade distribution and verticallyfunnel-shaped.  Ore minerals includechalcopyrite (CuFeS2), chalcosine (Cu2S) and molybdenite (MoS2)with occasional galena, tetraedrite and enargite as non economical ore.

 

Mine exploration

 

Exploration activities during the drill campaign in 2008 are asfollows:

** **
| **Studies**         | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                   | ** ** |
|---------------------|------------|------------|------------|-----------|------------|-----------------------------------------------------------------------------|------------|
| Infill Drilling     |       | 779        |       | 3         |       | To obtain additional information to improve  confidence in our block model. |       |
| Geotechnical  Holes |       | 3,043      |       | 19        |       | To improve geotechnical information                                         |       |
| **Total**           |       | 3,822      |       | 22        |       |                                                                        |       |

 

Concentrator

 

Our Cuajone operations use state-of-the-art computer monitoring systemsat the concentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. Material with a copper grade over 0.40% is loaded onto rail cars andsent to the milling circuit, where giant rotating crushers reduce the size ofthe rocks to approximately one-half of an inch. The ore is then sent to the ball 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 to produce foam for floating the copper and molybdenumminerals, but splitting waste material called tailings. This copper-molybdenumbulk concentrate then is treated by inverse flotation where molybdenum isfloated and copper is depressed. The copper concentrate is shipped by rail tothe smelter at Ilo and the molybdenum concentrate is packaged for shipment tocustomers.  Sulfides under 0.40% copperare considered waste.

 

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

 

Major Cuajone concentrator plant equipment includes:one primary crusher, three secondary crushers, seven tertiary crushers, tenprimary ball mills, four ball mills for re-grinding rougher concentrate; onevertical mill for re-grinding rougher concentrate; thirty 100ft3 cells for rougher flotation; four 160ft3 cells for rougher flotation; five 60ft3 cells for cleaner scavenger; six 1350ft3 cells for cleaner scavenger; fourteen 300ft3 cells for cleaner scavenger; eight column cells;one Larox filter press; two thickeners for copper-molybdenum and copperconcentrates; three  tailings thickeners;one high-rate tailings thickener and six pumps for recycling reclaimed water.

 

A major mill expansion was completed in 1999 and theeleventh primary mill was put in operation in January 2008.  We believe the plant’s equipment is in goodphysical condition and currently in operation.

 

Toquepala

 

Our Toquepala operations consist of an open-pit copper mine and aconcentrator.  We also refine copper atthe SX/EW facility through a leaching process. Toquepala is located in southern Peru, 30 kilometers from Cuajone and870 kilometers from Lima.  Access is by 

 

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plane from Lima to the city of Tacna (1:20 hours) and then by thePan-American highway to Camiara (1:20 hours) and by road to Toquepala (1hour).  The concentrator has a millingcapacity of 60,000 tons per day.  TheSX/EW facility has a production capacity of 56,000 tons per year of LME grade Acopper cathodes.  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 2008, 2007 and 2006 production informationfor our Toquepala operations:

 
| ** **                                     | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days                    |       | (days)     |       | 366      |       | 365      |       | 365      |       |
| Total material  mined                          |       | (kt)       |       | 131,646  |       | 130,267  |       | 131,607  |       |
| Total ore mined                                |       | (kt)       |       | 21,356   |       | 20,889   |       | 20,813   |       |
| Copper grade                                   |       | (%)        |       | 0.608    |       | 0.759    |       | 0.797    |       |
| Molybdenum grade                               |       | (%)        |       | 0.036    |       | 0.046    |       | 0.043    |       |
| Leach material  mined                          |       | (kt)       |       | 74,286   |       | 90,521   |       | 42,827   |       |
| Leach material  grade                          |       | (%)        |       | 0.226    |       | 0.235    |       | 0.221    |       |
| Estimated leach  recovery                      |       | (%)        |       | 26.34    |       | 26.89    |       | 28.44    |       |
| SX/EW cathode  production (from SPCC material) |       | (kt)       |       | 38.8     |       | 36.7     |       | 35.8     |       |
| Third parties  copper sulfate processed        |       | (kt)       |       | 5.6      |       | 15.2     |       | —   |       |
| Average copper  grade on copper sulfate        |       | (%)        |       | 23.88    |       | 24.16    |       | —   |       |
| SX/EW cathode  production from third parties   |       | (kt)       |       | 1.3      |       | 3.7      |       | —   |       |
| Stripping ratio                                |       | (x)        |       | 5.16     |       | 5.24     |       | 5.32     |       |
| Total material  milled                         |       | (kt)       |       | 21,328   |       | 20,906   |       | 20,828   |       |
| Copper recovery                                |       | (%)        |       | 88.03    |       | 88.78    |       | 91.43    |       |
| Molybdenum  recovery                           |       | (%)        |       | 60.93    |       | 64.39    |       | 65.0     |       |
| Copper  concentrate                            |       | (kt)       |       | 419.7    |       | 521.9    |       | 557.5    |       |
| Molybdenum  concentrate                        |       | (kt)       |       | 8.5      |       | 11.4     |       | 10.7     |       |
| Copper concentrate  average grade              |       | (%)        |       | 27.20    |       | 26.99    |       | 27.22    |       |
| Molybdenum  concentrate average grade          |       | (%)        |       | 54.91    |       | 54.60    |       | 54.08    |       |
| Copper in  concentrate                         |       | (kt)       |       | 114.1    |       | 140.9    |       | 151.8    |       |
| Molybdenum in  concentrate                     |       | (kt)       |       | 4.7      |       | 6.2      |       | 5.8      |       |

 

----

Key:                       kt = thousand tons

x  = ratioobtained dividing waste plus leachable material by ore mined.

Copperand molybdenum grades are referred to as total copper grade and totalmolybdenum grade, respectively.

 

Majormine equipment at Toquepala includes nineteen 290-ton capacity trucks, five 231-toncapacity trucks, eighteen 218-ton capacitytrucks, one 78-ton capacityshovel, three 73-ton capacity shovels, three 20-ton capacity shovels, fiveelectric rotary drills, one Down the Hole (DTH) drill for pre-split and onefront-end loader with a capacity of37 tons.

 

We continuously improve and renovate ourequipment.  In 2003, we started a projectto install a crushing, conveying and spreading system at the Toquepala mine toimprove cost containment and production efficiency.  The new system improves recovery at ourleaching facilities and will largely eliminate costly truck haulage in theprocess.  The conveying system isoperating and has positioned 42.5 million tons of waste material to build theramp and has placed 28.5 million tons of leachable material.

 

In 2008 we installed conveyor No. 17.  Present production for the last six monthperiod of 2008 reached 7,186 tons per hour. This new system improves our cost containment and production efficiency.  During 2008, we put into operation one new Komatsu930E truck with improved haul efficiency.

 

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Geology

 

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

 

The Toquepala deposit is in the southernregion of Peru, located on the western slope of the Andes mountain range,approximately 120 kilometers from the border with Chile.  This region 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 which broke and smelted the rocks ofthe Toquepala Group.  These intrusiveactivities resulted in diorites, granodiorites and dikes of porphyric dacite.  Toquepala has a simple mineralogy withregular 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.

 

Mine exploration

 

Exploration activities during the drill campaign in 2008 are asfollows:

 
| **Studies**                                                       | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                         |
|-------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------------------------------------------------------------------------------|
| Infill and lateral body delimitation (leach and ore  of Phase II) |       | 4,531      |       | 22        |       | To obtain  additional information to improve confidence in the block model.       |
| To define depth and location of potential surfaces  of fault.     |       | 1,892      |       | 8         |       | 4 drills in  southwestern sector and 4 in the southeastern sector were perforated |
| Total                                                             |       | 6,423      |       | 30        |       |                                                                              |

 

Concentrator

 

Our Toquepala concentrator operations use state-of-the-art computermonitoring systems in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.40% isloaded onto rail cars and sent to the crushing circuit, where rotating crushersreduce the size of the rocks to approximately 85% less than one-half of aninch.  The ore is then sent to the rodand ball mills, which grind it in a mix with water to the consistency of finepowder.  The finely ground powder mixedwith water is then transported to flotation cells.  Air is pumped into the cells producing afroth, which carries the copper mineral to the surface but not the waste rock,or tailings.  The bulk concentrate withsufficient molybdenum content is processed to recover molybdenum by inverseflotation.  This final copper concentratewith a content of approximately 27.5% of copper is filtered in order to get8.5% moisture.  Concentrates are thenshipped by rail to the smelter at Ilo.

 

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

 

Major concentrator plantequipment at Toquepala include one primary crusher, three secondary crushers,six tertiary crushers, eight rod mills, thirty-three ball mills, onedistributed control system (DCS), one expert grinding system, forty-twoflotation cells, 

 

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fifteen column cells,seventy-two Agitair 1.13 m3 cells, two Larox pressure filters, five middlingthickeners, two conventional tailings thickeners, three high-rate tailingsthickeners, one tripper car, one track tractor and a recycled water pipe line.

 

SX/EW Plant

 

The SX/EW facility at Toquepala produces grade A LME electrowon coppercathodes of 99.999% purity from solutions obtained by leaching low-grade orestored at the Toquepala and Cuajone mines. The leach plant commenced operations in 1995 with a design capacity of35,629 tons per year of copper cathodes. In 1999 the capacity was expanded to 56,000 tons per year.

 

Copper oxides from Cuajone with a copper grade higher than 0.343%, withan acid solubility index higher than 20% and a cyanide solubility index higherthan 50% are leached.  In Toquepala, theleach material cutoff grade is 0.081% and therefore material with a totalcopper grade between 0.081% and 0.40% are leached.

 

Major equipment at the Cuajone SX plantincludes one primary jaw crusher and one secondary cone crusher with a capacity of390 tons per hour.  In addition the planthas one agglomeration mill, one front end loader and three 109 ton capacitytrucks for hauling to the leach dumps. Copper in solution produced in Cuajone is sent to Toquepala through aneight-inch pipe laid alongside the Cuajone-Toquepala railroad track.

 

Major equipment at the Toquepala plantincludes three spray systems and five pregnant solution (PLS) ponds, each withits own pumping system to send the solution to the SX/EW plant.  The plant also has three lines of SX, eachwith a nominal capacity of 1,068 cubic meters per hour of pregnant solution and162 electrowinning cells.

 

Plant and equipment are supported by amaintenance plan and a quality management system to assure good physicalcondition and high availability.  TheSX/EW plant management quality system (including leaching operations) has beenaudited periodically since 2002 by an external audit company, and found to bein compliance with the requirements of the ISO 9001-2000 standard.

 

Processing Facilities - Ilo

 

Our Ilo smelter and refinery complex is located in the southern part ofPeru, 17 kilometers north of the city of Ilo, 121 kilometers from Toquepala,147 kilometers from Cuajone, and 1,240 kilometers from the city of Lima.  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 aremoved between Toquepala, Cuajone and Ilo on our industrial railroad.

 

Smelter

 

Our Ilo smelter provides copper for the refinery we operate as part ofthe same facility.  Copper produced bythe smelter exceeds the refinery’s capacity and the excess is sold to otherrefineries around the world.  The nominalinstalled capacity of the smelter is 1,200,000 tons per year.

 

Copper concentrates from Toquepala and Cuajone are transported byrailroad to the smelter, where they are smelted using an ISASMELT furnace,converters and anode furnaces to produce copper anodes with 99.7% copper.  At the smelter, the concentrates are mixedwith flux and other material and sent to the ISASMELT furnace producing a mixtureof 

 

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copper matte and slag which is tapped through a taphole to either oftwo rotary holding furnaces, where this smelted phases will be separated.  Copper matte contains approximately 62%copper.  Copper matte is then sent to thefour converters, where the material is oxidized in two steps: (1) the ironsulfides in the matte are oxidized with oxygen enriched air and silica is addedproducing slag that is sent to the slag cleaning furnaces, and (2) thecopper contained in the matte sulfides is then oxidized to produce blistercopper, containing approximately 99.3% copper. The blister copper is refined in two anode furnaces by oxidation toremove sulfur with compressed air injected into the bath.  Finally, the oxygen content of the moltencopper is adjusted by reduction with injection of liquefied petroleum gas withsteam into the bath.  Anodes, containingapproximately 99.7% copper are cast in two casting wheels.

 

The table below sets forth 2008, 2007 and2006 production and sales information for our Ilo smelter plant:

 
| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Concentrate  smelted (kt)           |       | 1,003    |       | 846      |       | 1,107    |       |
| Average copper  recovery            |       | 97.10    | %          | 96.59    | %          | 97.29    | %          |
| Blister  production (kt)            |       | —   |       | 9.3      |       | 30.8     |       |
| Average blister  grade (%)          |       | —   |       | 99.369   | %          | 99.349   | %          |
| Anode production  (kt)              |       | 307.5    |       | 232.9    |       | 298.4    |       |
| Average anode  grade (%)            |       | 99.704   | %          | 99.698   | %          | 99.708   | %          |
| Sulfuric acid  produced (kt)        |       | 959      |       | 771      |       | 376      |       |
| Blister sales  (kt)                 |       | —   |       | 9.3      |       | 3.0      |       |
| Anode sales (kt)                    |       | 10.0     |       | 14.1     |       | 13.5     |       |
| Average blister  sales price ($/lb) |       | —   |       | 3.20     |       | 3.10     |       |
| Average anode  sales price ($/lb)   |       | 1.84     |       | 2.87     |       | 3.17     |       |

----

Key:    kt = thousand tons

 

The off gases from the smelter are treated to recover over 92% of theincoming sulfur received in the concentrates producing 98.5% sulfuricacid.  The gas stream from the smelterwith 11.34% SO2 issplit between two plants: The No. 1 acid plant (single absorption/singlecontact) and the No. 2 plant (double absorption/double contact).

 

The smelter also has two oxygen plants. Plant No. 1, with 254 tons per day of production capacity and PlantNo.2, with 1,045 tons per day of capacity.

 

In addition, the smelter includes a seawater intake system, twodesalinization plants to provide water for the process, an electric substationand a new system of centralized controls using advanced computer technology.

 

Refinery

 

The refinery consists of a receiving and preparing anode facility, anelectrolytic plant, a precious metal plant and a number of ancillaryinstallations.  The refinery is producinggrade A copper cathode of 99.998% purity. The nominal capacity is 280,000 tons per year.  Anodic slimes are recovered from the refiningprocess and then sent to the precious metals facility to produce refinedsilver, refined gold and commercial grade selenium.

 

Anodes are suspended intanks containing an aqueous solution of sulfuric acid and copper sulfate.  A low voltage but high amperage electricalcurrent is passed through the anodes**,**chemical solution and cathodes, in order to dissolve copper which is depositedon initially very thin starting sheets increasing its thickness to produce highgrade copper cathodes containing at least 99.99% copper.  During this process, silver, gold 

 

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and other metals,including palladium, platinum and selenium, along with other impurities, settleon the bottom of the tank in form of anodic slime.  This anodic slime is processed in a preciousmetal plant where silver, gold and selenium are recovered.

 

The table below sets forth 2008, 2007 and2006 production and sales information for our Ilo refinery and precious metalsplants:

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cathodes  produced (kt)                 |       | 248.7    |       | 178.4    |       | 273.3    |       |
| Average copper  grade (%)               |       | 99.986   | %          | 99.998   | %          | 99.998   | %          |
| Refined silver  produced (000 Kg)       |       | 92.4     |       | 82.7     |       | 119.2    |       |
| Refined gold  produced (kg)             |       | 152.9    |       | 296.0    |       | 260.9    |       |
| Commercial grade  selenium produced (t) |       | 44.2     |       | 35.4     |       | 49.8     |       |
| Average cathodes  sales price ($/lb)    |       | 2.95     |       | 3.20     |       | 3.20     |       |
| Average silver  sales price ($/oz)      |       | 14.2     |       | 12.30    |       | 11.46    |       |
| Average gold  sales price ($/oz)        |       | 833.59   |       | 692.29   |       | 589.76   |       |

----

Key:    kt= thousands tons

 

Major equipment at therefinery includes one electrolytic plant, with 926 commercial cells, fifty-twostarting sheet cells, sixteen primary liberator cells, twenty-four secondaryliberator cells, an anodic slime treatment circuit (includes leaching and centrifugation),and a crude nickel sulfate production circuit.

 

Main equipment at theprecious metals plant includes one selenium reactor, one tilting Copellafurnace, twenty-four silver refining cells including an induction furnace forshots and silver ingots production and one hydrometallurgical system for goldrecovery.

 

The refinery also hasthese facilities:

 

(1)                  Production Control: Provides sampling andsampling preparation for samples coming from the operating units as well asSX/EW, smelter and external services.

 

(2)                  Laboratory: Provides sample analysis servicesthroughout the Company, including the analysis of final products like coppercathodes, electrowon cathodes, copper concentrates and oil analysis.

 

(3)                  Maintenance: Responsible for maintenance of all equipment involved in the process.

 

(4)                  Auxiliary facilities: Includes one desalinizationplant to produce fresh water and a Babcock boiler to produce steam used in therefinery, one Gonella boiler and two stand-by KMH boilers.

 

Other facilities in Ilo are a coquina plant with a production capacityof 200,000 tons per year of seashells and a lime plant with a capacity of80,000 tons per year.  We also operate anindustrial railroad to haul production and supplies between Toquepala, Cuajoneand Ilo.

 

The industrial railroad’s main equipment includes fifteen locomotivesof different types including 4000HP EMD’s SD70, 3000HP EMD’s GP40-3, 2250HP GEU23B and others.  The rolling stock hasapproximately 490 cars of different types and capacities, including oreconcentrate cars, gondolas, flat cars, dump cars, boxcars, tank cars andothers.  The track runs in a single 214kilometer standard gauge line and supports a 30-ton axle load.  The total length of the track system isaround 257 kilometers including main yards and sidings.

 

The infrastructure includes 27 kilometers of track under tunnels andone concrete bridge.  The industrialrailroad includes a car repair shop which is responsible for maintenance andrepair of the car fleet.  In 2008 a longterm main line upgrade program 

 

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was completed and 115 and 133 pound rail replaced 90 and 105 poundrail.  Also an upgrade program increasingthe capacity of the ore concentrate cars from 70 to 100 net tons continues andis expected to be completed by 2010. Annual tonnage transported is approximately 5.5 million metric tons.

 

MEXICAN OPERATIONS

 

Followingis a map indicating the approximate locations of our Mexican mines andprocessing facilities:

 

 

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MEXICAN OPEN PIT SEGMENT

 

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

 

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

 

 

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Cananea

 

Since July 2007, Cananea has been on strike. Please see Note 14 “Commitmentand contingencies” to our consolidated financial statements.  The Cananea mining unit operates an open-pitcopper mine, a concentrator and two SX/EW plants.  It is located 100 air-kilometers northwest ofLa Caridad and 40 kilometers south of the Arizona USA-Mexico border.  It lies on the outskirts of the Cananeatownsite.  Cananea is connected by pavedhighways to the border city of Agua Prieta to the northeast, to the town ofNacozari in the southeast, and to the town of Imuris to the west.  Cananea is also connected by railway to AguaPrieta and Nogales.  A municipal airportis located approximately 20 kilometers to the northeast of Cananea.

 

The concentrator has anominal milling capacity of 76,700 tons per day.  The SX/EW facility has a cathode productioncapacity of 54,750 tons per year.  TheCananea ore body is considered one of the world’s largest porphyry copperdeposits.  Cananea is the oldestcontinuously operated copper mine in North America, with operations dating backto 1899.  High grade ore deposits in thedistrict were mined exclusively using underground methods.  The Anaconda Company acquired the property in1917.  In the early 1940s Anacondastarted developing the first open pit in Cananea.  In 1990, through a public auction procedure,Minera Mexico acquired 100% of the Cananea mining assets for $475 million.  Cananea is currently applying conventionalopen-pit mining methods to extract copper ore for further processing in theconcentrator.  Two leach ore crushers andthe corresponding belt conveying systems are used to convey the leachablematerial to the heaps.  Likewise, run-offmine leachable ore is hauled by trucks to the leach dumps.

 

The following table shows 2008, 2007 and 2006 production informationfor Cananea:

 
| ** **                        | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual  operating days (1)   |       | (days)     |       | 88       |       | 211      |       | 331      |       |
| Total material  mined             |       | (kt)       |       | 4,820    |       | 74,672   |       | 114,595  |       |
| Total ore mined                   |       | (kt)       |       | 1,271    |       | 12,545   |       | 22,896   |       |
| Copper grade                      |       | (%)        |       | 0.628    |       | 0.630    |       | 0.588    |       |
| Leach material  mined             |       | (kt)       |       | 2,965    |       | 39,198   |       | 59,678   |       |
| Leach material  grade             |       | (%)        |       | 0.285    |       | 0.272    |       | 0.292    |       |
| Estimated leach  recovery         |       | (%)        |       | 65.5     |       | 65.5     |       | 62.5     |       |
| SX/EW cathode  production         |       | (kt)       |       | 9.4      |       | 34.6     |       | 52.5     |       |
| Stripping ratio                   |       | (x)        |       | 2.79     |       | 4.95     |       | 4.01     |       |
| Total material  milled            |       | (kt)       |       | 1,233    |       | 12,571   |       | 22,915   |       |
| Copper  concentrate               |       | (kt)       |       | 24.5     |       | 229.8    |       | 386.0    |       |
| Copper  concentrate average grade |       | (%)        |       | 25.14    |       | 27.81    |       | 28.83    |       |
| Copper in  concentrate            |       | (kt)       |       | 6.2      |       | 63.9     |       | 111.3    |       |
| Copper recovery                   |       | (%)        |       | 79.65    |       | 81.22    |       | 82.56    |       |

----

Key:                       kt = thousand tons

x = ratio obtained dividing waste plus leachablematerial by ore mined.

The copper grade is total grade.

(1)          During 2008 and 2007 there were 278 days and 154 daysof illegal work stoppage, respectively. As consequence, the Company lost approximately 129 thousand tons and 55thousand tons of copper in concentrates and 59 thousand tons and 24 thousandtons of SX/EW cathodes production in 2008 and 2007, respectively.  Also while there were 47 days of strikes in2006, only 34 production days were lost as 13 days of production were maintainedwith the support of management personnel.

 

Major Cananea mine equipment includes 44 trucks forore hauling with individual capacities ranging from 240 to 360 tons, eightshovels with individual capacities 

 

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ranging from 30 to 70 tons, and mine auxiliaryequipment including, seven drillers, five front loaders, five motor graders andtwenty-four tractors.

 

Geology

 

The Cananea mining district lies on the southern cordilleran orogen,which extends from southern Mexico to northwestern United States.  It also falls within the Basin and Rangemetallogenic province.  Geological and structuralfeatures in the district are representative of large, disseminated type,porphyry copper deposits.  A calcareoussedimentary sequence of lower Paleozoic age, lithologically correlated with asimilar section in southeastern Arizona, uncomformably overlies Precambriangranite basement.  The entire section wascovered by volcanic rocks of Mesozoic age and later intruded by deep seatedgranodiorite batholith of Tertiary age, with further quartz monzonite porphyrydifferentiates of Laramide age.

 

Mineralization in the district is extensive covering a surface area ofapproximately 30 km(2).  An earlypegmatitic stage associated with bornite-chalcopyrite-molybdenite assemblagewas followed by a widespread flooding of hydrothermal solutions with quartz-pyrite-chalcopyrite.  A pervasivequartz-sericite alteration is evident throughout the district’s igneous rockfabric.

 

An extensive and economically important zone of supergene enrichment,with disseminated and stockworks of chalcocite (Cu2S),developed below the iron oxide capping. This zone coincides with the topography and has an average thickness of300 meters.  A mixed zone of secondaryand primary sulfides underlay the chalcocite blanket.  The hypogene mineralization, principallychalcopyrite, (CuFeS2), extensively underlies theorebody.  Molybdenite occurs throughoutthe deposit and the content tends to increase with depth.

 

The Cananea copper porphyry is considered world-class and unique.  The deepest exploration results in the coreof the deposit have confirmed significant increase in copper grades.  Similar porphyry copper deposits usuallycontain lower grades at depth. The district is also unique for the occurrenceof high-grade breccia pipes, occurring in clusters following the trend of thedistrict.

 

Current dimensions of the mineralized ore body are 5x3 kilometers, andprojects to more than 1 kilometer at depth. Considering the geological and economic potential of the Cananeaporphyry copper deposit, it is expected that the operation can support asizeable increase in copper production capacity.

 

Mine Exploration

 

Due to Cananea’s illegal work stoppage, the exploration program was notresumed during 2008.  Assuming settlementof the work stoppage, the core drilling program in the areas adjacent to thedeposit will be continued in 2009 in order to define areas where leach andwaste will be deposited.  Drillingresults from past campaigns in areas adjacent to the deposit are confirming thedistrict-wide mineralization and alteration patterns.  The block model was updated with the in-fillexploratory results, both, for copper and molybdenum and we proceeded tocalculate an updated estimate of the resource with new available data.

 

Concentrator

 

Cananea uses state-of-the-art computer monitoring systems at theconcentrator, the crushing plant and the flotation circuit in order tocoordinate inflows and optimize operations. Material with a copper grade over 0.38% is loaded onto trucks and sentto the milling circuit, where giant rotating crushers reduce the size of theore to approximately one-half of an inch. The ore is then sent to the ball and bar mills, 

 

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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, which carries the copper mineral to the surface but not the waste rock,or tailings.  Recovered copper, with theconsistency of froth, is filtered and dried to produce copper concentrates withan average copper content of approximately 28%. Concentrates are then shipped by rail to the smelter at La Caridad.

 

The Cananea concentrator plant, with a milling capacity of 76,700 tonsper day, consists of two primary crushers, four secondary crushers, tentertiary crushers, ten primary mills, a distributed control system, five millsfor re-grinding, 103 primary flotation cells, ten column cells, seventyexhaustion flotation cells, seven thickeners and three ceramic filters.

 

SX/EW Plant

 

The Cananea unit operates a leaching facility and two SX/EWplants.  All copper ore with a gradelower than the mill cut-off grade of 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 18.9 million cubic meters ofpregnant leach solution in inventory with a concentration of approximately 2.0grams of copper per liter.

 

Major equipment at the SX-EW plants I and II of Cananea includes twocrushing systems (No. 1 and No. 2). Crushing system no. 1 has a capacity of 32,000 tons per day and includes an apron feeder, a conveyor beltfeeder, seven conveyor belts system and a distributor car.  Crushing system no. 2 has a capacity of 48,000 tons per day and includes onecrusher, a conveyor belt feeder, three conveyor belts and a distributingcar.  There are four irrigation systemsfor the dumps and six dams for the pregnant leach solution (PLS).  Plant I has three solvent extraction tankswith a nominal capacity of 16,000liters per minute of PLS and 46 electrowinning cells.  Plant I has a daily production capacity of 30tons of copper cathodes with 99.999% purity. Plant II has five trains of solvent extraction with a nominal capacityof 55,000 liters per minute ofPLS and 216 cells distributed intwo bays.  Plant II has a dailyproduction capacity of 120 tons of copper cathodes with 99.9% purity.

 

We intend to increase our Cananea unit’s production ofcopper cathodes with a new SX/EW plant, (SXEW III) with an annual capacity of33,000 tons.  The plant would 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.  Dueto the ongoing strike at Cananea, this project has been temporarily put on holduntil we satisfactorily resolve the labor issue.

 

La Caridad

 

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

 

La Caridad mine and mill are located about 23 kilometers southeast ofthe town of Nacozari de Garcia in northeastern Sonora.  Nacozari is about 264 kilometers northeast ofthe Sonora state capital of Hermosillo and 121 kilometers south of theUS-Mexico border.  Nacozari is connectedby paved highway with Hermosillo and Agua Prieta and by rail with theinternational port of Guaymas, and the Mexican and United States rail 

 

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systems.  An airstrip with areported runway length of 2,500 meters is located 36 kilometers north ofNacozari, less than one kilometer away from the La Caridad copper smelter andrefinery.  The smelter and the sulfuricacid plants, as well as the refineries and rod plant, are located approximately24 kilometers from the mine.  Access isby paved highway and by railroad.

 

The concentrator began operations in 1979, the molybdenum plant wasadded in 1982, the smelter in 1986, the first sulfuric acid plant in 1988, theSX/EW plant in 1995, the second sulfuric acid plant in 1997, the copperrefinery in 1997, the rod plant in 1998, and the precious metals refinery in1999.

 

The table below sets forth 2008, 2007 and 2006 production informationfor La Caridad:

 
| ** **                            | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006 (1)** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|--------------|------------|
| Mine annual  operating days           |       | (days)     |       | 366      |       | 365      |       | 229          |       |
| Total material  mined                 |       | (kt)       |       | 85,739   |       | 80,819   |       | 46,606       |       |
| Total ore mined                       |       | (kt)       |       | 31,779   |       | 30,970   |       | 16,872       |       |
| Copper grade                          |       | (%)        |       | 0.380    |       | 0.408    |       | 0.449        |       |
| Molybdenum grade                      |       | (%)        |       | 0.0380   |       | 0.0377   |       | 0.0348       |       |
| Leach material  mined                 |       | (kt)       |       | 38,053   |       | 30,017   |       | 19,109       |       |
| Leach material  grade                 |       | (%)        |       | 0.235    |       | 0.252    |       | 0.252        |       |
| Estimated leach  recovery             |       | (%)        |       | 50.84    |       | 34.44    |       | 34.39        |       |
| SX/EW cathode  production             |       | (kt)       |       | 22.0     |       | 22.7     |       | 11.2         |       |
| Total material  milled                |       | (kt)       |       | 31,587   |       | 31,129   |       | 16,637       |       |
| Stripping ratio                       |       | (x)        |       | 1.70     |       | 1.61     |       | 1.76         |       |
| Copper  concentrate                   |       | (kt)       |       | 421.5    |       | 423.0    |       | 227.8        |       |
| Molybdenum  concentrate               |       | (kt)       |       | 13.7     |       | 11.2     |       | 4.5          |       |
| Copper  concentrate average grade     |       | (%)        |       | 23.00    |       | 24.18    |       | 25.49        |       |
| Molybdenum  concentrate average grade |       | (%)        |       | 53.02    |       | 54.83    |       | 55.92        |       |
| Copper in  concentrate                |       | (kt)       |       | 96.9     |       | 102.3    |       | 58.1         |       |
| Molybdenum in  concentrate            |       | (kt)       |       | 7.3      |       | 6.2      |       | 2.5          |       |
| Copper recovery                       |       | (%)        |       | 80.70    |       | 80.43    |       | 77.69        |       |
| Molybdenum  recovery                  |       | (%)        |       | 60.59    |       | 52.54    |       | 43.20        |       |

----

Key:                       kt = thousand tons

x = ratio obtained dividing waste plus leachablematerial by ore mined

The copper and molybdenumgrade are total grade.  The molybdenumgrade value corresponds to molybdenum disulfide (molybdenite); molybdenumrecovery is presently about 60.59%.

(1)          In 2006 there were 125 days of strikes.

 

Major mine equipment includes twenty-seven trucks forore hauling with capacity of 240 tons, six shovels with a capacity of 43 cubicyard.  Loading and auxiliary equipmentinclude six drillers, five front loaders, three motorgraders and twentytractors.

 

Geology

 

The La Caridad deposit is a typical porphyry copper deposit as seenalso in the southwestern basin of United States.  The La Caridad mine uses a conventionalopen-pit mining method.  The ore body isat the top of a mountain, which gives La Caridad the advantage of a relativelow waste-stripping ratio, natural pit drainage and relative short haul forboth ore and waste.  The mining methodinvolves drilling, blasting, loading and haulage of ore and waste to theprimary crushers and the waste dumps, respectively.

 

LaCaridad deposit is located in northeastern Sonora, Mexico.  The deposit is situated near the crest of theSierra Juriquipa, about 23 kilometers southeast of the town of 

 

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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 copper depositoccurs exclusively in felsic to intermediate intrusive igneous rocks andassociated breccias.  Host rocks includediorite and granodiorite.  These rocksare intruded by a quartz monzonite porphyry stock and by numerous brecciamasses, which contain fragments of all the older rock types.

 

Supergene enrichment, consisting of completeto partial chalcosite (Cu2S) replacement ofchalcopyrite (CuFeS2). The zone of supergene enrichment occurs as a flat and tabular blanketwith an average diameter of 1,700 meters and thickness generally between 0 and90 meters.

 

Economic ore is found as disseminatedsulfurs within the central part of the deposit. Sulfide-filled breccias cavities are most abundant in the intrusivebreccia.  This breccia-cavitymineralization occurs as sulfide aggregates which have crystallized in thespaces separating breccia clasts.  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 La Caridad ore bodyfor over 25 years.  The extent of themodel area is approximately 6,000 meters by 4,000 meters with elevation rangingfrom 750 to 1,800 meters.

 

Fifteen drilling campaigns have beenconducted on the property since 1968. These campaigns drilled a total of 3,315 drill holes: 1,152 were diamonddrill hole and 2,163 were reverse circulation. We have also drilled some hammer and percussion drill holes.  A total of 606,623 meters have been drilledthrough December 2008.

 

In 2008, La Caridad finished a largeexploration program of 50,000 meters. The target was to get down to the 900 level in order to reduce thedrilling space and to define the copper and molybdenum mineralization continuityand also carry out metallurgical testing for the flotation and leachingprocesses.

 

Concentrator

 

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

 

Ore extracted from the mine with a copper grade over 0.30% is sent tothe concentrator and is processed into copper concentrates and molybdenumconcentrates.  The copper concentratesare sent to the smelter and the molybdenum concentrate is exported.  The molybdenum recovery plant has a capacityof 2,000 tons per day of copper-molybdenum concentrates.  The lime plant has a capacity of 340 tons offinished product per day.

 

La Caridad concentrator plant has a milling capacity of 90,000 tons perday and consists of two primary crushers, six secondary crushers, twelvetertiary crushers, twelve ball mills, a master milling control system, 100primary flotation cells, four re-grinding mills, 96 cleaning flotation cells,twelve thickeners and six drum filters.

 

SX/EW Plant

 

Approximately 547.5million tons of leaching ore with an average grade of approximately 

 

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0.26% copper have beenextracted from the La Caridad open-pit mine and deposited in leaching dumpsfrom May 1995 to December 31, 2008. All copper ore with a grade lower than the mill cut-off grade 0.30%, buthigher than 0.15% copper, is delivered to the leaching dumps.  In 1995, we completed the construction of aSX/EW facility at La Caridad that has allowed processing of this ore andcertain leach ore reserves that were not mined and has resulted in a reductionin our copper production costs.  TheSX/EW facility has an annual capacity of 21,900 tons of copper cathodes.

 

The La Caridad SX-EW plant has nine irrigation systems for the dumpsand two PLS dams, a container of heads that permits the combination of thesolutions 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 cubic meters perhour and 94 electrowinning cells distributed in one single electrolyticbay.  The plant has a daily productioncapacity of 62 tons of copper cathodes with 99.999% purity.

 

Processing Facilities — La Caridad

 

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

 

Smelter

 

Copper concentrates from Cananea and La Caridad are transported by railand truck, respectively, to the La Caridad smelter where they are processed andcast into copper anodes of 99.2% purity. Sulfur dioxide off-gases collected from the flash furnace, Tenienteconverter and conventional converters are processed into sulfuric acid, at twosulfuric acid plants.  Approximately 2%to 3% of this acid is used by our SX-EW plants and the balance is sold to thirdparties.

 

Almost all of the anodes produced in the smelter are sent to the LaCaridad copper refinery.  The actualinstalled capacity of the smelter is 1,000,000 tons per year, a capacity thatis sufficient to treat all the concentrates of the La Caridad and Cananeamining complexes.  The smelter includes aflash type concentrates drier, a steam drier, a flash furnace, one El Tenientemodified converted furnace, two electric slag-cleaning furnaces, threePierce-Smith converters, three rafinnate furnaces and two casting wheels.  The anode production capacity is 300,000 tonsper year.

 

Refinery

 

La Caridad includes an electrolytic copper refinery that uses permanentcathode technology.  The installedcapacity of the refinery is 300,000 tons per year.  The refinery consists of an anode plant witha preparation area, an electrolytic plant with an electrolytic cell house with1,115 cells and 32 liberator cells, two cathode stripping machines, an anodewashing machine, a slime treatment plant and a number of ancillaryinstallations.  The refinery is producinggrade A copper cathode of 99.99% purity. Anodic slimes are recovered from the refining process and sent to theslimes treatment plant where additional copper is extracted.  The slimes are then filtered, packed andshipped to the La Caridad precious metals refinery to produce silver and gold.

 

The operations of the precious metal refinery are divided into twostages: (i) the antimony is eliminated from the slime, and (ii) theslime is dried in a steam dryer.  Afterthis the dried slime is smelted and a gold and silver alloy is obtained, whichis known as dore.  The precious metalrefinery plant has a hydrometallurgical stage and a pyrometallurgical stage,besides a steam dryer, dore casting system, Kaldo furnace, 20 

 

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electrolytic cells in the silver refinery, one induction furnace forfine silver, one silver ingot casting system, two reactors for obtaining finegold.  The process ends with the refiningof the gold and silver alloy.

 

Copper Rod Plant

 

A rod plant at the La Caridad complex was completed in 1998 and reachedits full annual operating capacity of 150,000 tons in 1999.  The plant is producing eight millimetercopper rods with a purity of 99.99%.  Therod plant includes a vertical furnace, one retention furnace, one moldingmachine, one laminating machine, one coiling machine and one coil compacter.

 

Otherfacilities include a limeplant with a capacity of 132,000 tons per year; two sulfuric acid plants, onewith a capacity of 2,625 tons per day and the second with a capacity of 2,135tons per day; three oxygen plants, each with a production capacity of 275 tonsper day; and two power turbo generators, one of them uses residual heat fromthe flash furnace, the first with a 11.5 megawatt capacity and the second witha 25 megawatt capacity.

 

The table below sets forth 2008, 2007 and 2006 production informationfor the La Caridad processing facilities:

 
| ** **                        | ** ** | ** ** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Smelter**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total copper  concentrate smelted |       | (kt)       |       | 574.6      |       | 684.8      |       | 724.0      |       |
| Anode copper  production          |       | (kt)       |       | 173.2      |       | 204.4      |       | 242.4      |       |
| Average copper  content in anode  |       | (%)        |       | 99.25      |       | 99.19      |       | 99.28      |       |
| Average smelter  recovery         |       | (%)        |       | 97.50      |       | 97.55      |       | 97.44      |       |
| Sulfuric acid  production         |       | (kt)       |       | 578.2      |       | 674.3      |       | 670.5      |       |
| **Refinery**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Refined cathode  production       |       | (kt)       |       | 140.3      |       | 173.3      |       | 200.4      |       |
| Refined silver  production        |       | (000 kg)   |       | 136.4      |       | 110.1      |       | 131.0      |       |
| Refined gold  production          |       | (Kg)       |       | 666        |       | 544        |       | 722        |       |
| **Rod  Plant**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Copper rod  production            |       | (kt)       |       | 76.3       |       | 96.6       |       | 96.6       |       |

 
| ** **                            | ** ** | ** **   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|--------------|------------|----------|------------|----------|------------|----------|------------|
| **Sales  data:**                      |       |         |       |     |       |     |       |     |       |
| Average realized  price copper rod    |       | ($per lb)    |       | 3.24     |       | 3.24     |       | 3.11     |       |
| Average premium  copper rod           |       | ($per lb)    |       | 0.11     |       | 0.07     |       | 0.08     |       |
| Average realized  price gold          |       | ($per ounce) |       | 858.80   |       | 660.57   |       | 596.83   |       |
| Average realized  price silver        |       | ($per ounce) |       | 13.84    |       | 13.04    |       | 11.58    |       |
| Average realized  price sulfuric acid |       | ($per ton)   |       | 145.99   |       | 47.66    |       | 41.86    |       |

----

Key:                       kt = thousand tons

 

MEXICAN IMMSA UNIT

 

Our IMMSA unit (underground mining poly-metallicdivision) operates five underground mining complexes situated in central andnorthern Mexico and produces zinc, lead, copper, silver, gold and has a coalmine.  These complexes include industrialprocessing facilities for zinc, lead, copper and silver.  All of IMMSA’s mining facilities employexploitation systems and conventional equipment.  We believe that all the plants and equipmentare in satisfactory operating condition. IMMSA’s principal mining facilities include Charcas, Santa Barbara, SanMartin, Santa Eulalia and Taxco.

 

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The table below sets forth 2008, 2007 and 2006 production informationfor our Mexican IMMSA unit:

 
| ** **                        | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average annual  operating days(*) |       |       |       | 315      |       | 290      |       | 323      |       |
| Total material  mined and milled  |       | (kt)       |       | 2,923    |       | 3,863    |       | 4,407    |       |
| Zinc average ore  grade           |       | (%)        |       | 4.14     |       | 3.62     |       | 3.56     |       |
| Zinc concentrate                  |       | (kt)       |       | 194.0    |       | 222.8    |       | 252.1    |       |
| Zinc concentrate  average grade   |       | (%)        |       | 55.10    |       | 54.32    |       | 54.17    |       |
| Zinc average  recovery            |       | (%)        |       | 88.37    |       | 86.47    |       | 87.06    |       |
| Lead average ore  grade           |       | (%)        |       | 0.89     |       | 0.65     |       | 0.57     |       |
| Lead concentrate                  |       | (kt)       |       | 38.3     |       | 39.1     |       | 38.9     |       |
| Lead concentrate  average grade   |       | (%)        |       | 53.36    |       | 49.53    |       | 49.06    |       |
| Lead average  recovery            |       | (%)        |       | 78.38    |       | 77.09    |       | 76.32    |       |
| Copper average  ore grade         |       | (%)        |       | 0.37     |       | 0.39     |       | 0.41     |       |
| Copper  concentrate               |       | (kt)       |       | 18.3     |       | 36.9     |       | 46.4     |       |
| Copper  concentrate average grade |       | (%)        |       | 29.57    |       | 24.51    |       | 22.72    |       |
| Copper average  recovery          |       | (%)        |       | 50.42    |       | 59.52    |       | 59.09    |       |

----

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 kilometers north of the cityof San Luis Potosi in the State of San Luis Potosi, Mexico.  Charcas is connected to the state capital bya paved highway of 130 kilometers.  14kilometers 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 the cityof Matehuala via a federal highway and begins at the northeast of the Charcastownsite.  The complex includes threeunderground mines (San Bartolo, Rey-Reina and La Aurora) and one flotationplant that produces zinc, lead and copper concentrates, with significantamounts of silver.  The Charcas miningdistrict was discovered in 1573 and operations in the 20th century began in1911.  The Charcas mine is characterizedby low operating costs and good quality ores and is situated near the zincrefinery.  The Charcas mine is now Mexico’slargest producer of zinc.

 

The Charcas complex’s equipment includes sixteen jumbo drilling tools,twenty-one scoop trams for mucking and loading, seven trucks and threelocomotives for internal ore haulage and three hoists.  In addition, the mill has one primarycrusher, one secondary crusher and two tertiary crushers, four mills and threeflotation circuits.

 

Geology

 

The Charcas mining district occupies the east-central part of theMexican Central Mesa and is part of the Sierra Madre metallogenicprovince.  Geological history starts inthe 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 

 

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scarce sphalerite.  Economic oreis found as replacement sulfurs in carbonates host rock. The ore mineralogy iscomprised predominantly of calcopyrite (CuFeS2),sphalerite (ZnS), galena (PbS) and silver minerals as diaphorite (Pb2Ag3Sb3S8).

 

Mine exploration

 

In Charcas, 16,739 metersof diamond drilling were executed from underground stations and 39,043 metersfrom surface.  With this drilling,1,683,724 tons were added to the reserve base in 2008.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our Charcas mine:

 
| ** **                        | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days)     |       | 325      |       | 324      |       | 323      |       |
| Total material  mined and milled  |       | (kt)       |       | 1,169    |       | 1,259    |       | 1,343    |       |
| Zinc average ore  grade           |       | (%)        |       | 5.70     |       | 5.46     |       | 5.37     |       |
| Zinc concentrate                  |       | (kt)       |       | 109.5    |       | 112.4    |       | 117.8    |       |
| Zinc concentrate  average grade   |       | (%)        |       | 56.94    |       | 56.91    |       | 56.90    |       |
| Zinc average  recovery            |       | (%)        |       | 93.53    |       | 93.14    |       | 92.97    |       |
| Lead average ore  grade           |       | (%)        |       | 0.53     |       | 0.32     |       | 0.20     |       |
| Lead concentrate                  |       | (kt)       |       | 9.8      |       | 7.6      |       | 4.6      |       |
| Lead concentrate  average grade   |       | (%)        |       | 45.40    |       | 33.70    |       | 27.14    |       |
| Lead average  recovery            |       | (%)        |       | 71.26    |       | 63.78    |       | 45.86    |       |
| Copper average  ore grade         |       | (%)        |       | 0.23     |       | 0.22     |       | 0.21     |       |
| Copper  concentrate               |       | (kt)       |       | 3.6      |       | 4.2      |       | 4.2      |       |
| Copper  concentrate average grade |       | (%)        |       | 28.54    |       | 26.17    |       | 26.08    |       |
| Copper average  recovery          |       | (%)        |       | 37.83    |       | 40.07    |       | 38.16    |       |

----

kt = thousand tons

 

The Charcas mine uses the hydraulic cut-and-fill method and theroom-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 approximately 26 kilometerssouthwest of the city of Hidalgo del Parral in southern Chihuahua, Mexico.  The area can be reached via paved road fromHidalgo del Parral, a city on a federal highway.  Chihuahua, the state capital is located 250kilometers north of the Santa Barbara complex. Additionally, El Paso on the Texas border is located 600 kilometersnorth of Santa Barbara.  Santa Barbaraincludes three main underground mines (San Diego, Segovedad and Tecolotes) anda flotation plant and produces lead, copper and zinc concentrates, withsignificant amounts of silver. Gold-bearing veins were discovered in the Santa Barbara district asearly as 1536.  Mining activities in the20th century began in 1913.

 

The mining operations at Santa Barbara are more diverse and complexthan at any of the other mines in our Mexican operations, with veins thataggregate approximately 21 kilometers in length.  Each of the three 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 

 

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flotation plant to produce concentrates.  The flotation plant has a capacity of 5,700tons 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.

 

The major mine equipment at Santa Barbara includes eighteen jumbodrilling tools, one Simba drilling tools, thirty-six scoop trams, thirteentrucks and eleven locomotives for internal ore haulage, seven trucks forexternal haulage and six hoists.  Fortreating the ore, there are six primary jaw crushers, one secondary crusher andtwo tertiary crushers, three mills and three flotation circuits.  The concentrator plant has a milling capacityof 6,000 tons of ore per day.

 

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).  Gangueminerals include quartz (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 in exploration.

 

Mine Exploration:

 

In Santa Barbara, 12,705meters were drilled from underground stations and 8,519 meters from the surfacein 2008.  With this drilling 511,603 tonswere added to thereserve base in 2008.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our Santa Barbara mines:

 

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| ** **                        | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days)     |       | 327      |       | 326      |       | 326      |       |
| Total material  mined and milled  |       | (kt)       |       | 1,461    |       | 1,450    |       | 1,484    |       |
| Zinc average ore  grade           |       | (%)        |       | 2.37     |       | 2.18     |       | 2.11     |       |
| Zinc concentrate                  |       | (kt)       |       | 55.9     |       | 48.6     |       | 48.6     |       |
| Zinc concentrate  average grade   |       | (%)        |       | 53.68    |       | 53.94    |       | 54.38    |       |
| Zinc average  recovery            |       | (%)        |       | 86.69    |       | 82.82    |       | 84.50    |       |
| Lead average ore  grade           |       | (%)        |       | 0.90     |       | 0.85     |       | 0.86     |       |
| Lead concentrate                  |       | (kt)       |       | 19.4     |       | 19.5     |       | 20.1     |       |
| Lead concentrate  average grade   |       | (%)        |       | 54.28    |       | 52.40    |       | 54.11    |       |
| Lead average  recovery            |       | (%)        |       | 80.20    |       | 83.02    |       | 85.20    |       |
| Copper average  ore grade         |       | (%)        |       | 0.53     |       | 0.53     |       | 0.52     |       |
| Copper  concentrate               |       | (kt)       |       | 14.8     |       | 15.1     |       | 14.3     |       |
| Copper  concentrate average grade |       | (%)        |       | 29.82    |       | 29.81    |       | 30.20    |       |
| Copper average  recovery          |       | (%)        |       | 56.87    |       | 58.49    |       | 56.10    |       |

----

kt = thousand tons

 

San Martin

 

The San Martin mining complex is located in the municipality ofSombrerete in the western part of the state of Zacatecas, Mexico, approximately101 kilometers southeast of the city of Durango and nine kilometers east of theDurango State boundary.  Access to theproperty is via a federal highway between the cities of Durango andZacatecas.  A paved six kilometer roadconnects the mine and town of San Martin with the highway.  The city of Sombrerete is about 16 kilometerseast of the property. The complex includes an underground mine and a flotationplant and produces lead, copper and zinc concentrates, with significant amountsof silver.  The mining district in whichthe San Martin mine is located was discovered in 1555.  Mining operations in the 20th century beganin 1949.  San Martin lies in the MesaCentral between the Sierra Madre Occidental and the Sierra Madre Oriental.

 

The horizontal cut-and-fill mining method is used at the San Martinmine.  The broken ore is hauled to theunderground crusher station.  The ore isthen brought to the surface and fed to the flotation plant to produceconcentrates.  The flotation plant has atotal capacity of 4,400 tons of ore per day. The lead concentrate is treated at a third party refinery inMexico.  The copper concentrate istreated at our San Luis Potosi copper smelter and zinc concentrate is eithertreated at the San Luis Potosi zinc refinery or exported.

 

The major mine equipment at San Martin includes eight jumbo drillingtools, thirteen scoop trams, nine trucks and three hoists.  For treating the ore, there are two primaryjaw crushers, two secondary crushers and one tertiary crusher, two mills andthree flotation circuits. The concentrator plant has a mill capacity of 4,400tons of ore per day.

 

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.

 

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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,which appear at the surface for distances of up to 1,000 meters, withthicknesses of 40 centimeters to four meters, paralleling the intrusivecontact.  In the central part of thedeposit there is a horizontal zoning with respect to the contact of theintrusive with high values of silver and copper.  In the top of the deposit there is mostlylead and zinc.  In the northeast/eastover concentric structures to the intrusive there is an increment of lead, zincand silver in the skarn.  Economic ore isfound as replacement ore bodies between the main veins as massive anddisseminated sulfides with widths from 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) and stibnite (Sb2S3).  Molybdenum and tungsten are found in littleportions in the skarn near the contact associated with the calcite.

 

Mine Exploration

 

There was no mineexploration drilling in 2008 because the San Martin mine was on strike for thewhole year.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our San Martin mines:

 
| ** **                        | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days            |       | (days) (1) |       | —   |       | 171      |       | 239      |       |
| Total material  mined and milled  |       | (kt)       |       | —   |       | 625      |       | 926      |       |
| Zinc average ore  grade           |       | (%)        |       | —   |       | 1.76     |       | 2.17     |       |
| Zinc concentrate                  |       | (kt)       |       | —   |       | 16.0     |       | 29.9     |       |
| Zinc concentrate  average grade   |       | (%)        |       | —   |       | 51.68    |       | 51.45    |       |
| Zinc average  recovery            |       | (%)        |       | —   |       | 75.16    |       | 76.67    |       |
| Lead average ore  grade           |       | (%)        |       | —   |       | 0.18     |       | 0.21     |       |
| Lead concentrate                  |       | (kt)       |       | —   |       | 1.1      |       | 2.6      |       |
| Lead concentrate  average grade   |       | (%)        |       | —   |       | 32.26    |       | 34.02    |       |
| Lead average  recovery            |       | (%)        |       | —   |       | 32.96    |       | 44.65    |       |
| Copper average  ore grade         |       | (%)        |       | —   |       | 0.69     |       | 0.71     |       |
| Copper  concentrate               |       | (kt)       |       | —   |       | 17.6     |       | 27.9     |       |
| Copper  concentrate average grade |       | (%)        |       | —   |       | 19.59    |       | 18.38    |       |
| Copper average  recovery          |       | (%)        |       | —   |       | 80.21    |       | 77.89    |       |

----

kt = thousand tons

(1)          There were 366, 136 and 77 days ofstrikes in 2008, 2007 and 2006, respectively. As a consequence San Martin lost10,292 tons and 6,078 tons of zinc in concentrates, 501 tons and 477 tons oflead in concentrates and 4,375 tons and 2,237 tons of copper in concentrates in2008 and 2007, respectively.

 

Santa Eulalia

 

The miningdistrict of Santa Eulalia is located in the central part of the state ofChihuahua, Mexico, approximately 26 kilometers east of the city of Chihuahua.  This district covers approximately 48 squarekilometers and is divided into three fields: east field, central field and westfield.  The west field and the eastfield, in which the principal mines of the complex are found, are separated bysix kilometers.  The Buena Tierra mine islocated in the west field and the San Antonio mine is located in the eastfield.  The mining district wasdiscovered in 1590, although exploitation did not formally begin until 1870.

 

The district of SantaEulalia is connected to the city of Chihuahua by a paved road 

 

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(highway no. 45), at adistance of ten kilometers there is a paved detour to Aquiles Serdan andFrancisco Portillo (also known as Santo Domingo) where the Company’s officesand the Buena Tierra mine are located. Access to the Buena Tierra mine and SanAntonio mine is through an 11 kilometer unpaved road.

 

The Santa Eulalia mine suspended operations from October 2000 to December 2004,during which time rehabilitation work was completed at the San Antonio shaftand pipes were installed to expand the pumping capacity to 10,500 gallons perminute.  In January 2005, operationsrestarted at the Santa Eulalia mine, with a production plan for 230,900tons.  The flotation plant, at which leadand zinc concentrates are produced, has a capacity of 1,500 tons of ore perday.  The lead concentrate is treated ata third party refinery, and the zinc concentrate is treated at our San LuisPotosi zinc refinery.

 

Major mine equipment at the Santa Eulaliamine include five Jumbo drilling tools, nine scoop trams for mucking andloading, two trucks and two hoists.  Fortreating the ore, there are two primary crushers, one secondary crusher and onetertiary crusher, two mill crushers, one mill and two flotation circuits.  The concentrator plant has a milling capacityof 1,450 tons of ore per day.

 

Geology

 

Santa Eulalia is the largest of a numberof similar districts that lie along the intersection of the Laramide-agedMexican Thrust Belt and the Tertiary volcanic plateau of the Sierra MadreOccidental.  Deposits throughout the beltoccur in a thick Jurassic-Cretaceous carbonate succession that overliesPaleozoic or older crust.

 

The main sedimentary rock in the SantaEulalia district is the Lower Cretaceous Limestone. These are irregularlycovered by volcanic sedimentary conglomerates that are overlaid by volcanicrocks of the tertiary and alluvial material of the Quaternary Age.

 

In the Santa Eulalia mining district athickness of 500 meters of sedimentary rocks is known to exist which consistsof the following formations: 1) Formation Lagrima (limestone fossils); 2)Formation Glen Rose (limestone blue and at its base a black limestone appears);and 3) Formation Cuchillo (limestone with shale). Dikes and sills of riolitecomposition and sills of diabase also exist.

 

In the district there are several systemsof fractures and faults associated with the emplacement of felsitic and maphicintrusives.  The most importantcontroller of the ore bodies are the north-south fractures.

 

The mineralization corresponds in itsmajority to ore skarns — silicoaluminates of calcium, iron and manganese withvariable quantities of lead, zinc, copper and iron sulfides, located in theplanes of crossings in the interstices of the silicates.

 

Economic ore is found as replacement inthe Limestone Glen Rose in the contact with dikes and sills and replacements indiabase sills.  The mineralogy iscomprised predominantly of sphalerite (ZnS), galena (PbS) and small quantitiesof pyrargyrite (Ag3SbS3).

 

Mine Exploration

 

At Santa Eulalia, in2008, 8,520 meters were drilled from underground stations and 9,649 meters fromthe surface.  With this drilling anadditional mineralized materialof502,755 tons was developed and 15,375 tons were added to the reserve base in2008.

 

The table below setsforth 2008, 2007 and 2006 production information for our Santa Eulalia mine:

 

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| ** **                       | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days           |       | (days)     |       | 326      |       | 326      |       | 326      |       |
| Total material  mined and milled |       | (kt)       |       | 293      |       | 281      |       | 244      |       |
| Zinc average ore  grade          |       | (%)        |       | 6.73     |       | 6.60     |       | 6.95     |       |
| Zinc concentrate                 |       | (kt)       |       | 28.7     |       | 28.1     |       | 26.1     |       |
| Zinc concentrate  average grade  |       | (%)        |       | 50.87    |       | 50.23    |       | 51.19    |       |
| Zinc average  recovery           |       | (%)        |       | 73.87    |       | 76.14    |       | 78.75    |       |
| Lead average ore  grade          |       | (%)        |       | 2.29     |       | 2.24     |       | 2.04     |       |
| Lead concentrate                 |       | (kt)       |       | 9.1      |       | 8.5      |       | 7.1      |       |
| Lead concentrate  average grade  |       | (%)        |       | 59.94    |       | 61.10    |       | 56.17    |       |
| Lead average  recovery           |       | (%)        |       | 81.41    |       | 82.35    |       | 80.13    |       |

----

kt = thousand tons

 

Taxco

 

The Taxco mining complex is located on the outskirts of the city ofTaxco in the northern part of Guerrero State, Mexico, approximately 71kilometers from the city of Cuernavaca, Morelos, where access through thehighway to the complex is possible.  Thecomplex includes several underground mines (San Antonio, Guerrero and Remedios)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 theroom 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 athird party refinery in Mexico.  The zinc concentrate is either treated at theSan Luis Potosi zinc refinery or exported.

 

The major mine equipment at the Taxco complex include four Jumbodrilling tools, ten scoop trams for mucking and loading, five trucks and threelocomotives for internal ore haulage and three hoists. For treating the ore,there are two primary crushers, one secondary crusher and two tertiarycrushers, three mills and two flotation circuits.  The concentrator plant has a milling capacityof 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 control characteristics.  The Taxco schist is composed of a series ofschists and fylites, most likely from a volcanic-sedimentary sequence of tufaand limonites.  They represent a sequenceof metamorphological arch and its age has been defined as Jurassic Medium.  The Morelos formation from the UpperCretaceous age (Apian-Turonian) lies on a discordant form over Taxco schist andits contact is several times marked by a clay zone (mylonites) and breccia,which implies a shifting of this unit over the schist (packs).  The Mezcala formation is constituted by asequence of shale and sandstone with some inter-stratified layers oflimestone.  Its base is calcarean.  Its top tends to be rich in clay with thinlimestone layers.  The Balsas group is constitutedby conglomerates and is sandy on its base,rests in discordance form on an erosioned surface from the Mexcalaformation.  The Tilzapotla Ryolite is thenewest rock, which emerged in the district before the alluvial deposit.  It is formed of flux, breccia, tuffaceous,ignimbrites and vitrophyrre of ryolite composition.

 

There are four types ofore deposits found in Taxco district.  Inorder of importance 

 

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they are as follows:fissure-filling veins, replacement veins, blanket-like replacement bodies (socalled “mantos”), stock works and brecciate chimneys.  The three first ones are intimately relatedand they were formed in the same era, although in different stages.

 

The veins reach up to twokilometers in length with a variable potency of thirty centimeters up to eightmeters, which is the case of copper veins at the mines of Guerrero, Hueyapa andPalo Amarillo at the San Antonio mine; the Remedios mine has among other veins,El Muerto and El Cristo one kilometer long and five meters in average potency.

 

Economic ore is found inthe deposit in veins. Ore mineral include argentiferous galena (PbS),sphalerite (ZnS), pyrargyrite (Ag3SbS3), and other sulfosalts, and replacement “mantos.”  The most mineralized zones are in thevicinity of the veins with the limestone. The mineralization is more intensive in the base of the limestone andconsists of sphalerite (ZnS), galena (PbS), pyrite (FeS) and magnetite (FeOFe2O3).

 

Mine Exploration

 

There was no mineexploration drilling in 2008 because the Taxco mine was on strike for the wholeyear.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our Taxco mine:

 
| ** **                       | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating  days           |       | (days)(1)  |       | —   |       | 171      |       | 323      |       |
| Total material  mined and milled |       | (kt)       |       | —   |       | 248      |       | 411      |       |
| Zinc average ore  grade          |       | (%)        |       | —   |       | 4.08     |       | 4.0      |       |
| Zinc concentrate                 |       | (kt)       |       | —   |       | 17.7     |       | 29.7     |       |
| Zinc concentrate  average grade  |       | (%)        |       | —   |       | 47.83    |       | 48.35    |       |
| Zinc average  recovery           |       | (%)        |       | —   |       | 83.77    |       | 87.29    |       |
| Lead average ore  grade          |       | (%)        |       | —   |       | 0.56     |       | 0.65     |       |
| Lead concentrate                 |       | (kt)       |       | —   |       | 2.4      |       | 4.6      |       |
| Lead concentrate  average grade  |       | (%)        |       | —   |       | 43.69    |       | 46.16    |       |
| Lead average  recovery           |       | (%)        |       | —   |       | 74.97    |       | 79.24    |       |

----

kt = thousand tons

(1)          There were 365 days and 136 days ofstrike in 2008 and 2007, respectively. As a result it is estimated that Taxco lost 13,306 tons and 5,531 tonsof zinc in concentrates and 2,233 tons and 873 tons of lead in concentrates in2008 and 2007, respectively.

 

Processing Facilities - San Luis Potosi

 

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

 

Smelter

 

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

 

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The plant operates one blast furnace (with a second on stand-by) thatsmelts incoming materials, mainly copper concentrates and copper by-productsfrom lead plants, to produce a copper matte. The copper matte is then treated in one of the two Pierce Smithconverters, producing copper blister (95.7% copper), which in 2008 containedapproximately 2.1 ounces of gold and 360 ounces of silver per ton of copperblister produced.  Of a total copperconcentrate intake of 40,878 tons in 2008, approximately 29% was supplied bythe IMMSA unit’s mines and the remaining amount was purchased from thirdparties.  25% of the blister productionis sold to the La Caridad copper smelter and the remaining 75% is sold to thirdparty refineries throughout the world.

 

The San Luis Potosi copper smelter’s equipment include two yardlocomotives, two drag-shovels, twenty dump cars and six mechanic front loadersfor the furnace charge mixing. Smelting and conversion equipment include threeblast furnaces, two Pierce Smith converter furnaces, two molding furnaces, sixelectric front loaders, six towing units, three narrow way locomotives, twobridge cranes, two 7-ton cranes and three hoists.  Venting system equipment includes nine fanswith different capacities and two filtering bag houses.  This plant has a smelting capacity of 24,000tons of blister copper per year.

 

As the materials treated at the smelter contain various impurities(especially lead and arsenic), the facility has been equipped with an arsenicrecovery plant for treatment of the flue dust produced in the blast furnacesection.  This material containsapproximately 35% lead and 18% arsenic which, when treated, produces approximately1,800 tons per year of high purity arsenic trioxide which is, in turn, sold inthe United States principally to the wood preserving industry.  Approximately 13,000 tons per year of leadbearing calcines (approximately 32% lead) are sold annually to IndustriasPeñoles, S.A. de C.V. (“Peñoles”).

 

The table below sets forth 2008, 2007 and 2006 production informationfor our San Luis Potosi copper smelter:

 
| ** **                             | ** ** | ** **         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Total copper  concentrate smelted      |       | (kt)               |       | 40.9     |       | 48.1     |       | 48.1     |       |
| Blister copper  production             |       | (kt)               |       | 19.0     |       | 20.8     |       | 20.2     |       |
| Silver in  blister                     |       | (oz. per ton)      |       | 360      |       | 397      |       | 460      |       |
| Gold in blister                        |       | (oz. per ton)      |       | 2.1      |       | 1.5      |       | 1.6      |       |
| Copper average  grade in blister       |       | (%)                |       | 96.0     |       | 96.06    |       | 96.75    |       |
| Average smelter  recovery              |       | (%)                |       | 97.07    |       | 97.18    |       | 98.13    |       |
| Average realized  price copper blister |       | ($ per pound) |       | 2.63     |       | 3.35     |       | 3.51     |       |

----

kt = thousand tons

 

Zinc Refinery

 

The San Luis Potosi electrolytic zinc refinery was built in 1982.  It was designed to produce 105,000 tons ofrefined zinc per year by treating up to 200,000 tons of zinc concentrate fromour own mines, principally Charcas, located only 113 kilometers from therefinery.  The refinery produces specialhigh grade zinc (99.995% zinc), high grade zinc (over 99.9% zinc) and zinc-basedalloys with aluminum, lead, copper or magnesium in varying quantities and sizesdepending on market demand.

 

Theelectrolytic zinc refinery’s major equipment includes a roaster with a capacityof 85 m2 of roasting area, a steam recovery boiler and an acid plant.  There is a calcine 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 includes a cellhouse with two electrowinning circuits to 

 

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finallyobtain metallic zinc; an alloy and molding area with two induction furnaces andfour molding systems, two of them with chains to produce 25 kilogram ingots;and two casting wheels to manufacture one ton Jumbo pieces.  This refinery has a production capacity of105,000 tons of refined zinc per year.

 

The table below sets forth 2008, 2007 and 2006 production informationfor our San Luis Potosi zinc refinery:

 
| ** **                               | ** ** | ** **      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006(1)** | ** ** |
|------------------------------------------|------------|-----------------|------------|----------|------------|----------|------------|-------------|------------|
| Total zinc  concentrate treated          |       | (kt)            |       | 179.2    |       | 181.3    |       | 118.0       |       |
| Refined zinc  produced                   |       | (kt)            |       | 95.4     |       | 90.9     |       | 45.3        |       |
| Sulfuric acid  produced                  |       | (kt)            |       | 162.1    |       | 165.1    |       | 98.5        |       |
| Refined silver  produced                 |       | (kt)            |       | 10.0     |       | 10.3     |       | 9.2         |       |
| Refined gold  produced                   |       | (k)             |       | 6.0      |       | 5.0      |       | 7.0         |       |
| Refined cadmium  produced                |       | (kt)            |       | 0.6      |       | 0.6      |       | 0.4         |       |
| Average refinery  recovery               |       | (%)             |       | 95.2     |       | 94.0     |       | 73.35       |       |
| Average realized  price refined zinc     |       | ($ per lb) |       | 0.89     |       | 1.46     |       | 1.67        |       |
| Average realized  price zinc concentrate |       | ($ per lb) |       | 0.88     |       | 1.57     |       | 1.46        |       |
| Average realized  price silver           |       | ($ per oz) |       | 13.82    |       | 13.02    |       | 11.45       |       |

----

kt = thousand tons

(1)          Some production was lost due to a fire atthe refinery in the first quarter of 2006.

 

Nueva Rosita Coal and Coke Complex

 

The Nueva Rosita coal and coke complex, which began operations in 1924,is located in the state of Coahuila, Mexico on the outskirts of the city ofNueva Rosita near the Texas border.  Itincludes a) an underground coal mine, which has been closed as a result of agas explosion in February 2006; b) an open pit mine with a yearly capacityof approximately 350,000 tons of coal; c) a coal washing plant completed in1998 with a capacity of 900,000 tons per year that produces clean coal of ahigher quality; and d) a re-engineered and modernized 21 coke oven facilitycapable of producing 105,000 tons of coke (metallurgical, nut and fine) peryear of which 95,000 tons are metallurgical coke.  There is also a by-product plant to clean thecoke gas oven in which tar, ammonium sulfate and light crude oil arerecovered.  There are also boilers toproduce 80,000 steam pounds that are used in the by-products plant.  The re-engineering and modernization of 21ovens was completed in April, 2006 and it is presently operating with noproblems to report.

 

At present, the coke oven installation supplies the San Luis Potosicopper smelter with low-cost coke, resulting in significant cost savings to thesmelter.  The surplus production is soldto Peñoles and other Mexican consumers in northern Mexico.  We expect to sell 37,438 tons ofmetallurgical coke in 2009.

 

Mine Exploration:

 

During 2008 there was noexploration activity at the Nueva Rosita unit.

 

The table below sets forth 2008, 2007 and 2006 production information forour Nueva Rosita coal and coke complex:

 

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| ** **                                 | ** ** | ** **       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|
| Coal mined —  underground mine        |       | (kt)             |       | —   |       | —   |       | 29.4     |       |
| Coal mined —  open pit                |       | (kt)             |       | 296.8    |       | 97.4     |       | 185.9    |       |
| Total coal mined                           |       | (kt)             |       | 296.8    |       | 97.4     |       | 215.3    |       |
| Average BTU  content                       |       | BTU/Lb           |       | 9,100.0  |       | 9,054.9  |       | 9,720.0  |       |
| Average percent  sulfur                    |       | %                |       | 1.80     |       | 1.78     |       | 0.80     |       |
| Clean coal  produced                       |       | (kt)             |       | 91.5     |       | 41.1     |       | 51.8     |       |
| Coke tonnage  produced                     |       | (kt)             |       | 70.3     |       | 63.4     |       | 55.7     |       |
| Average realized  price coal               |       | ($ per ton) |       | 27.70    |       | 29.01    |       | 25.49    |       |
| Average realized  price arsenic clean coal |       | ($ per ton) |       | 45.00    |       | —   |       | 47.07    |       |
| Average realized  price coke               |       | ($ per ton) |       | 213.62   |       | 197.0    |       | 222.35   |       |

----

kt = thousand tons

 

In the Pasta de Conchos mining complex within the mine there are fivecontinuous mining circuits, six transporting cars, two locomotives, one longwall equipment and a cutting machine. There is also a hoist to transport materials inside the unit; a breakerin the surface to feed the washing plant; and a set of 21 coke ovens with acapacity of 100,000 coke tons per year. There is a by-product plant to clean the coke gas in which tar, ammoniumsulfate and light crude oil are recovered. There are also two boilers which produce 80,000 steam pounds that areused in the by-products plant.

 

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) quantityis computed from dimensions revealed in outcrops, trenches, workings or drillholes; (b) grade and/or quality are computed from the results of detailedsamplings; and (c) the sites for inspection, sampling and measurement arespaced so closely and the geologic character is so well defined that size,shape, depth and mineral content of reserves are well-established.  “Probable” (indicated) reserves are reservesfor which quantity and grade and/or quality are computed from informationsimilar to that used for proven (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 arespaced at intervals sufficiently close enough and the geologicalcharacteristics of the deposits are sufficiently well defined to render theestimates reliable.  The ore reservesestimates include assessments of the resource, mining and metallurgy, as wellas economic, 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 

 

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confidence in the blockgrade estimate.  This approach combinesthe local variability of the composites used to krig a block with the Krigingvariance and incorporates the use of confidence intervals in measuringuncertainty of the block estimates relative to each other.  The final resource classification is thenbased on the distribution of these RCB values for blocks above 0.05% copper.  It is the distribution that is used to findthe breaks between proven/probable and probable/possible.

 

In December 2006, weannounced a significant increase in ore reserves at our Peruvian mines.  Using a 90 cent 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 into consideration theprincipal characteristics of the deposit. Based on this block model classification, and with the implementation ofthe Lerch-Grossman algorithm, and the Mine-Sight Pit Optimizer procedure,mineable reserves are determined.  Thecalculated proven and probable reserves include those blocks that areeconomically feasible to mine by open pit method within a particular minedesign.

 

 For the IMMSA unit, the basis for reserve estimations are samplingof mining operations and drilling exploration, geographical and topographicsurveys, tracking down all the foregoing in the corresponding maps,measurement, calculations and interpretation based on the maps and reports fromthe mines, the mills and/or smelters. Mineral reserves are mineral stock which is estimated for extraction, toexploit if necessary, to sell or utilize economically, all or in part, takinginto consideration the quotations, subsidies, costs, availability of treatmentplants and other conditions which the Company estimates will prevail in theperiod for which reserves are being calculated. The reserves are divided into proven (85% reliable or more according tostatistical studies) and probable (70-80% reliable or more according tostatistical studies) categories according to their level of reliability andavailability.  In order to comply withSEC regulations, proven reserves is a classification that can only be used forsuch mineral found on top of the last level of the mine (either mineral up to15 meters below the last level or below the first 15 meters only withsufficient drilling (25 or 30 meters between each drill)).

 

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

 

Pursuant to SEC guidance,the reserves information in this report 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 $3.148 per pound for copper and $28.022 per pound formolybdenum, both current prices as of December 31, 2008.  The current 

 

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prices for copper andmolybdenum were $2.664 and $28.987 as of December 31, 2007 and $2.020 and$24.315 as of December 31, 2006.

 

For production planningpurposes our management uses long-term metals price assumptions for copper andmolybdenum.  These prices are intended toapproximate average prices over the long term. Starting December 31, 2007these price assumptions were changed to $1.20 per pound for copper and $9.00per pound for molybdenum.  Average metalprices over the last 10 and 15 year periods and the continued positive outlookfor these metals have led us to reappraise our view of prices.  In prior years, we used metals priceassumptions of $0.90 per pound for copper and $5.00 per pound for molybdenum.

 

For the years 2008, 2007and 2006, we have used reserves estimates based on current average prices as ofthe most recent year then ended to determine amortization of mine developmentand intangible assets, for the years prior to 2006 the same reserve calculationwas used to determine the amount of mine stripping that was capitalized andunits of production amortization of capitalized mine stripping.

 

We periodicallyreevaluate estimates of our ore reserves, which represent our estimate as tothe amount of unmined copper remaining in our existing mine locations that canbe produced and sold at a profit.  Theseestimates are based on engineering evaluations derived from samples of drillholes and other openings, combined with assumptions about copper market pricesand production costs at each of our mines.

 

The persons responsiblefor ore reserve calculations are as follows:

 

Peruvian open pit:

Cuajone mine — Enrique A.Paredes, Mine Manager

Toquepala mine — Luis O.Ticona, Mine Manager

 

Mexican open pit:

La Caridad Mine - MarcoA. Figueroa, Engineering and Mine Planning Superintendent

Cananea mine — JesusMolinares, Engineering and Mine Planning Superintendent

 

IMMSA Unit:

Santa Barbara - Jorge M.Espinosa, Planning and Control Superintendent

Charcas - Jose P.Guerrero, Planning and Control Superintendent

Santa Eulalia — GuillermoGarcia, Planning and Control Superintendent

Taxco - Marco A.Gonzalez, Regional Geologist

San Martin - Maria I.Carrillo, Chief Engineer

 

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

 

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**The table below details our proven and probablecopper and molybdenum reserves as estimated at December 31, 2008.**

 
| ** **                                                   | ** ** | **PERUVIAN OPEN-PIT UNIT** | ** ** | **MEXICAN OPEN-PIT UNIT** | ** ** | ** **           | ** ** | **MEXICAN IMMSA UNIT**  | ** ** | **Sensitivity to Change in metals prices (3)** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|----------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **Cuajone Mine (1)**       | ** ** | **Toquepala Mine (1)**    | ** ** | **Cananea Mine (1)** | ** ** | **La Caridad Mine (1)** | ** ** | **TOTAL OPEN-PIT MINES**                       | ** ** | **IMMSA (2)** | ** ** | **Increase 20%** | ** ** | **Decrease 20%** | ** ** |
| Mineral Reserves                                             |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| Metal prices:                                                |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| Copper ($/lb.)                                               |       | 3.148                      |       | 3.148                     |       | 3.148                |       | 3.148                   |       | 3.148                                          |       | 3.148 |   | 3.778 |   | 2.519 |   |
| Molybdenum  ($/lb.)                                          |       | 28.022                     |       | 28.022                    |       | 28.022               |       | 28.022                  |       | 28.022                                         |       | 28.022 |   | 33.626 |   | 22.417 |   |
| Cut-off grade                                                |       | 0.135                      | %          | 0.139                     | %          | 0.106                | %          | 0.085                   | %          | 0.114                                          | %          |   |   | 0.098 | % | 0.144 | % |
| Sulfide ore  reserves (thousands of tons)                    |       | 2,446,155                  |       | 4,294,020                 |       | 6,684,931            |       | 3,800,122               |       | 17,225,228                                     |       | 48,340 |   | 18,380,324 |   | 15,219,550 |   |
| Average grade:                                               |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| Copper                                                       |       | 0.517                      | %          | 0.442                     | %          | 0.378                | %          | 0.223                   | %          | 0.379                                          | %          | 0.470 | % | 0.365 | % | 0.408 | % |
| Molybdenum                                                   |       | 0.019                      | %          | 0.021                     | %          | —               |       | 0.029                   | %          | 0.024                                          | %          | — |   | 0.024 | % | 0.024 | % |
| Lead                                                         |       | —                     |       | —                    |       | —               |       | —                  |       | —                                         |       | 0.880 | % | — |   | — |   |
| Zinc                                                         |       | —                     |       | —                    |       | —               |       | —                  |       | —                                         |       | 3.140 | % | — |   | — |   |
| Leachable  material (thousands of tons)                      |       | 19,257                     |       | 1,304,621                 |       | 1,773,625            |       | 1,145,308               |       | 4,242,811                                      |       | — |   | 4,039,305 |   | 4,864,465 |   |
| Leachable  material grade                                    |       | 0.454                      | %          | 0.064                     | %          | 0.127                | %          | 0.117                   | %          | 0.106                                          | %          | — |   | 0.091 | % | 0.131 | % |
|                                                         |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| Waste (thousands  of tons) (5)                               |       | 7,566,914                  |       | 13,835,964                |       | 6,833,021            |       | 1,122,993               |       | 29,358,892                                     |       | — |   | 30,024,856 |   | 28,059,125 |   |
| Total material  (thousands of tons)                          |       | 10,032,326                 |       | 19,434,605                |       | 15,291,577           |       | 6,068,423               |       | 50,826,931                                     |       | — |   | 52,444,485 |   | 48,143,140 |   |
| Stripping ratio                                              |       | 3.10                       |       | 3.53                      |       | 1.29                 |       | 0.60                    |       | 1.95                                           |       | — |   | 1.85 |   | 2.16 |   |
|                                                         |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| **Leachable  material**                                      | ** ** | ** **                 | ** ** | ** **                | ** ** | ** **           | ** ** | ** **              | ** ** | ** **                                     | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves in  stock (thousands of tons)                       |       | 19,525                     |       | 1,014,789                 |       | 707,552              |       | 551,344                 |       | 2,293,210                                      |       | — |   | 2,293,210 |   | 2,293,210 |   |
| Average copper  grade                                        |       | 0.474                      | %          | 0.146                     | %          | 0.127                | %          | 0.251                   | %          | 0.168                                          | %          | — |   | 0.168 | % | 0.168 | % |
|                                                         |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| In pit reserves  (thousands of tons)                         |       | 19,257                     |       | 1,304,621                 |       | 1,773,625            |       | 1,145,308               |       | 4,242,811                                      |       | — |   | 4,039,305 |   | 4,864,465 |   |
| Average copper  grade                                        |       | 0.454                      | %          | 0.064                     | %          | 0.127                | %          | 0.117                   | %          | 0.106                                          | %          | — |   | 0.091 | % | 0.131 | % |
|                                                         |       |                       |       |                      |       |                 |       |                    |       |                                           |       |   |   |   |   |   |   |
| Total leachable  reserves (thousands of tons)                |       | 38,782                     |       | 2,319,410                 |       | 2,481,177            |       | 1,696,652               |       | 6,536,021                                      |       | — |   | 6,332,515 |   | 7,157,675 |   |
| Average copper  grade                                        |       | 0.464                      | %          | 0.100                     | %          | 0.127                | %          | 0.160                   | %          | 0.128                                          | %          | — |   | 0.119 | % | 0.143 | % |
| **Copper  contained in ore reserves (thousand of tons) (4)** | ** ** | **12,734**                 | ** ** | **19,815**                | ** ** | **27,522**           | ** ** | **9,813**               | ** ** | **69,884**                                     | ** ** | **227** | ** ** | **70,732** | ** ** | **68,488** | ** ** |

 

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(1)          The Cuajone,Toquepala, Cananea and La Caridad concentrator recoveries calculated for thesereserves were 85.7%, 86.8%, 81.0% and 83.0%, respectively, obtained by usingrecovery 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 are1,518 and 425 thousand tons, respectively.

(3)          In preparing thesensitivity analysis, we recalculated our reserves based on the assumption thatcurrent average metal prices were 20% higher and 20% lower, respectively, thanthe actual current average prices for year-end 2008.  Reserve results of this sensitivity analysisare not proportional to the increase or decrease in metal price assumptions.  The analysis above does not include our IMMSAunit’s underground mines, for which the sensitivity analysis is as follows:

** **

| ** **                                | ** ** | **Sensitivity to 20% Change in  Metals Prices** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                | ** ** | **Increase 20%**                                | ** ** | **Decrease 20%** | ** ** |
| Sulfide ore  reserves (thousands of tons) |       | 48,831                                          |       | 46,553 |   |
| Average grade  copper                     |       | 0.46                                            | %          | 0.47 | % |
| Copper contained  (thousands of tons)     |       | 225                                             |       | 219 |   |

 

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

 

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Thetable below details our proven and probable copper and molybdenum reserves asof December 31, 2008 calculated based on long-term price assumptions of,$1.20 for copper and $9.00 for molybdenum.

 
| ** **                                                    | ** ** | **Cuajone  Mine** | ** ** | **Toquepala  Mine** | ** ** | **Cananea  Mine** | ** ** | **La Caridad  Mine** | ** ** | **Total  Open-Pit  Mines** | ** ** | **IMMSA  (1)** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-------------------|------------|----------------------|------------|----------------------------|------------|----------------|------------|
| **Mineral  Reserves**                                         | ** ** | ** **        | ** ** | ** **          | ** ** | ** **        | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Metal prices:                                                 |       |              |       |                |       |              |       |                 |       |                       |       |           |       |
| Copper ($/lb.)                                                |       | $                 | 1.20       |                | $          | 1.20              |       | $                    | 1.20       |                       | $          | 1.20           |       | $ | 1.20 |   | $ | 1.20 |   |
| Molybdenum  ($/lb.)                                           |       | $                 | 9.00       |                | $          | 9.00              |       | $                    | 9.00       |                       | $          | 9.00           |       | $ | 9.00 |   | $ | 9.00 |   |
| Cut-off grade                                                 |       | 0.303             | %          | 0.321               | %          | 0.366             | %          | 0.181                | %          | 0.310                      | %          | —         |       |
| Sulfide ore  reserves (thousands of tons)                     |       | 1,601,229         |       | 2,018,318           |       | 1,833,860         |       | 888,193              |       | 6,341,600                  |       | 34,307         |       |
| Average grade:                                                |       |              |       |                |       |              |       |                 |       |                       |       |           |       |
| Copper                                                        |       | 0.558             | %          | 0.594               | %          | 0.624             | %          | 0.344                | %          | 0.559                      | %          | 0.550          | %          |
| Molybdenum                                                    |       | 0.020             | %          | 0.035               | %          | —            |       | 0.028                | %          | 0.028                      | %          | —         |       |
| Lead                                                          |       | —            |       | —              |       | —            |       | —               |       | —                     |       | 1.000          | %          |
| Zinc                                                          |       | —            |       | —              |       | —            |       | —               |       | —                     |       | 3.330          | %          |
| Leachable  material                                           |       |              |       |                |       |              |       |                 |       |                       |       |           |       |
| (thousands of  tons)                                          |       | 11,602            |       | 1,953,365           |       | 3,117,556         |       | 1,587,596            |       | 6,669,579                  |       | —         |       |
| Leachable  material grade                                     |       | 0.581             | %          | 0.199               | %          | 0.268             | %          | 0.177                | %          | 0.227                      | %          | —         |       |
| Waste (thousands  of tons)                                    |       | 3,668,193         |       | 8,149,976           |       | 2,719,387         |       | 426,392              |       | 14,963,948                 |       | —         |       |
| Total material  (thousands of tons)                           |       | 5,280,484         |       | 12,121,659          |       | 7,670,803         |       | 2,902,181            |       | 27,975,127                 |       | —         |       |
| Stripping ratio                                               |       | 2.30              |       | 5.01                |       | 3.18              |       | 2.27                 |       | 3.41                       |       | —         |       |
|                                                          |       |              |       |                |       |              |       |                 |       |                       |       |           |       |
| **Leachable  material**                                       | ** ** | ** **        | ** ** | ** **          | ** ** | ** **        | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Reserves in  stock (thousands of tons)                        |       | 19,525            |       | 1,014,789           |       | 707,552           |       | 551,344              |       | 2,293,210                  |       | —         |       |
| Average copper  grade                                         |       | 0.474             | %          | 0.146               | %          | 0.127             | %          | 0.251                | %          | 0.168                      | %          | —         |       |
| In-pit reserves  (thousands of tons)                          |       | 11,062            |       | 1,953,365           |       | 3,117,556         |       | 1,587,596            |       | 6,669,789                  |       | —         |       |
| Average copper  grade                                         |       | 0.581             | %          | 0.199               | %          | 0.268             | %          | 0.177                | %          | 0.227                      | %          | —         |       |
| Total leachable  reserves (thousands of tons)                 |       | 30,587            |       | 2,968,154           |       | 3,825,108         |       | 2,138,940            |       | 8,962,789                  |       | —         |       |
| Average copper  grade                                         |       | 0.513             | %          | 0.181               | %          | 0.242             | %          | 0.196                | %          | 0.212                      | %          | —         |       |
| **Copper  contained in ore reserves (thousands of tons) (2)** | ** ** | **8,999**         | ** ** | **15,876**          | ** ** | **19,798**        | ** ** | **5,865**            | ** ** | **50,538**                 | ** ** | **189**        | ** ** |

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(1)          The IMMSA unitincludes the Charcas, Santa Barbara, San Martin, Santa Eulalia and Taxco mines.Zinc and lead contained in ore reserves are 1,142 and 343 thousand tons,respectively.

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

 

OVERVIEWOF BLOCK MODEL RECONCILIATION PROCESS

 

Weapply the following block model to mill reconciliation procedure.

 

Thefollowing stages are identified at the Cuajone, Toquepala, Cananea and LaCaridad 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.

 

 

 

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

 

Tonnageand grade reconciliation for 2008 are as follows:

** **
| ** ** | ** ** | **Long Range Model**       | ** ** | **Mill**     | ** ** | **Variance**          | ** ** |
|------------|------------|----------------------------|------------|--------------|------------|-----------------------|------------|
| **Mine**   | ** ** | **Tons  (thousands)** | ** ** | **% Copper** | ** ** | **Tons  (thousands)** | ** ** | **% Copper** | ** ** | **Tons   (thousands)** | ** ** | **% Copper** | ** ** |
| Cuajone    |       | 30,374                     |       | 0.755        |       | 30,217                |       | 0.751 |   | 157 |   | 0.004 |   |
| Toquepala  |       | 21,757                     |       | 0.607        |       | 21,328                |       | 0.608 |   | 429 |   | (0.001 | ) |
| Cananea    |       | 12,852                     |       | 0.633        |       | 12,545                |       | 0.630 |   | 307 |   | 0.003 |   |
| La Caridad |       | 32,332                     |       | 0.374        |       | 31,779                |       | 0.380 |   | (553 | ) | 0.016 |   |

 

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 understand the geological characteristics (grade, rock type,mineralization and alteration) and the spacing of drill holes which areconsidered in the ore body zone.

 

AVERAGEDRILL-HOLE SPACING

 

Thefollowing is the average drill-hole spacing for proven and probable sulfidereserves:

 

As of December 31, 2008

 

| ** ** | ** ** | **Proven**                      | ** ** | **Probable** | ** ** |
|------------|------------|---------------------------------|------------|--------------|------------|
| ** ** | ** ** | **(average spacing in meters)** | ** ** |
| Cuajone    |       | 87.22                           |       | 124.37       |       |
| Toquepala  |       | 80.32                           |       | 113.18       |       |
| Cananea    |       | 51.96                           |       | 100.94       |       |
| La Caridad |       | 44.40                           |       | 101.54       |       |

 

 

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Item 3. Legal proceedings

 

Reference is made to theinformation under the caption “Litigation Matters” in the consolidatedfinancial statement Note 14 “Commitments and Contingencies.”

 

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

 

None

 

Item 4A. ExecutiveOfficers of Registrant

 

Executive Officers of theRegistrant

 

Set forth below are the executive officers of the Company, their agesas of January 31, 2009 and their positions.

 
| **Name**                         | ** ** | **Age** | ** ** | **Position**                                                                                                        |
|----------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------------|
| German Larrea  Mota-Velasco      |       | 55      |       | Chairman of the  Board and Director                                                                                 |
| Oscar Gonzalez  Rocha            |       | 70      |       | President, Chief  Executive Officer and Director                                                                    |
| Xavier Garcia de  Quevedo Topete |       | 62      |       | President, Chief  Executive Officer of Southern Copper Minera Mexico, Chief Operating Officer  of SCC, and Director |
| Genaro Guerrero  Diaz Mercado    |       | 49      |       | Vice President,  Finance and Chief Financial Officer                                                                |
| Armando Ortega  Gomez            |       | 48      |       | Vice President,  Legal, General Counsel, Secretary and Director                                                     |
| Jose N. Chirinos  Fano           |       | 67      |       | Comptroller                                                                                                         |
| Jose de los Heros Ugarte         |       | 48      |       | Vice President,  Commercial                                                                                         |
| Vidal Muhech Dip                 |       | 68      |       | Vice President,  Projects                                                                                           |
| Remigio Martinez  Müller    |       | 65      |       | Vice President,  Explorations                                                                                       |

 

**German Larrea Mota-Velasco** has served as our Chairman of the Boardsince December 1999, Chief Executive Officer from December 1999 to October 2004,and as a 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 beenChairman of the Board of Directors and Chief Executive Officer of GrupoFerroviario Mexicano S.A. de C.V (railroad company) since 1997.  Mr. Larrea was previously Executive ViceChairman of Grupo Mexico and has been a member of the Board of Directors since1981.  He is also Chairman of the Boardof Directors and Chief Executive Officer of Empresarios Industriales de Mexico,S.A. de C.V. (holding), Compañia Perforadora Mexico, S.A. de C.V., (drillingcompany), Mexico Compañia Constructora, S.A. de C.V. (construction company) andFondo Inmobiliario (real estate company), since 1992.  He founded Grupo Impresa, a printing andpublishing company in 1978, remaining as the Chairman and Chief ExecutiveOfficer until 1989 when the company was sold. He is also a director of Banco Nacional de Mexico, S.A. (Citigroup),which forms part of Grupo Financiero Banamex, S.A. de C.V., Consejo Mexicano deHombres de Negocios, and Grupo Televisa, S.A.B.

 

**Oscar Gonzalez Rocha** has served as our President since December 1999and our Chief Executive Officer since October 21, 2004.  He has been our Director since November 1999.  Previously, he was our President and GeneralDirector and Chief Operating Officer from December 1999 to October 20,2004.  He was a Director of Grupo Mexicofrom 2002 to January 2009. Previously he was General Director of Mexicana de Cobre, S.A. de C.V.from 1986 to 1999 and of Mexicana de Cananea S.A. de C.V. from 1990 to1999.  He was an Alternate Director ofGrupo Mexico from 1988 to April 2002.

 

**Xavier Garcia de Quevedo Topete** has served as President of Minera Mexicosince September 2001 to date and President and Chief Executive Officer ofSouthern Copper Minera Mexico 

 

 

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and our Chief Operating Officer since April 12, 2005.  He also served as a member of our Board ofDirectors from November 1999 to the present.  He has been the President and Chief ExecutiveOfficer of Americas Mining Corporation since September 7, 2007.  Mr. Garcia de Quevedo initiated hisprofessional career in 1969 with Grupo Mexico. He was President of Grupo Ferroviario Mexicano S.A. de C.V., and ofFerrocarril Mexicano, S.A. de C.V. from December 1997 to December 1999,and General Director of Exploration and Development of Grupo Mexico from 1994to 1997.  He has been a director of GrupoMexico since April 2002.  He wasalso Vice President of Grupo Condumex for eight years.  Mr. Garcia de Quevedo is the Chairman ofthe Mining Chamber of Mexico.

 

**Genaro Guerrero Diaz-Mercado** has served as our Vice President,Finance and Chief Financial Officer since January 2, 2008.  He has held various Treasury functions withGrupo Mexico from 1992 to July 31, 2000. On August 1, 2000, Mr. Guerrero was transferred to Asarco, anaffiliate Company of Grupo Mexico.  Hewas the Vice President Finance, Chief Financial Officer and Treasurer of Asarcountil May 3, 2006.  Mr. Guerreroheld a key financial role with Southern Peru Limited, a subsidiary of theCompany until December 31, 2007.

 

**Armando Ortega Gomez** has served as a member of our Board of Directorssince August 2002.  Mr. Ortegahas been our General Counsel since October 23, 2003, and has served as ourVice President, Legal and Secretary since April 25, 2002.  Previously, he was our Assistant Secretaryfrom July 25, 2001 to April 25, 2002. He was General Counsel of Grupo Mexico from 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, andwas a negotiator for international matters for said Ministry from 1988 to May 2001.

 

**Jose N. Chirinos Fano** has served as our Comptroller since April 2005and as our Treasurer from April 2004 to April 2005.  Mr. Chirinos also served as our interimChief Financial Officer from June to December 2007.  He has been General Director of Comptrollerand Finance since December 1999. From January 1994 until April 2005 he was our AssistantComptroller.  Since January 2004, Mr. Chirinoshas been Vice President of Finance and Chief Financial Officer of Southern PeruLimited, one of our subsidiaries.  He hasheld various positions in Accounting, Administration and Finance during his 42years at our Company.

 

**Jose de los Heros Ugarte**was appointed Vice President, Commercialon November 21, 2008.  Mr. delos Heros has held several positions with the Company since 1983 includingholding the position of Commercial Director of SPCC from 1999 to 2008.  Mr. De los Heros directs the Company’scommercial operations worldwide from the offices in Peru, Mexico and the UnitedStates.

 

**Vidal Muhech Dip** has served as our Vice President, Projects since April 25,2002.  He has been Corporate Director ofEngineering and Construction of Grupo Mexico since April 1995.  Previously, he was Director of Engineeringand Construction of Industrial Minera Mexico S.A. de C.V. from 1985 to 1995.

 

**Remigio Martinez Müller**has served as our Vice President,Exploration since April 2002.  Hehas been Corporate Director of Exploration of Grupo Mexico since 2002.  From 1990 to 2001 he was Director ofExploration of Mexicana de Cobre, S.A. de C.V. Mr. Martinez has heldseveral other managerial positions within Grupo Mexico and its predecessor,Asarco Mexicana.

 

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities

 

At December 31,2008, there were 1,174 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 PCU on the BVL.

 

The table below setsforth the cash dividends paid per share of capital stock and the high and low stockprices 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 2008 stock split.

 
| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| **Quarters**        | ** ** | **1st**  | ** ** | **2nd**  | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Dividend per  Share |       | $        | 0.47       |     | $          | 0.57 |   | $ | 0.57 |   | $ | 0.33 |   | $ | 1.94 |   | $ | 0.57 |   | $ | 0.50 |   | $ | 0.53 |   | $ | 0.67 |   | $ | 2.27 |   |
|                |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock market  Price |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NYSE:               |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  High          |       | $        | 39.80      |     | $          | 41.34 |   | $ | 35.70 |   | $ | 18.37 |   | $ | 41.34 |   | $ | 25.00 |   | $ | 31.81 |   | $ | 41.72 |   | $ | 47.12 |   | $ | 47.12 |   |
|  Low           |       | $        | 26.72      |     | $          | 33.77 |   | $ | 18.72 |   | $ | 9.19 |   | $ | 9.19 |   | $ | 16.84 |   | $ | 24.21 |   | $ | 28.18 |   | $ | 32.97 |   | $ | 16.84 |   |
|                |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BVL:                |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  High          |       | $        | 39.67      |     | $          | 41.63 |   | $ | 35.15 |   | $ | 18.41 |   | $ | 41.63 |   | $ | 25.00 |   | $ | 32.10 |   | $ | 41.73 |   | $ | 47.17 |   | $ | 47.17 |   |
|  Low           |       | $        | 25.01      |     | $          | 33.82 |   | $ | 18.70 |   | $ | 10.30 |   | $ | 10.30 |   | $ | 16.77 |   | $ | 24.26 |   | $ | 27.33 |   | $ | 33.17 |   | $ | 16.77 |   |

 

**Shareholder Return PerformancePresentation**

 

Set forth below is a linegraph comparing the yearly change in the cumulative total returns on theCompany’s Common Stock against cumulative total return on the S&P 500 StockIndex and the S&P Metals and Mining Select Industry Index, for the fiveyear period ending December 31, 2008. The Company’s Common Stock commenced trading on the New York StockExchange on January 5, 1996.  Thechart below analyzes the total return on SCC’s Common Stock for the periodcommencing  December 31, 2003 andending December 31, 2008, compared to the total return of the S&P 500and the S&P Metals and Mining Select Industry Index for the five-yearperiod commencing December 31, 2003 and ending December 31,2008.  In 2004, SCC’s stock provided apositive return of 3.63%, compared to a positive return of 8.99% and 33.01% forthe S&P 500 and the S&P Metals and Mining Select Industry Index,respectively.  In 2005, SCC’s stockreturn was positive 58.26% compared to 3.00% and 21.23% for the S&P 500 andthe S&P Metals and Mining Industry Index, respectively.  In 2006, SCC’s stock  ́provided a positivereturn of 74.99% compared to 13.62% for the S&P 500 and 33.83% for S&PMetals and Mining Select Industry Index. In 2007, SCC’s stock provided a positive return of 115.34% compared to3.53% for S&P 500 and 41.71% for S&P Metals and Mining Select IndustryIndex. In 2008, SCC ́s stock had a negative return of 50.65%, compared tonegative returns of 38.49& and 60.02% for the S&P 500 and for S&PMetals and Mining Select Industry Index, respectively.

 

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Comparison of FiveYear Cumulative Total Return *

SCC Stock, S&P500 Index and S&P Metals and Mining Select Industry Index **

----

*                 Total return assumes reinvestment ofdividends

**          The comparison assumes $100 invested on December 31,2003

 

The foregoing PerformanceGraph and related information shall not be deemed “soliciting material” or “filed”with the SEC or subject to Section 18 of the Securities Exchange Act of1934, as amended, nor shall such information be incorporated by reference intoany future filing under the Securities Act of 1933 or Securities Exchange Actof 1934, each as amended, except to the extent that the Company specificallyincorporates it by reference into such filing.

 

On January 30, 2009,a dividend of $0.117 per share was announced payable March 30, 2009 toshareholders of record as of March 11, 2009.  Our dividend policy continues to be reviewedat Board of Directors’ meetings, taking into consideration the currentintensive capital investment program and expected future cash flow generatedfrom operations.

 

For a description oflimitations on our ability to make dividend distributions, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources” and Note 11 — “Financings” to our consolidatedfinancial statements.

 

The following table setsforth certain information related to the Equity Compensation Plan Informationrelated to our shares held as treasury stock for the Directors stock award planat December 31, 2008:

 
| **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                                                            |       | 370,800                                                                  |       |

 

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SCC sharerepurchase program:

 

In 2008 theCompany’s Board of Directors authorized a $500 million share repurchaseprogram.  During 2008 the Companypurchased 28.5 million shares of its common stock at a cost of $384.7million.  These shares will be availablefor general corporate purposes.  TheCompany may purchase additional shares from time to time, based on marketconditions and other factors.  Thisrepurchase program has no expiration date and may be modified or discontinuedat any time.

 

The followingtable presents the repurchase program activity for the year 2008:

 

|       |   |                |   |                 |   |                         |   | **Total Number**              |       | **Maximum Number**          |      |
|------------|--------|---------------------|--------|----------------------|--------|------------------------------|--------|-------------------------------|------------|-----------------------------|-----------|
|       |   |                |   |                 |   |                         |   | **of Shares Purchased**       |       | **of Shares that**          |      |
| **Period** |   | **Total Number of** |   | **Average Price**    |   | **as Part of Publicly** |   | **May Yet Be Purchased** |       |
| **From**   |   | **To**              |   | **Shares Purchased** |   | **Paid per Share**           |   | **Announced Plan**            |       | **Under the Plan @ $16.06** |      |
| 08/11/2008 |   | 08/31/2008          |   | 410,150              |   | $                            | 22.91  |                          | 410,150    |                        |      |   |
|       |   |                |   |                 |   |                         |   |                          |       |                        |      |
| 09/01/2008 |   | 09/30/2008          |   | 2,900,000            |   | $                            | 20.37  |                          | 3,310,150  |                        |      |   |
|       |   |                |   |                 |   |                         |   |                          |       |                        |      |
| 10/01/2008 |   | 10/31/2008          |   | 9,100,000            |   | $                            | 12.65  |                          | 12,410,150 |                        |      |   |
|       |   |                |   |                 |   |                         |   |                          |       |                        |      |
| 11/01/2008 |   | 11/30/2008          |   | 10,621,800           |   | $                            | 12.55  |                          | 23,031,950 |                        |      |   |
|       |   |                |   |                 |   |                         |   |                          |       |                        |      |
| 12/01/2008 |   | 12/31/2008          |   | 5,478,200            |   | $                            | 12.37  |                          | 28,510,150 |                        | 7,182,056 |   |
|       |   | Total               |   | 28,510,150           |   | $                            | 13.49  |                          |       |                        |      |   |
|       |   |                |   |                 |   |                         |   |                          |       |                        |      |

 

Please see Note 22 “SubsequentEvents” for further purchases in 2009.

 

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Item 6. SelectedFinancial Data

 

FIVE-YEAR SELECTEDFINANCIAL AND STATISTICAL DATA

 

The selected historical financial data presented below as of and forthe five years ended December 31, 2008, includes certain information thathas been derived from our consolidated 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 the consolidated financial statementsand notes thereto.

 
| **(In millions, except capital**                                | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** stock and financial ratios,  except where noted)** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
| ** **                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement of Earnings Data**                                  | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Net sales                                                       |       | $                                | 4,850.8    |       | $          | 6,085.7    |       | $          | 5,460.2    |       | $          | 4,089.1 |   | $ | 3,096.7 |   |
| Operating income                                                |       | 2,201.9                          |       | 3,497.4    |       | 3,054.3    |       | 2,071.0    |       | 1,482.4    |       |
| Minority  interest                                              |       | (7.9                             | )          | (10.2      | )          | (9.3       | )          | (12.5      | )          | (4.7       | )          |
| Net earnings                                                    |       | $                                | 1,406.6    |       | $          | 2,216.4    |       | $          | 2,037.6    |       | $          | 1,400.1 |   | $ | 982.4 |   |
|                                                            |       |                             |       |       |       |       |       |       |       |       |       |
| Per share  amounts: (1)                                         |       |                             |       |       |       |       |       |       |       |       |       |
| Earnings basic  and diluted                                     |       | $                                | 1.60       |       | $          | 2.51       |       | $          | 2.31       |       | $          | 1.59 |   | $ | 1.11 |   |
| Dividends paid                                                  |       | $                                | 1.94       |       | $          | 2.27       |       | $          | 1.71       |       | $          | 0.97 |   | $ | 0.22 |   |

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| **Balance Sheet Data**                           | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                           | 716.7      |   | $ | 1,409.3 |   | $ | 1,022.8 |   | $ | 876.0 |   | $ | 710.7 |   |
| Total assets                                     |       | 5,764.3                     |       | 6,580.6 |   | 6,376.4 |   | 5,687.6 |   | 5,319.2 |   |
| Total long-term  debt, including current portion |       | 1,290.0                     |       | 1,449.8 |   | 1,528.1 |   | 1,172.1 |   | 1,330.3 |   |
| Total  liabilities                               |       | 2,368.9                     |       | 2,715.8 |   | 2,695.8 |   | 2,348.8 |   | 2,494.3 |   |
| Total  stockholders’ equity                 |       | $                           | 3,381.3    |   | $ | 3,848.1 |   | $ | 3,666.6 |   | $ | 3,326.1 |   | $ | 2,813.6 |   |

 
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| **Statement of Cash Flows**               | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Cash provided  from operating activities  |       | $                                | 1,720.6    |   | $ | 2,703.5 |   | $ | 2,059.3 |   | $ | 1,663.5 |   | $ | 1,172.4 |   |
| Depreciation,  amortization and depletion |       | 327.3                            |       | 327.9 |   | 275.1 |   | 277.2 |   | 192.6 |   |
| Cash used for  investing activities       |       | (410.9                           | )          | (246.0 | ) | (725.3 | ) | (435.9 | ) | (219.5 | ) |
| Capital  expenditures                     |       | (516.7                           | )          | (315.7 | ) | (455.8 | ) | (470.6 | ) | (228.3 | ) |
| Cash used for  financing activities       |       | (2,048.0                         | )          | (2,088.3 | ) | (1,164.3 | ) | (1,064.4 | ) | (540.6 | ) |
| Dividends paid                            |       | (1,710.8                         | )          | (2,002.3 | ) | (1,509.1 | ) | (853.9 | ) | (191.4 | ) |
|                                           |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| **Capital Stock (1)**                                              | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Common shares  outstanding — basic and diluted (in thousands) |       | 854,900                          |       | 883,397 |   | 883,384 |   | 883,368 |   | 883,353 |   |
| NYSE Price —  high                                            |       | $                                | 41.34      |   | $ | 47.12 |   | $ | 19.37 |   | $ | 11.77 |   | $ | 9.02 |   |
| NYSE Price — low                                              |       | $                                | 9.19       |   | $ | 16.84 |   | $ | 11.55 |   | $ | 6.94 |   | $ | 4.42 |   |
| Book value per  share                                              |       | 3.96                             |       | 4.36 |   | 4.15 |   | 3.77 |   | 3.19 |   |
| P/E ratio                                                          |       | 10.03                            |       | 14.05 |   | 7.79 |   | 7.04 |   | 7.08 |   |

 
| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| **Financial Ratios**                   | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Gross margin(2)                        |       | 48.3                             | %          | 59.7 | % | 58.0 | % | 53.2 | % | 50.7 | % |
| Operating income  margin(3)            |       | 45.4                             | %          | 57.5 | % | 55.9 | % | 50.6 | % | 47.9 | % |
| Net margin(4)                          |       | 29.0                             | %          | 36.4 | % | 37.3 | % | 34.2 | % | 31.7 | % |
| Current assets  to current liabilities |       | 2.11                             |       | 2.84 |   | 2.84 |   | 2.15 |   | 1.70 |   |
| Net  debt(5)/total capitalization(6)   |       | 14.5                             | %          | 1.0 | % | 12.1 | % | 8.2 | % | 18.0 | % |
| Ratio of  earnings to fixed charges(7) |       | 20.8x                            |       | 25.4x |   | 27.2x |   | 17.8x |   | 12.6x |   |

 

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(1)          Number of shares and values per share hasbeen adjusted to reflect the 2008 and 2006 stock splits.

(2)          Represents net sales less cost of sales(including depreciation, amortization and depletion), divided by net sales as apercentage.

(3)          Represents operating income divided bysales as a percentage.

(4)          Represents net earnings divided by salesas a percentage.

(5)          Net debt is defined as total debt minuscash and cash equivalents balance.

(6)          Represents net debt divided by net debtplus stockholders’ equity.

(7)          Represents earnings divided by fixedcharges.  Earnings are defined asearnings before income taxes, minority interest and cumulative effect of changein accounting principle, plus fixed charges and amortization of interestcapitalized, less interest capitalized. Fixed charges are defined as the sum of interest expense and interestcapitalized, plus amortized premiums, discounts and capitalized expensesrelated to indebtedness.

 

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Item 7. Management’sDiscussion and Analysis of Financial Condition and Result of Operation

 

# EXECUTIVE SUMMARY

#  

*This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations relates to and should be readtogether with our Audited Consolidated Financial Statements as of and for eachof the years in the three-year period ended December 31, 2008.  Therefore, unless otherwise noted, thediscussion below of our financial condition and results of operations is forus, including our Minera Mexico subsidiary, on a consolidated basis for allperiods.  Our financial results may notbe indicative of our future results.*

 

*This discussion contains forward-looking statementsthat are based on management’s current expectations, estimates and projectionsabout our business and operations.  Ouractual results may differ materially from those currently anticipated andexpressed in the forward-looking statements as a result of a number offactors.  See “Cautionary Statements.”*

 

OVERVIEW

 

Our business is primarily the production and sale of copper.  In the process of producing copper, a numberof valuable metallurgical by-products are recovered, such as molybdenum, zinc,silver, lead and gold, which we also produce and sell.  Market forces outside of our control largelydetermine the sales prices for our products. Our management, therefore, focuses on copper production, cost control,production enhancement and maintaining a prudent capital structure to remainprofitable.  We believe we endeavor toachieve these goals through capital spending programs, exploration efforts andcost reduction programs.  Our aim is toremain profitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

Since our inception, we have principally maintainedoperations in Peru.  However, in recentyears, we have refocused our strategies to internationalize our business andbroaden our market exposure.  In 2003, weacquired exploration properties in Chile, which are being evaluated forpotential exploitation and, in 2005 we acquired Minera Mexico, with substantialmining operations in Mexico.  Theacquisition was accounted for in a manner similar to a pooling of interests asit involved the reorganization of entities under common control.

 

The year 2008 was aturbulent time for the world’s economies and it appears to us that this willcontinue at a minimum through 2009.  Thesub-prime mortgage crisis in the United States led to liquidity issues at themajor financial institutions and this spread through most of the industrializedworld.  These problems began to have asignificant effect on our industry in the third quarter of 2008 and continuedthrough the balance of the year as metal prices declined.  The LME copper price ended 2007 at $3.03 perpound and averaged $3.62 per pound for the first three quarters of 2008; thecopper price in the fourth quarter, however, averaged $1.77 per pound and endedthe year at $1.32 per pound.  Early in2009, through mid-February we see copper averaging about $1.49 perpound.  These metal prices are beinginfluenced by current economic distress and also by inventory adjustments(draw-downs) by the worlds’ copper consumers. We anticipate that the inventory adjustments will be completed later in2009 and that demand will rise afterwards. However, it is difficult to predict with any accuracy when this willoccur.

 

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While we are experiencinga major downturn, it must be remembered that we are in a cyclical industry andhave historically operated through these up and down periods.  Our Company’s strengths lie in our orereserves, our low operating costs, our strong cash position of $716.7 millionand our low debt level of $1.3 billion, with no significant principal paymentsuntil 2015, which we believe will permit us to maintain our profitability andpositive cash flow.  Nevertheless, wehave suspended most of our capital investments in new as well as in expansionprojects, as we believe this prudence and business discipline is needed duringthe current low commodity cycle.

 

By most objective results2008 was a good year for our Company. Sales of $4.9 billion and net earnings of $1.4 billion were the thirdhighest in our history, and dividend distributions to our shareholders of $1.7billion were the second highest in our history. Additionally, the average 2008 LME price of copper of $3.16 per poundand the average molybdenum price of $28.42 were the second and third highestaverage prices, respectively, for these metals. However, the year closed with declining metal prices and resulted in afourth quarter loss of $124.7 million, the first such loss of our Company sincewe combined our Peruvian operations with Minera Mexico in 2005.  The declining fourth quarter metal pricesalso created an adjustment to sales to write down provisionally priced sales tothe lower realized prices and lower future prices.  This occurred as much of our copper, andalmost all of our molybdenum sales, take their final price in months subsequentto shipment.  Sales value for theseprovisionally priced shipments are recorded at prices in effect at the time ofshipment, so that in a time of decreasing metal prices prior months salescreate a negative adjustment to sales. The effect in 2008 of the provisional price adjustment was a reductionin net sales of $403.5 million and an estimated reduction in net earnings of$251.5 million.

 

Net sales for 2008 were$4.9 billion, as compared to $6.1 billion in 2007. The year end drop off in pricesand lower volumes caused this decrease. Net earnings for 2008 were $1.4 billion, as compared to $2.2 billion in2007, this decrease was primarily caused by the decreasing metal prices andlower sales volumes and higher 2008 production cost.  In 2008, capital spending and explorationspending totaled $553.6 million, as compared to $356.0 million in 2007.  Included in 2008 spending is $118.0 millionfor the Tia Maria project and $37.7 million for the Toquepala expansionproject.  In 2008 we distributed $1.7billion in cash dividends to our shareholders, as compared to $2.0 billion in2007.  In light of the current economicsituation we will continue to monitor dividend distributions throughout 2009.  Please see our dividend policy under “otherliquidity considerations” in this item.

 

In 2008 copper mineproduction decreased by 227.6 million pounds from prior year, largely as aresult of the strike at our Cananea mine. Zinc and silver production, in 2008 also decreased, while molybdenumproduction increased slightly.  Despitethese decreases, we exceeded our production objectives at the open pit mines ofToquepala, Cuajone and La Caridad, as well as at the IMMSA underground units ofCharcas, Santa Eulalia, Santa Barbara, the coking facility at Nueva Rosita andthe La Caridad precious metals plant.

 

A continuing area ofconcern for our Company is the strike at our Cananea mine, as well as Taxco andSan Martin.  This strike began in July 2007and continues into 2009.  While positivejudicial rulings have been issued a number of times, these have been generallyfollowed by appeals that reversed the previous decisions.  Most recently, in December 2008, theMexican Federal Labor Court ruled in favor of the Company and declared thestrike illegal.  The union appealed thisdecision and on January 7, 2009, the judge of the fifth district on labormatters annulled the favorable decision to the Company.  We have filed a request for a review of thisruling before an appellate federal court. We will continue to pursue a favorable resolution of the labor 

 

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stoppage.  It is expected that production at Cananeawill remain suspended until these labor issues are resolved.  We estimate that these strikes have reducedproduction of copper and zinc in 2008 by 425.6 million pounds and 52.0 millionpounds, respectively, and have reduced operating income by approximately $1.1billion.  We are hopeful of resolvingthese strikes in 2009, but it is difficult to predict with any accuracy whenthis will occur.

 

We discuss below severalmatters that we believe are important to understand our results of operationsand financial condition.  These include, (i) our“operating cash costs” as a measure of our performance, (ii) metal prices,(iii) business segments, (iv) the effect of inflation and other localcurrency issues and (v) our expansion and modernization program andenvironmental protection program.

 

Operating Cash Costs

 

An overall benchmark used by us and a common industry metric to measureperformance is operating cash costs per pound of copper produced.  Operating cash cost is a non-GAAP measurethat does not have a standardized meaning and may not be comparable tosimilarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (exclusive of depreciation, amortization anddepletion) as presented in the consolidated statement of earnings is presentedunder the subheading, “Non-GAAP Information Reconciliation,” below.  We have defined operating cash cost per poundas cost of sales (exclusive of depreciation, amortization and depletion); plusselling, general and administrative charges, treatment and refining charges andby-products revenue and sales premiums; less workers’ participation and othermiscellaneous charges, including the Peruvian royalty charge and the change ininventory levels; divided by total pounds of copper produced and purchased byus.  In our calculation of operating cashcost per pound of copper produced, we credit against our costs the revenuesfrom the sale of by-products, principally molybdenum, zinc, silver and the premiumover market price that we receive on copper sales.  We account for the by-product revenue in thisway because we consider our principal business to be the production and sale ofcopper.  We believe that our Company isviewed by the investment community as a copper company, and is valued, in largepart, by the investment community’s view of the copper market and our abilityto produce copper at a reasonable cost. We also include copper sales premiums as a credit, as these amounts arein excess of published copper prices. The increase in recent years in the price of molybdenum, as well asincreases in silver and zinc, 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 by-product revenues against our costs.

 

We exclude from our calculation of operating cash cost depreciation,amortization and depletion, which are considered non-cash expenses.  Exploration is considered a discretionaryexpenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-taxearnings and are also excluded. Additionally excluded from operating cash costs are items of anon-recurring nature and the royalty charge.

 

Our operating cash costs per pound, as defined, are presented in thetable below for the three years ended December 31, 2008.  We present cash costs with and without theinclusion of by-product revenues.

 

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| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Positive (negative) Variance** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------------|------------|
| ** (Cents per pound)**                                                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2008-2007**                    | ** ** | **2007-2006** | ** ** |
| Operating cash  cost per pound of copper produced and purchased                             |       | 34.1       |       | (13.3      | )          | 15.9       |       | (47.4                            | )          | 29.2 |   |
| Less:  by-products revenue                                                                  |       | 137.3      |       | 151.3      |       | 112.4      |       | (14.0                            | )          | 38.9 |   |
| Operating cash  cost per pound of copper produced and purchased without by-products revenue |       | 171.4      |       | 138.0      |       | 128.3      |       | (33.4                            | )          | (9.7 | ) |

 

2008 against 2007:

 

As seen on the chartabove, our cash cost per pound for 2008 when calculated with by-productsrevenue are costs of 34.1 cents per pound compared with a credit of 13.3 centsper pound in 2007.  The decrease in theby-products credit in the 2008 period was largely due to lower molybdenumprices especially in the last quarter of the year.  The effect of lower molybdenum prices reducedthe by-products credit by approximately 13.7 cents per pound for 2008.

 

Our per pound cash cost,excluding by-product revenues, were higher by 33.4 cents per pound in 2008compared to 2007 due to a decrease of 17.4% in copper production, principallyas a result of the Cananea mine strike, which increased cash cost by 18.1 centsand the higher power and fuel cost which increased cash cost by 9.9 cents.

 

2007 against 2006:

 

Our cash cost per poundfor 2007 when calculated with by-products revenue was a credit of 13.3 centsper pound compared with a cost of 15.9 cents per pound in 2006.  The increase in the by-products credit in the2007 period was largely due to higher molybdenum prices and sales volume.  The credit for molybdenum sales was 84.9cents per pound in 2007 as compared to 42.0 cents per pound in 2006.

 

Our cash cost, excludingby-product revenues, were higher by 9.7 cents per pound in 2007 compared to2006 and this was due to 15.8 cents of higher production cost (mainly labor,power and fuel cost) as well as to 6.5 cents per pound of higher freight due tothe sale of concentrates which were partially offset by 11.8 cents per pound oflower purchases of third-party metals.

 

Metals Prices

 

The profitability of our operations is dependent on, and our financialperformance is significantly affected by, the international market prices forthe products we produce, especially for copper, molybdenum, zinc andsilver.  Metals prices historically havebeen subject to wide fluctuations and are affected by numerous factors beyondour control.  These factors, which affecteach commodity to varying degrees, include international economic and politicalconditions, levels of supply and demand, the availability and cost ofsubstitutes, inventory levels maintained by producers and others and, to alesser 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 the volatility of copperand other metals prices.  Assuming thatexpected metal production and sales are achieved, that tax rates are unchangedand giving no effects to potential hedging programs, metal price 

 

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sensitivity factors would indicate the estimated change in net earningsresulting from metal price changes in 2009 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)                              |       | $          | 6.0        |           | $          | 22.4     |       | $          | 1.3        |   | $ | 9.7 |   |

 

# Business Segments

#  

We view our Company ashaving three operating segments and manage on the basis of these segments.  These segments are (1) our Peruvianoperations, (2) our Mexican open-pit operations and (3) our Mexicanunderground operations, known as our IMMSA unit.  Our Peruvian operations include the Toquepalaand Cuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.  The Peruvian operations produce copper, withsignificant by-product production of molybdenum, silver and othermaterial.  Our Mexican open-pit operationsinclude La Caridad and Cananea mine complexes, the smelting and refining plantsand support facilities which service both mines.  The Mexican open pit operations producecopper, with significant by-products production of molybdenum, silver and othermaterial.  Our IMMSA unit includes fiveunderground mines that produce zinc, lead, copper, silver and gold, a coal minewhich produces coal and coke, and several industrial processing facilities forzinc, copper and silver.

 

Segmentinformation is included in our review of “Results of Operations” and also inNote 20 of our consolidated financial statements.

 

Inflation and Devaluation of the Peruvian Nuevo Soland 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 netmonetary assets denominated in nuevos soles or pesos can be affected bydevaluation of the nuevo sol or the peso, resulting in a remeasurement loss inour financial statements.  Recentinflation and devaluation rates are provided in the table below.

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peru                                              |       |                             |       |   |   |   |   |
| Peruvian  inflation rate                          |       | 6.6                              | %          | 3.9 | % | 1.1 | % |
| Nuevo sol/dollar  devaluation/(appreciation) rate |       | 4.8                              | %          | (6.3 | )% | (6.8 | )% |
| Mexico                                            |       |                             |       |   |   |   |   |
| Mexican  inflation rate                           |       | 6.5                              | %          | 3.8 | % | 4.1 | % |
| Peso/dollar  devaluation/(appreciation) rate      |       | 24.5                             | %          | (0.1 | %) | 1.5 | % |

 

Capital Expansion Program

 

We made capital expenditures of $516.7 million, $315.7 million and$455.8 million in 2008, 2007 and 2006, respectively, and we expect to makecapital expenditures, of 

 

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approximately $392.6 million in 2009. In general, the capital expenditures and projects described below areintended to increase production and/or decrease costs.

 

The table below sets forth our capital expenditures for the years endedDecember 31, 2008, 2007 and 2006:

 
| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | **(dollars in millions)**        | ** ** |
| Projects                                                                    |       |                             |       |   |   |   |   |
| Ilo smelter  modernization (including marine trestle)                       |       | $                                | 6.6        |   | $ | 21.0 |   | $ | 160.9 |   |
| Tia Maria —  Arequipa —Peru                                       |       | 118.0                            |       |   |   |   |   |
| Cuajone ball  mill                                                          |       | 1.4                              |       | 10.0 |   | 0.4 |   |
| Toquepala  crushing, conveying system for leach material                    |       | 0.1                              |       | 2.0 |   | 3.3 |   |
| Toquepala  concentrator expansion                                           |       | 37.7                             |       | — |   | — |   |
| Cuajone concentrador expansion                                              |       | 18.2                             |       |   |   |   |   |
| Tailings disposal — Quebrada Honda dam                                 |       | 21.7                             |       | 13.8 |   | 2.5 |   |
| Cuajone leaching  pad                                                       |       | —                           |       | 1.4 |   | 2.4 |   |
| PLS dams at  Huanaquera                                                     |       | 0.3                              |       | 10.5 |   | 15.6 |   |
| Pilares Mine                                                                |       | 20.0                             |       | — |   | — |   |
| La Caridad  tailings dam - internal dikes                                   |       | 2.1                              |       | 2.1 |   | 3.4 |   |
| Metallurgical  laboratory — La Caridad                                 |       | 1.5                              |       | 1.8 |   | — |   |
| La Caridad gas  handling system                                             |       | 11.3                             |       | 12.2 |   | 4.7 |   |
| La Caridad  by-products treatment plant                                     |       | 6.9                              |       | — |   | — |   |
| La Caridad Vertical lime kiln                                               |       | 7.1                              |       | 2.0 |   | 0.5 |   |
| PLS dams and  leaching system Cananea                                       |       | —                           |       | 4.1 |   | 0.8 |   |
| Cananea SX/EW  plant III                                                    |       | —                           |       | 0.2 |   | 1.9 |   |
| Cananea crusher  and conveyors system for leach material Phases II and III  |       | 13.6                             |       | 21.5 |   | 7.2 |   |
| La Caridad  crusher high efficiency system                                  |       | 2.8                              |       | — |   | — |   |
| Nueva Rosita  coke furnaces                                                 |       | —                           |       | — |   | 3.5 |   |
| San Martin  underground shaft                                               |       | —                           |       | — |   | 2.6 |   |
| La Caridad  tailings dam growth — Concentrator                         |       | —                           |       | 1.9 |   | — |   |
| El Arco  feasibility study, land a water                                    |       | 3.9                              |       | — |   | — |   |
| Santa Barbara  Segovedad II mine expansion and conveyor and main substation |       | 6.5                              |       | 3.7 |   | 0.8 |   |
| Total project  expenditures                                                 |       | 279.7                            |       | 108.2 |   | 210.5 |   |
|                                                                        |       |                             |       |   |   |   |   |
| Replacement  capital expenditures:                                          |       |                             |       |   |   |   |   |
| Mexico                                                                      |       | 138.4                            |       | 139.0 |   | 177.1 |   |
| Peru                                                                        |       | 98.5                             |       | 68.5 |   | 68.2 |   |
| Total  replacement expenditures                                             |       | 236.9                            |       | _207.5 |   | 245.3 |   |
| Total capital  expenditures                                                 |       | $                                | 516.6      |   | $ | 315.7 |   | $ | 455.8 |   |

 

In light of the current business environment we have suspended most ofour capital investments in new as well as in expansion projects.  Set forth below are descriptions of some ofour current expected capital expenditures. The Company expects to meet the cash requirements for these projectsfrom cash on hand, internally generated funds and from additional externalfinancing if required.

 

PeruvianOperations:

 

Tia Maria:  The Tia Mariaproject, which includes the Tia Maria and the La Tapada deposits, is located inthe department of Arequipa on the southern coast of Peru and is part of a copperporphyritic system.

 

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The feasibility studies in 2008 for Tia Maria show 193million tons of mineralized material with 0.302% copper content.  For La Tapada, the estimated mineralizedresources show 445 million tons of mineralized material, with 0.434% coppercontent.  In 2008 the Company completedthe basic engineering and started the detailed engineering studies for theproject.  The environmental impactassessment is expected to be completed in the second quarter of 2009.

 

As of December 31, 2008, we have spent $118.0million for the Tia Maria project.  Weare currently evaluating whether to put on hold or to slow down the spending inlight of current market conditions and capital equipment cost.  We estimate spending $140.0 million on thisproject during 2009, which includes funds necessary to complete environmentaland engineering studies, as well as spending previously committed.  When completed the new operating unit isexpected to produce 120,000 tons of copper cathodes per year.

 

Toquepala concentrator expansion: As of December 31,2008, we have spent $37.7 million for the Toquepala expansion.  This project is designed to increase annualToquepala copper production by approximately 100,000 tons per year.  We completed the feasibility study.  The basic engineering is almost completed anddetailed engineering will be started. The environmental impact assessment is also underway and is expected tobe completed in the fourth quarter of 2009. We expect to spend $113.0 million in 2009, to complete studies and forpreviously committed orders.  After thatwe will put on hold making any new additional capital spending commitments forthis project.

 

Cuajone concentrator expansion: For the Cuajoneconcentrator expansion project we have completed the feasibility study and willonly continue at this point with the environmental impact assessment.  However, any further spending is beingdeferred pending improvement in economic conditions.

 

Ilo Smelter Modernization:  This project was completed in January 2007and has allowed our Company to increase sulfur capture over the 92% requirementestablished in our agreement with the Peruvian government.  A complimentary project to the Ilo smeltermodernization is the construction of a marine trestle to offload the sulfuricacid produced at the smelter directly to offshore ships.  At December 31, 2008 this projectreached 66% completion and is expected to be completed in June 2009.  The completed project is expected to easecongestion in our Ilo area.

 

Tailings disposal at Quebrada Honda: This project willincrease the height of the existing Quebrada Honda dam to impound future tailingsfrom the Toquepala and Cuajone mills. The procurement of the main equipment and materials was finished.  Construction of the main civil and mechanicaland electrical installations for the main and lateral dams has beencompleted.  The lateral dam wascommissioned in December 2008 and the main dam will be commissioned in February 2009.  Progress on the first stage of this projectis 99.7% complete and the balanceisexpected to be completed by March 2009. The total cost of this project is estimated to be $66.0 million, with$38.0 million expended through December 31, 2008.

 

Mexican operations:

 

The Company will continue with the environmentalprojects at its mining and metallurgical facilities.  At La Caridad metallurgical complex the gashandling and dust and effluent treatment projects are being completed. Theseprojects are at 93% and 70% of completion, respectively, and have a combinedbudget of $9.0 million for 2009.

 

The Agua Prieta lime plant modernization project, inthe Mexican state of Sonora, is moving forward to completion. When finished,this project is expected to reduce the annual lime cost of our Mexicanoperations by approximately $9.0 million. The capital budget for this project is $14.0 million.

 

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Other Expenditures:

 

Regarding our copper deposit projects at Los Chancasin Peru, El Arco, Pilares and the underground polymetallic mine in Angangueo inMexico, we will continue to evaluate them, but will defer making a finaldecision until economic conditions improve.

 

All capital projects related to Cananea are on holdpending resolution of the labor situation. These include the new SX-EW plant, the concentrator expansion and amolybdenum circuit at this operation.

 

Potential Projects:

 

We have a number of projects that we may developin the future.  We evaluate new projectson the basis of our long-term corporate objectives, expected return, environmentalneeds, required investment and estimated production, among otherconsiderations.  All capital expenditureshave been stopped or are under review. We believe that this discipline is required in response to the weakenedcommodity prices and economic uncertainties.

 

The above information are estimates only.  We cannot make any assurance that we willundertake any of these projects or that the information noted is accurate.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

** **

Our significant accounting policies arediscussed in Note 2, Summary of Significant Accounting Policies, of the Notesto Consolidated Financial Statements, included in Item 8, Financial Statementsand Supplementary Data of this Annual Report on Form 10-K.

 

Our discussion and analysis of financial condition and results ofoperations, as well as quantitative and qualitative disclosures about marketrisks, are based upon our consolidated financial statements, which have beenprepared in accordance with U.S. GAAP. Preparation of these consolidated financial statements requires ourmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. We make our best estimate of the ultimate outcome for these items basedon historical trends and other information available when the financialstatements are prepared.  Changes inestimates are recognized in accordance with the accounting rules for theestimate, 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 deferredtax assets, tax positions, fair value of financial instruments, and inventoryobsolescence.  We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

Ore Reserves:*** ***For purposes of our long-termproduction planning, we use metal price assumptions of $1.20 per pound forcopper and $9.00 per pound for molybdenum. Prior to 2007, we used $0.90 per pound and $5.00 per pound for copperand molybdenum, respectively.  Theseprices are intended to approximate average prices over the long term.  Ore reserves based on these prices are thebasis for our internal planning, including the preparation of the mine plansfor our mines.  Our management uses these

 

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price assumptions, as it believes these prices reflectthe full price cycle of the metals market.

 

However, pursuant to SECguidance, the reserve information in this report is calculated using averagemetals prices over the most recent three years, except as otherwisestated.  We refer to these three-yearaverage metals prices as “current average prices.”  Our current average prices for copper arecalculated using prices quoted by COMEX, and our current average prices formolybdenum are calculated using prices published in *Platt’s**Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $3.15 per pound for copper and $28.02 per pound formolybdenum, both current average prices as of December 31, 2008.  The current average per pound prices for copperand molybdenum were $2.66 and $28.99, respectively, as of December 31,2007 and $2.02 and $24.31, respectively, as of December 31, 2006.

 

Certain financial information is based on reserve estimates calculatedon the basis of current average prices. These include amortization of intangible assets and mine development.

 

Leachable Material:  At one of ourMexican 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 leaching costs associatedwith this mining operation as incurred, net operating cost would have decreasedby $57.6 million and $10.1 million for the years 2008 and 2007, respectively,and increased $19.3 million for the year 2006.

 

Asset Retirement Obligation:*** ***Ourmining and exploration activities are subject to various laws and regulationsgoverning the 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 our Asset Retirement Obligation inNote 10 to our consolidated financial statements included herein.

 

Revenue Recognition:*** ***For certain of our sales ofcopper and molybdenum products, customer contracts allow for pricing based on amonth subsequent to shipping, generally ranging between one and six monthssubsequent to shipment.  In such cases,revenue is recorded at a provisional price at the time of shipment.  The provisionally priced copper sales areadjusted to reflect forward LME or COMEX copper prices at the end of each monthuntil a final adjustment is made to the price of the shipments upon settlementwith customers pursuant to the terms of the contract.  In the case of molybdenum sales, for whichthere are no published forward prices, the provisionally priced sales areadjusted to reflect the market prices at the end of each month until a finaladjustment is made to the price of the shipments upon settlement with customerspursuant to the terms of the contract. (See details under “Provisionally pricessales” below).

 

Derivative Instruments: We utilizecertain types of derivative financial instruments to enhance our ability tomanage risks that exist as part of our ongoing business 

 

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operations and to enhance our return onCompany assets.  Derivative contracts arereflected as assets or liabilities in the balance sheet at their fairvalue.  The estimated fair value of thederivatives is based on market and/or dealer quotations and in certain casesvaluation modeling.  From time to time wehave entered into copper and zinc swap contracts to protect a fixed copper andzinc price for portions of our metal sales, hedging contracts to fix powerprices for a portion of our production costs, interest rate swap agreements tohedge the interest rate risk exposure on certain of our bank obligations withvariable interest rates, currency swap arrangements to ensure Mexican peso/U.S. dollar conversion rates.  Gains andlosses related to copper and zinc hedges are included in net sales, gain andlosses related to power costs are included in cost of sales, all other gainsand losses on derivative contracts are included in “Gain (loss) on derivativecontracts” in the consolidated statement of earnings.

 

Income Taxes:**In preparing our consolidated financial statements, werecognize income taxes in each of the jurisdictions in which we operate.  For each jurisdiction, we calculate theactual amount currently payable or receivable as well as deferred tax assetsand liabilities attributable to temporary differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  Deferred incometax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which these temporary differences areexpected to be recovered or settled.  Theeffect on deferred tax assets and liabilities of a change in rate is recognizedthrough the income tax provision in the period that the change 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.

 

Our Company’s operations involve dealing with uncertainties andjudgments in the application of complex tax regulations in multiplejurisdictions. The final taxes paid are dependent upon many factors, includingnegotiations with taxing authorities in various jurisdictions and resolution ofdisputes arising from federal, state, and international tax audits.  We recognize potential liabilities and recordtax liabilities for anticipated tax audit issues in the U.S. and other taxjurisdictions based on our estimate of whether, and the extent to which,additional taxes will be due. As of January 1, 2007, we adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN48”), an interpretation of FASB Statement No. 109, “Accounting for IncomeTaxes,” guidance to record these liabilities (See Note 8 “Income Taxes” of theconsolidated financial statements for additional information).  We adjust these reserves in light of changingfacts and circumstances; however, due to the complexity of some of theseuncertainties, the ultimate resolution may result in a payment that is materiallydifferent from the Company’s current estimate of the tax liabilities.  If our estimate of tax liabilities proves tobe less than the ultimate assessment, an additional charge to expense wouldresult.  If payment of these amountsultimately proves to be less than the recorded amounts, the reversal of theliabilities would result in tax benefits being recognized in the period when wedetermine the liabilities are no longer necessary.  We recognize interest and penalties, if any,related to unrecognized tax benefits in income tax expense.

 

Asset Impairments: We evaluate our long-term assets when events or changes in economiccircumstances indicate that the carrying amount of such assets may not berecoverable.

 

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Our evaluations are based on business plans that are prepared using atime horizon that is reflective of our expectations of metal prices over ourbusiness cycle.  We are currently using along-term average copper price of $1.80 per pound of copper and an averagemolybdenum price of $12.00 per pound, along with near-term price forecast, for2008 through 2010, reflective of the current price environment, for our impairmenttests.  We use an estimate of the futureundiscounted net cash flows of the related asset or asset group over theremaining life to measure whether the assets are recoverable and measure anyimpairment by reference to fair value. Due to the illegal work stoppage we have performed an impairmentanalysis on the assets at the Cananea mine. We continue to provide periodic maintenance to the assets and expect tobegin operations at this mine in the near future.  We have determined through our impairmentanalysis that no impairment exists as of December 31, 2008.  Should estimates of future copper andmolybdenum prices decrease significantly, impairments could result.

 

Provisionally Priced Sales

 

The following are the provisionally priced copper and molybdenum salesoutstanding at December 31, 2008, 2007 and 2006:

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Provisionally Priced Sales**    | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Copper                            |       |                             |       |   |   |   |   |
| Millions of  pounds               |       | 141.0                            |       | 165.9 |   | 169.9 |   |
| Priced at  average of (per pound) |       | $                                | 1.39       |   | $ | 3.03 |   | $ | 2.87 |   |
| Molybdenum                        |       |                             |       |   |   |   |   |
| Millions of  pounds               |       | 6.3                              |       | 4.7 |   | 7.3 |   |
| Priced at  average of (per pound) |       | $                                | 9.50       |   | $ | 32.38 |   | $ | 24.50 |   |

 

Provisional sales adjustments included in accounts receivable and netsales at December 31, 2008, 2007 and 2006 were as follows:

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Provisional Sales Adjustments** | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       | **(dollars  in millions)**       |       |
| Copper                            |       | $                                | (44.2      | ) | $ | (42.0 | ) | $ | (47.3 | ) |
| Molybdenum                        |       | (53.1                            | )          | — |   | (11.5 | ) |
| Total                             |       | $                                | (97.3      | ) | $ | (42.0 | ) | $ | (58.8 | ) |

 

During the month of January 2009,the market price of copper increased and the price of molybdenum decreasedslightly.  The effect of these changes on2008 sales settling in January 2009 was an increase of $1.1 million insales.  Additionally, forward prices forcopper as of January 31, 2009 also increased, the effect of this increaseon 2008 open sales settling after January 2009 would be an increase of$3.2 million in sales.

 

Results of Operations

 

The following table highlights key financial results for each of theyears in the three-year period ended December 31, 2008.

 

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| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Statement of Earnings Data**                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(dollars in millions)**        | ** ** |
|                                                                   |       |                             |       |   |   |   |   |
| Net sales                                                              |       | $                                | 4,850.8    |   | $ | 6,085.7 |   | $ | 5,460.2 |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | (2,182.2                         | )          | (2,122.2 | ) | (2,019.8 | ) |
| Selling, general  and administrative                                   |       | (102.4                           | )          | (98.0 | ) | (88.3 | ) |
| Depreciation,  amortization and depletion                              |       | (327.3                           | )          | (327.9 | ) | (275.1 | ) |
| Exploration                                                            |       | (37.0                            | )          | (40.2 | ) | (22.7 | ) |
|                                                                   |       |                             |       |   |   |   |   |
| Operating income                                                       |       | 2,201.9                          |       | 3,497.4 |   | 3,054.3 |   |
| Interest expense                                                       |       | (105.9                           | )          | (123.2 | ) | (113.4 | ) |
| Interest  capitalized                                                  |       | 6.8                              |       | 14.7 |   | 27.9 |   |
| Interest income                                                        |       | 48.4                             |       | 82.5 |   | 50.2 |   |
| Loss on debt  prepayments                                              |       | —                           |       | (16.6 | ) | (1.1 | ) |
| Loss on  derivative instruments                                        |       | (74.6                            | )          | (73.7 | ) | (11.6 | ) |
| Other income  (expense)                                                |       | 17.2                             |       | 30.8 |   | (0.3 | ) |
| Income taxes                                                           |       | (679.3                           | )          | (1,185.3 | ) | (959.1 | ) |
| Minority  interest                                                     |       | (7.9                             | )          | (10.2 | ) | (9.3 | ) |
| Net earnings                                                           |       | $                                | 1,406.6    |   | $ | 2,216.4 |   | $ | 2,037.6 |   |

 

The table below outlines the average published market metals prices forour metals for each of the years ended December 31, 2008, 2007 and 2006:

 

**AverageMarket Metals Prices**

 

| ** **                              | ** ** | **Year Ended December 31,** | ** ** | **% Change** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                              | ** ** | **2008**                         | ** ** | **2007**     | ** ** | **2006** | ** ** | **2007 to 2008** | ** ** | **2006 to 2007** | ** ** |
| Copper price ($ per pound - LME)   |       | $                                | 3.16       |         | $          | 3.23 |   | $ | 3.05 | ** ** | (2.2 | )% | 5.9 | % |
| Copper price ($ per pound - COMEX) |       | $                                | 3.13       |         | $          | 3.22 |   | $ | 3.09 |   | (2.8 | )% | 4.2 | % |
| Molybdenum price  ($ per pound)(1) |       | $                                | 28.42      |         | $          | 29.91 |   | $ | 24.38 |   | (5.0 | )% | 22.7 | % |
| Zinc price ($ per pound - LME)     |       | $                                | 0.85       |         | $          | 1.47 |   | $ | 1.49 |   | (42.2 | )% | (1.3 | )% |
| Silver price ($ per ounce - COMEX) |       | $                                | 14.97      |         | $          | 13.39 |   | $ | 11.54 |   | 11.8 | % | 16.0 | % |

----

(1)         Platt’s Metals Week Dealer Oxide.

 

Segment SalesInformation

 

The following tablepresents the volume of sales by segment of copper and our significantby-products, for each of the years in the three year period ended December 31,2008:

 

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| **Copper Sales (million pounds)** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peruvian  operations              |       | 793.7                            |       | 863.4 |   | 860.9 |   |
| Mexican open-pit                  |       | 321.9                            |       | 512.0 |   | 594.8 |   |
| Mexican IMMSA  unit               |       | 35.5                             |       | 30.9 |   | 36.4 |   |
| Intersegment  elimination         |       | (36.6                            | )          | (75.8 | ) | (105.9 | ) |
| Total copper  sales               |       | 1,114.5                          |       | 1,330.5 |   | 1,386.2 |   |

 
| **By-product Sales (million pounds, except silver - million ounces)** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peruvian  operations:                                                 |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                  |       | 20.3                             |       | 21.9 |   | 20.6 |   |
| Zinc-refined and  in concentrate (1)                                  |       | 18.6                             |       | 40.3 |   | 49.6 |   |
| Silver                                                                |       | 3.7                              |       | 4.9 |   | 5.6 |   |
|                                                                  |       |                             |       |   |   |   |   |
| Mexican open-pit  operations:                                         |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                  |       | 16.1                             |       | 14.0 |   | 5.0 |   |
| Zinc-refined and  in concentrate (1)                                  |       | —                           |       | — |   | 15.5 |   |
| Silver                                                                |       | 4.5                              |       | 3.6 |   | 4.5 |   |
|                                                                  |       |                             |       |   |   |   |   |
| IMMSA unit                                                            |       |                             |       |   |   |   |   |
| Zinc-refined and  in concentrate                                      |       | 220.7                            |       | 250.6 |   | 273.1 |   |
| Silver                                                                |       | 8.9                              |       | 10.7 |   | 12.0 |   |
|                                                                  |       |                             |       |   |   |   |   |
| Intersegment  elimination                                             |       |                             |       |   |   |   |   |
| Zinc                                                                  |       | (18.2                            | )          | (39.1 | ) | (57.1 | ) |
| Silver                                                                |       | (2.1                             | )          | (0.9 | ) | (2.3 | ) |
|                                                                  |       |                             |       |   |   |   |   |
| Total by-product  sales                                               |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                  |       | 36.4                             |       | 35.9 |   | 25.6 |   |
| Zinc-refined and  in concentrate                                      |       | 221.1                            |       | 251.8 |   | 281.1 |   |
| Silver                                                                |       | 15.0                             |       | 18.3 |   | 19.8 |   |

----

(1)         Through 2006, the Mexican open-pit operationspurchased zinc products from IMMSA for resale to its customers.  This practice was discontinued in 2006 andIMMSA’s zinc sales were either to their customers or to the Peruvian segment,who in turn resold to their customers.

 

**Results of Operations for the Year Ended December 31,2008 Compared to Year Ended December 31, 2007.**

 

***Net sales***

 

Net sales in 2008were $4,850.8 million, compared with $6,085.7 million in 2007, a decrease of$1,234.9 million or 20.3%.  The decreasewas principally attributable to a decrease in sales volume of 16.2% and adecline in metal prices.

 

Copper salesvolume decreased 16.2% in 2008 due to a 17.4% decrease in productionprincipally due to the ongoing strike at the Cananea mine and lower ore gradesat the Toquepala and La Caridad mines. In 2007, we also lost sales volume at Cananeadue to a strike but to a lesser extent than in 2008.  In addition, zinc and silver sales volumedecreased as result of the strikes at some of our other Mexican operations.

 

The decline inmetal prices began late in the third quarter of the year and continued throughthe fourth quarter.  Copper was 2.8% and2.2% lower in 2008, depending on 

 

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whether it was COMEXor LME market, the molybdenum price was 5.0% lower and zinc prices were 42.2%lower.  As a result of the decreasingcopper and molybdenum prices, adjustments for provisionally priced salesreduced 2008 net sales by approximately $403.5 million.  In 2008, approximately 60% of our copper andalmost all of our molybdenum were sold under contracts that based the finalsales price on months subsequent to shipment.

 

Net sales in 2008also include a $137.0 million gain on copper derivatives compared with a gainof $10.9 million in 2007.

 

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

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper Sales (million pounds)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Refined                           |       | 657.4                            |       | 586.4 |   |
| Blister                           |       | 21.9                             |       | 51.4 |   |
| Anode                             |       | 22.0                             |       | 31.1 |   |
| Concentrates and  other           |       | 101.4                            |       | 255.9 |   |
| SX/EW                             |       | 142.2                            |       | 190.4 |   |
| Rod                               |       | 169.6                            |       | 215.3 |   |
| **Total**                         |       | 1,114.5                          |       | 1,330.5 |   |

 

Mine copper production was 1,077.9 millionpounds in 2008, a decrease of 17.4% from 2007. This decrease of 227.6 million pounds included a reduction of 204.1million pounds at our Mexican operations mainly due to strike relatedreductions at our Cananea and San Martin mines which were on strike almost allof 2008 and lower ore grade and PLS processed at the La Caridad mine.  Additionally, production at our Peruvianmines decreased by 23.5 million pounds mainly due to lower ore grades andrecoveries at the Toquepala mine.

 

Molybdenum production and sales volume increased1.1% and 1.3%, respectively in 2008 when compared to 2007.  The increases are principally due to highergrades from La Caridad mine.

 

Mine zinc production amounted to 235.7 millionpounds in 2008, an 11.6% decrease from 2007. The decrease of 31.1 million pounds in zinc production is mainly due tothe strike losses at our Taxco and San Martin mines.

 

Copper made up 69.2% of net sales in 2008 compared with 69.5% in2007.  Sales of by-products in 2008totaled $1,495.9 million compared with $1,856.9 million in 2007, a decrease of19.4%.  The decrease is principallyattributable to the decrease in the sales prices for molybdenum as well asdecrease in sales volume and prices for zinc. The table below provides the sales of our by-products as a percentage ofour total net sales.

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| **By-product Sales as a Percentage of Total Net Sales** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Molybdenum                                              |       | 16.5                             | %          | 17.8 | % |
| Zinc                                                    |       | 4.0                              | %          | 6.0 | % |
| Silver                                                  |       | 4.3                              | %          | 3.8 | % |
| Other  by-products                                      |       | 6.0                              | %          | 2.9 | % |
| **Total**                                               |       | 30.8                             | %          | 30.5 | % |

 

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

 

Our cost of sales(exclusive of depreciation, amortization and depletion) in 2008 was $2,182.2million, compared with $2,122.2 million in 2007, an increase of $60.0 million,or 2.8%.  The increase in cost of saleswas principally due to 1) $152.7 million of higher production cost, including,$113.2 million of higher fuel and power cost and $37.1 million of higher laborcosts mainly in our Peruvian operations due to new labor agreements and theappreciation of the nuevo sol, and 2) $56.5 million of higher concentratespurchased from third parties to cover the loss of production at our Mexicanmines.  These increases were partiallyoffset by 1) $98.8 million of lower workers participation, 2) $13.2 million oflower mining royalties both due to the decrease in revenues as a result oflower metal prices and 3) $29.8 million of gain in currency translation mainlydue to the depreciation of the Mexican peso.

 

***Selling, generaland administrative***

 

Our selling, general and administrative expense in 2008 was $102.4million, compared with $98.0 million in 2007, an increase of $4.4 million.  The increase was principally due to higherlabor costs of $1.8 million, $1.5 million of higher legal and consultingservices and $1.2 million of higher software and license fees.

 

***Exploration***

 

We maintain active exploration programs in Peru,Mexico and Chile.  Exploration expense in2008 was $37.0 million and included $20.4 million in Peru (including Chile) and$16.6 million in Mexico, compared with $40.2 million in 2007, of which $25.4million was in Peru (including Chile) and $14.8 million in Mexico.

 

Exploration expense at Tia Maria decreased from $8.9million in 2007 to $4.6 million in 2008. The spending in 2007 was high becauseit included the Tia Maria feasibility study. In 2008, Tia Maria entered the development stage as an economic project,please see “Capital expansion program”, under this Item 7.  Also in Peru, exploration spending on the LosChancas project increased to $3.2 million in 2008 from $0.9 million in 2007, aswe increased our spending on drilling and field work in 2008.  Additionally, in 2007 we spent $7.0 millionon other feasibility studies, compared to $3.2 million in 2008.

 

Exploration spending in Mexico was $16.6 million in2008, as compared to $14.8 in 2007. Major spending in 2008 included drilling and field work at the Charcasand Santa Eulalia mines in our IMMSA unit.

 

***Interest expense***

 

Interest expense in 2008 was $105.9 million compared with $123.2million in 2007, a decrease of $17.3 million. Interest expense decreased in 2008 as a result of a decrease in ouraverage debt outstanding, mainly due to the payment in April 2008 of $150million of Series A of our Yankee bonds. Please see “Liquidity and Capital Resources” for a further discussion ofour financing program.

 

***Capitalizedinterest***

 

Capitalized interest in 2008 was $6.8 million, compared with $14.7million in 2007, a decrease of $7.9 million. This decrease is mainly due to the startup of the Ilo smeltermodernization project in early 2007 and the start up of the new PLS dumpproject at Toquepala in late 2007.  Capitalizedinterest for these two projects was $3.2 million lower in 2008.  Capitalized interest in our Mexicanoperations decreased by $4.7 million in 2008 due to payment of our Yankeebonds.

 

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***Interest income***

 

Interest income in 2008 was $48.4 million, compared with $82.5 millionin 2007, a decrease of $34.1 million. Our interest income decreased principally as a result of lower interestrates on cash investments in 2008 and lower average invested balances.

 

***Loss on debtprepayments***

 

Loss on debt prepayments in 2007 was $16.6 million.  This loss was related to the repurchase of$68.6 million of Series B of our Yankee bonds.  We did not prepay any debt in 2008.

 

***Loss on derivative instruments***

 

Loss on derivative instruments in 2008 was $74.6 million compared with$73.7 million in 2007.  Gain or losses oncopper and other metal derivatives are included in net sales and gain or losseson gas derivatives are included in the cost of sales on the consolidatedstatement of earnings.  The loss onderivative instruments in 2008 and 2007 includes the following (in millions):

 
| ** **                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Gain (loss) on  US dollar/ Mexican peso exchange rate derivatives |       | $        | (74.6      | )        | $          | 8.6 |   |
| Loss on embedded  derivatives in short-term investments           |       | —   |       | (81.0    | )          |
| Loss on dual  currency notes                                      |       | —   |       | (1.3     | )          |
| Total                                                             |       | $        | (74.6      | )        | $          | (73.7 | ) |

 

The $74.6 million loss onUS dollar/ Mexican peso exchange rate in 2008 was result of the devaluation ofthe Mexican peso late in 2008.  TheMexican peso devalued 24.5% in 2008 compared to an appreciation of 0.1% in2007.  In 2007 we held short-terminvestment instruments which were indexed to SCC common stock prices and otherinstruments leveraged and indexed to certain bond pools.    These instruments were not principalprotected and were deemed to contain embedded derivatives.  Related to these embedded derivatives we lost$81.0 million in 2007 which was recorded as “Loss on derivative instruments” inthe consolidated statement of earnings. The total amount of these investment instruments were liquidated duringthe course of 2007.  We did not holdthese types of instruments in 2008.

 

For a further discussion please see Note 16 Derivative instruments toour consolidated financial statements.

 

***Other income(expense)***

 

Other income (expense) in 2008 was $17.2 million compared to $30.8million in 2007.  The decrease of $13.6million in income was attributable to $8.8 million of lower income in ourPeruvian operations and $4.8 million in our Mexican operations.  The decrease in income in our Peruvianoperation was mainly due to a $10.3 million loss on a mark to market valuationof short-term investments, net of an increase in income of $1.5 million onmiscellaneous sales.  The decrease inincome in our Mexican operation was mainly due to a loss of $12.4 million onthe sale of investments, net of $3.9 million of tax recoveries, other thanincome tax.  Also 2008 includes a $2.6million loss on asset disposals.

 

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***Income taxes***

 

Income taxes in 2008 were $679.3 million and include $724.3 million ofPeruvian and Mexican income taxes and a benefit of $45.0 million for U.S. Federaland state income taxes.  Income taxes in2007 were $1,185.3 million and include $1.153.9 million of Peruvian and Mexicanincome taxes and $31.5 million for U.S. Federal and state income taxes.   US income taxes are primarily attributableto investment income and limitations placed on the use of available tax credits(both foreign tax credits and the minimum tax credit).

 

The decrease of $506.1 million or 42.7% was primarily due to $1,318.1million of lower pretax income.  Theeffective tax rate for 2008 was 32.5%, compared with 34.8% in 2007.  The decrease in the effective tax rate islargely due to the decrease in unrecognized tax benefits for uncertain taxpositions due to a settlement with the IRS. Please see note 8 “Income Taxes”for further discussion of the settlement.

 

***Minority interest***

 

Minority interest in 2008 was $7.9 million compared with $10.2 millionin 2007, a decrease of $2.3 million or 23.1%. This decrease is the result of lower earnings in our Peruvianoperations.

 

***Net earnings***

 

Our net earnings in 2008 were $1,406.6 million, compared with $2,216.4million in 2007, a decrease of $809.8 million or 36.5%.  Net earnings decreased as a result of thefactors described above.

 

**Segment Operating Income Information — 2008vs.2007:**

 

**Peruvian Open-pit Operations**

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 2,943.2    |       | $          | 3,512.9    |       | $ | (569.7 | ) | (16.2 | ) |
| Operating costs  and expenses |       | (1,418.4   | )          | (1,541.2   | )          | 122.8      |       | (8.0 | ) |
| Operating income              |       | $          | 1,524.8    |       | $          | 1,971.7    |       | $ | (446.9 | ) | (22.7 | ) |

 

Net sales at our Peruvian operations in 2008 were $2,943.2 million,compared with $3,512.9 million in 2007, a decrease of $569.7 million.  This decrease was principally due to theprice decline of copper and molybdenum late in 2008.  While the LME copper price was 2.2% lower in2008 (the majority of copper sales of our Peruvian operation are priced on theLME) and the molybdenum price was 5.0% lower. The reduction to sales was magnified, since the prices of the metalsdropped sharply in the fourth quarter of 2008. This occurred since much of our sales of copper and molybdenum takefinal pricing in months subsequent to shipment. The effect of provisional price adjustments in the fourth quarter of2008 reduced sales by $330.3 million.

 

Additionally, in 2008 copper, molybdenum and silver sales volumedecreased by 69.7 million pounds, 1.6 million pounds and 1.2 million ounces,respectively.  The decrease in coppersales was mainly due to lower rod sales by our trading subsidiary.  These sales were less due to less materialbeing available from our Mexican operations as a result of the Cananeastrike.  The decrease in molybdenum salesvolume was due to lower production mainly from the Toquepala mine due to lowerore grade.  Net sales in 2008 alsoinclude a gain on copper derivatives of $91.8 million compared with a gain of$5.5 million in 2007.

 

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Operating costs and expenses at our Peruvian operations in 2008 were$1,418.4 million, compared with $1,541.2 in 2007, a decrease of $122.8 millionprincipally due to lower cost of sales (exclusive of depreciation, amortizationand depletion).  Cost of sales (exclusiveof depreciation, amortization and depletion) was $1,243.1 million in 2008,compared with $1,365.2 million in 2007. The decrease of $122.1 million wasprincipally the result of 1) $104.6 million of lower copper concentratespurchased from third parties, 2) $153.0 million of lower metal purchased fromour Mexican operations due to the strike at Cananea, 3) $17.1 million of lowerworkers participation due to lower earnings, 4) $16.5 million of lower salesexpenses due to changes in product mix sales and 5) $8.9 million of lowermining royalties due to lower metal prices. These decreases were partiallyoffset by $192.6 million of higher production cost mainly due to $118.0 millionof higher fuel and power cost due to higher market prices and $62.3 million ofhigher labor cost due to new labor agreements and the appreciation of thePeruvian nuevo sol during part of the year.

 

Operating income in 2008 was $1,524.8 million, compared with $1,971.7million in 2007, a decrease of $446.9 million. The operating income increased as a result of the factors describedabove.

 

**Mexican Open-pit Operations****.**

 

 

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 1,583.6    |       | $          | 2,225.1    |       | $ | (641.5 | ) | 28.8 |   |
| Operating costs  and expenses |       | (949.5     | )          | (954.4     | )          | 4.9        |       | 0.5 |   |
| Operating income              |       | $          | 634.1      |       | $          | 1,270.7    |       | $ | (636.6 | ) | 50.1 |   |

 

Net sales at our Mexicanopen-pit operations in 2008 were $1,583.6 million, compared with $2,225.1million in 2007, a decrease of $641.5 million or 28.8%.  This decrease is result of lower metal pricesand lower copper sales volume, mainly refined and rod, due to the loss ofproduction as a result of the ongoing strike activity at the Cananea mine.  While the COMEX copper price was 2.8% lowerin 2008 (the majority of copper sales of our Mexican operations are priced onCOMEX) and the molybdenum price was 5.0% lower, the effect of provisional priceadjustments in the fourth quarter of 2008 reduced sales by $76.4 million.  Partially offsetting this reduction, netsales in 2008 included a gain on copper derivatives of $45.2 million comparedwith a gain of $5.5 million in 2007.

 

Operating cost andexpenses at our Mexican open-pit operations in 2008 was $949.5 million comparedwith $954.4 million in 2007, a decrease of $4.9 million.  This decrease was the result of lower cost ofsales (exclusive of depreciation, amortization and depletion) in 2008 of $7.7million, partially offset by $1.4 million of higher depreciation amortizationand depletion due to higher amortization of capitalized leach material and $0.9million of higher selling, general and administrative expenses.  The decrease in cost of sales (exclusive ofdepreciation, amortization and depletion) was principally the effect of theongoing strike at the Cananea mine and is explained by 1) $56.4 million of lowerproduction cost, 2) $62.0 million of lower workers’ participation, 3) $17.6million of lower inventory consumption partially offset by 4) $99.0 million ofhigher metals purchased from third parties, 5) $28.0 million of continuing costat Cananea mine and 6) $14.0 million of severance payments.

 

Operating income in 2008was $634.1 million, compared with $1,270.7 million in 2007, a decrease of$636.6 million or 50.1%.  The operatingincome increased as a result of the factors described above.

 

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**IMMSA Unit**.

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 525.1      |       | $          | 680.7      |       | $ | (155.6 | ) | 22.9 |   |
| Operating costs  and expenses |       | (511.7     | )          | (434.3     | )          | (77.4      | )          | 17.8 |   |
| Operating income              |       | $          | 13.4       |       | $          | 246.4      |       | $ | (233.0 | ) | 94.6 |   |

 

Net sales at our IMMSAunit in 2008 were $525.1 million, compared with $680.7 million in 2007, adecrease of $155.6 million or 22.9%.  Thedecrease in 2008 was principally due to lower sales volume caused by strikes atthe Taxco and San Martin mines and lower zinc prices.

 

Operating costs andexpenses at our IMMSA unit were $511.7 million in 2008, compared with $434.3million in 2007, an increase of $77.4 million or 17.8%.  This increase was principally the result of$84.7 million of higher cost of sales (exclusive of depreciation, amortizationand depletion) partially offset by $4.9 million of lower depreciation,amortization and depletion, the effect of the accelerated depreciationtaken in 2007 on the processing plantequipment at Pasta de Conchos as a result of the mine accident and $3.7 millionof lower selling, general and administrative expenses due to lower consultantand support services.  The increase in costof sales (exclusive of depreciation, amortization and depletion) wasprincipally the result of 1) $82.4 million of higher metal purchased from thirdparties to partially cover the production loss due to the strikes, 2) $38.0million of loss in currency translation due to the depreciation of the Mexicanpeso against the US dollar, 3) $9.1 million of higher fuel and power cost dueto increased market prices, 4) $8.6 million of higher drilling and field workat the Charcas and Santa Eulalia mines and 5) $11.4 million of contractorservices for operations due to higher production of coal and coke in NuevaRosita south pit.  These increases werepartially offset by 1) $21.2 million of lower workers participation, 2) $15.0million for an insurance reimbursement for the zinc refinery fire in 2007, 3)$13.1 million of use of inventory and 4) $8.1 million of lower tolling cost dueto termination of the contract in May 2008.

 

Operating income in 2008was $13.4 million, compared with $246.4 million in 2007, a decrease of $233.0million or 94.6%.  The operating incomedecreased as a result of the factors described above.

 

Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and expenses and operating income discussed above will not be directlyequal to amounts in our consolidated statement of earnings because theadjustments of intersegment operating revenues and expenses must be taken intoaccount.  Please see Note 20 of ourconsolidated financial statements.

 

**Results of Operations for the Year Ended December 31,2007 Compared to Year Ended December 31, 2006.**

 

***Net sales***

 

Our sales in 2007were $6,085.7 million, compared with $5,460.2 million in 2006, an increase of$625.5 million or 11.5%.  The increasewas attributable to higher market prices for most of our products.  Copper was 4.2% to 5.9% higher in 2007,depending on whether it was COMEX or LME market, the molybdenum price was 22.7%higher and silver was 16% higher.  Zincprices decreased by 1.3% in 2007.  Inaddition, molybdenum sales volume increased 40.2% in 2007 due to higher gradesat our Peruvian mines and increased production from the La Caridad mine whichhad strike losses in 2006.  2007 netsales 

 

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also include a$10.9 million gain on copper derivatives compared with a loss of $276.1 millionin 2006.  There was, however, a decreasein copper sales volume in 2007 due to a strike at the Cananea mine.

 

Sales volume forcopper decreased by 55.7 million pounds in 2007 a decrease of 4% compared with2006.  The impact of this decrease incopper sales volume, as well as a volume decrease in the sale of zinc andsilver was a result of the strikes at some of our Mexican operations.  However, during this year there was anincrease in the volume of molybdenum sales.

 

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

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper Sales (million pounds)** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Refined                           |       | 586.4                            |       | 835.0 |   |
| Blister                           |       | 51.4                             |       | 43.9 |   |
| Anode                             |       | 31.1                             |       | 29.9 |   |
| Concentrates                      |       | 255.9                            |       | 56.0 |   |
| SX/EW                             |       | 190.4                            |       | 210.9 |   |
| Rod                               |       | 215.3                            |       | 210.5 |   |
| **Total**                         |       | 1,330.5                          |       | 1,386.2 |   |

 

Mine copper production was 1,305.5 millionpounds in 2007, a decrease of 2.2% from 2006. This decrease of 29.7 million pounds included a reduction of 24.6million pounds at our Mexican operations due to strike related reductions atour Cananea and San Martin mines where strikes began on July 30, 2007 andran through the end of the year. Additionally, production at our Peruvian mines decreased by 5.1 millionpounds mainly due to lower ore grade at the Toquepala mine.  The make up of our 2007 copper sales changedsignificantly from 2006, as we sold about 200 million additional pounds ofcopper in concentrate form and about 250 million pounds less of refinedcopper.  This change was causedprincipally by some delays in reaching full capacity at our modernized Ilosmelter.

 

Molybdenum production and sales increased 36.8%and 40.2%, respectively in 2007 when compared to 2006.  The increases are principally due to highergrades at our Peruvian mines and from La Caridad mine which lost production in2006 due to strikes.

 

Mine zinc production amounted to 266.8 millionpounds in 2007, a 11.4% decrease from 2006. The decrease of 34.3 million pounds in zinc production is mainly due tothe strike losses at our Taxco and San Martin mines.

 

Copper made up 69.5% of net sales in 2007 compared with 76.0% in2006.  Sales of by-products in 2007totaled $1,856.9 million compared with $1,313.1 million in 2006, an increase of41.4%.  The increase is principallyattributable to the increase in the volume and sales prices formolybdenum.  This increase was partiallyreduced by lower volume and sales prices for zinc.  The table below provides the sales of ourby-products as a percentage of our total net sales.

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| **By-product Sales as a Percentage of Total Net Sales** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Molybdenum                                              |       | 17.8                             | %          | 10.5 | % |
| Zinc                                                    |       | 6.0                              | %          | 7.1 | % |
| Silver                                                  |       | 3.8                              | %          | 4.1 | % |
| Other  by-products                                      |       | 2.9                              | %          | 2.3 | % |
| **Total**                                               |       | 30.5                             | %          | 24.0 | % |

 

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

 

Our cost of sales(exclusive of depreciation, amortization and depletion) in 2007 was $2,122.2million, compared with $2,019.8 million in 2006, an increase of $102.4 million,or 5.1%.  The increase in cost of saleswas principally due to $132.0 million of higher production cost, including,$21.7 million due to higher fuel and power cost, $15.5 million of higher watercost at our Mexican operations due to an increase in the water rate applicableto the mining industry, $14.8 million of higher labor costs, $24.9 million ofhigher repair costs, and $55.1 million of other operating costs offset by$146.8 million of lower metal purchased from third parties.  The increase in cost of sales also includes$32.3 million of higher freight and selling cost mainly due to higher sale ofconcentrates, $27.1 million of inventory consumption and $39.4 million ofhigher workers participation.

 

***Selling, generaland administrative***

 

Our selling, general and administrative expense in 2007 was $98.0million, compared with $88.3 million in 2006, an increase of $9.7 million.  The increase was principally due to higherlabor costs of $6.4 million and $2.5 million of higher rental equipment andoffice maintenance cost at our Mexican corporate office.

 

***Depreciation,amortization and depletion***

 

Depreciation, amortization and depletion was $327.9 million in 2007compared with $275.1 million in 2006, an increase of $52.8 million over2006.  The increase includes additionalcharges of $24.4 million at our Peruvian operations, of which $21.7 million wasfor our newly activated Ilo smelter modernization project.  Increases in depreciation, amortization anddepletion in 2007 at our Mexican operations amounted to $28.5 million.  This increase includes $11.4 million ofhigher amortization of capitalized leach material due to increased amountscapitalized in 2006, $8.9 million of accelerated depreciation of the processingplant equipment at Pasta de Conchos over the remaining mineral located in theopen pit after the mine accident and $8.2 million due to the activation ofmaintenance and replacement equipment.

 

***Exploration***

 

Exploration expense in 2007 was $40.2 million compared with $22.7million in 2006, an increase of $17.5 million over 2006.  This increase includes $11.8 million at ourPeruvian operations, and was principally for the Tia Maria project in thedepartment of Arequipa, where spending increased by $9.2 million.  A feasibility study for the project wascompleted in 2007 and we are planning to begin the project in 2008.  Exploration expense at our Mexican operationincreased by $5.7 million in 2007 and was principally for the surface drillingactivity at Santa Barbara, San Martin and Santa Eulalia.

 

***Interest expense***

 

Interest expense in 2007 was $123.2 million compared with $113.4million in 2006, an increase of $9.8 million. Interest expense increased in 2007 principally as a result of anincrease in our average debt outstanding. Please see “Liquidity and Capital Resources” for a further discussion ofour financing program.

 

***Capitalizedinterest***

 

Capitalized interest in 2007 was $14.7 million, compared with $27.9million in 2006, a decrease of $13.2 million. This decrease is largely due to the startup of the Ilo 

 

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smelter modernization project in early 2007, for which we capitalized$14.0 million less interest in 2007.

 

***Interest income***

 

Interest income in 2007 was $82.5 million, compared with $50.2 millionin 2006, an increase of $32.3 million. Our interest income increased principally as a result of higher interestrates on short term securities and higher invested balances.

 

***Loss on debtprepayments***

 

Loss on debt prepayments in 2007 was $16.6 million, compared with $1.1million in 2006, an increase of $15.5 million. Losses in both periods are related to the repurchase of our MexicanYankee bonds.

 

***Loss on derivative instruments***

 

Loss on derivative instruments in 2007 was $73.7 million, compared witha loss of $11.6 million in 2006.  Gain orlosses on copper and other metal derivatives are included in the net sales lineand gain or losses on gas derivatives are included in the cost of sales line ofthe consolidated statement of earnings. The loss on derivative instruments in 2007 and 2006 includes $81.0million and $11.6 million of loss on the embedded derivatives on short-terminvestment, respectively.  Also the 2007loss on derivative instruments includes $1.3 million of loss on dual currencynotes and gain of $8.6 million in exchange rate derivatives US dollar/Mexicanpeso.  For a further discussion pleasesee Note 3 Short-term Investments and Note 16 Derivative Instruments to ourAudited Consolidated Financial Statements.

 

***Other income(expense)***

 

Other income in 2007 was $30.8 million, compared with an expense of$0.3 million in 2006.  The increase inincome is primarily attributable to $12.4 million of gain on the sale of aninactive Mexican subsidiary, $3.0 million of lower cost of disposal of assets, and$10.5 million of lower miscellaneous expenses.

 

***Income taxes***

 

Income taxes in 2007 were $1,185.3 million and include $1.153.8 millionof Peruvian and Mexican income taxes and $31.5 million for U.S. Federal andstate income taxes.  Income taxes in 2006were $959.1 million and included $940.3 million of Peruvian and Mexican incometaxes and $18.8 million for U.S. Federal and state income taxes.   US income taxes are primarily attributableto investment income and limitations placed on the use of available tax credits(both foreign tax credits and the minimum tax credit).

 

The increase of $226.2 million or 23.6% was primarily due to $405.8million of higher pretax income.  Theeffective tax rate for 2007 was 34.7%, compared with 31.9% in 2006.  The increase in the effective tax rate islargely due to the incremental U.S. tax on dividend income.  The dividend income eliminates in financialconsolidation (book income) but it is taxable in the U.S. at the differencebetween the 35% U.S. statutory rate and the foreign tax credit rate of 28% onthe dividend.

 

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***Minority interest***

 

Minority interest in 2007 was $10.2 million compared with $9.3 millionin 2006, an increase of $0.9 million or 10.0%. This increase is the result of higher earnings.

 

***Net earnings***

 

Our net earnings in 2007 were $2,216.4 million, compared with $2,037.6million in 2006, an increase of $178.8 million or 8.8%.  Net earnings increased as a result of thefactors described above.

 

**Segment Operating Income Information — 2007vs.2006:**

 

**Peruvian Open-pit Operations**

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 3,512.9    |       | $          | 3,215.4    |       | $ | 297.5 |   | 9.3 | % |
| Operating costs  and expenses |       | (1,541.4   | )          | (1,383.4   | )          | (158.0     | )          | 11.4 | % |
| Operating income              |       | $          | 1,971.5    |       | $          | 1,832.0    |       | $ | 139.5 |   | 7.6 | % |

 

Net sales at our Peruvianoperations in 2007 were $3,512.9 million, compared with $3,215.4 million in2006, an increase of $297.5 million. This increase was principally due to increases in the sales price ofcopper and molybdenum.  The LME copperprice was 5.9% higher in 2007 (the majority of sales of our Peruvian operations’copper is priced on LME) and the molybdenum price was 22.7% higher.  Additionally in 2007 copper and molybdenumsales volume increased by 2.5 million pounds and 1.3 million pounds,respectively.  Net sales in 2007 includea gain on copper derivatives of $5.5 million compared with a loss of $162.3million in 2006.

 

Operating costs andexpenses at our Peruvian operations in 2007 were $1,541.4 million, comparedwith $1,383.4 in 2006, an increase of $158.0 million principally due to highercost of sales and higher depreciation, amortization and depletion.  The increase in cost of sales (exclusive ofdepreciation, amortization and depletion) of $117.8 million was principally theresult of higher labor cost of $26.6 million due to an increase in salaries andan exchange rate effect, $9.6 million of higher fuel and power cost, $37.4million of higher freight and selling cost mainly due to the sale ofconcentrates and $16.8 million of inventory consumption.  The increase in depreciation, amortization ofdepletion of $24.4 million is mainly due to the newly activated Ilo smeltermodernization project which represents an additional charge of $21.7 million.

 

Operating income in 2007was $1,971.5 million, compared with $1,832.0 million in 2006, an increase of$139.5 million.  The operating incomeincreased as a result of the factors described above.

 

**Mexican Open-pit Operations**

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 2,225.1    |       | $          | 1,987.1    |       | $ | 238.0 |   | 12.0 | % |
| Operating costs  and expenses |       | (954.4     | )          | (1,067.3   | )          | 112.9      |       | 10.6 | % |
| Operating income              |       | $          | 1,270.7    |       | $          | 919.8      |       | $ | 350.9 |   | 38.1 | % |

 

Net sales from ourMexican open-pit operations in 2007 were $2,225.1 million, compared with$1,987.1 million in 2006, an increase of $238.0 million or 12.0%.  This 

 

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improvement is the resultof the higher molybdenum volume, produced and sold in 2007 and the higher salesprice for the molybdenum.  Sales ofmolybdenum, produced by our La Caridad mine increased from 5.5 million poundsin 2006 to 13.6 million pounds in 2007. Significant production and sales ofmolybdenum were lost in 2006 as La Caridad had a lengthy strike in the firsthalf of the year.  This increase, from molybdenumsales, was reduced by the decrease in volume of copper sales, due principallyto a strike at the Cananea mine.  Inaddition, net sales in 2007 included a gain on copper derivatives of $5.5million compared with a loss of $113.9 million in 2006.

 

Operating costsand expenses at our Mexican open-pit operations in 2007 were $954.4 millioncompared with $1,067.3 million in 2006, a decrease of $112.9 million or10.6%.  This decrease was principally theresult of lower cost of sales net of higher depreciation, amortization anddepletion.  The decrease in cost of sales(exclusive of depreciation, amortization and depletion) of $131.9 million wasprincipally the effect of the Cananea strike, which began on July 30, 2007and continued through the end of 2007. An increase in depreciation, amortization and depletion of $16.6 millionin 2006 was principally due to higher amortization of capitalized leachmaterial due to increased amounts capitalized in 2006.

 

Operating income in 2007was $1,270.7 million, compared with $919.8 million in 2006, an increase of$350.9 million or 38.1%.  The operatingincome increased as a result of the factors described above.

 

**IMMSA Unit**

 
| ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Value**  | ** ** | **%** | ** ** |
| Net sales                     |       | $          | 680.7      |       | $          | 702.5      |       | $ | (21.8 | ) | (3.1 | %) |
| Operating costs  and expenses |       | (434.3     | )          | (405.2     | )          | (29.1      | )          | 7.2 | % |
| Operating income              |       | $          | 246.4      |       | $          | 297.3      |       | $ | (50.9 | ) | (17.1 | %) |

 

Net sales at our IMMSAunit in 2007 were $680.7 million, compared with $702.5 million in 2006, adecrease of $21.8 million or 3.1%.  Thedecrease was principally due to lower sales volume caused by strikes at theTaxco and San Martin mines and lower zinc prices partially offset by highersales prices in 2007 for copper and silver. Net sales in 2006 include a loss on zinc derivatives of $0.2 million.

 

Operating costs andexpenses at our IMMSA unit were $434.3 million in 2007, compared with $405.2million in 2006, an increase of $29.1 million or 7.2%.  This increase was principally the result ofhigher cost of sales (exclusive of depreciation, amortization and depletion)and higher depreciation, amortization and depletion.  The increase in cost of sales (exclusive ofdepreciation, amortization and depletion) of $15.8 million, was principally theresult of $12.0 million of higher fuel and power cost, $1.7 million of higherwater cost due to increase in water rates and $3.2 million of other operatingcost.  These increases were partiallyoffset by $0.9 million of lower metal purchased from third parties.  The increase in depreciation, amortizationand depletion of $9.1 million is mainly due to the accelerated depreciation ofthe processing plant equipment at Pasta de Conchos over the remaining minerallocated in the open pit after the mine accident.

 

Operating income in 2007was $246.4 million, compared with $297.3 million in 2006, a decrease of $50.9million or 17.1%.  The operating incomedecreased as a result of the factors described above.

 

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Intersegment Eliminationsand Adjustments

 

The net sales, operatingcosts and expenses and operating income discussed above will not be directlyequal to amounts in our consolidated statement of earnings because theadjustments of intersegment operating revenues and expenses must be taken intoaccount.  Please see Note 20 of ourconsolidated financial statements.

 

**Liquidity and Capital Resources**

 

The following discussion relates to ourliquidity and capital resources for each of the years in the three year periodended December 31, 2008.

 

***Liquidity***

 
| **(in millions)**                            | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                             |       |   |   |   |   |
| Net cash  provided from operating activities |       | $                                | 1,720.6    |   | $ | 2,703.5 |   | $ | 2,059.3 |   |
| Net cash used  for investing activities      |       | (410.9                           | )          | (246.0 | ) | (725.3 | ) |
| Net cash used  for financing activities      |       | (2,048.0                         | )          | (2,088.3 | ) | (1,164.3 | ) |
|                                              |            |                                  |            |  |  |  |  |  |  |  |

 

***Cash Flows from OperatingActivities***

 

Net cash provided fromoperating activities was $1,720.6 million, $2,703.5 million and $2,059.4million in 2008, 2007 and 2006, respectively. The decrease in 2008 was primarily the result of lower net earnings as aresult of lower sales prices for most of our metal products and a decrease insales volume.  The increase in 2007 wasprimarily the result of higher net earnings, which was the result of improvedsales prices for most of our metal products and the change in the balances ofoperating assets and liabilities.  Alsoin 2007, an increase in molybdenum sales volume contributed to the increase incash flow.

 

In 2008, our earningswere $1,406.6 million, approximately 81.8% of the net operating cash flow.  Significant items deducted from, or added toarrive to operating cash flow included depreciation, amortization and depletionof $327.3 million and $56.8 million of unrealized loss on derivativeinstruments which positively increased operating cash flow and $100.1 millionof a deferred income tax benefit, $30.0 million for a gain on the sale ofinactive properties in our Mexican operations and $18.1 million of gain oncurrency translation which lowered our cash flow.  Additionally in 2008, a decrease in workingcapital needs increased operating cash flow by $61.9 million.

 

The contribution fromworking capital includes (in millions):

 
| Accounts  receivable                      |   | $      | 330.2 |   |
|-------------------------------------------|--------|--------|-------|--------|
| Inventories                               |   | (3.3   | )     |
| Accounts payable  and accrued liabilities |   | (164.3 | )     |
| Other operating  assets and liabilities   |   | (100.7 | )     |
| Total                                     |   | $      | 61.9  |   |

 

The cash flow generatedby the reduction in accounts receivable was primarily caused by the sharpdecrease in metal prices at the end of 2008. The fourth quarter 2008 price of copper and molybdenum was approximately46% and 55% lower than the fourth quarter of 2007.  In addition, the year-end 2008 price ofcopper and molybdenum was approximately 55% and 70% lower than the year-end2007 prices.  Accounts payable and 

 

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accrued liabilitiesdecreased by $164.3 million in 2008, largely as a result of a decrease inworkers’ participation and income tax accruals of $107.8 million and $97.8million, respectively, as a result of lower earnings in 2008.  Other operating assets and liabilities in2008 were a use of cash of $100.7 million which was caused principally by adecrease of $84.5 million in FIN 48 provision, see Note 8 — “Income Taxes”, ofour consolidated financial statements.

 

In 2007, our earningswere $2,216.4 million, approximately 82.0% of the net operating cash flow.  Significant items deducted from, or added toarrive to operating cash flow included, depreciation amortization and depletionof $327.9 million, $81.0 million of realized loss on short-term investments and$66.6 million of deferred income tax, which positively increased operating cashflow and $45.9 million of capitalized leachable material, which lowered ourcash flow.  Additionally, a decrease inworking capital needs increased operating cash flow by $34.9 million.

 

The 2007 contribution from working capital includes (in millions):

 
| Accounts  receivable                      |   | $      | 66.2   |   |
|-------------------------------------------|--------|--------|--------|--------|
| Inventories                               |   | (34.6  | )      |
| Accounts payable  and accrued liabilities |   | (150.3 | )      |
| Other operating  assets and liabilities   |   | 153.6  |   |
| Total                                     |   | $      | 34.9   |   |

 

The cash flow generatedby the reduction in accounts receivable was primarily caused by a timingdifference in sales.  The increase ininventory of $34.6 million was due to a temporary increase of suppliesinventory due to the strikes at our Mexican operations partially offset by adecrease in metal inventory due to the decrease in production.  Accounts payable and accrued liabilitiesdecreased by $150.3 million.  Other operating assets and liabilitiesin 2007 was a use of cash of $153.6 million.

 

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 short-term investment, which positively increased operating cash flowand capitalized leachable material of $65.9 million, which lowered our cashflow.  Additionally, an increase inworking capital reduced operating cash flow by $178.5 million.  The working capital increase was the resultof an increase of $217.9 million of receivables as a result of higher copperprices, this increase was reduced by a buildup of $80.7 million of accountspayable and accrued liabilities, a key component of which was the increase of$104.3 million in the unpaid provision for workers’ participation, which waspaid in the first quarter of 2007.  Otherincreases in working capital amounted to $41.3 million.

 

***Cash Flows from InvestingActivities***

 

Net cash used for investing activities was $410.9million in 2008 compared to $246.0 million in 2007.  In 2008 investing activities include $516.7million of capital expenditures, $45.2 million received from the redemption ofshort-term investments and $60.6 million of proceeds from the sale of inactiveproperties in our Mexican operations.

 

The $516.7 million of capital expenditures includesthe following expenditures at our Peruvian operations, $118.0 million for theTia Maria project, $37.7 million for the Toquepala expansion project, $18.2million for the Cuajone expansion project, $21.7 million for the tailingdisposal project, $17.3 million for electrical shovels and $89.5 

 

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for equipment replacement and upgrades.  Capital expenditures also include equipmentreplacement and upgrade of $145.0 million at Mexican our open pit operations,$44.2 million in our IMMSA unit and $25.1 million for our administrative officein Mexico.

 

Net cash used for investing activities was $246.0million in 2007 compared to $725.3 million in 2006.  In 2007, investing activities include $315.7million of capital expenditures, $217.9 million for the purchase of short-terminvestments, less $287.4 million received on the redemption of short-terminvestments.  The $315.7 million ofcapital expenditures, includes $21.0 million for the Ilo smelter modernizationproject, $13.8 million for the Toquepala leach dump project, $10.5 million forthe PLS dam project and $270.4 million for equipment replacements and upgradesof which $188.6 million was for our Mexican operations.

 

Net cash used for investing activities was $725.3million in 2006.  In 2006, investingactivities include $455.8 million of capital expenditures, and short-term investmentsof $280.0 million.  The $455.8 million ofcapital expenditures includes $160.9 million for the Ilo smelter modernizationproject, $15.6 million for the Toquepala leach dump project and $279.3 millionprincipally for equipment replacements and upgrades, of which $202.5 millionwas for our Mexican operations.

 

***Cash Flows from FinancingActivities***

 

For 2008, cash used for financing activities amounted to $2,048.0million, and included a shareholder dividend distribution of $1,710.8 million,a distribution to minority interest investors of $10.2 million, $384.7 millionfor the repurchase of 28.5 million shares of our common stock and $160.0million of debt repayment.  In addition,we received $216.4 million from the sale of 350 million shares of our parentcompany’s common stock. See Note 15 “Stockholder Equity”.

 

For 2007, cash used for financing activities amounted $2,088.3 million,mainly for a dividend distribution of $2,002.3 million to our shareholders and$7.2 million to our remaining minority interest investors.  In 2007, financing activities also include$68.6 million for the repurchase of our Yankee bonds series B and $10.0 millionfor the amortization of the Mitsui loan.

 

For 2006, cash used for financing activities amounted to $1,164.3 million,mainly for a dividend distribution of $1,509.1 million to our shareholders and$8.3 million to our remaining minority interest investors.  In addition, net debt incurred in 2007 was$356.0 million.

 

***Other Liquidity Considerations***

 

In 2008, the Company’sBoard of Directors authorized an up to $500 million share repurchaseprogram.  Under this program we maypurchase shares from time to time, based on market conditions and otherfactors.  The repurchase program has noexpiration date and may be modified or discontinued at any time. The sharesacquired will be available for general corporate purposes.  During 2008 we repurchased 28.5 millionshares at an average cost of $13.49 totaling $384.7 million. Please see note 22to the financial statements, “Subsequent events” for repurchase activity in2009.

 

**On January 30, 2009 the Board of Directorsauthorized a dividend of 11.7 cents per share to be paid on March 30, 2009to shareholders of record as of March 11, 2009.  Our dividend policy continues to be reviewedat Board of Directors’ meetings, taking**

** **

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** **

**into consideration the current capital investmentprogram and expected future cash flow generated from operations.**

** **

We expect that it will meet our cash requirements for 2009 and beyondfrom cash on hand, internally generated funds and from additional externalfinancing if required.

 

In December 2006, our Peruvian Branch signed a contract with thePeruvian government committing our Company to make annual contributions forfive years to support the regional development of Peru.  The contributions are being used for socialbenefit programs.  In 2008 and 2007, wemade contributions of $18.9 million and $16.1 million out of 2007 and 2006earnings, respectively and has charged 2008 earnings $12.2 million for the 2009contribution.  Future contributions couldincrease or decrease depending on earnings and copper prices.  If the average annual LME copper price isbelow $1.79 per pound the contribution will cease.

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies. Under this law, we are subject to a 1% to 3% charge, based on sales,applicable to the value of the concentrates produced.  We made a provision of $53.9 million, $62.8million and $67.2 million in 2008, 2007 and 2006, for this charge.  During 2008, 2007 and 2006 we made paymentsof $58.0 million, $64.0 million and $67.1 million, respectively, related tothis charge.

 

***Financing***

 

Our total debt at December 31, 2008 was $1,306.4 million comparedwith $1,466.4 million at December 31, 2007 before the unamortized discountof notes issued under par of $16.4 million and $16.7 million at December 31,2008 and 2007, respectively.  The $160.0million net decrease in total debt during 2008 was due to the payment of $150.0million of Yankee bonds series A. With this payment the Series A Yankeebonds were fully repaid.  Additionally wepaid $10.0 million of its Mitsui loan

 

Our ratio of debt tototal capitalization was 27.5% at December 31, 2008, compared with 27.3%at December 31, 2007.

 

***Capital ExpenditurePrograms***

 

A discussion of our capital expenditure programs is an important partof understanding our liquidity and capital resources.  We expect to meet the cash requirements forthese capital expenditures from cash on hand, internally generated funds andfrom additional external financing if required. For information regarding our capital expenditure programs, please seethe discussion under the caption “Capital Expansion Program” of this section.

 

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**Contractual Obligations**

 

The following table summarizes our significant contractual obligationsas of December 31, 2008:

 
| ** **                                         | ** ** | **Payments due by Period** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **Total**                  | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and  Thereafter** | ** ** |
| ** **                                         | ** ** | **(dollars in millions)**  | ** ** |
| Long-term debt                                     |       | $                          | 1,306.4    |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 1,256.4 |   |
| Interest on debt                                   |       | 2,188.2                    |       | 94.7 |   | 94.2 |   | 94.0 |   | 93.5 |   | 93.3 |   | 1,718.5 |   |
| FIN No. 48  (a)                               |       | 70.3                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Workers’  participation                       |       | 218.9                      |       | 218.9 |   |   |   |   |   |   |   |   |   |   |   |
| Contribution to  the Peruvian regional development |       | 12.2                       |       | 12.2 |   |   |   |   |   |   |   |   |   |   |   |
|                                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pension and  post-retirement obligations           |       | 93.5                       |       | 24.6 |   | 5.2 |   | 5.4 |   | 5.6 |   | 6.0 |   | 46.7 |   |
| Purchase  obligations:                             |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commitment to  purchase energy                     |       | 1,061.0                    |       | 184.3 |   | 134.0 |   | 117.3 |   | 117.3 |   | 117.3 |   | 390.9 |   |
| Capital  expenditure projects and material         |       | 596.2                      |       | 273.0 |   | 323.2 |   | — |   | — |   | — |   | — |   |
|                                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                              |       | $                          | 5,546.7    |   | $ | 817.7 |   | $ | 566.6 |   | $ | 226.7 |   | $ | 226.4 |   | $ | 226.6 |   | $ | 3,412.5 |   |

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(a)          The above table does not include any future paymentrelated to FIN No.48 liabilities because there is often a high degree ofuncertainty regarding the timing of future cash outflows.  As of December 31, 2008 the liabilityrecognized by the Company is $70.3 million and is included as non-currentliability in the consolidated balance sheet.

 

Interest on debt is calculated at rates in effect at December 31,2008.  Please refer to “Note 11-Financing”of our consolidated financial statements for a description of our long-termdebt arrangements and credit facilities.

 

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

 

Pursuant to our agreement with the Peruvian Government signed on December 28,2006 we have committed to make annual contributions for five years for theregional development of Peru based on Peruvian Branch earnings after incometax.  Future contributions could increaseor decrease depending on copper prices. The commitment of the Branch is for a total of 1.25% of its annualearnings, after Peruvian income tax.  Ifthe average annual LME copper price drops below $1.79 per pound thecontribution will cease.  For anadditional discussion on this matter please see “Regional developmentcontribution” on “Note 14-Commitments and Contingencies” of the consolidatedfinancial statements.

 

Pension and post retirement obligations include the benefit expected tobe paid under our post-retirement benefit plans. Please refer to Note 12 “Benefitplans” of our consolidated financial statements.

 

We have a commitment to purchase power for our Peruvian operations fromEnergia del Sur, S.A. until 2017. Amounts indicated on the above table are based on power costs in 2008, 

 

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which are subject to change as energy generation costs change and ourforecasted power requirements through the life of the agreements change.

 

Capital expenditure projects include committed purchase orders andexecuted contracts principally for our Peruvian projects of Tia Maria and theToquepala concentrator expansion.  Thesecommitments are under re-evaluation and subject to renegotiation due to thecurrent economic situation.  Also, thisline item includes committed purchase orders for operating material at ouroperations.

 

**Non-GAAP Information Reconciliation-**

 

Following is a reconciliation of “Operating Cash Cost” (see page 80)to GAAP cost of sales in millions of dollars and cents per pound in the tablebelow:

 
| ** **                                                                       | ** ** | **2008**           | ** ** | **2007**            | ** ** | **2006**           | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** | **$ million** | ** ** | **$ per unit** | ** ** |
| Cost of sales  (exclusive of depreciation, amortization and depletion)—GAAP |       | $                  | 2,182.2    |                | $          | 1.890              |       | $ | 2,122.2 |   | $ | 1.644 |   | $ | 2,019.8 |   | $ | 1.468 |   |
| Add:                                                                             |       |               |       |                |       |               |       |   |   |   |   |   |   |
| Selling, general  and administrative                                             |       | 102.4              |       | 0.089               |       | 98.0               |       | 0.076 |   | 88.3 |   | 0.064 |   |
| Treatment and  refining charges                                                  |       | 40.8               |       | 0.035               |       | 57.9               |       | 0.045 |   | 61.0 |   | 0.044 |   |
| By-product  revenue (1)                                                          |       | (1,584.8           | )          | (1.373              | )          | (1,952.7           | )          | (1.513 | ) | (1,547.1 | ) | (1.124 | ) |
|                                                                             |       |               |       |                |       |               |       |   |   |   |   |   |   |
| Less:                                                                            |       |               |       |                |       |               |       |   |   |   |   |   |   |
| Workers’  participation                                                     |       | (212.1             | )          | (0.184              | )          | (310.9             | )          | (0.241 | ) | (271.5 | ) | (0.197 | ) |
| Royalty charge  and other, net                                                   |       | (111.1             | )          | (0.095              | )          | (155.0             | )          | (0.120 | ) | (127.1 | ) | (0.093 | ) |
| Inventory change                                                                 |       | (23.9              | )          | (0.021              | )          | (31.5              | )          | (0.024 | ) | (4.4 | ) | (0.003 | ) |
| **Operating  Cash Cost**                                                         | ** ** | **$**              | **393.5**  | ** **          | **$**      | **0.341**          | ** ** | **$** | **(172.0** | **)** | **$** | **(0.133** | **)** | **$** | **219.0** | ** ** | **$** | **0.159** | ** ** |
| Less by-product  revenue                                                         |       | 1,584.8            |       | 1.373               |       | 1,952.7            |       | 1.513 |   | 1,547.1 |   | 1.124 |   |
| Operating Cash  Cost, without by-product revenue                                 |       | $                  | 1,978.3    |                | $          | 1.714              |       | $ | 1,780.7 |   | $ | 1.380 |   | $ | 1,766.1 |   | $ | 1.283 |   |
| Total pounds of  copper produced and purchased (in millions)                     |       | 1,154.6            |       |                |       | 1,291.0            |       |   |   | 1,375.9 |   |   |   |

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(1)          Includes net by-product sales revenue and premiums onsales of refined products.

 

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Item 7A.Quantitative and Qualitative Disclosures About Market Risk

 

A portion 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, 2008, a change in interest rates of one percent (or 100basis points) would impact net income and cash flows by $0.5 million annually.

 

We are also exposed to market risk associated with changes in foreigncurrency exchange rates as certain costs incurred are in currencies other thanour functional currency, the U.S. dollar. To manage the volatility related to the risk, we may enter into forwardexchange contracts, currency swaps or other currency hedging arrangements.  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 netmonetary assets denominated in nuevos soles or pesos can be affected bydevaluation of the nuevo sol or the peso, resulting in a remeasurement loss inour financial statements.  Recentinflation and devaluation rates are provided in the table below.

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Peru                                              |       |                             |       |   |   |   |   |
| Peruvian  inflation rate                          |       | 6.6                              | %          | 3.9 | % | 1.1 | % |
| Nuevo sol/dollar  devaluation/(appreciation) rate |       | 4.8                              | %          | (6.3 | )% | (6.8 | )% |
| Mexico                                            |       |                             |       |   |   |   |   |
| Mexican  inflation rate                           |       | 6.5                              | %          | 3.8 | % | 4.1 | % |
| Peso/dollar  devaluation/(appreciation) rate      |       | 24.5                             | %          | (0.1 | )% | 1.5 | % |

 

Change in monetaryposition:

 

Assuming an exchange ratechange of 10% at December 31, 2008, we estimate our net monetary positionin Peruvian nuevo sol and Mexican pesos would increase (decrease) our netearnings as follows:

 
| **Variance**                                                     | ** ** | **Effect in net earnings** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **($ in million)**    | ** ** |
| Appreciation of  10% in exchange rate of dollar vs. Nuevo sol    |       | $                          | 12.9       |   |
| Devaluation of  10% in exchange rate of dollar vs. nuevo sol     |       | $                          | (15.7      | ) |
| Appreciation of  10% in exchange rate of dollar vs. Mexican peso |       | $                          | 11.4       |   |
| Devaluation of  10% in exchange rate of dollar vs. Mexican peso  |       | $                          | (14.0      | ) |

 

The net monetary position is the net of those assets and liabilitiesthat are nuevo sol or peso denominated at December 31, 2008.  It principally includes cash and variousreceivables and liabilities in local currencies.

 

Metal price sensitivity:

 

We are subject to market risks arising from the volatility of copperand other metal prices.  Assuming that expectedmetal production and sales are achieved, that tax rates are unchanged, andgiving no effects to potential hedging programs, metal price 

 

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sensitivity factors would indicate estimated changes in net earningsresulting from metal price changes in 2009 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)                              |       | $          | 6.0        |           | $          | 22.4     |       | $          | 1.3        |   | $ | 9.7 |   |

 

We occasionally usederivative instruments to manage our exposure to market risk from changes incommodity prices, interest rate and exchange rate risk exposures.  We generally do not enter into derivativecontracts unless we anticipate a future activity that is likely to occur thatwill result in exposing our Company to market risk.

 

Copperand zinc swaps:

 

During 2008, 2007 and 2006we entered into copper collar and swap contracts to protect a portion of oursales of copper production as follows

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Collar  contracts:            |       |     |       |     |       |     |       |
| Pounds (in  millions)         |       | 220.5    |       | 170.5    |       | —   |       |
| Average LME cap  price        |       | $        | 4.23       |     | $          | 4.07     |       | — |   |
| Average LME  floor price      |       | $        | 3.40       |     | $          | 3.20     |       | — |   |
|                          |       |     |       |     |       |     |       |
| Swap contracts:               |       |     |       |     |       |     |       |
| Pounds (in  millions)         |       | 175.1    |       | 11.9     |       | 847.7    |       |
| Weighted average  COMEX price |       | $        | 3.87       |     | $          | 3.71     |       | $ | 3.17 |   |
|                               |            |          |            |          |            |          |            |  |  |  |

 

Related to the settlementof these copper collar and swap contracts, we recorded gains of $137.0 millionand $10.9 million in 2008 and 2007, respectively, and a loss of $276.1 millionin 2006.  These gains and losses wererecorded in net sales on the consolidated statement of earnings.  Also, these gains and losses were recorded innet earnings in operating activities of the consolidated statement of cashflow.

 

In addition, in 2006 weentered into a zinc swap contract to protect the cost of a portion of the zincconcentrates purchased during the recovery from a fire at the San Luis Potosizinc refinery.  Related to the settlementof this zinc swap contract we recorded a loss of $0.2 million in 2006.  This loss was recorded in net sales on theconsolidated statement of earnings. Also, this loss was recorded in net earnings in operating activities ofthe consolidated statement of cash flow. We did not enter into any zinc derivative contracts in 2008 and 2007.

 

At December 31, 2008we did not hold any open copper or zinc derivative contracts.

 

Transactions under thesemetal price protection programs are not accounted for as hedges under SFAS No. 133and are adjusted to fair market value based on the metal prices as of the lastday of the respective reporting period with the gain or loss recorded in netsales on the consolidated statement of earnings.

 

Gas swaps:

 

In the last three years we entered into gas swap contracts to protectpart of our gas consumption in both periods as follows:

 

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| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|----------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Gas volume  (MMBTUs)       |       | 460,000  |       | 900,000  |       | 3,650,000 |       |
| Fixed price                |       | $        | 8.2175     |     | $          | 7.5250    |       | $ | 4.2668 |   |
| (Loss) gain (in  millions) |       | $        | (0.9       | )        | $          | (0.9      | )          | $ | 6.3 |   |

 

The losses and gain obtained were included in the production cost.  At December 31, 2008, we did not holdany open gas swap contracts.

 

Exchange Rate 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 in Mexicanpesos, we entered into zero-cost derivative contracts with the purpose ofprotecting, within a range, against an appreciation of the Mexican peso to theUS dollar.

 

At December 31, 2008we held two types of exchange rate derivative contracts:

 

In the first type ofexchange rate derivative contract, if the exchange rate settles at or below thebarrier price, we do not sell US dollars, if the exchange rate settles abovethe barrier price and below the strike price established in the contract, wesell the notional amount of US dollars settling in the week at the strikeprice.  If the exchange rate settlesabove the strike price established in the contract, we sell double theunderlying amount of US dollars settling in the week at the strike price establishedin the contract.  At December 31,2008, we held the following contracts of this type:

 
| **Notional  Amount  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Due Date, Weekly  expiration until** | ** ** | **Strike Price  (Mexican  Pesos/U.S.  Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/  U.S. Dollars)** | ** ** |
|----------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
| $                                | 15.0       |                               | $          | 1.25                                   |       | March 11, 2009                              |       | 11.25                                             |       | 10.60 |   |
|                                  |            |                                    |            |                                        |            |                                                  |            |                                                   |            |  |  |

 

Each notional amountincludes a group of underlying amount transactions that have the same strikeand barrier price.

 

In the second type ofexchange rate derivative contract, if the exchange rate is less than or equalto the strike price, we sell US dollars in an amount equal to the underlyingamount for the expiration period at the strike price.  The difference between the strike price andthe market exchange rate is considered a gain to us.  The total accumulated gain over the life ofthe contract cannot exceed 200 cents per dollar transacted in the firstcontract and 500 cents per dollar transacted in the second contract.  If the exchange rate is above the strikeprice, we sell dollars in an amount equal to 2 times the underlying amount forthe expiration period at the strike price and the loss does not reduce theaccumulated gain.  At December 31,2008, we held the following contracts of this type:

 
| **Notional  Amount  (millions)** | ** ** | **Underlying  amount  (millions)** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price  (Mexican Pesos/  U.S. Dollars)**  | ** ** |
|----------------------------------|------------|------------------------------------|------------|------------------------|------------|--------------|------------|---------------------------------------------------|------------|
| $                                | 15.0       |                               | $          | 2.5                    |       | Monthly      |       | January 13, 2009 through June 11, 2009  |       | 10.59 |   |
| $                                | 85.0       |                               | $          | 2.5                    |       | Weekly       |       | January 2, 2009 through August 21, 2009 |       | 10.53 |   |

 

Each notional amountincludes a group of underlying amount transactions that have the same strikeand barrier price.

 

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The exercise of thesezero-cost derivative contracts resulted in a realized loss of $17.8 million in2008 and gains of $8.1 million and $0.9 million in 2007 and 2006, respectively,which were recorded as Loss on derivative instruments in the consolidatedstatement of earnings.

 

At December 31,2008, the mark-to-market of the above listed exchange rate derivative contractsgenerated an unrealized loss of $56.8 million which was recorded as Loss onderivative instruments in the consolidated statement of earnings.

 

If the exchangerate of the Mexican Peso to the US Dollar were to increase or decrease by 10%,the additional loss or benefit of these derivative instruments would not beconsidered material to our overall results of operations.

 

Dualcurrency notes:

 

In 2007 we invested$560.0 million in dual currency notes which provided an above market interestreturn subject to a barrier range of the Mexican peso/US dollar exchangerates.  Related to these investments werealized an exchange loss of $1.3 million, which was recorded as a loss onderivative instruments in the consolidated statement of earnings.  At December 31, 2008, we did not hold anydual currency notes.

 

We earned interestof $2.1 million in 2007, which was recorded as interest income in theconsolidated statement of earnings.

 

Short-term investments:

 

Thebalance of short-term investments was as follows (in millions):

 
| ** **                                                                                                        | ** ** | **As of**                  | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Investments**                                                                                                   | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| Short-term  investments in securities issued by public companies with a weighted average  interest rate of 1.85%. |       | $                          | 62.4       |   | $ | 117.9 |   |
|                                                                                                                   |            |                            |            |  |  |  |  |

 

Short-terminvestments in securities consist of available for sale securities issued bypublic companies.  The Company has a diversifiedportfolio of investments.

 

In 2008, we earnedinterest of $4.1 million, respectively, related to these investments which wererecorded as interest income in the consolidated statement of earnings.  In addition, in 2008, we redeemed $45.2million of these investments.

 

During 2008 we lost $10.3million on these investments.  Weconsidered this loss to be other than temporary, and therefore have recorded itas other expense in the consolidated statement of earnings.

 

During 2007 we invested$380.0 million in investment instruments, some of which were indexed to SCCcommon stock prices while others were leveraged and indexed to certain bondpools.  The entire amount of theseinvestment instruments were liquidated during the course of 2007.  Related to these investments, we realizedlosses of $81.0 million in 2007 which were recorded as loss on derivativeinstruments in the consolidated statement of earnings.  Additionally, we earned interest of $18.7million on these investments in 2007 which were recorded in interest income inthe consolidated statement of earnings.

 

**Impact of New Accounting Standards**

 

In December 2008 the FASB approved FASBStaff Position (FSP) No. FAS 132(R)-1, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits” (FSP No. FAS 

 

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132(R)-1), which provides guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpostretirement plan. This FSP also includes a technical amendment to Statement132(R) that requires a nonpublic entity to disclose net periodic benefitcost for each annual period for which a statement of income is presented.  The disclosures about plan assets required bythis FSP shall be provided for fiscal years ending after December 15,2009.

 

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles.”  This statement identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements that are presented in conformitywith U.S. GAAP.  This statement iseffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, “The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.”  We do not expect any material impact on ourfinancial position and results of operations with the adoption of thisstatement.

 

On March 19, 2008 the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities.”  The new standard is intended to improvefinancial reporting about derivative instruments and hedging activities byrequiring enhanced disclosures to enable investors to better understand theireffects on an entity’s financial position, financial performance and cashflows.  This statement is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  We arecurrently analyzing the effect that this statement will have on our financialposition and results of operations.

 

In December 2007, the FASB publishedSFAS No. 160 “Non Controlling Interests in Consolidated FinancialStatements” — an amendment of ARB No. 51. This statement addresses the reporting of minority interests in theresults of the parent and provides direction for the recording of suchinterests in the financial statements. It also provides guidance for the recording of various transactionsrelated to the minority interests, as well as certain disclosure requirements.

 

SFAS No. 160 will be effective forfiscal years, and interim periods beginning after December 15, 2008,earlier adoption is prohibited and shall be applied prospectively.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.  We have adopted this pronouncement on January 1,2009.

 

The adoption of this statement will causesome changes to our presentation of financial results and our statement ofposition.  However, these changes are notexpected to be of a material nature.

 

In December 2007, the FASB publishedSFAS No. 141-R, which replaces SFAS No. 141, “Business Combinations.”  This statement improves the reporting ofinformation about a business combination and its effects.  This statement establishes principles andrequirements for how the acquirer will recognize and measure the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquisition.  Also, the statementdetermines the recognition and measurement of goodwill acquired in the businesscombination or a gain from a bargain purchase, and finally, determines thedisclosure requirements to enable users of the financial statements to evaluatethe nature and financial effects of the business combination.

 

SFAS No 141-R will be effective for allbusiness combinations with an acquisition date on or after the beginning of thefirst annual reporting period after December 15, 2008, earlier adoption isprohibited.  The Company has adopted thispronouncement on January 1, 2009 to be applied in any future businesscombination.

 

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Item 8. Financial Statements and Supplementary Data

 

Southern CopperCorporation

and Subsidiaries

CONSOLIDATED STATEMENT OF EARNINGS

 
| **For the years ended December 31,**                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands, except for per share amounts)**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                                      |       | $          | 4,850,820  |       | $          | 6,085,672  |       | $ | 5,460,221 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Operating cost  and expenses:                                                                  |       |       |       |       |       |       |       |
| Cost of sales  (exclusive of depreciation, amortization and depletion shown separately  below) |       | 2,182,206  |       | 2,122,163  |       | 2,019,840  |       |
| Selling, general  and administrative                                                           |       | 102,432    |       | 98,047     |       | 88,274     |       |
| Depreciation,  amortization and depletion                                                      |       | 327,302    |       | 327,898    |       | 275,062    |       |
| Exploration                                                                                    |       | 36,990     |       | 40,212     |       | 22,704     |       |
| Total operating  costs and expenses                                                            |       | 2,648,930  |       | 2,588,320  |       | 2,405,880  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Operating income                                                                               |       | 2,201,890  |       | 3,497,352  |       | 3,054,341  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Interest expense                                                                               |       | (105,928   | )          | (123,204   | )          | (113,422   | )          |
| Capitalized  interest                                                                          |       | 6,776      |       | 14,717     |       | 27,951     |       |
| Loss on  derivative instruments                                                                |       | (74,628    | )          | (73,711    | )          | (11,595    | )          |
| Loss on debt  prepayments                                                                      |       | —     |       | (16,572    | )          | (1,137     | )          |
| Other income  (expense)                                                                        |       | 17,272     |       | 30,759     |       | (326       | )          |
| Interest income                                                                                |       | 48,400     |       | 82,519     |       | 50,217     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings before  income taxes and minority interest                                            |       | 2,093,782  |       | 3,411,860  |       | 3,006,029  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Income taxes                                                                                   |       | 679,323    |       | 1,185,261  |       | 959,087    |       |
| Minority  interest                                                                             |       | 7,866      |       | 10,229     |       | 9,302      |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net earnings                                                                                   |       | $          | 1,406,593  |       | $          | 2,216,370  |       | $ | 2,037,640 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Per common share  amounts:                                                                     |       |       |       |       |       |       |       |
| Net earnings —  basic and diluted                                                         |       | $          | 1.60       |       | $          | 2.51       |       | $ | 2.31 |   |
| Dividends paid                                                                                 |       | $          | 1.94       |       | $          | 2.27       |       | $ | 1.71 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Weighted average  shares outstanding — basic and diluted                                  |       | 878,713    |       | 883,392    |       | 883,378    |       |

 

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

 

 

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Southern Copper Corporation

and Subsidiaries

CONSOLIDATED BALANCE SHEET

 
| **At December 31,**                                                                                                     | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                                       |       |       |       |       |       |
| Current assets:                                                                                                              |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                   |       | $          | 716,740    |       | $          | 1,409,272 |   |
| Short-term  investments                                                                                                      |       | 62,376     |       | 117,903    |       |
| Accounts  receivable trade (less allowance for doubtful accounts (2008 - $4,811, and  2007 - $4,585)                         |       | 104,149    |       | 385,611    |       |
| Accounts  receivable other (including affiliates 2008 - $1,925 and 2007 - $1,644)                                            |       | 29,439     |       | 77,167     |       |
| Inventories                                                                                                                  |       | 451,597    |       | 448,283    |       |
| Deferred income  tax — current portion                                                                                  |       | 64,711     |       | 72,303     |       |
| Other current  assets                                                                                                        |       | 124,681    |       | 124,970    |       |
| Total current  assets                                                                                                        |       | 1,553,693  |       | 2,635,509  |       |
|                                                                                                                         |       |       |       |       |       |
| Property, net                                                                                                                |       | 3,803,764  |       | 3,568,311  |       |
| Leachable  material, net                                                                                                     |       | 156,294    |       | 220,243    |       |
| Intangible  assets, net                                                                                                      |       | 114,056    |       | 115,802    |       |
| Deferred income  tax                                                                                                         |       | 83,106     |       | -          |       |
| Other assets                                                                                                                 |       | 53,411     |       | 40,693     |       |
| Total assets                                                                                                                 |       | $          | 5,764,324  |       | $          | 6,580,558 |   |
|                                                                                                                         |       |       |       |       |       |
| LIABILITIES                                                                                                                  |       |       |       |       |       |
| Current  liabilities:                                                                                                        |       |       |       |       |       |
| Current portion  of long-term debt                                                                                           |       | $          | 10,000     |       | $          | 160,000 |   |
| Accounts payable                                                                                                             |       | 413,351    |       | 255,070    |       |
| Accrued income  taxes                                                                                                        |       | 34,378     |       | 132,175    |       |
| Due to  affiliated companies                                                                                                 |       | 8,965      |       | 3,870      |       |
| Accrued workers’  participation                                                                                         |       | 205,466    |       | 313,251    |       |
| Accrued interest                                                                                                             |       | 40,968     |       | 37,325     |       |
| Other accrued  liabilities                                                                                                   |       | 24,335     |       | 25,499     |       |
| Total current  liabilities                                                                                                   |       | 737,463    |       | 927,190    |       |
|                                                                                                                         |       |       |       |       |       |
| Long-term debt                                                                                                               |       | 1,279,972  |       | 1,289,754  |       |
| Deferred income  taxes                                                                                                       |       | 169,342    |       | 219,501    |       |
| Non-current  taxes payable                                                                                                   |       | 70,266     |       | 154,721    |       |
| Other  liabilities and reserves                                                                                              |       | 93,875     |       | 111,442    |       |
| Asset retirement  obligation                                                                                                 |       | 18,007     |       | 13,145     |       |
| Total  non-current liabilities                                                                                               |       | 1,631,462  |       | 1,788,563  |       |
|                                                                                                                         |       |       |       |       |       |
| Commitments and  contingencies (Note 14)                                                                                     |       |       |       |       |       |
|                                                                                                                         |       |       |       |       |       |
| MINORITY  INTEREST                                                                                                           |       | 14,140     |       | 16,685     |       |
|                                                                                                                         |       |       |       |       |       |
| STOCKHOLDERS’  EQUITY                                                                                                   |       |       |       |       |       |
| Common stock par  value $0.01; shares authorized: 2008 and 2007 960,000,000 shares issued: 2008  and 2007 — 884,596,086 |       | 8,846      |       | 8,846      |       |
| Additional  paid-in capital                                                                                                  |       | 993,826    |       | 819,646    |       |
| Retained  earnings                                                                                                           |       | 2,916,517  |       | 3,220,857  |       |
| Accumulated other  comprehensive loss                                                                                        |       | (23,477    | )          | (26,554    | )          |
| Treasury stock,  at cost, common shares                                                                                      |       | (514,453   | )          | (174,675   | )          |
| Total  stockholders’ equity                                                                                             |       | 3,381,259  |       | 3,848,120  |       |
| Total  liabilities, Minority Interest and Stockholders’ equity                                                          |       | $          | 5,764,324  |       | $          | 6,580,558 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

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SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDSTATEMENT OF CASH FLOWS

 
| **For the years ended December 31,**                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |       |       |       |       |       |       |
| OPERATING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Net earnings                                                                           |       | $          | 1,406,593  |       | $          | 2,216,370  |       | $ | 2,037,640 |   |
|                                                                                   |       |       |       |       |       |       |       |
| Adjustments to  reconcile net earnings to net cash provided from operating activities: |       |       |       |       |       |       |       |
| Depreciation,  amortization and depletion                                              |       | 327,302    |       | 327,898    |       | 275,062    |       |
| Capitalized  leachable material                                                        |       | (2,246     | )          | (45,903    | )          | (65,930    | )          |
| Gain (loss) on  currency translation effect                                            |       | (18,063    | )          | 12,052     |       | 5,758      |       |
| Provision  (benefit) for deferred income taxes                                         |       | (100,115   | )          | 66,596     |       | (33,693    | )          |
| (Gain)loss on  sale of property                                                        |       | (29,778    | )          | 780        |       | (1,881     | )          |
| Loss on  short-term investments                                                        |       | 10,339     |       | 81,006     |       | 11,595     |       |
| Unrealized loss  (gain) on derivative investments                                      |       | 56,815     |       | (520       | )          | —     |       |
| Minority  interest                                                                     |       | 7,866      |       | 10,229     |       | 9,302      |       |
| Cash provided  from (used for) operating assets and liabilities:                       |       |       |       |       |       |       |       |
| Accounts  receivable                                                                   |       | 330,163    |       | 66,200     |       | (217,991   | )          |
| Inventories                                                                            |       | (3,314     | )          | (34,632    | )          | (17,807    | )          |
| Accounts payable  and accrued liabilities                                              |       | (164,284   | )          | (150,309   | )          | 80,694     |       |
| Other operating  assets and liabilities                                                |       | (100,684   | )          | 153,689    |       | (23,436    | )          |
| Net cash  provided from operating activities                                           |       | 1,720,594  |       | 2,703,456  |       | 2,059,313  |       |
|                                                                                   |       |       |       |       |       |       |       |
| INVESTING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Capital  expenditures                                                                  |       | (516,654   | )          | (315,741   | )          | (455,818   | )          |
| Purchase of  short-term investments                                                    |       | —     |       | (217,903   | )          | (280,000   | )          |
| Net proceeds on  sale short-term investments                                           |       | 45,188     |       | 287,398    |       | —     |       |
| Sale of property                                                                       |       | 60,613     |       | —     |       | —     |       |
| Other                                                                                  |       | —     |       | 267        |       | 10,532     |       |
| Net cash used  for investing activities                                                |       | (410,853   | )          | (245,979   | )          | (725,286   | )          |
|                                                                                   |       |       |       |       |       |       |       |
| FINANCING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Debt incurred                                                                          |       | —     |       | —     |       | 389,192    |       |
| Debt repaid                                                                            |       | (160,025   | )          | (78,600    | )          | (33,146    | )          |
| Capitalized debt  issuance cost                                                        |       | —     |       | —     |       | (3,150     | )          |
| SCC common  shares buyback                                                             |       | (384,656   | )          | —     |       | —     |       |
| Proceeds from  sale of parent company shares                                           |       | 216,438    |       | —     |       | —     |       |
| Dividends paid  to common stockholders                                                 |       | (1,710,813 | )          | (2,002,312 | )          | (1,509,099 | )          |
| Distributions to  minority interest                                                    |       | (10,211    | )          | (7,211     | )          | (8,282     | )          |
| Other                                                                                  |       | 1,231      |       | (224       | )          | 185        |       |
| Net cash used  for financing activities                                                |       | (2,048,036 | )          | (2,088,347 | )          | (1,164,300 | )          |
|                                                                                   |       |       |       |       |       |       |       |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | 45,763     |       | 17,364     |       | (22,952    | )          |
|                                                                                   |       |       |       |       |       |       |       |
| (Decrease)  increase in cash and cash equivalents                                      |       | (692,532   | )          | 386,494    |       | 146,775    |       |
| Cash and cash  equivalents, at beginning of year                                       |       | 1,409,272  |       | 1,022,778  |       | 876,003    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Cash and cash  equivalents, at end of year                                             |       | $          | 716,740    |       | $          | 1,409,272  |       | $ | 1,022,778 |   |
| Supplemental  disclosure of cash flow information:                                     |       |       |       |       |       |       |       |
| Cash paid during  the year for:                                                        |       |       |       |       |       |       |       |
| Interest                                                                               |       | $          | 129,459    |       | $          | 130,633    |       | $ | 116,052 |   |
| Income taxes                                                                           |       | $          | 922,019    |       | $          | 1,057,931  |       | $ | 1,031,511 |   |
| Workers’  participation                                                           |       | $          | 305,216    |       | $          | 301,056    |       | $ | 173,296 |   |
| Supplemental  schedule of non-cash operating, investing and financing activities:      |       |       |       |       |       |       |       |
| Accounts  receivable from affiliate offset by accounts payable                         |       | $          | —     |       | $          | —     |       | $ | 3,520 |   |
| (Increase)  decrease in pension and other post-retirement benefits                     |       | $          | 3,050      |       | $          | (3,266     | )          | $ | 1,160 |   |
| Impact of FASB  158 adoption                                                           |       | $          | —     |       | $          | —     |       | $ | 16,527 |   |
|                                                                                   |       |       |       |       |       |       |       |
| Non cash  transactions (1):                                                            |       |       |       |       |       |       |       |
| Common stock  split:                                                                   |       |       |       |       |       |       |       |
| Increase in  common stock                                                              |       | $          | 5,897      |       | $          | —     |       | $ | 1,472 |   |
| Decrease in  additional paid-in capital                                                |       | $          | 5,897      |       | $          | —     |       | $ | 1,472 |   |

----

(1) 2006 initialbalance where retrospectively adjusted to reflect the stock splits.

 

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

 

 

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SouthernCopper Corporation

and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’EQUITY

 
| **For years ended December 31,**                                                                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                       |       |       |       |       |       |       |       |
| CAPITAL STOCK:                                                                                                                             |       |       |       |       |       |       |       |
| Balance at  beginning of year (1):                                                                                                         |       | $          | 8,846      |       | $          | 8,846      |       | $ | 8,846 |   |
| Net movement of  the period                                                                                                                |       | —     |       | —     |       | —     |       |
| Balance at end  of year                                                                                                                    |       | 8,846      |       | 8,846      |       | 8,846      |       |
|                                                                                                                                       |       |       |       |       |       |       |       |
| ADDITIONAL  PAID-IN CAPITAL (1):                                                                                                           |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                              |       | 819,646    |       | 766,796    |       | 766,796    |       |
| Gain on sale of  parent company shares                                                                                                     |       | 144,091    |       | —     |       | —     |       |
| Net movement of  the period                                                                                                                |       | 30,089     |       | 52,850     |       | —     |       |
| Balance at end  of year                                                                                                                    |       | 993,826    |       | 819,646    |       | 766,796    |       |
|                                                                                                                                       |       |       |       |       |       |       |       |
| TREASURY STOCK:                                                                                                                            |       |       |       |       |       |       |       |
| Southern Copper  common shares                                                                                                             |       |       |       |       |       |       |       |
| Balance at  beginning of the year                                                                                                          |       | (4,360     | )          | (4,409     | )          | (4,466     | )          |
| Share  repurchased program                                                                                                                 |       | (384,656   | )          |       |       |       |       |
| Used for  corporate purposes                                                                                                               |       | 48         |       | 49         |       | 57         |       |
| Balance at end  of period                                                                                                                  |       | (388,968   | )          | (4,360     | )          | (4,409     | )          |
|                                                                                                                                       |       |       |       |       |       |       |       |
| Parent Company  common shares                                                                                                              |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                              |       | (170,315   | )          | (92,603    | )          | (80,368    | )          |
| Sale of shares                                                                                                                             |       | 72,339     |       | —     |       | —     |       |
| Other activity,  including dividends, interest and currency translation effect                                                             |       | (27,509    | )          | (77,712    | )          | (12,235    | )          |
| Balance at end  of year                                                                                                                    |       | (125,485   | )          | (170,315   | )          | (92,603    | )          |
|                                                                                                                                       |       |       |       |       |       |       |       |
| Treasury stock  balance at end of year                                                                                                     |       | (514,453   | )          | (174,675   | )          | (97,012    | )          |
|                                                                                                                                       |       |       |       |       |       |       |       |
| RETAINED  EARNINGS:                                                                                                                        |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                              |       | 3,220,857  |       | 3,010,307  |       | 2,648,359  |       |
| Net earnings                                                                                                                               |       | 1,406,473  |       | 2,216,370  |       | 2,037,640  |       |
| Net effect of  change in accounting for mine stripping cost, net of income tax                                                             |       | —     |       | —     |       | (166,593   | )          |
| Cumulative  effect of FIN No. 48 adoption                                                                                             |       | —     |       | (3,508     | )          |       |       |
| Dividends paid,  common stock, per share, 2008 - $1.94, 2007 — $2.27, 2006 - $1.71                                                    |       | (1,710,813 | )          | (2,002,312 | )          | (1,509,099 | )          |
| Balance at end  of year                                                                                                                    |       | 2,916,517  |       | 3,220,857  |       | 3,010,307  |       |
|                                                                                                                                       |       |       |       |       |       |       |       |
| ACCUMULATED  OTHER COMPREHENSIVE LOSS:                                                                                                     |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                              |       | (26,554    | )          | (22,332    | )          | (13,090    | )          |
| (Increase)  decrease in pension and other post-retirement benefits                                                                         |       | 3,050      |       | (3,266     | )          | 1,160      |       |
| Net effect of  the adoption of change in accounting for pensions and post retirement benefit  obligations, net of income tax (SFAS No 158) |       | —     |       | —     |       | (16,527    | )          |
| Unrealized gain  on equity securities                                                                                                      |       | 27         |       | (956       | )          | 6,125      |       |
| Balance at end  of year                                                                                                                    |       | (23,477    | )          | (26,554    | )          | (22,332    | )          |
|                                                                                                                                       |       |       |       |       |       |       |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                                           |       | $          | 3,381,259  |       | $          | 3,848,120  |       | $ | 3,666,605 |   |

----

(1) Initialbalance was retrospectively adjusted to reflect the stock split made in 2008.

 

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| ** **                                                               | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|--------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| RETAINED  EARNINGS:                                                      |       |      |       |      |       |      |       |
| Unappropriated                                                           |       | $         | 531,294    |      | $          | 1,128,407 |       | $ | 3,010,307 |   |
| Appropriated                                                             |       | 2,385,223 |       | 2,092,450 |       | —    |       |
| Total retained  earnings                                                 |       | $         | 2,916,517  |      | $          | 3,220,857 |       | $ | 3,010,307 |   |
|                                                                     |       |      |       |      |       |      |       |
| COMPREHENSIVE  INCOME:                                                   |       |      |       |      |       |      |       |
| Net earnings                                                             |       | $         | 1,406,593  |      | $          | 2,216,370 |       | $ | 2,037,640 |   |
| Pension and post  retirement benefits amounts recognized in net earnings |       | —    |       | 1,500     |       | —    |       |
| Other  comprehensive income (loss)                                       |       | 3,077     |       | (4,222    | )          | (9,242    | )          |
| Total  comprehensive income                                              |       | $         | 1,409,670  |      | $          | 2,213,648 |       | $ | 2,028,398 |   |

 

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

 

 

 

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SOUTHERN COPPER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The consolidated financial statements presented herein consist of theaccounts of Southern Copper Corporation (“SCC”) and its subsidiaries.  The Company is an integrated producer ofcopper and other minerals, and operates mining, smelting and refiningfacilities in Peru and Mexico.  The Companyconducts its primary operations in Peru through a registered branch (the “Branch”).  The Branch is not a corporation separate fromthe Company.  The Company’s Mexicanoperations are conducted through subsidiaries.

 

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

 

*Principlesof consolidation—*

 

Theconsolidated financial statements include the accounts of subsidiaries of whichthe Company has voting control, in accordance with SFAS No. 94 “Consolidationof All Majority-Owned Subsidiaries.” Such financial statements are prepared in accordance with accountingprinciples generally accepted in the United States (“U.S. GAAP”).

 

*Use ofestimates—*

 

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; estimates of recoverable copper in mill and leachstockpiles; asset impairments (including estimates of future cash flows); baddebts; inventory obsolescence; deferred and current income tax; valuationallowances for deferred tax assets; reserves for contingencies and litigation;and fair value of financial instruments. Management bases its estimates on the Company’s historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results coulddiffer from those estimates.

 

*Revenuerecognition—*

 

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, customercontracts allow for pricing based on a month subsequent to shipping,  generally ranging between one and six monthssubsequent to shipment.  In such cases,revenue is recorded at a provisional price at the time of shipment.  The provisionally priced copper sales are 

 

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adjustedto reflect forward LME or COMEX copper prices at the end of each month until afinal adjustment is made to the price of the shipments upon settlement withcustomers pursuant to the terms of the contract.  In the case of molybdenum sales, for whichthere are no published forward prices, the provisionally priced sales areadjusted to reflect the market prices at the end of each month until a finaladjustment is made to the price of the shipments upon settlement with customerspursuant 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 forDerivative Instruments and Hedging Activities”, as amended (“SFAS 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.  See note 20 “Segment information and relatedinformation”.

 

*Shippingand 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).

 

*Cashand 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 approximates fair value.

 

*Short-terminvestments—*

 

The Company accounts forshort-term investments in accordance with SFAS No. 115, Accounting for CertainInvestments in Debt and Equity Securities. The Company determines the appropriate classification of all short-terminvestments as held-to-maturity, available-for-sale or trading at the time ofpurchase and re-evaluates such classifications as of each balance sheetdate.  Unrealized gains and losses onavailable-for-sale investments, net of taxes, are reported as a component ofaccumulated other comprehensive income (loss) in stockholders’ equity, unlesssuch loss is deemed to be of a permanent nature.  At the end of 2008, the Company does not holdany held-to-maturity or trading investments.

 

*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.

 

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 results in the production of copper andmolybdenum concentrates. Molybdenum in-process inventory includes the cost ofmolybdenum concentrates and the costs incurred to convert those concentratesinto various high-purity molybdenum chemicals or metallurgical products.

 

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

 

*Minedevelopment —*

 

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.

 

Thereis a diversity of practices in the mining industry in the treatment of drillingand other related costs to delineate new ore reserves.  The Company follows the practices delineatedin the next two paragraphs in its treatment of drilling and related costs.

 

Drillingand other associated costs incurred in the Company’s efforts to delineate newresources, whether near-mine or Greenfield are expensed as incurred.  These costs are classified as mineralexploration costs.  Once the Companydetermines through feasibility studies that proven and probable reserves existand that the drilling and other associated costs embody a probable futurebenefit that involves a capacity, singly or in combination with other assets,to contribute directly or indirectly to future net cash inflow, then the costsare classified as mine development costs. These mine development costs incurred prospectively to develop theproperty are capitalized as incurred, until the commencement of production, andare amortized using the units of production method over estimated life of theore body.  During the production stage,drilling and other related costs incurred to maintain production are includedin production cost in the period in which they are incurred.

 

Drillingand other related costs incurred in the Company’s efforts to delineate a majorexpansion of reserves at an existing production property are expensed asincurred.  Once the Company determines throughfeasibility studies that proven and probable incremental reserves exist andthat the drilling and other associated costs embody a probable future benefitthat involves a capacity, singly or in combination with other assets, tocontribute directly or indirectly to future net cash inflow, then the costs areclassified as mine development costs. These incremental mine development costs are capitalized as incurred,until the commencement of production and amortized using the units ofproduction method over the estimated life of the ore body.  A major expansion of reserves is one thatincreases total reserves at a property by approximately 10%.

 

Forthe years ended December 31, 2008, 2007 and 2006 the Company did notcapitalize any drilling and related costs. The net balance of capitalized mine development costs at 

 

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December 31,2008 and 2007 were $46.4 million and $48.7 million, respectively.

 

*Assetretirement obligations (reclamation and remediation costs)—*

 

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.

 

*Intangibleassets—*

 

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.

 

*Debtissuance costs—*

 

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

 

*Orereserves—*

 

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, combinedwith assumptions 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.  The current price per pound of copper, asdefined, was $3.15, $2.66 and $2.02 at the end of 2008, 2007 and 2006,respectively.  The ore reserve estimatesare used to determine the amortization of mine development and intangibleassets.

 

*Leachablematerial—*

 

Atone of its mines the Company capitalizes the cost of materials with low coppercontent extracted during the mining process (leachable material), which is collectedin areas known as leaching dumps.  Theamortization of the capitalized costs is determined based on the depletionperiod of the leaching dumps, which is estimated to be five years.

 

*Exploration—*

 

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

 

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*Incometaxes—*

 

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 SFAS No. 109, “Accountingfor Income Taxes” (“SFAS 109”).  Aschanges in tax laws or rates are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes.  Deferred income tax assets are reduced by anybenefits that, in the opinion of management, are more likely not to berealized.

 

TheCompany classifies income tax-related interest and penalties as income taxes inthe financial statements.

 

Inpreparing SCC’s financial statements, the Company recognizes income taxes ineach of the jurisdictions in which it operates. For each jurisdiction, the Company estimates the actual amount ofcurrently payable 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.

 

Avaluation allowance is provided for those deferred tax assets for which it ismore likely than not that the related benefits will not be realized.  In determining the amount of the valuationallowance, the Company considers estimated future taxable income as well asfeasible tax planning strategies in each jurisdiction.  If the Company determines that it will notrealize all or a portion of its deferred tax assets, the Company will increaseits valuation allowance with a charge to income tax expense.  Conversely, if the Company determines that itwill ultimately 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.

 

OurCompany’s operations involve dealing with uncertainties and judgments in theapplication of complex tax regulations in multiple jurisdictions.  The final taxes paid are dependent upon manyfactors, including negotiations with taxing authorities in variousjurisdictions and resolution of disputes arising from federal, state, andinternational tax audits.  We recognizepotential liabilities and record tax liabilities for anticipated tax auditissues in the U.S. and other tax jurisdictions based on our estimate ofwhether, and the extent to which, additional taxes will be due. As of January 1,2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes,” (“FIN 48”), an interpretation of SFAS No. 109 guidanceto record these liabilities (See Note 8 “Income taxes” of the consolidatedfinancial statements for additional information).  We adjust these reserves in light of changingfacts and circumstances; however, due to the complexity of some of theseuncertainties, the ultimate resolution may result in a payment that ismaterially different from the Company’s current estimate of the taxliabilities.  If our estimate of taxliabilities proves to be less than the ultimate assessment, an additionalcharge to expense would result.  If paymentof these amounts ultimately proves to be less than the recorded amounts, thereversal of the liabilities would result in tax benefits being recognized inthe period when we determine the liabilities are no longer necessary.  We recognize interest and penalties, if any,related to unrecognized tax benefits in income tax 

 

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expense.

 

*Foreignexchange—*

 

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

 

Foreigncurrency assets and liabilities are remeasured into U.S. dollars at current exchangerates except for non-monetary items such as inventory, property, intangibleassets and other assets which are remeasured at historical exchange rates.  Revenues and expenses are generallytranslated at actual exchange rates in effect during the period, except forthose items related to balance sheet amounts that are remeasured at historicalexchange rates.  Gains and losses fromforeign currency remeasurement are included in earnings of the period.

 

Gainsand (losses) resulting from foreign currency transactions are included in “Costof sales (exclusive of depreciation, amortization and depletion).”

 

*Derivativeinstruments—*

 

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.  Gains andlosses related to copper and zinc hedges are included in net sales, gain andlosses related to power costs are included in cost of sales, all other gainsand losses on derivative contracts are included in “Gain (loss) on derivativecontracts” in the consolidated statement of earnings.

 

*Asset impairments—*

 

TheCompany evaluates long-term assets when events or changes in economiccircumstances indicate that the carrying amount of such assets may not berecoverable.  These evaluations are basedon business plans that are prepared using a time horizon that is reflective ofthe Company’s expectations of metal prices over its business cycle.  The Company is currently using a long-termaverage copper price of $1.50 per pound of copper and an average molybdenum priceof $10.00 per pound, along with near-term price forecast, for 2009 through2011, reflective of the current price environment, for impairment tests.  The Company uses an estimate of the futureundiscounted net cash flows of the related asset or asset group over theremaining life to measure whether the assets are recoverable and measure anyimpairment by reference to fair value.  Due to the illegal work stoppage theCompany has performed an impairment analysis on the assets at the Cananeamine.  The Company continues to provideperiodic maintenance to the assets and expects to begin operations at this minein the near future.  The Companydetermined through its impairment analysis that no impairment exists as of December 31,2008.  Should estimates of future copper and molybdenum prices decreasesignificantly, impairments could result.

 

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*Othercomprehensive income—*

 

Comprehensiveincome represents changes in equity during a period, except those resultingfrom investments by owners and distributions to owners.  During the fiscal years ended December 31,2008, 2007 and 2006, the components of “other comprehensive income (loss)” werethe additional minimum liability for employee benefit obligations andunrealized gain on equity securities and the adjustment necessary to adopt SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans.”

 

*Businesssegments—*

 

Companymanagement views Southern Copper as having three operating segments and manageson the basis of these segments.  Thesegments identified by the Company are: 1) Peruvian operations, which includethe two open pit copper mines in Peru and the plants and services supportingsuch mines.  2) The Mexican open pitcopper mines, which include La Caridad and Cananea mine complexes and theirsupporting facilities.  3) The Mexicanunderground mining operations, which include five underground mines thatproduce zinc, copper, silver and gold, a coal mine and several industrialprocessing facilities.

 

TheChief Operating Officer of the Company focuses on operating income as measureof performance to evaluate different segments, and to make decisions toallocate resources to the reported segments.

 

*Adoptionof new accounting principle—*

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS No. 159”).  SFASNo. 159 permits companies, at their election, to measure specifiedfinancial instruments and warranty and insurance contracts at fair value on acontract-by-contract basis, with changes in fair value recognized in earningseach reporting period.  The election,called the “fair value option,” will enable some companies to reduce thevolatility in reported earnings caused by measuring related assets andliabilities differently, and it is easier than using the complex hedge-accountingrequirements in SFAS No. 133, to achieve similar results.  Subsequent changes in fair value fordesignated items will be required to be reported in earnings in the currentperiod.  SFAS No. 159 is effectivefor financial statements issued for fiscal years beginning after November 15,2007 and therefore became effective for the Company as of January 1,2008.  The Company has not elected tomeasure any eligible items at fair value. Accordingly, the adoption of SFAS No. 159 has not impacted theCompany’s results of operations and financial position.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements;rather, it applies under other accounting pronouncements that require or permitfair value measurements.  The provisionsof SFAS No. 157 are to be applied prospectively as of the beginning of thefiscal year in which it is initially applied, with any transition adjustmentrecognized as a cumulative-effect adjustment to the opening balance of retainedearnings.

 

SFAS No. 157establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (Level 1 measurements) andthe lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchyunder SFAS No. 157 are described below:

 

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Level 1 - Unadjustedquoted prices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities;

 

Level 2 - Inputs that areobservable, either directly or indirectly, but do not qualify as Level 1inputs. (i.e., quoted prices for similar assets or liabilities)

 

Level 3 - Prices orvaluation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (i.e., supported by little or no marketactivity).

 

The provisions of SFAS No. 157were adopted by the Company on January 1, 2008 and do not have any effecton its overall financial position or results of operations.  All fair value adjustments at December 31,2008 represent assets or liabilities measured at fair value on a recurringbasis.  Fair values as of December 31,2008 were calculated as follows (in millions of US dollars):

 
| ** **                   | ** ** | **Balance at  December 31, 2008** | ** ** | **Quoted prices in  active markets  for identical  assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** |
|------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | ** **                             | ** ** | **(Level 1)**                                               | ** ** | **(Level 2)**                              | ** ** | **(Level 3)**                         | ** ** |
| Short-term  investments      |       | $                                      | 62.4       |                                                        | —     |                                       | $          | 51.4                                  |       | $ | 11.0 |   |
| Derivative  instruments      |       | (56.8                                  | )          | —                                                      |       |                                       | (56.8      | )                                     | —     |   |
| Pension plans                |       | 39.5                                   |       | 26.6                                                        |       | 12.9                                       |       | —                                |       |
| Long term debt  (*)          |       | (1,038.6                               | )          | (994.9                                                      | )          | —                                     |       | (43.7                                 | )          |
| Provisionally  priced sales: |       |                                   |       |                                                        |       |                                       |       |                                  |       |
| Copper                       |       | (44.2                                  | )          | (44.2                                                       | )          | —                                     |       | —                                |       |
| Molybdenum                   |       | (53.1                                  | )          | (53.1                                                       | )          | —                                     |       | —                                |       |
| Total                        |       | $                                      | (1,090.8   | )                                                           | $          | (1,065.6                                   | )          | $                                     | 7.5        |   | $ | (32.7 | ) |
|                              |            |                                        |            |                                                             |            |                                            |            |                                       |            |  |  |  |  |

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(*)         Long term debt is carried at amortized cost and itscarrying value as of December 31, 2008 is $1,306.4 million. The $1,038.6 millionrepresents the estimated fair value of the debt. See Note 17 “FinancialInstruments” for SFAS 107 fair value disclosures.

 

The Company’s short-terminvestments are classified as Level 2 because they are valued using quotedprices for similar investments.  TheCompany classifies investments within Level 3 of the valuation hierarchy incertain cases where there is limited activity or less observable inputs to thevaluation.  Investments classified withinLevel 3 include corporate bonds, asset backed obligations, and mortgage-backedsecurities.

 

Derivatives are valuedusing internal models that use as their basis readily observable market inputs,such as time value, forward interest rates, volatility factors, and current andforward market prices for foreign exchange rates.  The Company generally classifies theseinstruments within Level 2 of the valuation hierarchy.  Such derivatives include foreign currency,copper and zinc derivatives.

 

The fair value of theplan assets is valued using quoted market prices; such value is classifiedwithin Level 1 of the fair value hierarchy.

 

Fair value for long termdebt is based on quoted market prices classified as Level 1 in the fair value hierarchy.  The Mitsui loan is based on the present valueof the cash flow discounted at 9% which is the Company’s weighted average costof capital, this fair value is classified as Level 3 in the fair valuehierarchy.

 

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The Company’s accountsreceivables associated with provisionally priced sales of copper are valuedusing quoted market prices based on the forward price in the London MetalExchange (LME) or on the Commodities Exchange (COMEX) in New York.  Such value is classified within Level 1 ofthe fair value hierarchy.  Molybdenumprices are established by reference to the publication Platt’s Metals Week andare considered Level 1 in the fair value hierarchy.

 

The table below setsforth a summary of changes in the fair value of the Company’s Level 3short-term investments (corporate bond, asset backed obligations, and mortgagebacked securities) and the long term debt (Mitsui loan) for the year ended on December 31,2008.

 

| Balance at  beginning of period                   |   | $    | (38.3  | ) |
|---------------------------------------------------|--------|------|--------|---|
| Unrealized  losses                                |   | (5.5 | )      |
| Purchases,  sales, issuance and settlements (net) |   | 5.3  |   |
| Transfers in/out  of Level 3                      |   | 5.8  |   |
| Balance at end  of period                         |   | $    | (32.7  | ) |
|                                                   |        |      |        |   |  |

 

The total amount ofunrealized losses for the period was included in Interest Expense in theconsolidated statement of earnings for December 31, 2008.

 

In February 2008 theFinancial Accounting Standards Board (FASB) approved FASB Staff Position (FSP) No. FAS157-2, “Effective Date of FASB Statement No. 157” (FSP No. FAS157-2), that permits companies to partially defer the effective date of SFAS No. 157for one year for nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis.  FSP No. FAS157-2 does not permit companies to defer recognition and disclosurerequirements for financial assets and financial liabilities or for nonfinancialassets and nonfinancial liabilities that are remeasured at least annually.  In accordance with the provisions of FSP No. FAS157-2, the Company has decided to defer the adoption of SFAS No. 157 forone year for nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis.

 

*Newaccounting pronouncements—*

 

InDecember 2008 the FASB approved FASB Staff Position (FSP) No. FAS132(R)-1, “Employers’ Disclosures about Pensions and Other PostretirementBenefits” (FSP No. FAS 132(R)-1), which provides guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  This FSP alsoincludes a technical amendment to Statement 132(R) that requires anonpublic entity to disclose net periodic benefit cost for each annual periodfor which a statement of income is presented. The disclosures about plan assets required by this FSP shall be providedfor fiscal years ending after December 15, 2009.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles.”  Thisstatement identifies the sources of accounting principles and the framework forselecting the principles to be used in the preparation of financial statementsthat are presented in conformity with U.S. GAAP.  This statement is effective 60 days followingthe SEC’s approval of the Public Company Accounting Oversight Board amendmentsto AU Section 411, “The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.” The Company does not expect any material impact on its financialposition and results of operations with the 

 

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adoptionof this statement.

 

OnMarch 19, 2008 the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting aboutderivative instruments and hedging activities by requiring enhanced disclosuresto enable investors to better understand their effects on an entity’s financialposition, financial performance and cash flows. This statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008.  The Company is currently analyzing the effectthat this statement will have on its financial position and results ofoperations.

 

InDecember 2007, the FASB published SFAS No. 160 “Non Controlling Interestsin Consolidated Financial Statements” — an amendment of ARB No. 51.  This statement addresses the reporting ofminority interests in the results of the parent and provides direction for therecording of such interests in the financial statements.  It also provides guidance for the recordingof various transactions related to the minority interests, as well as certaindisclosure requirements.

 

SFASNo. 160 will be effective for fiscal years, and interim periods beginningafter December 15, 2008, earlier adoption is prohibited and shall beapplied prospectively.  The presentationand disclosure requirements shall be applied retrospectively for all periodspresented.  The Company has adopted thispronouncement on January 1, 2009.

 

Theadoption of this statement will cause some changes to our Company’spresentation of financial results and our statement of position.  However, these changes are not expected to beof a material nature.

 

InDecember 2007, the FASB published SFAS No. 141-R, which replaces SFASNo. 141, “Business Combinations.” This statement improves the reporting of information about a businesscombination and its effects.  Thisstatement establishes principles and requirements for how the acquirer willrecognize and measure the identifiable assets acquired, the liabilitiesassumed, and any non-controlling interest in the acquisition.  Also, the statement determines therecognition and measurement of goodwill acquired in the business combination ora gain from a bargain purchase, and finally, determines the disclosurerequirements to enable users of the financial statements to evaluate the natureand financial effects of the business combination.

 

SFASNo 141-R will be effective for all business combinations with an acquisitiondate on or after the beginning of the first annual reporting period after December 15,2008, earlier adoption is prohibited. The Company has adopted this pronouncement on January 1, 2009 to beapplied in any future business combination.

 

**NOTE 3- SHORT-TERM INVESTMENTS**

 

Thebalance of short-term investments was as follows (in millions):

 
| ** **                                                                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Investments**                                                                                                   | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Short-term  investments in securities issued by public companies with a weighted average  interest rate of 1.85%. |       | $                           | 62.4       |   | $ | 117.9 |   |
|                                                                                                                   |            |                             |            |  |  |  |  |

 

Short-terminvestments in securities consist of available for sale securities issued bypublic companies.  The Company has a diversifiedportfolio of investments.

 

In 2008, the Companyearned interest of $4.1 million related to these investments which 

 

 

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were recorded as interestincome in the consolidated statement of earnings.  In addition, in 2008, the Company redeemed$45.2 million of these investments.

 

During 2008 the Companylost $10.3 million on these investments. The Company’s management consideredthis loss to be other than temporary, and therefore has recorded it as otherexpense in the consolidated statement of earnings.

 

During 2007 the Companyinvested $380.0 million in short-term investment instruments, some of whichwere indexed to SCC common stock prices while others were leveraged and indexedto certain bond pools.  Related to theseinvestments, the Company realized losses of $81.0 million in 2007 which wererecorded as loss on derivative instruments in the consolidated statement ofearnings.  Additionally, the Companyearned interest of $18.7 million on these investments in 2007 which wererecorded in interest income in the consolidated statement of earnings.  The entire amount of these investmentinstruments were liquidated during the course of 2007.

 

**NOTE4-INVENTORIES:**

 
| ** **         | ** ** | **As of December 31,** | ** ** |
|--------------------|------------|-----------------------------|------------|
| **(in millions)**  | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Metals:            |       |                        |       |   |   |
| Finished goods     |       | $                           | 46.7       |   | $ | 65.7 |   |
| Work-in-process    |       | 135.8                       |       | 140.7 |   |
| Supplies           |       | 269.1                       |       | 241.9 |   |
| Total  inventories |       | $                           | 451.6      |   | $ | 448.3 |   |

 

**NOTE 5-PROPERTY:**

 
| ** **                                            | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                     | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Buildings and  equipment                              |       | $                           | 6,292.9    |   | $ | 6,126.9 |   |
| Construction in  progress                             |       | 634.5                       |       | 309.8 |   |
| Mine development                                      |       | 267.8                       |       | 263.2 |   |
| Land, other than  mineral                             |       | 48.2                        |       | 74.2 |   |
| Total property                                        |       | 7,243.4                     |       | $ | 6,774.1 |   |
| Accumulated  depreciation, amortization and depletion |       | (3,439.6                    | )          | (3,205.8 | ) |
| Total property,  net                                  |       | $                           | 3,803.8    |   | $ | 3,568.3 |   |

 

Depreciation and depletion expense for the years ended December 31,2008, 2007 and 2006 amounted to $257.9 million, $263.8 million and $221.9million, respectively.

 

**NOTE 6-CAPITALIZED LEACHABLE MATERIAL COST:**

 
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                    | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Capitalized  leachable material      |       | $                           | 378.1      |   | $ | 374.4 |   |
| Accumulated  amortization            |       | (221.8                      | )          | (154.1 | ) |
| Capitalized  leachable material, net |       | $                           | 156.3      |   | $ | 220.3 |   |

 

Amortization of leachable material is included in “Depreciation,amortization and depletion” and amounted to $67.7 million, $61.8 million and$50.4 million in 2008, 2007 and 2006, respectively.

 

 

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The Company’s policy of deferring leachable material cost increased(decreased) operating costs by $57.6 million, $10.1 million and $(19.3) millionin 2008, 2007, and 2006, respectively, as compared to what such amounts wouldhave been if the Company expensed leachable material costs as incurred.

 

**NOTE 7-INTANGIBLE ASSETS:**

** **
| ** **                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                         | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Mining  concessions                       |       | $                           | 121.2      |   | $ | 121.2 |   |
| Mine engineering  and development studies |       | 6.0                         |       | 6.0 |   |
|                                      |       | 127.2                       |       | 127.2 |   |
| Accumulated  amortization                 |       | (30.1                       | )          | (28.4 | ) |
|                                      |       |                        |       |   |   |
| Goodwill                                  |       | 17.0                        |       | 17.0 |   |
| Intangible  assets, net                   |       | $                           | 114.1      |   | $ | 115.8 |   |

 

Amortization of intangibles was $1.7 million, $2.3 million and $2.7million for the years ended December 31, 2008, 2007 and 2006,respectively.  The estimated aggregateamortization expense for intangibles is $10.7 million for the years 2009through 2013, approximately $2.1 million per year.

 

The goodwill of $17.0 million was generated in 1997 as result ofpurchasing the remaining participation of the Cananea mine.

 

**NOTE 8-INCOME TAXES:**

 

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

 
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **(in millions)**                 | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S. federal and  state:          |       |                             |       |   |   |   |   |
| Current                           |       | $                                | (29.9      | ) | $ | 79.8 |   | $ | (4.0 | ) |
| Deferred                          |       | (15.1                            | )          | (48.3 | ) | 22.8 |   |
|                              |       | (45.0                            | )          | 31.5 |   | 18.8 |   |
| Foreign (Peru  and Mexico):       |       |                             |       |   |   |   |   |
| Current                           |       | 809.3                            |       | 1,038.8 |   | 996.7 |   |
| Deferred                          |       | (85.0                            | )          | 115.1 |   | (56.4 | ) |
|                              |       | 724.3                            |       | 1,153.9 |   | 940.3 |   |
| Total provision  for income taxes |       | $                                | 679.3      |   | $ | 1,185.4 |   | $ | 959.1 |   |

 

The source of income tax is as follows:

 
| ** **                                             | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                      | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Earnings by  location:                                 |       |                                      |       |   |   |   |   |
| U.S.                                                   |       | $                                         | 1.2        |   | $ | 13.5 |   | $ | 12.1 |   |
| Foreign (Peru  and Mexico)                             |       | 2,092.6                                   |       | 3,398.4 |   | 2,993.9 |   |
| Earnings before  taxes on income and minority interest |       | $                                         | 2,093.8    |   | $ | 3,411.9 |   | $ | 3,006.0 |   |

 

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

 

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| ** **                                                                    | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected tax                                                                  |       | 30.0                                      | %          | 30.0 | % | 30.0 | % |
| Effect of income  taxed at a rate other than the statutory rate               |       | 7.0                                       |       | 5.8 |   | 0.4 |   |
| Depletion                                                                     |       | (5.1                                      | )          | (3.7 | ) | — |   |
| Permanent  differences                                                        |       | 1.3                                       |       | 1.0 |   | 1.8 |   |
| Effect of tax  rate change in Mexico                                          |       | —                                    |       | — |   | (0.1 | ) |
| Peru tax on net  income deemed distributed                                    |       | 2.0                                       |       | 1.4 |   | 1.4 |   |
| Increase  (decrease) in valuation allowance                                   |       | 0.1                                       |       | — |   | (2.7 | ) |
| Adjustment to  deferred taxes                                                 |       | —                                    |       | — |   | 2.9 |   |
| Increase  (decrease) in unrecognized tax benefits for uncertain tax positions |       | (3.8                                      | )          | 0.4 |   | — |   |
| Other                                                                         |       | 1.0                                       |       | (0.1 | ) | (1.8 | ) |
| Effective income  tax rate                                                    |       | 32.5                                      | %          | 34.8 | % | 31.9 | % |

 

The Company files income tax returns in three jurisdictions, Peru,Mexico and the United States, each of which has a different statutory rate for2008.  For the three years presentedabove the statutory income tax rate for Peru was 30% and for the United Statesthe rate was 35%.  For Mexico thestatutory rates were 28%, 28% and 29% for the years 2008, 2007 and 2006,respectively.  The expected rate usedabove is the statutory tax rate for Peru.

 

The Company has chosen to use the Peruvian income tax rate of 30% forthis tax rate reconciliation because the Peruvian income tax provision is thelargest component of tax expense for each of the three years presented.  For all of the years presented, both SCC andMinera Mexico filed separate tax returns in their respective taxjurisdictions.  Although the tax rules andregulations imposed in the separate tax jurisdictions may vary significantly,similar permanent items exist, such as items which are nondeductible ornontaxable.  Some permanent differencesrelate specifically to SCC such as the allowance in the U.S for percentagedepletion.

 

A special in depth analysis of Peruvian and U.S. deferred taxesresulted in the above “Adjustment to deferred taxes” in 2006.  The impact of the change in the valuationallowance reflects the change in valuation allowances for the combinedcompanies.  See the “Out of periodadjustment” discussion in this note for further details regarding these twoadjustments.

 

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

 
| ** **                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                         | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Assets:                                   |       |                        |       |   |   |
| Inventories                               |       | $                           | 0.4        |   | $ | 14.3 |   |
| Capitalized  exploration expenses         |       | 11.6                        |       | 11.7 |   |
| Foreign tax  credit carryforward          |       | 52.8                        |       | 2.9 |   |
| AMT credit  carryforward                  |       | —                      |       | 27.6 |   |
| Unrealized loss  on short-term investment |       | 2.2                         |       | 9.9 |   |
| Capital loss  carryforward                |       | 28.6                        |       | — |   |
| Reserves                                  |       | 81.9                        |       | 79.2 |   |
| Tax loss  carryforward                    |       | 25.3                        |       | 34.2 |   |
| Valuation  allowance                      |       | (28.6                       | )          | (34.1 | ) |
| Other                                     |       | 18.5                        |       | 26.7 |   |
| Total deferred  tax assets                |       | 192.7                       |       | 172.4 |   |
|                                           |            |                             |            |  |  |  |  |

 

 

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| Liabilities:                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| Property, plant  and equipment                 |       | (156.7     | )          | (221.1     | )          |
| Deferred charges                               |       | (51.0      | )          | (83.9      | )          |
| Other                                          |       | (6.7       | )          | (14.5      | )          |
| Total deferred  tax liabilities                |       | (214.4     | )          | (319.5     | )          |
|                                           |       |       |       |       |       |
| Total net  deferred tax assets / (liabilities) |       | $          | (21.7      | )          | $          | (147.1 | ) |
|                                                |            |            |            |            |            |  |  |

 

At December 31,2008, the Company has a capital loss carryforward of $81.8 million related toclosed derivative transactions.  Thiscapital loss carryforward will expire in 2012 if it is not utilized againsttaxable capital gains before then.  TheCompany has placed a full valuation allowance of $28.6 million on the deferredtax asset related to this capital loss carryforward because management believesit is not more likely than not that the benefit of this capital losscarryforward will be realized.

 

In our Mexicanoperations, in years prior to 2005 only 60% of losses could be deducted inconsolidation.  For years post 2004, 100%of the losses can be deducted in consolidation. In 2008, the Company benefited from the law change and from increasedrevenues from intercompany equipment leasing arrangements and utilized $8.7million of these losses.

 

With theopportunity to increase revenue through these leasing arrangements and the lawchange, management believes it is more likely than not that the remaininglosses of $25.3 million generated prior to 2005 will be utilized before theirexpiration and has removed the remaining valuation allowance.  If not utilized, the remaining losses willexpire as follows: $0.9 million in 2012, $21.8 million in 2013 and $2.6 million2014.

 

*U.S.Tax Matters—*

 

U.S. income taxes are not accrued for the unremitted earnings offoreign subsidiaries that have been or are intended to be investedindefinitely.  The Company has notestablished a U.S. deferred tax liability for $2.0 billion in unremittedearnings as of December 31, 2008. It is not practicable to estimate an amount of tax that could be payableif there was a remittance of the earnings that are to be permanentlyreinvested.

 

At December 31, 2008, the foreign tax credit (FTC) carryforwardavailable to reduce possible future U.S. income tax approximated $52.8million.  All FTC’s generated in 2008 canbe carried forward for 10 years. They will expire without benefit, if notutilized by 2019.  There are no otherU.S. tax credits available for carryforward or carryback.

 

*Peruvian Tax Matters—*

 

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

 

*Mexican Tax Matters—*

 

On October 1, 2007, the Mexican government enacted a newlaw, which took effect on January 1, 2008. The law introduced a flat tax, which replaces Mexico’s asset tax andapplies along with Mexico’s regular income tax. In general, Mexican companies are subject to paying the greater of theflat tax or the income tax.  As of December 31,2008, this tax law change does not have an effect on the Company’s deferred tax

 

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position.

 

The flat tax is calculated by applying a 16.5% tax rate in 2008, a 17%tax rate in 2009, and 17.5% in 2010 and the following years.  Although the flat tax is defined as a minimumtax it has a wider taxable base as many of the tax deductions allowed forincome tax purposes are not allowed for the flat tax.

 

The Mexican income tax law as amended reduced the income tax rate to29% in 2006 and 28% in 2007 and thereafter.

 

Out of period adjustment-

 

In 2006, the Company completed acomprehensive deferred tax analysis. This analysis was performed as of December 31, 2005, 2004 and2003.  The result of this analysis was anincrease in deferred tax liabilities of $85.4 million and a release ofvaluation allowance of $81.2 million. The net effect of this analysis was $4.2 million of additional taxexpense in 2006.

 

In this analysis, the Company trued up itsPeru and US gross temporary differences and then measured its U.S. deferredtaxes by applying the regular statutory tax rate (35%).  This recalculation exercise resulted incumulative additional deferred tax liabilities equaling $85.4 million as of December 31,2005.  As a second component to thecomprehensive deferred tax analysis, the Company undertook a schedulingexercise of certain carryforward credits relating to US minimum tax and foreigntax credits.  Prior to this schedulingexercise, the Company had created a valuation allowance related to US minimumtax and foreign tax credits.  Thescheduling exercise component of the comprehensive analysis resulted in theCompany releasing the December 31, 2004 cumulative valuation allowance of$81.2 million.

 

The net adjustment of $4.2 million wasrecorded as part of income tax expense in 2006. The Company accounted for this adjustment as an out of period adjustmentas it falls below the materiality levels established in the Company’s SAB 108analysis.

 

**FIN No. 48 —****Accounting for Uncertainty inIncome Taxes**

 

FinancialAccounting Standards Board (FASB) Interpretation No. 48 “Accounting forUncertainty in Income Taxes”, (FIN 48) was issued in July 2006 andinterprets FASB Statement of Financial Accounting Standards SFAS No. 109.  FIN 48 became effective for the Company on January 1,2007 and prescribes a comprehensive model for the recognition, measurement,financial statement presentation and disclosure of uncertain tax positionstaken or expected to be taken in a tax return. FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  The Company classifies income tax-relatedinterest and penalties as income taxes in the financial statements.

 

Thetotal amount of unrecognized tax benefits in 2008 and 2007 were as follows (inmillions):

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrecognized tax  benefits, opening balance                 |       | $        | 136.3      |     | $          | 32.0 |   |
| Adjustment to  unrecognized tax benefits at implementation  |       | —   |       | 84.1     |       |
| Gross increases  — tax positions in prior period       |       | 11.6     |       | 11.5     |       |
| Gross decreases  — tax positions in prior period       |       | —   |       | (10.1    | )          |
| Recognition of  benefits from resolution of issues with IRS |       | (90.2    | )          | —   |       |
| Gross increases  — current-period tax positions        |       | 17.6     |       | 18.8     |       |
| Decreases  related to settlements with taxing authorities   |       | (10.4    | )          | —   |       |
| Unrecognized tax  benefits, ending balance                  |       | $        | 64.9       |     | $          | 136.3 |   |

 

 

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Thedecrease in the 2008 unrecognized tax benefit of $71.4 million relatesprimarily to completion of the audits for the tax years 1997-2002 andindividually insignificant increases and decreases in the current and prioryear tax positions

 

Theamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate was $18.4 million at December 31, 2008 and $42.6million at December 31, 2007.  Theseamounts relate entirely to U.S. income tax matters.  The Company has no unrecognized Peruvian orMexican tax benefits.

 

Asof December 31, 2008 and December 31, 2007, the Company’s liabilityfor uncertain tax positions included accrued interest and penalties of $5.4million and $19.7 million, respectively.

 

OnNovember 13, 2008, the Company and the IRS reached an agreement with respectto the audit results of the Company’s 1997 through 2002 U.S. federal income taxreturns.  In November 2008 theCompany made a $10.4 million cash tax payment to the IRS for the settlement ofthe audit.  Approximately $19.0 millionof interest expense related to this settlement is expected to be paid in 2009.

 

Inthe United States, the tax years 2003 and 2004 are currently before the appealsdivision of the IRS.  The tax years 2005,2006 and 2007 are currently under IRS field examination, which commenced in November 2008.  Management does not expect that any of theopen years will result in a cash payment within the preceding twelve months of December 31,2009.  The Company’s reasonableexpectations about future resolutions of uncertain items did not materiallychange during the year ended December 31, 2008.

 

Thefollowing tax years remain open to examination and adjustment by the Company’sthree major tax jurisdictions:

 
| Peru:   |   | 2003  and all future years (years 1997 through 2002 have been examined by the  Peruvian tax authority and the issues raised are being contested; no new  issues can be raised for these years) |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| U.S.:   |   | 2003  and all future years                                                                                                                                                                     |
| Mexico: |   | 2002  and all future years                                                                                                                                                                     |

 

 

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**NOTE 9-WORKERS’ PARTICIPATION:**

 

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

 

In Peru, the provision for workers’ participation is calculated at 8%of pre-tax earnings.  The current portionof this participation, which is accrued during the year, is based on Branch’staxable income and is distributed to workers following determination of finalresults for 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.

 

The provision for workers’ participation is included in “Cost of sales(exclusive of depreciation, amortization and depletion)” in the consolidatedstatement of earnings.  For the yearsended December 31, 2008, 2007, and 2006, workers’ participation expensewas $212.1 million $310.9 million and $271.5 million, respectively.

 

**NOTE 10-ASSET RETIREMENT OBLIGATION**

 

The Company maintains an estimated asset retirement obligation for itsmining properties in Peru, as required by the Peruvian Mine Closure Law.  In accordance with the law, a conceptual mineclosure plan, without costs, was submitted to the Peruvian Ministry of Energyand Mines (“MEM”) in August 2006. The Company received MEM’s response in November 2007 and respondedto MEM’s review in March 2008.  In June 2008,the MEM requested additional information regarding the closure plan.  The Company complied with this request in July 2008.  From September 2008 through November 2008,public discussion of the Company’s closure plan has taken place in the areas ofthe Company’s operations.  In addition,this closure plan has been reviewed with INRENA and DIGESA, the Peruviangovernment agencies responsible for the preservation of natural resources andfor environmental and water resources, respectively.  The Company is awaiting MEM’s report, whichis expected to consolidate the issues raised in the recent review for theclosure plan.

 

The closure cost recognized for this liability includes the estimatedcost required at the Peruvian operations, based on the Company’s experience,and includes cost at the Ilo smelter, the tailing disposal, and dismantling theToquepala and Cuajone concentrators, and the shops and auxiliary facilities.

 

As of December 31, 2008, the Company has made an estimatedprovision of $18.0 million for this liability in its financial statements, butbelieves that this estimate should be viewed with caution, pending finalapproval of the mine closure plan.

 

The following is areconciliation of the asset retirement obligation for the two years ended December 31,2007 and 2008 (in millions):

 

| Balance  January 1, 2007    |   | $      | 12.2   |   |
|----------------------------------|--------|--------|--------|--------|
| Additions,  changes in estimates |   | — |   |
| Accretion  expense               |   | 0.9    |   |
|                             |   |   |   |
| Balance,  December 31, 2007 |   | 13.1   |   |
| Additions,  changes in estimates |   | 4.1    |   |
| Accretion  expense               |   | 0.8    |   |
|                             |   |   |   |
| Balance,  December 31, 2008 |   | $      | 18.0   |   |

 

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**NOTE 11-FINANCING:**

 

*Long term debt:*

 
| ** **                                                                                                                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                                                                                                                  | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| **SCC:**                                                                                                                                                           |       |                        |       |   |   |
| 6.375% Notes due  2015 ($200 million face amount, less unamortized discount of $0.9 million at  December 31,2008 and 2007)                                    |       | $                           | 199.1      |   | $ | 199.1 |   |
| 7.500% Notes due  2035 ($1,000 million face amount, less unamortized discount of $15.5 million  and $15.8 million at December 31,2008 and 2007, respectively) |       | 984.5                       |       | 984.2 |   |
| 3.57% Mitsui  credit agreement due 2013 (Japanese LIBO rate plus 1.25% (6.08% at  December 31, 2007))                                                         |       | 50.0                        |       | 60.0 |   |
| **Minera  Mexico:**                                                                                                                                                |       |                        |       |   |   |
| 8.25% Yankee  bonds—Series A due 2008                                                                                                                    |       | —                      |       | 150.0 |   |
| 9.25% Yankee  bonds—Series B due 2028                                                                                                                    |       | 56.4                        |       | 56.4 |   |
| Total debt                                                                                                                                                         |       | 1,290.0                     |       | 1,449.7 |   |
| Less, current  portion                                                                                                                                             |       | (10.0                       | )          | (160.0 | ) |
| Total long-term  debt                                                                                                                                              |       | $                           | 1,280.0    |   | $ | 1,289.7 |   |

 

In 1998, Minera Mexico issued $500 million of unsecured debt, which arereferred to as Yankee bonds.  These bondswere offered in two series: Series A for $375 million, with an interestrate of 8.25% and a 2008 maturity, and Series B for $125 million, with aninterest rate of 9.25% and a 2028 maturity date.  During 2007, the Company repurchased $68.6million of the Series B bond and during 2006 the Company repurchased $23.3million of the Series A bonds.  Inconnection with these purchases the Company paid premiums of $16.6 million and$1.1 million, in 2007 and 2006, respectively, which are included in theconsolidated statement of earnings on the line “Loss on debt prepayments.”   In 2008, the Company paid $150.0 million ofthe remaining balance of its Series A Yankee bonds.  With this payment the Series A Yankeebonds were fully repaid.  The bondscontain a covenant requiring Minera Mexico to maintain a ratio of EBITDA tointerest expense of not less than 2.5 to 1.0 as such terms are defined by thefacility.  At December 31, 2008,Minera Mexico is in compliance with this covenant.

 

In 1999, SCC entered into a $100 million, 15-year loan agreement withMitsui.  The interest rate for this loanis the Japanese LIBO rate plus 1.25% (Japanese LIBO for this loan at December 31,2008 was 2.32%).  The Mitsui creditagreement is collateralized by pledges of receivables on 31,000 tons of copperper year.  The Mitsui agreement requiresthe Company 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 31,2008, the Company is in compliance with these covenants.

 

In July 2005 the Company issued $200 million 6.375% Notes due 2015at a discount of $1.1 million and $600 million 7.5% Notes due 2035, at a discountof $5.3 million.  The notes are seniorunsecured obligations of the Company. The Company capitalized $8.8 million of costs associated with thisfacility and is included in “Other assets”, non-current on the consolidatedbalance sheet.  The net proceeds from theissuance and sale of the notes were principally used to repay outstandingindebtedness of the Company and the balance was used for general corporatepurposes.  The Company filed aregistration statement on Form S-4 with respect to these notes in October 2005.  In January 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 for anequivalent amount of new notes and an aggregate of $590.5 million of the 7.5%old notes due 2035 were tendered in exchange for 

 

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an equivalent amount of new notes. The indentures relating to the notes contain certain covenants,including limitations on liens, limitations on sale and leaseback transactions,rights of the holders of the notes upon the occurrence of a change of controltriggering event, limitations on subsidiary indebtedness and limitations onconsolidations, mergers, sales or conveyances. All of these limitations and restrictions are subject to a number of significantexceptions, and some of these covenants will cease to be applicable before thenotes mature if the notes attain an investment grade rating.  At December 31, 2008 the Company is incompliance with these covenants.

 

On May 9, 2006, theCompany issued an additional $400 million 7.5% notes due 2035.  These notes are in addition to the $600million of 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 wasissued at a spread of +315 basis points over the 30-year U.S. Treasurybond.  The notes were issued at adiscount of $10.8 million.  The Companycapitalized $3.2 million of cost associated with this facility and is includedin non-current “Other assets, net” on the consolidated balance sheet.  The Company used proceeds from the May 2006issuance for its expansion programs.

 

The notes issued in July 2005and 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 registeredthese notes under the Securities Act of 1933, as amended.

 

Aggregate maturities of the outstanding borrowings at December 31,2008, are as follows:

 

| **(in millions)** | ** ** | ** **        | ** ** |
|-------------------|------------|-------------------|------------|
| **Year**          | ** ** | **Principal Due** | ** ** |
| 2009              |       | $                 | 10.0       |   |
| 2010              |       | 10.0              |       |
| 2011              |       | 10.0              |       |
| 2012              |       | 10.0              |       |
| 2013              |       | 10.0              |       |
| Thereafter        |       | 1,256.4           |       |
| Total             |       | $                 | 1,306.4    |   |

 

Total debt maturities do not include the debt discount valuationaccount of $16.4 million.

 

At December 31, 2008 and 2007, other assets included $5.9 millionand $6.8 million, respectively, held in escrow accounts as required by theCompany’s loan agreements. The funds are released from escrow as scheduled loanrepayments are made.

 

At December 31, 2008 and 2007, the balance of capitalized debtissuance costs was $11.2 million and $11.8 million, respectively.  Amortization charged to interest expense was$0.6 million, $0.8 million and $1.6 million in 2008, 2007 and 2006,respectively.

 

**NOTE 12-BENEFIT PLANS:**

 

*Peruvian operations*

 

The Company has two noncontributory defined benefit pension planscovering former salaried employees in the United States and certain formeremployees in Peru. It also has a post-retirement health care plan.

 

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*Peru Defined Benefit Pension Plans.*

 

Effective October 31, 2000, the Board of Directors amended thequalified pension plan to suspend the accrual of benefits.

 

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

 
| ** **                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| **(in millions)**               | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest cost                   |       | $                                | 0.7        |   | $ | 0.6 |   | $ | 0.6 |   |
| Expected return  on plan assets |       | (0.5                             | )          | (0.5 | ) | (0.5 | ) |
| Amortization of  net loss       |       | (*)                              |       | 0.1 |   | _0.1 |   |
| Net periodic  benefit cost      |       | $                                | 0.2        |   | $ | 0.2 |   | $ | 0.2 |   |

----

(*)         less than $0.1 million

 

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

 
| ** **                                                                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                                             | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Change in  benefit obligation:                                                                |       |                        |       |   |   |
| Projected  benefit obligation at beginning of year                                            |       | $                           | 11.6       |   | $ | 12.4 |   |
| Interest cost                                                                                 |       | 0.6                         |       | 0.6 |   |
| Benefits paid                                                                                 |       | (0.9                        | )          | (0.9 | ) |
| Actuarial gain  (loss)                                                                        |       | 0.1                         |       | (0.5 | ) |
| Projected  benefit obligation at end of year                                                  |       | $                           | 11.4       |   | $ | 11.6 |   |
|                                                                                          |       |                        |       |   |   |
| Change in Plan  Assets:                                                                       |       |                        |       |   |   |
| Fair value of  plan assets at beginning of year                                               |       | $                           | 12.4       |   | $ | 12.0 |   |
| Actual return on  plan assets                                                                 |       | (0.1                        | )          | 0.8 |   |
| Employer  contributions                                                                       |       | 1.5                         |       | 0.5 |   |
| Benefits paid                                                                                 |       | (0.9                        | )          | (0.9 | ) |
| Administrative  expenses                                                                      |       | —                      |       | — |   |
| Fair value of  plan assets at end of year                                                     |       | $                           | 12.9       |   | $ | 12.4 |   |
|                                                                                          |       |                        |       |   |   |
| Funded Status at  end of year:                                                                |       | $                           | 1.5        |   | $ | 0.8 |   |
|                                                                                          |       |                        |       |   |   |
| SFAS  No. 158 amounts recognized in statement of financial position consists  of:        |       |                        |       |   |   |
| Non current  assets                                                                           |       | $                           | 1.5        |   | $ | 0.8 |   |
| Current  liabilities                                                                          |       |                        |       |   |   |
| Non current  liabilities                                                                      |       | —                      |       | — |   |
| Total                                                                                         |       | $                           | 1.5        |   | $ | 0.8 |   |
|                                                                                          |       |                        |       |   |   |
| SFAS  No. 158 amounts recognized in accumulated other comprehensive income  consists of: |       |                        |       |   |   |
| Net loss (gain)  net of income tax                                                            |       | $                           | 2.2        |   | $ | 1.8 |   |
| Prior service  cost (credit)                                                                  |       | —                      |       | — |   |
| Transition  obligation (asset)                                                                |       | —                      |       | — |   |
| Total (net of  income tax of $1.2 million and $1.0 million, respectively)                     |       | $                           | 2.2        |   | $ | 1.8 |   |

 

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The following table summarized the changes in accumulated othercomprehensive income for the year ended December 31, related to our pensionplan (net of income tax in million):

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                 | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Reconciliation  of accumulated other comprehensive income:        |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year |       | $                           | 1.8        |   | $ | 2.4 |   |
|                                                              |       |                        |       |   |   |
| Net loss/(gain)amortized  during the year                         |       | (*)                         |       | (*) |   |
| Net  loss/(gain)occurring during the year                         |       | 0.4                         |       | (0.6 | ) |
| Net adjustment  to accumulated other comprehensive income         |       | 0.4                         |       | (0.6 | ) |
|                                                              |       |                        |       |   |   |
| Accumulated  other comprehensive income at end of plan year       |       | $                           | 2.2        |   | $ | 1.8 |   |

----

(*)         less than $0.1 million

 

The following table summarizes the amounts in accumulative othercomprehensive income amortized and recognized as a component of net periodicbenefit cost in 2008 (net of income tax, in millions):

 
| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                            | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Amortization of  prior service cost (credit) |       | —                      |       | — |   |
| Amortization of  net losses                  |       | $                           | (0.1       | ) | $ | (0.1 | ) |
| Total  amortization expenses                 |       | $                           | (0.1       | ) | $ | (0.1 | ) |
|                                              |            |                             |            |  |  |  |  |  |  |

 

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

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                    |       | 6.30     | %          | 6.25     | %          | 5.50     | %          |
| Expected  long-term rate of return on plan asset |       | 4.50     | %          | 4.50     | %          | 4.50     | %          |
| Rate of increase  in future compensation level   |       | N/A      |       | N/A      |       | N/A      |       |

 

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

 

| **Year**     | ** ** | **Expected  Benefit Payments** | ** ** |
|--------------|------------|--------------------------------|------------|
| ** **   | ** ** | **(in millions)**              | ** ** |
| 2009         |       | $                              | 0.9        |   |
| 2010         |       | 0.9                            |       |
| 2011         |       | 0.9                            |       |
| 2012         |       | 0.9                            |       |
| 2013         |       | 0.9                            |       |
| 2014 to 2018 |       | 4.5                            |       |
| Total        |       | $                              | 9.0        |   |

 

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

 

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The Company’s policy for determining asset mix-targets includesperiodic consultation 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 6.25%.  The fair value of plan assets is impacted by generalmarket conditions.  If actual returns onplan assets vary from the expected returns, actual results could differ.

 

*Peru Post-retirement Health Care Plan—*

 

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

 

Effective October 31, 2000, the health care plan for retirees wasterminated and the Company informed retirees that they would be covered by thethen in effect post-retirement health care plan of Asarco, a former shareholderof the Company and a subsidiary of Grupo Mexico, which offered substantiallythe same benefits and required the same contributions.  As a result of the Chapter 11 proceedings,Asarco is no longer managing the plan. The Company has assumed management of the plan and is currentlyproviding health benefits to retirees. The plan is accounted for in accordance with SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other Than Pensions”, asamended by SFAS No. 158.

 

The components of net period benefit costs are as follows:

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                              | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                   |       | $                                | —     |   | $ | — |   | $ | — |   |
| Amortization of  net loss / (gain)             |       | (*)                              |       | (*) |   | (*) |   |
| Amortization of  prior service cost / (credit) |       | (*)                              |       | (*) |   | (*) |   |
| Interest cost                                  |       | 0.1                              |       | 0.1 |   | 0.1 |   |
| Net periodic  benefit cost                     |       | $                                | 0.1        |   | $ | 0.1 |   | $ | 0.1 |   |

----

(*)         less than $0.1 million

 

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

 
| ** **                                                                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                                             | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Change in  Benefit Obligation:                                                                |       |                        |       |   |   |
| Benefit  obligation at beginning of year                                                      |       | $                           | 1.3        |   | $ | 1.4 |   |
| Interest cost                                                                                 |       | 0.1                         |       | 0.1 |   |
| Plan Amendments                                                                               |       |                        |       | — |   |
| Benefits paid                                                                                 |       | (0.1                        | )          | (0.1 | ) |
| Actuarial (gain)  or loss                                                                     |       | 0.6                         |       | (0.1 | ) |
| Benefit  obligation at end of year                                                            |       | $                           | 1.9        |   | $ | 1.3 |   |
|                                                                                          |       |                        |       |   |   |
| 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                                                                 |       | $                           | (1.9       | ) | $ | (1.3 | ) |
|                                                                                          |       |                        |       |   |   |
| SFAS  No. 158 amounts recognized in statement of financial position consists  of:        |       |                        |       |   |   |
| Non current  assets                                                                           |       | —                      |       | — |   |
| Current  liabilities                                                                          |       | (0.1                        | )          | (0.1 | ) |
| Non current  liabilities                                                                      |       | (1.8                        | )          | (1.2 | ) |
| Total                                                                                         |       | $                           | (1.9       | ) | $ | (1.3 | ) |
|                                                                                          |       |                        |       |   |   |
| SFAS  No. 158 amounts recognized in accumulated other comprehensive income  consists of: |       |                        |       |   |   |
| Net loss (gain)                                                                               |       | $                           | 1.0        |   | $ | 0.4 |   |
| Prior service  cost (credit)                                                                  |       | (0.2                        | )          | (0.3 | ) |
| Total (net of  income tax)                                                                    |       | $                           | 0.8        |   | $ | 0.1 |   |

 

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The following table summarized the changes in accumulated othercomprehensive income for the year ended December 31, related to ourpost-retirement plan (pre-tax in million):

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                 | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Reconciliation  of accumulated other comprehensive income:        |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year |       | $                           | 0.1        |   | $ | 0.1 |   |
|                                                              |       |                        |       |   |   |
| Net loss /(gain)  occurring during the year                       |       | 0.7                         |       | — |   |
| Net loss/gain  amortized during the year                          |       | (*)                         |       | (*) |   |
| Net adjustment  to accumulated other comprehensive income         |       | $                           | 0.7        |   | (*) |   |
|                                                              |       |                        |       |   |   |
| Accumulated  other comprehensive income at end of plan year       |       | $                           | 0.8        |   | $ | 0.1 |   |

----

(*)         less than $0.1 million

 

The following table summarizes the amounts in accumulative othercomprehensive income amortized and recognized as a component of net periodicbenefit cost in 2008 (net of income tax, in millions):

 
| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                            | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Amortization of  prior service cost (credit) |       | $                           | 0.1        |   | $ | 0.1 |   |
| Amortization of  net losses                  |       | (0.1                        | )          | (0.1 | ) |
| Total  amortization expenses                 |       | $                           | —     |   | $ | — |   |

 

The discount rate used in the calculation of other post-retirementbenefits and cost as of December 31, 2008 and 2007 was 6.25% and 5.5%,respectively.

 

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

 

| **(in millions)** | ** ** | ** **                     | ** ** |
|-------------------|------------|--------------------------------|------------|
| **Year**          | ** ** | **Expected  Benefit Payments** | ** ** |
| 2009              |       | $                              | 0.1        |   |
| 2010              |       | 0.1                            |       |
| 2011              |       | 0.1                            |       |
| 2012              |       | 0.1                            |       |
| 2013              |       | 0.1                            |       |
| 2014 to 2017      |       | 0.7                            |       |
| Total             |       | $                              | 1.2        |   |

 

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For measurement purposes, 8.0% annual rate of increase in the percapita cost of covered health care benefits was assumed for 2008.  The rate is assumed to decrease gradually to5% for 2014 and remain at that level thereafter.

 

Assumed health care cost trend rates can have a significant effect onthe amount reported for the health care plan. A one percentage-point change in assumed health care trend rate wouldnot have a significant effect.

 

*Mexican operations*

 

*Minera Mexico Defined Benefit Pension Plans—*

 

Minera Mexico has established for its salaried employees a definedcontribution benefit pension plan.  Thisplan is in addition to benefits granted by the Instituto Mexicano de SeguroSocial (IMSS).  Under this plan, theCompany will make yearly matching contributions equaling 3% of participatingemployee’s base salary.  Related to this,the Company recorded a contribution expense of $0.7 million in both 2008 and2007.  The defined contribution planliability was $2.4 million and $3.4 million in 2008 and 2007, respectively.

 

The benefits earned in the Company’s defined benefit plan are based onsalaries adjusted by inflation.  AsMexico has experienced a period of low inflation in recent years, the benefitsearned from the IMSS have exceeded those earned from the Company’snon-contributory defined benefit plan. Due to this fact, and due to the fact that the Company wants to assurethe economic well being of its retired employees, the Company decided in 2006to create 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.

 

In 2006 the change in plan was accounted for as a settlement under SFAS88, “Employee’s Accounting for Settlements and Curtailments of Deferred BenefitPension Plans and for Termination Benefits.” The Company recorded a $1.7 million settlement gain in relation to thechange in plan.

 

Minera Mexico has established for its union employees anon-contributory defined benefit pension plan. This plan is in addition tobenefits granted by IMSS.

 

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

 
| ** **                              | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest cost                           |       | $                                         | 2.0        |   | $ | 2.2 |   | $ | 1.8 |   |
| Service cost                            |       | 2.4                                       |       | 2.2 |   | 2.1 |   |
| Expected return  on plan assets         |       | (2.9                                      | )          | (3.1 | ) | (2.0 | ) |
| Amortization of  transition assets, net |       | (0.1                                      | )          | (0.1 | ) | — |   |
| Amortization of  net actuarial loss     |       | (0.7                                      | )          | (0.2 | ) | — |   |
| Settlement  (Gain)                      |       |                                      |       | — |   | (1.7 | ) |
| Amortization of  prior services cost    |       | 0.2                                       |       | 0.2 |   | — |   |
| Net period  benefit cost                |       | $                                         | 0.9        |   | $ | 1.2 |   | $ | 0.2 |   |

 

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The change inbenefit obligation and plan assets are as follows:

 
| ** **                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                                                                             | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Change in  benefit obligation:                                                                |       |                  |       |   |   |
| Projected benefit  obligation at beginning of year                                            |       | $                     | 39.8       |   | $ | 36.1 |   |
| Service cost                                                                                  |       | 2.4                   |       | 2.2 |   |
| Interest cost                                                                                 |       | 2.0                   |       | 2.2 |   |
| Actuarial (loss)  gain, net                                                                   |       | (4.7                  | )          | — |   |
| Amendments                                                                                    |       | —                |       | — |   |
| Settlements                                                                                   |       | 1.0                   |       | — |   |
| Benefits paid                                                                                 |       | (6.8                  | )          | (0.7 | ) |
| Inflation  adjustment                                                                         |       | (6.8                  | )          | — |   |
| Projected  benefit obligation at end of year                                                  |       | $                     | 26.9       |   | $ | 39.8 |   |
|                                                                                          |       |                  |       |   |   |
| Change in plan  assets:                                                                       |       |                  |       |   |   |
| Fair value of  plan assets at beginning of year                                               |       | $                     | 40.2       |   | $ | 33.6 |   |
| Actual return on  plan assets                                                                 |       | (5.6                  | )          | 7.5 |   |
| Transfer of  assets                                                                           |       | (0.7                  | )          | — |   |
| Benefits paid                                                                                 |       | (0.5                  | )          | (0.5 | ) |
| Currency  exchange rate adjustment                                                            |       | (6.7                  | )          | (0.4 | ) |
| Fair value of  plan assets at end of year                                                     |       | $                     | 26.7       |   | $ | 40.2 |   |
|                                                                                          |       |                  |       |   |   |
| Funded status                                                                                 |       | $                     | (0.2       | ) | $ | 0.4 |   |
|                                                                                          |       |                  |       |   |   |
| SFAS  No. 158 amounts recognized in statement of financial position consists  of:        |       |                  |       |   |   |
| Non current assets                                                                            |       | $                     | —     |   | $ | 0.4 |   |
| Current  liabilities                                                                          |       | —                |       | — |   |
| Non current  liabilities                                                                      |       | (0.2                  | )          | — |   |
| Total                                                                                         |       | $                     | (0.2       | ) | $ | 0.4 |   |
| SFAS  No. 158 amounts recognized in accumulated other comprehensive income  consists of: |       |                  |       |   |   |
| Net loss (gain)                                                                               |       | $                     | (1.6       | ) | $ | (4.8 | ) |
| Prior service  cost (credit)                                                                  |       | 0.7                   |       | 1.2 |   |
| Transition  Obligation (asset)                                                                |       | (0.1                  | )          | (0.2 | ) |
| Total (net of  income tax of $0.6 million and $4.0 million, respectively)                     |       | $                     | (1.0       | ) | $ | (3.8 | ) |

 

The following table summarizes the changes in accumulated othercomprehensive income for the years ended December 31, 2008 and 2007,respectively related to our pension plans (net of income tax in millions):

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                 | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Reconciliation  of accumulated other comprehensive income:        |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year |       | $                           | (3.8       | ) | $ | (1.0 | ) |
|                                                              |       |                        |       |   |   |
| Amortization of  transition obligation (asset)                    |       | 0.1                         |       | (*) |   |
| Prior services  cost amortized during the year                    |       | (0.2                        | )          | 0.1 |   |
| Net loss/gain  amortized during the year                          |       | 0.4                         |       | (0.1 | ) |
| Net gains  occurring during the year.                             |       | 2.2                         |       | (2.7 | ) |
| Currency  exchange rate changes                                   |       | 0.3                         |       | (0.1 | ) |
| Net adjustment  to accumulated other comprehensive income         |       | 2.8                         |       | (2.8 | ) |
|                                                              |       |                        |       |   |   |
| Accumulated  other comprehensive income at end of plan year       |       | $                           | (1.0       | ) | $ | (3.8 | ) |

----

(*)         Amount less than $0.1 million

 

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The following table summarizes the amounts in accumulative othercomprehensive income amortized and recognized as a component of net periodicbenefit cost (net of income tax, in millions):

 
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                    | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Amortization of  transition asset    |       | $                           | (0.1       | ) | $ | (0.1 | ) |
| Amortization of  net losses          |       | (0.7                        | )          | (0.2 | ) |
| Amortization of  prior services cost |       | 0.2                         |       | 0.2 |   |
| Total  amortization expenses         |       | $                           | (0.6       | ) | $ | (0.1 | ) |

 

The assumptionsused to determine the pension obligation and seniority premiums as of year-endand net cost in the ensuing year were:

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  discount rate                  |       | 8.0      | %          | 8.0      | %          | 10.0     | %          |
| Expected  long-term rate of return on plan asset |       | 8.0      | %          | 8.0      | %          | 12.0     | %          |
| Rate of increase  in future compensation level   |       | 4.5      | %          | 4.5      | %          | 6.0      | %          |

 

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

 

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

 

| **(in millions)** | ** ** | **Expected**         | ** ** |
|-------------------|------------|----------------------|------------|
| **Year**          | ** ** | **Benefit Payments** | ** ** |
| 2009              |       | $                    | 20.0       |   |
| 2010              |       | 0.5                  |       |
| 2011              |       | 0.5                  |       |
| 2012              |       | 0.5                  |       |
| 2013              |       | 0.6                  |       |
| 2014 to 2017      |       | 4.1                  |       |
| Total             |       | $                    | 26.2       |   |

 

Minera Mexico’s policy for determining asset mix targets includesperiodic consultation with recognized third party investment consultants.  The expected long-term rate of return on planassets is updated periodically, taking into consideration assets allocations,historical returns and the current economic environment.  The fair value of plan assets is impacted bygeneral market conditions.  If actualreturns on plan assets vary from the expected returns, actual results coulddiffer.

 

These plans accounted for approximately 30% of benefitobligations.  The following tablerepresents the asset mix of the investment portfolio as of December 31:

 
| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Asset category:    |       |     |       |     |       |
| Equity  securities |       | 83       | %          | 70       | %          |
| Treasury bills     |       | 17       | %          | 30       | %          |
|               |       | 100      | %          | 100      | %          |

 

The amount of contributions that the Company expects to be paid to theplan during 2009 is not material.

 

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*Minera Mexico Post-retirement health care plan*

 

The components of net period benefit costs are as follows:

 
| ** **                                  | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| **(in millions)**                           | ** ** | **2008**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest cost                               |       | $                                        | 4.8        |   | $ | 2.4 |   | $ | 2.3 |   |
| Service cost                                |       | 0.6                                      |       | 0.5 |   | 0.5 |   |
| Amortization of  net loss (gain)            |       | 0.7                                      |       | 0.1 |   | — |   |
| Amortization of  transition obligation      |       | 1.6                                      |       | 1.6 |   | — |   |
| Inflation  adjustment                       |       | —                                   |       | 0.2 |   | — |   |
|                                        |       |                                     |       |   |   |   |   |
| Net periodic  post-retirement benefit costs |       | $                                        | 7.7        |   | $ | 4.6 |   | $ | 2.8 |   |

 

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

 
| ** **                                                                                    | ** ** | **As of December 31** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(in millions)**                                                                             | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| Change in  benefit obligation:                                                                |       |                       |       |   |   |
| Projected  benefit obligation at beginning of year                                            |       | $                          | 63.3       |   | $ | 50.7 |   |
| Service cost                                                                                  |       | 0.6                        |       | 0.5 |   |
| Interest costs                                                                                |       | 4.8                        |       | 2.4 |   |
| Actuarial (loss)  gain, net                                                                   |       | 0.1                        |       | 10.9 |   |
| Benefits paid                                                                                 |       | (1.6                       | )          | (3.3 | ) |
| Settlements                                                                                   |       | —                     |       | — |   |
| Currency  exchange rate adjustment                                                            |       | (13.2                      | )          | 2.1 |   |
| Projected  benefit obligation at end of year                                                  |       | $                          | 54.0       |   | $ | 63.3 |   |
|                                                                                          |       |                       |       |   |   |
| Funded status                                                                                 |       | $                          | (54.0      | ) | $ | (63.3 | ) |
|                                                                                          |       |                       |       |   |   |
| SFAS  No. 158 amounts recognized in statement of financial position consists  of:        |       |                       |       |   |   |
| Non current  assets                                                                           |       | $                          | —     |   | $ | — |   |
| Current  liabilities                                                                          |       | —                     |       | — |   |
| Non current  liabilities                                                                      |       | (54.0                      | )          | (63.3 | ) |
| Total                                                                                         |       | $                          | (54.0      | ) | $ | (63.3 | ) |
|                                                                                          |       |                       |       |   |   |
| SFAS  No. 158 amounts recognized in accumulated other comprehensive income  consists of: |       |                       |       |   |   |
| Net loss (gain)                                                                               |       | $                          | 9.1        |   | $ | 11.7 |   |
| Prior service  cost (credit)                                                                  |       | —                     |       | — |   |
| Transition  Obligation (asset)                                                                |       | 11.6                       |       | 15.5 |   |
| Total (net of  income tax of $16.7 million and $12.5 million, respectively)                   |       | $                          | 20.7       |   | $ | 27.2 |   |

 

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The following table summarizes the changes in accumulated othercomprehensive income for the years ended December 31, 2008 and 2007,respectively, related to our pension plan (net of income tax in millions):

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                 | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Reconciliation  of accumulated other comprehensive income:        |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year |       | $                           | 27.2       |   | $ | 20.7 |   |
| Effect of  adopting FAS 158                                       |       | —                      |       | — |   |
| Amortization of  transition obligation                            |       | (1.0                        | )          | (1.0 | ) |
| Net loss/(gain)  occurring during the year.                       |       | (0.4                        | )          | 6.8 |   |
| Currency  exchange rate changes                                   |       | (5.1                        | )          | 0.7 |   |
| Net adjustment  to accumulated other comprehensive income         |       | (6.5                        | )          | 6.5 |   |
|                                                              |       |                        |       |   |   |
| Accumulated  other comprehensive income at end of plan year       |       | $                           | 20.7       |   | $ | 27.2 |   |

 

The following table summarizes the amounts in accumulated othercomprehensive income amortized and recognized as a component of net periodicbenefit cost (net of income tax in millions):

 
| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                            | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Amortization of  prior service cost (credit) |       | $                           | 1.6        |   | $ | 1.6 |   |
| Amortization of  net losses                  |       | 0.7                         |       | 0.1 |   |
| Total  amortization expenses                 |       | $                           | 2.3        |   | $ | 1.7 |   |

 

Discount rates usedin the calculation of other post-retirement benefits and costs as of December 31,2008 and 2007 were 8.0% and 4.0%, respectively.

 

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

 

| **(in millions)** | ** ** | **Expected**         | ** ** |
|-------------------|------------|----------------------|------------|
| **Year**          | ** ** | **Benefit Payments** | ** ** |
| 2009              |       | $                    | 3.6        |   |
| 2010              |       | 3.7                  |       |
| 2011              |       | 3.9                  |       |
| 2012              |       | 4.1                  |       |
| 2013              |       | 4.4                  |       |
| 2014 to 2017      |       | 37.4                 |       |
| Total             |       | $                    | 57.1       |   |

 

For measurement purposes, a 2.5% annual rate of increase in the percapita cost of covered health care benefits was assumed for 2008 and remains atthat level thereafter.

 

An increase in other benefit cost trend rates have a significant effecton the amount of the reported obligations as well as component cost of theother benefit plan.  One percentage-pointchange in assumed other benefits cost trend rates would have the followingeffects:

 
| ** **                                            | ** ** | **One Percentage Point** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|
| **(in millions)**                                     | ** ** | **Increase**             | ** ** | **Decrease** | ** ** |
| Effect on total  service and interest cost components |       | $                        | 2.2        |   | $ | 1.7 |   |
| Effect on the  post-retirement benefit obligation     |       | $                        | 26.5       |   | $ | 21.1 |   |

 

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**NOTE 13-MINORITY INTEREST:**

 

For all the years presented, in the consolidated statement of earningsthe minority interest is based on the earnings of the Company’s PeruvianBranch.

 

The minority interest of the Company’s Peruvian Branch is forinvestment shares, formerly called labor shares.  These shares were generated by legislation inplace in Peru from the 1970s through 1989; such legislation provided for theparticipation of mining workers in the profits of the enterprises for whichthey worked.  This participation wasdivided between equity and cash.  Theinvestment shares included in the minority interest on the balance sheet arethe still outstanding equity distributions made to the Peruvian Branch’semployees.

 

In prior years the Company acquired some Peruvian investment shares inexchange for newly issued common shares of the Company and through purchases atmarket value.  These acquisitions havebeen accounted for as purchases of minority interests.  The excess paid over the carrying value wasassigned to intangible assets and is being amortized based on production.  As a result of these acquisitions, theremaining investment shareholders hold a 0.71% interest in the Peruvian Branchand are entitled to a pro rata participation in the cash distributions made bythe Branch.  The shares are recorded as aminority interest in the Company’s financial statements.

 

**NOTE 14-COMMITMENTS AND CONTINGENCIES:**

 

**Environmentalmatters:**

 

The Company hasinstituted extensive environmental conservation programs at its miningfacilities in Peru and Mexico.  TheCompany’s environmental programs include, among other features, water recoverysystems to conserve water and minimize impact on nearby streams, reforestationprograms to stabilize the surfaces of the tailings dams and the implementationof scrubbing technology in the mines to reduce dust emissions.

 

Peruvianoperations

 

The Company’soperations are subject to applicable Peruvian environmental laws andregulations.  The Peruvian government,through the MEM conducts annual audits of the Company’s Peruvian mining andmetallurgical operations.  Through theseenvironmental audits, matters related to environmental commitments, compliancewith legal requirements, atmospheric emissions, and effluent monitoring arereviewed.  The Company believes that itis in material compliance with applicable Peruvian environmental laws and regulations.

 

In the firstquarter of 2007, with the completion of the Ilo smelter modernization, theCompany completed a 10-year environmental program agreed to with the Peruviangovernment in 1997.  This program appliedto all of the Company’s Peruvian operations and contained mitigation measuresand projects necessary to (1) bring the existing operations intocompliance with the environmental standards established by the MEM and (2) identifyareas impacted by operations that were no longer active and needed to bereclaimed.

 

In 2003 the Peruviancongress published a new law announcing future closure and remediationobligations for the mining industry.  Inaccordance with the requirements of this law the Company has prepared andsubmitted the required closure plans to MEM. These plans have been or are being reviewed by the responsiblegovernmental agency and have been or will be open to public discussion in theareas of the Company’s operations.  TheCompany is awaiting feedback from MEM regarding these plans.  See Note 10, Asset 

 

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retirement obligation,for further discussion of this matter.

 

For the Company’sPeruvian operations, environmental capital expenditures were $0.5 million,$21.6 million and $161.0 million in 2008, 2007 and 2006, respectively.

 

Mexican operations

 

The Company’soperations are subject to applicable Mexican federal, state and municipalenvironmental laws, to Mexican official standards, and to regulations for theprotection of the 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 principallegislation applicable to the Company’s Mexican operations is the FederalGeneral Law of Ecological Balance and Environmental Protection, which isenforced by the Federal Bureau of Environmental Protection (“PROFEPA”).  PROFEPA monitors compliance withenvironmental legislation and enforces Mexican environmental laws, regulationsand official standards.  PROFEPA mayinitiate administrative proceedings against companies that violateenvironmental laws, which in the most extreme cases may result in the temporaryor permanent closing of non-complying facilities, the revocation of operatinglicenses and/or other sanctions or fines. Also, according to the Federal Criminal Code, PROFEPA must informcorresponding authorities regarding environmental non-compliance.

 

Mexicanenvironmental regulations have become increasingly stringent over the lastdecade, and this trend is likely to continue and has been influenced by theenvironmental treaty entered into by Mexico, United States and Canada inconnection with NAFTA in 1999.  However,the Company’s management does not believe that continued compliance with thefederal environmental law or Mexican state environmental laws will have amaterial adverse effect on the Company’s business, properties, results ofoperations, financial condition or prospects or will result in material capitalexpenditures.  Although the Companybelieves that all of its facilities are in material compliance with applicableenvironmental, mining and other laws and regulations, the Company cannot assurethat future laws and regulations would not have a material adverse effect onthe Company’s business, properties, results of operations, financial conditionor prospects.

 

Due to theproximity of certain facilities of Minera Mexico to urban centers, theauthorities may implement certain measures that may impact or restrain theoperation of such facilities.

 

For the Company’sMexican operations, environmental capital expenditures were $13.1 million,$25.8 million and $5.3 million in 2008, 2007 and 2006, respectively.

 

**Litigationmatters**:

 

Peruvianoperations

 

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

 

The Companyconducts its operations in Peru through a registered Branch.  Although the 

 

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Peruvian Branchhas neither capital nor liability separate from that of the Company, underPeruvian law it is deemed to have an equity capital for purposes of determiningthe economic interest of the holders of the labor shares.  The labor share litigation is based on claimsof former employees for ownership of labor shares issued during the 1970s until1979 under a former Peruvian mandated profit sharing system.  In 1971, the Peruvian government enacted legislationproviding that workers in the mining industry would participate in the pre-taxprofits of the enterprises for which they worked at a rate of 10%.  This participation was distributed 40% incash and 60% as an equity interest in the enterprise.  Under the law, the equity participation wasoriginally delivered to the “Mining Community”, an organization representingall workers.  The cash portion wasdistributed to the workers after the close of the year.  The accrual for this participation was (and continuesto be) a current liability of the Company, until paid.  In 1978, the law was amended and the equitydistribution was calculated at 5.5% of pre-tax profits and was made toindividual workers of the enterprise in the form of “labor shares” to be issuedin Peru by the Peruvian Branch of SCC. These labor shares represented an equity interest in theenterprise.  In addition, according tothe 1978 law, the equity participations previously distributed to the “MiningCommunity” were returned to the Company and redistributed in the form of laborshares 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, theCompany offered to exchange new common shares of the Company for the laborshares issued under the prior Peruvian law. Approximately 80.8% of the issued labor shares were exchanged for theCompany’s common shares, greatly reducing the minority interest on the Company’sbalance sheet.  What remains of theworkers’ equity participation is now included on the consolidated balance sheetunder the caption “Minority interest.”

 

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

 

1)              As stated above, in April 1996, theCompany was served with a complaint filed in Peru by approximately 800 formeremployees, (Garcia Ataucuri and others vs. SCC), seeking the delivery of38,763,806.80 “labor shares” (acciones laborales), now “investment shares”(acciones de inversion) (or S/. 3,876,380,679.56), as required by Law No. 22333,to be issued in a proportional way to each former employee or worker inaccordance with their time of work with SCC’s Branch in Peru, plus dividends onsuch shares.  In 2000 SCC appealed anadverse decision of an appellate civil court, affirming a decision of a lowercivil court, to the Peruvian Supreme Court. On September 19, 2001, the Peruvian Supreme Court annulled theproceedings noting that the civil courts lacked jurisdiction and that thematter had to be decided by a labor court. On March 8, 2002, Mr. Garcia Ataucuri restated the claim tocomply with Peruvian labor law and procedural requirements, and increased thenumber of plaintiffs to approximately 958 ex-workers.  In January 2005, the lower labor judgedismissed the lawsuit on procedural grounds without deciding on the merits ofthe case.  In March 2005, theplaintiffs appealed this decision but the appellate court dismissed the appealdue to procedural defects and remanded the case to the lower labor court forfurther proceedings.  The lower laborcourt, on motions from the plaintiffs, reinstated the appeal of the dismissalof the case of seven plaintiffs that had cured the procedural defects.  As of December 31, 2008, the caseremains open with no further new developments. The labor court has temporarily lost jurisdiction over this case untilthe Supreme Court decides on the Constitutional Tribunal’s decision describedbelow.

 

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In October 2007, ina separate proceeding initiated by Mr. Garcia Ataucuri against thejustices of the Peruvian Supreme Court, the Peruvian Constitutional Court nullifiedthe Peruvian Supreme Court decision issued on September 19, 2001 becauseit had violated Mr. Garcia Ataucuri’s constitutional due process rights byobliging him and the other plaintiffs to commence a new proceeding before thelabor courts when they had litigated against the Company in civil courts forover 10 years.  The PeruvianConstitutional Court ordered the Supreme Court to decide again on the merits ofthe case accepting or denying the Company’s 2000 appeal.

 

Although the Company wasnot formally a party to the Garcia Ataucuri proceedings before the PeruvianConstitutional Court, the nullity of the favorable decision of the SupremeCourt, issued on September 19, 2001, is final and cannot be appealed bythe Company.

 

It is uncertain how thePeruvian Supreme Court will decide on the Company’s 2000 appeal and the meritsof the case in view of the decision of the Peruvian Constitutional Court.

 

2)             On May 10, 2006, the Company wasserved with a second complaint filed in Peru, this time by 44 former employees,(Cornejo Flores and others vs. SCC), seeking delivery of (1) labor shares(or shares of whatever other current legal denomination) corresponding to years1971 to December 31, 1977 (the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the prior lawsuit), that should havebeen issued in accordance with Law No. 22333, plus interest and (2) laborshares resulting from capital increases made by the Branch in 1980 “for theamount of the workers’ participation of S/.17,246,009,907.20, equivalent to172,460,099.72 labor shares”, plus dividends. On May 23, 2006, the Company answered this new complaint, denyingthe validity of the claim.  As of December 31,2008 the case remains open with no new developments.

 

3)             Additionally, on June 27, 2008, the Company wasserved with a new complaint filed in Peru, this time by 82 former employees,(Alejandro Zapata Mamani and others vs. SPCC), seeking delivery of labor shares(or shares of whatever other current legal denomination) corresponding to years1971 to December 31, 1977 (the plaintiffs are seeking the same38,763,806.80 labor shares mentioned in the two previous labor share lawsuits),that should have been issued in accordance with Law No. 22333, plusinterest, and labor shares resulting from capital increases, plusdividends.  The Company answered this newcomplaint, denying the validity of the claim. As of December 31, 2008 the case remains open with no newdevelopments.

 

The Companyasserts that the claims are without merit and that the labor shares weredistributed to the former employees in accordance with the profit sharing lawthen in effect.  The Company does notbelieve that an unfavorable outcome is reasonably possible.  The Company has not made a provision forthese lawsuits because it believes that it has meritorious defenses to theclaims asserted in the complaints.

 

Mineria IntegralS.A.C.: In January 2007, the Company was served with three claims filed inPeru by Mineria Integral S.A.C.  Theclaims alleged that the Company had trespassed on certain mining rights of theplaintiff, in Ilo, Department of Moquegua, and sought that the Company desistfrom the trespass and pay compensation in the amount of $49.1 million.  In September 2008, the RegionalDirection of Moquegua ruled in favor of SPCC denying the plaintiff’sclaim.  The plaintiff has not appealedthis decision and therefore the case is closed.

 

Mexican operations

 

The MexicanGeological Services (“MGS”) Royalties: In August 2002, MGS (formerly named

 

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Council of MineralResources (“COREMI”)) filed with the Third Federal District Judge in CivilMatters, an action demanding from Mexcobre (La Caridad) the payment ofroyalties since 1997.  In December 2005,Mexcobre signed an agreement with MGS. Under the terms of this agreement the parties established a newprocedure to calculate the royalty payments applicable for 2005 and thefollowing years, and the Company paid in January 2006, $6.9 million ofroyalties for 2005 and $8.5 million as payment on account of royalties from thethird quarter 1997 through the last quarter of 2004.  On January 22, 2007 the Third FederalDistrict Judge issued a ruling regarding the payment related to the period fromthe third quarter of 1997 through the fourth quarter of 2004.  This ruling was appealed by both parties in February 2007.  The appeal was lost by the Company in October 2007.  The Company filed a protective action(Amparo) before the Ninth collegiate Civil Tribunal which rendered a negativeruling on August 27, 2008.  TheCompany is defending its economic interest in the judicial process to determinethe final amount to be paid to MGS.  Onan ongoing basis the Company is required to pay a 1% royalty on La Caridad’scopper production value after deduction of treatment and refining charges andcertain other carrying costs.

 

San Luis PotosiFacilities: The municipality of San Luis Potosi has granted DesarrolladoraIntersaba, S.A. de C.V. (“Intersaba”), licenses for use of land andconstruction of housing and/or commercial zones in the former Ejido Capulineszone, where some residential projects like “Villa Magna” and other newresidential projects are being developed within, an area, designated as abuffer zone due to IMMSA’s use of anhydrous ammonia gas.  This designation as a buffer zone was grantedby the risk area of SEMARNAT (the federal environmental authority) within itsapproval of the IMMSA’s Risk Analysis.

 

Regarding thissituation, a number of actions occurred, including the following:

 

1)    Against themunicipality of San Luis Potosi, requesting the annulment of DesarrolladoraIntersaba’s authorizations and licenses granted within the zinc plant’s bufferzone.

 

In August 2006, the action regarding theannulment of Villa Magna licenses was decided by a federal appeals court, whichdenied IMMSA’s request.  In September 2006,IMMSA submitted its final appeal to the Supreme Court of Justice and in February 2007,the court ruled against IMMSA.

 

IMMSA believes that even though the outcome wasadverse to its interest, the construction of the “Villa Magna” housing andcommercial development will not affect the operations of IMMSA’s zinc plant byitself.

 

In November 2008, a local court ruled that IMMSAhas to pay $0.9 million related to this matter. IMMSA has appealed this ruling. Intersaba also has submitted an appeal against the decision.

 

2)    In additionto the foregoing, IMMSA has initiated a series of legal and administrativeprocedures against the Municipality of San Luis Potosi due to its refusal toissue IMMSA’s use of land permit (licencia de uso de suelo) in respect to itszinc plant.  A federal judge ruled thatIMMSA’s use of land permit should be granted. The municipal authorities are evaluating how to comply with the ruling.

 

3)    Additionally,Ejido Capulines, an agricultural community, filed a protective action againstIMMSA’s Risk Analysis approved by SEMARNAT. As previously noted, this approval determines a buffer zone around theSan Luis facilities.

 

On November 4,2008, a federal judge terminated the case and noted that the Ejido Capulinesdid not prove any harm caused by IMMSA’s Risk Analysis authorization.  In 

 

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December 2008,the Ejido Capulines appealed this decision before a federal court.  The appeal is pending.

 

4)    Also, newlawsuits were filed by IMMSA against the Municipality of San Luis Potosichallenging other licenses granted in the safeguard area.

 

5)    IMMSA filedon October 7, 2008 a lawsuit against SEMARNAT before the Federal Tax andAdministrative Justice Court seeking the nullity of a July 24, 2008 denialof the Company’s request for a safeguard declaration.

 

The EjidalCommissariat of the “Ejido Pilares de Nacozari”, initiated a protective action(Amparo) against the second expropriation decree (by means of which 2.322 hectareswere expropriated for public use), ignoring the judicial settlement reachedwith the Company on this matter.  Thejudicial settlement had been ratified in January 2006.  The Company will defend the settlementreached with the Ejido and seek the dismissal of the case.

 

Mrs. Martinez,the wife of a miner, who died in the Pasta de Conchos accident, initiated aprotective action against the negative ruling issued by the Ministry of Economydenying her request to launch a procedure to cancel Industrial Minera Mexico’scoal concessions, which she argued the accident should trigger.

 

The First DistrictAdministrative Judge flatly dismissed the case, but this ruling was laterrevised by an appeals court.  Mrs. Martinezfiled a new protective action against a new ruling issued by the Ministry ofEconomy.  The Company is certain that anaccident cannot trigger a procedure of cancellation of the coalconcessions.  Although the Company cannotpredict the outcome of the procedures filed by Mrs. Martinez, the Companyasserts that the claims of Mrs. Martinez are without merit and isvigorously defending against the actions.

 

 

**Labormatters**:

 

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

 

PeruvianOperations

 

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

 

From June 30 to July 5,2008 the three major unions went on strike in support of a mining federationstrike.  During this strike operationswere near normal; an insignificant amount of production was lost as workcontinued with the support of staff and administrative personnel and withcontractors.

 

Mexican operations

 

Approximately 75% of the Mexican labor force was unionized at December 31,2008, represented by two separate unions. Under Mexican law, the terms of employment for unionized workers is setforth in collective bargaining agreements. Mexican companies negotiate the salary provisions of collectivebargaining agreements with the labor 

 

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unions annually and negotiate other benefits every two years.  The Company conducts negotiations separatelyat each mining complex and each processing plant.

 

In the last sevenyears the Cananea mine has experienced more than nine labor stoppages totalingmore than 634 days of inactivity through December 31, 2008.  Beginning on July 30, 2007, our Cananeamine in Mexico started a work stoppage which continues into 2009.  On January 11, 2008 the Mexican FederalLabor Court declared the Cananea strike illegal and ordered the workers toreturn to work within 24 hours. The workers partially returned to work and theCompany resumed operations. However, on April 11, 2008 the workersrestarted the labor stoppage and shut down production, based upon a newfederal ruling.  The Company has triedunsuccessfully to resolve the current labor stoppage that obstructsproduction at Cananea, in the second quarter 2008 the Board of Directorsoffered all Cananea employees a severance payment in accordance with thecollective bargaining agreement and applicable law.  This was offered in order to award theemployees a significant severance payment that allows them to choose the laboralternative that is best for each of them. During the second and third quarters of 2008, under this plan a group ofemployees was terminated at a cost to the Company of $15.2 million, which wasrecorded in cost of sales on the consolidated statement of earnings.  In accordance with SFAS No. 112, theCompany has estimated a liability of $36.4 million which has been recorded onthe consolidated balance sheet.  In December 2008,the Mexican Federal Labor Court ruled in favor of the Company and declared thestrike illegal.  The union appealed thisdecision.  On January 7, 2009 thejudge of the fifth district on labor matters annulled the favorable decision tothe Company.  The Company has filed arequest for a review of this ruling before an appellate federal court.  The Company will continue to pursue afavorable resolution of the labor stoppage.

 

The Company hasthe right to resume operations at the mine with those workers who wish tocontinue.  Nevertheless some strikershave illegally blocked the entrance to the unit.  The Company has filed two successivecomplaints before an upper court in order to require the Fifth District judgeto safeguard the Company’s right to operate.

 

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

 

 

**Otherlegal matters**:

 

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

 

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’ and

 

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experts’ fees andcosts.  The defendants believe that thislawsuit is without merit and are vigorously defending against the action.

 

The Company’smanagement believes that the outcome of the aforementioned legal proceedingwill not have a material adverse effect on the Company’s financial position orresults of operations.

 

The Company isinvolved in various other legal proceedings incidental to its operations, butthe Company does not believe that decisions adverse to it in any suchproceedings individually or in the aggregate would have a material adverseeffect on its financial position or results of operations.

 

The Company’s directand indirect parent corporations, including AMC and Grupo Mexico, have fromtime to time been named parties in various litigations involving Asarco LLC (“Asarco”).  In August 2002 the U.S. Department ofJustice brought a claim alleging fraudulent conveyance in connection with AMC’sthen-proposed purchase of SCC from a subsidiary of Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  In March 2003,AMC purchased its interest in SCC from Asarco. In October 2004, AMC, Grupo Mexico, Mexicana de Cobre and 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 2005Chapter 11 bankruptcy filing by Asarco, as described below.  However, on November 16, 2007, thislawsuit after being removed to federal court was transferred to the UnitedStates District Court for the Southern District of Texas in Brownsville, Texas,for resolution in conjunction with a new lawsuit filed by Asarco’s creditors,as described below.  On February 2,2007 a complaint was filed by Asarco on behalf of Asarco’s creditors, allegingmany of the matters previously claimed in the New York State lawsuit, includingthat AMC’s purchase of SCC from Asarco should be voided as a fraudulentconveyance.  In June 2008 thelawsuit was concluded in Brownsville, Texas. The constructive fraudulent conveyance claim was dismissed; however theactual fraud and the aiding and abetting the breach of fiduciary duties countswere favorable to plaintiffs.  The court’sdecision did not determine the damage amount. Grupo Mexico has stated they will appeal the ruling.  While Grupo Mexico and its affiliates believethat these claims are without merit, the Company cannot assure you that theseor future claims, if successful, will not have an adverse effect on the Company’sparent corporation or the Company.  Anyincrease in the financial obligations of the Company’s parent corporation, as aresult of matters related to Asarco or otherwise could, among other effects,result in the Company’s parent corporation attempting to obtain increaseddividends or other funding from the Company. In 2005, certain subsidiaries of Asarco filed bankruptcy petitions inconnection with alleged asbestos liabilities. In July 2005, the unionized workers of Asarco commenced a workstoppage.  As a result of variousfactors, including the above-mentioned work stoppage, in August 2005Asarco filed a voluntary petition for relief under Chapter 11 of the U.S.Bankruptcy Code before the U.S. Bankruptcy Court in Corpus Christi, Texas.  Asarco’s bankruptcy case is being joined withthe bankruptcy cases of its subsidiaries. Asarco’s bankruptcy could result in additional claims being filedagainst Grupo Mexico and its subsidiaries, including SCC, Minera Mexico or itssubsidiaries.

 

 

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**Other**:

 

Regional developmentcontribution:

 

In December 2006,the Company’s Peruvian Branch signed a contract with the Peruvian governmentcommitting the Company to make annual contributions for five years to supportthe regional development of Peru.  Thiswas in response to an appeal by the president of Peru to the mining industry.  The contributions are being used for socialbenefit programs.  In 2008 and 2007, theCompany made non-deductible contributions of $18.9 million and $16.1 millionout of 2007 and 2006 earnings, respectively. These contributions were deposited with a separate entity, CopperAssistance Civil Association (Asociación Civil Ayuda del Cobre) which will makedisbursements for approved investments in accordance with the agreement.  Future contributions could increase ordecrease depending on copper prices.  Thecommitment of the Branch is for a total of 1.25% of its annual earnings, afterPeruvian income tax.  If the averageannual LME copper price is below $1.79 per pound the contribution willcease.  In 2008 the Company made aprovision of $12.2 million based on Peruvian Branch earnings.

 

Royalty charge

 

In June 2004,the Peruvian Congress enacted legislation imposing a royalty charge to be paidby mining companies.  Under this law, theCompany is subject to a 1% to 3% royalty, based on sales, applicable to thevalue of the concentrates produced in our Toquepala and Cuajone mines.  The Company made provisions of $53.9 million,$62.8 million and $67.2 million in 2008, 2007 and 2006, respectively, for thisroyalty.  These provisions are includedin “Cost of sales (exclusive of depreciation, amortization and depletion)” inthe consolidated statement of earnings.

 

Power purchaseagreement

 

In 1997, SCC soldits Ilo power 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 theagreement was amended releasing Enersur from its obligation to constructadditional capacity to meet the Company’s increased electricityrequirements.  SCC believes it cansatisfy the need for increased electricity requirements from other sources,including local power providers.  Basedon power cost in 2008, the estimated contractual obligation to purchase energyin the remaining period of the contract is approximately $1.1 billion.

 

**Taxcontingency matters:**

 

Tax contingenciesare provided for under FIN No 48 (see Note 8 “Income Taxes.”)

 

**NOTE 15-STOCKHOLDERS’ EQUITY:**

 

**Common stock**:

 

In 2008 Grupo Mexico,through its wholly owned subsidiary AMC, purchased approximately 11.8 million sharesof the Company’s common shares.  Inaddition, in 2008 the Company repurchased 28.5 million shares of the Company’scommon shares.  As a result of thesetransactions Grupo Mexico’s ownership of SCC’s outstanding capital stockincreased to 79.0%. Please see Note 22 “Subsequent Events” for furtherpurchases in 2009.

 

 

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**Stock split**

 

On June 19, 2008 theExecutive Committee of the Board of Directors declared a three-for-one split ofthe Company’s outstanding common stock. On July 10, 2008 common shareholders of record at the close of businesson June 30, 2008, received two additional shares of common stock for everyshare owned.  The split increased thenumber of shares outstanding to 883,410,150 from 294,470,050.  The stock split was recorded in our 2008financial statements.  All share and pershare amounts have been retroactively adjusted to reflect the stock split.

 

**Appropriated Retained Earnings**:

 

As of December 31, 2008, Company management set aside $2.4 billionof unremitted earnings, of its Mexican subsidiary, Minera Mexico, as appropriatedretained earnings.  It is Company’sintention to indefinitely invest these funds in Mexico.  These amounts are earmarked for the Company’sMexican expansion program.  See also Note8 of these financial statements.

 

**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.

 

Activity in treasurystock in the years 2008 and 2007 was as follows (in millions):

 

|                                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Southern Copper  Corporation common shares                                              |       |     |       |     |       |
| Balance as of  January 1                                                           |       | $        | 4.4        |     | $          | 4.4 |   |
| Purchase of  shares                                                                     |       | 384.6    |       | —   |       |
| Used for  corporate purposes                                                            |       | (*       | )          | (*       | )          |
| Balance as of  December 31                                                         |       | 389.0    |       | 4.4      |       |
|                                                                                    |       |     |       |     |       |
| Parent Company  (Grupo Mexico) common shares                                            |       |     |       |     |       |
| Balance as of  January 1                                                           |       | 170.3    |       | 92.6     |       |
| Sale of shares                                                                          |       | (72.3    | )          | —   |       |
| Purchase of  shares                                                                     |       | (*       | )          | —   |       |
| Other activity,  including received dividends, interest and currency translation effect |       | 27.5     |       | 77.7     |       |
| Balance as of  December 31                                                         |       | 125.5    |       | 170.3    |       |
|                                                                                    |       |     |       |     |       |
| Treasury stock  balance as of December 31                                          |       | $        | 514.5      |     | $          | 174.7 |   |

----

(*)         Amount less than $0.1 million.

 

SCC common shares intreasury

 

At December 31, 2008and 2007 treasury stock holds 29,696,086 shares and 1,199,136 shares ofSouthern Copper Corporation common stock with a cost of $389.0 million and $4.4million, respectively.

 

The shares of SouthernCopper Corporation are used for general corporate purposes, including forawards under the Directors’ Stock Award Plan. In both 2008 and 2007, the Company distributed 13,200 shares of SouthernCopper Corporation shares to directors under the Directors’ Stock Award Plan.

 

 

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Directors’ Stock Award Plan

 

The Company established a stock awardcompensation plan for the directors who are not compensated as employees of theCompany.  Under this plan, participantswill receive 1,200 shares of common stock upon election and 1,200 additionalshares following each annual meeting of stockholders thereafter. 600,000 sharesof Southern Copper common stock have been reserved for this plan.  At December 31, 2008 and 2007, 229,200and 216,000 shares, respectively, have been awarded under this plan.

 

SCC sharerepurchase program

 

In 2008 theCompany’s Board of Directors authorized a $500 million share repurchaseprogram.  During 2008 the Companypurchased 28.5 million shares of its common stock at a cost of $384.7million.  These shares will be availablefor general corporate purposes.  TheCompany may purchase additional shares from time to time, based on marketconditions and other factors.  This repurchaseprogram has no expiration date and may be modified or discontinued at any time.

 

The followingtable presents the repurchase program activity for the year 2008:

 
| **Period** | ** ** | **Total  Number of  Shares** | ** ** | **Average  Price  Paid per** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly** | ** ** | **Maximum Number  of Shares that  May Yet Be  Purchased Under  the Plan @** | ** ** |
|------------|------------|------------------------------|------------|------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **From**   | ** ** | **To**                       | ** ** | **Purchased**                | ** ** | **Share**                                                         | ** ** | **Announced Plan**                                                               | ** ** | **$16.06** | ** ** |
|       |       |                         |       |                         |       |                                                              |       |                                                                             |       |   |   |
| 08/11/2008 |       | 08/31/2008                   |       | 410,150                      |       | $                                                                 | 22.91      |                                                                             | 410,150    |   |   |   |
|       |       |                         |       |                         |       |                                                              |       |                                                                             |       |   |   |
| 09/01/2008 |       | 09/30/2008                   |       | 2,900,000                    |       | $                                                                 | 20.37      |                                                                             | 3,310,150  |   |   |   |
|       |       |                         |       |                         |       |                                                              |       |                                                                             |       |   |   |
| 10/01/2008 |       | 10/31/2008                   |       | 9,100,000                    |       | $                                                                 | 12.65      |                                                                             | 12,410,150 |   |   |   |
|       |       |                         |       |                         |       |                                                              |       |                                                                             |       |   |   |
| 11/01/2008 |       | 11/30/2008                   |       | 10,621,800                   |       | $                                                                 | 12.55      |                                                                             | 23,031,950 |   |   |   |
|       |       |                         |       |                         |       |                                                              |       |                                                                             |       |   |   |
| 12/01/2008 |       | 12/31/2008                   |       | 5,478,200                    |       | $                                                                 | 12.37      |                                                                             | 28,510,150 |   | 7,182,056 |   |
|       |       | Total                        |       | 28,510,150                   |       | $                                                                 | 13.49      |                                                                             |       |   |   |   |

 

Please see Note 22 “SubsequentEvents” for further purchases in 2009.

 

Grupo Mexico shares intreasury

 

At December 31, 2008and 2007 treasury stock holds 88,704,513 shares and 434,351,019 shares of GrupoMexico with a cost of $17.6 million and $82.4 million, respectively.

 

The shares of Grupo Mexicoare used to make awards under both the Employee stock purchase plan and theExecutive Stock Purchase Plan.  In 2008,the Company did not award any share of Grupo Mexico under the employee stockpurchase plan.  In 2007 the Companyawarded 4.8 million shares of Grupo Mexico under the employee stock purchaseplan.

 

On June 19,2008 Grupo Mexico announced a three-for-one split of their outstanding commonstock which was effective on June 30, 2008.  Accordingly all share amounts in the Employeeand Executive Stock Purchase plans have been retroactively adjusted to reflectthe stock split.

 

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On August 22,2008 Grupo Mexico paid a dividend of 1 share for each 150 shares held, asconsequence the number of Grupo Mexico shares held by the Company increased by2,792,315 shares from 433,351,490 shares to 436,143,805 shares.

 

On November 11,2008 the Company sold 350 million shares of Grupo Mexico for $216.5 millionwith a cost of $72.4 million.  Thistransaction qualifies as a transaction among entities under common control, assuch, the resulting gain of $144.1 million was recorded as additional paid-incapital in the Company’s consolidated balance sheet.

 

On November 14,2008 Grupo Mexico paid a dividend of 1 share for each 35 shares held, asconsequence the number of Grupo Mexico shares held by the Company increased by2,560,708 shares from 86,143,805 shares to 88,704,513 shares.

 

The gain net ofincome taxes is allocated as follows, $94.8 million to the majorityshareholders’ interest and $25.2 million to the remaining 21.0% interest heldby the international investment community.

 

**Employee Stock Purchase Plan**:

 

In January 2007, theCompany offered to eligible employees a stock purchase plan (the “EmployeeStock Purchase Plan”) through a trust that acquires shares of Grupo Mexicostock for sale to its employees, and employees of subsidiaries, and certainaffiliated companies.  The purchase priceis established at the approximate fair market value on the grant date.  Every two years employees will be able to acquiretitle to 50% of the shares paid in the previous two years.  The employees will pay for shares purchasedthrough monthly payroll deductions over the eight year period of the plan.  At the end of the eight year period, theCompany will grant the participant a bonus of 1 share for every 10 sharespurchased by the employee.

 

If Grupo Mexico paysdividends on shares during the eight year period, the participants will beentitled to receive the dividend in cash for all shares that have been fullypurchased and paid as of the date that the dividend is paid.  If the participant has only partially paidfor shares, the entitled dividends will be used to reduce the remainingliability owed for purchased shares.

 

In the case of voluntaryresignation of the employee, the Company will pay to the employee the purchaseprice applying a deduction based on the following schedule:

 

| **If the resignation occurs during:** | ** ** | **% Deducted** | ** ** |
|---------------------------------------|------------|----------------|------------|
| 1st year after  the grant date        |       | 90             | %          |
| 2nd year after  the grant date        |       | 80             | %          |
| 3rd year after  the grant date        |       | 70             | %          |
| 4th year after  the grant date        |       | 60             | %          |
| 5th year after  the grant date        |       | 50             | %          |
| 6th year after  the grant date        |       | 40             | %          |
| 7th year after  the grant date        |       | 20             | %          |

 

In the case ofinvoluntary termination of the employee, the Company will pay to the employeethe difference between the fair market value of the shares at the date oftermination of employment, and the purchase price.  When the fair market value of the shares ishigher than the purchase price, the Company will apply a deduction over theamount to be paid to the employee based on the following schedule.

 

| **If the termination occurs during:** | ** ** | **% Deducted** | ** ** |
|---------------------------------------|------------|----------------|------------|
| 1st year after  the grant date        |       | 100            | %          |
| 2nd year after  the grant date        |       | 95             | %          |
| 3rd year after  the grant date        |       | 90             | %          |
| 4th year after  the grant date        |       | 80             | %          |
| 5th year after  the grant date        |       | 70             | %          |
| 6th year after  the grant date        |       | 60             | %          |
| 7th year after  the grant date        |       | 50             | %          |

 

 

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In case of retirement ordeath of the employee, the Company will render the buyer or his legalbeneficiary, the shares effectively paid as of the date of retirement or death.

 

For the years 2008 and2007, the stock based compensation expense under this plan was $2.1 million inboth periods.  As of December 31,2008, there was $12.8 million of unrecognized compensation expenses under thisplan, which is expected to be recognized over the remaining 6 years period.

 

The following tablepresents the stock award activity for the years ended December 31, 2008and 2007:

 

| ** **                                    | ** ** | **Shares** | ** ** | **Unit Weighted Average Grant Date Fair Value** | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| Outstanding  shares at January 1, 2007   | ** ** | **—** | ** ** | **—**                                      | ** ** |
| Granted                                       |       | 14,504,151 |       | $                                               | 1.17       |   |
| Exercised                                     |       | —     |       | —                                          |       |
| Forfeited                                     |       | —     |       | —                                          |       |
| Outstanding  shares at December 31, 2007 |       | 14,504,151 |       | $                                               | 1.17       |   |
|                                          |       |       |       |                                            |       |
| Outstanding  shares at January 1, 2008   |       | 14,504,151 |       | $                                               | 1.17       |   |
| Granted                                       |       | —     |       | —                                          |       |
| Exercised                                     |       | (23,655    | )          | $                                               | 1.17       |   |
| Received as  dividend                         |       | 96,515     |       |                                            |       |
| Forfeited                                     |       | —     |       | —                                          |       |
| Outstanding  shares at December 31, 2008 |       | 14,577,011 |       | $                                               | 1.16       |   |

 

**Executive Stock Purchase Plan:**

 

Grupo Mexico also offersa stock purchase plan for certain members of its executive management and theexecutive management of its subsidiaries and certain affiliated companies.  Under this plan, participants will receiveincentive cash bonuses which are used to purchase up to 2,250,000 shares ofGrupo Mexico over an eight year period. The fair value of the award is estimated on the date of grant and isrecognized as compensation expense over a weighted average requisite serviceperiod of eight years.  The Companyrecorded $1.3 million and $0.5 million net of tax, in compensation expense in2008 and 2007, respectively.  As of December 31,2008, there was $1.9 million of unrecognized compensation cost, related to thisplan, which is expected to be recognized over the remaining period of 6 years.

 

The following tablepresents the stock award activity for the year ended December 31, 2008 and2007:

 

| ** **                                    | ** ** | **Shares** | ** ** | **Unit Weighted Average Grant Date Fair Value** | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| Outstanding  shares at January 1, 2007   |       | 2,250,000  |       | $                                               | 0.77       |   |
| Granted                                       |       | —     |       |                                            |       |
| Exercised                                     |       | (877,500   | )          | $                                               | 0.77       |   |
| Forfeited                                     |       | —     |       |                                            |       |
| Outstanding  shares at December 31, 2007 |       | 1,372,500  |       | $                                               | 0.77       |   |

 

 

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| Outstanding  shares at January 1, 2008   |   | 1,372,500 |   | $      | 0.77   |   |
|-----------------------------------------------|--------|-----------|--------|--------|--------|--------|
| Granted                                       |   | —    |   |   |   |
| Exercised                                     |   | (675,000  | )      | $      | 0.77   |   |
| Forfeited                                     |   | —    |   |   |   |
| Outstanding  shares at December 31, 2008 |   | 697,500   |   | $      | 0.77   |   |

 

**NOTE 16-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.  The Company generally does not enter into derivativecontracts unless it anticipates a future activity that is likely to occur thatwill result in exposing the Company to market risk.

 

Copperand zinc swaps:

 

During 2008, 2007 and2006 the Company entered into copper collar and swaps contracts to protect aportion of its sales of copper production as follows

 
| ** **                    | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Collar  contracts:            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pounds (in  millions)         |       | 220.5      |       | 170.5      |       | —     |       |
| Average LME cap  price        |       | $          | 4.23       |       | $          | 4.07       |       | — |   |
| Average LME  floor price      |       | $          | 3.40       |       | $          | 3.20       |       | — |   |
|                          |       |       |       |       |       |       |       |
| Swap contracts:               |       |       |       |       |       |       |       |
| Pounds (in  millions)         |       | 175.1      |       | 11.9       |       | 847.7      |       |
| Weighted average  COMEX price |       | $          | 3.87       |       | $          | 3.71       |       | $ | 3.17 |   |
|                               |            |            |            |            |            |            |            |  |  |  |

 

Related to the settlementof these copper collar and swap contracts, the Company recorded gains of $137.0million and $10.9 million in 2008 and 2007, respectively, and a loss of $276.1million in 2006.  These gains and losseswere recorded in net sales on the consolidated statement of earnings.  Also, these gains and losses were recorded innet earnings in operating activities on the consolidated statement of cashflows.

 

In addition, in 2006 theCompany entered into a zinc swap contract to protect the cost of a portion ofthe zinc concentrates purchased during the recovery from a fire at the San LuisPotosi zinc refinery.  Related to thesettlement of this zinc swap contract the Company recorded a loss of $0.2million in 2006.  This loss was recordedin net sales on the consolidated statement of earnings.  Also, this loss was recorded in net earningsin operating activities of the consolidated statement of cash flow. The Companydid not enter into any zinc derivative contracts in 2008 and 2007.

 

At December 31, 2008the Company did not hold any open copper or zinc derivative instruments.

 

Transactions under thesemetal price protection programs are not accounted for as hedges under SFAS No. 133and are adjusted to fair market value based on the metal prices as of the lastday of the respective reporting period with the gain or loss recorded in netsales on the consolidated statement of earnings.

 

 

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Gas swaps:

 

In the last three years the Company entered into gas swap contracts toprotect part of its gas consumption as follows:

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|---------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Gas volume  (MMBTUs)      |       | 460,000  |       | 900,000  |       | 3,650,000 |       |
| Fixed price               |       | $        | 8.2175     |     | $          | 7.5250    |       | $ | 4.2668 |   |
| (Loss) gain (in  million) |       | $        | (0.9       | )        | $          | (0.9      | )          | $ | 6.3 |   |

 

The losses and gain obtained were included in the production cost. At December 31,2008, the Company did not hold any open gas swap contracts.

 

Exchange Rate Derivatives, U.S. dollar / Mexican peso contracts:

 

Because more than 85% ofthe Company’s sales collections in Mexico are in US dollars and many of itscosts are in Mexican pesos, the Company entered into zero-cost derivativecontracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar.

 

At December 31, 2008the Company held two types of exchange rate derivative contracts:

** **

In the first type ofexchange rate derivative contract, if the exchange rate settles at or below thebarrier price, the Company does not sell US dollars, if the exchange ratesettles above the barrier price and below the strike price established in the contract,the Company sells the notional amount of US dollars settling in the week at thestrike price. If the exchange rate settles above the strike price establishedin the contract, the Company sells double the underlying amount of US dollarssettling in the week at the strike price established in the contract. AtDecember 31, 2008, the Company held the following contracts of this type:

 

 

| **Notional Amount (millions)** | ** ** | **Underlying amount  (millions)** | ** ** | **Due Date, Weekly expiration until** | ** ** | **Strike Price (Mexican Pesos/U.S. Dollars)** | ** ** | **Barrier Price (Mexican Pesos/U.S. Dollars)** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| $                              | 15.0       |                              | $          | 1.25                                  |       | March 11, 2009                           |       | 11.25                                          |       | 10.60 |   |
|                                |            |                                   |            |                                       |            |                                               |            |                                                |            |  |  |

 

Each notional amountincludes a group of underlying amount transactions that have the same strikeand barrier price.

 

In the second type ofexchange rate derivative contract, if the exchange rate is less than or equalto the strike price, the Company sells US dollars in an amount equal to theunderlying amount for the expiration period at the strike price.  The difference between the strike price andthe market exchange rate is considered a gain to the Company.  The total accumulated gain over the life ofthe contract cannot exceed 200 cents per dollar transacted in the firstcontract and 500 cents per dollar transacted in the second contract.  If the exchange rate is above the strikeprice, the Company sells dollars in an amount equal to 2 times the underlyingamount for the expiration period at the strike price and the loss does notreduce the accumulated gain.  At December 31,2008, the Company held the following contracts of this type:

 

 

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| **Notional Amount  (millions)** | ** ** | **Underlying amount  (millions)** | ** ** | **Expiration  Period** | ** ** | **Due Date** | ** ** | **Strike Price  (Mexican Pesos/U.S. Dollars)**     | ** ** |
|---------------------------------|------------|-----------------------------------|------------|------------------------|------------|--------------|------------|----------------------------------------------------|------------|
| $                               | 15.0       |                              | $          | 2.5                    |       | Monthly      |       | January 13, 2009  through June 11, 2009  |       | 10.59 |   |
| $                               | 85.0       |                              | $          | 2.5                    |       | Weekly       |       | January 2, 2009  through August 21, 2009 |       | 10.53 |   |

 

Each notional amountincludes a group of underlying amount transactions that have the same strikeand barrier price.

 

The exercise of thesezero-cost derivative contracts resulted in a realized loss of $17.8 million in2008 and gains of $8.1 million and $0.9 million in 2007 and 2006, respectively,which were recorded as Loss on derivative instruments in the consolidatedstatement of earnings.

 

At December 31,2008, the mark-to market value of the above listed exchange rate derivativecontracts generated an unrealized loss of $56.8 million which was recorded asloss on derivative instruments in the consolidated statement of earnings.

 

If the exchangerate of the Mexican Peso to the US Dollar were to increase or decrease by 10%,the additional loss or benefit of these derivative instruments would not be consideredmaterial to the overall results of operations of the Company.

 

Dualcurrency notes:

 

In 2007 the Companyinvested $560.0 million in dual currency notes which provided an above marketinterest return subject to a barrier range of the Mexican peso/US dollarexchange rates.  Related to theseinvestments the Company realized an exchange loss of $1.3 million, which wasrecorded as a loss on derivative instruments in the consolidated statement ofearnings.  At December 31, 2008, theCompany did not hold any dual currency notes.

 

The Company earnedinterest of $2.1 million in 2007, which was recorded as interest income in theconsolidated statement of earnings.

 

**NOTE 17-FINANCIAL INSTRUMENTS:**

 

For certain of the Company’s financial instruments, including cash andcash equivalents, accounts receivable (other than accounts receivableassociated with provisionally priced sales) and accounts payable, the carryingamounts approximate fair value due to their short maturities.  Consequently, such financial instruments arenot included in the following table that provides information about thecarrying amounts and estimated fair values of other financial instruments:

 

 

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| ** **                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| ** **                                                       | ** ** | **Carrying  value**         | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Assets:                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts  receivable associated with provisionally priced sales: |       |                        |       |   |   |   |   |   |   |
| Copper                                                           |       | $                           | (44.2      | ) | $ | (44.2 | ) | $ | (42.0 | ) | $ | (42.0 | ) |
| Molybdenum                                                       |       | $                           | (53.1      | ) | $ | (53.1 | ) | $ | — |   | $ | — |   |
| Short-term  investments                                          |       | $                           | 62.4       |   | $ | 62.4 |   | $ | 117.9 |   | $ | 117.9 |   |
| Liabilities:                                                     |       |                        |       |   |   |   |   |   |   |
| Long-term debt                                                   |       | $                           | 1,306.4    |   | $ | 1,038.6 |   | $ | 1,466.4 |   | $ | 1,531.7 |   |

 

The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate that value:

 

Accounts receivable associated with provisionally priced sales: Fairvalue of copper is based on published forward prices and fair value ofmolybdenum is based on year-end market prices.

 

Short-term investments: Due to the short term nature of theinvestments, current value is deemed to approximate fair value.

 

Long-term debt: Fair value is based on quoted market prices except for theMitsui loan which is based on the present value of the cash flow discounted at9% which is the Company’s weighted average capital cost.

 

**NOTE 18-CONCENTRATION OF RISK:**

 

The Company operates four open-pit copper mines, five underground polymetal mines, three smelters and eight refineries in Peru and Mexico andsubstantially all of its assets are located in these countries.  There can be no assurances that the Company’soperations and assets that are subject to the jurisdiction of the governmentsof Peru and Mexico will not be adversely affected by future actions of suchgovernments.  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 the Company to aconcentration of credit risk, consist primarily of cash and cash equivalents,short-term investments and trade accounts receivable.

 

The Company invests or maintains available cash with various banks,principally in the United States, Mexico, Europe and Peru, or in commercialpapers of highly-rated companies.  Aspart of its cash management process, the Company regularly monitors therelative credit standing of these institutions. At December 31, 2008, SCC had invested its cash equivalents asfollows:

 

| **Country** | ** ** | **% of total cash** | ** ** | **% invested in one institution** | ** ** |
|-------------|------------|---------------------|------------|-----------------------------------|------------|
| Abroad      |       | 59.5                | %          | 25.5                              | %          |
| Peru        |       | 8.3                 | %          | 15.4                              | %          |
| Mexico      |       | 32.2                | %          | 30.7                              | %          |

 

 

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During the normal course of business, the Company provides credit toits customers.  Although the receivablesresulting from these transactions are not collateralized, the Company has notexperienced significant problems with the collection of receivables.

 

The Company is exposed to credit loss in cases where the financialinstitutions with which it has entered into derivative transactions (commodity,foreign exchange and currency/interest rate swaps) are unable to pay when theyowe funds as a result of protection agreements with them. To minimize the riskof such losses, the Company only uses highly-rated financial institutions thatmeet certain requirements. The Company also periodically reviews the creditworthinessof these institutions to ensure that they are maintaining their ratings. TheCompany does not anticipate that any of the financial institutions will defaulton their obligations.

 

The Company’s five largest trade receivable balances accounted for 61.7%,45.4% and 39.5% of the trade accounts receivable at December 31, 2008,2007 and 2006, respectively, of which one customer represented approximately21.5%, 22.4% and 10.9%, respectively, of our trade accounts receivable.

 

**NOTE 19-RELATED PARTY TRANSACTIONS:**

 

Balances receivable and payable with affiliated companies are shownbelow (in millions):

 
| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Affiliate  receivable:                                      | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Grupo Mexico  S.A.B de C.V. and affiliates                  |       | $                           | 0.8        |   | $ | 1.5 |   |
| Ferrocarril  Mexicano, S.A. de C.V.                         |       | 0.3                         |       | — |   |
| Mexico Proyectos  y Desarrollos S.A. de C.V. and affiliates |       | 0.8                         |       | — |   |
| Other                                                       |       | —                      |       | 0.1 |   |
|                                                        |       | $                           | 1.9        |   | $ | 1.6 |   |
| Affiliate  payable:                                         |       |                        |       |   |   |
| Grupo Mexico  S.A.B. de C.V. and affiliates                 |       | $                           | 8.9        |   | $ | 3.0 |   |
| Ferrocarril  Mexicano, S.A. de C.V.                         |       | —                      |       | 0.9 |   |
| Other                                                       |       | —                      |       | — |   |
|                                                        |       | $                           | 8.9        |   | $ | 3.9 |   |

 

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 and are subject to review and approval bysenior management, as are all related party transactions.  It is our policy that the Audit Committee ofthe Board of Directors shall review all related party transactions.  The Company is prohibited from entering orcontinuing a material related party transaction that has not been reviewed andapproved or ratified by the Audit Committee.

 

Grupo Mexico, the Company’sultimate parent and the majority indirect stockholder of the Company, and itsaffiliates provide various services to the Company.  These services are principally related toaccounting, legal, tax, financial, treasury, human resources, price riskassessment and hedging, purchasing, procurement and logistics, sales andadministrative and other support services. The Company pays Grupo Mexico Servicios S.A de C.V., a subsidiary ofGrupo Mexico for these services.  Thetotal amount paid by the Company for such services in each of the last threeyears ended December 31, 2008 was $13.8 million.  The Company expects to continue to pay forthese 

 

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services in the future.

 

The Company’s Mexicanoperations paid fees of $11.0 million, $11.0 million and $17.2 million in 2008,2007 and 2006, 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 $22.0 million, $14.5 million and $29.8 million in 2008,2007 and 2006, respectively, for construction services provided by MexicoConstructora Industrial S.A. de C.V., an indirect subsidiary of Grupo Mexico.

 

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.  In connection with this, theCompany paid fees of $1.8 million, $2.5 million and $5.5 million in 2008, 2007and 2006, respectively, for maintenance services and sale of vehicles providedby Mexico Compañia de Productos Automotrices, S.A. de C.V., a companycontrolled by the Larrea family.  Also,in 2007, the Company paid fees of $0.8 million for drilling services provided byPerforadora Mexico, S.A de C.V, a company controlled by the Larrea family.

 

Additionally, in thethird quarter of 2006, one of our Mexican subsidiaries provided a short-terminterest bearing loan of $10.6 million to Mexico Transportes Aereos, S.A. deC.V. (“MexTransport”) for the purchase of an airplane, which was paid in thefirst quarter of 2007.  MexTransport, acompany controlled by the Larrea family, provides aviation services to ourMexican operations.  Our Mexicansubsidiaries have provided a guaranty for a new $10.8 million loan obtained byMexTransport.  The guaranty provided toMexTransport is backed up by the transport services provided by MexTransport tothe Company’s Mexican subsidiaries.  TheCompany paid fees of $2.9 million, $1.2 million in 2008 and 2007, respectively,to MexTransport for aviation services.

 

The Companypurchased $4.0 million, $6.3 million and $4.9 million in 2008, 2007 and 2006,respectively, of industrial materials from Higher Technology S.A.C in which Mr. CarlosGonzalez has a proprietary interest.  TheCompany paid fees of $0.8 million, $0.7 million and $0.6 million in 2008, 2007and 2006, respectively, for maintenance services provided by Servicios yFabricaciones Mecanicas S.A.C., a company in which Mr. Carlos Gonzalez hasa proprietary interest.  Mr. Carlos Gonzalezis the son of SCC’s Chief Executive Officer.

 

The Companypurchased $0.7 million, $0.7 million and $0.5 million in 2008, 2007 and 2006,respectively, of industrial material from Sempertrans France BeltingTechnology, in which Mr. Alejandro Gonzalez is employed as a salesrepresentative.  Also, the Companypurchased $0.5 million and $0.3 million in 2008 and 2007, respectively, ofindustrial material from PIGOBA, S.A. de C.V., a company in which Mr. AlejandroGonzalez has a proprietary interest. Mr. Alejandro Gonzalez is the son ofSCC’s Chief Executive Officer.

 

The Company purchased$2.2 million, $3.6 million and $4.6 million in 2008, 2007 and 2006,respectively, of industrial material and services from Breaker, S.A. de C.V., acompany in which Mr. Jorge Gonzalez has a proprietary interest.  Mr. Jorge Gonzalez is the son-in-law ofSCC’s Chief Executive Officer.

 

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

 

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**NOTE 20-SEGMENT AND RELATED INFORMATION:**

 

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

 

The three segmentsidentified are groups of mines with the similar economic characteristics, typeof products, processes and support facilities, similar regulatory environments,similar employee bargaining contracts and similar currency risks.  In addition, each mine within the individualgroup earns revenues from similar type of customers for their products andservices and each group incurs expenses independently, including commercialtransactions between groups.

 

Intersegment sales are based on arms-length prices at the time ofsale.  These may not be reflective ofactual prices realized by the Company due to various factors, includingadditional processing, timing of sales to outside customers and transportationcost.  Added to the segment informationis information regarding the Company’s sales. The segments identified by the Company are:

 

1.               Peruvian operations, which include the Toquepala andCuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.  The Peruvian operations produce copper, withproduction of by-products of molybdenum, silver and other material.

 

2.               Mexican open pit operations, which include La Caridadand Cananea mine complexes and the smelting and refining plants and supportfacilities which service both mines.  TheMexican open pit operations produce copper, with production of by-products ofmolybdenum, silver and other material.

 

3.               Mexican underground mining operations, which includefive underground mines that produce zinc, copper, silver and gold, a coal minewhich produces coal and coke, and several industrial processing facilities forzinc and copper.  This group isidentified as the IMMSA unit.

 

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

 

The Mexican open pitsegment includes two copper mines whose mineral output is processed in the samesmelter and refinery without distinguishing between the products of the twomines.  The resultant product, anodes andrefined copper, are then shipped to customers throughout the world. Theseshipments are recorded as revenues of the Company’s Mexican open pit mines.

 

The Company hasdetermined that it is necessary to classify the Peruvian open pit operations asa separate operating segment from the Mexican open pit operations due to thevery distinct regulatory and political environments in which they operate.  The Company’s Chief Operating Officer mustconsider the operations in each country separately when analyzing results ofthe Company and making key decisions. The open pit mines in Peru must comply with stricter environmental rules andmust continually deal with a political climate that has a very distinct visionof the mining industry as compared to Mexico. In addition, the collective bargaining agreement contracts are 

 

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negotiated verydistinctly in each of the two countries. These key differences result in the Company taking varying decisionswith regards to the two countries.

 

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

 

Financial information isregularly prepared for each of the three segments and the results of theCompany’s operations are regularly reported to the Chief Operating Officer onthe segment basis.  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.

 

Financial informationrelating to Company’s segments is as follows:

 
| ** **                                                             | ** ** | **Year Ended, December 31, 2008** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  eliminations** | ** ** | **Total  Consolidated** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                      | 1,477.5    |   | $ | 430.1 |   | $ | 2,943.2 |   | — |   | $ | 4,850.8 |   |
| Intersegment  sales                                                    |       | 106.1                                  |       | 95.0 |   | — |   | $ | (201.1 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 728.2                                  |       | 446.4 |   | 1,243.1 |   | (235.5 | ) | 2,182.2 |   |
| Selling, general  and administrative                                   |       | 37.9                                   |       | 21.5 |   | 40.3 |   | 2.7 |   | 102.4 |   |
| Depreciation,  amortization and depletion                              |       | 178.2                                  |       | 32.4 |   | 114.6 |   | 2.1 |   | 327.3 |   |
| Exploration                                                            |       | 5.2                                    |       | 11.4 |   | 20.4 |   | — |   | 37.0 |   |
| Operating income                                                       |       | $                                      | 634.1      |   | $ | 13.4 |   | $ | 1,524.8 |   | $ | 29.6 |   | 2,201.9 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (50.7 | ) |
| Loss on  derivative instruments                                        |       |                                   |       |   |   |   |   |   |   | (74.6 | ) |
| Other income  (expense)                                                |       |                                   |       |   |   |   |   |   |   | 17.2 |   |
| Income taxes                                                           |       |                                   |       |   |   |   |   |   |   | (679.3 | ) |
| Minority  interest                                                     |       |                                   |       |   |   |   |   |   |   | (7.9 | ) |
| Net earnings                                                           |       |                                   |       |   |   |   |   |   |   | $ | 1,406.6 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                  |       | $                                      | 145.0      |   | $ | 44.2 |   | $ | 302.4 |   | $ | 25.1 |   | $ | 516.7 |   |
| Property, net                                                          |       | $                                      | 1,644.5    |   | $ | 271.1 |   | $ | 1,846.7 |   | $ | 41.6 |   | $ | 3,803.8 |   |
| Total assets                                                           |       | $                                      | 2,704.1    |   | $ | 612.8 |   | $ | 2,502.3 |   | $ | (54.9 | ) | $ | 5,764.3 |   |

 

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| ** **                                                             | ** ** | **Year Ended, December 31, 2007** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  eliminations** | ** ** | **Total  Consolidated** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales  outside of segments                                         |       | $                                      | 1,981.1    |   | $ | 591.7 |   | $ | 3,512.9 |   | $ | — |   | $ | 6,085.7 |   |
| Intersegment  sales                                                    |       | 244.0                                  |       | 89.0 |   | — |   | (333.0 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 735.9                                  |       | 361.7 |   | 1,365.2 |   | (340.6 | ) | 2,122.2 |   |
| Selling, general  and administrative                                   |       | 37.0                                   |       | 25.2 |   | 39.8 |   | (4.0 | ) | 98.0 |   |
| Depreciation,  amortization and depletion                              |       | 176.8                                  |       | 37.3 |   | 110.8 |   | 3.0 |   | 327.9 |   |
| Exploration                                                            |       | 4.7                                    |       | 10.1 |   | 25.4 |   | — |   | 40.2 |   |
| Operating income                                                       |       | $                                      | 1,270.7    |   | $ | 246.4 |   | $ | 1,971.7 |   | $ | 8.6 |   | 3,497.4 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (26.0 | ) |
| Loss on  derivative instruments                                        |       |                                   |       |   |   |   |   |   |   | (73.7 | ) |
| Loss on debt  prepayment                                               |       |                                   |       |   |   |   |   |   |   | (16.6 | ) |
| Other income  (expense)                                                |       |                                   |       |   |   |   |   |   |   | 30.8 |   |
| Income taxes                                                           |       |                                   |       |   |   |   |   |   |   | (1,185.3 | ) |
| Minority  interest                                                     |       |                                   |       |   |   |   |   |   |   | (10.2 | ) |
| Net earnings                                                           |       |                                   |       |   |   |   |   |   |   | $ | 2,216.4 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                  |       | $                                      | 132.4      |   | $ | 26.5 |   | $ | 127.2 |   | $ | 29.6 |   | $ | 315.7 |   |
| Property, net                                                          |       | $                                      | 1,605.2    |   | $ | 248.5 |   | $ | 1,654.8 |   | $ | 59.8 |   | $ | 3,568.3 |   |
| Total assets                                                           |       | $                                      | 2,841.4    |   | $ | 590.2 |   | $ | 3,306.2 |   | $ | (157.2 | ) | $ | 6,580.6 |   |

 

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| ** **                                                             | ** ** | **Year Ended, December 31, 2006** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  eliminations** | ** ** | **Total  Consolidated** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| 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                                   |       | 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  derivative Instruments                                        |       |                                   |       |   |   |   |   |   |   | (11.6 | ) |
| Loss on debt  prepayment                                               |       |                                   |       |   |   |   |   |   |   | (1.1 | ) |
| Other income  (expense)                                                |       |                                   |       |   |   |   |   |   |   | (0.3 | ) |
| 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 |   | $ | 3,224.9 |   | $ | (132.0 | ) | $ | 6,376.4 |   |

 

Sales value per segment:

 
| ** **        | ** ** | **Year Ended, December 31, 2008** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Consolidated** | ** ** |
|              |       |                                   |       |   |   |   |   |   |   |   |   |
| Copper            |       | $                                      | 1,066.7    |   | $ | 79.7 |   | $ | 2,322.7 |   | $ | (114.2 | ) | $ | 3,354.9 |   |
| Molybdenum        |       | 347.6                                  |       | — |   | 450.6 |   | — |   | 798.2 |   |
| Other             |       | 169.3                                  |       | 445.4 |   | 169.9 |   | (86.9 | ) | 697.7 |   |
| Total             |       | $                                      | 1,583.6    |   | $ | 525.1 |   | $ | 2,943.2 |   | $ | (201.1 | ) | $ | 4,850.8 |   |
|              |       |                                   |       |   |   |   |   |   |   |   |   |
| ** **        | ** ** | **Year Ended, December 31, 2007** | ** ** |
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Consolidated** | ** ** |
|              |       |                                   |       |   |   |   |   |   |   |   |   |
| Copper            |       | $                                      | 1,694.5    |   | $ | 101.0 |   | $ | 2,677.8 |   | $ | (244.5 | ) | $ | 4,228.8 |   |
| Molybdenum        |       | 435.5                                  |       | — |   | 650.5 |   | — |   | 1,086.0 |   |
| Other             |       | 95.1                                   |       | 579.7 |   | 184.6 |   | (88.5 | ) | 770.9 |   |
| Total             |       | $                                      | 2,225.1    |   | $ | 680.7 |   | $ | 3,512.9 |   | $ | (333.0 | ) | $ | 6,085.7 |   |

 

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

 

NET SALES AND GEOGRAPHICAL INFORMATION:

 

Net sales to respective countries were as follows:

 
| ** **                                | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                         | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States                             |       | $                                | 1,288.6    |   | $ | 1,553.2 |   | $ | 1,747.5 |   |
| Europe                                    |       | 1,108.0                          |       | 1,491.7 |   | 1,711.6 |   |
| Mexico                                    |       | 1,088.2                          |       | 1,189.3 |   | 1,094.7 |   |
| Peru                                      |       | 129.8                            |       | 152.1 |   | 155.2 |   |
| Latin America,  excluding Mexico and Peru |       | 861.2                            |       | 1,133.7 |   | 659.4 |   |
| Asia                                      |       | 238.0                            |       | 554.8 |   | 368.1 |   |
| Derivative  instruments                   |       | 137.0                            |       | 10.9 |   | (276.3 | ) |
| Total                                     |       | $                                | 4,850.8    |   | $ | 6,085.7 |   | $ | 5,460.2 |   |

 

PROVISIONAL SALES PRICE:

 

At December 31, 2008, the Company has recorded provisionallypriced sales of 141.0 million pounds of copper, at a forward average price of$1.39 per pound.  Also, the Company hasrecorded provisionally priced sales of 6.3 million pounds of molybdenum at theyear-end market price of $9.50 per pound. These sales are subject to final pricing based on the average monthlyLME and COMEX copper prices and Dealer Oxide molybdenum prices in the futuremonth of settlement.

 

Following are the provisionally priced copper and molybdenum salesoutstanding at December 31, 2008:

 

| **Pounds  of copper**      | ** ** | **Priced at**    | ** ** | **Month of settlement** | ** **        |
|----------------------------|------------|------------------|------------|-------------------------|-------------------|
| **(millions)**             | ** ** | ** **       | ** ** | ** **              | ** **        |
| 73.3                       |       | $                | 1.39       |                    | January 2009 |   |
| 41.6                       |       | 1.39             |       | February 2009      |              |
| 17.8                       |       | 1.39             |       | March 2009         |              |
| 7.2                        |       | 1.40             |       | April 2009         |              |
| 1.1                        |       | 1.40             |       | May 2009           |              |
| 141.0                      |       | $                | 1.39       |                    | Total             |   |
|                       |       |             |       |                    |              |
| **Pounds   of molybdenum** | ** ** | **Market price** | ** ** | **Month of settlement** | ** **        |
| **(millions)**             | ** ** | ** **       | ** ** | ** **              | ** **        |
| 1.9                        |       | $                | 9.50       |                    | January 2009 |   |
| 2.1                        |       | 9.50             |       | February 2009      |              |
| 1.6                        |       | 9.50             |       | March 2009         |              |
| 0.2                        |       | 9.50             |       | April 2009         |              |
| 0.5                        |       | 9.50             |       | May 2009           |              |
| 6.3                        |       | $                | 9.50       |                    | Total             |   |

 

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Provisional sales price adjustments included in accounts receivable andnet sales were as follows at December 31 (in millions):

 

| ** ** | ** ** | **As of December 31,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Copper     |       | $                           | (44.2      | ) | $ | (40.2 | ) |
| Molybdenum |       | (53.1                       | )          | — |   |
| Total      |       | $                           | (97.3      | ) | $ | (40.2 | ) |

 

During the month of January 2009,the market price of copper increased and the price of molybdenum decreasedslightly.  The effect of these changes on2008 sales settling in January 2009 was an increase of $1.1 million insales.  Additionally, forward prices forcopper as of January 31, 2009 also increased, the effect of this increaseon 2008 open sales settling after January 2009 would be an increase of$3.2 million in sales.

 

LONG-TERM SALES CONTRACTS:

 

The following are the significant outstanding long-term contracts:

 

Under the terms of a forward sales contract with Cumerio Belgium,formerly Union Minière, as amended, the Company is required to supply CumerioBelgium, through its agent, S.A. SOGEM N.V., with 8,800 tons of blister copperduring 2009.  The price of the coppercontained in blister supplied under the contract is determined based on the LMEmonthly average settlement price, less a refining allowance, which isnegotiated annually.

 

Under the terms of a sales contract with Mitsui & Co. Ltd. (“Mitsui”),the Company is required to supply Mitsui with 48,000 tons of copper cathodesannually through 2013.  If the shipmentdestination is Asia, the pricing of the cathodes is based upon the LME monthlyaverage settlement price.  However, ifthe destination of shipments is the United States, the pricing of the cathodesis based upon the COMEX monthly average settlement price plus a producerpremium, 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.

 

**NOTE 21-QUARTERLY DATA(unaudited)**

(in millions,except per share data)

 
| **2008**                 | ** ** |
|--------------------------|------------|
| ** **               | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales                |       | $ | 1,499.2 |   | $ | 1,461.8 |   | $ | 1,440.1 |   | $ | 449.7 |   | $ | 4,850.8 |   |
| Gross Profit             |       | $ | 978.6 |   | $ | 911.4 |   | $ | 794.3 |   | $ | (15.7 | ) | $ | 2,668.6 |   |
| Operating income         |       | $ | 864.7 |   | $ | 792.4 |   | $ | 676.0 |   | $ | (131.2 | ) | $ | 2,201.9 |   |
| Net earnings             |       | $ | 565.0 |   | $ | 548.5 |   | $ | 417.8 |   | $ | (124.7 | ) | $ | 1,406.6 |   |
| Net earnings per  share: |       |   |   |   |   |   |   |   |   |   |   |
| Basic and  diluted       |       | $ | 0.64 |   | $ | 0.62 |   | $ | 0.48 |   | $ | (0.14 | ) | $ | 1.60 |   |
| Dividend per  share      |       | $ | 0.47 |   | $ | 0.57 |   | $ | 0.57 |   | $ | 0.33 |   | $ | 1.94 |   |

 

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| **2007**                 | ** ** |
|--------------------------|------------|
| ** **               | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales                |       | $ | 1,358.3 |   | $ | 1,826.5 |   | $ | 1,606.4 |   | $ | 1,294.5 |   | $ | 6,085.7 |   |
| Gross Profit             |       | $ | 891.6 |   | $ | 1,264.2 |   | $ | 1,046.6 |   | $ | 761.1 |   | $ | 3,963.5 |   |
| Operating income         |       | $ | 787.4 |   | $ | 1,145.2 |   | $ | 933.8 |   | $ | 631.0 |   | $ | 3,497.4 |   |
| Net earnings             |       | $ | 551.7 |   | $ | 726.0 |   | $ | 627.8 |   | $ | 310.9 |   | $ | 2,216.4 |   |
| Net earnings per  share: |       |   |   |   |   |   |   |   |   |   |   |
| Basic and  diluted       |       | $ | 0.62 |   | $ | 0.82 |   | $ | 0.71 |   | $ | 0.36 |   | $ | 2.51 |   |
| Dividend per  share      |       | $ | 0.57 |   | $ | 0.50 |   | $ | 0.53 |   | $ | 0.67 |   | $ | 2.27 |   |

 

All the per shareamounts prior to 2nd quarter 2008 had been restated to reflect the common stocksplit.

 

**NOTE 22-SUBSEQUENT EVENTS**

 

**In 2009, through February 23, we purchased anadditional 2.7 million shares of our common shares and AMC purchased 2.2million shares of our common shares.  Asa result, as of February 23, 2009 Grupo Mexico’s ownership of our capital stockincreased to 79.5%.**

** **

**On January 30, 2009 the Board of Directorsauthorized a dividend of 11.7 cents per share to be paid on March 30, 2009to shareholders of record as of March 11, 2009.**

** **

OnFebruary 18, 2009 the Company announced that it has given notice toFrontera Copper Corporation, “Frontera”, a Canadian mining, development andexploration company of the termination of the support agreement dated February 4,2009.  Under the support agreement, theCompany agreed to acquire all of Frontera’s outstanding shares for C$0.65 pershare, or approximately C$42 million (approximately $35 million).  On February 6, 2009, Invecture made an offer ofC$0.75 per share of Frontera, or the Invecture Offer, which Frontera’s board ofdirectors unanimously recommended to Frontera’s shareholders to accept.  The Company, in turn, decided not to exerciseits right under the support agreement to restate the Invecture Offer byincreasing its C$0.65 per share tender to outbid the C$0.75 per share ofInvecture, because the Company deemed that an increase of its offer would notbe in its best economic interest.  TheCompany remains open to pursue other business opportunities which are accretiveto its shareholders.

 

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** **

**OTHERCOMPANY INFORMATION:**

** **

**ANNUALMEETING**

** **

**The annual stockholders meeting of Southern CopperCorporation will be held on Thursday, April 30, 2009 at 9:00 am, MexicoCity time, at Edificio Parque Reforma, Campos Eliseos No. 400, 12th Floor,Colonia Lomas de Chapultepec, Mexico City, Mexico.**

** **

**TRANSFERAGENT, REGISTRAR AND STOCKHOLDERS SERVICES**

** **

**The Bank of New York Mellon Corporation (BONY)**

**Shareowner Services**

**480 Washington Boulevard**

**Jersey City, NJ 07310-1900-0286**

**Phone: (800) 524-4458**

** **

**DIVIDENDREINVESTMENT PROGRAM**

** **

**SCC stockholders can have their dividends automaticallyreinvested in SCC common shares.  SCCpays all administrative and brokerage fees. This plan is administered by The Bank of New York MellonCorporation.  For more information,contact The Bank of New York Mellon Corporation at (800) 524-4458.**

** **

**STOCKEXCHANGE LISTING**

** **

**The principal markets for SCC’s Common Stock are the NYSEand the Lima Stock Exchange.  SCC’sCommon Stock symbol is PCU on both the NYSE and the Lima Stock Exchange.**

** **

**OTHERSECURITIES**

** **

**The Branch in Peru has issued, in accordance with PeruvianLaw, “investment shares” (formerly named labor shares) that are quoted on theLima Stock Exchange under symbols S-1 and S-2. Transfer Agent, registrar and stockholders services are provided byBanco de Credito del Peru, Avenida Centenario 156, La Molina, Lima 12, Peru.**

**Telephone (51-1) 313-2478, Fax (51-1) 313-2556.**

** **

**OTHER CORPORATE INFORMATION**

 

For other information onthe Company or to obtain, free of charge, additional copies of the AnnualReport on Form 10-K, contact the Investor Relations 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.

Telephone: (51-1) 512-0440,Ext. 3354

Lima Stock ExchangeSymbol: PCU

 

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Edificio Parque Reforma, Campos Eliseos No. 400, 11th Floor, Col.Lomas de Chapultepec, Mexico City, Mexico

 

Web Page:  **www.southerncoppercorp.com**

**Email address:** southerncopper@southernperu.com.pe

** **

**CERTIFICATIONREQUIRED BY THE NEW YORK STOCK EXCHANGE**

** **

TheCompany has filed with the New York Stock Exchange (“NYSE”) the 2008certification that the Chief Executive Officer is unaware of any violation ofthe corporate governance standards of the NYSE. The Company has also filed with the Securities and Exchange Commission (“SEC”)the certifications required under Section 302 of the Sarbanes-Oxley Act of2002, as exhibits to the 2008 Annual Report on Form 10-K.  The Company anticipates filing, on a timelybasis, the 2009 NYSE certification and is filing the Section 302certifications as exhibits to this Annual Report on Form 10-K.

 

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directorsand Shareholders of Southern Copper Corporation:

 

In our opinion, theconsolidated financial statements listed in the index appearing under Item15(a)(1),present fairly, in all material respects, the financial position ofSouthern Copper Corporation and its subsidiaries at December 31, 2008 and December 31,2007, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2008 in conformity withaccounting principles generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedules appearing under Item 15 presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2008, based on criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for these financial statements and financial statement schedules,for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, “Management’sReport on Internal Control over Financial Reporting” appearing on Item 9A.  Our responsibility is to express opinions onthese financial statements, on the financial statement schedules, and on theCompany’s internal control over financial reporting based on our integratedaudits.  We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audits of thefinancial statements included 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. Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generally acceptedaccounting principles.  A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositionsof the assets of the company; (ii) provide reasonable assurance thattransactions 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) providereasonable 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.

 

Because of its inherentlimitations, internal control over financial reporting may not 

 

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prevent or detectmisstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopersS.C.

Mexico, D.F.

March 2, 2009

 

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Item 9. Changes inand Disagreements With Accountants on Accounting and Financial Disclosure

 

None —

 

Item 9A. Controlsand Procedures

 

As of December 31,2008, the Company conducted an evaluation under the supervision and with theparticipation of the Company’s Disclosure Committee and the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness and the design and operation of the Company’s disclosurecontrols and procedures.  Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effectiveas of December 31, 2008, to ensure that information required to bedisclosed in reports filed or submitted under the Exchange Act is:

 

1.                                      recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and

 

2.                                      accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

CHANGES ININTERNAL CONTROL OVER FINANCIAL REPORTING

 

There was nochange in the Company’s internal control over financial reporting (as such termis defined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934, as amended) that occurred during the quarter ended December 31,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the Company.  Under thesupervision and with the participation of management, including the Company’sprincipal executive officer and principal financial officer, the Companyconducted an evaluation of the effectiveness of its internal control over financialreporting based on the framework in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organization of the TreadwayCommission.  Based on the evaluation madeunder this framework, management concluded that as of December 31, 2008such internal control over financial reporting is effective.

 

Because of itsinherent limitations, internal control over financial reporting, may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness for future periods are subjectto the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with policies or procedures maydeteriorate.

 

The Company’sinternal control over financial reporting as of December 31, 2008 has beenaudited by PricewaterhouseCoopers, an independent registered public accountingfirm, as stated in their report which appears herein.

 

Item 9B. OtherInformation

 

None

 

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PART III

 

Item 10, 11, 12,13 and 14.

 

Reference is madeto the Section captioned “Executive Officers of the Registrant” on pages 71to 72.  Information in response to thedisclosure requirements specified by Part III, Items 10, 11, 12, 13, and14 will be included in a definitive proxy statement, which will be filedpursuant to Regulation 14A of the 1934 Securities Exchange Act, as amended,prior to April 30, 2009 or will be provided by amendment to this Form 10-K,also to be filed no later than April 30, 2009.

 

The informationcontained in such definitive proxy statement is incorporated herein byreference.

 

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PART IV

 

Item 15. Exhibits,Financial Statement Schedules

 

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

 

1.                              Financial Statements

 

The following financial statements of Southern Copper Corporation andits subsidiaries are included at the indicated pages of the document asstated below:

 
|                                                                                                                      | **Form 10-K** |
|---------------------------------------------------------------------------------------------------------------------------|--------------------|
|                                                                                                                      | **Pages**          |
| Consolidated statement of earnings for the years ended  December 31, 2008, 2007 and 2006                             | 112                |
| Consolidated  balance sheet at December 31, 2008 and 2007                                                            | 113                |
| Consolidated statement of cash flows for the years  ended December 31, 2008, 2007 and 2006                           | 114                |
| Consolidated statement of changes in stockholders’  equity for the years ended December 31, 2008, 2007 and 2006 | 115-116            |
| Notes to the consolidated financial statements                                                                            | 117-170            |
| Reports of Independent Registered Public Accounting  Firm                                                                 | 173-174            |

 

2.                              Exhibits:

 
| 3.1    |   | (a) Amended  and Restated Certificate of Incorporation, filed on October 11, 2005. 

 

(b) Certificate  of Amendment of Amended and Restated Certificate of Incorporation (dated  May 2, 2006). 

 

(c) Certificate  of Amendment of Amended and Restated Certificate of Incorporation (dated  May 28, 2008)                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | By-Laws, (as  amended on April 26, 2007).                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 $400,000,000 7.500% Notes due 2035, by and between Southern Copper  Corporation, The Bank of New York and the Bank of New York (Luxembourg) S. A.                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Form of  6.375% Note (included in Exhibit 4.2).                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5    |   | Form of New  7.500% Note (included in Exhibit 4.3(a)).                                                                                                                                                                                                                                                                                                                               |

 

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| 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.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                    |
| 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.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                    |
| 14.0   |   | Code of Business  Conduct and Ethics adopted by the Board of Directors on May 8, 2003 and  amended by the Board of Directors on October 21, 2004.                                                                             |
|   |   |                                                                                                                                                                                                                                    |
| 21.1   |   | Subsidiaries of  the Company.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of  Registered Public Accounting Firm (PricewaterhouseCoopers S.C.)                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                    |
| 31.1   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                    |
| 31.2   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                    |
| 32.1   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8328.                                                                       |
|   |   |                                                                                                                                                                                                                                    |
| 32.2   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8328.                                                                       |

 

The exhibitslisted as 10.2 through 10.4 above are the management contracts or compensatoryplans or arrangements required to be filed pursuant to Item 15(b) of Form 10-K.

 

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Schedule II

Valuation andQualifying 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:                                   |       |                                 |       |                                |       |       |       |   |   |   |   |
| 2008                                                    |       | 4.6                                  |       | 0.4                                 |       |       |       | 0.2 |   | 4.8 |   |
| 2007                                                    |       | 6.0                                  |       | —                              |       | —     |       | 1.4 |   | 4.6 |   |
| 2006                                                    |       | 5.7                                  |       | 0.3                                 |       | —     |       | — |   | 6.0 |   |
|                                                    |       |                                 |       |                                |       |       |       |   |   |   |   |
| Supplies:                                               |       |                                 |       |                                |       |       |       |   |   |   |   |
| 2008                                                    |       | 30.4                                 |       | 6.4                                 |       |       |       | 0.1 |   | 36.7 |   |
| 2007                                                    |       | 27.7                                 |       | 3.0                                 |       | —     |       | 0.3 |   | 30.4 |   |
| 2006                                                    |       | 23.4                                 |       | 4.6                                 |       |       |       | 0.3 |   | 27.7 |   |
|                                                    |       |                                 |       |                                |       |       |       |   |   |   |   |
| Notes issued  under par:                                |       |                                 |       |                                |       |       |       |   |   |   |   |
| 2008                                                    |       | 16.7                                 |       | —                              |       | —     |       | 0.3 |   | 16.4 |   |
| 2007                                                    |       | 16.9                                 |       | —                              |       | —     |       | 0.2 |   | 16.7 |   |
| 2006                                                    |       | 6.2                                  |       | 10.8                                |       | —     |       | 0.1 |   | 16.9 |   |
|                                                    |       |                                 |       |                                |       |       |       |   |   |   |   |
| Deferred Tax  Assets:                                   |       |                                 |       |                                |       |       |       |   |   |   |   |
| 2008                                                    |       | 34.1                                 |       | —                              |       | —     |       | 5.5 |   | 28.6 |   |
| 2007                                                    |       | —                               |       | 62.7                                |       | —     |       | 28.6 |   | 34.1 |   |
| 2006                                                    |       | 81.2                                 |       | —                              |       | —     |       | 81.2 |   | — |   |

 

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant has duly caused this Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | SOUTHERN COPPER  CORPORATION           |
|--------|----------------------------------------|
|   | (Registrant)                           |
|   |                                   |
|   | By:                                    | /s/ Oscar  Gonzalez Rocha |
|   |                                   | Oscar Gonzalez  Rocha |
|   | President and  Chief Executive Officer |

 

Date:  February 24, 2009

 

Pursuant torequirements of the Securities Exchange Act of 1934, this Report on Form 10-Khas been signed below by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.

 
| /s/ German  Larrea Mota-Velasco |   | Chairman of the  Board, and Director             |
|---------------------------------|--------|--------------------------------------------------|
| German Larrea  Mota-Velasco     |   |                                             |
|                            |   |                                             |
| /s/ Oscar  Gonzalez Rocha       |   | President, Chief Executive Officer and Director  |
| Oscar Gonzalez  Rocha           |   |                                             |
|                            |   |                                             |
| /s/ Genaro  Guerrero            |   | Vice President, Finance, Chief Financial Officer |
| Genaro Guerrero                 |   | (principal financial officer)                    |
|                            |   |                                             |
| /s/ Jose N.  Chirinos Fano      |   | Comptroller  (principal Accounting Officer)      |
| Jose N. Chirinos  Fano          |   |                                             |

 

**DIRECTORS**

 
| /s/ German  Larrea Mota-Velasco |   | /s/ Genaro  Larrea Mota-Velasco     |
|---------------------------------|--------|-------------------------------------|
| German Larrea  Mota-Velasco     |   | Genaro Larrea  Mota-Velasco         |
|                            |   |                                |
| /s/ Emilio  Carrillo Gamboa     |   | /s/ Daniel Muñiz  Quintanilla  |
| Emilio Carrillo  Gamboa         |   | Daniel Muñiz  Quintanilla      |
|                            |   |                                |
| /s/ Alfredo  Casar Perez        |   | /s/ Armando  Ortega Gomez           |
| Alfredo  Casar Perez            |   | Armando  Ortega Gomez               |
|                            |   |                                |
| /s/ Alberto De  la Parra Zavala |   | /s/ L. Miguel  Palomino Bonilla     |
| Alberto De la  Parra Zavala     |   | L. Miguel  Palomino Bonilla         |
|                            |   |                                |
| /s/Xavier Garcia  de Quevedo    |   | /s/ Gilberto  Perezalonso Cifuentes |
| Xavier Garcia de  Quevedo       |   | Gilberto  Perezalonso Cifuentes     |
|                            |   |                                |
| /s/ Oscar  Gonzalez Rocha       |   | /s/ Juan  Rebolledo Gout            |
| Oscar Gonzalez  Rocha           |   | Juan Rebolledo  Gout                |
|                            |   |                                |
| /s/ Harold S.  Handelsman       |   | /s/ Carlos Ruiz  Sacristan          |
| Harold S.  Handelsman           |   | Carlos Ruiz Sacristan               |

 

Date:  February 24, 2009

 

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Southern Copper Corporation

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 Quarterly Report on  Form 10-Q for the third quarter and incorporated herein by reference). 

(b) Certificate  of Amendment of Amended and Restated Certificate of Incorporation (dated  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). 

(c) Certificate  of Amendment of Amended and Restated Certificate of Incorporation (dated  May 28, 2008). (Filed as Exhibit 3.1 to the Company’s 2008  Quarterly Report on Form 10-Q for the second quarter and incorporated  herein by reference). |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |             |
| 3.2                             |       | By-Laws, as  amended on April 26, 2007. (Filed as Exhibit 3.2 to Quarterly  Report on Form 10-Q for the first quarter of 2007 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |             |
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| 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).                                                                                                     |       |             |
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| 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).                                                                                                                                              |       |             |

 

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Table ofContents

 
| 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(a)).                                                                                                                                                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 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) |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 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 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)                                                                 |   |   |
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| 21.1   |   | Subsidiaries of  the Company (filed herewith)                                                                                                                                                                                                                                                                                                        |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 23.1   |   | Consent of  Registered Public Accounting Firm (PricewaterhouseCoopers S.C.)                                                                                                                                                                                                                                                                          |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 31.1   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 31.2   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                      |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 32.1   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8238 (filed  herewith)                                                                                                                                                                   |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 32.2   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8238 (filed  herewith)                                                                                                                                                                   |   |   |

 

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