**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| x | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------------|

**For thefiscal year ended: December 31, 2007**

 

**OR**

 

| o | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------------------|

**For thetransition 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) |

 

Registrant’stelephone number, including area code:  **(602) 494-5328**

 

Securitiesregistered 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 accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x      Acceleratedfiler  o      Non-acceleratedfiler  o      ora 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, 2008, there were of record 294,465,650 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 $6,896.6 million.

 

PORTIONS OF THEFOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE:

 
| Part III: | Proxy statement  for 2008 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                                                                                                            | 4-16 |
|                                      |                                                                                                                |   |
| Item 1A                                   | Risk factors                                                                                                        | 17-27 |
|                                      |                                                                                                                |   |
| Item 1B                                   | Unresolved Staff  Comments                                                                                          | 27 |
|                                      |                                                                                                                |   |
| Item 2                                    | Properties                                                                                                          | 28-70 |
|                                      |                                                                                                                |   |
| Item 3                                    | Legal Proceedings                                                                                                   | 71 |
|                                      |                                                                                                                |   |
| Item 4.                                   | Submission of  Matters to a Vote of Security Holders                                                                | 71 |
|                                      |                                                                                                                |   |
|                                      |                                                                                                                |   |
| Part II.                             |                                                                                                                |   |
|                                      |                                                                                                                |   |
| Item 5.                                   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 73-75 |
|                                      |                                                                                                                |   |
| Item 6.                                   | Selected Financial  Data                                                                                            | 76-77 |
|                                      |                                                                                                                |   |
| Item 7.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 78-104 |
|                                      |                                                                                                                |   |
| Item 7A.                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 105-108 |
|                                      |                                                                                                                |   |
| Item 8.                                   | Financial  Statements and Supplementary Data                                                                        | 109-170 |
|                                      |                                                                                                                |   |
| Item 9.                                   | Changes in and  Disagreements with Accountant on Accounting and Financial Disclosure                                | 171 |
|                                      |                                                                                                                |   |
| Item 9A.                                  | Controls and  Procedures                                                                                            | 171 |
|                                      |                                                                                                                |   |
| Item 9B.                                  | Other Information                                                                                                   | 171 |
|                                      |                                                                                                                |   |
|                                      |                                                                                                                |   |
| PART III.                            |                                                                                                                |   |
|                                      |                                                                                                                |   |
| Item 10.                                  | Directors, Executive Officers  and Corporate Governance                                                             | 172 |
|                                      |                                                                                                                |   |
| Item 11.                                  | Executive Compensation                                                                                              | 172 |
|                                      |                                                                                                                |   |
| Item 12.                                  | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 172 |
|                                      |                                                                                                                |   |
| Item 13.                                  | Certain Relationships and  Related Transactions and Director Independence                                           | 172 |

 

2

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| Item 14.      | Principal Accounting Fees and  Services  | 172     |
|---------------|------------------------------------------|---------|
|          |                                     |    |
|          |                                     |    |
| PART IV. |                                     |    |
|          |                                     |    |
| Item 15.      | Exhibits,  Financial Statement Schedules | 173-175 |
|          |                                     |    |
|          | Signatures                               | 176     |
|          |                                     |    |
|          | Exhibit index                            | 177-178 |

 

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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 produce copper,molybdenum, zinc and silver.  All of ourmining, smelting and refining facilities are located in Peru and in Mexico andwe conduct exploration activities in those countries and Chile.  See “Review of Operations” for maps of ourprincipal mines, smelting facilities and refineries.  Our operations make us one of the largestmining companies in Peru and also in Mexico. We believe, based on our review of the major mining companies’ 2006annual reports, that we are the largest publicly traded copper mining companyin the world based on copper reserves. We were incorporated in Delaware in 1952 and have conducted coppermining operations since 1960.  Since1996, our common stock has been listed on both the New York Stock Exchange andthe Lima Stock Exchange.

 

Our Peruvian copper operations involve mining,milling and flotation of copper ore to produce copper concentrates andmolybdenum concentrates; the smelting of copper concentrates to produce anodeand blister copper; and the refining of blister/anode copper to produce coppercathodes.  As part of this productionprocess, we also produce significant amounts of molybdenum and silver.  We also produce refined copper using SX/EWtechnology.  We operate the Toquepala andCuajone mines high in the Andes mountains, approximately 984 kilometerssoutheast of the city of Lima, Peru.  Wealso operate a smelter and refinery west of the Toquepala and Cuajone mines inthe coastal city of Ilo, Peru.

 

Our Mexican operations are conducted through oursubsidiary, Minera Mexico 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 processingmethods, including global positioning systems and computerized miningoperations.  Our operations have a highlevel of vertical integration that allows us to manage the entire productionprocess, from the mining of the ore to the production of refined copper andother products and most related transport and logistics functions, using our ownfacilities, employees and equipment.

 

The sales prices for our products are largelydetermined by market forces outside of our control. Our management, therefore,focuses on cost control and production enhancement to improveprofitability.  We achieve these goalsthrough capital spending programs, exploration efforts and cost reductionprograms.  Our focus is on seeking toremain profitable during periods of low copper prices and maximizing results inperiods of high copper prices.  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 financialinformation is presented in US dollars and any reference herein to “U.S.dollars”, “dollars”, or “$” are to U.S. dollars; references to “S/.”, “nuevosol” or “nuevos soles”, are to Peruvian nuevos soles; and references to “peso”,“pesos”, or “Ps.”, are to Mexican pesos.

 

 

Unit Information:

 

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

 

 

ORGANIZATIONAL STRUCTURE

 

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

 

 

We are a majority-owned,indirect subsidiary of Grupo Mexico S.A.B. de C.V. (“Grupo Mexico”).  Through its wholly-owned subsidiaries, GrupoMexico currently owns approximately 75.1% of our capital stock. Grupo Mexico’sprincipal business is to act as a holding company for shares of othercorporations engaged in the mining, processing, purchase and sale of mineralsand other products and railway and other related services.

 

5

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We conduct our operations in Peru through aregistered branch (the “SPCC Peru Branch” or “Peruvian Branch”).  The SPCC Peru Branch comprises substantiallyall of our assets and liabilities associated with our copper operations inPeru.  The SPCC Peru Branch is not acorporation separate from us and, therefore, obligations of SPCC Peru Branchare direct obligations of SCC and vice-versa. It is, however, an establishment, registered pursuant to Peruvian law,through which we hold assets, incur liabilities and conduct operations inPeru.  Although it has neither its owncapital nor liability separate from us, it is deemed to have equity capital forpurposes of determining the economic interests of holders of our investmentshares, formerly known as labor shares (See Note 13 “Minority interest” of ourconsolidated combined financial statements).

 

On April 1, 2005, we acquired Minera Mexico,the largest mining company in Mexico on a stand-alone basis, from AmericasMining Corporation (“AMC”), a subsidiary of Grupo Mexico, our controllingstockholder.  Minera Mexico is a holdingcompany and all of its operations are conducted through subsidiaries that aregrouped into three units: (i) the Mexcobre unit, (ii) the Cananeaunit and (iii) the IMMSA unit.  Wenow own 99.95% of Minera Mexico.

 

 

CAUTIONARY STATEMENT

 

Forward-lookingstatements in this report and in other Company statements include statementsregarding expected commencement dates of mining or metal production operations,projected quantities of future metal production, anticipated production rates,operating efficiencies, costs and expenditures as well as projected demand orsupply for the Company’s products. Actual results could differ materially depending upon factors includingthe risks and uncertainties relating to general U.S. and international economicand political conditions, the cyclical and volatile prices of copper, othercommodities and supplies, including fuel and electricity, availability ofmaterials, insurance coverage, equipment, required permits or approvals andfinancing, the occurrence of unusual weather or operating conditions, lowerthan expected ore grades, water and geological problems, the failure ofequipment or processes to operate in accordance with specifications, failure toobtain financial assurance to meet closure and remediation obligations, laborrelations, litigation and environmental risks, as well as political andeconomic risk associated with foreign operations.  Results of operations are directly affectedby metals prices on commodity exchanges, which can be volatile.

 

Additional businessinformation follows:

 

COPPER BUSINESS

 

Copper is the world’s third most widely used metal 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 have continued to improve through 2007 from the15-year price lows set during 2002.

 

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BUSINESS REPORTINGSEGMENTS:

 

Company management views Southern Copper as havingthree operating segments and manages on the basis of these segments.  The significant increase in the price ofmolybdenum in recent years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three copper segments.

 

The three segmentsidentified are groups of individual mines with similar economiccharacteristics, type of products, processes and support facilities, similarregulatory environments, similar employee bargaining contracts, and similarcurrency risks.  In addition, each minewithin the individual group earns revenues from similar type of customers fortheir products and services and each group incurs expenses independently, includingcommercial transactions between groups.

 

Intersegment sales are based on arms-length pricesat the time of sale. These may not be reflective of actual prices realized bythe Company due to various factors, including additional processing, timing ofsales to outside customers and transportation cost.  Added to the segment information isinformation regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.               Peruvian operations, which includes theToquepala and Cuajone mine complexes and the smelting and refining plants,industrial railroad and port facilities which service both mines. Sales of itsproducts are recorded as revenue of our Peruvian mines.

 

2.               Mexican open pit operations, whichincludes 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.

 

3.               Mexican underground mining operations,which includes five underground mines that produce zinc, copper, silver and gold,a coal mine, which produces coal and coke and several industrial processingfacilities for zinc and copper.  Thisgroup is identified as the IMMSA unit and sales of its products are recorded asrevenue of the IMMSA unit.

 

Each of our segmentsreports independently to the Chief Operating Officer.  The Chief Operating Officer of the Companyfocuses on operating income and on total assets as measures of performance toevaluate different segments and to make decisions to allocate resources to thereported segments.  These are commonmeasures in the mining industry.

 

Segment information isincluded under the captions “Overview-Metal production” and “Ore reserves.”  More information on business segment andsegment financial information is included in Note 20 of our ConsolidatedCombined 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 tolocate additional ore bodies in Peru, Mexico and Chile.  We invested $40.2 million on explorationprograms in 2007, $22.7 million in 2006 and $24.4 million in 2005, and havebudgeted $26.1 million for 2008.

 

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Currently in Peru, we have direct control of164,867 hectares of mineral rights.  InMexico, we hold 293,137 hectares of explorationconcessions.  We also hold 35,258hectares of exploration concessions in Chile.

 

Peru

 

*Tia Maria.*  The Tia Maria project, which includes the TiaMaria and the La Tapada deposits, is located in the department of Arequipa onthe southern coast of Peru and is part of a copper porphyritic system.

 

We have completed feasibility studies in 2007covering 36,232 meters of diamond drilling at Tia Maria and 73,085 meters at LaTapada.  Estimated mineralized resourcesin Tia Maria show 193 million tons of mineralized material with 0.302% coppercontent.  For La Tapada, the estimatedmineralized resources show 445 million tons of mineralized material, with0.434% copper content.  The Company isconducting a bidding process for basic and detailed engineering as well aspreparing to purchase major equipment and select construction management.  The Company expects to invest $65 million inthis project during 2008. When completed at the end of 2010, the new operatingunit will produce 120,000 tons of copper cathodes per year.

 

*Los Chancas.*  The Los Chancas project, located in thedepartment of Apurimac in southern Peru, is a copper and molybdenum porphyrydeposit.  The exploration program and thefinal phase of the metallurgical testing were completed in early 2006.  Pre-feasibility studies were completed in2007.  Estimated mineralized resourcesidentified after the preliminary design of the pit are 355 million tons ofmineralized material with a 0.62% copper content, 0.05% molybdenum and 0.039grams of gold per ton.  We expect to workon a feasibility study during 2008 which will include complementary studies andan additional drilling program in order to define the ore reserves of thedeposit.

 

*Tantahuatay.*  The Tantahuatay project is located in thedepartment of Cajamarca in northern Peru. The exploration work is intended to evaluate the upper part of thedeposit mainly for gold recovery.  Workto date indicates 27.1 million tons of mineralized material, with an average silvercontent of 13.0 grams per ton and 0.89 grams of gold per ton.  We have a 44.25% share in this project.  We have started a feasibility study toevaluate the possibility of recovering gold mineral from the upper part of thedeposit.  We continue our efforts ondealing with social and environmental concerns of communities near the project.

 

*Other Peruvian Prospects.*

 

As part of the exploration program in 2007, we have drilled 14,352meters in the southern region of Peru. Our 2008 program includes more intensecopper exploration activities in the southern and northern parts of Peru, aswell as gold exploration in Ayacucho, in the central part of Peru.

 

Mexico

 

In addition to exploratory drilling programs atexisting mines, we are currently conducting exploration to locate mineraldeposits at various other sites in Mexico. The following are some of the more significant exploration projects:

 

*El Arco.*  The El Arco site is located in the state ofBaja California in Mexico.  Preliminaryinvestigations of the El Arco site indicate a mineral deposit of 846 milliontons of mineralized material with average copper grades of 0.51% and 0.14 gramsof gold per ton, and 170 million tons of leach mineralized materials withaverage copper grades of 0.56%.  In 2007,we have continued in the process of identifying water sources for a 

 

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leaching operation, and have finished four testsholes that indicate sufficient water potential for leaching operations.

 

*Angangueo.*  The Angangueo site is located in the state ofMichoacán in Mexico.  A mineral depositof 13 million tons of mineralized material has been identified with diamonddrilling.  Testing indicates that themineral deposit contains mineralized material containing 0.16 grams of gold and262 grams of silver per ton, and is comprised of 0.79% lead, 0.97% copper and3.5% zinc.  During 2005, we received theapproval for our environmental impact study and we are in the process ofobtaining land use approval.  During2007, we have continued negotiating with the state of Michoacan to purchasevarious properties essential to the operation.

 

*Buenavista.*  The Buenavista project site is located in thestate of Sonora in Mexico, adjacent to the Cananea ore body.  Drilling and metallurgical studies have shownthat the site contains 36 million tons of mineralized material containing 29 gramsof silver, 0.69% of copper and 3.3% of zinc per ton.  A new “scoping level” study indicates thatBuenavista may be an economical deposit. During 2007, 2,100 meters were drilled to upgrade the mineral resourceand to acquire material for metallurgical testing.  Results confirm the previous geologicinterpretation of the mineralized areas.

 

*Carbon Coahuila*.  In Coahuila, an intensive exploration programof diamond drilling has identified two additional areas, Esperanza with apotential for more than 30 million tons of “in place” mineralized coal andGuayacan with a potential for 15 million tons of “in place” 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 resources were identified at ourNueva Rosita No. 16 concession.

 

*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 recovery processthat can be applied to this ore.  In 2007we continued with the evaluation of the ore body and we expect to conclude themetallurgical testing of the project during 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 2007, 7,338 meters have been drilled. Results confirm the presence of copper and zinc mineralization, but aneconomic deposit has not yet been identified.

 

Chile

 

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

 

*El Salado.*  The El Salado prospect, located in the AtacamaRegion, is being explored for copper-gold. Through 2007, 24,798 meters of diamond drilling were completed, 4,448meters and 8,326 meters were drilled in 2007 and 2006, respectively.  Likewise, in the Sierra Aspera, a copper-goldprospect, located in the north of Chile, 1,128 meters of diamond drilling wasperformed.

 

*Other Chilean Prospects.*  There are other prospects such as Esperanza(copper-molybdenum), located in the Atacama region.  During 2007, we completed 2,538 meters ofdiamond drilling.  We are also continuingwith the exploration of the Resguardo prospect 

 

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(gold-copper) in the Tarapaca region and theCatanave prospect (gold-silver) in the Arica region.

 

 

PRINCIPAL PRODUCTS ANDMARKETS

 

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

 

Our marketing strategy and annual sales planningemphasize developing and maintaining long-term customer relationships, and thusacquiring annual or other long-term contracts for the sale of our products is ahigh priority.  Approximately 90% of ourmetal production for the years 2007, 2006 and 2005, were sold under annual orlonger-term contracts.  Sales prices aredetermined based on prevailing commodity prices for the quotation period,generally being the month of, the month prior to or the months following the actualor contractual month of shipment or delivery, according to the terms of thecontract.

 

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

 

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

 

 

METALS PRICES

 

Prices for our products are principally a functionof supply and demand and, except for molybdenum, are established on theCommodities Exchange, or COMEX, in New York and the London Metal Exchange orLME, the two most important metal exchanges in the world.  Prices for our molybdenum products areestablished by reference to the publication Platt’s Metals Week.  Our contract prices also reflect anynegotiated premiums and the costs of freight and other factors.  From time to time, we have entered intohedging transactions to provide partial protection against future decreases inthe market price of metals and we may do so under certain marketconditions.  We have entered into copperswaps and collar contracts in 2007, 2006 and 2005 and into zinc swap contractsin 2006.  At December 31, 2007 wedid not have any copper or zinc swap contracts outstanding.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” For a further discussion of prices for our products, please see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —MetalPrices.”

 

 

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

 

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| ** ** | ** ** | **Copper (COMEX)** | ** ** | **Copper (LME)** | ** ** |
|------------|------------|--------------------|------------|------------------|------------|
| **Year**   | ** ** | **High**           | ** ** | **Low**          | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| 1993       |       | 1.07               |       | 0.72             |       | 0.85 |   | 1.02 |   | 0.74 |   | 0.87 |   |
| 1994       |       | 1.40               |       | 0.78             |       | 1.07 |   | 1.38 |   | 0.79 |   | 1.05 |   |
| 1995       |       | 1.46               |       | 1.21             |       | 1.35 |   | 1.40 |   | 1.20 |   | 1.33 |   |
| 1996       |       | 1.31               |       | 0.86             |       | 1.06 |   | 0.98 |   | 0.79 |   | 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               |       | 0.90             |       | 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 |   | 1.03 |   | 1.30 |   |
| 2005       |       | 2.28               |       | 1.40             |       | 1.68 |   | 2.11 |   | 1.39 |   | 1.67 |   |
| 2006       |       | 4.08               |       | 2.13             |       | 3.09 |   | 3.99 |   | 2.06 |   | 3.05 |   |
| 2007       |       | 3.75               |       | 2.40             |       | 3.22 |   | 3.77 |   | 2.37 |   | 3.23 |   |

 

The per pound COMEXcopper price during the last 5, 10 and 15 year periods averaged $2.02, $1.39and $1.28, respectively.  The per poundLME copper price during the last 5, 10 and 15 year periods averaged $2.01,$1.38 and $1.27, respectively.

 

At February 22,2008, the COMEX and LME copper prices were $3.79 and $3.77 per pound,respectively.

 

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

 
| ** ** | ** ** | ** **    | ** ** | ** **         | ** ** | **Molybdenum (Dealer**        | ** ** |
|------------|------------|---------------|------------|--------------------|------------|-------------------------------|------------|
| ** ** | ** ** | ** **    | ** ** | ** **         | ** ** | **Oxide Platt’s Metals** | ** ** |
| ** ** | ** ** | **Zinc(LME)** | ** ** | **Silver (COMEX)** | ** ** | **Week)**                     | ** ** |
| **Year**   | ** ** | **High**      | ** ** | **Low**            | ** ** | **Average**                   | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Average** | ** ** |
| 1993       |       | 0.49          |       | 0.40               |       | 0.44                          |       | 5.44 |   | 3.52 |   | 4.30 |   | 2.80 |   | 1.82 |   | 2.32 |   |
| 1994       |       | 0.52          |       | 0.42               |       | 0.45                          |       | 5.78 |   | 4.57 |   | 5.28 |   | 17.00 |   | 2.68 |   | 4.59 |   |
| 1995       |       | 0.52          |       | 0.44               |       | 0.47                          |       | 6.10 |   | 4.38 |   | 5.19 |   | 17.50 |   | 3.90 |   | 4.30 |   |
| 1996       |       | 0.48          |       | 0.45               |       | 0.47                          |       | 5.82 |   | 4.67 |   | 5.18 |   | 5.50 |   | 2.90 |   | 3.78 |   |
| 1997       |       | 0.80          |       | 0.47               |       | 0.60                          |       | 6.31 |   | 4.16 |   | 4.87 |   | 4.90 |   | 3.52 |   | 7.90 |   |
| 1998       |       | 0.52          |       | 0.42               |       | 0.46                          |       | 7.26 |   | 4.61 |   | 5.53 |   | 4.60 |   | 2.00 |   | 3.41 |   |
| 1999       |       | 0.56          |       | 0.41               |       | 0.49                          |       | 5.76 |   | 4.87 |   | 5.22 |   | 2.90 |   | 2.48 |   | 2.65 |   |
| 2000       |       | 0.58          |       | 0.46               |       | 0.51                          |       | 5.55 |   | 4.56 |   | 4.97 |   | 2.98 |   | 2.15 |   | 2.55 |   |
| 2001       |       | 0.48          |       | 0.33               |       | 0.40                          |       | 4.81 |   | 4.03 |   | 4.36 |   | 2.65 |   | 2.15 |   | 2.36 |   |
| 2002       |       | 0.38          |       | 0.33               |       | 0.35                          |       | 5.11 |   | 4.22 |   | 4.60 |   | 8.30 |   | 2.40 |   | 3.77 |   |
| 2003       |       | 0.46          |       | 0.34               |       | 0.38                          |       | 5.98 |   | 4.35 |   | 4.89 |   | 7.80 |   | 3.15 |   | 5.32 |   |
| 2004       |       | 0.58          |       | 0.43               |       | 0.48                          |       | 8.21 |   | 5.51 |   | 6.68 |   | 33.25 |   | 7.20 |   | 15.95 |   |
| 2005       |       | 0.87          |       | 0.53               |       | 0.63                          |       | 9.00 |   | 6.43 |   | 7.32 |   | 40.00 |   | 26.00 |   | 31.05 |   |
| 2006       |       | 2.10          |       | 0.87               |       | 1.49                          |       | 14.85 |   | 8.82 |   | 11.54 |   | 28.40 |   | 20.50 |   | 24.38 |   |
| 2007       |       | 1.93          |       | 1.00               |       | 1.47                          |       | 15.50 |   | 11.47 |   | 13.39 |   | 31.17 |   | 29.39 |   | 29.91 |   |

 

The per pound LME zincprice during the last 5, 10 and 15 year periods averaged $0.89, $0.67 and$0.61, respectively.  The per ounce COMEXsilver price during the last 5, 10  and15 year periods averaged $8.76, $6.85 and $6.22, respectively.  The per pound Platt’s Metals Week DealerOxide molybdenum price during the last 5, 10 and 15 year periods averaged$21.32, $12.14 and $9.62, respectively.

 

At February 22, 2008the LME zinc price was $1.09 per pound, the COMEX silver price was $18.03 perounce and the Platt’s Metals Week Dealer Oxide molybdenum price was $33.25 perpound.

 

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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, 2007, we employed 12,134persons, approximately 72% of whom are covered by labor agreements with tendifferent labor unions.  During the lastseveral years, we have experienced strikes or other labor disruptions that havehad an adverse impact on our operations and operating results.  We cannot assure you that in the future wewill not experience strikes or other labor related work stoppages thatcould have a material adverse effect on our financial condition and results ofoperations.

 

Peru

 

Approximately 68% of our Peruvian labor force wasunionized at December 31, 2007, represented by eight separate unions.

 

Collectivebargaining agreements with the Company’s Peruvian labor unions expired in early2007.  A number of strikes were initiatedby the Company’s labor unions, demanding wage increases and betterbenefits.  In addition, some of theunions went on strike in support of national union strikes.  These strikes were generally of a briefnature and the Company was able to continue normal operations with the supportof staff and administrative personnel and contractors.  New collective bargaining agreements, forperiods ranging from three to six years, were signed by the end of the thirdquarter 2007 with all of the Company’s Peruvian unions.

 

Employees of theToquepala and Cuajone units reside in town sites, where we have built 2,513houses and apartments and 1,186 houses and apartments, respectively.  In 1998, Company housing, at our Ilo unit,was sold to workers at nominal prices. We still hold 90 houses at Ilo for staff personnel.  Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees.  Our town site and housing complexes includeschools, medical facilities, churches, social clubs, shopping, banking andother services.

 

Mexico

 

Approximately 74% of our Mexican labor force wasunionized at December 31, 2007, represented by two separate unions.  Under Mexican law, the terms of employmentfor unionized workers is set forth in collective bargaining agreements.  Mexican companies negotiate the salaryprovisions of collective bargaining agreements with the labor unions annuallyand negotiate other benefits every two years. We conduct negotiations separately at each mining complex and eachprocessing plant.

 

BeginningJuly 2007, employees at our mines at Cananea, Taxco and San Martin went onstrike.  On January 11, 2008 theMexican federal labor court declared the Cananea strike illegal and ordered theworkers to return to work within 24 hours. This ruling was challenged before a federal judge who upheld the union’scase on February 14, 2008.  TheCompany will appeal this unfavorable ruling. The Company expects that it will take about three months to return tofull production at Cananea.  The Companyhas put the Taxco operations on standby due to the strike.  Resuming operations at San Martin remainsdependant upon the result of litigation.

 

The 4,201 workers from eight of eleven mining units and plants of MineraMexico voted on September 5, 2007 to elect union representation, fromamong the “Sindicato de 

 

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Trabajadores Mineros Metalurgicos y Similares de la Republica Mexicana”(National Union of Workers Engaged in Mining, Metallurgical and Similar Activities)and the “Sindicato Nacional de Trabajadores de la Exploracion, Explotacion yBeneficio de Minas de la Republica Mexicana” (National Union of Workers Engagedin Exploration, Exploitation and Mine Development Activities) which belongs tothe National Federation of Independent Unions with 332,000 members.  By overwhelming majority, 97% of the workersdecided to change to the National Union of Workers Engaged in Exploration,Exploitation and Mine Development Activities.  On October 15, 2007 the Federal Labor Board for Conciliation andArbitration decided in favor of the National Union of Workers Engaged inExploration, Exploitation and Mine Development Activities, a decision which waslater challenged and is pending before federal judges.

 

In 2006, there were a number of work stoppages atsome of our Mexican operations.  Whilesome of these work stoppages were of a short-term nature with little or noproduction loss, others have been more disruptive.  A strike at the La Caridad copper mine inSonora began in the first quarter of 2006 and ended when the mine was returnedto us on July 26, 2006.  A strike atthe San Martin polymetallic complex in Zacatecas commenced in the first quarterof 2006 and ended in May 2006. Additionally, workers at the Cananea copper mine went on strike on June 1,2006 returning 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.

 

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

 

Employees of the Mexcobre and Cananea Units residein town sites at La Caridad and Cananea, where we have built approximately2,000 houses and apartments and 275 houses and apartments, respectively.  Employees of the IMMSA Unit principallyreside on the grounds of the mining or processing complexes in which they workand where we have built approximately 900 houses and apartments.  Housing, together with maintenance andutility services, is provided at minimal cost to most of our employees.  Our town sites and housing complexes includeeducational and, in some units, medical facilities, churches, social clubs,shopping, banking and other services.  Atthe Cananea Unit, health care is provided free of charge to employees, retiredunionized employees and their families.

 

FUEL, ELECTRICITY AND WATERSUPPLIES

 

The principal raw materials used in our operationsare fuels (including fuel oil to power boilers and generators, natural gas formetallurgical processes at our Mexican operations and diesel fuel for miningequipment), electricity and water.  Webelieve that supplies of fuel, electricity and water are readilyavailable.  Although the prices of theseraw materials may fluctuate beyond our control, we focus our efforts to reducethese increased costs through cost and energy saving measures.

 

Peru

 

In Peru, electric power for our operatingfacilities is generated by two thermal electric plants owned and operated byEnergia del Sur, S.A. (“Enersur”), a diesel and 

 

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waste heat boilers plant located adjacent to theIlo smelter and a coal plant located south of Ilo.  Power generation capacity for Peruvianoperations is currently 344 megawatts. In addition, we have nine megawatts of power generation capacity from twosmall hydro-generating installations at Cuajone.  Power is distributed over a 224-kilometerclosed loop transmission circuit.  Weobtain fuel in Peru principally from Repsol Comercial S.A.C., a local producer,which forms part of Grupo Repsol YPF of Spain.

 

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

 

In Peru, we have water concessions for up to 1,950liters per second for well fields at Huaitire, Vizcachas and Titijones andsurface water rights from the Suches lake and two small water courses, namelyQuebrada Honda and Quebrada Tacalaya, which together are sufficient to supplythe needs of 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 orindirectly from Petroleos Mexicanos, (“PEMEX”), the state oil monopoly.  Electricity for our Mexican operations, whichis used as the main energy source at our mining complexes, is either purchasedfrom the *Comision Federal de Electricidad*(the Federal Electricity Commission, or CFE), the state’s electrical powerproducer, or steam-generated at Mexcobre’s smelter by recovering energy fromwaste heat boilers.  Accordingly, asignificant portion 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 to import natural gas from the United Statesat market prices and thereby reduce operating costs.  A contract with PEMEX provides us with theoption of using a fixed price for a portion of our natural gas purchases.

 

In 2007 and 2006, we entered into gas swapcontracts to protect part of our gas consumption in both periods.  In 2007 we entered into a gas swap contractfor 0.9 million MMBTUs with a fixed price of $7.525 per MMBTU.  In 2006 we entered into a gas swap contractfor 3.7 million MMBTUs with a fixed price of $4.2668 per MMBTU.  Related to these contracts we recorded a lossof $0.9 million and a gain of $6.3 million in 2007 and 2006, respectively,which were included in the production cost.

 

In December 2005 we announced our plans for a 450 megawatt powergeneration plant in Mexico to supply our own facilities.  During 2007 we reformulated this project toincrease the plant capacity to 600 megawatt. Additionally, it is our intention to build this facility in the state ofSonora, Mexico.  We anticipate that theproject will be built and managed by an independent power company and ourobligation will be the supply of coal and an agreement to use the power output.  We expect this plant will give us the abilityto better control the cost of our energy requirements. The project is alsoexpected to create nearly 350 permanent jobs and 3,000 jobs during theconstruction stage.  It is anticipatedthat the project will be completed in 2011 and that it will exceed Mexican andinternational environmental standards. We have begun a feasibility study for this plant which is expected to befinished by the end of 2008.

 

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In Mexico, water is a national property andindustries not connected to a public services water supply must obtain a waterconcession from *Comisión Nacional del Agua*(the “National Water Commission”, or “CNA”). Water usage fees are established in the *LeyFederal de Derechos (the Federal Law on Water Rights),* whichdistinguishes several availability zones with different fees per unit of volumeaccording to each zone.  All of ouroperations have one or several water concessions and, with the exception ofMexicana de Cobre, pump out the required water from one or several wells.  Mexicana de Cobre pumps water from the 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 been establishedin each plant in order to conserve and recycle water.  Water usage fees are updated on a yearlybasis and have been increasing in recent years.

 

In December 2006,the Federal Water Rights Law was modified effective January 1, 2007. As aresult the mining industry now pays for water at 100% of the established waterrate instead of the 25% previously paid. This increased water cost by approximately $15.6 million in 2007.

 

ENVIRONMENTAL MATTERS

 

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

 

**MINING RIGHTS AND CONCESSIONS**

** **

Peru

 

We have 238,183 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  |       | 46,128         |       | 18,955      |       | 7,056   |       | —    |       | 72,139    |       |
| Exploration |       | —         |       | —      |       | —  |       | 164,867   |       | 164,867   |       |
| Total       |       | 46,428         |       | 19,411      |       | 7,477   |       | 164,867   |       | 238,183   |       |

 

We believe that ourPeruvian concessions are in full force and effect under applicable Peruvianlaws and that we are in compliance with all material terms and requirementsapplicable to these concessions.  Theconcessions have indefinite terms, subject to our payment of concession fees ofup to $3.00 per hectare annually for the mining concessions and a fee based onnominal capacity for the processing concessions.  Fees paid during 2007, 2006 and 2005 wereapproximately $1.4 million, $0.8 million and $0.8 million, respectively.  We have two types of mining concessions inPeru: metallic and non-metallic concessions. We also have water concessions for well fields at Huaitire, Titijonesand Vizcachas and surface water rights from the Suches Lake, which together aresufficient to supply the needs of our Toquepala and Cuajone operating units.

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty charge to be paid by mining companies in favorof the regional governments and communities where mining resources arelocated.  Under this law, we are subjectto a 1% to 3% charge, based on sales, applicable to the value of the concentratesproduced in our Toquepala and Cuajone mines. We made provisions of $62.8 million, $67.2 million and $40.3 million in2007, 2006 and 2005, respectively, for this charge.  These provisions are included in 

 

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cost of sales (exclusive of depreciation,amortization and depletion) on the consolidated combined statement of earnings.

 

Mexico

 

In Mexico we haveapproximately 483,988 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 |       | 86,386          |       | 117,164        |       | 14,144      |       | 266,294      |       | 483,988    |       |

 

 

We believe that ourMexican concessions are in full force and effect under applicable Mexican lawsand that we are in compliance with all material terms and requirementsapplicable to these concessions.  UnderMexican law, mineral resources belong to the Mexican nation and a concessionfrom the Mexican federal government is required to explore or mine mineralreserves.  Mining concessions have a50-year term that can be renewed for another 50 years.  Holding fees for mining concessions can befrom $0.4 to $8.8 per hectare depending on the expedition dates of miningconcession.  Fees paid during 2007, 2006and 2005 were approximately $2.2 million, $2.1 million and $2.1 million,respectively.  In addition, all of ouroperating units in Mexico have water concessions that are in full force andeffect.  We generally own the land towhich our Mexican concessions relate, although ownership is not required inorder to explore or mine a concession. We also own all of the processing facilities of our Mexican operationsand the land on which they are constructed.

 

 

REPUBLIC OF PERU 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 itsmost important Board Committees. However, the information found on our website is not part of this or anyother report.

 

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Item1A. Risk factors

 

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 andcertain other 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 a lowof $0.72 in 2002 to a high of $3.22 in 2007.  The LME copper prices during this period,while slightly different, closely paralleled the COMEX prices.  Molybdenum, zinc and silver during the same15-year period showed average highs and lows as follows: molybdenum $4.32 perpound, low in 1993 and $31.05 per pound, high in 2005; zinc $0.35 per pound,low in 2002 and $1.49 per pound, high in 2006; and silver $4.30 per ounce, lowin 1993 and $13.39 per ounce high in 2007. Also please see discussion in Item 1, Business, Metal prices.

 

We cannot predict whethermetals prices will rise or fall in the future. A decline in metals prices and, in particular, copper or molybdenumprices, could have an adverse impact on our results of operations and financialcondition, and we might, in very adverse market conditions, consider curtailingor modifying certain of our mining and processing operations.

 

***Changes in the level of demand for our products could adverselyaffect 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 may affectthe level of that demand to the extent that changes increase or decrease theneed for our metal products.  A change indemand, including any change resulting from economic slow-downs or, recessions,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 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 

 

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actual reserves conformto geological, metallurgical or other expectations or that the estimated volumeand grade of ore will be recovered. Market prices, increased production costs, reduced recovery rates,short-term operating factors, royalty taxes and other factors may render provenand probable reserves uneconomic to exploit and may result in revisions of reservesdata from time to time.  Reserves dataare not indicative of future results of operations.  Our reserves are depleted as we mine.  We depend on our ability to replenish our orereserves for our long-term viability.  Weuse several strategies to replenish and increase our ore reserves, includingexploration and investment in properties located near our existing mine sitesand investing in technology that could extend the life of a mine by allowing usto cost-effectively process ore types that were previously considereduneconomic.  Acquisitions may alsocontribute to increased ore reserves and we review potential acquisitionopportunities 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 with lawsand regulations require capital expenditures. We must continue to invest capital to maintain or to increase the amountof copper reserves that we exploit and the amount of copper and other metals weproduce.  We cannot assure you that wewill be able to maintain our production levels to generate sufficient cash, orthat we have access to sufficient financing to continue our exploration,exploitation and refining activities at or above present levels.

 

***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 require repaymentof the indebtedness immediately.  OurMinera Mexico subsidiary is further limited by the terms of its outstandingnotes, which also restrict the Company’s applicable incurrence of debt andliens.  In addition, future creditfacilities may contain limitations on our incurrence of additional debt andliens 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.

 

***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.  

 

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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 2007, 2006 and2005, our largest customer accounted for approximately 12.4%, 10.1% and 11.7%,respectively, of our sales. Additionally, our five largest customers in each of 2007, 2006 and 2005collectively accounted for approximately 39.6%, 33.7% and 40.8%, 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 fromlower cost 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.

 

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 

 

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countries other than Peruand 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 40% of our total 2007 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 the1970s and 1980s, our ability to import fuel oil was restricted by Peruviangovernment policies that required us to purchase fuel oil domestically from agovernment-owned oil producer at prices substantially above those prevailing onthe world market. In addition, in recent years the price of oil has risendramatically due to a variety of factors. Disruptions in supply or increases incosts of energy resources could have a material adverse effect on our financialcondition and results of operations.

 

We believe our results ofoperations can, from time to time, be affected by accounting policy changes,such as the 2005 Emerging Issues Task Force, or EITF 04-06, consensus, whichrequired us to include stripping costs incurred during the production phase ofa mine in the cost of the inventory produced (extracted) during the period thatthe stripping costs are incurred.

 

A 2005 Mexican SupremeCourt decision reduced our results by requiring increased workers’ profitsharing payments by Minera Mexico’s subsidiaries.  In May 2005, the court rendered adecision that changed the method of computing the amount of statutory workers’profit-sharing required to be paid by certain Mexican companies, includingMinera Mexico.  The court’s ruling ineffect prohibited applying net operating loss carryforwards in computing theincome used as the base for determining the workers’ profit sharing amounts, asfurther described under “Management’s Discussion and Analysis  of Financial Condition and Results ofOperations—Liquidity and Capital Resources—Other Liquidity Considerations.”

 

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. For example,the direction and relative strength of the U.S. economy has recently beenincreasingly uncertain due to softness in the housing markets, the subprimemortgage and credit market turmoil, rising oil prices, difficulties in thefinancial services sector, and continuing geopolitical uncertainties. Copper purchasesfrom China have significantly contributed to the increased price of copper inrecent years. Some observers have expressed concern regarding China’s long termpolitical and economic prospects. If economic growth in the United States andother major consuming countries’ economies is slowed, many customers may delayor reduce purchases of our products or similiar commodities. This could resultin reductions in sales of or prices for our products, longer sales cycles,difficulty in collecting sales proceeds, slower spending on capital projects orpostponement of the projects, and increased price competition. The U.S.-ledeconomic slowdown and uncertainty about the financial markets may prompt banksto limit lending, which may have an adverse effect on our liquidity and on ourability to carry out our announced capital investment programs.  We cannot 

 

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provide any assurance that any of these events willnot have a material adverse effect on market conditions, prices of oursecurities, our ability to obtain financing, and our results of operations andfinancial 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 31,2007, unions represented approximately 72% of our workforce.

 

BeginningJuly 2007, our Mexican mines of Cananea, Taxco and San Martin went onstrike.  Since January 11, 2008 theCananea mine is open and is preparing to gradually resume normal operations inthe near future.  The mine was reopenedbased on a ruling by the labor authorities who declared the strike illegal forthe second consecutive time.  While theCananea union later obtained an injunction from a federal judge preventing theCompany from firing workers that do not return to work immediately, the samejudge did explicitly safeguard the rights of any worker that wishes to returnto work at the mine and the right of the Company to conduct operations in theordinary course of business.

 

During 2006, there were anumber of work stoppages at some of our Mexican operations.  While some of these work stoppages wereof a short-term nature with little or no production loss, others have been moredisruptive.  A strike at the La Caridadcopper mine in Sonora began in the first quarter of 2006 and ended in July 2006.  As a result of these strikes, we were forcedto declare “force majeure” on certain of our June and July coppercontracts. In 2006, we also experienced strikes at our Cananea and San Martinmines.

 

Collective bargainingagreements with the Company’s Peruvian labor unions expired in 2007.  A number of strikes were initiated by theCompany’s labor unions, demanding wage increases and better benefits.  In addition, some of the unions went onstrike in support of national union strikes. These strikes were generally of a brief nature and the Company was ableto continue normal operations with the support of staff, administrativepersonnel and contractors.  Newcollective bargaining agreements, for periods ranging from three to six yearswere signed with all of the Company’s unions.

 

***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  

 

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Mexico, the United Statesand Canada in connection with the North American Free Trade Agreement. Webelieve our operations are in compliance with all environmental laws andregulations within the areas we operate.

 

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 processing facilities.  We cannot assure you that our explorationprograms will result in the expansion or replacement of current production withnew proven and probable ore reserves.

 

Development projects 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 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 Mexicanpesos.  Accordingly, when inflation inPeru or Mexico increases without a corresponding devaluation of the nuevo solor the Mexican peso, our financial position, results of operations and cashflows could be adversely affected.  Tomanage the volatility related to the risk of currency rate fluctuations, we mayenter into forward exchange contracts. We cannot assure you, however, that currency fluctuations will not havean impact on our financial 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 financialresults.  These costs principally includeelectricity, labor, maintenance, local contractors and fuel.  For the year ended December 31, 2007, asubstantial portion of our costs were denominated in a currency other than U.S.dollar.  Operating costs are influencedby the currencies of the countries where our mines and processing

 

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plants are located andalso 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, which wouldnegatively 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 includingthe possibility of slope failure.  If weare required 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 and indirect parent corporations, including AMC and GrupoMexico, have from time to time been named parties in various litigationsinvolving Asarco LLC (“Asarco”).  In August 2002the U.S. Department of Justice brought a claim alleging fraudulent conveyancein connection with AMC’s then-proposed purchase of SCC from Asarco.  That action was settled pursuant to a ConsentDecree dated February 2, 2003.  In March 2003,AMC purchased its 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 from Asarcoshould be voided as a fraudulent conveyance. The lawsuit filed 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, this lawsuit,after being removed to Federal Court, was transferred to the United StatesDistrict Court for the Sourthern District of Texas in Brownsville, Texas, forresolution in conjunction with a new lawsuit filed by Asarco, the debtor inpossession, as described below.  On February 2,2007 a complaint was filed by Asarco, the debtor in possession, alleging manyof the matters previously claimed in the New York State lawsuit, including thatAMC’s purchase of SCC from Asarco should be voided as a fraudulent conveyance. Inlate December 2004 and early January 2005, three purported class actionderivative lawsuits were filed in the Delaware Court of Chancery (New CastleCounty) relating to the merger transaction between SCC and Minera Mexico. OnJanuary 31, 2005, the three actions were consolidated. The consolidatedcomplaint alleges, among other things, that the merger was the result ofbreaches of fiduciary duties by SCC’s directors and was not entirely fair toSCC 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. While Grupo Mexico and its affiliates believethat these claims are without merit, we cannot assure you that these or futureclaims, if successful, will not have an adverse effect on the Company’s parentcorporation or the Company.  Any increasein the financial obligations of the Company’s parent corporation, as a resultof matters related to Asarco or otherwise could, among other effects, result inthe Company’s parent corporation attempting to obtain increased dividends orother funding from the Company.  In 2005,certain subsidiaries of Asarco filed bankruptcy petitions in connection withalleged asbestos 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.

 

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***We are controlled by Grupo Mexico, which exercisessignificant influence over our affairs and policies and whose interests may bedifferent from yours.***

 

Grupo Mexico ownsindirectly approximately 75% 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.

 

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 pay a significant amount of our net income as cashdividends 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, legalrestrictions, contractual restrictions in credit agreements, limitationsimposed by the government of Peru, Mexico or other countries where we havesignificant operations and other factors that our board of directors may deemrelevant.  We anticipate paying asignificant amount of our net income as cash dividends on our common stock inthe foreseeable future.  Such paymentswould reduce cash available to meet our debt service obligations.

 

**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 fromconcessions from 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 *Secretaria de Economia* (Ministry ofEconomy), pursuant to the *Ley Minera*(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 

 

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and to allow inspectionsby the Ministry of Economy.  Anytermination or unfavorable modification of the terms of one or more of ourconcessions, or failure to obtain renewals of such concessions subject torenewal or extensions, could have a material adverse effect on our financialcondition and prospects.

 

***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 militarycoups and 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.

 

From 1985 through 1990,government policies restricted our ability, among other things, to repatriatefunds and import products from abroad. In addition, currency exchange rates were strictly controlled and allexports sales were required to be deposited in Peru’s *Banco Central de Reserva*, where they wereexchanged from U.S. dollars to the Peruvian currency at less-than-favorablerates of exchange.  These policiesgenerally had an adverse effect on our results of operations. Controls onrepatriation of funds limited the ability of our stockholders to receivedividends outside of Peru but did not limit the ability of our stockholders toreceive distributions of earnings in Peru.

 

On April 9, 2006,Peruvian citizens participated in the election for president, congress andrepresentatives to the Andean Parliament, to be appointed for the five-yearperiod commencing July 28, 2006.  24political parties participated in this election process. As none of thepresidential candidates received more than 50 percent of the votes, on June 4,2006 a run-off election between the top two vote getters was held.  On June 16, 2006 the National Office ofElectoral Processes proclaimed Mr. Alan Garcia president-elect, therebybringing the electoral process to an end. Mr. Garcia assumed office on July 28,2006.  Mr. Garcia, a member of theAPRA party, was president of Peru from 1985 to 1990.  At the inauguration an appeal was made to themining industry for a voluntary contribution for regional development.  In December 2006, the Company signed anagreement with the Peruvian government to make a contribution for this purpose.

 

There is a risk ofterrorism in Peru relating to *SenderoLuminoso* and the *MovimientoRevolucionario Tupac Amaru*, which were particularly active in the1980s and early 1990s.  We cannotguarantee that acts by these or other terrorist organizations will notadversely affect our operations in the future.

 

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

 

***Mexican 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 

 

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significant devaluationof the peso, increased inflation, high domestic interest rates, a substantialoutflow of capital, negative economic growth, reduced consumer purchasing powerand high unemployment.  An economiccrisis occurred in 1995 in the context of a series of internal disruptions andpolitical events including a large current account deficit, civil unrest in thesouthern state of Chiapas, the assassination of two prominent politicalfigures, a substantial outflow of capital and a significant devaluation of thepeso.  We cannot assure you that suchconditions will not recur, that other unforeseen negative political or socialconditions will not arise or that such conditions will not have a materialadverse effect on our financial condition and results of operations.

 

A general election washeld in Mexico on July 2, 2006.  On July 6,2006 preliminary results declared Mr. Felipe Calderon of the NationalAction Party or PAN, winner of the presidential election. On December 1,2006 Mr. Felipe Calderon was sworn in as president of Mexico.

 

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

 

***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 3.9%in 2007.  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 a revaluation of 6.3% in 2007.  Our revenues are primarily denominated inU.S. dollars and our operating expenses are partly denominated in U.S.dollars.  If inflation in Peru were toincrease without a corresponding devaluation of the nuevo sol relative to theU.S. dollar, our financial position and results of operations, and the marketprice of our common stock, could be affected. Although the Peruvian government’s stabilization plan has significantlyreduced inflation and the Peruvian economy has experienced moderate growth inrecent years, we cannot assure you that inflation will not increase from itscurrent level or that such growth will continue in the future at similar ratesor 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 January 31,2008, were $30.7 billion as compared to $17.3 billion at December 31,2006.  We cannot assure that Peru will beable to maintain adequate 

 

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foreign reserves to meetits foreign currency denominated obligations or that Peru will not devalue itscurrency should its foreign reserves decline.

 

***Mexican inflation, restrictive exchange control policies 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 3.8% in 2007, 4.1% in 2006 and 3.3% in 2005.  The Mexican government has publicly announcedthat it does not expect inflation to exceed 3.8% in 2008.  At the same time, the peso has been subjectin the past to significant devaluation, which may not have been proportionateto the inflation rate and may not be proportionate to the inflation rate in thefuture.  The value of the peso increasedby 0.1% in 2007, decreased by 1.5% in 2006 and increased by 4.9% in 2005.

 

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 debtsecurities.

 

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

 

Item 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 believe that our existing properties are in goodcondition and suitable for the conduct of 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 undergroundmining, concentrating, copper smelting, copper refining, copper rod production,solvent extraction/electrowinning (SX/EW), zinc refining, sulfuric acid production,molybdenum concentrate production and silver and gold refining.  The extraction and production process are summarizedbelow.

 

 

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OPEN-PIT MINING

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

 

UNDERGROUND MINING

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

 

CONCENTRATING

The copper ore with a copper grade over 0.4% fromthe primary crusher or the copper, zinc and lead-bearing ore from theunderground mines is transported to a concentrator plant where gyratory crushersbreak the ore into sizes no larger than three-quarters of an inch.  The ore is then sent to a mill section whereit is ground to the consistency of fine powder. The finely ground ore is mixed with water and chemical reagents andpumped as a slurry to the flotation separator where it is mixed with certainchemicals.  In the flotation separator,reagents solution and air pumped into the flotation cells cause the minerals toseparate from the waste rock and bubble to the surface where they are collectedand dried.

 

If the bulk concentrated copper containsmolybdenum it is first processed in a molybdenum plant as described below under“Molybdenum Production.”

 

COPPER SMELTING

Copper concentrates are transported to a smelter,where they are smelted using a furnace, converter and anode furnace to produceeither copper blister (which is in the form of cakes with air pockets) orcopper anodes (which are cleaned of air pockets).  At the smelter, the concentrates are mixedwith flux (a chemical substance intentionally included for high temperatureprocessing) and then sent to reverberatory furnaces producing copper matte andslag (a mixture of iron and other impurities). Copper matte contains approximately 65% copper.  Copper matte is then sent to the converters,where the material is oxidized in two steps: (i) the iron sulfides in thematte are oxidized with silica, producing slag that is returned to thereverberatory furnaces, and (ii) the copper contained in the mattesulfides is then oxidized to produce copper that, after casting, is calledblister 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 the remainderis sent to the refinery.

 

COPPER REFINING

Anodes are suspended in tanks containing sulfuricacid and copper sulfate.  A weakelectrical current is passed through the anodes and chemical solution and thedissolved copper is deposited on very thin starting sheets to produce coppercathodes containing approximately 99.99% copper.  During this process, silver, gold and othermetals (for example, palladium, platinum and selenium), along with otherimpurities, settle on the bottom of the tank (anodic slime).  This anodic slime is processed at a preciousmetal plant where selenium, silver and gold are recovered.

 

 

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COPPER ROD PLANT

To produce copper rod, copper cathodes are firstsmelted in a furnace and then dosified in a casting machine.  The dosified copper is then extruded andpassed through a cooling system that begins solidification of copper into a 60 ́50 millimeter copper bar.  The resulting copper bar is graduallystretched in a rolling mill to achieve the desired diameter.  The rolled bar is then cooled and sprayedwith wax as a preservation agent and collected into a rod coil that iscompacted and sent to market.

 

SOLVENT EXTRACTION/ELECTROWINNING(SX/EW)

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

 

MOLYBDENUM PRODUCTION

Molybdenum is recovered from copper-molybdenumconcentrates produced at the concentrator. The copper-molybdenum concentrate is first treated with a thickeneruntil it becomes slurry with 60% solids. The slurry is then agitated in a chemical and water solution and pumpedto the flotation separator.  Theseparator creates a froth that carries molybdenum to the surface but not thecopper mineral (which is later filtered to produce copper concentrates containingapproximately 27% copper).  Themolybdenum froth is skimmed off, filtered and dried to produce molybdenumconcentrates of approximately 58% contained molybdenum.

 

ZINC REFINING

Metallic zinc is produced through electrolysisusing zinc concentrates and zinc oxides. Sulfur is eliminated from the concentrates by roasting and the zincoxide is dissolved in sulfuric acid solution to eliminate solidimpurities.  The purified zinc sulfidesolution is treated by electrolysis to produce refined zinc and to separatesilver and gold, which are recovered as concentrates.

 

SULFURIC ACID PRODUCTION

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

 

SILVER AND GOLD REFINING

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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***The following table sets forth asof December 31, 2007, the locations of production facilities by reportablesegment, the processes used, as well as the key production and capacity datafor each location:***

*** ***
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          | *** *** | ***2007***        |
|---------------------------------------|--------------|------------------------|--------------|----------------------------------------------------------------------------------------------------|--------------|--------------------------------------------|--------------|-----------------------|--------------|-------------------|
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | ***Nominal***                              | *** *** | ***2007***            | *** *** | ***Capacity***    |
| ***Facility Name***                   | *** *** | ***Location***         | *** *** | ***Process***                                                                                      | *** *** | ***Capacity  (1)***                        | *** *** | ***Production***      | *** *** | ***Utilization*** |
| ***PERUVIAN  OPEN PIT UNIT***         | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          |
| ***Mining  Operations***              | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          | *** *** | *** ***      |
| ***Cuajone***Open-pit Mine            | *** *** | ***Cuajone (Peru)***   | *** *** | ***Copper ore milling and recovery, copper and molybdenum concentrate  production***               | *** *** | ***87.0 ktpd — Milling***             | *** *** | ***78.3 ktpd***       | *** *** | ***90.2%***       |
| ***Toquepala***Open-pit Mine          | *** *** | ***Toquepala (Peru)*** | *** *** | ***Copper ore milling and recovery, copper and molybdenum concentrate  production***               | *** *** | ***60.0 ktpd — Milling***             | *** *** | ***58.4 ktpd***       | *** *** | ***97.3%***       |
| ***Toquepala SX-EW Plant***           | *** *** | ***Toquepala (Peru)*** | *** *** | ***Leaching, solvent extraction and cathode electro winning***                                     | *** *** | ***56.0 ktpy — Refined***             | *** *** | ***40.3 ktpy***       | *** *** | ***72.0%***       |
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          | *** *** | *** ***      |
| ***Processing  Operations***          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          | *** *** | *** ***      |
| ***Ilo Copper Smelter***              | *** *** | ***Ilo (Peru)***       | *** *** | ***Copper smelting, blister, anodes production***                                                  | *** *** | ***1,200.0 ktpy — Concentrate feed*** | *** *** | ***846.2 ktpy*** | *** *** | ***70.5%***       |
| ***Ilo Copper Refinery***             | *** *** | ***Ilo (Peru)***       | *** *** | ***Copper refining***                                                                              | *** *** | ***280 ktpy — Refined cathodes***     | *** *** | ***178.4 ktpy*** | *** *** | ***63.7%***       |
| ***Ilo Acid Plants***                 | *** *** | ***Ilo (Peru)***       | *** *** | ***Sulfuric Acid***                                                                                | *** *** | ***1,050 ktpy — Sulfuric acid***      | *** *** | ***771.3 ktpy*** | *** *** | ***73.5%***       |
| ***Ilo Precious Metals Refinery***    | *** *** | ***Ilo (Peru)***       | *** *** | ***Slime recovery & processing, gold & silver refining***                        | *** *** | ***320 tpy***                              | *** *** | ***247.0 tpy***  | *** *** | ***77.2%***       |
| *** ***                          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          | *** *** | *** ***      |
| ***MEXICAN  OPEN PIT UNIT***          | *** *** | *** ***           | *** *** | *** ***                                                                                       | *** *** | *** ***                               | *** *** | *** ***          |
| ***Cananea***Open-Pit Mine            | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper Ore milling & recovery, copper concentrate production***                        | *** *** | ***76.7 ktpd — Milling***             | *** *** | ***59.6  Ktpd*** | *** *** | ***77.7%***       |
| ***Cananea SX-EW I, II Plants*** | *** *** | ***Sonora (Mexico)***  | *** *** | ***Leaching, solvent extraction & refined cathode  electrowinning***                      | *** *** | ***54.8 ktpy (combined)***                 | *** *** | ***34.6 ktpy***       | *** *** | ***63.1%***       |
| ***La Caridad***Open-Pit Mine         | *** *** | ***Sonora (Mexico)***  | *** *** | ***Copper ore milling & recovery, copper & molybdenum  concentrate production*** | *** *** | ***90.0 ktpd — Milling***             | *** *** | ***85.8 ktpd***       | *** *** | ***95.3%***       |
| ***La Caridad SX-EW Plant***          | *** *** | ***Sonora (Mexico)***  | *** *** | ***Leaching, solvent extraction & cathode electro winning***                              | *** *** | ***21.9 ktpy — Refined***             | *** *** | ***22.7 ktpy***       | *** *** | ***103.7%***      |

 

 

31

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| ***Processing  Operations***                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
|-----------------------------------------------------|--------------|--------------------------------|--------------|--------------------------------------------------------------------------------------------------------|--------------|------------------------------------------|--------------|-------------------------|--------------|--------------|
| ***La Caridad Copper Smelter***                     | *** *** | ***Sonora (Mexico)***          | *** *** | ***Concentrate smelting, anode production***                                                           | *** *** | ***1,000 ktpy — Concentrate feed*** | *** *** | ***684.8 ktpy***   | *** *** | ***68.5%***  |
| ***La Caridad Copper Refinery***                    | *** *** | ***Sonora (Mexico)***          | *** *** | ***Copper refining***                                                                                  | *** *** | ***300 ktpy Copper cathode***            | *** *** | ***173.3 ktpy***   | *** *** | ***57.8%***  |
| ***La Caridad Copper Rod Plant***                   | *** *** | ***Sonora (Mexico)***          | *** *** | ***Copper rod production***                                                                            | *** *** | ***150 ktpy Copper rod***                | *** *** | ***96.6 ktpy***         | *** *** | ***64.4%***  |
| ***La Caridad Precious Metals  Refinery***          | *** *** | ***Sonora (Mexico)***          | *** *** | ***Slime recovery & processing, gold & silver refining***                            | *** *** | ***2.8 ktpy — Slime***              | *** *** | ***0.5 ktpy***          | *** *** | ***18.2%***  |
| ***La Caridad Sulfuric Acid Plant***                | *** *** | ***Sonora (Mexico)***          | *** *** | ***Sulfuric acid***                                                                                    | *** *** | ***1,565.5 ktpy — Sulfuric acid***  | *** *** | ***674.3 ktpy***   | *** *** | ***43.1%***  |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***IMMSA  UNIT***                                   | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***Underground Mines***                             | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***Charcas***                                       | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Copper, zinc, lead milling, recovery & concentrate  production***                          | *** *** | ***1,460 ktpy — Milled ore***       | *** *** | ***1,258.5 ktpy*** | *** *** | ***86.2%***  |
| ***San Martin***                                    | *** *** | ***Zacatecas (Mexico)***       | *** *** | ***Lead, zinc, copper & silver mining, milling  recovery & concentrate production*** | *** *** | ***1,606 ktpy — Milled ore***       | *** *** | ***625.3 ktpy***   | *** *** | ***38.9%***  |
| ***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***                                         | *** *** | ***Guerrero (Mexico)***        | *** *** | ***Lead, zinc silver & gold mining recovery &  concentrate production***             | *** *** | ***730 ktpy — Milled ore***         | *** *** | ***247.5 ktpy***   | *** *** | ***33.9%***  |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***Nueva Rosita Coal &  Coke Complex***(2) | *** *** | ***Coahuila (Mexico)***        | *** *** | ***Clean coal production***                                                                            | *** *** | ***900 ktpy clean coal***                | *** *** | ***41.1 ktpy***         | *** *** | ***4.6%***   |
| *** ***                                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***Processing  Operations***                        | *** *** | *** ***                   | *** *** | *** ***                                                                                           | *** *** | *** ***                             | *** *** | *** ***            | *** *** | *** *** |
| ***San Luis Potosi Copper Smelter***                | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Concentrate smelting, blister production***                                                         | *** *** | ***230 ktpy concentrate feed***          | *** *** | ***48.1 ktpy***         | *** *** | ***20.9%***  |
| ***San Luis Potosi Zinc Refinery***                 | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Zinc concentrates refining***                                                                       | *** *** | ***105.0 ktpy zinc cathode***            | *** *** | ***90.8 ktpy***         | *** *** | ***86.4%***  |
| ***Sa***n  Luis Potosi Sulfuric Acid Plant          | *** *** | ***San Luis Potosi (Mexico)*** | *** *** | ***Sulfuric acid***                                                                                    | *** *** | ***180.0 ktpy sulfuric acid***           | *** *** | ***165.1 ktpy***   | *** *** | ***91.7%***  |

----

Key:
| koz =  thousands of ounces    |
|------------------------------------|
| ktpd = thousands of tons  per day  |
| ktpy = thousands of tons  per year |
| tpy  = tons per year          |

 

 

32

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(1)       Our estimates of actual capacity contemplating normaloperating conditions with allowance for normal downtime for repairs andmaintenance and based on the average metal content for the relevant period.

(2)       At December 31, 2007, the coal reserves for the NuevaRosita coal were 66,362,623 tons with average sulfur content of 1.78% and a BTUcontent of 9,054.9 per pound.

(3) At December 31, 2007, net book values ofproperty are as follows: Peruvian operation $1,654.8 million (Cuajone $420.1million, Toquepala $511.9 million and Ilo and other support facilities $722.8million), Mexican open pit $1,605.2 million (Cananea $562.6 million, La Caridad$1,042.6 million) and Mexican IMMSA unit $248.5 million (San Luis Potosí $41.1million, zinc electrolytic refinery $58.9 million, Charcas $6.1 million, SanMartin $35.2 million, Santa Barbara $43.3 million, Taxco $7.1 million, SantaEulalia $14.4 million, Pasta de Conchos and Nueva Rosita $27.9 million andproperty in progress and other facilities $14.5 million).

 

33

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SUMMARY OPERATING DATA

 

The following table sets out certain operatingdata underlying our combined financial and operating information for each ofthe periods indicated.

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **COPPER (thousand pounds):** |       |                             |       |   |   |   |   |
| **Mined**                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru open pit**             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                     |       | 310,560                          |       | 334,605 |   | 347,130 |   |
| Cuajone                       |       | 401,498                          |       | 384,493 |   | 360,805 |   |
| SX-EW Toquepala               |       | 80,844                           |       | 78,935 |   | 80,464 |   |
|                          |       |                             |       |   |   |   |   |
| **Mexico open pit**           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                    |       | 225,443                          |       | 128,024 |   | 269,662 |   |
| Cananea                       |       | 140,896                          |       | 245,331 |   | 261,778 |   |
| SX-EW La Caridad              |       | 50,072                           |       | 24,796 |   | 48,603 |   |
| SX-EW Cananea                 |       | 76,265                           |       | 115,794 |   | 124,359 |   |
| ** **                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IMMSA Unit**                |       | 19,961                           |       | 23,270 |   | 28,228 |   |
| **Total Mined**               | ** ** | **1,305,539**                    | ** ** | **1,335,248** | ** ** | **1,521,029** | ** ** |
|                          |       |                             |       |   |   |   |   |
| **Smelted**                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru open pit**             |       |                             |       |   |   |   |   |
| Blister Ilo                   |       | 20,466                           |       | 67,364 |   | 713,200 |   |
| Anodes Ilo                    |       | 511,906                          |       | 656,016 |   | - |   |
|                          |       |                             |       |   |   |   |   |
| **Mexico open pit**           |       |                             |       |   |   |   |   |
| Anodes La  Caridad            |       | 446,894                          |       | 530,592 |   | 617,953 |   |
| ** **                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IMMSA Unit**                |       |                             |       |   |   |   |   |
| Blister IMMSA                 |       | 45,894                           |       | 44,518 |   | 46,998 |   |
| **Total Smelted**             | ** ** | **1,025,160**                    | ** ** | **1,298,490** | ** ** | **1,378,151** | ** ** |
|                          |       |                             |       |   |   |   |   |
| **Refined**                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru Open Pit**             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes Ilo                  |       | 393,297                          |       | 602,520 |   | 628,769 |   |
| SX-EW Toquepala               |       | 88,920                           |       | 78,935 |   | 80,464 |   |
|                          |       |                             |       |   |   |   |   |
| **Mexico Open Pit**           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cathodes La  Caridad          |       | 382,152                          |       | 441,705 |   | 515,179 |   |
| SX-EW La Caridad              |       | 50,072                           |       | 24,796 |   | 48,603 |   |
| SX-EW Cananea                 |       | 76,265                           |       | 115,794 |   | 124,359 |   |
| **Total Refined**             | ** ** | **990,706**                      | ** ** | **1,263,750** | ** ** | **1,397,374** | ** ** |
|                          |       |                             |       |   |   |   |   |
| **Rod Mexico Open Pit**       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                    |       | 212,978                          |       | 212,923 |   | 249,485 |   |
| **Total Rod**                 | ** ** | **212,978**                      | ** ** | **212,923** | ** ** | **249,485** | ** ** |
|                          |       |                             |       |   |   |   |   |
| **SILVER (thousand ounces)**  | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mined**                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Peru Open Pit**             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Toquepala                     |       | 2,047                            |       | 2,083 |   | 2,230 |   |
| Cuajone                       |       | 2,219                            |       | 2,141 |   | 2,261 |   |
|                          |       |                             |       |   |   |   |   |
| **Mexico Open Pit**           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| La Caridad                    |       | 1,893                            |       | 1,055 |   | 2,123 |   |
| Cananea                       |       | 798                              |       | 1,616 |   | 1,698 |   |
|                          |       |                             |       |   |   |   |   |
| **IMMSA Unit**                |       | 8,272                            |       | 9,276 |   | 10,183 |   |
| **Total Mined**               | ** ** | **15,229**                       | ** ** | **16,171** | ** ** | **18,495** | ** ** |

 

 

34

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|                              |       |       |       |       |       |       |       |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Refined**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Peru Open Pit —  Ilo         |       | 2,657      |       | 3,831      |       | 3,533      |       |
| Mexico Open Pit — La Caridad |       | 3,539      |       | 4,211      |       | 4,583      |       |
| IMMSA Unit                        |       | 3,805      |       | 4,337      |       | 4,371      |       |
| **Total Refined**                 | ** ** | **10,001** | ** ** | **12,379** | ** ** | **12,487** | ** ** |
|                              |       |       |       |       |       |       |       |
| **MOLYBDENUM (thousand pounds)**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mined**                         |       |       |       |       |       |       |       |
| Toquepala                         |       | 13,730     |       | 12,815     |       | 11,737     |       |
| Cuajone                           |       | 8,424      |       | 7,767      |       | 11,638     |       |
| La Caridad                        |       | 13,578     |       | 5,514      |       | 9,260      |       |
| **Total Mined**                   | ** ** | **35,732** | ** ** | **26,096** | ** ** | **32,635** | ** ** |
|                              |       |       |       |       |       |       |       |
| **ZINC (thousand pounds)**        |       |       |       |       |       |       |       |
| Mined IMMSA                       |       | 266,787    |       | 301,133    |       | 316,603    |       |
| Refined IMMSA                     |       | 200,105    |       | 112,513    |       | 223,820    |       |

 

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 of which may negativelyaffect our results of operations and financial condition, as well as have theeffect of diminishing our stated ore reserves. To meet the geotechnical challenges relating to slope stability of theopen pit mines, we have taken the following steps:

 

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

 

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

 

 

35

----

 

 

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 faceangle of 72 degrees. Additionally, single benching was recommended for theupper sections 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 slope segmentsthat consist of either alluvial material, mine waste dumps or mineralizedstockpile material.  Alternatively,slopes in these types of materials, may be designed with an overall 37 degreeslope.  We are currently reviewing theserecommendations, but since final pit limits have not been yet established at LaCaridad, all current pit walls are effectively working slopes. Geostructuraland geotechnical data collected at the open pit mine from cell-mapping andoriented-core drilling databases provided the basis for the geotechnicalevaluation and recommendations.

 

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 water managementconsultants in 2004.  A third phase ofthe study, which addresses pit dewatering design, and drilling of peripheralmonitoring boreholes and dewatering test wells, will follow and is expected tobe completed in 2009.  Therecommendations proposed by the consulting firms in Phases 1 and 2, are beingimplemented.

 

**METALPRODUCTION BY SEGMENTS**

** **

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

 

**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.

 

Following is a map indicating the approximatelocation of, and access to, our Cuajone and Toquepala mine complexes as well asour Ilo processing facilities:

 

 

36

----

 

 

 

Cuajone

 

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

 

The table below sets forth 2007, 2006 and 2005production information for our Cuajone operations:

 
| ** **                           | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual operating days           |       | (days)     |       | 365      |       | 365      |       | 365      |       |
| Total material mined                 |       | (kt)       |       | 116,438  |       | 112,410  |       | 109,855  |       |
| Total ore mined                      |       | (kt)       |       | 28,310   |       | 28,299   |       | 29,544   |       |
| Copper grade                         |       | (%)        |       | 0.755    |       | 0.703    |       | 0.643    |       |
| Molybdenum grade                     |       | (%)        |       | 0.022    |       | 0.020    |       | 0.026    |       |
| Leach material mined (1)             |       | (kt)       |       | -        |       | 41.6     |       | -        |       |
| Leach material grade                 |       | (%)        |       | -        |       | 0.655    |       | -        |       |
| Stripping ratio                      |       | (x)        |       | 3.11     |       | 2.97     |       | 2.72     |       |
| Total material milled                |       | (kt)       |       | 28,352   |       | 28,228   |       | 29,621   |       |
| Copper recovery                      |       | (%)        |       | 85.10    |       | 87.87    |       | 85.96    |       |
| Molybdenum recovery                  |       | (%)        |       | 61.1     |       | 62.6     |       | 69.7     |       |
| Copper concentrate                   |       | (kt)       |       | 706.7    |       | 666.7    |       | 619.2    |       |
| Molybdenum concentrate               |       | (kt)       |       | 7.0      |       | 6.4      |       | 9.5      |       |
| Copper concentrates average grade    |       | (%)        |       | 25.77    |       | 26.16    |       | 26.43    |       |
| Molybdenum concentrate average grade |       | (%)        |       | 54.57    |       | 55.18    |       | 55.58    |       |
| Copper in concentrate                |       | (kt)       |       | 182.1    |       | 174.4    |       | 163.7    |       |
| Molybdenum in concentrate            |       | (kt)       |       | 3.8      |       | 3.5      |       | 5.3      |       |

----

Key:        kt = thousand tons

 

37

----

 

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

(1)                      In 2006, 41.6 kt of copper oxides were extracted from the Cuajone mine.No oxide material was mined in 2007 and 2005.

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

 

Major Cuajone mine equipment includes six 290-toncapacity trucks, twenty 218-ton capacity trucks, eight 231-ton capacity trucks,three 73-ton capacity shovels, one 54-ton capacity shovel, one 23-ton capacityfront end loader, four electric drills, seven track dozers, seven rubber trackdozers, three front end loaders CAT 988 and 966, and three motor graders.  We continuously improve and renovate ourequipment.

 

Geology

 

The Cuajone porphyry copper deposit is located onthe western slopes of Cordillera Occidental, in the southern-most AndesMountains of Peru.  The deposit is partof a mineral district that contains two additional known deposits, Toquepalaand Quellaveco. The copper mineralization at Cuajone is typical of porphyrycopper 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 to Quaternary.  There are 32 rock types including,pre-mineral rocks, balsaltic andesite, porphyritic rhyolite, Toquepala doleriteand intrusive rocks, including diorite, porphyritic latite, breccias anddikes.  In addition, the followingpost-mineral rocks are present, the Huaylillas formation which appears in thesouth-southeast side of the deposit and has been formed by conglomerates,tuffs, traquites and agglomerates.  Theseformations date 17 to 23 million years and are found in the Toquepala Group asdiscordance.  The Chuntacala formationwhich dates 9 to 14 million years and is formed by conglomerates, flows, tuffsand agglomerates placed gradually in some cases and in discordance inothers.  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) withoccasional galena, tetraedrite and enargite as non economical ore.

 

Exploration in the mine

 

Exploration activities during the drill campaignin 2007 are as follows:

** **
| **Studies**        | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                  | ** ** |
|--------------------|------------|------------|------------|-----------|------------|----------------------------------------------------------------------------|------------|
| Infill Drilling    |       | 3,293.80   |       | 25        |       | To obtain additional information to improve  confidence in our block model |       |
| Geotechnical Holes |       | 1,155.87   |       | 9         |       | To improve geotechnical information                                        |       |
| **Total**          |       | 4,449.67   |       | 34        |       |                                                                       |       |

 

Concentrator

 

Our Cuajone operations use state-of-the-artcomputer monitoring systems at the concentrator, the crushing plant and theflotation circuit in order to coordinate inflows and optimize operations.  Material with a copper grade over 0.40% isloaded onto rail cars and sent to the milling circuit, where giant rotatingcrushers reduce the size of the rocks to approximately one-half of aninch.  The ore is then sent to the ballmills, which grind it to the consistency of fine powder.  The finely ground powder is agitated in awater and reagents solution and is then transported to flotation cells.  Air is pumped into the cells to produce foamfor floating the copper and molybdenum

 

 

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minerals, splitting waste material calledtailings. This copper-molybdenum bulk concentrate then is treated by inverseflotation where molybdenum is floated and copper is depressed. The copperconcentrate is shipped by rail to the smelter at Ilo and the molybdenumconcentrate is packaged for shipment to customers.  Sulfides under 0.40% copper are consideredwaste.

 

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

 

Major Cuajone concentrator plantequipment includes: one primary crusher, three secondary crushers, seventertiary crushers, ten primary ball mills, four ball mills for re-grindingrougher concentrate; one vertical mill for re-grinding rougher concentrate;thirty 100ft3 cells for rougher flotation; four 160ft3 cells forrougher flotation; five 60ft3 cells for cleanerscavenger; six 1350ft3 cells for cleaner scavenger;fourteen 300ft3 cells for cleaner scavenger; eight columncells; 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 wascompleted in 1999. We believe the plant’s equipment is in good physicalcondition and currently in operation.

 

Toquepala

 

Our Toquepala operations consist of an open-pitcopper mine and a concentrator.  We alsorefine copper at the SX/EW facility through a leaching process.  Toquepala is located in southern Peru, 30kilometers from Cuajone and 870 kilometers from Lima.  Access is by plane from Lima to the city ofTacna (1:20 hours) and then by the Pan-American highway to Camiara (1:20 hours)and by road to Toquepala (1 hour).  Theconcentrator has a milling capacity of 60,000 tons per day.  The SX/EW facility has a production capacityof 56,000 tons per year of LME grade A copper cathodes.  Overburden removal commenced in 1957 and oreproduction commenced in 1960.  OurToquepala operations utilize a conventional open-pit mining method to collectcopper ore for further processing in our concentrator.

 

The table below sets forth 2007, 2006 and 2005production information for our Toquepala operations:

 

 

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| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual operating days                    | (days)     | 365      |       | 365      |       | 365      |       |
| Total material mined                          | (kt)       | 130,267  |       | 131,607  |       | 134,505  |       |
| Total ore mined                               | (kt)       | 20,889   |       | 20,813   |       | 21,224   |       |
| Copper grade                                  | (%)        | 0.759    |       | 0.797    |       | 0.812    |       |
| Molybdenum grade                              | (%)        | 0.046    |       | 0.043    |       | 0.039    |       |
| Leach material mined                          | (kt)       | 90,521   |       | 42,827   |       | 16,693   |       |
| Leach material grade                          | (%)        | 0.235    |       | 0.221    |       | 0.222    |       |
| Estimated leach recovery                      | (%)        | 26.89    |       | 28.44    |       | 28.24    |       |
| SX/EW cathode production (from SPCC material) | (kt)       | 36.7     |       | 35.8     |       | 36.5     |       |
| Third parties copper sulfate processed        | (kt)       | 15.2     |       | —   |       | —   |       |
| Average copper grade on copper sulfate        | (%)        | 24.16    |       | —   |       | —   |       |
| SX/EW cathode production from third parties   | (kt)       | 3.7      |       | —   |       | —   |       |
| Stripping ratio                               | (x)        | 5.24     |       | 5.32     |       | 5.34     |       |
| Total material milled                         | (kt)       | 20,906   |       | 20,828   |       | 21,225   |       |
| Copper recovery                               | (%)        | 88.78    |       | 91.43    |       | 91.47    |       |
| Molybdenum recovery                           | (%)        | 64.39    |       | 65.0     |       | 64.6     |       |
| Copper concentrate                            | (kt)       | 521.9    |       | 557.5    |       | 576.4    |       |
| Molybdenum concentrate                        | (kt)       | 11.4     |       | 10.7     |       | 9.7      |       |
| Copper concentrate average grade              | (%)        | 26.99    |       | 27.22    |       | 27.32    |       |
| Molybdenum concentrate average grade          | (%)        | 54.60    |       | 54.08    |       | 54.67    |       |
| Copper in concentrate                         | (kt)       | 140.9    |       | 151.8    |       | 157.5    |       |
| Molybdenum in concentrate                     | (kt)       | 6.2      |       | 5.8      |       | 5.3      |       |

----

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.

 

Major mine equipment at Toquepala includes eighteen290-ton capacity trucks, five 231-ton capacity trucks, eighteen 218-ton capacity trucks, six 181-ton capacity trucks, one 78-ton capacity shovel, three 73-toncapacity shovels, three 20-ton capacity shovels, five electric rotary drills,one Down the Hole (DTH) drill for pre-split and one front-end loader witha capacity of 37tons.

 

We continuously improve and renovate our equipment. In2003, we started a project to install a crushing, conveying and spreadingsystem at the Toquepala mine to improve cost containment and productionefficiency.  The new system improvesrecovery at our leaching facilities and will largely eliminate costly truck haulagein the process.  The conveying system is operating and has positioned 42.5 million tonsof waste material to build the ramp and has placed 28.5 million tons ofleachable material. Total expended on this project through December 31,2007 was $80.7 million and it is estimate that $0.4 million will be needed tofinalize this project.

 

Presently the crushing,conveying and spreading system are being implemented up to conveyor sixteen atthe Toquepala mine.  In 2008 conveyorseventeen will be installed. Actual production for the last six months in 2007reached 6,650 tons per hour.  This newsystem improves our cost containment and production efficiency.  During 2007, we put into operation three newKomatsu 930E3 trucks which have improved haul efficiency.

 

Geology

 

The Toquepala porphyry copper deposit is locatedon the western slopes of Cordillera Occidental, in the southern-most AndesMountains of Peru.  The deposit is partof a mineral district that contains two additional known deposits, Cuajone andQuellaveco.

 

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The Toquepala depositis in the southern region of Peru, located on the western slope of the Andesmountain 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 porphyricdacite.  Toquepala has a simplemineralogy with regular copper grade distribution.  Economic ore is found as disseminated sulfursthroughout the deposit as veinlets, replenishing empty places or as smallaggregates.  Ore minerals includechalcopyrite (CuFeS2), chalcosine (Cu2S) and molybdenite (MoS2).  A secondary enrichment zone is also foundwith thicknesses between 0 and 150 meters.

 

Exploration in the mine

 

Exploration activities during the drill campaignin 2007 are as follows:

 
| **Studies**                          | ** ** | **Meters** | ** ** | **Holes** | ** ** | **Notes**                                                                   | ** ** |
|--------------------------------------|------------|------------|------------|-----------|------------|-----------------------------------------------------------------------------|------------|
| Infill and lateral body delimitation |       | 6,239      |       | 40.0      |       | To obtain additional information to improve confidence  in our block model. |       |

 

Concentrator

 

Our Toquepala concentrator operations usestate-of-the-art computer monitoring systems in order to coordinate inflows andoptimize operations.  Material with acopper grade over 0.40% is loaded onto rail cars and sent to the crushingcircuit, where rotating crushers reduce the size of the rocks to approximately85% less than one-half of an inch.  Theore is then sent to the rod and ball mills, which grind it in a mix with waterto the consistency of fine powder.  Thefinely ground powder mixed with water is then transported to flotationcells.  Air is pumped into the cellsproducing a froth, which carries the copper mineral to the surface but not thewaste rock, or tailings.  The bulkconcentrate with important molybdenum content is processed for recovering Mo byinverse flotation.  Copper finalconcentrate goes as tailings of the Mo plant. This final copper concentrate with a content of approximately 27.5% Cuis filtered in order to get 8.5% moisture. Concentrates are then shipped byrail to the smelter at Ilo.

 

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

 

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

 

In order to reduce operating and maintenance costsand to comply with environmental requirements, we replaced the disc filters atthe Toquepala concentrator with a new vertical press filter in 2005.

 

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SX/EW Plant

 

The SX/EW facility at Toquepala produces grade ALME electrowon copper cathodes of 99.999% purity from solutions obtained byleaching low-grade ore stored at the Toquepala and Cuajone mines.  The leach plant commenced operations in 1995with a design capacity of 35,629 tons per year of copper cathodes.  In 1999 the capacity was expanded to 56,000tons per year.

 

Copper oxides from Cuajone with a copper gradehigher than 0.359%, with an acid solubility index higher than 20% and a cyanidesolubility index higher than 50% are leached. In Toquepala, the leach material cutoff grade is0.095% and therefore material with a total copper grade between 0.095% and0.40% are leached.

 

Major equipment at theCuajone SX plant includes oneprimary jaw crusher and onesecondary cone crusher with a capacity of 390 tons per hour.  In addition the plant has 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 theToquepala plant includes three spray systems and five pregnant solution (PLS)ponds, each with its own pumping system to send the solution to the SX/EWplant.  The plant also has three lines ofSX, each with a nominal capacity of 1,068 m3/hr of pregnant solution and 162electrowinning cells.

 

Plant and equipment aresupported by a maintenance plan and a quality management system to assure goodphysical condition and high availability. The SX/EW plant management quality system (including leachingoperations) has been audited, by an external audit company, and found to be incompliance with the requirements of the ISO 9001-2000 standard since 2002.

 

Processing Facilities - Ilo

 

Our Ilo smelter and refinery complex is located in the southern part ofPeru, 17 kilometers north of the city of Ilo, 121 kilometers from Toquepala,147 kilometers from Cuajone, and 1,240 kilometers from the city of Lima.  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 refinerywe operate as part of the same facility. Copper produced by the smelter exceeds the refinery’s capacity and theexcess is sold to other refineries around the world.  The nominal installed capacity of the smelteris 1,131,500 tons per year.

 

Copper concentrates from Toquepala and Cuajone aretransported by railroad to the smelter, where they are smelted using anISASMELT furnace, converters and anode furnaces to produce copper anodes with99.7% Cu.  At the smelter, theconcentrates are mixed with flux and other material and sent to the ISASMELTfurnace producing a mixture of copper matte and slag which is tapped through ataphole to either of two rotary holding furnaces, where this smelted phaseswill be separated.  Copper matte containsapproximately 62% copper.  Copper matteis then sent to the converters, where the material is oxidized in two steps: (1) theiron sulfides in the matte are oxidized with oxygen enriched air and silica isadded producing slag that is sent to the slag cleaning 

 

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furnaces, and (2) the copper contained in thematte sulfides is then oxidized to produce blister copper, containingapproximately 99.3% copper.  The blistercopper is refined in the anode furnaces by oxidation to remove sulfur withcompressed air injected into the bath. Finally, the oxygen content of the molten copper is adjusted byreduction with injection of LPG with steam into the bath.  Anodes, containing approximately 99.7% copperare cast in two casting wheels.

 

The table below setsforth 2007, 2006 and 2005 production and sales information for our Ilo smelterplant:

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Concentrate smelted (kt)           |       | 846      |       | 1,107    |       | 1,206    |       |
| Average copper recovery            |       | 96.59    | %          | 97.29    | %          | 97.57    | %          |
| Blister production (kt)            |       | 9.3      |       | 30.8     |       | 325.6    |       |
| Average blister grade (%)          |       | 99.369   | %          | 99.349   | %          | 99.349   | %          |
| Anode production (kt)              |       | 232.9    |       | 298.4    |       | —   |       |
| Average anode grade (%)            |       | 99.698   | %          | 99.708   | %          | —   |       |
| Sulfuric acid produced (kt)        |       | 771      |       | 376      |       | 370      |       |
| Blister sales (kt)                 |       | 9.3      |       | 3.0      |       | 41.5     |       |
| Anode sales (kt)                   |       | 14.1     |       | 13.5     |       | —   |       |
| Average blister sales price ($/lb) |       | 3.20     |       | 3.10     |       | 1.87     |       |
| Average anode sales price ($/lb)   |       | 2.87     |       | 3.17     |       | —   |       |

----

Key:        kt = thousand tons

 

In compliance with an agreement made withthe government of Peru, we completely renovated our Ilo smelter.  This modernization was done at a cost of $570million and completed in January 2007. Major equipment at our Ilo smelter includes two reverberatory furnaces, seven Pierce Smith converters,one El Teniente converter, two anode furnaces and a twin wheel casting system,a sulfuric acidplant with a capacity of 300,000 tons per year and an oxygen plant with acapacity of 100,000 tons per year.

 

The modernized smelter uses a technology used inmany smelters throughout the world. For the fusion process, it utilizes anIsasmelt technology furnace, a stationary vertical furnace 17 meters high, witha treatment capacity of 165 tons of copper concentrates per hour.  The smelter also uses two rotary holdingfurnaces (RHF) to separate the matte, with 62% copper content, from theslag.  The smelter also has a new oxygenplant, with a production capacity of 1,045 tons per day.  In the conversion process, four Pierce Smithconverter furnaces are used to produce copper with 99.3% purity.  This copper product is then sent to the newanodes plant, which has two rotary furnaces of 400 tons capacity each and twocasting wheels that produce anodes with 99.7% purity.  The anode plant was completed in 2006 andblister production was mostly replaced with anode production, enabling us toeliminate a costly re-melting step in our production process.

 

In addition, we have built a new sulfuric acidplant to recapture sulfur dioxide in excess of the 92% recapture requirementestablished in the PAMA.  The new acidplant has a production capacity of 800,000 tons of acid per year.  Also, we have built two storage tanks and aneffluents plant.  The new smelter alsoincludes a new seawater intake system, two desalinization plants to providewater for the process, an electric substation and a new system of centralizedcontrols using advanced computer technology.

 

Refinery

 

The refinery consists of a receiving and preparinganodes facilities, an electrolytic plant, a precious metal plant and a numberof ancillary installations.  The refineryis producing grade A copper cathode of 99.998% purity.  The nominal capacity is 280,000 tons peryear.  Anodic slimes are recovered fromthe refining process and then sent to 

 

43

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the precious metals facility to produce refinedsilver, refined gold and commercial grade selenium.

 

Anodesare suspended in tanks containing an aqueous solution of sulfuric acid andcopper sulfate.  A low voltage but highamperage electrical current is passed through the anodes**,** chemical solution and cathodes, in orderto dissolve copper which is deposited on initially very thin starting sheetsincreasing its thickness up to produce high grade copper cathodes containing atleast 99.99% copper.  During thisprocess, silver, gold and other metals, including palladium, platinum andselenium, along with other impurities, settle on the bottom of the tank in formof anodic slime.  This anodic slime isprocessed in a precious metal plant where silver, gold and selenium arerecovered.

 

The table below setsforth 2007, 2006 and 2005 production and sales information for our Ilo refineryand precious metals plants:

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cathodes produced (kt)                 |       | 178.4    |       | 273.3    |       | 285.2    |       |
| Average copper grade (%)               |       | 99.998   |       | 99.998   | %          | 99.998   | %          |
| Refined silver produced (000 Kg)       |       | 82.7     |       | 119.2    |       | 109.9    |       |
| Refined gold produced (kg)             |       | 296.0    |       | 260.9    |       | 183.7    |       |
| Commercial grade selenium produced (t) |       | 35.4     |       | 49.8     |       | 48.7     |       |
| Average cathodes sales price ($/lb)    |       | 3.20     |       | 3.20     |       | 1.79     |       |
| Average silver sales price ($/oz)      |       | 12.30    |       | 11.46    |       | 7.26     |       |
| Average gold sales price ($/oz)        |       | 692.29   |       | 589.76   |       | 447.33   |       |

----

Key:        kt=thousands tons

 

Major equipment at therefinery includes one electrolytic plant, with 926 commercial cells, fifty-twostarting sheet cells, sixteen primary liberator cells, sixteen secondaryliberator cells, an anodic slime treatment circuit (includes leaching andcentrifugation), 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:

 

·                  Laboratory: Provides sample analysis services throughout the Company,including the analysis of final products like copper cathodes, electrowoncathodes, copper concentrates and oil analysis.

 

·                  Maintenance:  Responsible formaintenance of all equipment involved in the process.

 

·                  Auxiliary facilities: Includes onedesalinization plant to produce fresh water and a Babcock boiler to producesteam used in the refinery, one Gonella boiler and two stand-by KMH boilers.

 

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

 

The industrial railroad’s main equipment includesfifteen locomotives of different types including 4000HP EMD’s SD70, 3000HP EMD’sGP40-3, 2250HP GE U23B and others.  Therollingstock has approximately 490 cars of different types and capacities,including ore concentrate cars, gondolas, flat cars, dump cars, boxcars, tankcars and others.  The track runs in asingle 214 km standard gauge line and supports a 30-ton axle load.  The 

 

44

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total length of the track system is around 257kilometers including main yards and sidings.

 

The infrastructure includes 27 kilometers of trackunder tunnels and one concrete bridge. The industrial railroad includes a car repair shop which is responsiblefor maintenance and repair of the car fleet. During the last nine years a main line upgrade program has beenimplemented and 115 and 133 pound rail has replaced 90 and 105 pound rail.  Also an upgrade program increasing thecapacity of the ore concentrate cars from 70 to 100 net tons is well in progress.  Annual tonnage transported is approximately5.5 million metric tons.

 

MEXICAN OPERATIONS

 

Following is a map indicating the approximatelocations of our Mexican mines and processing facilities:

 

 

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.

 

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Following is a map indicating the approximatelocation of, and access to, our Mexican open pit mine complexes as well as ourprocessing facilities:

 

 

Cananea

 

We operate an open-pit copper mine, a concentratorand two SX/EW plants at our Cananea mining complex, located 71 kilometers fromLa Caridad, Mexico and 61 kilometers south of

 

 

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the Arizona border on theoutskirts of the town of Cananea. Cananea is connected by paved highways to the city of Agua Prieta in thenortheast, to the town of Nacozari in the southeast, and to the town of Imurisin the west.  Cananea is also connectedby railway to Agua Prieta and Nogales.  Amunicipal airport is located approximately 20 kilometers to the northeast ofCananea.

 

Theconcentrator has a milling capacity of 76,700 tons per day.  The SX/EW facility has a refining capacity of54,750 tons per year.  The Cananea oredeposit is one of the world’s largest porphyry copper deposits.  Cananea is the oldest continuously operated coppermine in North America, with operations tracing back to 1899.  The ore deposit was originally minedexclusively for underground metals by Anaconda Company between 1917 and early1940s when the open pit was developed. In 1990 through a public auction procedure, Mexcananea acquired 100% ofthe assets for approximately $475 million.  Cananea uses a conventional open-pit miningmethod to extract copper ore for further processing in our concentrator.  Crushed leachable material is transported byconveyor belts and as run-of-mine by trucks to leach dumps.

 

The following table shows 2007, 2006 and 2005production information for Cananea:

 
| ** **                       | ** ** | ** ** | ** ** | **2007(2)** | ** ** | **2006(1)** | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------|------------|
| Mine annual operating days       |       | (days)     |       | 211         |       | 331         |       | 365      |       |
| Total material mined             |       | (kt)       |       | 74,672      |       | 114,595     |       | 102,508  |       |
| Total ore mined                  |       | (kt)       |       | 12,545      |       | 22,896      |       | 25,638   |       |
| Copper grade                     |       | (%)        |       | 0.630       |       | 0.588       |       | 0.572    |       |
| Leach material mined             |       | (kt)       |       | 39,198      |       | 59,678      |       | 52,112   |       |
| Leach material grade             |       | (%)        |       | 0.272       |       | 0.292       |       | 0.301    |       |
| Estimated leach recovery         |       | (%)        |       | 65.5        |       | 62.50       |       | 50.00    |       |
| SX/EW cathode production         |       | (kt)       |       | 34.6        |       | 52.5        |       | 56.4     |       |
| Stripping ratio                  |       | (x)        |       | 4.95        |       | 4.01        |       | 3.00     |       |
| Total material milled            |       | (kt)       |       | 12,571      |       | 22,915      |       | 25,622   |       |
| Copper concentrate               |       | (kt)       |       | 230.5       |       | 386.0       |       | 436.5    |       |
| Copper concentrate average grade |       | (%)        |       | 27.81       |       | 28.83       |       | 27.21    |       |
| Copper in concentrate            |       | (kt)       |       | 63.9        |       | 111.3       |       | 118.7    |       |
| Copper recovery                  |       | (%)        |       | 81.22       |       | 82.56       |       | 81.03    |       |

----

Key:        kt = thousand tons

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

                Thecopper grade is total grade.

(1)          While there were 47days of strikes in 2006, only 34 production days were lost as 13 days ofproduction were maintained with the support of management personnel.

(2)          During 2007 therewere 154 days of illegal work stoppage. As consequence, the Company lost approximately 55 thousand tons ofcopper in concentrates and 24 thousand tons of SX/EW cathodes production.

 

Major Cananea mine equipmentincludes 44 trucks for ore hauling with individual capacities ranging from 240to 360 tons, eight shovels with individual capacities ranging from 39 to 70tons, and mine auxiliary equipment including, eight drillers, seven frontloaders, five motor graders and twenty-four tractors.

 

Geology

 

The Cananea mining district lies on the southerncordilleran orogen, which extends from southern Mexico to northwestern UnitedStates.  It also falls within the Basinand Range metallogenic province. Geological and structural features in the district are representative oflarge, disseminated type, porphyry copper deposits.  A calcareous sedimentary sequence of lowerPaleozoic age, lithologically correlated with a similar section in southeasternArizona, uncomformably overlies Precambrian granite basement.  

 

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The entire section was covered by volcanic rocksof Mesozoic age and later intruded by deep seated granodiorite batholith ofTertiary age, with further quartz monzonite porphyry differentiates of Laramideage.

 

Mineralization in the district is extensivecovering a surface area of approximately 30 km2.  An early pegmatitic stage associated withbornite-chalcopyrite-molybdenite assemblage was followed by a widespreadflooding of hydrothermal solutions with quartz- pyrite-chalcopyrite.  A pervasive quartz-sericite alteration isevident throughout the districts igneous rock fabric.

 

An extensive and economically important zone ofsupergene enrichment, with disseminated and stockworks of chalcocite (Cu2S), developed below the ironoxide capping.  This zone coincides withthe topography and has an average thickness of 300 meters.  A mixed zone of secondary and primarysulfides underlay the chalcocite blanket. The hypogene mineralization, principally chalcopyrite, (CuFeS2), extensively underlies theorebody.  Molybdenite occurs throughoutthe deposit and the content tends to increase with depth.

 

The Cananea copper porphyry is consideredworld-class and unique.  The deepestexploration results in the core of the deposit have confirmed significantincrease in copper grades.  Similarporphyry copper deposits usually contain lower grades at depth. The district isalso unique for the occurrence of high-grade breccia pipes, occurring in clustersfollowing the trend of the district.

 

Current dimensions of the mineralized orebody are5 x 3 km2, and projects more than 1 km2 at depth.  Considering the geological and economicpotential of the Cananea porphyry copper deposit, it is expected that theoperation can support a sizeable increase in copper production capacity.

 

Mine Exploration

 

The exploration program conducted during 2007continues to expand the limits of the resource and confirmed the presence anddistribution of molybdenite in the copper deposit.  Likewise, the core drilling program in theareas adjacent to the deposit was continued in order to define areas whereleach and waste will be deposited.  It isexpected that exploration will be continued intensively during 2008.  Drilling results in areas adjacent to thedeposit are confirming the district-wide mineralization and alterationpatterns.  The block model was updatedwith the in-fill exploratory results, both, for copper and molybdenum and weproceeded to calculate this resource with this new available data.

 

Concentrator

 

Cananea uses state-of-the-art computer monitoringsystems at the concentrator, the crushing plant and the flotation circuit inorder to coordinate inflows and optimize operations.  Material with a copper grade over 0.38% isloaded onto trucks and sent to the milling circuit, where giant rotating crushersreduce the size of the ore to approximately one-half of an inch.  The ore is then sent to the ball and barmills, 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 millingcapacity of 76,700 tons per day, consists of two primary crushers, foursecondary crushers, ten tertiary crushers, ten primary mills, a distributedcontrol system, five mills for re-grinding, 103 primary flotation 

 

48

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cells, ten column cells, seventy exhaustionflotation cells, seven thickeners and three ceramic filters.

 

SX/EW Plant

 

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

 

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

 

Major equipment at the SX-EW plants I and II ofCananea includes two crushing systems (No. 1 and No. 2).  Crushing system no. 1 has a capacity of 32,000 tons per day and includes anapron feeder, a conveyor belt feeder, seven conveyor belts system and adistributor car.  Crushing system no. 2has a capacity of 48,000 tonsper day and includes one crusher, a conveyor belt feeder, three conveyor beltsand a distributing car.  There are fourirrigation systems for the dumps and six dams for the pregnant leach solution(PLS).  Plant I has three solvent extractiontanks with 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, (SX/EW 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 labor problems at Cananea in 2007, this project has been temporarily put onhold until we satisfactorily resolve these issues.

 

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 23kilometers southeast of the town of Nacozari de Garcia in northeasternSonora.  Nacozari is about 264 kilometersnortheast of the Sonora state capital of Hermosillo and 121 kilometers south ofthe US-Mexico border.  Nacozari isconnected by paved highway with Hermosillo and Agua Prieta and by rail with theinternational port of Guaymas, and the Mexican and United States railsystems.  An airstrip with a reportedrunway length of 2,500 meters is located 36 kilometers north of Nacozari, lessthan one kilometer away from the La Caridad copper smelter and refinery.  The smelter and the sulfuric acid plants, aswell as the refineries and rod plant, are located approximately 24 kilometersfrom the mine.  Access is by pavedhighway and by railroad.

 

The concentrator began operations in 1979, themolybdenum plant was added in 1982, the smelter in 1986, the first sulfuricacid plant in 1988, the SX/EW plant in 1995, the 

 

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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 2007, 2006 and 2005production information for La Caridad:

 
| ** **                           | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Mine annual operating days           |       | (days)(1)  |       | 365      |       | 229      |       | 364      |       |
| Total material mined                 |       | (kt)       |       | 80,819   |       | 46,606   |       | 75,465   |       |
| Total ore mined                      |       | (kt)       |       | 30,970   |       | 16,872   |       | 31,551   |       |
| Copper grade                         |       | (%)        |       | 0.408    |       | 0.449    |       | 0.483    |       |
| Molybdenum grade                     |       | (%)        |       | 0.0377   |       | 0.0348   |       | 0.0324   |       |
| Leach material mined                 |       | (kt)       |       | 30,017   |       | 19,109   |       | 29,969   |       |
| Leach material grade                 |       | (%)        |       | 0.252    |       | 0.252    |       | 0.260    |       |
| Estimated leach recovery             |       | (%)        |       | 34.44    |       | 34.39    |       | 38.54    |       |
| SX/EW cathode production             |       | (kt)       |       | 32.7     |       | 11.2     |       | 22.0     |       |
| Total material milled                |       | (kt)       |       | 31,129   |       | 16,637   |       | 31,644   |       |
| Stripping ratio                      |       | (x)        |       | 1.61     |       | 1.76     |       | 1.39     |       |
| Copper concentrate                   |       | (kt)       |       | 423.0    |       | 227.8    |       | 449.6    |       |
| Molybdenum concentrate               |       | (kt)       |       | 11.2     |       | 4.5      |       | 7.4      |       |
| Copper concentrate average grade     |       | (%)        |       | 24.18    |       | 25.49    |       | 27.20    |       |
| Molybdenum concentrate average grade |       | (%)        |       | 54.83    |       | 55.92    |       | 56.88    |       |
| Copper in concentrate                |       | (kt)       |       | 102.3    |       | 58.1     |       | 122.3    |       |
| Molybdenum in concentrate            |       | (kt)       |       | 6.2      |       | 2.5      |       | 4.2      |       |
| Copper recovery                      |       | (%)        |       | 80.43    |       | 77.69    |       | 79.95    |       |
| Molybdenum recovery                  |       | (%)        |       | 52.54    |       | 43.20    |       | 40.99    |       |

----

Key:        kt = thousand tons

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

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

The copper and molybdenumgrade are total grade.  The molybdenumgrade value corresponds to molybdenum disulfide (molybdenite); molybdenumrecovery is presently about 52.54%.

 

Major mine equipment includes thirty-two trucks forore hauling with capacity that range between 170 to 240 tons, eight shovels with individual capacitiesthat range between 16 to 43 tons. Loading and auxiliary equipment include six drillers, four frontloaders, four motor graders and twenty-one tractors.

 

Geology

 

The La Caridad deposit is a typical porphyrycopper deposit as seen also 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 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 porphyrycopper deposit occurs exclusively in felsic to intermediate intrusive igneousrocks and associated breccias.  Hostrocks include diorite and 

 

50

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granodiorite.  These rocks are intruded by a quartzmonzonite porphyry stock and by numerous breccia masses, which containfragments of all the older rock types.

 

Supergene enrichment,consisting of complete to partial chalcosite (Cu2S)replacement of chalcopyrite (CuFeS2).  The zone of supergene enrichment occurs as aflat and tabular blanket with an average diameter of 1,700 meters and thicknessgenerally between 0 and 90 meters.

 

Economic ore is foundas disseminated sulfurs within the central part of the deposit.  Sulfide-filled breccias cavities are mostabundant in the intrusive breccia.  Thisbreccia-cavity mineralization occurs as sulfide aggregates which havecrystallized in the spaces separating breccia clasts.  Near the margins of the deposit,mineralization occurs almost exclusively in veinlets.  Ore minerals include chalcopyrite (CuFeS2), chalcosite (Cu2S) and molybdenite (MoS2).

 

Mine Exploration

 

We have been mining theLa Caridad ore body for over 25 years. The extent of the model area is approximately 6,000 meters by 4,000meters with elevation ranging from 750 to 1,800 meters.

 

Fifteen drillingcampaigns have been conducted on the property since 1968.  These campaigns drilled a total of 3,238drill holes.  There are 2,055 reversecirculation drill holes.  The rest arediamond drill holes, and some hammer drilling. A total of 549,051 meters have been drilled through December 2007.

 

Currently, La Caridadis drilling a new exploration program; the budget is for 50,000 meters.  The target is to get down to the 900 level inorder to reduce the drilling space and to define the copper and molybdenummineralization continuity and also carry out metallurgical testing for theflotation and leaching processes.

 

Concentrator

 

La Caridad uses state-of-the-art computermonitoring systems at the concentrator, the crushing plant and the flotationcircuit in order to coordinate inflows and optimize operations.  The concentrator has a current capacity of90,000 tons of ore per day.

 

Ore extracted from the mine with a copper gradeover 0.30% is sent to the concentrator and is processed into copperconcentrates and molybdenum concentrates. The copper concentrates are sent to the smelter and the molybdenumconcentrate is exported.  The molybdenumrecovery plant has a capacity of 2,000 tons per day of copper-molybdenumconcentrates.  The lime plant has acapacity of 340 tons of finished product per day.

 

La Caridad concentrator plant has a milling capacityof 90,000 tons per day and consists of two primary crushers, six secondarycrushers, twelve tertiary crushers, twelve ball mills, a master milling controlsystem, 100 primary flotation cells, four re-grinding mills, 96 cleaningflotation cells, twelve thickeners and six drum filters.

 

SX/EW Plant

 

Approximately507.6 million tons of leaching ore with an average grade of approximately 0.25%copper have been extracted from the La Caridad open-pit mine and deposited inleaching dumps from May 1995 to December 31, 2007.  All copper ore with a grade lower than themill cut-off grade 0.30%, but higher than 0.15% copper, is delivered to theleaching dumps.  In 1995, we completedthe construction of a SX/EW facility at La Caridad that has allowed processingof this ore and certain leach ore reserves that were not mined and has resultedin a reduction in our copper production costs. The SX/EW 

 

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facilityhas an annual capacity of 21,900 tons of copper cathodes.

 

The La Caridad SX-EW plant has nine irrigationsystems for the dumps and two PLS dams, a container of heads that permits thecombination of the solutions of both dams and feeds the SX/EW plant with a morehomogenous concentration.  The plant hasthree trains of solvent extraction with a nominal capacity of 2,070 cubicmeters per hour and 94 electrowinning cells distributed in one singleelectrolytic bay.  The plant has a dailyproduction capacity of 62 tons of copper cathodes with 99.999% purity.

 

Processing Facilities — La Caridad

 

Our La Caridad complex includes a smelter, anelectrolytic copper refinery, a precious metal refinery and a copper rodplant.  The distance between this complexand the La Caridad mine is approximately 24 kilometers.

 

Smelter

 

Copper concentrates from both Cananea and LaCaridad are shipped by rail to the La Caridad smelter where they are processedand cast into copper anodes of 99.2% purity. Sulfur dioxide off-gases collected from the flash furnaces andconverters are processed into sulfuric acid, at two sulfuric acid plants.  Approximately 2% to 3% of this acid is usedby our SX-EW plants and the balance is sold to third parties.

 

Almost all of the anodes produced in the smelterare sent to the La Caridad copper refinery. The actual installed capacity of the smelter is 1,000,000 tons per year,a capacity that is sufficient to treat all the concentrates of the La Caridadand Cananea mining complexes.  Thesmelter includes aflash type concentrates drier, a steam drier, a flash furnace, one El Tenientemodified converted furnace, two electric furnaces for the cleaning of slag,three Pierce Smith converters, three raffinate furnaces and two castingwheels.  The anode production capacity is 300,000 tons per year.

 

Refinery

 

La Caridad includes an electrolytic copperrefinery that uses permanent cathode technology.  The installed capacity of the refinery is300,000 tons per year.  The refineryconsists of an anode plant with a preparation area, an electrolytic plant with an electrolytic cell house with 1,115cells and 32 releaser cells, two cathode stripping machines, an anode washingmachine, a slime treatment plant and anumber of ancillary installations.  Therefinery is producing grade A copper cathode of 99.99% purity.  Anodic slimes are recovered from the refiningprocess and sent to the slimes treatment plant where additional copper isextracted.  The slimes are then filtered,packed and shipped to the La Caridad precious metals refinery to produce silverand gold.

 

The operations of the precious metal refinery aredivided into two stages: (i) the antimony is eliminated from the slime,and (ii) the slime is dried in a steam dryer.  After this the dried slime is smelted and agold and silver alloy is obtained, which is known as dore.  The precious metal refinery plant has ahydrometallurgical stage and a pyrometallurgical stage, besides a steam drier,dore molding system Kaldo furnace, 20 electrolytic cells in the silverrefinery, one induction furnace for silver, one silver ingot molding system,two reactors for obtaining fine gold.  The process ends with the refining of the gold andsilver alloy.

 

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Copper Rod Plant

 

A rod plant at the La Caridad complex wascompleted in 1998 and reached its full annual operating capacity of 150,000tons in 1999.  The plant is producingeight millimeter copper rods with a purity of 99.99%.  The rod plant includes a vertical furnace, one retentionfurnace, one molding machine, one laminating machine, one coiling machine andone coil compacter.

 

Other facilities include a lime plant with a capacity of 132,000tons per year; two sulfuric acid plants, one with an annual capacity of 2,625tons and the second with an annual capacity of 2,135 tons; three oxygen plants,two with a production capacity of 200,000 tons per year and the third, with acapacity of 100,000 tons per year; and two power turbogenerators that use thekiln residual heat from the furnace, the first with a 11.5 megawatt capacityand the second with a 25 megawatt capacity.

 

The table below sets forth 2007, 2006 and 2005production information for the La Caridad processing facilities:

 
| ** **                       | ** ** | ** ** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Smelter**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total copper concentrate smelted |       | (kt)       |       | 684.8      |       | 724.0      |       | 894.7      |       |
| Anode copper production          |       | (kt)       |       | 204.4      |       | 242.4      |       | 282.4      |       |
| Average copper content in anode  |       | (%)        |       | 99.19      |       | 99.28      |       | 99.25      |       |
| Average smelter recovery         |       | (%)        |       | 97.55      |       | 97.44      |       | 97.40      |       |
| Sulfuric acid production         |       | (kt)       |       | 674.3      |       | 670.5      |       | 833.4      |       |
| **Refinery**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Refined cathode production       |       | (kt)       |       | 173.3      |       | 200.4      |       | 233.7      |       |
| Refined silver production        |       | (000 kg)   |       | 110.1      |       | 131.0      |       | 142.5      |       |
| Refined gold production          |       | (Kg)       |       | 544        |       | 722        |       | 817        |       |
| **Rod Plant**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Copper rod production            |       | (kt)       |       | 96.6       |       | 96.6       |       | 113.2      |       |

 
| ** **                                 | ** ** | ** **         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|
| **Sales data:**                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Copper concentrate                         |       | (kt)               |       | —     |       | —     |       | 22.7       |       |
| Average realized price copper concentrates |       | ($ per lb)    |       | —     |       | —     |       | 1.73       |       |
| Average realized price copper rod          |       | ($ per lb)    |       | 3.24       |       | 3.11       |       | 1.75       |       |
| Average premium copper rod                 |       | ($ per lb)    |       | 0.07       |       | 0.08       |       | 0.07       |       |
| Average realized price gold                |       | ($ per ounce) |       | 660.57     |       | 596.83     |       | 442.92     |       |
| Average realized price silver              |       | ($ per ounce) |       | 13.04      |       | 11.58      |       | 7.40       |       |
| Average realized price sulfuric acid       |       | ($ per ton)   |       | 47.66      |       | 41.86      |       | 35.52      |       |

----

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 ofIMMSA’s mining facilities employ exploitation systems and conventionalequipment.  We believe that all theplants and equipment are in satisfactory operating condition.  IMMSA’s principal mining facilities includeCharcas, Santa Barbara, San Martin, Santa Eulalia and Taxco.

 

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The table below sets forth 2007, 2006 and 2005production information for our Mexican IMMSA unit:

 
| ** **                       | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Average annual operating days(*) |       |       |       | 290      |       | 323      |       | 311      |       |
| Total material mined and milled  |       | (kt)       |       | 3,863    |       | 4,407    |       | 4,618    |       |
| Zinc average ore grade           |       | (%)        |       | 3.62     |       | 3.56     |       | 3.58     |       |
| Zinc concentrate                 |       | (kt)       |       | 222.8    |       | 252.1    |       | 264.3    |       |
| Zinc concentrate average grade   |       | (%)        |       | 54.32    |       | 54.17    |       | 54.33    |       |
| Zinc average recovery            |       | (%)        |       | 86.47    |       | 87.06    |       | 86.80    |       |
| Lead average ore grade           |       | (%)        |       | 0.65     |       | 0.57     |       | 0.58     |       |
| Lead concentrate                 |       | (kt)       |       | 39.1     |       | 38.9     |       | 38.5     |       |
| Lead concentrate average grade   |       | (%)        |       | 49.53    |       | 49.06    |       | 50.71    |       |
| Lead average recovery            |       | (%)        |       | 77.09    |       | 76.32    |       | 72.70    |       |
| Copper average ore grade         |       | (%)        |       | 0.39     |       | 0.41     |       | 0.44     |       |
| Copper concentrate               |       | (kt)       |       | 36.9     |       | 46.4     |       | 56.4     |       |
| Copper concentrate average grade |       | (%)        |       | 24.51    |       | 22.72    |       | 22.68    |       |
| Copper average recovery          |       | (%)        |       | 59.52    |       | 59.09    |       | 62.32    |       |

----

kt = thousand tons

(*) Weighted average annual operating days basedon total material mined and milled in the five mines: Charcas, San Martin,Taxco, Santa Barbara, and Santa Eulalia.

 

Charcas

 

The Charcas mining complex is located 111kilometers north of the city of San Luis Potosi in the State of San LuisPotosi, Mexico.  Charcas is connected tothe state capital by a paved highway of 130 kilometers.  14 kilometers from the southeast of theCharcas complex is the “Los Charcos” railroad station which connects with theMexico-Laredo railway.  Also, a pavedroad connects Charcas to the city of Matehuala via a federal highway and beginsat the northeast of the Charcas town site. The complex includes three underground mines (San Bartolo, Rey-Reina andLa Aurora) and one flotation plant that produces zinc, lead and copperconcentrates, with significant amounts of silver.  The Charcas mining district was discovered in1573 and operations in the 20th century began in 1911.  The Charcas mine is characterized by lowoperating costs and good quality ores and is situated near the zinc refinery.  The Charcas mine is now Mexico’s largestproducer of zinc.

 

The Charcas complex’s equipment includes elevenjumbo drilling tools, nineteen scoop trams for mucking and loading, four trucksand three locomotives for internal ore haulage and three hoists.  In addition, the mill has one primary crusher,one secondary crusher andtwo tertiary crushers, four mills and threeflotation circuits.

 

Geology

 

The Charcas mining district occupies theeast-central part of the Mexican Central Mesa and is part of the Sierra Madremetallogenic province.  Geological history starts in the SuperiorTriasic, where sandy clay sediments were deposited argilloarenaceous.  Due to emersion in the beginning of theJurassic Superior, the sediments suffered intense erosion, settling oncontinental sediments.  This sequence wasaffected by tectonic effort, which folded and failed on this rock package.  Later the positioning of intrusive rocksoriginated fractures, which gave way to positioning of mineral deposits.  The site’s paragenesis suggests two stages ofmineralization.  First minerals are richin silver, lead and zinc, with abundant calcite and small quantities of quartzchalcopyrite.  Second, there is a link ofcopper and silver, where the characteristic minerals are chalcopyrite, lead orewith silver content, pyrite and 

 

54

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scarce sphalerite.  Economic ore is found as replacement sulfurs incarbonates host rock. The ore mineralogy is comprised predominantly ofcalcopyrite (CuFeS2), sphalerite (ZnS), galena (PbS) and silverminerals as diaphorite (Pb2Ag3Sb3S8).

 

Mine exploration

 

In Charcas, 16,466 metersof diamond drilling were executed from underground stations and 28,568 tonsfrom surface.  With this drilling,2,115,557 tons were added to the reserve base in 2007.

 

The table below sets forth 2007, 2006 and 2005production information for our Charcas mine:

 
| ** **                       | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating days            |       | (days)     |       | 324      |       | 323      |       | 324      |       |
| Total material mined and milled  |       | (kt)       |       | 1,259    |       | 1,343    |       | 1,328    |       |
| Zinc average ore grade           |       | (%)        |       | 5.46     |       | 5.37     |       | 5.68     |       |
| Zinc concentrate                 |       | (kt)       |       | 112.4    |       | 117.8    |       | 123.6    |       |
| Zinc concentrate average grade   |       | (%)        |       | 56.91    |       | 56.90    |       | 57.11    |       |
| Zinc average recovery            |       | (%)        |       | 93.14    |       | 92.97    |       | 93.59    |       |
| Lead average ore grade           |       | (%)        |       | 0.32     |       | 0.20     |       | 0.29     |       |
| Lead concentrate                 |       | (kt)       |       | 7.6      |       | 4.6      |       | 6.0      |       |
| Lead concentrate average grade   |       | (%)        |       | 33.70    |       | 27.14    |       | 36.75    |       |
| Lead average recovery            |       | (%)        |       | 63.78    |       | 45.86    |       | 56.14    |       |
| Copper average ore grade         |       | (%)        |       | 0.22     |       | 0.21     |       | 0.20     |       |
| Copper concentrate               |       | (kt)       |       | 4.2      |       | 4.2      |       | 2.9      |       |
| Copper concentrate average grade |       | (%)        |       | 26.17    |       | 26.08    |       | 27.62    |       |
| Copper average recovery          |       | (%)        |       | 40.07    |       | 38.16    |       | 30.36    |       |

----

kt = thousand tons

 

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

 

Santa Barbara

 

The Santa Barbara mining complex is locatedapproximately 26 kilometers southwest of the city of Hidalgo del Parral insouthern Chihuahua, Mexico.  The area canbe reached via paved road from Hidalgo del Parral, a city on a federalhighway.  Chihuahua, the state capital islocated 250 kilometers north of the Santa Barbara complex.  Additionally, El Paso on the Texas border islocated 600 kilometers north of Santa Barbara. Santa Barbara includes three main underground mines (San Diego,Segovedad and Tecolotes) and a flotation plant and produces lead, copper and zincconcentrates, with significant amounts of silver.  Gold-bearing veins were discovered in theSanta Barbara district as early as 1536. Mining activities in the 20th century began in 1913.

 

The mining operations at Santa Barbara are morediverse and complex than at any of the other mines in our Mexican operations,with veins that aggregate approximately 21 kilometers in length.  Each of the three underground mines hasseveral shafts and crushers.  Due to thevariable characteristics of the ore bodies, four types of mining methods areused: shrinkage stoping, long-hole drilled open stoping, cut-and-fill 

 

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stoping and horizontal bench stoping.  The ore, once crushed, is processed in theflotation plant to produce concentrates. The flotation plant has a capacity of 6,000 tons of ore per day.  The lead concentrate produced is treated at athird party refinery in Mexico.  Thecopper concentrates are treated at our San Luis Potosi copper smelter, and thezinc concentrates are either treated at the San Luis Potosi zinc refinery orexported.

 

The major mine equipment at Santa Barbara includes fifteen jumbodrilling tools, two Simba drilling tools, thirty-six scoop trams, twelve trucksand eleven locomotives for internal ore haulage, seven trucks for externalhaulage and six hoists.  For treating theore, there are four primary jaw crushers, one secondary crusher and twotertiary 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). Gangue minerals 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, 16,882meters were drilled from underground stations and 5,323 meters from the surfacein 2007.  The measured resource developedwas 1,208,560 tons.

 

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The table below setsforth 2007, 2006 and 2005 production information for our Santa Barbara mines:

 
| ** **                       | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating days            |       | (days)     |       | 326      |       | 326      |       | 328      |       |
| Total material mined and milled  |       | (kt)       |       | 1,450    |       | 1,484    |       | 1,487    |       |
| Zinc average ore grade           |       | (%)        |       | 2.18     |       | 2.11     |       | 2.28     |       |
| Zinc concentrate                 |       | (kt)       |       | 48.6     |       | 48.6     |       | 54.2     |       |
| Zinc concentrate average grade   |       | (%)        |       | 53.94    |       | 54.38    |       | 53.99    |       |
| Zinc average recovery            |       | (%)        |       | 82.82    |       | 84.50    |       | 86.33    |       |
| Lead average ore grade           |       | (%)        |       | 0.85     |       | 0.86     |       | 0.92     |       |
| Lead concentrate                 |       | (kt)       |       | 19.5     |       | 20.1     |       | 20.5     |       |
| Lead concentrate average grade   |       | (%)        |       | 52.40    |       | 54.11    |       | 55.43    |       |
| Lead average recovery            |       | (%)        |       | 83.02    |       | 85.20    |       | 83.24    |       |
| Copper average ore grade         |       | (%)        |       | 0.53     |       | 0.52     |       | 0.50     |       |
| Copper concentrate               |       | (kt)       |       | 15.1     |       | 14.3     |       | 14.3     |       |
| Copper concentrate average grade |       | (%)        |       | 29.81    |       | 30.20    |       | 29.39    |       |
| Copper average recovery          |       | (%)        |       | 58.49    |       | 56.10    |       | 56.45    |       |

----

kt = thousand tons

 

 

San Martin

 

The San Martin mining complex is located in themunicipality of Sombrerete in the western part of the state of Zacatecas,Mexico, approximately 101 kilometers southeast of the city of Durango and nine kilometers east of the Durango State boundary.  Accessto the property 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 includesan underground mine and a flotation plant and produces lead, copper and zincconcentrates, with significant amounts of silver.  The mining district in which the San Martinmine is located was discovered in 1555. Mining operations in the 20th century began in 1949.  San Martin lies in the Mesa Central betweenthe Sierra Madre Occidental and the Sierra Madre Oriental.

 

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

 

The major mine equipment at San Martin includeseight jumbo drilling tools, thirteen scoop trams, nine trucks and threehoists.  For treating the ore, there aretwo primary jaw crushers, two secondary crushers and one tertiary crusher, twomills and three flotation circuits. The concentrator plant has a mill capacityof 4,400 tons 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-

 

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grained clayed limestonesin ten to thirty centimeter thick layers.

 

The district’s mostimportant mineral deposits are replacement veins and bodies generated in theskarn by Cerro de la Gloria granodiorite intrusion.  An extensive zone of skarn west of theintrusive, hosts the San Marcial, Ibarra and Gallo-Gallina main ore veins,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

 

A total of 15,895 metersof diamond drilling were executed in San Martin in 2007, 4,117 meters fromunderground and 11,778 meters from surface. A total measured resource of 2,091,964 tons has been developed.

 

The table below sets forth 2007, 2006 and 2005production information for our San Martin mines:

 
| ** **                       | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating days            |       | (days)     | (1)        | 171      |       | 239      |       | 301      |       |
| Total material mined and milled  |       | (kt)       |       | 625      |       | 926      |       | 1,231    |       |
| Zinc average ore grade           |       | (%)        |       | 1.76     |       | 2.17     |       | 2.03     |       |
| Zinc concentrate                 |       | (kt)       |       | 16.0     |       | 29.9     |       | 36.7     |       |
| Zinc concentrate average grade   |       | (%)        |       | 51.68    |       | 51.45    |       | 51.11    |       |
| Zinc average recovery            |       | (%)        |       | 75.16    |       | 76.67    |       | 75.25    |       |
| Lead average ore grade           |       | (%)        |       | 0.18     |       | 0.21     |       | 0.20     |       |
| Lead concentrate                 |       | (kt)       |       | 1.1      |       | 2.6      |       | 2.4      |       |
| Lead concentrate average grade   |       | (%)        |       | 32.26    |       | 34.02    |       | 31.60    |       |
| Lead average recovery            |       | (%)        |       | 32.96    |       | 44.65    |       | 29.16    |       |
| Copper average ore grade         |       | (%)        |       | 0.69     |       | 0.71     |       | 0.80     |       |
| Copper concentrate               |       | (kt)       |       | 17.6     |       | 27.9     |       | 39.2     |       |
| Copper concentrate average grade |       | (%)        |       | 19.59    |       | 18.38    |       | 19.87    |       |
| Copper average recovery          |       | (%)        |       | 80.21    |       | 77.89    |       | 79.05    |       |

----

kt = thousand tons

(1) There were 136 and 77days of strikes in 2007 and 2006, respectively. As a consequence San Martinlost 6,078 tons of zinc in concentrates, 477 tons of lead in concentrates and2,237 tons of copper in concentrates in 2007.

 

 

Santa Eulalia

 

The mining district of Santa Eulalia is located in the central part ofthe state of Chihuahua, Mexico, approximately 26 kilometers east of the city ofChihuahua.  This district coversapproximately 48 square kilometers and is divided into three fields: eastfield, central field and west field.  Thewest field and the east field, in which the principal mines of the complex arefound, are separated by six kilometers. The Buena Tierra mine is located in the west field and the San Antoniomine is located in 

 

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the east field.  The miningdistrict was discovered in 1590, although exploitation did not formally beginuntil 1870.

 

The district of SantaEulalia is connected to the city of Chihuahua by a paved road (highway no. 45);at a distance of ten kilometers thereis a paved detour to Aquiles Serdan and Francisco Portillo (also known as SantoDomingo) where the Company’s offices and the Buena Tierra mine are located.Access to the Buena Tierra mine and San Antonio mine is through an 11 kilometer unpaved road.

 

The Santa Eulalia mine suspended operations from October 2000to December 2004, during which time rehabilitation work was completed atthe San Antonio shaft and pipes were installed to expand the pumping capacityto 10,500 gallons per minute.  In January 2005,operations restarted at the Santa Eulalia mine, with a production plan for230,900 tons.  The flotation plant, atwhich lead and zinc concentrates are produced, has a capacity of 1,500 tons ofore per day.  The lead concentrate is treatedat a third party refinery, and the zinc concentrate is treated at our San LuisPotosi zinc refinery.

 

Major mine equipment at the Santa Eulaliamine includes five Jumbo drilling tools, nine scoop trams for mucking andloading, two trucks and two hoists.  For treating the ore,there are one primary crusher, one secondarycrusher and one tertiary crusher, two mill crushers, one mill and twoflotation circuits.  The concentratorplant has a milling capacity of 1,450 tons of ore per day.

 

Geology

 

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

 

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

 

In the Santa Eulaliamining district a thickness of 500 meters of sedimentary rocks is known toexist which consists of the following formations: 1) Formation Lagrima(limestone fossils); 2) Formation Glen Rose (limestone blue and at its base ablack limestone appears); and 3) Formation Cuchillo (limestone with shale).Dikes and sills of riolite composition and sills of diabase also exist.

 

In the districtthere are several systems of fractures and faults associated with theemplacement of felsitic and maphic intrusives. The most important controller of the ore bodies are the north-southfractures.

 

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

 

Economic ore isfound as replacement in the Limestone Glen Rose in the contact with dikes andsills and replacements in diabase sills. The mineralogy is comprised predominantly of sphalerite (ZnS), galena(PbS) and small quantities of pyrargyrite (Ag3SbS3).

 

Mine Exploration

 

At Santa Eulalia, in2007, 7,211 meters were drilled from underground stations and 3,392 meters fromthe surface.  An additional measuredresource of 138,400 tons was developed.

 

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The table below setsforth 2007, 2006 and 2005 production information for our Santa Eulalia mine:

 
| ** **                      | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating days           |       | (days)     |       | 326      |       | 326      |       | 329      |       |
| Total material mined and milled |       | (kt)       |       | 281      |       | 244      |       | 210      |       |
| Zinc average ore grade          |       | (%)        |       | 6.60     |       | 6.95     |       | 8.08     |       |
| Zinc concentrate                |       | (kt)       |       | 28.1     |       | 26.1     |       | 24.8     |       |
| Zinc concentrate average grade  |       | (%)        |       | 50.23    |       | 51.19    |       | 51.73    |       |
| Zinc average recovery           |       | (%)        |       | 76.14    |       | 78.75    |       | 75.68    |       |
| Lead average ore grade          |       | (%)        |       | 2.24     |       | 2.04     |       | 1.89     |       |
| Lead concentrate                |       | (kt)       |       | 8.5      |       | 7.1      |       | 4.6      |       |
| Lead concentrate average grade  |       | (%)        |       | 61.10    |       | 56.17    |       | 60.32    |       |
| Lead average recovery           |       | (%)        |       | 82.35    |       | 80.13    |       | 69.75    |       |

----

kt = thousandtons

 

 

Taxco

 

The Taxco mining complex is located on theoutskirts of the city of Taxco in the northern part of Guerrero State, Mexico,approximately 71 kilometers from the city of Cuernavaca, Morelos, where access through the highwayto the complex is possible.  The complex includes several undergroundmines (San Antonio, Guerrero and Remedios) and a flotation plant and produceslead and zinc concentrates, with some amounts of gold and silver.  The mining district in which the Taxco minesare located was discovered in 1519. Mining activities in the 20th century commenced in 1918.  TheTaxco district lies in the northern part of the Balsas-Mexcala basin adjacentto the Paleozoic Taxco-Zitacuaro Massif.

 

IMMSA employs shrinkage,cut-and-fill and the room and pillar mining methods at the Taxco mines.  The flotation plant has a capacity of 2,000tons of ore per day.  The lead concentrateis treated at a third party refinery in Mexico.  The zinc concentrate is eithertreated at the San 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 controlcharacteristics.  The Taxco schist iscomposed of a series of schists and fylites, most likely from avolcanic-sedimentary sequence of tufa and limonites.  They represent a sequence ofmetamorphological arch and its age has been defined as Jurassic Medium. TheMorelos formation from the Upper Cretaceous age (Apian-Turonian) lies on adiscordant form over Taxco schist and its contact is several times marked by aclay zone (mylonites) and breccia, which implies a shifting of this unit overthe schist (packs).  The Mezcalaformation is constituted by a sequence of shale and sandstone with someinter-stratified layers of limestone. Its base is calcarean.  Its toptends to be rich in clay with thin limestone layers.  The Balsas group, which is constituted byconglomerates and is sandy on its base, rests in discordance form on anerosioned surface from the Mexcala formation. The Tilzapotla Ryolite is the newest 

 

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rock, which emerged inthe district before the alluvial deposit. It is formed of flux, breccia, tuffaceous, ignimbrites and vitrophyrreof ryolite composition.

 

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

 

The veins reach 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 reaching one kilometer in length and five meters inaverage 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

 

The drilling in thisproperty was 4,197 meters from underground stations.  No measured resources were added to thereserve base in 2007 as strike activity prevented this.

 

The table below sets forth 2007, 2006 and 2005production information for our Taxco mine:

 
| ** **                      | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Annual operating days           |       | (days)     | (1)        | 171      |       | 323      |       | 215      |       |
| Total material mined and milled |       | (kt)       |       | 248      |       | 411      |       | 363      |       |
| Zinc average ore grade          |       | (%)        |       | 4.08     |       | 4.0      |       | 3.92     |       |
| Zinc concentrate                |       | (kt)       |       | 17.7     |       | 29.7     |       | 25.0     |       |
| Zinc concentrate average grade  |       | (%)        |       | 47.83    |       | 48.35    |       | 48.66    |       |
| Zinc average recovery           |       | (%)        |       | 83.77    |       | 87.29    |       | 85.51    |       |
| Lead average ore grade          |       | (%)        |       | 0.56     |       | 0.65     |       | 0.80     |       |
| Lead concentrate                |       | (kt)       |       | 2.4      |       | 4.6      |       | 5.1      |       |
| Lead concentrate average grade  |       | (%)        |       | 43.69    |       | 46.16    |       | 48.24    |       |
| Lead average recovery           |       | (%)        |       | 74.97    |       | 79.24    |       | 85.03    |       |

----

kt = thousand tons

(1) There were 136 days ofstrike in 2007. As a result it is estimated that Taxco lost 5,531 tons of zincin concentrates and 873 tons of lead in concentrates.

 

 

Processing Facilities - San Luis Potosi

 

Our San Luis Potosi electrolytic zinc refinery islocated in the city of San Luis Potosi, in the state of San Luis Potosi,Mexico.  The San Luis Potosi coppersmelter is adjacent to the refinery.  Thecity of San Luis Potosi is connected to our refinery and smelter by a majorhighway and our refinery and smelter are connected to each other by pavedroads.

 

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Smelter

 

The San Luis Potosi copper smelter has been inoperation since 1925 and has gone through several phases of modernization,principally over the last ten years.  Thesmelter presently has the capacity to process 230,000 tons of copperconcentrate per year.

 

The plant operates one blast furnace (with asecond on stand-by) that smelts incoming materials, mainly copper concentratesand copper by-products from lead plants, to produce a copper matte.  The copper matte is then treated in one ofthe two Pierce Smith converters, producing copper blister (95.7% copper), whichin 2007 contained approximately 1.5 ounces of gold and 397 ounces of silver perton of copper blister produced.  Of atotal copper concentrate intake of 48,107 tons in 2007, approximately 80% wassupplied by the IMMSA unit’s mines and the remaining amount was smelted undertoll arrangements with third parties. All of the blister production is sold to third party refineriesthroughout the world.

 

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 containvarious impurities (especially lead and arsenic), the facility has beenequipped with an arsenic recovery plant for treatment of the flue dust producedin the blast furnace section.  Thismaterial contains approximately 35% lead and 18% arsenic which, when treated,produces approximately 1,800 tons per year of high purity arsenic trioxidewhich is, in turn, sold in the United States principally to the wood preservingindustry.  Approximately 13,000 tons peryear of lead bearing calcines (approximately 32% lead) are sold annually toIndustrias Peñoles, S.A. de C.V. (“Peñoles”).

 

The table below sets forth 2007, 2006 and 2005production information for our San Luis Potosi copper smelter:

 
| ** **                            | ** ** | ** **    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|---------------|------------|----------|------------|----------|------------|----------|------------|
| Total copper concentrate smelted      |       | (kt)          |       | 48.1     |       | 48.1     |       | 50.2     |       |
| Blister copper production             |       | (kt)          |       | 20.8     |       | 20.2     |       | 21.3     |       |
| Silver in blister                     |       | (oz. per ton) |       | 397      |       | 460      |       | 400      |       |
| Gold in blister                       |       | (oz. per ton) |       | 1.5      |       | 1.6      |       | 1.0      |       |
| Copper average grade in blister       |       | (%)           |       | 96.06    |       | 96.75    |       | 98.17    |       |
| Average smelter recovery              |       | (%)           |       | 97.18    |       | 98.13    |       | 96.89    |       |
| Average realized price copper blister |       | ($per pound)  |       | 3.35     |       | 3.51     |       | 1.83     |       |

----

kt = thousand tons

 

Zinc Refinery

 

The San Luis Potosi electrolytic zinc refinery wasbuilt in 1982.  It was designed toproduce 105,000 tons of refined zinc per year by treating up to 200,000 tons ofzinc concentrate from our own mines, principally Charcas, located only 113kilometers from the refinery.  Therefinery produces special high grade zinc (99.995% zinc), high grade zinc (over99.9% zinc) and zinc-based alloys with aluminum, lead, copper or magnesium invarying quantities and sizes depending on market demand.

 

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 calcinea processing area with fiveleaching stages: neutral, hot acid, intermediate 

 

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acid,acid, purified fourth and jarosite, as well as two stages for solutionpurifying.  Additionally, the equipmentincludes a cell house with two electrowinning circuits to finally obtainmetallic zinc; an alloy and molding area with two induction furnaces and fourmolding systems, two of them with chains to produce 25 kilogram ingots; and twocasting wheels to manufacture one ton Jumbo pieces.  This refinery has a production capacity of104,000 tons of refined zinc per year.

 

The table below sets forth 2007, 2006 and 2005production information for our San Luis Potosi zinc refinery:

 
| ** **                              | ** ** | ** **      | ** ** | **2007** | ** ** | **2006 (1)** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|-----------------|------------|----------|------------|--------------|------------|----------|------------|
| Total zinc concentrate treated          |       | (kt)            |       | 180.7    |       | 118.0        |       | 166.8    |       |
| Refined zinc produced                   |       | (kt)            |       | 90.9     |       | 45.3         |       | 101.5    |       |
| Sulfuric acid produced                  |       | (kt)            |       | 165.1    |       | 98.5         |       | 176.3    |       |
| Refined silver produced                 |       | (kt)            |       | 10.0     |       | 9.2          |       | 14.6     |       |
| Refined gold produced                   |       | (k)             |       | 3.8      |       | 7.0          |       | 4.0      |       |
| Refined cadmium produced                |       | (kt)            |       | 0.6      |       | 0.4          |       | 0.7      |       |
| Average refinery recovery               |       | (%)             |       | 94.0     |       | 73.35        |       | 94.57    |       |
| Average realized price refined zinc     |       | ($ per lb) |       | 1.46     |       | 1.67         |       | 0.64     |       |
| Average realized price zinc concentrate |       | ($ per lb) |       | 1.57     |       | 1.46         |       | 0.64     |       |
| Average realized price silver           |       | ($ per oz) |       | 13.02    |       | 11.45        |       | 7.19     |       |

----

kt = thousand tons

(1) Some production was lostdue to a fire at the refinery in the first quarter of 2006.

 

 

Nueva Rosita Coal and Coke Complex

 

The Nueva Rosita coal and coke complex, whichbegan operations in 1924, is located in the state of Coahuila, Mexico on theoutskirts of the city of Nueva Rosita near the Texas border.  It includes a) an underground coal mine, whichhas been closed as a result of a gas explosion in February 2006; b) an open pitmine with a yearly capacity of approximately 350,000 tons of coal; c) a coalwashing plant completed in 1998 with a capacity of 900,000 tons per year thatproduces clean coal of a higher quality; and d) a re-engineered and modernized21 coke oven facility capable of producing 105,000 tons of coke (metallurgical,nut and fine) per year 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 suppliesthe San Luis Potosi copper smelter with low-cost coke, resulting in significantcost savings to the smelter.  The surplusproduction is sold to Peñoles and other Mexican consumers in northernMexico.  We expect to sell 63,670 tons ofmetallurgical coke in 2008.

 

Exploration:

 

At Nueva Rosita, 59,446meters of diamond drilling were done at the Guayacan, Esperanza, Obayos and ElAs areas.  Through this drilling weidentified approximately 29 million tons of in-situ mineralized materials atEsperanza and approximately 12 million tons at Guayacan.  The drilling at Obayos is still in apreliminary stage and at El As the drilling results indicated an absence ofsignificant resources.  There was nodrilling activity at Esperanza and Obayos in 2007.

 

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The table below sets forth 2007, 2006 and 2005production information for our Nueva Rosita coal and coke complex:

 
| ** **                                | ** ** | ** **       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|
| Coal mined - underground mine             |       | (kt)             |       | —   |       | 29.4     |       | 257.0    |       |
| Coal mined - open pit                     |       | (kt)             |       | 97.4     |       | 185.9    |       | 407.1    |       |
| Total coal mined                          |       | (kt)             |       | 97.4     |       | 215.3    |       | 664.1    |       |
| Average BTU content                       |       | BTU/Lb           |       | 9,054.9  |       | 9,720.0  |       | 10,017.2 |       |
| Average percent sulfur                    |       | %                |       | 1.78     |       | 0.80     |       | 1.02     |       |
| Clean coal produced                       |       | (kt)             |       | 55.8     |       | 52.8     |       | 181.0    |       |
| Coke tonnage produced                     |       | (kt)             |       | 63.4     |       | 55.7     |       | 44.4     |       |
| Average realized price coal               |       | ($ per ton) |       | 29.01    |       | 25.49    |       | 24.41    |       |
| Average realized price arsenic clean coal |       | ($ per ton) |       | —   |       | 47.07    |       | 62.83    |       |
| Average realized price coke               |       | ($ per ton) |       | 197.0    |       | 222.35   |       | 197.99   |       |

----

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. “Mineralized material,”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 

 

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on a RCB Index (RelativeConfidence Bound Index) that measures our level of geologic knowledge and confidencein each block.  The RCB index is ameasure of relative confidence in the block grade estimate.  This approach combines the local variabilityof the composites used to krig a block with the Kriging variance andincorporates the use of confidence intervals in measuring uncertainty of theblock estimates relative to each other. The final resource classification is then based on the distribution ofthese RCB values for blocks above 0.05% copper. It is the distribution that is used to find the breaks betweenproven/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 

 

65

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stated, reservesestimates in this report use $2.664 per pound for copper and $28.987 per poundfor molybdenum, both current prices as of December 31, 2007.  The current prices for copper and molybdenumwere $2.020 and $24.315 as of December 31, 2006 and $1.261 and $17.817 asof December 31, 2005.

 

For planning purposes ourmanagement 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 2007, 2006and 2005, 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.

 

For more informationregarding our reserve estimates, see “Management’s Discussion and Analysis ofFinancial Conditions and Results of Operations—Critical Accounting Policies andEstimates—Ore Reserves.”

 

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** **

**The tablebelow details our proven and probable copper and molybdenum reserves asestimated at December 31, 2007.**

** **
| ** **                                                   | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **   | ** ** | ** **      | ** ** | **Sensitivity  to**   | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------|------------|-----------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **   | ** ** | ** **      | ** ** | **Change  in metals** | ** ** |
| ** **                                                   | ** ** | **PERUVIAN  OPEN-PIT UNIT** | ** ** | **MEXICAN  OPEN-PIT UNIT** | ** ** | **TOTAL**    | ** ** | **MEXICAN**     | ** ** | **prices  (3)**       | ** ** |
| ** **                                                   | ** ** | **Cuajone**                 | ** ** | **Toquepala**              | ** ** | **Cananea**  | ** ** | **La  Caridad** | ** ** | **OPEN-PIT**          | ** ** | **IMMSA  UNIT** | ** ** | **Increase** | ** ** | **Decrease** | ** ** |
| ** **                                                   | ** ** | **Mine (1)**                | ** ** | **Mine (2)**               | ** ** | **Mine (1)** | ** ** | **Mine (1)**    | ** ** | **MINES**             | ** ** | **IMMSA  (2)** | ** ** | **20%** | ** ** | **20%** | ** ** |
| Mineral Reserves                                             |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| Metal prices:                                                |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| Copper ($/lb.)                                               |       | 2.664                       |       | 2.664                      |       | 2.664        |       | 2.664           |       | 2.664                 |       | 2.664 |   | 3.197 |   | 2.132 |   |
| Molybdenum  ($/lb.)                                          |       | 28.987                      |       | 28.987                     |       | 28.987       |       | 28.987          |       | 28.987                |       | 28.987 |   | 34.785 |   | 23.19 |   |
| Cut-off grade                                                |       | 0.134                       | %          | 0.133                      | %          | 0.126        | %          | 0.120           | %          | 0.128                 | %          | — |   | 0.105 | % | 0.164 | % |
| Sulfide ore  reserves (thousands of tons)                    |       | 2,404,338                   |       | 4,373,291                  |       | 6,266,637    |       | 3,901,828       |       | 16,946,094            |       | 44,914 |   | 18,267,976 |   | 14,428,996 |   |
| Average grade:                                               |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| Copper                                                       |       | 0.522                       | %          | 0.443                      | %          | 0.394        | %          | 0.226           | %          | 0.386                 | %          | 0.46 | % | 0.370 | % | 0.419 | % |
| Molybdenum                                                   |       | 0.019                       | %          | 0.021                      | %          | —       |       | 0.029           | %          | 0.023                 | %          | — |   | 0.023 | % | 0.023 | % |
| Lead                                                         |       | —                      |       | —                     |       | —       |       | —          |       | —                |       | 0.95 | % | — |   | — |   |
| Zinc                                                         |       | —                      |       | —                     |       | —       |       | —          |       | —                |       | 3.08 | % | — |   | — |   |
| Leachable  material (thousands of tons)                      |       | 19,448                      |       | 1,597,583                  |       | 1,723,662    |       | 983,286         |       | 4,323,979             |       | — |   | 4,125,465 |   | 5,036,844 |   |
| Leachable  material grade                                    |       | 0.452                       | %          | 0.056                      | %          | 0.132        | %          | 0.101           | %          | 0.098                 | %          | — |   | 0.079 | % | 0.133 | % |
|                                                         |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| Waste (thousands  of tons) (5)                               |       | 7,054,709                   |       | 13,011,062                 |       | 6,663,738    |       | 1,136,333       |       | 27,865,842            |       | — |   | 28,808,852 |   | 25,819,957 |   |
| Total material  (thousands of tons)                          |       | 9,478,495                   |       | 18,981,936                 |       | 14,654,037   |       | 6,021,447       |       | 49,135,915            |       | — |   | 51,202,293 |   | 45,285,797 |   |
| Stripping ratio                                              |       | 2.94                        |       | 3.34                       |       | 1.34         |       | 0.54            |       | 1.90                  |       | — |   | 1.80 |   | 2.14 |   |
|                                                         |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| **Leachable  material**                                      | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **   | ** ** | ** **      | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves in stock  (thousands of tons)                       |       | 20,701                      |       | 940,502                    |       | 704,587      |       | 513,291         |       | 2,179,081             |       | — |   | 2,179,081 |   | 2,198,406 |   |
| Average copper  grade                                        |       | 0.482                       | %          | 0.143                      | %          | 0.127        | %          | 0.252           | %          | 0.167                 | %          | — |   | 0.167 | % | 0.168 | % |
|                                                         |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| In pit reserves  (thousands of tons)                         |       | 19,448                      |       | 1,597,583                  |       | 1,723,662    |       | 983,286         |       | 4,323,979             |       | — |   | 4,125,465 |   | 5,036,844 |   |
| Average copper  grade                                        |       | 0.452                       | %          | 0.056                      | %          | 0.132        | %          | 0.101           | %          | 0.098                 | %          | — |   | 0.079 | % | 0.133 | % |
|                                                         |       |                        |       |                       |       |         |       |            |       |                  |       |   |   |   |   |   |   |
| Total leachable  reserves (thousands of tons)                |       | 40,149                      |       | 2,538,085                  |       | 2,428,249    |       | 1,496,577       |       | 6,503,060             |       | — |   | 6,304,546 |   | 7,235,250 |   |
| Average copper  grade                                        |       | 0.467                       | %          | 0.088                      | %          | 0.130        | %          | 0.153           | %          | 0.121                 | %          | — |   | 0.110 | % | 0.144 | % |
| **Copper  contained in ore reserves (thousand of tons) (4)** | ** ** | **12,639**                  | ** ** | **20,268**                 | ** ** | **26,966**   | ** ** | **9,811**       | ** ** | **69,684**            | ** ** | **207** | ** ** | **70,786** | ** ** | **67,120** | ** ** |

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(1)                    The Cuajone, Toquepala, Cananea and LaCaridad concentrator recoveries calculated for these reserves were 86.3%,86.7%, 81.0% and 83.0%, respectively, obtained by using recovery formulasaccording to the different milling capacity and geo-metallurgical zones.

 

(2)                    The****IMMSA unitincludes the Charcas, Santa Barbara, San Martin, Santa Eulalia and Taxco mines.Zinc and lead contained in ore reserves are 1,383 and 427 thousand tons,respectively.

 

(3)                    In preparing the sensitivity analysis, werecalculated our reserves based on the assumption that current average metalprices were 20% higher and 20% lower, respectively, than the actual currentaverage prices for year-end 2007. Reserve results of this sensitivity analysis are not proportional to theincrease or decrease in metal price assumptions.  The analysis above does notinclude our IMMSA unit’s underground mines, for which the sensitivity analysisis as follows:

 

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| ** **                               | ** ** | **Sensitivity to 20% Change in Metals Prices** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **Increase 20%**                               | ** ** | **Decrease 20%** | ** ** |
| Sulfide ore reserves (thousands of tons) |       | 46,175                                         |       | 41,928 |   |
| Average grade copper                     |       | 0.46                                           | %          | 0.48 | % |
| Copper contained (thousands of tons)     |       | 212                                            |       | 201 |   |

 

(4)                      Copper contained in ore reserves foropen-pit mines is (i) the product of sulfide ore reserves and the averagecopper grade plus (ii) the product of in-pit leachable reserves and theaverage copper grade.  Copper containedin ore reserves for underground mines is the product of sulfide ore reservesand the average copper grade.

 

(5)                      At the Cuajone mine, waste includes744,731 thousand tons of low grade sulfur material.

 

 

AVERAGEDRILL-HOLE SPACING

 

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

 
| **As of December 31, 2007** | ** ** | **Proven**                      | ** ** | **Probable** | ** ** |
|----------------------------------|------------|---------------------------------|------------|--------------|------------|
| ** **                       | ** ** | **(average spacing in meters)** | ** ** |
| Cuajone                          |       | 82.55                           |       | 120.51       |       |
| Toquepala                        |       | 81.85                           |       | 116.97       |       |
| Cananea                          |       | 51.96                           |       | 100.94       |       |
| La Caridad                       |       | 47.40                           |       | 97.40        |       |

 

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Thetable below details our proven and probable copper and molybdenum reserves asof December 31, 2007 calculated based on long-term price assumptions of,$1.20 for copper and $9.00 for molybdenum.

 
| ** **                                                    | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **     | ** ** | **Total**    | ** ** | ** **    | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|---------------|------------|-------------|------------|----------------|------------|--------------|------------|---------------|------------|
| ** **                                                    | ** ** | **Cuajone** | ** ** | **Toquepala** | ** ** | **Cananea** | ** ** | **La Caridad** | ** ** | **Open-Pit** | ** ** | ** **    | ** ** |
| ** **                                                    | ** ** | **Mine**    | ** ** | **Mine**      | ** ** | **Mine**    | ** ** | **Mine**       | ** ** | **Mines**    | ** ** | **IMMSA (1)** | ** ** |
| **Mineral  Reserves**                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** |
| Metal prices:                                                 |       |        |       |          |       |        |       |           |       |         |       |          |       |
| Copper ($/lb.)                                                |       | $1.200      |       | $1.200        |       | $1.200      |       | $1.200         |       | $1.200       |       | $1.20         |       |
| Molybdenum  ($/lb.)                                           |       | $9.00       |       | $9.00         |       | $9.00       |       | $9.00          |       | $9.00        |       | $9.00         |       |
| Cut-off grade                                                 |       | 0.318       | %          | 0.348         | %          | 0.312       | %          | 0.270          | %          | 0.318        | %          | —        |       |
| Sulfide ore  reserves (thousands of tons)                     |       | 1,594,589   |       | 1,940,206     |       | 2,511,484   |       | 932,191        |       | 6,978,470    |       | 40,781        |       |
| Average grade:                                                |       |        |       |          |       |        |       |           |       |         |       |          |       |
| Copper                                                        |       | 0.566       | %          | 0.598         | %          | 0.577       | %          | 0.348          | %          | 0.550        | %          | 0.49          | %          |
| Molybdenum                                                    |       | 0.020       | %          | 0.036         | %          | —      |       | 0.026          | %          | 0.028        | %          | —        |       |
| Lead                                                          |       | —      |       | —        |       | —      |       | —         |       | —       |       | 0.97          | %          |
| Zinc                                                          |       | —      |       | —        |       | —      |       | —         |       | —       |       | 3.08          | %          |
| Leachable  material                                           |       |        |       |          |       |        |       |           |       |         |       |          |       |
| (thousands of  tons)                                          |       | 10,902      |       | 2,117,946     |       | 1,670,689   |       | 1,189,125      |       | 4,988,662    |       | —        |       |
| Leachable  material grade                                     |       | 0.584       | %          | 0.195         | %          | 0.267       | %          | 0.161          | %          | 0.212        | %          | —        |       |
| Waste (thousands  of tons)                                    |       | 3,757,014   |       | 7,709,984     |       | 3,939,387   |       | 425,261        |       | 15,831,646   |       | —        |       |
| Total material  (thousands of tons)                           |       | 5,362,505   |       | 11,768,136    |       | 8,121,560   |       | 2,546,577      |       | 27,798,778   |       | —        |       |
| Stripping ratio                                               |       | 2.36        |       | 5.07          |       | 2.23        |       | 1.73           |       | 2.98         |       | —        |       |
|                                                          |       |        |       |          |       |        |       |           |       |         |       |          |       |
| **Leachable  material**                                       | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **    | ** ** |
| Reserves in  stock (thousands of tons)                        |       | 20,701      |       | 940,502       |       | 704,587     |       | 513,291        |       | 2,179,081    |       | —        |       |
| Average copper  grade                                         |       | 0.482       | %          | 0.143         | %          | 0.127       | %          | 0.252          | %          | 0.167        | %          | —        |       |
| In-pit reserves  (thousands of tons)                          |       | 10,902      |       | 2,117,946     |       | 1,670,689   |       | 1,189,125      |       | 4,988,662    |       | —        |       |
| Average copper  grade                                         |       | 0.584       | %          | 0.195         | %          | 0.267       | %          | 0.161          | %          | 0.212        | %          | —        |       |
| Total Leachable  reserves (thousands of tons)                 |       | 31,603      |       | 3,058,448     |       | 2,375,276   |       | 1,702,416      |       | 7,167,743    |       | —        |       |
| Average copper  grade                                         |       | 0.517       | %          | 0.179         | %          | 0.225       | %          | 0.188          | %          | 0.198        | %          | —        |       |
| **Copper  contained in ore reserves (thousands of tons) (2)** | ** ** | **9,089**   | ** ** | **15,732**    | ** ** | **18,952**  | ** ** | **5,159**      | ** ** | **48,932**   | ** ** | **200**       | ** ** |

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(1)                      The IMMSA unit includes the Charcas,Santa Barbara, San Martin, Santa Eulalia and Taxco mines. Zinc and lead contained in ore reservesare 1,313 and 396 thousand tons, respectively.

 

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

 

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 minegeologists gather the necessary monthly statistical data from our informationsystem (“SRP”), which provides ore tons milled and ore grades in theconcentrator.

 

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2.               Mined areas aretopographically determined and related boundaries are built.

3.               Using the “interactiveplanner” option in our mining software (Minesight), ore tons and grades arecalculated inside mined areas over the block model.  At this point the current cut-off grade isconsidered.

4.               In the finalstage, accumulated tons mined, weighted average grade for ore material andleach is compared with data coming from our SRP system.

 

Tonnageand grade reconciliation for 2007 are as follows:

** **
| ** ** | ** ** | **Long Range Model** | ** ** | **Mill**     | ** ** | **Variance**    | ** ** |
|------------|------------|----------------------|------------|--------------|------------|-----------------|------------|
| ** ** | ** ** | **Tons**             | ** ** | ** **   | ** ** | **Tons**        | ** ** | ** ** | ** ** | **Tons** | ** ** | ** ** | ** ** |
| **Mine**   | ** ** | **(thousands)**      | ** ** | **% Copper** | ** ** | **(thousands)** | ** ** | **% Copper** | ** ** | **(thousands)** | ** ** | **% Copper** | ** ** |
| Cuajone    |       | 29,032               |       | 0.731        |       | 28,310          |       | 0.755 |   | 722 |   | (0.024 | ) |
| Toquepala  |       | 22,131               |       | 0.735        |       | 20,843          |       | 0.760 |   | 1,288 |   | (0.025 | ) |
| Cananea    |       | 23,656               |       | 0.626        |       | 23,554          |       | 0.590 |   | 102 |   | 0.036 |   |
| La Caridad |       | 30,319               |       | 0.403        |       | 30,970          |       | 0.409 |   | 651 |   | 0.006 |   |

 

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 are consideredin the ore body zone.

 

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Item 3. Legalproceedings

 

Reference is made to theinformation under the caption “Litigation Matters” in the Consolidated CombinedFinancial Statement Note 14 “Commitments and Contingencies.”

 

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

 

None

 

 

Executive Officers of theRegistrant

 

Set forth below are the executive officers of theCompany, their ages as of January 31, 2008 and their positions.

 
| **Name**                        | ** ** | **Age** | ** ** | **Position**                                                                                                      |
|---------------------------------|------------|---------|------------|-------------------------------------------------------------------------------------------------------------------|
| German Larrea Mota-Velasco      |       | 54      |       | Chairman of the Board and Director                                                                                |
| Oscar Gonzalez Rocha            |       | 69      |       | President, Chief Executive Officer and Director                                                                   |
| Xavier Garcia de Quevedo Topete |       | 61      |       | President, Chief Executive Officer of Southern  Copper Minera Mexico, Chief Operating Officer of SCC and Director |
| Genaro Guerrero Diaz Mercado    |       | 48      |       | Vice President, Finance and Chief Financial Officer                                                               |
| Armando Ortega Gomez            |       | 47      |       | Vice President, Legal, General Counsel, Secretary  and Director                                                   |
| Jose N. Chirinos Fano           |       | 66      |       | Comptroller                                                                                                       |
| Mario Vinageras Barroso         |       | 52      |       | Vice President, Commercial                                                                                        |
| Vidal Muhech Dip                |       | 67      |       | Vice President, Projects                                                                                          |
| Remigio Martinez Müller    |       | 64      |       | Vice President, Explorations                                                                                      |

 

**German Larrea Mota-Velasco** has served as ourChairman of the Board since December 1999, Chief Executive Officer from December 1999to 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 Americas Mining Corporation (holding) since 2003 and was its ChiefExecutive Officer from 2003 to September 6, 2007.  Mr. Larrea has been Chairman of theBoard of Directors and Chief Executive Officer of Grupo Ferroviario MexicanoS.A. de C.V (railroad company) since 1997. Mr. Larrea was previously Executive Vice Chairman of Grupo Mexicoand has been a member of the Board of Directors since 1981.  He is also Chairman of the Board of Directorsand Chief Executive Officer of Empresarios Industriales de Mexico, S.A. de C.V.(holding), Compañia Perforadora Mexico, S.A. de C.V., (drilling company),Mexico Compañia Constructora, S.A. de C.V. (construction company) and FondoInmobiliario (real estate company), since 1992. He founded Grupo Impresa, a printing and publishing company in 1978,remaining as the Chairman and Chief Executive Officer until 1989 when thecompany 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 de Hombres de Negocios, and Grupo Televisa, S.A.B.

 

**Oscar Gonzalez Rocha** has served as ourPresident since December 1999 and our Chief Executive Officer since October 21,2004.  He has been our Director since November 1999.  Previously, he was our General Director andChief Operating Officer from December 1999 to October 20, 2004.  He has been a Director of Grupo Mexico since2002 and General Director of Mexicana de Cobre, S.A. de C.V. from 1986 to 1999and of Mexicana de Cananea S.A. de C.V. from 1990 to 1999.  He was an Alternate Director of Grupo Mexicofrom 1988 to April 2002.

 

**Xavier Garcia de Quevedo Topete** has served asPresident and Chief Executive Officer of Southern Copper Minera Mexico since September 2001to date and as our Chief Operating 

 

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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 ourVice President, Finance and Chief Financial Officer since January 2,2008.  He has held various Treasuryfunctions with Grupo Mexico from 1992 to July 31, 2000.  On August 1, 2000, Mr. Guerrero wastransferred to ASARCO, an affiliate Company of Grupo Mexico.  He was the Vice President Finance, ChiefFinancial Officer and Treasurer of ASARCO until May 3, 2006.  Mr. Guerrero held a key financial rolewith Southern Peru Limited, a subsidiary of the Company until December 31,2007.

 

**Armando Ortega Gomez** has served as amember of our Board of Directors since August 2002.  Mr. Ortega has been our General Counselsince October 23, 2003, and has served as our Vice President, Legal andSecretary since April 25, 2002. Previously, he was our Assistant Secretary from July 25, 2001 to April 25,2002.  He was General Counsel of GrupoMexico 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 ourComptroller since April 2005 and 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 Director of Comptroller andFinance since December 1999.  From January 1994until April 2005 he was our Assistant Comptroller.  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 41years at our Company.

 

**Mario Vinageras Barroso** has served as ourVice President, Commercial since April 25, 2002.  He has been Commercial Director of GrupoMexico since September 1994 and Corporate Director of Sales of GrupoMexico since June 1, 2000.

 

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

 

**Remigio Martinez Müller**has served as ourVice President, Exploration since April 2002.  He has been Corporate Director of Explorationof Grupo Mexico since 2002.  From 1990 to2001 he was Director of Exploration of Mexicana de Cobre, S.A. de C.V. Mr. Martinezhas held several other managerial positions within Grupo Mexico and itspredecessor, Asarco Mexicana.

 

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PART II

 

Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

 

At December 31,2007, there were 1,104 holders of record of our Common Stock.  SCC’s Common Stock is traded on the New YorkStock Exchange (“NYSE”) and the Lima Stock Exchange (“BVL”).  The SCC Common Stock symbol is PCU on theNYSE and PCU1 on the BVL.

 

The table below setsforth the cash dividends paid per share of capital stock and the high and lowstock prices on both the NYSE, and the BVL for the periods indicated.  Dividends per share and the stock marketprice have been retroactively adjusted to reflect the stock split.

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| **Quarters**       | ** ** | **1st**  | ** ** | **2nd**  | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Dividend per Share |       | $        | 1.7000     |     | $          | 1.5000 |   | $ | 1.6000 |   | $ | 2.000 |   | $ | 6.8000 |   | $ | 1.3750 |   | $ | 1.3750 |   | $ | 1.0000 |   | $ | 1.3750 |   | $ | 5.1250 |   |
|               |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock market Price |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NYSE:              |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High               |       | $        | 75.00      |     | $          | 95.44 |   | $ | 125.17 |   | $ | 141.35 |   | $ | 141.35 |   | $ | 45.58 |   | $ | 52.93 |   | $ | 48.87 |   | $ | 58.12 |   | $ | 58.12 |   |
| Low                |       | $        | 50.52      |     | $          | 72.64 |   | $ | 84.54 |   | $ | 98.90 |   | $ | 50.52 |   | $ | 34.65 |   | $ | 35.45 |   | $ | 41.49 |   | $ | 44.40 |   | $ | 34.65 |   |
|               |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BVL:               |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High               |       | $        | 75.00      |     | $          | 96.30 |   | $ | 125.20 |   | $ | 141.50 |   | $ | 141.50 |   | $ | 45.60 |   | $ | 53.25 |   | $ | 48.75 |   | $ | 57.90 |   | $ | 57.90 |   |
| Low                |       | $        | 50.30      |     | $          | 72.77 |   | $ | 82.00 |   | $ | 99.50 |   | $ | 50.30 |   | $ | 34.55 |   | $ | 35.50 |   | $ | 42.45 |   | $ | 44.30 |   | $ | 34.55 |   |

 

 

**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, 2007. 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, 2002 andending December 31, 2007, 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, 2002 and ending December 31,2007.  In 2003, SCC’s stock provided apositive return of 230.36%, compared to a positive return of 26.38% and 75.91%for the S&P 500 and the S&P Metals and Mining Select Industry Index,respectively.  In 2004, SCC’s stockincreased 3.63%, compared to a positive return of 8.99% for the S&P 500 anda positive return of 33.01% for the S&P Metals and Mining Select IndustryIndex.  In 2005, SCC’s stock return waspositive 58.26% compared to 3.00% and 21.23% for the S&P 500 and theS&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 to 3.53%for S&P 500 and 41.71% for S&P Metals and Mining Select Industry Index.

 

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Comparison of FiveYear Cumulative Total Return *

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

 

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*                               Total return assumes reinvestment ofdividends

**                        The comparison assumes $100 invested onDecember 31, 2002

 

 

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 24, 2008,a dividend of $1.40 per share was announced payable February 29, 2008 toshareholders of record as of February 12, 2008.  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.

 

On January 29, 2008,the Company announced an up to $300 million share repurchase program authorizedby the Board of Directors.  Under thisprogram the Company may purchase shares from time to time, based on marketconditions and other factors.  Therepurchase program has no expiration date and may be modified or discontinuedat any time.  Any shares acquired will beavailable for general corporate purposes.

 

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 - Financing to our ConsolidatedCombined Financial Statements.

 

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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, 2007:

 
| ** **                       | ** ** | **Number of securities** | ** ** | ** **              | ** ** | ** **               | ** ** |
|----------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **to be issued upon**    | ** ** | **Weighted-average**    | ** ** | **Number of securities** | ** ** |
| ** **                       | ** ** | **exercise of**          | ** ** | **exercise price of**   | ** ** | **remaining available**  | ** ** |
| **Plan Category**                | ** ** | **outstanding options**  | ** ** | **outstanding options** | ** ** | **for future issuance**  | ** ** |
| ** **                       | ** ** | **(a)**                  | ** ** | **(b)**                 | ** ** | **(c)**                  | ** ** |
| Directors’ stock award plan |       | N/A                      |       | N/A                     |       | 128,000                  |       |

 

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Item 6. SelectedFinancial Data

 

FIVE-YEAR SELECTEDFINANCIAL AND STATISTICAL DATA

 

The selected historical financial data presentedbelow as of and for the five years ended December 31, 2007, includescertain information that has been derived from our consolidated combinedfinancial statements.  The selectedfinancial data should be read in conjunction with Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated combined financial statements and notes thereto.

 

(In millions, except Capital Stock and Financial Ratios, except wherenoted)

 
| ** **                         | ** ** | **Year  Ended December 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| **Statement of Earnings Data**     | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                          |       | $                                 | 6,085.7    |   | $ | 5,460.2 |   | $ | 4,089.1 |   | $ | 3,096.7 |   | $ | 1,576.6 |   |
| Operating income                   |       | 3,497.4                           |       | 3,054.3 |   | 2,071.0 |   | 1,482.4 |   | 325.7 |   |
| Minority  interest                 |       | (10.2                             | )          | (9.3 | ) | (12.5 | ) | (4.7 | ) | (4.3 | ) |
| Net earnings  (loss)               |       | $                                 | 2,216.4    |   | $ | 2,037.6 |   | $ | 1,400.1 |   | $ | 982.4 |   | $ | 83.5 |   |
|                               |       |                              |       |   |   |   |   |   |   |   |   |
| Per share  amounts:                |       |                              |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  basic and diluted |       | $                                 | 7.53       |   | $ | 6.92 |   | $ | 4.76 |   | $ | 3.34 |   | $ | 0.28 |   |
| Dividends paid                     |       | $                                 | 6.80       |   | $ | 5.13 |   | $ | 2.90 |   | $ | 0.65 |   | $ | 0.16 |   |

 

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| **Balance Sheet Data**                          | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash and cash equivalents                       |       | $                      | 1,409.3    |   | $ | 1,022.8 |   | $ | 876.0 |   | $ | 710.7 |   | $ | 351.6 |   |
| Total assets                                    |       | 6,580.6                |       | 6,376.4 |   | 5,687.6 |   | 5,319.2 |   | 4,491.0 |   |
| Total long-term debt, including current portion |       | 1,449.8                |       | 1,528.1 |   | 1,172.1 |   | 1,330.3 |   | 1,671.2 |   |
| Total liabilities                               |       | 2,715.8                |       | 2,695.8 |   | 2,348.8 |   | 2,494.3 |   | 2,385.9 |   |
| Total stockholders’ equity                 |       | $                      | 3,848.1    |   | $ | 3,666.6 |   | $ | 3,326.1 |   | $ | 2,813.6 |   | $ | 2,022.7 |   |

 

 
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| **Statement of Cash Flows**                         | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash  provided from operating activities            |       | $                           | 2,703.5    |   | $ | 2,059.4 |   | $ | 1,663.5 |   | $ | 1,172.4 |   | $ | 64.8 |   |
| Depreciation,  amortization and depletion           |       | 327.9                       |       | 275.1 |   | 277.2 |   | 192.6 |   | 177.1 |   |
| Cash  used for investing activities                 |       | (246.0                      | )          | (725.3 | ) | (435.9 | ) | (219.5 | ) | (59.7 | ) |
| Capital  expenditures                               |       | (315.7                      | )          | (455.8 | ) | (470.6 | ) | (228.3 | ) | (64.9 | ) |
| Cash  (used for) provided from financing activities |       | (2,088.3                    | )          | (1,164.4 | ) | (1,064.4 | ) | (540.6 | ) | 185.6 |   |
| Dividends  paid                                     |       | (2,002.3                    | )          | (1,509.1 | ) | (853.9 | ) | (191.4 | ) | (45.4 | ) |
|                                                     |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| **Capital Stock (1)**                                    | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Common  shares outstanding – basic (in thousands)   |       | 294,466                     |       | 294,461 |   | 294,456 |   | 294,448 |   | 294,440 |   |
| Common  shares outstanding – diluted (in thousands) |       | 294,466                     |       | 294,461 |   | 294,456 |   | 294,448 |   | 294,450 |   |
| NYSE  Price – High                                  |       | $                           | 141.35     |   | $ | 58.12 |   | $ | 35.30 |   | $ | 27.05 |   | $ | 24.43 |   |
| NYSE  Price – Low                                   |       | $                           | 50.52      |   | $ | 34.65 |   | $ | 20.82 |   | $ | 13.27 |   | $ | 7.21 |   |
| Book  value per share                                    |       | 13.07                       |       | 12.45 |   | 11.30 |   | 9.56 |   | 6.87 |   |
| P/E  ratio                                               |       | 14.05                       |       | 7.79 |   | 7.04 |   | 7.08 |   | 83.11 |   |

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(1)                      Number of shares andvalues per share has been adjusted to reflect the 2006 stock split.

 

 
| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| **Financial Ratios**                    | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross  margin (2)                       |       | 59.7                        | %          | 58.0 | % | 53.2 | % | 50.7 | % | 25.8 | % |
| Operating  income margin (3)            |       | 57.5                        | %          | 55.9 | % | 50.6 | % | 47.9 | % | 20.7 | % |
| Net  margin (4)                         |       | 36.4                        | %          | 37.3 | % | 34.2 | % | 31.7 | % | 5.3 | % |
| Current  assets to current liabilities  |       | 2.84                        |       | 2.84 |   | 2.15 |   | 1.70 |   | 1.88 |   |
| Net  debt (5)/totalCapitalization (6)   |       | 1.0                         | %          | 12.1 | % | 8.2 | % | 18.0 | % | 39.5 | % |
| Ratio  of Earnings to Fixed charges (7) |       | 25.4                        | x          | 27.2 | x | 17.8 | x | 12.6 | x | 2.7 | x |

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(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 netearnings divided by sales as a percentage.

(5)                      Net debt is definedas total debt minus cash and cash equivalents balance.

(6)                      Represents net debtdivided by net debt plus stockholders’ equity.

(7)                      Represents earningsdivided by fixed charges.  Earnings aredefined as earnings before income taxes, minority interest and cumulativeeffect of change in accounting principle, plus fixed charges and amortizationof interest capitalized, less interest capitalized.  Fixed charges are defined as the sum ofinterest expense and interest capitalized, plus amortized premiums, discountsand capitalized expenses related to indebtedness.

 

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Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

# EXECUTIVE SUMMARY

 

*This Management’s Discussion andAnalysis of Financial Condition and Results of Operations relates to and shouldbe read together with our Audited Consolidated Combined Financial Statements asof and for each of the years in the three-year period ended December 31,2007.  Effective April 1, 2005,Southern Copper Corporation acquired substantially all of the outstandingcommon stock of Minera Mexico.  Theacquisition was accounted for in a manner similar to a pooling of interests asit involved the reorganization of entities under common control.  Under such accounting, the financialstatements of SCC and Minera Mexico are combined on a historical cost basis forall the periods presented since they were under the indirect common control ofGrupo Mexico during such periods. Therefore, unless otherwise noted, the discussion below of our financialcondition and results of operations is for us, including our Minera Mexicosubsidiary, on a consolidated or combined basis for all periods.  Our combined financial results may not beindicative of the results of operations that actually would have been achievedhad the acquisition of Minera Mexico taken place at the beginning of theperiods presented and do not purport to be indicative of our future results.*

 

*This discussion containsforward-looking statements that are based on management’s current expectations,estimates and projections about our business and operations.  Our actual results may differ materially fromthose currently anticipated and expressed in the forward-looking statements asa result of a number of factors.  See “CautionaryStatements.”*

 

OVERVIEW

 

Our business is primarily the production and saleof copper.  In the process of producingcopper, a number of valuable metallurgical by-products are recovered, such asmolybdenum, 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 improveprofitability.  We believe we achievethese goals through capital spending programs, exploration efforts and costreduction programs.  Our aim is to remainprofitable during periods of low copper prices and to maximize financialperformance in periods of high copper prices.

 

A number of events andresults highlight our Company’s 2007 year. Net sales were $6,085.7 million an 11.5% increase over 2006,additionally, net earnings were $2,216.4 million, an increase of 8.8% over2006, both sales and net earnings are the highest in the Company history.  These increases were achieved while three ofour Mexican properties, Cananea, San Martin and Taxco, were on strike from July 30through the end of the year.  We estimatethat these strikes cost the Company 178.4 million pounds of copper and 25.6million pounds of zinc, and reduced 2007 operating income by $487.5million.  Since January 11, 2008 theCananea mine is open and is preparing to gradually resume normal operations inthe near future.  The mine was reopenedbased on a ruling by the labor authorities who declared the strike illegal.Subsequently, the Cananea union obtained an injunction from a federal judgepreventing the Company from firing workers who do not return to workimmediately, the same judge did explicitly safeguard the rights of any workerwho wished to return to work at the mine and the right of the Company toconduct operations in the ordinary course of business.  The ruling declaring the illegality of theCananea strike was challenged before a federal judge who upheld the union’scase on February 14, 2008.  The Companywill appeal this unfavorable ruling.  TheCompany expects that it will take about three months to return to fullproduction at Cananea.

 

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Earnings and sales in2007 increased because of higher average metal prices for most of our products,copper was 4.2% to 5.9% higher in 2007, depending on whether it was priced on theCOMEX or LME market, the molybdenum price was 22.7% higher and silver was 16%higher.  Of our other significantby-products only zinc prices were lower in 2007 and, in that case, by1.3%.  The Cananea strike resulted in adecrease in copper, zinc and silver sales volumes.  However, during this year there was anincrease in the volume of molybdenum sales. Molybdenum production and sales volume increased in 2007 due to highergrades at our Peruvian mines and from an increase in production from the LaCaridad mine, which suffered strike losses in 2006.  Another factor effecting the improvement in2007 sales and net income was the impact of the derivative metal contractswhich reduced net sales and operating income in 2006 by $276.1 million andincreased net sales and operating income by $10.9 million in 2007.

 

During 2007 we announceda modification to our capital investment program to prioritize majorinvestments in Peru.  These investmentsinclude the Tia Maria SX/EW copper project in Arequipa, Peru, expansions of theToquepala and Cuajone concentrators and the expansion of the smelter andrefinery in Ilo, Peru.  We estimate thatthese investments will have a capital cost of $2,108 million and increase ourannual copper production by 270,000 tons in 2011.  Feasibility studies indicate a resource of638 million tons of mineralized material at Tia Maria with an average coppergrade of 0.39%.

 

We discuss below several matters that ourmanagement believes are important to understand our results of operations andfinancial condition.  These mattersinclude (i) our “operating cash costs” as a measure of our performance, (ii) metalsprices, (iii) our acquisition of Minera Mexico, (iv) our businesssegments and (v) the effects of inflation and other local currency issues.

 

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 operation in Mexico.  Please see “MineraMexico Acquisition.”

 

 

Operating Cash Costs

 

An overall benchmark used by us and a commonindustry metric to measure performance is operating cash costs per pound ofcopper produced.  Operating cash cost isa non-GAAP measure that does not have a standardized meaning and may not becomparable to similarly titled measures provided by other companies.  A reconciliation of our operating cash costper pound to the cost of sales (including depreciation, amortization anddepletion) as presented in the consolidated combined statement of earnings ispresented under the subheading, “Non-GAAP Information Reconciliation,”below.  We have defined operating cashcost per pound as cost of sales (including depreciation, amortization anddepletion); plus selling, general and administrative charges, treatment andrefining charges; less by-products revenue and sales premiums, depreciation,amortization and depletion, workers’ participation and other miscellaneouscharges, including the Peruvian royalty charge and the change in inventorylevels; divided by total pounds of copper produced and purchased by us.  In our calculation of operating cash cost per

 

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pound of copper produced, we credit against our coststhe revenues from the sale of by-products, principally molybdenum, zinc andsilver and the premium over 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 cashcost depreciation, amortization and depletion, which are considered non-cashexpenses.  Exploration is considered adiscretionary expenditure and is also excluded. Workers’ participation provisions are determined on the basis of pre-taxearnings and are also excluded. Additionally excluded from operating cash costs are items of anon-recurring nature, the royalty charge and in periods prior to 2006 theportion of our mine stripping costs that we capitalized.

 

Our operating cash costs per pound, as defined,are presented in the table below for the three years ended December 31,2007.  We present cash costs with andwithout the inclusion of by-product revenues.

 
| ** **                                                                                   | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                   | ** ** | **(dollars per pound)** | ** ** |
| Operating cash  cost per pound of copper produced and purchased                              |       | $                       | (0.167     | )        | $          | 0.159    |       | $ | 0.030 |   |
| Operating cash  cost per pound of copper produced and purchased (without by-product revenue) |       | $                       | 1.401      |     | $          | 1.283    |       | $ | 1.009 |   |

 

Thedecrease in the cash costs per pound of copper produced and purchased(including by-product revenue) in 2007 is mainly attributable to higher marketprice and volume of molybdenum in 2007. The credit for molybdenum sales amounted to $0.849 per pound, $0.420 perpound and $0.617 per pound, in 2007, 2006 and 2005, respectively.  The credit to the cost for zinc sales amountedto $0.337 per pound, $0.374 per pound and $0.126 per pound in 2007, 2006 and2005, respectively.  The credit tooperating cash cost for the by-product revenue in 2007 reduced cash cost by$1.568 per pound, an increase in benefit of $0.444 per pound over 2006.  The improved benefit is almost entirely dueto molybdenum revenue, which accounted for $0.429 per pound of theimprovement.  The reason for the addedbenefit from molybdenum revenues in 2007 is attributable to both higher salesvolume and higher sales price.  Volumesimproved because of better grades at our Peruvian mines and higher production,an increase of 8.1 million pounds from La Caridad in Mexico, which hadsignificant strike activity in 2006. Molybdenum prices were 22.7% higher in 2007.  The credit to operating cash cost in 2006improved over 2005 by $0.145 per pound and was principally caused byimprovements in the sales price of zinc and silver, reduced somewhat by adecrease in the sales price of molybdenum.

 

Thecash cost without by-product revenue increased in 2007 principally as a resultof the following factors, higher production cost (mainly power, water, laborand repair costs) which increased our cash cost by $0.158, higher freight andtreatment charges due to the sale of concentrates which increased cost by$0.065 and also an increase of $0.031 in unit cost due to strikes at some ofour Mexican operations.  These increaseswere partially offset by a decrease in the purchase of outside metal, whichreduced cost by $0.118.  The cash costwithout by-product revenue increased in 2006 as a result of costincreases.  The increasingly highercopper prices in 2006 increased our computation 

 

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ofcash cost, as we include in our calculation the cost of purchased metal.  The higher value and thus the higher cost ofcopper in 2006 increased our cash cost by $0.240 in 2006.  Significant strike activity at some of ourMexican properties required us to purchase larger quantities of third party copperin 2006.  Also the cost of fuel products,electricity and other supplies increased in 2006.  Additionally, our operating cash costsincreased in 2006 as a result of the EITF consensus, which we adopted on January 1,2006 and is described below under “Critical Accounting Policies andEstimates-Capitalized Mine Stripping Costs.” If we had applied this consensusin 2005 our per pound operating cash cost would have increased by $0.023.

 

Metals Prices

 

The profitability of our operations is dependenton, and our financial performance is significantly affected by, theinternational market prices for the products we produce, especially for copper,molybdenum, zinc and silver.  Metalsprices historically have been subject to wide fluctuations and are affected bynumerous factors beyond our control. These factors, which affect each commodity to varying degrees, includeinternational economic and political conditions, levels of supply and demand,the availability and cost of substitutes, inventory levels maintained byproducers and others and, to a lesser degree, inventory carrying costs andcurrency exchange rates.  In addition,the market prices of certain metals have on occasion been subject to rapidshort-term changes due to speculative activities.

 

We are subject to market risks arising from thevolatility of copper and other metals prices. Assuming that expected metal production and sales are achieved, that taxrates are unchanged and giving no effects to potential hedging programs, metalprice sensitivity factors would indicate the estimated change in net earningsresulting from metal price changes in 2008 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)                               |       | $          | 7.6        |           | $          | 19.5     |       | $          | 1.4        |   | $ | 8.6 |   |

 

 

Minera Mexico Acquisition

 

In April, 2005, we acquired Minera Mexico from asubsidiary of Grupo Mexico, our controlling stockholder.  At the time of the acquisition Minera Mexicowas the largest mining company in Mexico and the eleventh largest copperproducer in the world on a stand-alone basis. We exchanged 67.2 million newly-issued shares of our common stock forthe outstanding shares of Minera Mexico’s direct majority stockholder, andMinera Mexico became our 99.1% owned subsidiary.  As a part of this transaction, on March 1,2005, we paid a special transaction dividend of $100 million to all of ourstockholders.  Upon completion of themerger, Grupo Mexico increased its indirect beneficial ownership of our capitalstock from approximately 54.2% to approximately 75.1%.  In October 2005, in another transactionwe acquired 6.4 million shares of Minera Mexico from Grupo Mexico for $30.3million.  This increased our holdings inMinera Mexico to 99.95%.  With thisacquisition, based on the then current data, we increased our total copperreserves by over 100% and increased our annual copper production byapproximately 80%.

 

# BusinessSegments

 

Company management viewsSouthern Copper as having three operating segments and 

 

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manages on the basis ofthese segments.  The significant increasein the price of molybdenum over the past three years has had an importantimpact on the Company’s earnings. Nevertheless, the Company continues to manage its operations on thebasis of three copper segments.  Thesesegments are our Peruvian operations, our Mexican open-pit operations and ourMexican underground operations, known as our IMMSA unit.  Our Peruvian operations include the Toquepalaand Cuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.  Our Mexican open-pit operations include LaCaridad and Cananea mine complexes, the smelting and refining plants andsupport facilities which service both mines. Our IMMSA unit includes five underground mines that produce zinc, lead,copper, silver and gold, a coal mine, and several industrial processingfacilities for zinc, copper and silver.

 

Segmentinformation is included in our review of “Results of Operations” and also inNote 20 of our Consolidated Combined Financial Statements.

 

 

Inflation and Devaluation of thePeruvian Nuevo Sol and the Mexican Peso

 

Our functional currency is the U.S. dollar.  Portions of our operating costs aredenominated in Peruvian nuevos soles and Mexican pesos.  Since our revenues are primarily denominatedin U.S. dollars, when inflation/deflation in Peru or Mexico is not offset by achange in the exchange rate of the nuevo sol or the peso, respectively, to thedollar, our financial position, results of operations and cash flows could beadversely affected to the extent that the inflation/devaluation effects arepassed onto us by our suppliers or reflected in our wage adjustments.  In addition, the dollar value of our 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,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Peru                                              |       |                             |       |   |   |   |   |
| Peruvian  inflation rate                          |       | 3.9                              | %          | 1.1 | % | 1.5 | % |
| Nuevo sol/dollar  (appreciation)/devaluation rate |       | (6.3                             | )%         | (6.8 | )% | 4.5 | % |
| Mexico                                            |       |                             |       |   |   |   |   |
| Mexican  inflation rate                           |       | 3.8                              | %          | 4.1 | % | 3.3 | % |
| Peso/dollar  (appreciation)/devaluation rate      |       | (0.1                             | )%         | 1.5 | % | (4.9 | )% |

 

 

Capital Expansion Program

 

We made capital expenditures of $315.7 million,$455.8 million and $470.6 million in 2007, 2006 and 2005, respectively, and weexpect to make capital expenditures, of approximately $530.0 million in2008.  In general, the capitalexpenditures and projects described below are intended to contribute to furthervertical integration of our operations by increasing the capacity forproduction of refined metal products.

 

The Company expects to meet the cash requirementsfor these projects from cash on hand, internally generated funds and fromadditional external financing if required.

 

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The table below setsforth our capital expenditures for the years ended December 31, 2007, 2006and 2005:

 
| ** **                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(dollars in millions)**        | ** ** |
| Projects                                                                    |       |                             |       |   |   |   |   |
| Ilo smelter modernization                                                   |       | $                                | 21.0       |   | $ | 160.9 |   | $ | 234.6 |   |
| Cuajone ball mill                                                           |       | 10.0                             |       | 0.4 |   | — |   |
| Toquepala crushing, conveying system for leach  material                    |       | 2.0                              |       | 3.3 |   | 32.8 |   |
| Toquepala copper filter                                                     |       | —                           |       | — |   | 2.2 |   |
| Tailings disposal - Quebrada  Honda dam                                     |       | 13.8                             |       | 2.5 |   | — |   |
| Cuajone leaching pad                                                        |       | 1.4                              |       | 2.4 |   | — |   |
| PLS dams at Huanuquera                                                      |       | 10.5                             |       | 15.6 |   | 9.1 |   |
| La Francisca leaching dam                                                   |       | —                           |       | — |   | 7.5 |   |
| La Caridad tailings dam - internal dikes                                    |       | 2.1                              |       | 3.4 |   | — |   |
| Metallurgical laboratory - La Caridad                                       |       | 1.8                              |       | — |   | — |   |
| La Caridad gas handling system                                              |       | 12.2                             |       | 4.7 |   | — |   |
| La Caridad acid plant  upgrade                                              |       | —                           |       | 1.0 |   | 4.9 |   |
| La Caridad Vertical lime  kiln                                              |       | 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  |       | 21.5                             |       | 7.2 |   | — |   |
| Nueva Rosita coke furnaces                                                  |       | —                           |       | 3.5 |   | 7.5 |   |
| San Martin underground shaft                                                |       | —                           |       | 2.6 |   | 1.0 |   |
| La Caridad tailings dam growth - Concentrator                               |       | 1.9                              |       | — |   | — |   |
| Santa Barbara Segovedad II mine expansion and  conveyor and main substation |       | 3.7                              |       | 0.8 |   | — |   |
| Total project expenditures                                                  |       | 108.2                            |       | 211.5 |   | 299.6 |   |
|                                                                        |       |                             |       |   |   |   |   |
| Replacement capital expenditures:                                           |       |                             |       |   |   |   |   |
| Mexico                                                                      |       | 139.0                            |       | 176.1 |   | 127.8 |   |
| Peru                                                                        |       | 68.5                             |       | 68.2 |   | 43.2 |   |
| Total replacement expenditures                                              |       | 207.5                            |       | 244.3 |   | 171.0 |   |
| Total capital expenditures                                                  |       | $                                | 315.7      |   | $ | 455.8 |   | $ | 470.6 |   |

 

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

 

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.  The new smelter maintains production atcurrent levels.  The nominal and designcapacity for the new Isasmelt furnace was reached in less than 45 days;compared with other smelting furnaces using this technology, the start-up ofthe Ilo smelter was achieved in the shortest time.  Theaverage sulfur capture in 2007 was 95%. Performance tests are pending completion with the two majorcontractors.  These are expected to becompleted in the first quarter 2008.  Thefacility is currently operating at full capacity and we expect to smelt 1.1million tons of concentrates in 2008. The total cost of this project was $ 570.4 million.

 

Toquepala Leach Dump Project: *** ***This project at Toquepala,which includes a crushing, conveying and spreading system at the leach dumps,was completed by year end 2007.  Theconveying system is operating and has positioned 42.5 million tons of wastematerial to build the ramp and has placed 28.5 million tons of leachablematerial.  Total expended 

 

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on this project through December 31,2007 was $80.7 million and it is estimated that $0.4 million will be needed tofinalize this project.

 

Cananea SX/EW Plant: *** ***This project is intended to increaseCananea’s production of copper cathodes with a new SX/EW plant, (SX/EW III)with an annual capacity of 33,000 tons. The plant would produce copper cathodes of ASTM grade 1 or LME gradeA.  The project includes the installationof storage for deliverables required for operation of the plant and theinstallation of an emergency power plant and a fire protection system.  Due to labor problem at Cananea in 2007, thisproject has been temporarily put on hold until we satisfactorily resolve these issues.

 

Gas Handling System: This projectis intended to improve gas capture efficiency and reduce the sulfur dioxideemissions to the atmosphere by the converters and reactor at La Caridad coppersmelter.

 

Cananea crusher and conveyorssystem for leach material: This project includes the installation of a crushingsystem and bands for leach material including a movable stacker with a capacityof 15 million tons of crushing material. We are currently in the third phase of the project.  This phase includes 5,500 meters of bandtransporters and the construction of a 500 meters tunnel to move the materialto the leaching area.

 

Other Expenditures:

 

Tailings disposal at QuebradaHonda: This project will increase the height of the existing Quebrada Honda Damto impound future tailings from the Toquepala and Cuajone mills.  The procurement of the main equipment, withlong fabrication lead-time continues and part of the material has beenreceived.  Construction of the main civilworks and some access roads for the main and lateral dams has been completedand our operations personnel are working on an additional access road.  The first stage of this project will be underdevelopment until 2012.  The total costof this project is estimated to be $66.0 million, with $16.4 million expendedthrough December 31, 2007.

 

The dam project at Huanaquera includes theconstruction of sedimentation, PLS and storm water retention dams for theToquepala leaching facility.  The projectis at the administrative close out stage; all equipment was installed and isoperative.  Total spending on thisproject through December 31, 2007 was $36.6 million and it is estimatedthat $0.5 million will be needed to complete the project.

 

A pre-feasibility study for Los Chancas, acopper-molybdenum property in the southern part of Peru was completed and isbeing evaluated in order to determine our next steps for this project.  Also, we are in the process of formulatingthe necessary program and timeframe to develop our Mexican properties at ElArco in Baja California and Angangueo in Michoacan.

 

Potential Projects:

 

We have a number of projects that we maydevelop in the future.  We evaluate newprojects on the basis of our long-term corporate objectives, expected return,environmental needs, required investment and estimated production, among otherconsiderations.  We have defined three “generations”of capital projects:

 

First generation: Projects that we are planning.

 

This generation includes the development of fiveprojects in Peru (1) the Tia Maria SX/EW copper project, (2) the Toquepalaconcentrator expansion, (3) the Cuajone concentrator expansion, (4) theIlo smelter expansion, and (5) the Ilo copper refinery expansion, with atotal investment of $2,108 million. This investment would permit us to 

 

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increase our copper production by 270,000 tons peryear by 2011, which represents 39% of the current production level.

 

This new investment program replaces theinvestment program previously approved for our Mexican operations, which includeda SX/EW III plant, concentrator expansion and molybdenum circuit at Cananea,the Buena Vista mine, the new Cananea concentrator, and the Guaymas smelter andrefinery.  These projects with a totalinvestment of $2,256 million have been temporarily put on hold.

 

Feasibility studies for the Tia Maria project werefinished with indicative resources of 638 million tons of mineralized materialwith an average copper grade of 0.39%. The Company is conducting a bidding process for basic and detailedengineering as well as preparing to purchase major equipment and selectconstruction management.  The Companyexpects to invest $65 million in this project during 2008.  When completed at the end of 2010, the newoperating unit will produce 120,000 tons of copper cathodes per year.

 

Second generation: Projects that are attractivebut will require significant additional evaluation.

 

This generation includes three greenfieldprojects: El Arco, Angangueo and Los Chancas exploration properties.  We believe that these properties could add306,000 tons of annual copper production, in concentrate and SX/EW copper.  The Company’s Board of Directors will beevaluating the investment in these projects in line with their expectedreturns, the metal market price performance and the operating and capitalcosts.

 

Third generation: This generation includes theCananea, Sonora and Guaymas projects put on hold by our Board of Directors asresult of the strikes in 2007 at some of our Mexican units: the Cananea SX/EWIII, the Cananea concentrator expansion, the Cananea molybdenum circuit, theBuena Vista mine, the new Cananea concentrator, and the Guaymas smelter andrefinery.

 

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

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

** **

Our discussion and analysis of financial conditionand results of operations, as well as quantitative and qualitative disclosuresabout market risks, are based upon our consolidated combined financialstatements, which have been prepared in accordance with U.S. GAAP.  Preparation of these consolidated combinedfinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Management makes its best estimate of theultimate outcome for these items based on historical trends and otherinformation available when the financial statements are prepared.  Changes in estimates are recognized inaccordance with the accounting rules for the estimate, which is typicallyin the period when new information becomes available to management.  Areas where the nature of the estimate makesit reasonably possible that actual results could materially differ from amountsestimated include: ore reserves, revenue recognition, estimated mine strippingratios, leachable material and related amortization, the estimated useful livesof fixed assets, asset retirement obligations, litigation and contingencies,valuation allowances for deferred tax assets, tax positions, fair value offinancial instruments, and inventory obsolescence.  We base our estimates on historicalexperience and on various other 

 

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assumptions that we believe to be reasonable underthe circumstances.  Actual results maydiffer from these estimates under different assumptions or conditions.

 

Ore Reserves:*** ***For purposes of our long-term planning, we use metalprice assumptions of $1.20 per pound for copper and $9.0 per pound formolybdenum.  Prior to 2007, we used $0.90per pound and $5.00 per pound for copper and molybdenum, respectively.  Metal prices over the last ten years and thecontinued positive outlook for these metals have led us to reappraise our viewof prices.  These prices are intended toapproximate average prices over the long term. Ore reserves based on these prices are the basis for our internalplanning, including the preparation of the mine plans for our mines.  Our management uses these price assumptions,as it believes these prices reflect the full price cycle of the metals market.

 

However, pursuant to SEC guidance, the reservesinformation in this report is calculated using average metals prices over themost recent three years, except as otherwise stated.  We refer to these three-year average metalsprices as “current average prices.”  Ourcurrent average prices for copper are calculated using prices quoted by COMEX,and our current average prices for molybdenum are calculated according to *Platt’s**Metals Week*.  Unless otherwise stated, reserves estimatesin this report use $2.66 per pound for copper and $28.99 per pound formolybdenum, both current average prices as of December 31, 2007.  The current average per pound prices forcopper and molybdenum were $2.02 and $24.31, respectively, as of December 31,2006 and $1.26 and $17.82, respectively, as of December 31, 2005.

 

Certain financial information is based on reserveestimates calculated on the basis of current average prices.  This includes amortization of intangibleassets and mine development, and for years prior to 2006 the amount of minestripping that was capitalized and units of production amortization ofcapitalized mine stripping.

 

Leachable Material: At one of our Mexican mines, we capitalize the cost of materials withlow copper content extracted during the mining process (leachable material),which is collected in leach dumps.  Theamortization of the capitalized cost is determined based on the depletionperiod of the leach dumps, which is estimated to be five years.

 

If we were to have expensed all capitalizedleaching costs associated with this mining operation as incurred, net operatingcost would have decreased by $10.1 million for the year 2007 and increased$19.3 million and $68.0 million for the years 2006, and 2005.

 

Asset Retirement Obligation:*** ***Our mining and exploration activities are subject tovarious laws and regulations governing the protection of the environment.  Accounting for reclamation and remediationobligations requires management to make estimates unique to each miningoperation of the future costs we will incur to complete the reclamation andremediation work required to comply with existing laws and regulations.  These estimates are based in part on ourinflation and credit rate assumptions. Actual costs incurred in future periods could differ from amountsestimated.  Additionally, future changesto environmental laws and regulations could increase the extent of reclamationand remediation work required to be performed by us.  Any such increases in future costs couldmaterially impact the amounts charged to operations for reclamation andremediation.

 

We further discuss our AssetRetirement Obligation in Note 10 to our consolidated combined financialstatements included herein.

 

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

 

Deferred Taxes:**In preparing ourconsolidated combined financial statements, we recognize income taxes in eachof the jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount currently payableor receivable as well as deferred tax assets and liabilities attributable totemporary differences between the financial statement carrying amounts ofexisting 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 through the income taxprovision in the period that the change is enacted.

 

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

 

Asset Impairments: We evaluate our long-termassets when events or changes in economic circumstances indicate that thecarrying amount of such assets may not be recoverable.  Our evaluations are based on business plansthat are prepared using a time horizon that is reflective of our expectationsof metal prices over our business cycle. We are currently using a long-term average copper price of $1.80 per poundof copper and an average molybdenum price of $12.00 per pound, along withnear-term price forecast, for 2008 through 2010, reflective of the currentprice environment, for our impairment tests. We use an estimate of the future undiscounted net cash flows of therelated asset or asset group over the remaining life to measure whether theassets are recoverable and measure any impairment by reference to fairvalue.  Should estimates of future copperand molybdenum prices decrease significantly, impairments could result.

 

Provisionally Priced Sales

 

The following are the provisionally priced copperand molybdenum sales outstanding at December 31, 2007, 2006 and 2005:

 

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| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| **Provisionally Priced Sales** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Copper                         |       |                             |       |   |   |   |   |
| Millions of  pounds            |       | 165.9                            |       | 169.9 |   | 163.7 |   |
| Priced at (per  pound)         |       | $                                | 3.03       |   | $ | 2.87 |   | $ | 2.04 |   |
| Molybdenum                     |       |                             |       |   |   |   |   |
| Millions of  pounds            |       | 4.7                              |       | 7.3 |   | 6.1 |   |
| Priced at (per  pound)         |       | $                                | 32.38      |   | $ | 24.50 |   | $ | 25.00 |   |

 

Provisional sales adjustments included in accountsreceivable and net sales at December 31, 2007, 2006 and 2005 were asfollows:

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Provisional Sales Adjustments** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(dollars  in millions)**       | ** ** |
| Copper                            |       | $                                | (42.0      | ) | $ | (47.3 | ) | $ | 7.9 |   |
| Molybdenum                        |       | —                           |       | (11.5 | ) | (39.2 | ) |
| **Total**                         |       | $                                | (42.0      | ) | $ | (58.8 | ) | $ | (31.3 | ) |

 

During the month of January 2008,the market price of copper and molybdenum increased.  The effect of these changes on 2007 salessettling in January 2008 was an increase of $3.3 million in sales.  Additionally, forward prices for copper as ofJanuary 31, 2008 also increased, the effect of this increase on 2007 opensales settling after January 2008 would be an increase of $33.2 million insales.

 

Results of Operations

 

The following table highlights key financialresults for each of the years in the three-year period ended December 31,2007.

 

| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Statement of Earnings Data**                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(dollars in millions)**        | ** ** |
|                                                                   |       |                             |       |   |   |   |   |
| Net sales                                                              |       | $                                | 6,085.7    |   | $ | 5,460.2 |   | $ | 4,089.1 |   |
| Cost of sales (exclusive of depreciation,  amortization and depletion) |       | (2,122.2                         | )          | (2,019.8 | ) | (1,635.4 | ) |
| Selling, general and administrative                                    |       | (98.0                            | )          | (88.3 | ) | (81.1 | ) |
| Depreciation, amortization and depletion                               |       | (327.9                           | )          | (275.1 | ) | (277.2 | ) |
| Exploration                                                            |       | (40.2                            | )          | (22.7 | ) | (24.4 | ) |
|                                                                   |       |                             |       |   |   |   |   |
| Operating income                                                       |       | 3,497.4                          |       | 3,054.3 |   | 2,071.0 |   |
| Interest expense                                                       |       | (123.2                           | )          | (113.4 | ) | (108.9 | ) |
| Interest capitalized                                                   |       | 14.7                             |       | 27.9 |   | 22.5 |   |
| Interest income                                                        |       | 82.5                             |       | 50.2 |   | 30.8 |   |
| Loss on debt prepayments                                               |       | (16.6                            | )          | (1.1 | ) | (10.6 | ) |
| (Loss) gain on derivative instruments                                  |       | (73.7                            | )          | (11.6 | ) | 1.1 |   |
| Other income (expense)                                                 |       | 30.8                             |       | (0.3 | ) | (3.6 | ) |
| Income taxes                                                           |       | (1,185.3                         | )          | (959.1 | ) | (589.7 | ) |
| Minority interest                                                      |       | (10.2                            | )          | (9.3 | ) | (12.5 | ) |
| Net earnings                                                           |       | $                                | 2,216.4    |   | $ | 2,037.6 |   | $ | 1,400.1 |   |

 

The table below outlines the average publishedmarket metals prices (rounded to the nearest cent) for our metals for each ofthe years ended December 31, 2007, 2006 and 2005:

 

88

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**Average Market Metals Prices**

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** | **% Change** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **2005** | ** ** | **2006 to 2007** | ** ** | **2005 to 2006** | ** ** |
| Copper price ($ per pound — LME)   |       | $                                | 3.23       |         | $          | 3.05 |   | $ | 1.67 |   | 5.9 | % | 82.6 | % |
| Copper price ($ per pound — COMEX) |       | $                                | 3.22       |         | $          | 3.09 |   | $ | 1.68 |   | 4.2 | % | 83.9 | % |
| Molybdenum price ($ per pound)(1)       |       | $                                | 29.91      |         | $          | 24.38 |   | $ | 31.05 |   | 22.7 | % | (21.5 | )% |
| Zinc price ($ per pound — LME)     |       | $                                | 1.47       |         | $          | 1.49 |   | $ | 0.63 |   | (1.3 | )% | 136.5 | % |
| Silver price ($ per ounce — COMEX) |       | $                                | 13.39      |         | $          | 11.54 |   | $ | 7.32 |   | 16.0 | % | 57.7 | % |

----

(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 31,2007:

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper Sales (million pounds)** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                             |       |   |   |   |   |
| Peruvian operations               |       | 863.4                            |       | 860.9 |   | 825.3 |   |
| Mexican open-pit                  |       | 512.0                            |       | 594.8 |   | 768.8 |   |
| Mexican IMMSA unit                |       | 30.9                             |       | 36.4 |   | 93.1 |   |
| Intersegment elimination          |       | (75.8                            | )          | (105.9 | ) | (147.2 | ) |
| Total copper sales                |       | 1,330.5                          |       | 1,386.2 |   | 1,540.0 |   |

 

| ** **                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **By-product Sales (million  pounds, except silver****—****million ounces)** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Peruvian operations:                                                              |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                              |       | 21.9                             |       | 20.6 |   | 23.4 |   |
| Zinc-refined and  in concentrate (1)                                              |       | 40.3                             |       | 49.6 |   | — |   |
| Silver                                                                            |       | 4.9                              |       | 5.6 |   | 4.2 |   |
|                                                                              |       |                             |       |   |   |   |   |
| Mexican open-pit operations:                                                      |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                              |       | 14.0                             |       | 5.0 |   | 8.8 |   |
| Zinc-refined and  in concentrate (1)                                              |       | —                           |       | 15.5 |   | 108.9 |   |
| Silver                                                                            |       | 3.6                              |       | 4.5 |   | 7.2 |   |
|                                                                              |       |                             |       |   |   |   |   |
| IMMSA unit                                                                        |       |                             |       |   |   |   |   |
| Zinc-refined and  in concentrate                                                  |       | 250.6                            |       | 273.1 |   | 288.7 |   |
| Silver                                                                            |       | 10.7                             |       | 12.0 |   | 11.5 |   |
|                                                                              |       |                             |       |   |   |   |   |
| Intersegment elimination                                                          |       |                             |       |   |   |   |   |
| Zinc                                                                              |       | (39.1                            | )          | (57.1 | ) | (103.4 | ) |
| Silver                                                                            |       | (0.9                             | )          | (2.3 | ) | (3.1 | ) |
|                                                                              |       |                             |       |   |   |   |   |
| Total by-product sales                                                            |       |                             |       |   |   |   |   |
| Molybdenum  contained in concentrate                                              |       | 35.9                             |       | 25.6 |   | 32.2 |   |
| Zinc-refined and  in concentrate                                                  |       | 251.8                            |       | 281.1 |   | 294.2 |   |
| Silver                                                                            |       | 18.3                             |       | 19.8 |   | 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.

 

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

 

***Netsales***

 

Our sales in 2007 were $6,085.7 million, compared with $5,460.2 millionin 2006, an increase of $625.5 million or 11.5%.  The increase was attributable to highermarket prices for most of our products. Copper was 4.2% to 5.9% higher in 2007, depending on whether it was COMEXor LME market, the molybdenum price was 22.7% higher and silver was 16%higher.  Zinc prices decreased by 1.3% in2007.  In addition, molybdenum salesvolume increased 40.2% in 2007 due to higher grades at our Peruvian mines andincreased production from the La Caridad mine which had strike losses in2006.  2007 net sales also include a$10.9 million gain on copper derivatives compared with a loss of $276.1 millionin 2006. There was, however, a decrease in copper sales volume in 2007 due to astrike at the Cananea mine.

 

Sales volume for copper decreased by 55.7 million pounds in 2007 adecrease of 4% compared with 2006.  Theimpact of this decrease in copper sales volume, as well as a volume decrease inthe sale of zinc and silver was a result of the strikes at some of our Mexicanoperations.  However, during this year there was an increase in the volume ofmolybdenum sales.

 

The table below presents information regarding thevolume of our copper sales 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 million poundsin 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 Ilo smelter.

 

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 comparedwith 76.0% in 2006.  Sales of by-productsin 2007 totaled $1,856.9 million compared with $1,313.1 million in 2006, anincrease of 41.4%.  The increase isprincipally attributable to the increase in the 

 

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volume and sales prices for molybdenum.  This increase was partially reduced by lowervolume and sales prices for zinc.  Thetable below provides the sales of our by-products as a percentage of our totalnet sales.

 

| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| **By-product Sales as a  Percentage of Total Net Sales** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Molybdenum                                               |       | 17.8                             | %          | 10.5 | % |
| Zinc                                                     |       | 5.9                              | %          | 7.1 | % |
| Silver                                                   |       | 3.8                              | %          | 4.1 | % |
| Other by-products                                        |       | 3.0                              | %          | 2.3 | % |
| **Total**                                                |       | 30.5                             | %          | 24.0 | % |

 

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

 

Our cost of sales (exclusive of depreciation, amortization anddepletion) in 2007 was $2,122.2 million, compared with $2,019.8 million in2006, an increase of $102.4 million, or 5.1%. The increase in cost of sales was principally due to $132.0 million ofhigher production cost, including, $21.7 million due to higher fuel and powercost, $15.5 million of higher water cost at our Mexican operations due to anincrease in the water rate applicable to the mining industry, $14.8 million ofhigher labor costs, $24.9 million of higher repair costs, and $55.1 million ofother operating costs offset by $146.8 million of lower metal purchased fromthird parties.  The increase in cost ofsales also includes $32.3 million of higher freight and selling cost mainly dueto higher sale of concentrates, $27.1 million of inventory consumption and$39.4 million of higher workers participation.

 

***Selling,general and administrative***

 

Our selling, general and administrative expense in2007 was $98.0 million, compared with $88.3 million in 2006, an increase of$9.7 million.  The increase wasprincipally due to higher labor costs of $6.4 million and $2.5 million ofhigher rental equipment and office maintenance cost at our Mexican corporateoffice.

 

***Depreciation,amortization and depletion***

 

Depreciation, amortization and depletion was$327.9 in 2007 compared with $275.1 million in 2006, an increase of $52.8million over 2006.  The increase includesadditional charges of $24.4 million at our Peruvian operations, of which $21.7million was for 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 millioncompared with $22.7 million in 2006, an increase of $17.5 million over2006.  This increase includes $11.8million at our Peruvian operations, and was principally for the Tia Mariaproject in the department of Arequipa, where spending increased by $9.2million.  A feasibility study for theproject was completed 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.

 

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***Interestexpense***

 

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

 

***Capitalizedinterest***

 

Capitalized interest in 2007 was $14.7 million,compared with $27.9 million in 2006, a decrease of $13.2 million.  This decrease is largely due to the startupof the Ilo smelter modernization project in early 2007, for which wecapitalized $14.0 million less interest in 2007.

 

***Interestincome***

 

Interest income in 2007 was $82.5 million,compared with $50.2 million in 2006, an increase of $32.3 million.  Our interest income increased principally asa result of higher interest rates on short term securities and higher investedbalances.

 

***Losson debt prepayments***

 

Loss on debt prepayments in 2007 was $16.6million, compared with $1.1 million in 2005, an increase of $15.4 million.  Losses in both periods are related to therepurchase of our Mexican Yankee bonds.

 

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

 

Loss on derivative instruments in 2007 was $73.7million, compared with a loss of $11.6 million in 2006.  Gain or losses on copper and other metalderivatives are included in the net sales line and gain or losses on gasderivatives are included in the cost of sales line of the consolidated combinedstatement of earnings.  The (loss) gainon derivative instruments in 2007 and 2006 includes $81.0 million and $11.6million of loss on the embedded derivatives on short-term investment,respectively.  Also the 2007 (loss) gainon derivative instruments includes $1.3 million of loss on dual currency notesand 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 our ConsolidatedCombined Financial Statements.

 

***Otherincome (expense)***

 

Other income in 2007 was $30.8 million, comparedwith an expense of $0.3 million in 2006. The increase in income is primarily attributable to $12.4 million ofgain on the sale of an inactive Mexican subsidiary, $3.0 million of lower costof disposal of assets, and $10.5 million of lower miscellaneous expenses.

 

***Incometaxes***

 

Income taxes in 2007 were $1,185.3 million and include $1.153.8 millionof Peruvian and Mexican income taxes and $31.5 for U.S. Federal and stateincome taxes.  Income taxes in 2006 were$959.1 million and included $940.3 million of Peruvian and Mexican income taxesand $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).

 

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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.

 

***Minorityinterest***

 

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

 

***Netearnings***

 

Our net earnings in 2007 were $2,216.4 million,compared with $2,037.6 million in 2006, an increase of $178.8 million or8.8%.  Net earnings increased as a resultof the factors described above.

 

**Segment Operating IncomeInformation — 2007 vs.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 |       | (1,541.2   | )          | (1,383.4   | )          | (157.8     | )          | 11.4 | % |
| Operating income             |       | $          | 1,971.7    |       | $          | 1,832.0    |       | $ | 139.7 |   | 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 include a gain on copper derivatives of $5.5 millioncompared with a loss of $162.3 million in 2006.

 

Operating costs andexpenses at our Peruvian operations in 2007 were $1,541.2 million, comparedwith $1,383.4 in 2006, an increase of $157.8 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 increase in salaries andexchange rate effect, $9.6 million of higher fuel and power cost, $37.4 millionof higher freight and selling cost mainly due to the sale of concentrates 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 $1,971.7 million, compared with $1,832.0 million in 2006, an increase of$139.7 million.  The operating incomeincreased as a result of the factors described above.

 

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**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 improvement is the result of the highermolybdenum volume, produced and sold in 2007 and the higher sales price for themolybdenum.  Sales of molybdenum, producedby our La Caridad mine increased from 5.5 million pounds in 2006 to 13.6million pounds in 2007. Significant production and sales of molybdenum werelost in 2006 as La Caridad had a lengthy strike in the first half of theyear.  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 gainon copper derivatives of $5.5 million compared with a loss of $113.9 million in2006.

 

Operating cost andexpenses 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 amountscapitalized 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 onzinc 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 partially offset by $0.9 million of lower metal purchasedfrom third parties.  The increasein depreciation, 

 

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amortization anddepletion of $9.1 million is mainly due to the accelerated depreciation of the processing plant equipment at Pasta deConchos over the remaining mineral located in the open pit after the mineaccident.

 

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.

 

Intersegment Eliminationsand Adjustments

 

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

 

**Results of Operations for theYear Ended December 31, 2006 Compared to Year Ended December 31,2005.**

 

***Netsales***

 

Our sales in 2006 were $5,460.2 million, compared with $4,089.1 millionin 2005, an increase of $1,371.1 million or 33.5%.  The increase was attributable to significantincreases in metal prices in 2006, particularly for copper, which roseapproximately 83%, zinc and silver, which rose 136.5% and 57.7%,respectively.  As a result of a change inour accounting presentation, net sales includes losses on copper derivatives of$276.1 million and $23.5 million in 2006 and 2005, respectively, and $0.2million on zinc derivatives in 2006.

 

Sales volumes for copper declined by 153.8 million pounds in 2006 adecrease of 10% compared with 2005.  Thisdecrease in copper sales volume, as well as a decrease in the volume of zincand molybdenum sold, reduced, somewhat, the sales price increase.

 

The table below presents information regarding thevolume of our copper sales products.

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Copper Sales (million pounds)** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Refined                           |       | 835.0                            |       | 817.3 |   |
| Blister                           |       | 43.9                             |       | 110.3 |   |
| Anode                             |       | 29.9                             |       | — |   |
| Concentrates                      |       | 56.0                             |       | 14.2 |   |
| SX/EW                             |       | 210.9                            |       | 267.4 |   |
| Rod                               |       | 210.5                            |       | 330.8 |   |
| **Total**                         |       | 1,386.2                          |       | 1,540.0 |   |

 

Mine copper production was 1,335.2 millionpounds in 2006, a decrease of 12.2% from 2005. This decrease of 185.8 million pounds included a decrease of 190.5million pounds from the Mexican open pit operations, 4.9 million pounds in theMexican underground mines and an increase of 9.6 million pounds from thePeruvian mines.  The decrease of 190.5million pounds in the Mexican open pit mines was principally the result of the125 day strike at La Caridad mine and 47 days of strike at the Cananeamine.  The decrease of 4.9 million poundsin the Mexican underground mines was due to lower ore grades.  The increase of 9.6 million pounds inproduction from the Peruvian mines was principally due to higher ore grade andrecovery in the Cuajone mine.

 

Molybdenum production decreased 19.9% from 32.6million pounds in 2005 to 26.1 million pounds in 2006.  This decrease in production includes 3.7million pounds from La 

 

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Caridad due to the strike activity and 2.8million pounds from our Peruvian operations mainly due to lower ore grade andrecovery at the Cuajone mine.

 

Mine zinc production amounted to 301.1 millionpounds in 2006, a decrease of 15.5 million pounds or 4.9% from 2005.  This decrease was the result of lowerproduction at three of IMMSA’s zinc mines. Lower ore grades at Charcas and Santa Barbara and reduced throughput atSan Martin were the prime reasons for the lower production.  Production increases at two of the otherIMMSA mines, Taxco and Santa Eulalia, somewhat reduced the productionlosses.  The decrease in throughput atSan Martin was caused by a 77-day strike in the first half of 2006.  The increases in throughput at Taxco andSanta Eulalia were caused by increased operating days at Taxco, 15 days werelost due to strike in 2005, and the increase at Santa Eulalia was caused asproduction ramped up after a prolonged shutdown.  Santa Eulalia restarted operations at the endof 2004 after a three-year shutdown.

 

A fire at the San Luis Potosi zinc refinery inthe first quarter of 2006, reduced refined zinc production in 2006; we were,however, able to sell zinc concentrates on favorable terms until the refinerywas fully operational, which occurred by the end of the third quarter of 2006.

 

Copper made up 76.0% of net sales in 2006 comparedwith 66.4% in 2005.  Sales of by-productsin 2006 totaled $1,313.1 million compared with $1,373.6 million in 2005, adecrease of 4.4%.  The decrease isprincipally attributable to the decrease in the volume and sales prices formolybdenum.  The decrease in molybdenumwas to a great extent reduced by the improved prices for zinc and silver, whichincreased by 136.5% and 57.7%, respectively. 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** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Molybdenum                                               |       | 10.5                             | %          | 22.7 | % |
| Zinc                                                     |       | 7.1                              | %          | 4.9 |   |
| Silver                                                   |       | 4.1                              | %          | 3.6 |   |
| Other by-products                                        |       | 2.3                              | %          | 2.4 |   |
| **Total**                                                |       | 24.0                             | %          | 33.6 | % |

 

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

 

Our cost of sales (exclusive of depreciation, amortization anddepletion) in 2006 was $2,019.8 million, compared with $1,635.4 million in2005, an increase of $384.4 million, or 23.5%. The principal element of the cost of sales increase is the higher valueof copper purchased in 2006 which increased our cost of sales by $280.6 millionover 2005.  Cost of sales in 2006 alsohad an increase of $23.9 million in Peruvian mining royalties and an increaseof $52.4 million in workers’ participation. In addition, cost of sales also increased in 2006 due to the requirementof EITF 04-6 which prohibits the capitalization of mine stripping costs at ouroperating mines. As such, this cost is now included in cost of sales.  The practice of capitalizing mine strippingcost in 2005 reduced cost of sales by approximately $35.0 million.

 

***Selling,general and administrative***

 

Our selling, general and administrative expense in2006 was $88.3 million, compared with $81.1 million in 2005, an increase of$7.2 million, $5.2 million of which was in our Mexican operations.  The Mexican increase is principally due tohigher labor costs of $4.4 million and higher professional fees of $1.7million.

 

96

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***Depreciation,amortization and depletion***

 

Our depreciation, amortization and depletionexpense in 2006 was $275.1 million, compared with $277.2 million in 2005, adecrease of $2.1 million.  The decreasewas due to the change in accounting for mine stripping cost.  Depreciation, amortization and depletion in2005, included amortization of $67.6 million of capitalized minestripping.  A 2006 increase in depreciationrelated to replacement capital expenditures reduced the impact of theaccounting change.

 

***Exploration***

 

Exploration expense in 2006 was $22.7 million,compared with $24.4 million in 2005, a decrease of $1.7 million.  The decrease was principally as a result of$2.3 million of lower drilling activities in our Mexican operations, mainly atLa Caridad due to strikes, $1.2 million of higher investment at Coimolache andTantahuatay projects net of a decrease of $0.7 million in drilling cost at theTia Maria project in Peru.

 

***Interestexpense***

 

Interest expense in 2006 was $113.4 millioncompared with $108.9 million in 2005, an increase of $4.5 million.  Our currently paid interest expense increasedin 2006 principally as a result of an increase in our debt outstanding.  However, included in 2005 there was $15.0million for the write-off of previously capitalized debt issuance cost forfinancings prepaid in such years.  Withrespect to our financing programs reference is made to “Liquidity and CapitalResources” for a further discussion of this matter.

 

***Capitalizedinterest***

 

Capitalized interest in 2006 was $27.9 million,compared with $22.4 million in 2005, an increase of $5.4 million.  This increase is largely due to the Ilosmelter modernization project, on which we capitalized $5.0 million more thanin 2005.

 

***Interestincome***

 

Interest income in 2006 was $50.2 million,compared with $30.8 million in 2005, an increase of $19.4 million.  Our interest income increased principally asa result of higher interest rates on short term securities and significantlyhigher invested balances.

 

***Losson debt prepayments***

 

Loss on debt prepayments in 2006 was $1.1 million,compared with $10.6 million in 2005, a decrease of $9.5 million.  In 2006 and 2005 we paid a premium of $1.1million and $8.6 million, respectively to repurchase outstanding Yankee bonds.  In addition in 2005 we paid a penalty of $2.0million for the prepayment of $199 million of Peruvian bonds.

 

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

 

Loss on derivatives instruments in 2006 was $11.6million, compared with a gain of $1.2 million in 2005.  Gain or losses on copper and other metalderivatives are included in the net sales line and gain or losses on gasderivatives are included in the cost of sales line of the consolidated combinedstatement of earnings.  The loss of $11.6million in 2006 is a fair value adjustment made on short-term investments madeby the Company in 2006.

 

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***Otherincome (expense)***

 

Other expense in 2006 was $0.3 million, comparedwith $3.6 million in 2005, a decrease of $3.3 million.  The major component of other expenses in 2006is a provision of $16.1 million for our contribution to the Peruvian regionaldevelopment fund; this program, requested by the president of Peru, will beused for nutritional, health, education and other social benefits in our areasof activities.  This amount is reduced bygains from insurance recoveries of $11.2 million principally from a partialpayment for a fire at our zinc refinery in Mexico, at the beginning of 2006,$3.2 million due to a Mexican tax benefit on gas imports, $2.4 million for aprior year tax adjustment and other miscellaneous income in our Mexicanoperations of $3.3 million.

 

***Incometaxes***

 

Income taxes in 2006 were $959.1 million, compared with $589.7 millionin 2005, an increase of $369.4 million and include $940.3 million and $576.3million of Peruvian and Mexican income taxes, $18.8 million and $13.4 millionfor US Federal and state taxes for 2006 and 2005, respectively.  US income taxes are primarily attributable toinvestment income as well as limitations on use of the alternative minimum tax.

 

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

 

***Minorityinterest***

 

Minority interest in 2006 was $9.3 millioncompared with $12.5 million in 2005, a decrease of $3.2 million or 25.6%.  This decrease is the result of theacquisition in the fourth quarter of 2005 of a minority holding of shares inour Minera Mexico subsidiary.

 

***Netearnings***

 

Our net earnings in 2006 were $2,037.6 million,compared with $1,400.1 million in 2005, an increase of $637.5 million or45.5%.  Net earnings increased as aresult of the factors described above.

 

**Segment Operating IncomeInformation — 2006 vs.2005:**

 

**Peruvian Open-pit Operations**

 

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

 

Net sales at our Peruvianoperations in 2006 were $3,215.4 million, compared with $2,167.7 million in2005, an increase of $1,047.7 million. This increase was principally due to significant increases in the priceof copper and silver.  Copper salesvolume increased by 35.5 million pounds in 2006 in part as a result of thepurchase and resale of copper acquired from our Mexican operations.  Net salesin 2006 and 2005 include losses on copper derivatives of $162.3 million and $12.2million, 

 

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respectively.

 

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

 

Our cost for workers’ participationincreased $53.4 million in 2006.  Thiscost is calculated based on 8% of our Peruvian operations pre-tax earnings andincreased as our profits increase.  APeruvian royalty provision which was instituted in June 2004 added $26.9million to our cost in 2006.

 

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

 

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

 

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

 

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

 

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

 

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

 

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**IMMSA Unit**.

 

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

 

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

 

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

 

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

 

Intersegment Eliminationsand Adjustments

 

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

 

**Liquidity and Capital Resources**

 

The following discussionrelates to our liquidity and capital resources for each of the years in thethree year period ended December 31, 2007.

 

***Liquidity***

 

| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                           | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                             |       |   |   |   |   |
| Net cash provided from operating activities |       | $                                | 2,703.5    |   | $ | 2,059.4 |   | $ | 1,663.5 |   |
| Net cash used for investing activities      |       | (246.0                           | )          | (725.3 | ) | (435.9 | ) |
| Net cash used for financing activities      |       | (2,088.3                         | )          | (1,164.4 | ) | (1,064.4 | ) |
|                                             |            |                                  |            |  |  |  |  |  |  |  |

 

***Cash Flows fromOperating Activities***

 

Net cash provided fromoperating activities was $2,703.5 million, $2,059.4 million and $1,663.5million in 2007, 2006 and 2005, respectively. The increases in 2007 and 2006 were primarily the result of higher netearnings in both years, which were the result of improved sales prices for mostof our metal products and the change in the balances of operating assets andliabilities.  Also in 2007, an increasein molybdenum sales volume contributed to the increase in cash flow.

 

In 2007, our earningswere $2,216.4 million, approximately 82.0% of the net operating 

 

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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 $35.7 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.

 

In 2005, our earningswere $1,400.1 million, approximately 84.2% of the net operating cash flow.  Significant items deducted from, or added to,our earnings to arrive to operating cash flow included, depreciation,amortization and depletion of $277.2 million, which positively increasedoperating cash flow, and capitalized mine stripping and leachable material of$38.9 million and $77.5 million, respectively, and a deferred tax benefit of$42.3 million, which reduced operating cash flow.  Additionally, changes in working capitalbalances added $110.5 million to our net cash from operating activities.

 

***Cash Flows fromInvesting Activities***

 

Net cash used for investingactivities was $246.0 million 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 of capitalexpenditures, includes $21.0 million for the Ilo smelter modernization project,$13.8 million for the Toquepala leach dump project, $10.5 million for the PLSdam project and $270.4 million for equipment replacements and upgrades of which$188.6 million was for our Mexican operations.

 

Net cash used for investingactivities was $725.3 million in 2006 compared to $435.9 million in 2005.  We made capital expenditures of $455.8million in 2006, including $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.  In addition,the Company made short-term investments of $280.0 million for 2006.

 

Net cash used for investing activities was $435.9million in 2005.  We made capitalexpenditures in an aggregate amount of $470.6 million in 2005, including $234.6million for the Ilo smelter modernization project, $32.8 million for theToquepala crushing, conveyor system for leachable material, $9.1 million forthe Toquepala leach dump project and $194.1 million principally for equipmentreplacements and upgrades, of which $148.7 million was for our Mexicanoperations.  Cash flow provided byinvesting activities in 2005 was from the net sale of short-term investments of$45.3 million.

 

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***Cash Flows fromFinancing Activities***

 

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

 

For 2006, cash used for financing activitiesamounted to $1,164.4 million, mainly for a dividend distribution of $1,509.1million to our shareholders and $8.3 million to our remaining minority interestinvestors.  In addition, net debtincurred in 2007 was $356.0 million.

 

For 2005, cash used for financing activitiesamounted to $1,064.4 million.  Newfinancings undertaken in 2005 resulted not only in improved terms for our debtbut also reduced our debt burden by $158.2 million.  In addition, we distributed $853.9 million toour shareholders in 2005 and $5.3 million to our remaining minority interestinvestors.  In October 2005, wepurchased an additional 6.4 million shares of Minera Mexico, representing0.8133% of the outstanding shares, for $30.3 million.

 

***Other LiquidityConsiderations***

 

On January 29, 2008,the Company announced an up to $300 million share repurchase program authorizedby the Board of Directors.  Under thisprogram the Company may purchase shares from time to time, based on marketconditions and other factors.  Therepurchase program has no expiration date and may be modified or discontinuedat any time. Any shares acquired will be available for general corporatepurposes.

 

On January 24,2008, the Board of Directors approved a dividend of $1.40 per share, totaling$412.3 million, to be paid on February 29, 2008 to shareholders of recordas of February 12, 2008.  Our dividend policy continues to bereviewed at Board of Directors’ meetings, taking into consideration the currentintensive capital investment program and expected future cash flow generatedfrom operations.

 

The Company expects that it will meet its cashrequirements for 2008 and beyond from cash on hand, internally generated fundsand from additional external financing if required.

 

In December 2006, our Peruvian Branch signeda contract with the Peruvian government committing our Company to make annualcontributions for five years to support the regional development of Peru.  The contributions are being used for socialbenefit programs.  In 2007, the Companymade a contribution of $16.1 million out of 2006 earnings and has charged 2007earnings $17.9 million for the 2008 contribution.  The following three years’ contributionscould increase or decrease depending on earnings and copper prices.  If the copper price drops below $1.79 perpound the contribution will cease.

 

In June 2004, the Peruvian Congress enactedlegislation imposing a royalty 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 $62.8 million, $67.2million and $40.3 million in 2007, 2006 and 2005, respectively, for thischarge.  During 2007, 2006 and 2005 wemade payments of $64.0 million, $67.1 million and $47.4 million, respectively,related to this charge.

 

***Financing***

 

The Company’s total debt at December 31, 2007 was $1,466.4 millioncompared with $1,545.0 million at December 31, 2006 before the unamortizeddiscount of notes issued under par of $16.7 million and $16.9 million at December 31,2007 and 2006, 

 

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respectively.  The $78.6 millionnet decrease in total debt during 2007 was due to the repurchase of $68.6million of Yankee bonds series B and $10.0 million payment on the Mitsui loan.

 

The Company’s ratio ofdebt to total capitalization was 27.3% at December 31, 2007, compared with29.3% at December 31, 2006.

 

The $400 million 7.5%notes due 2035 issued in 2006 are in addition to the $600 million of existing7.5% notes due 2035 that were issued in July 2005.  The 2006 financing was issued at a spread of+240 basis points over the 30-year U.S. Treasury bond.  Comparatively, the financing in July 2005was issued at a spread of +315 basis points over the 30-year U.S. Treasurybond.  The notes are rated Baa2 by Moody’s,BBB- by Standard & Poor’s, and BBB- by Fitch. The 2006 financing wasissued at a discount of $10.8 million. Additionally, the Company capitalized in“Other assets, net,” on the consolidated balance sheet, $3.2 million of costsassociated with the 2006 issuance.

 

***CapitalExpenditure Programs***

 

A discussion of our capital expenditure programsis an important part of understanding our liquidity and capital resources.  The Company expects to meet the cashrequirements for these capital expenditures from cash on hand, internallygenerated funds and from additional external financing if required.  For information regarding our capital expenditureprograms, please see the discussion under the caption “Capital ExpansionProgram” of this section.

 

**Contractual Obligations**

 

The following table summarizes our significantcontractual obligations as of December 31, 2007:

 
| ** **                                         | ** ** | ** ** | ** ** | **Payments due by Period** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **Total**  | ** ** | **2008**                   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 and  Thereafter** | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **(dollars in millions)**  | ** ** |
| Long-term debt                                     |       | $          | 1,466.4    |                       | $          | 160.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 10.0 |   | $ | 1,266.4 |   |
| Interest on debt                                   |       | 2,286.2    |       | 99.6                       |       | 95.8 |   | 95.3 |   | 94.6 |   | 94.1 |   | 1,806.8 |   |
| FIN No. 48 (a)                                |       | 154.7      |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Purchase obligations:                              |       |       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Commitment to  purchase energy                     |       | 1,491.0    |       | 157.0                      |       | 157.0 |   | 157.0 |   | 157.0 |   | 157.0 |   | 706.0 |   |
| Contribution to  the Peruvian regional development |       | 17.9       |       | 17.9                       |       | — |   | — |   | — |   | — |   | — |   |
| Total                                              |       | $          | 5,416.2    |                       | $          | 434.5 |   | $ | 262.8 |   | $ | 262.3 |   | $ | 261.6 |   | $ | 261.1 |   | $ | 3,779.2 |   |

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(a) Theabove table does not include any future payment related to FIN No.48liabilities because there is often a high degree of uncertainty regarding thetiming of future cash outflows.  As of December 31,2007 the liability recognized by the Company was $154.7 million and is includedas non-current liability in the consolidated balance sheet.

 

Interest on debt is calculated at rates in effectat December 31, 2007.  Please referto “Note 11—Financing” of our Consolidated Financial Statements for adescription of our long-term debt arrangements and credit facilities.

 

We have a commitment to purchase power for ourPeruvian operations from Energia del Sur, S.A. until 2017.  Amounts indicated on the above table arebased on power costs in 2007, which are subject to change as energy generationcosts change and our forecasted power requirements through the life of theagreements change.

 

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Pursuant to our agreement with the PeruvianGovernment signed on December 28, 2006 we have committed to make annualcontributions for five years for the regional development of Peru based onPeruvian Branch earnings after income tax. The following three-year contributions could increase or decreasedepending on copper prices.  Thecommitment of the Branch is for a total of 1.25% of its annual earnings, afterPeruvian income tax.  If the copper pricedrops below $1.79 per pound the contribution will cease.

 

For an additional discussion on this matter pleasesee “Regional development contribution” on “Note 14—Commitments andContingencies” of the Consolidated Combined Financial Statements.

 

**Non-GAAP InformationReconciliation-**

 

Following is a reconciliation of “Operating Cash Cost”(see page 79) to GAAP cost of sales in millions of dollars and cents perpound in the table below:

 
| ** **                                                                    | ** ** | **2007** | ** **        | **2006**   | ** ** | **2005**           | ** ** |
|-------------------------------------------------------------------------------|------------|----------|-------------------|------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **$**    | ** million** | ** ** | **$**      | ** per unit** | ** ** | **$** | ** million** | ** ** | **$** | ** per unit** | ** ** | **$** | ** million** | ** ** | **$** | ** per unit** | ** ** |
| Cost of sales  (including depreciation, amortization and depletion)—GAAP |       | $        | 2,450.1           |       | $          | 1.898              |       | $ | 2,294.9 |   | $ | 1.668 |   | $ | 1,912.6 |   | $ | 1.266 |   |
| Add:                                                                          |       |     |              |       |       |               |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                                 |       | 98.0     |              | 0.076      |       | 88.3               |       | 0.064 |   | 81.1 |   | 0.054 |   |
| Treatment and  refining charges                                               |       | 57.9     |              | 0.045      |       | 61.0               |       | 0.044 |   | 34.3 |   | 0.023 |   |
| Less:                                                                         |       |     |              |       |       |               |       |   |   |   |   |   |   |
| By-product  revenue (1)                                                       |       | (2,023.7 | )                 | (1.568     | )          | (1,547.1           | )          | (1.124 | ) | (1,478.0 | ) | (0.979 | ) |
| Depreciation,  amortization and depletion                                     |       | (327.9   | )                 | (0.254     | )          | (275.1             | )          | (0.200 | ) | (277.2 | ) | (0.184 | ) |
| Workers’  participation                                                  |       | (310.9   | )                 | (0.241     | )          | (271.5             | )          | (0.197 | ) | (219.2 | ) | (0.145 | ) |
| Royalty charge  and other, net                                                |       | (128.0   | )                 | (0.099     | )          | (127.1             | )          | (0.093 | ) | (40.8 | ) | (0.027 | ) |
| Inventory change                                                              |       | (31.5    | )                 | (0.024     | )          | (4.4               | )          | (0.003 | ) | 33.0 |   | 0.022 |   |
| **Operating  Cash Cost**                                                      | ** ** | **$**    | **(216.0**        | **)**      | **$**      | **(0.167**         | **)**      | **$** | **219.0** | ** ** | **$** | **0.159** | ** ** | **$** | **45.8** | ** ** | **$** | **0.030** | ** ** |
| Add by-product  revenue                                                       |       | 2,023.7  |              | 1.568      |       | 1,547.1            |       | 1.124 |   | 1,478.0 |   | 0.979 |   |
| Operating Cash  Cost, without by-product revenue                              |       | $        | 1,807.7           |       | $          | 1.401              |       | $ | 1,766.1 |   | $ | 1.283 |   | $ | 1,523.8 |   | $ | 1.009 |   |
| Total pounds of  copper produced and purchased (in millions)                  |       | 1,291.0  |              |       |       | 1,375.9            |       |   |   | 1,510.4 |   |   |   |

----

(1) Includes net by-product sales revenue andpremiums on sales of refined products.

 

104

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Item 7A.Quantitative and Qualitative Disclosures about Market Risk

 

A portion of our outstanding debt bears interestat variable rates and accordingly is sensitive to changes in interestrates.  Interest rate changes would alsoresult in gains or losses in the market value of our fixed rate debt portfoliodue to differences in market interest rates and the rates at the inception ofthe debt agreements.  Based upon ourindebtedness at December 31, 2007, a change in interest rates of onepercent (or 100 basis points) would impact net income and cash flows by $0.6million annually.

 

We are also exposed to market risk associated withchanges in foreign currency exchange rates as certain costs incurred are incurrencies other than our functional currency. To manage the volatility related to the risk, we may enter into forwardexchange contracts, currency swaps or other currency hedging arrangements.

 

We are subject to market risks arising from thevolatility of copper and other metal prices. Assuming that expected metal production and sales are achieved, that taxrates are unchanged, and giving no effects to potential hedging programs metalprice sensitivity factors would indicate estimated change in net earningsresulting from metal price changes in 2008 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)                               |       | $          | 7.6        |           | $          | 19.5     |       | $          | 1.4        |   | $ | 8.6 |   |

 

We occasionally usederivative instruments to manage our exposure to market risk from changes incommodity prices, interest rate and exchange rate risk exposures.  The Company generally does not enter intoderivative contracts unless it anticipates a future activity that is likely tooccur that will result in exposing the Company to market risk.

 

Copperand zinc derivatives:

 

Fromtime to time we enter into derivative instruments to protect a fixed copper, orzinc price for a portion of our metal sales.

 

In 2007 and 2006we entered into copper collar and swaps contracts to protect a portion of our2007 and 2006 sales of copper production. Related to the settlement of these copper derivative instruments werecorded a gain of $10.9 million and a loss of $276.1 million in the 2007 and 2006,respectively.  These gains and losseswere recorded in net sales in the consolidated combined statement of earnings.

 

In the thirdquarter of 2006 we entered into a zinc swap contract to protect a portion ofthe sale of zinc concentrates purchased during the recovery from a fire at theSan Luis Potosi zinc refinery.  Relatedto the settlement of this contract we recorded in 2006, a loss of $0.2 millionwhich was recorded in net sales in the consolidated combined statement ofearnings.

 

We did not hold anycopper or zinc derivative contracts at the end of December 2007.

 

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 combined statement of earnings.  In 2006, the Company changed its accountingclassification policy to recognize gains or losses on metal price derivativesin net sales.  The Company believes thatthis income statement classification reflects better the intention of thisprice protection 

 

 

105

----

 

 

program.  Before 2006, the change in the fair marketvalue of our derivative instruments was accounted for in a separatenon-operating income statement line item. Prior-year gains and losses have been reclassified to conform to the2006 presentation.

 

Gas swaps:

 

In2006 and 2007 we entered into gas swap contracts to protect part of our gasconsumption as follows:

 

| ** **               | ** ** | **2007** | ** ** | **2006**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|
| Gas volume (MMBTUs)      |       | 900,000  |       | 3,650,000 |       |
| Fixed price              |       | 7.5250   |       | 4.2668    |       |
| Gain (loss) (in million) |       | $        | (0.9       | )         | $          | 6.3 |   |
|                          |            |          |            |           |            |  |  |

 

Thegains (losses) obtained were included in the production cost.  At December 31, 2007, we didnot hold any open gas swap contracts.

 

Exchange ratederivatives, U.S. dollar / Mexican peso contracts:

 

Because more than 85% ofour sales collections in Mexico are in US dollars and many of our costs are inMexican pesos, during 2006 and 2007 we entered into zero-cost derivativecontracts with the purpose of protecting, within a range, against anappreciation of the Mexican peso to the US dollar.  In these contracts if the exchange rate settlesat or below the barrier, we do not sell US dollars, if the exchange ratesettles above the barrier price established in the contract we sell US dollarsat the strike price established in the contract.

 

In 2007 and 2006 theexercise of these zero-cost derivative contracts resulted in gains of $8.1million and $0.9 million, respectively, which were recorded as gain (loss) onderivative instruments in the consolidated combined statement of earnings.

 

At December 31, 2007we held the following exchange rate derivative operations:

 
| **Notional Amount (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** ** | **Strike Price  (Mexican Pesos/U.S. Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/ U.S. Dollars)** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| $ 2.0                     |       | 1st Quarter 2008                        | (*)        | 11.60                                          |       | 11.28                                            |       |
| $ 2.0                     |       | 1st Quarter 2008                        | (*)        | 11.28                                          |       | 10.70                                            |       |
| $ 60.0                    |       | 4th Quarter 2008                        |       | 11.32                                          |       | 10.60                                            |       |

----

(*) These operationsmatured on January 3, 2008 and reported a gain of $0.1 million, which wasrecorded as unrealized gain on derivative instruments in the consolidatedcombined statement of earnings at December 31, 2007.

 

At December 31,2007, the fair value of the above listed exchange rate derivative contracts wasa gain of $0.5 million,which was recorded as gain on derivative instruments inthe consolidated combined statement of earnings.  Each notional amount includes a group ofweekly transactions that have the same strike and barrier price.

 

In addition, at December 31,2007 the Company held the following exchange rate derivative contract:

 
| Amount                     |   | $53.0 million                                        |
|----------------------------|--------|------------------------------------------------------|
| Valuation date             |   | $1.0 million weekly,  through December 31, 2008 |
| Peso/dollar exchange  rate |   | 11.2 pesos = $1.00                                   |

 

 

106

----

 

 

The above noted contractsettles weekly, and if the Mexican peso/US dollar exchange rate is below 11.20the counterparty to the contract, in this case Merrill Lynch Capital Services, Inc.(“MLCS”), will pay the Company 11.2 million Mexican pesos and the Company willpay MLCS $1.0 million.  If the Mexicanpeso/US dollar exchange rate is not below 11.20 MLCS will pay the Company 22.4million Mexican pesos and the Company will pay MLCS $2.0 million.

 

Dual currency notes:

 

In2007 we invested $560.0 million in dual currency notes which provided an abovemarket interest return subject to a barrier range of the Mexican peso/US dollarexchange rates.  Related to theseinvestments we realized an exchange loss of $1.3 million, which was recorded asa loss on derivative instruments in the consolidated combined statement ofearnings.

 

We earned interest of $2.1 million in 2007, which was recorded asinterest income in the consolidated combined statement of earnings.

 

Interest Rate Swaps:

 

During 2005 the Company entered into short interest rate swap contractsto reduce its exposure to interest rate risk on certain of its floating ratebank obligations.  As a result of thesepositions, the Company recorded a net gain of $1.2 million in 2005. This gainwas recorded in loss in derivatives instruments on the consolidated combinedstatement of earnings.  The Company didnot hold any interest rate swap contracts during 2007 and 2006 and does nothold any open positions as of December 31, 2007.

 

Short-term investments:

 

Commencing in 2006 the Company began making short-terminvestments (90 days to 1 year) in leveraged, indexed instruments.  The balances of short-term investments wereas follows (in millions):

 
| ** **                                                                                                                                                                                                     | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Investment**                                                                                                                                                                                                 | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| 3-month note, issued  December 12, 2006, with extensions every 3 months up to a maximum of 12  months, and with an interest rate of 7% established by a pool of Mexican and  Peruvian bond issues.        |       | $                           | —     |   | $ | 100.0 |   |
| 3-month note, issued  December 12, 2006, with extensions every 3 months up to a maximum of 13  months and 5 days, with an interest rate of 7% established by a pool of  Mexican and Peruvian bond issues. |       | —                      |       | 100.0 |   |
| 180-day note, maturing  June 12, 2007 with an interest rate of 6%, with barrier range of $37.669  and $69.957 of SCC stock price, NYSE symbol PCU.                                                        |       | —                      |       | 40.0 |   |
| 180-day note, maturing  June 28, 2007 with an interest rate of 6%, with barrier range of $38.738  and $71.942 of SCC stock price, NYSE symbol PCU.                                                        |       | —                      |       | 20.0 |   |
| 300-day note, maturing  December 24, 2007 with an interest rate of 3.6%, with barrier range of  $50.00 and $75.00 of SCC stock price, NYSE symbol PCU.                                                    |       | —                      |       | 20.0 |   |
| Short-term investment  in securities issued by public companies with a weighted average interest  rate of 5.07%.                                                                                               |       | 117.9                       |       | — |   |
| Total                                                                                                                                                                                                          |       | $                           | 117.9      |   | $ | 280.0 |   |

 

 

107

----

 

 

Inaddition to the 2006 investments, on January 19, 2007 we invested $100.0million, in a 3-month note, with extensions every 3 months up to a maximum of12 months and at an interest rate of 7.25%, established by a pool of Mexicanand Peruvian bond issues.  Thisinvestment was liquidated on October 3, 2007.

 

Short-term investment in securities held as of December 31, 2007 consists of thoseinvestments available for sale and are issued by public companies.  Each security is independent of theothers.  Current value of theseinvestments is deemed to approximate fair value.

 

Someof the other investment instruments were indexed to SCC common stock priceswhile others were leveraged and indexed to certain bond pools.  Both types of instruments could have causedthe principal of the investment to be reduced if the established ranges werebreached.  Since the notes were not principalprotected, the Company risked losing part or all of the initialinvestment.  These instruments had beendeemed to contain embedded derivatives and had been subject to valuation usinga binomial model.

 

Relatedto these short-term investments, the Company recorded losses of $81.0 millionand $11.6 million in 2007 and 2006, respectively.  The losses on these short-term investmentswere recorded as loss on derivative instruments in the consolidated combinedstatement of earnings.

 

Additionally,the Company earned interest of $18.7 million and $9.3 million on theseinvestments in 2007 and 2006, respectively, which were recorded in interestincome in the consolidated combined statement of earnings.

 

**Impact of New AccountingStandards**

 

In December 2007, the FASB published SFAS No. 160“Non Controlling Interests in Consolidated Financial Statements” — an amendmentof ARB No. 51.  This statementaddresses the reporting of minority interests in the results of the parent andprovides direction for the recording of such interests in the financialstatements. 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 for fiscalyears, and interim periods after December 15, 2008; earlier adoption isprohibited and shall be applied prospectively. The presentation and disclosure requirements shall be appliedretrospectively for all periods presented. The Company will adopt this pronouncement on January 1, 2009.

 

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

 

In September 2006 the FASB published SFAS No. 157“Fair Value Measurements”, which provides enhanced guidance for using fairvalue to measure assets and liabilities. SFAS No. 157 establishes a commondefinition of fair value, provides a framework for measuring fair value underU.S. GAAP and expands disclosure requirements about fair valuemeasurements.  SFAS No. 157 was tobe effective for financial statements issued in fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  On February 6, 2008, the FASB issued aposition paper that partially defers SFAS No. 157 for one year.  The Company is currently evaluating theimpact, if any, the adoption of SFAS No. 157 will have on its financialposition, results of operations and disclosures.

 

For a description of the impact of other newaccounting standards, see Note 2, “Summary of Significant AccountingPolicies—Impact of new accounting standards,” to our consolidated combinedfinancial statements.

 

108

----

 

 

Item 8. Financial Statements and Supplementary Data

 

Southern CopperCorporationand Subsidiaries

CONSOLIDATED COMBINED STATEMENT OF EARNINGS

 
| **For the years ended  December 31,**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands, except for per  share amounts)**                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Net sales (2005 includes sales to affiliates of  $28,357)                                      |       | $          | 6,085,672  |       | $          | 5,460,221  |       | $ | 4,089,145 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Operating cost and expenses:                                                                   |       |       |       |       |       |       |       |
| Cost of sales  (exclusive of depreciation, amortization and depletion shown separately  below) |       | 2,122,163  |       | 2,019,840  |       | 1,635,393  |       |
| Selling, general  and administrative                                                           |       | 98,047     |       | 88,274     |       | 81,132     |       |
| Depreciation,  amortization and depletion                                                      |       | 327,898    |       | 275,062    |       | 277,248    |       |
| Exploration                                                                                    |       | 40,212     |       | 22,704     |       | 24,356     |       |
| Total operating  costs and expenses                                                            |       | 2,588,320  |       | 2,405,880  |       | 2,018,129  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Operating income                                                                               |       | 3,497,352  |       | 3,054,341  |       | 2,071,016  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Interest expense                                                                               |       | (123,204   | )          | (113,422   | )          | (108,874   | )          |
| Capitalized interest                                                                           |       | 14,717     |       | 27,951     |       | 22,509     |       |
| Gain (loss) on derivative instruments                                                          |       | (73,711    | )          | (11,595    | )          | 1,159      |       |
| Loss on debt prepayments                                                                       |       | (16,572    | )          | (1,137     | )          | (10,559    | )          |
| Other income (expense)                                                                         |       | 30,759     |       | (326       | )          | (3,649     | )          |
| Interest income                                                                                |       | 82,519     |       | 50,217     |       | 30,765     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Earnings before income taxes and minority interest                                             |       | 3,411,860  |       | 3,006,029  |       | 2,002,367  |       |
|                                                                                           |       |       |       |       |       |       |       |
| Income taxes                                                                                   |       | 1,185,261  |       | 959,087    |       | 589,744    |       |
| Minority interest                                                                              |       | 10,229     |       | 9,302      |       | 12,475     |       |
|                                                                                           |       |       |       |       |       |       |       |
| Net earnings                                                                                   |       | $          | 2,216,370  |       | $          | 2,037,640  |       | $ | 1,400,148 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Per common share amounts:                                                                      |       |       |       |       |       |       |       |
| Net earnings —  basic and diluted                                                         |       | $          | 7.53       |       | $          | 6.92       |       | $ | 4.76 |   |
| Dividends paid                                                                                 |       | $          | 6.80       |       | $          | 5.13       |       | $ | 2.90 |   |
|                                                                                           |       |       |       |       |       |       |       |
| Weighted average shares outstanding — basic and  diluted                                  |       | 294,466    |       | 294,461    |       | 294,456    |       |

 

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

 

109

----

Southern CopperCorporation

and Subsidiaries

CONSOLIDATED BALANCE SHEET

 
| **At December 31,**                                                                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                                  |       |       |       |       |       |
| Current assets:                                                                                                         |       |       |       |       |       |
| Cash and cash  equivalents                                                                                              |       | $          | 1,409,272  |       | $          | 1,022,778 |   |
| Short-term  investment                                                                                                  |       | 117,903    |       | 280,000    |       |
| Accounts  receivable trade (less allowance for doubtful accounts (2007 - $4,585 and  2006 - $5,948)                     |       | 404,598    |       | 560,227    |       |
| Accounts  receivable — other (including affiliates 2007 - $1,644 and 2006 - $2,630)                                |       | 58,180     |       | 46,199     |       |
| Inventories                                                                                                             |       | 448,283    |       | 413,652    |       |
| Deferred income  tax — current portion                                                                             |       | 72,303     |       | 65,638     |       |
| Other current  assets                                                                                                   |       | 124,970    |       | 54,383     |       |
| Total current  assets                                                                                                   |       | 2,635,509  |       | 2,442,877  |       |
|                                                                                                                    |       |       |       |       |       |
| Property, net                                                                                                           |       | 3,568,311  |       | 3,538,295  |       |
| Leachable  material, net                                                                                                |       | 220,243    |       | 231,516    |       |
| Intangible  assets, net                                                                                                 |       | 115,802    |       | 118,107    |       |
| Deferred income  tax non-current                                                                                        |       | —     |       | 14,549     |       |
| Other assets                                                                                                            |       | 40,693     |       | 31,070     |       |
| Total assets                                                                                                            |       | $          | 6,580,558  |       | $          | 6,376,414 |   |
|                                                                                                                    |       |       |       |       |       |
| LIABILITIES                                                                                                             |       |       |       |       |       |
| Current  liabilities:                                                                                                   |       |       |       |       |       |
| Current portion  of long-term debt                                                                                      |       | $          | 160,000    |       | $          | 10,000 |   |
| Accounts payable                                                                                                        |       | 255,070    |       | 271,064    |       |
| Accrued income  taxes                                                                                                   |       | 132,175    |       | 226,047    |       |
| Due to  affiliated companies                                                                                            |       | 3,870      |       | 3,581      |       |
| Accrued workers’  participation                                                                                    |       | 313,251    |       | 299,892    |       |
| Accrued Interest                                                                                                        |       | 37,325     |       | 37,140     |       |
| Other accrued  liabilities                                                                                              |       | 25,499     |       | 11,847     |       |
| Total current  liabilities                                                                                              |       | 927,190    |       | 859,571    |       |
|                                                                                                                    |       |       |       |       |       |
| Long-term debt                                                                                                          |       | 1,289,754  |       | 1,518,111  |       |
| Deferred income  taxes                                                                                                  |       | 219,501    |       | 194,759    |       |
| Non-current  taxes payable                                                                                              |       | 154,721    |       | —     |       |
| Other  liabilities and reserves                                                                                         |       | 111,442    |       | 111,196    |       |
| Asset retirement  obligation                                                                                            |       | 13,145     |       | 12,183     |       |
| Total non-current  liabilities                                                                                          |       | 1,788,563  |       | 1,836,249  |       |
|                                                                                                                    |       |       |       |       |       |
| Commitments and  contingencies (Note 14)                                                                                |       |       |       |       |       |
|                                                                                                                    |       |       |       |       |       |
| MINORITY INTEREST                                                                                                       |       | 16,685     |       | 13,989     |       |
|                                                                                                                    |       |       |       |       |       |
| STOCKHOLDERS’ EQUITY                                                                                               |       |       |       |       |       |
| Common stock par  value $0.01; shares authorized: 2007 and 2006- 320,000,000; shares issued  2007 and 2006- 294,865,362 |       | 2,949      |       | 2,949      |       |
| Additional  paid-in capital                                                                                             |       | 825,543    |       | 772,693    |       |
| Retained  earnings                                                                                                      |       | 3,220,857  |       | 3,010,307  |       |
| Accumulated  other comprehensive loss                                                                                   |       | (26,554    | )          | (22,332    | )          |
| Treasury stock,  at cost, common shares                                                                                 |       | (174,675   | )          | (97,012)   |       |
| Total  stockholders’ equity                                                                                        |       | 3,848,120  |       | 3,666,605  |       |
| Total  liabilities, Minority Interest and Stockholders’ Equity                                                     |       | $          | 6,580,558  |       | $          | 6,376,414 |   |

 

Theaccompanying notes are an integral part of these consolidated combinedfinancial statements.

 

110

----

 

SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CASH FLOWS

 
| **For the years ended  December 31,**                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                   |       |       |       |       |       |       |       |
| OPERATING ACTIVITIES                                                                   |       |       |       |       |       |       |       |
| Net earnings                                                                           |       | $          | 2,216,370  |       | $          | 2,037,640  |       | $ | 1,400,148 |   |
|                                                                                   |       |       |       |       |       |       |       |
| Adjustments to  reconcile net earnings to net cash provided from operating activities: |       |       |       |       |       |       |       |
| Depreciation,  amortization and depletion                                              |       | 327,898    |       | 275,062    |       | 277,248    |       |
| Capitalized  leachable material                                                        |       | (45,903    | )          | (65,930    | )          | (77,523    | )          |
| Capitalized mine  stripping                                                            |       | —     |       | —     |       | (38,886    | )          |
| Loss on currency  translation effect                                                   |       | 12,052     |       | 5,758      |       | 8,885      |       |
| Provision for  deferred income taxes                                                   |       | 66,596     |       | (33,693    | )          | (42,268    | )          |
| Loss on  short-term investments                                                        |       | 81,006     |       | 11,595     |       | —     |       |
| Unrealized gain  on derivative investments                                             |       | (520       | )          | —     |       | —     |       |
| Write-off  unamortized financial cost                                                  |       | —     |       | —     |       | 14,965     |       |
| Minority  interest                                                                     |       | 10,229     |       | 9,302      |       | 12,475     |       |
| Cash provided  from (used for) operating assets and liabilities:                       |       |       |       |       |       |       |       |
| Accounts  receivable                                                                   |       | 66,200     |       | (217,991   | )          | 59,457     |       |
| Inventories                                                                            |       | (34,632    | )          | (17,807    | )          | (43,468    | )          |
| Accounts payable  and accrued liabilities                                              |       | (229,189   | )          | 80,694     |       | 75,269     |       |
| Other operating  assets and liabilities                                                |       | 233,349    |       | (25,317    | )          | 17,194     |       |
| Net cash  provided from operating activities                                           |       | 2,703,456  |       | 2,059,313  |       | 1,663,496  |       |
|                                                                                   |       |       |       |       |       |       |       |
| INVESTING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Capital  expenditures                                                                  |       | (315,741   | )          | (455,818   | )          | (470,636   | )          |
| Purchase of  short-term investments                                                    |       | (217,903   | )          | (280,000   | )          | (74,339    | )          |
| Net proceeds  from short-term investments                                              |       | 287,398    |       | —     |       | 119,606    |       |
| Other                                                                                  |       | 267        |       | 10,532     |       | (10,501    | )          |
| Net cash used  for investing activities                                                |       | (245,979   | )          | (725,286   | )          | (435,870   | )          |
|                                                                                   |       |       |       |       |       |       |       |
| FINANCING  ACTIVITIES                                                                  |       |       |       |       |       |       |       |
| Debt incurred                                                                          |       | —     |       | 389,192    |       | 993,717    |       |
| Debt repaid                                                                            |       | (78,600    | )          | (33,146    | )          | (1,151,940 | )          |
| Capitalized debt  issuance cost                                                        |       |       |       | (3,150     | )          | (8,800     | )          |
| Capital stock  transaction — Minera Mexico                                        |       | —     |       | —     |       | (7,438     | )          |
| Dividends paid  to common stockholders                                                 |       | (2,002,312 | )          | (1,509,099 | )          | (853,887   | )          |
| Distributions to  minority interest                                                    |       | (7,211     | )          | (8,282     | )          | (5,297     | )          |
| Purchase of  shares Minera Mexico                                                      |       | —     |       | —     |       | (30,276    | )          |
| Other                                                                                  |       | (224       | )          | 185        |       | (478       | )          |
| Net cash used  for financing activities                                                |       | (2,088,347 | )          | (1,164,300 | )          | (1,064,399 | )          |
|                                                                                   |       |       |       |       |       |       |       |
| Effect of  exchange rate changes on cash and cash equivalents                          |       | 17,364     |       | (22,952    | )          | 2,069      |       |
|                                                                                   |       |       |       |       |       |       |       |
| Increase in cash  and cash equivalents                                                 |       | 386,494    |       | 146,775    |       | 165,296    |       |
| Cash and cash  equivalents, at beginning of year                                       |       | 1,022,778  |       | 876,003    |       | 710,707    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Cash and cash  equivalents, at end of year                                             |       | $          | 1,409,272  |       | $          | 1,022,778  |       | $ | 876,003 |   |

 

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| ** **                                                                          | ** ** | **2007**           | ** ** | **2006** | ** ** | **2005**  | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|-----------|------------|
| ** **                                                                          | ** ** | **(in thousands)** | ** ** |
| Supplemental disclosure of cash flow information:                                   |       |               |       |     |       |      |       |
| Cash paid during  the year for:                                                     |       |               |       |     |       |      |       |
| Interest                                                                            |       | $                  | 130,633    |     | $          | 116,052   |       | $ | 80,286 |   |
| Income taxes                                                                        |       | $                  | 1,057,931  |     | $          | 1,031,511 |       | $ | 702,660 |   |
| Workers  Participation                                                              |       | $                  | 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                  |       | $                  | (3,266     | )        | $          | 1,160     |       | $ | (849 | ) |
| Impact of FASB  158 adoption                                                        |       | $                  | —     |     | $          | 16,527    |       | $ | — |   |
|                                                                                |       |               |       |     |       |      |       |   |   |
| Non cash  transactions:                                                             |       |               |       |     |       |      |       |
| Common stock split:                                                                 |       |               |       |     |       |      |       |
| Increase in Common stock                                                            |       | $                  | —     |     | $          | 1,472     |       | $ | — |   |
| Decrease in Additional paid-in capital                                              |       | $                  | —     |     | $          | 1,472     |       | $ | — |   |
|                                                                                     |            |                    |            |          |            |           |            |  |  |  |  |  |  |

 

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

 

 

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SouthernCopper Corporation

and Subsidiaries

CONSOLIDATEDCOMBINED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 
| **For years ended  December 31,**                                                                                                      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(in thousands)**                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                        |       |       |       |       |       |       |       |
| CAPITAL STOCK:                                                                                                                              |       |       |       |       |       |       |       |
| Balance at  beginning of year:                                                                                                              |       | $          | 2,949      |       | $          | 2,949      |       | $ | 1,631 |   |
| Issued in  exchange for class A common stock                                                                                                |       | —     |       | —     |       | 1,318      |       |
| Balance at end  of year                                                                                                                     |       | 2,949      |       | 2,949      |       | 2,949      |       |
|                                                                                                                                        |       |       |       |       |       |       |       |
| Class A Common Stock:                                                                                                                  |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                               |       |       |       |       |       | 1,318      |       |
| Exchanged for  common stock                                                                                                                 |       | —     |       | —     |       | (1,318     | )          |
| Balance at end  of year                                                                                                                     |       | —     |       | —     |       | —     |       |
|                                                                                                                                        |       |       |       |       |       |       |       |
| ADDITIONAL PAID-IN CAPITAL:                                                                                                                 |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                               |       | 772,693    |       | 772,693    |       | 799,687    |       |
| Net movement of  the period                                                                                                                 |       | 52,850     |       | —     |       | (26,994    | )          |
| Balance at end  of year                                                                                                                     |       | 825,543    |       | 772,693    |       | 772,693    |       |
|                                                                                                                                        |       |       |       |       |       |       |       |
| TREASURY STOCK:                                                                                                                             |       |       |       |       |       |       |       |
| Southern Copper Common shares                                                                                                               |       |       |       |       |       |       |       |
| Balance at  beginning of the year                                                                                                           |       | (4,409     | )          | (4,466     | )          | (4,589     | )          |
| Used for  corporate purposes                                                                                                                |       | 49         |       | 57         |       | 123        |       |
| Balance at end  of period                                                                                                                   |       | (4,360     | )          | (4,409     | )          | (4,466     | )          |
|                                                                                                                                        |       |       |       |       |       |       |       |
| Parent Company Common Shares                                                                                                                |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                               |       | (92,603    | )          | (80,368    | )          | (72,897    | )          |
| Purchase of  shares                                                                                                                         |       | (77,712    | )          | (12,235    | )          | (7,471     | )          |
| Balance at end  of year                                                                                                                     |       | (170,315   | )          | (92,603    | )          | (80,368    | )          |
|                                                                                                                                        |       |       |       |       |       |       |       |
| Treasury stock  balance at end of year                                                                                                      |       | (174,675   | )          | (97,012    | )          | (84,834    | )          |
|                                                                                                                                        |       |       |       |       |       |       |       |
| RETAINED  EARNINGS:                                                                                                                         |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                               |       | 3,010,307  |       | 2,648,359  |       | 2,102,098  |       |
| Net earnings                                                                                                                                |       | 2,216,370  |       | 2,037,640  |       | 1,400,148  |       |
| 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, 2007 - $6.80, 2006 — $5.13, 2005 - $2.90                                                     |       | (2,002,312 | )          | (1,509,099 | )          | (853,887   | )          |
| Balance at end  of year                                                                                                                     |       | 3,220,857  |       | 3,010,307  |       | 2,648,359  |       |
|                                                                                                                                        |       |       |       |       |       |       |       |
| ACCUMULATED OTHER COMPREHENSIVE LOSS:                                                                                                       |       |       |       |       |       |       |       |
| Balance at  beginning of year                                                                                                               |       | (22,332    | )          | (13,090    | )          | (13,653    | )          |
| (Increase) decrease  in pension and other post-retirement benefits                                                                          |       | (3,266     | )          | 1,160      |       | (849       | )          |
| 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                                                                                                       |       | (956       | )          | 6,125      |       | 1,412      |       |
| Balance at end  of year                                                                                                                     |       | (26,554    | )          | (22,332    | )          | (13,090    | )          |
|                                                                                                                                        |       |       |       |       |       |       |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                             |       | $          | 3,848,120  |       | $          | 3,666,605  |       | $ | 3,326,077 |   |

 

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| ** **                                                               | ** ** | **2007**           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                                               | ** ** | **(in thousands)** | ** ** |
| RETAINED  EARNINGS:                                                      | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unappropriated                                                           |       | $                  | 1,788,735  |       | $          | 3,010,307  |       | $ | 2,648,359 |   |
| Appropriated                                                             |       | 1,432,122          |       | —     |       | —     |       |
| Total retained  earnings                                                 |       | $                  | 3,220,857  |       | $          | 3,010,307  |       | $ | 2,648,359 |   |
|                                                                     |       |               |       |       |       |       |       |
| COMPREHENSIVE  INCOME:                                                   |       |               |       |       |       |       |       |
| Net earnings                                                             |       | $                  | 2,216,370  |       | $          | 2,037,640  |       | $ | 1,400,148 |   |
| Pension and post retirement benefits amounts  recognized in net earnings |       | 1,500              |       | —     |       | —     |       |
| Other comprehensive income (loss)                                        |       | (4,232             | )          | (9,242     | )          | 563        |       |
| Total comprehensive income                                               |       | $                  | 2,213,638  |       | $          | 2,028,398  |       | $ | 1,400,711 |   |

 

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

 

 

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SOUTHERN COPPERCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED COMBINED FINANCIALSTATEMENTS

 

 

**NOTE 1-DESCRIPTION OF THEBUSINESS:**

 

The consolidated combined financial statementspresented herein consist of the accounts of Southern Copper Corporation (“SCC”)and its subsidiaries as well as those of Minera Mexico, S.A. de C.V., (“MineraMexico”) and its subsidiaries.  EffectiveApril 1, 2005, SCC acquired substantially all of the outstanding commonstock of Minera Mexico, as further described below.  Unless the context otherwise requires, theterm “Company” refers to both SCC and Minera Mexico as consolidated (after March 31,2005) or combined (prior to April 1, 2005).

 

Effective April 1, 2005, Grupo Mexico S.A.B.de C.V.(“Grupo Mexico”), through its subsidiary, Americas Mining Corporation (“AMC”)sold its approximately 99.15% shareholding in Minera Mexico to SCC in returnfor the issuance to AMC of 134.4 million new shares of common stock of SCC (seenote 15).  The transaction resulted inGrupo Mexico increasing its indirect equity ownership in SCC to approximately75.1% from its prior indirect interest of approximately 54.2%.  As part of this transaction, SCC paid aspecial transaction cash dividend of $100 million on March 1, 2005.  On October 20, 2005, the Company’s boardof directors approved the acquisition of 6.4 million shares of Minera Mexicofrom Grupo Mexico.  The acquired sharesrepresented 0.81833% of the outstanding Minera Mexico shares and were purchasedfor $30.3 million.  This acquisition increasedthe Company’s holding in Minera Mexico to 99.95%.

 

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

 

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

 

 

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

 

*Principles of consolidation and combination—*

 

The consolidated combined financial statementsinclude the accounts of subsidiaries of which the Company has voting control,in accordance with FAS No. 94 Consolidation of All Majority-OwnedSubsidiaries.  Such financial statementsare prepared in accordance with accounting principles generally accepted in theUnited States (“U.S. GAAP”).  Asmentioned above, the financial statements also reflect the combination of SCCand Minera Mexico on a historicalcost basis in a manner similar to a pooling of interests.

 

*Use of estimates—*

 

The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Significant items subject to such estimatesand assumptions include 

 

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the carrying value of ore reserves that are thebasis for future cash flow estimates and amortization calculations;environmental, reclamation, closure and retirement obligations; estimates ofrecoverable copper in mill and leach stockpiles; asset impairments (includingestimates of future cash flows); bad debts; inventory obsolescence; deferredand current income tax; valuation allowances for deferred tax assets; reservesfor contingencies and litigation; and fair value of financial instruments.  Management bases its estimates on the Company’shistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results could differ from those estimates.

 

*Revenue recognition—*

 

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

 

Revenue is recognized when title passes to thecustomer.  The passing of title is basedon terms of the contract, generally upon shipment.  Copper revenue is determined based on themonthly average of prevailing commodity prices according to the terms of thecontracts.  The Company providesallowances for doubtful accounts based upon historical bad debt and claimsexperience and periodic evaluation of specific customer accounts.

 

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

 

These provisional pricing arrangements areaccounted as an embedded derivative instrument under Statement of FinancialAccounting Standards No. 133 “Accounting for Derivative Instruments andHedging 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.

 

*Shipping and handling fees and costs—*

 

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

 

*Cash and cash equivalents—*

 

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

 

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*Short-term investments—*

 

Short-term investments consist primarily ofinterest bearing instruments with original maturities greater than 90 days butless than one year.  These deposits areheld to maturity and carried at cost. Due to the short term nature of theinvestments, cost is deemed to approximate fair value.

 

*Inventories—*

 

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

 

Work-in-process inventories represent materialsthat are in the process of being converted into a saleable product.  Conversion processes vary depending on thenature of the copper ore and the specific mining operation.  For sulfide ores, processing includes millingand concentrating and the results from the production of copper and molybdenumconcentrates. Molybdenum in-process inventory includes the cost of molybdenumconcentrates and the costs incurred to convert those concentrates into varioushigh-purity molybdenum chemicals or metallurgical products.

 

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

 

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

 

*Property—*

 

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

 

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

 

*Mine development—*

 

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

 

There is a diversity of practices in the miningindustry in the treatment of drilling and other related costs to delineate newore reserves.  The Company follows thepractices delineated in the next two paragraphs in its treatment of drillingand related costs.

 

Drilling and other associated costs incurred in theCompany’s efforts to delineate new resources, whether near-mine or Greenfieldare expensed as incurred.  These costsare classified as mineral exploration costs. Once the Company determines through feasibility studies that proven andprobable reserves exist and that the drilling and other associated costs embodya probable future benefit that involves a capacity, singly or in combinationwith other assets, to contribute directly or indirectly to future net 

 

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cash inflow, then the costs are classified as minedevelopment costs.  These minedevelopment costs incurred prospectively to develop the property arecapitalized as incurred, until the commencement of production, and areamortized using the units of production method over estimated life of the orebody.  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.

 

Drilling and other related costs incurred in theCompany’s efforts to delineate a major expansion of reserves at an existingproduction property are expensed as incurred. Once the Company determines through feasibility studies that proven andprobable incremental reserves exist and that the drilling and other associatedcosts embody a probable future benefit that involves a capacity, singly or incombination with other assets, to contribute directly or indirectly to futurenet cash inflow, then the costs are classified as mine development costs.  These incremental mine development costs arecapitalized as incurred, until the commencement of production and amortizedusing the units of production over the estimated life of the ore body.  A major expansion of reserves is one thatincreases total reserves at a property by approximately 10%.

 

For the years ended December 31, 2007, 2006and 2005 the Company did not capitalize any drilling and related costs.  The net balance of capitalized minedevelopment costs at December 31, 2007 and 2006 were $48.7 million and$54.4 million, respectively.

 

*Asset retirement obligations (reclamation and remediationcosts)—*

 

The fair value of a liability for asset retirementobligations is recognized in the period in which the liability isincurred.  The liability is measured atfair value and is adjusted to its present value in subsequent periods asaccretion expense is recorded. The corresponding asset retirement costs arecapitalized as part of the carrying value of the related long-lived assets anddepreciated over the asset’s useful life.

 

*Intangible assets—*

 

Intangible assets include primarily the excessamount paid over the book value for investment shares and mining andengineering development studies. Intangible assets are carried at acquisition costs, net of accumulatedamortization and are amortized principally on a unit of production basis overthe estimated remaining life of the mines. Intangible assets are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of the asset may not berecoverable.

 

*Debt issuance costs—*

 

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

 

*Ore reserves—*

 

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

 

The Company updates its estimate of ore reserves atthe beginning of each year. In this calculation the Company uses current metalprices which are defined as the average metal price over the preceding threeyears.  The current price per pound ofcopper, as defined, was $2.66, $2.02 and $1.26 at the end of 2007, 2006 and2005, respectively.  

 

118

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The ore reserve estimates are used to determine**the amortization of mine development andintangible assets.

 

*Leachable material—*

 

At one of its mines the Company capitalizes thecost of materials with low copper content extracted during the mining process(leachable material), which is collected in areas known as leaching dumps.  The amortization of the capitalized costs isdetermined based on the depletion period of the leaching dumps, which isestimated to be five years (unaudited).

 

*Exploration—*

 

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

 

*Income taxes—*

 

Provisions for income taxes are based on taxespayable or refundable for the current year and deferred taxes on temporarydifferences between the amount of taxable income and pretax financial incomeand between the tax bases of assets and liabilities and their reported amountsin the financial statements.  Deferredtax assets and liabilities are included in the financial statements atcurrently enacted income tax rates applicable to the period in which thedeferred tax assets and liabilities are expected to be realized and settled asprescribed in SFAS No. 109, “Accounting for Income Taxes”.  As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision forincome taxes. Deferred income tax assets are reduced by any benefits that, inthe opinion of management, are more likely than not to be realized.

 

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

 

In preparing SCC’s financial statements, theCompany recognizes income taxes in each of the jurisdictions in which itoperates.  For each jurisdiction, theCompany estimates the actual amount of currently payable or receivable as wellas deferred tax assets and liabilities attributable to temporary differencesbetween the financial statement carrying amounts of existing assets and liabilitiesand their respective tax bases.  Deferredincome tax assets and liabilities are measured using enacted tax rates expectedto apply to taxable income in the years in which these temporary differencesare expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rate isrecognized in income 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, the Company considersestimated future taxable income as well as feasible tax planning strategies ineach jurisdiction.  If the Companydetermines that it will not realize all or a portion of its deferred taxassets, the Company will increase its valuation allowance with a charge toincome tax expense.  Conversely, if theCompany determines that it will ultimately be able to realize all or a portionof the related benefits for which a valuation allowance has been provided, allor a portion of the related valuation allowance will be reduced with a creditto income tax expense.

 

119

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*Foreign exchange—*

 

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

 

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

 

Gains and losses resulting from foreign currencytransactions are included in “Cost of sales (exclusive of depreciation,amortization and depletion)” and amounted to $(12.1) million, $(5.8) million,and $(8.9) million in 2007, 2006 and 2005, respectively.

 

*Derivative instruments—*

 

The Company utilizes certain types of derivativefinancial instruments to enhance its ability to manage risks that exist as partof its ongoing business operations. Derivative contracts are reflected as assets or liabilities in theconsolidated balance sheet at their fair value. The estimated fair value of the derivatives is based on market and/ordealer quotations and in certain cases valuation modeling.  From time to time the Company has enteredinto copper and zinc swap contracts to protect a fixed copper and zinc pricefor portions of its metal sales, hedging contracts to fix power prices for aportion of its production costs, interest rate swap agreements to hedge theinterest rate risk exposure on certain of its bank obligations with variableinterest rates and 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 combined statement of earnings.

 

*Asset impairments—*

 

We evaluate our long-term assets when events orchanges in economic circumstances indicate that the carrying amount of suchassets may not be recoverable. Our evaluations are based on business plans thatare prepared using a time horizon that is reflective of our expectations ofmetal prices over our business cycle. We are currently using a long-termaverage copper price of $1.80 per pound of copper and an average molybdenumprice of $12.00 per pound, along with near-term price forecast, for 2008through 2010, reflective of the current price environment, for our impairmenttests. We use an estimate of the future undiscounted net cash flows of therelated asset or asset group over the remaining life to measure whether theasses are recoverable and measure any impairment by reference to fair value.Should estimates of future copper and molybdenum prices decrease significantly,impairments could result.

 

*Other comprehensive income—*

 

Comprehensive income represents changes in equityduring a period, except those resulting from investments by owners anddistributions to owners. During the fiscal years ended December 31, 2007,2006 and 2005, the components of “other comprehensive income (loss)” were theadditional minimum liability for employee benefit obligations, the change infair value of investments available for sale and the adjustment necessary 

 

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to adopt SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans.”

 

*Business segments—*

 

Company management views Southern Copper as havingthree operating segments and manages on the basis of these segments. The significantincrease in the price of molybdenum over the past three years has had animportant impact on the Company’s earnings. Nevertheless, the Company continues to manage its operations on thebasis of the three copper segments.  The segments identified by the Company are:1) Peruvian operations, which include the two open pit copper mines in Peru andthe plants and services supporting such mines. 2) Mexican open pit mines, which include La Caridad and Cananea minecomplexes and their supporting facilities. 3) The Mexican underground mining operations, which include fiveunderground mines that produce zinc, copper, silver and gold, a coal mine, andseveral industrial processing facilities.

 

The Chief Operating Officer of the Company focuseson operating income as measure of performance to evaluate different segments,and to make decisions to allocate resources to the reported segments.

 

*Adoption of new accounting principle—*

 

Effective January 1, 2006, the Company adoptedEmerging Issues Task Force, consensus 04-6, which states that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the costs of the inventory produced.  Accordingly, the Company reversed $289.4million of net cumulative stripping cost as of December 31, 2005 andrecorded a net charge of $166.6 million to retained earnings after recognitionof workers’ participation and tax benefits of $122.8 million.  Amortization of mine stripping for the year2005, amounted to $467.5 million and is included in “Depreciation, amortizationand depletion” in the Company’s statement of earnings.

 

Effective January 1, 2007 the Company adopted Financial Accounting Standards Board(FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”,(FIN No. 48). See note 8 “Income Taxes.”

 

Effective December 31, 2006 the Companyadopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132(R)” Seenote 12 “Benefit Plans.”

 

*New accounting pronouncements—*

 

In December 2007, the FASB published SFAS No. 160“Non Controlling Interests in Consolidated Financial Statements” — an amendmentof ARB No. 51. This statement addresses the reporting of minorityinterests in the results of the parent and provides direction for the recordingof such interests in the financial statements. It also provides guidance forthe recording of various transactions related to the minority interests, aswell as certain disclosure requirements.

 

SFAS No. 160 will be effective for fiscalyears, and interim periods after December 15, 2008, earlier adoption isprohibited and shall be applied prospectively. The presentation and disclosurerequirements shall be applied retrospectively for all periods presented.  The Company will adopt this pronouncement on January 1,2009.

 

The adoption of this statement will have somechanges on the Company’s presentation of financial results and statement ofposition.  However, these changes are notexpected to be of a material nature.

 

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In December 2007, the FASB published SFAS No. 141-R,which replaces SFAS No. 141, “Business Combinations.” This statementimproves the reporting of information about a business combination and itseffects. This statement establishes principles and requirements for how theacquirer will recognize and measure the identifiable assets acquired, theliabilities assumed, 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.

 

SFAS No 141-R will be effective for all businesscombinations with an acquisition date on or after the beginning of the firstannual reporting period after December 15, 2008, earlier adoption isprohibited. The Company will adopt this pronouncement on January 1, 2009.

 

In February 2007 the FASB published SFAS No. 159,“The Fair Value Option for Financial Assets and Financial liabilities.”  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilities differentlywithout having to apply complex hedge accounting provisions.

 

This Statement also establishes presentation anddisclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities.  This statement does notaffect any existing accounting literature that requires certain assets andliabilities to be carried at fair value. This Statement does not establish requirements for recognizing andmeasuring dividend income, interest income, or interest expense.  This statement does not eliminate disclosurerequirements included in other accounting standards, including requirements fordisclosures about fair value measurements included in SFAS No. 157, FairValue Measurements, and SFAS No. 107, Disclosures about Fair Value ofFinancial Instruments.

 

SFAS No. 159 will be effective for all fiscalyears beginning after November 15, 2007. The Company is currently evaluating the impact this statement will haveon its financial position, results of operations and disclosures, should theCompany elect to measure certain financial instruments at fair value.

 

In September 2006 the FASB published SFAS No. 157“Fair Value Measurements”, which provides enhanced guidance for using fairvalue to measure assets and liabilities. SFAS No. 157 establishes a commondefinition of fair value, provides a framework for measuring fair value underU.S. GAAP and expands disclosure requirements about fair value measurements.SFAS No. 157 was to be effective for financial statements issued in fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years.  On February 6, 2008,the FASB issued a position paper that partially defers SFAS No. 158 forone year. The Company is currently evaluating the impact, if any, the adoptionof SFAS No. 157 will have on its financial position, results of operationsand disclosures.

 

 

**NOTE 3- SHORT-TERM INVESTMENTS**

 

Commencing in 2006 the Company began making short terminvestments (90 days to 1 year) in leveraged, indexed instruments.  The balances of short-term investments wereas follows (in millions):

 

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| ** **                                                                                                                                                                                                     | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **Investment**                                                                                                                                                                                                 | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| 3-month note,  issued December 12, 2006, with extensions every 3 months up to a maximum  of 12 months, and with an interest rate of 7% established by a pool of  Mexican and Peruvian bond issues.        |       | $                           | —     |   | $ | 100.0 |   |
| 3-month note,  issued December 12, 2006, with extensions every 3 months up to a maximum  of 13 months and 5 days, with an interest rate of 7% established by a pool of  Mexican and Peruvian bond issues. |       | —                      |       | 100.0 |   |
| 180-day note,  maturing June 12, 2007 with an interest rate of 6%, with barrier range  of $37.669 and $69.957 of SCC stock price, NYSE symbol PCU.                                                        |       | —                      |       | 40.0 |   |
| 180-day note,  maturing June 28, 2007 with an interest rate of 6%, with barrier range  of $38.738 and $71.942 of SCC stock price, NYSE symbol PCU.                                                        |       | —                      |       | 20.0 |   |
| 300-day note,  maturing December 24, 2007 with an interest rate of 3.6%, with barrier  range of $50.00 and $75.00 of SCC stock price, NYSE symbol PCU.                                                    |       | —                      |       | 20.0 |   |
| Short-term  investment in securities issued by public companies with a weighted average  interest rate of 5.07%.                                                                                               |       | 117.9                       |       | — |   |
| Total                                                                                                                                                                                                          |       | $                           | 117.9      |   | $ | 280.0 |   |

 

Inaddition to the 2006 investments, in January 2007 the Company invested$100.0 million in a 3-month note, with extensions every 3 months up to amaximum of 12 months, at an interest rate of 7.25% established by a pool ofMexican and Peruvian bond issues.  Thisinvestment was liquidated on October 3, 2007.

 

Short-term investment in securities held as of December 31, 2007 consists of thoseinvestments available for sale and issued by public companies.  Each security is independent of theothers.  Current value of theseinvestments is deemed to approximate fair value.

 

Someof the other investment instruments were indexed to SCC common stock priceswhile others were leveraged and indexed to certain bond pools.  Both types of instruments could have causedthe principal of the investment to be reduced if the established ranges werebreached.  Since the notes were notprincipal protected the Company risked losing part or all of the initialinvestment.  These instruments had beendeemed to contain embedded derivatives and had been subject to valuation usinga binomial model.

 

Relatedto these investments, the Company recorded losses of $81.0 million and $11.6million in 2007 and 2006, respectively. The losses on these short-term investments were recorded as loss onderivative instruments in the consolidated combined statement of earnings.

 

Additionally,the Company earned interest of $18.7 million and $9.3 million on theseinvestments in 2007 and 2006, respectively, which were recorded in interestincome in the consolidated combined statement of earnings.

 

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**NOTE 4-INVENTORIES:**

 

| ** **        | ** ** | **As of December 31,** | ** ** |
|-------------------|------------|-----------------------------|------------|
| **(in millions)** | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Metals:           |       |                        |       |   |   |
| Finished goods    |       | $                           | 65.7       |   | $ | 116.1 |   |
| Work-in-process   |       | 140.7                       |       | 121.9 |   |
| Supplies          |       | 241.9                       |       | 175.7 |   |
| Total inventories |       | $                           | 448.3      |   | $ | 413.7 |   |

** **

** **

**NOTE 5-PROPERTY:**

 

| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                    | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Buildings and equipment                              |       | $                           | 6,126.9    |   | $ | 5,569.1 |   |
| Construction in progress                             |       | 309.8                       |       | 625.8 |   |
| Mine development                                     |       | 263.2                       |       | 261.1 |   |
| Land, other than mineral                             |       | 74.2                        |       | 73.6 |   |
| Total property                                       |       | $                           | 6,774.1    |   | 6,529.6 |   |
| Accumulated depreciation, amortization and depletion |       | (3,205.8                    | )          | (2,991.3 | ) |
| Total property, net                                  |       | $                           | 3,568.3    |   | $ | 3,538.3 |   |

 

Depreciation, amortization and depletion expensefor the years ended December 31, 2007, 2006 and 2005 amounted to $263.8million, $221.9 million and $201.1 million, respectively.

 

 

**NOTE 6-CAPITALIZED LEACHABLE MATERIALCOST:**

 

| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                   | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Capitalized leachable material      |       | $                           | 374.4      |   | $ | 323.8 |   |
| Accumulated amortization            |       | (154.1                      | )          | (92.3 | ) |
| Capitalized leachable material, net |       | $                           | 220.3      |   | $ | 231.5 |   |

 

Amortization of leachable material is included in “Depreciation,amortization and depletion” and amounted to $61.8 million, $50.4 million and$5.7 million in 2007, 2006 and 2005, respectively.

 

The Company’s policy of deferring leachablematerial cost increased (decreased) operating costs by $10.1 million, $(19.3)million and $(68.0) million in 2007, 2006, and 2005, respectively, as comparedto what such amounts would have been if the Company expensed leachable materialcosts as incurred.

 

 

**NOTE 7-INTANGIBLE ASSETS:**

** **

| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                        | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Mining concessions                       |       | $                           | 121.2      |   | $ | 121.2 |   |
| Mine engineering and development studies |       | 6.0                         |       | 6.0 |   |
|                                     |       | 127.2                       |       | 127.2 |   |
| Accumulated amortization                 |       | (28.4                       | )          | (26.1 | ) |
| Goodwill                                 |       | 17.0                        |       | 17.0 |   |
| Intangible assets, net                   |       | $                           | 115.8      |   | $ | 118.1 |   |

 

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Amortization of intangibles was $2.3 million, $2.7million and $2.9 million for the years ended December 31, 2007, 2006 and2005, respectively.  The estimatedaggregate amortization expense for intangibles is $14.2 million for the years2008 through 2012, approximately $2.8 million per year.

 

 

**NOTE 8-INCOME TAXES:**

 

The components of the provision for income taxesare as follows:

 

 

| ** **                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| **(in millions)**                | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| U.S. federal and state:          |       |                             |       |   |   |   |   |
| Current                          |       | $                                | 79.8       |   | $ | (4.0 | ) | $ | 13.4 |   |
| Deferred                         |       | (48.3                            | )          | 22.8 |   | — |   |
|                             |       | 31.5                             |       | 18.8 |   | 13.4 |   |
| Foreign (Peru and Mexico):       |       |                             |       |   |   |   |   |
| Current                          |       | 1,038.8                          |       | 996.7 |   | 618.6 |   |
| Deferred                         |       | 115.1                            |       | (56.4 | ) | (42.3 | ) |
|                             |       | 1,153.9                          |       | 940.3 |   | 576.3 |   |
| Total provision for income taxes |       | $                                | 1,185.4    |   | $ | 959.1 |   | $ | 589.7 |   |

 

The source of income tax is asfollows:

 

| ** **                                            | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                     | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Earnings by location:                                 |       |                                      |       |   |   |   |   |
| U.S.                                                  |       | $                                         | 13.5       |   | $ | 12.1 |   | $ | 5.2 |   |
| Foreign (Peru  and Mexico)                            |       | 3,398.4                                   |       | 2,993.9 |   | 1,997.2 |   |
| Earnings before taxes on income and minority Interest |       | $                                         | 3,411.9    |   | $ | 3,006.0 |   | $ | 2,002.4 |   |

 

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

 

 

| ** **                                                      | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected tax                                                    |       | 30.0                                      | %          | 30.0 | % | 30.0 | % |
|                                                            |       |                                      |       |   |   |   |   |
| Effect of income  taxed at a rate other than the statutory rate |       | (1.0                                      | )          | 0.4 |   | 1.5 |   |
| Dividends                                                       |       | 2.7                                       |       | — |   | 4.1 |   |
| Permanent  differences                                          |       | 1.0                                       |       | 1.8 |   | 0.7 |   |
| Effect of tax  rate change in Mexico                            |       | —                                    |       | (0.1 | ) | (2.5 | ) |
| Loss of tax  benefits upon corporate reorganization             |       | —                                    |       | — |   | (1.8 | ) |
| Peru tax on net  income deemed distributed                      |       | 1.4                                       |       | 1.4 |   | 1.5 |   |
| Reduction in  valuation allowance                               |       | —                                    |       | (2.7 | ) | — |   |
| Adjustment to  deferred taxes                                   |       | —                                    |       | 2.9 |   | — |   |
| Other                                                           |       | 0.6                                       |       | (1.8) |   | (4.1) |   |
| Effective income  tax rate                                      |       | 34.7                                      | %          | 31.9 | % | 29.4 | % |

 

The Company files income tax returns in threejurisdictions, Peru, Mexico and the United States, each of which has adifferent statutory rate for 2007.  Thestatutory income tax rates for Peru are 30% for the three years presentedabove, for Mexico the statutory rates are 28%, 29% and 30% for the years 2007,2006 and 2005, respectively, and for the United States 35% for the three yearspresented.  The expected rate used aboveis the statutory tax rate for Peru.

 

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The Company has chosen to use this rate for thisreconciliation because the Peruvian income tax provision is the largestcomponent of tax expense for each of the three years presented.  In addition, it is the rate applicable toMexico for the year 2005.  For all of theyears presented, both SCC and Minera Mexico filed separate tax returns in theirrespective tax jurisdictions.  Althoughthe tax rules and regulations imposed in the separate tax jurisdictionsmay vary significantly, similar permanent items exist, such as the impact ofchanges in statutory tax rates, and income and expense items, which arenondeductible or nontaxable.  Somepermanent differences relate specifically to SCC such as the allowance in theU.S for percentage depletion.

 

A special in depth analysis of Peruvian and U.S.deferred taxes resulted in the above “Adjustment to deferred taxes” in2006.  The impact of the change in thevaluation allowance reflects the change in valuation allowances for thecombined companies.  See the “Out ofperiod adjustment” discussion in this note for further details regarding thesetwo adjustments.

 

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

 

 

| ** **                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                             | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Assets:                                       |       |                        |       |   |   |
| Inventories                                   |       | $                           | 14.3       |   | $ | 3.2 |   |
| Capitalized  exploration expenses             |       | 11.7                        |       | — |   |
| Capitalized mine  stripping                   |       | —                      |       | 40.7 |   |
| Foreign tax  credit carryforwards             |       | 2.9                         |       | 102.4 |   |
| AMT credit  carryforward                      |       | 27.6                        |       | 29.2 |   |
| Unrealized loss  on short-term investment     |       | 9.9                         |       | — |   |
| Reserves                                      |       | 79.2                        |       | — |   |
| Tax loss  carryforward                        |       | 0.1                         |       | — |   |
| Other accrued  expenses                       |       | —                      |       | 86.0 |   |
| Other                                         |       | 26.7                        |       | 31.7 |   |
| Total deferred tax assets                     |       | 172.4                       |       | 293.2 |   |
| Liabilities:                                  |       |                        |       |   |   |
| Property, plant  and equipment                |       | (221.1                      | )          | (315.1 | ) |
| Deferred charges                              |       | (83.9                       | )          | (77.1 | ) |
| Other                                         |       | (14.5                       | )          | (15.7 | ) |
| Total deferred tax liabilities                |       | (319.5                      | )          | (407.9 | ) |
|                                          |       |                        |       |   |   |
| Total net deferred tax assets / (liabilities) |       | $                           | (147.1     | ) | $ | (114.7 | ) |

 

*U.S. Tax Matters—*

 

U.S. income taxes are not accrued for theunremitted earnings of foreign subsidiaries that have been or are intended tobe invested indefinitely.  The Companyhas not established a U.S. deferred tax liability for $1.6 billion inunremitted earnings as of December 31, 2007.  It is not practicable to estimate an amountof tax that could be payable if there was a remittance of the earnings that areto be permanently reinvested.

 

At December 31, 2006, the foreign tax credit(FTC) carryforward available to reduce possible future U.S. income taxapproximated $102.4 million.  Primarilyas a result of the $957.0 cash dividend in 2007 from its Minera Mexicosubsidiary 100% of the FTC carryforwards at December 31, 2006 wereutilized in 2007.

 

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Without the benefit ofthese carryovers, in 2007 the Company would have had to pay a U.S. current cashtax of approximately $90.0 million on the dividend income in 2007.  The additional U.S. tax on the dividend from Mexicois the result of the rate differential between the U.S. federal tax rate andthe Mexican effective tax rate.  At December 31,2007 $2.9 million of FTC’s remained available for carryforward.  This credit can be carried forward for 10years.  It will expire without benefit,if not utilized by 2018.

 

At December 31, 2007, the minimum tax creditcarryforward available is $27.6 million. The minimum tax credit is not subject to expiration.

 

*Peruvian Tax Matters—*

 

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

 

*Mexican Tax Matters—*

 

On October 1, 2007, the Mexican government enacted a newlaw, which generally takes effect on January 1, 2008.  The law introduces a flat tax, which replacesMexico’s asset tax and will apply along with Mexico’s regular income tax.  In general Mexican companies are subject topaying the greater of the flat tax or the income tax.  As of December 31, 2007, this tax lawchange does not have an effect on the Company’s deferred tax position.

 

The flat tax is calculated by applying a 16.5% taxrate in 2008, a 17% tax rate in 2009, and 17.5% in 2010 and the followingyears.  Although the flat tax is definedas a minimum tax it has a wider taxable base as many of the tax deductionsallowed for income tax purposes are not allowed for the flat tax.

 

The Mexican income tax law as amended reduced theincome tax rate to 30% in 2005, 29% in 2006 and to 28% in 2007, where it is expectedto remain in the foreseeable future.

 

Out of period adjustment—

 

In 2006, the Companycompleted a comprehensive deferred tax analysis.  This analysis was performed as of December 31,2005, 2004 and 2003.  The result of thisanalysis was an increase in deferred tax liabilities of $85.4 million and arelease of valuation allowance of $81.2 million.  The net effect of this analysis was $4.2million of additional tax expense in 2006.

 

In this analysis, theCompany trued up its Peru and US gross temporary differences and then measuredits U.S. deferred taxes 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 tothe comprehensive 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 

 

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exercise component ofthe comprehensive analysis resulted in the Company releasing the December 31,2004 cumulative valuation allowance of $81.2 million.

 

The combined net effectof the deferred tax analysis was an increase in the total income tax expense of$4.2 million.  This adjustment 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 No. 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

 

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

 

Theamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate was $42.6 million at December 31, 2007 and $25.4million at January 1, 2007.  Theseamounts relate entirely to U.S. income tax matters.  The Company has no unrecognized Peruvian orMexican tax benefits.

 

Thetotal amount of unrecognized tax benefits in 2007 were as follows:

 

| Unrecognized tax  benefits, opening balance                |   | $      | 32.0   |   |
|------------------------------------------------------------|--------|--------|--------|--------|
| Adjustment to  unrecognized tax benefits at implementation |   | 84.1   |   |
| Gross increases  — tax positions in prior period      |   | 11.5   |   |
| Gross decreases  — tax positions in prior period      |   | (10.1  | )      |
| Gross increases  — current-period tax positions       |   | 18.8   |   |
| Settlements                                                |   | — |   |
| Lapse of statute  of limitations                           |   | — |   |
| Unrecognized tax  benefits, ending balance                 |   | $      | 136.3  |   |

 

Theincrease in the unrecognized tax benefit of $20.2 million includes individuallyinsignificant increases and decreases in the current and prior year taxpositions.  The “adjustment tounrecognized tax benefits at implementation” is necessary because there was anincorrect netting of foreign tax credit carryforwards with the unrecognized taxbenefits at implementation.

 

TheCompany’s tax provision for the year ended December 31, 2007 includedinterest of $5.2 million.  As of December 31,2007 and January 1, 2007, the Company’s liability for uncertain taxpositions included accrued interest of $19.1 million and $13.9 million,respectively.  The financial statementsinclude no penalties because management expects no penalties to apply to theresolution of any of its uncertain tax positions.

 

Varioustax positions are currently under review by the U.S. Internal Revenue Service (“IRS”)Appeals and Examination Offices.  It isnot likely that this review will result in a cash payment within the twelvemonths preceding December 31, 2008.

 

Suchpositions include the determination of appropriate depreciation periods forfixed 

 

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assets,the capitalization of costs to the copper inventory inherent in leachabledumps, and percentage depletion deductions.

 

TheIRS requests the Company to use longer depreciable lives, resulting in the sameexpense being spread over a longer period. The IRS also requests the Company to capitalize more interest expenseagainst capital projects, converting current interest expense into futuredepreciation expense.

 

TheIRS requests the Company capitalize the cost of drilling, blasting, hauling,and dumping leachable material and waste as an inventory item.  This will result in a deferral of theseexpenses for ten to fifteen years, until electrowon copper leached from thedumped material is sold.  These three adjustments,if accepted by the Company, will generally not affect the Company’s total taxexpense, but will accelerate taxes due to earlier years.

 

TheIRS has also questioned the value of services rendered by a subsidiary companyof Minera Mexico, Servicios de Apoyo Administrativo, S.A. de C.V., and seeks todisallow a portion of the fees paid.

 

Lastly,the Company deducts, for U.S. tax purposes, a depletion allowance based on apercentage of its income from mining. The IRS requests the Company report a lower income from mining, andallocate more profit to smelting and refining. These last two adjustments would result in a permanent increase intaxable income and, if accepted by the Company, will result in a greater taxexpense.  All five adjustments wouldchange the year in which tax is due, and result in interest charges.  Any interest paid will be an expensedeductible for tax purposes.

 

Asof December 31, 2007, Management did not expect that a final resolution ofthe IRS review would result in a significant change in the Company’sliability.  The Company’s reasonableexpectations about future resolutions of uncertain items did not materiallychange during the year ended December 31, 2007.

 

Thefollowing tax years remain open to examination and adjustment by the Company’sthree major tax jurisdictions:

 

| Peru:   |   | 2003 and all following 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.:   |   | 1997 and all following years                                                                                                                                                                     |
| Mexico: |   | 2002 and all following years                                                                                                                                                                     |

 

**NOTE 9-WORKERS’ PARTICIPATION:**

 

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

 

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

 

The provision for workers’ participation isincluded in “Cost of sales (exclusive of depreciation, amortization anddepletion)” in the consolidated combined statement of 

 

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earnings. For the years ended December 31, 2007, 2006 and 2005, workers’participation expense was $310.9 million, $271.5 million and $219.1 million,respectively.

 

**NOTE 10-ASSET RETIREMENTOBLIGATION**

 

In2005 the Company added an estimated asset retirement obligation for its miningproperties in Peru, as required by the Mine Closure Law, enacted in 2003 andregulated in 2005.  In accordance withthe law, a conceptual mine closure plan, without costs, was submitted to thePeruvian Ministry of Energy and Mines (“MEM”) in August 2006.  According to regulations, the plan wassubject to review by MEM for 45 days. After the MEM review the Company will have 90 days to prepare andresubmit the mine closure plan, including costs, which will then be subject toMEM approval and open to public discussion and comment in the area of theCompany operations.  The Company is stillawaiting MEM’s initial review.  However,as of December 31, 2007, the Company has made an estimated provision of$6.4 million for this liability in its financial statements, but believes thatthis estimate should be viewed with caution, pending final approval of the mineclosure plan.

 

Theclosure cost recognized for this liability includes the estimated cost requiredat the Peruvian operations, based on the Company’s experience, and includescost at the Ilo smelter, the tailing disposal, and dismantling the Toquepalaand Cuajone concentrators, and the shops and auxiliary facilities.  Based on this estimated cost, the Company recordedan additional asset retirement liability in 2005 of $5.2 million, whichincreased its previously recorded asset retirement liability to $11.2 million.This increased net property by $4.6 million.

 

The following is a reconciliation of the assetretirement obligation for the two years ended December 31, 2006 and 2007(in millions):

 

| Balance January 1, 2006    |   | $      | 11.2   |   |
|---------------------------------|--------|--------|--------|--------|
| Additions, changes in estimates |   | — |   |
| Accretion expense               |   | 1.0    |   |
|                            |   |   |   |
| Balance, December 31, 2006 |   | 12.2   |   |
| Additions, changes in estimates |   | — |   |
| Accretion expense               |   | 0.9    |   |
|                            |   |   |   |
| Balance, December 31, 2007 |   | $      | 13.1   |   |

 

130

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**NOTE 11-FINANCING:**

 

*Long term debt:*

 
| ** **             | ** **                                                                                                                                                  | **As of December 31,** | ** ** |
|------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|------------|
| **(in millions)**      | ** **                                                                                                                                                  | **2007**                    | ** ** | **2006** | ** ** |
| **SCC:**               |                                                                                                                                                        |                        |       |   |   |
| 6.375%                 | Notes due 2015 ($200 million face amount, less  unamortized discount of $0.9 million and $0.9 million at December 31,  2007 and 2006, respectively)    |                        | $          | 199.1 |   | $ | 199.1 |   |
| 7.500%                 | Notes due 2035 ($1,000 million face amount, less  unamortized discount of $15.8 million and $16.0 million at  December 31,2007 and 2006, respectively) |                        | 984.2      |   | 984.0 |   |
| 6.08%                  | Mitsui credit agreement due 2013 (Japanese LIBO rate  plus 1.25% (6.60% at December 31, 2006)                                                          |                        | 60.0       |   | 70.0 |   |
| **Minera  Mexico:**    |                                                                                                                                                        |                        |       |   |   |
| 8.25%                  | Yankee  bonds—Series A due 2008                                                                                                                   |                        | 150.0      |   | 150.0 |   |
| 9.25%                  | Yankee  bonds—Series B due 2028                                                                                                                   |                        | 56.4       |   | 125.0 |   |
| Total debt             |                                                                                                                                                        | 1,449.7                     |       | 1,528.1 |   |
| Less, current  portion |                                                                                                                                                        | (160.0                      | )          | (10.0 | ) |
| Total long-term  debt  |                                                                                                                                                        | $                           | 1,289.7    |   | $ | 1,518.1 |   |

 

In 1998, Minera Mexico issued $500 million ofunsecured debt, which are referred to as Yankee bonds.  These bonds were offered in two series: Series Afor $375 million, with an interest rate of 8.25% and a 2008 maturity, and Series Bfor $125 million, with an interest rate of 9.25% and a 2028 maturity date.  During 2007, the Company repurchased $68.6million of the Series B bonds and during 2006 the Company repurchased$23.3 million of the Series A bonds. In connection with these purchases the Company paid premiums of $16.6million and $1.1 million, in 2007 and 2006, respectively, which are included inthe consolidated combined statement of earnings on the line “Loss on debtprepayments.”  The bonds contain acovenant requiring Minera Mexico to maintain a ratio of EBITDA to interestexpense of not less than 2.5 to 1.0 as such terms are defined by thefacility.  At December 31, 2007,Minera Mexico is in compliance with this covenant.

 

In 1999, SCC entered into a $100 million, 15-yearloan agreement with Mitsui.  The interestrate for this loan is the Japanese LIBO rate plus 1.25% (Japanese LIBO for thisloan at December 31, 2007 was 4.83%). The Mitsui credit agreement is collateralized by pledges of receivableson 31,000 tons of copper per year.  TheMitsui agreement requires the Company to maintain a minimum stockholders’equity of $750 million and a specific ratio of debt to equity.  Reduction of Grupo Mexico’s direct orindirect voting interest in the Company to less than a majority wouldconstitute an event of default under the Mitsui agreement.  At December 31, 2007, the Company is incompliance with these covenants.

 

In 2005, the Company prepaid a Minera Mexico $600million Citibank credit facility.  Inconnection with the prepayment of this facility, the Company wrote off $10.2million of deferred financing costs which is recorded in the consolidatedcombined statement of earnings on the line “Interest expense.”

 

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

 

131

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respectively. On July 28, 2005 this credit facility was repaid and the Companywrote off $2.5 million of deferred financing cost.

 

On July 27, 2005 the Company issued $200million 6.375% Notes due 2015 at a discount of $1.1 million and $600 million7.5% Notes due 2035, at a discount of $5.3 million.  The notes are senior unsecured obligations ofthe Company.  The Company capitalized$8.8 million of costs associated with this facility and are included in “Otherassets”, non-current on the consolidated balance sheet.  The net proceeds from the issuance and saleof the notes were used to repay outstanding indebtedness of the Company’sPeruvian and Mexican operations under its $200 million and $600 million ($480million outstanding) credit facilities, respectively, and the balance was usedfor general corporate purposes.  TheCompany filed a Registration Statement on Form S-4 with respect to thesenotes on October 28, 2005.  On January 3,2006 the Company completed an exchange offer for $200 million, 6.375% Notes due2015 and $600 million, 7.5% Notes due 2035. In the exchange offer, $197.4 million of the 6.375% old notes due 2015were tendered in exchange for an equivalent amount of new notes and anaggregate of $590.5 million of the 7.5% old notes due 2035 were tendered inexchange for 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 ofsignificant exceptions, and some of these covenants will cease to be applicablebefore the notes mature if the notes attain an investment grade rating.  At December 31, 2007 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 are rated Baa2 by Moody’s,BBB- by Standard & Poor’s, and BBB- by Fitch. The notes were issued ata discount of $10.8 million. The Company capitalized $3.2 million of costassociated with this facility and is included in “Other assets, net”non-current on the consolidated balance sheet. The Company used proceeds fromthe May 2006 issuance 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 borrowingsat December 31, 2007, are as follows:

 

| **(in millions)** | ** ** | ** **        | ** ** |
|-------------------|------------|-------------------|------------|
| **Year**          | ** ** | **Principal Due** | ** ** |
| 2008              |       | $                 | 160.0      |   |
| 2009              |       | 10.0              |       |
| 2010              |       | 10.0              |       |
| 2011              |       | 10.0              |       |
| 2012              |       | 10.0              |       |
| Thereafter        |       | 1,266.4           |       |
| Total             |       | $                 | 1,466.4    |   |

 

Total debt maturities do not include the debtdiscount valuation account of $16.7 million.

 

132

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At December 31, 2007 and 2006, other assetsincluded $6.8 million and $7.3 million, respectively, held in escrow accountsas required by the Company’s loan agreements. The funds are released fromescrow as scheduled loan repayments are made.

 

At December 31, 2007 and 2006, the balance ofcapitalized debt issuance costs was $11.8 million and $12.6 million,respectively.  Amortization charged tointerest expense was $0.8 million, $1.6 million and $4.1 million in 2007, 2006and 2005, respectively.

 

**NOTE 12-BENEFIT PLANS:**

 

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

 

*SCC Defined Benefit PensionPlans.*

 

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

 

The components of net periodic benefit costscalculated in accordance with SFAS No. 87 “Employers’ Accounting forPensions”, using December 31 as a measurement date, consist of thefollowing:

 

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| **(in millions)**              | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest cost                  |       | $                                | 0.6        |   | $ | 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 |   | $ | 0.1 |   |

 

The change in benefit obligation and plan assetsand a reconciliation of funded status are as follows:

 

 
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                 | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Change in benefit obligation:                     |       |                        |       |   |   |
| Projected benefit obligation at beginning of year |       | $                           | 12.4       |   | $ | 11.9 |   |
| Interest cost                                     |       | 0.6                         |       | 0.7 |   |
| Benefits paid                                     |       | (0.9                        | )          | (0.9 | ) |
| Actuarial gain (loss)                             |       | (0.5                        | )          | 0.7 |   |
| Projected benefit obligation at end of year       |       | $                           | 11.6       |   | $ | 12.4 |   |
|                                              |       |                        |       |   |   |
| Change in Plan Assets:                            |       |                        |       |   |   |
| Fair value of plan assets at beginning of year    |       | $                           | 12.0       |   | $ | 12.4 |   |
| Actual return on plan assets                      |       | 0.8                         |       | 0.5 |   |
| Employer contributions                            |       | 0.5                         |       | — |   |
| Benefits paid                                     |       | (0.9                        | )          | (0.9 | ) |
| Administrative expenses                           |       | —                      |       | — |   |
| Fair value of plan assets at end of year          |       | $                           | 12.4       |   | $ | 12.0 |   |
|                                              |       |                        |       |   |   |
| Funded Status at end of year:                     |       | $                           | 0.8        |   | $ | (0.4 | ) |

 

133

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| SFAS No. 158 amounts recognized in statement of  financial position consists of:         |   |   |   |   |   |
|-----------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Non current  assets                                                                           |   | $      | 0.8    |   | — |   |
| Current  liabilities                                                                          |   |   |   | — |   |
| Non current  liabilities                                                                      |   | — |   | $      | 0.4    |   |
| Total                                                                                         |   | $      | 0.8    |   | $      | 0.4 |   |
| SFAS  No. 158 amounts recognized in accumulated other comprehensive income  consists of: |   |   |   |   |   |
| Net  loss (gain) net of income tax                                                            |   | $      | 1.8    |   | $      | 2.4 |   |
| Prior  service cost (credit)                                                                  |   | — |   | — |   |
| Transition  obligation (asset)                                                                |   | — |   | — |   |
| Total  (net of income tax of $1.0 million and $1.3 million, respectively)                     |   | $      | 1.8    |   | $      | 2.4 |   |

 

The following table summarized the changes inaccumulated other comprehensive income for the year ended December 31,2007 related to our pension and post-retirement plans (net of income tax inmillion):

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                 | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Reconciliation  of accumulated other comprehensive income:        |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year |       | $                           | 2.4        |   | $ | — |   |
|                                                              |       |                        |       |   |   |
| Effect of  adopting FAS 158                                       |       | —                      |       | 2.4 |   |
| Net loss/(gain)  amortized during the year                        |       | (0.6                        | )          | — |   |
| Net adjustment  to acccumulated other comprehensive income        |       | (0.6                        | )          | 2.4 |   |
|                                                              |       |                        |       |   |   |
| Accumulated  other comprehensive income at end of plan year       |       | $                           | 1.8        |   | $ | 2.4 |   |

 

The following table summarizes the amounts inaccumulative other comprehensive income amortized and recognized as a componentof net periodic benefit cost in 2007 (net of income tax, in millions):

 
| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                           | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Amortization of prior service cost (credit) |       | —                      |       | N/A |   |
| Amortization of net losses                  |       | (0.1                        | )          | N/A |   |
| Total amortization expenses                 |       | $                           | (0.1       | ) | N/A |   |
|                                             |            |                             |            |  |  |  |

 

The assumptions used to determine the pensionobligation and seniority premiums as of year end and net cost in the ensuingyear were:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                   |       | 6.25     | %          | 5.50     | %          | 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      |       |

 

 

134

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

 

| ** **   | ** ** | **Expected  Benefit Payments** | ** ** |
|--------------|------------|--------------------------------|------------|
| **Year**     | ** ** | **(in millions)**              | ** ** |
| 2008         |       | $                              | 0.9        |   |
| 2009         |       | 0.9                            |       |
| 2010         |       | 0.9                            |       |
| 2011         |       | 0.9                            |       |
| 2012         |       | 0.9                            |       |
| 2013 to 2016 |       | 4.5                            |       |
| Total        |       | $                              | 9.0        |   |

 

The Company’s funding policy is to contributeamounts to the qualified plan sufficient to meet the minimum fundingrequirements set forth in the Employee Retirement Income Security Act of 1974,plus such additional amounts as the Company may determine to beappropriate.  Plan assets are invested incommingled stock and bond funds.

 

The Company’s policy for determining assetmix-targets includes periodic consultation with recognized third partyinvestment consultants.  The expectedlong-term rate of return on plan assets is updated periodically, taking intoconsideration asset allocations, historical returns and the current economicenvironment.  Based on these factors weexpect our assets will earn an average of 4.5% per annum assuming our long-termmix will be consistent with our current mix and an assumed discount rate of6.25%.  The fair value of plan assets isimpacted by general market conditions. If actual returns on plan assets vary from the expected returns, actualresults could differ.

 

*SCC Post-retirement Health CarePlan—*

 

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

 

Effective October 31, 2000, the health careplan for retirees was terminated and the Company informed retirees that theywould be covered by the then in effect post-retirement health care plan ofAsarco, a former shareholder of the Company and a subsidiary of Grupo Mexico,which offered substantially the same benefits and required the samecontributions.  As a result of theChapter 11 proceedings, Asarco is no longer managing the plan.  The Company has assumed management of theplan and is currently providing health benefits to retirees.  The plan is accounted for in accordance withSFAS No. 106, “Employers’ Accounting for Postretirement Benefits OtherThan Pensions”, as amended by SFAS No. 158.

 

The components of net period benefit costs are asfollows:

 
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| **(in millions)**         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost              |       | $                                | —     |   | $ | — |   | $ | — |   |
| Interest cost             |       | 0.1                              |       | 0.1 |   | 0.1 |   |
| Net periodic benefit cost |       | $                                | 0.1        |   | $ | 0.1 |   | $ | 0.1 |   |

 

135

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The change in benefit obligation and areconciliation of funded status are as follows:

 
| ** **                                                                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                                            | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Change in Benefit Obligation:                                                                |       |                        |       |   |   |
| Benefit  obligation at beginning of year                                                     |       | $                           | 1.4        |   | $ | 1.4 |   |
| Interest cost                                                                                |       | 0.1                         |       | 0.1 |   |
| Plan Amendments                                                                              |       | —                      |       | — |   |
| Benefits paid                                                                                |       | (0.1                        | )          | (0.1 | ) |
| Actuarial (gain)  or loss                                                                    |       | (0.1                        | )          | — |   |
| Benefit obligation at end of year                                                            |       | $                           | 1.3        |   | $ | 1.4 |   |
|                                                                                         |       |                        |       |   |   |
| Change in Plan Assets:                                                                       |       |                        |       |   |   |
| Fair value of  plan assets at beginning of year                                              |       | $                           | —     |   | $ | — |   |
| Employer  contributions                                                                      |       | 0.1                         |       | 0.1 |   |
| Benefits paid                                                                                |       | (0.1                        | )          | (0.1 | ) |
| Fair value of plan assets at end of year                                                     |       | $                           | —     |   | $ | — |   |
|                                                                                         |       |                        |       |   |   |
| Funded status at end of year                                                                 |       | $                           | (1.3       | ) | $ | (1.4 | ) |
|                                                                                         |       |                        |       |   |   |
| SFAS No. 158 amounts recognized in statement of  financial position consists of:        |       |                        |       |   |   |
| Non current  assets                                                                          |       | —                      |       | — |   |
| Current liabilities                                                                          |       | (0.1                        | )          | (0.1 | ) |
| Non current liabilities                                                                      |       | (1.2                        | )          | (1.3 | ) |
| Total                                                                                        |       | $                           | (1.3       | ) | $ | (1.4 | ) |
|                                                                                         |       |                        |       |   |   |
| SFAS No. 158 amounts recognized in accumulated  other comprehensive income consists of: |       |                        |       |   |   |
| Net loss (gain)                                                                              |       | $                           | 0.4        |   | $ | 0.4 |   |
| Prior service  cost (credit)                                                                 |       | (0.3                        | )          | (0.3 | ) |
| Total (net of  income tax)                                                                   |       | $                           | 0.1        |   | $ | 0.1 |   |

 

The following table summarized the changes inaccumulated other comprehensive income for the year ended December 31,2007 related to our pension and post-retirement plans (pre-tax in million):

 
| ** **                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                  | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Reconciliation of accumulated other comprehensive  income:         |       |                        |       |   |   |
| Accumulated  other comprehensive income at beginning of plan year: |       | $                           | 0.1        |   | $ | — |   |
|                                                               |       |                        |       |   |   |
| Effect of  adopting FAS 158                                        |       | —                      |       | 0.1 |   |
| Net loss/gain amortized  during the year                           |       | (*                          | )          | — |   |
| Net adjustment to accumulated other comprehensive  income          |       | (*                          | )          | 0.1 |   |
|                                                               |       |                        |       |   |   |
| Accumulated other comprehensive income at end of  plan year        |       | $                           | 0.1        |   | $ | 0.1 |   |

----

(*) less than $0.1 million

 

The following table summarizes the amounts inaccumulative other comprehensive income amortized and recognized as a componentof net periodic benefit cost in 2007 (net of income tax, in millions):

 
| ** **                                   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                            | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Amortization  of prior service cost (credit) |       | $                           | 0.1        |   | N/A |   |
| Amortization  of net losses                  |       | (0.1                        | )          | N/A |   |
| Total  amortization expenses                 |       | $                           | —     |   | N/A |   |

 

 

136

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The discount rate used in the calculation of otherpost-retirement benefits and cost as of December 31, 2007 and 2006 was6.25% and 5.5%, respectively.

 

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

 

| **(in millions)** | ** ** | **Expected**         | ** ** |
|-------------------|------------|----------------------|------------|
| **Year**          | ** ** | **Benefit Payments** | ** ** |
| 2008              |       | $                    | 0.1        |   |
| 2009              |       | 0.1                  |       |
| 2010              |       | 0.1                  |       |
| 2011              |       | 0.1                  |       |
| 2012              |       | 0.1                  |       |
| 2013 to 2016      |       | 0.3                  |       |
| Total             |       | $                    | 0.8        |   |

 

For measurement purposes, a 8.0% annual rate ofincrease in the per capita cost of covered health care benefits was assumed for2007.  The rate is assumed to decreasegradually to 5% for 2013 and remain at that level thereafter.

 

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

 

*Minera Mexico Defined BenefitPension Plans—*

 

Minera Mexico has established for its salariedemployees a defined contribution benefit pension plan.  This plan is in addition to benefits grantedby the Instituto Mexicano de Seguro Social (IMSS).  Under this plan, the Company will make yearlymatching contributions equaling 3% of participating employee’s basesalary.  Related to this, the Companyrecorded a contribution expense of $0.7 million and $1.1 million in 2007 and2006, respectively. The defined contribution plan liability was $3.4 millionand $4.1 million in 2007 and 2006, respectively.

 

The benefits earned in the Company’s definedbenefit plan are based on salaries adjusted by inflation.  As Mexico has experienced a period of lowinflation in recent years, the benefits earned from the IMSS have exceededthose earned from the Company’s non-contributory defined benefit plan.  Due to this fact, and due to the fact thatthe Company wants to assure the economic well being of its retired employees,the Company decided in 2006 to create a new defined contribution plan.  Certain groups of salaried employees agreedto transfer from the non-contributory defined benefit plan to the new definedcontribution plan.  Benefits earned byparticipating employees as of January 1, 2006 were transferred into thenew defined contribution plan.  Theinitial transfer of benefits from the non-contributory defined benefit plan tothe new defined contribution plan equaled $13.7 million.

 

In 2006 the change in plan was accounted for as asettlement under SFAS88, “Employee’s Accounting for Settlements andCurtailments of Deferred Benefit Pension Plans and for Termination Benefits”.  The Company recorded a $1.7 millionsettlement gain in relation to the change in plan.

 

Minera Mexico has established for its unionemployees a non-contributory defined benefit pension plan. This plan is inaddition to benefits granted by IMSS.

 

137

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The components of net periodic benefit costscalculated in accordance with SFAS No. 87 “Employers Accounting forPensions”, using December 31 as a measurement date, consist of thefollowing:

 
| ** **                             | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                      | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest cost                          |       | $                                         | 2.2        |   | $ | 1.8 |   | $ | 2.9 |   |
| Service cost                           |       | 2.2                                       |       | 2.1 |   | 2.6 |   |
| Expected return on plan assets         |       | (3.1                                      | )          | (2.0 | ) | 3.1 |   |
| Amortization of transition assets, net |       | (0.1                                      | )          | — |   | (0.2 | ) |
| Recognized net actuarial loss          |       | (0.2                                      | )          | — |   | 0.2 |   |
| Settlement (Gain)                      |       | —                                    |       | (1.7 | ) | — |   |
| Amortization of prior services cost    |       | 0.2                                       |       | — |   | — |   |
| Net period benefit cost                |       | $                                         | 1.2        |   | $ | 0.2 |   | $ | 8.6 |   |

 

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

 
| ** **                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in millions)**                                                                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Change in benefit obligation:                                                                |       |                  |       |   |   |
| Projected benefit obligation at beginning of year                                            |       | $                     | 36.1       |   | $ | 42.1 |   |
| Service cost                                                                                 |       | 2.2                   |       | 2.1 |   |
| Interest cost                                                                                |       | 2.2                   |       | 1.8 |   |
| Actuarial (loss) gain, net                                                                   |       | —                |       | 3.9 |   |
| Amendments                                                                                   |       | —                |       | 3.2 |   |
| Settlements                                                                                  |       | —                |       | (14.7 | ) |
| Benefits paid                                                                                |       | (0.7                  | )          | (1.7 | ) |
| Inflation adjustment                                                                         |       | —                |       | (0.6 | ) |
| Projected benefit obligation at end of year                                                  |       | $                     | 39.8       |   | $ | 36.1 |   |
|                                                                                         |       |                  |       |   |   |
| Change in plan assets:                                                                       |       |                  |       |   |   |
| Fair value of plan assets at beginning of year                                               |       | $                     | 33.6       |   | $ | 36.6 |   |
| Actuarial return on plan assets                                                              |       | 7.5                   |       | 11.9 |   |
| Employer contribution                                                                        |       | —                |       | (0.7 | ) |
| Benefits paid                                                                                |       | (0.5                  | )          | (0.5 | ) |
| Other transfer                                                                               |       | (0.4                  | )          | (13.7 | ) |
| Fair value of plan assets at end of year                                                     |       | $                     | 40.2       |   | $ | 33.6 |   |
|                                                                                         |       |                  |       |   |   |
| Funded status                                                                                |       | $                     | 0.4        |   | $ | (2.5 | ) |
|                                                                                         |       |                  |       |   |   |
| SFAS No. 158 amounts recognized in statement of  financial position consists of:        |       |                  |       |   |   |
| Non current  assets                                                                          |       | $                     | 0.4        |   | — |   |
| Current  liabilities                                                                         |       | —                |       | — |   |
| Non current  liabilities                                                                     |       | —                |       | (2.5 | ) |
| Total                                                                                        |       | $                     | 0.4        |   | $ | (2.5 | ) |
|                                                                                         |       |                  |       |   |   |
| SFAS No. 158 amounts recognized in accumulated  other comprehensive income consists of: |       |                  |       |   |   |
| Net loss (gain)                                                                              |       | $                     | (4.8       | ) | $ | (2.1 | ) |
| Prior service  cost (credit)                                                                 |       | 1.2                   |       | 1.3 |   |
| Transition Obligation  (asset)                                                               |       | (0.2                  | )          | (0.2 | ) |
| Total (net of  income tax of $2.3 million and $4.0 million, respectively)                    |       | $                     | (3.8       | ) | $ | (1.0 | ) |

 

138

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The following table summarizes the changes inaccumulated other comprehensive income for the year ended December 31, 2007related to our pension and post-retirement plans (net of income tax in millions):

 
| ** **                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                  | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Reconciliation of accumulated other comprehensive  income:         |       |                        |       |   |   |
| Accumulated other comprehensive income at beginning  of plan year: |       | $                           | (1.0       | ) | $ | — |   |
|                                                               |       |                        |       |   |   |
| Effect of  adopting FAS 158                                        |       | —                      |       | (1.0 | ) |
| Amortization of  transition obligation (asset)                     |       | (*                          | )          | — |   |
| Prior services  cost amortized during the year                     |       | 0.1                         |       | — |   |
| Net loss/gain  amortized during the year                           |       | (0.1                        | )          | — |   |
| Net gains  occurring during the year.                              |       | (2.7                        | )          | — |   |
| Currency exchange rate changes                                     |       | (0.1                        | )          | — |   |
| Net adjustment to accumulated other comprehensive  income          |       | (2.8                        | )          | (1.0 | ) |
|                                                               |       |                        |       |   |   |
| Accumulated other comprehensive income at end of  plan year        |       | $                           | (3.8       | ) | $ | (1.0 | ) |

 

----

(*)   Amount less than $0.1 million

 

The following table summarizes the amounts inaccumulative other comprehensive income amortized and recognized as a componentof net periodic benefit cost in 2007 (net of income tax, in millions):

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                   | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Amortization of transition asset    |       | (0.1                        | )          | N/A |   |
| Amortization of net losses          |       | (0.2                        | )          | N/A |   |
| Amortization of prior services cost |       | 0.2                         |       | N/A |   |
| Total amortization expenses         |       | (0.1                        | )          | N/A |   |

 

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

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average discount rate                  |       | 8.0      | %          | 10.0     | %          | 10.0     | %          |
| Expected long-term rate of return on plan asset |       | 8.0      | %          | 12.0     | %          | 12.0     | %          |
| Rate of increase in future compensation level   |       | 4.5      | %          | 6.0      | %          | 6.0      | %          |

 

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

 

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

 

| **(in millions)** | ** ** | **Expected**         | ** ** |
|-------------------|------------|----------------------|------------|
| **Year**          |       | **Benefit Payments** |       |
| 2008              |       | $                    | 29.4       |   |
| 2009              |       | 0.8                  |       |
| 2010              |       | 0.8                  |       |
| 2011              |       | 0.9                  |       |
| 2012              |       | 0.9                  |       |
| 2013 to 2016      |       | 5.7                  |       |
| Total             |       | 38.5                 |       |
|                   |            |                      |            |  |

 

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Minera Mexico’s policy for determining asset mixtargets includes periodic consultation with recognized third party investmentconsultants.  The expected long-term rateof return on plan assets is updated periodically, taking into considerationassets allocations, historical returns and the current economicenvironment.  The fair value of planassets is impacted by general market conditions.  If actual returns on plan assets vary fromthe expected returns, actual results could differ.

 

These plans accounted for approximately 30% ofbenefit obligations.  The following tablerepresents the asset mix of the investment portfolio as of December 31:

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Asset category:    |       |     |       |     |       |
| Equity  securities |       | 70       | %          | 79       | %          |
| Treasury bills     |       | 30       | %          | 21       |       |
|               |       | 100      | %          | 100      | %          |

 

The amount of contributions that the Companyexpects to be paid to the plan during 2007 is not material.

 

*Minera Mexico Post-retirementhealth care plan*

 

The components of net period benefit costs are asfollows:

 
| ** **                                 | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| **(in millions)**                          | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest cost                              |       | $                                        | 2.4        |   | $ | 2.3 |   | $ | 2.2 |   |
| Service cost                               |       | 0.5                                      |       | 0.5 |   | 0.4 |   |
| Amortization of net loss (gain)            |       | 0.1                                      |       | — |   | — |   |
| Amortization of transition obligation      |       | 1.6                                      |       | — |   | 1.6 |   |
| Inflation adjustment                       |       | 0.2                                      |       | — |   | — |   |
| Net periodic post-retirement benefit costs |       | $                                        | 4.6        |   | $ | 2.8 |   | $ | 4.2 |   |

 

The change in benefit obligation and areconciliation of funded status are as follows:

 
| ** **                                                                                   | ** ** | **As of December 31** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(in millions)**                                                                            | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Change in benefit obligation:                                                                |       |                       |       |   |   |
| Projected benefit obligation at beginning of year                                            |       | $                          | 50.7       |   | $ | 48.8 |   |
| Service cost                                                                                 |       | 0.5                        |       | 0.5 |   |
| Interest costs                                                                               |       | 2.4                        |       | 2.3 |   |
| Actuarial (loss) gain, net                                                                   |       | 10.9                       |       | 0.9 |   |
| Benefits paid                                                                                |       | (3.3                       | )          | (3.0 | ) |
| Settlements                                                                                  |       | —                     |       | — |   |
| Inflation adjustment                                                                         |       | 2.1                        |       | 1.2 |   |
| Projected benefit obligation at end of year                                                  |       | $                          | 63.3       |   | $ | 50.7 |   |
|                                                                                         |       |                       |       |   |   |
| Funded status                                                                                |       | $                          | (63.3      | ) | $ | (50.7 | ) |
|                                                                                         |       |                       |       |   |   |
| SFAS No. 158 amounts recognized in statement of  financial position consists of:        |       |                       |       |   |   |
| Non current assets                                                                           |       | $                          | —     |   | $ | — |   |
| Current  liabilities                                                                         |       | —                     |       | — |   |
| Non current  liabilities                                                                     |       | (63.3                      | )          | (50.7 | ) |
| Total                                                                                        |       | $                          | (63.3      | ) | $ | (50.7 | ) |
|                                                                                         |       |                       |       |   |   |
| SFAS No. 158 amounts recognized in accumulated  other comprehensive income consists of: |       |                       |       |   |   |
| Net loss (gain)                                                                              |       | $                          | 11.7       |   | $ | 4.9 |   |
| Prior service  cost (credit)                                                                 |       | —                     |       | — |   |
| Transition  Obligation (asset)                                                               |       | 15.5                       |       | 15.8 |   |
| Total (net of  income tax of $16.7 million and $12.5 million, respectively)                  |       | $                          | 27.2       |   | $ | 20.7 |   |

 

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The following table summarized the changes inaccumulated other comprehensive income for the year ended December 31,2007 related to our pension and post-retirement plans (net of income tax inmillion):

 
| ** **                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                  | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Reconciliation of accumulated other comprehensive  income:         |       |                        |       |   |   |
| Accumulated other comprehensive income at beginning  of plan year: |       | 20.7                        |       | — |   |
| Effect of  adopting FAS 158                                        |       | —                      |       | 20.7 |   |
| Amortization of  transition obligation                             |       | (1.0                        | )          | — |   |
| Net loss/ (gain)  occuring during the year.                        |       | 6.8                         |       | — |   |
| Currency  exchange rate changes                                    |       | 0.7                         |       | — |   |
| Net adjustment to accumulated other comprehensive  income          |       | 6.5                         |       | 20.7 |   |
| Accumulated other comprehensive income at end of  plan year        |       | 27.2                        |       | 20.7 |   |

 

The following table summarizes the amounts inaccumulative other comprehensive income amortized and recognized as a componentof net periodic benefit cost in 2007 (net of income tax, in millions):

 
| ** **                                         | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                  | ** ** | **2007**                    | ** ** | **2006** | ** ** |
|  Amortization  of prior service cost (credit) |       | 1.6                         |       | N/A |   |
|  Amortization  of net losses                  |       | 0.1                         |       | N/A |   |
|  Total  amortization expenses                 |       | 1.7                         |       | N/A |   |

 

Discount rates used in the calculation of other post-retirement benefitsand costs as of December 31, 2007 and 2006 were 4.0% and 5.0%,respectively.

 

The benefits expected to be paidin each of the next five years, and thereafter, are as follows:

 

| **(in millions)  Year** | ** ** | **Expected  Benefit Payments** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| 2008                    |       | 4.4                            |       |
| 2009                    |       | 4.7                            |       |
| 2010                    |       | 5.0                            |       |
| 2011                    |       | 5.3                            |       |
| 2012                    |       | 5.6                            |       |
| 2013 to 2016            |       | 32.5                           |       |
| Total                   |       | 57.5                           |       |

 

For measurement purposes, a 2.5% annual rate ofincrease in the per capita cost of covered health care benefits was assumed for2008 and remains at that level thereafter.

 

An increase in other benefit cost trend rates havea significant effect on the amount of the reported obligations as well ascomponent cost of the other benefit plan. One 

 

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percentage-point change in assumed other benefitscost trend rates would have the following effects:

 
| ** **                                           | ** ** | **One Percentage Point** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| **(in millions)**                                    | ** ** | **Increase**             | ** ** | **Decrease** | ** ** |
| Effect on total service and interest cost components |       | $                        | 4.0        |   | $ | 3.1 |   |
| Effect on the post-retirement benefit obligation     |       | $                        | 71.7       |   | $ | 56.4 |   |

 

**NOTE 13-MINORITY INTEREST:**

 

For all the years presented, in the consolidatedcombined statement of earnings the minority interest is based on the earningsof the Company’s Peruvian Branch, and through October 2005 it alsoincluded the interest of minority shareholders in Minera Mexico.  In October 2005, the Company acquired anadditional 0.81833% of the outstanding shares of Minera Mexico for $30.3million.  This acquisition increased theCompany’s holding in Minera Mexico to 99.95%.

 

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 Peruvianinvestment shares at market value.  Theseacquisitions have been 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 ANDCONTINGENCIES:**

 

**Environmental matters:**

 

The Company has instituted extensive environmental conservation programsat its mining facilities in Peru and Mexico. The Company’s environmental programs include, among other things, waterrecovery systems to conserve water and minimize impact on nearby streams,reforestation programs to stabilize the surfaces of the tailings dams, and theimplementation of scrubbing technology in the mines to reduce dust emissions.

 

Peruvian operations

 

The Company’s operations are subject to applicable Peruvianenvironmental laws and regulations.  ThePeruvian government, through its Ministry of Energy and Mines (“MEM”) conductsannual audits of the Company’s Peruvian mining and metallurgicaloperations.  Through these environmentalaudits, matters related to environmental commitments, compliance with legalrequirements, atmospheric emissions, and effluent monitoring are reviewed.  The Company believes that it is in materialcompliance with applicable Peruvian environmental laws and regulations.

 

In the first quarter of 2007, with the completion of the Ilo smeltermodernization, the Company completed a 10-year environmental program agreed towith the Peruvian government 

 

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in 1997.  This program applied toall of the Company’s Peruvian operations and contained 34 mitigation measuresand projects necessary to (1) bring the existing operations into compliancewith the environmental standards established by the MEM and (2) identifyareas impacted by operations that were no longer active and needed to bereclaimed.

 

In2003 the Peruvian congress published a new law announcing future closure andremediation obligations for the mining industry. In August 2006, inaccordance with this law and its amendments the Company prepared and submittedto MEM a closure plan. The Company is awaiting MEM’s review of this plan. Seenote 10 “Asset Retirement Obligation” for further disclosure of this matter.

 

For the Company’s Peruvian operations, environmental capitalexpenditures were $21.6 million, $161.0 million and $235.1 million in 2007,2006 and 2005, respectively. The Company expects to spend approximately $14.1 millionfor environmental capital expenditures in 2008.

 

Mexican operations

 

The Company’s operations are subject to applicable Mexican federal,state and municipal environmental laws, to Mexican official standards, and toregulations for the protection of the environment, including regulationsrelating to water supply, water quality, air quality, noise levels andhazardous and solid waste.  Some of theselaws and regulations are relevant to legal proceedings pertaining to theCompany’s San Luis Potosi copper facilities.

 

The principal legislation applicable to the Company’s Mexican operationsis the federal General Law of Ecological Balance and Environmental Protection,which is enforced by the Federal Bureau of Environmental Protection (“PROFEPA”).  The PROFEPA monitors compliance withenvironmental legislation and enforces Mexican environmental laws, regulationsand official standards.  PROFEPA mayinitiate administrative proceedings against companies that violate environmentallaws, which in the most egregious cases may result in the temporary orpermanent closing of non-complying facilities, the revocation of operatinglicenses and/or other sanctions or fines. Also, according to the Federal Criminal Code, the PROFEPA must informcorresponding authorities regarding environmental non-compliance.

 

Mexican environmental regulations have become increasingly stringentover the last decade, and this trend is likely to continue and has beeninfluenced by the environmental treaty entered into by Mexico, United Statesand Canada in connection with NAFTA in February 1999.  However, the Company’s management does notbelieve that continued compliance with the Environmental Law or Mexican Stateenvironmental laws will have a material adverse effect on the Company’s business,properties, results of operations, financial condition or prospects or willresult in material capital expenditures. Although the Company believes that all of its facilities are in materialcompliance with applicable environmental, mining and other laws andregulations, the Company cannot assure that future laws and regulations wouldnot have a material adverse effect on the Company’s business, properties,results of operations, financial condition or prospects.

 

Due to the proximity of certain facilities of Minera Mexico to urbancenters, the authorities may implement certain measures that may impact orrestrain the operation of such facilities.

 

For the Company’s Mexican operations, environmental capital expenditureswere $25.8 million, $5.3 million and $7.5 million in 2007, 2006 and 2005,respectively. Approximately, $45.2 million has been budgeted for environmentalcapital expenditures in 2008.

 

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**Litigation matters:**

 

Peruvian operations

 

Garcia-Ataucuri and Others against SCC: In April 1996, the Company was served with a complaint filed inPeru by approximately 800 former employees seeking the delivery of asubstantial number of “labor shares” (acciones laborales) of its PeruvianBranch plus dividends on such shares, to be issued in a proportional way toeach former employee in accordance with their time of work with SCC’s PeruvianBranch.

 

The Company conducts its operations in Peru through a registeredBranch.  Although the Peruvian Branch hasneither capital nor liability separate from that of the Company, under Peruvianlaw it is deemed to have an equity capital for purposes of determining theeconomic 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 until1989 under a former Peruvian mandated profit sharing system. In 1971, thePeruvian government enacted legislation providing that workers in the miningindustry would participate in the pre-tax profits of the enterprises for whichthey worked at a rate of 10%.  Thisparticipation was distributed 40% in cash and 60% as an equity interest in theenterprise.  Under the law, the equityparticipation was originally delivered to the “Mining Community”, anorganization representing all workers. The cash portion was distributed to the workers after the close of theyear.  The accrual for this participationwas (and continues to be) a current liability of the Company, until paid.  In 1978, the law was amended and the equitydistribution was calculated at 5.5% of pre-tax profits and was made toindividual workers of the enterprise in the form of “labor shares” 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, the Company offered to exchange new common shares of theCompany for the labor shares issued under the prior Peruvian law.  Approximately 80.8% of the issued laborshares were exchanged for the Company’s common shares, greatly reducing theminority interest on the Company’s balance sheet.  What remains of the workers’ equityparticipation is now included on the consolidated balance sheet under thecaption “Minority interest.”

 

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

 

1)              As stated above, in April 1996,the Company was served with a complaint filed in Peru by approximately 800former employees, (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 # 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 an adversedecision of an appellate civil court, affirming a decision of a lower civilcourt, to the Peruvian Supreme Court.  OnSeptember 19, 2001, the Peruvian Supreme Court annulled the proceedingsnoting that the civil courts lacked jurisdiction and that the matter had to bedecided by a labor court.  On March 8,2002, Mr. García Ataucuri restated the claim to comply with Peruvian laborlaw and procedural requirements, and increased the number of 

 

 

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plaintiffsto approximately 958 ex-workers.  In January 2005,the lower labor judge dismissed the lawsuit on procedural grounds withoutdeciding on the merits of the case. In March 2005, the plaintiffs appealed this decision but theappellate court dismissed the appeal due to procedural defects and remanded thecase to the lower labor court for further proceedings.  The lower labor court, on motions from theplaintiffs, reinstated the appeal of the dismissal of the case of sevenplaintiffs that had cured the procedural defects.  As of December 31, 2007, 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 described below.

 

In October 2007, ina separate proceeding initiated by Mr. García Ataucuri against thejustices of the Peruvian Supreme Court, the Peruvian Constitutional Courtnullified the Peruvian Supreme Court decision issued on September 19, 2001because it had violated Mr. Garcia-Ataucuri’s constitutional due processrights by obliging him and the other plaintiffs to commence a new proceedingbefore the labor courts when they had litigated against the Company in civilcourts for over 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.

 

In October 2007, aPeruvian prosecuting attorney investigating an accusation made by Mr. GarciaAtaucuri against various officers of the Company’s Peruvian Branch agreed with Mr. Ataucurithat the non issuance of shares in the Ataucuri case constituted an illegalappropriation of same.  The Company filedan action against the prosecuting attorney before a criminal judge, who decidedin favor of the Company annulling the accusation of Mr. Ataucuri.  In November 2007 a criminal appealscourt affirmed the decision of the lower court. This decision is final and cannot be appealed.

 

2)              Additionally, on May 10, 2006, the Company wasserved with a new 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 # 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 Companyanswered this new complaint, denying the validity of the claim. As of December 31,2007 the case remains in the discovery stage.

 

The Company asserts that the claims are without meritand that the labor shares were distributed to the former employees inaccordance with the profit sharing law then in effect. We do not believe thatan unfavorable outcome is reasonably possible. The Company has not made aprovision for these lawsuits because it believes that it has meritoriousdefenses to the claims asserted in the complaints.

 

Mineria Integral S.A.C.: In January 2007, the Company was servedwith three claims filed 

 

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in Peru by Mineria Integral S.A.C. The claims allege that the Company has trespassed on certain miningrights of the plaintiff, in Ilo, Department of Moquegua, and seek that theCompany desist from the trespass and pay compensation in the amount of $49.1million.  The Company believes that theseadministrative procedures are without merit and is vigorously defending itselfagainst these actions.

 

Mexican operations

 

The Mexican Geological Services (MGS) Royalties: In August 2002,MGS (formerly named Council of Mineral Resources (“COREMI”)) filed with theThird Federal District Judge in Civil Matters, an action demanding fromMexcobre the payment of royalties since 1997. In December 2005, Mexcobre signed an agreement with MGS.  Under the terms of this agreement the partiesestablished a new procedure to calculate the royalty payments applicable for2005 and the following years, and the Company paid in January 2006, $6.9million of royalties for 2005 and $8.5 million as payment on account ofroyalties from the third quarter 1997 through the last quarter of 2004.  The Company estimates that the payment madeon January 11, 2006 will cover 100% of the royalty payments required for2004 and prior periods.  On January 22,2007 the Third Federal District Judge issued a ruling regarding the paymentrelated to the period from the third quarter of 1997 through the fourth quarterof 2004.  This ruling was appealed byboth parties in February 2007.  Theappeal was lost by the Company in October 2007. The Company filed aprotective action (Amparo) before the First Unitary Tribunal of the FirstCircuit, which resolution is pending. The Company believes that the payment made on account for this period iscorrect.

 

On an ongoing basis the Company is required to pay a 1% royalty on LaCaridad’s copper production value after deduction of treatment and refiningcharges and certain other carrying costs.

 

San Luis Potosi Facilities: The municipality of San Luis Potosi hasgranted Desarrolladora Intersaba, S.A. de C.V. (“Intersaba”), licenses for useof land and construction of housing and/or commercial zones in the former EjidoCapulines zone, where the residential project “Villa Magna” is expected to bedeveloped in the near future.

 

The “Villa Magna” residential project is being developed within an areathat IMMSA’s Risk Analysis approved by SEMARNAT (the federal environmental authority),has secured as a safeguard and buffer zone due to the use by IMMSA of anhydrousammonia gas.

 

Based on the foregoing, IMMSA has initiated two different actionsregarding this matter.  First, againstthe municipality of San Luis Potosi, requesting the annulment of theauthorization and licenses granted to Intersaba to develop “Villa Magna” withinthe zinc plant’s safeguard and buffer zone, and second, filed before SEMARNATfor the declaration of a safeguard and buffer zone surrounding IMMSA’s zincplant.

 

In August 2006, the first action was resolved by a Federal Court,which denied 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 while this outcome was adverse to its interests, theconstruction of the “Villa Magna” housing and commercial development will not,in itself, affect the operations of IMMSA’s zinc plant.

 

Intersaba has filed a lawsuit against IMMSA, requesting payment ofdamages in the amount of approximately $11.0 million supposedly caused by IMMSAduring these proceedings.  IMMSA intendsto vigorously defend against this lawsuit.

 

In addition to the foregoing, IMMSA has initiated a series of legal andadministrative 

 

 

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procedures against the Municipality of San Luis Potosi due to itsrefusal to issue IMMSA’s use of land permit (*licencia deuso de suelo*) in respect to its zinc plant.  A federal judge ruled that IMMSA’s use ofland permit should be granted.  Themunicipal authorities are evaluating how to comply with the ruling.

 

**Labor matters:**

 

In recent years the Company has experienced a number of strikes or otherlabor disruptions that have had an adverse impact on its operations andoperating results.

 

Peruvian Operations

 

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

 

Mexican operations

 

Beginning July 2007, our mines at Cananea, Taxco and San Martinwent on strike.  On January 11, 2008the Mexican federal labor court declared the Cananea strike illegal and orderedthe workers to return to work within 24 hours. This ruling was challenged before a federal judge who upheld the union’scase on February 14, 2008.  TheCompany will appeal this unfavorable ruling. The Company expects that it will take about three months to return tofull production at Cananea.  At Taxco,operations have been put on standby due to the strike.  Resuming operations at San Martin remainsdependant upon the results of litigation. Additionally, the Company estimates that 178.4 million pounds and 25.6million pounds of copper and zinc production, respectively, were lost in thesestrikes, as well as $487.5 million in operating income.

 

During 2006, there were a number of work stoppages at some of theCompany’s Mexican operations.  While someof these work stoppages were of a short-term nature with little or noproduction loss, others have been more disruptive.  A strike at the La Caridad copper mine inSonora began in the first quarter of 2006 and ended in July 2006.  As a result of these strikes, the Companydeclared “force majeure” on certain of its June and July coppercontracts.  In 2006, we also experiencedstrikes at our Cananea and San Martin mines.

 

Other legal matters

 

Class actions:  Threepurported class action derivative lawsuits have been filed in the DelawareCourt of Chancery (New Castle County) late in December 2004 and early January 2005relating to the acquisition of Minera Mexico by SCC.  On January 31, 2005, the three actionsLemon Bay, LLP v. Americas Mining Corporation, et al., Civil Action No. 961-N,Therault Trust v. Luis Palomino Bonilla, et al., and Southern CopperCorporation, et al., Civil Action No. 969-N, and James Sousa v. SouthernCopper Corporation, et al., Civil Action No. 978-N were consolidated intoone action titled, In re Southern Copper Corporation Shareholder DerivativeLitigation, Consol.  C. A. No. 961-Nand the complaint filed in Lemon Bay was designated as the operative complaintin the consolidated lawsuit.  Theconsolidated action purports to be brought on behalf of the Company’s commonstockholders.

 

The consolidated complaint alleges, among other things, that theacquisition of Minera 

 

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Mexico is the result of breaches of fiduciary duties by the Company’sdirectors and is not entirely fair to the Company and its minoritystockholders.  The consolidated complaintseeks, among other things, a preliminary and permanent injunction to enjoin theacquisition, the award of damages to the class, the award of damages to theCompany and such other relief that the court deems equitable, includinginterest, attorneys’ and experts’ fees and costs.  The defendants believe that this lawsuit iswithout merit and are vigorously defending the action.

 

The Company’s management believes that the outcome of the aforementionedlegal proceeding will not have a material adverse effect on the Company’sfinancial position or results of operations.

 

The Company is involved in various other legal proceedings incidental toits operations, but the Company does not believe that decisions adverse to itin any such proceedings individually or in the aggregate would have a materialadverse effect on its financial position or results of operations.

 

Our direct and indirect parent corporations, including AMC and GrupoMexico, have from time to time been named parties in various litigationsinvolving Asarco LLC (“Asarco”).  In August 2002the U.S. Department of Justice brought a claim alleging fraudulent conveyancein connection with AMC’s then-proposed purchase of SCC from a subsidiary ofAsarco.  That action was settled pursuantto a Consent Decree dated February 2, 2003.  In March 2003, AMC purchased itsinterest in SCC from Asarco.  In October 2004,AMC, Grupo Mexico, Mexicana de Cobre and other parties, not including SCC, werenamed in a lawsuit filed in New York State court in connection with allegedasbestos liabilities, which lawsuit claims, among other matters, that AMC’spurchase of SCC from Asarco should be voided as a fraudulent conveyance.  The lawsuit filed in New York State court wasstayed as a result of the August 2005 Chapter 11 bankruptcy filing by Asarco,as described below.  However, onNovember 16, 2007, this lawsuit, after being removed from Federal Court,was transferred to the United States District Court for the Southern Districtof Texas in Brownsville, Texas, for resolution in conjunction with a newlawsuit filed by Asarco, the debtor in possession, as described below.  On February 2, 2007 a complaint was filedby Asarco, the debtor in possession, alleging many of the matters previouslyclaimed in the New York State lawsuit, including that AMC’s purchase of SCCfrom Asarco should be voided as a fraudulent conveyance.  In late December 2004 and early January 2005,three purported class action derivative lawsuits were filed in the DelawareCourt of Chancery (New Castle County) relating to the merger transactionbetween SCC and Minera Mexico.  OnJanuary 31, 2005, the three actions were consolidated.  The consolidated complaint alleges, amongother things, that the merger was the result of breaches of fiduciary duties bySCC’s directors and was not entirely fair to SCC and its minoritystockholders.  The case is currently inthe early stages of discovery.  The defendantsbelieve that the lawsuit is without merit and are vigorously defending theaction.  While Grupo Mexico and itsaffiliates believe that these claims are without merit, we cannot assure youthat these or future claims, if successful, will not have an adverse effect onthe Company’s parent corporation or the Company.  Any increase in the financial obligations ofthe Company’s parent corporation, as a result of matters related to Asarco orotherwise could, among other effects, result in the Company’s parentcorporation attempting to obtain increased dividends or other funding from theCompany.  In 2005, certain subsidiariesof Asarco filed bankruptcy petitions in connection with alleged asbestosliabilities.  In July 2005, theunionized workers of Asarco commenced a work stoppage.  As a result of various factors, including theabove-mentioned work stoppage, in August 2005 Asarco filed a voluntary petitionfor 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 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.

 

**Other:**

 

Mine accident

 

On February 19, 2006 an explosion occurred at the IMMSA unit’sPasta de Conchos coal mine, located in San Juan de Sabinas, Coahuila,Mexico.  Immediately thereafter and for14 months, IMMSA conducted a comprehensive rescue effort.  Federal and local 

 

 

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governmental help and support was received.  As a result of the accident eight miners wereinjured and 65 perished.

 

Both the Coahuila Public District Attorney (Procuraduria de Justicia)and the Federal Attorney’s Office (Procuraduria Federal de la Republica)initiated investigations to establish the causes of the accident and theresponsible party.  A local judge at SanJuan de Sabinas ordered five mine representatives to stand trial for theaccident.  On April 16, 2007 thejudge terminated the case due to the indemnification for damages to thefamilies of the victims, which was paid by the Company’s insurancecompany.  In January 2008, twofamilies of the victims were granted additional indemnification by virtue of afederal ruling.  Recovery efforts havestopped due to increased hazards and potential health risks for the recoveryworkers.  On November 30, 2007,Federal labor officials have ordered the permanent closure of the mine.

 

Regionaldevelopment contribution

 

In December 2006, the Company’s Peruvian Branch signed a contractwith the Peruvian government committing the Company to annual contributions forfive years to support the regional development of Peru.  This was in response to an appeal by thepresident of Peru to the mining industry.  The contributions are being used for social benefit programs.  In 2007, the Company made a contribution of$16.1 million, calculated based on 2006 Peruvian earnings after incometax.  In accordance with the agreement inApril 2007, this contribution was deposited with a separate entity, the “AsociacionCivil Ayuda del Cobre” which will make disbursements for approved investmentsin accordance with the agreement.  Thefollowing years’ contributions could increase or decrease depending on copperprices.  The commitment of the Branch isfor a total of 1.25% of its annual earnings, after Peruvian income tax.  If the copper price drops below $1.79 perpound the contribution will cease.  TheCompany made a provision of $17.9 million for 2007 based on Peruvian Branchearnings.

 

Royalty charge

 

In June 2004, the Peruvian Congress enacted legislation imposing aroyalty charge to be paid by mining companies. Under this law, the Company is subject to a 1% to 3% royalty, based onsales, applicable to the value of the concentrates produced in our Toquepalaand Cuajone mines.  The Company madeprovisions of $62.8 million, $67.2 million and $40.3 million in 2007, 2006 and2005, respectively, for this royalty. These provisions are included in “Cost of sales (exclusive ofdepreciation, amortization and depletion)” in the consolidated combinedstatement of earnings.

 

Power purchase agreement

 

In 1997, SCC sold its Ilo power plant to an independent power company,Enersur S.A. (“Enersur”).  In connectionwith the sale, a power purchase agreement was also completed under which SCCagreed to purchase all of its power needs for its Peruvian operations fromEnersur for twenty years, commencing in 1997. In 2003 the agreement was amended releasing Enersur from its obligationto construct additional 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.

 

**Tax contingency matters:**

 

Tax contingencies are provided for under FIN No 48 (see Note 8 “IncomeTax”).

 

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**NOTE 15-STOCKHOLDERS’ EQUITY:**

 

Merger adjustments:

 

Pursuantto U.S. GAAP, since both SCC and Minera Mexico are under common control for allthe periods presented, the acquisition of Minera Mexico by SCC has beenreflected at the historical carrying value of Minera Mexico’s assets andliabilities in a manner similar to a pooling of interests.  The difference in the value of the 134.4million shares of SCC issued and the net carrying value of Minera Mexico hasbeen recognized in equity as a reduction in additional paid-in capital.  In addition, Minera Mexico’s historicalcommon stock, treasury stock and additional paid in capital accounts wereeliminated and classified within SCC’s additional paid-in capital.  Minera Mexico’s retained earnings werecarried forward as reported to be combined with retained earnings of SCC.  For the purpose of these financialstatements, the issuing of 134.4 million shares has been reflected as if theyhad been outstanding as of January 1, 2005.  Therefore, historical common stock and pershare data presented herein differs from that previously reported by SCC on astand-alone basis.

 

Common stock:

 

The Company had two classes of common sharesoutstanding.  Class A commonstockholders were entitled to five votes per share.  Common share stockholders are entitled to onevote per share.

 

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

 

Stock split:

 

On August 30, 2006 the Executive Committee of the Board ofDirectors declared a two-for-one split of the Company’s outstanding commonstock.  On October 2, 2006 commonshareholders of record at the close of business on September 15, 2006,received one additional share of common stock for every share owned.  The Company’s common stock began trading atits post-split price on October 3, 2006. The split increased the number of shares outstanding to 294,460,850 from147,230,425.  The stock split wasrecorded in our 2006 financial statements. All share and per share amounts were retroactively adjusted to reflectthe stock split.

 

Appropriated RetainedEarnings:

 

In 2007, Company management set aside $1.4 billion of unremittedearnings of its Mexican subsidiary, Minera Mexico, as appropriated retainedearnings.  It is Company’s intention toindefinitely invest these funds in Mexico. These amounts are earmarked for the Company’s Mexican expansion program.  See also Note 8 of these financialstatements.

 

Directors Stock AwardPlan:

 

The Company establisheda stock award compensation plan for certain directors who are not compensatedas employees of the Company.  Under thisplan, participants will receive 400 shares of common stock upon election and400 additional shares following each annual meeting of stockholders thereafter.200,000 shares of Southern Copper common stock have been reserved for thisplan.  At December 31, 2007 and2006, 72,000 and 67,600 shares, respectively, have been awarded under thisplan.

 

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Employee Stock PurchasePlan:

 

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 toacquire title 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             | %          |

 

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 2007, the stock basedcompensation expenses under this plan was $2.1 million.  As of December 31, 2007, there was $14.9million of unrecognized compensation expenses under this plan, which isexpected to be recognized over a period of 8 years.

 

The following tablepresents the stock award activity for the year ended December 31, 2007:

 

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| ** **                                   | ** ** | **Shares** | ** ** | **Unit Weighted   Average Grant   Date Fair Value** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Outstanding shares at January 1, 2007   |       | —     |       | —                                              |       |
| Granted                                      |       | 4,834,717  |       | $                                                   | 3.50       |   |
| Exercised                                    |       | —     |       | —                                              |       |
| Forfeited                                    |       | —     |       | —                                              |       |
| Outstanding shares at December 31, 2007 |       | 4,834,717  |       | $                                                   | 3.50       |   |

 

Executive Stock PurchasePlan:

 

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 750,000 shares of GrupoMexico over an eight year period.  Thefair value of the award is estimated on the date of grant and is recognized ascompensation expense over a weighted average requisite service period of eightyears.  The Company recorded $0.5 millionnet of tax, in compensation expense in 2007. As of December 31, 2007, there was $3.2 million of unrecognizedcompensation cost, related to this plan, which is expected to be recognizedover a weighted average period of eight years.

 

The following tablepresents the stock award activity for the year ended December 31, 2007:

 
| ** **                                   | ** ** | **Shares** | ** ** | **Unit Weighted  Average Grant  Date Fair Value** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| Outstanding shares at January 1, 2007   |       | 750,000    |       | $                                                 | 2.30       |   |
| Granted                                      |       | —     |       |                                              |       |
| Exercised                                    |       | (292,500   | )          | 2.30                                              |       |
| Forfeited                                    |       | —     |       |                                              |       |
| Outstanding shares at December 31, 2007 |       | 457,500    |       | $                                                 | 2.30       |   |

 

Treasury Stock:

 

Included in treasurystock are shares of the Company’s common stock carried at cost.  In addition, included in treasury stock areshares of the Company’s principal shareholder, Grupo Mexico.  At December 31, 2007 and 2006 treasurystock held 399,712 shares and 404,112 shares of Southern CopperCorporation common stock with a cost of $4.4 million and $4.5 million,respectively.  At December 31, 2007and 2006 treasury stock held 144,783,673 Grupo Mexico shares and 145,289,025 GrupoMexico shares with a cost of $82.4 million and $82.8 million, respectively.

 

The shares of SouthernCopper Corporation are used to make awards under the Directors Stock Awardplan.

 

The shares of GrupoMexico are used to make awards under both the Employee Stock Purchase Plan andthe Executive Stock Purchase Plan.

 

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Activity in treasurystock in the years 2007 and 2006 was as follows (in millions):

 
|                                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Southern Copper  Corporation common shares                                              |       |     |       |     |       |
| Balance as of  January 1                                                           |       | $        | 4.4        |     | $          | 4.5 |   |
| Purchase of  shares                                                                     |       | —   |       |     |       |
| Used for  corporate purposes                                                            |       | (*       | )          | (0.1     | )          |
| Balance as of  December 31                                                         |       | 4.4      |       | 4.4      |       |
|                                                                                    |       |     |       |     |       |
| Parent Company (Grupo Mexico) common shares                                             |       |     |       |     |       |
| Balance as of  January 1                                                           |       | 92.6     |       | 80.4     |       |
| Other activity,  including received dividends, interest and currency translation effect |       | 77.7     |       | 12.2     |       |
| Balance as of  December 31                                                         |       | 170.3    |       | 92.6     |       |
|                                                                                    |       |     |       |     |       |
| Treasury stock balance as of December 31                                           |       | $        | 174.7      |     | $          | 97.0 |   |

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(*)Year 2007 is lowerthan $0.1 million.

 

In 2007 and 2006, theCompany distributed 4,400 shares and 5,200 shares, respectively, of SouthernCopper Corporation shares to directors under the Directors’ Stock Award Plan.

 

In 2007 the Companyawarded 4.8 million shares of Grupo Mexico under the Employee Stock Purchase Plan.

 

**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 intoderivative contracts unless it anticipates a future activity that is likely tooccur that will result in exposing the Company to market risk.

 

Copperand zinc swaps:

 

During 2007, 2006 and2005 the Company entered into copper collar and swaps contracts to protect aportion of its sales of copper production. In 2007 the Company entered into collar contracts for 77,350 metric tonsof its copper production at weighted average minimum and maximum LME prices of$3.20 per pound and $4.07 per pound, respectively. Also in 2007 the Companyentered into swap contracts for 5,400 metric tons of its copper production at aweighted average COMEX price of $3.71 per pound.  In 2006 the Company entered into swapcontracts for 384,500 metric tons of its copper production for future sales ata weighted average price of $3.17 per pound and during 2005 the Company enteredinto swap contracts for 299,457 metric tons of copper at a weighted averageprice of $1.63 per pound.  Related to thesettlement of these copper collar and swap contracts the Company recorded again of $10.9 million in 2007 and losses of $276.1 million and $23.5 million in2006 and 2005, respectively.  These gainsand losses were recorded in net sales on the consolidated combined statement ofearnings.  Also, these gains and losseswere recorded in net earnings in operating activities of the consolidated statementof cash flow.

 

In addition, in 2006 theCompany entered into a zinc swap contract to protect the cost of a portion ofthe zinc concentrates purchases 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 combined statement of earnings.  Also, this loss was recorded in net earningsin operating activities of the consolidated statement of cash flow.

 

The Company didnot enter into any zinc derivative contracts in 2007 and 2005 and at 

 

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December 31,2007 the Company did not hold any open copper or zinc futures positions.

 

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 combined statement of earnings.

 

Gas swaps:

 

In 2007 and 2006, the Company entered into gasswap contracts to protect part of its gas consumption as follows:

 
| ** **               | ** ** | **2007** | ** ** | **2006**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|
| Gas volume (MMBTUs)      |       | 900,000  |       | 3,650,000 |       |
| Fixed price              |       | $        | 7.5250     |      | $          | 4.2668 |   |
| Gain (loss) (in million) |       | $        | (0.9       | )         | $          | 6.3 |   |

 

The gains and losses obtained were included in theproduction cost. At December 31, 2007, the Company did not hold any opengas swap contracts.

 

Interest Rate Swaps:

 

During 2005 the Company entered into a shortinterest rate swap contract to reduce its exposure to interest rate risk oncertain of its floating rate bank obligations. As a result of these positions, the Company recorded a net gain of $1.2million in 2005. This gain was recorded in Gain (loss) on derivativeinstruments on the consolidated combined statement of earnings.  The Company did not hold any interest rateswap contracts during 2007 and 2006 and does not hold any open position as of December 31,2007.

 

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 inMexican pesos, during 2006 the Company entered into zero-cost derivativescontracts with the purpose of protecting, within a range, against an appreciationof the Mexican peso to the US dollar. In these contracts if the exchange ratesettles at or below the barrier, the Company does not sell dollars, if theexchange rate settles above the barrier price established in the contract theCompany sells dollars at the strike price established in the contract.

 

In 2007 and 2006 theexercise of these zero-cost derivative contracts resulted in gains of $8.1million and $0.9 million, respectively, which were recorded as Gain (loss) onderivative instruments in the consolidated combined statement of earnings.

 

At December 31, 2007we held the following exchange rate derivative operations:

 
| **Notional  Amount  (millions)** | ** ** | **Due Date, Weekly  expiration during** | ** **       | **Strike Price  (Mexican Pesos/U.S. Dollars)** | ** ** | **Barrier Price  (Mexican Pesos/ U.S. Dollars)** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| $                                | 2.0        |                                    | 1st Quarter 2008 | (*)                                            | 11.60      |                                             | 11.28      |   |
| $                                | 2.0        |                                    | 1st Quarter 2008 | (*)                                            | 11.28      |                                             | 10.70      |   |
| $                                | 60.0       |                                    | 4th Quarter 2008 |                                           | 11.32      |                                             | 10.60      |   |

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(*) These operationsmatured on January 3, 2008 and reported a gain of $0.1 million which wasrecorded as unrealized gain on derivative instruments in the consolidatedcombined statement of earnings at December 31, 2007.

 

At December 31,2007, the fair value of the above listed exchange rate derivative 

 

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contracts is a gain of$0.5 million which was recorded as Gain (loss) on derivative instruments in theconsolidated combined statement of earnings. Each notional amount includes a group of weekly transactions that havethe same strike and barrier price.

 

In addition, at December 31,2007 the Company held the following exchange rate derivative contract:

 
| Amount                    |   | $53.0 million                                       |   |
|---------------------------|--------|-----------------------------------------------------|--------|
| Valuation date            |   | $1.0 million weekly, through December 31, 2008 |   |
| Peso/dollar exchange rate |   | 11.2 pesos = $1.00                                  |   |

 

The above noted contractsettles weekly.  If the Mexican peso/USdollar exchange rate is below 11.20 the counterparty to the contract, in thiscase Merrill Lynch Capital Services, Inc. (“MLCS”), will pay the Company11.2 million Mexican pesos and the Company will pay MLCS $1.0 million.  If the Mexican peso/US dollar exchange rateis not below 11.20, MLCS will pay the Company 22.4 million Mexican pesos andthe company will pay MLCS $2.0 million.

 

Additionally, the Company held embeddedderivatives which are described in note 3 “Short-term investments.”

 

**NOTE 17-FINANCIAL INSTRUMENTS:**

 

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

 

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| ** **                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | **Carrying  value**         | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Assets:                                                          |       |                        |       |   |   |   |   |   |   |
| Accounts receivable associated with provisionally  priced sales: |       |                        |       |   |   |   |   |   |   |
| Copper                                                           |       | $                           | (42.0      | ) | $ | (42.0 | ) | $ | (47.3 | ) | $ | (47.3 | ) |
| Molybdenum                                                       |       | —                      |       | — |   | $ | (11.5 | ) | $ | (11.5 | ) |
| Short-term  investments                                          |       | $                           | 117.9      |   | $ | 117.9 |   | $ | 280.0 |   | $ | 280.0 |   |
| Liabilities:                                                     |       |                        |       |   |   |   |   |   |   |
| Long-term debt                                                   |       | $                           | 1,466.4    |   | $ | 1,531.7 |   | $ | 1,525.0 |   | $ | 1,681.1 |   |

 

The following methods and assumptions were used toestimate the fair value of each class of financial instruments for which it ispracticable to estimate that value:

 

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

 

Short-term investments: Due to the short termnature of the investments, current value is deemed to approximate fair value.

 

Long-term debt: Fair value is based on quotedmarket prices except for the Mitsui loan which is based on the present value ofthe cash flow discounted at 9% which is the Company’s weighted average capitalcost.

 

**NOTE18-CONCENTRATION OF RISK:**

 

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

 

Financial instruments, which potentially subjectthe Company to a concentration of credit risk, consist primarily of cash andcash equivalents, short-term investments and trade accounts receivable.

 

The Company invests or maintains available cashwith various banks, principally in the United States, Mexico, Europe and Peru,or in commercial papers of highly-rated companies.  As part of its cash management process, theCompany regularly monitors the relative credit standing of theseinstitutions.  At December 31, 2007,SCC had invested its cash equivalents as follows:

 

| **Country** | ** ** | **% of total cash** | ** ** | **% invested in one  institution** | ** ** |
|-------------|------------|---------------------|------------|------------------------------------|------------|
| Abroad      |       | 64.7                | %          | 60.8                               | %          |
| Peru        |       | 32.4                | %          | 31.7                               | %          |
| Mexico      |       | 2.9                 | %          | 51.5                               | %          |

 

 

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

 

The Company is exposed to credit loss in caseswhere the financial institutions with which it has entered into derivativetransactions (commodity, foreign exchange and currency/interest rate swaps) areunable to pay when they owe funds as a result of protection agreements withthem. To minimize the risk of such losses, the Company only uses highly-ratedfinancial institutions that meet certain requirements. The Company alsoperiodically reviews the creditworthiness of these institutions to ensure thatthey are maintaining their ratings. The Company does not anticipate that any ofthe financial institutions will default on their obligations.

 

The Company’s five largest trade receivablebalances accounted for 45.4%, 39.5% and 40.9% of the trade accounts receivableat December 31, 2007, 2006 and 2005, respectively, of which one customerrepresented approximately 22.4%, 10.9% and 14.6%, respectively, of our tradeaccounts receivable.

 

**NOTE 19-RELATEDPARTY TRANSACTIONS:**

 

Balances receivable and payable with affiliatedcompanies are shown below (in millions):

 

| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Affiliate receivable:                                       |       |                        |       |   |   |
| Grupo Mexico S.A.B de C.V. and affiliates                   |       | $                           | 1.5        |   | $ | — |   |
| Mexico Proyectos y Desarrollos S.A. de C.V. and  affiliates |       | —                      |       | 2.6 |   |
| Other                                                       |       | 0.1                         |       | — |   |
|                                                        |       | $                           | 1.6        |   | $ | 2.6 |   |
| Affiliate payable:                                          |       |                        |       |   |   |
| Grupo Mexico S.A.B. de C.V. and affiliates                  |       | $                           | 3.0        |   | $ | 0.4 |   |
| Ferrocarril Mexicano, S.A. de C.V.                          |       | 0.9                         |       | 3.2 |   |
| Other                                                       |       | —                      |       | — |   |
|                                                        |       | $                           | 3.9        |   | $ | 3.6 |   |

 

The Company has enteredinto certain transactions in the ordinary course of business with parties thatare controlling shareholders or their affiliates.  These transactions include the lease ofoffice space, air transportation and construction services and products andservices relating to mining and refining. The Company lends and borrows funds among affiliates for acquisitionsand other corporate purposes.  Thesefinancial transactions bear interest and aresubject to review and approval by senior management, as are all related partytransactions.  It is our policy that theAudit Committee of the Board of Directors shall review all related partytransactions.  The Company is prohibitedfrom entering or continuing a material related party transaction that has notbeen reviewed and approved or ratified by the Audit Committee.

 

The Company sold toAsarco LLC (Asarco), an affiliate of Grupo Mexico, $0.3 million and $11.6million of metal products in 2006 and 2005, respectively, and purchased metalproducts from Asarco for $1.1 million in 2005. In addition, the Company paid $2.5 million to Asarco in 2005 for tollingservices.  There were no sales in 2007 orpurchases of metal products and tolling services from Asarco in 2007 and 2006.

 

 

 

157

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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 to Grupo Mexico Servicios S.A de C.V., a subsidiary ofGrupo Mexico for these services.  Thetotal amount paid by the Company to Grupo Mexico Servicios S.A. de C.V. forsuch services in each of the years 2007, 2006 and 2005 was $13.8 million.  The Company expects to continue to pay forthese services in the future.

 

The Company paid $0.5million in 2005 in interest expenses related to borrowings from Grupo Mexico.There were no borrowings from Grupo Mexico in 2007 and 2006.

 

The Company’s Mexicanoperations paid fees of $11.0 million, $17.2 million and $21.0 million in 2007,2006 and 2005, 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 $14.5 million, $29.8 million and $29.8 mi1lion in 2007,2006 and 2005, 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, the Company paid fees of $2.5 million,$5.5 million and $3.7 million in 2007, 2006 and 2005, 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 $0.8million for drilling services provided by Perforadora Mexico, S.A de C.V, acompany controlled by the Larrea family. Additionally, in the third quarter of 2006, one of our Mexicansubsidiaries provided a short-term interest bearing loan of $10.6 million toMexico Transportes Aereos, S.A. de C.V. (“MexTransport”) for the purchase of anairplane, which was paid in the first quarter of 2007.  MexTransport, a company controlled by theLarrea family, provides aviation services to our Mexican operations.  Our Mexican subsidiaries have provided aguaranty for a new $10.8 million loan obtained by MexTransport.  The guaranty provided to MexTransport isbacked up by the transport services provided by MexTransport to the Company’sMexican subsidiaries.  The Company paidfees of $1.2 million in 2007 to MexTransport for aviation services.

 

The Company purchased $6.3 million, $4.9 million and $3.3 million in2007, 2006 and 2005, respectively, of industrial materials from HigherTechnology S.A.C in which Mr. Carlos Gonzalez has a proprietaryinterest.  The Company paid fees of $0.7million, $0.6 million and $0.7 million in 2007, 2006 and 2005, respectively,for maintenance services provided by Servicios y Fabricaciones MecanicasS.A.C., a company in which Mr. Carlos Gonzalez has a proprietaryinterest.  The Company also paid fees of$0.1 million in 2005 

 

 

158

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for contractor services provided by GPC Ingenieria S.A. de C.V., acompany in which Mr. Carlos Gonzalez has a proprietary interest.  Mr. Carlos Gonzalez is the son of SCC’sChief Executive Officer.

 

The Company purchased $0.7 million, $0.5 million and $0.2 million in2007, 2006 and 2005, respectively, of industrial material from SempertransFrance Belting Technology, in which Mr. Alejandro Gonzalez is employed asa sales representative.  Also, theCompany purchased $0.3 million in 2007 of industrial material from PIGOBA, S.A.de C.V., a company in which Mr. Alejandro Gonzalez has a proprietaryinterest. Mr. Alejandro Gonzalez is the son of SCC’s Chief ExecutiveOfficer.

 

TheCompany purchased $3.6 million, $4.6 million and $3.0 million in 2007, 2006 and2005, respectively, of industrial material and services from Breaker, S.A. deC.V., a company in which Mr. Jorge Gonzalez has a proprietaryinterest.  Mr. Jorge Gonzalez is theson-in-law of SCC’s Chief Executive Officer.

 

Theformer holders of the Company’s Class A common stock until June 2005and their affiliates purchased copper and other products from the Company fromtime to time at prices determined by reference to the LME and COMEX marketprice for copper and published prices for other products, if available.  These purchases were $15.2 million in 2005.

 

See also the disclosure on the acquisition ofMinera Mexico in Note 1.

 

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

 

**NOTE 20-SEGMENT AND RELATED INFORMATION:**

 

Company management views Southern Copper as havingthree operating segments and manages on the basis of these segments.  The significant increase in the price ofmolybdenum over the past three years has had an important impact on the Company’searnings.  Nevertheless, the Companycontinues to manage its operations on the basis of the three copper segments. Each of its segments report independentlyto the Chief Operating Officer and he focuses on operating income as a measureof performance to evaluate different segments, and to make decisions toallocate resources 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 pricesat the time of sale. These may not be reflective of actual prices realized bythe Company due to various factors, including additional processing, timing ofsales to outside customers and transportation cost.  Added to the segment information isinformation regarding the Company’s molybdenum sales.  The segments identified by the Company are:

 

1.               Peruvian operations, which includes the Toquepala andCuajone mine complexes and the smelting and refining plants, industrialrailroad and port facilities which service both mines.

 

 

159

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2.               Mexican open pit operations, which includes La Caridadand Cananea mine complexes and the smelting and refining plants and supportfacilities which service both mines.

 

3.               Mexican underground mining operations, which includesfive underground mines that produce zinc, copper, silver and gold, a coal mine,which 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 resultingproduct, anodes and refined copper, are then shipped to customers throughoutthe world. These shipments are recorded as revenue of the Company’s Peruvianmines. The Mexican open pit segment includes two copper mines whose mineraloutput is processed in the same smelter and refinery without distinguishingbetween the products of the two mines. 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. TheCompany’s Chief Operating Officer must consider the operations in each countryseparately when analyzing results of the Company and making key decisions. Theopen 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 collectivebargaining agreement contracts are negotiated very distinctly in each of thetwo countries. These key differences result in the Company taking varyingdecisions with regards to the two countries.

 

The IMMSA segmentincludes five mines whose minerals are processed in the same smelter andrefinery. This segment also includes a coal underground mine. Sales of productfrom this segment are recorded as revenues of the Company’s IMMSA unit. Whilethe Mexican underground mines are subject to a very similar regulatoryenvironment of the Mexican open pit mines, the nature of the products andprocesses of two Mexican operations vary distinctly. These differences causethe Company’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.

 

 

160

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

 
| ** **                                                             | ** ** | **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:                                                                  |       |                                   |       |   |   |   |   |   |   | (26.0 | ) |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (16.6 | ) |
| Loss on debt  prepayment                                               |       |                                   |       |   |   |   |   |   |   | (73.7 | ) |
| Loss on  derivative instruments                                        |       |                                   |       |   |   |   |   |   |   | 30.8 |   |
| Other income  (expense)                                                |       |                                   |       |   |   |   |   |   |   | (1,185.3 | ) |
| Income taxes                                                           |       |                                   |       |   |   |   |   |   |   | (10.2 | ) |
| Minority  interest                                                     |       |                                   |       |   |   |   |   |   |   | $ | 2,216.4 |   |
| Net earnings                                                           |       |                                   |       |   |   |   |   |   |   |   |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| 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 |   |

 

 

161

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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 | ) |
| Income taxes                                                           |       |                                   |       |   |   |   |   |   |   | (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 |   |

 

 

162

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| ** **                                                             | ** ** | **Year Ended, December 31, 2005** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **(in millions)**                      | ** ** |
| ** **                                                             | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian Operations** | ** ** | **Corporate  and other  eliminations** | ** ** | **Total  Combined** | ** ** |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Net sales outside of segments                                          |       | $                                      | 1,667.4    |   | $ | 261.8 |   | $ | 2,159.9 |   | $ | — |   | $ | 4,089.1 |   |
| Intersegment sales                                                     |       | 90.9                                   |       | 186.9 |   | 7.8 |   | (285.6 | ) | — |   |
| Cost of sales  (exclusive of depreciation, amortization and depletion) |       | 836.6                                  |       | 330.8 |   | 756.0 |   | (288.0 | ) | 1,635.4 |   |
| Selling, general and administrative                                    |       | 37.1                                   |       | 19.4 |   | 34.0 |   | (9.4 | ) | 81.1 |   |
| Depreciation, amortization and depletion                               |       | 176.7                                  |       | 24.0 |   | 76.5 |   | — |   | 277.2 |   |
| Exploration                                                            |       | 3.8                                    |       | 7.7 |   | 12.9 |   | — |   | 24.4 |   |
| Operating income                                                       |       | $                                      | 704.1      |   | $ | 66.8 |   | $ | 1,288.3 |   | $ | 11.8 |   | 2,071.0 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Less:                                                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest, net                                                          |       |                                   |       |   |   |   |   |   |   | (55.6 | ) |
| Gain on  derivative instruments                                        |       |                                   |       |   |   |   |   |   |   | 1.1 |   |
| Loss on debt  prepayment                                               |       |                                   |       |   |   |   |   |   |   | ( 10.6 | ) |
| Other income  (expense)                                                |       |                                   |       |   |   |   |   |   |   | (3.6 | ) |
| Taxes on income                                                        |       |                                   |       |   |   |   |   |   |   | (589.7 | ) |
| Minority interest                                                      |       |                                   |       |   |   |   |   |   |   | (12.5 | ) |
| Net earnings                                                           |       |                                   |       |   |   |   |   |   |   | $ | 1,400.1 |   |
|                                                                   |       |                                   |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                   |       | $                                      | 104.5      |   | $ | 44.2 |   | $ | 321.9 |   | $ | — |   | $ | 470.6 |   |
| Property, net                                                          |       | $                                      | 1,559.3    |   | $ | 270.1 |   | $ | 1,468.7 |   | $ | 28.0 |   | $ | 3,326.1 |   |
| Total assets                                                           |       | $                                      | 2,538.3    |   | $ | 518.9 |   | $ | 3,333.6 |   | $ | (703.2 | ) | $ | 5,687.6 |   |

 

Sales value per segment:

 
| ** **        | ** ** | **Year Ended, December 31, 2007** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Consolidated** | ** ** |
|              |       |                                   |       |   |   |   |   |   |   |   |   |
| Copper            |       | $                                      | 1,696.0    |   | $ | 104.0 |   | $ | 2,677.8 |   | $ | (249.0 | ) | $ | 4,228.8 |   |
| Molybdenum        |       | 435.2                                  |       | — |   | 650.5 |   | — |   | 1,085.7 |   |
| Other             |       | 93.9                                   |       | 576.6 |   | 184.6 |   | (83.9 | ) | 771.2 |   |
| Total             |       | $                                      | 2,225.1    |   | $ | 680.6 |   | $ | 3,512.9 |   | $ | (332.9 | ) | $ | 6,085.7 |   |

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

 

 

163

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| ** **        | ** ** | **Year Ended, December 31, 2005** | ** ** | ** **              | ** ** |
|-------------------|------------|----------------------------------------|------------|-------------------------|------------|
| **(in millions)** | ** ** | **Mexican  Open Pit**                  | ** ** | **Mexican  IMMSA Unit** | ** ** | **Peruvian  Operations** | ** ** | **Intersegment  Elimination** | ** ** | **Total  Combined** | ** ** |
|              |       |                                   |       |                    |       |   |   |   |   |   |   |
| Copper            |       | $                                      | 1,310.3    |                    | $          | 134.2 |   | $ | 1,467.5 |   | $ | (196.5 | ) | $ | 2,715.5 |   |
| Molybdenum        |       | 271.0                                  |       | —                  |       | 655.5 |   | — |   | 926.5 |   |
| Other             |       | 177.0                                  |       | 314.5                   |       | 44.7 |   | (89.1 | ) | 447.1 |   |
| Total             |       | $                                      | 1,758.3    |                    | $          | 448.7 |   | $ | 2,167.7 |   | $ | (285.6 | ) | $ | 4,089.1 |   |

 

NET SALES ANDGEOGRAPHICAL INFORMATION:

 

Net sales to respective countries were as follows:

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **(in millions)**                        | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States                            |       | $                                | 1,553.2    |   | $ | 1,747.5 |   | $ | 1,394.2 |   |
| Europe                                   |       | 1,491.7                          |       | 1,711.6 |   | 823.7 |   |
| Mexico                                   |       | 1,189.3                          |       | 1,094.7 |   | 930.9 |   |
| Peru                                     |       | 152.1                            |       | 155.2 |   | 72.0 |   |
| Latin America, excluding Mexico and Peru |       | 1,133.7                          |       | 659.4 |   | 671.7 |   |
| Australia                                |       | —                           |       | — |   | 3.3 |   |
| Asia                                     |       | 554.8                            |       | 368.1 |   | 216.8 |   |
| Derivative instruments                   |       | 10.9                             |       | (276.3 | ) | (23.5 | ) |
| Total                                    |       | $                                | 6,085.7    |   | $ | 5,460.2 |   | $ | 4,089.1 |   |

 

PROVISIONAL SALES PRICE:

 

At December 31, 2007, the Company hasrecorded provisionally priced sales of 165.9 million pounds of copper, at aforward average price of $3.03 per pound. Also, the Company has recorded provisionally priced sales of 4.7 millionpounds of molybdenum at the year-end market price of $32.38 per pound.  These sales are subject to final pricingbased on the average monthly LME and COMEX copper prices and Dealer Oxidemolybdenum prices in the future month of settlement.

 

Following are the provisionally priced copper and molybdenum salesoutstanding at December 31, 2007:

 

| **Pounds********of copper** | ** ** | **Priced at** | ** ** | **Month of settlement** |
|-----------------------------|------------|---------------|------------|-------------------------|
| **(millions)**              | ** ** | ** **    | ** ** | ** **              |
| 63.6                        |       | 3.019313      |       | January 2008       |
| 24.5                        |       | 3.027922      |       | February 2008      |
| 15.2                        |       | 3.028247      |       | March 2008         |
| 14.2                        |       | 3.031464      |       | April 2008         |
| 22.6                        |       | 3.032160      |       | May 2008           |
| 20.1                        |       | 3.034080      |       | June 2008          |
| 5.7                         |       | 3.034990      |       | July 2008          |
| 165.9                       |       | 3.026520      |       | Total                   |

 

164

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| **Pounds  of molybdenum** | ** ** | **Market price** | ** ** | **Month of settlement** |
|---------------------------|------------|------------------|------------|-------------------------|
| **(millions)**            | ** ** | ** **       | ** ** | ** **              |
| 1.9                       |       | 32.375           |       | January 2008       |
| 1.7                       |       | 32.375           |       | February 2008      |
| 1.1                       |       | 32.375           |       | March 2008         |
| 4.7                       |       | 32.375           |       | Total                   |

 

Provisional sales price adjustments included in accountsreceivable and net sales were as follows at December 31 (in millions):

 

| ** ** | ** ** | **As of December 31,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Copper     |       | $                           | (40.2      | ) | $ | (47.3 | ) |
| Molybdenum |       | —                      |       | (11.5 | ) |
| Total      |       | $                           | (40.2      | ) | $ | (58.8 | ) |

 

During the month of January 2008,the market price of copper and molybdenum increased.  The effect of these changes on 2007 salessettling in January 2008 was an increase of $3.3 million in sales.  Additionally, forward prices for copper as ofJanuary 31, 2008 also increased; the effect of this increase on 2007 opensales settling after January 2008 would be an increase of $33.2 million insales.

 

LONG-TERM SALES CONTRACTS:

 

The following are the significant outstandinglong-term contracts:

 

Under the terms of a forward sales contract withCumerio Belgium, formerly Union Minière, as amended, the Company is required tosupply Cumerio Belgium, through its agent, S.A. SOGEM N.V., with 18,000 tons ofblister copper during 2008 and 13,800 tons of blister during 2009.  The price of the copper contained in blistersupplied under the contract is determined based on the LME monthly averagesettlement price, less a refining allowance, which is negotiated annually.

 

Under the terms of a sales contract with MitsuiBussan Metals Sales Co., an affiliate of 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.

 

165

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**NOTE 21-QUARTERLY DATA(unaudited)**

(in millions,except per share data)

 
| ** **               | ** ** | **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       |       | $        | 1.87       |   | $ | 2.47 |   | $ | 2.13 |   | $ | 1.06 |   | $ | 7.53 |   |
| Dividend per share       |       | $        | 1.70       |   | $ | 1.50 |   | $ | 1.60 |   | $ | 2.00 |   | $ | 6.80 |   |

 
| ** **               | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|
| ** **               | ** ** | **1st**  | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** | **Year** | ** ** |
| Net sales                |       | $        | 1,121.3    |   | $ | 1,276.7 |   | $ | 1,412.2 |   | $ | 1,650.0 |   | $ | 5,460.2 |   |
| Gross Profit             |       | $        | 714.4      |   | $ | 754.9 |   | $ | 902.9 |   | $ | 1,068.2 |   | $ | 3,440.4 |   |
| Operating income         |       | $        | 632.7      |   | $ | 649.0 |   | $ | 804.5 |   | $ | 968.1 |   | $ | 3,054.3 |   |
| Net earnings             |       | $        | 421.6      |   | $ | 439.3 |   | $ | 521.6 |   | $ | 655.1 |   | $ | 2,037.6 |   |
| Net earnings per  share: |       |     |       |   |   |   |   |   |   |   |   |
| Basic and  diluted       |       | $        | 1.43       |   | $ | 1.49 |   | $ | 1.77 |   | $ | 2.23 |   | $ | 6.92 |   |
| Dividend per share       |       | $        | 1.38       |   | $ | 1.38 |   | $ | 1.00 |   | $ | 1.37 |   | $ | 5.13 |   |

 

All the per shareamounts prior to 3rd quarter 2006 had been restated to reflect the common stocksplit.

 

**NOTE 22—SUBSEQUENT EVENTS**

 

On January 24, 2008,a dividend of $1.40 per share was announced, totaling $412.3 million and to bepaid on February 29, 2008 to shareholders of record as of February 12,2008.  Our dividend policy continues tobe reviewed at Board of Directors’ meetings, taking into consideration the cashposition, the current capital investment program and expected future cash flowgenerated from operations.

 

On January 29, 2008,the Company announced an up to $300 million share repurchase program authorizedby the Board of Directors. Under this program the Company may purchase sharesfrom time to time, based on market conditions and other factors. Therepurchased program has no expiration date and may be modified or discontinuedat any time. Any shares acquired will be available for general corporate purposes.

 

**OTHERCOMPANY INFORMATION:**

** **

**ANNUALMEETING**

**The annual stockholders meeting of Southern CopperCorporation will be held on Thursday, April 24, 2008 at 9:00 am, MexicoCity time, at Edificio Parque Reforma, Campos Eliseos No. 400, 12th Floor,Colonia Lomas de Chapultepec, Mexico City, Mexico.**

** **

**166**

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** **

**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) 348-5999, Fax (51-1)349-0592.**

** **

**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

 

Edificio Parque Reforma, Campos Eliseos No. 400, 12th Floor, Col.Lomas de Chapultepec, Mexico City, Mexico

Telephone: (52-55)1103-5320

 

Web Page:  www.southerncoppercorp.com

**Email address:** southerncopper@southernperu.com.pe

** **

**167**

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** **

**CERTIFICATIONREQUIRED BY THE NEW YORK STOCK EXCHANGE**

** **

TheCompany has filed with the New York Stock Exchange (“NYSE”) the 2007certification 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 2006 Annual Report on Form 10-K.  The Company anticipates filing, on a timelybasis, the 2008 NYSE certification and is filing the Section 302certifications as exhibits to this Annual Report on Form 10-K.

 

168

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directorsand Shareholders of Southern Copper Corporation:

 

In our opinion, theconsolidated combined financial statements listed in the index appearing underItem 15(a)(1), present fairly, in all material respects, the financial positionof Southern Copper Corporation and its subsidiaries at December 31, 2007and December 31, 2006, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2007 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in our opinion,the financial statement schedule appearing under Item 15  presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedconsolidated financial statements.  Alsoin our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, basedon criteria established in Internal Control - Integrated Framework issued bythe 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 generallyaccepted accounting principles.  Acompany’s internal 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 anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial 

 

169

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statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation 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.

February 29, 2008

 

170

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Item 9. Changes inand Disagreements With Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controlsand Procedures

 

As of December 31,2007, 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, 2007, 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 31,2007 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 overfinancial reporting based on the framework in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organization of the TreadwayCommission.  Based on the evaluation madeunder this framework, management concluded that as of December 31, 2007such 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.

 

Our management’sassessment of the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007 has been audited byPricewaterhouseCoopers, an independent registered public accounting firm, asstated in their report which appears herein.

 

Item 9B. OtherInformation

 

None

 

171

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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 24, 2008 or will be provided by amendment to this Form 10-K,also to be filed no later than April 30, 2008.

 

The informationcontained in such definitive proxy statement is incorporated herein byreference.

 

172

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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 combined statement of earnings for the  years ended December 31, 2007, 2006 and 2005                              |       | 109                |
| Consolidated balance sheet at December 31, 2007  and 2006                                                                      |       | 110                |
| Consolidated combined statement of cash flows for  the years ended December 31, 2007, 2006 and 2005                            |       | 111-112            |
| Consolidated  combined statement of changes in stockholders’ equity for the years ended  December 31, 2007, 2006 and 2005 |       | 113-114            |
| Notes to the consolidated combined financial  statements                                                                            |       | 115-168            |
| Reports of Independent Registered Public Accounting  Firm                                                                           |       | 169-170            |

 

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). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                            |
| 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 U.S.$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)).                                                                                                                                               |
|   |   |                                                                                                                                                                                                            |
| 4.6    |   | Form of New  7.500% Note (included in Exhibit 4.3 (b)).                                                                                                                                               |

 

173

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| 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     |   | Code of Business Conduct and Ethics adopted by the  Board of Directors on May 8, 2003 and amended by the Board of Directors  on October 21, 2004.                                                                            |
|   |   |                                                                                                                                                                                                                                   |
| 21.1   |   | Subsidiaries of the Company.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                   |
| 31.1   |   | Certification required by Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                   |
| 31.2   |   | Certification required by Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                   |
| 32.1   |   | Certification required by Section 906 of the  Sarbanes-Oxley Act of 2002. This document is being furnished in accordance  with SEC Release No. 33-8328.                                                                      |
|   |   |                                                                                                                                                                                                                                   |
| 32.2   |   | Certification required by Section 906 of the  Sarbanes-Oxley Act of 2002. This document is being furnished in accordance  with SEC Release No. 33-8328.                                                                      |

 

The exhibitslisted as 10.2 through 10.5 above are the management contracts or compensatoryplans or arrangements required to be filed pursuant to Item 15(c) of Form 10-K.

 

174

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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:                                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| 2007                                                    |       | 6.0                                   |       | —                               |       | —     |       | 1.4 |   | 4.6 |   |
| 2006                                                    |       | 5.7                                   |       | 0.3                                  |       | —     |       | — |   | 6.0 |   |
| 2005                                                    |       | 8.4                                   |       | 0.4                                  |       | —     |       | 3.1 |   | 5.7 |   |
|                                                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Supplies:                                               |       |                                  |       |                                 |       |       |       |   |   |   |   |
| 2007                                                    |       | 27.7                                  |       | 3.0                                  |       | —     |       | 0.3 |   | 30.4 |   |
| 2006                                                    |       | 23.4                                  |       | 4.6                                  |       |       |       | 0.3 |   | 27.7 |   |
| 2005                                                    |       | 21.5                                  |       | 3.3                                  |       |       |       | 1.4 |   | 23.4 |   |
|                                                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Notes issued under par:                                 |       |                                  |       |                                 |       |       |       |   |   |   |   |
| 2007                                                    |       | 16.9                                  |       | —                               |       | —     |       | 0.2 |   | 16.7 |   |
| 2006                                                    |       | 6.2                                   |       | 10.8                                 |       | —     |       | 0.2 |   | 16.9 |   |
| 2005                                                    |       | —                                |       | 6.3                                  |       | —     |       | 0.1 |   | 6.2 |   |
|                                                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| Deferred Tax Assets:                                    |       |                                  |       |                                 |       |       |       |   |   |   |   |
| 2007                                                    |       | —                                |       | —                               |       | —     |       | — |   | — |   |
| 2006                                                    |       | 81.2                                  |       | —                               |       | —     |       | 81.2 |   | — |   |
| 2005                                                    |       | 33.4                                  |       | 47.8                                 |       | —     |       | — |   | 81.2 |   |

 

175

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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 his 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 26, 2008

 

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/                                              | Harold S.  Handelsman           |   |
|          | German Larrea  Mota-Velasco |   |                                             | Harold S.  Handelsman           |   |
|          |                        |   |                                             |                            |   |
| /s/           | Emilio Carrillo  Gamboa     |   | /s/                                              | Genaro Larrea  Mota-Velasco     |   |
|          | Emilio Carrillo  Gamboa     |   |                                             | Genaro Larrea  Mota-Velasco     |   |
|          |                        |   |                                             |                            |   |
| /s/           | Alfredo Casar  Perez        |   | /s/                                              | Armando Ortega  Gomez           |   |
|          | Alfredo Casar  Perez        |   |                                             | Armando Ortega  Gomez           |   |
|          |                        |   |                                             |                            |   |
| /s/           | Jaime Collazo  Gonzalez     |   | /s/                                              | L. Miguel  Palomino Bonilla     |   |
|          | Jaime Collazo  Gonzalez     |   |                                             | L. Miguel  Palomino Bonilla     |   |
|          |                        |   |                                             |                            |   |
| /s/           | Xavier Garcia de Quevedo    |   | /s/                                              | Gilberto  Perezalonso Cifuentes |   |
|          | Xavier Garcia de  Quevedo   |   |                                             | Gilberto  Perezalonso Cifuentes |   |
|          |                        |   |                                             |                            |   |
| /s/           | Alberto De la Parra Zavala  |   | /s/                                              | Juan Rebolledo  Gout            |   |
|          | Alberto De la Parra Zavala  |   |                                             | Juan Rebolledo  Gout            |   |
|          |                        |   |                                             |                            |   |
| /s/           | Oscar Gonzalez  Rocha       |   | /s/                                              | Carlos Ruiz  Sacristan          |   |
|          | Oscar Gonzalez  Rocha       |   |                                             | Carlos Ruiz  Sacristan          |   |

 

Date:  February 26, 2008

 

176

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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 3rd quarter  Quarterly Report on Form 10-Q 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)                                                                                                                                                                                      |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 4.1                             |       | (a) Registration  Rights Agreement, dated as of July 27, 2005, by and between Southern  Copper Corporation, Citigroup Global Markets Inc. and UBS Securities LLC  (Filed as Exhibit 4.1 to Registration Statement on Form S-4, File  No. 33-129287 filed on October 28, 2005 and incorporated herein by  reference) (b) Registration Rights Agreement, dated as of May 9,  2006, by and between Southern Copper Corporation and Citigroup Global Markets  Inc. as Representative of the Initial Purchasers. Filed as Exhibit 4.1  to Registration Statement on Form S-4, File No. 333-135170 filed on  June 20, 2006 and incorporated herein by reference) |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 4.2                             |       | Indenture  governing U.S.$200,000,000 6.375% Notes due 2015, by and between Southern  Copper Corporation, The Bank of New York and The Bank of New York  (Luxembourg) S.A. (Filed as Exhibit 4.1 to the Company’s Current Report  on Form 8-K, filed on August 1, 2005 and incorporated by reference)                                                                                                                                                                                                                                                                                                                                                                                              |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 4.3                             |       | (a) Indenture  governing U.S.$600,000,000 7.500% Notes due 2035, by and between Southern  Copper Corporation, The Bank of New York and The Bank of New York  (Luxembourg) S.A. (Filed as Exhibit 4.2 to the Company’s Current Report  on Form 8-K, filed on August 1, 2005 and incorporated herein by  reference) (b) Indenture governing $400,000,000 7.500% Notes due 2035,  by and between Southern Copper Corporation, The Bank of new York, The Bank of  New York (Luxembourg) S.A. (Filed as Exhibit 4.1 to the Company’s  Current Report on Form 8-K, filed on August 1, 2005 and  incorporated herein by reference)                                          |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 4.4                             |       | Form of  6.375% Note (included in exhibit 4.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |             |
|                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |             |
| 4.5                             |       | Form of New  7.500% Note (included in Exhibit 4.3(a))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |             |

 

177

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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) (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)                                                                                                                                                                  |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 10.5   |   | 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)                 |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 12.1   |   | Computation of  financial ratios                                                                                                                                                                                                                                                                                                                    |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 14.0   |   | Code of Business  Conduct and Ethics adopted by the Board of Directors on May 8, 2003 and  amended on October 21, 2004 (Filed as Exhibit 14 to the Company’s  Current Report on Form 8-K dated October 22, 2004 and incorporated  herein by reference)                                                                |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 21.1   |   | Subsidiaries of  the Company (filed herewith)                                                                                                                                                                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 31.1   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 31.2   |   | Certification  required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith)                                                                                                                                                                                                                                                     |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 32.1   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8238 (filed  herewith)                                                                                                                                                                  |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                |   |   |
| 32.2   |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002. This document  is being furnished in accordance with SEC Release No. 33-8238 (filed  herewith)                                                                                                                                                                  |   |   |

 

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